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, 20142016
Commission File Number 000-51211
GTT Communications, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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| Delaware | | 20-2096338 |
| (State or Other Jurisdiction of | | (I.R.S. Employer Identification No.) |
| Incorporation or Organization) | | |
7900 Tysons One Place
Suite 1450
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:
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| Title of each class | Name of each exchange on which registered |
| Common stock, par value $.0001 per share | NYSE |
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Securities registered pursuant to Section 12(g) of the Act:
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| None |
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No þ
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer ¨ | | Accelerated Filer þ |
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Non-Accelerated Filer ¨ | | Smaller reporting company ¨ |
| (Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The aggregate market value of the common stock held by non-affiliates of the registrant (17,957,188(26,633,462 shares) based on the $10.21$18.48 closing price of the registrant’s common stock as reported on the NYSE MKT on June 30, 2014,2016, was $183,342,889.$492,186,378. 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 13, 20158, 2017, 34,007,98340,998,289 shares of common stock, par value $.0001 per share, of the registrant were outstanding.
Documents Incorporated by Reference
Portions of our definitive proxy statement for the 20152017 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.
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| Item 1. | Business | |
| Item 1A. | Risk Factors | |
| Item 1B. | Unresolved Staff Comments | |
| Item 2. | Properties | |
| Item 3. | Legal Proceedings | |
| Item 4. | Mine Safety Disclosures | |
| | PART II | |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
| Item 6. | Selected Financial Data | |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |
| Item 8. | Financial Statements and Supplementary Data | |
| Item 9. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure | |
| Item 9A. | Controls and Procedures | |
| Item 9B. | Other Information | |
| | PART III | |
| Item 10. | Directors, Executive Officers and Corporate Governance | |
| Item 11. | Executive Compensation | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
| Item 14. | Principal Accounting Fees and Services | |
| | PART IV | |
| Item 15. | Exhibits, Financial Statement Schedules | |
| Item 16. | Form 10-K Summary | |
| | Signatures | |
CAUTIONARY NOTES REGARDING FORWARD-LOOKING STATEMENTS
OurCertain statements contained or incorporated by reference in this Form 10-K (“("Annual Report”Report") includes certain “forward-looking statements”may constitute "forward-looking statements" within the meaning of Section 27A of the Private Securities Litigation ReformAct and Section 21E of the Securities Act of 1995, which reflect the current views1934, as amended (the "Exchange Act"). Any statements included or incorporated by reference in this Annual Report about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. Should one or more of GTT Communications, Inc., with respect to current events and financial performance.these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ from those anticipated, estimated or expected. You can identify these forward-looking statements by forward-lookingthe use of words or phrases such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “could,” “should,”"may," "likely," "potentially," "will," "expect," "intend," "anticipate," "projects," "believe," "estimate," "plan," "could," "should," "opportunity," and “continue”"continue" or similar words.words, whether in the negative or the affirmative. Forward-looking statements include information concerning our business strategy, plans, and goals and objectives, as well as information concerning the expected timing, consummation and financial benefits of certain transactions.
Forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account information currently available to us. These forward-looking statements may also use different phrases. Unless the context otherwise requires, when we use the words the ‘‘Company,” “GTT,” “we”, or “us" in this Form 10-K, we are referring to GTT Communications, Inc., a Delaware corporation, and its subsidiaries, unless it is clear from the context or expressly stated that these references are only to GTT Communications, Inc. From time to time, GTT also provides forward-looking statements in other materials GTT releases to the public or files with the United States Securities and Exchange Commission (the “SEC”), as well as oral forward-looking statements. You should consider 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 manyknown and unknown risks, uncertainties and factors relating to our operations and the business environmentor events that may cause our actual results, to be materially different from any future results, expressperformance or achievements expressed or implied by such forward-looking statements. Factorsstatements, many of which are beyond our control. These statements include, among others, statements concerning:
•our business and our strategy for continuing to pursue our business;
our integration of the operations from recent and anticipated acquisitions, and realization of anticipated benefits and synergies in connection with the acquisitions;
anticipated growth of our industry;
expectations as to our future revenue, margins, expenses, cash flows, profitability and capital requirements; and
other statements of expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts.
These statements are subject to risks and uncertainties, including financial, regulatory, environmental, and industry projections, that could cause GTT’sactual events or results to differ materially from those expressed or implied by the statements. Factors, contingencies, and risks that could cause our actual results to differ materially from these forward-looking statements include, but are not limited to, the effects on our business and customers of general economic and financial market conditions, as well as the following:
our ability to achieve the expected benefits of certain transactions;
our ability to develop and market new products and services that meet customer demands and generate acceptable margins;
our reliance on several large customers;
our ability to negotiate and enter into acceptable contract terms with our suppliers;
our ability to attract and retain qualified management and other personnel;
competition in the industry in which we do business;
failure of the third-party communications networks on which we depend;
legislation or regulatory environments, requirements or changes adversely affecting the businesses in which we are engaged;
our ability to maintain our databases, management systems and other intellectual property;
our ability to prevent process and system failures or security breaches that significantly disrupt the availability and quality of the services that we provide;
our ability to maintain adequate liquidity and produce sufficient cash flow to fund acquisitions and capital expenditures;
our capital expendituresability to meet all the terms and conditions of our debt service;obligations;
our ability to obtain capital to grow our business;
technological developments and changes in the industry;
declining prices of IP transit;
fluctuations in our effective tax rate;ability to utilize our net operating losses;
expectations regarding the trading price of our common stockstock; and
our ability to complete acquisitions or divesturesdivestitures and toeffectively integrate any business or operation acquired; and
general economic conditions.acquired.
Among the factors that could cause actual results to differ materially from those indicated in the forward-looking statements are risks and uncertainties inherent in our business. Such risks and uncertainties include, among others, factors discussed under the section entitled "Risk Factors" in this Annual Report. Any such risks and uncertainties could materially and adversely affect our results of operations, our profitability and our cash flows, which could, in turn, have a material adverse impact on our ability to make payments on our debt.
You are cautionedshould not to place undue reliance on theseany forward-looking statements. Forward-looking statements which speak only as of the date of this annual report. Forward-lookingwhich statements involve known and unknown risks and uncertaintieswere made. We expressly disclaim any obligation to update our forward-looking statements, whether as a result of new information, future events or circumstances, or otherwise, except as required by law.
You should understand that may cause our actual future results to differmay be materially different from those projected or contemplated inwhat we expect. We qualify all of 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 entiretyincorporated by the cautionary statements contained or referred toreference in this section. ExceptAnnual Report by these cautionary statements. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement. You should carefully consider the risk factors contained herein, in addition to the extent requiredother information included or incorporated by applicable laws and regulations, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this annual report or to reflect the occurrence of unanticipated events. You should be aware that the occurrence of the events described in the “Risk Factors” section and elsewhere in this annual report could have a material adverse effect on our business and our results of operations.
reference.
PART I
ITEM 1. BUSINESS
IntroductionOverview
GTT Communications, Inc. ("GTT," the "Company," "we" or "us") is a Delaware corporation which was incorporated on January 3, 2005. GTT operatesprovider of cloud networking services to multinational clients. We offer a broad portfolio of global services including: wide area network ("WAN") services; Internet services; managed network and security services; and voice and unified communication services.
Our global Tier 1 IP network connectingdelivers connectivity for our clients to locations and cloud applications around the world. We seekprovide services to further extendleading multinational enterprises, carriers and government customers in over 100 countries. We differentiate ourselves from our network globally whilecompetition by delivering exceptional client service to our clients with simplicity, speed and agility.
Our Customers
We are a Delaware corporation founded in 2005. As of December 31, 2014,2016, we had 662 full-time equivalent employees.
Strategy
Multinational clients are shifting greater amounts of traffic to cloud-based applications and outsourcing IT infrastructure services, which creates significant opportunities for GTT. Our cloud connectivity services are designed to capitalize on these growing market demands. We believe our global networking services provide a better way for multinational clients to reach the cloud.
Our strategy is focused on three key elements:
Expanding cloud networking services to multinational clients. Our network assets and services are built to serve the requirements of large, global clients. These organizations have increasing demands for scalable and flexible network connectivity services due to the rapid adoption of cloud-based applications and increasing data usage across locations driven by increasing file sizes, voice, video and real-time collaboration tools. In addition, enterprise CIOs and technology executives are increasingly using third-party management of their network and IT infrastructure so their teams can focus on application development and performance. We are one of the few non-incumbent providers with the product breadth, global scope and operating experience to meet the sophisticated networking needs and managed service requirements of the world’s most demanding multinational clients, and we will continue to look for ways to expand our portfolio of services to meet our clients’ needs.
Extending secure network connectivity to any location in the world and any application in the cloud. We operate one of the five largest IP networks in the world, and our global access footprint is one of the broadest in the industry. Network connectivity is a fundamental requirement for clients to realize the full benefits of cloud computing, and they are increasingly demanding dedicated, secure and high-bandwidth connectivity between their various office locations and leading cloud service providers for mission-critical applications and services. We can connect any client location in the world to our global network through our relationships with approximately 2,000 regional suppliers. We will continue to seek opportunities to expand our global footprint to enable our clients to connect to the cloud more efficiently and cost-effectively.
Delivering outstanding client experience by living our core values of Simplicity, Speed and Agility. We strive to be easy to work with, fast and responsive, and to say “yes” to our clients. We are committed to delivering high-quality, reliable and secure services that will continue to attract new clients and create additional opportunities with existing clients. We believe that by operating all areas of our business with simplicity, speed and agility, we are able to offer customers a better service experience than larger incumbent providers.
We execute on this strategy both organically and through strategic acquisitions. We have completed many acquisitions throughout our history, and we believe we have consistently demonstrated an ability to acquire and effectively integrate companies, realize cost synergies, and organically grow revenue post-acquisition. Acquisitions have the ability to increase the scale of our operations, which in turn affords us the ability to expand our operating leverage, extend our network reach, augment our product set, and broaden our customer base was comprisedbase. We believe our ability to realize significant cost synergies through acquisitions provides us with a competitive advantage in future consolidation opportunities within our industry. We will continue to evaluate these opportunities and are regularly involved in acquisition discussions. We will evaluate these opportunities based on a number of over 4,000 businesses. Forcriteria, including the year ended December 31, 2014, no singlestrategic fit within our existing businesses, the ability to integrate people, systems and network quickly, and the opportunity to create value through the realization of cost synergies.
Global Network
Our global network assets are deployed in North America, Europe, the Middle East, Asia and Australia. Our Tier 1 IP network consists of approximately 250 points of presence ("PoPs") in top data centers around the world, connected with resilient and redundant transport. Based on industry data, our IP backbone is consistently ranked a top five network in terms of internet routes.
Our private, long-haul optical network provides the foundation for a multiprotocol label switching ("MPLS") mesh between core backbone routers in each market. We engineer our network to provide high levels of capacity and performance, even when utilizing enhanced services such as traffic analysis and filtering. We route network traffic to ensure customer accountedapplications take the shortest path possible through the network, ensuring performance, reliability and security.
We employ a "capex light" model, which leverages the sophisticated routing and switching infrastructure in our core global network, then integrates network access leased from last mile carriers. This business model benefits us and our customers. We are able to quickly add capacity as needed, minimize infrastructure deployment, maintenance and replacement costs, and focus solely on designing the best network solutions for more than 10% of our total consolidated revenue. Our five largest customers accounted for approximately 18% of consolidated revenue during the same period.clients' specific needs.
Service Offerings
We deliver four primary service offerings to our customers:
Wide Area Network Services
We provide Layer 2 (Ethernet) and Layer 3 (MPLS) WAN solutions to meet the growing needs of multinational clients regardless of location. We design and implement custom private, public and hybrid cloud network solutions, offering bandwidth speeds from 10 Mbps to 100 Gbps per port with burstable and aggregate bandwidth capabilities. Using our advanced multipoint and virtual private lan service ("VPLS") functionality, which provide Ethernet-based multipoint to multipoint communication over IP or MPLS networks, customers can directly connect locations anywhere in the world with a single Ethernet port at each location, sharing information between locations as easily as over a local network. Our WAN service is available in point-to-point, point-to-multipoint, and full mesh configurations. All services in over 100 countries,are available on a protected basis with the ability to expand into new geographic areas by adding new regional partnersspecify pre-configured alternate routes to minimize the impact of any network disruption.
Through GTT’s WAN services, clients can securely connect to cloud service providers in data centers and suppliers. Our service expansion is largely customer-driven. We have designed, delivered, and subsequently managed services in all six populated continentsexchanges around the world. Our Cloud Connect feature provides private, secure, pre-established connectivity to leading cloud service providers. Clients can connect to GTT in one location and have access to a broad cloud service provider ecosystem from anywhere in the world.
Internet Services
We offer customers scalable, high-bandwidth global Internet connectivity and IP transit with guaranteed availability and packet delivery. Our Internet services offer flexible connectivity with multiple port interfaces including Fast Ethernet, Gigabit Ethernet, 10 Gigabit Ethernet and 100 Gigabit Ethernet. We also offer broadband and wireless access services. We support a dual stack of IPv4 and IPv6 protocols, enabling the delivery of seamless IPv6 services alongside existing IPv4 services.
Managed Services
We offer fully managed network services, including managed equipment, managed security services and managed remote access, enabling customers to focus on their core business. These end-to-end services cover the design, procurement, implementation, monitoring and maintenance of a customer’s network.
Managed CPE. Managed CPE provides a turnkey solution for the end-to-end management of customer premise equipment, from premises through the core network. This includes the design, procurement, implementation, monitoring and maintenance of equipment including routers, switches, servers and Wi-Fi access points.
Security Services. Our cloud-based and premises-based security services provide a comprehensive, multi-layered security solution that protects the network while meeting the most stringent security standards. Our Unified Threat Management (“UTM”) services include advanced firewall, intrusion detection, anti-virus, web filtering and anti-spam. UTM services also cover a broad range of compliance requirements, offering customers Security-as-a-Service versions of managed logging, vulnerability scanning and security information management that meet numerous security standards, including Payment Card Industry / Cardholder Information Security Program ("PCI/CISP") compliance.
Managed Remote Access. Our Managed Remote Access service provides clients of all sizes with secure remote access to their network applications from any device, anywhere, anytime from any authorized user. Managed Remote Access extends network reach, allowing trusted users to establish a secure data connection from any browser or device using Transport Layer Security to encrypt all traffic and protect the network from unauthorized users.
Voice and Unified Communication Services
SIP Trunking. Our SIP Trunking service is an enterprise-built unified communications offering that integrates voice, video and chat onto a single IP connection, driving efficiency and productivity organization-wide. The service is interoperable with key Unified Communications ("UC") platforms such as Cisco, Avaya, ShoreTel, Siemens and Microsoft to support collaboration requirements, as well as with legacy infrastructure. SIP Trunking brings substantial cost savings by eliminating legacy infrastructure and providing more predictable local and long-distance costs. SIP Trunking is delivered over our fully redundant and robust global network that is purpose-built to handle bandwidth-intensive communication services. The service includes a full suite of international telephony services, including direct inward dialing ("DIDs"), toll-free numbers, termination and emergency services. We also offer customized redundancy options to meet clients' most stringent disaster recovery requirements, as well as a secure trunking option for encryption of sensitive call signaling and media.
Enterprise PBX. Our Enterprise PBX service allows clients to eliminate traditional voice infrastructure with communication services delivered through the cloud. The offering includes fully hosted and hybrid models for maximum flexibility. Enterprise PBX includes full PBX features, such as call transfer, music on hold, voicemail, unified messaging, company directory, auto attendant and enhanced call routing. The user management portal provides integrated and consistent functionality, regardless of user location. Clients can further expand capabilities through additional cloud-based features, such as contact center and audio conferencing.
Operations
Supplier Management
We have strong, long-standing relationships with a diverse group of approximately 2,000 suppliers from which we source our global network connectivity, last-mile bandwidth capacity and other services. We maintain multiple supplier agreements covering diverse routes throughout our network to ensure service continuity, competitive pricing, bandwidth capacity and improved carrier responsiveness.
For our core global network, supplier agreements are typically one-year commitments with an option to renew, which enables us to (i) maintain significant flexibility regarding the year ended December 31, 2014, approximately 58%amount of bandwidth purchased and (ii) consistently benefit from the latest competitive pricing. For last-mile connections, we typically structure the lease term to match the term of the underlying customer contract.
Our supplier management team continually monitors supplier performance, network information and pricing to provide greater choice, flexibility and cost savings for our customers.
Network Operations
Our network is supported by global Network Operations Centers (NOCs) located in Austin, Texas; Belfast, Northern Ireland; Denver, Colorado, Lemont Furnace, Pennsylvania; and Seattle, Washington. The NOCs provide active monitoring, prioritization and resolution of network-related events 24 hours per day, 365 days per year. Our NOCs also respond to customer network inquiries, and coordinate and notify customers of maintenance activities.
IT Systems
We provide customers with advanced routing control and visibility into their network performance. Our proprietary online client portal provides customers with online access to monitor their network performance and track real-time statistics.
We have developed a comprehensive Client Management Database (CMD) that manages our network, customer and supplier contracts, sales quoting, service provisioning, and customer and supplier invoicing. CMD also supports our financial reporting and other operational processes. Our CMD system has been in operation since our inception, and its capabilities and processes are continually enhanced and automated. The CMD system provides our management team with visibility into all areas of our revenue was attributableoperations and allows us to operate with simplicity, speed and agility.
Sales and Marketing
We market our operations basedproducts and services through a global direct sales force and indirect sales channels. We have sales representatives throughout North America, Europe, Middle East, and Asia. Our sales activities are specifically focused on building relationships with new clients and driving expansion within existing client accounts. Because we typically sell to large, global clients and 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 supplement our direct sales approach with a trusted community of agents and integrators who already have personal relationships with many leading multinational clients.
Our sales force is supported by global service delivery organization and other support teams. The service delivery team ensures the successful implementation of customer services after the sale. A service delivery manager is assigned to each customer order to ensure that the underlying network facilities required for the solution are provisioned, that the customer is provided with status reports on its service, and that any difficulties related to the installation of a customer order are proactively managed.
Marketing activities are designed to generate awareness and familiarity with our value proposition to multinational clients, develop new products to meet customer needs and communicate to key customer decision makers.
Customers
Our customer base consists of enterprise, carrier and government clients around the world. Our multinational enterprise client base includes leading organizations in financial services, healthcare, technology, manufacturing, retail media and entertainment, and business services verticals. Carrier customers include some of the largest telecommunications firms in the United States, 27% based in Italy, 13% based in the United Kingdom, and 2% from operations in other countries.world, who rely on our global network to extend their reach.
Our customer contracts for network services and support are generally for initial terms ofrange from one to threefive years with some contracts callingor more for terms in excess of five years.the initial term. Following the initial terms,term, these agreements typically provide for automatic renewal automatically for specified periods ranging from one month to one year. Our prices are fixed for the duration of the contract, and we typically bill monthly in advance for such services.
Our Network
GTT has deployed network assets in North America, Europe and Asia. Our global, proprietary Ethernet and Internet Protocol (IP) backbone is one 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 most interconnected Ethernet service platforms around the world, and accordingterm or, at a minimum, our liability to industry sources our IP backbone is consistently a top five network in the world in terms of IP routes. We provide reliable, scalable and secure solutions, including private, public and hybrid cloud networking, high bandwidth IP transit for content delivery and hosting applications, on-demand and high-demand network capacity to support varying needs and network-to-network carrier interconnects.any underlying suppliers.
Competition
We operate in a highly competitive industry. Our competitors include incumbent local exchange carriers, competitive local exchange carriers, Internet service providers and other facilities-based operators. Many of these competitors are large, well-capitalized, and have designed, deliveredstrong market presence, brand recognition and existing customer relationships. We also face competition from smaller providers who offer network services and managed services in all six populated continents around the world. Our service expansion is largely customer-driven,enterprise solutions similar to ours. Specific competitors vary based on geography and we have also grown our network through a series of acquisitions. We have over 1,000 supplier relationships worldwide from which we source last-mile bandwidth and other services and combine our own network assets to meet our customers’ requirements.
Our supplier management team works with our suppliers to acquire updated pricing and network asset information and negotiate purchase agreements when appropriate. All of these efforts are aimed at providing greater choice, flexibility, and cost savings for our customers. We are committed to using high-quality suppliers, and our supplier management team continually monitors supplier performance. product offerings.
Business Overview and StrategyRegulatory Matters
We deliver three primary services to our customers - EtherCloud, our flexible Ethernet-based connectivity service; Internet Services, our reliable, high bandwidth Internet connectivity services; and Managed Services, our provision of fully managed network services so organizations can focus on their core business. Our extensive network and broad geographic reach enable us to cost effectively deliver the bandwidth, scale and security demanded by our customers.
We market our products and services through a global direct sales force and independent sales channels. We differentiate and sell the value of our product offerings primarily based on customer service, product quality and performance, reliability and price. Our sales activities are specifically focused on building relationships with new clients and driving expansion within existing accounts. 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.
Our growth strategy is to extend ubiquitous network connectivity to locations and cloud applications around the world, expand cloud networking services to multinational clients, and deliver outstanding client experience by living our core values of simplicity, speed and agility.
Competition
Our competition consists primarily of traditional, facilities-based providers that provide service around the globe, including companies that provide network connectivity and internet access principally within one continent or geographical region, such as CenturyLink, KPN, XO and COLT. We also compete against carriers who provide network connectivity on a multi-continent, or global basis, such as Level 3, Verizon Business, AT&T, British Telecom, NTT, Deutsche Telekom and Orange Business Services.
Government Regulation
In connection with certain of our service offerings, we may be subject to federal, state and foreign regulations. In the United States, Federal laws andthe Federal Communications Commission (“FCC”), regulations generally apply to(FCC) has jurisdiction over interstate telecommunications and international telecommunications that originate or terminate in the United States, while state laws and regulations applyStates. State Public Utilities Commissions (PUCs) have similar powers with respect to telecommunications transmissions ultimately terminating within the same state as the point of origination.intrastate telecommunications. 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,constantly evolving, and varies from state to state and from country to country.
Where certification, licensing or licensingauthorization is required, carriers are required to comply with certain ongoing responsibilities. For example, we may beare 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 toIn addition, we are responsible for the payment of certain regulatory fees and the collection and remittance of certain surcharges and fees associated with the provision of telecommunications services. Some of our services are subject to these assessments, depending upon the jurisdiction, the type of service and the type of customer.
Federal Regulation
Generally, the FCC has chosen not to heavily regulate the charges or practices of non-dominant carriers, like GTT. 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 payment 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 application 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, 2014, we had a total of 294 employees and full-time equivalents.
Executive Officers
Our executive officers and their respective ages and positions as of March 13, 2015 are as follows:
Richard D. Calder, Jr., 51, is GTT’s President and Chief Executive Officer, appointed by GTT’s Board of Directors effective May 2007. He brings over two decades of experience in the telecommunications arena to GTT. In his role, Mr. Calder has full strategic and operational responsibility for the company and also serves as a director on the company’s Board of Directors. Mr. Calder joined GTT from InPhonic, Inc., a leading provider of wireless services and products, where he served as the President and Chief Operating Officer. Prior to InPhonic, Mr. Calder was President of Business Enterprise & Carrier Markets at Broadwing Communications. He held senior management positions at Winstar Communications and prior to Winstar, Mr. Calder co-founded GO Communications, a wireless communications company. In his early career, Mr. Calder held various marketing and business development positions at MCI Communications, and various marketing and engineering positions at Tellabs, Inc. Mr. Calder received a B.S. in Electrical Engineering from Yale University and an M.B.A. from the Harvard Business School.
H. Brian Thompson, 76, 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 heads his own private equity investment and advisory firm, Universal Telecommunications, Inc., focused on start-up companies and consolidations in the information/telecommunications area. From December 2002 to June 2007, he was Chairman of Comsat International (CI), one of the largest independent telecommunications operators serving Latin America. Previously, he was the Chairman and Chief Executive Officer of Global TeleSystems Group, Inc. and served as Chairman and CEO of LCI International, Inc. until its sale to Qwest Communications International, Inc. when be became Vice Chairman of the Board. Earlier in this career, Mr. Thompson was an Executive Vice President of MCI Communications Corporation. Currently, he is a member of the board of directors of Axcelis Technologies, Inc., Pendrell Corporation, Penske Automotive Group, Inc. and Sonus Networks, Inc. Mr. Thompson also served as the Co-Chairman for the Americas and is currently on the Executive Committee of the Global Information Infrastructure Commission, a multinational organization focused on developing global information and telecommunications infrastructure. Mr. Thompson received his Masters of Business Administration from Harvard’s Graduate School of Business and holds an undergraduate degree in Chemical Engineering from the University of Massachusetts.
Michael R. Bauer, 42, has served as our Chief Financial Officer since 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 has over 18 years of broad finance and accounting experience. Prior to joining GTT, Mr. Bauer led the financial planning and analysis 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 Science degree in Accounting from the Pennsylvania State University.
Chris McKee, 46, joined GTT in 2008 and is GTT’s General Counsel and EVP, Corporate Development and Corporate Secretary for the GTT Board. Mr. McKee is responsible for all of the company’s corporate legal requirements, human resources and supplier management. Mr. McKee also oversees the development of strategic business opportunities for the company, including all merger and acquisition activities. Mr. McKee has over 20 years of broad legal experience in the telecommunications industry. Prior to joining GTT, he served as General Counsel for StarVox Communications where he was responsible for the company’s legal department, mergers and acquisitions, employment law, litigation, and legal support for the sales teams. Mr. McKee also formerly served as Vice President and Assistant General Counsel for Covad Communications where he headed Covad’s Washington DC office and directed the federal and state regulatory compliance and advocacy efforts for the company. Mr. McKee previously worked for XO
Communications, Net2000 Communications and was in private practice in Washington DC as an associate at Dickstein Shapiro and Cooley LLP. Mr. McKee earned a law degree from Syracuse University and received his Bachelor of Arts from Colby College.
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, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. OurWe make available, through our website, www.gtt.net, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and allexhibits and amendments to suchthose reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, promptly after they are available free of charge onelectronically filed with the SEC website at www.sec.govSecurities and Exchange Commission (the "SEC"). We caution you that the information on our website at www.gtt.net as soon as reasonably practicable after such material is electronically filednot part of this or any other report we file with, or furnishedfurnish to, the SEC.
In addition to our website, you may read and copy any materials we file with the SEC at www.sec.gov.
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 known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or telecommunications and/or technology companies in general, may also impair our business operations. If any of these risks or uncertainties actually occurs, our business, financial condition and operating results could be materially adversely affected.
Risks RelatingRelated to Our Business and Operations
Our business could suffer delays and problems due to the actions of network providers on whom we are partially dependent.
Most of our customers are connected to our network by means of communications lines that are provided as services by local telephone companies and others. We depend on several large customers,may experience problems with the installation, maintenance and the loss of one or morepricing of these customers,or a significant decrease in total revenue from any of these customers, wouldlikely reduce our revenuelines and income.
For the year ended December 31, 2014, our five largest customers accounted for approximately 18% 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 onother communications links, which services are purchased from us, our revenue could decline andadversely affect our results of operations would suffer.
Ifand 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 usplans to add additional customers to our network using such services. We attempt to mitigate this risk by using many different providers so that we have alternatives for linking a customer to our network. Competition among the providers tends to improve installation intervals, maintenance 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:
substantially greater financial, technical, marketing, and other resources, including brand or corporate name recognition;
substantially lower cost structures, including cost structures of facility-based providers who have reduced debt and other obligations through bankruptcy or other restructuring proceedings;
larger client bases;
longer operating histories;
more established relationships in the industry; and
larger geographic presence.pricing.
Our competitorsnetwork may be able to use these advantages to:
develop or adapt to new or emerging technologiesthe target of potential cyber-attacks and changes in client requirements more quickly;other security breaches that could have significant negative consequences.
take advantage of acquisitions and other opportunities more readily;
enter into strategic relationships to rapidly grow the reach of their networks and capacity;
devote greater resources to the marketing and sale of their services;
adopt more aggressive pricing and incentive policies, which could drive down margins; and
expand their offerings more quickly.
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 supportOur 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, 2014, we had approximately $49.3 million in cash and cash equivalents, and our current assets were $14.5 million greater than current liabilities. While we have sufficient cash as of December 31, 2014 to fund our working capital or other capital requirements, we expect to continue to acquire entities that are strategic in nature and may be require the Company 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. 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, our 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 2019, and if we are unable to satisfy our obligations, the lenders could foreclose on their security interests.
Because our business is dependent upon selling telecommunications networkcapacity purchased in part from third parties, the failure of our suppliers and other serviceproviders to provide us with services, or disputes with those suppliers and service providers, could affect our ability to provide quality services to our customers andhave an adverse effect on our operations and financial condition.
Much of our business consists of integrating and selling 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 claims against us, some of which if resolved against us could have an adverse impact on our results of operations and/or financial condition. Suppliers may also attempt to impose onerous terms as part of purchase contract negotiations. Although we know of no pending or threatened claims with respect to past compliance with any such terms, claims asserting any past noncompliance, if successful, could have a material adverse effect on our operations and/or financial condition. Moreover, to the extent that key suppliers were to attempt to impose such provisions as part of future contract negotiations, such developments could have an adverse impact on the company’s operations. Finally, some of our suppliers are potential competitors. We cannot guarantee that we will be able to obtain use of facilities or services in a timely manner or on terms acceptable and in quantities satisfactory to us.
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 through mergers and acquisitions involving regional or smaller national or international competitors. 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 revenue from its customers, which could result in a material and adverse impact on the Company’s operating results.
System disruptions, either in our network or in third party networks on which we depend, could cause delays or interruptions of our service, which could cause us to lose customers, or incur additional expenses.
Our customers dependdepends on our ability to provide network availability with minimal interruptionlimit and mitigate interruptions or degradation in services. 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, power loss, telecommunications failures, terrorism, sabotage, vandalism, cyber-attacks, computer viruses or other infiltration by third parties or the financial distress or other events 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.availability. Our network, including our routers, may be vulnerable to unauthorized access, computer viruses, cyber-attacks, distributed denial of service (DDOS), and
other security breaches. An attack on or security breach of our network could result in interruption or cessation of services, our inability to meet our service level commitments, and potentially compromise customer data transmitted over our network. We cannot guarantee that our security measures will not be circumvented, thereby resulting in network failures or interruptions that could impact our network availability and have a material adverse effect on our business, financial condition and operational results. We may be required to expend significant resources to protect against such threats, and may experience a reduction in revenues, litigation, and a diminution in goodwill, caused by a breach. Although our customer contracts limit our liability, affected customers and third parties may seek to recover damages from us under various legal theories.
We are required to maintain, repair, upgrade and replace our network and facilities and our network could suffer serious disruption if certain locations experience serious damage.
Our business requires that we maintain, upgrade, repair and periodically replace parts of our network facilities. This requires, and will continue to require, management time and the expenditure of capital on a regular basis. In the event that we fail to maintain, upgrade or replace essential portions of our network facilities, it could lead to a material degradation in the level of service that we provide, which would adversely affect our business.
There are certain locations through which a large amount of our internetInternet traffic passes. Examples are facilities in which we exchange traffic with other carriers, the facilities through which our transatlantic traffic passes, and certain of our network hub sites. If any of these facilities were destroyed or seriously damaged, a significant amount of our network traffic could be disrupted. Because of the large volume of traffic passing through these facilities, our ability (and the ability of carriers with whom we exchange traffic) to quickly restore service would be challenged. In the event of such damage to any of our owned infrastructure, we will be required to incur expenses to repair such damage. There could be parts of our network or the networks of other carriers that could not be quickly restored or that would experience substantially reduced service for a significant time. If such a disruption occurs, our reputation could be negatively impacted which may cause us to lose customers and adversely affect our ability to attract new customers, resulting in an adverse effect on our business, operating results and cash flows.
We may have difficulty and experience disruptions as we add features and upgrade our network.
We are constantly upgrading our network and implementing new features and services. This process involves reconfiguring our network and making changes to our operating systems. In doing so we may experience disruptions that affect our customers, our revenue, and our ability to grow. We may require additional resources to accomplish this work in a timely manner. That could cause us to incur unexpected expenses or delay portions of this effort to the detriment of our ability to provide service to our customers.
We may make purchase commitments to vendors for longer terms or in excess of the volumes committed by our underlying customers, or we may occasionally have certain sales commitments to customers that extend beyond our commitments from our underlying suppliers.
We attempt to match our purchase of network capacity from our suppliers and service commitments from our customers. However, from time to time, we may contract for obligations to our suppliers that exceed the duration of the related customer contracts or that are for capacity in excess of the amount for which we have customer commitments. This could arise:
based upon the terms and conditions available from our suppliers;
from an expectation that we will be able to utilize the excess capacity;
as a result of a breach of a customer’s commitment to us; and
to support fixed elements of our network.
Under any of these circumstances, we may incur the cost of the network capacity from our supplier without having corresponding revenue from customers, which could result in a material and adverse impact on our operating results.
Conversely, from time to time, our customer may contract for services that extend beyond the duration of the underlying vendor commitment. This may cause us to seek a renewal of services or a shorter period than we typically seek, or a shortened service period at higher prices. Our financial results could be adversely affected if we are unable to purchase extended service from a supplier at a cost sufficiently low to maintain margins for the remaining term of our commitment to a customer. While we have not historically encountered material price increases from suppliers with respect to continuation or renewal of services after expiration of initial contract terms, we cannot be certain that we would be able to obtain similar terms and conditions from suppliers going forward.
Our connections to the Internet require us to establish and maintain peering relationships with other providers, which we may not be able to maintain.
The Internet is composed of various network providers who operate their own networks that interconnect at public and private interconnection points. Our network is one such network. In order to obtain Internet connectivity for our network, we must establish and maintain relationships with other providers, including many providers that are customers, and incur the necessary capital costs to locate our equipment and connect our network at these various interconnection points.
By entering into what are known as settlement-free peering arrangements, providers agree to exchange traffic between their respective networks without charging each other. Our ability to avoid the higher costs of acquiring paid dedicated network capacity (transit or paid peering) and to maintain high network performance is dependent upon our ability to establish and maintain peering relationships and to increase the capacity of these peering connections. The terms and conditions of our peering relationships may also be subject to adverse changes, which we may not be able to control. If we are not able to maintain or increase our peering relationships in all of our markets on favorable terms, we may not be able to provide our customers with high performance or affordable or reliable services, which could cause us to lose existing and potential customers, damage our reputation and have a material adverse effect on our business.
Our core network infrastructure equipment is provided by a single vendor.
We purchase from Juniper Networks, Inc. (Juniper) the majority of the routers and transmission equipment used in our core IP network. If Juniper fails to provide equipment on a timely basis or fails to meet our performance expectations, including in the event that Juniper fails to enhance, maintain, upgrade or improve its products, hardware or software we purchase from them when and how we need, we may be delayed or unable to provide services as and when requested by our customers. We also may be unable to upgrade our network and face greater difficulty maintaining and expanding our network. Transitioning from Juniper to another vendor would be disruptive because of the time and expense required to learn to install, maintain and operate the new vendor's equipment and to operate a multi-vendor network. Any such disruption could increase our costs, decrease our operating efficiencies and have an adverse effect on our business, results of operations and financial condition.
Juniper may also be subject to litigation with respect to the technology on which we depend, including litigation involving claims of patent infringement. Such claims have been growing rapidly in the communications industry. Regardless of the merit of these claims, they can result in the diversion of technical and management personnel, or require us to obtain non-infringing technology or enter into license agreements for the technology on which we depend. There can be no assurance that such non-infringing technology or licenses will be available on acceptable terms and conditions, if at all.
If the information systems that we depend on to support our customers, network operations, sales, billing and financial reporting do not perform as expected, our operations and our financial results may be adversely affected.
We rely on complex information systems to operate our network and support our other business functions. Our ability to track sales leads, close sales opportunities, provision services, bill our customers for our services and prepare our financial statements depends upon the effective integration of our various information systems. If our information systems, individually or collectively, fail or do not perform as expected, our ability to process and provision orders, to make timely payments to vendors, to ensure that we collect amounts owed to us and prepare our financial statements would be adversely affected. Such failures or delays could result in increased capital expenditures, customer and vendor dissatisfaction, loss of business or the inability to add new customers or additional services, and the inability to prepare accurate and timely financial statements, all of which would adversely affect our business and results of operations.
Our business depends on agreements with carrier neutral data center operators, which we could fail to obtain or maintain.
Our business depends upon access to customers in carrier neutral data centers, which are facilities in which many large users of the Internet house the computer servers that deliver content and applications to users by means of the Internet and provide access to multiple Internet access networks. Most carrier neutral data centers allow any carrier to operate within the facility (for a standard fee). We expect to enter into additional agreements with carrier neutral data center operators as part of our growth plan. Current government regulations do not require carrier neutral data center operators to allow all carriers access on terms that are reasonable or nondiscriminatory. We have been successful in obtaining agreements with these operators in the past and have generally found that the operators want to have us located in their facilities because we offer low-cost, high-capacity Internet service to their customers. Any deterioration in our existing relationships with these operators could harm our sales and marketing efforts and could substantially reduce our potential customer base.
We may be liable for the material that content providers distribute over our network.
Although we believe our liability for third-party information stored on or transmitted through our networks is limited, the liability of private network operators is impacted both by changing technology and evolving legal principles. As a private network provider, we could be exposed to legal claims relating to third-party content stored or transmitted on our networks. Such claims could involve, among others, allegations of defamation, invasion of privacy, copyright infringement, or aiding and abetting restricted activities such as online gambling or pornography. If we decide to implement additional measures to reduce our exposure to these risks or if we are required to defend ourselves against these kinds of claims, our operating results and financial condition could be negatively affected.
In the past, we have generated net losses and used more cash than we have generated from operations, and we may continue to do so.
We have historically generated net losses and such losses may continue in the future. These net losses primarily have been driven by acquisition-related expenses, depreciation, amortization, interest expense, and share-based compensation. We cannot assure you that we will generate net income in the future.
We have also consistently consumed our entire positive cash flow generated from operating activities with our investing activities. Our investing activities have consisted principally of the acquisition of businesses as well as additions to property and equipment. We have funded the excess of cash used in investing activities over cash provided by operating activities with proceeds from equity and debt issuances.
We intend to continue to invest in expanding our business and pursuing acquisitions that we believe provide an attractive return on our capital. These investments may continue to exceed the amount of cash flow available from operations after debt service requirements. To the extent that our investments exceed our cash flow from operations, we plan to rely on potential future debt or equity issuances, which could increase interest expense or dilute the interest of stockholders, as well as cash on hand and borrowings under our revolving credit facility. We cannot assure you, however, that we will be able to obtain or continue to have access to sufficient capital on reasonable terms, or at all, to successfully grow our business.
Our revenue is relatively concentrated among a small number of customers, and the loss of any of these customers could significantly harm our business, financial condition, results of operations and cash flows.
Our largest single customer, based on recurring revenue, accounted for approximately 5% of our revenue for the year ended December 31, 2016, and revenues from our top five customers accounted for approximately 15% of our revenue for the year ended December 31, 2016. We currently depend, and expect to continue to depend, upon a relatively small number of customers for a significant percentage of our revenue. Many of these customers are also competitors for some or all of our service offerings. Our customer contracts typically have terms of one to three years. Our customers may elect not to renew these contracts. Furthermore, our customer contracts are terminable for cause if we breach a material provision of the contract. We may face increased competition and pricing pressure as our customer contracts become subject to renewal. Our customers may negotiate renewal of their contracts at lower rates, for fewer services or for shorter terms. Many of our customers are in the telecommunications industry, which is undergoing consolidation. To the extent that two or more of our customers combine, they may be able to use their greater size to negotiate lower prices from us and may purchase fewer services from us, especially if their networks overlap. If we are unable to successfully renew our customer contracts on commercially acceptable terms, or if our customer contracts are terminated, our business could suffer.
We are also subject to credit risk associated with the concentration of our accounts receivable from our key customers. If one or more of these customers were to become bankrupt, insolvent or otherwise were unable to pay for the services provided by us, we may incur significant write-offs of accounts receivable or incur impairment charges.
Future acquisitions are a component of our strategic plan, and will include integration and other risks that could harm our business.
We have grown rapidly and intend to continue to acquire complementary businesses and assets. This exposes us to the risk that when we evaluate a potential acquisition target we over-estimate the target’s value and, as a result, pay too much for it. We also cannot be certain that we will be able to successfully integrate acquired assets or the operations of the acquired entity with our existing operations. Businesses and assets that we have acquired or may acquire in the future may be subject to unknown or contingent liabilities for which we may have limited or no recourse against the sellers. While we usually require the sellers to indemnify us with respect to breaches of representations and warranties that survive, such indemnification is often limited and subject to various claim expiration periods, materiality thresholds, a significant deductible or an aggregate cap on losses. As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that we may incur with respect to liabilities associated with acquired properties and entities may exceed our expectations, which may adversely affect our operating results and financial condition.
Difficulties with integration could cause material customer disruption and dissatisfaction, which could in turn increase churn and reduce new sales. Additionally, we may not be able to integrate acquired businesses in a manner that permits us to realize the cost synergies we anticipate. Our actual cost synergies, cost savings, growth opportunities, and efficiency and operational benefits resulting from any acquisition may be lower and may take longer to realize than we currently expect.
We may incur additional debt or issue additional equity to assist in the funding of these potential transactions, which may increase our leverage and/or dilute the interest of stockholders. Further, additional transactions could cause disruption of our ongoing business and divert management’s attention from the management of daily operations to the closing and integration of the acquired business. Acquisitions also involve other operational and financial risks such as:
increased demand on our existing employees and management related to the increase in the size of the business and the possible distraction from our existing business due to the acquisition;
loss of key employees and salespeople of the acquired business;
liabilities of the acquired business, both unknown and known at the time of the consummation of the acquisition;
discovery that the financial statements we relied on to buy a business were incorrect;
expenses associated with the integration of the operations of the acquired business;
the possibility of future impairment, write-downs of goodwill and other intangibles associated with the acquired business;
finding that the services and operations of the acquired business do not meet the level of quality of those of our existing services and operations; and
recognizing that the internal controls of the acquired business were inadequate.
We are growing rapidly and may not maintain or efficiently manage our growth.
We have rapidly grown our company through acquisitions of companies and assets and the acquisition of new customers through our own sales efforts. In order to become consistently profitable and consistently cash flow positive, we need to both retain existing
customers and continue to add a large number of new customers. While no single customer accounted for more than 6% of our 2016 revenue, the loss of or reduced purchases from several significant customers could impair our growth, cash flow and profitability. Customers can be reluctant to switch providers of bandwidth services because it can involve substantial expense and technical difficulty. That can make it harder for us to acquire new customers through our own sales efforts. Our expansion may place strains on our management and our operational and financial infrastructure. Our ability to manage our growth will be particularly dependent upon our ability to:
expand, develop and retain an effective sales force and other qualified personnel;
maintain the quality of our operations and our service offerings;
attract customers to switch from their current providers to us in spite of the costs associated with switching providers;
maintain and enhance our system of internal controls to ensure timely and accurate reporting; and
expand our operational information systems in order to support our growth, including integrating new customers without disruption.
We expect that economies of scale will allow us to increase revenue while incurring incremental costs that are proportionately lower than those applicable to our existing businesses. If the increased costs required to support our revenue growth turn out to be greater than anticipated, we may be unable to improve our profitability and/or cash flows even if our revenue growth goals are achieved.
We are highly dependent on our management team and other key employees.
We expect that our continued success will largely depend upon the efforts and abilities of members of our management team and other key employees. Our success also depends upon our ability to identify, attract, develop, and retain qualified employees. If we lost members of our management team or other key employees, or if we are unable to recruit qualified employees in the future, it would likely have a material adverse effect on our business and our cash flows.
The international operations of our business expose us to risks that could materially and adversely affect the business.
We have operations and investments outside of the United States, as well as rights to undersea cable capacity extending to other countries, that expose us to risks inherent in international operations. These include:
general economic, social and political conditions;
the difficulty of enforcing agreements and collecting receivables through certain foreign legal systems;
tax rates in some foreign countries may exceed those in the U.S.;
foreign currency exchange rates may fluctuate, which could adversely affect our results of operations and the value of our international assets and investments;
foreign earnings may be subject to withholding requirements or the imposition of tariffs, exchange controls or other restrictions;
difficulties and costs of compliance with foreign laws and regulations that impose restrictions on our investments and operations, with penalties for noncompliance, including loss of licenses and monetary fines;
difficulties in obtaining licenses or interconnection arrangements on acceptable terms, if at all; and
changes in U.S. laws and regulations relating to foreign trade and investment.
We may as part of our expansion strategy increase our exposure to international investments and operations.
Some of our customer agreements contain service level obligations that could subject us to liability or the loss of revenue.
Some of our contracts with customers contain service level guarantees (including network availability) and service delivery date targets, which, if not met, enable customers to claim credits and, under certain conditions, terminate their agreements. Our failure to meet our service level guarantees could adversely affect our business, financial condition and results of operations. Lost revenue from failure to meet service level guarantees was de minimis for the years ended December 31, 2015 and 2016. While we typically have carve-outs for force majeure events, many events, such as fiber cuts, equipment failure and third-party vendors being unable to meet their underlying commitments with us, could impact our ability to meet our service level agreements, which could adversely affect our financial conditions and operations.
Our international operations expose us to currency risk.
We conduct a portion of our business using the British Pound Sterling and the Euro. Appreciation of the U.S. Dollar adversely affects our consolidated revenue. For example, the U.S. Dollar has appreciated significantly against the Euro and the Pound in
recent periods. Since we tend to incur costs in the same currency in which those operations realize revenue, the effect on operating income and operating cash flow is largely mitigated. However, if the U.S. Dollar continues to appreciate significantly, future revenues, operating income and operating cash flows could be adversely affected.
Our future tax liabilities are not predictable or controllable. If we become subject to increased levels of taxation, our financial condition and operations could be negatively impacted.
We provide telecommunication and other services in multiple jurisdictions across the United States and Europe and are, therefore, subject to multiple sets of complex and varying tax laws and rules. We cannot predict the amount of future tax liabilities to which we may become subject. Any increase in the amount of taxation incurred as a result of our operations or due to legislative or regulatory changes would be adverse to us. In addition, we may become subject to income tax audits by many tax jurisdictions throughout the world. It is possible that certain tax positions taken by us could result in tax liabilities for us. While we believe that our current provisions for taxes are reasonable and appropriate, we cannot assure you that these items would be settled for the amounts accrued or that we will not identify additional exposures in the future.
We cannot assure you whether, when or in what amounts we will be able to use our net operating losses, or when they will be depleted.
At December 31, 2016, we had $71.7 million of U.S. federal net operating loss carryforwards (“NOLs”) net of limitations under Section 382. Under certain circumstances, these NOLs can be used to offset our future federal and certain taxable income. If we experience an “ownership change,” as defined in Section 382 of the Internal Revenue Code and related Treasury regulations at a time when our market capitalization is below a certain level, our ability to use the NOLs could be substantially limited. This limit could impact the timing of the usage of the NOLs, thus accelerating cash tax payments or causing NOLs to expire prior to their use, which could affect the ultimate realization of the NOLs.
Furthermore, transactions that we enter into, as well as transactions by existing or future 5% stockholders that we do not participate in, could cause us to incur an “ownership change,” which could prevent us from fully utilizing our NOLs to reduce our federal income taxes. These limitations could cause us not to pursue otherwise favorable acquisitions and other transactions involving our capital stock, or could reduce the net benefits to be realized from any such transactions. Despite this, we expect to use substantially all of these NOLs and certain other deferred tax attributes as an offset to our federal future taxable income, although the timing of that use will depend upon our future earnings and future tax circumstances. If and when our NOLs are fully utilized, we expect that the amount of our cash flow dedicated to the payment of federal taxes will increase substantially.
Impairment of our intellectual property rights and our alleged infringement on other companies' intellectual property rights could harm our business.
We cannot assure you that the steps taken by us to protect our intellectual property rights will be adequate to deter misappropriation of proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. We also are subject to the risk of litigation alleging infringement of third-party intellectual property rights. Any such claims could require us to spend significant sums in litigation, pay damages, develop non-infringing intellectual property or acquire licenses to the intellectual property that is the subject of the alleged infringement.
We issue projected results and estimates for future periods from time to time, and such projections and estimates are subject to inherent uncertainties and may prove to be inaccurate.
Financial information, results of operations and other projections that we may issue from time to time are based upon our assumptions and estimates. While we believe these assumptions and estimates to be reasonable when they are developed, they are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. You should understand that certain unpredictable factors could cause our actual results to differ from our expectations and those differences may be material. No independent expert participates in the preparation of these estimates. These estimates should not be regarded as a representation by us as to our results of operations during such periods as there can be no assurance that any of these estimates will be realized. In light of the foregoing, we caution you not to place undue reliance on these estimates. These estimates constitute forward-looking statements.
If we do not comply with laws regarding corruption and bribery, we may become subject to monetary or criminal penalties.
The United States Foreign Corrupt Practices Act generally prohibits companies and their intermediaries from bribing foreign officials for the purpose of obtaining or keeping business. Other countries have similar laws to which we are subject. We currently take precautions to comply with these laws. However, these precautions may not protect us against liability, particularly as a result
of actions that may be taken in the future by agents and other intermediaries through whom we have exposure under these laws even though we may have limited or no ability to control such persons. Our competitors include foreign entities that are not subject to the United States Foreign Corrupt Practices Act or laws of similar stringency, and hence we may be at a competitive disadvantage.
Risks Related to Our Industry
Consolidation among companies in the telecommunications industry could further strengthen our competitors and adversely impact our business.
The telecommunications industry is intensely competitive and continues to undergo significant consolidation. There are many reasons for consolidation in our industry, including the desire for companies to acquire customers or assets in regions where they currently have no or insufficient presence. The consolidation within the industry may cause customers to disconnect services to move them to their own networks, or consolidate buying with other providers. Additionally, consolidation in the industry could further strengthen our competitors, give them greater financial resources and geographic reach, and allow them to put additional pressure on prices for our services. Furthermore, consolidation can reduce the number of available suppliers available to contract with, resulting in decreased flexibility and cost savings opportunity.
The sector in which we operate is highly competitive, and we may not be able to compete effectively.
We face significant competition from incumbent carriers, Internet service providers and facilities-based network operators. Relative to us, many of these providers have significantly greater financial, technological and personnel resources, more well-established brand names, superior marketing capabilities, greater network reach, larger customer bases, and more diverse strategic plans and service offerings. Most of these competitors are also our customers and suppliers. Intense competition from these traditional and new communications companies has led to declining prices and margins for many communications services, and we expect this trend to continue as competition intensifies in the future. Our competitors may also introduce new technologies or services that could make our services less attractive to potential customers.
Certain of our services are subject to regulation that could change or otherwise impact us in an adverse manner.
Communications services are subject to domestic and international regulation at the federal, state and local levels. These regulations affect our business and our existing and potential competitors. Our electronic communications services and electronic communications networks in Europe and elsewhere are subject to regulatory oversight by national communications regulators, such as the United Kingdom’s Office of Communications (“Ofcom”). In addition, in the United States, both the Federal Communications Commission (“FCC”) and the state public utility commissions or similar regulatory authorities (the “State PUCs”) typically require us to file periodic reports, pay various regulatory fees and assessments, and to comply with their regulations. Such compliance can be costly and burdensome and may affect the way we conduct our business. Delays in receiving required regulatory approvals (including approvals relating to acquisitions or financing activities or for interconnection agreements with other carriers), the enactment of new and adverse international or domestic legislation or regulations (including those pertaining to broadband initiatives and net-neutrality), or the denial, modification or termination by a regulator of any approval or authorization, could have a material adverse effect on our business. Local governments also exercise legal authority that may have an adverse effect on our business because of our need to obtain rights-of-way for certain portions of our network. While local governments may not prohibit persons from providing telecommunications services nor treat telecommunications service providers in a discriminatory manner, they can affect the timing and costs associated with our use of public rights-of-way. Further, the current regulatory landscape is subject to change through judicial review of current legislation and rulemaking by the FCC, Ofcom and other domestic, foreign, and international rulemaking bodies. These bodies regularly consider changes to their regulatory framework and fee obligations. Changes in current regulation may make it more difficult to obtain the approvals necessary to operate our business, significantly increase the regulatory fees to which we are subject, or have other adverse effects on our future operations in the United States and Europe.
Our growth and financial health are subject to a number of economic risks.
A downturn in the world economy, especially the economies of North America and Europe, would negatively impact our growth. We would be particularly impacted by a decline in the development of new applications and businesses that make use of the Internet, which depend on numerous factors beyond our control. Our revenue growth is predicated on growing use of the Internet that makes up for the declining prices of Internet service. An economic downturn could impact the Internet business more significantly than other businesses that are less dependent on new applications and growth in the use of those applications because of the retrenchment by consumers and businesses that typically occur in an economic downturn.
Unfavorable general global economic conditions could negatively impact our operating results and financial condition.
Unfavorable general global economic conditions could negatively affect our business. Although it is difficult to predict the impact of general economic conditions on our business, these conditions could adversely affect the affordability of, and customer demand for, our services, and could cause customers to delay or forgo purchases of our services. One or more of these circumstances could cause our revenue to decline. Also, our customers may not be able to obtain adequate access to credit, which could affect their ability to purchase our services or make timely payments to us. The current economic conditions, including federal fiscal and monetary policy actions, may lead to inflationary conditions in our cost base, particularly in our lease and personnel related expenses. This could harm our margins and profitability if we are unable to increase prices or reduce costs sufficiently to offset the effects of inflation in our cost base. For these reasons, among others, if challenging economic conditions persist or worsen, our operating results and financial condition could be adversely affected.
Terrorist activity throughout the world, military action to counter terrorism and natural disasters could adversely impact our business.
The continued threat of terrorist activity and other acts of war or hostility have had, and may continue to have, an adverse effect on business, financial and general economic conditions internationally. Effects from these events and any future terrorist activity, including cyber terrorism, may, in turn, increase our costs due to the need to provide enhanced security, which would adversely affect our business and results of operations. These circumstances may also damage or destroy our Internet infrastructure and may adversely affect our ability to attract and retain customers, our ability to raise capital and the operation and maintenance of our network access points. We are also susceptible to other catastrophic events such as major natural disasters, extreme weather, fire or similar events that could affect our headquarters, other offices, our network, infrastructure or equipment, which could adversely affect our business.
Disruptions or degradations in our service could subject usRisk Factors Related to legal claims and liability 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 revenue and gross margin. In addition, customers may, under certain contracts, have the ability to terminate services in case of prolonged or severe service disruptions or other outages which would also adversely impact our results of operations. Our reputation could be harmed if we fail to provide a reasonably adequateIndebtedness
Our substantial level of network availability, and as a result weindebtedness could find it more difficult to attract and retain customers.
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 revenue.
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, has 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 revenue 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:
the willingness of enterprises to make additional information technology expenditures;
the availability of security products necessary to ensure data privacy over the public networks;
the quality, cost, and functionality of these services and competing services;
the increased adoption of wired and wireless broadband access methods;
the continued growth of broadband-intensive applications; and
the proliferation of electronic devices and related applications.
Our long sales and service deployment cycles require us to incur substantial salescosts that may not result in related revenue.
Our business is characterized by long sales cycles 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 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, revenue. Even if we enter into a contract, we will have incurred substantial sales-related expenses well before we recognize any related 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 revenue 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% 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, statutory requirements, or other restrictions in foreign countries, which may reduce ourprofitability.
The Company is subject to various risks associated with conducting business worldwide. 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. The Company is also subject to foreign government employment standards, labor strikes and work stoppages. These risks and any other restrictions imposed on our foreign operations may increase our costs of business in those jurisdictions, which in turn may reduce our profitability.
If our goodwill or amortizable intangible assets become 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 years ended December 31, 2014 and 2013, 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 revenue or to facilitate the supply of services in a cost-effective manner.
If we are unable to protect our intellectual property rights, competitors may be ableto use our technology or trademarks, which could weaken our competitive position.
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 revenue.
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:
be time-consuming and expensive;
divert attention and resources away from our daily business;
impede or prevent delivery of our products and services; and
require us to pay significant royalties, licensing fees, and damages.
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.
We continue to evaluate merger and acquisition opportunities and may purchaseadditional companies in the future, and the failure to integrate them successfullywith our existing business may adversely affect our financial condition and resultsof operations.
We continue to explore merger and acquisition opportunities and we may face difficulties if we acquire other businesses in the future including:
integrating the management personnel, services, products, systems and technologies of the acquired businesses intoprevent us from fulfilling our existing operations;obligations under our debt agreements.
retaining key personnel of the acquired businesses;
failing to adequately identify or assess liabilities of acquired businesses;
retaining existing customers and/or vendors of both companies;
failing to achieve the synergies, revenue growth and other expected benefits we used to determine the purchase price of the acquired businesses;
failing to realize the anticipated benefits of a particular merger and acquisition;
incurring significant transaction and acquisition-related costs;
incurring unanticipated problems or legal liabilities;
being subject to business uncertainties and contractual restrictions while an acquisition is pending that could adversely affect our business; and
diverting our management’s attention from the day-to-day operation of our business.
These difficulties could disrupt our ongoing business and increase our expenses. As of the date of the filing of this Form 10-K, we have no agreement or memorandum of understanding to enter into any acquisition transaction.
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 ourrevenue 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 revenue 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 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 administrative expenses could have a material adverse impact, on our business and operations. Furthermore, we are dependent in certain cases on the services other carriers provide, and therefore on other carriers’ abilities to retain their respective licenses in the regions of the world in which they operate. We are also dependent, in some circumstances, on our customers’ abilities to obtain and retain the necessary licenses. The failure of a customer or carrier to obtain or retain any necessary license could have an adverse effect on our ability to conduct operations.
“Net neutrality” legislation or regulation could limit GTT’s ability to operate its business profitably and to manage its broadband facilities efficiently.
The FCC’s rules under its Open Internet Order imposing net neutrality obligations on broadband internet access providers are based on principles of transparency, no blocking and no unreasonable discrimination and are applicable to fixed and wireless broadband internet access providers to different extents. Under these new rules, fixed and wireless broadband internet access providers, including GTT, are required to make their practices transparent to both consumers and providers of internet content, services, applications and devices on both the website and at the point-of-sale. In addition, subject to “reasonable network management,” fixed broadband internet access providers, including GTT, are prohibited from blocking lawful content, applications, services and non-harmful devices, and from engaging in unreasonable discrimination in transmitting lawful traffic.
In order to continue to provide quality high-speed data service at attractive prices and to offer new services, GTT needs the continued flexibility to develop and refine business models that respond to changing consumer uses and demands, to manage bandwidth usage efficiently and to continue to invest in its systems. It remains unclear how the FCC’s net neutrality regulations will be implemented and how “reasonable network management” will be determined. These regulations could adversely impact GTT’s ability to operate its high-speed data network profitably and to undertake the upgrades and put into operation management practices that may be needed to continue to provide high quality high-speed data services and new services and could negatively impact its ability to compete effectively.
Future changes in regulatory requirements, new interpretations of existing regulatoryrequirements, or determinations that we violated existing regulatory requirements mayimpair our ability to provide services, result in financial losses or otherwise reduce 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 revenue 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 revenue and to operate our business.
Our business and operations are growing rapidly and we may not be able to efficiently manage our growth.
We have rapidly grown our company through network expansion and obtaining new customers through our sales efforts.substantial indebtedness. Our expansion places significant strains on our management, operational and financial infrastructure. Our ability to manage our growth will be particularly dependent upon our ability to:
expand, develop and retain an effective sales force and qualified personnel;
maintain the quality of our operations and our service offerings;
maintain and enhance our system of internal controls to ensure timely and accurate compliance with our financial and regulatory reporting requirements; and
expand our accounting and operational information systems in order to support our growth.
If we fail to implement these measures successfully, our ability to manage our growth will be impaired.
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.
If we fail to maintain an effective system of internal control over financial reporting, wesubstantial debt may not be able to accurately report our financial results. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our common stock.
As of December 31, 2014, management concluded that our internal control over financial reporting was effective based on criteria created by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") set forth in Internal Control - Integrated Framework (2013). However, if material weaknesses are identified in our internal control over financial reporting in the future, our management will be unable to report favorably as to the effectiveness of our internal control over financial reporting and/or our disclosure controls and procedures, and we could be required to implement remedial measures. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Such remedial measures could be expensive and time consuming and could potentially cause investors to lose confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price and potentially subject us to litigation.
Risks Relating to Our Indebtedness
Our failure to comply with covenants in our loan agreements could result in ourindebtedness being immediately due and payable and the loss of our assets.
Pursuant to the terms of our loan agreements, we have pledged substantially all of our assets to the lenders as security for our payment obligations under the loan agreements. If we fail to pay any of our indebtedness under the loan agreements when due, or if we breach any of the other covenants in the loan agreements, it may result in one or more events of default. An event of default under our loan agreements would permit the lenders to declare all amounts owing to be immediately due and payable and, if we were unable to repay any indebtedness owed, the lenders could proceed against the collateral securing that indebtedness.
Covenants in our loan agreements and outstanding notes, and in any future debtagreements, may restrict our future operations.
The loan agreements related to our outstanding senior and mezzanine 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:
incur additional indebtedness or place additional liens on our assets;
pay dividends or make other distributions on, redeem or repurchase our capital stock;
make investments or repay subordinated indebtedness;
enter into transactions with affiliates;
sell assets;
engage in a merger, consolidation or other business combination; or
change the nature of our businesses.
Any additional indebtedness we may incur in the future may subject us to similar or even more restrictive conditions.
Our level of indebtedness and debt service obligations could impair ourfinancial condition, hinder our growth and put us at a competitive disadvantage.
Our level of indebtedness could have important consequences for our business, results of operations and financial condition.consequences. For example, a high level of indebtedness could, among other things:
instance, it could:
make it more difficult for us to satisfy our financial obligations;
increaseobligations, including those relating to our vulnerability to general adverse economic and industry conditions, including interest rate fluctuations;
increase the risk that a substantial decrease in cash flows from operating activities or an increase in expenses will make it difficult for us to meet our debt service requirements and will require us to modify our operations;
debt;
require us to dedicate a substantial portion of ourany cash flow from operations to make payments onthe payment of interest and principal due under our indebtedness, thereby reducingdebt, which will reduce funds available for other business purposes, including the availabilitygrowth of our cash flow to fund future business opportunities, working capital,operations, capital expenditures and other general corporate purposes;acquisitions;
place us at a competitive disadvantage compared with some of our competitors that may have less debt and better access to capital resources; and
limit our ability to borrowobtain additional fundsfinancing required to expandfund working capital and capital expenditures, for strategic acquisitions and for other general corporate purposes.
Our ability to satisfy our obligations including our debt depends on our future operating performance and on economic, financial, competitive and other factors, many of which are beyond our control. Our business may not generate sufficient cash flow, and future financings may not be available to provide sufficient net proceeds, to meet these obligations or to successfully execute our business or ease liquidity constraints;strategy.
Despite our leverage, we may still be able to incur more debt. This could further exacerbate the risks that we and our subsidiaries face.
We and our subsidiaries may incur additional indebtedness, including additional secured indebtedness, in the future. The terms of our debt facilities restrict, but do not completely prohibit, us from doing so. If new debt or other liabilities are added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.
We may be subject to interest rate risk, and increasing interest rates may increase our interest expense.
Borrowings under the credit agreement bear, and our future indebtedness may bear, interest at variable rates and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash available for servicing our indebtedness would decrease.
The agreements governing our debt obligations impose restrictions on our business and could adversely affect our ability to undertake certain corporate actions.
The agreements governing our various debt obligations include covenants imposing significant restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. These covenants place restrictions on our ability to, among other things:
incur additional debt;
create liens;
make certain investments;
consummate acquisitions;
enter into certain transactions with affiliates;
declare or pay dividends, redeem stock or make other distributions to stockholders; and
consolidate, merge or transfer or sell all or substantially all of our assets.
Our ability to comply with these agreements may be affected by events beyond our control, including prevailing economic, financial and industry conditions. These covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other corporate opportunities.
In addition, the credit agreement requires us to comply with specified financial ratios, including ratios regarding secured leverage. Our ability to comply with these ratios may be affected by events beyond our control. These restrictions limit our ability to plan for or react to market conditions, meet capital needs, or otherwise constrain our activities or business plans. They also may adversely affect our ability to finance our operations, enter into acquisitions or engage in other business activities that would be in our interest.
A breach of any of the covenants contained in our credit agreement or any future agreements related to indebtedness or our inability to comply with the financial ratios could result in an event of default, which would allow the lenders to declare all borrowings outstanding to be due and payable or to terminate the ability to borrow under the Revolver. If the amounts outstanding under the credit agreement or other future indebtedness were to be accelerated, we cannot assure that our assets would be sufficient to repay in full the money owed. In such a situation, we could be forced to file for bankruptcy or seek other protections from creditors.
To service our indebtedness, we will require a significant amount of cash. However, our ability to generate cash depends on many factors, many of which are beyond our control.
Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future, which, in turn, is subject to general economic, financial, competitive, regulatory and other factors, many of which are beyond our control.
Our business may not generate sufficient cash flow from operations and we may not have available to us future borrowings in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. In these circumstances, we may need to refinance all or a portion of our indebtedness on or before maturity;
maturity. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. Without this financing, we could be forced to sell assets or secure additional financing to make up for any shortfall in our payment obligations under unfavorable circumstances. However, we may not be able to secure additional financing on terms favorable to us or at all and, in addition, the terms of the indentures governing our notes limit our ability to pursue future acquisitions;sell assets and also restrict the use of proceeds from such a sale. We may not be able to sell assets quickly enough or for sufficient amounts to enable us to meet our obligations, including our obligations under our notes.
limitIf we are unable to meet our flexibilitydebt service obligations, we would be in planningdefault under the terms of our credit agreement, permitting acceleration of the amounts due under the credit agreement and eliminating our ability to draw on the Revolver. If the amounts outstanding under the credit facilities or future indebtedness were to be accelerated, we could be forced to file for or reacting to, changes in our business and the industry in which we operate; and
place us at a competitive disadvantage relative to competitors that have less indebtedness.bankruptcy.
Risks Related to ourOur 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.
The concentration of our capital stock ownership will likelymay 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 ownMr. Thompson’s private equity investment and advisory firm, owned 6,757,1856,789,166 shares of our common stock at December 31, 2014.February 20, 2017. Based on the number of shares of our common stock outstanding on December 31, 2014,February 20, 2017, Mr. Thompson and Universal Telecommunications, Inc. would beneficially own approximately 20%17% of our common stock. In addition, as of December 31, 2014,February 20, 2017, our executive officers, directors and affiliated entities, excluding H. BrianMr. Thompson and Universal Telecommunications, Inc., together beneficially owned common stock, without taking into account their unexercised options, representing approximately 10%8% 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 GTT that other stockholders may view as beneficial.
We might require additional capital to support business growth, and this capital might not be available on favorable terms, or at all.
Our operations or expansion efforts may require substantial additional financial, operational and managerial resources. While we believe we have sufficient liquidity as of December 31, 2016 to fund our working capital and other operating requirements, we may raise additional funds for acquisitions or to expand our operations. If we obtain additional funding in the future, we may seek debt financing or obtain additional equity capital. 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.
It may be difficult for you to resell shares of our common stock if an active marketforgiven the limited trading volume in our common stock does not develop.stock.
Our common stock has only recently been listed on the NYSE since November 2014, and prior to this listing theour common stock was thinly traded on the NYSE MKT and OTC Markets. If a liquid market for theDuring 2016, on average, approximately 100,000 to 200,000 shares of our common stock does not developtraded each day on the NYSE, then,NYSE. Therefore, in addition to the concentrated ownership of our capital stock, thislimited daily trading volumes may further impair your ability to sell your shares when you want to do so and could depress our stock price. As a result, you may find it difficult to dispose of,obtain or to obtain accurate quotations of the pricedispose of our securities because smaller quantities of shares could be bought and sold, transactions could be delayed, and security analyst and news coverage of the Company may be limited. These factors could result in lower prices and larger spreads in the bid and ask prices for our shares.
Disruptions in the financial markets could affect our ability to obtain debt or equity financing or to refinance our existing indebtedness on reasonable terms or at all.
Disruptions in the financial markets could impact our ability to obtain debt or equity financing, or lines of credit, in the future as well as impact our ability to refinance our existing indebtedness on reasonable terms or at all, which could affect our strategic operations and our financial performance and force modifications to our operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company doesAs of December 31, 2016, we did not own any real estate. Instead,estate and leased all of the Company’sour facilities, are leased. GTT’swhich includes office space, data centers, colocation facilities and PoPs. Our corporate headquarters arefacility consists of approximately 19,000 square feet, located in McLean, Virginia. We also lease corporate office space in the following cities around the world:
North America: Chicago, IL; Denver, CO; New York, NY; East Rutherford, NJ; Dallas, TX; Scottsdale, AZ; Lemont Furnace, PA
|
| | | |
| Phoenix, AZ | Chicago, IL | Trooper, PA | Seattle, WA |
| Costa Mesa, CA | New York, NY | Austin, TX | |
| Pleasanton, CA | Lemont Furnace, PA | Frisco, TX | |
Europe: London, England; Cagliari, Italy; Milan, Italy; Frankfurt, Germany; Belfast, Ireland
|
| | | |
| London, England | Frankfurt, Germany | Cagliari, Italy | Belfast, Northern Ireland |
We believe our properties, taken as a whole, are in good operating condition and are adequate for our business needs.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is awe are party to legal proceedings arising in the normal course of its business. The Company doesWe do not believe that it is awe are party to any current or pending legal action that could reasonably be expected to have a material adverse effect on its businessour financial condition or operating results financial position or cash flows.of operations.
The Company filed a civil complaint against Artel, LLC on June 15, 2012 in the Fairfax County Virginia Circuit Court, docket number CL2012-04735, alleging breach of contract with respect to telecommunication services provided by the Company. In response to the Company’s complaint, Artel, LLC filed a counterclaim against the Company based on allegations of breach of contract and certain business torts. On December 20, 2013, the Court entered a judgment against the Company in the amount of $3.3 million. The Company reached an agreement with Artel, LLC in 2014 to settle all litigation proceedings equal to the initial judgment of $3.3 million.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Equity Securities
Our common stock trades on the NYSE under the symbol “GTT”"GTT" and has traded on the NYSE since November 28, 2014. Prior to November 28, 2014, our common stock traded on the NYSE MKT.
The following table sets forth, for the calendar quarters indicated, the quarterly high and low sales information of our common stock as reported on the NYSE since November 28, 2014 and on the NYSE MKT from June 17, 2013January 1, 2014 to November 28, 2014. The quarterly high and low bid informationAs of March 8, 2017, there were approximately 185 holders of record of our common stock, as reported on the OTC Markets were for the period prior to June 17, 2013.par value $.0001 per share.
| | | | Common Stock | Common Stock |
| | High | | Low | High | | Low |
| 2013 | | | | |
| First Quarter | $ | 3.65 |
| | $ | 2.55 |
| |
| Second Quarter, to June 17 | $ | 4.25 |
| | $ | 2.30 |
| |
| Second Quarter, from June 17 | $ | 4.48 |
| | $ | 4.25 |
| |
| Third Quarter | $ | 5.93 |
| | $ | 4.01 |
| |
| Fourth Quarter | $ | 7.74 |
| | $ | 4.83 |
| |
| 2014 | | | | |
| 2015 | | | | |
| First Quarter | $ | 13.39 |
| | $ | 6.50 |
| $ | 19.34 |
| | $ | 11.32 |
|
| Second Quarter | $ | 12.41 |
| | $ | 7.59 |
| $ | 24.65 |
| | $ | 17.62 |
|
| Third Quarter | $ | 13.12 |
| | $ | 9.83 |
| $ | 26.64 |
| | $ | 14.00 |
|
| Fourth Quarter | $ | 14.20 |
| | $ | 11.25 |
| $ | 25.13 |
| | $ | 15.87 |
|
| 2016 | | | | |
| First Quarter | | $ | 18.70 |
| | $ | 12.31 |
|
| Second Quarter | | $ | 18.88 |
| | $ | 14.96 |
|
| Third Quarter | | $ | 24.20 |
| | $ | 17.55 |
|
| Fourth Quarter | | $ | 29.75 |
| | $ | 20.80 |
|
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 notesfrom the credit agreement that we have issuedentered into preclude us from paying dividends until those notescertain conditions are paid in full.met.
Performance Graph
The following performance graph compares the relative changes in the cumulative total return of our common stock for the period from December 31, 2011 to December 31, 2016, against the cumulative total return for the same period of (1) The Standard & Poor's 500 (S&P 500) Index, (2) The Standard & Poor's (S&P) Telecom Select Industry Index, and (3) NASDAQ Telecommunication Index. The comparison below assumes $100 was invested on December 31, 2011, in our common stock, the S&P 500 Index, the S&P Telecom Select Industry Index, and NASDAQ Telecommunication Index.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
* $100 invested on 12/31/11 in stock or index. Fiscal year ending December 31.
Copyright © 2016 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Dec-11 | | Dec-12 | | Dec-13 | | Dec-14 | | Dec-15 | | Dec-16 |
| GTT Communications, Inc. | $ | 100.00 |
| | $ | 237.29 |
| | $ | 618.64 |
| | $ | 1,121.19 |
| | $ | 1,445.76 |
| | $ | 2,436.44 |
|
S&P 500 ® Index | 100.00 |
| | 113.41 |
| | 146.98 |
| | 163.72 |
| | 162.53 |
| | 178.02 |
|
| S&P Telecom Select Industry Index | 100.00 |
| | 110.91 |
| | 135.36 |
| | 140.02 |
| | 135.78 |
| | 168.28 |
|
| NASDAQ Telecommunications Index | 100.00 |
| | 102.00 |
| | 126.50 |
| | 137.77 |
| | 127.44 |
| | 146.39 |
|
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Equity Compensation Plan Information
The information required by this Item 5 regarding Securities Authorized for Issuance Under Equity Compensation Plans is incorporated in this report by reference to the information set forth under the capital "Equity Plan Information" in our 2017 Proxy Statement.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.The annual financial information set forth below has been summarized from our audited consolidated financial statements for GTT Communications, Inc. and its wholly owned subsidiaries, for the periods and as of the dates indicated. The information should be read in connection with, and is qualified in its entirety by reference to, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations", the consolidated financial statements and notes included elsewhere in this report and in our SEC filings. These historical results are not necessarily indicative of the results to be expected in the future.
|
| | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | (Amounts In thousands, except for share and per share data) |
| Consolidated Statement of Operations Data: | | | | | | | | | |
| Telecommunications service revenue | $ | 521,688 |
| | $ | 369,250 |
| | $ | 207,343 |
| | $ | 157,368 |
| | $ | 107,877 |
|
| Operating expenses: | | | | | | | | | |
| Cost of telecommunications services | 274,012 |
| | 204,458 |
| | 128,086 |
| | 102,815 |
| | 76,000 |
|
| Selling, general and administrative expense | 143,193 |
| | 101,712 |
| | 45,613 |
| | 31,675 |
| | 18,957 |
|
| Severance, restructuring and other exit costs | 870 |
| | 12,670 |
| | 9,425 |
| | 7,677 |
| | 701 |
|
| Depreciation and amortization | 62,788 |
| | 46,708 |
| | 24,921 |
| | 17,157 |
| | 7,296 |
|
| Total operating expenses | 480,863 |
| | 365,548 |
| | 208,045 |
| | 159,324 |
| | 102,954 |
|
| Operating income (loss) | 40,825 |
| | 3,702 |
| | (702 | ) | | (1,956 | ) | | 4,923 |
|
| Interest expense, net | (29,428 | ) | | (13,942 | ) | | (8,454 | ) | | (8,408 | ) | | (4,686 | ) |
| Loss on debt extinguishment | (1,632 | ) | | (3,420 | ) | | (3,104 | ) | | (706 | ) | | — |
|
| Other expense, net | (577 | ) | | (1,167 | ) | | (8,636 | ) | | (11,724 | ) | | (1,054 | ) |
| Income (loss) before income taxes | 9,188 |
| | (14,827 | ) | | (20,896 | ) | | (22,794 | ) | | (817 | ) |
| Income tax expense (benefit) | 3,928 |
| | (34,131 | ) | | 2,083 |
| | (2,005 | ) | | 746 |
|
| Net income (loss) | $ | 5,260 |
| | $ | 19,304 |
| | $ | (22,979 | ) | | $ | (20,789 | ) | | $ | (1,563 | ) |
| Net income (loss) per common share - basic | $ | 0.14 |
| | $ | 0.55 |
| | $ | (0.85 | ) | | $ | (0.95 | ) | | $ | (0.08 | ) |
| Net income (loss) per common share - diluted | $ | 0.14 |
| | $ | 0.54 |
| | $ | (0.85 | ) | | $ | (0.95 | ) | | $ | (0.08 | ) |
| Weighted average common shares - basic | 37,055,663 |
| | 34,973,284 |
| | 27,011,381 |
| | 21,985,241 |
| | 18,960,347 |
|
| Weighted average common shares - diluted | 37,568,915 |
| | 35,801,395 |
| | 27,011,381 |
| | 21,985,241 |
| | 18,960,347 |
|
| | | | | | | | | | |
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Cash and cash equivalents | $ | 29,748 |
| | $ | 14,630 |
| | $ | 49,256 |
| | $ | 5,785 |
| | $ | 4,726 |
|
| Restricted cash and cash equivalents | 304,266 |
| | — |
| | — |
| | — |
| | — |
|
| Property and equipment, net | 43,369 |
| | 38,823 |
| | 25,184 |
| | 20,450 |
| | 5,494 |
|
| Total assets | 953,261 |
| | 596,454 |
| | 266,478 |
| | 171,756 |
| | 97,756 |
|
| Term loan | 429,508 |
| | 386,243 |
| | 120,826 |
| | 64,750 |
| | 24,500 |
|
| Mezzanine notes | — |
| | — |
| | — |
| | 27,710 |
| | 15,481 |
|
| 7.875% Senior Note | 300,000 |
| | — |
| | — |
| | — |
| | — |
|
| Stockholders' equity | 127,759 |
| | 110,486 |
| | 77,566 |
| | 9,510 |
| | 17,039 |
|
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussionThis Management's Discussion and analysis should be read together withAnalysis of Financial Condition and Results of Operations ("MD&A") contains certain forward-looking statements within the Company’s Consolidated Financial Statementsmeaning of Section 21E of the Securities Exchange Act of 1934, as amended. Historical results may not indicate future performance. Our forward-looking statements reflect our current views about future events, are based on assumptions, and related notes thereto beginning on page F-1. Reference is madeare subject to “Cautionary Notes Regarding Forward-Looking Statements” which describes important factorsknown and unknown risks and uncertainties that could cause actual results to differ materially from expectationsthose contemplated by these statements. Factors that may cause differences between actual results and non-historical information contained herein.those contemplated by forward-looking statements include, but are not limited to, those discussed in "Risk Factors" in Part I, Item 1A, of this Annual Report. We undertake no obligation to publicly update or revise any forward-looking statements, including any changes that might result from any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.
This MD&A is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. As used in this MD&A, the words, "we", "our", and "us" refer to GTT Communications and its consolidated subsidiaries. This MD&A should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report.
Company Overview
GTT Communications, Inc. is a Delaware corporation which was incorporated on January 3, 2005. GTT operatesprovider of cloud networking services to multinational clients. We offer a broad portfolio of global services including: WAN services; Internet services; managed network and security services; and voice and unified communication services.
Our global Tier 1 IP network connectingdelivers connectivity for our clients to locations and cloud applications around the world. We seekprovide services to further extendleading multinational enterprises, carriers and government customers in over 100 countries. We differentiate ourselves from our network globally whilecompetition by delivering exceptional client service to our clients with simplicity, speed and agility.
AsWe deliver four primary service offerings to our customers:
WAN Services. We provide Layer 2 (Ethernet) and Layer 3 (MPLS) WAN solutions to meet the growing needs of December 31, 2014,multinational enterprises, carriers, service providers and content delivery networks regardless of location. We design and implement custom private, public and hybrid cloud network solutions for our customers, offering bandwidth speeds from 10 Mbps to 100 Gbps per port with burstable and aggregate bandwidth capabilities. All services are available on a protected basis with the ability to specify pre-configured alternate routes to minimize the impact of any network disruption.
Internet Services. We offer domestic and multinational customers scalable, high-bandwidth global Internet connectivity and IP transit with guaranteed availability and packet delivery. Our Internet services offer flexible connectivity with multiple port interfaces including Fast Ethernet, Gigabit Ethernet, 10 Gigabit Ethernet and 100 Gigabit Ethernet. We also offer broadband and wireless access services. We support a dual stack of IPv4 and IPv6 protocols, enabling the delivery of seamless IPv6 services alongside existing IPv4 services.
Managed Services. We offer fully managed network services, including managed equipment, managed security services and managed remote access, enabling customers to focus on their core business. These end-to-end services cover the design, procurement, implementation, monitoring and maintenance of a customer’s network.
Voice and Unified Communication Services. Our SIP Trunking service is an enterprise-built unified communications offering that integrates voice, video and chat onto a single IP connection, driving efficiency and productivity organization-wide. Our Enterprise PBX service allows clients to eliminate traditional voice infrastructure with communication services delivered through the cloud. The offering includes fully hosted and hybrid models for maximum flexibility.
Our customer base was comprisedcontracts are generally for initial terms of over 4,000 businesses.three years, with some contracts at one year, and others at five years or more. Following the initial terms, these agreements typically provide for automatic renewal for specified periods ranging from one month to one year. Our prices are fixed for the duration of the contract, and we typically bill monthly in advance for such services. If a customer terminates its agreement, the terms of the Company’s customer contracts typically require full recovery of any amounts due for the remainder of the term or, at a minimum, our liability to any underlying suppliers.
Our revenue is composed of three primary categories that include monthly recurring revenue (or "MRR"), non-recurring revenue and usage revenue. MRR relates to contracted ongoing service that is generally fixed in price and paid by the customer on a monthly basis for the contracted term. For the year ended December 31, 2014, no single customer accounted for more than 10%2016, MRR was approximately 91% of our total consolidated revenue. Our five largestNon-recurring revenue primarily includes the amortization of previously collected installation and equipment charges to customers, accountedand one-time termination charges for approximately 18% of consolidated revenues for the year ended December 31, 2014.
Costs and Expenses
The Company’s cost of revenue consists 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 over 250 Points of Presence and for network extensions from our core network using third party providers ofcustomers who cancel their services associated with customer 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 appliedprior to the suppliers’ costs, and generallycontract termination date. Usage revenue represents variable revenue based on back-to-back term lengths. There are no wages or overheads includedwhether a customer exceeds its committed usage threshold as specified 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.contract.
Our network supplier contracts do not have any market related net settlement provisions. The Company hasWe have not entered into, and has no plansdo not plan to enter into, any supplier contracts whichthat involve financial or derivative instruments. The supplier contracts are entered into solely for the direct purchase of telecommunications capacity, which is resold by the Companyus in itsthe normal course of business.
Other than cost of revenue, the Company’stelecommunications services provided, our most significant operating expenses are employment costs. As of December 31, 2016, we had 662 full-time equivalent employees. For the year ended December 31, 2016, the employee cash compensation and benefits represented approximately 16% of revenue.
Factors Affecting Our Results of Operations
Business Acquisitions
Since our formation, we have consummated a number of transactions accounted for as business combinations which were executed as part of our strategy of expanding through acquisitions. These acquisitions, which are in addition to our periodic purchases of customer contracts, have allowed us to increase the scale at which we operate which in turn affords us the ability to increase our operating leverage, extend our network, and broaden our customer base.The accompanying consolidated financial statements include the operations of the acquired entities from their respective acquisition dates. The acquisitions noted below are collectively defined as "Acquisitions" for purposes of explaining our results of operations.
Telnes
In February 2016, we completed the acquisition of Telnes Broadband ("Telnes"). We paid $15.5 million in cash and issued 178,202 unregistered shares of our common stock valued at $2.0 million.
One Source
In October 2015, we completed the acquisition of One Source Networks Inc. ("One Source"). We paid $169.3 million in cash and issued 185,946 unregistered shares of our common stock valued at $2.3 million. We also issued 289,055 unregistered shares of our common stock to certain One Source employees as compensation for continuous employment valued at $3.6 million.
MegaPath
In April 2015, we acquired MegaPath Corporation ("MegaPath"). We paid $141.4 million in cash (exclusive of the assumption of $3.4 million in capital leases), and issued 610,843 unregistered shares of our common stock valued at $7.5 million.
UNSi
In October 2014, we acquired United Networks Services, Inc. ("UNSi"). We paid $32.5 million in cash and issued 231,539 of unregistered shares of our common stock valued at $2.9 million.
Asset Purchases
Periodically we acquire customer contracts that we account for as an asset purchase and record a corresponding intangible asset that is amortized over its assumed useful life. During 2016 we acquired two portfolios of customer contracts for an aggregate purchase price of $41.3 million, of which $20 million was paid in 2016 at the respective closing dates. The remaining $21.3 million will be paid in 2017. We did not have any material asset purchases in 2015 or 2014, respectively.
Indebtedness
The following summarizes our long-term debt at December 31, 2016 and 2015 (amounts in thousands):
|
| | | | | | | |
| | 2016 | | 2015 |
| | | | |
| Term loan | $ | 425,775 |
| | $ | 400,000 |
|
| 7.875% Senior Note | 300,000 |
| | — |
|
| Revolving line of credit facility | 20,000 |
| | 5,000 |
|
| Total debt obligations | 745,775 |
| | 405,000 |
|
| Unamortized debt issuance costs | (9,310 | ) | | (10,938 | ) |
| Unamortized original issuance discount | (6,957 | ) | | (7,819 | ) |
| Carrying value of debt | 729,508 |
| | 386,243 |
|
| Less current portion | (4,300 | ) | | (4,000 | ) |
| | $ | 725,208 |
| | $ | 382,243 |
|
October 2015 Credit Agreement
In October 2015, we entered into a credit agreement (the “October 2015 Credit Agreement”) that provided for a $400.0 million term loan facility and a $50.0 million revolving line of credit facility (which includes a $15.0 million letter of credit facility and a $10.0 million swingline facility). The term loan facility was issued at a discount of $8.0 million. The maturity date of the term loan facility is October 22, 2022, and the maturity date of the revolving line of credit is October 22, 2020.
On May 3, 2016, we entered into an incremental term loan agreement that increased outstanding term loans by $30.0 million, the proceeds of which were used to repay the then outstanding revolving loans.
On June 28, 2016, we entered into Amendment No. 1 (the "Repricing Amendment") to the October 2015 Credit Agreement. The Repricing Amendment, among other things, reduced the applicable rate for term loans to LIBOR plus 4.75% (subject to a LIBOR floor of 1.00%) and reduced the applicable rate for revolving loans to LIBOR plus 4.25% (with no LIBOR floor).
As of December 31, 2016, we had drawn $20.0 million under the revolving line of credit and had $29.5 million of available borrowing capacity. Approximately $0.5 million of the revolving line of credit was utilized for outstanding letters of credit relating to our real estate lease obligations.
Our obligations under the October 2015 Credit Agreement are guaranteed by certain of our subsidiaries and secured by substantially all of our tangible and intangible assets. We were in compliance with all financial covenants under the October 2015 Credit Agreement as of December 31, 2016.
The effective interest rate on outstanding debt at December 31, 2016 and 2015 was 5.76% and 6.24% respectively.
7.875% Senior Unsecured Notes
On December 22, 2016, in connection with the pending acquisitions of Hibernia Networks, we completed a private offering of $300 million aggregate principal amount of 7.875% senior unsecured notes due in 2024 (the "Notes"). The proceeds of the private offering were deposited into escrow, where the funds remained until all the escrow release conditions were satisfied, most notably the closing of the acquisition of Hibernia Networks on January 9, 2017. Had the acquisition agreement been terminated, the funds in escrow would have been released and returned to the investors of the Notes, including accrued and unpaid interest up to the date of release. We have recognized the proceeds from the private offering as restricted cash and cash equivalents in our consolidated financial statements. In connection with the offering, we incurred debt issuance costs of $9.7 million of which $0.5 million was incurred in 2016 and the remainder was incurred in 2017. The deferred costs associated with the Notes will begin amortizing in the first quarter of 2017.
Results of Operations of the Company
Year Ended December 31, 2016 Compared to Years Ended December 31, 2015 and 2014
Overview. The information presented in the tables below is composed of the consolidated financial information for the years ended December 31, 2016, 2015 and 2014 (amounts in thousands):
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Year-over-Year |
| | 2016 | | 2015 | | 2014 | | 2016 to 2015 | | 2015 to 2014 |
| | | | | | | | | | |
| Revenue: | | |
|
| |
|
| | | | |
| Telecommunications services | $ | 521,688 |
| | $ | 369,250 |
| | $ | 207,343 |
| | 41.3 | % | | 78.1 | % |
| | |
|
| |
|
| | | | |
| Operating expenses: | | |
|
| |
|
| | | | |
| Cost of telecommunications services | 274,012 |
| | 204,458 |
| | 128,086 |
| | 34.0 | % | | 59.6 | % |
| Selling, general and administrative expenses | 143,193 |
| | 101,712 |
| | 45,613 |
| | 40.8 | % | | 123.0 | % |
| Severance, restructuring and other exit costs | 870 |
| | 12,670 |
| | 9,425 |
| | (93.1 | )% | | 34.4 | % |
| Depreciation and amortization | 62,788 |
| | 46,708 |
| | 24,921 |
| | 34.4 | % | | 87.4 | % |
| | |
|
| |
|
| | | | |
| Total operating expenses | 480,863 |
| | 365,548 |
| | 208,045 |
| | 31.5 | % | | 75.7 | % |
| | |
|
| |
|
| | | | |
| Operating income (loss) | 40,825 |
| | 3,702 |
| | (702 | ) | | 1,002.8 | % | | 627.4 | % |
| | |
|
| |
|
| | | | |
| Other expense: | | |
|
| |
|
| | | | |
| Interest expense, net | (29,428 | ) | | (13,942 | ) | | (8,454 | ) | | 111.1 | % | | 64.9 | % |
| Loss on debt extinguishment | (1,632 | ) | | (3,420 | ) | | (3,104 | ) | | (52.3 | )% | | 10.2 | % |
| Other expense, net | (577 | ) | | (1,167 | ) | | (8,636 | ) | | (50.6 | )% | | (86.5 | )% |
| | |
| |
| | | | |
| Total other expense | (31,637 | ) | | (18,529 | ) | | (20,194 | ) | | 70.7 | % | | (8.2 | )% |
| | | |
| | |
| | | | |
| Income (loss) before income taxes | 9,188 |
| | (14,827 | ) | | (20,896 | ) | | 162.0 | % | | (29.0 | )% |
| | |
|
| |
|
| | | | |
| Income tax expense (benefit) | 3,928 |
| | (34,131 | ) | | 2,083 |
| | * |
| | * |
|
| | | |
| | |
| | | | |
| Net income (loss) | $ | 5,260 |
| | $ | 19,304 |
| | $ | (22,979 | ) | | (72.8 | )% | | 184.0 | % |
* Not meaningful
The following table supplements the information presented above for selling, general and administrative expenses for the years ended December 31, 2016, 2015, and 2014 (amounts in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Cash compensation | $ | 83,096 |
| | $ | 59,707 |
| | $ | 29,563 |
|
| Non-cash compensation | 15,775 |
| | 7,876 |
| | 2,418 |
|
| Transition and integration expense | 4,780 |
| | 6,085 |
| | — |
|
Other SG&A(1) | 39,542 |
| | 28,044 |
| | 13,632 |
|
| Total | $ | 143,193 |
| | $ | 101,712 |
| | $ | 45,613 |
|
(1) Includes professional fees, marketing costs, facilities and other general support costs.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenue
Our revenue increased by $152.4 million, or 41.3%, from $369.3 million for the year ended December 31, 2015 to $521.7 million for the year ended December 31, 2016. The increase was primarily due to the Acquisitions, as well as organic growth and the purchase of certain customer contracts.
On a constant currency basis using the average exchange rates in effect during the year ended December 31, 2015, revenue would have been higher by $2.8 million for the year ended December 31, 2016.
Cost of Telecommunications Services Provided
Cost of telecommunications services provided increased by $69.6 million, or 34.0%, from $204.5 million for the year ended December 31, 2015 to $274.0 million for the year ended December 31, 2016. Consistent with our increase in revenue, the increase in cost of telecommunications services provided was principally driven by the Acquisitions, as well as organic growth and the purchase of certain customer contracts.
On a constant currency basis using the average exchange rates in effect during the year ended December 31, 2015, cost of telecommunications services provided would have been higher by $1.0 million for the year ended December 31, 2016.
Operating Expenses
Selling, General and Administrative Expenses. SG&A expenses increased by $41.5 million, or 40.8%, from $101.7 million for the year ended December 31, 2015 to $143.2 million for the year ended December 31, 2016. Cash compensation expense increased $23.4 million or 39.2% from $59.7 million for the year ended December 31, 2015 to $83.1 million for the year ended December 31, 2016, primarily due to the Acquisitions.
Non-cash compensation expense increased by $7.9 million, or 100.3%, from $7.9 million for the year ended December 31, 2015 to $15.8 million for the year ended December 31, 2016 driven by (i) the recognition of share-based compensation for performance awards where the performance criteria have been met, (ii) certain shares issued to former employees of One Source which were accounted for as compensation, and (iii) an overall increase in quantity of employee equity awards. Transaction and integration costs decreased by $1.3 million, or 21.4% from $6.1 million for the year ended December 31, 2015 to $4.8 million for the year ended December 31, 2016. Other SG&A expense increased $11.5 million, or 41.0%, from $28.0 million for the year ended December 31, 2015 to $39.5 million for the year ended December 31, 2016, primarily as a result of the Acquisitions.
Severance, Restructuring and Other Exit Costs. Restructuring costs decreased by $11.8 million, or 93.1%, from $12.7 million for the year ended December 31, 2015 to $0.9 million for year ended December 31, 2016. The decrease was due to the fact that we closed two large acquisitions in 2015 (One Source and MegaPath), compared to one small acquisition in 2016 (Telnes).
Depreciation and Amortization. Amortization of intangible assets increased $14.7 million, or 56.5%, from $26.0 million for the year ended December 31, 2015 to $40.7 million for the year ended December 31, 2016 due to an increase in definite-lived intangible assets from the Acquisitions and the purchase of certain customer contracts. Depreciation expense increased by $1.4 million, or 6.8%, from $20.7 million for the year ended December 31, 2015 to $22.1 million for the year ended December 31, 2016, primarily due to the addition of property and equipment from the Acquisitions.
Other Expense. Other expense increased by $13.1 million, or 70.7% from $18.5 million for the year ended December 31, 2015 to $31.6 million for the year ended December 31, 2016. This is primarily attributed to higher interest expense related to increased debt levels to support acquisition activities.
On a constant currency basis using the average exchange rates in effect during the year ended December 31, 2015, operating expenses would have been higher by $0.6 million for the year ended December 31, 2016. Selling, general and administrative expenses are the only operating expenses that would have been impacted by the change in exchange rates.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Revenue
Our revenue increased by $161.9 million, or 78.1%, from $207.3 million for the year ended December 31, 2014 to $369.3 million for the year ended December 31, 2015. The increase was primarily due to the Acquisitions completed in 2015.
On a constant currency basis using the average exchange rates in effect during the year ended December 31, 2014, revenue would have been higher by $11.8 million for the year ended December 31, 2015.
Cost of Telecommunications Services Provided
Cost of telecommunications services provided increased by $76.4 million, or 59.6%, from $128.1 million for the year ended December 31, 2014 to $204.5 million for the year ended December 31, 2015. Consistent with our increase in revenue, the increase in cost of telecommunications services provided was principally driven by the Acquisitions.
On a constant currency basis using the average exchange rates in effect during the year ended December 31, 2014, cost of telecommunications services provided would have been higher by $4.4 million for the year ended December 31, 2015.
Operating Expenses
Selling, General and Administrative Expenses. SG&A expenses increased by $56.1 million, or 123.0% from $45.6 million for the year ended December 31, 2014 to $101.7 million for the year ended December 31, 2015. Cash compensation expense increased by $30.1 million, or 102.0%, from $29.6 million for the year ended December 31, 2014 to $59.7 million for the year ended December 31, 2015, due primarily to the Acquisitions. Non-cash compensation expense increased by $5.5 million, or 225.7%, from $2.4 million for the year ended December 31, 2014 to $7.9 million for the year ended December 31, 2015, driven by the recognition of share-based compensation for performance awards where the performance criteria have been met and an overall increase in the quantity of employee equity awards. Other SG&A expense increased $14.4 million, or 105.7%, from $13.6 million for the year ended December 31, 2014 to $28.0 million for the year ended December 31, 2015. Transaction and integration was $6.1 million for the year ended December 31, 2015. There were no transition and integration costs incurred in 2014.
Severance, Restructuring and Other Exit Costs. Restructuring costs increased by $3.2 million, or 34.4% from $9.4 million for the year ended December 31, 2014 to $12.7 million for year ended December 31, 2015. The $12.7 million in 2015 is comprised of exit costs associated with the acquisition of One Source and MegaPath, and the $9.4 million in 2014 is comprised of $6.1 million of exit costs associated with the acquisition of UNSi and $3.3 million in litigation settlement.
Depreciation and Amortization. Amortization of intangible assets increased $12.2 million, or 88.4%, from $13.8 million for the year ended December 31, 2014 to $26.0 million for the year ended December 31, 2015, due to the addition of definite-lived intangible assets from the Acquisitions. Similarly, depreciation expense increased $9.6 million, or 86.5%, from $11.1 million for the year ended December 31, 2014 to $20.7 million for the year ended December 31, 2015, primarily due to the addition of property and equipment from the Acquisitions.
Other Expense. Other expense decreased by $1.7 million, or 8.2%, from $20.2 million for the year ended December 31, 2014 to $18.5 million for the year ended December 31, 2015. For the year ended December 31, 2014, we recorded $6.9 million of expense associated with the change in fair value of the warrant liability that was extinguished in the third quarter of 2014. This was offset by increased interest expense of $5.5 million for the year ended December 31, 2015, attributed to increased debt for the acquisitions during 2015.
Using constant currency, when compared to 2014, operating expense for year ended December 31, 2015, would have been $1.6 million higher than reported. Selling, general and administrative expenses are the only operating expenses that would have been impacted by the change in exchange rates.
Non-GAAP Financial Measures
In addition to financial measures prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), from time to time we may use or publicly disclose certain "non-GAAP financial measures" in the course of our financial presentations, earnings releases, earnings conference calls, and otherwise. For these purposes, the SEC defines a "non-GAAP financial measure" as a numerical measure of historical or future financial performance, financial positions, or cash flows that (i) exclude amounts, or is subject to adjustments that effectively exclude amounts, included in the most directly comparable measure calculated and presented in accordance with GAAP in financial statements, and (ii) include amounts, or is subject to adjustments that effectively include amounts, that are excluded from the most directly comparable measure so calculated and presented.
Non-GAAP financial measures are provided as additional information to investors to provide an alternative method for assessing our financial condition and operating results. We believe that these non-GAAP measures, when taken together with our GAAP financial measures, allow us and our investors to better evaluate our performance and profitability. These measures are not in accordance with, or a substitute for, GAAP, and may be different from or inconsistent with non-GAAP financial
measures used by other companies. These measures should be used in addition to and in conjunction with results presented in accordance with GAAP, and should not be relied upon to the exclusion of GAAP financial measures.
Pursuant to the requirements of Regulation G, whenever we refer to a non-GAAP financial measure, we will also generally present the most directly comparable financial measure calculated and presented in accordance with GAAP, along with a reconciliation of the differences between the non-GAAP financial measure we reference with such comparable GAAP financial measure.
Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)
Adjusted EBITDA is defined as net income/(loss) before interest, income taxes, depreciation and amortization ("EBITDA") adjusted to exclude severance, restructuring and other exit costs, acquisition-related transaction and integration costs, losses on extinguishment of debt, share-based compensation, and from time to time, other non-cash or non-recurring items.
We use Adjusted EBITDA to evaluate operating performance, and this financial measure is among the primary measures we use for planning and forecasting future periods. We further believe that the presentation of Adjusted EBITDA is relevant and useful for investors because it allows investors to view results in a manner similar to the method used by management and makes it easier to compare our results with the results of other companies that have different financing and capital structures. In addition, we have debt covenants that are based on a leverage ratio that utilizes a modified EBITDA calculation, as defined in our credit agreement. The modified EBITDA calculation is similar to our definition of Adjusted EBITDA; however it includes the pro forma Adjusted EBITDA of and expected cost synergies from the companies acquired by us during the applicable reporting period. Finally, Adjusted EBITDA results, along with other quantitative and qualitative information, are utilized by management and our compensation committee for purposes of determining bonus payouts to our employees.
Adjusted EBITDA Less Capital Expenditures
Adjusted EBITDA less purchases of property and equipment, which we also refer to as capital expenditures or capex, is a performance measure that we use to evaluate the appropriate level of capital expenditures needed to support our expected revenue, and to provide a comparable view of our performance relative to other telecommunications companies who may utilize different strategies for providing access to fiber-based services and related infrastructure. We use a "capex light" strategy, which means we purchase fiber-based services and related infrastructure from other providers on an as-needed basis, pursuant to our customers' requirements. Many other telecommunications companies spend significant amounts of capital expenditures to construct their own fiber networks and data centers, and attempt to purchase as little as possible from other providers. As a result of our strategy, we typically have lower Adjusted EBITDA margins compared to other providers, but also spend much less on capital expenditures relative to our revenue. We believe it is important to take both of these factors into account when evaluating our performance.
The following is a reconciliation of Adjusted EBITDA and Adjusted EBITDA less capital expenditures from Net Income (Loss):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (Amounts in thousands) | 2016 | | 2015 | | 2014 |
| | | | (Unaudited) | | |
| Adjusted EBITDA | | | | | |
| Net income (loss) | $ | 5,260 |
| | $ | 19,304 |
| | $ | (22,979 | ) |
| Provision for (benefit from) income taxes | 3,928 |
| | (34,131 | ) | | 2,083 |
|
| Interest and other expense, net | 30,005 |
| | 15,109 |
| | 17,090 |
|
| Loss on debt extinguishment | 1,632 |
| | 3,420 |
| | 3,104 |
|
| Depreciation and amortization | 62,788 |
| | 46,708 |
| | 24,921 |
|
| Severance, restructuring and other exit costs | 870 |
| | 12,670 |
| | 9,425 |
|
| Transaction and integration costs | 4,780 |
| | 6,085 |
| | — |
|
| Share-based compensation | 15,775 |
| | 7,876 |
| | 2,418 |
|
| Adjusted EBITDA | 125,038 |
| | 77,041 |
| | 36,062 |
|
| | | | | | |
| Purchases of property and equipment | (24,189 | ) | | (14,070 | ) | | (5,819 | ) |
| Adjusted EBITDA less capital expenditures | $ | 100,849 |
| | $ | 62,971 |
| | $ | 30,243 |
|
Liquidity and Capital Resources
Our primary sources of liquidity have been cash provided by operations, equity offerings and debt financing. Our principal uses of cash have been for acquisitions, working capital, capital expenditures, and debt service requirements. We anticipate that our principal uses of cash in the future will be for acquisitions, capital expenditures, working capital, and debt service.
Management monitors cash flow and liquidity requirements on a regular basis, including an analysis of the anticipated working capital requirements for the next 12 months. This analysis assumes our ability to manage expenses, capital expenditures, indebtedness and the anticipated growth of revenue. If our operating performance differs significantly from our forecasts, we may be required to reduce our operating expenses and curtail capital spending, and we may not remain in compliance with our debt covenants. In addition, if we are unable to fully fund our cash requirements through operations and current cash on hand, we may need to obtain additional financing through a combination of equity and debt financings and/or renegotiation of terms of our existing debt. If any such activities become necessary, there can be no assurance that we would be successful in obtaining additional financing or modifying our existing debt terms.
As of December 31, 2016, we had 294 employeesapproximately $29.7 million in unrestricted cash and full-timecash equivalents, and employmentour current assets were $23.0 million greater than current liabilities. Our current liabilities include $24.4 million of earn-outs and holdback obligations payable in 2017; and $3.2 million of accrued severance and exit costs comprised approximately 13%with a substantial portion of total operating expenses.this obligation expected to be paid in 2017. We believe that cash currently on hand, expected cash flows from future operations and existing borrowing capacity are sufficient to fund operations for at least the next 12 months.
Our capital expenditures increased by $10.1 million, or 71.9%, from $14.1 million for the year ended December 31, 2015 to $24.2 million for the year ended December 31, 2016. The increase in capital expenditures was due to our growth, but remained less than 5% of revenue, consistent with our 'capex light' strategy. We anticipate that we will incur capital expenditures in the range of 6% to 7% of revenue in 2017, taking into consideration the recent acquisition of Hibernia Networks, which closed in January 2017. We continue to expect that our capital expenditures will be primarily success-based, i.e., in support of specific revenue opportunities.
Cashflows
We believe that our cash flows from operating activities, in addition to cash on-hand, will be sufficient to fund our operating activities and capital expenditures for the foreseeable future, and in any event for at least the next 12 to 18 months. However, no assurance can be given that this will be the case.
The following table summarizes the components of our cash flows for the years ended December 31, 2016, 2015 and 2014.
|
| | | | | | | | | | | |
| Consolidated Statements of Cash Flows Data | Year Ended December 31, |
| (amounts in thousands) | 2016 | | 2015 | | 2014 |
| Net cash provided by (used in) operating activities | $ | 60,543 |
| | $ | 24,651 |
| | $ | (6,475 | ) |
| Net cash used in investing activities | (362,601 | ) | | (314,772 | ) | | (43,513 | ) |
| Net cash provided by financing activities | 318,611 |
| | 253,531 |
| | 88,231 |
|
Cash Provided (or Used) by Operating Activities
Our largest source of cash provided by operating activities is monthly recurring revenue from our customers. Our primary uses of cash are payments to network suppliers, compensation related costs and third-party vendors such as agents, contractors, and professional service providers.
Net cash flows from operating activities increased by $35.9 million, or 145.6%, from $24.7 million for the year ended December 31, 2015 to $60.5 million for the year ended December 31, 2016, due primarily to the Acquisitions, as well as organic growth and the purchase of certain customer contracts. Net cash flows from operating activities increased by $31.1 million, or 480.7%, from a use of operating cash of $6.5 million for the year ended December 31, 2014 to a source of operating cash of $24.7 million for the year ended December 31, 2015, also due primarily to the Acquisitions, as well as organic growth and the purchase of certain customer contracts.
Cash provided by operating activities during the year ended December 31, 2016 included $4.4 million cash paid for severance and exit costs, $4.8 million cash paid for transaction and integration costs and a working capital use of $29.5 million. The working capital use was driven by an effort to improve the timeliness of payments to our key vendors, and slower payment timing by some of our larger customers. We have several initiatives underway to improve payment timing from our customers, which we expect to take effect in 2017.
Cash provided by operating activities during the year ended December 31, 2015 includes $8.0 million cash paid for severance and exit costs, $6.1 million cash paid for transaction and integration costs, and a working capital use of $24.2 million.
Cash used by operating activities during the year ended December 31, 2014 includes $4.8 million cash paid for severance and exit costs, and a working capital use of $23.8 million.
Cash Used in Investing Activities
Our primary uses of cash include acquisitions, purchase of customer contracts and capital expenditures.
Net cash flows from investing activities increased by $47.8 million, or 15.2% from $314.8 million for the year ended December 31, 2015 to $362.6 million for the year ended December 31, 2016. Net cash flows from investing activities increased by $271.3 million, or 623.4%, from $43.5 million for the year ended December 31, 2014 to $314.8 million for the year ended December 31, 2015.
Cash used for the year ended December 31, 2016 primarily consisted of $304.3 million for restricted cash that was deposited into escrow in anticipation of the Hibernia Networks acquisition that closed on January 9, 2017 (see Note 15 - Subsequent Events for details). We also completed the Telnes acquisition and certain customer contract purchases during 2016 for which we paid a total of approximately $34.1 million, in addition to capital expenditures of approximately $24.2 million.
Cash used in investing activities for the year ended December 31, 2015 primarily consisted of $300.7 million of cash used for the acquisitions of One Source and MegaPath, in addition to capital expenditures of approximately $14.1 million.
Cash used in investing activities for the year ended December 31, 2014, primarily consisted of $37.5 million of cash used for the acquisition of UNSi and capital expenditures of $5.8 million.
Cash Provided by Financing Activities
Our primary source of cash for financing activities is debt financing proceeds. Our primary use of cash for financing activities is the refinancing of our debt and repayment of principal pursuant to the debt agreements.
Net cash flows from financing activities increased by $65.1 million, or 25.7% from $253.5 million for the year ended December 31, 2015 to $318.6 million for the year ended December 31, 2016. Net cash flows from financing activities increased by $165.3 million, or 187.3%, from $88.2 million for the year ended December 31, 2014 to $253.5 million for the year ended December 31, 2015.
Net cash provided by financing activities for the year ended December 31, 2016, was $318.6 million consisting primarily of $300.0 million in proceeds from the issuance of senior notes to fund the Hibernia Networks acquisition that closed on January 9, 2017 (see Note 15 - Subsequent Events for details).
Net cash provided by financing activities for the year ended December 31, 2015, was $253.5 million, which primarily consisted of net proceeds from the October 2015 Credit Agreement used to fund the acquisition of One Source.
Net cash provided by financing activities for the year ended December 31, 2014, was $88.2 million, which primarily consisted of $72.7 million from new equity raised and net debt proceeds of $29.4 million from the August 2014 Credit Agreement. For additional discussion of indebtedness, refer to Note 6 - Debt of the consolidated financial statements.
Other cash flows
During the years ended December 31, 2016, 2015 and 2014, we made cash payments for interest totaling $26.3 million, $13.1 million and $8.0 million, respectively. The increase in interest payments is a result of the incremental debt associated with the Acquisitions, as discussed further in Note 6 - Debt of the consolidated financial statements.
Contractual Obligations and Commitments
As of December 31, 2016, we had contractual payment obligations of approximately $955.2 million.
The following table summarizes our significant contractual obligations as of December 31, 2016 (amounts in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| Term loan | $ | 425,775 |
| | $ | 4,300 |
| | $ | 8,600 |
| | $ | 8,600 |
| | $ | 404,275 |
|
| 7.875% Senior Note | 300,000 |
| | — |
| | — |
| | — |
| | 300,000 |
|
| Revolving line of credit | 20,000 |
| | — |
| | — |
| | 20,000 |
| | — |
|
| Operating leases | 10,181 |
| | 3,332 |
| | 4,649 |
| | 1,727 |
| | 473 |
|
| Capital leases | 1,135 |
| | 1,015 |
| | 120 |
| | — |
| | — |
|
Network supplier agreements (1) | 189,747 |
| | 103,770 |
| | 80,050 |
| | 4,375 |
| | 1,552 |
|
Other (2) | 8,350 |
| | 7,618 |
| | 732 |
| | — |
| | — |
|
| | $ | 955,188 |
| | $ | 120,035 |
| | $ | 94,151 |
| | $ | 34,702 |
| | $ | 706,300 |
|
(1)Excludes contracts where the initial term has expired and we are currently in month-to-month status.
(2) "Other" consists of vendor contracts associated with network monitoring and maintenance services.
Off-Balance Sheet Arrangements
As of December 31, 2016, we did not have any off-balance sheet arrangements.
Subsequent Events
Hibernia Acquisition
On January 9, 2017, we acquired 100% of Hibernia Networks. We paid $621.5 million, comprised of $515.0 million in cash consideration, $14.6 million net cash acquired and 3,329,872 unregistered shares of our common stock, initially valued at $75.0 million on the date of announcement, and ultimately valued at $91.9 million at closing. The purchase price is subject to a final post-closing reconciliation for closing date cash, net working capital, transaction expenses, indebtedness, certain tax payments and prepaid customer contracts.
$300.0 million of the cash consideration was funded by proceeds from the issuance of the 7.875% senior unsecured notes ("Notes"), which was funded into escrow in December 2016 (refer to Note 6 - Debt of the consolidated financial statements for further information). The remainder was funded by a new credit agreement, which is discussed in more detail below.
The Company expects the integration of Hibernia to be substantially complete by the end of the third quarter of 2017.
Credit Agreement
In conjunction with the Hibernia acquisition, we closed on a new credit agreement (the "2017 Credit Agreement") on January 9, 2017. The 2017 Credit Agreement provides a $700.0 million term loan facility and a $75.0 million revolving line of credit facility. At our election, the loans under the 2017 Credit Agreement may be made as either Base Rate Loans or Eurodollar Loans, with applicable margins at 3.00% and 4.00%, respectively. The Eurodollar Loans will be subject to a floor of 1.00%, and the applicable margin for revolving loans will be 2.50% for Base Rate Loans and 3.50% for Eurodollar Loans.
The maturity date of the term loan facility is January 9, 2024 and the maturity date of the revolving loan facility is January 9, 2022. The principal amount of the term loan facility is payable in equal quarterly installments of $1.75 million, commencing on March 31, 2017 and continuing thereafter until the maturity date, when the remaining balance of outstanding principal is payable in full. The revolving loan facility contains a maximum consolidated net secured leverage ratio when more than 30% is utilized.
The proceeds from the Notes and 2017 Credit Agreement were used to fund the Hibernia acquisition, repay existing indebtedness, pay various fees and expenses incurred in connection with the acquisition and related financing transactions, and for general corporate purposes.
For additional details on our indebtedness, refer to Note 6 - Debt of the consolidated financial statements or the Liquidity and Capital Resources section included herein.
Critical Accounting Policies and Estimates
The Company’s significant accounting policiesdiscussion of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. In the preparation of our consolidated financial statements, we are described in Note 2required to make estimates and assumptions that affect the accompanyingreported amounts of assets, liabilities, revenues and expenses, as well as the related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements. The Company considersOur critical accounting policies have been discussed with the Audit Committee of our Board of Directors. We believe that the following critical accounting policies to be those that requireaffect the mostmore significant judgments and estimates used in the preparation of itsour consolidated financial statements, and believesbelieve that an understanding of these policies is important to a proper evaluation of the reported consolidated financial results. Our significant accounting policies are described in Note 2 to the accompanying consolidated financial statements.
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on reported results of operations.
Segment Reporting
We report operating results and financial data in one operating and reporting segment. The chief operating decision maker manages our business as a single profit center in order to promote collaboration, provide comprehensive service offerings across our entire customer base, and provide incentives to employees based on the success of the organization as a whole. Although certain information regarding selected products or services is discussed for purposes of promoting an understanding of our complex business, the chief operating decision maker manages our business and allocates resources at the consolidated level.
Revenue Recognition
The Company delivers threeWe deliver four primary services to our customers—EtherCloud, ourcustomers — flexible Ethernet-based connectivity service; Internet Services, our reliable,wide area network services; high bandwidth internetInternet connectivity services; and Managed Services, our provision of fully managed network services so organizations can focus on their core business.and security services; and global communication and collaboration services. Certain of the Company’sour current revenuecommercial activities have features that may be considered multiple elements. The Company believeselements, specifically, when we sell Customer Premise Equipment ("CPE") in addition to our services. We believe that there is insufficientsufficient evidence to determine each element’s fair
value and, as a result, in those arrangements where there are multiple elements, the service revenue is recorded ratably over the term of the arrangement.agreement and the equipment is accounted for as a sale, at the time of sale, as long as collectability is reasonably assured.
The Company’sOur 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.services, including installation date, recurring and non-recurring fees, payment terms and length of term. These contracts call for the Companyus 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 of service maintenance and trouble-shooting) during the service term. The contracts do not typically provide the customer any rights to use specifically identifiable assets. Furthermore, the contracts generally provide us with discretion to engineer (or re-engineer) a particular network solution to satisfy each customer’s data transmission requirement, and typically prohibit physical access by the customer to the network infrastructure used by the Companyus and itsour suppliers to deliver the services.
The Company recognizesWe recognize revenue as follows:
Network ServicesMonthly Recurring Revenue. Monthly recurring revenue represents the substantial majority of our revenue, and Support. The Company’sconsists of fees we charge for ongoing services that are provided pursuant to contracts that typically provide for payments of recurring chargesgenerally fixed in price and billed on a recurring monthly basis (one month in advance) for use of the services over a committedspecified 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, most contracts provide for a continuation of most service contractsservices on the contracts roll forwardsame terms, either for a specified renewal period (e.g., one year) or on a month-to-month basis. We record recurring revenue based on the fees agreed to in each contract, as long as the contract is in effect.
Usage Revenue. Usage revenue represents variable charges for certain services, based on specific usage of those services, or other periodic basis and continue to bill atusage above a fixed threshold, billed monthly in arrears. We record usage revenue based on actual usage charges billed using the same fixed recurring rate. If any cancellation rates and/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 formulathresholds 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 feesrevenue consists of charges 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 revenue earned for providing provisioning servicesinstallation in connection with the delivery of recurring communications services, is recognized ratably over the contractual term of the recurring service starting upon commencement of the service contract term.late payments, cancellation fees, early termination fees and equipment sales. Fees recorded or billed from these provisioningfor installation services are initially recorded as deferred revenue then recognized ratably over the contractual term of the recurring service. Installation costs related to provisioning incurred byWe believe that 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 recordedterm serves 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. The Company believes the initial contractual term is the best estimate of the period of earnings.
Other Revenue. From time to time, the Company recognizes revenue in the form ofexpected relationship term. Fees charged for late payments, cancellation (pre-installation) or early termination (post-installation) are typically fixed or determinable cancellation (pre-installation) or termination (post-installation) charges imposed pursuant toper the service contract. Thisterms of the respective contract, and are recognized as revenue is earned when a customer cancels or terminates a service agreement prior to the end of its committed term. This revenue is recognized when billed if collectability is reasonably assured.billed. In addition, the Company from time to time sellswe sell communications and/or networking equipment to our customers in connection with our data networking applications. The Company recognizesservices. We recognize 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.
We record revenue only 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 evaluationassured, irrespective of the trendtype 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.
These disputes with suppliers generally fall into four categories: pricing errors, network design, start of service date or disconnection errors, and taxation and regulatory surcharge errors. In the instances where the billed amount exceeds the applicable contractual rate the Company does not accrue the full face amount of obvious billing errors in accounts payable because to do so would present a misleading and confusing picture of the Company’s current liabilities by accounting for liabilities that are erroneous based upon a detailed review of objective evidence. If the Company ultimately pays less than the
corresponding accrual in resolution of an erroneously over-billed amount, the Company recognizes the resultant decrease in cost of revenue in the period in which the resolution is reached. If the Company ultimately pays more than the corresponding accrual in resolution of an erroneously billed amount, the Company recognizes the resultant cost of revenue increase in the period in which the resolution is reached and during which period the Company makes payment to resolve such account.
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, 2014, the Company had $6.9 million in disputed billings from suppliers.
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.
Business Combinations
The Company allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets.
Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and developed technology; and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed, as more fully discussed in Note 3 of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Goodwilland Intangible Assets
The Company assesses goodwill for impairment on at least an annual basis on October 1 unless interim indicators of impairment exist. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair value. The Company operates as a single operating segment and as a single reporting unit for the purpose of evaluating goodwill. As of October 1, 2014, the Company performed its annual impairment test of goodwill by comparing the fair value of the Company (primarily based on market capitalization) to the carrying value of equity, and concluded that the fair value of the reporting unit was greater than the carrying amount. During the fiscal years ended December 31, 2014, and 2013 the Company did not record any goodwill impairment.
Intangible assets consist of customer relationships, restrictive covenants related to employment agreements, license fees and a trade name. Customer relationships and restrictive covenants related to employment agreements are amortized, on a straight-line basis, over periods of up to seven years. Point-to-point FCC Licenses are accounted for as definite lived intangibles and amortized over the average remaining useful life of such licenses which approximates three years. The trade name is not amortized, but is tested on at least an annual basis as of October 1 unless interim indicators of impairment exist. The trade name is considered to be impaired when the net book value exceeds its estimated fair value. As of October 1, 2014 and 2013 the Company performed its annual impairment test of the trade name, and concluded that the fair value of the trade name was greater than the carrying amount, respectively. The Company used the relief from royalty method for valuation. The fair value of the asset is the present value of the license fees avoided by owning the asset, or the royalty savings.
Income Taxes
Provisions for federal and state income taxes are calculated from the income reported on our financial statements based on current tax law and also include the cumulative effect of any changes in tax rates from those previously used in determining deferred tax assets and liabilities. Such provisions differ from the amounts currently receivable or payable because certain items of income and expense are recognized in different time periods for purposes of preparing financial statements than for income tax purposes.
Significant judgment is required in determining income tax provisions and evaluating tax positions. We establish reserves for uncertain tax positions when, despite the belief that our tax positions are supportable, there remains uncertainty in a tax position taken in our previously filed income tax returns. For tax positions where it is more likely than not that a tax benefit will be sustained, we record the largest amount of tax benefit with a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. To the extent we prevail in matters for which accruals have been established or are required to pay amounts in excess of reserves, our effective tax rate in a given financial statement period may be materially impacted.
The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient future taxable income in certain tax jurisdictions to realize the value of these assets. If we are unable to generate sufficient future taxable income in these jurisdictions, a valuation allowance is recorded when it is more likely than not that the value of the deferred tax assets is not realizable.revenue.
Share-Based Compensation
We issue three types of grants under our share-based compensation plan, time-based restricted stock, time-based stock options, and performance-based restricted stock. The time-based restricted stock and stock options generally vest over a four-year period, contingent upon meeting the requisite service period requirement. Performance awards typically vest over a shorter period, e.g., two years, starting when the performance criteria established in the grant have been met.
The share price on the day of grant is used as the fair value for all restricted stock. We use the Black-Scholes option-pricing model to determine the estimated fair value for stock options. Critical inputs into the Black-Scholes option-pricing model include the following: option exercise price; fair value of the stock price; expected life of the option; annualized volatility of the stock; annual rate of quarterly dividends on the stock; and risk-free interest rate.
Implied volatility is calculated as of each grant date based on our historical stock price volatility along with an assessment of a peer group for future option grants.group. Other than the expected life of the option, volatility is the most sensitive input to our option grants. To be consistent with all other implied calculations, the same peer group used to calculate other implied metrics is also used to calculate implied volatility. We assess the validity of our peer group on an annual basis to determine whether any new guideline companies are better comparisons to the Company. While we are not aware of any news or disclosures by our peers that may impact their respective volatility, there is a risk that peer group volatility may increase, potentially increasing any prospective future compensation expense that will result from future option grants.
The risk-free interest rate used in the Black-Scholes option-pricing model is determined by referencing the U.S. Treasury yield curve rates with the remaining term equal to the expected life assumed at the date of grant.
Forfeitures are estimated based on our historical analysis of attrition levels. Forfeiture estimates are updated quarterly for actual forfeitures.
Income Taxes
Income taxes are accounted for under the asset and liability method pursuant to GAAP. Under this method, deferred tax assets and liabilities are recognized for the expected future consequences attributable to the differences between the financial statement
carrying amounts and the tax basis of assets and liabilities. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the change. Further, deferred tax assets are recognized for the expected realization of available net operating loss and tax credit carryforwards. A valuation allowance is recorded on gross deferred tax assets when it is "more likely than not" that such asset will not be realized. When evaluating the realizability of deferred tax assets, all evidence, both positive and negative, is evaluated. Items considered in this analysis include the ability to carry back losses, the reversal of temporary differences, tax planning strategies and expectations of future earnings. We review our deferred tax assets on a quarterly basis to determine if a valuation allowance is required based upon these factors. Changes in our assessment of the need for a valuation allowance could give rise to a change in such allowance, potentially resulting in additional expense or benefit in the period of change.
Our income tax provision includes U.S. federal, state, local and foreign income taxes and is based on pre-tax income or loss. In determining the annual effective income tax rate, we analyzed various factors, including our annual earnings and taxing jurisdictions in which the earnings were generated, the impact of state and local income taxes and our ability to use tax credits and net operating loss carryforwards.
Under GAAP for income taxes, the amount of tax benefit to be recognized is the amount of benefit that is "more likely than not" to be sustained upon examination. We analyze our tax filing positions in all of the U.S. federal, state, local and foreign tax jurisdictions where we are required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, we determine that uncertainties in tax positions exist, a liability is established in the consolidated financial statements. We recognize accrued interest and penalties related to unrecognized tax positions in the provision for income taxes.
Estimating Allowances and Accrued Liabilities
Allowance for Doubtful Accounts
We establish an allowance for bad debts for accounts receivable amounts that may not be collectible. We state our accounts receivable balances at amounts due from the customer net of an allowance for doubtful accounts. We determine 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. As of December 31, 2016 and 2015, we had an allowance for doubtful accounts of $2.7 million and $1.0 million, respectively.
Allowance for Vendor Disputes
In the normal course of business, we identify errors by suppliers with respect to the billing of services. We perform bill verification procedures to ensure that errors in our suppliers’ billed invoices are identified and resolved. If we conclude that a vendor has billed us inaccurately, we will record a liability only for the amount that we believe is owed. As of December 31, 2016 and 2015, we had $5.8 million and $6.9 million, respectively, in disputed billings from suppliers that were not accrued because we do not expect this assumptionbelieve we owe them.
Deferred Costs
Installation costs related to change materially,provisioning of recurring communications services that we incur from 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 attrition levels associateddeferred contract costs and expensed ratably over the contractual term of service in the same manner as the deferred revenue arising from that contract. Based on historical experience, we believe the initial contractual term is the best estimate for the period of earnings. If any installation costs exceed the amount of corresponding deferred revenue, the excess cost is recognized in the current period.
Goodwilland Intangible Assets
We record the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination as goodwill. Goodwill is reviewed for impairment at least annually, in October, or more frequently if a triggering event occurs between impairment testing dates. We operate as a single operating segment and as a single reporting unit for the purpose of evaluating goodwill impairment. Our impairment assessment begins with new option grants havea qualitative assessment to determine whether it is more like than not materially changed. Asthat fair value of the reporting unit is less than its carrying value. The qualitative assessment includes comparing our overall financial performance against the planned results used in the last quantitative goodwill impairment test. Additionally, we assess the fair value in light of certain events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity and Company specific events. The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a public company,reporting units exceeds the carrying value involves significant judgments and estimates.
If it is determined under the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a two-step quantitative impairment test is performed. Under the first step, we useestimate the closing pricefair value compared with our carrying value (including goodwill). If the fair value exceeds the carrying value, step two does not need to be performed. If the estimated fair value is less than the carrying value, an indication of goodwill impairments exists and we would need to perform step two of the impairment test. Under step two, an impairment loss would be recognized for any excess of the carrying amount of our common stock ongoodwill over the grant dateimplied fair value of that goodwill. The fair value under the two-step assessment is determined using a combination of both income and market-based approaches. There were no impairments identified for valuation purposes.
Basis of Presentationthe years ended December 31, 2016, 2015 and 2014.
The accompanyingIntangible assets arising from business combinations, such as acquired customer contracts and relationships, (collectively "customer relationships"), trade names, intellectual property or know-how, are initially recorded at fair value. We amortize these intangible assets over the determined useful life which ranges from three to seven years. We review the intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, an impairment loss is recognized for the difference between fair value and the carrying value of the asset. There were no impairments recognized for the years ended December 31, 2016, 2015, and 2014.
Further information is available in Note 4 of the notes to the consolidated financial statements includeincluded herein.
Business Combinationsand Asset Acquisitions
We allocate the accountsfair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the Companypurchase consideration over the fair values of these identifiable assets and its wholly-owned subsidiaries,liabilities is recorded as goodwill. When determining the fair values of assets acquired and have been preparedliabilities assumed, we make significant estimates and assumptions, especially with respect to intangible assets.
We recognize the purchase of assets and the assumption of liabilities as an asset acquisition, if the transaction does not constitute a business combination. The excess of the fair value of the purchase price is allocated on a relative fair value basis to the identifiable assets and liabilities. No goodwill is recorded in accordancean asset acquisition.
Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and developed technology, discount rates and terminal values. Our estimate of fair value is based upon assumptions believed to be reasonable, but actual results may differ from estimates.
Other estimates associated with the accounting principles generally acceptedfor acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed, as more fully discussed in Note 3 of the United States ("GAAP"). All intercompany balances and transactions have been eliminated in consolidation. The Company’s fiscal year ends on December 31 and unless otherwise noted, referencesnotes to fiscal year or fiscal are for fiscal years ended December 31. The accompanying consolidated financial statements present the financial position of the Company as of December 31, 2014 and 2013 and the Company’s results of operations for fiscal 2014 and fiscal 2013.
Use of Estimates and Assumptions
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results can, and in many cases will, differ from those estimates.
Segment Reporting
We report operating results and financial data in one operating and reportable segment. We manage our business as a single profit center in order to promote collaboration, provide comprehensive service offerings across our entire customer base, and provide incentives to employees based on the success of the organization as a whole. Although certain information regarding geographic markets and selected products or services are discussed for purposes of promoting an understanding of our complex business, we manage our business and allocate resources at the consolidated level of a single operating segment.included herein.
Recent Accounting Pronouncements
ReferenceRevenue Recognition
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is madetransferred to the customers. The new revenue recognition standard will be effective for us in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. We currently anticipate adopting the new standard effective January 1, 2018. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). While we are still in the process of completing our analysis on the impact this guidance will have on our consolidated financial statements and related disclosures, we are not aware of any material impact the new standard will have and we anticipate adopting the standard using the modified retrospective method. This assessment excludes the potential impact the acquisition of Hibernia Networks will have on our analysis. Refer to Note 2 of15 - Subsequent Events to the consolidated financial statements which commence on page F-9 of this annual report, which Note is incorporated herein by reference.
Results of Operations of the Company
Fiscal Year Ended December 31, 2014 compared to Fiscal Year Ended December 31, 2013
Overview. The financial information presented in the tables below is comprised of the consolidated financial information of the Company for the year ended December 31, 2014 and 2013 (amounts in thousands):
|
| | | | | | | | | | | |
| | | Year Ended | | |
| | | December 31, 2014 | | December 31, 2013 | | % Change |
| | | | | | | |
| Revenue: | |
|
| |
|
| | |
| Telecommunications services | | $ | 207,343 |
| | $ | 157,368 |
| | 31.8 | % |
| |
|
| |
|
| | |
| Operating expenses: | |
|
| |
|
| | |
| Cost of telecommunications services | | 128,086 |
| | 102,815 |
| | 24.6 | % |
| Selling, general and administrative expense | | 45,613 |
| | 31,675 |
| | 44.0 | % |
| Restructuring costs, employee termination and other items | | 9,425 |
| | 7,677 |
| | 22.8 | % |
| Depreciation and amortization | | 24,921 |
| | 17,157 |
| | 45.3 | % |
| |
|
| |
|
| | |
| Total operating expenses | | 208,045 |
| | 159,324 |
| | 30.6 | % |
| |
|
| |
|
| | |
| Operating loss | | (702 | ) | | (1,956 | ) | | (64.1 | )% |
| |
|
| |
|
| | |
| Other expense: | |
|
| |
|
| | |
| Interest expense, net | | (8,454 | ) | | (8,408 | ) | | 0.5 | % |
| Loss on debt extinguishment | | (3,104 | ) | | (706 | ) | | 339.7 | % |
| Other expense, net | | (8,636 | ) | | (11,724 | ) | | (26.3 | )% |
| |
| |
| | |
| Total other expense | | (20,194 | ) | | (20,838 | ) | | (3.1 | )% |
| | |
| | |
| | |
| Loss before income taxes |
| (20,896 | ) |
| (22,794 | ) | | (8.3 | )% |
| |
|
| |
|
| | |
| Income tax expense (benefit) | | 2,083 |
| | (2,005 | ) | | (203.9 | )% |
| | |
| | |
| | |
| Net loss | | $ | (22,979 | ) | | $ | (20,789 | ) | | 10.5 | % |
Revenue. The table below presents the components of revenue for the years ended December 31, 2014 and 2013:
|
| | | | |
| Geographical Revenue | 2014 | 2013 |
| | | |
| United States | 58 | % | 57 | % |
| Italy | 27 | % | 25 | % |
| United Kingdom | 13 | % | 15 | % |
| Other | 2 | % | 3 | % |
| Totals | 100 | % | 100 | % |
Revenue increased $50.0 million, or 31.8% for the year ended December 31, 2014, compared to year ended December 31, 2013. The increase is primarily due to the acquisition of United Network Services, Inc. ("UNSi") on October 1, 2014, which added approximately 2,000 customers. Additionally, the increase is due to the timing of acquisitions made in 2013. NT Network Services LLC SCS (''Tinet'') was acquired on April 30, 2013, which added approximately 1,000 customers.
Costs of Telecommunications Service. Costs of telecommunications services were $128.1 million and $102.8 million for the years ended December 31, 2014 and December 31, 2013, respectively. The increase is primarily due to the Tinet acquisition, which had over 120 points of presence globally and operated one of the largest global Tier 1 IP networks, and the UNSi acquisition.
Selling, General and Administrative Expenses. SG&A increased $13.9 million, or 44.0%, for the year ended December 31, 2014 compared to the year ended December 31, 2013, due primarily to the increase in employment costs resulting from the net increase of approximately 180 employees following the Tinet and UNSi acquisitions, as well as additional employees to support other added clients, and an increase in rent expense, travel costs, and professional fees to support the broader global organization resulting from the Tinet and UNSi acquisitions.
Restructuring costs, employee termination and other items. Restructuring costs increased by $1.7 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase primarily reflects the settlement of the Artel LLC litigation in the third quarter of fiscal 2014 for approximately $3.3 million. The Company incurred approximately $6.1 million of costs associated with the acquisition of UNSi for severance and other employee termination related costs, professional fees, network integration, and travel expenses, compared to similar costs of $7.7 million incurred in fiscal 2013 associated with the acquisitions of IDC Global, Inc. and Tinet.
Depreciation and Amortization. Depreciation and amortization expense increased $7.8 million to $24.9 million for the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase was due primarily to the depreciation and amortization of the global IP and Ethernet network assets and intangible assets, primarily customer relationships, obtained in the Tinet and UNSi acquisitions.
Other Expense. Other expense decreased $3.1 million to $8.6 million for the year ended December 31, 2014, compared to the year ended December 31, 2013. The decrease is primarily due to the extinguishment of the warrant liability on August 6, 2014, which occurred in conjunction with the Credit Agreement described further on page 24. See Note 5 for additional information.
Liquidity and Capital Resources
|
| | | | | | | |
| | December 31, 2014 | | December 31, 2013 |
| | | | |
| Cash and cash equivalents | $ | 49,256 |
| | $ | 5,785 |
|
| Debt | $ | 123,626 |
| | $ | 92,460 |
|
Management monitors cash flow and liquidity requirements. Baseddetails on the Company’s cash, debt, and analysis of the anticipated working capital requirements, management believes the Company has sufficient liquidity to fund the business and meet its contractual obligations for 2015. The Company’s current planned cash requirements for 2015 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 plan and make reductions in expenses.
The Company believes that cash currently on hand, expected cash flows from future operations and existing borrowing capacity are sufficient to fund operations for at least the next twelve months, including the $6.2 million scheduled repayment of the senior term loan indebtedness. If our operating performance differs significantly from our forecasts, we may be required to reduce our operating expenses and curtail capital spending, and we may not remain in compliance with our debt covenants. In addition, if the Company were unable to fully fund its cash requirements through operations and current cash on hand, the Company would need to obtain additional financing through a combination of equity and subordinated debt financings and/or renegotiation of terms of its existing debt. If any such activities become necessary, there can be no assurance that the Company would be successful in obtaining additional financing or modifying its existing debt terms.
Cashflows
The table below sets forth our net cash flows for the periods presented:
|
| | | | | | | |
| | Fiscal Year Ended December 31, |
| | 2014 | | 2013 |
| | (in thousands) |
| Net cash (used in) provided by operating activities | $ | (10,127 | ) | | $ | 2,679 |
|
| Net cash used in investing activities | (43,513 | ) | | (59,979 | ) |
| Net cash provided by financing activities | 91,883 |
| | 57,684 |
|
| Effect of exchange rate changes on cash | 5,228 |
| | 675 |
|
| Total increase in cash and cash equivalents | $ | 43,471 |
| | $ | 1,059 |
|
Lease Accounting
On February 25, 2016, the FASB issued ASU 2016-02, Leases, which requires most leases (with the exception of leases with terms of less than one year) to be recognized on the balance sheet as an asset and a lease liability. Leases will be classified as an operating lease or a financing lease. Operating Activities. Cash used in operating activitiesleases are expensed using the straight-line method, whereas financing leases will be treated similarly to a capital lease under the current standard. The new standard will be effective for annual and interim periods, within those fiscal years, beginning after December 15, 2018, but early adoption is permitted. The new standard must be presented using the year ended December 31, 2014, was approximately $10.1 million. Cash provided by operating activities formodified retrospective method beginning with the year ended December 31, 2013 was approximately $2.7 million.earliest comparative period presented. We are currently evaluating the effect of the new standard on our consolidated financial statements and related disclosures.
Share-Based Payment
Investing Activities.On March 30, 2016, the FASB issued ASU 2016-09, Cash used in investing activitiesCompensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which was approximately $43.5 million forissued as part of the year ended December 31, 2014, consisting primarilyFASB’s simplification initiative and cover such areas as (i) the recognition of approximately $37.5 millionexcess tax benefits and deficiencies and the classification of those excess tax benefits on the statement of cash used, netflows, (ii) an accounting policy election for forfeitures to be estimated or account for when incurred, (iii) the amount an employer can withhold to cover income taxes and still qualify for equity classification, and (iv) the classification of those taxes paid on the statement of cash acquired,flows. This update is effective for annual and interim periods beginning after December 15, 2016, which will require us to adopt these provisions in acquisitions during fiscal 2014, the most significant beingfirst quarter of 2017. This guidance will be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the acquisitionspecific area covered. We do not expect the new guidance to have a material impact on our consolidated financial statements and related disclosures.
Classification of UNSi.Certain Cash usedTransactions
On August 26, 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in investing activities were approximately $60.0 million forpractice of how certain transactions are classified and presented in the year ended December 31, 2013, consisting primarily of approximately $52.0 millionstatement of cash used, netflows in accordance with ASC 230. The ASU amends or clarifies guidance on eight specific cash flow issues, some of which include classification on debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and separately identifiable cash flows and application of the predominance principle. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those periods. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. We are currently evaluating the effect of the new standard on our consolidated financial statements and related disclosures but we do not expect the new guidance to have a material impact.
Statement of Cash Flows - Restricted Cash
On November 17, 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies the presentation requirements of restricted cash within the statement of cash acquired,flows. The changes in restricted cash and restricted cash equivalents during the period should be included in the acquisitionbeginning and ending cash and cash equivalents balance reconciliation on the statement of Tinet.cash flows. When cash, cash equivalents, restricted cash or restricted cash equivalents are presented in more than one line item within the statement of financial position, an entity shall calculate a total cash amount in a narrative or tabular format that agrees to the amount shown on the statement of cash flows. Details on the nature and amounts of restricted cash should also be disclosed. This guidance will be effective in the first quarter of 2018 and early adoption is permitted. We do not expect the new guidance to have a material impact on our consolidated financial statements and related disclosures.
Business Combinations – Clarifying the Definition of a Business
Financing Activities.On January 5, 2017, the FASB issued ASU 2017-01, Net cash provided by financing activitiesBusiness Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for the year endedas acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 31, 2014, was approximately $91.9 million, consisting primarily of approximately $72.7 million of15, 2017, including interim periods within that reporting period. We do not expect this new equity raised in fiscal 2014 and net debt proceeds of $29.4 million. Cash provided by financing activities was approximately $57.7 million for the year ended December 31, 2013.guidance to have a material impact on our consolidated financial statements.
Effect of Exchange Rate Changes on Cash. Effect of exchange rate changes on cash increased by $4.6 million to approximately $5.2 million for the year ended December 31, 2014 compared to approximately $0.7 million for the year ended December 31, 2013.
Interest Payments. During the years ended December 31, 2014 and 2013, the Company made cash payments for interest totaling $8.0 million and $7.4 million, respectively. The increase in interest payments was a result of the amended and restated credit agreement entered into on August 6, 2014 as discussed further on page 24.
Indebtedness
The following summarizes the debt activity of the Company during the year ended December 31, 2014 (amounts in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Total Debt | | Senior Term Loan | | Delayed Draw Term Loan | | Line of Credit | | Mezzanine Notes |
| Debt obligation as of December 31, 2013 | $ | 92,460 |
| | $ | 61,750 |
| | $ | — |
| | $ | 3,000 |
| | $ | 27,710 |
|
| Issuance | 129,500 |
| | 110,000 |
| | 15,000 |
| | 3,000 |
| | 1,500 |
|
| Debt discount amortization | 420 |
| | — |
| | — |
| | — |
| | 420 |
|
| Debt discount extinguishment | 1,370 |
| | — |
| | — |
| | — |
| | 1,370 |
|
| Payments | (100,124 | ) | | (63,124 | ) | | — |
| | (6,000 | ) | | (31,000 | ) |
| Debt obligation as of December 31, 2014 | $ | 123,626 |
| | $ | 108,626 |
| | $ | 15,000 |
| | $ | — |
| | $ | — |
|
Estimated annual commitments for debt maturities are as follows at December 31, 2014 (amounts in thousands):
|
| | | |
| | Total Debt |
| 2015 | $ | 6,188 |
|
| 2016 | 10,120 |
|
| 2017 | 12,331 |
|
| 2018 | 12,203 |
|
| 2019 | 82,784 |
|
| Total | $ | 123,626 |
|
Senior Term Loan and Line of Credit
On August 6, 2014, the Company completed a refinancing transaction (the “Refinancing Transaction”), which included amendments to the First Amended and Restated Credit Agreement ("Credit Agreement"). The Credit Agreement, as amended, provides for $110.0 million in term loans; a $15.0 million revolving credit facility; an available $15.0 million delayed draw term loan ("DDTL"); and an available uncommitted $30.0 million incremental term loan. The maturity of the facilities under the Credit Agreement, as amended, were extended to August 6, 2019. The obligations of the Company under the Credit Agreement are secured by substantially all of the Company’s tangible and intangible assets. Additionally, the Company is in compliance with the reporting and financial covenants stated in the Credit Agreement.
On September 30, 2014, the Company drew $15.0 million on the DDTL, no amounts had been drawn on the revolving credit facility nor the uncommitted incremental term loan. The DDTL facility will be repaid on a quarterly basis starting March 31, 2016 at 1.875% of the aggregate outstanding balance, increasing to 2.5% of the aggregate outstanding balance starting December 31, 2016, with any remaining amount due on August 6, 2019. The term loan of $110.0 million will be repaid on a quarterly basis starting December 31, 2014 at $1.4 million of the aggregate outstanding balance, increasing to $2.1 million on December 31, 2015, and lastly increasing to $2.7 million on December 31, 2016, with any remaining amount due on August 6, 2019.
In connection with the Refinancing Transaction, the Company accelerated the amortization of ratable portions of the deferred
financing costs associated with the prior term loan facilities and portions of the deferred financing costs of the Credit Agreement, as amended, that do not qualify for deferral of $1.4 million. These amounts are reflected in Loss on Debt Extinguishment.
The interest rate on the Credit Agreement, as amended, is a LIBOR-based tiered pricing tied to our net leverage ratio. As of December 31, 2014, the interest rate was 4.5%.
Mezzanine Notes
The Company entered into an agreement on August 6, 2014 ("Mezzanine Credit Agreement") that used the proceeds from the Refinancing Transaction to repay the remaining $31.0 million of indebtedness payable to BIA Digital Partners SBIC II LP, Plexus Fund II, L.P., and BNY Mellon-Alcentra Mezzanine III, L.P. ("Note Holders"). In accordance with the terms of the Mezzanine Credit Agreement, the Company also paid a prepayment penalty of $0.3 million, which is included in Loss on Debt Extinguishment. The remaining original issue discount of the warrant of $1.5 million is included in Loss on Debt Extinguishment.
Warrants
On August 6, 2014, in conjunction with the Refinancing Transaction, the Company entered into an agreement with the Note Holders that extinguished the entire balance of the warrant liability of $19.2 million (the "Warrant Purchase and Exercise Agreement"). Under the Warrant Purchase and Exercise Agreement, the Note Holders agreed to sell 1,172,080 of their outstanding Warrants (or 50% of the total outstanding warrants) to the Company for $9.6 million. In addition, the Mezzanine Note Holders agreed to exercise the remaining 1,172,080 warrants on a cash-less basis into 913,749 common shares of the Company.
Capital Structure and Resources
Our stockholders’ equity amounted to $77.6 million as of December 31, 2014, an increase of $68.1 million compared to stockholders’ equity of $9.5 million as of December 31, 2013, primarily due to $91.7 million of additional paid-in capital attributable to the common stock issuances offset by net losses of $23.0 million in fiscal 2014.
Off-Balance Sheet Arrangements
As of December 31, 2014, we did not have any off-balance sheet arrangements.
Contractual Obligations and Commitments
As of December 31, 2014, the Company had total contractual obligations of approximately $193.5 million. Of these obligations, approximately $58.6 million, or 30.3% are supplier agreements associated with the telecommunications services that the Company has contracted to purchase from its vendors through 2018 and beyond. The Company generally tries to structure its contracts so the terms and conditions in the vendor and 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 $123.6 million, or 63.9%, of the total contractual obligations are associated with the Company’s debt which matures between 2014 and 2016.
Operating leases amount to $11.3 million, or 5.8% of total contractual obligations, which consist mainly of building leases.
The following table summarizes the Company’s significant contractual obligations as of December 31, 2014 (amounts in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | |
| | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| Senior Term Loan | $ | 108,626 |
| | $ | 6,188 |
| | $ | 30,938 |
| | $ | 71,500 |
| | $ | — |
|
| DDTL | 15,000 |
| | — |
| | 3,716 |
| | 11,284 |
| | — |
|
| Operating leases | 11,295 |
| | 2,985 |
| | 6,316 |
| | 1,994 |
| | — |
|
| Supplier agreements | 58,613 |
| | 11,431 |
| | 38,357 |
| | 4,413 |
| | 4,412 |
|
| | $ | 193,534 |
| | $ | 20,604 |
| | $ | 79,327 |
| | $ | 89,191 |
| | $ | 4,412 |
|
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks. These risks, which include interest rate risk and foreign currency exchange risk, arise in the normal course of business rather than from trading activities.
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 linkedOur exposure to the applicable base interest rate. For the years ended December 31, 2014 and December 31, 2013, the Company had interest expense, net of interest income, of approximately $8.5 million and $8.4 million, respectively. The Company believes that its results of operations are not materially affected bymarket risk for changes in interest rates.
rates is primarily related to our outstanding term loans and revolving loans. The interest expense associated with our term loans and any loans under our revolving credit facility will vary with market rates, specifically LIBOR.
25For purposes of the following hypothetical calculations, we have used the term loans under the October 2015 Credit Agreement, which carries an interest rate equal to LIBOR plus 4.75%, with a LIBOR floor of 1.0%. Current LIBOR rates are below 1.0%, which means there would not be any impact to our income or cash flows from an increase in LIBOR until LIBOR exceeds 1.0%. Based on current rates, a hypothetical 100 basis point increase in LIBOR would increase annual interest expense by approximately $4.5 million, which would decrease our income and cash flows by the same amount. A hypothetical increase of LIBOR to 4.0%, the average historical three-month LIBOR, would increase annual interest expense by approximately $18.1 million, which would decrease our income and cash flows by the same amount.
We do not currently use derivative financial instruments and have not entered into any interest rate hedging transactions, but we may do so in the future.
Exchange Rate Sensitivity
Approximately 42% of the Company’s revenue Our exposure to market risk for the year ended December 31, 2014 is derived from services provided outside of the United States. As a consequence, a material percentage of the Company’s revenue is billedchanges in British Pounds Sterling or Euros. Since we operate on a global basis, we are exposed to various foreign currency risks. First,rate relates to our global operations. Our consolidated financial statements are denominated in U.S. Dollars, but a significant portion of our revenue, iscost of telecommunication services provided and selling, general and administrative expenses are 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 natureApproximately 13.5% 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 policy to pay its suppliers in the same currency that it will receive cash from customers, where these circumstances arise with respect to supplier invoices in one currency and customer billings in another currency, the Company’s gross margins may increase or decrease based upon changes in the exchange rate. Such factors did not have a significant impact on the Company’s results inrevenues for the year ended December 31, 2014.2016 are generated by non-U.S. entities, of which 56.0% is recorded in Euros and the remainder is recorded in British Pounds. Approximately 9.8% of our cost of telecommunications services provided and approximately 8.9% of our selling, general and administrative expenses for the year ended December 31, 2016 are generated by the same non-U.S. entities. Therefore, it is highly unlikely that changes in exchange rates would have a material impact on our financial conditions or results of operations.
We do not currently use derivative financial instruments and have not entered into any foreign currency hedging transactions, but we may do so in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the consolidated financial statements, the notes thereto, and the report thereon, commencing on page F-1 of this annual report,Annual Report, which consolidated financial statements, notes, and report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’sOur management, with the participation of our Chief Executive Officerchief executive officer (CEO) and Chief Financial Officer,chief financial officer (CFO), has evaluated the effectiveness of our disclosure controls and procedures as(as defined in Rules 13a-15(e) and 15d-15(e) ofunder the Securities Exchange Act of 1934, as of the end of the period covered by this Annual Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that,amended (Exchange Act)), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our CEO and CFO have concluded that as of December 31, 2016, our disclosure controls and procedures wereare designed at a reasonable assurance level and are effective as of December 31, 2014.to provide reasonable assurance that information we are required to disclose in
reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting and Attestation Report of the Registered Public Accounting Firm
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and board of directors regardingreporting (as defined in Rule 13a-15(f) under the reliability of financial reporting and the preparation of financial statements for external purposes. Our managementExchange Act). Management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2014. This assessment was based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013)(2013 framework). Based on thisthe assessment, management has concluded that as of December 31, 2014, ourits internal control over financial reporting was effective. Our independent registered public accounting firm has issued a report oneffective as of December 31, 2016, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. The effectiveness of our internal control over financial reporting which is below.
The scope of management's assessment of the effectiveness of internal control over financial reporting includes all of the Company's subsidiaries except for United Network Services, Inc. ("UNSi"), a material business acquired on October 1, 2014. The Company's consolidated revenues for the year ended December 31, 2014, were $207.3 million, of which UNSi represented $14.2 million. The Company's total assets as of December 31, 2014, were $269.3 million, of2016, has been audited by CohnReznick LLP, an independent registered public accounting firm, as stated in their report, which UNSi represented $55.3 million.appears herein.
Changes in Internal Control Over Financial Reporting
On October 1, 2014, the Company acquired UNSi. During the quarterly periodyear ended December 31, 2014, UNSi's2016, we implemented a new financial accounting system. In connection with the implementation of this new system, we updated many of the processes and systems were discrete and did not significantly impactprocedures related to our internal controlscontrol over financial reporting, atas needed. We do not believe the Company's other subsidiaries. The Company's management performed due diligenceimplementation of the new system or the corresponding changes in processes and procedures associated with the acquisition of UNSi. During these
due diligence procedures and in the quarterly period after the acquisition, the Company's management found no significant deficiencieshas had or will have a material weaknesses in the design of UNSi'sor adverse effect on our internal controlscontrol over financialfinancing reporting.
ThereExcept as otherwise described above, there were no other changes in our internal control over financial reporting as(as defined in Rules 13a-15(f) and 15d-15(f) ofunder the Securities Exchange Act of 1934,Act) during the quarter ended December 31, 2016, that occurred in the fourth fiscal quarter of the period covered by this Annual Report thathas materially affected, or areis reasonably likely to materially affect our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and ShareholdersStockholders of GTT Communications, Inc.:
We have audited GTT Communications, Inc. and Subsidiaries (“GTT”subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2014,2016, based on criteria established in Internal Control - IntegratedControl-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(2013 framework) (the “COSO criteria”). GTT’sGTT Communications, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on GTT’sthe Company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also includedrisk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
As described in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, management has excluded United Network Services, Inc. (“UNSi”) from its assessment of internal control over financing reporting as of December 31, 2014, because it was acquired by the Company in a purchase business combination on October 1, 2014. We also excluded UNSi from our audit of internal control over financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.
In our opinion, GTT Communications, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014,2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of GTT Communications, Inc. and subsidiaries as of December 31, 20142016 and 2013,2015, and the related consolidated statements of operations, comprehensive loss,income (loss), stockholders’ equity, and cash flows for each of the three years thenin the period ended of GTT Communications, Inc.December 31, 2016, and Subsidiariesthe related financial statement schedule listed in the Index at 15(a) 2, and our report dated March 13, 2015,8, 2017 expressed an unqualified opinion thereon.opinion.
/s/ CohnReznick LLP
Tysons, Virginia
Vienna, VAMarch 8, 2017
March 13, 2015
ITEM 9B. OTHER INFORMATION
Not applicable.
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 20152017 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. EXECUTIVE COMPENSATION
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 20152017 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND 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 20152017 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
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 20152017 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 20152017 Annual Meeting of Stockholders.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
| |
| 1. | Financial Statements are listed in the Index to Financial Statements on page F-1 of this annual report. |
| |
| 2. | Schedules have been omitted because they are not applicable or because the information required to be set forth thereinFinancial Statement Schedules. The Financial Statement Schedule described below is included in the consolidated financial statements or notes thereto.filed as part of this report. |
Description
Schedule II - Valuation and Qualifying Accounts.
All other financial statement schedules are not required under the relevant instructions or are inapplicable and therefore have been omitted.
(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:
|
| |
2.1 (1) | Agreement for the sale and purchase of the entire issued share capital of and loan notes in PacketExchange (Ireland) Limited, dated May 23, 2011, among Esprit Capital I Fund No. 1 LP, Esprit Capital I Fund No. 2 LP and the others, as Sellers, and GTT-EMEA, Limited, as Buyer. |
2.2 (2) | StockShare Purchase Agreement, dated as of April 30, 2012,November 8, 2016, by and among nLayer Communications, Inc.the Registrant, Murosa Development S.A.R.L., Jordan Lowe, Daniel Brosk Trusta company organized under the laws of Luxembourg (“Murosa”), Columbia Ventures Corporation, a Washington corporation, Hibernia NGS Limited, a private company limited by shares formed under the laws of the Republic of Ireland, and Murosa as the Seller Representative (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed November 15, 2016). |
| 2.2 | Agreement and Plan of Merger, dated December 22, 2006,as of September 15, 2015, by and among the Registrant, Global Telecom & Technology Americas, Inc., a Virginia corporation, Duo Merger Sub, Inc., a Delaware corporation, One Source Networks Inc., a Texas corporation, Ernest Cunningham, as representative of the equityholders in One Source Networks Inc. and, for limited portions of the Registrant.Agreement and Plan of Merger, certain key employees of One Source named therein (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed September 18, 2015). |
2.3 (17) | EquityAgreement and Plan of Merger Amendment No.1 to the Agreement and Plan of Merger, dated as of September 15, 2015, by and among the Registrant, Global Telecom & Technology Americas, Inc., a Virginia corporation, Duo Merger Sub, Inc., a Delaware corporation, One Source Networks Inc., a Texas corporation, Ernest Cunningham, as representative of the equityholders in One Source Networks Inc. and, for limited portions of the Agreement and Plan of Merger, certain key employees of One Source named therein (incorporated by reference to Exhibit 2.7 to the Registrant’s Annual Report on Form 10-K filed March 9, 2016). |
| 2.4 | Agreement and Plan of Merger Amendment No. 2 to the Agreement and Plan of Merger, dated as of September 15, 2015, by and among the Registrant, Global Telecom & Technology Americas, Inc., a Virginia corporation, Duo Merger Sub, Inc., a Delaware corporation, One Source Networks Inc., a Texas corporation, Ernest Cunningham, as representative of the equityholders in One Source Networks Inc. and, for limited portions of the Agreement and Plan of Merger, certain key employees of One Source named therein (incorporated by reference to Exhibit 2.8 to the Registrant’s Annual Report on Form 10-K filed March 9, 2016). |
| 2.5 | Stock Purchase Agreement, dated April 30, 2013, between Neutral Tandem,February 19, 2015, by and among Global Telecom & Technology Americas, Inc. (d/b/, a Inteliquent)Delaware corporation, the Registrant, MegaPath Group, Inc., a Delaware corporation, and MegaPath Corporation, a Virginia corporation (incorporated by reference to Exhibit 10.1 to the Registrant.Registrant’s Current Report on Form 8-K filed February 25, 2015). |
2.4 (22)2.6 | Agreement and Plan of Merger, dated as of October 1, 2014, by and among the Registrant, Global Telecom & Technology Americas, Inc., GTT UNSI, Inc., American Broadband, Inc. (d/b/a United Network Services, Inc.) and Francis D. John, as stockholder representative.representative (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed October 7, 2014). |
3.1 (3) | Second Amended and Restated Certificate of Incorporation, dated October 16, 2006.2006 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed October 19, 2006). |
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3.2 (19) | Certificate of Amendment to Second Amended and Restated Certificate of Incorporation, dated December 31, 2013.2013 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed January 6, 2014). |
3.3 (3) | Amended and Restated Bylaws, dated October 15, 2006.2006 (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed October 19, 2006). |
3.4 (4) | Amendment to Amended and Restated Bylaws, dated May 7, 2007.2007 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed May 10, 2007). |
4.1 (5) | Specimen of Common Stock Certificate.Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q filed November 14, 2006). |
4.2 (7) | Form of Registration Rights Agreement, dated as of 2005, among the Registrant, Universal Telecommunications, Inc., Hackman Family Trust, Charles Schwab & Company Custodian FBO David Ballarini IRA and Mercator Capital L.L.C. (incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 (File No. 333-122303) filed January 26, 2005). |
4.3 (2) | Registration Rights Agreement, dated April 30, 2012, among the Registrant, Jordon Lowe and Daniel Brosk Trust dated December 22, 2006.2006 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed May 4, 2012). |
4.4 (16) | Form of Registration Rights Agreement, dated March 28, 2013.2013 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed April 3, 2013). |
| 4.5 | Indenture, dated as of December 22, 2016, by and between GTT Escrow Corporation and Wilmington Trust, National Association, as trustee December 22, 2016 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed December 22, 2016). |
| 4.6 | First Supplemental Indenture, dated as of January 9, 2017, by and among the Registrant, the Guaranteeing Subsidiaries party thereto and Wilmington Trust, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed January 13, 2017). |
10.1 (8) + | 2006 Employee, Director and Consultant Stock Plan, as amended.amended (incorporated by reference to Annex E to the Registrant’s Definitive Proxy Statement on Schedule 14A filed October 2, 2006). |
10.2 (9) + | 2011 Employee, Director and Consultant Stock Plan.Plan (incorporated by reference to Annex A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed April 29, 2011). |
10.3 (3) + | 2015 Stock Option and Incentive Plan (incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed April 30, 2015). |
| 10.4 + | Employment Agreement for H. Brian Thompson, dated October 15, 2006.2006 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October 19, 2006). |
10.4 (4)10.5 + | Employment Agreement for Richard D. Calder, Jr., dated May 7, 2007.2007 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed May 10, 2007). |
10.5 (10)10.6 + | Amendment No. 1 to the Employment Agreement for Richard D. Calder, Jr., dated July 18, 2008.2008 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed August 4, 2008). |
10.6 (11)10.7 + | Employment Agreement for Christopher McKee, dated September 12, 2011.2011 (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed September 16, 2011). |
10.7 (12)10.8 + | Employment Agreement for Michael Sicoli, dated as of April 13, 2015 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed May 7, 2015). |
| 10.9* + | Employment Agreement for Michael R. Bauer,Layne Levine, dated June 27,October 24, 2012. |
10.8 (2)10.10 | Joinder and Second Loan Modification Agreement, dated April 30, 2012, (i) among Silicon Valley Bank, (ii) the Registrant, Global Telecom & Technology (Americas), Inc., PacketExchange (USA), Inc., PacketExchange, Inc., WBS Connect LLC and (iii) nLayer Communications, Inc. |
10.9 (20) | First Loan ModificationCredit Agreement, dated as of December 15, 2011,January 9, 2017, by and among (1) the Registrant, Global Telecomas borrower, (2) KeyBank National Association, as the administrative agent and Technology Americas,as an LC Issuer, (3) KeyBanc Capital Markets Inc., PacketExchangeCredit Suisse Securities (USA), Inc., PacketExchange, Inc. and WBS Connect LLC and Silicon Valley Bank. |
10.10 (13) | Loan and Security Agreement, dated June 29, 2011, among the Registrant, Global Telecom and Technology Americas,SunTrust Robinson Humphrey, Inc., PacketExchange (USA), Inc., PacketExchange, Inc.as joint lead arrangers and WBS Connectjoint bookrunners, (4) Credit Suisse AG, Cayman Islands Branch, and SunTrust Bank, as the syndication agents, (5) Citizens Bank, Wells Fargo Bank, National Association, and ING Capital LLC, as the documentation agents and Silicon Valley Bank.(6) the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed January 13, 2017). |
|
| |
10.11 (17) | Credit Agreement, dated April 30, 2013,as of October 22, 2015, among: (i) the Registrant, as the borrower; (ii) the lenders from time to time party hereto; (ii) KeyBank National Association, as the administrative agent, as the Swing Line Lender, and as LC Issuer, (iv) SunTrust Bank, as a Lender and as the syndication agent; (v) KeyBank Capital Markets Inc. and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and joint bookrunners; and (vi) MUFG Union Bank, N.A., Pacific Western Bank, CIT Bank, N.A., ING Capital LLC, Société Générale and CoBank, ACB as Co-Documentation Agents (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October 27, 2016). |
| 10.12 | Incremental Term Loan Assumption Agreement, dated as of May 3, 2016, among (1) the Registrant, as the borrower, (2) KeyBank National Association, as the administrative agent, and (3) KeyBank National Association, as the Initial Term Lender (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed May 5, 2016). |
| 10.13 | Amendment No. 1, dated as of June 28, 2016, among the Registrant, Global Telecom & Technology Americas, Inc., GTT Global Telecom Government Services, LLC, nLayer Communications, Inc., PacketExchange (USA), Inc., PacketExchange, Inc., TEK Channel Consulting, LLC, WBS Connect LLC, Communication Decisions-SNVC, LLC, Core180, LLC, Electra, LTD,as the borrower, the lenders party thereto, and IDC Global, Inc., Webster Bank, N.A.,KeyBank National Association, as the administrative agent and as the other Lenders (as defined therein) party thereto.Additional Tranche B Term Loan Lender (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 29, 2016). |
10.12 (19)10.14 | Amended and Restated Credit Agreement, dated December 30, 2013, among the Registrant, Global Telecom & Technology Americas, Inc., GTT Global Telecom Government Services, LLC, nLayer Communications, Inc., PacketExchange (USA), Inc., PacketExchange, Inc., TEK Channel Consulting, LLC, WBS Connect LLC, Communication Decisions-SNVC, LLC, Core180, LLC, Electra, LTD, IDC Global, Inc., NT Network Services, LLC, Webster Bank, N.A., and the other Lenders (as defined therein) party thereto. |
10.13 (21) | Second Amended and Restated Credit Agreement, dated August 6, 2014, among the Registrant, Global Telecom & Technology Americas, Inc., GTT Global Telecom Government Services, LLC, nLayer Communications, Inc., PacketExchange (USA), Inc., PacketExchange, Inc., TEK Channel Consulting, LLC, WBS Connect LLC, Communication Decisions-SNVC, LLC, Core180, LLC, Electra, LTD, IDC Global, Inc., NT Network Services, LLC, GTT 360, Inc. and Wall Street Network Solutions, LLC, as co-borrows, and Webster Bank, N.A., as administrative agent, lead arranger and lender, the other lenders (as defined therein) party thereto, Pacific Western Bank, as syndication agent and East West Bank and Fifth Third Bank, as co-document agents.agents (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed August 12, 2014). |
10.14 (17)10.15 | SecurityAmendment Agreement, dated April 1, 2015, to the Second Amended and Restated Credit Agreement, dated August 6, 2014, among the Registrant, Global Telecom & Technology Americas, Inc., GTT Global Telecom Government Services, LLC, Communication Decisions-SNVC, LLC, Core180, LLC, Electra, LTD, NT Network Services, LLC, GTT 360, Inc., Wall Street Network Solutions, LLC, American Broadband, Inc., Airband Communications, Inc., Sparkplug, Inc., and MegaPath Corporation, as borrows, and Keybank National Association, as administrative agent, joint lead arranger, L/C issuer and lender, the other lenders (as defined therein) party thereto, Webster Bank, N.A. as joint lead arranger, syndication agent, L/C issuer and lender, Pacific Western Bank, Cobank, ACB and MUFG Union Bank, N.A., as co-document agents (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed April 7, 2015). |
| 10.16 | Amendment Agreement, dated June 4, 2015, to the Second Amended and Restated Credit Agreement, dated August 6, 2014, among the Registrant, Global Telecom & Technology Americas, Inc., GTT Global Telecom Government Services, LLC, Communication Decisions-SNVC, LLC, Core180, LLC, Electra, LTD, IDC Global, Inc., NT Network Services, LLC, GTT 360, Inc., Wall Street Network Solutions, LLC, American Broadband, Inc., Airband Communications, Inc., Sparkplug, Inc., and GTT Communications (MP), Inc., as borrows, and Keybank National Association, as administrative agent, joint lead arranger, L/C issuer and lender, the other lenders (as defined therein) party thereto, Webster Bank, N.A., as joint lead arranger, syndication agent, L/C issuer and lender, Pacific Western Bank, Cobank, ACB and MUFG Union Bank, N.A., as co-document agents (incorporated by reference to Exhibit 99.4 to the Registrant’s Current Report on Form 8-K/A filed June 10, 2015). |
| 10.17 | Amended and Restated Credit Agreement, dated December 30, 2013, among the Registrant, Global Telecom & Technology Americas, Inc., GTT Global Telecom Government Services, LLC, nLayer Communications, Inc., PacketExchange (USA), Inc., PacketExchange, Inc., TEK Channel Consulting, LLC, WBS Connect LLC, Communication Decisions-SNVC, LLC, Core180, LLC, Electra, Ltd.,LTD, IDC Global, Inc., andNT Network Services, LLC, Webster Bank, N.A., and the other Lenders (as defined therein) party thereto. |
10.15 (6) | Note Purchase Agreement, dated Junethereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed January 6, 2011, between (i) the Registrant, Global Telecom & Technology (Americas), Inc., WBS Connect, LLC, PacketExchange, Inc., PacketExchange (USA), Inc. and (ii) BIA Digital Partners SBIC II LP. |
10.16 (6) | Unconditional Guaranty, dated June 6, 2011, between TEK Channel Consulting, LLC and BIA Digital Partners SBIC II LP. |
10.17 (6) | Unconditional Guaranty, dated June 6, 2011, between GTT Global Telecom Government Services, LLC and BIA Digital Partners SBIC II LP.2014). |
10.18 (6) | Security Agreement, dated June 6, 2011, among BIA Digital Partners SBIC II LP and TEK Channel Consulting, LLC and GTT Global Telecom Government Services, LLC. |
10.19 (6) | Pledge Agreement, dated June 6, 2011, among BIA Digital Partners SBIC II LP and the Registrant and Global Telecom & Technology Americas, Inc. |
10.20 (2) | Amended and Restated Note Purchase Agreement, dated April 30, 2012, among (i) the Registrant, Global Telecom & Technology (Americas), Inc., WBS Connect, LLC, PacketExchange, Inc., PacketExchange (USA), Inc., nLayer Communications, Inc., (ii) BIA Digital Partners SBIC II LP, as agent for the Purchasers, and (iii) the Purchasers party thereto. |
10.21 (2) | Note, dated April 30, 2012, issued by the Registrant, Global Telecom & Technology (Americas), Inc., WBS Connect, LLC, PacketExchange (USA), Inc, PacketExchange, Inc. and nLayer Communications, Inc., jointly and severally as borrowers, to Plexus Fund II, L.P. |
10.22 (2) | Amended and Restated Note, dated April 30, 2012, issued by the Registrant, Global Telecom & Technology (Americas), Inc., WBS Connect, LLC, PacketExchange (USA), Inc, PacketExchange, Inc. and nLayer Communications, Inc., jointly and severally as borrowers, to BIA Digital Partners II LP. |
10.23 (14) | Form of Promissory Note of the Registrant due February 8, 2012. |
10.24 (20) | Amendment No. 1, dated May __, 2011, to Promissory Notes of the Registrant due February 8, 2012. |
10.25 (15) | Form of Promissory Note of the Registrant due December 31, 2013. |
10.26 (17) | Second Amended and Restated Note Purchase Agreement, dated April 30, 2013, among (i) BIA Digital Partners SBIC II LP (as agent and purchaser), (ii) Plexus Fund II, L.P., and BNY Mellon-Alcentra Mezzanine III, L.P. (as purchasers) and (iii) the Registrant, Global Telecom & Technology Americas, Inc., WBS Connect LLC, PacketExchange (USA), Inc., PacketExchange Inc., Communication Decisions-SNVC, LLC, Core180, LLC, Electra Ltd., IDC Global, Inc., nLayer Communications, Inc., NT Network Services, LLC (as borrowers). |
10.27 (19) | Third Amendment Agreement, dated December 30, 2013, among (i) BIA Digital Partners SBIC II, LP. (as agent and purchaser), (ii) Plexus Fund II, L.P., Plexus Fund III, L.P., Plexus Fund QP III, L.P., and BNY Mellon-Alcentra Mezzanine III, L.P. (as purchasers) and (iii) the Registrant, Global Telecom & Technology Americas, Inc, nLayer Communications, Inc., PacketExchange (USA), Inc., PacketExchange, Inc., WBS Connect LLC, Communication Decisions-SNVC, LLC, Core180, LLC, Electra, Ltd., IDC Global, Inc., NT Network Services, LLC (as borrowers). |
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| |
10.28 (17) | Note, dated April 30, 2013, issued by the Registrant, Global Telecom & Technology Americas, Inc., WBS Connect LLC, PacketExchange Inc., PacketExchange (USA), Inc., Communication Decisions-SNVC, LLC, Core180, LLC, Electra Ltd., IDC Global, Inc., and nLayer Communications, Inc., jointly and severally as borrowers, to Plexus Fund II, L.P. |
10.29 (17) | Note, dated April 30, 2013, issued by the Registrant, Global Telecom & Technology Americas, Inc., WBS Connect LLC, PacketExchange Inc., PacketExchange (USA), Inc., Communication Decisions-SNVC, LLC, Core180, LLC, Electra Ltd., IDC Global, Inc., and nLayer Communications, Inc., jointly and severally as borrowers, to BIA Digital Partners SBIC II, LP. |
10.30 (17) | Note, dated April 30, 2013, issued by the Registrant, Global Telecom & Technology Americas, Inc., WBS Connect LLC, PacketExchange Inc., PacketExchange (USA), Inc., Communication Decisions-SNVC, LLC, Core180, LLC, Electra Ltd., IDC Global, Inc., and nLayer Communications, Inc., jointly and severally as borrowers, to BNY Mellon-Alcentra Mezzanine III, L.P. |
10.31 (17) | Second Amended and Restated Note, dated April 30, 2013, issued by the Registrant, Global Telecom & Technology Americas, Inc., WBS Connect LLC, PacketExchange Inc., PacketExchange (USA), Inc., Communication Decisions-SNVC, LLC, Core180, LLC, Electra Ltd., IDC Global, Inc., and nLayer Communications, Inc., jointly and severally as borrowers, to BIA Digital Partners SBIC II, LP.
|
10.32 (17) | Amended and Restated Note, dated April 30, 2013, issued by the Registrant, Global Telecom & Technology Americas, Inc., WBS Connect LLC, PacketExchange Inc., PacketExchange (USA), Inc., Communication Decisions-SNVC, LLC, Core180, LLC, Electra Ltd., IDC Global, Inc., and nLayer Communications, Inc., jointly and severally as borrowers, to Plexus Fund II, L.P. |
10.33 (18) | Second Amendment Agreement, dated November 1, 2013, among (i) BIA Digital Partners SBIC II, LP. (as agent and purchaser), (ii) Plexus Fund II, L.P. and BNY Mellon-Alcentra Mezzanine II, L.P. (as purchasers) and (iii) the Registrant, Global Telecom & Technology Americas, Inc., nLayer Communications, Inc., PacketExchange (USA), Inc., PacketExchange, Inc., WBS Connect LLC, Communication Decisions-SNVC, LLC, Core180, LLC, Electra, Ltd., IDC Global, Inc., NT Network Services, LLC (as borrowers). |
10.34 (18) | Additional Note, dated November 1, 2013, issued by the Registrant, Global Telecom & Technology Americas, Inc., WBS Connect LLC, PacketExchange Inc., PacketExchange (USA), Inc., Communication Decisions-SNVC, LLC, Core180, LLC, Electra Ltd., IDC Global, Inc., NT Network Services, LLC, and nLayer Communications, Inc., jointly and severally as borrowers, to Plexus Fund II, L.P. |
10.35 (18) | Additional Note, dated November 1, 2013, issued by the Registrant, Global Telecom & Technology Americas, Inc., WBS Connect LLC, PacketExchange Inc., PacketExchange (USA), Inc., Communication Decisions-SNVC, LLC, Core180, LLC, Electra Ltd., IDC Global, Inc., NT Network Services, LLC, and nLayer Communications, Inc., jointly and severally as borrowers, to BNY Mellon-Alcentra Mezzanine III, L.P. |
10.36 (19) | Third Amendment Note, dated December 30, 2013, issued by the Registrant, Global Telecom & Technology Americas, Inc., WBS Connect LLC, PacketExchange Inc., PacketExchange (USA), Inc., Communication Decisions-SNVC, LLC, Core180, LLC, Electra Ltd., IDC Global, Inc., NT Network Services, LLC, and nLayer Communications, Inc., to Plexus Fund III, L.P. |
10.37 (19) | Third Amendment Note, dated December 30, 2013, issued by the Registrant, Global Telecom & Technology Americas, Inc., WBS Connect LLC, PacketExchange Inc., PacketExchange (USA), Inc., Communication Decisions-SNVC, LLC, Core180, LLC, Electra Ltd., IDC Global, Inc., NT Network Services, LLC, and nLayer Communications, Inc., to Plexus Fund QP III, L.P. |
10.38 (21) | Warrant Purchase and Exercise Agreement, dated as of August 6, 2014, by and among the Registrant, BIA Digital Partners SBIC II LP, BNY Mellon-Alcentra Mezzanine III, L.P., Plexus Fund II, L.P. and GTT Communications, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed August 12, 2014). |
| 21.1* | Subsidiaries of the Registrant. |
| 23.1* | Consent of CohnReznick LLP. |
|
| |
| 24.1* | Power of Attorney (included on the signature page to this report)Annual Report). |
| 31.1* | Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934. |
| 31.2* | Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934. |
| 32.1* | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2* | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
| 99.1 + | 2016 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-210488) filed March 30, 2016). |
| 101.INS** | XBRL Instance Document |
| 101.SCH** | XBRL Taxonomy Extension Schema Document |
| 101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF** | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB** | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document |
| 101.INS** | XBRL Instance Document |
| 101.SCH** | XBRL Taxonomy Extension Schema Document |
| 101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF** | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB** | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document |
| 101.INS** | XBRL Instance Document |
| |
| * | 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 to the Registrant’s Current Report on Form 8-K filed June 10, 2011, and incorporated herein by reference. |
(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 February 12, 1010, and incorporated herein by reference. |
(15) | Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed February 23, 2011, and incorporated herein by reference. |
(16) | Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed April 3, 2013, and incorporated herein by reference. |
(17) | Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed May 6, 2013, and incorporated herein by reference. |
(18) | Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed November 7, 2013, and incorporated herein by reference. |
(19) | Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed January 6, 2014, and incorporated herein by reference. |
(21) | Previously filed as an Exhibit to the Registrant’s Annual Report on Form 10-K filed March 19, 2013, and incorporated herein by reference. |
ITEM 16. FORM 10-K SUMMARY
Not applicable.
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.
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| | | |
| | GTT COMMUNICATIONS, INC. | |
| | | | |
| | By: | /s/ Richard D. Calder, Jr. | |
| | | Richard D. Calder, Jr. | |
| | | President and Chief Executive Officer | |
Date: March 13, 20158, 2017
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,T. Sicoli, 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 13, 20158, 2017 by the following persons on behalf of the registrant and in the capacities indicated.
|
| | |
| Signature | | Title |
| /s/ Richard D. Calder, Jr. | | President, Chief Executive Officer and |
| Richard D. Calder, Jr. | | Director (Principal Executive Officer) |
| | |
/s/ Michael R. BauerT. Sicoli | | Chief Financial Officer and Treasurer |
Michael R. BauerT. Sicoli | | (Principal Financial Officer) |
| | |
| /s/ Daniel M. Fraser | | Vice President and Controller |
| Daniel M. Fraser | | (Principal Accounting Officer) |
| | |
| /s/ H. Brian Thompson | | Chairman of the Board and Executive |
| H. Brian Thompson | | Chairman |
| | |
| /s/ Nicola A. Adamo | | Director |
| Nicola A. Adamo | | |
| | |
| /s/ S. Joseph Bruno | | Director |
| S. Joseph Bruno | | |
| | |
| /s/ Rhodric C. Hackman | | Director |
| Rhodric C. Hackman | | |
| | |
| /s/ Howard Janzen | | Director |
| Howard Janzen | | |
| | |
/s/ Morgan E. O'BrienElizabeth Satin | | Director |
Morgan E. O’BrienElizabeth Satin | | |
| | |
| /s/ Theodore B. Smith, III | | Director |
| Theodore B. Smith, III | | |
INDEX TO FINANCIAL STATEMENTS
|
| |
| GTT Communications, Inc. | |
| Report of Independent Registered Public Accounting Firm | |
Consolidated Balance Sheets as of December 31, 20142016 and 20132015 | |
Consolidated Statements of Operations for the years endedYears Ended December 31, 20142016, 2015, and 20132014 | |
Consolidated Statements of Comprehensive LossIncome (Loss) for the years endedYears Ended December 31, 20142016, 2015, and 20132014 | |
Consolidated Statements of Stockholders’ Equity for the years endedYears Ended December 31, 20142016, 2015, and 20132014 | |
Consolidated Statements of Cash Flows for the years endedYears Ended December 31, 20142016, 2015, and 20132014 | |
| Notes to Consolidated Financial Statements | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and ShareholdersStockholders of GTT Communications, Inc.
We have audited the accompanying consolidated balance sheets of GTT Communications, Inc. and subsidiaries (the “Company”) as of December 31, 20142016 and 2013,2015, and the related consolidated statements of operations, comprehensive loss,income (loss), stockholders’ equity, and cash flows for each of the three years then ended. GTT Communications, Inc.’s management is responsible for these consolidatedin the period ended December 31, 2016. Our audits also included the financial statements.statement schedule listed in the Index at 15(a) 2. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 GTT Communications, Inc. and subsidiaries' as ofsubsidiaries at December 31, 20142016 and 2013,2015, and the results of their operations and their cash flows for each of the three years thenin the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), GTT Communications, Inc. and subsidiaries internal control over financial reporting as of December 31, 2014,2016, based on criteria established in Internal Control - IntegratedControl-Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(2013 framework), and our report dated March 13, 20158, 2017 expressed an unqualified opinion thereon.
/s/ CohnReznick LLP
Vienna, VATysons, Virginia
March 13, 20158, 2017
GTT Communications, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except for share and per share data)
| | | | | | | | | |
| | December 31, 2014 | | December 31, 2013 | December 31, 2016 | | December 31, 2015 |
| ASSETS | |
| | |
| |
| | |
|
| Current assets: | |
| | |
| |
| | |
|
| Cash and cash equivalents | $ | 49,256 |
| | $ | 5,785 |
| $ | 29,748 |
| | $ | 14,630 |
|
| Accounts receivable, net of allowances of $878 and $702, respectively | 29,328 |
| | 22,305 |
| |
| Deferred contract costs | 2,351 |
| | 1,975 |
| |
| Prepaid expenses and other current assets | 3,913 |
| | 2,878 |
| |
| Accounts receivable, net of allowances of $2,656 and $1,015, respectively | | 76,292 |
| | 60,446 |
|
| Deferred costs | | 3,415 |
| | 4,159 |
|
| Prepaid expenses | | 5,765 |
| | 7,794 |
|
| Other assets | | 3,565 |
| | 5,869 |
|
| Total current assets | 84,848 |
| | 32,943 |
| 118,785 |
| | 92,898 |
|
| Restricted cash and cash equivalents | | 304,266 |
| | — |
|
| Property and equipment, net | 25,184 |
| | 20,450 |
| 43,369 |
| | 38,823 |
|
| Intangible assets, net | 58,630 |
| | 43,618 |
| 193,936 |
| | 182,184 |
|
| Other assets | 7,933 |
| | 7,726 |
| |
| Goodwill | 92,683 |
| | 67,019 |
| 280,593 |
| | 270,956 |
|
| Other long-term assets | | 12,312 |
| | 11,593 |
|
| Total assets | $ | 269,278 |
| | $ | 171,756 |
| $ | 953,261 |
| | $ | 596,454 |
|
| LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | |
| |
| | |
|
| Current liabilities: | |
| | |
| |
| | |
|
| Accounts payable | $ | 20,336 |
| | $ | 20,983 |
| $ | 11,334 |
| | $ | 22,725 |
|
| Accrued expenses and other current liabilities | 35,464 |
| | 26,999 |
| 36,888 |
| | 43,115 |
|
| Short-term debt | 6,188 |
| | 6,500 |
| |
| Deferred revenue | 8,340 |
| | 6,797 |
| |
| Acquisition earn-outs and holdbacks | | 24,379 |
| | 12,842 |
|
| Capital lease, current | | 1,015 |
| | 1,392 |
|
| Short-term portion of long-term debt | | 4,300 |
| | 4,000 |
|
| Deferred revenue, short-term portion | | 17,875 |
| | 15,469 |
|
| Total current liabilities | 70,328 |
| | 61,279 |
| 95,791 |
| | 99,543 |
|
| Capital lease, noncurrent | | 120 |
| | 961 |
|
| Long-term debt | 117,438 |
| | 85,960 |
| 725,208 |
| | 382,243 |
|
| Deferred revenue | 766 |
| | 1,480 |
| |
| Warrant liability | — |
| | 12,295 |
| |
| Deferred revenue, long-term portion | | 3,416 |
| | 2,292 |
|
| Other long-term liabilities | 3,180 |
| | 1,232 |
| 967 |
| | 929 |
|
| Total liabilities | 191,712 |
| | 162,246 |
| 825,502 |
| | 485,968 |
|
| Commitments and contingencies |
|
| |
|
|
|
| |
|
|
| Stockholders' equity: | |
| | |
| |
| | |
|
| Common stock, par value $.0001 per share, 80,000,000 shares authorized, 33,848,543, and 23,311,023 shares issued and outstanding as of December 31, 2014 and 2013, respectively | 3 |
| | 2 |
| |
| Common stock, par value $.0001 per share, 80,000,000 shares authorized, 37,228,144 and 36,533,634 shares issued and outstanding as of December 31, 2016 and 2015, respectively | | 3 |
| | 3 |
|
| Additional paid-in capital | 167,678 |
| | 76,014 |
| 197,326 |
| | 182,797 |
|
| Accumulated deficit | (89,205 | ) | | (66,226 | ) | (64,641 | ) | | (69,901 | ) |
| Accumulated other comprehensive loss | (910 | ) | | (280 | ) | (4,929 | ) | | (2,413 | ) |
| Total stockholders' equity | 77,566 |
| | 9,510 |
| 127,759 |
| | 110,486 |
|
| Total liabilities and stockholders' equity | $ | 269,278 |
| | $ | 171,756 |
| $ | 953,261 |
| | $ | 596,454 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.consolidated financial statements.
GTT Communications, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except for share and per share data)
| | | | Year Ended | Year Ended |
| | December 31, 2014 | | December 31, 2013 | December 31, 2016 | | December 31, 2015 | | December 31, 2014 |
| Revenue: |
|
| |
|
| | |
|
| |
|
|
| Telecommunications services | $ | 207,343 |
| | $ | 157,368 |
| $ | 521,688 |
| | $ | 369,250 |
| | $ | 207,343 |
|
|
|
| |
|
| | |
|
| |
|
|
| Operating expenses: |
|
| |
|
| | |
|
| |
|
|
| Cost of telecommunications services | 128,086 |
| | 102,815 |
| 274,012 |
| | 204,458 |
| | 128,086 |
|
| Selling, general and administrative expense | 45,613 |
| | 31,675 |
| |
| Restructuring costs, employee termination and other items | 9,425 |
| | 7,677 |
| |
| Selling, general and administrative expenses | | 143,193 |
| | 101,712 |
| | 45,613 |
|
| Severance, restructuring and other exit costs | | 870 |
| | 12,670 |
| | 9,425 |
|
| Depreciation and amortization | 24,921 |
| | 17,157 |
| 62,788 |
| | 46,708 |
| | 24,921 |
|
|
|
| |
|
| | |
|
| |
|
|
| Total operating expenses | 208,045 |
| | 159,324 |
| 480,863 |
| | 365,548 |
| | 208,045 |
|
|
|
| |
|
| | |
|
| |
|
|
| Operating loss | (702 | ) | | (1,956 | ) | |
| Operating income (loss) | | 40,825 |
| | 3,702 |
| | (702 | ) |
|
|
| |
|
| | |
|
| |
|
|
| Other expense: |
|
| |
|
| | |
|
| |
|
|
| Interest expense, net | (8,454 | ) | | (8,408 | ) | (29,428 | ) | | (13,942 | ) | | (8,454 | ) |
| Loss on debt extinguishment | (3,104 | ) | | (706 | ) | (1,632 | ) | | (3,420 | ) | | (3,104 | ) |
| Other expense, net | (8,636 | ) | | (11,724 | ) | (577 | ) | | (1,167 | ) | | (8,636 | ) |
|
| |
| | |
| |
|
| Total other expense | (20,194 | ) | | (20,838 | ) | (31,637 | ) | | (18,529 | ) | | (20,194 | ) |
| |
| | |
| | | |
| | |
|
| Loss before income taxes | (20,896 | ) |
| (22,794 | ) | |
| Income (loss) before income taxes | | 9,188 |
| | (14,827 | ) | | (20,896 | ) |
|
|
| |
|
| | |
|
| |
|
|
| Income tax expense (benefit) | 2,083 |
| | (2,005 | ) | 3,928 |
| | (34,131 | ) | | 2,083 |
|
| |
| | |
| | | |
| | |
|
| Net loss | $ | (22,979 | ) | | $ | (20,789 | ) | |
| Net income (loss) | | $ | 5,260 |
| | $ | 19,304 |
| | $ | (22,979 | ) |
| |
| | |
| | | |
| | |
|
| Loss per share: |
|
| |
|
| |
| Earnings (loss) per share: | | | |
|
| |
|
|
| Basic | $ | (0.85 | ) | | $ | (0.95 | ) | $ | 0.14 |
| | $ | 0.55 |
| | $ | (0.85 | ) |
| Diluted | $ | (0.85 | ) | | $ | (0.95 | ) | $ | 0.14 |
| | $ | 0.54 |
| | $ | (0.85 | ) |
|
|
| |
|
| | |
|
| |
|
|
| Weighted average shares: |
|
| |
|
| | |
|
| |
|
|
| Basic | 27,011,381 |
| | 21,985,241 |
| 37,055,663 |
| | 34,973,284 |
| | 27,011,381 |
|
| Diluted | 27,011,381 |
| | 21,985,241 |
| 37,568,915 |
| | 35,801,395 |
| | 27,011,381 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.consolidated financial statements.
GTT Communications, Inc.
Consolidated Statements of Comprehensive LossIncome (Loss)
(Amounts in thousands)
|
| | | | | | | |
| | Year Ended |
| | December 31, 2014 | | December 31, 2013 |
| | | | |
| Net loss | $ | (22,979 | ) | | $ | (20,789 | ) |
|
|
| |
|
|
| Other comprehensive income (loss): |
|
| |
|
|
| Foreign currency translation (loss) gain | (630 | ) | | 453 |
|
| Comprehensive loss | $ | (23,609 | ) | | $ | (20,336 | ) |
|
| | | | | | | | | | | |
| | Year Ended |
| | December 31, 2016 | | December 31, 2015 | | December 31, 2014 |
| | | | | | |
| Net income (loss) | $ | 5,260 |
| | $ | 19,304 |
| | $ | (22,979 | ) |
| | | | | |
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation adjustment | (2,516 | ) | | (1,503 | ) | | (630 | ) |
| Comprehensive income (loss) | $ | 2,744 |
| | $ | 17,801 |
| | $ | (23,609 | ) |
The accompanying notes are an integral part of these Consolidated Financial Statements.consolidated financial statements.
GTT Communications, Inc.
Consolidated Statements of Stockholders’ Equity
(Amounts in thousands, except for share data)
| | | | | | | | | | | | Accumulated | | | Common Stock | | Additional
Paid -In Capital | | Accumulated Deficit | | Accumulated Other
Comprehensive | | |
| | Common Stock | | Additional
Paid -In | | Accumulated | | Other
Comprehensive | | | |
| | Shares | | Amount | | Capital | | Deficit | | Loss | | Total | |
| Balance, December 31, 2012 | 19,129,765 |
| | $ | 2 |
| | $ | 63,207 |
| | $ | (45,437 | ) | | $ | (733 | ) | | $ | 17,039 |
| |
| | | | | | | | | | | | | |
| Share-based compensation for options issued | — |
| | — |
| | 363 |
| | — |
| | — |
| | 363 |
| |
| | | | | | | | | | | | | |
| Share-based compensation for restricted stock issued | 722,357 |
| | — |
| | 1,103 |
| | — |
| | — |
| | 1,103 |
| |
| | | | | | | | | | | | | |
| Tax witholding related to the vesting of restricted stock units | (32,297 | ) | | — |
| | (120 | ) | | — |
| | — |
| | (120 | ) | |
| | | | | | | | | | | | | |
| Shares issued in connection with acquisition earn-out | 356,122 |
| | — |
| | 1,650 |
| | — |
| | — |
| | 1,650 |
| |
| | | | | | | | | | | | | |
| Stock issued in private offering | 2,060,595 |
| | — |
| | 6,182 |
| | — |
| | — |
| | 6,182 |
| |
| | | | | | | | | | | | | |
| Stock options exercised | 92,125 |
| | — |
| | 43 |
| | — |
| | — |
| | 43 |
| |
| | | | | | | | | | | | | |
| Stock issued on debt extinguishment | 982,356 |
| | — |
| | 3,586 |
| | — |
| | — |
| | 3,586 |
| |
| | | | | | | | | | | | | |
| Net loss | — |
| | — |
| | — |
| | (20,789 | ) | | — |
| | (20,789 | ) | |
| | | | | | | | | | | | | |
| Foreign currency translation | — |
| | — |
| | — |
| | — |
| | 453 |
| | 453 |
| |
| | | | | | | | | | | | | Shares | | Amount | | Additional
Paid -In Capital | | Accumulated Deficit | | Loss | | Total |
| Balance, December 31, 2013 | 23,311,023 |
| | 2 |
| | 76,014 |
| | (66,226 | ) | | (280 | ) | | 9,510 |
| 23,311,023 |
| | $ | 2 |
| | $ | (280 | ) | | $ | 9,510 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Share-based compensation for options issued | — |
| | — |
| | 883 |
| | — |
| | — |
| | 883 |
| — |
| | — |
| | 883 |
| | — |
| | — |
| | 883 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Share-based compensation for restricted stock issued | 1,030,482 |
| | — |
| | 1,535 |
| | — |
| | — |
| | 1,535 |
| 1,030,482 |
| | — |
| | 1,535 |
| | — |
| | — |
| | 1,535 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Tax witholding related to the vesting of restricted stock units | (147,025 | ) | | — |
| | (1,591 | ) | | — |
| | — |
| | (1,591 | ) | |
| Tax withholding related to the vesting of restricted stock units | | (147,025 | ) | | — |
| | (1,591 | ) | | — |
| | — |
| | (1,591 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued in connection with acquisition earn-out | 306,122 |
| | — |
| | 3,704 |
| | — |
| | — |
| | 3,704 |
| 306,122 |
| | — |
| | 3,704 |
| | — |
| | — |
| | 3,704 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued in connection with acquisitions | 325,438 |
| | — |
| | 3,884 |
| | — |
| | — |
| | 3,884 |
| 325,438 |
| | — |
| | 3,884 |
| | — |
| | — |
| | 3,884 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Cashless exercise of warrants | 913,749 |
| | — |
| | 9,576 |
| | — |
| | — |
| | 9,576 |
| 913,749 |
| | — |
| | 9,576 |
| | — |
| | — |
| | 9,576 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock issued in offerings, net of offering costs | 7,475,000 |
| | 1 |
| | 72,679 |
| | — |
| | — |
| | 72,680 |
| |
| Shares issued in offerings, net of offerings costs | | 7,475,000 |
| | 1 |
| | 72,679 |
| | — |
| | — |
| | 72,680 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock options exercised | 633,754 |
| | — |
| | 994 |
| | — |
| | — |
| | 994 |
| 633,754 |
| | — |
| | 994 |
| | — |
| | — |
| | 994 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | — |
| | — |
| | — |
| | (22,979 | ) | | — |
| | (22,979 | ) | — |
| | — |
| | — |
| | (22,979 | ) | | — |
| | (22,979 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation | — |
| | — |
| | — |
| | — |
| | (630 | ) | | (630 | ) | — |
| | — |
| | — |
| | — |
| | (630 | ) | | (630 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2014 | 33,848,543 |
| | $ | 3 |
| | $ | 167,678 |
|
| $ | (89,205 | ) |
| $ | (910 | ) |
| $ | 77,566 |
| 33,848,543 |
| | 3 |
| | 167,678 |
| | (89,205 | ) | | (910 | ) | | 77,566 |
|
| | | | | | | | | | | | | |
| Share-based compensation for options issued | | — |
| | — |
| | 1,591 |
| | — |
| | — |
| | 1,591 |
|
| | | | | | | | | | | | | |
| Share-based compensation for restricted stock issued | | 1,536,043 |
| | — |
| | 6,285 |
| | — |
| | — |
| | 6,285 |
|
| | | | | | | | | | | | | |
| Tax withholding related to the vesting of restricted stock units | | (195,917 | ) | | — |
| | (3,471 | ) | | — |
| | — |
| | (3,471 | ) |
| | | | | | | | | | | | | |
| Shares issued in connection with acquisitions | | 1,085,844 |
| | — |
| | 9,845 |
| | — |
| | — |
| | 9,845 |
|
| | | | | | | | | | | | | |
| Stock options exercised | | 259,121 |
| | — |
| | 869 |
| | — |
| | — |
| | 869 |
|
| | | | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | 19,304 |
| | — |
| | 19,304 |
|
| | | | | | | | | | | | | |
| Foreign currency translation | | — |
| | — |
| | — |
| | — |
| | (1,503 | ) | | (1,503 | ) |
| | | | | | | | | | | | | |
| Balance, December 31, 2015 | | 36,533,634 |
| | 3 |
| | 182,797 |
|
| (69,901 | ) |
| (2,413 | ) |
| 110,486 |
|
| | | | | | | | | | | | | |
| Share-based compensation for options issued | | — |
| | — |
| | 1,790 |
| | — |
| | — |
| | 1,790 |
|
| | | | | | | | | | | | | |
| Share-based compensation for restricted stock issued | | 408,108 |
| | — |
| | 13,985 |
| | — |
| | — |
| | 13,985 |
|
| | | | | | | | | | | | | |
| Tax withholding related to the vesting of restricted stock units | | (276,365 | ) | | — |
| | (5,650 | ) | | — |
| | — |
| | (5,650 | ) |
| | | | | | | | | | | | | |
| Shares issued in connection with employee stock purchase plan | | 77,279 |
| | — |
| | 1,181 |
| | — |
| | — |
| | 1,181 |
|
| | | | | | | | | | | | | |
| Shares issued in connection with acquisition | | 178,202 |
| | — |
| | 1,995 |
| | — |
| | — |
| | 1,995 |
|
| | | | | | | | | | | | | |
| Stock options exercised | | 307,286 |
| | — |
| | 1,228 |
| | — |
| | — |
| | 1,228 |
|
| | | | | | | | | | | | | |
| Net income | | — |
| | — |
| | — |
| | 5,260 |
| | — |
| | 5,260 |
|
| | | | | | | | | | | | | |
| Foreign currency translation | | — |
| | — |
| | — |
| | — |
| | (2,516 | ) | | (2,516 | ) |
| | | | | | | | | | | | | |
| Balance, December 31, 2016 | | 37,228,144 |
| | $ | 3 |
| | $ | 197,326 |
| | $ | (64,641 | ) | | $ | (4,929 | ) | | $ | 127,759 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.consolidated financial statements.
GTT Communications, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Cash flows from operating activities: | |
| | |
| | | |
| | |
|
| Net loss | $ | (22,979 | ) | | $ | (20,789 | ) | |
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | | |
| Net income (loss) | | $ | 5,260 |
| | $ | 19,304 |
| | $ | (22,979 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | |
| Depreciation and amortization | 24,921 |
| | 17,157 |
| 62,788 |
| | 46,708 |
| | 24,921 |
|
| Shared-based compensation | 2,418 |
| | 1,466 |
| |
| Share-based compensation | | 15,775 |
| | 7,876 |
| | 2,418 |
|
| Debt discount amortization | 420 |
| | 601 |
| 862 |
| | 181 |
| | 420 |
|
| Change in fair value of warrant liability | 6,857 |
| | 8,658 |
| — |
| | — |
| | 6,857 |
|
| Loss on debt extinguishment | 3,104 |
| | 706 |
| 1,632 |
| | 3,420 |
| | 3,104 |
|
| Amortization of debt issuance costs | | 1,531 |
| | 1,021 |
| | 1,014 |
|
| Deferred income taxes | | 2,209 |
| | (30,500 | ) | | — |
|
| Change in fair value of acquisition earn-out | 1,554 |
| | 1,978 |
| — |
| | 880 |
| | 1,554 |
|
| Changes in operating assets and liabilities, net of effects of acquisitions: | | | | |
| Changes in operating assets and liabilities, net of acquisitions: | | | | | | |
| Accounts receivable, net | (4,965 | ) | | 485 |
| (14,859 | ) | | (7,891 | ) | | (4,965 | ) |
| Deferred contract costs | 251 |
| | (619 | ) | |
| Deferred costs | | 538 |
| | (2,883 | ) | | 251 |
|
| Prepaid expenses and other current assets | (804 | ) | | 5,252 |
| 4,763 |
| | (8,094 | ) | | (804 | ) |
| Other assets | (2,795 | ) | | (4,533 | ) | (3,863 | ) | | (6,114 | ) | | (1,596 | ) |
| Accounts payable | (14,235 | ) | | 604 |
| (12,322 | ) | | (8,694 | ) | | (14,235 | ) |
| Accrued expenses and other current liabilities | (5,063 | ) | | (6,987 | ) | (7,099 | ) | | 1,829 |
| | (3,679 | ) |
| Deferred revenue and other long-term liabilities | 1,189 |
| | (1,300 | ) | |
| Net cash (used in) provided by operating activities | (10,127 | ) | | 2,679 |
| |
| Deferred revenue and other liabilities | | 3,328 |
| | 7,608 |
| | 1,244 |
|
| Net cash provided by (used in) operating activities | | 60,543 |
| | 24,651 |
| | (6,475 | ) |
| | | | | | | | | |
| Cash flows from investing activities: | |
| | |
| | | |
| | |
|
| Acquisition of businesses, net of cash acquired | (37,488 | ) | | (51,884 | ) | (14,146 | ) | | (300,702 | ) | | (37,488 | ) |
| Purchases of customer lists | (206 | ) | | (4,042 | ) | |
| Purchases of property and equipment | (5,819 | ) | | (4,053 | ) | |
| Purchase of customer contracts | | (20,000 | ) | | — |
| | (206 | ) |
| Change in restricted cash and cash equivalents | | (304,266 | ) | | — |
| | — |
|
| Purchases of property, equipment and software | | (24,189 | ) | | (14,070 | ) | | (5,819 | ) |
| Net cash used in investing activities | (43,513 | ) | | (59,979 | ) | (362,601 | ) | | (314,772 | ) | | (43,513 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | |
| | |
| | | |
| | |
|
| Repayment of promissory note | — |
| | (237 | ) | |
| Proceeds from line of credit | 3,000 |
| | 3,000 |
| — |
| | — |
| | 3,000 |
|
| Repayment of line of credit | (6,000 | ) | | — |
| — |
| | — |
| | (6,000 | ) |
| Proceeds from revolving line of credit | | 47,000 |
| | 5,000 |
| | — |
|
| Repayment of revolving line of credit | | (32,000 | ) | | — |
| | — |
|
| Proceeds from term loan | 125,000 |
| | 65,794 |
| 29,850 |
| | 622,000 |
| | 125,000 |
|
| Repayment of term loan | (63,124 | ) | | (28,544 | ) | (4,225 | ) | | (353,626 | ) | | (63,124 | ) |
| Proceeds from senior note | | 300,000 |
| | — |
| | — |
|
| Proceeds from mezzanine debt | 1,500 |
| | 11,651 |
| — |
| | — |
| | 1,500 |
|
| Repayment of mezzanine debt | (31,000 | ) | | — |
| — |
| | — |
| | (31,000 | ) |
| Repayment of warrant liability | (9,576 | ) | | — |
| |
| Repayment of subordinate notes payable | — |
| | (85 | ) | |
| Tax withholding related to the vesting of restricted stock units | (1,591 | ) | | (120 | ) | |
| Payment of earn-out and holdbacks | | (15,563 | ) | | (3,729 | ) | | (1,155 | ) |
| Debt issuance costs | | (1,385 | ) | | (12,579 | ) | | (2,213 | ) |
| Settlement of warrant liability | | — |
| | — |
| | (9,576 | ) |
| Repayment of capital leases | | (1,825 | ) | | (933 | ) | | (284 | ) |
| Proceeds from issuance of common stock under employee stock purchase plan | | 1,181 |
| | — |
| | — |
|
| Tax withholding related to the vesting of restricted stock awards | | (5,650 | ) | | (3,471 | ) | | (1,591 | ) |
| Exercise of stock options | 994 |
| | 43 |
| 1,228 |
| | 869 |
| | 994 |
|
| Stock issued in offering, net of offering costs | 72,680 |
| | 6,182 |
| |
| Shares issued in offering, net of offering costs | | — |
| | — |
| | 72,680 |
|
| Net cash provided by financing activities | 91,883 |
| | 57,684 |
| 318,611 |
| | 253,531 |
| | 88,231 |
|
| | | | | | | | | |
| Effect of exchange rate changes on cash | 5,228 |
| | 675 |
| (1,435 | ) | | 1,964 |
| | 5,228 |
|
| | | | | | | | | |
| Net increase in cash and cash equivalents | 43,471 |
| | 1,059 |
| |
| | | | | |
| Net increase (decrease) in cash and cash equivalents | | 15,118 |
| | (34,626 | ) | | 43,471 |
|
| | | | | | | | | |
| Cash and cash equivalents at beginning of year | 5,785 |
| | 4,726 |
| 14,630 |
| | 49,256 |
| | 5,785 |
|
| | | | | | | | | |
| Cash and cash equivalents at end of year | $ | 49,256 |
| | $ | 5,785 |
| $ | 29,748 |
| | $ | 14,630 |
| | $ | 49,256 |
|
| | | | | | | | | |
| Supplemental disclosure of cash flow information: | |
| | |
| | | |
| | |
|
| Cash paid for interest | $ | 7,976 |
| | $ | 7,412 |
| $ | 26,345 |
| | $ | 13,132 |
| | $ | 7,976 |
|
| Cash paid for taxes | | $ | 1,038 |
| | $ | 434 |
| | $ | 911 |
|
| | | | | | | | | |
| Supplemental disclosure of non-cash investing and financing activities: | |
| | |
| | | |
| | |
|
| Fair value of assets acquired | $ | 43,919 |
| | $ | 64,092 |
| |
| Fair value of liabilities acquired | $ | 20,284 |
| | $ | 36,152 |
| |
| Shares issued in connection with the extinguishment of subordinated notes and accrued interest thereon | $ | — |
| | $ | 2,880 |
| |
| Fair value of current assets acquired | | $ | 889 |
| | $ | 26,094 |
| | $ | 6,193 |
|
Fair value of non-current assets acquired* | | $ | 53,428 |
| | $ | 171,768 |
| | $ | 37,726 |
|
| Fair value of current liabilities assumed | | $ | 640 |
| | $ | 26,053 |
| | $ | 19,847 |
|
| Fair value of non-current liabilities assumed | | $ | — |
| | $ | 1,895 |
| | $ | 437 |
|
| Shares issued in connection with acquisition earn-out | $ | 3,704 |
| | $ | 1,650 |
| $ | — |
| | $ | — |
| | $ | 3,704 |
|
| Shares issued in connection with acquisitions | $ | 3,884 |
| | $ | — |
| |
| Shares issued in connection with acquisition | | $ | 1,995 |
| | $ | 9,845 |
| | $ | 3,884 |
|
| Cashless exercise of warrants | $ | 9,576 |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | 9,576 |
|
* Excludes goodwill
The accompanying notes are an integral part of these Consolidated Financial Statements.consolidated financial statements.
GTT Communications, Inc.
Notes to Consolidated Financial Statements
NOTE 1 — ORGANIZATION AND BUSINESS
Organization and Business
GTT Communications, Inc. ("GTT," or the "Company",) is a Delaware corporation which was incorporated on January 3, 2005. GTT operatesprovider of cloud networking services to multinational clients. The Company offers a broad portfolio of global services including: wide area network services ("WAN"); Internet services; managed network and security services; and voice and unified communication services.
GTT's global Tier 1 IP network connectingdelivers connectivity to clients to locations and cloud applications around the world. We seekThe Company provides services to further extend our network globally whileleading multinational enterprises, carriers and government customers in over 100 countries. GTT differentiates itself from its competition by delivering exceptional client service to its clients with simplicity, speed and agility.
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 and it'sits wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect thecertain 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 revenue and expenses during the reporting period. Significant accounting estimates to be made by management includeare used when establishing allowances for doubtful accounts, valuation of goodwill and other long-lived assets, accrualaccruals for billing disputes and exit activities, determining useful lives for depreciation and amortization, assessing the need for impairment charges (including those related to intangible assets and goodwill), determining the fair values of assets acquired and liabilities assumed in business combinations, accounting for income taxes and related valuation allowances against deferred tax assets and estimating the grant date fair values used to compute the share-based compensation expense. Management evaluates these estimates and judgments on an ongoing basis and makes estimates based on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The results of equity instruments. Becausethese estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the uncertainty inherent in such estimates, actualaccounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates.estimates under different assumptions or conditions.
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on reported results of operations.
Segment Reporting
The Company reports operating results and financial data in one operating and reportable segment. The Companychief operating decision maker manages its businessthe Company as a single profit center in order to promote collaboration, provide comprehensive service offerings across its entire customer base and provide incentives to employees based on the success of the organization as a whole. Although certain information regarding geographic markets and selected products or services are discussed for purposes of promoting an understanding of the Company's complex business, the Companychief operating decision maker manages its businessthe Company and allocates resources at the consolidated level of a single operating segment.level.
Revenue Recognition
We deliver threeThe Company delivers four primary services to our customers—EtherCloud, ourits customers — flexible Ethernet-based connectivity service; Internet Services, our reliable,WAN services; high bandwidth internetInternet connectivity services; and Managed Services, our provision of fully managed network services so organizations can focus on their core business. Our extensive network and broad geographic reach enable us to cost-effectively deliver the bandwidth, scale and security demanded by our customers.services; and global communication and collaboration services. Certain of the Company’sits current revenuecommercial activities have features that may be considered multiple elements.elements, specifically, when the Company sells one of its connectivity services in addition to Customer Premise Equipment ("CPE"). The Company believes that there is insufficientsufficient evidence to determine each element’s fair value and, as a result, in those arrangements where there are multiple elements, the service revenue is recorded ratably over the term of the arrangement.agreement and the equipment is accounted for as a sale, at the time of sale, as long as collectability is reasonably assured.
Network Services and Support.
The Company’sCompany's services are provided pursuant tounder contracts that typically provide for an installation charge as well as payments of recurring charges on a monthly basis for use of the services over a committed term. EachIts contracts with customers specify the terms and conditions for providing such services, including installation date, recurring and non-recurring fees, payment terms and length of term. These contracts call for the Company to provide the service contract hasin question (e.g., data transmission between point A and point Z), to manage the activation process and to provide ongoing support (in the form of service maintenance and trouble-shooting) during the service term. The contracts do not typically provide the customer any rights to use specifically identifiable assets. Furthermore, the contracts generally provide the Company with discretion to engineer (or re-engineer) a particular network solution to satisfy each customer’s data transmission requirement, and typically prohibit physical access by the customer to the network infrastructure used by the Company and its suppliers to deliver the services.
The Company recognizes revenue as follows:
Monthly Recurring Revenue. Monthly recurring revenue represents the substantial majority of the Company's revenue, and consists of fees charged for ongoing services that are generally fixed in price and billed on a recurring monthly cost andbasis (one month in advance) for a fixed term, in addition to a fixed installation charge (if applicable).specified term. At the end of the initial term, most contracts provide for a continuation of most service contracts,services on the contracts roll forwardsame terms, either for a specified renewal period (e.g., one year) or on a month-to-month basis. The Company records recurring revenue based on the fees agreed to in each contract, as long as the contract is in effect.
Usage Revenue. Usage revenue represents variable charges for certain services, based on specific usage of those services, or other periodic basis and continue to bill atusage above a fixed threshold, billed monthly in arrears. The Company records usage revenue based on actual usage charges billed using the same fixed recurring rate. If any cancellation rates and/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 formulathresholds 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 feesrevenue consists of charges 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 revenue earned for providing provisioning servicesinstallation in connection with the delivery of recurring communications services, is recognized ratably over the contractual term of the recurring service starting upon commencement of the service contract term.late payments, cancellation fees, early termination fees and equipment sales. Fees recorded or billed from these provisioningfor installation services are initially recorded as deferred revenue then recognized ratably over the contractual term of the recurring service. Installation costs related to provisioning incurred
byManagement believes that 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 recordedterm serves 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. Based on operating activity, the Company believes the initial contractual term is the best estimate of the periodexpected relationship term. Fees charged for late payments, cancellation (pre-installation) or early termination (post-installation) are typically fixed or determinable per the terms of earnings.
Other Revenue. Fromthe respective contract, and are recognized as revenue when billed. In addition, from time to time the Company recognizes revenue in the form of fixed or determinable cancellation (pre-installation) or termination (post-installation) charges imposed pursuantsells communications equipment to the service contract. This revenue is earned when a customer cancels or terminates a service agreement prior to the end of its committed term. This revenue is recognized when billed if collectability is reasonably assured. In addition, the Company from time to time sells equipmentcustomers in connection with its data networking applications.services. 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.
The Company records revenue only when collectability is reasonably assured.assured, irrespective of the type of revenue.
Universal Service Fund (USF), Gross Receipts Taxes and Other Surcharges
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. Where the Company collects on behalf of a regulatory agency, the Company does not record any revenue. The Company records applicable taxes applicable on a net basis.
TranslationCost of Foreign CurrenciesTelecommunications Services
These consolidated financial statements have been reportedCost of telecommunications services includes direct costs incurred in U.S. Dollars by translating assetaccessing other telecommunications providers’ networks in order to maintain the Company's global IP network and liability amounts of foreign subsidiaries atprovide telecommunications services to the closing exchange rate, equity amounts at historical rates,Company's customers including access, co-location, and the results of operationsusage-based charges.
Marketing and cash flow at the average exchange rate prevailing during the periods reported.Advertising Costs
A summary of exchange rates used isCosts related to marketing and advertising are expensed as follows:
|
| | | | | | | |
| | U.S. Dollar / British Pounds Sterling | | U.S. Dollar / Euro |
| | 2014 | | 2013 | | 2014 | | 2013 |
| Closing exchange rate at December 31 | 1.55 | | 1.65 | | 1.22 | | 1.38 |
| | | | | | | | |
| Average exchange rate during the period | 1.65 | | 1.56 | | 1.33 | | 1.33 |
Transactions denominatedincurred and included in foreign currencies are recorded at the rates of exchange prevailing at the time of the transaction. Monetary assetsselling, general and liabilities denominatedadministrative expenses 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 theour consolidated statements of operationsoperations. Our marketing and advertising expense was $2.2 million, $1.3 million and $0.9 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Share-Based Compensation
The Company issues three types of equity grants under its share-based compensation plan: time-based restricted stock, time-based stock options and performance-based restricted stock. The time-based restricted stock and stock options generally vest over a four-year period, contingent upon meeting the requisite service period requirement. Performance awards typically vest over a shorter period, e.g. two years, starting when the performance criteria established in other expense.the grant have been met.
The share price on the day of grant is used as the fair value for all restricted stock. The Company uses the Black-Scholes option-pricing model to determine the estimated fair value for stock options. Critical inputs into the Black-Scholes option-pricing model include the following: option exercise price; fair value of the stock price; expected life of the option; annualized volatility of the stock; annual rate of quarterly dividends on the stock; and risk-free interest rate.
Implied volatility is calculated as of each grant date based on our historical stock price volatility along with an assessment of a peer group. Other than the expected life of the option, volatility is the most sensitive input to our option grants. The risk-free interest rate used in the Black-Scholes option-pricing model is determined by referencing the U.S. Treasury yield curve rates with the remaining term equal to the expected life assumed at the date of grant. Forfeitures are estimated based on our historical analysis of attrition levels. Forfeiture estimates are updated quarterly for actual forfeitures.
The expense is recognized on a straight-line basis over the vesting period. The Company recognizes share-based compensation expense for performance awards when the achievement of the performance criteria is considered probable.
Other Expense, Net
The Company recognized other expense, net, of $8.6$0.6 million, $1.2 million, and $11.7$8.6 million for the years ended December 31, 20142016, 2015 and 2013,2014 respectively. The following table presents other expense, net by type:
| | | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Change in fair value of warrant liability | $ | 6,857 |
| | $ | 8,658 |
| $ | — |
| | $ | — |
| | $ | 6,857 |
|
| Change in fair value of acquisition earn-outs | 1,554 |
| | 1,978 |
| — |
| | 880 |
| | 1,554 |
|
| Other | 225 |
| | 1,088 |
| 577 |
| | 287 |
| | 225 |
|
| | $ | 8,636 |
| | $ | 11,724 |
| |
| Total other expense, net | | $ | 577 |
| | $ | 1,167 |
| | $ | 8,636 |
|
Income Taxes
Income taxes are accounted for under the asset and liability method pursuant to GAAP. Under this method, deferred tax assets and liabilities are recognized for the expected future consequences attributable to the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the change. Further, deferred tax assets are recognized for the expected realization of available net operating loss and tax credit carryforwards. A valuation allowance is recorded on gross deferred tax assets when it is "more likely than not" that such asset will not be realized. When evaluating the realizability of deferred tax assets, all evidence, both positive and negative is evaluated. Items considered in this analysis include the ability to carry back losses, the reversal of temporary differences, tax planning strategies and expectations of future earnings. The Company reviews its deferred tax assets on a quarterly basis to determine if a valuation allowance is required based upon these factors. Changes in the Company's assessment of the need for a valuation allowance could give rise to a change in such allowance, potentially resulting in additional expense or benefit in the period of change.
The Company's income tax provision includes U.S. federal, state, local and foreign income taxes and is based on pre-tax income or loss. In determining the annual effective income tax rate, the Company analyzed various factors, including its annual earnings and taxing jurisdictions in which the earnings were generated, the impact of state and local income taxes and its ability to use tax credits and net operating loss carryforwards.
Under GAAP for income taxes, the amount of tax benefit to be recognized is the amount of benefit that is "more likely than not" to be sustained upon examination. The Company analyzes its tax filing positions in all of the U.S. federal, state, local and foreign tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, the Company determines that uncertainties in tax positions exist, a liability is established in the consolidated financial statements. The Company recognizes accrued interest and penalties related to unrecognized tax positions in the provision for income taxes.
Comprehensive Income (Loss)
In addition to net income (loss), comprehensive income (loss) includes charges or credits to equity occurring other than as a result of transactions with stockholders. For the Company, this consists of foreign currency translation adjustments.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income or (loss) 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.
The table below details the calculations of earnings (loss) per share (in thousands, except for share and per share amounts):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Numerator for basic and diluted EPS – income (loss) available to common stockholders | $ | 5,260 |
| | $ | 19,304 |
| | $ | (22,979 | ) |
| Denominator for basic EPS – weighted average shares | 37,055,663 |
| | 34,973,284 |
| | 27,011,381 |
|
| Effect of dilutive securities | 513,252 |
| | 828,111 |
| | — |
|
| Denominator for diluted EPS – weighted average shares | 37,568,915 |
| | 35,801,395 |
| | 27,011,381 |
|
| | | |
|
| |
|
|
| Earnings (loss) per share: basic | $ | 0.14 |
| | $ | 0.55 |
| | $ | (0.85 | ) |
| Earnings (loss) per share: diluted | $ | 0.14 |
| | $ | 0.54 |
| | $ | (0.85 | ) |
The table below details the anti-dilutive common share items that were excluded in the computation of earnings (loss) per share (amounts in thousands):
|
| | | | | | | | |
| | December 31, |
| | 2016 | | 2015 | | 2014 |
| Stock options | — |
| | 256 |
| | 1,363 |
|
Cash and Cash Equivalents
Cash and cash equivalents may include 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.
Restricted Cash and Cash Equivalents
Cash and cash equivalents that are contractually restricted from operating use are classified as restricted cash and cash equivalents. On December 22, 2016, the Company completed a private offering of $300.0 million aggregate principal amount of 7.875% senior unsecured notes due in 2024 (the "Notes"). The proceeds of the private offering plus 60 days of prepaid interest, were deposited into escrow, where the funds remained until all the escrow release conditions were satisfied, specifically the closing of the acquisition of Hibernia Networks ("Hibernia"). Had the acquisition agreement been terminated, the funds in escrow would have been returned to the investors of the Notes plus accrued and unpaid interest up to the date of release, with any remaining balance from prepaid interest returned to the Company. The Company has recognized the proceeds from the private offering and associated prepaid interest as restricted cash and cash equivalents in its consolidated financial statements. See Note 6 - Debt for further details.
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 timedate 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 payment history and current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole.economy. 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 outweighoutweighs the likelihood of recovery. The total allowance for doubtful accounts was $0.9$2.7 million and $0.7$1.0 million as of December 31, 20142016 and 2013,2015, respectively.
Other Comprehensive LossDeferred Costs
In additionInstallation costs related to net loss, comprehensive loss includes charges or credits to equity occurring other than as a resultprovisioning of transactions with stockholders. Forcommunications services that the Company this consistsincurs from third-party suppliers, directly attributable and necessary to fulfill particular service contract, and which costs would not have been incurred but for the occurrence of foreign currency translation adjustments.
Share-Based Compensation
Share-based compensation expensethat service contract, are recorded as deferred contract costs and expensed ratably over the contractual term of service in the same manner as the deferred revenue arising from that contract. Based on historical experience, the Company believes the initial contractual term is the best estimate for the period of earnings. If any installation costs exceed the amount of corresponding deferred revenue, the excess cost is recognized in the Company’s consolidated statements of operations for the years ended December 31, 2014 and 2013, included compensation expense for share-based payment awards based on the grant date fair value with the expense recognized on a straight-line over the requisite servicecurrent period.
The Company uses the Black-Scholes option-pricing model to determine the fair value of its awards at the time of grant.
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
Derivative instruments are recorded in the consolidated balance sheet as either assets or liabilities, measured at fair value. The Company issued warrants to the Mezzanine Note Holders which have been recorded as a liability with the fair value of the liability being remeasured on a quarterly basis. As of December 31, 2014, the warrant liability has been extinguished in full. The warrant liability was extinguished in August 2014 in connection with the refinancing transaction described in Note 5. Through the date of the extinguishment, the warrant liability was marked to market which resulted in a loss of $6.9 million in 2014. The balance of the warrant liability immediately before the extinguishment was $19.2 million. As of December 31, 2013, the warrant liability was marked to market which resulted in a loss of $8.7 million in 2013. The balance of the warrant liability was $12.3 million at December 31, 2013. See Note 5 for additional information.
Income Taxes
The Company provides for income taxes as a "C" corporation on income earned from operations. The Company is subject to federal, state, and foreign taxation in various jurisdictions.
Deferred tax assets and liabilities are recorded to recognize the expected future tax benefits or costs of events that have been, or will be, reported in different years for financial statement purposes than for tax purposes. Deferred tax assets and liabilities are computed based on the difference between the financial statement carrying amount and tax basis of assets and liabilities using enacted tax rates and laws for the years in which these items are expected to reverse. If management determines that some portion or all of a deferred tax asset is not “more likely than not” to be realized, a valuation allowance is recorded as a component of the income tax provision to reduce the deferred tax asset to an appropriate level in that period. In determining the need for a valuation allowance, management considers all positive and negative evidence, including historical earnings, projected future taxable income, future reversals of existing taxable temporary differences, taxable income in prior carryback periods, and prudent, feasible tax-planning strategies.
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 2011, 2012, 2013 and 2014 are still open. In the event the Company has received an assessment for interest and/or penalties, it has been classified in the consolidated statements of operations as other general and administrative costs.
Net Loss Per Share
Basic loss per share is computed by dividing net loss 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.
The table below details the calculations of earnings per share (in thousands, except for share and per share amounts):
|
| | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 |
| Numerator for basic and diluted EPS – loss available to common stockholders | $ | (22,979 | ) | | $ | (20,789 | ) |
| Denominator for basic EPS – weighted average shares | 27,011,381 |
| | 21,985,241 |
|
| Effect of dilutive securities | — |
| | — |
|
| Denominator for diluted EPS – weighted average shares | 27,011,381 |
| | 21,985,241 |
|
| |
|
| |
|
|
| Loss per share: basic | $ | (0.85 | ) | | $ | (0.95 | ) |
| Loss per share: diluted | $ | (0.85 | ) | | $ | (0.95 | ) |
The table below details the anti-dilutive common share items that were excluded in the computation of earnings per share (amounts in thousands):
|
| | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 |
| BIA warrant | — |
| | 1,055 |
|
| Plexus warrant | — |
| | 960 |
|
| Alcentra warrant | — |
| | 329 |
|
| Stock options | 1,363 |
| | 1,698 |
|
| Totals | 1,363 |
| | 4,042 |
|
Software Capitalization
Software development costs include costs to develop software programs to be used solely to meet our internal needs and cloud based applications used to deliver our services. The Company capitalizes development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended. Costs capitalized for developing such software applications were not material for the periods presented.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation computed using the straight-line method.depreciation. Depreciation on these assets is computed on a straight-line basis over the estimated useful lives of the assets. Assets are recorded at acquired cost plus any internal labor to prepare the asset for installation to become functional. Assets and liabilities under capital leases are recorded at the lesser of the present value of the aggregate future minimum lease payments or the fair value of the assets under lease. Leasehold improvements and assets under capital leases are amortized over the shorter of the term of the lease, excluding optional extensions, or the useful life. Expenditures for maintenance and repairs are expensed as incurred. Depreciable lives used by the Company for its classes of assets are as follows:
|
| |
| Furniture and Fixtures | 7 years |
| Network Equipment | 5 years |
| Leasehold Improvements | up to 10 years |
| Computer Hardware and Software | 3-5 years |
The Company reviews long-lived assets to be held 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 exceedswere to exceed its estimated future undiscounted cash flows, the asset iswould be considered to be impaired. Impairment losses arewould then be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of, if any, are reported at the lower of the carrying amount or fair value less costs to sell.
Software Capitalization
Software development costs include costs to develop software to be used solely to meet the Company's internal needs. The Company capitalizes development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a function it previously did not perform. Software maintenance, data conversion and training costs are expensed in the period in which they are incurred. The Company capitalized software costs of $1.5 million and $1.1 million for the years ended December 31, 2016 and 2015, respectively. Capitalized software cost was not material for the year ended December 31, 2014.
Goodwill and Intangible Assets
The Company assesses goodwill
Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. Goodwill is reviewed for impairment on at least an annual basis onannually, in October, 1 unless interim indicators ofor more frequently if a triggering event occurs between impairment exist. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair value.testing dates. The Company operates as a single operating segment and as a single reporting unit for the purpose of evaluating goodwill. Asgoodwill impairment. The Company's impairment assessment begins with a qualitative assessment to determine whether it is more like than not that fair value of October 1, 2014,the reporting unit is less than its carrying value. The qualitative assessment includes comparing the overall financial performance of the Company performedagainst the planned results used in the last quantitative goodwill
impairment test. Additionally, the Company's fair value is assessed in light of certain events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity and Company specific events. The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves significant judgment and estimates. If it is determined under the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its annualcarrying value, then a two-step quantitative impairment test is performed. Under the first step, the estimated fair value of goodwill by comparingthe Company would be compared with its carrying value (including goodwill). If the fair value of the Company (primarily based on market capitalization)exceeds its carrying value, step two does not need to be performed. If the estimated fair value of the Company is less than its carrying value, an indication of goodwill impairment exists for the Company and it would need to perform step two of the impairment test. Under step two, an impairment loss would be recognized for any excess of the carrying amount of the Company's goodwill over the implied fair value of that goodwill. Fair value of the Company under the two-step assessment is determined using a combination of both income and market-based approaches. There were no impairments identified for the years ended December 31, 2016, 2015 and 2014.
Intangible assets arising from business combinations, such as acquired customer contracts and relationships, (collectively "customer relationships"), trade names, intellectual property or know-how, are initially recorded at fair value. The Company amortizes these intangible assets over the determined useful life which ranges from three to seven years. The Company reviews its intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, an impairment loss is recognized for the difference between fair value and the carrying value of equity, and concluded that the fair value ofasset. There were no impairments recognized for the reporting unit was greater than the carrying amount. During the fiscal years ended December 31, 2014,2016, 2015 and 2013 the Company did not record any goodwill impairment.
Intangible assets consist of customer relationships, restrictive covenants related to employment agreements, license fees and a trade name. Customer relationships and restrictive covenants related to employment agreements are amortized, on a straight-line basis, over periods of up to seven years. Point-to-point FCC Licenses are accounted for as definite lived intangibles and amortized over the average remaining useful life of such licenses which approximates three years. The trade name is not amortized, but is tested on at least an annual basis as of October 1 unless interim indicators of impairment exist. The trade name is considered to be impaired when the net book value exceeds its estimated fair value. As of October 1, 2014 the Company performed its annual impairment test of the trade name, and concluded that the fair value of the trade name was greater than the carrying amount. The Company used the relief from royalty method for valuation. The fair value of the asset is the present value of the license fees avoided by owning the asset, or the royalty savings.2014.
Business Combinations
The Company includes the results of operations of the businesses that it acquires as of the respective dates of acquisition. The Company allocates the fair value of the purchase price of its acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill.
Asset Purchases
Periodically we acquire customer contracts that we account for as an asset purchase and record a corresponding intangible asset that is amortized over its assumed useful life. Any excess of the fair value of the purchase price over the fair value of the identifiable assets and liabilities is allocated on a relative fair value basis. No goodwill is recorded in an asset acquisition. During 2016 we acquired two portfolios of customer contracts for an aggregate purchase price of $41.3 million, of which $20 million was paid in 2016 at the respective closing dates. The remaining $21.3 million will be paid in 2017. We did not have any material asset purchases in 2015 or 2014, respectively.
Disputed Supplier Expenses
In the normal course of business, the Company identifies errors by suppliers with respect to the billing of services. The Company performs bill verification procedures to ensure that errors in the Company's suppliers' billed invoices are identified and resolved. If the Company concludes that a vendor has billed inaccurately, the Company will record a liability only for the amount that it believes is owed. As of December 31, 2016 and 2015, the Company had $5.8 million and $6.9 million, respectively, in disputed billings from suppliers that were not accrued because the Company does not believe it owes them.
Acquisition Earn-outs and Holdbacks
Acquisition earn-outs and holdbacks represent either contingent consideration subject to fair value measurements, or fixed deferred consideration to be paid out at some point in the future, typically on the one-year anniversary of an acquisition. Contingent consideration is remeasured to fair value at each reporting period. The portion of the deferred consideration due within one year is recorded as a current liability until paid, and any consideration due beyond one year is recorded in other long-term liabilities.
Translation of Foreign Currencies
For non-U.S. subsidiaries, the local currency is the functional currency for financial reporting purposes. These consolidated financial statements have been reported in U.S. Dollars by translating asset and liability amounts of foreign subsidiaries at the closing currency exchange rate, equity amounts at historical rates, and the results of operations and cash flow at the average currency
exchange rate prevailing during the periods reported. The net effect of such translation gains and losses are reflected in accumulated other comprehensive loss in the stockholders' equity section of the consolidated balance sheets.
Transactions denominated in foreign currencies other than a subsidiary's functional currency 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 in other expense, net.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. The Company classifies certain assets and liabilities based on the following hierarchy of fair value:
| |
| Level 1: | Quoted prices for identical assets or liabilities in active markets that can be assessed at the measurement date. |
| |
| Level 2: | Inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
| |
| Level 3: | Inputs reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument's valuation. |
When determining the fair value measurements for assets and liabilities required to be recorded at fair value, management considers the principal or most advantageous market in which it would transact and considers risks, restrictions, or other assumptions that market participants would use when pricing the asset or liability.
Concentrations of Credit Risk
Financial instruments potentially subjecting the Companysubject to a significant concentration of credit risk consist primarily of cash and cash equivalents.equivalents, restricted cash and cash equivalents, and trade accounts receivable. At times during the periods presented, the Company had funds in excess of $250,000 insured by the U.S. 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, 2014, approximately $45.2 million of the Company’s deposits were held at institutions as balances in excess of the U.S. Federal Deposit Insurance Corporation and international insured deposit limits for those institutions. However, managementManagement 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.
The Company's restricted cash and cash equivalents were held in escrow for the sole purpose of funding the acquisition of Hibernia. The funds were contractually restricted to remain in escrow until the closing of the acquisition, otherwise returned to the investors plus accrued interest. Due to the short duration in which the funds remained in escrow, management believes the concentration of credit risk was minimal.
The Company's trade receivables, whichaccounts receivable are unsecured areand geographically dispersed. No customers'single customer's trade accounts receivable balance as of December 31, 20142016 and 20132015, exceeded 10% of the Company's consolidated accounts receivable, net.
For No single customer accounted for more than 10% of revenue for the years ended December 31, 20142016, 2015 and 2013, no single customer exceeded 10% of total consolidated revenue.2014.
Fair Value of Financial Instruments
The Company accounts for fair value measurements in accordance with the fair value accounting standard as it relates to financial assets and financial liabilities. The Company 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 prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (Level 1); inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2); and unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions (Level 3).
The carrying amounts of cash equivalents, 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 consolidated balance sheet date and approximates the carrying value of such debt.
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, 2014, open disputes totaled approximately $6.9 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 $2.1 million in connection with these disputes as of December 31, 2014. As of December 31, 2013, open disputes totaled approximately $7.3 million and the Company determined the liability from these disputes to be $2.3 million.
RecentRecently Issued Accounting Pronouncements
OnIn May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards CodificationUpdate ("ASC"ASU") 606,No. 2014-09, Revenue Fromfrom Contracts With Customers.with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in ASC 606 supersedesdetermining whether it controls a specified good or service before it is transferred to the customers. The new revenue recognition requirementsstandard will be effective for the Company in Topic 605,the first quarter of 2018, with the option to adopt it in the first quarter of 2017. The Company currently anticipates adopting the new standard effective January 1, 2018. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). While the Company is still in the process of completing the analysis on the impact this guidance will have on its consolidated financial statements and related
disclosures, the Company is not aware of any material impact the new standard will have. The Company anticipates adopting the standard using the modified retrospective method. This assessment excludes the potential impact the acquisition of Hibernia Networks will have on its analysis. Refer to Note 15 - Subsequent Events.
In February 2016, the FASB issued ASU 2016-02, Revenue RecognitionLeases, andwhich requires most industry-specific guidance throughoutleases (with the Industry Topicsexception of the Codification. ASC 606 states that an entity should recognize revenue to depict the transferleases with terms of promised goods or services to customers in an amount that reflects the consideration to which the entity expectsless than one year) to be entitled in exchange for those goodsrecognized on the balance sheet as an asset and a lease liability. Leases will be classified as an operating lease or services.a financing lease. Operating leases are expensed using the straight-line method, whereas financing leases will be treated similarly to a capital lease under the current standard. The Company is assessing the impact of ASC 606 andnew standard will adopt the guidancebe effective for annual reporting periods (includingand interim reporting periods, within those periods)fiscal years, beginning after December 15, 2016.2018, but early adoption is permitted. The new standard must be presented using the modified retrospective method beginning with the earliest comparative period presented. The Company is currently evaluating the effect of the new standard on its consolidated financial statements and related disclosures.
On August 27, 2014,In March 2016, the FASB issued anASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting Standard Update ("ASU") 2014-15, Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern, which provideswas issued as part of the FASB’s simplification initiative and covers such areas as (i) the recognition of excess tax benefits and deficiencies and the classification of those excess tax benefits on the statement of cash flows, (ii) an accounting policy election for forfeitures to be estimated or account for when incurred, (iii) the amount an employer can withhold to cover income taxes and still qualify for equity classification, and (iv) the classification of those taxes paid on the statement of cash flows. This update is effective for annual and interim periods beginning after December 15, 2016, which will require the Company to adopt these provisions in the first quarter of 2017. This guidance will be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area impacted by this update. The Company does not expect the new guidance to have a material impact on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice of how certain transactions are classified and presented in the statement of cash flows in accordance with ASC 230. The ASU amends or clarifies guidance on eight specific cash flow issues, some of which include classification on debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and separately identifiable cash flows and application of the predominance principle. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those periods. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company is currently evaluating the effect of the new standard on its consolidated financial statements and related disclosures, but the Company does not expect the new guidance to have a material impact.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies the presentation requirements of restricted cash within the statement of cash flows. The changes in restricted cash and restricted cash equivalents during the period should be included in the beginning and ending cash and cash equivalents balance reconciliation on the statement of cash flows. When cash, cash equivalents, restricted cash or restricted cash equivalents are presented in more than one line item within the statement of financial position, an entity shall calculate a total cash amount in a narrative or tabular format that agrees to the amount shown on the statement of cash flows. Details on the nature and amounts of restricted cash should also be disclosed. This guidance will be effective in the first quarter of 2018 and early adoption is permitted. The Company does not expect the new guidance to have a material impact on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and howclarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting entities must disclose going-concern uncertainties in theirperiod. The Company does not expect this new guidance to have a material impact on its consolidated financial statements. The new standard requires
Other recent accounting pronouncements issued by the FASB during 2016 and through the filing date did not and are not believed by management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date of issuance of the entity's financial statements (or within one year after the date on which the financial statements are available to be issued, when applicable). Further, an entity must provide certain disclosures if there is "substantial doubt about the entity's ability to continue as a going concern".The impact of adopting this guidance on January 1, 2017 is not expected to have a material impact on the Company's present or historical consolidated financial statements.
NOTE 3 — ACQUISITIONS
AcquisitionsSince its formation, the Company has consummated a number of transactions accounted for as business combinations. The acquisitions were executed as part of the Company’s business strategy of expanding through acquisitions. The acquisitions of these businesses, which are in addition to periodic purchases of customer contracts, have been recorded usingallowed the acquisition method of accountingCompany to increase the scale at which it operates, which in turn affords the Company the ability to increase its operating leverage, extend its network and accordingly, results of their operations have been included in the Company'sbroaden its customer base.
The accompanying consolidated financial statements sinceinclude the effective date of each respective acquisition.
2014
UNSi
On October 1, 2014, the Company acquired 100%operations of the issued and outstanding stock in United Networks Services, Inc. ("UNSi"), a Delaware corporation. UNSi delivers high capacity Ethernet and MPLS wide-area-network solutions, internet services and a broad range of managed services. The Company paid the shareholders of UNSi an aggregate of $35.4 million, payable in a combination of cash and 231,539 shares of common stockacquired entities from their respective acquisition dates. All of the Company. $2.6 million of the purchase price is being withheld by the Company for one year following the closing of the acquisition as security for UNSi's indemnification obligations under the Merger Agreement.
The Companyacquisitions noted below have been accounted for the acquisition using the acquisition method of accounting with GTT treated as the acquiring entity.a business combination. Accordingly, consideration paid by the Company to complete the acquisition of UNSi has been preliminarilyacquisitions is initially allocated to UNSi'sthe respective assets and liabilities based upon their estimated fair values as of the date of completion of the acquisition, October 1, 2014.acquisition. The recorded amounts for acquired assets and liabilities assumed are provisional and subject to change.change during the measurement period, which is 12 months from the date of acquisition.
The following is a list of material acquisitions the Company completed during 2016, 2015 and 2014, respectively.
Acquisitions Completed During 2016
Telnes Broadband
On February 4, 2016, the Company completed the acquisition of Telnes Broadband ("Telnes"). The Company will finalizepaid $17.5 million, composed of $15.5 million in cash and 178,202 unregistered shares of the amounts recognized as it obtainsCompany's common stock valued at $2.0 million. $1.8 million of the information necessarycash consideration was deferred for one year subject to complete the analysis. In accordance with US GAAP,reduction for any indemnification claims made by the Company expectsprior to finalize these amounts beforesuch date. The Company incurred $0.9 million in exit costs associated with the acquisition for the year ended December 31, 2016. The purchase price allocation was finalized as of September 30, 2016. The acquisition was considered an asset purchase for tax purposes.
Acquisitions Completed During 2015
One Source Networks Inc.
On October 22, 2015, the Company acquired One Source Networks Inc. ("One Source"). The Company paid $169.3 million of cash and issued 185,946 unregistered shares of the Company's common stock valued at $2.3 million. The Company also issued 289,055 unregistered shares of its common stock to certain One Source employees as compensation for continuous employment. Share-based compensation of $3.6 million has been amortized ratably over an 18 month service period. The net working capital was finalized in 2016 for additional consideration of $0.4 million. The Company incurred $4.9 million in exit costs associated with the acquisition of One Source for the year ended December 31, 2015. The acquisition was considered a stock purchase for tax purposes.
MegaPath Corporation
On April 1, 2015, the Company acquired MegaPath Corporation ("MegaPath"). The Company paid $141.4 million in cash (exclusive of the assumption of $3.4 million in capital leases) and issued 610,843 unregistered shares of the Company’s common stock valued at $7.5 million. In April 2016, the Company also settled a dispute related to closing date working capital with MegaPath in 2016, resulting in an increase to total consideration and goodwill of $4.1 million. $10.0 million of the initial cash consideration was deferred for one year, subject to reduction for any indemnification claims made by the Company prior to such date. The Company incurred $7.7 million in exit costs associated with the acquisition of MegaPath for the year ended December 31, 2015. The acquisition was considered an asset purchase for tax purposes.
Acquisitions Completed During 2014
UNSi
On October 1, 2015.2014, the Company acquired United Networks Services, Inc. ("UNSi"). The following table summarizesCompany paid $32.5 million in cash and issued 231,539 unregistered shares of the Company's common stock valued at $2.9 million. $2.6 million of the purchase price andwas deferred for one year, subject to reduction for any indemnification claims made by the preliminary allocationCompany prior to such date. $1.0 million of assets acquired and liabilities assumed asthis holdback was paid in 2016 with the remaining $1.6 million pending resolution of a dispute. The Company incurred $6.1 million in exit costs associated with the acquisition date at estimated fair value:
|
| | | |
| | Amounts in thousands |
| Purchase Price: | |
| Total cash consideration | $ | 29,978 |
|
| Total holdback | 2,568 |
|
| Total stock consideration | 2,884 |
|
| Fair value of liabilities assumed | 16,052 |
|
| Total consideration | $ | 51,482 |
|
| | |
| Purchase Price Allocation: | |
| Acquired Assets | |
| Current assets | $ | 4,292 |
|
| Property and equipment | 8,181 |
|
| Intangible assets | 17,605 |
|
| Total fair value of assets acquired | 30,078 |
|
| Goodwill | 21,404 |
|
| Total consideration | $ | 51,482 |
|
Intangible assets acquired include $15.9 million related to customer relationships with a weighted-average useful life of five years and $1.7 million related to point-to-point FCC licenses with a useful life of three years. The customer relationships and license fees are amortized on a straight-line basis based on the expected period of benefit.
Amortization expense of $0.8 million has been recordedUNSi for the year ended December 31, 2014. Estimated amortization expense relatedThe acquisition was considered a stock purchase for tax purposes.
Acquisition Method Accounting Estimates
The Company initially recognizes the assets and liabilities acquired from the aforementioned acquisitions based on its preliminary estimates of their acquisition date fair values. As additional information becomes known regarding the acquired assets and assumed liabilities, management may make adjustments to intangible assets created as a resultthe opening balance sheet of the UNSi acquisition for eachacquired company up to the end of the years subsequent to December 31, 2014,measurement period, which is as follows (amounts in thousands):a one-year period following the acquisition date. The determination of the fair values of the
acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment.
The table below reflects the Company's estimates of the acquisition date fair values of the assets and liabilities assumed for its acquisitions over the past three years (amounts in thousands):
|
| | | |
| 2015 | $ | 3,914 |
|
| 2016 | 3,743 |
|
| 2017 | 3,604 |
|
| 2018 | 3,188 |
|
| 2019 | 2,391 |
|
| Total | $ | 16,840 |
|
|
| | | | | | | | | | | | | | | |
| Purchase Price | Telnes | | One Source | | MegaPath | | UNSi |
| Cash paid at closing, incl. working capital | $ | 13,751 |
| | $ | 169,305 |
| | $ | 131,397 |
| | $ | 29,978 |
|
Deferred cash consideration(1) | 1,800 |
| | — |
| | 10,000 |
| | 2,568 |
|
| Common stock | 1,995 |
| | 2,345 |
| | 7,500 |
| | 2,884 |
|
| Purchase consideration | $ | 17,546 |
| | $ | 171,650 |
| | $ | 148,897 |
| | $ | 35,430 |
|
| | | | | | | | |
| Purchase Price Allocation | | | | | | | |
| Assets acquired: | | | | | | | |
| Current assets | $ | 889 |
| | $ | 10,957 |
| | $ | 15,137 |
| | $ | 4,292 |
|
| Property, plant and equipment | 996 |
| | 2,072 |
| | 16,565 |
| | 8,181 |
|
| Other assets | 17 |
| | — |
| | — |
| | — |
|
Intangible assets - customer lists(2) | 10,951 |
| | 63,590 |
| | 72,162 |
| | 13,960 |
|
Intangible assets - intellectual property(2) | — |
| | 17,379 |
| | — |
| | — |
|
Intangible assets - tradename(2) | 213 |
| | — |
| | — |
| | — |
|
| Deferred tax asset | — |
| | — |
| | 5,245 |
| | 1,409 |
|
| Goodwill | 5,120 |
| | 115,471 |
| | 60,566 |
| | 23,640 |
|
| Total assets acquired | 18,186 |
| | 209,469 |
| | 169,675 |
| | 51,482 |
|
| | | | | | | | |
| Liabilities assumed: | | | | | | | |
| Current liabilities | (640 | ) | | (7,170 | ) | | (18,883 | ) | | (16,052 | ) |
| Capital leases, long-term portion | — |
| | — |
| | (1,895 | ) | | — |
|
| Deferred tax liability | — |
| | (30,649 | ) | | — |
| | — |
|
| Total liabilities assumed | (640 | ) | | (37,819 | ) | | (20,778 | ) | | (16,052 | ) |
| | | | | | | | |
| Net assets acquired | $ | 17,546 |
| | $ | 171,650 |
| | $ | 148,897 |
| | $ | 35,430 |
|
(1)The deferred consideration for MegaPath and $1.0 million of the deferred consideration for UNSi was paid in 2016. The deferred consideration for Telnes was paid in February 2017.
(2)The weighted average amortization period of intangible assets acquired during 2016 was 3.6 years for customer lists, 1.4 years for non-compete agreements, 1.6 years for trademark, and 3.6 years in total, as of December 31, 2016.
GoodwillTransaction Costs
Transaction costs describe the broad category of costs the Company incurs in connection with signed and/or closed acquisitions. There are two types of costs that the Company accounts for:
•Severance, restructuring and other exit costs
•Transaction and integration costs
Severance, restructuring and other exit costs include severance and other one-time benefits for terminated employees; termination charges for leases and supplier contracts; and other costs incurred associated with an exit activity. These costs are reported separately in the amountconsolidated statements of $21.4operations during these periods. Refer to Note 10 for further information.
Transaction and integration costs include expenses associated with legal, accounting, regulatory and other transition services rendered in connection with acquisitions, travel expense, and other non-recurring direct expenses associated with acquisitions. Transaction and integration costs are expensed as incurred in support of the integration. The Company incurred transaction and integration costs of $4.8 million was recordedand $6.1 million for the years ended December 31, 2016 and 2015, respectively. The amounts were
not significant in 2014. Transaction and integration costs have been included in selling, general and administrative expenses in the consolidated statements of operations and in cash flows from operating activities in the consolidated statements of cash flows during these years.
Pro forma Financial Information (Unaudited)
The pro forma results presented below include the effects of the Company’s acquisitions during 2016 and 2015 as if the acquisitions occurred on January 1, 2015. The pro forma net income for the years ended December 31, 2016 and 2015 includes the additional depreciation and amortization resulting from the adjustments to the value of property, plant and equipment and intangible assets resulting from acquisition accounting and adjustment to amortized revenue during 2016 and 2015 as a result of the acquisition date valuation of UNSi. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Substantially all of the goodwill is deducible for tax purposes.
assumed deferred revenue. The following schedule presents unaudited consolidated pro forma results of operations as ifalso include interest expense associated with debt used to fund the UNSi acquisition had occurred on January 1, 2013. This information doesacquisitions. The pro forma results do not purport to be indicativeinclude any anticipated synergies or other expected benefits of the actual results that would have occurred if the UNSi acquisition had actually been completed on January 1, 2013, nor is it necessarily indicative of the future operating results or the financial position of the combined company.acquisitions. The unaudited pro forma financial information below is not necessarily indicative of either future results of operations do not reflector results that might have been achieved had the costacquisitions been consummated as of any integration activities or benefits that may result from synergies that may be derived from any integration activities.
January 1, 2015 (amounts in thousands, except per share and share data).
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2014 | | 2013 | 2016 | | 2015 |
| Amounts in thousands, except per share and share data | | | | |
| | | | |
| Revenue | $ | 252,642 |
| | $ | 206,811 |
| $ | 523,371 |
| | $ | 481,028 |
|
| Net income | | $ | 5,512 |
| | $ | 11,531 |
|
| | | | | | | |
| Net loss | $ | (31,639 | ) | | $ | (33,829 | ) | |
| | | | | |
| Net loss per share: | | | | |
| Net income per share: | | | | |
| Basic | $ | (1.17 | ) | | $ | (1.54 | ) | $ | 0.15 |
| | $ | 0.33 |
|
| Diluted | $ | (1.17 | ) | | $ | (1.54 | ) | $ | 0.15 |
| | $ | 0.32 |
|
| | | | | | | |
| Basic | 27,011,381 |
| | 21,985,241 |
| 37,072,217 |
| | 35,151,486 |
|
| Diluted | 27,011,381 |
| | 21,985,241 |
| 37,585,469 |
| | 35,979,597 |
|
2013
IDC
On February 1, 2013, the Company entered into a stock purchase agreement with IDC Global Incorporated ("IDC"), a privately held company in Chicago. IDC owns and operates two data center facilities and its own metro optical fiber network in Chicago. The two data center facilities' fiber connects to 350 East Cermak, which is the largest multi-story data center property in the world. IDC provides cloud networking, co-location, and managed cloud services with a focus on providing multi-location enterprises with a complete portfolio of cloud infrastructure services.
Pursuant to the agreement, the Company acquired 100% of the issued and outstanding shares of capital stock of IDC for cash consideration paid of $3.6 million. The Company estimated the fair value of IDC’s assets and liabilities based on discussions with IDC’s management, due diligence and information presented in financial statements. The following table summarizes the purchase price and the assets acquired and liabilities assumed as of the acquisition date at estimated fair value:
|
| | | |
| | Amounts in thousands |
| Purchase Price: | |
|
| Cash consideration paid | $ | 3,593 |
|
| Fair value of liabilities assumed | 1,338 |
|
| Total consideration | $ | 4,931 |
|
| | |
|
| Purchase Price Allocation: | |
|
| Acquired Assets | |
|
| Current assets | $ | 187 |
|
| Property and equipment | 798 |
|
| Other assets | 82 |
|
| Intangible assets | 3,100 |
|
| Total fair value of assets acquired | 4,167 |
|
| Goodwill | 764 |
|
| Total consideration | $ | 4,931 |
|
Intangible assets acquired include $3.1 million related to customer relationships with a weighted-average useful life of 5 years. Customer relationships are amortized on a straight-line basis based on the expected period of benefit.
Goodwill in the amount of $0.8 million was recorded as a result of the acquisition of IDC. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill is deductible for tax purposes.
Tinet
On April 30, 2013, the Company acquired from Neutral Tandem, Inc. (doing business as Inteliquent) all of the equity interests (the “Interests”) in NT Network Services, LLC and NT Network Services, LLC SCS (collectively, “Tinet”), which, together with the subsidiaries of such companies, comprise the data transport business of Inteliquent. The acquisition was pursuant to an equity purchase agreement between the Company and Inteliquent on April 30, 2013.
Pursuant to the agreement, the Company paid Inteliquent cash consideration of $49.2 million for the Interests, subject to a net working capital adjustment and an adjustment based on the cash and cash equivalents and amount of indebtedness of Tinet immediately prior to the acquisition. In addition, the Company will provide certain services to Inteliquent without charge for up to three years after the closing. These services are provided under a separate service agreement that is valued at $2.0 million.
The Company accounted for the acquisition using the acquisition method of accounting with GTT treated as the acquiring entity. Accordingly, consideration paid by the Company to complete the acquisition of Tinet has been allocated to Tinet's assets and liabilities based upon their estimated fair values as of the date of completion of the acquisition, April 30, 2013. The Company estimated the fair value of the acquired companies assets and liabilities based on discussions with management, due diligence and information presented in financial statements. The following table summarizes the purchase price and the assets acquired and liabilities assumed as of the acquisition date at estimated fair value:
|
| | | |
| | Amounts in thousands |
| Purchase Price: | |
|
| Cash consideration paid | $ | 49,158 |
|
| Liabilities assumed | |
| Accounts payable | 4,179 |
|
| Accrued expenses and other current liabilities | 20,607 |
|
| Deferred revenue | 2,443 |
|
| Total fair value of liabilities assumed | 27,229 |
|
| Total consideration | $ | 76,387 |
|
| | |
|
| Purchase Price Allocation: | |
|
| Acquired assets | |
|
| Accounts receivable | $ | 11,601 |
|
| Prepaid expenses | 1,137 |
|
| Other current assets | 5,101 |
|
| Property and equipment | 15,004 |
|
| Other assets | 1,282 |
|
| Intangible assets | 25,800 |
|
| Total fair value of assets acquired | 59,925 |
|
| Goodwill | 16,462 |
|
| Total consideration | $ | 76,387 |
|
Intangible assets acquired include $25.0 million related to customer relationships with a weighted-average useful life of 5 years and $0.8 million related to the trade name. Customer relationships are amortized on a straight-line basis based on the expected period of benefit. The trade name is assessed as an indefinite-lived asset and is not amortized, but rather tested for impairment at least annually by comparing the estimated fair values to their carrying values.
Goodwill in the amount of $16.5 million was recorded as a result of the acquisition of Tinet. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill is deductible for tax purposes.
NOTE 4 — GOODWILL AND INTANGIBLE ASSETS
On October 1, 2014, the Company completed its annualThe goodwill impairment testing. The Company performed a Step 1 fair value impairment testbalance was $280.6 million and determined that the fair value$271.0 million as of the reporting unit is greater than its carrying amount; therefore, the Company concluded that no impairment existed.
The Company recorded goodwill in the amount of $25.7 million in 2014, in connection with businesses added. During the quarter ended December 31, 2014,2016 and 2015, respectively. Additionally, the Company recorded goodwill in the amountCompany's intangible asset balance was $193.9 million and $182.2 million as of $21.4 million in connection with the UNSi acquisitionDecember 31, 2016 and $15.9 million of the purchase price was allocated2015, respectively. The additions to intangible assets related to customer relationships and $1.7 million related to point-to-point FCC license fees. The intangible assets related to customer relationships and the FCC licenses are subject to a straight-line amortization.
In accordance with GAAP,both goodwill and intangible assets during the year ended December 31, 2016 relate to the acquisition of Telnes, the purchase of certain customer contracts, purchase price allocation refinement for the One Source acquisition, and the working capital settlement with indefinite lives are not amortized, but rather tested for impairmentMegaPath (see Note 3 - Acquisitions). Further additions to intangible assets during the year ended December 31, 2016 relate to the asset purchase of customer contracts totaling $41.3 million, of which $20.0 million was paid at least annually by comparingclosing of the estimated fair values to their carrying values. Acquired trade names are assessed as indefinite lived assets because there is no foreseeable limit onrespective transactions and the period of time over which they are expected to contribute cash flows.remaining $21.3 million will be paid in 2017.
The changes in the carrying amount of goodwill for the years ended December 31, 20142016 and 2013 are2015 were as follows (amounts in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Telnes | | One Source | | MegaPath | | UNSi | | Prior Acquisitions | | Total |
| Balance, December 31, 2014 | $ | — |
| | $ | — |
| | $ | — |
| | $ | 23,640 |
| | $ | 69,043 |
| | $ | 92,683 |
|
| Purchase Price Allocation | — |
| | 115,471 |
| | 60,566 |
| | — |
| | — |
| | 176,037 |
|
| PPA adjustment | — |
| | — |
| | — |
| | 2,236 |
| | — |
| | 2,236 |
|
| Balance, December 31, 2015 | — |
| | 115,471 |
| | 60,566 |
| | 25,876 |
| | 69,043 |
| | 270,956 |
|
| Purchase Price Allocation | 5,120 |
| | — |
| | — |
| | — |
| | — |
| | 5,120 |
|
| PPA adjustment | — |
| | 394 |
| | 4,101 |
| | — |
| | 22 |
| | 4,517 |
|
| Balance, December 31, 2016 | $ | 5,120 |
| | $ | 115,865 |
| | $ | 64,667 |
| | $ | 25,876 |
| | $ | 69,065 |
| | $ | 280,593 |
|
|
| | | |
| Balance, January 1, 2013 | $ | 49,793 |
|
| Goodwill associated with the acquisitions | 17,226 |
|
| Balance, December 31, 2013 | 67,019 |
|
| Goodwill associated with the acquisitions | 25,664 |
|
| Balance, December 31, 2014 | $ | 92,683 |
|
The following table summarizestables summarize the Company’s intangible assets as of December 31, 20142016 and December 31, 20132015 (amounts in thousands):
|
| | | | | | | | | | | | | |
| | | | December 31, 2014 |
| | Amortization Period | | Gross Asset Cost | | Accumulated Amortization | | Net Book Value |
| Customer contracts | 3-7 years | | $ | 85,759 |
| | $ | 29,639 |
| | $ | 56,120 |
|
| Non-compete agreements | 3-5 years | | 4,331 |
| | 4,147 |
| | 184 |
|
| Point-to-point FCC License fees | 3 years | | 1,665 |
| | 139 |
| | 1,526 |
|
| Trade name (non-amortizing) | N/A | | 800 |
| | — |
| | 800 |
|
| | | | $ | 92,555 |
| | $ | 33,925 |
| | $ | 58,630 |
|
|
| | | | | | | | | | | | | |
| | | | December 31, 2016 |
| | Amortization Period | | Gross Asset Cost | | Accumulated Amortization | | Net Book Value |
| Customer relationships | 3-7 years | | $ | 267,755 |
| | $ | 91,136 |
| | $ | 176,619 |
|
| Non-compete agreements | 3-5 years | | 4,572 |
| | 4,420 |
| | 152 |
|
| Point-to-point FCC license fees | 3 years | | 1,695 |
| | 1,268 |
| | 427 |
|
| Intellectual property | 10 years | | 17,379 |
| | 2,076 |
| | 15,303 |
|
| Trade name | 3 years | | 3,092 |
| | 1,657 |
| | 1,435 |
|
| | | | $ | 294,493 |
| | $ | 100,557 |
| | $ | 193,936 |
|
|
| | | | | | | | | | | | | |
| | | | December 31, 2013 |
| | Amortization Period | | Gross Asset Cost | | Accumulated Amortization | | Net Book Value |
| Customer contracts | 4-7 years | | $ | 58,611 |
| | $ | 16,218 |
| | $ | 42,393 |
|
| Non-compete agreements | 4-5 years | | 4,331 |
| | 3,906 |
| | 425 |
|
| Trade name (non-amortizing) | N/A | | 800 |
| | — |
| | 800 |
|
| | | | $ | 63,742 |
| | $ | 20,124 |
| | $ | 43,618 |
|
|
| | | | | | | | | | | | | |
| | | | December 31, 2015 |
| | Amortization Period | | Gross Asset Cost | | Accumulated Amortization | | Net Book Value |
| Customer relationships | 3-7 years | | $ | 215,802 |
| | $ | 54,041 |
| | $ | 161,761 |
|
| Non-compete agreements | 3-5 years | | 4,331 |
| | 4,305 |
| | 26 |
|
| Point-to-point FCC license fees | 3 years | | 1,695 |
| | 701 |
| | 994 |
|
| Intellectual property | 10 years | | 17,379 |
| | 336 |
| | 17,043 |
|
| Trade name | 3 years | | 2,079 |
| | 519 |
| | 1,560 |
|
Trade name (indefinite-lived)(1) | N/A | | 800 |
| | — |
| | 800 |
|
| | | | $ | 242,086 |
| | $ | 59,902 |
| | $ | 182,184 |
|
(1)Subsequent to performing its annual impairment test of the trade name on October 1, 2016, where no impairment was identified, the Company concluded that the trade name should be deemed a definite-lived intangible asset with an estimated useful life of three years, to be amortized prospectively as of October 1, 2016.
Amortization expense was $13.8$40.7 million, $26.0 million and $10.2$13.8 million for the years ended December 31, 20142016, 2015 and 2013,2014, respectively.
Estimated amortization expense related to intangible assets subject to amortization at December 31, 20142016 in each of the years subsequent to December 31, 20142016 is as follows (amounts in thousands):
| | | 2015 | $ | 16,756 |
| |
| 2016 | 15,668 |
| |
| 2017 | 13,858 |
| $ | 43,202 |
|
| 2018 | 8,110 |
| 36,884 |
|
| 2019 | 3,438 |
| 32,016 |
|
| 2020 | | 28,989 |
|
| 2021 | | 27,442 |
|
| 2022 and beyond | | 25,403 |
|
| Total | $ | 57,830 |
| $ | 193,936 |
|
NOTE 5 — DEBTPROPERTY AND EQUIPMENT
The following table summarizes the debt activityCompany’s property and equipment at December 31, 2016 and 2015 (amounts in thousands):
|
| | | | | | | |
| | 2016 | | 2015 |
| Network equipment | $ | 116,187 |
| | $ | 70,808 |
|
| Computer hardware and software | 15,606 |
| | 9,613 |
|
| Leasehold improvements | 4,371 |
| | 3,113 |
|
| Furniture and fixtures | 950 |
| | 838 |
|
| Property and equipment, gross | 137,114 |
| | 84,372 |
|
| Less accumulated depreciation | (93,745 | ) | | (45,549 | ) |
| Property and equipment, net | $ | 43,369 |
| | $ | 38,823 |
|
Certain property, plant and equipment, primarily network equipment, is subject to capital lease in the amount of $3.2 million and $3.5 million as of December 31, 2016 and 2015, respectively, less accumulated depreciation of $2.0 million and $1.1 million as of December 31, 2016 and 2015, respectively.
Depreciation expense associated with property and equipment was $22.1 million, $20.7 million and $11.1 million for the Company during the yearyears ended December 31, 2016, 2015 and 2014, respectively.
NOTE 6 — DEBT
As of December 31, 2016 and 2015, long-term debt was as follows (amounts in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Total Debt | | Senior Term Loan | | Delayed Draw Term Loan | | Line of Credit | | Mezzanine Notes |
| Debt obligation as of December 31, 2013 | $ | 92,460 |
| | $ | 61,750 |
| | $ | — |
| | $ | 3,000 |
| | $ | 27,710 |
|
| Issuance | 129,500 |
| | 110,000 |
| | 15,000 |
| | 3,000 |
| | 1,500 |
|
| Debt discount amortization | 420 |
| | — |
| | — |
| | — |
| | 420 |
|
| Debt discount extinguishment | 1,370 |
| | — |
| | — |
| | — |
| | 1,370 |
|
| Payments | (100,124 | ) | | (63,124 | ) | | — |
| | (6,000 | ) | | (31,000 | ) |
| Debt obligation as of December 31, 2014 | $ | 123,626 |
| | $ | 108,626 |
| | $ | 15,000 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | |
| | 2016 | | 2015 |
| | | | |
| Term loan | $ | 425,775 |
| | $ | 400,000 |
|
| 7.875% Senior Note | 300,000 |
| | — |
|
| Revolving line of credit facility | 20,000 |
| | 5,000 |
|
| Total debt obligations | 745,775 |
| | 405,000 |
|
| Unamortized debt issuance costs | (9,310 | ) | | (10,938 | ) |
| Unamortized original issuance discount | (6,957 | ) | | (7,819 | ) |
| Carrying value of debt | 729,508 |
| | 386,243 |
|
| Less current portion | (4,300 | ) | | (4,000 | ) |
| | $ | 725,208 |
| | $ | 382,243 |
|
Estimated annual commitmentsOctober 2015 Credit Agreement
On October 22, 2015, the Company entered into a credit agreement (the "October 2015 Credit Agreement") that provided for a $400.0 million term loan facility and a $50.0 million revolving line of credit facility (which includes a $15.0 million letter of credit facility and a $10.0 million swingline facility).
The term loan facility was issued at a discount of $8.0 million. Approximately $0.5 million of the revolving line of credit is currently utilized for outstanding letters of credit relating to the Company’s real estate lease obligations. As of December 31, 2016, the Company had drawn $20.0 million under the revolving line of credit and had $29.5 million of borrowing capacity available.
On May 3, 2016, the Company entered into an incremental term loan agreement, which increased outstanding term loans by $30.0 million, the proceeds of which were used to repay the outstanding revolving loans.
On June 28, 2016, the Company entered into Amendment No. 1 (the "Repricing Amendment") to the October 2015 Credit Agreement. The Repricing Amendment, among other things, reduced the applicable rate for term loans to LIBOR plus 4.75% (subject to a LIBOR floor of 1.00%) and reduced the applicable rate for revolving loans to LIBOR plus 4.25% (with no LIBOR
floor). The Repricing Amendment also included a "soft call" prepayment penalty of 1.0% through December 28, 2016 for certain prepayments, refinancings, and amendments where the primary purpose is to further reduce the applicable rate.
As of December 31, 2016, the maturity date of the term loan facility was October 22, 2022 and the maturity date of the revolving line of credit was October 22, 2020. The aggregate contractual maturities of long-term debt maturities are(excluding unamortized discounts and unamortized debt issuance costs) were as follows at December 31, 20142016 (amounts in thousands):
| | | | Total Debt | Total Debt |
| 2015 | $ | 6,188 |
| |
| 2016 | 10,120 |
| |
| 2017 | 12,331 |
| $ | 4,300 |
|
| 2018 | 12,203 |
| 4,300 |
|
| 2019 | 82,784 |
| 4,300 |
|
| 2020 | | 24,300 |
|
| 2021 | | 4,300 |
|
| 2022 | | 404,275 |
|
| Total | $ | 123,626 |
| $ | 445,775 |
|
The Company may prepay loans under the October 2015 Credit Agreement at any time, subject to certain notice requirements and LIBOR breakage costs.
The effective interest rate on outstanding debt at December 31, 2016 and 2015 was 5.76% and 6.24% respectively.
The October 2015 Credit Agreement contains customary financial and operating covenants, including among others a consolidated net secured leverage ratio and covenants restricting the incurrence of debt, imposition of liens, the payment of dividends and entering into affiliate transactions. The October 2015 Credit Agreement also contains customary events of default, including among others nonpayment of principal or interest, material inaccuracy of representations and failure to comply with covenants. If an event of default occurs and is continuing under the October 2015 Credit Agreement, the entire outstanding balance may become immediately due and payable.
In addition, the Company must comply with a Consolidated Net Secured Leverage Ratio covenant and is restricted from permitting the Consolidated Net Secured Leverage Ratio to be greater than the maximum ratio specified below during the period opposite such maximum ratio. The Company was in compliance with all financial covenants under the October 2015 Credit Agreement as of December 31, 2016.
The Company's obligations under the October 2015 Credit Agreement are guaranteed by certain of its subsidiaries and secured by substantially all of its tangible and intangible assets.
7.875% Senior Term Loan, Delayed Draw Term LoanNotes
On December 22, 2016, in connection with the pending acquisition of Hibernia Networks, GTT Escrow Corporation (the "Escrow Issuer") completed a private offering of $300.0 million aggregate principal amount 7.875% senior unsecured notes (the "Notes") due in 2024. The Escrow Issuer is the Company's wholly owned subsidiary and Linewas created solely for the purpose of issuing the Notes.
The proceeds of the offer were deposited into escrow, where the funds remained until the escrow release conditions were satisfied, most notably the closing of the acquisition of Hibernia. Had the acquisition agreement been terminated, the funds in escrow would have been released and returned to the investors of the Notes, plus accrued and unpaid interest up to the date of release. Accordingly, the Company has recognized the proceeds from the offer as Restricted Cash in its consolidated financial statements. The notes are not guaranteed until the release of the escrow, but once released, the notes will be fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of the Company's subsidiaries that guarantee the Company's new credit agreement.
In addition, in conjunction with the acquisition of Hibernia, the Company entered into a new credit agreement (the "2017 Credit Agreement") to fund the remaining portion of the purchase price. Refer to Note 15 - Subsequent Events for further details.
Debt Issuance Costs
In connection with the October 2015 Credit Agreement, the Company incurred debt issuance costs of $8.6 million (net of extinguishments). These costs are in addition to $2.6 million of debt issuance costs that were carried over from the prior term loan facility that qualified as a modification.
In June 2016, the Company accounted for the Repricing Amendment as a modification of debt, whereby the Company incurred an additional $0.8 million of debt issuance costs that were deferred and recorded as an offset to Long-Term Debt in the consolidated balance sheets. The Company also accelerated $1.6 million of prior deferred debt issuance cost, which was recorded as a Loss on Debt Extinguishment in the consolidated statement of operations. In connection with the Notes offering, we incurred debt issuance costs of $0.5 million as of December 31, 2016. The deferred costs associated with the Notes will begin amortizing in the first quarter of 2017.
Debt issuance costs are amortized to interest expense over the respective term of the underlying debt instruments using the effective interest method, unless extinguished earlier, at which time the applicable remaining unamortized costs will be immediately expensed.
The unamortized balance of debt issuance costs as of December 31, 2016 and 2015 was $9.3 million and $10.9 million, respectively.
The amortization of debt issuance costs is included on the consolidated statements of cash flows within the caption “Amortization of debt issuance costs” along with the amortization of the discount on the Company’s indebtedness. Interest expense associated with the amortization of debt issuance costs was $1.5 million for the year ended December 31, 2016 and $1.0 million for each of the years ended December 31, 2015 and 2014.
Debt issuance costs are presented in the consolidated balance sheets as a reduction to "Long-term debt, non-current".
Previous Debt Agreements
April 2015 Credit Agreement
On April 1, 2015, the Company entered into the April 2015 Credit Agreement, which amended the August 2014 Credit Agreement and provided for a term loan facility of $230.0 million, a revolving line of credit facility of $25.0 million, and an uncommitted incremental credit facility of $50.0 million in term loans and/or revolving credit commitments. The interest rate on borrowings under the term loan facility was LIBOR plus a 4.50% spread. The interest rate on borrowings under the revolving credit facility was subject to a leveraged based pricing grid. The maturity date of the loans was March 31, 2020. The proceeds were used to fund the MegaPath acquisition and repay all outstanding balances under the Company's prior credit agreement. The April 2015 Credit Agreement was extinguished as a result of the refinancing transaction in connection with the October 2015 Credit Agreement.
August 2014 Credit Agreement
On August 6, 2014 the Company completed a refinancing transaction (the “Refinancing Transaction”),entered into the August 2014 Credit Agreement, which included amendments to the First Amended and Restated Credit Agreement ("Credit Agreement").previously existing debt. The Credit Agreement, as amended, providesagreement provided for a term loan facility of $110.0 million, in term loans; a revolving line of credit facility of $15.0 million, revolving credit facility; an available $15.0 million delayed draw term loan, ("DDTL"); and an available uncommitted $30.0 million incremental term loan. The interest rate on borrowings under the term loan facility consisted of LIBOR plus an applicable spread subject to a leveraged based pricing grid. The maturity date of the facilities under the Credit Agreement, as amended, were extended toloans was August 6, 2019. The obligationsAugust 2014 Credit Agreement was extinguished as a result of the Company underrefinancing transaction in connection with the April 2015 Credit Agreement are secured by substantially all ofAgreement.
NOTE 7 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following table summarizes the Company’s tangibleaccrued expenses and intangible assets. Additionally, the Company is in compliance with the reporting and financial covenants stated in the Credit Agreement.
On September 30, 2014, the Company drew $15.0 million on the DDTL, no amounts had been drawn on the revolving credit facility nor the uncommitted incremental term loan. The DDTL facility will be repaid on a quarterly basis starting March 31, 2016 at 1.875%other current liabilities as of the aggregate outstanding balance, increasing to 2.5% of the aggregate outstanding balance starting December 31, 2016 with any remaining amount due on August 6, 2019. The term loan of $110.0 million will be repaid on a quarterly basis starting December 31, 2014 at $1.4 million of the aggregate outstanding balance, increasing to $2.1 million on December 31,and 2015 and lastly increasing to $2.7 million on December 31, 2016, with any remaining amount due on August 6, 2019.(amounts in thousands):
In connection with the Refinancing Transaction, the Company accelerated the amortization of ratable portions of the deferred
financing costs associated with the prior term loan facilities and portions of the deferred financing costs of the Credit Agreement, as amended, that do not qualify for deferral of $1.4 million. These amounts are reflected in Loss on Debt Extinguishment.
The interest rate on the Credit Agreement, as amended, is a LIBOR-based tiered pricing tied to our net leverage ratio. As of December 31, 2014, the interest rate was 4.5%.
Mezzanine Notes
The Company entered into an agreement on August 6, 2014 ("Mezzanine Credit Agreement") that used the proceeds from the Refinancing Transaction to repay the remaining $31.0 million of indebtedness payable to BIA Digital Partners SBIC II LP, Plexus Fund II, L.P., and BNY Mellon-Alcentra Mezzanine III, L.P. ("Note Holders"). In accordance with the terms of the Mezzanine Credit Agreement, the Company also paid a prepayment penalty of $0.3 million, which is included in Loss on Debt Extinguishment. The remaining original issue discount of the warrant of $1.5 million is included in Loss on Debt Extinguishment.
On August 6, 2014, in conjunction with the Refinancing Transaction, the Company entered into an agreement with the Note Holders that extinguished the entire balance of the warrant liability of $19.2 million (the "Warrant Purchase and Exercise Agreement"). Under the Warrant Purchase and Exercise Agreement, the Note Holders agreed to sell 1,172,080 of their outstanding Warrants (or 50% of the total outstanding warrants) to the Company for $9.6 million. In addition, the Mezzanine Note Holders agreed to exercise the remaining 1,172,080 warrants on a cash-less basis into 913,749 common shares of the Company. |
| | | | | | | |
| | 2016 | | 2015 |
| Accrued compensation and benefits | $ | 10,035 |
| | $ | 9,465 |
|
| Accrued selling, general and administrative | 4,534 |
| | 2,701 |
|
| Accrued carrier costs | 13,543 |
| | 21,637 |
|
| Accrued restructuring | 3,247 |
| | 6,833 |
|
| Accrued other | 5,529 |
| | 2,479 |
|
| | $ | 36,888 |
| | $ | 43,115 |
|
NOTE 68 — FAIR VALUE MEASUREMENTS
The accounting standard for faircarrying value measurements establishes a three-tier hierachy which prioritizesof the inputs used in measuring fair value.
The Company considersCompany's long-term debt, inclusive of $20 million revolving line of credit, net of unamortized debt issuance costs and unamortized original issuance discount, was $729.5 million and $386.2 million as of December 31, 2016 and 2015, respectively. Based on trading activity of the valuation of its warrant liability as a level 3 liability based on unobservable inputs. The Company uses the Black-Scholes pricing model to measureCompany's specific debt, the fair value of the warrant liability. During the the year endingCompany's long-term debt as of December 31, 2014,2016 and 2015 was estimated to approximate its carrying value. The Company's fair value estimates of the model required the input of highly subjective assumptions including volatility of 63%, expected term of 3 years, and risk-free interest rate of 0%.long-term debt were based on Level 1 inputs; quoted prices for identical instruments in active markets.
Certain sellers may electFrom time to receive uptime, the Company has issued contingent consideration, or an earn-out, to one-halfselling shareholders of acquired companies. Historically, the post-closing payments to which they become entitled inearn-out has taken the form of Company-issued common stock or cash consideration contingent on the performance of the Company.entity the Company acquired. The Company considers the valuation of the earn-outs as a levelLevel 3 liability based on unobservable inputsinputs. For issuances of Company common stock, the Company considers this comparable to a stock option and measures the fair value of the option to take the stock using the Black-Scholes pricing model. During the year endingended December 31, 2014, the model required the input of highly subjective assumptions including volatility of 60%, expected term of 3 months, and a risk-free interest rate of 0.1%. This earn-out was settled in full in April 2014.2016, there were no share-based earn-outs entered into or requiring valuation.
The remaining earn-out liability in 20142015 relates to business acquisitions in which the sellers will receivereceived a cash payout based upon the performance of the entity wethe Company acquired. There have been no changes to the fair value of this contingent consideration in 2014.
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, 20142016 and 20132015, respectively (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| | December 31, 2014 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Liabilities: | |
| | |
| | |
| | |
|
| Acquisition earn-out | $ | — |
| | $ | — |
| | $ | 3,374 |
| | $ | 3,374 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2013 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Liabilities: | |
| | |
| | |
| | |
|
| Warrant liability | $ | — |
| | $ | — |
| | $ | 12,295 |
| | $ | 12,295 |
|
| Acquisition earn-out | $ | — |
| | $ | — |
| | $ | 2,900 |
| | $ | 2,900 |
|
Rollforward of level 3 liabilities are as follows (amounts in thousands):
Warrant Liability
|
| | | |
| Balance, December 31, 2012 | $ | 2,288 |
|
| Issuance of warrants | 1,349 |
|
| Change in fair value | 8,658 |
|
| Balance, December 31, 2013 | 12,295 |
|
| Paid in cash | (9,576 | ) |
| Settled in shares | (9,576 | ) |
| Change in fair value | 6,857 |
|
| Issuance of warrants | — |
|
| Balance, December 31, 2014 | $ | — |
|
Acquisition Earn-outs
|
| | | |
| Balance, December 31, 2012 | $ | 6,200 |
|
| Paid in cash | (3,628 | ) |
| Settled in shares | (1,650 | ) |
| Change in the fair value | 1,978 |
|
| Balance, December 31, 2013 | 2,900 |
|
| Paid in cash | (1,155 | ) |
| Settled in shares | (3,704 | ) |
| Change in fair value | 1,554 |
|
| Incurred | 3,779 |
|
| Balance, December 31, 2014 | $ | 3,374 |
|
|
| | | |
| Balance, December 31, 2014 | $ | 3,374 |
|
| Paid in cash | (3,729 | ) |
| Change in fair value | 880 |
|
| Balance, December 31, 2015 | 525 |
|
| Paid in cash | (525 | ) |
| Balance, December 31, 2016 | $ | — |
|
Assets and liabilities measured at a fair value on a non-recurring basis include goodwill, tangible assets, and intangible assets. Such assets are reviewed quarterly for impairment indicators. If a triggering event has occurred, the assets are remeasured when the estimated fair value of the corresponding asset group is less than the carrying value. The fair value measurements, in such instances, are based on significant unobservable inputs (level(Level 3). There were no goodwill or intangible asset impairments recorded during the years ended December 31, 20142016 and 2013.
NOTE 7 — PROPERTY AND EQUIPMENT2015.
The following table summarizes the Company’s property and equipment at December 31, 2014 and 2013 (amounts in thousands):
|
| | | | | | | |
| | 2014 | | 2013 |
| Network equipment | $ | 44,218 |
| | $ | 30,485 |
|
| Computer software | 3,468 |
| | 3,423 |
|
| Leasehold improvements | 2,094 |
| | 757 |
|
| Furniture and fixtures | 253 |
| | 259 |
|
| Property and equipment, gross | 50,033 |
| | 34,924 |
|
| Less accumulated depreciation and amortization | (24,849 | ) | | (14,474 | ) |
| Property and equipment, net | $ | 25,184 |
| | $ | 20,450 |
|
Depreciation expense associated with property and equipment was $11.1 million and $6.9 million for the years ended December 31, 2014 and 2013, respectively.
NOTE 8 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following table summarizes the Company’s accrued expenses and other current liabilities as of December 31, 2014 and 2013 (amounts in thousands):
|
| | | | | | | |
| | 2014 | | 2013 |
| Accrued compensation and benefits | $ | 4,385 |
| | $ | 4,257 |
|
| Accrued interest payable | — |
| | 379 |
|
| Accrued taxes | 2,446 |
| | 3,407 |
|
| Accrued carrier costs | 14,359 |
| | 13,085 |
|
| Acquisition earn-outs and holdbacks | 5,942 |
| | 2,900 |
|
| Accrued restructuring | 2,101 |
| | 755 |
|
| Accrued other | 6,231 |
| | 2,216 |
|
| | $ | 35,464 |
| | $ | 26,999 |
|
NOTE 9 — INCOME TAXES
The components of the provision forincome (loss) before income taxes for the years ended December 31, 2016, 2015 and 2014 and 2013 arewere as follows (amounts in thousands):
|
| | | | | | | |
| | 2014 | | 2013 |
| Current: | |
| | |
|
| Federal | $ | — |
| | $ | — |
|
| State | 83 |
| | (8 | ) |
| Foreign | 1,215 |
| | 720 |
|
| Subtotal | 1,298 |
| | 712 |
|
| Deferred: | | | |
|
| Federal | (2,712 | ) | | (6,000 | ) |
| State | (552 | ) | | (803 | ) |
| Foreign | 937 |
| | 1,439 |
|
| Subtotal | (2,327 | ) | | (5,364 | ) |
| Change in valuation allowance | 3,112 |
| | 2,647 |
|
| Provision for income taxes | $ | 2,083 |
| | $ | (2,005 | ) |
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Domestic | $ | 11,459 |
| | $ | (12,318 | ) | | $ | (25,355 | ) |
| Foreign | (2,271 | ) | | (2,509 | ) | | 4,459 |
|
| Total | $ | 9,188 |
| | $ | (14,827 | ) | | $ | (20,896 | ) |
The components of the provision for income taxes differs from the amount computed by applying the U.S. federal statutory income tax rate to income before income taxes for the reasons set forth below(benefit) expense for the years ended December 31, 2016, 2015 and 2014 and 2013:were as follows (amounts in thousands):
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Current: | |
| | |
| | |
| Federal | $ | 456 |
| | $ | 77 |
| | $ | — |
|
| State | (35 | ) | | — |
| | 83 |
|
| Foreign | 1,298 |
| | (3,708 | ) | | 1,215 |
|
| Total current | 1,719 |
| | (3,631 | ) | | 1,298 |
|
| Deferred: | | | | | |
|
| Federal | 2,381 |
| | (25,347 | ) | | 852 |
|
| State | 745 |
| | (3,783 | ) | | (459 | ) |
| Foreign | (917 | ) | | (1,370 | ) | | 392 |
|
| Total deferred | 2,209 |
| | (30,500 | ) | | 785 |
|
| Income tax (benefit) expense | $ | 3,928 |
| | $ | (34,131 | ) | | $ | 2,083 |
|
The following is a reconciliation of the U.S. federal statutory income taxes to the amounts reported in the financial statements for the years ended December 31, 2016, 2015 and 2014 (amounts in thousands):
| | | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| U.S. federal statutory income tax rate | 35.00 | % | | 35.00 | % | |
| U.S. federal statutory income tax | | $ | 3,216 |
| | $ | (5,188 | ) | | $ | (7,233 | ) |
| Permanent items | (2.79 | )% | | (10.23 | )% | (184 | ) | | 733 |
| | 575 |
|
| State taxes, net of federal benefit | (0.43 | )% | | (0.13 | )% | 417 |
| | (533 | ) | | 89 |
|
| Foreign tax rate differential | 2.04 | % | | 1.55 | % | 6 |
| | (34 | ) | | (421 | ) |
| Warrant extinguishment | (27.79 | )% | | — | % | — |
| | — |
| | 5,743 |
|
| Change in valuation allowance | (15.09 | )% | | (14.17 | )% | — |
| | (23,450 | ) | | 3,118 |
|
| Unrecognized tax positions | (1.53 | )% | | (1.31 | )% | — |
| | (2,167 | ) | | 316 |
|
| Italian IRAP tax | 1.38 | % | | (1.6 | )% | |
| Prior year AMT | — | % | | 0.11 | % | |
| Return to provision adjustments | (0.87 | )% | | (0.29 | )% | |
| Effective Tax Rate | (10.08 | )% | | 8.93 | % | |
| Other | | 473 |
| | (3,492 | ) | | (104 | ) |
| Total income tax (benefit) expense | | $ | 3,928 |
| | $ | (34,131 | ) | | $ | 2,083 |
|
In 2014, loss before income taxes of $20.9 million consisted of $25.3 million domestic loss and $4.4 million foreign income. In 2013, loss before income taxes of $22.8 million consisted of $23.6 million domestic loss and and $0.8 million foreign income.
As of December 31, 2014, the Company has net operating loss ("NOL") carryforwards of approximately $72 million for tax purposes which will be available to offset future income. The NOL carryforwards consist of $15.4 million in foreign NOL carryforwards, which have an indefinite carryforward period and $56.6 million in U.S. NOL carryforward. If not used, the US carryforwards will expire between 2020 and 2034. The Company's U.S. NOL carryforward are limited under Section 382 of the Internal Revenue Code ("IRC"). In future periods, an aggregate, tax effected amount of $2.2 million of NOL's will be recorded to Additional paid-in-capital when carried forward excess tax benefits from stock based compensation are utilized to reduce future cash tax payments.
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's deferred tax assets and liabilities at December 31, 20142016 and 2013 are2015 were as follows (amounts in thousands):
|
| | | | | | | | |
| | | 2014 | | 2013 |
| Deferred tax assets: | | |
| | |
|
| Net operating loss carryforwards | | $ | 24,735 |
| | $ | 8,442 |
|
| Capital loss and trade deficit loss carryforwards | | 678 |
| | 745 |
|
| Allowance for doubtful accounts | | 1,683 |
| | 860 |
|
| Fixed assets | | 1,972 |
| | 286 |
|
| Intangible Assets | | — |
| | 5,585 |
|
| Mark to market adjustment | | — |
| | 3,794 |
|
| Stock compensation | | 984 |
| | 671 |
|
| Miscellaneous items | | 1,389 |
| | 1,435 |
|
| Total deferred tax assets before valuation allowance | | 31,441 |
| | 21,818 |
|
| Less: Valuation allowance | | (23,756 | ) | | (19,806 | ) |
| Total deferred tax assets | | 7,685 |
| | 2,012 |
|
| Deferred tax liabilities: | | | | |
|
| Intangibles | | 5,887 |
| | — |
|
| Miscellaneous items | | 942 |
| | 239 |
|
| Total deferred tax liabilities | | 6,829 |
| | 239 |
|
| Net deferred tax liability | | $ | (856 | ) | | $ | (1,773 | ) |
|
| | | | | | | |
| | 2016 | | 2015 |
| Deferred tax assets: | |
| | |
|
| Net operating loss carryforwards | $ | 20,280 |
| | $ | 29,607 |
|
| Capital loss and trade deficit carryforwards | 980 |
| | 677 |
|
| Reserves and allowances | 697 |
| | 1,831 |
|
| Share-based compensation | 3,742 |
| | 2,019 |
|
| Other | 2,238 |
| | 1,640 |
|
| Total deferred tax assets before valuation allowance | 27,937 |
| | 35,774 |
|
| Less: Valuation allowance | (284 | ) | | (305 | ) |
| Total deferred tax assets | 27,653 |
| | 35,469 |
|
| Deferred tax liabilities: | | | |
| Intangible assets and goodwill | (17,724 | ) | | (29,193 | ) |
| Property and equipment | (4,162 | ) | | 1,526 |
|
| Other | (606 | ) | | (432 | ) |
| Total deferred tax liabilities | (22,492 | ) | | (28,099 | ) |
Net deferred tax assets(1) | $ | 5,161 |
| | $ | 7,370 |
|
The Company currently has significant deferred tax assets primarily resulting from NOL carryforwards. The significant increase in NOL as of December 31, 2014 resulted from acquired NOL(1) Included as a resultcomponent of the acquisitions in 2014. As of December 31, 2014, the Company provided a full valuation allowance against its net US deferred taxOther long-term assets since, based on the application of the criteria inconsolidated balance sheets.
ASC 740, it concluded that it was more likely thanIn accordance with ASU No. 2015-17, at December 31, 2016 all deferred tax assets and liabilities were presented as noncurrent. No prior periods were adjusted retrospectively.
As of December 31, 2016, the Company had $71.7 million of U.S. federal net operating loss ("NOL") carryforwards net of limitations under Section 382. Approximately $27.8 million of the NOL carryforwards have not thatbeen recognized as they relate to "windfall" tax benefits associated with share-based compensation. The Company's U.S. federal NOL carryforwards, if not utilized to reduce taxable income in future years, will expire between 2020 and 2035.
As of December 31, 2016, the Company had tax-effected state NOL carryforwards of approximately $3.2 million, which are subject to limitations and have various expirations through 2035. Approximately $1.5 million of the tax-effected state NOL carryforwards have not been recognized as they related to "windfall" benefits associated with share-based compensation.
As of these assets would not be realizedDecember 31, 2016, the Company had NOL carryforwards in the future. Following the criteria in ASC 740, the Company reviews this valuation allowance on a quarterly basis assessing the positive and negative evidence to determine ifU.K. of $14.5 million, which have an indefinite carry forward period.
Management believes it is more likely than not that some or all of theit will utilize its net deferred tax assets, will be realized. Based on its assessmentwith the exception of $0.3 million foreign deferred tax assets.
Accounting for Uncertainty in Income Taxes
The Company had unrecognized tax benefits of $0.0 million as of December 31, 2014, the Company determined to maintain valuation allowance in the US2016 and Italy.2015, and $2.2 million as of December 31, 2014. The Company will continuerecognizes interest and penalties related to evaluate the need a valuation allowanceuncertain tax positions in the other foreign jurisdictions.income tax expense. Changes in unrecognized tax benefits are set forth below (amounts in thousands):
Foreign earnings are considered |
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Balance, January 1 | $ | — |
| | $ | 2,167 |
| | $ | 1,851 |
|
| Changes for tax positions of prior years | — |
| | (1,849 | ) | | — |
|
| Increases for tax positions related to the current year | — |
| | — |
| | 342 |
|
| Settlements and lapsing of statutes of limitations | — |
| | (318 | ) | | (26 | ) |
| Balance, December 31 | $ | — |
| | $ | — |
| | $ | 2,167 |
|
The Company files income tax returns in U.S. federal, state and foreign jurisdictions. The Company is no longer subject to be permanently reinvested and, accordingly, no U.S. federal and state income taxes have been provided theron.
The Company applies guidancetax examinations for uncertainty in income taxes that requiresyears prior to 2013 with the application of a more likely than not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, this guidance permits the Company to recognize a tax benefit measured at the largest amountexception of the federal and state tax benefit that, in the Company’s judgment, is more likely than not to be realized upon settlement. The Company has performed an analysisreturns of all open years, December 31, 2009 to December 31, 2014 and the expected tax positions to be taken at the balance sheet date. At December 31, 2014, approximately $2.2 million of unrecognized tax benefits including penalties and interest in conjunction with its activities in certain countries where a permanent establishment may give rise to corporate income taxes. Of the $2.2 million recorded, $1.5 million was established through purchase price accounting on 2013. The gross unrecognized tax benefit amount is not expected to materially change in the next 12 months. The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits:acquired entities for which net operating losses are available for utilization.
|
| | | | | | | |
| | 2014 | | 2013 |
| Balance, January 1 | $ | 1,851 |
| | $ | — |
|
| Changes for tax positions of prior years | — |
| | 1,851 |
|
| Increases for tax positions related to the current year | 342 |
| | — |
|
| Settlements and lapsing of statues of limitations | (26 | ) | | — |
|
| Balance, December 31 | $ | 2,167 |
| | $ | 1,851 |
|
NOTE 10 — RESTRUCTURING COSTS, EMPLOYEE TERMINATION AND OTHER ITEMS
The Company incurred severance, restructuring and other exit costs associated with the acquisitions of Telnes, One Source, MegaPath and UNSi. These costs include employee severance costs, termination costs associated with facility leases and network agreements, and other exit costs directly related to the exit activities associated with the acquisitions. Transaction and integration costs are not included in exit costs, but are recorded as a component of selling, general and administrative expense.
During the year ended December 31, 2016, the Company incurred $0.9 million in charges associated with the acquisition of Telnes offset by $0.1 million of adjustments from prior acquisitions. The Company paid $2.7 million in employee termination benefits consisting of $0.8 million for Telnes, $1.1 million for One Source and $0.8 million for MegaPath. The Company paid $0.6 million in lease termination costs consisting of $0.5 million related to the MegaPath acquisition and $0.1 million related to the One Source acquisition. Payments made for other contract terminations cost of $1.0 million were primarily related to the acquisition of MegaPath.
The exit costs recorded and paid relating to the acquisitions mentioned above are summarized as follows for the year ended December 31, 2016 (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| | Balance, December 31, 2015 | | Charges and Adjustments | | Payments | | Balance, December 31, 2016 |
| Employee Termination Benefits | $ | 1,903 |
| | $ | 870 |
| | $ | (2,731 | ) | | $ | 42 |
|
| Contract Terminations: | | | | | | | |
| Lease terminations | 1,503 |
| | — |
| | (644 | ) | | 859 |
|
| Other contract terminations | 3,427 |
| | (102 | ) | | (979 | ) | | 2,346 |
|
| | $ | 6,833 |
| | $ | 768 |
| | $ | (4,354 | ) | | $ | 3,247 |
|
During the year ended December 31, 2015, the Company incurred $12.7 million in exit costs associated with the acquisitions, consisting of $4.9 million for One Source and $7.7 million for MegaPath. No additional exit costs were incurred for the acquisition of UNSi which occurred in 2014. The Company paid $6.0 million in employee termination benefits consisting of $1.2 million for One Source, $4.1 million for MegaPath and the remainder for UNSi. The Company also paid $1.4 million in other contract termination costs consisting of $1.0 million for MegaPath and $0.4 million for UNSi.
The exit costs recorded and paid are summarized as follows for the year ended December 31, 2015 (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| | Balance, December 31, 2014 | | Charges and Adjustments | | Payments | | Balance, December 31, 2015 |
| Employee Termination Benefits | $ | 778 |
| | $ | 7,159 |
| | $ | (6,034 | ) | | $ | 1,903 |
|
| Contract Terminations: | | | | | | | |
| Lease terminations | 194 |
| | 1,796 |
| | (487 | ) | | 1,503 |
|
| Other contract terminations | 1,130 |
| | 3,729 |
| | (1,432 | ) | | 3,427 |
|
| | $ | 2,102 |
| | $ | 12,684 |
| | $ | (7,953 | ) | | $ | 6,833 |
|
During the year ended December 31, 2014, the Company incurred $6.1$9.4 million in exit costs, consisting of $6.1 million associated with the UNSi acquisition, including payroll and employee severance costs, professional fees, termination costs associated with network grooming, and travel expenses. In addition, the Company recorded a $3.3 million for litigation settlement forsettlement. The Company paid $4.8 million in employee termination benefits, lease terminations, and other contract terminations, related to the Artel LLC litigation as a restructuring cost during the year ended December 31, 2014.
The restructuring charges and accruals established by the Company are summarized as follows for the year ended December 31, 2014 (amounts in thousands):
|
| | | | | | | | | | | |
| | Charges Net of Reversals | | Cash Payments | | Balance, December 31, 2014 |
| | | | | | |
| Employment costs | $ | 3,725 |
| | $ | 3,495 |
| | $ | 230 |
|
| Professional fees | 1,003 |
| | 332 |
| | 671 |
|
| Integration expenses | 100 |
| | 75 |
| | 25 |
|
| Travel and other expenses | 1,297 |
| | 122 |
| | 1,175 |
|
| Total | $ | 6,125 |
| | $ | 4,024 |
| | $ | 2,101 |
|
acquisition of UNSi.
During the year ended December 31, 2013, the Company incurred $7.7 million in costs associated with executing and closing the IDC and Tinet acquisitions, including payroll and employee severance costs, professional fees, termination costs associated with network grooming, and travel expenses.
The restructuring charges and accruals established by the Company, and activities related thereto, are summarized as follows for the year ended December 31, 2013 (amounts in thousands):
|
| | | | | | | | | | | |
| | Charges Net of Reversals | | Cash Payments | | Balance, December 31, 2013 |
| | | | | | |
| Employment costs | $ | 4,600 |
| | $ | 4,564 |
| | $ | 36 |
|
| Professional fees | 1,565 |
| | 1,246 |
| | 319 |
|
| Integration expenses | 1,282 |
| | 891 |
| | 391 |
|
| Travel and other expenses | 230 |
| | 221 |
| | 9 |
|
| Total | $ | 7,677 |
| | $ | 6,922 |
| | $ | 755 |
|
The $0.8 million accrued for at December 31, 2013 was paid by March 31, 2014.
NOTE 11 — EMPLOYEE STOCK-BASEDSHARE-BASED COMPENSATION BENEFITS
Stock-BasedShare-Based Compensation Plan
The Company adopted itsgrants share-based equity awards, including stock options and restricted stock, pursuant to three plans in effect as of December 31, 2016 the 2006 Employee, Director and Consultant Stock Plan (the “2006 Plan”)adopted in October 2006. In addition2006, the 2011 Plan adopted in June 2011 and the 2015 Plan adopted in June 2015 (collectively referred to stock options,as the Company may also grant restricted stock or other stock-based awards under the 2006 Plan."GTT Stock Plan"). The maximum number of shares issuable over the term of the 2006GTT Stock Plan is limited to 3,500,000 shares.
The Company adopted its 2011 Employee, Directoran aggregate 9,500,000 shares of which 7,652,671 have been issued 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 numberare outstanding as 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.December 31, 2016.
The GTT Stock Plan permits the granting of time-based stock options, time-based restricted stock and performance-based restricted stock to employees (including employee directors and officers) and consultants of the Company, and non-employee directors of the Company. Options
Time-based options granted under the GTT Stock 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 ten10 years from the grant date. The stock options generally vest over four years with 25% of the option sharesoptions becoming exercisable one year from the date of grant and the remaining 75% annually or quarterly over the following three years.
Time-based restricted stock granted under the GTT Stock Plan is granted at the closing stock price on the day of grant. Restricted stock generally vests over four years with 25% of the shares becoming unrestricted one year from the date of grant and the remaining 75% annually or quarterly over the following three years.
The Company uses the Black-Scholes option-pricing model to determine the fair value of its option awards at the time of grant. The fair value of the restricted stock awards was calculated using the value of GTT common stock on the grant date and is being amortized over the vesting periods in which the restrictions lapse.
Performance-based restricted stock is granted under the GTT Stock Plan subject to the achievement of certain performance measures. Once achievement of these performance measures becomes probable, the Company starts to expense the fair value of
the grant over the vesting period. The performance-based restricted stock is valued at the closing price on the day of grant. The performance grant will vest annually or quarterly over the vesting period once achievement of the performance measure has been met and approved by the Compensation Committee.
The Compensation Committee of the Board of Directors, as administrator of the Plan, has the discretion to useauthorize a different vesting schedule.schedule for any awards.
The following table summarizes the share-based compensation expense recognized as a selling, general and administrative expense in the consolidated statements of operations (amounts in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Time-based stock options | $ | 1,790 |
| | $ | 1,591 |
| | $ | 883 |
|
Time-based restricted stock(1) | 6,451 |
| | 5,052 |
| | 1,535 |
|
| Performance-based restricted stock | 7,248 |
| | 1,233 |
| | — |
|
| ESPP | 286 |
| | — |
| | — |
|
| Total | $ | 15,775 |
| | $ | 7,876 |
| | $ | 2,418 |
|
(1)Includes $2.2 million and $0.7 million for the years ended December 31, 2016 and 2015, respectively, related to the shares issued to the former employees of One Source for continued employment.
The following table summarizes the unrecognized compensation cost and the weighted average period over which the cost is expected to be amortized (amounts in thousands):
|
| | | | | |
| | December 31, 2016 |
| | Unrecognized Compensation Cost | | Weighted Average Remaining Period to be Recognized (Yrs) |
| Stock Options | $ | 3,205 |
| | 1.67 |
| Restricted Stock | 14,032 |
| | 1.83 |
| Performance Awards | 8,101 |
| | 1.39 |
| Total | $ | 25,338 |
| | 1.67 |
Time-Based 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 simplifiedBlack-Scholes option-pricing model method to estimatecalculate the options’fair value of the stock options. The use of option valuation models requires the input by management of certain assumptions, including the expected term.stock price volatility, the expected life of the option term and the forfeiture rate. These assumptions are utilized by the Company in determining the estimated fair value of the stock options. Assumptions used in the calculation of the stock option expense were as follows:
|
| | | | | | |
| | | 2014 | | 2013 |
| Volatility | | 62.2% - 63.2% |
| | 60.2% - 63.4% |
|
| Risk free rate | | 1.7% - 2.0% |
| | 1.0% - 1.9% |
|
| Term | | 6.25 |
| | 6.25 |
|
| Dividend yield | | — | % | | — | % |
Stock-based compensation expense recognized in the accompanying consolidated statement of operations for the year ended December 31, 2014 is based on awards ultimately expected to vest, reduced for estimated forfeitures. Forfeiture assumptions were based upon management’s estimate. |
| | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Expected volatility | 42.5% - 48.8% |
| | 44.3% - 64.6% |
| | 62.2% - 63.2% |
|
| Risk free interest rate | 1.0% - 1.9% |
| | 1.3% - 1.9% |
| | 1.7% - 2.0% |
|
| Expected term (in years) | 6.11 |
| | 6.25 |
| | 6.25 |
|
| Dividend yield | 0.0 | % | | 0.0 | % | | 0.0 | % |
| Forfeiture rate | 4.0 | % | | 4.0 | % | | 4.0 | % |
The fair value of each stock option grant to employees is estimated onas of 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
Stock option activity during the years ended December 31, 2016, 2015 and 2014 and 2013, the Company recognized compensation expense related to stock options of $0.9 million and $0.4 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, 2014, 459,450 options were granted pursuant to the Plan. The following table summarizes information concerning options outstanding as of December 31, 2014:follows:
| | | | | Options | | Weighted Average Exercise Price | | Weighted Average Fair Value | | Weighted Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value | | Options | | Weighted Average Exercise Price | | Weighted Average Fair Value | | Weighted Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value |
| Balance, December 31, 2013 | | 1,697,500 |
| | $ | 2.09 |
| | $ | 0.47 |
| | 7.31 | | $ | 7,962,468 |
| | 1,697,500 |
| | $ | 2.09 |
| | $ | 0.47 |
| |
| |
|
|
| Granted | | 459,450 |
| | 12.44 |
| | 7.35 |
| | 9.31 | | — |
| | 459,450 |
| | 12.44 |
| | 7.35 |
| |
|
|
| Exercised | | (633,754 | ) | | 1.67 |
| | 1.10 |
| | 5.12 | | 1,278,434 |
| | (633,754 | ) | | 1.67 |
| | 1.10 |
| |
|
|
| Forfeited | | (159,736 | ) | | 4.98 |
| | 2.85 |
| | 8.18 | | 1,606,253 |
| |
| Forfeited or canceled | | | (159,736 | ) | | 4.98 |
| | 2.85 |
| |
|
|
| Balance, December 31, 2014 | | 1,363,460 |
| | $ | 5.41 |
| | $ | 3.17 |
| | 7.52 | | $ | 10,664,023 |
| | 1,363,460 |
| | 5.41 |
| | 3.17 |
| |
| |
|
|
| Granted | | | 344,117 |
| | 17.91 |
| | 8.64 |
| |
|
|
| Exercised | | | (259,121 | ) | | 2.35 |
| | 1.40 |
| |
|
|
| Forfeited or canceled | | | (72,079 | ) | | 6.50 |
| | 2.75 |
| |
|
|
| Balance, December 31, 2015 | | | 1,376,377 |
| | 9.05 |
| | 4.89 |
| |
| |
|
|
| Granted | | | 158,958 |
| | 13.76 |
| | 6.10 |
| | |
| Exercised | | | (307,286 | ) | | 3.83 |
| | 2.29 |
| | |
| Forfeited or canceled | | | (64,141 | ) | | 13.31 |
| | 6.47 |
| | |
| Balance, December 31, 2016 | | | 1,163,908 |
| | $ | 10.84 |
| | $ | 5.66 |
| | 7.26 | | $ | 20,847,944 |
|
| Exercisable | | 557,305 |
| | $ | 1.83 |
| | $ | 1.12 |
| | 6.09 | | $ | 6,355,069 |
| | 645,936 |
| | $ | 8.17 |
| | $ | 4.51 |
| | 6.51 | | $ | 13,292,491 |
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company's closing stock price on the last day of the year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2016. The amount of aggregate intrinsic value will change based on the fair market value of the Company's stock.
As of December 31, 2014,2016, the total vested portion of share-based compensation expense was $0.6 million. As of December 31, 2014, the unvested portion of share-based compensation expense attributable tofor time-based stock options was $5.6 million, the unamortized compensation cost related to unvested stock options was $3.2 million, and the weighted average period inover which such expensethis cost is expected to vest and be recognized is as follows (amounts in thousands): 1.7 years.
|
| | | |
| 2015 | $ | 880 |
|
| 2016 | 983 |
|
| 2017 | 840 |
|
| 2018 | 240 |
|
| Total | $ | 2,943 |
|
The fair value of share-based compensation for options that vested as of December 31, 2014 was $2.9 million.
During the year ended December 31, 2013, 486,750 options were granted pursuant to the Plan. The following table summarizes information concerning options outstanding as of December 31, 2013:
|
| | | | | | | | | | | | | | | | | | |
| | | Options | | Weighted Average Exercise Price | | Weighted Average Fair Value | | Weighted Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value |
| Balance at December 31, 2012 | | 1,395,250 |
| | $ | 1.49 |
| | $ | 0.43 |
| | 7.23 |
| | $ | 1,834,685 |
|
| Granted | | 486,750 |
| | 3.64 |
| | 2.07 |
| | — |
| | — |
|
| Exercised | | (92,125 | ) | | — |
| | — |
| | — |
| | 279,830 |
|
| Forfeited | | (92,375 | ) | | 1.03 |
| | 0.56 |
| | — |
| | 594,455 |
|
| Balance at December 31, 2013 | | 1,697,500 |
| | $ | 2.09 |
| | $ | 0.47 |
| | 7.31 |
| | $ | 7,962,468 |
|
| Exercisable | | 829,913 |
| | $ | 4.34 |
| | $ | 0.93 |
| | 5.81 |
| | $ | 4,885,047 |
|
As of December 31, 2013, the vested portion of share-based compensation expense was $0.8 million. As of December 31, 2013, 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):
|
| | | |
| 2014 | $ | 427 |
|
| 2015 | 370 |
|
| 2016 | 284 |
|
| 2017 | 97 |
|
| Total | $ | 1,178 |
|
The fair value of share-based compensation for options that vested as of December 31, 2013 was $1.2 million.
Time-Based Restricted Stock
The fair value of the restricted shares issued is amortized on a straight-line basis over the vesting periods. During the year ended December 31, 2014 and 2013, the Company recognized compensation expense related to restricted stock of $1.5 million and $1.1 million, respectively, which is included in selling, general and administrative expense on the accompanying consolidated statements of operations.
Following table summarizesTime-based restricted stock activity during the years ended December 31, 2016, 2015 and 2014 and 2013:was as follows:
| | | | | 2014 | | 2013 | Shares | | Weighted Average Fair Value |
| | | Shares | | Weighted Average Fair Value | | Shares | | Weighted Average Fair Value | |
| Nonvested Balance at January 1, | | 976,938 |
| | $ | 2.96 |
| | 660,001 |
| | $ | 1.66 |
| |
| Unvested balance, December 31, 2013 | | 789,938 |
| | $ | 9.58 |
|
| Granted | | 1,016,902 |
| | 12.48 |
| | 727,357 |
| | 3.58 |
| 406,902 |
| | 11.94 |
|
| Forfeited | | (142,503 | ) | | 12.57 |
| | (5,000 | ) | | 3.40 |
| (142,503 | ) | | 3.49 |
|
| Vested | | (405,762 | ) | | 10.88 |
| | (405,420 | ) | | 5.02 |
| (375,262 | ) | | 10.71 |
|
| Nonvested Balance at December 31, | | 1,445,575 |
| | $ | 10.92 |
| | 976,938 |
| | $ | 2.96 |
| |
| Unvested balance, December 31, 2014 | | 679,075 |
| | 11.65 |
|
| Granted | | 550,027 |
| | 18.46 |
|
| Forfeited | | (18,220 | ) | | 10.96 |
|
| Vested | | (331,250 | ) | | 19.20 |
|
| Unvested balance, December 31, 2015 | | 879,632 |
| | 13.08 |
|
| Granted | | 638,362 |
| | 14.66 |
|
| Forfeited | | (83,293 | ) | | 16.85 |
|
| Vested | | (385,731 | ) | | 18.93 |
|
| Unvested balance, December 31, 2016 | | 1,048,970 |
| | $ | 11.59 |
|
The fair value of time-based restricted stock awarded totaled $9.4 million, $10.9 million and $4.4 million for the years ended December 31, 2016, 2015 and 2014, respectively. The fair value of these awards was calculated using the value of GTT common stock on the grant date and is being amortized over the respective vesting periods. As of December 31, 2016, unamortized compensation cost related to unvested restricted stock was $14.0 million and the weighted average period over which this cost will be recognized is 1.7 years.
Performance-Based Restricted Stock
Performance-based restricted stock activity during the years ended December 31, 2016, 2015 and 2014 was as follows:
|
| | | | | | |
| | Shares | | Weighted Average Fair Value |
| Unvested balance, December 31, 2013 | 187,000 |
| | $ | 5.82 |
|
| Granted | 610,000 |
| | 12.82 |
|
| Forfeited | — |
| | — |
|
| Vested | (30,500 | ) | | 12.98 |
|
| Unvested balance, December 31, 2014 | 766,500 |
| | 11.11 |
|
| Granted | 935,000 |
| | 19.18 |
|
| Forfeited | — |
| | — |
|
| Vested | (303,373 | ) | | 20.03 |
|
| Unvested balance, December 31, 2015 | 1,398,127 |
| | 14.57 |
|
| Granted | — |
| | — |
|
| Forfeited | (19,687 | ) | | 17.69 |
|
| Vested | (450,004 | ) | | 18.36 |
|
| Unvested balance, December 31, 2016 | 928,436 |
| | $ | 12.66 |
|
The Company granted $8.5 million of restricted stock during 2014 and early 2015 contingent upon the non-vested portionachievement of certain performance criteria (the "2014 Performance Awards"). The fair value of the 2014 Performance Awards was calculated using the value of GTT common stock on the grant date. The Company started recognizing stock-based compensation expense for these grants when the achievement of the performance criteria became probable, which was in the third quarter of 2015. The 2014 Performance Awards started vesting in the fourth quarter of 2015 when the performance criteria were met, and they will continue to vest ratably through the third quarter of 2017. As of December 31, 2016, unamortized compensation cost related to the unvested 2014 Performance Awards was $0.7 million.
In November 2015, the Company granted $16.9 million of restricted stock, contingent upon the achievement of certain performance criteria (the "2015 Performance Awards"). The fair value of the 2015 Performance Awards was calculated using the value of GTT common stock on the grant date. Upon announcement of the Hibernia Networks acquisition in November 2016 (see Note 15 - Subsequent Events), the achievement of two of the four performance criteria became probable. Accordingly, the Company recognized share-based compensation expense attributableof $1.1 million for the year ended December 31, 2016. Of the $15.8 million that remains unamortized as of December 31, 2016, $8.4 million relates to restrictedthe two performance criteria that have not been met.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan ("ESPP") that permits eligible employees to purchase common stock amountsthrough payroll deductions at the lesser of the opening stock price or 85% of the closing stock price of the Company's common stock during each of the three-month offering periods. The offering periods generally commence on the first day and the last day of each quarter. At December 31, 2016, 417,204 shares were available for issuance under the ESPP. During the twelve months ended December 31, 2016, the Company has recognized $0.3 million of compensation expense related to $1.5the ESPP. There was no ESPP expense in 2015 and 2014.
Shares Issued in Acquisition
In conjunction with the acquisition of One Source, the Company issued $3.6 million, or 289,055 unregistered shares, of common stock to the selling shareholders of One Source subject to a continuing employment period of 18 months. The fair value of this
issuance was calculated using the value of GTT common stock on the acquisition date less a discount for lack of marketability. The $3.6 million was expensed ratably over the service period of 18 months. As of December 31, 2016, unamortized compensation expense was $0.7 million which is expected to vest andwill be recognized during a weighted-average period of 10.8 years.through April 2017.
NOTE 12 — DEFINED CONTRIBUTION PLAN
The Company has a defined contribution retirement plan under Section 401(k) of the IRCInternal Revenue Code ("IRC") that covers substantially all U.S. based employees. EligibleThe plan allows eligible employees mayto contribute amountsfrom 1% to 100% of their pre-tax eligible earnings, subject to defined limits. The Company matches 50% of an employee's voluntary contributions per pay period up to the annual maximum as defined by the IRS. Employer's matching contributions under the Company's plan via payroll withholding, subject to certain limitations.vest at a rate of 25% for each year of employment and are fully vested after four years of employment for all current and future contributions. During 2014the years ended December 31, 2016, 2015 and 2013,2014, the Company matched 40%incurred 401(k) matching expense of employees’ contributions to the plan. The Company’s 401(k) expense was $239,000 in 2014$0.9 million, $0.6 million and $179,000 in 2013.$0.2 million, respectively.
NOTE 13 — COMMITMENTS AND CONTINGENCIES
Estimated annual commitments under contractual obligations are as follows at December 31, 2016 (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| | Network Supply | | Office Space | | Capital Leases | | Other(1) |
| 2017 | $ | 103,770 |
| | $ | 3,332 |
| | $ | 1,015 |
| | $ | 7,618 |
|
| 2018 | 57,220 |
| | 2,618 |
| | 120 |
| | 578 |
|
| 2019 | 22,830 |
| | 2,031 |
| | — |
| | 154 |
|
| 2020 | 3,477 |
| | 1,114 |
| | — |
| | — |
|
| 2021 | 898 |
| | 613 |
| | — |
| | — |
|
| 2022 and beyond | 1,552 |
| | 473 |
| | — |
| | — |
|
| | $ | 189,747 |
| | $ | 10,181 |
| | $ | 1,135 |
| | $ | 8,350 |
|
(1) Primarily consists of vendor contracts associated with network monitoring and maintenance services.
Network Supply Agreements
As of December 31, 2016, the Company had purchase obligations of $189.7 million associated with the telecommunications services that the Company has contracted to purchase from its suppliers. The Company’s supplier agreements fall into two key categories, the Company's core IP backbone and customer specific locations (also referred to as 'last mile' locations). Supplier agreements associated with the Company's core IP backbone are typically contracted on a one-year term and do not relate to any specific underlying customer commitments. The short term duration allows the Company to take advantage of favorable pricing trends.
Supplier agreements associated with the Company's customer specific locations, which represents the substantial majority of the Company's network spending are typically contracted so the terms and conditions in both the vendor and customer contracts are substantially the same in terms of duration and capacity. The back-to-back nature of the Company’s contracts means that its network supplier obligations are generally mirrored by its customers' commitments to purchase the services associated with those obligations.
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 is currently headquartered in McLean, Virginia and has 8ten offices throughout the United States, 5four offices in Europe and one office in Hong Kong.
The Company records rent expense using the straight-line method over the term of the lease agreement. Office facility rent expense was $2.1$5.5 million, $4.5 million and $1.2$2.1 million, for the years ended December 31, 20142016, 2015 and 2013,2014, respectively.
Estimated annual commitments under non-cancelable operating leases are as follows at December 31, 2014 (amounts in thousands):
F-27“Take-or-Pay” Purchase Commitments
|
| | | | | | | |
| | Office Space | | Other |
| | | | |
| 2015 | $ | 2,411 |
| | $ | 574 |
|
| 2016 | 2,079 |
| | 474 |
|
| 2017 | 2,078 |
| | 474 |
|
| 2018 | 1,211 |
| | — |
|
| 2019 | 1,200 |
| |
|
|
| 2020 and beyond | 794 |
| |
|
|
| | $ | 9,773 |
| | $ | 1,522 |
|
Commitments - Supply agreements
As of December 31, 2014, the Company had supplier agreement purchase obligations of $58.6 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 natureOne of the Company’s contracts means thatsupplier agreements requires the largest componentCompany to make minimum monthly payments regardless of its contractual obligationswhether or not the Company is generally mirrored by its customer’s commitmentutilizing enough services to purchasesatisfy the services associated with those obligations.
Estimated annual commitments under supplier contractual agreements are as follows at December 31, 2014 (amounts in thousands):
|
| | | |
| | Supplier Agreements |
| | |
| 2015 | $ | 11,431 |
|
| 2016 | 15,670 |
|
| 2017 | 21,662 |
|
| 2018 | 1,025 |
|
| 2019 | 2,740 |
|
| 2020 and beyond | 6,085 |
|
| | $ | 58,613 |
|
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 practiceminimum (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 canceled. Additionally, the Company maintains some fixed network costs and from time to time, if it deems portions of the network are not economically beneficial, the Company may disconnect those portions and potentially incur early termination liabilities.“take-or-pay”
“Take-or-Pay” Purchase CommitmentsF - 30
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, 2014 and 2013,2016, the Company’s aggregate monthlyCompany no longer had any obligations under suchthis take-or-pay commitments overcommitment. As of December 31, 2015, the remaining term of all of those contracts totaled $2.2 million and $4.3 million, respectively.Company's aggregate obligations under the take-or-pay commitment was $33.9 million.
Contingencies - Legal proceedingsProceedings
From time to time, the Company is a party to legal proceedings arising in the normal course of its business. Aside from the matters discussed below, theThe Company does not believe that it is a party to any current or pending legal action that could reasonably be expected to have a material adverse effect on its businessfinancial condition or operating results financial position or cash flows.
NOTE 14 — FOREIGN OPERATIONS
The Company’s operations are located primarily in the United States and Europe. The Company’s financial data recognized by geographic area islegal entities as follows:follows (amounts in thousands):
| | | | US | | ITALY | | UK | | OTHER | | Total GTT | ITALY | | UK | | OTHER | | FOREIGN COUNTRY TOTAL | | US | | TOTAL |
| 2016 | | | | | | | | | | | | |
| Revenues by geographic area | | $ | 37,670 |
| | $ | 30,952 |
| | $ | 1,643 |
| | $ | 70,265 |
| | $ | 451,423 |
| | $ | 521,688 |
|
| Long-lived assets at December 31 | | 24,098 |
| | 8,054 |
| | 558 |
| | 32,710 |
| | 485,188 |
| | 517,898 |
|
| 2015 | | | | | | | | | | | | |
| Revenues by geographic area | | 46,565 |
| | 25,565 |
| | 3,456 |
| | 75,586 |
| | 293,664 |
| | 369,250 |
|
| Long-lived assets at December 31 | | 29,978 |
| | 9,337 |
| | 1,223 |
| | 40,538 |
| | 451,425 |
| | 491,963 |
|
| 2014 | |
| | | | |
| | |
| | |
| | | |
| | |
| | | | |
| | |
|
| Revenues by geographic area | $ | 118,966 |
| | $ | 56,547 |
| | $ | 27,092 |
| | $ | 4,738 |
| | $ | 207,343 |
| 56,547 |
| | 27,092 |
| | 4,738 |
| | 88,377 |
| | 118,966 |
| | 207,343 |
|
| Long-lived assets at December 31 | $ | 126,762 |
| | $ | 38,172 |
| | $ | 9,840 |
| | $ | 1,723 |
| | $ | 176,497 |
| 38,172 |
| | 9,840 |
| | 1,723 |
| | 49,735 |
| | 126,762 |
| | 176,497 |
|
| 2013 | |
| | | | |
| | |
| | |
| |
| Revenues by geographic area | $ | 88,995 |
| | $ | 39,959 |
| | $ | 23,481 |
| | $ | 4,933 |
| | $ | 157,368 |
| |
| Long-lived assets at December 31 | $ | 73,462 |
| | $ | 46,510 |
| | $ | 11,109 |
| | $ | 6 |
| | $ | 131,087 |
| |
NOTE 15 — SUBSEQUENT EVENTEVENTS
Hibernia Acquisition
On February 19, 2015,January 9, 2017, the Company entered into a definitive agreement to acquire the Managed Services businessacquired 100% of MegaPath Corporation, which provides private wide-area-networking, Internet access services, managed services and managed security to multinational clients.
Under the termsHibernia Networks. The Company paid $621.5 million, comprised of the agreement, the Company will pay $144.8$515.0 million in cash consideration, $14.6 million net cash acquired and 610,8433,329,872 unregistered shares of the Company's common stock, initially valued at $75.0 million on the date of announcement, and ultimately valued at $91.9 million at closing. The purchase price is subject to a final post-closing reconciliation for closing date cash, net working capital, transaction expenses, indebtedness, certain tax payments and prepaid customer contracts. $300.0 million of the cash consideration was funded by proceeds from the issuance of 7.875% senior unsecured notes ("Notes"), which was funded into escrow in December 2016 (refer to Note 6 - Debt). The remainder was funded by a new credit agreement, which is discussed in more detail below.
Credit Agreement
In conjunction with the closing of the Hibernia acquisition, the Company entered into a credit agreement (the "2017 Credit Agreement") that provided a $700.0 million term loan facility and a $75.0 million revolving line of credit facility (which includes a $25.0 million letter of credit facility). In addition, the Company may request incremental term loan and/or incremental revolving loan commitments in an aggregate amount not to exceed the sum of $150.0 million and an unlimited amount that is subject to pro forma compliance with certain net secured leverage ratio tests provided, however, that incremental revolving loan commitments may not exceed $25.0 million.
The maturity date of the term loan facility is January 9, 2024 and the maturity date of the revolving loan facility is January 9, 2022. Each maturity date may be extended per the terms of the 2017 Credit Agreement. The Company may prepay loans under the 2017 Credit Agreement at any time, subject to certain notice requirements and LIBOR breakage costs. The principal amount of the term loan facility is payable in equal quarterly installments of $1.75 million, commencing on March 31, 2017 and continuing thereafter until the maturity date, when the remaining balance of outstanding principal amount is payable in full.
At the Company's election, the loans under the 2017 Credit Agreement may be made as either Base Rate Loans or Eurodollar Loans, with applicable margins at 3.00% for Base Rate Loans and 4.00% for Eurodollar loans. The Eurodollar Loans are subject to a floor of 1.00%, and the applicable margin for revolving loans is 2.50% for Base Rate Loans and 3.50% for Eurodollar Loans. The obligations under the Credit Agreement are secured by the substantial majority of the tangible and intangible assets of the Company and the guarantors.
The 2017 Credit Agreement does not contain a financial covenant for the acquisition.term loan facility, but includes a maximum consolidated net secured leverage ratio applicable only to the revolving credit facility in the event that utilization exceeds 30% of the revolving loan facility commitment. The Company expectsis restricted from permitting the Consolidated Net Secured Leverage Ratio to closebe greater than the maximum ratio as specified in the 2017 Credit Agreement.
The proceeds of the term loan facility were used to finance the Hibernia Networks acquisition, refinance the Company's existing credit facility and to pay costs and expenses associated with such transactions.
NOTE 16 — QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following tables are unaudited consolidated quarterly results of operations for the years ended December 31, 2016 and 2015. The financial information presented should be read in conjunction with other information included in the Company's consolidated financial statements.
|
| | | | | | | | | | | | | | | |
| | Quarters Ended |
| | March 31, 2016 | | June 30, 2016 | | September 30, 2016 | | December 31, 2016 |
| Revenue: | | | (In thousands) | | |
|
| Telecommunications services | $ | 124,437 |
| | $ | 128,914 |
| | $ | 131,851 |
| | $ | 136,486 |
|
| | | | | | | | |
| Operating expenses: | | | | | | | |
| Cost of telecommunications services | 66,197 |
| | 68,272 |
| | 68,184 |
| | 71,359 |
|
| | | | | | | | |
| Operating income | 8,953 |
| | 9,041 |
| | 12,235 |
| | 10,596 |
|
| | | | | | | | |
| Net income (loss) | 898 |
| | 91 |
| | 5,127 |
| | (856 | ) |
| | |
| | |
| | | | |
|
| Earnings (loss) per share: | | | | | | | |
| Basic | $ | 0.02 |
| | $ | — |
| | $ | 0.14 |
| | $ | (0.02 | ) |
| Diluted | $ | 0.02 |
| | $ | — |
| | $ | 0.14 |
| | $ | (0.02 | ) |
| | | | | | | | |
| Weighted average shares: | | | | | | | |
| Basic | 36,854,219 |
| | 37,065,651 |
| | 37,152,063 |
| | 37,221,037 |
|
| Diluted | 37,455,379 |
| | 37,678,120 |
| | 37,785,921 |
| | 37,221,037 |
|
|
| | | | | | | | | | | | | | | |
| | Quarters Ended |
| | March 31, 2015 | | June 30, 2015 | | September 30, 2015 | | December 31, 2015 |
| Revenue: | | | (In thousands) | | |
|
| Telecommunications services | $ | 62,353 |
| | $ | 95,076 |
| | $ | 96,996 |
| | $ | 114,825 |
|
| | | | | | | | |
| Operating expenses: | | | | | | | |
| Cost of telecommunications services | 37,697 |
| | 51,461 |
| | 53,363 |
| | 61,937 |
|
| | | | | | | | |
| Operating income (loss) | 2,289 |
| | (5,464 | ) | | 5,449 |
| | 1,427 |
|
| | | | | | | | |
Net income (loss) (1) | 1,067 |
| | (11,114 | ) | | 1,762 |
| | 27,589 |
|
| | |
| | |
| | | | |
|
| Earnings (loss) per share: | | | | | | | |
| Basic | $ | 0.03 |
| | $ | (0.32 | ) | | $ | 0.05 |
| | $ | 0.77 |
|
| Diluted | $ | 0.03 |
| | $ | (0.32 | ) | | $ | 0.05 |
| | $ | 0.75 |
|
| | | | | | | | |
| Weighted average shares: | | | | | | | |
| Basic | 33,935,481 |
| | 34,835,154 |
| | 34,981,104 |
| | 36,060,212 |
|
| Diluted | 34,659,757 |
| | 34,835,154 |
| | 35,888,525 |
| | 36,906,979 |
|
(1) Fourth quarter net income was driven by an income tax benefit of $34.1 million, which was primarily related to the release of the Company’s valuation allowance against U.S. deferred tax assets, based on management’s conclusion that it was more likely that not that the acquisition on, or around, April 1, 2015 after obtaining regulatory approvals.Company would be able to utilize its U.S. net operating loss carryforwards in the future. Refer to Note 9 for further details.
SCHEDULE II
GTT COMMUNICATIONS INC.
VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company’s allowance accounts for the years ended December 31, 2016, 2015 and 2014 was as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Allowance for Doubtful Accounts Receivable |
| Year | | Balance at Beginning of Year | | Charged to Cost and Expenses | | Deductions | | Other | | Balance at End of Year |
| 2014 | | $ | 702 |
| | $ | 835 |
| | $ | (767 | ) | | $ | 108 |
| | $ | 878 |
|
| 2015 | | $ | 878 |
| | $ | 3,210 |
| | $ | (3,180 | ) | | $ | 107 |
| | $ | 1,015 |
|
| 2016 | | $ | 1,015 |
| | $ | 5,986 |
| | $ | (4,362 | ) | | $ | 17 |
| | $ | 2,656 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Deferred Tax Asset Valuation |
| Year | | Balance at Beginning of Year | | Charged to Cost and Expenses | | Deductions | | Other | | Balance at End of Year |
| 2014 | | $ | 19,805 |
| | $ | 3,112 |
| | $ | — |
| | $ | 839 |
| | $ | 23,756 |
|
| 2015 | | $ | 23,756 |
| | $ | — |
| | $ | (23,450 | ) | | $ | (1 | ) | | $ | 305 |
|
| 2016 | | $ | 305 |
| | $ | — |
| | $ | (21 | ) | | $ | — |
| | $ | 284 |
|
