UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
Commission file number 000-51211
Global Telecom & Technology, Inc.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 20-2096338 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
8484 Westpark Drive
Suite 720
McLean, Virginia 22102
(703) 442-5500
(Address including zip code, and telephone number, including area
code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per shareClass W WarrantsClass Z Warrants
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso Noþ
Indicate by check mark whether the box above will not relieve any registrantregistrant: (1) has filed all reports required to file reports pursuant tobe filed by Section 13 or 15(d) of the Securities Exchange Act from their obligations under those Sections.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ No o No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
The aggregate market value of the common stock held by non-affiliates of the registrant (7,098,043(7,351,334 shares) based on the $1.30$2.35 closing price of the registrant’s common stock as reported on the Over-the-Counter Bulletin Board on June 30, 2009,2012, was $9,227,456.$17,275,635. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.
As of March 24, 201019, 2013 there were outstanding 17,216,39019,129,765 shares of the registrant’s common stock, par value $.0001 per share.
Documents Incorporated by Reference
Portions of our definitive proxy statement for the 20102013 Annual Meeting of Stockholders, to be filed within 120 days after the end of the fiscal year covered by this Form 10-K, are incorporated by reference into Part III hereof.
Our Form 10-K (“Annual Report”) includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect the current views of Global Telecom & Technology, Inc., with respect to current events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “could,” “should,” and “continue” or similar words. These forward-looking statements may also use different phrases. From time to time, Global Telecom & Technology, Inc., which we refer to as “we”, “us” or “our” and in some cases, “GTT” or the “Company”, also provides forward-looking statements in other materials GTT releases to the public or files with the United States Securities &and Exchange Commission (“SEC”), as well as oral forward-looking statements. You should consultconsider any further disclosures on related subjects in our quarterly reports on Form 10-Q and current reports on Form 8-K filed with the SEC.
Such forward-looking statements are and will be subject to many risks, uncertainties and factors relating to our operations and the business environment that may cause our actual results to be materially different from any future results, express or implied, by such forward-looking statements. Factors that could cause GTT’s actual results to differ materially from these forward-looking statements include, but are not limited to, the following:
| our reliance on several large customers; | |||
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual future results to differ materially from those projected or contemplated in the forward-looking statements.
All forward-looking statements included herein attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of
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Unless the context otherwise requires, when we use the words “ ‘‘the Company,” “GTT,” “we”“we”, “us,” or “our Company” in thisForm 10-K,, we are referring to GlobalTelecom & Technology, Inc., a Delaware corporation, and its subsidiaries, unlessit is clear from the context or expressly stated that these references are only toGlobal Telecom & Technology, Inc.
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ITEM 1.BUSINESS
Introduction
Global Telecom & Technology, Inc. (“GTT” or the “Company”) is a Delaware corporation which was incorporated on January 3, 2005. GTT is a globalpremiere cloud network integrator providing a broad portfolio of Wide-Area Network (WAN), dedicated Internet access,provider delivering simplicity, speed and managed data services. With over 800 supplier relationships worldwide, GTT combines multiple networks and technologies such as traditional OC-x, MPLS and Ethernet,agility to deliver cost-effective solutions specifically designed for each client’s unique requirements. GTT enhances its client performance through its proprietary Client Management Database (CMD), providing customers with an integrated support system for all of their services. GTT is committed to providing comprehensive solutions, project management and 24x7 global operations support.
Our Customers
As of December 31, 2009,2012, our customer base was comprised of over 7001,000 businesses. These customers included Global 500 companies, some of which are in the global banking, manufacturing, communications, and media industries. For the year ended December 31, 2009,2012, no single customer accounted for more than 10%11% of our total consolidated revenues.revenue. Our five largest customers accounted for approximately 36%27% of consolidated revenuesrevenue during the same period.
We provide services in over 80 countries, with the ability to expand into new geographic areas by adding new regional partners and suppliers. Our service expansion is largely customer-driven. We have designed, delivered, and subsequently managed services in all six populated continents around the world.
For the year ended December 31, 2009,2012, approximately 58%76% of our revenue was attributable to our operations based in the United States, 29%19% was attributable to operations based in the United Kingdom, and 13%5% was attributable to operations based in Germany.
Our customer contracts for network services and support are generally for initial terms of one to three years, with some contracts calling for terms in excess of five years. Following the initial terms, these agreements typically provide for renewal automatically for specified periods.periods ranging from one month to one year. Our prices are fixed for the duration of the contract, and we typically bill in advance for such services. If a customer terminates its agreement, the terms of our customer contracts typically require full recovery of any amounts due for the remainder of the term (or at a minimum, our liability to the underlying suppliers).
Our Suppliers
GTT has deployed network assets in North America, Europe and Asia to provide Dedicated Internet Access and Ethernet Transport services. GTT’s core network consists of December 31, 2009,a global Layer 2 switched Ethernet, diversely routed 10Gb mesh network as well as IP Transit or Dedicated Internet Access through approximately 130 Points of Presence (“PoPs”), delivering cloud networking services to enterprise, government and wholesale customers. GTT has network connectivity in all major U.S. cities and European cities, established Ethernet hubs with various carriers and multiple connections to Tier 1 IP providers.
The GTT backbone network is built using a multi-layer design developed to offer the highest level of performance and reliability. GTT's private optical long-haul network provides the foundation for a Layer 2 Ethernet-over-MPLS mesh between core backbone routers in each city. This same infrastructure also provides dedicated data transport services to customers in GTT's backbone cities.
Built on top of GTT's highly-resilient optical transport network, the Company’s Layer 3/IP Network was engineered to provide the highest levels of capacity and performance, even when utilizing enhanced services such as traffic analysis, DDoS mitigation and traffic filtering.
Additionally, we hadhave over 800 supplier relationships worldwide from which we source bandwidth and other services and combine our own network assets to meet our customers’ requirements. Through our extensive supplier relationships, our customers have access to an array of service providers without having to manage multiple contracts. For example, on many point-to-point private line connections we may contract with three different suppliers, such as an access supplier at each end of the connection and a third network services provider for the long-haul connection between them.
Our supplier management teams interactteam works with our suppliers to acquire updated pricing and network asset information and negotiate purchase agreements when appropriate. In some cases, we have electronic interfaces into our suppliers’ pricing systems to
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Business Overview and Marketing
Our customer facing operations are led by two business units – “Americas” based in the United States and “EMEA” in the United Kingdom. Each business unit owns the key customer touch points including quoting, sales engineering, ordering, provisioning and account management.
Because our markets are highly competitive, we believe that personal relationships and quality of service delivery remain important in winning new and repeat customer business. We therefore sell our services largely through a direct sales forceforces located across the globe, as well as strong agent channel relationships, with principal concentration in the United States and the United Kingdom, and Germany.Kingdom. Most of our sales representatives have many years of experience in selling to multinational corporations, enterprises, governmental entities, service providers, and carriers. We also employ sales engineers to provide presales support to our sales representatives. The average sales cycle can be as little as two to six weeks for existing customers and three to six months or longer for larger new customers.
Our sales and marketing efforts are focused on generating new business opportunities through industry contacts, new product offerings, and long-term relationships with new and existing customers. Our sales activities are specifically focused on recruiting seasoned industry experts with deep ties to the direct enterprise, system integratorgovernment and carrierwholesale markets, building relationships with our new clients, and driving expansion within existing accounts. Our marketing activities are designed to generate awareness and familiarity of our value proposition with our target accounts, develop new products to meet the needs of our customer base, and communicate to our target markets, thereby reinforcing our value proposition among our customers’ key decision makers.
Our global operations consist of two parts: global customer operations, and global network operations and engineering.
Network operationsOperations and engineering is comprised ofEngineering
Network Operations include the global Network Operations Center (“NOC”) and, Service Engineering, and Information and Communications Technology (“ICT”). The NOC receives, prioritizes, tracks, and resolves network outages or other customer needs, alongneeds. Service Engineering is charged with provisioning and testing of new services. Engineeringservices, and also provides support for the NOC and the sales team, as well as carrying out all provisioning for GTT Network Services.Tier 3 network support. ICT manages all internal desktop and network and server infrastructure.
Engineering is responsible for the overall network architecture, including design, capacity planning, configuration, maintenance and implementation of all GTT owned network assets. Engineering also provides support for the business units and the Network Operations group.
Competition
Our competition consists primarily of traditional, facilities-based providers, including companies that provide network connectivity and internet access principally within one continent or geographical region, such as Level 3, Qwest, KPN, XO, Comcast Communications, and COLT. We also compete against carriers who provide network connectivity on a multi-continent, or global basis, such as Verizon Business, AT&T, British Telecom, NTT and Deutsche Telekom.
Government Regulation
In connection with certain of our service offerings, we may be subject to federal, state, and foreign regulations. United States Federal laws and Federal Communications Commission, or FCC, regulations generally apply to interstate telecommunications and international telecommunications that originate or terminate in the United States, while state laws and regulations apply to telecommunications transmissions ultimately terminating within the same state as the point of origination. A foreign country’s laws and regulations apply to telecommunications that originate or terminate in, or in some instances traverse, that country. The regulation of the telecommunications industry is changing rapidly, and varies from state to state and from country to country.
Where certification or licensing is required, carriers are required to comply with certain ongoing responsibilities. For example, we may be required to submit periodic reports to various telecommunications regulatory authorities relating to the provision of services within the relevant jurisdiction. Another potential ongoing responsibility relates to payment of regulatory fees and the
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Federal Regulation
Generally, the FCC has chosen not to heavily regulate the charges or practices of non-dominant carriers. For example, we are not required to tariff the interstate inter-exchange private line services we provide, but need only to post terms and conditions for such services on our website. In providing certain telecommunications services, however, we may remain subject to the regulatory requirements applicable to common carriers, such as providing services at just and reasonable rates, filing the requisite reports, and paying regulatory fees and contributing to universal service. The FCC also releases orders and takes other actions from time to time that modify the regulations applicable to services provided by carriers such as us; these orders and actions can result in additional (or reduced) reporting or payments requirements, or changes in the relative rights and obligations of carriers with respect to services they provide to each other or to other categories of customers. These changes in regulation can affect the services that we procure and/or provide and, in some instances, may affect demand for or the costs of providing our services.
State Regulation
The Telecommunications Act of 1996, as amended generally prohibits state and local governments from enforcing any law, rule, or legal requirement that prohibits or has the effect of prohibiting any person from providing any interstate or intrastate telecommunications service. However, states retain jurisdiction to adopt regulations necessary to preserve universal service, protect public safety and welfare, ensure the continued quality of communications services, and safeguard the rights of consumers. Generally, each carrier must obtain and maintain certificates of authority from regulatory bodies in states in which it offers intrastate telecommunications services. In most states, a carrier must also file and obtain prior regulatory approval of tariffs containing the rates, terms and conditions of service for its regulated intrastate services. A state may also impose telecommunications regulatory fees, fees related to the support for universal service, and other costs and reporting obligations on providers of services in that state. We are currently authorized to provide intrastate services in more than 20 states and the District of Columbia as an interexchange carrier and/or a competitive local provider.
Foreign Regulation
Generally, the provisioning to U.S. customers of international telecommunications services originating or terminating in the United States is governed by the FCC. In addition, the regulatory requirements to operate within a foreign country or to provide services to customers within that foreign country vary from jurisdiction to jurisdiction, although in some respects regulation in the Western European markets is harmonized under the regulatory structure of the European Union. As opportunities arise in particular nations, we may need to apply for and acquire various authorizations to operate and provide certain kinds of telecommunications services. Although some countries require complex applications procedures for authorizations and/or impose certain reporting and fee payment requirements, others simply require registration with or notification to the regulatory agency and some simply operate through general authorization with no filing requirement at all.
Intellectual Property
We do not own any patent registrations, applications or licenses. We maintain and protect trade secrets, know-how, and other proprietary information regarding many of our business processes and related systems and databases.
Employees
As of December 31, 2009,2012, we had a total of 8397 employees.
Executive Officers
Our executive officers and their respective ages and positions as of March 24, 201019, 2013 are as follows:
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Eric Swank
H. Brian Thompson, 42,74, has served as Chairman of our Board of Directors since January 2005, as our Executive Chairman since October 2006, and as our interim Chief Executive Officer from January 2005 to October 2006 and from February 2007 to May 2007. Mr. Thompson continues to head his own private equity investment and advisory firm, Universal Telecommunications, Inc. From December 2002 to June 2007, Mr. Thompson was Chairman of Comsat International, one of the largest independent telecommunications operators serving all of Latin America. He also served as Chairman and Chief Executive Officer of Global TeleSystems Group, Inc. from March 1999 through September of 2000. Mr. Thompson was Chairman and CEO of LCI International from 1991 until its merger with Qwest Communications International Inc. in June 1998, and became Vice Chairman of the board for Qwest until his resignation in December 1998. He previously served as Executive Vice President of MCI Communications Corporation from 1981 to 1990, and prior to MCI, was a management consultant with the Washington, DC offices of McKinsey & Company for nine years, where he specialized in the management of telecommunications. Mr. Thompson currently serves as a member of the board of directors of Axcelis Technologies, Inc, Pendrell Corporation, Penske Automotive Group, and Sonus Networks, Inc., and is a member of the Irish Prime Minister’s Ireland-America Economic Advisory Board. Mr. Thompson holds a Master of Business Administration from Harvard Business School, and holds an undergraduate degree in chemical engineering from the University of Massachusetts.
Michael R. Bauer, 40, has served as our Chief Financial Officer and Treasurer since February 2009.June 2012. Mr. Bauer oversees all global financial functions and has direct responsibility for financial operations, investor relations activities, and all banking and advisory relationships. Mr. Bauer brings over 16 years of finance and accounting experience to GTT. Prior to joining us,GTT, Mr. Swank served asBauer led the Treasurerfinancial planning and Senior Vice Presidentanalysis and investor relations efforts at MeriStar Hospitality Corporation. Mr. Bauer’s previous telecommunications experience includes Sprint and OneMain.com, an internet service provider. Mr. Bauer began his career with Arthur Andersen in audit and business advisory services. Mr. Bauer is a Certified Public Accountant and holds his Bachelor of Finance at Mobile Satellite Ventures (now SkyTerra Communications), a publicly-held, Reston, Virginia-based developer and supplier of mobile satellite communications services from November 2001 to April 2008. From 1994 to 2001, Mr. Swank served in various positions, including Director, Corporate Development and Investor Relations, and Vice President, Corporate Planning and Investor Relations, at Motient Corporation (now TerreStar Corporation), a publicly-held, Reston, Virginia-based integrated mobile satellite and terrestrial communications network provider. Prior to joining Motient, from 1989 to 1994, Mr. Swank served as Director, Operations and Manager, Business Development for C-Tec Corporation, a diversified telecommunications holding company organized to hold Commonwealth Telephone Inc. and other non-regulated telecommunications businesses. Mr. Swank received a Bachelor’sScience degree in FinanceAccounting from King’s College.
Chris McKee, 42,45, has served as our General Counsel and Secretary since May 2008. Prior to joining us, Mr. McKee served as the Vice President and General Counsel of StarVox Communications, Inc. from June, 2007 to April 2008. From 2005 to 2007, Mr. McKee was the Vice President and Assistant General Counsel of Covad Communications Group Inc., a publicly held San Jose, California-based broadband provider of integrated voice and data communications nationwide. Prior to joining Covad, from 2002 to 2005, Mr. McKee served as Executive Director of Legal and Regulatory Affairs for XO Communications, Inc., a publicly held Reston, Virginia-based broadband provider of integrated voice and data communications nationwide. Mr. McKee previously, from 1998 to 2002, served as Deputy General Counsel of Net2000 Communications Inc., a publicly traded Herndon, Virginia-based telecommunications services provider. Prior to that, from 1994 to 1998, Mr. McKee was an associate at Washington, D.C.-based law firms Dickstein Shapiro LLP and Dow Lohnes PLLC. Mr. McKee received a Bachelor’s degree from Colby College and a Juris Doctor from Syracuse University.
Available Information
The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW.,NW, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to such reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on the SEC website atwww.sec.gov and on our website atwww.gt-t.net as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
ITEM 1A.RISK FACTORS
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. Below are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently
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Risks Relating to Our Business and Operations
We depend on several large customers, and the loss of one or more of these customers,or a significant decrease in total revenue from any of these customers, wouldlikely reduce our revenue and income.
For the year ended December 31, 2012, our five largest customers accounted for approximately 27% of our total service revenue. If we were to lose all of the underlying services from one or more of our large customers, or if one or more of our large customers were to significantly reduce the services purchased from us or otherwise renegotiate the terms on which services are purchased from us, our revenue could decline and our results of operations would suffer.
If our customers elect to terminate their agreements with us, our business, financialcondition and results of operations may be adversely affected.
Our services are sold under agreements that generally have initial terms of between one and three years. Following the initial terms, these agreements generally automatically renew for successive month-to-month, quarterly or annual periods, but can be terminated by the customer without cause with relatively little notice during a renewal period. In addition, certain government customers may have rights under Federal law with respect to termination for convenience that can serve to minimize or eliminate altogether the liability payable by that customer in the event of early termination. Our customers may elect to terminate their agreements as a result of a number of factors, including their level of satisfaction with the services they are receiving, their ability to continue their operations due to budgetary or other concerns and the availability and pricing of competing services. If customers elect to terminate their agreements with us, our business, financial condition and results of operation may be adversely affected.
Competition in the industry in which we do business is intense and growing, and ourfailure to compete successfully could make it difficult for us to add and retaincustomers or increase or maintain revenue.
The markets in which we operate are rapidly evolving and highly competitive. We currently or potentially compete with a variety of companies, including some of our transport suppliers, with respect to their products and services, including global and regional telecommunications service providers such as AT&T, British Telecom, NTT, Level 3, Qwest and Verizon, among others.
The industry in which we operate is consolidating, which is increasing the size and scope of our competitors. Competitors could benefit from assets or businesses acquired from other carriers or from strategic alliances in the telecommunications industry. New entrants could enter the market with a business model similar to ours. Our target markets may support only a limited number of competitors. Operations in such markets with multiple competitive providers may be unprofitable for one or more of such providers. Prices in the data transmission and internet access business have declined in recent years and may continue to decline.
Many of our potential competitors have certain advantages over us, including:
Our competitors may be able to use these advantages to:
If we are unable to compete successfully against our current and future competitors, our revenue and gross margin could decline and we would lose market share, which could materially and adversely affect our business.
We might require additional capital to support business growth, and this capitalmight not be available on favorable terms, or at all.
Our operations or expansion efforts may require substantial additional financial, operational and managerial resources. As of December 31, 2009,2012, we had approximately $5.5$4.7 million in cash, and cash equivalents andour current liabilities $25.8were $21.6 million greater than current assets. We may have insufficient cash to fund our working capital or other capital requirements (including our outstanding debt obligations maturing during 2010), and may be required to raise additional funds to continue or expand our operations. If we are required to obtain additional funding in the future, we may have to sell assets, seek debt financing, or obtain additional equity capital. Our ability to sell assets or raise additional equity or debt capital will depend on the condition of the capital and credit markets and our financial condition at such time. Accordingly, additional capital may not be available to us, or may only be available on terms that adversely affect our existing stockholders, or that restrict our operations. For example, if we raise additional funds through issuances of equity or convertible debt securities, our existing stockholders could suffer dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our common stock. In addition, certain promissory notes that we have issued contain anti-dilution provisions related to their conversion into our common stock. The issuance of new equity securities or convertible debt securities could trigger an anti-dilution adjustment pursuant to these promissory notes, and our existing stockholders would suffer dilution if these notes are converted into shares of our common stock. Also, if we were forced to sell assets, there can be no assurance regarding the terms and conditions we could obtain for any such sale, and if we were required to sell assets that are important to our current or future business, outour current and future results of operations could be materially and adversely affected. We have granted security interests in substantially all of our assets to secure the repayment of our indebtedness maturing in 2010,between 2013 and 2016, and if we are unable to satisfy our obligations, the lenders could foreclose on their security interests. Our need for capital to satisfy our outstanding indebtedness due in 2010 is discussed below under the risk factor captioned “Risks Relating to Our Indebtedness – We are obligated to repay several debt instruments that mature during 2010. If we are unable to raise additional capital or renegotiate the terms of that debt, we may be unable to make the required payments with respect to one or more of these debt instruments.”
We depend on several large customers, and the loss of one or more of these clients, or a significant decrease in total revenues from any of these customers, would likely reduce our revenue and income.
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The majority of our business consists of integrating and reselling network capacity purchased from facility-based telecommunications carriers. Accordingly, we will be largely dependent on third parties to supply us with services. Occasionally in the past, our operating companies have experienced delays or other problems in receiving services from third party providers. Disputes also arise from time to time with suppliers with respect to billing or interpretation of contract terms. Any failure on the part of third parties to adequately supply us or to maintain the quality of their facilities and services in the future, or the termination of any significant contracts by a supplier, could cause customers to experience delays in service and lower levels of customer care, which could cause them to switch providers. Furthermore, disputes over billed amounts or interpretation of contract terms could lead to
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Industry consolidation may affect our ability to obtain services from suppliers on atimely or cost-efficient basis.
A principal method of connecting with our customers is through local transport and last mile circuits we purchase from incumbent carriers such as AT&T and Verizon, or competitive carriers such as Time Warner Telecom, XO, or Level 3. In recent years, AT&T, Verizon, and Level 3 have acquired competitors with significant local and/or long-haul network assets. Industry consolidation has occurred on a lesser scale as well through mergers and acquisitions involving regional or smaller national or international competitors. Generally speaking, we believe that a marketplace with multiple supplier options for transport access is important to the long-term availability of competitive pricing, service quality, and carrier responsiveness. It is unclear at this time what the long-term impact of such consolidation will be, or whether it will continue at the same pace as it has in recent years; we cannot guarantee that we will continue to be able to obtain use of facilities or services in a timely manner or on terms acceptable and in quantities satisfactory to us from such suppliers.
We may occasionally have certain sales commitments to customers that extend beyondthe Company’s commitments from its underlying suppliers.
The Company’s financial results could be adversely affected if the Company were unable to purchase extended service from a supplier at a cost sufficiently low to maintain the Company’s margin for the remaining term of its commitment to a customer. While the Company has not encountered material price increases from suppliers with respect to continuation or renewal of services after expiration of initial contract terms, the Company cannot be certain that it would be able to obtain similar terms and conditions from suppliers. In most cases where the Company has faced any price increase from a supplier following contract expiration, the Company has been able to locate another supplier to provide the service at a similar or reduced future cost; however, the Company’s suppliers may not provide services at such cost levels in the future.
We may make purchase commitments to vendors for longer terms or in excess of thevolumes committed by our underlying customers.
The Company attempts to match its purchase of network capacity from its suppliers and its service commitments from its customers. However, from time to time, the Company has obligations to its suppliers that exceed the duration of the Company’s related customer contracts or that are for capacity in excess of the amount for which it has Customer commitments. This could arise based upon the terms and conditions available from the Company’s suppliers, from an expectation of the Company that we will be able to utilize the excess capacity, as a result of a breach of a customer’s commitment to us, or to support fixed elements of the Company’s network. Under any of these circumstances, the Company would incur the cost of the network capacity from its supplier without having corresponding revenuesrevenue from its customers, which could result in a material and adverse impact on the Company’s operating results.
TheSystem disruptions, either in our network or in third party networks on which we depend, may fail,could cause delays or interruptions of our service, which would interrupt the network availability they provide and make it difficultcould cause us to retain and attract customers.lose customers, or incur additional expenses.
Our customers depend on our ability to provide network availability with minimal interruption.interruption or degradation in serivces. The ability to provide this service depends in part on the networks of third party transport suppliers. The networks of transport suppliers may be interrupted as a result of various events, many of which they cannot control, including fire, human error, earthquakes and other natural disasters, disasters along communications rights-of-way, power loss, telecommunications failures, terrorism, sabotage, vandalism, computer viruses or other infiltration by third parties or the financial distress or other event adversely affecting a supplier, such as bankruptcy or liquidation.
Although we have attempted to design our network services to minimize the possibility of service disruptions or other outages, in addition to risks associated with third party provider networks, our services may be disrupted by problems on our own systems, that affect our central offices, corporate headquarters, network operations centers, or network equipment.
Disruptions or degradations in our service, could subject us to legal claims and be liableliability for losses suffered by customers due to our inability to provide service. If our network failure rates are higher than permitted under the applicable customer contracts, we may incur significant expenses related to network outage credits, which would reduce our revenuesrevenue and gross margins. Our reputation could be harmed if we fail to provide a
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If the products or services that we market or sell do not maintain market acceptance,our results of operations will be adversely affected.
Certain segments of the telecommunications industry are dependent on developing and marketing new products and services that respond to technological and competitive developments and changing customer needs. We cannot assure you that our products and services will gain or obtain increased market acceptance. Any significant delay or failure in developing new or enhanced technology, including new product and service offerings, could result in a loss of actual or potential market share and a decrease in revenues.
The communications market in which we operate is highly competitive; we could be forced to reduce prices, may lose customers to other providers that offer lower prices and have problems attracting new customers.
The communications industry is highly competitive and pricing for some of our key service offerings, such as our dedicated IP transport services, have been generally declining. If our costs of service, including the cost of leasing underlying facilities, do not decline in a similar fashion, we could experience significant margin compression, reduction of profitability and loss of business.
If carrier and enterprise connectivity demand does not continue to expand, we mayexperience a shortfall in revenuesrevenue or earnings or otherwise fail to meet publicmarket expectations.
The growth of our business will be dependent, in part, upon the increased use of carrier and enterprise connectivity services and our ability to capture a higher proportion of this market. Increased usage of enterprise connectivity services depends on numerous factors, including:
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Our business is characterized by long sales cycles which are often in the range of 45 days or more, between the time a potential customer is contacted and a customer contract is signed. The average sales cycle can be as little as two to six weeks for existing customers and three to six months or longer for new customers with complicated service requirements. Furthermore, once a customer contract is signed, there is typically an extended period of between 30 and 120 days before the customer actually begins to use the services, which is when we begin to realize revenues.revenue. As a result, we may invest a significant amount of time and effort in attempting to secure a customer, which investment may not result in near term, if any, revenues.revenue. Even if we enter into a contract, we will have incurred substantial sales-related expenses well before we recognize any related revenues.revenue. If the expenses associated with sales increase, if we are not successful in our sales efforts, or if we are unable to generate associated offsetting revenuesrevenue in a timely manner, our operating results could be materially and adversely affected.
Because much of our business is international, our financial results may be affectedby foreign exchange rate fluctuations.
Approximately 42%24% of our revenue comes from countries outside of the United States. As such, other currencies, particularly the Euro and the British Pound Sterling, can have an impact on the Company’s results (expressed in U.S. Dollars). Currency variations also contribute to variations in sales in impacted jurisdictions. Accordingly, fluctuations in foreign currency rates, most notably the strengthening of the dollar against the euro and the pound, could have a material impact on our revenue growth in future periods. In addition, currency variations can adversely affect margins on sales of our products in countries outside of the United States and margins on sales of products that include components obtained from suppliers located outside of the United States.
Because much of our business is international, we may be subject to local taxes,tariffs, or other restrictions in foreign countries, which may reduce ourprofitability.
Revenue from our foreign subsidiaries, or other locations where we provide or procure services internationally, may be subject to additional taxes in some foreign jurisdictions. Additionally, some foreign jurisdictions may subject us to additional withholding tax requirements or the imposition of tariffs, exchange controls, or other restrictions on foreign earnings. Any such taxes, tariffs, controls, and other restrictions imposed on our foreign operations may increase our costs of business in those jurisdictions, which in turn may reduce our profitability.
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If our goodwill or amortizable intangible assets become further impaired we may berequired to record a significant charge to earnings.
Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include reduced future cash flow estimates, a decline in stock price and market capitalization, and slower growth rates in our industry. During the year ending December 31, 2008, the Company recorded impairment to goodwill and amortizable intangible assets of $41.9 million in aggregate. During the yearyears ended December 31, 2009,2012 and 2011, the Company recorded no impairment to goodwill and amortizable intangible assets. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, negatively impacting our results of operations.
The ability to implement and maintain our databases and management informationsystems is a critical business requirement, and if we cannot obtain or maintainaccurate data or maintain these systems, we might be unable to cost-effectivelyprovide solutions to our customers.
To be successful, we must increase and update information in our databases about network pricing, capacity and availability. Our ability to provide cost-effective network availability and access cost management depends upon the information we collect from our transport suppliers regarding their networks. These suppliers are not obligated to provide this information and could decide to stop providing it to us at any time. Moreover, we cannot be certain that the information that these suppliers share with us is accurate. If we cannot continue to maintain and expand the existing databases, we may be unable to increase revenuesrevenue or to facilitate the supply of services in a cost-effective manner.
Furthermore, we are in the process of reviewing, integrating, and augmenting our management information systems to facilitate management of client orders, client service, billing, and financial applications. Our ability to manage our businesses could be materially adversely affected if we fail to successfully and promptly maintain and upgrade the existing management information systems.
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We own certain proprietary programs, software and technology. However, we do not have any patented technology that would preclude competitors from replicating our business model; instead, we rely upon a combination of know-how, trade secret laws, contractual restrictions, and copyright, trademark and service mark laws to establish and protect our intellectual property. Our success will depend in part on our ability to maintain or obtain (as applicable) and enforce intellectual property rights for those assets, both in the United States and in other countries. Although our Americas operating company has registered some of its service marks in the United States, we have not otherwise applied for registration of any marks in any other jurisdiction. Instead, with the exception of the few registered service marks in the United States, we rely exclusively on common law trademark rights in the countries in which we operate.
We may file applications for patents, copyrights and trademarks as our management deems appropriate. We cannot assure you that these applications, if filed, will be approved or that we will have the financial and other resources necessary to enforce our proprietary rights against infringement by others. Additionally, we cannot assure you that any patent, trademark, or copyright obtained by us will not be challenged, invalidated, or circumvented, and the laws of certain foreign countries may not protect intellectual property rights to the same extent as do the laws of the United States or the member states of the European Union. Finally, although we intend to undertake reasonable measures to protect the proprietary assets of our combined operations, we cannot guarantee that we will be successful in all cases in protecting the trade secret status of certain significant intellectual property assets. If these assets should be misappropriated, if our intellectual property rights are otherwise infringed, or if a competitor should independently develop similar intellectual property, this could harm our ability to attract new clients, retain existing customers and generate revenues.revenue.
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Intellectual property and proprietary rights of others could prevent us from usingnecessary technology to provide our services or otherwise operate our business.
We utilize data and processing capabilities available through commercially available third-party software tools and databases to assist in the efficient analysis of network engineering and pricing options. Where such technology is held under patent or other intellectual property rights by third parties, we are required to negotiate license agreements in order to use that technology. In the future, we may not be able to negotiate such license agreements at acceptable prices or on acceptable terms. If an adequate substitute is not available on acceptable terms and at an acceptable price from another software licensor, we could be compelled to undertake additional efforts to obtain the relevant network and pricing data independently from other, disparate sources, which, if available at all, could involve significant time and expense and adversely affect our ability to deliver network services to customers in an efficient manner.
Furthermore, to the extent that we are subject to litigation regarding the ownership of our intellectual property or the licensing and use of others’ intellectual property, this litigation could:
| divert attention and resources away from our daily business; | ||
Parties making claims of infringement may be able to obtain injunctive or other equitable relief that could effectively block our ability to provide our services and could cause us to pay substantial damages. In the event of a successful claim of infringement, we may need to obtain one or more licenses from third parties, which may not be available at a reasonable cost, if at all. The defense of any lawsuit could result in time-consuming and expensive litigation, regardless of the merits of such claims, and could also result in damages, license fees, royalty payments, and restrictions on our ability to provide our services, any of which could harm our business.
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We continue to explore merger and acquisition opportunities and we may face difficulties if we acquire other businesses in the future including:
retaining existing customers and/or vendors of both companies;
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In addition, our ability to complete acquisitions may depend, in part, on our ability to finance these acquisitions, including both the costs of the acquisition and the cost of the subsequent integration activities. Our ability may be constrained by our cash flow, the level of our indebtedness, restrictive covenants in the agreements governing our indebtedness, conditions in the securities and credit markets and other factors, most of which are generally beyond our control. If we proceed with one or more acquisitions in which the consideration consists of cash, we may use a substantial portion of our available cash to complete such acquisitions, thereby reducing our liquidity. If we finance one or more acquisitions with the proceeds of indebtedness, our interest expense and debt service requirements could increase materially. Thus, the financial impact of future acquisitions, including the costs to pursue acquisitions that do not ultimately close, could materially affect our business and could cause substantial fluctuations in our quarterly and yearly operating results.
Our efforts to develop new service offerings may not be successful, in which case our revenuesrevenue may not grow as we anticipate or may decline.
The market for telecommunications services is characterized by rapid change, as new technologies are developed and introduced, often rendering established technologies obsolete. For our business to remain competitive, we must continually update our service offerings to make new technologies available to our customers and prospects. To do so, we may have to expend significant management and sales resources, which may increase our operating costs. The success of our potential new service offerings is uncertain and would depend on a number of factors, including the acceptance by end-user customers of the telecommunications technologies which would underlie these new service offerings, the compatibility of these technologies with existing customer information technology systems and processes, the compatibility of these technologies with our then-existing systems and processes, and our ability to find third-party vendors that would be willing to provide these new technologies to us for delivery to our users. If we are unsuccessful in developing and selling new service offerings, our revenuesrevenue may not grow as we anticipate, or may decline.
If we do not continue to train, manage and retain employees, clients may reducepurchases of services.
Our employees are responsible for providing clients with technical and operational support, and for identifying and developing opportunities to provide additional services to existing clients. In order to perform these activities, our employees must have expertise in areas such as telecommunications network technologies, network design, network implementation and network management, including the ability to integrate services offered by multiple telecommunications carriers. They must also accept and incorporate training on our systems and databases developed to support our operations and business model. Employees with this level of expertise tend to be in high demand in the telecommunications industry, which may make it more difficult for us to attract and retain qualified employees. If we fail to train, manage, and retain our employees, we may be limited in our ability to gain more business from existing clients, and we may be unable to obtain or maintain current information regarding our clients’ and suppliers’ communications networks, which could limit our ability to provide future services.
The regulatory framework under which we operate could require substantial time andresources for compliance, which could make it difficult and costly for us to operatethe businesses.
In providing certain interstate and international telecommunications services, we must comply, or cause our customers or carriers to comply, with applicable telecommunications laws and regulations prescribed by the Federal Communications Commission (“FCC”)FCC and applicable foreign regulatory authorities. In offering services on an intrastate basis, we may also be subject to state laws and to regulation by state public utility commissions. Our international services may also be subject to regulation by foreign authorities and, in some markets, multinational authorities, such as the European Union. The costs of compliance with these regulations, including legal, operational and administrative expenses, may be substantial. In addition, delays in receiving or failure to obtain required regulatory approvals or the enactment of new or adverse legislation, regulations or regulatory requirements may have a material adverse effect on our financial condition, results of operations and cash flow.
If we fail to obtain required authorizations from the FCC or other applicable authorities, or if we are found to have failed to comply, or are alleged to have failed to comply, with the rules of the FCC or other authorities, our right to offer certain services could be challenged and/or fines or other penalties could be imposed on us. Any such challenges or fines could be substantial and could cause us to incur substantial legal and administrative expenses as well; these costs in the forms of fines, penalties, and legal and
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Future changes in regulatory requirement, new interpretations of existing regulatoryrequirements, or determinations that we violated existing regulatory requirements mayimpair our ability to provide services, result in financial losses or otherwisereduce our profitability.
Many of the laws and regulations that apply to providers of telecommunications services are subject to frequent changes and different interpretations and may vary between jurisdictions. Changes to existing legislation or regulations in particular markets may limit the opportunities that are available to enter into markets, may increase the legal, administrative, or operational costs of operating in those markets, or may constrain other activities, including our ability to complete subsequent acquisitions, or purchase services or products, in ways that we cannot anticipate. Because we purchase telecommunications services from other carriers, our costs and manner of doing business can also be adversely affected by changes in regulatory policies affecting these other carriers.
In addition, any determination that we, including companies that we have acquired, have violated applicable regulatory requirements could result in material fines, penalties, forfeitures, interest or retroactive assessments. For example, a determination that we have not paid all required universal service fund contributions could result in substantial retroactive assessment of universal service fund contributions, together with applicable interest, penalties, fines or forfeitures.
We depend on key personnel to manage our businesses effectively in a rapidly changingmarket, and our ability to generate revenuesrevenue will suffer if we are unable to retainkey personnel and hire additional personnel.
The future success, strategic development and execution of our business will depend upon the continued services of our executive officers and other key sales, marketing and support personnel. We do not maintain “key person” life insurance policies with respect to any of our employees, nor are we certain if any such policies will be obtained or maintained in the future. We may need to hire additional personnel in the future and we believe the success of the combined business depends, in large part, upon our ability to attract and retain key employees. The loss of the services of any key employees, the inability to attract or retain qualified personnel in the future, or delays in hiring required personnel could limit our ability to generate revenuesrevenue and to operate our business.
Interruption or failure of our information technology and communications systems could hurt our ability to effectively provide our products and services, which could damage our reputation and harm our operating results.
The availability of our products and services depends on the continuing operation of our information technology and communications systems. Our systems are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to harm our systems. Some of our systems are not fully redundant and our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster, a decision to close a facility we are using without adequate notice for financial reasons, or other unanticipated problems at our data centers could result in lengthy interruptions in our service.
Risks Relating to Our Indebtedness
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Pursuant to the terms of our credit facilityloan agreement with Silicon Valley Bank, we have pledged substantially all of our assets to the lender as security for our payment obligations under the credit facility.loan agreement. If we fail to pay any of our indebtedness under this credit facilityloan agreement when due, or if we breach any of the other covenants in the credit facility,loan agreement, it may result in one or more events of default. An event of default under our credit facilityloan agreement would permit the lender to declare all amounts owing to be immediately due and payable and, if we were unable to repay any indebtedness owed, the lender could proceed against the collateral securing that indebtedness.
Covenants in our credit facilityloan agreement and outstanding notes, and in any future debtagreement, may restrict our future operations.
The indenture governing the notesloan agreements related to our outstanding senior and the New Credit Facility willmezzanine indebtedness impose financial restrictions that limit our discretion on some business matters, which could make it more difficult for us to expand our business, finance our operations and engage in other business activities that may be in our interest. These restrictions include compliance with, or maintenance of, certain financial tests and ratios and restrictions that limit our ability and that of our subsidiaries to, among other things:
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Any additional indebtedness we may incur in the future may subject us to similar or even more restrictive conditions.
Our substantial level of indebtedness and debt service obligations could impair ourfinancial condition, hinder our growth and put us at a competitive disadvantage.
As of December 31, 20092012, our indebtedness was substantial in comparison to our available cash and our net income. Our substantial level of indebtedness could have important consequences for our business, results of operations and financial condition. For example, a high level of indebtedness could, among other things:
Risks Related to our Common Stock and the Securities Markets
Because we do not currently intend to pay dividends on our common stock, stockholderswill benefit from an investment in our common stock only if it appreciates in value.
We do not currently anticipate paying any dividends on shares of our common stock. Any determination to pay dividends in the future will be made by our Board of Directors and will depend upon results of operations, financial conditions, contractual restrictions, restrictions imposed by applicable law and other factors our Board of Directors deems relevant. Accordingly, realization of a gain on stockholders’ investments will depend on the appreciation of the price of our common stock. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders purchased their shares.
Our outstanding warrants may have an adverse effect on the market price of our commonstock.
As of December 31, 2012, we had 12,090,000 Class Woutstanding warrants outstanding, each of which entitles the holder to purchase a shareapproximately 1.4 million shares of our common stock at an exercise price of $5.00 per share on or before April 10, 2010. In addition, at March 24, 2010 we had 12,090,000 Class Z warrants, each of which entitles the holder to purchase a share of our common stock at an exercise price of $5.00 per share on or before April 10, 2012. We also have outstanding approximately $4.8 million in principal amount of promissory notes due in December 2010 that are convertible into common stock at a conversion price of $1.70 per share. We also issued to the representative of the underwriters in our initial public offering an option to purchase at any time on or before April 10, 2010, 25,000 Series A units at anweighted-average exercise price of $17.325equal to $1.73 per Series A unit (each of which is comprised of two shares of common stock, five Class W warrants and five Class Z warrants) and/or 230,000 Series B units at an exercise price of $16.665 per Series B unit (each of which is comprised of two shares of common stock, one Class W warrant and one Class Z warrant), except that (a) the exercise
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The concentration of our capital stock ownership will likely limit a stockholder’sability to influence corporate matters, and could discourage a takeover thatstockholders may consider favorable and make it more difficult for a stockholder toelect directors of its choosing.
H. Brian Thompson, the Company’s Executive Chairman of the Board of Directors, and Universal Telecommunications, Inc., his own private equity investment and advisory firm, owned 5,716,171 shares of our common stock at December 31, 2012. Based on the number of shares of our common stock outstanding on December 31, 2012, Mr. Thompson and Universal Telecommunication, Inc. would beneficially own approximately 30% of our common stock. Based on public filings with the SEC made by J. Carlo Cannell, we believe that, as of December 31, 2009,2012, funds associated with Cannell Capital LLC owned 3,419,106 shares of our common stock and warrants to acquire 2,224,0003,472,080 shares of our common stock. Based on the number of shares of our common stock outstanding on March 20, 2010 without taking into account their unexercised warrants,December 31, 2012, these funds would beneficially own approximately 20%18% of our common stock. In addition, as of March 24, 2010,December 31, 2012, our executive officers, directors and affiliated entities, excluding H. Brian Thompson and Universal Telecommunications, together beneficially owned common stock, without taking into account their unexercised and unconverted warrants, options, and convertible notes, representing approximately 32%13% of our common stock. As a result, these stockholders have the ability to exert significant control over matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. The interests of these stockholders might conflict with your interests as a holder of our securities, and it may cause us to pursue transactions that, in their judgment, could enhance their equity investments, even though such transactions may involve significant risks to you as a security holder. The large concentration of ownership in a small group of stockholders might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.
It may be difficult for you to resell shares of our common stock if an active marketfor our common stock does not develop.
Our common stock is not activelythinly traded on a securities exchange and we currently do not meet the initial listing criteria for any registered securities exchange, including the NASDAQ National Market System. It is quoted on the less recognized Over-the-Counter Bulletin Board.OTC Markets. This factor, in addition to the concentrated ownership of our capital stock, may further impair your ability to sell your shares when you want and/or could depress our stock price. As a result, you may find it difficult to dispose of, or to obtain accurate quotations of the price of our securities because smaller quantities of shares could be bought and sold, transactions could be delayed, and security analyst and news coverage of our company may be limited. These factors could result in lower prices and larger spreads in the bid and ask prices for our shares.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
| ITEM 2. | PROPERTIES |
The Company does not own any real estate. Instead, all of the Company’s facilities are leased. GTT’s headquarters in McLean, Virginia are occupied under a lease that expires in December 2014. We also maintain offices in Denver, Colorado, and London, England and Düsseldorf, Germany.England. The lease of our London, England facility expires in June 2012.May 2017. The Company leases its facility in Düsseldorf, Germany under a multi-year lease thatof our Denver, Colorado office expires in July 2011. The Company’s offices in Denver, Colorado are leased under a three month lease that renews for successive three month periods unless either GTT or the landlord gives a notice of non-renewal. We are currently evaluating our options with respect to our offices in Düsseldorf, Germany, and Denver, Colorado. We believe the necessary office space in these locations will be available on commercially reasonable terms.
We believe our properties, taken as a whole, are in good operating condition and are adequate for our business needs.
| ITEM 3. | LEGAL PROCEEDINGS |
The Company is not currently subject to any material legal proceedings. From time to time, however, we or our operating companies may party to other various legal proceedings that arisefiled a civil complaint against Artel, LLC on June 15, 2012 in the normal courseFairfax County Virginia Circuit Court, docket number CL2012-04735. The nature of business.the Company’s claims against Artel is breach of contract with respect to telecommunication services provided by the Company. In response to the opinionCompany’s complaint, Artel filed a counterclaim against the Company alleging breach of management, none of these proceedings, individually orcontract, fraud in the aggregate, are likely to haveinducement and intentional interference with a material adverse effect on our consolidated financial
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| ITEM 4. | MINE SAFETY DISCLOSURE |
PART II
| ITEM 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market for Equity Securities
Our common stock trades on the Over-the-Counter Bulletin BoardOTC Markets under the symbol GTLT, and our Class W warrants and Class Z warrants trade under the symbols GTLTW and GTLTZ, respectively.GTLT. At March 24, 2010,19, 2013, we had outstanding 17,216,39019,129,765 shares of our common stock, 12,090,000 Class W Warrants and 12,090,000 Class Z Warrants.
The following table sets forth, for the calendar quarters indicated, the quarterly high and low bid information of our common stock warrants, and unitswarrants as reported on the Over-the-Counter Bulletin Board.OTC Markets. The quotations listed below reflect interdealer prices, without retail markup, markdown, or commission, and may not necessarily represent actual transactions.
| Common Stock | Class W Warrants | Class Z Warrants | ||||||||||||||||||||||
| High | Low | High | Low | High | Low | |||||||||||||||||||
| 2008 | ||||||||||||||||||||||||
| First Quarter | $ | 1.10 | $ | 0.33 | $ | 0.05 | $ | 0.03 | $ | 0.10 | $ | 0.02 | ||||||||||||
| Second Quarter | $ | 0.75 | $ | 0.40 | $ | 0.05 | $ | 0.04 | $ | 0.14 | $ | 0.06 | ||||||||||||
| Third Quarter | $ | 0.65 | $ | 0.33 | $ | 0.04 | $ | 0.01 | $ | 0.05 | $ | 0.01 | ||||||||||||
| Fourth Quarter | $ | 0.59 | $ | 0.26 | $ | 0.01 | $ | 0.00 | $ | 0.03 | $ | 0.01 | ||||||||||||
| 2009 | ||||||||||||||||||||||||
| First Quarter | $ | 0.50 | $ | 0.36 | $ | 0.00 | $ | 0.00 | $ | 0.01 | $ | 0.01 | ||||||||||||
| Second Quarter | $ | 1.40 | $ | 0.62 | $ | 0.02 | $ | 0.00 | $ | 0.06 | $ | 0.00 | ||||||||||||
| Third Quarter | $ | 1.44 | $ | 1.26 | $ | 0.01 | $ | 0.00 | $ | 0.06 | $ | 0.01 | ||||||||||||
| Fourth Quarter | $ | 1.25 | $ | 0.95 | $ | 0.00 | $ | 0.00 | $ | 0.03 | $ | 0.01 | ||||||||||||
| Common Stock | Class Z Warrants | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| 2011 | ||||||||||||||||
| First Quarter | $ | 1.30 | $ | 1.05 | $ | 0.00 | $ | 0.00 | ||||||||
| Second Quarter | $ | 1.26 | $ | 1.01 | $ | 0.01 | $ | 0.01 | ||||||||
| Third Quarter | $ | 1.30 | $ | 1.10 | $ | 0.07 | $ | 0.01 | ||||||||
| Fourth Quarter | $ | 1.40 | $ | 0.95 | $ | 0.01 | $ | 0.00 | ||||||||
| 2012 | ||||||||||||||||
| First Quarter | $ | 2.39 | $ | 1.12 | $ | 0.01 | $ | 0.00 | ||||||||
| Second Quarter | $ | 2.39 | $ | 1.75 | $ | 0.00 | $ | 0.00 | ||||||||
| Third Quarter | $ | 2.79 | $ | 2.10 | - | - | ||||||||||
| Fourth Quarter | $ | 2.82 | $ | 1.02 | - | - | ||||||||||
Dividends
We have not paid any dividends on our common stock to date, and do not anticipate paying any dividends in the foreseeable future. Moreover, restrictive covenants existing in certain promissory notes that we have issued preclude us from paying dividends until those notes are paid in full.
| ITEM 6. | SELECTED FINANCIAL DATA |
Not required as a Smaller Reporting Company.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS |
The following discussion and analysis should be read together with the Company’s Consolidated Financial Statements and related notes thereto beginning on page F-1. Reference is made to “Cautionary StatementNotes Regarding Forward-Looking Statements”
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Overview
Global Telecom & Technology, Inc. (“GTT” or the “Company”) is a Delaware corporation which was incorporated on January 3, 2005. GTT is a premiere cloud network provider delivering simplicity, speed and agility to enterprise, government and carrier customers in over 80 countries worldwide. Powered by our global network integrator providing a broad portfolioEthernet and IP backbone, GTT operates one of Wide-Area Network (WAN), dedicated Internet access,the most interconnected global networks. GTT’s solutions include cloud networking, high bandwidth IP transit for content delivery and managed date services. With over 800 supplier relationships worldwide, GTT combines multiple networkshosting, and technologies such as traditional OC-x, MPLS and Ethernet, to deliver cost-effective solutions specifically designed for each client’s unique requirements. GTT enhances its client performance through its proprietary Client Management Database (CMD), providing customers with an integrated support system for all of its services. GTT is committed to providing comprehensive solutions, project management and 24x7 global operations support.
The Company sells services largely through a direct sales force on a global basis.forces from its Americas and EMEA business units. The Company generally competes with large,traditional, facilities-based providers and other services providers in each of our global markets. As of December 31, 2009,2012, our customer base was comprised of over 7001,000 businesses. Our five largest customers accounted for approximately 36%27% of consolidated revenuesrevenue during the year ended December 31, 2009.
Costs and Expenses
The Company’s cost of revenue consists almost entirely of the costs for its core network consisting of a global Layer 2 Switched Ethernet mesh network as well as IP Transit/Internet Access through approximately 130 PoPs and for off-net procurement of services associated with customer solutions.services across North America, EMEA and Asia. The key off-net terms and conditions appearing in both supplier and customer agreements are substantially the same, with margin applied to the suppliers’ costs.costs, and generally on back-to-back term lengths. There are no wages or overheads included in these costs. From time to time, the Company has agreed to certain special commitments with vendors in order to obtain better rates, terms and conditions for the procurement of services from those vendors. These commitments include volume purchase commitments and purchases on a longer-term basis than the term for which the applicable customer has committed.
Our supplier contracts do not have any market related net settlement provisions. The Company has not entered into, and has no plans to enter into, any supplier contracts which involve financial or derivative instruments. The supplier contracts are entered into solely for the direct purchase of telecommunications capacity, which is resold by the Company in its normal course of business. As such, the Company considers its contracts with its suppliers to be normal purchases, according to the criteria in 10(b) of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” which was codified into ASC Topic 815,Derivatives and Hedging.
Other than cost of revenue, the Company’s most significant operating expenses are employment costs. As of December 31, 2009,2012, the Company had 8397 employees and employment costs comprised approximately 15%11% of total operating expenses for the year ended December 31, 2009.
Critical Accounting Policies and Estimates
The Company’s significant accounting policies are described in Note 2 to its accompanying consolidated financial statements. The Company considers the following accounting policies to be those that require the most significant judgments and estimates in the preparation of its consolidated financial statements, and believes that an understanding of these policies is important to a proper evaluation of the reported consolidated financial results.
Revenue Recognition
The Company provides data connectivitycloud networking solutions, such as dedicated circuit access, access aggregationethernet transport and hubbing and managed network servicesIP transit to its customers. Certain of the Company’s current revenue activities have features that may be considered multiple elements. The Company believes that there is insufficient evidence to determine each element’s fair value and as a result, in those arrangements where there are multiple elements, revenue is recorded ratably over the term of the arrangement.
The Company’s services are provided under contracts that typically provide for an installation charge along with payments of recurring charges on a monthly (or other periodic) basis for use of the services over a committed term. Our contracts with customers specify the terms and conditions for providing such services. These contracts call for the Company to provide the service in question (e.g., data transmission between point A and point Z), to manage the activation process, and to provide ongoing support (in the form
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The Company recognizes revenue as follows:
Network Services and SupportSupport..The Company’s services are provided pursuant to contracts that typically provide for payments of recurring charges on a monthly basis for use of the services over a committed term. Each service contract typically has a fixed monthly cost and a fixed term, in addition to a fixed installation charge (if applicable). Variable usage charges are applied when incurred for certain product offerings. At the end of the initial term of most service contracts the contracts roll forward on a month-to-month or other periodic basis and continue to bill at the same fixed recurring rate. If any cancellation or termination charges become due from the customer as a result of early cancellation or termination of a service contract, those amounts are calculated pursuant to a formula specified in each contract. Recurring costs relating to supply contracts are recognized ratably over the term of the contract.
Non-recurring fees, Deferred Revenue.Non-recurring fees for data connectivity typically take the form of one-time, non-refundable provisioning fees established pursuant to service contracts. The amount of the provisioning fee included in each contract is generally determined by marking up or passing through the corresponding charge from the Company’s supplier, imposed pursuant to the Company’s purchase agreement. Non-recurring revenuesrevenue earned for providing provisioning services in connection with the delivery of recurring communications services areis recognized ratably over the contractual term of the recurring service starting upon commencement of the service contract term. Fees recorded or billed from these provisioning services are initially recorded as deferred revenue then recognized ratably over the contractual term of the recurring service. Installation costs related to provisioning incurred by the Company from independent third party suppliers, directly attributable and necessary to fulfill a particular service contract, and which costs would not have been incurred but for the occurrence of that service contract, are recorded as deferred contract costs and expensed proportionally over the contractual term of service in the same manner as the deferred revenue arising from that contract. Deferred costs do not exceed deferred upfront fees. Due to its limited operating history, theThe Company believes the initial contractual term is the best estimate of the period of earnings.
Other RevenueRevenue..From time to time, the Company recognizes revenue in the form of fixed or determinable cancellation (pre-installation) or termination (post-installation) charges imposed pursuant to the service contract. These revenues areThis revenue is earned when a customer cancels or terminates a service agreement prior to the end of its committed term. These revenues areThis revenue is recognized when billed if collectability is reasonably assured. In addition, the Company from time to time sells equipment in connection with data networking applications. The Company recognizes revenue from the sale of equipment at the contracted selling price when title to the equipment passes to the customer (generally F.O.B. origin) and when collectability is reasonably assured.
Estimating Allowances and Accrued Liabilities
The Company employs the “allowance for bad debts” method to account for bad debts. The Company states its accounts receivable balances at amounts due from the customer net of an allowance for doubtful accounts. The Company determines this allowance by considering a number of factors, including the length of time receivables are past due, previous loss history, and the customer’s current ability to pay.
In the normal course of business from time to time, the Company identifies errors by suppliers with respect to the billing of services. The Company performs bill verification procedures to attempt to ensure that errors in its suppliers’ billed invoices are identified and resolved. The bill verification procedures include the examination of bills, comparison of billed rates to rates shown on the actual contract documentation and logged in the Company’s operating systems, comparison of circuits billed to the Company’s database of active circuits, and evaluation of the trend of invoiced amounts by suppliers, including the types of charges being assessed. If the Company concludes by reference to such objective factors that it has been billed inaccurately, the Company will record a liability for the amount that it believes is owed with reference to the applicable contractual rate and, in the instances where the billed amount exceeds the applicable contractual rate, the likelihood of prevailing with respect to any dispute.
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Although the Company disputes erroneously billed amounts in good faith and historically has prevailed in most cases, it recognizes that it may not prevail in all cases (or in full) with a particular supplier with respect to such billing errors or it may choose to settle the matter because of the quality of the supplier relationship or the cost and time associated with continuing the dispute. Careful judgment is required in estimating the ultimate outcome of disputing each error, and each reserve is based upon a specific evaluation by management of the merits of each billing error (based upon the bill verification process) and the potential for loss with respect to that billing error. In making such a case-by-case evaluation, the Company considers, among other things, the documentation available to support its assertions with respect to the billing errors, its past experience with the supplier in question, and its past experience with similar errors and disputes. As of December 31, 2009,2012, the Company had $1.7$4.1 million in billing errors disputed with suppliers, for which we have accrued $1.0 million in liabilities.
In instances where the Company has been billed less than the applicable contractual rate, the accruals remain on the Company’s consolidated financial statements until the vendor invoices for the under-billed amount or until such time as the obligations related to the under-billed amounts, based upon applicable contract terms and relevant statutory periods in accordance with the Company’s internal policy, have passed. If the Company ultimately determines it has no further obligation related to the under-billed amounts, the Company recognizes a decrease in expense in the period in which the determination is made.
Goodwill and Intangible Assets
Goodwill is the excess purchase price paid over identified intangible and tangible net assets of acquired companies. Goodwill is not amortized, and is tested for impairment at the reporting unit level annually or when there are any indications of impairment, as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350,Intangibles — Goodwill andOther (formerly Statement of Financial Accounting Standards“SFAS”No. 142). ASC Topic 350 provides guidance on financial accounting and reporting related to goodwill and other intangibles, other than the accounting at acquisition for goodwill and other intangibles. A reporting unit is an operating segment, or component of an operating segment, for which discrete financial information is available and is regularly reviewed by management. We have one reporting unit to which goodwill is assigned.
In September 2011, the FASB issued ASU No. 2011-08,Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is requiredintended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350,Intangibles-Goodwill and Other. The first step tests for impairment by applying fair value-based tests. The second step, if deemed necessary, measures the impairment by applying fair value-based tests to specific assets and liabilities. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the Company, the useful life over which cash flows will occur, and determination of the Company’s cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and conclusions on goodwill impairment.
The Company performs its annual goodwill impairment testing in the third quarter of each year, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. The Company tested its goodwill during the third quarter of 20092012 and 2011 and concluded that no impairment existed. In 2008, the Company tested its goodwill and concluded that impairment existed and recorded an impairment charge to goodwill of $38.9 million.
Intangible assets are assets that lack physical substance, and are accounted for in accordance with ASC Topic 350 and ASC Topic 360,360-10-35,Impairment or Disposal ofLong-Lived AssetsAssets.(formerly SFAS 144). ASC Topic 360-10-35 provides guidance for recognition and measurement of the impairment of long-lived assets to be held, used and disposed of by sale. Intangible assets arose from business combinations and consist of customer contracts, acquired technology and restrictive covenants related to employment agreements that are amortized, on a straight-line basis, over periods of up to five years. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. During the third quarter of 2009,2012 and 2011, the Company tested their intangible assetsperformed a qualitative assessment and concluded that no impairment existed. In 2008, we determined that certain of our intangible assets were impaired and recorded an impairment charge to intangible assets of $2.9 million.
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The Company accounts for income taxes in accordance with ASC Topic 740,Income Taxes(formerly SFAS 109).Under ASC Topic 740, deferred tax assets are recognized for future deductible temporary differences and for tax net operating loss and tax credit carry-forwards, and deferred tax liabilities are recognized for temporary differences that will result in taxable amounts in future years. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. A valuation allowance is provided to offset the net deferred tax asset if, based upon the available evidence, management determines that it is more likely than not that some or all of the deferred tax asset will not be realized.
In June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertaintyin Income Taxes(“ (“FIN 48”). FIN 48 was codified into ASC Topic 740, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements, and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of the new FASB ASC Topic did not have a material effect on the Company’s consolidated financial statements
We may from time to time be assessed interest and/or penalties by taxing jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. The Company’s federal, state and international tax returns for 2008, 2009, 2010 and 2011 are still open. In the event we have received an assessment for interest and/or penalties, it has been classified in the statement of operations as other general and administrative costs.
Share-Based Compensation
On October 16, 2006, the Company adopted SFAS No. 123 (revised 2004),ASC Topic 718,Share-Based Payment”Compensation — Stock (“SFAS 123(R)”)Compensation which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, directors, and consultants based on estimated fair values. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). SFAS 123(R) was codified into ASC Topic 718,Compensation — Stock Compensation.The adoption of the new FASB ASC Topic did not have a material effect on the Company’s consolidated financial statements.
ASC Topic 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statement of operations. The Company follows the straight-line single option method of attributing the value of stock-based compensation to expense. As stock-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company electeduses the Black-Scholes option-pricing model as its method of valuation for share-based awards granted. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards and the expected term of the awards. The Company accounts for non-employee share-based compensation expense in accordance with ASC Topic 505,Equity — Based Paymentsto Non-EmployeesNon-Employee. (formerly EITF Issue No. 96-18).
Use of Estimates and Assumptions
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and
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Recent Accounting Pronouncements
Reference is made to Note 2 (“Significant Accounting Policies”) of the consolidated financial statements, which commence on page F-1F-8 of this report, which Note is incorporated herein by reference.
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Results of Operations of the Company
Fiscal Year Ended December 31, 20092012 compared to Fiscal Year EndedDecember 31, 20082011
Overview.The financial information presented in the table below comprises the audited consolidated financial information of the Company for the years ended December 31, 20092012 and 20082011 (amounts in thousands):
| Year Ended | Year Ended | |||||||
| December 31, 2009 | December 31, 2008 | |||||||
Revenue: | ||||||||
| Telecommunications services sold | $ | 64,221 | $ | 66,974 | ||||
Operating expenses: | ||||||||
| Cost of telecommunications services provided | 45,868 | 47,568 | ||||||
| Selling, general and administrative expense | 14,684 | 18,197 | ||||||
| Impairment of goodwill and intangibles | — | 41,854 | ||||||
| Restructuring costs, employee termination and non-recurring items | 641 | — | ||||||
| Depreciation and amortization | 1,733 | 2,211 | ||||||
| Total operating expenses | 62,926 | 109,830 | ||||||
| Operating income (loss) | 1,295 | (42,856 | ) | |||||
| Other income (expense): | ||||||||
| Interest income (expense), net | (849 | ) | (781 | ) | ||||
| Other income (expense), net | 24 | (28 | ) | |||||
| Total other expense, net | (825 | ) | (809 | ) | ||||
| Income (loss) before income taxes | 470 | (43,665 | ) | |||||
| Provision for (benefit from) income taxes | 16 | (1,291 | ) | |||||
| Net income (loss) | $ | 454 | $ | (42,374 | ) | |||
| Net income (loss) per share: | ||||||||
| Basic | $ | 0.03 | $ | (2.85 | ) | |||
| Diluted | $ | 0.03 | $ | (2.85 | ) | |||
| Weighted average shares: | ||||||||
| Basic | 15,268,826 | 14,863,658 | ||||||
| Diluted | 15,470,763 | 14,863,658 | ||||||
| Year Ended December 31, 2012 | Year Ended December 31, 2011 | |||||||
| Revenue: | ||||||||
| Telecommunications services sold | $ | 107,877 | $ | 91,188 | ||||
| Operating expenses: | ||||||||
| Cost of telecommunications services provided | 76,000 | 64,198 | ||||||
| Selling, general and administrative expense | 18,957 | 18,597 | ||||||
| Restructuring costs, employee termination and other items | 701 | 958 | ||||||
| Depreciation and amortization | 7,296 | 3,896 | ||||||
| Total operating expenses | 102,954 | 87,649 | ||||||
| Operating income | 4,923 | 3,539 | ||||||
| Other expense: | ||||||||
| Interest expense, net | (4,686 | ) | (2,491 | ) | ||||
| Other expense, net | (1,054 | ) | (218 | ) | ||||
| Total other expense | (5,740 | ) | (2,709 | ) | ||||
| Income (loss) before income taxes | (817 | ) | 830 | |||||
| Provision for income taxes | 746 | 575 | ||||||
| Net income (loss): | $ | (1,563 | ) | $ | 255 | |||
| Earnings (loss) per share: | ||||||||
| Basic | $ | (0.08 | ) | $ | 0.01 | |||
| Diluted | $ | (0.08 | ) | $ | 0.01 | |||
| Weighted average shares: | ||||||||
| Basic | 18,960,347 | 18,599,028 | ||||||
| Diluted | 18,960,347 | 18,820,380 | ||||||
Revenues.
Revenue.The table below presents the components of revenuesrevenue for the years ended December 31, 20092012 and 2008:
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| Geographical Revenue | 2012 | 2011 | ||||||
| United States | 76 | % | 72 | % | ||||
| United Kingdom | 19 | % | 21 | % | ||||
| Other | 5 | % | 7 | % | ||||
| Totals | 100 | % | 100 | % | ||||
| Geographical Revenue Source | 2009 | 2008 | ||||||
| United States | 58 | % | 51 | % | ||||
| United Kingdom | 29 | 35 | ||||||
| Germany | 13 | 13 | ||||||
| Other Countries | — | 1 | ||||||
| Totals | 100 | % | 100 | % | ||||
Costs of Service.Total costs Costs of service decreased $1.7telecommunications services provided increased $11.8 million, or 3.6%18%, for the year ended December 31, 20092012 compared to the year ended December 31, 20082011 primarily due to the impact of foreign currency valuation as related to our revenuePacketExchange and costs outside of the United States,nLayer acquisitions, as well as the installation of higher margin servicesincreased sales to new and customer disconnections with lower margins.
Selling, General and Administrative Expenses.SG&A decreased $3.5increased $0.4 million, or 19.3%,2% for the year ended December 31, 20092012 compared to the year ended December 31, 2008. This reduction is2011, primarily due to the Company’s plan in 2009 to significantly reduce all generalPacketExchange and administrative expenses, as well as the impact of foreign currency translations.
Depreciation
Restructuring costs, employee termination and Amortization.non-recurring items.Depreciation and amortization expense Restructuring costs decreased $0.5 million, or 21.6%, to $1.7by $0.3 million for the year ended December 31, 2009,2012 compared to the year ended December 31, 2008.2011. The net decrease was primarily duereflects the lower costs associated with the acquisition of nLayer in 2012 in comparison to a reductionthe costs associated with the PacketExchange acquisition in 2011.
Depreciation and Amortization. Depreciation and amortization expense resulting from the impairment of the Company’s intangible assets in the third quarter of 2008.
Interest Expense.Interest expense increased $0.1$2.2 million, or 8.8%88%, to $0.8$4.7 million for the year ended December 31, 20092012 compared to the year ended December 31, 2008.2011. The net increase was primarily due to interest on draw-downs against the Company’s lineadditional debt incurred in connection with the nLayer and PacketExchange acquisitions.
Other Expense. Other expense increased $0.8 million to $1.1 million for the year ended December 31, 2012 compared to the year ended December 31, 2011. The increase is due to the warrant liability that was marked to market in 2012, which resulted in a loss of credit during the third and fourth quarter of 2009.
Liquidity and Capital Resources(amounts (amounts in thousands)
| December 31, 2009 | December 31, 2008 | |||||||
| Cash and cash equivalents and short-term investments | $ | 5,548 | $ | 5,785 | ||||
| Debt | $ | 12,707 | $ | 8,796 | ||||
| December 31, 2012 | December 31, 2011 | |||||||
| Cash and cash equivalents and short-term investments | $ | 4,726 | $ | 3,249 | ||||
| Debt | $ | 42,829 | $ | 27,989 | ||||
Management monitors cash flow and liquidity requirements. Based on the Company’s cash, the Silicon Valley Bank credit facility, and analysis of the anticipated working capital requirements, management believes the Company generated positivehas sufficient liquidity to fund the business and meet its contractual obligations for 2013. The Company’s current planned cash requirements for 2013 are based upon certain assumptions, including its ability to manage expenses and the growth of revenue from service arrangements. In connection with the activities associated with the services, the Company expects to incur expenses, including provider fees, employee compensation and consulting fees, professional fees, sales and marketing, insurance and interest expense. Should the expected cash flows not be available, management believes it would have the ability to revise its operating cash flow, inclusive of significantplan and make reductions in accounts payable, and generated positive net income. The Company also consummated the acquisition of WBS Connect in the last half of December 2009. As a result, the Company assumed additional current liabilities of WBS Connect and drew approximately $3.1 million on its credit facility to support cash payments required to consummate the acquisition.
The Company believes that cash currently on hand, expected cash flows from future operations and potential futureexisting borrowing capacity are sufficient to fund operations for at least the next twelve months, including the scheduled repayment extension or refinancing of indebtedness pursuant to multiple agreements including: (i) approximately $4.8 million in principal, plus accrued interest, of promissory notes we issued in November 2007, (ii) $4.0 million in principal, plus accrued interest, with respect to promissory notes
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Operating Activities.Net cash provided by operating activities was $1.4$4.0 million for the year ended December 31, 2009, reflecting a net income of $0.5, a change2012, driven primarily by an increase in operating assetsdepreciation and amortization and other long-term liabilities, of $1.4 million, offset by $2.3 million in non-cash operating items. The source of cash in working capital was primarily due to an overall decrease in accounts receivable resulting from improved customer collections, offset by a decrease in accounts payable, as a resultand net loss.
Investing Activities. Net cash used in investing activities for the year ended December 31, 2012 was $17.0 million, consisting primarily of faster vendor payment. The decreasethe $12.6 million of cash used, net of cash acquired, in working capital on the Company’s balance sheet was primarily due to an increase in short-term debt and an increase in accrued expenses and accounts payable in connection with the acquisition of WBS ConnectnLayer. Net cash used in investing activities for the year ended December 2009.
Financing Activities. Net cash provided by financing activities increased to $14.7 million for the year ended December 31, 2012 consisting primarily of the $20.5 million raised for the acquisition of nLayer. Cash flows provided by financing activities were $13.0 million for the year ended December 31, 2011.
Effect of Exchange Rate Changes on Cash. Effect of exchange rate changes on cash increased $0.3 million to $0.2 million for the year ended December 31, 2012 compared to ($0.1) million for the year ended December 31, 2011.
Interest Payments. During 2009the year ended December 31, 2012 and 2008, we2011, the Company made cash payments for interest totaling $0.3$4.8 million and $0.1$2.2 million, respectively. The increase in interest payments was a result of a contractual increase in the amount of cash interest due, as well as interest on draw-downs againstmodified Term Loan with Silicon Valley Bank and the Company’s line of creditAmended and Restated Note Purchase Agreement with BIA Digital Partners and Plexus Fund II, L.P. during the third and fourthsecond quarter of 2009.
Investing Activities.DebtNet cash used in investing activities was $4.1 million in
The following summarizes the year ended December 31, 2009, consisting primarilydebt activity of the $3.7 million of cash used in the purchase of WBS Connect, and $0.4 million of capital expenditures.
| Total Debt | SVB Term Loan | SVB Line of Credit | BIA Note | Plexus Note | Subordinated Notes | Promissory Note | ||||||||||||||||||||||
| Debt obligation as of December 31, 2011 | $ | 27,989 | $ | 13,500 | $ | 3,100 | $ | 8,078 | $ | - | $ | 2,602 | $ | 709 | ||||||||||||||
| Issuance, net of discount | 25,714 | 14,500 | 4,000 | - | 7,214 | - | - | |||||||||||||||||||||
| Debt discount amortization | 303 | - | - | 95 | 94 | 114 | - | |||||||||||||||||||||
| Payments | (11,177 | ) | (3,500 | ) | (7,100 | ) | - | - | (105 | ) | (472 | ) | ||||||||||||||||
| Debt obligation as of December 31, 2012 | $ | 42,829 | $ | 24,500 | $ | - | $ | 8,173 | $ | 7,308 | $ | 2,611 | $ | 237 | ||||||||||||||
Term Loan and Line of Credit
On June 6, 2011, immediately following the year ended December 31, 2008. This increase was due to borrowingsPacketExchange acquisition, the Company entered into a joinder and first loan modification agreement with Silicon Valley Bank (“SVB”), which amended the loan agreement, dated September 30, 2010, by and among SVB and the Company. The modification agreement contains customary representations, warranties and covenants of the Company and customary events of default. The obligations of the Company under its expanded SVB Credit facility, used to fund the WBS Connect acquisition.
On April 30, 2012, in connection with ourthe nLayer acquisition, of WBS Connect, and $0.6 million of capital lease obligations assumed in the acquisition (amounts in thousands):
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| Notes Payable to former | Notes Payable to former | Notes Payable to Other | Promissory Note / | Senior Secured Credit | ||||||||||||||||||||
| Total Debt | GII Shareholders | ETT and GII Shareholders | Investors | Capital Lease | Facility | |||||||||||||||||||
| Debt obligation as of December 31, 2008 | $ | 8,796 | $ | 4,000 | $ | 2,871 | $ | 1,925 | $ | — | $ | — | ||||||||||||
| Draw on Senior Secured Credit Facility | 3,078 | — | — | — | — | 3,078 | ||||||||||||||||||
| Promissory Note Issued | 250 | — | — | — | 250 | — | ||||||||||||||||||
| Captial lease obligation assumed | 583 | — | — | — | 583 | — | ||||||||||||||||||
| Debt obligation as of December 31, 2009 | $ | 12,707 | $ | 4,000 | $ | 2,871 | $ | 1,925 | $ | 833 | $ | 3,078 | ||||||||||||
On May 23, 2012, the Company refinanced the Term Loan through a syndication led by SVB, which amends the loan agreement dated April 2008 Notes for an aggregate of 2,570,144 shares of30, 2012, as amended, by and among SVB and the Company’s common stock, and (ii) exchangedCompany, which increased the remaining $2.4 million in aggregate principaloutstanding amount of the April 2008 Notes, plus accrued interest, for $2.9Term Loan by $7.0 million, aggregate principalwhile the existing covenants and the amount of the 10% convertible unsecured subordinated promissory notesLine of Credit remained unchanged.
The Term Loan matures on May 1, 2016. The Company will repay the Term Loan in sixteen (16) equal quarterly principal installments of $1.25 million, with each payment of principal being accompanied by a payment of accrued interest. The Term Loan bears interest at a floating rate per annum, calculated daily, equal to the prime rate plus 4.5% per annum, which may be reduced to 3.5% per annum if the Company’s consolidated senior leverage ratio is less than 2:1 and certain other criteria are met.
Any borrowing under the Line of Credit will mature on April 30, 2016, and will bear interest at a floating rate per annum, calculated daily, equal to the prime rate plus 3.5% per annum, which may be reduced to 2.5% per annum if the Company’s consolidated senior leverage ratio is less than 2:1 and certain other criteria are met.
BIA and Plexus Notes
Concurrent with entering in to the modification agreement, on June 6, 2011, the Company entered into a note purchase agreement (the “Purchase Agreement”) with the BIA Digital Partners SBIC II LP (“BIA”). The Purchase Agreement provided for a total commitment of $12.5 million, of which $7.5 million was immediately funded (the “BIA Notes”). The BIA Notes were issued at a discount to face value of $0.4 million and the discount is being amortized, into interest expense, over the life of the notes. The remaining $5.0 million of the committed financing was available to be called by the Company on or before August 11, 2011, subject to extension to December 31, 2011 at the sole option of BIA. On September 19, 2011, BIA agreed to extend the commitment period and funded the Company an additional $1.0 million. The additional funding was issued at a discount to face value of $45,000, due to the warrants issued, and the discount is being amortized, into interest expense, over the life of the notes.
On April 30, 2012, in connection with the nLayer acquisition, the Company entered into an amended and restated note purchase agreement (the “Amended Note Purchase Agreement”) with BIA and Plexus Fund II, L.P. (“Plexus”) (together with BIA, the “Note Holders”). The Amended Note Purchase Agreement provides for an increase in the total financing commitment by $8.0 million, of which $6.0 million was immediately funded (the “Plexus Notes” and together with the BIA Notes, the “Notes”). The Company called on the remaining $2.0 million on December 31, 2010 (the “December 2010 Notes”). All principal2012. The funding by Plexus was issued at a total discount to face value of $0.8 million, due to the warrants issued, and accruedthe discount is being amortized into interest expense over the life of the Notes.
The Notes mature on June 6, 2016. The obligations evidenced by the Notes shall bear interest at a rate of 13.5% per annum, of which (i) at least 11.5% per annum shall be payable, in cash, monthly (“Cash Interest Portion”) and (ii) 2.0% per annum shall be, at the Company’s option, paid in cash or paid-in-kind. If the Company achieves certain performance criteria, the obligations evidenced by the Notes shall bear interest at a rate of 12.0% per annum, with a Cash Interest Portion of at least 11.0% per annum.
The obligations of the Company under the December 2010 Notes is payableAmended Note Purchase Agreement are secured by a second lien on December 31, 2010. In addition, on November 13, 2007,substantially all of Company’s tangible and intangible assets. Pursuant to a pledge agreement (the “Pledge Agreement”), dated June 6, 2011, by and between BIA and the Company, sold an additional $1.9 million of December 2010 Notes to certain accredited investors including approximately $1.7 million of December 2010 Notes to certain membersthe obligations of the Company’s board of directors and entities affiliated with membersCompany are also secured by a pledge in all of the Company’s board of directors. An aggregate of $4.8 million in principal amountequity interests of the December 2010 Notes was outstanding asCompany in its respective United States subsidiaries and a pledge of December 31, 2009.
Concurrent with entering into the Amended Note Purchase Agreement, SVB and BIA entered into an agreement (the “Intercreditor and Subordination Agreement”) which governs, among other things, ranking and collateral access for the respective lenders.
Warrants
On June 6, 2011, pursuant to the Purchase Agreement, the Company issued to BIA a warrant to purchase from the Company 634,648 shares of the Company’s common stock, at an exercise price equal to $1.144 per share (as adjusted from time to time as provided in the Purchase Agreement). Upon the additional $1.0 million funding, the Company issued to BIA an additional warrant to purchase from the Company 63,225 shares of the Company’s common stock, at an exercise price equal to $1.181 per share.
On April 30, 2012, pursuant to the Amended Note Purchase Agreement, the Company issued to Plexus a warrant to purchase from the Company 535,135 shares of the Company’s common stock at an exercise price equal to $2.208 per share (as adjusted from time to time as provided in the warrant). On December 31, 2012, the Company issued to Plexus an additional warrant to purchase from the Company 178,378 shares of the Company’s common stock, at an exercise price equal to $2.542 per share (as adjusted from time to time as provided in the warrant). Upon a change of control (as defined in the Amended Note Purchase Agreement), the repayment of the Notes prior to the maturity date of the Notes, the occurrence of an event of default under the Notes or the maturity date of the Notes, the holder of the warrant shall have the option to require the Company to repurchase from the holder the warrant and any time,shares received upon exercise of the warrant and then held by the holder, which repurchase would be at a price per share equal to $1.70. The Company has the right to require the holdersgreater of the December 2010 Notes to convert the principal amount due under the December 2010 Notes at any time after the closing price of the Company’s common stock shallon such date or a price determined by reference to the Company’s adjusted enterprise value on such date, in each case, with respect to any warrant, less the exercise price per share.
The Company evaluated the down round ratchet feature embedded in the warrants and after considering ASC 480,Distinguishing Liabilities from Equity, which establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity, and ASC 815, Derivatives and Hedging, the Company concluded the warrants should be equaltreated as a derivative and recorded a liability for the original fair value amount of $1.3 million as of 2012. During 2012, the warrant liability was marked to or greater than $2.64 for 15 consecutive trading days.market which resulted in a loss of $1.0 million. The conversion provisionsbalance of the warrant liability was $2.3 million as of December 31, 2012, which is included in other long-term liabilities.
Subordinated Notes
On February 8, 2010, Notes include protection against dilutive issuancesthe Company completed a financing transaction in which it sold debt and common stock (“February 2010 Units”), resulting in $2.4 million of proceeds to the Company. The February 2010 Units consisted of $1.5 million in aggregated principal amount of the Company’s subordinated promissory notes due February 8, 2012, and $0.9 million of the Company’s common stock. The subordinated promissory notes were issued at a discount to face value of $0.2 million and the discount is being amortized into interest expense over the life of the subordinated promissory notes. Interest on the subordinated promissory notes accrues at 10% per annum. In May 2011, $1.4 million of the subordinated promissory notes were amended to mature in four equal installments on March 31, June 30, September 30 and December 31, 2013. The remaining $0.1 million of the subordinated promissory notes were paid off in February 2012. The total subordinated promissory notes of $1.4 million are included in short-term debt as of December 31, 2012. Accrued but unpaid interest was $283,000 as of December 31, 2012.
On December 31, 2010, the Company completed a financing transaction in which it sold debt and common stock subject(“December 2010 Units”), resulting in $2.2 million of proceeds to certain exceptions.the Company. The December 2010 Notes and the Amended Notes permit the incurrenceUnits consisted of senior indebtedness up to an aggregate$1.1 million in aggregated principal amount of $4.0 million. The Company has agreed to register with the SecuritiesCompany’s subordinated promissory notes due December 31, 2013, and Exchange Commission$1.1 million of the shares of Company’s common stock issued tostock. On February 16, 2011, the Company and the holders of the December 2010 Notes upon their conversion, subjectUnits amended the offering solely to certain limitations.
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Promissory Note
As part of the June 2011 acquisition of PacketExchange, the Company assumed a promissory note of approximately $0.7 million. As of December 31, 2012, the remaining balance due was $0.2 million.
Contractual Obligations and Commitments
As of December 31, 2012, the Company had total contractual obligations of approximately $45.9$84.2 million. Of these obligations, approximately $33.0$39.4 million, or 71.9%,47% are supplier agreements associated with the telecommunications services that the Company has contracted to purchase from its vendors.vendors through 2017 and beyond. The Company generally tries to structure its contracts so the terms and conditions in the vendor and client customer contracts are substantially the same in terms of duration and capacity. The back-to-back nature of the Company’s contracts means that the largest component of its contractual obligations is generally mirrored by its customer’s commitment to purchase the services associated with those obligations. However, in certain instances relating to network infrastructure, the Company will enter into purchase commitments with vendors that do not directly tie to underlying customer commitments.
Approximately $10.5$42.8 million, or 22.9%51%, of the total contractual obligations are associated with promissory notes issued by the CompanyCompany’s debt which are due December 31, 2010.
Operating leases amount to $2.4$2.0 million, or 5.2%2% of total contractual obligations, which consist of building and vehicle leases.
The following table summarizes the Company’s significant contractual obligations as of December 31, 2012 (amounts in thousands):
| Payments due by periods | ||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
| Term loan | $ | 24,500 | $ | 5,000 | $ | 10,000 | $ | 9,500 | $ | - | ||||||||||
| BIA note | 8,173 | - | - | 8,173 | - | |||||||||||||||
| Plexus note | 7,308 | - | - | 7,308 | - | |||||||||||||||
| Subordinated notes | 2,611 | 2,611 | - | - | - | |||||||||||||||
| Promissory note | 237 | 237 | - | - | - | |||||||||||||||
| Operating leases | 2,034 | 682 | 952 | 400 | - | |||||||||||||||
| Supplier agreements | 39,404 | 8,330 | 21,491 | 6,440 | 3,143 | |||||||||||||||
| $ | 84,267 | $ | 16,860 | $ | 32,443 | $ | 31,821 | $ | 3,143 | |||||||||||
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
Interest due on the Company’s loans is based upon the applicable stated fixed contractual rate with the lender. Interest earned on the Company’s bank accounts is linked to the applicable base interest rate. For the yearyears ended December 31, 2009,2012 and 2011, the Company had interest expense, net of interest income, of approximately $0.8 million.$4.7 million and $2.5 million, respectively. The Company believes that its results of operations are not materially affected by changes in interest rates. For the year ended December 31, 2008, the Company had no material net interest income.
Exchange Rate Sensitivity
Approximately 42%24% of the Company’s revenuesrevenue for the year ended December 31, 2009 are2012 is derived from services provided outside of the United States. As a consequence, a material percentage of the Company’s revenues arerevenue is billed in British Pounds Sterling or Euros. Since we operate on a global basis, we are exposed to various foreign currency risks. First, our consolidated financial statements are denominated in U.S. Dollars, but a significant portion of our revenue is generated in the local currency of our foreign subsidiaries. Accordingly, changes in exchange rates between the applicable foreign currency and the U.S. Dollar will affect the translation of each foreign subsidiary’s financial results into U.S. Dollars for purposes of reporting consolidated financial results.
In addition, because of the global nature of our business, we may from time to time be required to pay a supplier in one currency while receiving payments from the underlying customer of the service in another currency. Although it is the Company’s general
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ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the consolidated financial statements, the notes thereto, and the reportsreport thereon, commencing on page F-1 of this report, which consolidated financial statements, notes, and report are incorporated herein by reference.
ITEM 9A(T).9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
ITEM 9A.CONTROLS AND PROCEDURES
As of the end of the period covered by this Annual Report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief FinancialAccounting Officer, of the effectiveness of the design and operation of the Company’s “disclosuredisclosure controls and procedures”procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) and “internalinternal control over financial reporting”.
The evaluation of the Company’s disclosure controls and procedures and internal control over financial reporting included a review of our objectives and processes, implementation by the Company and the effect on the information generated for use in this Annual Report. In the course of this evaluation and in accordance with Section 302 of the Sarbanes Oxley Act of 2002, we sought to identify material weaknesses in our controls, to determine whether we had identified any acts of fraud involving personnel who have a significant role in our internal control over financial reporting that would have a material effect on our consolidated financial statements, and to confirm that any necessary corrective action, including process improvements, were being undertaken. Our evaluation of our disclosure controls and procedures is done quarterly and management reports the effectiveness of our controls and procedures in our periodic reports filed with the SEC. Our internal control over financial reporting is also evaluated on an ongoing basis by personnel in the Company’s finance organization. The overall goals of these evaluation activities are to monitor our disclosure controls and procedures and internal control over financial reporting and to make modifications as necessary. We periodically evaluate our processes and procedures and make improvements as required.
Because of its inherent limitations, disclosure controls and procedures and internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Management applies its judgment in assessing the benefits of controls relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the companyCompany have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Disclosure Controls and Procedures
Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) information is accumulated and communicated to management, including our Chief Executive Officer and Chief FinancialAccounting Officer, as appropriate to allow timely decisions regarding required disclosures. Our Chief Executive Officer and Chief FinancialAccounting Officer evaluated the effectiveness of the our disclosure controls and procedures in place at the end of the period covered by this Annual Report pursuant to Rule 13a-15(b) of the Exchange Act. Based on this evaluation, the Chief Executive Officer and Chief FinancialAccounting Officer concluded that the Company’s disclosure controls and procedures (as defined in the Exchange Act Rule 13(a)-15(e)) were effective as of December 31, 2009.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the Company
29
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There have been no significant changes in our internal control over financial reporting during the most recently completed fiscal quarter ended December 31, 20092012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
| 26 |
PART III
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item relating to our directors and corporate governance is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 20092013 Annual Meeting of Stockholders. The information required by this Item relating to our executive officers is included in Item 1, “Business — Executive Officers” of this report.
| ITEM 11. |
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2013 Annual Meeting of Stockholders.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS |
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2013 Annual Meeting of Stockholders.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE |
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2013 Annual Meeting of Stockholders.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2013 Annual Meeting of Stockholders.
PART IV
| ITEM 15. | EXHIBITS, |
(a) Financial Statements
| (1) | Financial Statements are listed in the Index to Financial Statements on page F-1 of this report. |
| (2) | Schedules have been omitted because they are not applicable or because the information required to be set forth therein is included in the consolidated financial statements or notes thereto. | ||
(b) Exhibits
The following exhibits, which are numbered in accordance with Item 601 of Regulation S-K, are filed herewith or, as noted, incorporated by reference herein:
EXHIBIT INDEX
Exhibit Number | Description of Document |
| 3.1 (3) | Second Amended and Restated Certificate of Incorporation dated October 16, 2006. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3.2 (3) | Amended and Restated Bylaws dated October 15, 2006. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3.3 (4) | Amendment to Amended and Restated Bylaws dated May 7, 2007. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 4.1 (5) | Specimen of Common Stock Certificate. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 4.2 (6) | Warrant, dated June 6, 2011, issued by Global Telecom & Technology, Inc. to BIA Digital Partners SBIC II LP. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 4.3 (2) | Warrant, dated April 30, 2012, issued by Global Telecom & Technology, Inc. to Plexus Fund II, L.P. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 4.4 (7) | Form of Registration Rights Agreement, dated as
|
| * | Filed herewith | |
| ** | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability. | |
| + | Denotes a management or compensatory plan or arrangement. | |
| (1) | ||
| Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed May 21, 2011, and incorporated herein by reference. | ||
| (2) | Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed May 4, 2012, and incorporated herein by reference. | |
| (3) | Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed October 19, 2006, and incorporated herein by reference. | |
| (4) | Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed May 10, 2007, and incorporated herein by reference. | |
| (5) | Previously filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q filed November 14, 2006 and incorporated herein by reference. | |
| (6) | Previously filed as an Exhibit | |
| (7) | Previously filed as an Exhibit to the Registrant’s Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 333-122303) filed January 26, 2005, and incorporated herein by reference. | |
| (8) | Previously filed as Annex E to the Registrant’s Definitive Proxy Statement on Schedule 14A filed October 2, 2006, and incorporated herein by reference. | |
| (9) | Previously filed as Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed April 29, 2011, and incorporated herein by reference. | |
| (10) | Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed August 4, 2008, and incorporated herein by reference. | |
| (11) | Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed September 16, 2011, and incorporated herein by reference. | |
| (12) | Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed June 29, 2012, and incorporated herein by reference. | |
| (13) | Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed July 6, 2011, and incorporated herein by reference. | |
| (14) | Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed October 6, | |
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| 30 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
GLOBAL TELECOM & TECHNOLOGY, INC.
President and Chief Executive Officer
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Date: March 19, 2013
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard D. Calder, Jr. and Michael R. Bauer, jointly and severally, his attorney-in-fact, each with the full power of substitution, for such person, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might do or could do in person hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on or before March 19, 2013 by the following persons on behalf of the registrant and in the capacities indicated.
INDEX TO FINANCIAL STATEMENTS
| F-2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Balance Sheets as of December 31, | F-3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Statements of | F-4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Statements of
| F-5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated Statements of Stockholders’ Equity
| F-6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated Statements of Cash Flows
| F-7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes to Consolidated Financial Statements | F-8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Global Telecom & Technology, Inc.
We have audited the accompanying consolidated balance sheets of Global Telecom & Technology, Inc. and Subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the years then ended. Global Telecom and Technology, Inc. and Subsidiaries management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Global Telecom & Technology, Inc. and Subsidiaries as of December 31, 2012 and 2011 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ CohnReznick LLP
Jericho, New York
March 19, 2013
Global Telecom & Technology, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except for share and per share data)
| December 31, 2012 | December 31, 2011 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 4,726 | $ | 3,249 | ||||
| Accounts receivable, net of allowances of $748 and $1,516, respectively | 11,003 | 10,855 | ||||||
| Deferred contract costs | 1,346 | 1,831 | ||||||
| Prepaid expenses and other current assets | 1,877 | 2,197 | ||||||
| Total current assets | 18,952 | 18,132 | ||||||
| Property and equipment, net | 5,494 | 3,262 | ||||||
| Intangible assets, net | 20,903 | 11,828 | ||||||
| Other assets | 2,614 | 4,153 | ||||||
| Goodwill | 49,793 | 40,950 | ||||||
| Total assets | $ | 97,756 | $ | 78,325 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 12,857 | $ | 16,457 | ||||
| Accrued expenses and other current liabilities | 13,301 | 8,325 | ||||||
| Short-term debt | 7,848 | 6,677 | ||||||
| Deferred revenue | 6,588 | 6,157 | ||||||
| Total current liabilities | 40,594 | 37,616 | ||||||
| Long-term debt | 34,981 | 21,312 | ||||||
| Deferred revenue | 234 | 265 | ||||||
| Other long-term liabilities | 4,908 | 1,001 | ||||||
| Total liabilities | 80,717 | 60,194 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity: | ||||||||
| Common stock, par value $.0001 per share, 80,000,000 shares authorized, 19,129,765 and 18,674,860 shares issued and outstanding as of December 31, 2012 and 2011, respectively | 2 | 2 | ||||||
| Additional paid-in capital | 63,207 | 62,442 | ||||||
| Accumulated deficit | (45,437 | ) | (43,874 | ) | ||||
| Accumulated other comprehensive loss | (733 | ) | (439 | ) | ||||
| Total stockholders' equity | 17,039 | 18,131 | ||||||
| Total liabilities and stockholders' equity | $ | 97,756 | $ | 78,325 | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
Global Telecom & Technology, Inc.
Condensed Consolidated Statements of Operations
(Amounts in thousands, except for share and per share data)
| Year Ended December 31, 2012 | Year Ended December 31, 2011 | |||||||
| Revenue: | ||||||||
| Telecommunications services sold | $ | 107,877 | $ | 91,188 | ||||
| Operating expenses: | ||||||||
| Cost of telecommunications services provided | 76,000 | 64,198 | ||||||
| Selling, general and administrative expense | 18,957 | 18,597 | ||||||
| Restructuring costs, employee termination and other items | 701 | 958 | ||||||
| Depreciation and amortization | 7,296 | 3,896 | ||||||
| Total operating expenses | 102,954 | 87,649 | ||||||
| Operating income | 4,923 | 3,539 | ||||||
| Other expense: | ||||||||
| Interest expense, net | (4,686 | ) | (2,491 | ) | ||||
| Other expense, net | (1,054 | ) | (218 | ) | ||||
| Total other expense | (5,740 | ) | (2,709 | ) | ||||
| Income (loss) before income taxes | (817 | ) | 830 | |||||
| Provision for income taxes | 746 | 575 | ||||||
| Net income (loss) | $ | (1,563 | ) | $ | 255 | |||
| Earnings (loss) per share: | ||||||||
| Basic | $ | (0.08 | ) | $ | 0.01 | |||
| Diluted | $ | (0.08 | ) | $ | 0.01 | |||
| Weighted average shares: | ||||||||
| Basic | 18,960,347 | 18,599,028 | ||||||
| Diluted | 18,960,347 | 18,820,380 | ||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
Global Telecom & Technology, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Amounts in thousands, except for share and per share data)
| Year Ended December 31, 2012 | Year Ended December 31, 2011 | |||||||
| Net income (loss) | $ | (1,563 | ) | $ | 255 | |||
| Other comprehensive loss: | ||||||||
| Change in accumulated foreign currency translation loss | (294 | ) | (152 | ) | ||||
| Comprehensive income (loss) | $ | (1,857 | ) | $ | 103 | |||
| F-5 |
Global Telecom & Technology, Inc.
Consolidated Statements of Stockholders’ Equity
(Amounts in thousands, except for share and per share data)
| Common Stock | Additional Paid -In | Accumulated | Accumulated Other Comprehensive | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||
| Balance, December 31, 2010 | 17,880,254 | $ | 2 | $ | 61,497 | $ | (44,129 | ) | $ | (287 | ) | $ | 17,083 | |||||||||||
| Share-based compensation for options issued | - | - | 171 | - | - | 171 | ||||||||||||||||||
| Share-based compensation for restricted stock issued | 384,606 | - | 527 | - | - | 527 | ||||||||||||||||||
| Shares issued related to December 2009 acquisition | 210,000 | - | - | - | - | - | ||||||||||||||||||
| Shares issued in February 2011 units offering | 200,000 | - | 247 | - | - | 247 | ||||||||||||||||||
| Net income | - | - | - | 255 | - | 255 | ||||||||||||||||||
| Change in accumulated foreign currency translation loss | - | - | - | - | (152 | ) | (152 | ) | ||||||||||||||||
| Balance, December 31, 2011 | 18,674,860 | 2 | 62,442 | (43,874 | ) | (439 | ) | 18,131 | ||||||||||||||||
| Share-based compensation for options issued | - | - | 210 | - | - | 210 | ||||||||||||||||||
| Share-based compensation for restricted stock issued | 406,248 | - | 400 | - | - | 400 | ||||||||||||||||||
| Stock options exercised | 48,657 | - | 3 | - | - | 3 | ||||||||||||||||||
| Tax benefit from stock option plans | - | - | 152 | - | - | 152 | ||||||||||||||||||
| Net loss | - | - | - | (1,563 | ) | - | (1,563 | ) | ||||||||||||||||
| Change in accumulated foreign currency translation loss | - | - | - | - | (294 | ) | (294 | ) | ||||||||||||||||
| Balance, December 31, 2012 | 19,129,765 | $ | 2 | $ | 63,207 | $ | (45,437 | ) | $ | (733 | ) | $ | 17,039 | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
Global Telecom & Technology, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
| Year Ended | ||||||||
| December 31, 2012 | December 31, 2011 | |||||||
| Cash flows from operating activities: | ||||||||
| Net Income (loss) | $ | (1,563 | ) | $ | 255 | |||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 7,296 | 3,896 | ||||||
| Shared-based compensation | 610 | 698 | ||||||
| Debt discount amortization | 303 | 316 | ||||||
| Change in fair value of warrant liability | 1,072 | (42 | ) | |||||
| Tax benefit for stock options | (152 | ) | ||||||
| Changes in operating assets and liabilities, net of acquisition: | ||||||||
| Accounts receivable, net | 1,017 | (2,307 | ) | |||||
| Deferred contract cost | 517 | (1,295 | ) | |||||
| Prepaid expenses and other current assets | 361 | 731 | ||||||
| Other assets | (601 | ) | (108 | ) | ||||
| Accounts payable | (4,109 | ) | 2,829 | |||||
| Accrued expenses and other current liabilities | (1,382 | ) | (3,124 | ) | ||||
| Deferred revenue and other long-term liabilities | 644 | (1,877 | ) | |||||
| Net cash provided by (used in) operating activities | 4,013 | (28 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Acquisition of businesses, net of cash acquired | (13,833 | ) | (14,604 | ) | ||||
| Purchase of customer list | (1,723 | ) | (1,000 | ) | ||||
| Purchases of property and equipment | (1,839 | ) | (530 | ) | ||||
| Net cash used in investing activities | (17,395 | ) | (16,134 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Principal payments on promissory note | (472 | ) | (244 | ) | ||||
| (Repayment of) borrowing from line of credit, net | (3,100 | ) | 762 | |||||
| Repayment of term loan | (3,500 | ) | (2,333 | ) | ||||
| Issuance of term loan | 14,500 | 14,417 | ||||||
| Issuance of Plexus note, net of discount | 7,214 | - | ||||||
| Payment of subordinate notes payable | (105 | ) | - | |||||
| Issuance of subordinated notes | - | 153 | ||||||
| Issuance of units offering common shares | - | 247 | ||||||
| Tax benefit for stock options | 152 | - | ||||||
| Exercise of stock options | 3 | - | ||||||
| Net cash provided by financing activities | 14,692 | 13,002 | ||||||
| Effect of exchange rate changes on cash | 167 | (153 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | 1,477 | (3,313 | ) | |||||
| Cash and cash equivalents at beginning of year | 3,249 | 6,562 | ||||||
| Cash and cash equivalents at end of year | $ | 4,726 | $ | 3,249 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 4,759 | $ | 2,175 | ||||
| Supplemental disclosure of non cash investing and financing activities (Note 4): | ||||||||
| Measurement period adjustment related to PacketExchange acquisition | $ | 744 | $ | - | ||||
| Adjustment related to August 2010 sales novations | 2,885 | - | ||||||
| Fair value of PacketExchange liabilities assumed | - | 9,869 | ||||||
| Fair value of PacketExchange assets acquired | - | 16,015 | ||||||
| Fair value of promissory note assumed in PacketExchange acquisition | - | 709 | ||||||
| Non-cash increase in other assets due to the PacketExchange acquisition | - | 544 | ||||||
| Fair value of warrant liability (Note 5) | - | 430 | ||||||
The accompanying notes are an integral part of these Consolidated Financial Statements
Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements
NOTE 1 — ORGANIZATION AND BUSINESS
NOTE 1 — ORGANIZATION AND BUSINESS
Global Telecom & Technology, Inc. (“GTT” or the “Company”) is a Delaware corporation which was incorporated on January 3, 2005. GTT is a premiere cloud network provider delivering simplicity, speed and agility to enterprise, government and carrier customers in over 80 countries worldwide. Powered by our global network integrator providing a broad portfolioEthernet and IP backbone, GTT operates one of Wide-Area Network (WAN), dedicated Internet access,the most interconnected global networks. GTT’s solutions include cloud networking, high bandwidth IP transit for content delivery and managed data services. With over 800 supplier relationships worldwide, GTT combines multiple networkshosting, and technologies such as traditional OC-x, MPLS and Ethernet, to deliver cost-effective solutions specifically designed for each client’s unique requirements. GTT enhances its client performance through its proprietary Client Management Database (“CMD”), providing customers with an integrated support system for all of its services. GTT is committed to providing comprehensive solutions, project management and 24x7 global operations support.
GTT serves as the holding company for two operating subsidiaries, Global Telecom & Technology Americas, Inc. (“GTTA”) and GTT — EMEA Ltd. (“GTTE”) and their respective subsidiaries (collectively, hereinafter, the “Company”).
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation of Consolidated Financial Statements and Use of Estimates
The consolidated financial statements include the accounts of the Company, GTTA, GTTE, and GTTA’s and GTTE’s operating subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
GTTA’s subsidiaries:
GTT Global Telecom Government Services, LLC
WBS Connect LLC
TEK Channel Consulting, LLC
PEUSA
PEINC
nLayer Communications, Inc.
GTTE’s subsidiaries:
European Telecommunications & Technology Inc., a Delaware corporation
Global Telecom & Technology Deutschland GmbH (formerly called ETT European Telecommunications &
Technology Deutschland GmbH), a German corporation
ETT (European Telecommunications & Technology) Private Limited, an Indian corporation
European Telecommunications & Technology (S) Pte Limited, a Singapore corporation
ETT Network Services Limited, a United Kingdom corporation
WBS Connect Europe, Ltd., a company formed under the laws of
PEIRL PacketExchange Ireland
F-7
PEX KK (Japan)
PEX (Singapore)
PEEL PacketExchange Europe
PEUK PacketExchange, Ltd.
PEML PacketExchange Metro
The preparation of the consolidated 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 consolidated financial statements, and the reported amounts of revenuesrevenue and expenses during the reporting period. Significant accounting estimates to be made by management include allowances for doubtful accounts, valuation of goodwill and other long-lived assets, accrual for billing disputes, and expected valuation of equity instruments. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.
Revenue Recognition
The Company provides data connectivity solutions, such as dedicated circuit access, access aggregation and hubbing and managed network services to its customers. Certain of the Company’s current revenue activities have features that may be considered multiple elements. The Company believes that there is insufficient evidence to determine each element’s fair value and as a result, in those arrangements where there are multiple elements, revenue is recorded ratably over the term of the arrangement.
Network Services and SupportSupport..The Company’s services are provided pursuant to contracts that typically provide for payments of recurring charges on a monthly basis for use of the services over a committed term. Each service contract has a fixed monthly cost and a fixed term, in addition to a fixed installation charge (if applicable). At the end of the initial term of most service contracts, the contracts roll forward on a month-to-month or other periodic basis and continue to bill at the same fixed recurring rate. If any cancellation or termination charges become due from the customer as a result of early cancellation or termination of a service contract, those amounts are calculated pursuant to a formula specified in each contract. Recurring costs relating to supply contracts are recognized ratably over the term of the contract.
Non-recurring fees,Fees, Deferred Revenue.Non-recurring fees for data connectivity typically take the form of one-time, non-refundable provisioning fees established pursuant to service contracts. The amount of the provisioning fee included in each contract is generally determined by marking up or passing through the corresponding charge from the Company’s supplier, imposed pursuant to the Company’s purchase agreement. Non-recurring revenuesrevenue earned for providing provisioning services in connection with the delivery of recurring communications services areis recognized ratably over the contractual term of the recurring service starting upon commencement of the service contract term. Fees recorded or billed from these provisioning services are initially recorded as deferred revenue then recognized ratably over the contractual term of the recurring service. Installation costs related to provisioning incurred by the Company from independent third party suppliers, directly attributable and necessary to fulfill a particular service contract, and which costs would not have been incurred but for the occurrence of that service contract, are recorded as deferred contract costs and expensed proportionally over the contractual term of service in the same manner as the deferred revenue arising from that contract. Deferred costs do not exceed deferred upfront fees. Due to its limitedBased on operating history,activity, the Company believes the initial contractual term is the best estimate of the period of earnings.
Other RevenueRevenue..From time to time, the Company recognizes revenue in the form of fixed or determinable cancellation (pre-installation) or termination (post-installation) charges imposed pursuant to the service contract. These revenues areThis revenue is earned when a customer cancels or terminates a service agreement prior to the end of its committed term. These revenues areThis revenue is recognized when billed if collectibilitycollectability is reasonably assured. In addition, the Company from time to time sells equipment in connection with data networking applications. The Company recognizes revenue from the sale of equipment at the contracted selling price when title to the equipment passes to the customer (generally F.O.B. origin) and when collectibilitycollectability is reasonably assured.
F-8
These consolidated financial statements have been reported in U.S. Dollars by translating asset and liability amounts of foreign subsidiaries at the closing exchange rate, equity amounts at historical rates, and the results of operations and cash flow at the average exchange rate prevailing during the periods reported.
A summary of exchange rates used is as follows:
| U.S. Dollars /British | ||||||||||||||||
| Pounds Sterling | U.S. Dollars / Euro | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Closing exchange rate at December 31, | 1.59 | 1.45 | 1.43 | 1.41 | ||||||||||||
| Average exchange rate during the period | 1.62 | 1.86 | 1.46 | 1.47 | ||||||||||||
| U.S. Dollars / British Pounds Sterling | U.S. Dollars / Euro | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Closing exchange rate at December 31 | 1.62 | 1.55 | 1.32 | 1.29 | ||||||||||||
| Average exchange rate during the period | 1.58 | 1.60 | 1.29 | 1.39 | ||||||||||||
Transactions denominated in foreign currencies are recorded at the rates of exchange prevailing at the time of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange prevailing at the balance sheet date. Exchange differences arising upon settlement of a transaction are reported in the consolidated statements of operations.
Other Income (Expense), Net
The Company recognized other income (expense),expense, net of approximately $24,000 in income, of $1.1 million and $28,000 of expense$0.2 for the years ended December 31, 20092012 and 2008,2011, respectively, primarily comprised of the unrealized and realized gain and loss on foreign exchange.
Accounts Receivable, Net
Accounts receivable balances are stated at amounts due from the customer net of an allowance for doubtful accounts. Credit extended is based on an evaluation of the customer’s financial condition and is granted to qualified customers on an unsecured basis.
The Company, pursuant to its standard service contracts, is entitled to impose a finance charge of a certain percentage per month with respect to all amounts that are past due. The Company’s standard terms require payment within 30 days of the date of the invoice. The Company treats invoices as past due when they remain unpaid, in whole or in part, beyond the payment time set forth in the applicable service contract.
The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade receivables are past due, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. Specific reserves are also established on a case-by-case basis by management. The Company writes off accounts receivable when they become uncollectible. Credit losses have historically been within management’s expectations. Actual bad debts, when determined, reduce the allowance, the adequacy of which management then reassesses. The Company writes off accounts after a determination by management that the amounts at issue are no longer likely to be collected, following the exercise of reasonable collection efforts, and upon management’s determination that the costs of pursuing collection outweigh the likelihood of recovery. As of December 31, 20092012 and 2008,2011, the total allowance for doubtful accounts was $0.6$0.7 million and $0.4$1.5 million, respectively.
Other Comprehensive Income (Loss)
In addition to net income, comprehensive income (loss) includes charges or credits to equity occurring
F-9
Share-Based Compensation
Accounting Standards Codification (“ASC”) Topic 718,Compensation — Stock Compensation(formerly SFAS 123(R)), requires the Company to measure and recognize compensation expense for all share-based payment awards made to employees and directors based on estimated fair values.
Share-based compensation expense recognized under ASC Topic 718 was $0.6 million for the yearsyear ended December 31, 20092012 and 2008 was $0.6 million$0.7 for the year ended December 31, 2011. For the year ended December 31, 2012 and $0.8 million respectively. 2009 amounts consisted of $0.2 million of2011, share-based compensation expense related to stock option grants and $0.4 million in restricted stock awards. 2008 amounts consisted of $0.1 million of share-basedwere both approximately $0.2 million. Share-based compensation expense related to stock option grants and $0.7 million in restricted stock awards.awards were $0.4 million for the year ended December 31, 2012 and $0.5 million for the years ended December 31, 2011. Share-based compensation expense is included in selling general and administrative expense on the accompanying consolidated statements of operations. See Note 910 for additional information.
ASC Topic 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statement of operations.
Share-based compensation expense recognized in the Company’s consolidated statements of operations for the years ended December 31, 20092012 and 20082011, included compensation expense for share-based payment awards based on the grant date fair value estimated in accordance with the provisions of ASC Topic 718. The Company follows the straight-line single option method of attributing the value of stock-based compensation to expense. As stock-based compensation expense recognized in the consolidated statement of operations for the years ended December 31, 20092012 and 20082011 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company useduses the Black-Scholes option-pricing model (“Black-Scholes model”) as its method of valuation for share-based awards granted. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to; the Company’s expected stock price volatility over the term of the awards and the expected term of the awards.
The Company accounts for non-employee stock-based compensation expense in accordance with ASC Topic 505,Equity — Based Payments to Non-Employees(formerly EITF Issue No. 96-18).The Company issued non-employee grants totaling 91,957 sharedid not issue any options or shares to non-employees in 2009.
Cash and Cash Equivalents
Included in cash and cash equivalents are deposits with financial institutions as well as short-term money market instruments, certificates of deposit and debt instruments with maturities of three months or less when purchased.
Accounting for Derivative Instruments
The Company accounts for derivative instruments in accordance with SFAS No. 133,ASC 815,Accounting for Derivative InstrumentsDerivatives and Hedging Activities,as amended (“SFAS 133”), which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments imbedded in other financial instruments or contracts. The Company also considers
F-10
The Company also considers EITF No. 07-5,Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stockwhich was effective forin ASC 815, the Company on January 1, 2009. EITF No. 07-5 was codified into ASC Topic 815, which provides guidance for determining whether an equity-linked financial instrument (or embedded feature) issued by an entity is indexed to the entity’s stock, and therefore, qualifying for the first part of the scope exception in paragraph 15-74 of ASC Topic 718. The718,Compensation—Stock Compensation. As a result, the Company evaluatedrecorded a warrant liability in the conversion feature embeddedamount of $0.8 million in its convertible notes payable based on the criteria of ASC Topic 815 to determine whether the conversion feature would be required to be bifurcated from the convertible notes2012 and accounted for separately as derivative liabilities. Based on management’s evaluation, the embedded conversion feature did not require bifurcation and derivative accounting as$0.5 million in 2011. As of December 31, 2009.2012, the warrant liability was marked to market which resulted in a loss of $1.1 million. The balance of the warrant liability was $2.3 million at December 31, 2012, which is included in other long-term liabilities.
| F-11 |
Taxes
The Company accounts for income taxes in accordance with ASC Topic 740,Income Taxes(formerly SFAS No. 109). Under ASC Topic 740, deferred tax assets are recognized for future deductible temporary differences and for tax net operating loss and tax credit carry-forwards, and deferred tax liabilities are recognized for temporary differences that will result in taxable amounts in future years. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. A valuation allowance is provided to offset the net deferred tax asset if, based upon the available evidence, management determines that it is more likely than not that some or all of the deferred tax asset will not be realized.
The Company may, from time to time, be assessed interest and/or penalties by taxing jurisdictions, although any such assessments historically have been minimal and immaterial to its financial results. The Company’s federal, state and international tax returns for 2008, 2009, 2010 and 2011 are still open. In the event the Company has received an assessment for interest and/or penalties, it has been classified in the statements of operations as other general and administrative costs.
The Company is liable in certain cases for collecting regulatory fees and/or certain sales taxes from its customers and remitting the fees and taxes to the applicable governing authorities. The Company records taxes applicable under ASC Topic 605, Subtopic 45,Revenue Recognition — Principal Agent ConsiderationsConsiderations (formerly EITF No. 06-3), on a net basis.
Net Income (loss) Per Share
Basic income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share reflect, in periods with earnings and in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options and warrants. Diluted loss
The table below details the calculations of earnings per share for the years ended December 31, 2009(in thousands, except share and 2008
F-11
| Year Ended December 31, | ||||||||
| 2012 | 2011 | |||||||
| Numerator for basic and diluted EPS – income (loss) available to common stockholders | $ | (1,563 | ) | $ | 255 | |||
| Denominator for basic EPS – weighted average shares | 18,960,347 | 18,599,028 | ||||||
| Effect of dilutive securities | - | 221,352 | ||||||
| Denominator for diluted EPS – weighted average shares | 18,960,347 | 18,820,380 | ||||||
| Earnings (loss) per share: basic and diluted | $ | (0.08 | ) | $ | 0.01 | |||
The table below details the anti-dilutive items that were excluded in the computation of earnings per share (in thousands):
| Year ended December 31, | ||||||||
| 2012 | 2011 | |||||||
| Class Z warrants | - | 12,090 | ||||||
| BIA warrant | 698 | 698 | ||||||
| Plexus warrant | 714 | - | ||||||
| Stock options | 1,395 | 658 | ||||||
| Totals | 2,807 | 13,446 | ||||||
On April 10, 2010. In addition, at March 24, 2010 we had 12,090,0002012, the Class Z warrants each of which entitles the holder to purchase a share of our common stock at an exercise price of $5.00 per share on or before April 10, 2012. We also have outstanding approximately $4.8 million in principal amount of promissory notes due in December 2010 that are convertible into common stock at a conversion price of $1.70 per share. We also issued to the representative of underwriters in our initial public offering an option to purchase at any time on or before April 10, 2010, 25,000 Series A units at an exercise price of $17.325 per Series A unit (each of which is comprised of two shares of common stock, five Class W warrants and five Class Z warrants) and/or 230,000 Series B units at an exercise price of $16.665 per Series B unit (each of which is comprised of two shares of common stock, one Class W warrant and one Class Z warrant), except that (a) the exercise price for these Class W warrants andexpired. No Class Z warrants is $5.50 per share and these Class Z warrants expire on April 10, 2010.were exercised to purchase common stock.
| F-12 |
Software Capitalization
Internal Use Software —The Company recognizes internal use software in accordance with ASC Topic 350, Sub-topic 40,350-40,Internal-Use Software(formerly SOP 98-1). This Statement, which requires that certain costs incurred in purchasing or developing software for internal use be capitalized as internal use software development costs and included in fixed assets. Amortization of the software begins when the software is ready for its intended use.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation computed using the straight-line method. Depreciation on these assets is computed over the estimated useful lives of the assets ranging from three to seven years. Leasehold improvements are amortized over the shorter of the term of the lease, excluding optional extensions.extensions, or the useful life. Depreciable lives used by the Company for its classes of assets are as follows:
| Furniture and Fixtures | 7 years | |||
| Telecommunication Equipment | 5 years | |||
| Leasehold Improvements | up to 10 years | |||
| Computer Hardware and Software | 3-5 years | |||
| Internal Use Software | 3 years |
Goodwill
Goodwill is the excess purchase price paid over identified intangible and tangible net assets of acquired companies.businesses. Goodwill is not amortized, and is tested for impairment at the reporting unit level annually or when there are any indications of impairment, as required by ASC Topic 350,Intangibles — Goodwill and Other(formerly SFAS 142). ASC Topic 350 provides guidance on financial accounting and reporting related to goodwill and other intangibles, other than the accounting at acquisition for goodwill and other intangibles. A reporting unit is an operating segment, or component of an operating segment, for which discrete financial information is available and is regularly reviewed by management. We have one reporting unit to which goodwill is assigned.
In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08,Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is requiredintended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350,Intangibles-Goodwill and Other. The first step tests for impairment by applying fair value-based tests. The second step, if deemed necessary, measures the impairment by applying fair value-based tests to specific assets and liabilities. Application of the goodwill impairment test
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Intangibles
Intangible assets are accounted for in accordance with ASC Topic 350 and ASC Topic 360.360-10-35,Impairment or Disposal of Long-Lived Assets. ASC Topic 360-10-35 provides guidance for recognition and measurement of the impairment of long-lived assets to be held, used and disposed of by sale. Intangible assets arose from business combinations and consist of customer contracts, acquired technology and restrictive covenants related to employment agreements that are amortized, on a straight-line basis, over periods of up to five years.
In accordance with ASC Topic 350,,the Company reviews long-lived assets to be held-and-usedheld and used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows the asset is considered to be impaired. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Fair Value of Financial Instruments
The fair values of the Company’s assets and liabilities that qualify as financial instruments under ASC Topic 825,Financial Instruments(formerly SFAS No. 107), including cash and cash equivalents, accounts receivable, accounts payable, short-term debt, and accrued expenses are carried at cost, which approximates fair value due to the short-term maturity of these instruments. Long-termThe reported amounts of long-term obligations approximate fair value, given management’s evaluation of the instruments’ current rates compared to market rates of interest and other factors.
Accrued Carrier Expenses
The Company accrues estimated charges owed to its suppliers for services. The Company bases this accrual on the supplier contract, the individual service order executed with the supplier for that service, the length of time the service has been active, and the overall supplier relationship.
Disputed Carrier Expenses
It is common in the telecommunications industry for users and suppliers to engage in disputes over amounts billed (or not billed) in error or over interpretation of contract terms. The disputed carrier cost included in the consolidated financial statements includes disputed but unresolved amounts claimed as due by suppliers, unless management is confident, based upon its experience and its review of the relevant facts and contract terms, that the outcome of the dispute will not result in liability for the Company. Management estimates this liability and reconciles the estimates with actual results as disputes are resolved, or as the appropriate statute of limitations with respect to a given dispute expires.
For the year ended December 31, 2009,2012, open disputes totaled approximately $1.7$4.1 million. Based upon its experience with each vendor and similar disputes in the past, and based upon management review of the facts and contract terms applicable to each dispute, management has determined that the most likely outcome is that the Company will be liable for approximately $1.0$1.1 million in connection with these disputes for which accrued liabilities are included on the accompanying consolidated balance sheet atas of December 31, 2009.
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In December 2007,May 2011, the FASB issued SFASASU No. 141(R),2011-04,Business Combinations(“SFAS 141(R)”)Amendments to Achieve Common Fair Value Measurement and SFAS No.160,Non-controlling InterestsDisclosure Requirements in Consolidated Financial StatementsU.S. GAAP and IFRSs(“SFAS 160”) that took effect January 1, 2009. These two standards changed, which amends the accounting forcurrent fair value measurement and the reporting for business combination transactions and non-controlling (minority) interests in the consolidated financial statements, respectively. SFAS No. 141 was codified intodisclosure guidance of ASC Topic 805,820,Business CombinationsFair Value Measurement, to include increased transparency around valuation inputs and SFASinvestment categorization. The Company adopted the guidance provided in ASU No. 160 was codified into ASC Topic 810 (Consolidation), which relates to non-controlling interests2011-04 for interim and classified as a component of equity.annual periods beginning after December 15, 2011. The adoption of these new FASB ASC Topicsprovisions did not have a material effectimpact on the Company’sunaudited condensed consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the Company’s consolidated financial statements or the Company’s future results of operations.
NOTE 3 — ACQUISITIONACQUISITIONS
On December 16, 2009, GTT acquired privately-held WBS Connect. BasedApril 30, 2012, the Company entered into an agreement (the “Acquisition Agreement”) to acquire privately-owned Chicago-based, nLayer Communications, Inc. (“nLayer”) through the acquisition of all of the equity interests in Denver, Colorado, WBS Connect provides wide areanLayer. nLayer owns and operates its own continuously upgraded all-optical IP/MPLS network and dedicated Internet accessprovides wholesale IP transit, data transport, and managed networking services to over 400 customers worldwide. The acquisition of WBS Connect will expand the portfolio of dedicated Internet access and Ethernet services. Additionally, GTT will add WBS Connect’s network infrastructure assets with over 60 points of presence in major markets throughout North American, AsianAmerica and European metro centers.
The Company acquired 100 percentclosing of the outstanding equity of WBS Connect from its two members (collectivelyacquisition occurred simultaneously with the “Sellers”) in exchange for an aggregate transaction consideration consistingsigning of the following:
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During the third quarter of accounting2012, the Company and the former stockholders of nLayer finalized an agreement to allow the Company to treat the acquisition as an asset purchase. This agreement resulted in additional purchase price and goodwill of $0.6 million. As a result of the transaction being valued at $17.8 million.
The Company accounted for the Acquisitionacquisition using the purchaseacquisition method of accounting with GTT treated as the acquiring entity. Accordingly, consideration paid by the Company to complete the acquisition of WBS ConnectnLayer has been preliminarily allocated to WBS Connect’snLayer’s assets and liabilities based upon their estimated fair values as of the date of completion of the Acquisition, December 16, 2009.acquisition, April 30, 2012. The Company estimated the fair value of WBS Connect’snLayer’s assets and liabilities based on discussions with WBS Connect’snLayer’s management, due diligence and information presented in financial statements.
| Amounts in | ||||
| thousands | ||||
| Purchase Price: | ||||
| Cash consideration paid at closing | $ | 1,050 | ||
| WBS debt extinguished by GTT at closing, including accrued interest and other fees | 2,849 | |||
| Total cash consideration | 3,899 | |||
| Fair value of liabilities assumed | 13,054 | |||
| Fair value of GTT common shares, to be issued over 18 months following the transaction | 476 | |||
| Fair value of earn out consideration | 100 | |||
| Fair value of promissory note issued to former WBS Connect owners | 250 | |||
| Total consideration rendered | $ | 17,779 | ||
| Purchase Price Allocation: | ||||
| Tangible net assets acquired | ||||
| Acquired Assets | ||||
| Current assets | $ | 4,613 | ||
| Property and equipment | 1,175 | |||
| Intangible assets | 4,800 | |||
| Other assets | 35 | |||
| Total fair value of assets acquired | 10,623 | |||
| Goodwill | 7,156 | |||
| Total consideration | $ | 17,779 | ||
| Amounts in thousands | ||||
| Purchase Price: | ||||
| Cash consideration paid | $ | 12,621 | ||
| Fair value of liabilities assumed | 1,143 | |||
| Fair value of deferred consideration | 6,200 | |||
| Total consideration | $ | 19,964 | ||
| Purchase Price Allocation: | ||||
| Acquired Assets | ||||
| Current assets | $ | 1,148 | ||
| Property and equipment | 2,657 | |||
| Intangible assets | 8,400 | |||
| Total fair value of assets acquired | 12,205 | |||
| Goodwill | 7,759 | |||
| Total consideration | $ | 19,964 | ||
The following schedule presents unaudited consolidated pro forma results of operations as if the Acquisitionacquisition had occurred on January 1, 2008.2011. This information does not purport to be indicative of the actual results that would have occurred if the Acquisitionacquisition had actually been completed January 1, 2008,2011, nor is it necessarily indicative of the future operating results or the financial position of the combined company. The unaudited pro forma results of operations do not reflect the cost of any integration activities or benefits that may result from synergies that may be derived from any integration activities. In addition,
| Year Ended December 31, | ||||||||
| 2012 | 2011 | |||||||
| Amounts in thousands, except per share data | ||||||||
| Revenue | $ | 113,401 | $ | 105,922 | ||||
| Net income (loss) | $ | (774 | ) | $ | 1,633 | |||
| Net income (loss) per share: | ||||||||
| Basic | $ | (0.04 | ) | $ | 0.09 | |||
| Diluted | $ | (0.04 | ) | $ | 0.09 | |||
| Basic | 18,960,347 | 18,599,028 | ||||||
| Diluted | 18,960,347 | 18,820,380 | ||||||
On August 24, 2012, the
F-15
| Amounts in thousands | ||||
| Purchase Price: | ||||
| Debt extinguished by GTT at closing | $ | 11,767 | ||
| Accrued liabilities extinguished by GTT at closing | 4,074 | |||
| Total cash consideration | 15,841 | |||
| Fair value of liabilities assumed | 10,613 | |||
| Fair value of debt assumed | 709 | |||
| Fair value of deferred consideration | 1,500 | |||
| Total consideration rendered | $ | 28,663 | ||
| Purchase Price Allocation: | ||||
| Acquired Assets: | ||||
| Current assets, including cash acquired of $1,238 | $ | 5,823 | ||
| Property and equipment | 2,455 | |||
| Intangible assets | 7,578 | |||
| Other assets | 159 | |||
| Total fair value of assets acquired | 16,015 | |||
| Goodwill | 12,648 | |||
| Total consideration | $ | 28,663 | ||
The following schedule presents unaudited consolidated pro forma results of operations as if the acquisition had occurred on January 1, 2011. This information does not purport to be indicative of the actual results that would have occurred if the acquisition had actually been completed January 1, 2011, nor is it necessarily indicative of the future operating results or the financial position of the combined company. The unaudited pro forma combined consolidated financial statementsresults of operations do not reflect one-time fees and expensesthe cost of approximately $0.6 million payable by GTTany integration activities or benefits that may result from synergies that may be derived from any integration activities.
| Year Ended December 31, | ||||
| 2011 | ||||
| Amounts in thousands, except per share data | ||||
| Revenue | $ | 101,919 | ||
| Net loss | $ | (528 | ) | |
| Net loss per share: | ||||
| Basic | $ | (0.03 | ) | |
| Diluted | $ | (0.03 | ) | |
| Basic | 18,599,028 | |||
| Diluted | 18,599,028 | |||
During the year ended December 31, 2011, the Company settled outstanding contingent consideration resulting from the 2009 acquisition. The Company issued 210,000 shares of common stock, which had been fair valued as a resultpart of the merger.
| Year ended December 31, | ||||||||
| Amounts in thousands, except per share data | 2009 | 2008 | ||||||
| Revenue | $ | 90,917 | $ | 93,033 | ||||
| Net loss | $ | (4,344 | ) | $ | (46,508 | ) | ||
| Net loss per share — basic and diluted | $ | (0.28 | ) | $ | (3.13 | ) | ||
NOTE 4 — GOODWILL AND INTANGIBLE ASSETS
During the third quarter of 2009,2012, the Company completed its annual goodwill impairment testing in accordance with ASC Topic 350. As part of step one,350,Intangibles—Goodwill and Other. After performing the qualitative assessment, the Company considered three methodologies to determinedetermined that it is more likely than not that the fair-value of our entity:
The Company recorded goodwill in the amount of $7.2$7.8 million in 2012 in connection with the WBS Connect acquisition.nLayer acquisition and in accordance with ASC Topic 350,Intangibles—Goodwill and Other. Additionally, $4.8$8.4 million of the purchase price was allocated to certain finite-lived intangible assets of WBS Connectrelated to customer relationships and non-compete agreements which are subject to straight-line amortization. Acquired finite-lived
During the second quarter of 2012, the Company completed a final measurement review of the PacketExchange goodwill that was initially recorded during the acquisition in the second quarter of 2011. In accordance with ASC Topic 805,Business Combinations, the Company recorded a $0.7 million measurement period adjustment. New information was obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date.
The Company entered into sales novation agreements in 2012 which assigned and transferred to the Company certain service level agreements and all rights under those agreements, as well as certain supply agreements and obligations thereunder. The Company valued the customer relationships from the novations and recorded $1.7 million in intangible assets included $4.5assets. The Company valued the customer relationships from the Electra acquisition and recorded $0.9 million associated with customer relationshipin intangible assets and $0.3 million associated with non-compete agreements.
The Company adjusted certain prepaid expenses and other assets relating to the August 2010 sales novation agreements, resulting in a $2.9 million increase to intangible assets. This was the result of a settlement agreement which triggered the re-characterization of the asset.
The changes in the carrying amount of goodwill for the year ended December 31, 2012 are as follows (in thousands):
| Balance at December 31, 2011 | $ | 40,950 | ||
| Goodwill associated with the nLayer acquisition | 7,759 | |||
| Measurement period adjustment related to the PacketExchange acquisition | 744 | |||
| Goodwill associated with the Electra acquisition | 340 | |||
| Balance at December 31, 2012 | $ | 49,793 |
The following table summarizes the Company’s intangible assets as of December 31, 20092012 and 2008December 31, 2011 (amounts in thousands):
| December 31, 2009 | ||||||||||||||||||||
| Amortization | Gross Asset | Accumulated | Net Book | |||||||||||||||||
| Period | Cost | Amortization | Impairment | Value | ||||||||||||||||
| Customer contracts | 4-5 years | $ | 4,800 | $ | 193 | $ | — | $ | 4,607 | |||||||||||
| Carrier contracts | 1 year | 151 | 151 | — | — | |||||||||||||||
| Noncompete agreements | 4-5 years | 4,800 | 2,634 | 1,269 | 897 | |||||||||||||||
| Software | 7 years | 6,600 | 2,826 | 1,665 | 2,109 | |||||||||||||||
| $ | 16,351 | $ | 5,804 | $ | 2,934 | $ | 7,613 | |||||||||||||
F-16
| December 31, 2012 | ||||||||||||||||
| Amortization | Gross Asset | Accumulated | Net Book | |||||||||||||
| Period | Cost | Amortization | Value | |||||||||||||
| Customer contracts | 4-7 years | $ | 26,471 | $ | 6,802 | $ | 19,669 | |||||||||
| Carrier contracts | 1 year | 151 | 151 | - | ||||||||||||
| Noncompete agreements | 4-5 years | 4,331 | 3,593 | 738 | ||||||||||||
| Software | 7 years | 4,935 | 4,439 | 496 | ||||||||||||
| $ | 35,888 | $ | 14,985 | $ | 20,903 | |||||||||||
| December 31, 2011 | ||||||||||||||||
| Amortization | Gross Asset | Accumulated | Net Book | |||||||||||||
| Period | Cost | Amortization | Value | |||||||||||||
| Customer contracts | 4-5 years | $ | 13,384 | $ | 2,827 | $ | 10,557 | |||||||||
| Carrier contracts | 1 year | 151 | 151 | - | ||||||||||||
| Noncompete agreements | 4-5 years | 3,531 | 3,384 | 147 | ||||||||||||
| Software | 7 years | 4,935 | 3,811 | 1,124 | ||||||||||||
| $ | 22,001 | $ | 10,173 | $ | 11,828 | |||||||||||
| December 31, 2008 | ||||||||||||||||||||
| Amortization | Gross Asset | Accumulated | Net Book | |||||||||||||||||
| Period | Cost | Amortization | Impairment | Value | ||||||||||||||||
| Customer contracts | 4-5 years | $ | 300 | $ | 133 | $ | — | $ | 167 | |||||||||||
| Carrier contracts | 1 year | 151 | 151 | — | — | |||||||||||||||
| Noncompete agreements | 4-5 years | 4,500 | 2,084 | 1,269 | 1,147 | |||||||||||||||
| Software | 7 years | 6,600 | 2,198 | 1,665 | 2,737 | |||||||||||||||
| $ | 11,551 | $ | 4,566 | $ | 2,934 | $ | 4,051 | |||||||||||||
Estimated amortization expense related to intangible assets subject to amortization at December 31, 2009 for2012 in each of the years in the five-year period endingsubsequent to December 31, 20142012 is as follows (amounts in thousands):
| 2010 | $ | 1,845 | ||
| 2011 | 1,794 | |||
| 2012 | 1,603 | |||
| 2013 | 1,471 | |||
| 2014 | 900 | |||
| Total | $ | 7,613 | ||
| 2013 | $ | 6,048 | ||
| 2014 | 5,455 | |||
| 2015 | 4,110 | |||
| 2016 | 3,201 | |||
| 2017 | 1,626 | |||
| and beyond | 463 | |||
| Total | $ | 20,903 |
NOTE 5 — FAIR VALUE MEASUREMENTS
The Company accounts for fair value measurements in accordance with ASC 820,Fair Value Measurements, as it relates to financial assets and financial liabilities. ASC 820 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America and expands disclosures about fair value measurements. ASC 820 applies under other previously issued accounting pronouncements that require or permit fair value measurements but does not require any new fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).
The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC 820 are described as follows:
| · | Level 1- Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. |
| · | Level 2- Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| · | Level 3- Inputs that are unobservable for the asset or liability. |
The following section describes the valuation methodologies that we used to measure financial instruments at fair value.
The Company considers the valuation of its warrant liability as a Level 3 liability based on unobservable inputs. The Company uses the Black-Scholes pricing model to measure the fair value of the warrant liability. The model required the input of highly subjective assumptions including volatility of 61%, expected term of 5 years, risk-free interest rate of 0% and a dividend yield of 0%.
The following table presents the liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of December 31, 2012 (amounts in thousands):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Warrant liability | $ | — | $ | — | $ | 2,288 | $ | 2,288 | ||||||||
Rollforward of Level 3 liabilities are as follows (amounts in thousands):
| Balance at December 31, 2011 | $ | 430 | ||
| Issuance of warrants | 786 | |||
| Change in fair value of warrant liability | 1,072 | |||
| Balance at December 31, 2012 | $ | 2,288 |
The carrying amounts of cash equivalents, investments, receivables, accounts payable, and accrued expenses approximate fair value due to the immediate or short-term maturity of these financial instruments. The fair value of notes payable is determined using current applicable rates for similar instruments as of the balance sheet date and approximates the carrying value of such debt.
NOTE 6 — PROPERTY AND EQUIPMENT
The following table summarizes the Company’s property and equipment as ofat December 31, 20092012 and 20082011 (amounts in thousands):
| 2009 | 2008 | |||||||
| Furniture and fixtures | $ | 242 | $ | 222 | ||||
| Computer equipment | 2,375 | 1,046 | ||||||
| Computer software | 478 | 437 | ||||||
| Leasehold improvements | 539 | 501 | ||||||
| Property and equipment, gross | 3,634 | 2,206 | ||||||
| Less accumulated depreciation and amortization | (1,399 | ) | (903 | ) | ||||
| Property and equipment, net | $ | 2,235 | $ | 1,303 | ||||
| 2012 | 2011 | |||||||
| Network equipment | $ | 8,710 | $ | 6,840 | ||||
| Computer software | 3,353 | 617 | ||||||
| Leasehold improvements | 744 | 527 | ||||||
| Furniture and fixtures | 256 | 248 | ||||||
| Property and equipment, gross | 13,063 | 8,232 | ||||||
| Less accumulated depreciation and amortization | (7,569 | ) | (4,970 | ) | ||||
| Property and equipment, net | $ | 5,494 | $ | 3,262 | ||||
Depreciation expense associated with property and equipment was $0.5$2.5 million and $0.4$1.4 million for the years ended December 31, 20092012 and 2008,2011, respectively.
| F-19 |
F-17
The following table summarizes the Company’s accrued expenses and other current liabilities as of December 31, 20092012 and 20082011 (amounts in thousands):
| 2009 | 2008 | |||||||
| Accrued compensation and benefits | $ | 1,880 | $ | 1,187 | ||||
| Accrued selling and administrative | 347 | 70 | ||||||
| Accrued interest payable | 1,546 | 394 | ||||||
| Accrued taxes | 2,277 | 2,078 | ||||||
| Accrued carrier costs | 4,599 | 774 | ||||||
| Accrued early termination liability | 580 | — | ||||||
| Accrued other | 143 | 797 | ||||||
| $ | 11,372 | $ | 5,300 | |||||
| 2012 | 2011 | |||||||
| Accrued compensation and benefits | $ | 1,056 | $ | 1,280 | ||||
| Accrued interest payable | 610 | 144 | ||||||
| Accrued taxes | 843 | 856 | ||||||
| Accrued carrier costs | 3,912 | 4,258 | ||||||
| Accrued other | 6,880 | 1,787 | ||||||
| $ | 13,301 | $ | 8,325 | |||||
NOTE 78 — INCOME TAXES
The components of the provision for (benefit from) income taxes for the years ended December 31, 20092012 and 20082011 are as follows (amounts in thousands):
| 2009 | 2008 | |||||||
| Current: | ||||||||
| Federal | $ | — | $ | (189 | ) | |||
| State | — | (23 | ) | |||||
| Foreign | 16 | 358 | ||||||
| Subtotal | 16 | 146 | ||||||
| Deferred: | ||||||||
| Federal | (332 | ) | (1,407 | ) | ||||
| State | (58 | ) | (143 | ) | ||||
| Foreign | (206 | ) | (617 | ) | ||||
| Subtotal | (596 | ) | (2,167 | ) | ||||
| Change in Valuation Allowance | 596 | 730 | ||||||
| Provision for (benefit from) income taxes | $ | 16 | $ | (1,291 | ) | |||
| 2012 | 2011 | |||||||
| Current: | ||||||||
| Federal | $ | 219 | $ | 41 | ||||
| State | 144 | 31 | ||||||
| Foreign | 279 | 308 | ||||||
| Subtotal | 642 | 380 | ||||||
| Deferred: | ||||||||
| Federal | (285 | ) | 271 | |||||
| State | (93 | ) | 500 | |||||
| Foreign | (167 | ) | 104 | |||||
| Subtotal | (545 | ) | 875 | |||||
| Change in valuation allowance | 649 | (680 | ) | |||||
| Provision for income taxes | $ | 746 | $ | 575 | ||||
The provision for or benefit from income taxes differs from the amount computed by applying the U.S. federal statutory income tax rates for federal, state, and localrate to income before income taxes for the reasons set forth below for the years ended December 31, 20092012 and 2008:
F-18
| 2012 | 2011 | |||||||
| US federal statutory income tax rate | 35.00 | % | 35.00 | % | ||||
| Permanent items | -4.26 | % | 1.57 | % | ||||
| State taxes, net of federal benefit | -13.12 | % | 7.58 | % | ||||
| Foreign tax rate differential | -15.79 | % | 9.95 | % | ||||
| Change in valuation allowance | -98.81 | % | -64.88 | % | ||||
| Stock compensation shortfalls | 0.00 | % | 46.68 | % | ||||
| Intangibles | 0.00 | % | 28.16 | % | ||||
| Prior year AMT | -6.74 | % | 0.00 | % | ||||
| Return to provision adjustments | 12.37 | % | 5.28 | % | ||||
| Effective Tax Rate | -91.35 | % | 69.34 | % | ||||
In 2012, loss before income taxes of $0.8 million consisted of $0.3 million domestic and $0.5 million foreign. In 2011, income before income taxes of $0.8 million consisted of $0.4 million domestic and $0.4 million foreign.
| 2009 | 2008 | |||||||
| US federal statutory income tax rate | 35.00 | % | 35.00 | % | ||||
| Permanent Items | 1.02 | % | -31.27 | % | ||||
| State Taxes | -3.75 | % | 0.35 | % | ||||
| Foreign tax rate differential | -15.10 | % | 0.62 | % | ||||
| Change in Valuation Allowance | -23.03 | % | -1.67 | % | ||||
| Other Items | 9.29 | % | 0.07 | % | ||||
| Effective Tax Rate | 3.43 | % | 3.10 | % | ||||
As of December 31, 2009,2012, the Company has net operating loss (“NOL”("NOL") carryforwards of approximately $20.6$25.3 million for tax purposes which will be available to offset future income. These net operating lossThe NOL carryforwards were generatedconsist of $20.7 million in a number of jurisdictions.foreign NOL carryforward and $4.6 million in U.S. NOL carryforward. If not used, these carryforwards will expire between 2020 and 2029. Approximately $2.8 million of the Company’s2030. The Company's U.S. NOL carryforward may be significantly limited under Section 382 of the Internal Revenue Code (“IRC”("IRC"). NOL carryforwards are limited under Section 382 when there is a significant “ownership change”"ownership change" as defined in the IRC. During 2006, the Company experienced such an ownership change.
Deferred income taxes reflect the net effects of net operating loss carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’sCompany's deferred tax assets and liabilities at December 31, 20092012 and 20082011 are as follows (amounts in thousands):
| 2009 | 2008 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 6,394 | $ | 6,332 | ||||
| Allowance for Doubtful Accounts | 12 | 104 | ||||||
| Fixed Assets | 390 | 285 | ||||||
| Stock Compensation | 1,136 | 862 | ||||||
| Accrued Bonuses | — | 137 | ||||||
| Miscellaneous items | 250 | 121 | ||||||
| Total deferred tax assets before valuation allowance | 8,182 | 7,841 | ||||||
| Less: Valuation Allowance | (7,017 | ) | (6,260 | ) | ||||
| Total deferred tax assets | 1,165 | 1,581 | ||||||
| Deferred tax liabilities: | ||||||||
| Identified intangibles | (1,165 | ) | (1,539 | ) | ||||
| Tax Accounting Method Changes and other miscellaneous items | — | (42 | ) | |||||
| Total deferred tax liabilities | (1,165 | ) | (1,581 | ) | ||||
Net deferred tax liability | $ | — | $ | — | ||||
| 2012 | 2011 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 5,400 | $ | 5,951 | ||||
| Allowance for doubtful accounts | 85 | 315 | ||||||
| Fixed assets | 320 | 394 | ||||||
| Stock compensation | 503 | 440 | ||||||
| Miscellaneous items | 646 | 155 | ||||||
| Total deferred tax assets before valuation allowance | 6,954 | 7,255 | ||||||
| Less: valuation allowance | (6,708 | ) | (6,059 | ) | ||||
| Total deferred tax assets | 246 | 1,196 | ||||||
| Deferred tax liabilities: | ||||||||
| Identified intangibles | 780 | 1,349 | ||||||
| Miscellaneous items | 274 | 211 | ||||||
| Total deferred tax liabilities | 1,054 | 1,560 | ||||||
| Net deferred tax liability | $ | 808 | $ | 364 | ||||
ASC Topic 740 provides for the recognition of deferred tax assets if realization of such assets isif more likely than not. The Company believes that it is more likely than not that all of the deferred tax assets will be realized against future taxable income but does not have objective evidence to support this future assumption. Based upon the weight of available evidence, which includes the Company’sCompany's historical operating performance and the reported accumulated net losses to date, the Company has provided a full valuation allowance against its deferred tax assets, except to the extent that those assets are expected to be realized through continuing amortization of the Company’sCompany's deferred tax liabilities for intangible assets.
F-19
The Company does not expect to remit earnings from its foreign subsidiaries. Earnings are considered to be permanently reinvested and, accordingly, no U.S. federal and state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company could be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries.
As of December 31, 2012 and 2011, the Company had no uncertain tax positions.
NOTE 89 — RESTRUCTURING COSTS, EMPLOYEE TERMINATION AND NON-RECURRINGOTHER ITEMS
During the fourth quarter of 2009,year ended December 31, 2012, the Company implemented various organizational restructuring plans in connection with the acquisition of WBS Connect to enable the combined organization to realize operating cost reductions or synergy and to best align its global sales strategy post acquisition. In connection with this, the Company incurred severance costs and contract termination costs related to the realigned organization. In addition, the Company incurred non-recurring costs associated with executing and closing the WBS ConnectnLayer acquisition, including legal fees, professional fees, and travel.
The restructuring charges and accruals established by the Company, and activities related thereto, are summarized as follows (amounts in thousands):
| Severance | Other | Total | ||||||||||
Balance, December 31, 2008 | $ | — | $ | — | $ | — | ||||||
| Charges net of reversals | 264 | 377 | 641 | |||||||||
| Cash uses | (204 | ) | (307 | ) | (511 | ) | ||||||
Balance, December 31, 2009 | $ | 60 | $ | 70 | $ | 130 | ||||||
| Charges Net of Reversals | Cash Payments | Total | ||||||||||
| Balance, December 31, 2011 | $ | - | $ | - | $ | - | ||||||
| Legal, advisory, consulting fees | 150 | (150 | ) | - | ||||||||
| Integration expenses | 541 | (541 | ) | - | ||||||||
| Travel and other expenses | 10 | (10 | ) | - | ||||||||
| Balance, December 31, 2012 | $ | 701 | $ | (701 | ) | $ | - | |||||
NOTE 910 — EMPLOYEE SHARE-BASED COMPENSATION BENEFITS
Stock-Based Compensation Plan
The Company adopted its 2006 Employee, Director and Consultant Stock Plan (the “Plan”“2006 Plan”) in October 2006. In addition to stock options, the Company may also grant restricted stock or other stock-based awards under the 2006 Plan. The maximum number of shares issuable over the term of the 2006 Plan is limited to 3,500,000 shares.
The Company adopted its 2011 Employee, Director and Consultant Stock Plan (the “2011 Plan”) in June 2011. In addition to stock options, the Company may also grant restricted stock or other stock-based awards under the 2011 Plan. The maximum number of shares issuable over the term of the 2011 Plan is limited to 3,000,000 shares. The 2006 Plan will continue according to its terms.
The Plan permits the granting of stock options and restricted stock to employees (including employee directors and officers) and consultants of the Company, and non-employee directors of the Company. Options granted under the Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and expire no later than ten years from the grant date. The options generally vest over four years with 25% of the option shares becoming exercisable one year from the date of grant and the remaining 75% annually or quarterly over the following three years. The Compensation committee of the Board of Directors, as administrator of the Plan, has the discretion to use a different vesting schedule.
Stock Options
Due to the Company’s limited history as a public company, the Company has estimated expected volatility based on the historical volatility of certain comparable companies as determined by management. The risk-free interest rate assumption is based upon observed interest rates at the time of grant appropriate for the term of the Company’s employee stock options. The dividend yield assumption is based on the Company’s intent not to issue a dividend under its dividend policy. The Company uses the simplified method under ASC Topic 718,Compensation –— Stock Compensation, to estimate the options’ expected term. Assumptions used in the calculation of the stock option expense were as follows:
F-20
| 2012 | 2011 | |||||||
| Volatility | 61.9% - 64.0 | % | 59.8% - 92.4 | % | ||||
| Risk free rate | 0.8% - 1.8 | % | 1.2% - 2.5 | % | ||||
| Term | 6.25 | 6.25 | ||||||
| Dividend yield | 0.0 | % | 0.0 | % | ||||
| 2009 | 2008 | |||||||
| Volatility | 92.2% - 98.5% | 80.0% - 88.5% | ||||||
| Risk free rate | 1.9% - 3.7 | % | 1.7% - 4.7 | % | ||||
| Term | 6.25 - 9.16 | 6.0 - 6.25 | ||||||
| Dividend yield | 0.0 | % | 0.0 | % | ||||
The fair value of each stock option grant to employees is estimated on the date of grant. The fair value of each stock option grant to non-employees is estimated on the applicable performance commitment date, performance completion date or interim financial reporting date.
During the yearsyear ended December 31, 20092012 and 2008,2011, the Company recognized compensation expense of $0.2$0.6 million and $0.1$0.2 million, respectively, related to stock options issued to employees and consultants, which is included in selling, general and administrative expense on the accompanying consolidated statements of operations.
During the year ended December 31, 2009, 321,5002012, 515,000 options were granted pursuant to the Plan. The following table summarizes information concerning options outstanding as of December 31, 2009 (amounts in thousands):
| Weighted | ||||||||||||||||||||
| Average | ||||||||||||||||||||
| Weighted | Weighted | Remaining | Aggregate | |||||||||||||||||
| Average | Average | Contractual | Intrinsic | |||||||||||||||||
| Options | Price | Fair Value | Life (Years) | Value | ||||||||||||||||
| Balance at December 31, 2008 | 528,375 | $ | 1.66 | $ | 1.04 | 8.78 | $ | — | ||||||||||||
| Granted | 321,500 | 0.48 | 0.39 | |||||||||||||||||
| Exercised | — | |||||||||||||||||||
| Forfeited | (160,375 | ) | 1.62 | 1.33 | ||||||||||||||||
| Balance at December 31, 2009 | 689,500 | $ | 1.20 | $ | 0.82 | 8.32 | $ | 305,660 | ||||||||||||
| Exercisable | 77,535 | $ | 0.57 | $ | 0.45 | 8.30 | $ | 150,655 | ||||||||||||
| Weighted Average | ||||||||||||||||||||
| Weighted Average | Weighted Average | Remaining Contractual | Aggregate Intrinsic | |||||||||||||||||
| Options | Exercise Price | Fair Value | Life (Years) | Value | ||||||||||||||||
| Balance at December 31, 2011 | 1,067,657 | $ | 1.20 | $ | 0.87 | 7.56 | $ | 228,298 | ||||||||||||
| Granted | 515,000 | 1.95 | 1.16 | - | - | |||||||||||||||
| Exercised | 48,657 | - | - | - | 74,257 | |||||||||||||||
| Forfeited | (236,064 | ) | 1.32 | 0.54 | - | 389,460 | ||||||||||||||
| Balance at December 31, 2012 | 1,395,250 | $ | 1.49 | $ | 0.43 | 7.23 | $ | 1,834,685 | ||||||||||||
| Exercisable | 512,384 | $ | 0.90 | $ | 0.68 | 5.60 | $ | 1,766,295 | ||||||||||||
As of December 31, 2009,2012, the unvested portion of share-based compensation expense attributable to stock options and the period in which such expense is expected to vest and be recognized is as follows (amounts in thousands):
| Year ending December 2010 | $ | 139 | ||
| Year ending December 2011 | 74 | |||
| Year ending December 2012 | 30 | |||
| Year ending December 2013 | 7 | |||
| Total | $ | 250 | ||
F-21
| 2013 | $ | 241 | ||||
| 2014 | 198 | |||||
| 2015 | 141 | |||||
| 2016 | 44 | |||||
| Total | $ | 624 |
Restricted Stock
The Company expenses restricted shares granted in accordance with the provisions of ASC Topic 718. The fair value of the restricted shares issued is amortized on a straight-line basis over the vesting periods. During the yearsyear ended December 31, 20092012 and 2008,2011, the Company recognized compensation expense related to restricted stock of $0.4 million and $0.7$0.5 million, respectively, which is included in selling, general and administrative expense on the accompanying consolidated statements of operations.
The following table summarizes restricted stock activity during the years ended December 31, 20092012 and 2008:
| 2009 | 2008 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Fair | Fair | |||||||||||||||
| Shares | Value | Shares | Value | |||||||||||||
| Nonvested Balance at January 1, | 566,752 | $ | 1.12 | 420,320 | $ | 2.64 | ||||||||||
| Granted | 454,365 | 0.48 | 621,428 | 0.59 | ||||||||||||
| Forfeited | (11,250 | ) | 0.52 | (103,867 | ) | 1.23 | ||||||||||
| Vested | (392,368 | ) | 0.71 | (371,129 | ) | 1.92 | ||||||||||
| Nonvested Balance at December 31, | 617,499 | $ | 0.72 | 566,752 | $ | 1.12 | ||||||||||
| 2012 | 2011 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Fair | Fair | |||||||||||||||
| Shares | Value | Shares | Value | |||||||||||||
| Nonvested Balance at January 1, | 587,089 | $ | 0.91 | 667,499 | $ | 0.91 | ||||||||||
| Granted | 419,726 | 2.08 | 386,387 | 1.20 | ||||||||||||
| Forfeited | - | - | (90,375 | ) | 1.07 | |||||||||||
| Vested | (104,225 | ) | 2.38 | (376,422 | ) | 1.19 | ||||||||||
| Nonvested Balance at December 31, | 902,590 | $ | 1.66 | 587,089 | $ | 0.91 | ||||||||||
As of December 31, 2009,2012, the unvested portion of share-based compensation expense attributable to restricted stock amounts to $0.4 million which is expected to vest and be recognized during a weighted-average period of 1.41.5 years.
NOTE 10 –11 — DEFINED CONTRIBUTION PLAN
The Company has a defined contribution retirement plan under Section 401(k) of the Internal Revenue CodeIRC that covers substantially all US based employees. Eligible employees may contribute amounts to the plan, via payroll withholding, subject to certain limitations. During 2009,2012 and 2011, the Company matched 25%35% of employees’ contributions to the plan. The Company’s 401(k) expense was $42,000$84,000 in 20092012 and $32,000$59,000 in 2008.
NOTE 1112 — DEBT
The following summarizes the debt activity of the Company during 20092012 (amounts in thousands):
| Notes Payable to | Notes Payable to | |||||||||||||||||||||||
| former GII | former ETT and GII | Notes Payable to | Promissory Note / | Senior Secured | ||||||||||||||||||||
| Total Debt | Shareholders | Shareholders | Other Investors | Capital Lease | Credit Facility | |||||||||||||||||||
| Debt obligation as of December 31, 2008 | $ | 8,796 | $ | 4,000 | $ | 2,871 | $ | 1,925 | $ | — | $ | — | ||||||||||||
| Draw on Senior Secured Credit Facility | 3,078 | — | — | — | — | 3,078 | ||||||||||||||||||
| Promissory Note Issued | 250 | — | — | — | 250 | — | ||||||||||||||||||
| Captial lease obligation assumed | 583 | — | — | — | 583 | — | ||||||||||||||||||
| Debt obligation as of December 31, 2009 | $ | 12,707 | $ | 4,000 | $ | 2,871 | $ | 1,925 | $ | 833 | $ | 3,078 | ||||||||||||
F-22
| Total Debt | SVB Term Loan | SVB Line of Credit | BIA Note | Plexus Note | Subordinated Notes | Promissory Note | ||||||||||||||||||||||
| Debt obligation as of December 31, 2011 | $ | 27,989 | $ | 13,500 | $ | 3,100 | $ | 8,078 | $ | - | $ | 2,602 | $ | 709 | ||||||||||||||
| Issuance, net of discount | 25,714 | 14,500 | 4,000 | - | 7,214 | - | - | |||||||||||||||||||||
| Debt discount amortization | 303 | - | - | 95 | 94 | 114 | - | |||||||||||||||||||||
| Payments | (11,177 | ) | (3,500 | ) | (7,100 | ) | - | - | (105 | ) | (472 | ) | ||||||||||||||||
| Debt obligation as of December 31, 2012 | $ | 42,829 | $ | 24,500 | $ | - | $ | 8,173 | $ | 7,308 | $ | 2,611 | $ | 237 | ||||||||||||||
| Total Debt | ||||||
| 2013 | $ | 7,848 | ||||
| 2014 | 5,000 | |||||
| 2015 | 5,000 | |||||
| 2016 | 24,981 | |||||
| $ | 42,829 | |||||
Term Loan and Line of Credit
On November 12, 2007,June 6, 2011, immediately following the PacketExchange acquisition, the Company entered into a joinder and first loan modification agreement with Silicon Valley Bank (“SVB”), which amended the loan agreement, dated September 30, 2010, by and among SVB and the Company. The modification agreement contains customary representations, warranties and covenants of the Company and the holderscustomary events of default. The obligations of the approximately $5.9Company under the modification agreement are secured by substantially all of the Company’s tangible and intangible assets pursuant to the loan agreement. As of December 31, 2012, the Company is in compliance with the reporting and financial covenants stated in the modification agreement.
On April 30, 2012, in connection with the nLayer acquisition, the Company and nLayer entered into a modification agreement with SVB, which increased the outstanding amount of the Term Loan by $7.5 million, while the existing covenants and revolving Line of promissory notes dueCredit in the aggregate principal amount of up to $5 million remained unchanged.
On May 23, 2012, the Company refinanced the Term Loan through a syndication led by SVB, which amends the loan agreement dated April 30, 2012, as amended, by and among SVB and the Company, which increased the outstanding amount of the Term Loan by $7.0 million, while the existing covenants and the amount of the Line of Credit remained unchanged.
The Term Loan matures on May 1, 2016. The Company will repay the Term Loan in sixteen (16) equal quarterly principal installments of $1.25 million, with each payment of principal being accompanied by a payment of accrued interest. The Term Loan bears interest at a floating rate per annum, calculated daily, equal to the prime rate plus 4.5% per annum, which may be reduced to 3.5% per annum if the Company’s consolidated senior leverage ratio is less than 2:1 and certain other criteria are met.
Any borrowing under the Line of Credit will mature on April 30, 2008 (the “April 2008 Notes”)2016, and will bear interest at a floating rate per annum, calculated daily, equal to the prime rate plus 3.5% per annum, which may be reduced to 2.5% per annum if the Company’s consolidated senior leverage ratio is less than 2:1 and certain other criteria are met.
BIA and Plexus Notes
Concurrent with entering in to the modification agreement, on June 6, 2011, the Company entered into agreementsa note purchase agreement (the “Purchase Agreement”) with the BIA Digital Partners SBIC II LP (“BIA”). The Purchase Agreement provided for a total commitment of $12.5 million, of which $7.5 million was immediately funded (the “BIA Notes”). The BIA Notes were issued at a discount to convert not less than 30%face value of $0.4 million and the discount is being amortized, into interest expense, over the life of the amounts due under the April 2008 Notes as of November 13, 2007 (including principal and accrued interest) into sharesnotes. The remaining $5.0 million of the Company’s common stock,committed financing was available to be called by the Company on or before August 11, 2011, subject to extension to December 31, 2011 at the sole option of BIA. On September 19, 2011, BIA agreed to extend the commitment period and funded the Company an additional $1.0 million. The additional funding was issued at a discount to obtain 10% convertible unsecured subordinated promissory notesface value of $45,000, due to the warrants issued, and the discount is being amortized, into interest expense, over the life of the notes.
On April 30, 2012, in connection with the nLayer acquisition, the Company entered into an amended and restated note purchase agreement (the “Amended Note Purchase Agreement”) with BIA and Plexus Fund II, L.P. (“Plexus”) (together with BIA, the “Note Holders”). The Amended Note Purchase Agreement provides for an increase in the total financing commitment by $8.0 million, of which $6.0 million was immediately funded (the “Plexus Notes” and together with the BIA Notes, the “Notes”). The Company called on the remaining $2.0 million on December 31, 20102012. The funding by Plexus was issued at a total discount to face value of $0.8 million, due to the warrants issued, and the discount is being amortized into interest expense over the life of the Notes.
The Notes mature on June 6, 2016. The obligations evidenced by the Notes shall bear interest at a rate of 13.5% per annum, of which (i) at least 11.5% per annum shall be payable, in cash, monthly (“Cash Interest Portion”) and (ii) 2.0% per annum shall be, at the Company’s option, paid in cash or paid-in-kind. If the Company achieves certain performance criteria, the obligations evidenced by the Notes shall bear interest at a rate of 12.0% per annum, with a Cash Interest Portion of at least 11.0% per annum.
The obligations of the Company under the Amended Note Purchase Agreement are secured by a second lien on substantially all of Company’s tangible and intangible assets. Pursuant to a pledge agreement (the “December 2010 Notes”“Pledge Agreement”), dated June 6, 2011, by and between BIA and the Company, the obligations of the Company are also secured by a pledge in all of the equity interests of the Company in its respective United States subsidiaries and a pledge of 65% of the voting equity interests and all of the non-voting equity interests of the Company in its respective non-United States subsidiaries.
Concurrent with entering into the Amended Note Purchase Agreement, SVB and BIA entered into an agreement (the “Intercreditor and Subordination Agreement”) which governs, among other things, ranking and collateral access for the remaining indebtedness then due under the April 2008 Notes. Pursuantrespective lenders.
Warrants
On June 6, 2011, pursuant to the conversion, a total of 2,570,143 shares of the Company’s common stock (with a quoted market price of $2,929,963) were issued for $3,528,987 of principal and accrued interest due under the April 2008 Notes as of November 13, 2007. All principal and accrued interest under the December 2010 Notes is payable on December 31, 2010. These exchanges are considered an extinguishment of debt in which the aggregate fair value of common stock and new convertible notes is less than the carrying value of the original notes. Accordingly,Purchase Agreement, the Company recordedissued to BIA a gain, included in other income (expense), of $0.6 million forwarrant to purchase from the year ended December 31, 2007 on the extinguishment of the original notes in accordance with ASC Topic 470,Debt — Modifications and Extinguishes(formerly EITF No. 96-19).
On April 30, 2012, pursuant to the Amended Note Purchase Agreement, the Company issued to Plexus a warrant to purchase from the Company 535,135 shares of the Company’s common stock at an exercise price equal to $2.208 per share (as adjusted from time to time as provided in the warrant). On December 31, 2012, the Company issued to Plexus an additional warrant to purchase from the Company 178,378 shares of the Company’s common stock, at an exercise price equal to $2.542 per share (as adjusted from time to time as provided in the warrant). Upon a change of control (as defined in the Amended Note Purchase Agreement), the repayment of the Notes prior to the maturity date of the Notes, the occurrence of an event of default under the Notes or the maturity date of the Notes, the holder of the warrant shall have the option to require the Company to repurchase from the holder the warrant and any time,shares received upon exercise of the warrant and then held by the holder, which repurchase would be at a price per share equal to $1.70. The Company has the right to require the holdersgreater of the December 2010 Notes to convert the principal amount due under the December 2010 Notes at any time after the closing price of the Company’s common stock shallon such date or a price determined by reference to the Company’s adjusted enterprise value on such date, in each case, with respect to any warrant, less the exercise price per share.
The Company evaluated the down round ratchet feature embedded in the warrants and after considering ASC 480,Distinguishing Liabilities from Equity, which establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity, and ASC 815, Derivatives and Hedging, the Company concluded the warrants should be equaltreated as a derivative and recorded a liability for the original fair value amount of $1.3 million as of 2012. During 2012, the warrant liability was marked to or greater than $2.64 for 15 consecutive business days.market which resulted in a loss of $1.0 million. The conversion provisionsbalance of the warrant liability was $2.3 million as of December 31, 2012, which is included in other long-term liabilities.
Subordinated Notes
On February 8, 2010, Notes include protection against dilutive issuancesthe Company completed a financing transaction in which it sold debt and common stock (“February 2010 Units”), resulting in $2.4 million of proceeds to the Company. The February 2010 Units consisted of $1.5 million in aggregated principal amount of the Company’s subordinated promissory notes due February 8, 2012, and $0.9 million of the Company’s common stock. The subordinated promissory notes were issued at a discount to face value of $0.2 million and the discount is being amortized into interest expense over the life of the Notes. Interest on the subordinated promissory notes accrues at 10% per annum. In May 2011, $1.4 million of the February 2010 Units subordinated notes were amended to mature in four equal installments on March 31, June 30, September 30 and December 31, 2013. The remaining $0.1 million of the February 2010 Units subordinated notes were paid off in February 2012. The total subordinate notes of $1.4 million are included in short-term debt as of December 31, 2012. Accrued but unpaid interest was $283,000 as of December 31, 2012.
On December 31, 2010, the Company completed a financing transaction in which it sold debt and common stock subject(“December 2010 Units”), resulting in $2.2 million of proceeds to certain exceptions.the Company. The December 2010 NotesUnits consisted of $1.1 million in aggregated principal amount of the Company’s subordinated promissory notes due December 31, 2013, and $1.1 million of the Amended Notes are subordinate to any future credit facility entered into byCompany’s common stock. On February 16, 2011, the Company up to an amount of $4.0 million. The Company has agreed to register with the Securities and Exchange Commission the shares of Company’s common stock issued to the holders of the December 2010 Notes upon their conversion, subjectUnits amended the offering solely to certain limitations.
As of December 31, 2012, the subordinated notes payable had a balance of $2.6 million. The balance includes notes totaling $1.5$2.1 million due to a related party, Universal Telecommunications, Inc. H. Brian Thompson, the Company’s Executive Chairman of the Board of Directors, is also the head of Universal Telecommunications, Inc,Inc., his own private equity investment and advisory firm.
Promissory Note
As part of December 31, 2008 and 2009, respectively, and all principal and remaining accrued interest is payable on December 31, 2010.
F-23
NOTE 1213 — CONCENTRATIONS
Financial instruments potentially subjecting the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents and designated cash.equivalents. At times during the periods presented, the Company had funds in excess of $250,000 insured by the US Federal Deposit Insurance Corporation, or in excess of similar Deposit Insurance programs outside of the United States, on deposit at various financial institutions. As of December 31, 2009,2012, approximately $4.8$0.8 million of the Company’s deposits were held at institutions as balances in excess of the US Federal Deposit Insurance Corporation and international insured deposit limits for those institutions. However, management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.
For the year ended December 31, 2009,2012, no single customer exceeded 10%11% of total consolidated revenues.revenue. For the year ended December 31, 2008, one2011, no single customer accounted for 12%exceeded 7% of total consolidated revenues.
F-24
Commitment — Leases
GTTA is required to provide its landlord with a letter of credit to provide protection from default under the lease for the Company’s headquarters. GTTA has provided the landlord with a letter of credit in the amount of $100,000 supported by hypothecation of a Certificate of Deposit held by the underlying bank in the same amount.
Office Space and Operating Leases
Office facility leases may provide for escalations of rent or rent abatements and payment of pro rata portions of building operating expenses. The Company currently leases facilities located in McLean, Virginia (lease expires December 2014), London (United Kingdom), (lease expires June, 2012)May 2017), Düsseldorf (Germany), (lease expires July, 2011) and Denver, Colorado (three month(lease expires January 2014). The Company gained additional lease that automatically renews unless a noticeobligations with the acquisition of non-renewal is delivered)PacketExchange in London (United Kingdom) (lease expires April 2014). The Company records rent expense using the straight-line method over the term of the lease agreement. Office facility rent expense was $0.9$0.8 million and $1.2$1.3 million for the years ended December 31, 20092012 and 2008,2011, respectively.
Estimated annual commitments under non-cancelable operating leases are as follows at December 31, 20092012 (amounts in thousands):
| Office Space | Other | |||||||
| 2010 | $ | 688 | $ | 28 | ||||
| 2011 | 598 | 11 | ||||||
| 2012 | 424 | — | ||||||
| 2013 | 327 | — | ||||||
| 2014 | 335 | — | ||||||
| $ | 2,372 | $ | 39 | |||||
| Office Space | ||||||
| 2013 | $ | 682 | ||||
| 2014 | 670 | |||||
| 2015 | 282 | |||||
| 2016 | 282 | |||||
| 2017 | 117 | |||||
| $ | 2,033 | |||||
Commitments-Supply agreements
As of December 31, 2009,2012, the Company had supplier agreement purchase obligations of $33.0$39.4 million associated with the telecommunications services that the Company has contracted to purchase from its vendors. The Company’s contracts are generally such that the terms and conditions in the vendor and client customer contracts are substantially the same in terms of duration. The back-to-back nature of the Company’s contracts means that the largest component of its contractual obligations is generally mirrored by its customer’s commitment to purchase the services associated with those obligations.
Estimated annual commitments under supplier contractual agreements are as follows at December 31, 2012 (amounts in thousands):
| Supplier Agreements | ||||
| 2013 | $ | 8,330 | ||
| 2014 | 11,009 | |||
| 2015 | 10,483 | |||
| 2016 | 3,300 | |||
| 2017 | 3,141 | |||
| and beyond | 3,143 | |||
| $ | 39,406 | |||
If a customer disconnects its service before the term ordered from the vendor expires, and if GTT were unable to find another customer for the capacity, GTT may be subject to an early termination liability. Under standard telecommunications industry practice (commonly referred to in the industry as “portability”), this early termination liability may be waived by the vendor if GTT were to order replacement service with the vendor of equal or greater value to the service cancelled. Additionally, the Company maintains some fixed network costs and from time to time if it deems portions of the network are not economically beneficial,beneficial; the Company may disconnect those portions and potentially incur early termination liabilities. As of December 31, 2009, the Company has $0.6 million accrued for early termination liabilities.
F-25
Some of the Company’s supplier purchase agreements call for the Company to make monthly payments to suppliers whether or not the Company is currently utilizing the underlying capacity in that particular month (commonly referred to in the industry as “take-or-pay” commitments). As of December 31, 20092012 and 2008,2011, the Company’s aggregate monthly obligations under such take-or-pay commitments over the remaining term of all of those contracts totaled $4.7$2.6 million and $0.0,$1.1 million, respectively.
Contingencies-Legal proceedings
The Company is subject to legal proceedings arising in the ordinary course of business. In the opinion of management, the ultimate disposition of those matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity. No material reserves have been established for any pending legal proceeding, either because a loss is not probable or the amount of a loss, if any, cannot be reasonably estimated.
NOTE 1415 — FOREIGN OPERATIONS
The Company’s operations are located primarily in the United States and Europe. OurThe Company’s financial data by geographic area is as follows:
| US | UK | Other | Total GTT | |||||||||||||
| 2009 | ||||||||||||||||
| Revenues by geographic area | $ | 36,941 | $ | 18,917 | $ | 8,363 | $ | 64,221 | ||||||||
| Long-lived assets at December 31 | 38,872 | 561 | — | 39,433 | ||||||||||||
| 2008 | ||||||||||||||||
| Revenues by geographic area | 34,087 | 23,308 | 9,579 | 66,974 | ||||||||||||
| Long-lived assets at December 31 | 27,084 | 591 | 51 | 27,726 | ||||||||||||
| US | UK | OTHER | Total GTT | |||||||||||||
| 2012 | ||||||||||||||||
| Revenues by geographic area | $ | 82,430 | $ | 20,648 | $ | 4,799 | $ | 107,877 | ||||||||
| Long-lived assets at December 31 | $ | 63,492 | $ | 12,679 | $ | 19 | $ | 76,190 | ||||||||
| 2011 | ||||||||||||||||
| Revenues by geographic area | $ | 65,364 | $ | 19,522 | $ | 6,302 | $ | 91,188 | ||||||||
| Long-lived assets at December 31 | $ | 44,430 | $ | 14,065 | $ | 41 | $ | 58,536 | ||||||||
NOTE 1516 — SUBSEQUENT EVENTS
On December 31, 2009, GTTFebruary 1, 2013, the Company entered into an agreementa Stock Purchase Agreement (the “Agreement’), with IDC Global Incorporated (“IDC”), a privately held company in Chicago. IDC owns and operates two data co-location facilities and its own metro optical fiber network in Chicago. The two data facilities fiber connects to acquire from Capital Growth Systems, Inc., Global Capacity Group, Inc.350 East Cermack, which is the largest multi-story data center property in the world. IDC provides cloud networking, co-location, and Global Capacity Direct, LLC (collectively “Global Capacity”) certain customer contracts and other assets relatedmanaged cloud services to point-to-point circuits fornearly 100 clients with a focus on providing multi-location enterprises with a complete portfolio of cloud infrastructure services.
Pursuant to the transmission of data. The closingAgreement, the Company acquired 100% of the Global Capacity acquisition has not yet occurred.
| F-28 |
F-26