Employment Arrangements with Executive Officers
DuringIn October 2006, we were a party to employment agreements with each of our Named Executive Officers. Eachentered into an employment agreement contains confidentialitywith H. Brian Thompson to serve as our Executive Chairman. Mr. Thompson’s initial annual salary is $150,000 subject to annual review and non-competition provisions intended to ensure thatpotential increase by our Compensation Committee. The employment agreement also provides for the Named Executive Officer serves our best interests during the termgrant of employment and preserves the confidentiality of our proprietary information both during the term of employment and thereafter.
The 2006 employment agreements with the Named Executive Officers each provide for payment of a stated initial salary. In the case of Messrs. Keenan and Thompson, the employment agreements also state the amount of50,000 shares of restricted stock (as set forth in the Grants of Plan-Based Awards Table) to be awarded as an initial equity bonus,bonus. Mr. Thompson’s employment agreement is terminable at-will.
In January 2007, we entered into an employment agreement with Mr. Welch to serve as our Chief Financial Officer and Treasurer. In May 2007, we entered into an employment agreement with Mr. Calder to serve as our Chief Executive Officer and President. Under these employment agreements, Mr. Calder has an initial annual salary of $250,000 and Mr. Keenan’s employment agreement also contains provisions specifying his eligibility (and the maximum payable amount)Welch has an initial annual salary of $190,000. The initial annual salary received by each of Messrs. Calder and Welch is subject to annual review and potential increase by our Compensation Committee. Mr. Calder is eligible for aan annual cash bonus of up to $250,000.$250,000, 50% of which is based upon Mr. Keenan’sCalder’s performance against criteria defined by our Compensation Committee and 50% of which is at the discretion of our Compensation Committee. Mr. Calder’s employment agreement states that he will also be eligible to receive additionalprovides for the grant of 200,000 shares of restricted stock grantsas an initial equity bonus. Mr. Welch is eligible for an annual bonus of up to $75,000, based upon an evaluation of individual and Company performance conducted by our Compensation Committee. Mr. Welch’s bonus, if paid, shall be composed of at least 50% cash. Mr. Welch’s employment agreement also provides for the grant of 22,500 shares of restricted stock and 55,000 stock options as an initial equity bonus.
The employment agreements for both Messrs. Calder and Welch will remain in such amounts, at such timeseffect until they are terminated under any of the following circumstances affecting Messrs. Calder and with such vesting schedulesWelch, as applicable: (a) death, (b) disability, (c) termination by us for “cause,” (d) termination by us without “cause,” (e) termination by Messrs. Calder or Welch for “good reason,” or (f) termination by Messrs. Calder or Welch other than for “good reason.” The employment agreements for both Messrs. Calder and Welch provide for payments or other terms,benefits upon the termination of the executive’s employment under specified circumstances as are determined from time to time by the Board.described below.
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POTENTIAL PAYMENTS UPON TERMINATION
We were not a party during 20062007 to any employment agreementsagreement providing for any paymentpayments with respect to an event that may constitute a “change of control.” The 2006
Messrs. Calder and Welch are entitled to a continuation of health benefits for twelve months following termination of employment agreementsdue to disability. Messrs. Calder and Welch are entitled to receive their applicable base salary and health benefits for Messrs. Thompson and Ballarini are terminable at-will, and there are no provisions in these agreements with respect to any payments upontwelve months following termination for any reason. The 2006of employment agreement for Mr. Keenan set forth varying provisions with respect to termination, depending upon whether termination wereif either executive if terminated by reason of deathus without “cause,” or disability, by the Companyexecutive for cause or“good reason.” In addition, if Mr. Calder is terminated by us without cause,“cause,” or by Mr. KeenanCalder for “good reason” or without cause. Further discussionreason,” the initial grant of the severance payments applicablestock provided for in certain cases under the Chief Executive Officer’shis employment agreement is provided both above inwould immediately vest upon the Compensation Discussion & Analysis and in the table that follows.effective date of termination.
Termination Scenarios as of DecemberEmployment Effective January 31, 2006 Under the
Chief Executive Officer’s 2006 Employment Agreement2008 due to Disability
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Termination by | | | | | | | | | | |
| | Company | | Termination by | | Termination by | | Termination by | | | | |
| | without | | Company for | | Executive | | Executive for | | Termination | | Termination for |
| | Cause(1) | | Cause | | without Cause | | Good Reason(2) | | Upon Death | | Disability |
Continuation of Salary | | $ | 250,000 | | | | — | | | | — | | | $ | 250,000 | | | | — | | | | — | |
Continuation of Health Benefits(3) | | $ | 8,511 | | | | — | | | | — | | | $ | 8,511 | | | | — | | | $ | 8,511 | |
Bonus Payment(4) | | $ | 166,667 | | | | — | | | | — | | | $ | 166,667 | | | | — | | | | — | |
Long-Term Incentives(5) | | $ | 522,000 | | | | — | | | | — | | | $ | 522,000 | | | $ | 21,250 | | | $ | 21,250 | |
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| | Continuation of | | Continuation of | | Long-Term | | |
Name | | Salary | | Health Benefits | | Incentives | | Total |
| | | | | | | | | | | | | | | | |
Richard D. Calder, Jr. | | | — | | | | 9,591 | | | | — | | | | 9,591 | |
Kevin J. Welch | | | — | | | | 9,591 | | | | — | | | | 9,591 | |
Termination of Employment Effective January 31, 2008 by the Company
without “Cause” (1) or by the Executive for “Good Reason” (2)
| | | | | | | | | | | | | | | | |
| | Continuation of | | Continuation of | | Long-Term | | |
Name | | Salary | | Health Benefits | | Incentives(3) | | Total |
| | | | | | | | | | | | | | | | |
Richard D. Calder, Jr. | | | 250,000 | | | | 9,591 | | | | 349,561 | | | | 609,152 | |
Kevin J. Welch | | | 190,000 | | | | 9,591 | | | | — | | | | 199,591 | |
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| | |
(1) | | “Cause” is defined inUnder the Chief Executive Officer’s employment agreement asagreements, each executive may be terminated for “cause” if: “(i)(a) the Executiveexecutive materially breaches any provision of this Agreementthe employment agreement after written notice identifying the substance of the material breach; (ii) Executive(b) executive fails or refuses to comply with any lawful direction or instruction of Company’sour Board of Directors, which failure or refusal is not timely cured, (iii)(c) the Executiveexecutive commits an act of fraud, embezzlement, misappropriation of funds, or dishonesty, (iv)(d) the Executiveexecutive commits a breach of his fiduciary duty based on a good faith determination by the Company’sour Board of Directors and after reasonably opportunity to cure if such breach is curable, (v)(e) the Executiveexecutive is grossly negligent or engages in willful misconduct in the performance of his duties hereunder, and fails to remedy such breach within ten (10) days of receiving written notice thereof from theour Board of Directors, provided, however, that no act, or failure to act, by the Executiveexecutive shall be considered “grossly negligent” or an act of “willful misconduct” unless committed in good faith and with a reasonable belief that the act or omission was in or not opposed to the Company’sour best interest; (vi)(f) the Executiveexecutive is convicted of a felony or a crime of moral turpitude; or (vi) Executive(g) executive has a drug or alcohol dependency.” |
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(2) | | “GoodUnder the employment agreements, each executive may terminate their employment for “good reason” is defined in the Chief Executive Officer’s employment agreement as “a termination by the Executive within ninety (90) days following (i)(a) the relocation of the primary office of the Executiveexecutive more than ten (10) miles from McLean, Virginia, without the consent of Executive, (ii)executive, (b) a material change in the Executive’sexecutive’s duties such that he is no longer theour Chief Executive Officer of the Company or (iii) removal of ExecutiveChief Financial Officer, as Chief Executive or failure to nominate him for a position on the Board of Directors; (iv)applicable, (c) the assignment to the Executiveexecutive of duties that are inconsistent with his position or that materially alter his ability to function as our Chief Executive Officer;Officer or (v)Chief Financial Officer, as applicable; or (d) a reduction in the Executive’sexecutive’s total base compensation as set forth in Sections 5.1, 5.2, 5.3 and 5.4.”compensation. |
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(3) | | Represents the value of twelve (12) months of continued health benefits under the Company’s standard health benefit plan. |
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(4) | | Represents a bonus payment calculated as required by the Chief Executive Officer’s employment agreement based upon the average of the annual bonuses payable to him pursuant to his employment agreement “for each of the last three (3) completed fiscal years of the Company completed prior to the date of his termination (but not less than two-thirds of the maximum grantable bonus) of $250,000. |
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(5) | | Represents the value derived from accelerated vesting of restricted stock as if termination had occurred on December 31, 2006.stock. |
In connection with Mr. Keenan’s resignation as our Chief Executive Officer in February 2007, we entered into a letter agreement with Mr. Keenan setting forth the terms of his separation. Pursuant to that agreement, Mr. Keenan will receive the following payments and benefits, in lieu of amounts otherwise payable pursuant to his Employment Agreement: (1)employment agreement: (a) continued payment of his annual base salary and health benefits for a period of 12 months following the separation date, (2)(b) a bonus in the amount of $166,667, payable on the earlier of the 12-month anniversary of the separation date or such date as we award bonuses to
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our executives with respect to its 2007 fiscal year,before February 23, 2008, and (3)(c) the 150,000 shares of our restricted common stock granted to Mr. Keenan pursuant to his employment agreement will vest in full at the same time as such bonus is paid to Mr. Keenan.
We anticipate that we will generally enter into negotiated severance and release agreements with an executive upon the event of termination of an executive without cause.
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2006 Employee, Director and Consultant Stock Plan
General
In May 2006, our Board of Directors adopted, and in October 2006 our stockholders approved, our 2006 Employee, Director and Consultant Stock Plan, or the Stock Plan. Up to 3,000,000 shares of common stock is available for issuance in connection with the grant of options and/or other stock-based or stock-denominated awards. As of December 31, 2007, there were outstanding under the Stock Plan 792,177 shares of restricted stock and options to purchase 517,000 shares of our common stock at a weighted average exercise price per share of $2.55. As of December 31, 2007, a total of 1,690,823 shares of our common stock remained available for future grants or awards under the Stock Plan.
Material Features of the Stock Plan
The purpose of the Stock Plan is to encourage ownership of our common stock by our employees, directors and certain consultants in order to attract such people, to induce them to work for our benefit and to provide additional incentive for them to promote our success.
The Stock Plan provides for the grant of incentive stock options, non-qualified stock options, restricted and unrestricted stock awards and other stock-based awards to employees, directors and consultants. Upon approval, an aggregate of 3,000,000 shares of common stock will be available for issuance under the Stock Plan.
In accordance with the terms of the Stock Plan, our Board of Directors has authorized our compensation committee to administer the Stock Plan. The compensation committee may delegate part of its authority and powers under the Stock Plan to one or more of our directors and/or officers, but only the compensation committee can make awards to participants who are directors or executive officers of us. In accordance with the provisions of the Stock Plan, our compensation committee will determine the terms of options and other awards, including:
| • | | the determination of which employees, directors and consultants will be granted options and other awards; |
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| • | | the number of shares subject to options and other awards; |
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| • | | the exercise price of each option which may not be less than fair market value on the date of grant; |
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| • | | the schedule upon which options become exercisable; |
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| • | | the terms and conditions of other awards, including conditions for repurchase, termination or cancellation, issue price and repurchase price; and |
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| • | | all other terms and conditions upon which each award may be granted in accordance with the Stock Plan. |
The maximum term of options granted under the Stock Plan is ten years. Awards are generally subject to early termination upon the termination of employment or other relationship of the participant with us, whether such termination is at our option or as a result of the death or disability of the participant. Generally, in the event of a participant’s termination for cause, all outstanding awards shall be forfeited. No participant may receive awards for more than 200,000 shares of common stock in any fiscal year.
In addition, our compensation committee may, in its discretion, amend any term or condition of an outstanding award provided (i) such term or condition as amended is permitted by our Stock Plan, and (ii) any such amendment shall be made only with the consent of the participant to whom such award was made, if the amendment is adverse to the participant.
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If our common stock shall be subdivided or combined into a greater or smaller number of shares or if we issue any shares of common stock as a stock dividend, the number of shares of our common stock deliverable upon exercise of an option issued or upon issuance of an award shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend.
Upon a merger or other reorganization event, our Board of Directors, may, in their sole discretion, take any one or more of the following actions pursuant to our Plan, as to some or all outstanding awards:
| • | | provide that all outstanding options shall be assumed or substituted by the successor corporation; |
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| • | | upon written notice to a participant, (i) provide that the participant’s unexercised options or awards will terminate immediately prior to the consummation of such transaction unless exercised by the participant; or (ii) terminate all unexercised outstanding options immediately prior to the consummation of such transaction unless exercised by the optionee; |
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| • | | in the event of a merger pursuant to which holders of our common stock will receive a cash payment for each share surrendered in the merger, make or provide for a cash payment to the optionees equal to the difference between the merger price times the number of shares of our common stock subject to such outstanding options, and the aggregate exercise price of all such outstanding options, in exchange for the termination of such options; |
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| • | | provide that all or any outstanding options shall become exercisable in full immediately prior to such event; and |
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| • | | provide that outstanding awards shall be assumed or substituted by the successor corporation, become realizable or deliverable, or restrictions applicable to an award will lapse, in whole or in part, prior to or upon the reorganization event. |
The Stock Plan may be amended by our stockholders. It may also be amended by the Board of Directors, provided that any amendment approved by the Board of Directors which is of a scope that requires stockholder approval as required in order to ensure favorable federal income tax treatment for any incentive stock options under Code Section 422, or for any other reason is subject to obtaining such stockholder approval. The Stock Plan will expire on May 21, 2016.
Limitations on Liability of Directors and Officers and Indemnification
Limitation of Liability
Our second amended and restated certificate of incorporation provides that our directors will not be personally liable to us or our stockholders for monetary damages resulting from a breach of fiduciary duty, to the maximum extent permitted by Delaware law. Under Delaware law, directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except for:
| • | | any breach of the duty of loyalty to the corporation or its stockholders; |
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| • | | acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; |
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| • | | unlawful payments of dividends or unlawful stock repurchases or redemptions; or |
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| • | | any transaction from which the director derived an improper personal benefit. |
This limitation of liability does not apply to non-monetary remedies that may be available, such as injunctive relief or rescission, nor does it relieve our directors from complying with federal or state securities laws.
Indemnification
Our second amended and restated certificate of incorporation provides that we shall indemnify our directors and executive officers, and may indemnify our other corporate agents, to the fullest extent permitted by law.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than the transactions described under the heading “Executive Compensation” (or with respect to which information is omitted in accordance with SEC regulations) and the transactions described below, since our inception on January 5, 2005 there have not been, and there is not currently proposed, any transaction or series of similar transactions to which we were or will be a party in which the amount involved exceeded or will exceed $120,000 and in which any director, executive officer, holder of more than 5% of any class of our capital stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest.
Unless specifically delegated by our Board of Directors to the Compensation Committee, our Audit Committee is charged with reviewing and approving all related party transactions and reviewing and making recommendations to the Board of Directors, or approving, any contracts or other transactions with current or former executive officers of the Company.
On October 15, 2006, we issued approximately $9.9 million in promissory notes to a number of the selling shareholders of GII and ETT as part of the consideration paid by us for those acquisitions. As originally issued, approximately $5.9 million of these notes had a maturity date of June 30, 2007; these notes were amended to extend the maturity date to April 30, 2008, the April 2008 Notes. As originally issued, the remaining $4.0 million of promissory notes had a maturity date of December 29, 2008, these notes were amended to extend the maturity date to December 30, 2010. As selling shareholders of GII, Mr. Keenan and Todd Vecchio are holders of approximately $1.0 million of the April 2008 Notes and they are holders of approximately $3.6 million of the notes maturing on December 30, 2010. These promissory notes were issued prior to the time that Mr. Keenan became a director and an executive officer, and before either Mr. Keenan or Mr. Vecchio became a holder of more than 5% of our common stock.
On November 12, 2007, we entered into agreements with the holders of the April 2008 Notes, including Mr. Keenan and Mr. Vecchio, pursuant to which the holders shall convert not less than 30% of the amounts due under the April 2008 Notes as of November 13, 2007 (including principal and accrued interest) into shares of our common stock, and obtain 10% convertible unsecured subordinated promissory notes due on December 31, 2010, the December 2010 Notes, for the remaining indebtedness then due under the April 2008 Notes. Pursuant to the conversion, Mr. Keenan and Mr. Vecchio were issued a total of 248,911 shares of our common stock and December 2010 Notes in an aggregate principal amount of approximately $800,000.
On November 13, 2007, we sold an additional $1.9 million of December 2010 Notes to certain accredited investors, including Universal Telecommunications, Inc., an affiliate of Mr. Thompson.
Between January 1, 2006 and October 31, 2006, Mercator Capital L.L.C. made available to us a small amount of office space and certain office and secretarial services. We paid Mercator Capital L.L.C. $7,500 per month for these services. Messrs. Hackman and Ballarini and Lior Samuelson are each principals and, in the aggregate, 95% owners of Mercator Capital L.L.C. and as a result, benefited from the transaction to the extent of their interests in Mercator Capital L.L.C.
Prior to our initial public offering on April 15, 2005, we issued 100 shares of common stock for $500 in cash, or a purchase price of $5.00 per share. We also issued 2,475,000 Class W warrants and 2,475,000 Class Z warrants for $247,500 in cash, at a purchase price of $0.05 per warrant. These securities were issued to the individuals set forth below, as follows:
| | | | | | | | | | | | | | |
| | Number of | | Number of | | | | |
| | Shares of | | Class W | | Number of Class | | |
Name | | Common Stock | | Warrants | | Z Warrants | | Relationship to Us |
H. Brian Thompson | | | 25 | (1) | | | 618,750 | (1) | | | 618,750 | (1) | | Chairman and Chief Executive Officer |
| | | | | | | | | | | | | | |
Rhodric C. Hackman | | | 25 | (2) | | | 495,000 | (2)(3) | | | 495,000 | (2)(3) | | President, Secretary and Director |
| | | | | | | | | | | | | | |
Lior Samuelson | | | 25 | | | | 495,000 | (3) | | | 495,000 | (3) | | Executive Vice President and Director |
| | | | | | | | | | | | | | |
David Ballarini | | | 25 | | | | 495,000 | (3) | | | 495,000 | (3) | | Chief Financial Officer, Treasurer and Director |
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Mercator Capital L.L.C. | | | — | | | | 371,250 | | | | 371,250 | | | Warrant holder |
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(1) | | Shares and warrants were acquired and are held by Universal Telecommunications, Inc. Does not include 4,000 shares of our common stock, 4,000 shares of our Class B common stock, 12,000 Class W warrants and 12,000 Class Z warrants which were acquired by Mr. Thompson upon his purchase of 2,000 Series A Units and 2,000 Series B Units. |
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(2) | | Shares and warrants were acquired and are held by the Hackman Family Trust. |
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(3) | | Does not include 371,250 Class W warrants and 371,250 Class Z warrants purchased by Mercator Capital L.L.C., an affiliate of Messrs. Hackman, Samuelson and Ballarini. |
Subsequent to the purchase by the individuals and entities of the securities referenced in the above table, Mercator Capital and Universal Telecommunications sold at fair market value, in the aggregate, 25,000 Class W warrants and 25,000 Class Z warrants to each of Mr. O’Brien and Alex Mandl, a former director of the Company.
Prior to the closing of the Acquisitions, we reimbursed our officers and directors for any reasonable out-of-pocket business expenses incurred by them in connection with certain activities on our behalf such as identifying and investigating possible target businesses and business combinations.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table provides information concerning beneficial ownership of our common stock as of December 1, 2007, by:
| • | | each stockholder, or group of affiliated stockholders, that we know owns more than 5% of our outstanding common stock; |
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| • | | each of our executive officers; |
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| • | | each of our directors; |
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| • | | all of our executive officers and directors as a group; and |
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| • | | each of the other selling stockholders. |
The following table lists the number of shares and percentage of shares beneficially owned based on 14,479,678 shares of common stock outstanding as of December 31, 2007.
This prospectus relates to the possible resale by the selling stockholders identified below of 5,242,717 shares of our common stock, 2,672,573 of which are issuable upon the conversion of 10% convertible unsecured subordinated promissory notes. In connection with the registration rights we granted to the selling stockholders, we agreed to file with the SEC a registration statement, of which this prospectus forms a part, with respect to the resale or other disposition of the shares of common stock offered by this prospectus or interests therein from time to time on the Over-the-Counter Bulletin Board, in privately negotiated transactions or otherwise. The selling stockholders may from time to time offer and sell pursuant to this prospectus any or all of the shares of common stock owned by them including those shares that qualify as “Conversion Shares” under the 10% convertible unsecured subordinated promissory notes. The selling stockholders, however, make no representations that the shares covered by this prospectus will be offered for sale.
The table below presents information regarding the selling stockholders and the shares that each such selling stockholder may offer and sell from time to time under this prospectus. When we refer to the “selling stockholders” in this prospectus, we mean those persons listed in the table below. The number of shares in the column “Number of Shares Offered” represents all of the shares that a selling stockholder may offer under this prospectus. The column “After the Offering Number of Shares Beneficially Owned” assumes that the selling stockholder will have sold all of the shares offered under this prospectus. However, because the selling stockholders may offer, from time to time, all, some or none of their shares under this prospectus, or in another permitted manner, no assurances can be given as to the actual number of shares that will be sold by the selling stockholders or that will be held by the selling stockholders after completion of the sales. Please carefully read the footnotes located below the selling stockholders table in conjunction with the information presented in the table.
Beneficial ownership is determined in accordance with the rules of the SEC, and generally includes voting power and/or investment power with respect to the securities held. Shares of common stock subject to options and warrants currently exercisable or exercisable within 60 days of December 31, 2007, are deemed outstanding and beneficially owned by the person holding such options or warrants for purposes of computing the number of shares and percentage beneficially owned by such person, but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person. Except as indicated in the footnotes to this table, the persons or entities named have sole voting and investment power with respect to all shares of our common stock shown as beneficially owned by them.
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Unless otherwise indicated, the principal address of each of the persons below is c/o Global Telecom & Technology, Inc., 8484 Westpark Drive, Suite 720, McLean, Virginia 22102.
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| | Prior to the Offering | | | | | | After the Offering |
| | Number of | | Percentage | | Number of | | Number of | | Percentage |
| | Shares | | of | | Shares | | Shares | | of |
| | Beneficially | | Outstanding | | Offered | | Beneficially | | Outstanding |
| | Owned | | Shares | | Hereby | | Owned | | Shares |
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Executive Officers and Directors | | | | | | | | | | | | | | | | | | | | |
Richard D. Calder, Jr. | | | 235,000 | | | | 1.6% | | | | — | | | | 235,000 | | | | 1.6% | |
Kevin J. Welch(1) | | | 42,250 | | | | * | | | | — | | | | 42,250 | | | | * | |
H. Brian Thompson(2) | | | 2,667,497 | | | | 15.9% | | | | 881,899 | | | | 1,785,598 | | | | 11.3% | |
S. Joseph Bruno(3) | | | 24,198 | | | | * | | | | 14,698 | | | | 9,500 | | | | * | |
Didier Delepine | | | 26,629 | | | | * | | | | — | | | | 26,629 | | | | * | |
Rhodric C. Hackman(4) | | | 1,804,854 | | | | 11.1% | | | | — | | | | 1,804,854 | | | | 11.1% | |
Howard Janzen(5) | | | 79,222 | | | | * | | | | 58,793 | | | | 20,429 | | | | * | |
D. Michael Keenan(6) | | | 2,099,207 | | | | 13.2% | | | | 170,897 | | | | 1,928,310 | | | | 13.2% | |
Morgan E. O’Brien(7) | | | 66,129 | | | | * | | | | — | | | | 66,129 | | | | * | |
Sudhakar Shenoy(8) | | | 30,827 | | | | * | | | | 14,698 | | | | 16,129 | | | | * | |
Theodore B. Smith, III(9) | | | 22,698 | | | | * | | | | 14,698 | | | | 8,000 | | | | * | |
All executive officers and directors as a group (11 persons) | | | 7,102,538 | | | | 35.3% | | | | 1,155,683 | | | | 5,946,855 | | | | 31.3% | |
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Other 5% Stockholders | | | | | | | | | | | | | | | | | | | | |
David Ballarini(10) | | | 1,741,525 | | | | 10.7% | | | | — | | | | 1,741,525 | | | | 10.7% | |
J. Carlo Cannell(11) | | | 8,006,597 | | | | 47.9% | | | | — | | | | 8,006,597 | | | | 47.9% | |
Goldman Sachs Asset Management, L.P.(12) | | | 1,475,000 | | | | 10.2% | | | | — | | | | 1,475,000 | | | | 10.2% | |
Millenco, L.L.C.(13) | | | 1,972,125 | | | | 12.0% | | | | — | | | | 1,972,125 | | | | 12.0% | |
Lior Samuelson(14) | | | 1,778,725 | | | | 10.9% | | | | — | | | | 1,778,725 | | | | 10.9% | |
Todd J. Vecchio(15) | | | 2,545,348 | | | | 15.8% | | | | 546,871 | | | | 1,998,477 | | | | 12.7% | |
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Other Selling Stockholders | | | | | | | | | | | | | | | | | | | | |
KB Fund III LP(16) | | | 406,823 | | | | 2.8% | | | | 406,823 | | | | — | | | | * | |
KB Fund III B LP(16) | | | 110,593 | | | | * | | | | 110,593 | | | | — | | | | * | |
New Star Private Equity Investment Trust plc(16) | | | 516,946 | | | | 3.6% | | | | 516,946 | | | | — | | | | * | |
Christopher Britton(17) | | | 195,308 | | | | 1.3% | | | | 195,308 | | | | — | | | | * | |
James Edmund Dodd(18) | | | 122,394 | | | | * | | | | 122,394 | | | | — | | | | * | |
Elderstreet Capital Partners Nominees Ltd.(19) | | | 517,362 | | | | 3.6% | | | | 517,362 | | | | — | | | | * | |
Esprit Nominees Limited(20) | | | 894,817 | | | | 5.9% | | | | 894,817 | | | | — | | | | * | |
NovaVest Fund I, LLC(21) | | | 639,199 | | | | 4.3% | | | | 639,199 | | | | — | | | | * | |
Raymond E. Wiseman(22) | | | 556,718 | | | | 3.7% | | | | 136,718 | | | | 420,000 | | | | 2.8% | |
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* | | Less than 1% of the outstanding shares of common stock. |
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(1) | | Includes 13,750 shares issuable upon the exercise of options. |
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(2) | | Includes 398,125 shares of common stock owned by Universal Telecommunications, Inc. Mr. Thompson is the Chief Executive Officer and majority shareholder of Universal Telecommunications, Inc. The shares of Universal Telecommunications, Inc. not held by Mr. Thompson are owned by members of his family. The beneficial ownership information includes 1,383,500 shares of common stock issuable upon the exercise of Class W warrants and Class Z warrants, 1,365,500 of which are held by Universal Telecommunications, Inc., and 881,899 shares of common stock issuable upon the conversion of a 10% convertible unsecured subordinated promissory note held by Universal Telecommunications, Inc. The beneficial owner’s address is 1950 Old Gallows Road, Vienna, Virginia 22182. |
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(3) | | Includes 14,698 shares of common stock issuable upon the conversion of a 10% convertible unsecured subordinated promissory note. |
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(4) | | Includes 36,154 shares of common stock owned by the Hackman Family Trust and 18,900 shares of common stock owned by Mercator Capital L.L.C. Mr. Hackman and his spouse are the trustees of the Hackman Family Trust, the beneficiaries of which are members of the Hackman family. The Hackman Family Trust exercises joint control over Mercator Capital L.L.C. with Messrs. Ballarini and Samuelson. The beneficial ownership information includes 1,749,800 shares of common stock issuable upon the exercise of Class W warrants and Class Z warrants, 1,017,200 of which are held by the Hackman Family Trust and 732,600 of which are held by Mercator Capital L.L.C. The beneficial owner’s address is c/o Mercator Capital L.L.C., One Fountain Square, 11911 Freedom Drive, Suite 590, Reston, Virginia 20190. |
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(5) | | Includes 58,793 shares of common stock issuable upon the conversion of a 10% convertible unsecured subordinated promissory note. |
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(6) | | Includes 1,305,000 shares of common stock issuable upon the exercise of Class W warrants and Class Z warrants and 111,633 shares of common stock issuable upon the conversion of a 10% convertible unsecured subordinated promissory note. |
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(7) | | Includes 50,000 shares of common stock issuable upon the exercise of Class W warrants and Class Z warrants. |
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(8) | | Includes 14,698 shares of common stock issuable upon the conversion of a 10% convertible unsecured subordinated promissory note. |
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(9) | | Includes 14,698 shares of common stock issuable upon the conversion of a 10% convertible unsecured subordinated promissory note. |
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(10) | | Includes 18,900 shares of common stock owned by Mercator Capital L.L.C. Mr. Ballarini exercises joint control over Mercator Capital L.L.C. with the Hackman Family Trust and Mr. Samuelson. The beneficial ownership information includes 1,722,600 shares of common stock issuable upon the exercise of Class W warrants and Class Z warrants, 732,600 of which are held by Mercator Capital L.L.C. The beneficial owner’s address is c/o Mercator Capital L.L.C., One Fountain Square, 11911 Freedom Drive, Suite 590, Reston, Virginia 20190. |
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(11) | | Based on information contained in the Form 4/A filed by J. Carlo Cannell on October 10, 2007. Includes 5,782,597 shares of common stock and 2,224,000 shares of common stock issuable upon the exercise of Class W warrants and Class Z warrants held by The Cuttyhunk Fund Limited (“Cuttyhunk”), Anegada Master Fund Limited (“Anegada”), TE Cannell Portfolio, Ltd. (“TEC”), Tonga Partners, L.P. (“Tonga”), Tristan Partners, L.P. (“Tristan”) and Kauai Partners, L.P. (“Kauai” and collectively with Cuttyhunk, Anegada, TEC, Tonga and Tristan, the “Funds”). J. Carlo Cannell possesses sole power to vote and direct the disposition of all such securities held by the Funds. The beneficial owner’s address is P.O. Box 3459, 240 East Deloney Avenue, Jackson, Wyoming 83001. |
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(12) | | Based on information contained in Schedule 13G filed by Goldman Sachs Asset Management, L.P. on December 12, 2006, Goldman Sachs Asset Management, L.P. has sole power to vote or to direct the vote, and sole power to dispose or direct the disposition of, all 1,475,000 shares of our common stock. The beneficial owner’s address is 32 Old Slip New York, New York 10005. |
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(13) | | Includes 1,935,025 shares of common stock issuable upon the exercise of Class W and Class Z warrants. Based on information contained in the Schedule 13D filed by Millenco, L.L.C. on October 25, 2006, Millenco, L.L.C. has sole power to vote or to direct the vote, and sole power to dispose or direct the disposition of, all 1,972,125 shares of our common stock. Pursuant to the Schedule 13D, Millennium Management, L.L.C. is the manager of Millenco, L.L.C., and consequently may be deemed to have voting control and investment discretion over securities owned by Millenco, L.L.C., and Israel A. Englander is the managing member of Millennium Management, L.L.C., and consequently may be deemed to be the beneficial owner of any shares deemed to be beneficially owned by Millennium Management, L.L.C. The beneficial owner’s address is 666 Fifth Avenue, 8th Floor, New York, New York 10103. |
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(14) | | Includes 18,900 shares of common stock owned by Mercator Capital L.L.C. Mr. Samuelson exercises joint control over Mercator Capital L.L.C. with the Hackman Family Trust and Mr. Ballarini. The beneficial ownership information includes 1,749,800 shares of common stock issuable upon the exercise of Class W and Class Z warrants, 732,600 of which are held by Mercator Capital L.L.C. The beneficial owner’s address is c/o Mercator Capital L.L.C., One Fountain Square, 11911 Freedom Drive, Suite 590, Reston, Virginia 20190. |
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(15) | | Includes 1,305,000 shares of common stock issuable upon the exercise of Class W and Class Z warrants and 357,225 shares of common stock issuable upon the conversion of a 10% convertible unsecured subordinated promissory note. |
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(16) | | The beneficial owner’s address is 10 Bedford Street, London WC2E 9HE, United Kingdom. |
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(17) | | Includes 127,578 shares of common stock issuable upon the conversion of a 10% convertible unsecured subordinated promissory note. The beneficial owner’s address is LeMoine House, 9 Church Green, Barnwell, Nr Oundle, Northamptionshire PE8 5QH, United Kingdom. |
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(18) | | The beneficial owner’s address is 20 Berkeley Square, London W1J 6LJ, United Kingdom. |
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(19) | | The beneficial owner’s address is 1 Knightsbridge Green, London SW1X 7NE, United Kingdom. |
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(20) | | Includes 584,509 shares of common stock issuable upon the conversion of a 10% convertible unsecured subordinated promissory note by Esprit Nominees Limited as nominee for Esprit Capital I Fund No. 1 LP and Esprit Capital I Fund No. 2 LP. The beneficial owner disclaims beneficial ownership of these shares. The beneficial owner’s address is 14 Buckingham Gate, London SW1E 6LB, United Kingdom. |
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(21) | | Includes 417,535 shares of common stock issuable upon the conversion of a 10% convertible unsecured subordinated promissory note. The beneficial owner’s address is c/o Anthony Bleasdale, NT General Partner (Guernsey) Limited, First Floor, Dorey Court, Admiral Park, St Peter Port, Guernsey GY1 6HJ, Channel Islands. |
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(22) | | Includes 290,000 shares of common stock issuable upon the exercise of Class W warrants and Class Z warrants and 89,306 shares of common stock issuable upon the conversion of a 10% convertible unsecured subordinated promissory note. The beneficial owner’s address is 1202 East Patuxent Drive, LaPlata, Maryland 20646. |
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PLAN OF DISTRIBUTION
The selling stockholders, and any of their pledgees, assignees and successors-in-interest (including successors by gift, partnership distribution or other non-sale-related transfer effected after the date of this prospectus), may, from time to time, sell any or all of their shares of our common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed prices, at market prices at the time of sale, at varying prices determined at the time of sale or at negotiated prices. The selling stockholders may use any one or more of the following methods when selling shares:
| • | | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
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| • | | block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; |
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| • | | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
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| • | | an exchange distribution in accordance with the rules of the applicable exchange; |
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| • | | privately negotiated transactions; |
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| • | | short sales; |
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| • | | broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; |
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| • | | a combination of any such methods of sale; and |
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| • | | any other method permitted pursuant to applicable law. |
The selling stockholders may also sell shares under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, if available, rather than under this prospectus. The selling stockholders are not obligated to, and there is no assurance that the selling stockholders will, sell all or any of the shares we are registering. The selling stockholders may transfer, devise or gift such shares by other means not described in this prospectus.
The selling stockholders may also engage in short sales against the box, puts and calls and other transactions in our securities or derivatives of our securities and may sell or deliver shares in connection with these trades.
Broker-dealers engaged by the selling stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. Any profits on the resale of shares of common stock by a broker-dealer acting as principal might be deemed to be underwriting discounts or commissions under the Securities Act. Discounts, concessions, commissions and similar selling expenses, if any, attributable to the sale of shares will be borne by a selling stockholder. The selling stockholders may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares if liabilities are imposed on that person under the Securities Act. The selling stockholders that are also broker-dealers are “underwriters” within the meaning of the Securities Act.
The selling stockholders may from time to time pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of any of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time under this prospectus as it may be supplemented from time to time, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus.
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The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
The selling stockholders have advised us that they have not entered into any agreements, understandings or arrangements with any underwriters or broker-dealers regarding the sale of their shares of common stock, nor is there an underwriter or coordinating broker acting in connection with a proposed sale of shares of common stock by any selling stockholder. If we are notified by any selling stockholder that any material arrangement has been entered into with a broker-dealer for the sale of shares of common stock, if required, we will file a supplement to this prospectus. If the selling stockholders use this prospectus for any sale of the shares of common stock, they will be subject to the prospectus delivery requirements of the Securities Act.
The anti-manipulation rules of Regulation M under the Securities Exchange Act of 1934 may apply to sales of our common stock and activities of the selling stockholders. We will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling stockholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling stockholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act.
DESCRIPTION OF SECURITIES
General
We are authorized to issue 80,000,000 shares of common stock, par value $.0001, and 5,000 shares of preferred stock, par value $.0001. As of December 31, 2007, 14,479,678 shares of our common stock are outstanding, held by 34 recordholders. No shares of our preferred stock are currently outstanding.
Common Stock
Holders of common stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. Holders of common stock have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the common stock.
Preferred Stock
Our certificate of incorporation authorizes the issuance of 5,000 shares of blank check preferred stock with such designation, rights and preferences as may be determined from time to time by our board of directors. Our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of common stock. The preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control of the Company. Although we do not currently intend to issue any shares of preferred stock, we cannot assure you that we will not do so in the future.
Warrants
We currently have Class W warrants and Class Z warrants outstanding.
Each Class W warrant entitles the registered holder to purchase one share of our common stock at a price of $5.00 per share, subject to adjustment as discussed below. The Class W warrants will expire at 5:00 p.m., New York City time on April 10, 2010.
7779
We may call the Class W warrants for redemption (except as set forth below), with the prior consent of HCFP/Brenner Securities, LLC, or HCFP/Brenner:
| • | | in whole and not in part, |
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| • | | at a price of $.05 per Class W warrant at any time after the Class W warrants become exercisable, |
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| • | | upon not less than 30 days’ prior written notice of redemption to each Class W warrantholder, and |
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| • | | if, and only if, the reported last sale price of our common stock equals or exceeds $7.50 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to the Class W warrantholders. |
The Class W warrants outstanding prior to our initial public offering, all of which were held by our officers and directors or their affiliates, are not redeemable by us as long as such warrants continue to be held by such individuals.
Each Class Z warrant entitles the registered holder to purchase one share of our common stock at a price of $5.00 per share, subject to adjustment as discussed below. The Class Z warrants will expire at 5:00 p.m., New York City time on April 10, 2012.
We may call the Class Z warrants for redemption (except as set forth below), with the prior consent of HCFP/Brenner:
| • | | in whole and not in part, |
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| • | | at a price of $.05 per Class Z warrant at any time after the Class Z warrants become exercisable, |
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| • | | upon not less than 30 days’ prior written notice of redemption to each Class Z warrantholder, and |
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| • | | if, and only if, the reported last sale price of our common stock equals or exceeds $8.75 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to the Class Z warrantholders. |
The Class Z warrants outstanding prior to our initial public offering, all of which were held by our officers and directors or their affiliates, are not be redeemable by us as long as such warrants continue to be held by such individuals.
The Class W warrants and Class Z warrants were issued in registered form under a warrant agreement between American Stock Transfer & Trust Company, as warrant agent, and us.
The exercise price and number of shares of common stock issuable on exercise of the Class W warrants and Class Z warrants may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the Class W warrants and Class Z warrants will not be adjusted for issuances of common stock at a price below their respective exercise prices.
The Class W warrants and Class Z warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified check payable to us, for the number of warrants being exercised. The Class W warrantsholders and Class Z warrantholders do not have the rights or privileges of holders of common stock or any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.
No warrants will be exercisable unless at the time of exercise a prospectus relating to common stock issuable upon exercise of the warrants is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement, we have agreed to meet these conditions and to maintain a current prospectus relating to common stock issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that we will be able to do so. The warrants may be deprived of any value and the market for the warrants may be limited if the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside.
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No fractional shares will be issued upon exercise of the Class W warrants and Class Z warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up to the nearest whole number the number of shares of common stock to be issued to the warrant holder.
Convertible Promissory Notes
We have issued approximately $4.8 million in 10% convertible unsecured subordinated promissory notes due on December 31, 2010, the 2010 Notes. The holders of the 2010 Notes can convert the principal due under the notes into shares of common stock, at any time, at a price per share equal to $1.70. We have the right to require the holders of the 2010 Notes to convert the principal amount due under the notes at any time after the closing price of our common stock shall be equal to or greater than $2.64 for 15 consecutive business days. The conversion provisions of the 2010 Notes include protection against dilutive issuances of our common stock, subject to certain exceptions. The 2010 Notes are subordinate to any future credit facility we entered into, up to an amount of $4.0 million.
Registration Rights
The holders of our shares of common stock, Class W warrants and Class Z warrants outstanding prior to our initial public offering have registration rights with respect to such securities. The holders of the majority of these securities are entitled to make up to two demands that we register their shares of common stock, their warrants and the shares of common stock underlying their warrants. The holders of the majority of these securities can elect to exercise these registration rights at any time. In addition, these stockholders have certain “piggy-back” registration rights on registration statements filed subsequent to such date. We will bear the expenses incurred in connection with the filing of any such registration statements.
The holders of our 2010 Notes have registration rights with respect to 2,570,143 shares of common stock and the common stock issuable upon the conversion of the notes, subject to adjustment to take into consideration the then interpretation of Rule 415. We have agreed to use commercially reasonable efforts to cause a registration statement covering such shares of common stock to be filed with, and declared effective by, the SEC. We will bear the expenses incurred in connection with the filing of any such registration statement.
Delaware Anti-Takeover Law and Provisions in Our Charter and Bylaws
Delaware Anti-Takeover Statute.We are subject to Section 203 of the Delaware General Corporation Law. In general, these provisions prohibit a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless the transaction in which the person became an interested stockholder is approved in a manner presented in Section 203 of the Delaware General Corporation Law. Generally, a “business combination” is defined to include mergers, asset sales and other transactions resulting in financial benefit to a stockholder. In general, an “interested stockholder” is a person who, together with affiliates and employees, owns, or within three years, did own, 15% or more of a corporation’s voting stock.
Certificate of Incorporation.Our second amended and restated certificate of incorporation provides that:
| • | | our Board of Directors may issue, without further action by the stockholders, up to 5,000 shares of undesignated preferred stock; and |
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| • | | vacancies on the Board of Directors, including newly created directorships, can be filled by a majority of the directors then in office. |
The provisions in our second amended and restated certificate of incorporation are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and to discourage certain types of transactions that may involve an actual or threatened change of control of the Company. These provisions also are designed to reduce our vulnerability to an unsolicited proposal for a takeover of the Company that does not contemplate the acquisition of all of its outstanding shares or an unsolicited proposal for the restructuring or sale of all or part of the Company. These provisions, however, could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. They may also have the effect of preventing changes in our management.
Transfer Agent
The transfer agent and registrar for our common stock, Class W warrants and Class Z warrants in American Stock Transfer & Trust Company.
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LEGAL MATTERS
Greenberg Traurig, LLP, McLean, Virginia, has passed upon the validity of the shares of common stock offered hereby.
EXPERTS
The consolidated financial statements of Global Telecom & Technology, Inc. and Subsidiaries as of December 31, 2006 and 2005, and for the year ended December 31, 2006 and the period from inception (January 3, 2005) to December 31, 2005; of GTT-EMEA Limited and Subsidiaries for the period from January 1, 2006 to October 15, 2006; and of Global Internetworking, Inc. and Subsidiaries as of September 30, 2006 and for the year then ended and for the period from October 1, 2006 to October 15, 2006 appearing in this prospectus and registration statement have been audited by J.H. Cohn LLP, independent registered public accounting firm, as set forth in their reports thereon, included therein. The consolidated statements of operations, comprehensive loss, changes in stockholders’ deficit and cash flows of GTT — EMEA Limited (formerly European Telecommunications & Technology Limited) for the year ended December 31, 2004 appearing in this prospectus and registration statement (which contains an emphasis of a matter paragraph relating to GTT — EMEA Limited’s recurring losses from operations since inception and net capital deficiency, as described in Note 1 to the financial statements) have been audited by PricewaterhouseCoopers LLP, independent accountants, as set forth in their report thereon, included therein. The consolidated financial statements of GTT — EMEA Limited (formerly European Telecommunications & Technology Limited) for the year ended December 31, 2005 appearing in this prospectus and registration statement have been audited by BDO Stoy Hayward LLP, independent registered public accounting firm, as set forth in their report thereon, included therein. The consolidated financial statements of Global Internetworking, Inc. for the years ended September 30, 2005 and 2004 appearing in this prospectus and registration statement have been audited Schwartz, Weissman & Co., PC, independent public accounting firm, as set forth in their reports thereon, included therein. All such financial statements have been included herein in reliance on the reports of such firms given upon their authority as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock that are offered by this prospectus. This prospectus does not contain all of the information included in the registration statement. For further information pertaining to us and our common stock, you should refer to the registration statement and its exhibits. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract, agreement or other document.
We are subject to the informational requirements of the Securities Exchange Act of 1934 and file annual, quarterly and current reports, proxy statements and other information with the SEC. You can read our SEC filings, including the registration statement, over the Internet at the SEC’s website at www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facility at 100 F Street, N.E., Washington, D.C., 20549.
You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C., 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facility.
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INDEX TO FINANCIAL STATEMENTS
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Global Telecom & Technology, Inc. | | | | |
Report of J.H. Cohn LLP, Independent Registered Public Accounting Firm | | | F-2 | |
Consolidated Balance Sheets as of December 31, 2006 and 2005 | | | F-3 | |
Consolidated Statements of Operations for the year ended December 31, 2006 and for the period from Inception (January 3, 2005) to December 31, 2005 | | | F-4 | |
Consolidated Statement of Stockholders’ Equity for year ended December 31, 2006 and for the period from Inception (January 3, 2005) to December 31, 2005 | | | F-5 | |
Consolidated Statements of Cash Flows for the year ended December 31, 2006 and for the period from Inception (January 3, 2005) to December 31, 2005 | | | F-6 | |
Notes to Consolidated Financial Statements | | | F-7 | |
Unaudited Condensed Consolidated Financial Statements | | | F-33 | |
Unaudited Condensed Consolidated Balance Sheets | | | F-34 | |
Unaudited Condensed Consolidated Statements of Operations | | | F-35 | |
Unaudited Condensed Consolidated Statement of Stockholders’ Equity | | | F-36 | |
Unaduited Condensed Consolidated Statements of Cash Flows | | | F-37 | |
Notes to Condensed Consolidated Financial Statements | | | F-38 | |
European Telecommunications & Technology Limited | | | | |
Report of J.H. Cohn LLP, Independent Registered Public Accounting Firm | | | F-47 | |
Report of BDO Stoy Hayward LLP, Independent Registered Public Accounting Firm | | | F-48 | |
Report of PricewaterhouseCoopers LLP, Independent Auditors | | | F-49 | |
Consolidated Balance Sheet as of December 31, 2005 | | | F-50 | |
Consolidated Statements of Operations for the period from January 1, 2006 to October 15, 2006 and for the years ended December 31, 2005 and 2004 | | | F-51 | |
Consolidated Statements of Comprehensive Income (Loss) for the period from January 1, 2006 to October 15, 2006 and for the years ended December 31, 2005 and 2004 | | | F-52 | |
Consolidated Statements of Changes in Shareholders’ Deficit for the period from January 1, 2006 to October 15, 2006 and for the years ended December 31, 2005 and 2004 | | | F-53 | |
Consolidated Statements of Cash Flows for the period from January 1, 2006 to October 15, 2006 and for the years ended December 31, 2005 and 2004 | | | F-54 | |
Notes to Consolidated Financial Statements | | | F-55 | |
Global Internetworking, Inc. | | | | |
Report of J.H. Cohn LLP, Independent Registered Public Accounting Firm | | | F-68 | |
Independent Auditors’ Report of Schwartz, Weissman & Co., PC | | | F-69 | |
Consolidated Balance Sheets as of September 30, 2006 and 2005 | | | F-70 | |
Consolidated Statements of Operations for the period from October 1, 2006 to October 15, 2006 and for the years ended September 30, 2006, 2005 and 2004 | | | F-71 | |
Consolidated Statements of Changes in Shareholders’ Equity for the period from October 1, 2006 to October 15, 2006 and for the years ended September 30, 2006, 2005 and 2004 | | | F-72 | |
Consolidated Statements of Cash Flows for the period from October 1, 2006 to October 15, 2006 and for the years ended September 30, 2006, 2005 and 2004 | | | F-73 | |
Notes to Consolidated Financial Statements | | | F-74 | |
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Global Telecom & Technology, Inc.
We have audited the accompanying consolidated balance sheets of Global Telecom & Technology, Inc. (formerly Mercator Partners Acquisition Corp.) and Subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2006 and the period from inception (January 3, 2005) to December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 consolidated financial position of Global Telecom & Technology, Inc. and Subsidiaries as of December 31, 2006 and 2005, and their consolidated results of operations and cash flows for the year ended December 31, 2006 and the period from inception (January 3, 2005) to December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
Jericho, New York
April 16, 2007
F-2
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| | December 31,
| | | December 31,
| |
| | 2006 | | | 2005 | |
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ASSETS |
Current assets: | | | | | | | | |
Cash and cash equivalents (including $533,348 in certificates of deposit in 2006) | | $ | 3,779,027 | | | $ | 1,383,204 | |
Designated cash | | | 10,287,180 | | | | — | |
Restricted investment in trust fund | | | — | | | | 54,657,439 | |
Accounts receivable, net | | | 7,687,544 | | | | — | |
Income tax refund receivable | | | 417,110 | | | | — | |
Deferred contract costs | | | 591,700 | | | | — | |
Prepaid expenses and other current assets | | | 970,821 | | | | 60,244 | |
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Total current assets | | | 23,733,382 | | | | 56,100,887 | |
Property and equipment, net | | | 890,263 | | | | — | |
Other assets | | | 1,075,063 | | | | — | |
Intangible assets, subject to amortization | | | 11,117,721 | | | | — | |
Goodwill | | | 61,458,599 | | | | — | |
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Total assets | | $ | 98,275,028 | | | $ | 56,100,887 | |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 13,892,664 | | | $ | 148,033 | |
Notes payable | | | 6,519,167 | | | | — | |
Common stock, subject to possible conversion to cash | | | 11,311,658 | | | | — | |
Unearned and deferred revenue | | | 2,930,639 | | | | — | |
Regulatory and sales tax payable | | | 297,251 | | | | — | |
Income taxes payable | | | 339,694 | | | | 56,000 | |
Derivative liabilities | | | 8,435,050 | | | | 6,507,700 | |
Accrued expenses and other current liabilities | | | 2,333,178 | | | | — | |
| | | | | | | | |
Total current liabilities | | | 46,059,301 | | | | 6,711,733 | |
Long-term obligations, less current maturities | | | 4,000,000 | | | | — | |
Long-term deferred revenue | | | 190,778 | | | | — | |
Deferred tax liability | | | 4,231,762 | | | | — | |
| | | | | | | | |
Total liabilities | | | 54,481,841 | | | | 6,711,733 | |
| | | | | | | | |
Common stock, subject to possible conversion to cash | | | — | | | | 10,926,022 | |
| | | | | | | | |
Commitments and contingencies | | | | | | | | |
Stockholders’ equity: | | | | | | | | |
Preferred stock, par value $.0001 per share, 5,000 shares authorized, no shares issued | | | — | | | | — | |
Common stock, par value $.0001 per share, 80,000,000 and 40,000,000 shares authorized, 11,011,932 and 1,150,100 shares issued and outstanding (in 2006 excluding 2,114,942 shares subject to possible to cash conversion) | | | 1,101 | | | | 115 | |
Common stock, Class B, par value $.0001 per share, 0 and 12,000,000 shares authorized, 0 and 8,465,058 shares issued and outstanding (in 2005 excluding 2,114,942 shares subject to possible conversion to cash) | | | — | | | | 847 | |
Additional paid-in capital | | | 44,049,553 | | | | 37,087,542 | |
Retained earnings (accumulated deficit) | | | (478,220 | ) | | | 1,369,061 | |
Accumulated other comprehensive income | | | 220,753 | | | | 5,567 | |
| | | | | | | | |
Total stockholders’ equity | | | 43,793,187 | | | | 38,463,132 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 98,275,028 | | | $ | 56,100,887 | |
| | | | | | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-3
| | | | | | | | |
| | | | | For the Period from
| |
| | | | | Inception (January 3,
| |
| | For the Year Ended
| | | 2005) to
| |
| | December 31, 2006 | | | December 31, 2005 | |
|
Revenue: | | | | | | | | |
Telecommunications services sold | | $ | 10,470,502 | | | $ | — | |
| | | | | | | | |
Operating expenses: | | | | | | | | |
Cost of telecommunications services provided | | | 7,784,193 | | | | — | |
Selling, general and administrative expense | | | 3,981,423 | | | | 358,892 | |
Depreciation and amortization | | | 521,854 | | | | — | |
| | | | | | | | |
Total operating expenses | | | 12,287,470 | | | | 358,892 | |
| | | | | | | | |
Operating loss | | | (1,816,968 | ) | | | (358,892 | ) |
Other income (expense): | | | | | | | | |
Interest income, net of expense | | | 2,108,716 | | | | 1,258,203 | |
Other (expense), net of income | | | (17,591 | ) | | | — | |
Gain (loss) on derivative financial instruments | | | (1,927,350 | ) | | | 776,750 | |
| | | | | | | | |
Total other income (expense) | | | 163,775 | | | | 2,034,953 | |
| | | | | | | | |
Income (loss) before income taxes | | | (1,653,193 | ) | | | 1,676,061 | |
Provision for income taxes | | | 194,088 | | | | 307,000 | |
| | | | | | | | |
Net (loss) income | | $ | (1,847,281 | ) | | $ | 1,369,061 | |
| | | | | | | | |
Net (loss) income per share: | | | | | | | | |
Basic and diluted | | $ | (0.15 | ) | | $ | 0.16 | |
| | | | | | | | |
Weighted average shares: | | | | | | | | |
Basic and diluted | | | 12,008,854 | | | | 8,434,067 | |
| | | | | | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-4
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Accumulated
| | | | |
| | | | | | | | | | | | | | Additional
| | | Retained
| | | Other
| | | | |
| | Common Stock | | | Common Stock, Class B | | | Paid-In
| | | Earnings
| | | Comprehensive
| | | | |
| | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | (Accumulated Deficit) | | | Income | | | Total | |
|
Balance, January 3, 2005 (inception) | | | — | | | $ | — | | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Issuance of common stock for cash | | | 100 | | | | — | | | | — | | | | — | | | | 500 | | | | — | | | | — | | | | 500 | |
Issuance of 4,950,000 warrants for cash | | | — | | | | — | | | | — | | | | — | | | | 247,500 | | | | — | | | | — | | | | 247,500 | |
Sale of 575,000 Series A units and 5,290,000 Series B units through public offering, net of underwriter’s discount and offering expenses and net proceeds of $10,680,457 allocable to 2,114,942 shares of common stock, Class B subject to possible conversion to cash | | | 1,150,000 | | | | 115 | | | | 8,465,058 | | | | 847 | | | | 44,369,457 | | | | — | | | | — | | | | 44,370,419 | |
Proceeds from sale of underwriters’ purchase option | | | — | | | | — | | | | — | | | | — | | | | 100 | | | | — | | | | — | | | | 100 | |
Allocation of value to Class B shares subject to possible conversion to cash | | | — | | | | — | | | | — | | | | — | | | | (245,565 | ) | | | — | | | | — | | | | (245,565 | ) |
Reclassification to derivative liabilities for portion of proceeds from sale of units in public offering relating to warrants and for value of underwriter purchase option | | | — | | | | — | | | | — | | | | — | | | | (7,284,450 | ) | | | — | | | | — | | | | (7,284,450 | ) |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,369,061 | | | | — | | | | 1,369,061 | |
Change in unrealized gain onavailable-for-sale securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5,567 | | | | 5,567 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,374,628 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2005 | | | 1,150,100 | | | | 115 | | | | 8,465,058 | | | | 847 | | | | 37,087,542 | | | | 1,369,061 | | | | 5,567 | | | | 38,463,132 | |
Allocation of value to Class B shares subject to possible conversion to cash | | | — | | | | — | | | | — | | | | — | | | | (385,636 | ) | | | — | | | | — | | | | (385,636 | ) |
Conversion of Class B common shares to common stock (excluding 2,114,942 shares subject to cash conversion) | | | 8,465,058 | | | | 847 | | | | (8,465,058 | ) | | | (847 | ) | | | — | | | | — | | | | — | | | | — | |
Value of common shares and warrants issued in connection with acquisition | | | 1,300,000 | | | | 130 | | | | — | | | | — | | | | 7,198,557 | | | | — | | | | — | | | | 7,198,687 | |
Share-based compensation for options issued to employees | | | — | | | | — | | | | — | | | | — | | | | 7,680 | | | | — | | | | — | | | | 7,680 | |
Share-based compensation for restricted stock issued | | | 96,774 | | | | 9 | | | | — | | | | — | | | | 66,397 | | | | — | | | | — | | | | 66,406 | |
Share-based compensation for restricted stock awarded | | | — | | | | — | | | | — | | | | — | | | | 75,013 | | | | — | | | | — | | | | 75,013 | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,847,281 | ) | | | — | | | | (1,847,281 | ) |
Change in unrealized gain onavailable-for-sale securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (5,567 | ) | | | (5,567 | ) |
Change in accumulated foreign currency gain on translation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 220,753 | | | | 220,753 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,632,095 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2006 | | | 11,011,932 | | | $ | 1,101 | | | | — | | | $ | — | | | $ | 44,049,553 | | | $ | (478,220 | ) | | $ | 220,753 | | | $ | 43,793,187 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-5
| | | | | | | | |
| | | | | For the Period from
| |
| | | | | Inception (January 3,
| |
| | For the Year Ended
| | | 2005) to
| |
| | December 31, 2006 | | | December 31, 2005 | |
|
Cash Flows From Operating Activities: | | | | | | | | |
Net (loss) income | | $ | (1,847,281 | ) | | $ | 1,369,061 | |
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities | | | | | | | | |
Depreciation and amortization | | | 521,854 | | | | — | |
Change in value of derivative liabilities | | | 1,927,350 | | | | (776,750 | ) |
Shared-based compensation from options issued to employees | | | 7,680 | | | | — | |
Shared-based compensation from restricted stock to employees | | | 141,419 | | | | — | |
Amortization of discount on U.S. Government Securities held in trust | | | (1,926,831 | ) | | | (1,222,872 | ) |
Changes in operating assets and liabilities, excluding effects of Acquisitions: | | | | | | | | |
Accounts receivable, net | | | 1,952,678 | | | | — | |
Income tax refund receivable | | | (89,606 | ) | | | — | |
Deferred contract cost and other assets | | | 540,578 | | | | — | |
Prepaid expenses and other current assets | | | (148,566 | ) | | | (60,244 | ) |
Other assets | | | 187,887 | | | | — | |
Accounts payable | | | 999,138 | | | | 148,033 | |
Unearned and deferred revenue | | | (2,751,271 | ) | | | — | |
Regulatory and sales tax payable | | | (44,532 | ) | | | — | |
Income taxes payable | | | 338,779 | | | | 56,000 | |
Accrued expenses and other current liabilities | | | 394,031 | | | | — | |
Long-term deferrals | | | (28,062 | ) | | | — | |
| | | | | | | | |
Net cash provided by (used in) operating activities | | | 175,245 | | | | (486,772 | ) |
| | | | | | | | |
Cash Flows from Investing Activities | | | | | | | | |
Acquisition of businesses, net of cash acquired | | | (44,370,105 | ) | | | — | |
Increase of designated cash | | | (10,149,180 | ) | | | — | |
Purchases of property and equipment | | | (50,564 | ) | | | — | |
Purchases of U.S. Government Securities held in Trust Fund | | | (166,038,591 | ) | | | (161,441,000 | ) |
Maturities of U.S. Government Securities held in Trust Fund | | | 222,741,468 | | | | 108,012,000 | |
| | | | | | | | |
Net cash provided by (used in) investing activities | | | 2,133,028 | | | | (53,429,000 | ) |
| | | | | | | | |
Cash Flows from Financing Activities | | | | | | | | |
Proceeds from sales of common stock and warrants to initial stockholders | | | — | | | | 248,000 | |
Portion of net proceeds from sale from Series B units through public offering allocable to shares of common stock, Class B subject to possible conversion to cash | | | — | | | | 10,680,457 | |
Net proceeds form sale of units through public offering | | | — | | | | 44,370,419 | |
Proceeds from sale of underwriters’ purchase option | | | — | | | | 100 | |
| | | | | | | | |
Net cash provided by financing activities | | | — | | | | 55,298,976 | |
Effect of exchange rate changes on cash | | | 87,550 | | | | — | |
| | | | | | | | |
Net increase in cash and cash equivalents | | | 2,395,823 | | | | 1,383,204 | |
Cash and cash equivalents at beginning of period | | | 1,383,204 | | | | — | |
| | | | | | | | |
Cash and cash equivalents at end of period | | $ | 3,779,027 | | | $ | 1,383,204 | |
| | | | | | | | |
Supplemental Disclosure of Cash Flow Information | | | | | | | | |
Cash paid for interest | | $ | 12,477 | | | $ | — | |
Cash paid for income taxes | | $ | — | | | $ | 251,000 | |
Noncash investing and financing activities: | | | | | | | | |
Deferred tax liability related to Acquisitions of GII and ETT | | $ | 4,231,762 | | | $ | — | |
Stock and warrants issued in connection with Acquisition of GII | | $ | 7,198,687 | | | $ | — | |
Debt issued for Acquisition of ETT | | $ | 4,666,667 | | | $ | — | |
Debt issued for Acquisition of GII | | $ | 5,250,000 | | | $ | — | |
Other notes payable | | $ | 602,500 | | | $ | — | |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
NOTE 1 — ORGANIZATION AND BUSINESS, MANAGEMENT’S PLANS
Organization and Business
Global Telecom & Technology, Inc., (“GTT”) serves as the holding company for two operating subsidiaries, Global Telecom & Technology Americas, Inc. (“GTTA”), which provides services primarily to customers in North, Central and South America, and GTT — EMEA Ltd. (“GTTE”), which provides services primarily to customers in Europe, the Middle East and Asia, and their respective subsidiaries (collectively, hereinafter, the “Company”).
The Company provides facilities-neutral, high-capacity communications network solutions, dedicated managed data networks and other value-added telecommunications services to over 200 domestic and multinational small, medium and enterprise customers with respect to over 50 countries.
GTT is a Delaware corporation formerly known as Mercator Acquisition Partners Corp. (“Mercator”), which was incorporated on January 3, 2005 for the purpose of effecting a merger, capital stock exchange, asset acquisition or another similar business combination with what was, at the time, an unidentified operating business or businesses (“Business Combination”). Mercator was a “shell company” as defined in Rule 405 promulgated under the Securities Act of 1933 andRule 12b-2 promulgated under the Securities Exchange Act. On April 11, 2005, Mercator effected an initial public offering of its securities (the “Offering”) (see Note 3) which closed on April 15, 2005.
GTTA is a Virginia corporation, incorporated in 1998, formerly known as Global Internetworking, Inc. (“GII”). GTTE is a UK limited company, incorporated in 1998, formerly known as European Telecommunications and Technology, Ltd. (“ETT”).
On October 15, 2006, GTT acquired all of the outstanding shares of common stock of GII and outstanding voting stock of ETT (collectively the “Acquisitions”) in exchange for cash, stock, warrants and notes (see Note 4). Immediately thereafter, Mercator changed its name to GTT. Subsequently, GII changed its name to Global Telecom & Technology Americas, Inc., and ETT changed its name to GTT — EMEA Ltd.
Basis of Presentation
The accompanying consolidated financial statements have been prepared on a going concern basis. As shown in the accompanying consolidated financial statements, the Company had a working capital deficit of approximately ($22.3) million at December 31, 2006. The working capital deficit includes designated cash which will be used to repurchase shares upon their conversion and the associated liability for such shares subject to possible conversion (see Note 2). Additionally, a portion of the working capital deficit, $8.4 million, is attributable to a derivative liability associated with the warrants and an option issued in the Offering (see Note 2).
Historically, the combined operations of the acquired companies have not been cash flow positive. However, cash flows of the Company are expected to improve through cost reductions following the combination of the two companies and additional growth in sales. Net cash provided by operations for the Company in 2006 was approximately $0.2 million and includes the impact of the Acquisitions from October 15, 2006 through December 31, 2006.
As a multiple network operator, the Company typically has very low levels of capital expenditures, especially when compared to infrastructure-owning traditional telecommunications competitors. Additionally, the Company’s cost structure is somewhat variable and provides management an ability to manage costs as appropriate. The Company’s capital expenditures are predominantly related to the maintenance of computer facilities, office fixtures and furnishings and are very low as a proportion of revenue. However, from time to time the Company may require capital investment as part of an executed service contract that would typically consist of significant multi-year commitments from the customer.
F-7
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
Management monitors cash flow and liquidity requirements. Based on the Company’s cash and cash equivalents and analysis of the anticipated working capital requirements, management believes the Company has sufficient liquidity to fund the business and meet its contractual obligations over a period beyond the next 15 months from December 31, 2006. The Company’s current planned cash requirements for fiscal 2007 are based upon certain assumptions, including its ability to raise additional financing and the growth of revenues from services arrangements. In connection with the activities associated with the services and fund raising activities, 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.
Although we believe that cash currently on hand and expected cash flows from future operations are sufficient to fund operations, we may seek to raise additional capital as necessary to meet certain capital and liquidity requirements in the future. Due to the dynamic nature of our industry and unforeseen circumstances, if we are unable to fully fund cash requirements through operations and current cash on hand, we will need to obtain additional financing through a combination of equity and debt financingsand/or renegotiation of terms on our existing debt. If any such activities become necessary, there can be no assurance that we would be successful in completing any of these activities on terms that would be favorable to us, if at all.
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation of Consolidated Financial Statements and Use of Estimates
The consolidated financial statements include the accounts of the Company, GTTA, GTTE, and GTTA’s and GTTE’s respective operating subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
GTTA’s operating subsidiaries:
GTT Global Telecom, LLC (US)
GTT Global Telecom Government Services, LLC (US)
Global Internetworking of Virginia, Inc. (US)
GTTE’s subsidiaries:
European Telecommunications & Technology SARL (France)
European Telecommunications & Technology Inc. (US)
ETT European Telecommunications & Technology Deutschland GmbH (Germany)
ETT (European Telecommunications & Technology) Private Limited (India)
European Telecommunications & Technology (S) Pte Limited (Singapore)
ETT Network Services Limited, (UK)
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates to be made by management include or will include allowances for doubtful accounts, impairment of goodwill and other long-lived assets, estimated reserves and other allowances and expected
F-8
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
volatility of common stock. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.
Predecessors
From its inception (January 3, 2005) until consummation of the Acquisitions on October 15, 2006, GTT had no substantial operations other than to serve as a vehicle for a Business Combination. Accordingly, since GTT’s operating activities prior to the Acquisitions are insignificant relative to those of the GTTA and GTTE, management believes that both GTTA and GTTE are GTT’s predecessors. Management has reached this conclusion based upon an evaluation of the requirements and facts and circumstances, including the historical life of each of GTTE and GTTA, the historical level of operations of GTTA and GTTE, the purchase price paid for each GTTE and GTTA and the fact that the consolidated Company’s operations, revenues and expenses after the Acquisitions are most similar in all respects to those of GTTA’s and GTTE’s historical periods. Accordingly, the historical financial statements of GTTA and GTTE have been provided elsewhere in this annual report onForm 10-K.
Revenue Recognition
Data Connectivity and Managed Network Services-Data connectivity and managed network services are provided pursuant to service contracts that typically provide for payments of recurring charges on a monthly basis for use of the services over a committed term. Each service contract for data connectivity and managed services has a fixed monthly cost and a fixed term, in addition to a fixed installation charge (if applicable). At the end of the initial term of most service contracts for data connectivity and managed services, the contracts roll forward on amonth-to-month or other periodic basis and continue to bill at the same fixed recurring rate. If any cancellation or termination charges become due from the customer as a result of early cancellation or termination of a service contract, those amounts are calculated pursuant to a formula specified in each contract. Recurring costs relating to supply contracts are recognized ratably over the term of the contract.
Non-recurring fees, Deferred Revenue-Non-recurring fees for data connectivity typically take the form of one-time, non-refundable provisioning fees established pursuant to service contracts. The amount of the provisioning fee included in each contract is generally determined by marking up or passing through the corresponding charge from the Company’s supplier, imposed pursuant to the Company’s purchase agreement. Non-recurring revenues earned for providing provisioning services in connection with the delivery of recurring communications services are recognized ratably over the term of the recurring service starting upon commencement of the service contract term. Fees recorded or billed from these provisioning services is initially recorded as deferred revenue then recognized ratably over the term of the recurring service. Installation costs related to provisioning incurred by the Company from independent third party suppliers, directly attributable and necessary to fulfill a particular service contract, and which costs would not have been incurred but for the occurrence of that service contract, are capitalized as deferred contract costs and expensed proportionally over the term of service in the same manner as the deferred revenue arising from that contract.
Other Revenue-From time to time, the Company recognizes revenue in the form of fixed or determinable cancellation (pre-installation) or termination (post-installation) charges imposed pursuant to the service contract. These revenues are earned when a customer cancels or terminates a service agreement prior to the end of its committed term. These revenues are recognized when billed if collectibility is reasonably assured. In addition, the Company from time to time sells equipment in connection with data networking applications. The Company recognizes revenue from the sale of equipment at the contracted selling price when title to the equipment passes to the customer (generally F.O.B. origin) and when collectibility is reasonably assured.
Professional Services —Fees for professional services are typically specified as applying on a fee per hour basis pursuant to agreements with customers and are computed based on the hours of service provided by the Company. Invoices for professional services performed on an hourly basis are rendered in the month following that
F-9
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
in which the professional services have been performed. Because such invoices for hourly fees are for services the Company has already performed, and because such work is undertaken pursuant to an executed statement of work with the customer specifying the applicable hourly rate, the Company recognizes revenue based upon hourly fees in the period the service is provided if collectibility is reasonably assured. Less than 1% of the Company’s revenues for the year ended December 31, 2006 were attributable to professional services provided to customers, and such revenues were not material to any prior periods.
In certain circumstances, the Company is engaged to perform professional services projects pursuant to master agreements and project-specific statements of work. Fees for the Company’s performance of project-specific engagements are specified in each executed statement of work by reference to certainagreed-upon and defined milestonesand/or the project as a whole. Invoices for professional services projects are rendered pursuant to payment plans specified in the statement of work executed by the customer. Revenue recognition is determined independently of the issuance of an invoice to, or receipt of payment from, the customer. Rather, revenue is recognized based upon the degree of delivery, performance and completion of such professional services projects as stated expressly in the contractual statement of work. The Company determines performance, completion and delivery of obligations on projects based on the underlying contract or statement of work terms, particularly by reference to any customer acceptance provisions or by other objective performance criteria defined in the contract or statement of work. Furthermore, even if a project has been performed, completed and delivered in accordance with all applicable contractual requirements, and even if an invoice has been issued consistent with those contractual requirements, professional services revenues are not recognized unless collected in advance or if collectibility is reasonably assured.
In cases where a project is partially billed upon attainment of a milestone or on another partial completion basis, revenue is allocated for recognition purposes based upon the relative fair market value of the individual milestone or deliverable. For this purpose, fair market value is determined by reference to factors such as how the company would price the particular deliverable on a standalone basisand/or what competitors may charge for a similar standalone product. Where the Company, for whatever reason, cannot make an objective determination of fair market value of a deliverable by reference to such factors, the amount paid is recognized upon performance, completion and delivery of the project as a whole.
Usage charge revenue is recognized as the connection is utilized by the customer in accordance with the agreement.
Translation of Foreign Currencies
These consolidated financial statements have been reported in US Dollars by translating asset and liability amounts at the closing exchange rate, the equity amounts at historical rates, and the results of operations and cash flow at the average exchange rate prevailing during the periods reported.
A summary of exchange rates used is as follows:
| | | | |
| | 2006 | |
|
Closing exchange rate at December 31, 2006 | | | 1.95913 | |
Average exchange rate during the period | | | 1.92462 | |
Transactions denominated in foreign currencies are recorded at the rates of exchange prevailing at the time of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange prevailing at the balance sheet date. Exchange differences arising upon settlement of a transaction are reported in the consolidated statement of operations.
F-10
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
Accounts Receivable, Allowance for Doubtful Accounts
Accounts receivable balances are stated at amounts due from the customer net of an allowance for doubtful accounts. Credit extended is based on an evaluation of the customer’s financial condition and is granted to qualified customers on an unsecured basis.
The Company, pursuant to its standard service contracts, is entitled to impose a finance charge of a certain percentage per month with respect to all amounts that are past due. The Company’s standard terms require payment within 30 days of the date of the invoice. The Company treats invoices as past due when they remain unpaid, in whole or in part, beyond the payment time set forth in the applicable service contract. At such time as an invoice becomes past due, the Company applies the finance charge as stated in the applicable service contract.
The Company determines its allowance by considering a number of factors, including the length of time trade receivables are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. Specific reserves are also established on acase-by-case basis by management. The Company writes off accounts receivable when they become uncollectible. Credit losses have historically been within management’s expectations. Actual bad debts, when determined, reduce the allowance, the adequacy of which management then reassesses. The Company writes off accounts after a determination by management that the amounts at issue are no longer likely to be collected, following the exercise of reasonable collection efforts and upon management’s determination that the costs of pursuing collection outweigh the likelihood of recovery. As of December 31, 2006, the total allowance for doubtful accounts was $127,634.
Other Comprehensive Income
In addition to net income, 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 and marked to market adjustments on available for sale securities.
Share-Based Compensation
Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) requires the Company to measure and recognize compensation expense for all share-based payment awards made to employees, directors and consultants based on estimated fair values. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).
There were no share-based compensation awards granted prior to October 16, 2006. Share-based compensation expense recognized under SFAS 123(R) for the year ended December 31, 2006 was $149,099 which consisted of $7,680 of share-based compensation expense related to stock option grants and $141,419 in restricted stock awards and is included in selling general and administrative expense on the accompanying consolidated statements of operations. See Note 10 for additional information.
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statement of operations.
Stock-based compensation expense recognized in the Company’s consolidated statements of operations for the year ended December 31, 2006 included compensation expense for share-based payment awards based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). The Company follows the straight-line single option method of attributing the value of stock-based compensation to expense. As stock-based compensation expense recognized in the consolidated statement of operations for the year ended December 31, 2006 is
F-11
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company used the Black-Scholes option-pricing model (“Black-Scholes model”) as its method of valuation for share-based awards granted. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards and the expected term of the awards.
The Company accounts for non-employee stock-based compensation expense in accordance with Emerging Issues Task Force (“EITF”) IssueNo. 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services(“EITF 96-18”). The Company had one grant of 6,000 share options to a non-employee consultant in December 2006, which resulted in a charge to the consolidated statement of operations.
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.
Designated Cash
At December 31, 2006, the Company had $10,287,180 in designated cash of which $10,149,180 relates to the repurchase of shares subject to conversion as discussed in Note 13. Subsequent to year end, the Company repurchased 1,860,850 shares of stock for approximately $9.96 million. Following the completion of the conversion process, any remaining cash will be available for general corporate purposes.
Investments
Consistent with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, the Company classifies all debt securities that have readily determinable fair values asavailable-for-sale, as the sale of such securities may be required prior to maturity to implement management strategies. Such securities are reported at fair value, with unrealized gains or losses excluded from earnings and included in other comprehensive income, net of applicable taxes. Discounts from the face value of restricted investments are amortized using the interest method over the period from the date of purchase to maturity and are included in interest income on the accompanying consolidated statement of operations.
The Company’s investments in 2005 consisted of United States of America Government Treasury securities, with a maturity date of January 12, 2006. The fair market value of the restricted investment was $54,657,439 as of December 31, 2005, including $5,567 of unrealized gains which are reported as a component of other comprehensive income as of December 31, 2005. In October 2006, all investments in U.S. Treasury securities were sold in connection with the Acquisitions.
Accounting for Derivative Instruments
SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,” as amended, requires all derivatives to be recorded on the balance sheet at fair value. However, paragraph 11(a) of SFAS No. 133 provides that contracts issued or held by a reporting entity that are both (1) indexed to its own stock and (2) classified as stockholders’ equity in its statement of financial position are not treated as derivative instruments. EITF00-19,
F-12
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
“Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock”(“EITF00-19”), provides criteria for determining whether freestanding contracts that are settled in a company’s own stock, including common stock warrants, should be designated as either an equity instrument, an asset or as a liability under SFAS No. 133. Under the provisions of EITF00-19, a contract designated as an asset or a liability must be carried at fair value on a company’s balance sheet, with any changes in fair value recorded in a company’s results of operations. A contract designated as an equity instrument is included within equity, and no fair value adjustments are required from period to period. In accordance with EITF00-19, the Company’s 8,165,000 Class W warrants and 8,165,000 Class Z warrants to purchase Common Stock included in the Series A Units and Series B Units sold in the Offering (see Note 14) and the Underwriters’ Purchase Options (the “UPO”) to purchase up to 25,000 Series A unitsand/or up to 230,000 Series B units are separately accounted for as liabilities. The agreements related to the Class W warrants and Class Z warrants and the UPO provide for the Company to attempt to register and maintain the registration of the shares underlying the securities and are silent as to the penalty to be incurred in the absence of the Company’s ability to deliver registered shares to the holders upon exercise of the securities. Under EITF00-19, registration of the common stock underlying the warrants and UPO is not within the Company’s control and, as a result, the Company must assume that it could be required to settle the securities on a net-cash basis, thereby necessitating the treatment of the potential settlement obligation as a liability. The fair values of these securities are presented on the accompanying consolidated balance sheet as “Derivative liabilities” and the changes in the values of these derivatives are shown in the accompanying consolidated statement of operations as “Gain (loss) on derivative liabilities.” Such gains and losses are non-operating and have no effect on cash flows from operating activities.
Fair values for traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates. The Class W warrants and Class Z warrants sold in the Offering are publicly traded, and consequently, the fair values of these warrants are based on the market price of the applicable class of warrant at each period end. To the extent that the market price increases or decreases, the Company’s derivative liabilities will also increase or decrease, with a corresponding impact on the accompanying consolidated statement of operations.
The UPO is a derivative that is separately valued and accounted for on the Company’s balance sheet. While the underlying shares and warrants are indexed to the Company’s common stock, because the UPO contains certain registration rights with respect to the UPO and the securities issuable upon exercise of the UPO, the Company has classified these instruments as a liability in accordance with EITF00-19. This derivative liability has been, and will continue to be, adjusted to fair value at each period end.
The pricing model the Company uses for determining the fair value of the UPO at the end of each period is the Black Scholes option-pricing model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates, market prices and volatilities. Selection of these inputs involves management’s judgment. The Company uses a risk-free interest rate, which is the rate on U.S. Treasury instruments, for a security with a maturity that approximates the estimated remaining contractual life of the derivative. Due to the Company’s limited history management uses volatility rates based upon a sample of comparable corporations. The volatility factor used in the Black Scholes model has a significant effect on the resulting valuation of the derivative liabilities on the Company’s balance sheet. The volatility for the calculation of the UPO was 62.55% and 34.99% as of December 31, 2006 and 2005, respectively. This volatility rate will continue to change in the future. The Company uses the closing market prices of the share and warrant securities underlying the UPO at the end of a period in the Black Scholes model. The Company’s securities prices will also change in the future. To the extent that the Company’s securities prices increase or decrease, the Company’s UPO derivative liability will also increase or decrease, absent any change in volatility rates and risk-free interest rates.
F-13
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109. Under SFAS No. 109, deferred tax assets are recognized for deductible temporary differences and for tax net operating loss and tax credit carry-forwards, and deferred tax liabilities are recognized for temporary differences that will result in taxable amounts in future years. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. A valuation allowance is provided to offset the net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Net Income (Loss) Per Share
Basic income (loss) per share is computed by dividing income (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. Diluted loss per share for the year ended December 31, 2006 and for the period from inception (January 3, 2005) to December 31, 2005 excludes potentially issuable common shares of 25,777,500 and 21,990,000, respectively, primarily related to the Company’s outstanding stock options and warrants because the assumed issuance of such potential common shares is antidilutive as the exercise prices of such securities are greater than the average closing price of the Company’s common stock during the periods.
Software Capitalization
Internal Use Software —The Company has adopted Statement of Position98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This Statement requires that certain costs incurred in purchasing or developing software for internal use be capitalized as internal use software development costs and included in fixed assets. Amortization of the software begins when the software is ready for its intended use. Since December 31, 2006, the Company has not capitalized software.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation computed using the straight-line method. Depreciation on these assets is computed over the estimated useful lives of the assets ranging from three to seven years. Leasehold improvements are amortized over the life of the lease, excluding optional extensions. Depreciable lives used by the Company for its classes of assets are as follows:
| | | | |
Furniture and Fixtures | | | 7 years | |
Telecommunication Equipment | | | 5 years | |
Leasehold Improvements | | | up to 10 years | |
Computer Hardware and Software | | | 3-5 years | |
Internal Use Software | | | 3 years | |
Goodwill
Under SFAS No. 141,“Business Combinations,” goodwill represents the excess of cost (purchase price) over the fair value of net assets acquired. Acquired intangibles are recorded at fair value as of the date acquired using the purchase method. Under SFAS No. 142,“Goodwill and Intangible Assets,” goodwill and other intangibles determined to have an indefinite life are not amortized, but are tested for impairment at least annually or when events or changes in circumstances indicate that the assets might be impaired.
F-14
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
Goodwill represents the Company’s allocation of the purchase price to acquire GTTA and GTTE in excess of the fair value of the assets acquired at the date of the acquisitions. The allocation of purchase price, to reflect the values of the assets acquired and liabilities assumed, has been based upon management’s evaluation and certain third-party appraisals and has been finalized.
The goodwill impairment test is a two-step process, which requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of the Company’s reporting units based on discounted cash flow models using revenue and profit forecasts and comparing the estimated fair values with the carrying values of the Company’s reporting units, which include the goodwill. If the estimated fair values are less than the carrying values, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of the Company’s “implied fair value” requires the Company to allocate the estimated fair value to the assets and liabilities of the reporting unit. Any unallocated fair value represents the “implied fair value” of goodwill, which is compared to the corresponding carrying value.
Under SFAS No. 142, the Company measures impairment of its indefinite lived intangible assets, which consist of assembled workforce, based on projected discounted cash flows. The Company also re-evaluates the useful life of these assets annually to determine whether events and circumstances continue to support an indefinite useful life. The Company performs its annual goodwill impairment testing, by reportable segment, in the third quarter of each year, or more frequently if events or changes in circumstances indicate that goodwill may be impaired
Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for GTTA and GTTE, the useful life over which cash flows will occur, and determination of GTTA and GTTE cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair valueand/or conclusions on goodwill impairment.
Intangibles
Intangible assets are accounted for under the provisions of SFAS No. 142. Intangible assets arose from business combinations and consist of customer contracts and relationships and restrictive covenants related to employment agreements that are amortized, on a straight-line basis, over periods of up to five years. The Company follows the impairment provisions and disclosure requirements of SFAS No. 142. Accordingly, intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable (see Note 5).
Impairment of Long-Lived Assets
In accordance with SFAS No. 144,“Accounting for Impairment or Disposal of Long-Lived Assets,” the Company reviews long-lived assets to beheld-and-used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows the asset is considered to be impaired. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Fair Value of Financial Instruments
The fair values of the Company’s assets and liabilities that qualify as financial instruments under SFAS No. 107 including cash and cash equivalents, designated cash, accounts receivable, accounts payable, accrued expenses, and common stock subject to possible conversion to cash, are carried at cost, which approximates fair value due to the
F-15
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
short-term maturity of these instruments. Investments and derivatives liabilities are stated at fair value. Long-term obligations approximate fair value, given management’s evaluation of the instruments’ current rates.
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. 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 accrued carrier cost reflected 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 monthly, and reconciles the estimates with actual results quarterly as the liabilities are paid, as disputes are resolved, or as the appropriate statute of limitations with respect to a given dispute expires.
As of December 31, 2006, open disputes totaled $287,301. 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 $88,979 in connection with these disputes, for which accruals are included on the accompanying consolidated balance sheet at December 31, 2006.
Segment Reporting
The Company determines and discloses its segments in accordance with SFAS No. 131,“Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”), which uses a “management” approach for determining segments.
The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of a company’s reportable segments. SFAS No. 131 also requires disclosures about products or services, geographic areas and major customers. The Company operates in two geographic regions in addition to corporate activities: (i) North, Central and South America, and (ii) Europe, the Middle East and Asia.
Recent Accounting Pronouncements
In May 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 156,“Accounting for Servicing of Financial Assets: an amendment of FASB Statement No. 140”(“SFAS No. 156”). SFAS No. 156 requires that all separately recognized servicing assets and liabilities be initially measured at fair value, if practicable. SFAS No. 156 also permits an entity to choose to subsequently measure each class of recognized servicing assets or servicing liabilities using either the amortization method specified in SFAS No. 140 or the fair value measurement method. The adoption of SFAS No. 156 is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48,“Accounting For Uncertainty in Income Taxes”(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109,“Accounting For Income Taxes”and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 will be effective for the Company
F-16
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
beginning January 1, 2007. The adoption of FIN 48 is not expected to have a material effect on the Company’s consolidated financial position and results of operations.
In June 2006, the FASB ratified the consensus on EITF IssueNo. 06-03,“How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” (“EITFNo. 06-03”). The scope of EITFNo. 06-03 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, Universal Service Fund (“USF”) contributions and some excise taxes. The Task Force affirmed its conclusion that entities should present these taxes in the income statement on either a gross or a net basis, based on their accounting policy, which should be disclosed pursuant to APB Opinion No. 22,“Disclosure of Accounting Policies.” If such taxes are significant, and are presented on a gross basis, the amounts of those taxes should be disclosed. The consensus on EITFNo. 06-03 will be effective for interim and annual reporting periods beginning after December 15, 2006. The Company currently records USF contributions and sales, use, value added and excise taxes billed to its customers on a net basis in its consolidated statements of operations. The adoption of EITFNo. 06-03 is not expected to have a material effect on the Company’s consolidated financial position and results of operations.
In September 2006, the FASB issued FASB Statement No. 157,“Fair Value Measurements”(“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. The Company will evaluate the potential impact, if any, of the adoption of SFAS No. 157 on its consolidated financial position, results of operations and cash flows.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115”(“SFAS No. 159”). SFAS No. 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Upon adoption of SFAS No. 159, an entity may elect the fair value option for eligible items that exist at the adoption date. Subsequent to the initial adoption, the election of the fair value option should only be made at initial recognition of the asset or liability or upon a remeasurement event that gives rise to new-basis accounting. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value nor does it eliminate disclosure requirements included in other accounting standards. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and may be adopted earlier but only if the adoption is in the first quarter of the fiscal year. The adoption of SFAS No. 159 is not expected to have a material effect on the Company’s consolidated financial position and results of operations.
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the Company’s consolidated financial statements.
NOTE 3 — PUBLIC OFFERING OF SECURITIES
In the Offering, effective April 11, 2005 (closed on April 15, 2005), the Company sold to the public 575,000 Series A Units (the “Series A Units”) and 5,290,000 Series B Units (the “Series B Units”) at a price of $10.50 and $10.10 per unit, respectively, inclusive of an over allotment option issued to the underwriters to purchase additional Series A Units and Series B Units, which was exercised in full. Net proceeds from the Offering, including the exercise of the over allotment option, totaled $55,050,876 which was net of $4,415,624 in underwriting and other expenses. Each Series A Unit consisted of two shares of the Company’s common stock, five Class W Warrants, and five Class Z Warrants. Each Series B unit consisted of two shares of the Company’s Class B common stock, one Class W Warrant, and one Class Z Warrant.
F-17
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
Prior to a Business Combination, both the common stock and the Class B common stock generally had one vote per share. However, the Class B stockholders could, and the common stockholders could not, vote on the approval of a Business Combination. Further, should a Business Combination not be consummated within a specified period of time, the Trust Fund would have been distributed pro-rata to all of the Class B common stockholders, subject to potential claims by creditors, and their Class B common shares would be cancelled and returned to the status of authorized but unissued shares.
Of the net proceeds from the Offering, $53,429,000 was placed in the Trust Fund, and the remaining approximately $1.6 million was used by the Company to fund operations through the date of the Acquisitions, including business, legal and accounting due diligence on prospective acquisitions and for general and administrative expenses. The net proceeds placed in the Trust Fund were to be held until the earlier of the completion of a Business Combination or the distribution of proceeds to Class B stockholders. In connection with the Acquisitions, on October 15, 2006 the proceeds from the Offering plus accrued interest were released from the Trust Fund (see Note 4).
As a result of the Acquisitions, the Company’s outstanding shares of Class B common stock, including Class B common stock subject to possible conversion, were automatically converted into shares of common stock upon consummation of the Acquisitions.
NOTE 4 — ACQUISITIONS
On October 15, 2006, the Company acquired all of the outstanding capital stock of GII pursuant to a stock purchase agreement dated May 23, 2006, as amended (the “Stock Purchase Agreement”). Following the closing of the Acquisition, the Company paid the GII stockholders $12.75 million in cash, $5.25 million in promissory notes, 1,300,000 shares of the Company’s common stock, 1,450,000 of the Company’s Class W warrants and 1,450,000 of the Company’s Class Z warrants (of which 966,666 Class W warrants and 966,666 Class Z Warrants were placed in escrow at the closing and will be released subject to certain conditions). The $5.25 million of promissory notes issued to the GII stockholders consisted of (i) $4,000,000 of subordinated promissory notes, bearing interest at 6% per annum which are due on the earlier to occur of December 29, 2008 (with certain accrued interest payments due prior thereto) or upon a change in control, the exercise of not less than 50% of the issued and outstanding warrants as of the date of the note, or the issuance by the Company of debt or equity securities resulting in a financing of $20,000,000 or more; and (ii) $1,250,000 of promissory notes bearing interest at 6% per annum and due on June 30, 2007. The latter set of notes has been amended as of March 23, 2007 to extend the maturity dates from June 30, 2007 to April 30, 2008 and to adjust the interest rates payable (see Note 15).
The Acquisition of GII has been accounted for as a business combination with the Company as the acquirer of GII. Under the purchase method of accounting, the assets and liabilities of GII acquired are recorded as of the acquisition date at their respective fair values, and added to those of the Company. The cash consideration issued in the Acquisition of GII was funded from net proceeds from the Offering plus accrued interest which were released from the Trust Fund upon Class B stockholder approval and consummation of the Acquisitions.
The purchase price for the Acquisition of GII has been determined based on the cash consideration given, the value of debt securities issued, the value of the Company’s common stock and warrants issued and direct acquisition costs incurred. The purchase price of GII of $25.22 million consists of $12.75 million of cash, $5.25 million of promissory notes, $6.73 million estimated fair value (or approximately $5.18 per common share) of the 1,300,000 shares of common stock, $0.0001 par value, issued to the former shareholders of GII, and $0.47 million estimated fair value (or approximately $0.47 per Class W warrant and approximately $0.49 per Class Z warrant) of the 483,334 Class W warrants and 483,334 Class Z warrants issued to the former shareholders of GII which were not placed in escrow. The 966,666 of the Class W warrants and 966,666 of the Class Z warrants issued to the GII shareholders and held in escrow will be released from escrow to the GII shareholders when a majority of the 10,640,000 of the Company’s Class W warrants or of the 10,640,000 of the Company’s Class Z warrants that were
F-18
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
issued and outstanding as of May 23, 2006, the date of the GII Stock Purchase Agreement, have been exercised, redeemed or otherwise converted into cash or equity securities, or earlier in the event that certain executive officers, are dismissed from employment by the Company other than for “cause,” as defined in the employment agreements such officers entered into with the Company in connection with the Acquisitions, or if there is a merger, asset sale or similar transaction that results in a change of control of the Company. The value of the warrants placed in escrow will be included in the purchase price of GII upon resolution of the contingency. The estimated aggregate value of the 966,666 Class W warrants and 966,666 Class Z warrants to be placed in escrow is estimated at approximately $0.93 million. The fair value of the Company’s common stock, Class W and Class Z warrants issued in exchange for the shares of GII was based on the average closing market price of the respective securities for a period of two days prior and two days subsequent to May 23, 2006, the date of which the purchase agreement with GII was entered into and announced.
On October 15, 2006, the Company also acquired all of the outstanding voting stock of ETT pursuant to an offer made to its stockholders under the laws of England and Wales (the “Offer”). Following the consummation of the Offer, the Company paid the ETT stockholders $32.3 million in cash and $4.7 million in promissory notes. The promissory notes issued to the ETT stockholders bear interest at 6% per annum and are due on June 30, 2007. These notes have been amended as of March 23, 2007 to extend the maturity dates from June 30, 2007 to April 30, 2008 and to adjust the interest rates payable (see Note 15).
The Acquisition of ETT, like the Acquisition of GII, has been accounted for as a business combination with the Company as the acquirer of ETT. Under the purchase method of accounting, the assets and liabilities of ETT acquired are recorded as of the acquisition date at their respective fair values, and added to those of the Company. The cash consideration issued in the Acquisition was funded from net proceeds from the Offering plus accrued interest which were released from the Trust Fund upon Class B stockholder approval and consummation of the Acquisitions.
The aggregate purchase price of ETT of $37 million consists of $32.3 million of cash and $4.7 million of promissory notes.
| | | | | | | | | | | | |
| | ETT | | | GII | | | Total | |
|
Cash | | $ | 32,333,333 | | | $ | 12,750,000 | | | $ | 45,083,333 | |
Debt | | | 4,666,667 | | | | 5,250,000 | | | | 9,916,667 | |
Common Stock | | | — | | | | 6,731,400 | | | | 6,731,400 | |
Warrants | | | — | | | | 467,287 | | | | 467,287 | |
Allocation of Acquisition costs | | | 1,670,000 | | | | 1,136,000 | | | | 2,806,000 | |
| | | | | | | | | | | | |
Totals | | $ | 38,670,000 | | | $ | 26,334,687 | | | $ | 65,004,687 | |
| | | | | | | | | | | | |
The determination of the purchase price and its allocation to the fair values of the assets acquired and liabilities assumed as reflected in the consolidated financial statements have been based on the Company’s valuation,
F-19
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
including the use of an independent appraisal. The fair value of the assets acquired and liabilities assumed in the Acquisitions of GII and ETT are as follows:
| | | | | | | | | | | | |
| | ETT | | | GII | | | Total | |
|
Net working capital deficiency | | $ | (4,961,947 | ) | | $ | (503,203 | ) | | $ | (5,465,150 | ) |
Property and equipment | | | 446,000 | | | | 460,000 | | | | 906,000 | |
Other assets | | | 390,000 | | | | 396,000 | | | | 786,000 | |
Software | | | — | | | | 6,600,000 | | | | 6,600,000 | |
Customer contracts | | | — | | | | 300,000 | | | | 300,000 | |
Carrier contracts | | | 7,000 | | | | 144,000 | | | | 151,000 | |
Noncompete agreements | | | 2,500,000 | | | | 2,000,000 | | | | 4,500,000 | |
Deferred tax liability | | | (752,100 | ) | | | (3,479,662 | ) | | | (4,231,762 | ) |
Goodwill | | | 41,041,047 | | | | 20,417,552 | | | | 61,458,599 | |
| | | | | | | | | | | | |
Totals | | $ | 38,670,000 | | | $ | 26,334,687 | | | $ | 65,004,687 | |
| | | | | | | | | | | | |
Goodwill is not deductible for tax purposes.
Summarized below are the pro forma unaudited results of operations for the years ended December 31, 2006 and 2005 as if the results of GTTA and GTTE were included for the entire periods presented. The pro forma results may not be indicative of the results that would have occurred if the Acquisitions had been completed at the beginning of the period presented or which may be obtained in the future (amounts in thousands expect per share information):
| | | | | | | | |
| | 2006 | | | 2005 | |
|
Revenues | | $ | 51,230 | | | $ | 49,991 | |
Net loss | | | (4,811 | ) | | | (2,033 | ) |
Basic and diluted loss per share | | $ | (0.37 | ) | | $ | (0.16 | ) |
Weighted average common shares outstanding | | | 13,035 | | | | 13,030 | |
NOTE 5 — INTANGIBLE ASSETS
The following table summarizes the Company’s intangible assets consisting of customer and carrier contracts, software and restrictive covenants related to employment agreements as of December 31, 2006:
| | | | | | | | | | | | | | | | |
| | Amortization
| | | Gross Asset
| | | Accumulated
| | | Net Book
| |
| | Period | | | Cost | | | Amortization | | | Value | |
|
Customer contracts | | | 5 years | | | $ | 300,000 | | | $ | 12,658 | | | $ | 287,342 | |
Carrier contracts | | | 1 year | | | | 151,000 | | | | 31,854 | | | | 119,146 | |
Noncompete agreements | | | 5 years | | | | 4,500,000 | | | | 189,863 | | | | 4,310,137 | |
Software | | | 7 years | | | | 6,600,000 | | | | 198,904 | | | | 6,401,096 | |
| | | | | | | | | | | | | | | | |
| | | | | | $ | 11,551,000 | | | $ | 433,279 | | | $ | 11,117,721 | |
| | | | | | | | | | | | | | | | |
Amortization expense was $433,279 for the year ended December 31, 2006.
F-20
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
Estimated amortization expense related to intangible assets subject to amortization at December 31, 2006 for each of the years in the five-year period ending December 31, 2011 and thereafter is as follows:
| | | | |
2007 | | $ | 2,022,003 | |
2008 | | | 1,902,857 | |
2009 | | | 1,902,857 | |
2010 | | | 1,902,857 | |
2011 | | | 1,700,337 | |
Thereafter | | | 1,686,810 | |
| | | | |
Total | | $ | 11,117,721 | |
| | | | |
NOTE 6 — SEGMENTS
The Company has determined subsequent to the Acquisitions that it operates under two reportable segments as the chief financial decision maker reviews operating results and makes decisions on a regional basis. A summary of the Company’s operations by geographic area follows:
| | | | | | | | | | | | | | | | |
| | | | | Europe, Middle East
| | | | | | | |
| | Americas | | | and Asia | | | Corporate | | | Total | |
|
Revenue | | $ | 3,730,344 | | | $ | 6,740,158 | | | $ | — | | | $ | 10,470,502 | |
Operating loss | | $ | (178,890 | ) | | $ | (106,993 | ) | | $ | (1,531,085 | ) | | $ | (1,816,968 | ) |
Depreciation and amortization | | $ | 351,670 | | | $ | 170,184 | | | $ | — | | | $ | 521,854 | |
Interest income, net of expense | | $ | 10,213 | | | $ | 6,135 | | | $ | 2,092,368 | | | $ | 2,108,716 | |
Gain on derivative financial instruments | | $ | — | | | $ | — | | | $ | (1,927,350 | ) | | $ | (1,927,350 | ) |
Net loss | | $ | (512,591 | ) | | $ | (207,814 | ) | | $ | (1,126,876 | ) | | $ | (1,847,281 | ) |
Total assets | | $ | 3,902,307 | | | $ | 10,606,365 | | | $ | 83,766,356 | | | $ | 98,275,028 | |
NOTE 7 — PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2006:
| | | | |
| | 2006 | |
|
Furniture and fixtures | | $ | 113,580 | |
Computer hardware and telecommunications equipment | | | 657,761 | |
Computer software | | | 6,048 | |
Leasehold improvements | | | 201,449 | |
| | | | |
Property and equipment, gross | | | 978,838 | |
Less accumulated depreciation and amortization | | | 88,575 | |
| | | | |
Property and equipment, net | | $ | 890,263 | |
| | | | |
Depreciation and amortization expense associated with property and equipment was $88,575 for the year ended December 31, 2006.
F-21
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
NOTE 8 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses consist of the following at December 31, 2006:
| | | | |
| | 2006 | |
|
Accrued compensation and benefits | | | 366,705 | |
Accrued professional fees | | | 122,790 | |
Accrued interest payable | | | 125,520 | |
Accrued taxes | | | 94,589 | |
Accrued carrier costs | | | 1,600,122 | |
Accrued other | | | 23,452 | |
| | | | |
| | $ | 2,333,178 | |
| | | | |
NOTE 9 — INCOME TAXES
The components of the provisions for income taxes for the year ended December 31, 2006 and the period from inception (January 3, 2005) to December 31, 2005 are as follows:
| | | | | | | | |
| | 2006 | | | 2005 | |
|
Current: | | | | | | | | |
Federal | | $ | 132,517 | | | $ | 307,000 | |
State | | | 61,571 | | | | — | |
Foreign | | | — | | | | — | |
| | | | | | | | |
Subtotal | | | 194,088 | | | | 307,000 | |
| | | | | | | | |
Deferred: | | | | | | | | |
Federal | | | — | | | | — | |
State | | | — | | | | — | |
Foreign | | | — | | | | — | |
| | | | | | | | |
Subtotal | | | — | | | | — | |
| | | | | | | | |
Provision for income taxes | | $ | 194,088 | | | $ | 307,000 | |
| | | | | | | | |
F-22
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
The provision for income taxes differs from the amount computed by applying the U.S. federal statutory income tax rates for federal, state and local to income before income taxes for the reasons set forth below for the year ended December 31, 2006 and the period from inception (January 3, 2005) to December 31, 2005:
| | | | | | | | |
| | 2006 | | | 2005 | |
|
US federal statuatory income tax rate | | | 34 | % | | | 34 | % |
Net (loss) income before federal income tax | | $ | (583,020 | ) | | $ | 569,861 | |
Addback loss (gain) on derivative financial instruments | | | 655,299 | | | | (264,095 | ) |
Addback GTTE loss not subject to US tax | | | 87,063 | | | | — | |
Less provision for state income tax | | | (20,934 | ) | | | — | |
Other | | | (5,891 | ) | | | 1,234 | |
| | | | | | | | |
Federal tax | | | 132,517 | | | | 307,000 | |
State Tax | | | 61,571 | | | | — | |
| | | | | | | | |
Total Tax | | $ | 194,088 | | | $ | 307,000 | |
| | | | | | | | |
The Company’s effective tax rate differs from the federal statutory rate primarily as a result of non-deductible expenses, valuation allowances and other deductions. The Company has not provided for US income taxes on the earnings of GTT-EMEA because it intends to permanently reinvest such earnings in the operations of GTT-EMEA.
The significant components of the Company’s net deferred tax asset at December 31, 2006 are as follows:
| | | | |
| | 2006 | |
|
Tax effect of operating loss carryforwards | | $ | 8,699 | |
Cumulative amortization of intangibles | | | 167,332 | |
Stock-based compensation | | | 11,919 | |
Depreciation and rent deferral | | | 663 | |
Effect of valuation allowance | | | (188,613 | ) |
| | | | |
Net deferred tax asset | | $ | — | |
| | | | |
The Company believes that it is more likely than not that all of the deferred tax asset will be realized against future taxable income but does not have objective evidence to support this future assumption. Therefore, the Company has recorded a full valuation allowance at December 31, 2006.
The significant components of the Company’s deferred tax liability at December 31, 2006 are as follows:
| | | | |
| | 2006 | |
|
Investment in intangible assets on acquisition of Subsidiary — GTTA | | $ | 9,010,000 | |
| | | | |
Investment in intangible assets on acquisition of Subsidiary — GTTE | | $ | 2,507,000 | |
| | | | |
Deferred US tax at 38.62% | | $ | 3,479,662 | |
Deferred UK tax at 30% | | | 752,100 | |
| | | | |
Deferred tax liability | | $ | 4,231,762 | |
| | | | |
F-23
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
Other Taxes
The Company is liable in certain cases for collecting regulatory feesand/or certain sales taxes from its customers and remitting the fees and taxes to the applicable governing authorities. Estimates of the liability and associated receivables are presented in the accompanying consolidated financial statements.
NOTE 10 — EMPLOYEE BENEFITS, SHARE-BASED COMPENSATION
Stock-Based Compensation Plan
The Company adopted its 2006 Employee, Director and Consultant Stock Plan (the “Plan”) in October 2006. In addition to stock options, the Company may also grant restricted stock or other stock-based awards under the Plan. The maximum number of shares issuable over the term of the Plan is limited to 3,000,000 shares.
The Plan permits the granting of stock options and restricted stock to employees (including employee directors and officers) and consultants of the Company, and non-employee directors of the Company. Options granted under the Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and expire no later than ten years from the grant date. The options generally vest over four years with 25% of the option shares becoming exercisable one year from the date of grant and then 25% annually over the following three years. The Compensation Committee of the Board of Directors, as administrator of the Plan, has the discretion to use a different vesting schedule.
Stock Options
Due to the Company’s limited history as a public company, the Company has estimated expected volatility based on the historical volatility of certain comparable companies as determined by management. The risk-free interest rate assumption is based upon observed interest rates at the time of grant appropriate for the term of the Company’s employee stock options. The dividend yield assumption is based on the Company’s intent not to issue a dividend under its dividend policy. The expected holding period assumption was estimated based on management’s estimate. The assumptions used in the calculation of the stock option expense were as follows:
| | | | |
| | 2006 |
|
Volatility | | | 80.5 | % |
Risk free rate | | | 4.7 | % |
Term | | | 6.25 | |
Dividend yield | | | 0.0 | % |
Stock-based compensation expense recognized in the accompanying consolidated statement of operations for the year ended December 31, 2006 is based on awards ultimately expected to vest, reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeiture assumptions were based upon management’s estimate.
The fair value of each stock option grant to employees is estimated on the date of grant. The fair value of each stock option grant to non-employees is estimated on the applicable performance commitment date, performance completion date or interim financial reporting date.
F-24
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
During the year ended December 31, 2006, 407,500 options were granted pursuant to the Plan. The following table summarizes information concerning options outstanding as of December 31, 2006:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Weighted
| | | | |
| | | | | Weighted
| | | Weighted
| | | Average
| | | | |
| | | | | Average
| | | Average
| | | Remaining
| | | Aggregate
| |
| | | | | Exercise
| | | Fair
| | | Contractual
| | | Intrinsic
| |
| | Options | | | Price | | | Value | | | Life (Years) | | | Value | |
|
Balance at December 31, 2005 | | | — | | | $ | — | | | $ | — | | | | | | | $ | — | |
Granted | | | 407,500 | | | | 3.10 | | | | 2.26 | | | | 9.97 | | | | 154,850 | |
Exercised | | | — | | | | — | | | | — | | | | | | | | — | |
Forfeited | | | — | | | | — | | | | — | | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2006 | | | 407,500 | | | $ | 3.10 | | | $ | 2.26 | | | | 9.97 | | | $ | 154,850 | |
| | | | | | | | | | | | | | | | | | | | |
Exercisable | | $ | — | | | $ | — | | | $ | — | | | | | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
During the year ended December 31, 2006, the Company recognized compensation expense of $7,680 as a result of the vesting of options issued to employees and consultants which is included in selling, general and administrative expense on the accompanying consolidated statement of operations.
As of December 31, 2006, 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:
| | | | |
Year ending December, 2007 | | $ | 230,407 | |
Year ending December, 2008 | | | 230,407 | |
Year ending December, 2009 | | | 230,407 | |
Year ending December, 2010 | | | 222,049 | |
| | | | |
| | $ | 913,270 | |
| | | | |
Restricted Stock
The Company expenses restricted shares granted in accordance with the provisions of SFAS 123(R). The fair value of the restricted shares issued is amortized on a straight-line basis over the vesting periods. The expense associated with the awarding of restricted shares for the year ended December 31, 2006 is $141,419, which is included in selling, general and administrative expense on the accompanying consolidated statement of operations. The following table summarizes information concerning restricted shares outstanding as of December 31, 2006:
| | | | | | | | |
| | | | | Weighted
| |
| | | | | Average
| |
| | Restricted
| | | Fair
| |
| | Stock | | | Value | |
|
Balance at October 16, 2006 | | | — | | | $ | — | |
Issued | | | 96,774 | | | | 3.10 | |
Forfeited/cancelled | | | — | | | | — | |
| | | | | | | | |
Balance at December 31, 2006 | | | 96,774 | | | $ | 3.10 | |
| | | | | | | | |
Vested | | | 24,192 | | | $ | 3.10 | |
| | | | | | | | |
As of December 31, 2006, the Company had entered into agreements to grant an aggregate of 576,774 restricted shares of common stock to employees and members of the Board of Directors. As of December 31, 2006, 96,774 of the 576,774 shares of restricted stock were issued and outstanding. The remaining 480,000 shares of
F-25
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
restricted stock had been awarded as of December 31, 2006 and were issued thereafter. Of the $141,419 in restricted stock expense recorded in 2006, $66,406 related to the 96,774 restricted shares awarded and outstanding and $75,013 related to the award of the 480,000 restricted shares.
Retirement Plan
In 2002, GTTA established a 401(k) plan for its employees. In 2006, the Company matched 10% of employees’ contributions to the plan. The Company’s 401(k) expense for 2006 was $20,090.
GTTE does not sponsor any employer-sponsored pension plans but makes discretionary contributions of up to 10% of gross salary to defined contribution plans. Such amounts are charged as expense in the period to which they relate. For 2006 pension expense was $47,120.
GTT does not sponsor any pension or other type of retirement plans.
NOTE 11 — DEBT
As of December 31, 2006, GTT was obligated as follows:
| | | | |
| | 2006 | |
|
Notes payable to former GII shareholders, due December 29, 2008, bearing interest at 6% per annum | | $ | 4,000,000 | |
Notes payable to former ETT and GII shareholders, due June 30, 2007, bearing interest at 6% per annum | | | 5,916,667 | |
Other notes payable | | | 602,500 | |
| | | | |
| | | 10,519,167 | |
Less current portion | | | 6,519,167 | |
| | | | |
Long-term debt | | $ | 4,000,000 | |
| | | | |
Maturities of long-term obligations for the years ended December 31 are as follows: | | | | |
2008 | | $ | 4,000,000 | |
| | | | |
In March 2007, the Company amended the terms of certain of these notes (see Note 15).
NOTE 12 — CONCENTRATIONS
Financial instruments potentially subjecting the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents and designated cash. At times during the periods presented, the Company had funds in excess of the $100,000 insured by the US Federal Deposit Insurance Corporation on deposit at various financial institutions. However, management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.
For the year ended December 31, 2006, no single customer accounted for more than 10% of our total consolidated revenues. Our four largest customers accounted for approximately 26.5% of revenues during this period.
Approximately 68.4% of the Company’s revenue is currently generated by data services under contracts having terms ranging generally from 1 to 60 months. These contracts are mainly with large multi-national companies. The most significant operating expense is the cost of contracting for the leasing of bandwidth and other services from suppliers. The Company is subject to risks and uncertainties common to rapidly growing technology-
F-26
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
based companies, including rapid technology change, actions of competitors, dependence on key personnel and availability of sufficient capital.
NOTE 13 — COMMITMENTS AND CONTINGENCIES
Commitment — Leases
GTTA is required to provide its landlord with a letter of credit to provide protection from default under the lease for the Company’s headquarters. GTTA has provided the landlord with a letter of credit in the amount of $268,000 supported by hypothecation of a CD held by the underlying bank in the same amount.
Office Space and Operating Leases
The Company has entered into certain non-cancelable operating lease agreements related to office space, equipment and vehicles. Total rent expense under operating leases was $273,436 for the year ended December 31, 2006. Estimated annual commitments under non-cancelable operating leases are as follows at December 31, 2006:
| | | | | | | | |
| | Office Space | | | Other | |
|
2007 | | | 1,012,846 | | | | 87,120 | |
2008 | | | 869,371 | | | | 61,901 | |
2009 | | | 743,388 | | | | 24,497 | |
2010 | | | 671,824 | | | | — | |
2011 | | | 671,824 | | | | — | |
Thereafter | | | 1,058,394 | | | | — | |
| | | | | | | | |
| | $ | 5,027,647 | | | $ | 173,518 | |
| | | | | | | | |
Related Party Transactions — Office Lease and Administrative Support
The Company agreed starting in 2005 to pay Mercator Capital, LLC, an affiliate of certain stockholders, directors, and officers at the time, an amount equal to $7,500 per month, commencing on consummation of the Offering, for office, secretarial and administrative services. Through December 31, 2006 and 2005, $75,000 and $67,500, respectively, of expense for such services was recorded in the Company’s consolidated statements of operations. This lease commitment and the associated expenses terminated as of October 2006 following consummation of the acquisitions of GII and ETT.
Commitments-Supply agreements
As of December 31, 2006, the Company had supplier agreement purchase obligations of $35.3 million associated with the telecommunications services that the Company has contracted to purchase from its vendors. The Company’s contracts are such that the terms and conditions in the vendor and client customer contracts are substantially the same in terms of duration. Theback-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.
“Take-or-Pay” Purchase Commitments
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, 2006, the Company’s
F-27
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
aggregate monthly obligations under suchtake-or-pay commitments over the remaining term of all of those contracts totaled $975,000.
Service-by-Service Commitments — Early Termination Liability
The Company, to the extent practicable, matches the quantity, duration and other terms of individual purchases of communications capacity with agreements to supply communications to individual customers on aservice-by-service basis. In the ordinary course of business, the Company enters into contracts with suppliers to provide telecommunication services typically for a period between 12 and 36 months. These supplier contracts are entered into when the Company has entered into sales contracts with customers. The key terms and conditions of the supplier and customer contracts are substantially the same. The Company recognizes profit on communications sales to the extent its revenue from supplying communications exceeds its cost to purchase the underlying capacity. In the year ended September 30, 2004, GTTA began purchasing capacity under five-year commitments from certain vendors in order to secure more competitive pricing. These five-year purchase commitments are not, in all cases, matched with five-year supply agreements to customers. In such cases, if a customer disconnects its service before the five-year term ordered from the vendor expires, and if GTTA were unable to find another customer for the capacity, GTTA would be subject to an early termination liability. Under standard telecommunications industry practice (commonly referred to in the industry as “portability”), this early termination liability may be able to be waived by the vendor if GTTA orders replacement service with the vendor of equal or greater revenue to the service cancelled. As of December 31, 2006, the total potential early termination liability exposure to the Company was $382,000.
Employment Agreements
In connection with the Acquisitions, certain members of management have entered into employment agreements with the Company for certain base salaries. In addition, such individuals are entitled to bonuses and share-based compensation.
Conversion Right of Holders of Class B Common Stock
As permitted in the Company’s Certificate of Incorporation prior to and until the Acquisitions, holders of the Company’s Class B common stock that voted against a Business Combination were, under certain conditions, entitled to convert their shares into a pro-rata distribution from the Trust Fund (the “Conversion Right”). In the event that holders of a majority of the outstanding shares of Class B common stock voted for the approval of the Business Combination and that holders owning less than 20% of the outstanding Class B common stock exercised their Conversion Rights, the Business Combination could then be consummated. Upon completion of such Business Combination, the Class B common stock would be converted to common stock and the holders of Class B common stock who voted against the Business Combination and properly exercised their Conversion Rights would be paid their conversion price. There is no distribution from the Trust Fund with respect to the warrants included in the Series A Units and Series B Units or with respect to the common stock issued prior to consummation of the Business Combination. Any Class B stockholder who converted his or her stock into his or her share of the Trust Fund retained the right to exercise the Class W warrants and Class Z warrants that were received as part of the Series B Units.
In connection with the Acquisitions, the Company determined that Class B stockholders owning less than 20% of the outstanding Class B common stock both voted against the Acquisitions and properly exercised their Conversion Rights for a pro-rata distribution from the Trust Fund based on the value of the Trust Fund as of October 13, 2006. The actual per-share conversion price issuable to Class B stockholders who voted against the Acquisitions and elected conversion is equal to the amount in the Trust Fund (inclusive of any interest thereon) immediately prior to the proposed Business Combination, divided by the number of Class B shares sold in the
F-28
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
Offering, or approximately $5.35 per share based on the value of the Trust Fund as of October 13, 2006. Accordingly, the Company is required to convert such Class B stockholders’ shares (which were converted into shares of common stock upon consummation of the Acquisitions) into cash following verification that such stockholders properly exercised their Conversion Rights. As of December 31, 2006, the Company had recorded a liability of approximately $11.3 million (based upon a maximum possible conversion of approximately 2.11 million shares of former Class B common stock) in connection with such exercises of Conversion Rights. As of December 31, 2006, the Company had not made payment with respect to any shares tendered for conversion, and was in the process of reviewing and confirming those shares’ eligibility for conversion into a cash payment. Since December 31, 2006, based upon its review of the documents submitted to validate eligibility for receipt of conversion payments, the Company has made payment with respect to the conversion of certain of these tendered shares (see Note 15).
Contingencies-Legal proceedings
The Company is subject to legal proceedings arising in the ordinary course of business. In the opinion of management, the ultimate disposition of those matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity. No material reserves have been established for any pending legal proceeding, either because a loss is not probable or the amount of a loss, if any, cannot be reasonably estimated.
NOTE 14 — CAPITAL STOCK
Preferred Stock
The Company is authorized to issue up to 5,000 shares of preferred stock with such designations, voting, and other rights and preferences as may be determined from time to time by the Board of Directors.
Common Stock and Class B Common Stock
Upon the consummation of the Acquisitions of GII and ETT in October 2006, all outstanding shares of the Company’sCompany���s Class B common stock were converted into common stock pursuant to the Company’s Certificate of Incorporation, subject to the rights of certain holders of our former Class B common stock who had voted against the Acquisitions and properly exercised their Conversion Rights to have such shares converted into cash equal to their pro rata portion of the Trust Fund. The Class B common stock ceased trading subsequent to the Acquisitions and was thereafter deregistered.
The Company is authorized to issue 80,000,000 shares of common stock. As of December 31, 2006, there are 13,126,874 shares of the Company’s common stock issued and outstanding, including up to approximately 19.99% (i.e., approximately 2,114,942 shares) of the Company’s 10,580,000 former Class B common shares that were subject to possible conversion to cash.
As of December 31, 2006, there are 38,569,900 authorized but unissued shares of the Company’s common stock available for future issuance, after appropriate reserves for the issuance of common stock in connection with the Class W warrants and Class Z warrants (representing 24,180,000 shares if all such warrants were exercised), the Plan (representing 2,903,226 remaining shares reserved under the Plan for issuance), and the UPO (representing 1,220,000 shares if the UPO were exercised in full).
F-29
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
Warrants
The Company has the following common stock warrants outstanding as of December 31, 2006 and 2005:
| | | | | | | | | | |
| | 2006 |
| | | | Exercise
| | |
| | Warrants | | Prices | | Expiration |
|
Founders’ warrants: | | | | | | | | | | |
Class W | | | 2,475,000 | | | $ | 5.00 | | | April 10, 2010 |
Class Z | | | 2,475,000 | | | $ | 5.00 | | | April 10, 2012 |
Warrants issued in connection with IPO: | | | | | | | | | | |
Class W | | | 8,165,000 | | | $ | 5.00 | | | April 10, 2010 |
Class Z | | | 8,165,000 | | | $ | 5.00 | | | April 10, 2012 |
Warrants issued in connection with acquisitions: | | | | | | | | | | |
Class W | | | 1,450,000 | | | $ | 5.00 | | | April 10, 2010 |
Class Z | | | 1,450,000 | | | $ | 5.00 | | | April 10, 2012 |
| | | | | | | | | | |
| | | 24,180,000 | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | 2005 |
| | | | Exercise
| | |
| | Warrants | | Prices | | Expiration |
|
Founders’ warrants: | | | | | | | | | | |
Class W | | | 2,475,000 | | | $ | 5.00 | | | April 10, 2010 |
Class Z | | | 2,475,000 | | | $ | 5.00 | | | April 10, 2012 |
Warrants issued in connection with IPO: | | | | | | | | | | |
Class W | | | 8,165,000 | | | $ | 5.00 | | | April 10, 2010 |
Class Z | | | 8,165,000 | | | $ | 5.00 | | | April 10, 2012 |
| | | | | | | | | | |
| | | 21,280,000 | | | | | | | |
| | | | | | | | | | |
In January 2005, the Company sold and issued to its initial security holders Class W warrants to purchase up to an aggregate of 2,475,000 shares of the Company’s common stock and Class Z warrants to purchase up to an aggregate of 2,475,000 shares of the Company’s common stock for an aggregate purchase price of $247,500, or $0.05 per warrant. These warrants are also subject to registration rights. However, if the Company is unable to register the underlying shares it may satisfy its obligations to the initial securityholders by delivering unregistered shares of common stock. The 2,475,000 Class W warrants and 2,475,000 Class Z warrants outstanding prior to the Offering, all of which were initially held by the Company’s officers and directors or their affiliates, are not redeemable by the Company as long as such warrants continue to be held by such individuals.
In connection with the Offering, the Company sold and issued Class W warrants to purchase up to an aggregate of 8,165,000 shares of the Company’s common stock. Except as set forth below, the Class W warrants are callable, subject to adjustment in certain circumstances, and entitle the holder to purchase common shares at $5.00 per share commencing upon completion of the Acquisitions and ending April 10, 2010. As of December 31, 2006 and 2005, there were 12,090,000 and 10,640,000 Class W warrants, respectively, outstanding.
In connection with the Offering, the Company sold and issued Class Z warrants to purchase up to an aggregate of 8,165,000 shares of the Company’s common stock. Except as set forth below, the Class Z warrants are callable, subject to adjustment in certain circumstances, and entitle the holder to purchase shares at $5.00 per share
F-30
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
commencing upon completion of the Acquisitions and ending April 10, 2010. As of December 31, 2006 and 2005, there were 12,090,000 and 10,640,000 Class Z warrants, respectively, outstanding.
The Class W warrants and Class Z warrants issued in the Offering are subject to registration provisions which require the Company to file a registration statement with respect to the shares of common stock underlying the warrants, and to use its best efforts to cause the registration statement to become effective and to maintain its effectiveness. The warrants also provide that the Company is not obligated to deliver any securities upon exercise of a warrant unless a registration statement covering those securities is effective.
Upon consummation of the acquisition of GII, as part of the consideration payable to the former GII shareholders in connection with their sale of GII’s capital stock, the Company issued 1,450,000 Class W warrants and 1,450,000 Class Z warrants to the GII shareholders. Pursuant to the Stock Purchase Agreement with GII, 966,666 of these Class W Warrants and 966,666 of these Class Z Warrants were placed in escrow, subject to release at such time that a majority of the Class W warrants or Class Z warrants, as applicable, issued and outstanding as of May 23, 2006 had been exercised, redeemed, or otherwise converted into cash or equity securities of the Company, or earlier under certain conditions.
The former GII shareholders executedlock-up agreements with the Company prohibiting them, for a specified period of time, from selling or transferring any common stock of the Company: (i) issued to the GII shareholders in connection with the acquisition of GII or (ii) acquired through the exercise of the warrants issued to the GII shareholders in connection with the acquisition of GII (the“Lock-Up Shares”). Six months after the closing of the acquisition of GII, the former shareholders of GII may sell or transfer up to 50% of that number ofLock-Up Shares that would be permitted to be sold pursuant to Rule 145 promulgated under the Securities Act of 1933, as amended, in any consecutive three month period. Eighteen months following the closing of the acquisition of GII, the former GII shareholders may freely sell or transfer theirLock-Up Shares.
The GII Stock Purchase Agreement, as amended, also included certain provisions setting forth the rights of the former GII shareholders with respect to registration of the equity securities of the Company (including, but not limited to, the Class W warrants and the Class Z warrants) received by those former GII shareholders as consideration for the sale of GII. Under these provisions, the Company would generally be required to make best efforts to include certain equity securities held by the former GII shareholders in any registration statement filed by the Company or to use reasonable best efforts to register those securities upon demand by certain GII shareholders starting three months after the closing of the Acquisitions. The GII Stock Purchase Agreement does not, however, obligate the Company to settle in cash the exercise of the Class W Warrants and Class Z Warrants issued to the former GII shareholders.
Purchase Option
Upon the closing of the Offering, the Company sold and issued the UPO, for $100, to purchase up to 25,000 Series A unitsand/or up to 230,000 Series B units. The Company accounted for the fair value of the UPO, inclusive of the receipt of the $100 cash payment, as an expense of the public offering. The Company estimated the fair value of this UPO at the date of issuance, $752,450, using a Black-Scholes option-pricing model. The fair value of the UPO granted was estimated as of the date of grant and issuance using the following assumptions: (1) expected volatility of 44.5%, (2) risk-free interest rate of 4.02% and (3) contractual life of 5 years. The UPO may be exercised for cash or on a “cashless” basis, at the holder’s option, such that the holder may use the appreciated value of the UPO (the difference between the exercise prices of the option and the underlying warrants and the market price of the units and underlying securities) to exercise the UPO without the payment of any cash. The Series A Units and Series B Units issuable upon exercise of this option are identical to those in the Offering, except that the exercise price of the warrants included in the units are $5.50 per share and the Class Z Warrants shall be exercisable for a period of only five years from the date of the Offering. The UPO is exercisable at $17.325 per Series A Unit and $16.665 per Series B Unit commencing on the completion of the Acquisitions and expiring on April 11, 2010.
F-31
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Consolidated Financial Statements — (Continued)
The UPO is classified as a derivative liability on the accompanying consolidated financial statements. Accordingly, the Company uses the Black Scholes option-pricing model for determining fair value of the UPO at the end of each period. The fair value of the UPO at December 31, 2006 of $596,650 was estimated using the following assumptions: (1) quoted fair value of a Series A Unit of $11.76 and quoted fair value of a Series B Unit of $7.92, (2) expected volatility of 62.55%, (3) risk-free interest rate of 4.74% and (4) contractual life of 3.29 years. The fair value of the UPO at December 31, 2005 of $547,250 was estimated using the following assumptions: (1) quoted fair value of a Series A Unit of $10.00 and quoted fair value of a Series B Unit of $10.90, (2) expected volatility of 34.99%, (3) risk-free interest rate of 4.35% and (4) contractual life of 4.29 years.
Derivative Liabilities
GTT’s derivative liabilities are the following at issuance on April 15, 2005 and at December 31, 2006 and 2005:
| | | | | | | | | | | | |
| | | | | At December 31,
| | | At December 31,
| |
| | At Issuance | | | 2006 | | | 2005 | |
|
Fair value of 8,165,000 Class W Warrants and 8,165,000 Class Z Warrants issued as part of Series A and Series B Units sold in the Offering | | $ | 6,532,000 | | | $ | 7,838,400 | | | $ | 5,960,450 | |
Fair value of Underwriter Purchase Option | | | 752,450 | | | | 596,650 | | | | 547,250 | |
| | | | | | | | | | | | |
Totals | | $ | 7,284,450 | | | $ | 8,435,050 | | | $ | 6,507,700 | |
| | | | | | | | | | | | |
During the year ended December 31, 2006 and the period of inception (January 3, 2005) to December 31, 2005, the Company recorded unrealized (losses) gains of $(1,927,350) and $776,750, respectively, on derivative liabilities as a result of changes in the fair value of the warrants and the UPO.
NOTE 15 — SUBSEQUENT EVENTS
Amendment of Promissory Notes Previously due June 30, 2007
On March 23, 2007, the Company and the holders of approximately $5.9 million in promissory notes previously due and payable by the Company on June 30, 2007 (see Note 11) entered into agreements to amend the notes. As a result of these amendments, the maturity date of each of the notes has been extended from June 30, 2007 to April 30, 2008. In addition, the per annum interest rate payable with respect to each note has been modified as follows: (a) from October 15, 2006 through March 31, 2007 — 6%; (b) from April 1, 2007 through June 30, 2007 — 8%; (c) from July 1, 2007 through October 31, 2007 — 10%; (d) from November 1, 2007 through December 31, 2007 — 12%; (e) from January 1, 2008 through March 31, 2008 — 14%; and (f) from April 1, 2008 and thereafter — 16%.
Conversion of Former Class B Shares into Cash, Share Retirement, and Share Issuances
As of March 16, 2007, the Company had determined that 1,860,850 shares of former Class B common stock qualified for conversion and has made payment of approximately $9.96 million with respect to the conversion of those shares. As a result of this conversion process, these shares have been canceled.
The Company issued approximately 340,000 shares of restricted stock between January 1, 2007 and March 16, 2007 to certain executives as contemplated by their respective employmentand/or restricted stock agreements.
F-32
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Unaudited Condensed Consolidated Financial Statements
F-33
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Condensed Consolidated Balance Sheets
| | | | | | | | |
| | September 30, 2007 | | | December 31, 2006 | |
| | (Unaudited) | | | (Note 1) | |
ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 2,057,010 | | | $ | 3,779,027 | |
Designated cash | | | — | | | | 10,287,180 | |
Accounts receivable, net | | | 7,168,419 | | | | 7,687,544 | |
Income tax refund | | | — | | | | 417,110 | |
Deferred contract costs | | | 1,114,132 | | | | 591,700 | |
Prepaid expenses and other current assets | | | 952,191 | | | | 970,821 | |
| | | | | | |
|
Total current assets | | | 11,291,752 | | | | 23,733,382 | |
|
Property and equipment, net | | | 883,701 | | | | 890,263 | |
Other assets | | | 758,147 | | | | 1,075,063 | |
Intangible assets, subject to amortization | | | 9,380,864 | | | | 11,117,721 | |
Goodwill | | | 61,458,599 | | | | 61,458,599 | |
| | | | | | |
| | | | | | | | |
Total assets | | $ | 83,773,063 | | | $ | 98,275,028 | |
| | | | | | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 12,774,494 | | | $ | 13,892,664 | |
Accrued expenses and other current liabilities | | | 3,719,624 | | | | 2,672,872 | |
Notes payable | | | 51,679 | | | | 6,519,167 | |
Common stock, subject to possible conversion to cash | | | — | | | | 11,311,658 | |
Unearned and deferred revenue | | | 3,450,120 | | | | 2,930,639 | |
Regulatory and sales tax payable | | | 551,244 | | | | 297,251 | |
Derivative liabilities | | | — | | | | 8,435,050 | |
| | | | | | |
|
Total current liabilities | | | 20,547,161 | | | | 46,059,301 | |
| | | | | | | | |
Long-term obligations, less current maturities | | | 10,346,557 | | | | 4,000,000 | |
Long-term deferred revenue | | | 414,858 | | | | 190,778 | |
Deferred tax liability | | | 3,582,934 | | | | 4,231,762 | |
| | | | | | |
| | | | | | | | |
Total liabilities | | | 34,891,510 | | | | 54,481,841 | |
| | | | | | |
| | | | | | | | |
Commitments and contingencies | | | | | | | | |
| | | | | | | | |
Stockholders’ equity: | | | | | | | | |
Common stock, par value $.0001 per share, 80,000,000 shares authorized,11,925,084 and 11,011,932 shares (as of December 31, 2006 excluding 2,114,942 shares subject to possible conversion to cash) issued and outstanding, respectively | | | 1,193 | | | | 1,101 | |
Additional paid-in capital | | | 53,706,926 | | | | 44,049,553 | |
Accumulated deficit | | | (5,078,868 | ) | | | (478,220 | ) |
Accumulated other comprehensive income | | | 252,302 | | | | 220,753 | |
| | | | | | |
| | | | | | | | |
Total stockholders’ equity | | | 48,881,553 | | | | 43,793,187 | |
| | | | | | | | |
| | | | | | |
Total liabilities and stockholders’ equity | | $ | 83,773,063 | | | $ | 98,275,028 | |
| | | | | | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
F-34
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Condensed Consolidated Statements of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | ETT Predecessor | | | GII Predecessor | |
| | | | | | | | | | | | | | | | | | | For the three | | | For the nine | | | For the three | | | For the nine | |
| | For the three months ended | | | For the nine months ended | | | | months ended | | | months ended | | | months ended | | | months ended | |
| | September 30, 2007 | | | September 30, 2006 | | | September 30, 2007 | | | September 30, 2006 | | | | September 30, 2006 | | | September 30, 2006 | | | September 30, 2006 | | | September 30, 2006 | |
| | (Unaudited) | | | (Unaudited) | | | | (Unaudited) | | | (Unaudited) | |
Revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Telecommunications services provided | | $ | 14,718,045 | | | $ | — | | | $ | 42,115,072 | | | $ | — | | | | $ | 8,280,571 | | | $ | 24,718,417 | | | $ | 4,741,742 | | | $ | 13,811,515 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of telecommunications services provided | | | 10,141,722 | | | | — | | | | 29,178,696 | | | | — | | | | | 6,022,960 | | | | 17,453,550 | | | | 3,337,393 | | | | 9,711,149 | |
Selling, general and administrative | | | 4,490,175 | | | | 156,793 | | | | 13,720,533 | | | | 578,469 | | | | | 2,672,308 | | | | 7,586,070 | | | | 1,312,513 | | | | 4,020,804 | |
Employee termination and non-recurring items | | | — | | | | — | | | | 3,154,950 | | | | — | | | | | — | | | | — | | | | — | | | | — | |
Depreciation and amortization | | | 726,872 | | | | — | | | | 2,057,239 | | | | — | | | | | 78,288 | | | | 190,998 | | | | (63,996 | ) | | | 7,171 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | | 15,358,769 | | | | 156,793 | | | | 48,111,418 | | | | 578,469 | | | | | 8,773,556 | | | | 25,230,618 | | | | 4,585,910 | | | | 13,739,124 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating (loss) income | | | (640,724 | ) | | | (156,793 | ) | | | (5,996,346 | ) | | | (578,469 | ) | | | | (492,985 | ) | | | (512,201 | ) | | | 155,832 | | | | 72,391 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income, net of interest expense | | | (204,261 | ) | | | 715,634 | | | | (486,412 | ) | | | 1,955,169 | | | | | (4,207 | ) | | | 15,544 | | | | 13,211 | | | | 29,284 | |
Other income, net of expense | | | 3,091 | | | | — | | | | 13,674 | | | | — | | | | | — | | | | — | | | | 19,977 | | | | 26,316 | |
Gain on derivative financial instruments | | | — | | | | 2,431,550 | | | | — | | | | 2,990,400 | | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
|
Total other income (expense) | | | (201,170 | ) | | | 3,147,184 | | | | (472,738 | ) | | | 4,945,569 | | | | | (4,207 | ) | | | 15,544 | | | | 33,188 | | | | 55,600 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
|
(Loss) income before income taxes | | | (841,894 | ) | | | 2,990,391 | | | | (6,469,084 | ) | | | 4,367,100 | | | | | (497,192 | ) | | | (496,657 | ) | | | 189,020 | | | | 127,991 | |
Provision for income taxes (benefit) | | | (323,143 | ) | | | 190,000 | | | | (717,836 | ) | | | 469,000 | | | | | — | | | | — | | | | 44,010 | | | | 44,010 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
|
Net (loss) income | | $ | (518,751 | ) | | $ | 2,800,391 | | | $ | (5,751,248 | ) | | $ | 3,898,100 | | | | $ | (497,192 | ) | | $ | (496,657 | ) | | $ | 145,010 | | | $ | 83,981 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic and diluted | | $ | (0.04 | ) | | $ | 0.24 | | | $ | (0.48 | ) | | $ | 0.33 | | | | $ | (0.00 | ) | | $ | (0.00 | ) | | $ | 0.06 | | | $ | 0.03 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average shares: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic and diluted | | | 11,935,736 | | | | 11,730,100 | | | | 11,908,079 | | | | 11,730,100 | | | | | 174,512,485 | | | | 174,512,485 | | | | 2,500,000 | | | | 2,500,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
F-35
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | Additional | | | | | | Other | | | | |
| | Common Stock | | | Paid -In | | | | | | Comprehensive | | | | |
| | Shares | | | Amount | | | Capital | | | Accumulated Deficit | | | Income | | | Total | |
Balance, December 31, 2006 | | | 11,011,932 | | | $ | 1,101 | | | $ | 44,049,553 | | | $ | (478,220 | ) | | $ | 220,753 | | | $ | 43,793,187 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Former Class B Common shares converted to common shares | | | 217,749 | | | | 22 | | | | (22 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Release of liability associated with potential conversion of former class B common shares | | | — | | | | — | | | | 1,161,476 | | | | — | | | | — | | | | 1,161,476 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Reclassification of amounts previously allocated to derivative liabilities upon change in accounting | | | — | | | | — | | | | 7,284,450 | | | | — | | | | — | | | | 7,284,450 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Adjustment to derivative liabilities, cumulative-effect change in accounting adjustment | | | — | | | | — | | | | — | | | | 1,150,600 | | | | | | | | 1,150,600 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation for options issued to employees | | | — | | | | — | | | | 88,221 | | | | — | | | | — | | | | 88,221 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation for restricted stock issued | | | 695,403 | | | | 70 | | | | 1,093,243 | | | | — | | | | — | | | | 1,093,313 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation for restricted stock awarded | | | — | | | | — | | | | 30,005 | | | | — | | | | — | | | | 30,005 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | — | | | | — | | | | — | | | | (5,751,248 | ) | | | — | | | | (5,751,248 | ) |
Change in accumulated foreign currency gain on translation | | | — | | | | — | | | | — | | | | — | | | | 31,549 | | | | 31,549 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | (5,719,699 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Balance, September 30, 2007 | | | 11,925,084 | | | $ | 1,193 | | | $ | 53,706,926 | | | $ | (5,078,868 | ) | | $ | 252,302 | | | $ | 48,881,553 | |
| | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
F-36
Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Condensed Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | ETT Predecessor | | | GII Predecessor | |
| | For the nine months ended | | | | For the nine months ended | |
| | September 30, 2007 | | | September 30, 2006 | | | | September 30, 2006 | | | September 30, 2006 | |
| | (Unaudited) | | | | (Unaudited) | |
Cash Flows From Operating Activities: | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (5,751,248 | ) | | $ | 3,898,100 | | | | $ | 535 | | | $ | (67,634 | ) |
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 2,057,239 | | | | — | | | | | 124,597 | | | | 71,168 | |
Change in value of derivative liabilities | | | — | | | | (2,990,400 | ) | | | | — | | | | — | |
Shared-based compensation from options issued to employees | | | 88,221 | | | | — | | | | | — | | | | — | |
Shared-based compensation from restricted stock to employees | | | 1,123,318 | | | | — | | | | | — | | | | — | |
Amortization of discount on U.S. Government Securities held in trust | | | — | | | | (1,922,935 | ) | | | | — | | | | — | |
Deferred income taxes | | | (648,828 | ) | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Changes in operating assets and liabilities, excluding effects of Acquisitions | | | | | | | | | | | | | | | | | |
Accounts receivable, net | | | 1,339,850 | | | | — | | | | | (988,223 | ) | | | (40,316 | ) |
Income tax refund receivable | | | 417,110 | | | | — | | | | | — | | | | — | |
Deferred contract cost and other assets | | | (487,992 | ) | | | — | | | | | 214,609 | | | | (8,096 | ) |
Prepaid expenses and other current assets | | | (76,604 | ) | | | 51,078 | | | | | — | | | | (107,053 | ) |
Other assets | | | (22,152 | ) | | | — | | | | | — | | | | 14,055 | |
Accounts payable | | | (966,978 | ) | | | 109,759 | | | | | 363,257 | | | | 255,498 | |
Unearned and deferred revenue | | | 564,503 | | | | — | | | | | (427,804 | ) | | | 180,174 | |
Regulatory and sales tax payable | | | 253,993 | | | | — | | | | | — | | | | 38,993 | |
Accrued expenses and other current liabilities | | | 1,002,601 | | | | 469,000 | | | | | (721,082 | ) | | | (201,539 | ) |
Long-term deferred revenues | | | 39,234 | | | | — | | | | | — | | | | — | |
| | | | | | | | | | | | | |
|
Net cash (used in) provided by operating activities | | | (1,067,733 | ) | | | (385,398 | ) | | | | (1,434,111 | ) | | | 135,250 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Cash Flows from Investing Activities | | | | | | | | | | | | | | | | | |
Purchases of property and equipment | | | (295,817 | ) | | | — | | | | | (94,844 | ) | | | (11,201 | ) |
Proceeds from certificates of deposit | | | 137,999 | | | | | | | | | — | | | | (3,331 | ) |
Payments for deferred acquisition cost | | | | | | | (296,024 | ) | | | | | | | | | |
Purchases of U.S. Government Securities held in Trust Fund | | | — | | | | (166,038,591 | ) | | | | — | | | | — | |
Maturities of U.S. Government Securities held in Trust Fund | | | — | | | | 166,038,591 | | | | | — | | | | — | |
| | | | | | | | | | | | | |
|
Net cash used in investing activities | | | (157,818 | ) | | | (296,024 | ) | | | | (94,844 | ) | | | (14,532 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Cash Flows from Financing Activities | | | | | | | | | | | | | | | | | |
Principal payments on long-term obligations | | | — | | | | — | | | | | (341,706 | ) | | | — | |
Repayment on notes payable | | | (550,821 | ) | | | — | | | | | — | | | | — | |
| | | | | | | | | | | | | |
|
Net cash used in financing activities | | | (550,821 | ) | | | — | | | | | (341,706 | ) | | | — | |
| | | | | | | | | | | | | |
Effect of exchange rate changes on cash | | | 54,355 | | | | — | | | | | 85,801 | | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (1,722,017 | ) | | | (681,422 | ) | | | | (1,784,860 | ) | | | 120,718 | |
Cash and cash equivalents at beginning of period | | | 3,779,027 | | | | 1,383,204 | | | | | 4,087,053 | | | | 876,883 | |
| | | | | | | | | | | | | |
|
Cash and cash equivalents at end of period | | $ | 2,057,010 | | | $ | 701,782 | | | | $ | 2,302,193 | | | $ | 997,601 | |
| | | | | | | | | | | | | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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Global Telecom & Technology, Inc.
(formerly Mercator Partners Acquisition Corp.)
Notes to Condensed Consolidated Financial Statements
NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION
Organization and Business
Global Telecom & Technology, Inc. (“GTT”) serves as the holding company for two main subsidiaries, Global Telecom & Technology Americas, Inc. (“GTTA”), which provides services primarily to customers in North, Central and South America, and GTT — EMEA Ltd. (“GTTE”), which provides services primarily to customers in Europe, the Middle East and Asia, and their respective subsidiaries (collectively, hereinafter, the “Company”).
The Company provides facilities-neutral, high-capacity communications network solutions, dedicated managed data networks and other value-added telecommunications services to over 200 domestic and multinational carrier and enterprise customers with respect to over 70 countries.
GTT is a Delaware corporation formerly known as Mercator Partners Acquisition Corp. (“Mercator”), which was incorporated on January 3, 2005 for the purpose of effecting a merger, capital stock exchange, asset acquisition or another similar business combination with what was, at the time, an unidentified operating business or businesses (“Business Combination”). Mercator was a “shell company” as defined in Rule 405 promulgated under the Securities Act of 1933 and Rule 12b-2 promulgated under the Securities Exchange Act. On April 11, 2005, Mercator effected an initial public offering of its securities (the “Offering”) which closed on April 15, 2005.
GTTA is a Virginia corporation, incorporated in 1998, formerly known as Global Internetworking, Inc. (“GII”). GTTE is a UK limited company, incorporated in 1998, formerly known as European Telecommunications and Technology, Ltd. (“ETT”).
On October 15, 2006, GTT’s predecessor, Mercator, acquired all of the outstanding shares of common stock of GII and outstanding voting stock of ETT (collectively the “Acquisitions”) in exchange for cash, stock, warrants and notes. Immediately thereafter, Mercator changed its name to GTT. Subsequently, GII changed its name to Global Telecom & Technology Americas, Inc., and ETT changed its name to GTT — EMEA Ltd.
Basis of Presentation
The accompanying consolidated financial statements have been prepared on a going concern basis. As shown in the accompanying consolidated financial statements, the Company had a working capital deficit of approximately $9.3 million at September 30, 2007. Historically, the combined operations of the acquired companies have not been cash flow positive. However, cash flows of the Company have improved through cost reductions following the combination of the two companies and additional growth in sales. Net cash flows from operations for the Company were negative during the nine months ended September 30, 2007.
As a multiple network operator, the Company typically has very low levels of capital expenditures, especially when compared to infrastructure-owning traditional telecommunications competitors. Additionally, the Company’s cost structure is somewhat variable and provides management an ability to manage costs as appropriate. During the first half of 2007, management completed a number of steps aimed at eliminating redundant costs and inefficient organizational structures. As a result, the Company recognized $3.2 million in employee termination and non-recurring costs, including $0.9 million in non-cash compensation. The Company’s capital expenditures are predominantly related to the maintenance of computer facilities, software, office fixtures and furnishings,and are relatively low as a percentage of revenue. However, from time to time the Company may require capital investment as part of an executed service contract that would typically consist of significant multi-year commitments from the customer.
Management monitors cash flow and liquidity requirements. The Company’s current planned cash requirements are based upon certain assumptions, including its ability to raise additional financing and grow revenues from services arrangements. In connection with the activities associated with fund raising activities and revenue growth, the Company expects to incur expenses, including provider fees, employee compensation, consulting and professional fees, sales and marketing expenses, insurance premiums and interest expense. Should expected cash flows not be available, management believes it would have the ability to revise its operating plan and reduce expenses.
Although management believes that cash currently on hand and expected cash flows from future operations are sufficient to sustain the business for the next twelve to eighteen months, management may seek to raise additional capital as necessary to meet certain capital and liquidity requirements in the future. There can be no assurance that the Company would be successful in obtaining additional financing on terms that would be favorable to it, if at all. Please see Item 2 of Part I “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Liquidity and Capital Resources” and Item 1A of Part II “Risk Factors” of this Quarterly Report for further discussion regarding the existing debt and financing matters.
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Unaudited Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the Company’s audited financial statements and footnotes thereto for the year ended December 31, 2006 included in the Company’s Annual Report on Form 10-K filed on April 17, 2007. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The financial statements reflect all adjustments (consisting primarily of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s consolidated financial position and the results of operations. The operating results for the three months and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the full fiscal year 2007 or for any other interim period. The December 31, 2006 balance sheet has been derived from the audited financial statements as of that date, but does not include all disclosures required by GAAP.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting periods. Examples include: allowance for uncollectible accounts, estimates of cost of service, accruals associated with restructuring activities, valuation of share-based compensation, and estimating the fair value and/or impairment of goodwill or other intangible assets. Actual results may differ from management’s estimates and assumptions.
Goodwill
Goodwill represents the excess of costs over fair value of net assets for businesses acquired. Goodwill and intangible assets that are determined to have an indefinite useful life are not amortized, but instead tested for impairment annually in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 142,Goodwill and Other Intangible Assets. The Company performs its annual impairment analysis during the third quarter of each year or more often if indicators of impairment arise. The impairment review may require an analysis of future projections and assumptions about the Company’s operating performance. If such a review indicates that the assets are impaired, an expense would be recorded for the amount of the impairment, and the carrying value of the corresponding impaired assets would be reduced. The Company tested its goodwill during this third fiscal quarter and concluded that no impairment existed under SFAS No. 142.
Identifiable Intangible Assets
Identifiable intangible assets are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used, and are reviewed for impairment in accordance with SFAS No. 144,Accounting for Impairment or Disposal of Long-Lived Assets(SFAS No. 144). Amortization expense related to intangible assets is included in depreciation and amortization expense in the consolidated statements of operations.
Predecessors
From its inception (January 3, 2005) until consummation of the Acquisitions on October 15, 2006, GTT had no substantial operations other than to serve as a vehicle for a Business Combination. Accordingly, since GTT’s operating activities prior to the Acquisitions are insignificant relative to those of the GTTA and GTTE, management believes that both GTTA and GTTE are GTT’s predecessors. Management has reached this conclusion based upon an evaluation of the requirements and facts and circumstances, including the historical life of each of GTTE and GTTA, the historical level of operations of GTTA and GTTE, the purchase price paid for each GTTE and GTTA and the fact that the consolidated Company’s operations, revenues and expenses after the Acquisitions are most similar in all respects to those of GTTA’s and GTTE’s historical periods. Accordingly, the historical statements of operations for the three months and nine months ended September 30, 2006 and statements of cash flows of each of GTTA and GTTE for the nine months ended September 30, 2006 have been presented.
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NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Change in Accounting Principle for Registration Payment Arrangements.
In December 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position on Emerging Issues Task Force (“EITF”) No. 00-19-2,Accounting for Registration Payment Arrangements(“FSP EITF 00-19-2”). FSP EITF 00-19-2 provides that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement should be separately recognized and measured in accordance with SFAS No. 5,Accounting for Contingencies, which provides that loss contingencies should be recognized as liabilities if they are probable and reasonably estimable. Subsequent to the adoption of FSP EITF 00-19-2, any changes in the carrying amount of the contingent liability will result in a gain or loss that will be recognized in the consolidated statement of operations in the period the changes occur. The guidance in FSP EITF 00-19-2 is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the date of issuance of FSP EITF 00-19-2. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of FSP EITF 00-19-2, this guidance is effective for our consolidated financial statements issued for the year beginning January 1, 2007, and interim periods within that year.
On January 1, 2007, the Company adopted the provisions of FSP EITF 00-19-2 to account for the registration payment arrangement associated with the Company’s 8,165,000 Class W warrants and 8,165,000 Class Z warrants to purchase Common Stock included in the Series A Units and Series B Units sold in the Offering and the Underwriters’ Purchase Options (the “UPO”) to purchase up to 25,000 Series A Units and/or up to 230,000 Series B Units (collectively, the “Registration Payment Arrangement”). As of January 1, 2007 and September 30, 2007, management determined that it was not probable that the Company would have any payment obligation under the Registration Payment Arrangement; therefore, no accrual for contingent obligation is required under the provisions of FSP EITF 00-19-2. Accordingly, the warrant liability account was eliminated. The amount originally allocated to the derivative liability of $7,284,450 was reclassified to additional paid-in-capital and the amount representing the cumulative re-valuation of such derivative liability through the adoption of FSP EITF 00-19-2, $1,150,600, was recorded as a cumulative-effect change in accounting principle against opening retained earnings.
The following financial statement line items for the nine months ended September 30, 2007 were affected by the change in accounting principle:
Condensed Consolidated Statements of Operations
| | | | | | | | | | | | |
| | As Computed under | | As Computed under FSP | | |
| | EITF 00-19 | | EITF 00-19-2 | | Effect of change |
Nine Months Ended September 30, 2007 | | | | | | | | | | | | |
Loss from operations | | $ | (5,996,346 | ) | | $ | (5,996,346 | ) | | $ | — | |
Gain on fair value of warrants | | | 4,386,600 | | | | — | | | | (4,386,600 | ) |
Net loss | | | (1,364,648 | ) | | | (5,751,248 | ) | | | (4,386,600 | ) |
Net loss per share: | | | | | | | | | | | | |
Basic and diluted | | $ | (0.11 | ) | | $ | (0.48 | ) | | $ | (0.37 | ) |
Condensed Consolidated Balance Sheet
| | | | | | | | | | | | |
| | As Computed under | | As Computed under FSP | | |
| | EITF 00-19 | | EITF 00-19-2 | | Effect of change |
As of September 30, 2007 | | | | | | | | | | | | |
Warrant liability | | $ | 4,048,450 | | | $ | — | | | $ | (4,048,450 | ) |
Total liabilities | | | 38,939,960 | | | | 34,891,510 | | | | (4,048,450 | ) |
Additional paid-in capital | | | 60,991,376 | | | | 53,706,926 | | | | (7,284,450 | ) |
Total stockholders’ equity | | $ | 44,833,103 | | | $ | 48,881,553 | | | $ | 4,048,450 | |
Revenue Recognition
Recurring Revenue
Data connectivity and managed network services are provided pursuant to service contracts that typically provide for payments of recurring charges on a monthly basis for use of the services over a committed term. Each service contract for data connectivity and managed services has a fixed monthly cost and a fixed term, in addition to a fixed installation charge (if applicable). At the end of the initial term of most service contracts for data connectivity and managed services, the contracts roll forward on a month-to-month or other periodic basis and continue to bill at the same fixed recurring rate. If any cancellation or termination charges become due from the customer as a result of early cancellation or termination of a service contract, those amounts are calculated pursuant to a formula specified in each contract. Recurring costs relating to supply contracts are recognized ratably over the term of the contract.
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Non-recurring fees, Deferred Revenue
Non-recurring fees for data connectivity typically take the form of one-time, non-refundable provisioning fees established pursuant to service contracts. The amount of the provisioning fee included in each contract is generally determined by marking up or passing through the corresponding charge from the Company’s supplier, imposed pursuant to the Company’s purchase agreement. Non-recurring revenues earned for providing provisioning services in connection with the delivery of recurring communications services are recognized ratably over the term of the recurring service starting upon commencement of the service contract term. Fees recorded or billed from these provisioning services are initially recorded as deferred revenue, and then recognized ratably over the term of the recurring service. Installation costs related to provisioning incurred by the Company from independent third party suppliers, directly attributable and necessary to fulfill a particular service contract, and which costs would not have been incurred but for the occurrence of that service contract, are capitalized as deferred contract costs and expensed proportionally over the term of service in the same manner as the deferred revenue arising from that contract.
Other Revenue
From time to time, the Company recognizes revenue in the form of fixed or determinable cancellation (pre-installation) or termination (post-installation) charges imposed pursuant to the service contract. These revenues are earned when a customer cancels or terminates a service agreement prior to the end of its committed term. These revenues are recognized when billed if collectability is reasonably assured. In addition, the Company from time to time sells equipment in connection with data networking applications. The Company recognizes revenue from the sale of equipment at the contracted selling price when title to the equipment passes to the customer (generally F.O.B. origin) and when collectability is reasonably assured.
Fees for professional services are typically specified as applying on a fee per hour basis pursuant to agreements with customers and are computed based on the hours of service provided by the Company. Invoices for professional services performed on an hourly basis are rendered in the month following that in which the professional services have been performed. Because such invoices for hourly fees are for services the Company has already performed, and because such work is undertaken pursuant to an executed statement of work with the customer specifying the applicable hourly rate, the Company recognizes revenue based upon hourly fees in the period the service is provided if collectability is reasonably assured. The Company did not generate any material revenue from professional services during the three months and nine months ended September 30, 2007, and such revenues were not material to any prior periods.
In certain circumstances, the Company is engaged to perform professional services projects pursuant to master agreements and project-specific statements of work. Fees for the Company’s performance of project-specific engagements are specified in each executed statement of work by reference to certain agreed-upon and defined milestones and/or the project as a whole. Invoices for professional services projects are rendered pursuant to payment plans specified in the statement of work executed by the customer. Revenue recognition is determined independently of the issuance of an invoice to, or receipt of payment from, the customer. Rather, revenue is recognized based upon the degree of delivery, performance and completion of such professional services projects as stated expressly in the contractual statement of work. The Company determines performance, completion and delivery of obligations on projects based on the underlying contract or statement of work terms, particularly by reference to any customer acceptance provisions or by other objective performance criteria defined in the contract or statement of work. Furthermore, even if a project has been performed, completed and delivered in accordance with all applicable contractual requirements, and even if an invoice has been issued consistent with those contractual requirements, professional services revenues are not recognized unless collected in advance or if collectability is reasonably assured.
In cases where a project is partially billed upon attainment of a milestone or on another partial completion basis, revenue is allocated for recognition purposes based upon the relative fair market value of the individual milestone or deliverable. For this purpose, fair market value is determined by reference to factors such as how the company would price the particular deliverable on a standalone basis and/or what competitors may charge for a similar standalone product. Where the Company, for whatever reason, cannot make an objective determination of fair market value of a deliverable by reference to such factors, the amount paid is recognized upon performance, completion and delivery of the project as a whole.
F-41
Usage charge revenue is recognized as the connection is utilized by the customer in accordance with the agreement.
The Company records Universal Service Fund contributions and sales, use, value added and excise taxes billed to its customers on a net basis in its condensed consolidated statements of operations.
Stock-Based Compensation
SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statement of operations.
Stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations for the three months and nine months ended September 30, 2007 included compensation expense for share-based payment awards based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). The Company follows the straight-line single option method of attributing the value of stock-based compensation to expense. As stock-based compensation expense recognized in the condensed consolidated statement of operations for the three months and nine months ended September 30, 2007 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company uses the Black-Scholes option-pricing model (“Black-Scholes”) as its method of valuation for stock-based awards granted. The Company’s determination of fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and the expected term of the awards.
The Company accounts for non-employee stock-based compensation expense in accordance with EITF Issue No. 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services(“EITF 96-18”). The Company had one grant of 6,000 share options to a non-employee consultant in December 2006 and a second grant of 15,000 share options to a non-employee consultant in July 2007.
Income Taxes
In June 2006, the FASB issued Interpretation No. 48,Accounting For Uncertainty in Income Taxes(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of FIN 48 on January 1, 2007 did not have any impact on the Company’s financial position and results of operations.
We may from time to time be assessed interest and/or penalties by taxing jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the statement of operations as other general and administrative costs.
Net Income (Loss) Per Share
Basic income (loss) per share is computed by dividing income (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. Diluted income (loss) per share for the three months and nine months ended September 30, 2007 and three months and nine months ended September 30, 2006 excludes potentially issuable common shares of 25,279,500 and 21,990,000, respectively, primarily related to the Company’s outstanding stock options and warrants because the assumed issuance of such potential common shares is anti-dilutive as the exercise prices of such securities are greater than the average closing price of the Company’s common stock during the periods. In addition, for the three and nine months ended September 30, 2007 the Company reported a net loss and the effect of securities with exercise prices greater than the average closing price of the Company’s common stock during the periods would be anti-dilutive.
F-42
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. 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 accrued carrier cost reflected in the condensed 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 monthly, and reconciles the estimates with actual results quarterly as the liabilities are paid, as disputes are resolved, or as the appropriate statute of limitations with respect to a given dispute expires.
As of September 30, 2007, open disputes totaled $631,060. 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 $121,192 in connection with these disputes, for which accruals are included on the accompanying condensed consolidated balance sheet at September 30, 2007.
Segment Reporting
The Company determines and discloses its segments in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”), which uses a “management” approach for determining segments.
The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of a company’s reportable segments. SFAS No. 131 also requires disclosures about products or services, geographic areas and major customers.
During 2007, the Company initiated a restructuring that included the centralization of all financial, selling and operational functions. As a result of the restructuring, management’s chief financial and operational decision making is performed centrally. The Company now operates in one business segment providing global telecommunications services, and is no longer organized by market.
NOTE 3 — ACQUISITIONS
On October 15, 2006, the Company acquired all of the outstanding capital stock of GII pursuant to a stock purchase agreement dated May 23, 2006, as amended. The Acquisition of GII was accounted for as a business combination with the Company as the acquirer of GII. Under the purchase method of accounting, the assets and liabilities of GII acquired are recorded as of the acquisition date at their respective fair values, and added to those of the Company.
On October 15, 2006, the Company also acquired all of the outstanding voting stock of ETT pursuant to an offer made to its stockholders under the laws of England and Wales. The Acquisition of ETT, like the Acquisition of GII, has been accounted for as a business combination with the Company as the acquirer of ETT. Under the purchase method of accounting, the assets and liabilities of ETT acquired are recorded as of the acquisition date at their respective fair values, and added to those of the Company.
Summarized below are the pro forma unaudited results of operations for the three months and nine months ended September 30, 2006 as if the results of GTTA and GTTE were included for the entire periods presented. The pro forma results may not be indicative of the results that would have occurred if the Acquisitions had been completed at the beginning of the period presented or which may be obtained in the future (amounts in thousands except per share information):
| | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, 2006 | | September 30, 2006 |
Revenue | | $ | 13,022 | | | $ | 38,530 | |
Net income (loss) | | $ | 1,070 | | | $ | (456 | ) |
Basic and diluted net income (loss) per share | | $ | 0.08 | | | $ | (0.04 | ) |
Weighted average common shares outstanding | | | 13,030 | | | | 13,030 | |
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NOTE 4 — SEGMENTS
Immediately following the Acquisitions, the Company operated under two reportable segments as the chief operating decision maker reviewed operating results and made decisions on a regional basis. During the first six months of 2007, the Company completed a restructuring initiative that included the centralization of all financial, selling and operational functions of the Company. As a result of the restructuring, the Company now operates in one business segment providing global telecommunications services, and is no longer organized by market. A single management team reports to the chief operating decision maker who comprehensively manages the business. The Company does not operate any material separate lines of business or separate business entities with respect to its services. Accordingly, the Company no longer accumulates discrete financial information with respect to separate service lines and, effective June 30, 2007, does not have separately reportable segments as defined by SFAS No. 131,Disclosure About Segments of an Enterprise and Related Information(SFAS No. 131). Financial results reflect those of the entire Company and the comparable reporting segment for prior periods reflects the total Company reported results for those periods.
NOTE 5 — RESTRUCTURING CHARGES AND NON-RECURRING ITEMS
During 2007, the Company implemented various organizational restructuring plans to reduce its operating expenses, centralize management and decision making, and strengthen both its competitive and financial positions. The restructuring plans reduced corporate level functions that were determined to be redundant or not consistent with the Company’s growth strategy. Restructuring charges were recorded during the three months ended March 31, 2007 and June 30, 2007, which represent costs incurred in connection with (i) the reduction of corporate headcount which resulted in a charge of $1.2 million, (ii) the severance related to executive level resignation of $0.9 million and (iii) $0.1 million in other costs including the closing of an office in India. No additional restructuring charges were incurred during the three months ended September 30, 2007.
The restructuring charges and accruals established by the Company, and activities related thereto, are summarized as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Balance at | | | | | | | | | | | | | | |
| | beginning of | | | Charges net of | | | | | | | Non-cash | | | Balance at | |
| | year | | | Reversals | | | Cash Uses | | | Uses | | | September 30, 2007 | |
Severance | | $ | — | | | $ | 2,137,706 | | | $ | (430,258 | ) | | $ | (923,865 | ) | | $ | 783,583 | |
Other | | | — | | | $ | 88,779 | | | $ | (4,432 | ) | | $ | — | | | $ | 84,347 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | — | | | $ | 2,226,485 | | | $ | (434,690 | ) | | $ | (923,865 | ) | | $ | 867,930 | |
| | | | | | | | | | | | | | | |
In addition, the Company incurred $0.2 million in expense related to an Acquisition adjustment and $0.7 million in costs related to the completion of the share conversion process as further described in Note 7.
NOTE 6 — SHARE-BASED COMPENSATION
The Company adopted its 2006 Employee, Director and Consultant Stock Plan (the “Plan”) in October 2006. In addition to stock options, the Company may also grant restricted stock or other stock-based awards under the Plan. The maximum number of shares issuable under the Plan is limited to 3,000,000 shares. The Company accounts for stock options and restricted shares granted in accordance with the provisions of SFAS 123(R).
Stock Options
During the three months and nine months ended September 30, 2007, the Company recognized compensation expense of $12,405 and $88,221 respectively, as a result of the vesting of options issued to employees and consultants, which is included in selling, general and administrative expense on the accompanying condensed consolidated statements of operations.
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Restricted Stock
During the three months ended September 30, 2007, the Company recognized compensation expense of $58,933 associated with the awarding of restricted shares, which is included in selling, general and administrative expense on the accompanying condensed consolidated statement of operations. During the nine months ended September 30, 2007, the Company recognized compensation expense of $1,123,318, of which $923,865 is included in restructuring charges and $199,453 is included in selling, general and administrative expense on the accompanying condensed consolidated statement of operations.
NOTE 7 — COMMITMENTS AND CONTINGENCIES
Conversion Right of Holders of Class B Common Stock
As permitted in the Company’s Certificate of Incorporation prior to and until the Acquisitions, holders of the Company’s Class B common stock that voted against a Business Combination were, under certain conditions, entitled to convert their shares into a pro-rata distribution from a trust fund (“Trust Fund”) established to hold most of the net proceeds from the Company’s initial public offering (the “Conversion Right”). In the event that holders of a majority of the outstanding shares of Class B common stock voted for the approval of the Business Combination and that holders owning less than 20% of the outstanding Class B common stock exercised their Conversion Rights, the Business Combination could then be consummated. Upon completion of such Business Combination, the Class B common stock would be converted to common stock and the holders of Class B common stock who voted against the Business Combination and properly exercised their Conversion Rights would be paid their conversion price. There was no distribution from the Trust Fund with respect to the warrants included in the Series A Units and Series B Units or with respect to the common stock issued prior to consummation of the Business Combination. Any Class B stockholder who converted his or her stock into his or her share of the Trust Fund retained the right to exercise the Class W warrants and Class Z warrants that were received as part of the Series B Units.
In connection with the Acquisitions, the Company determined that Class B stockholders owning less than 20% of the outstanding Class B common stock both voted against the Acquisitions and properly exercised their Conversion Rights for a pro-rata distribution from the Trust Fund based on the value of the Trust Fund as of October 13, 2006. The actual per-share conversion price issuable to Class B stockholders who voted against the Acquisitions and elected conversion was equal to the amount in the Trust Fund (inclusive of any interest thereon) immediately prior to the proposed Business Combination, divided by the number of Class B shares sold in the Offering, or approximately $5.35 per share based on the value of the Trust Fund as of October 13, 2006. Accordingly, the Company was required to convert such Class B stockholders’ shares (which were converted into shares of common stock upon consummation of the Acquisitions) into cash following verification that such stockholders properly exercised their Conversion Rights. As of June 30, 2007, the Company determined that 1,897,193 shares of former Class B common stock qualified for conversion and has made payment of approximately $10.15 million with respect to the conversion of those shares. As a result of this conversion process, these shares have been canceled. The Company also incurred approximately $0.7 million in costs associated with resolution of the share conversion process, including payments made to holders of shares who initially sought conversion of those shares but ultimately agreed to withdraw their conversion claims in consideration for such payments. The Company believes that it has completed the conversion process and does not expect to redeem any additional shares in connection with this conversion process.
NOTE 8 — CAPITAL STOCK
On January 19, 2007, the Company’s Series A Units and Series B Units were de-listed, and they were subsequently de-registered on January 22, 2007. All Series A Units and Series B Units were separated into their respective constituent underlying shares of common stock and warrants. The de-listing, de-registration, and separation of the Series A Units and Series B Units had no impact on the Company’s financial statements.
NOTE 9 — NOTES PAYABLE
On March 23, 2007, the Company and the holders of approximately $5.9 million in promissory notes previously due and payable by the Company on June 30, 2007 entered into agreements to amend the notes. As a result of these amendments, the maturity date of each of the notes was extended from June 30, 2007 to April 30, 2008. In addition, the per annum interest rate payable with respect to each note was modified as follows: (a) from October 15, 2006 through March 31, 2007 — 6%; (b) from April 1, 2007 through June 30, 2007 — 8%; (c) from July 1, 2007 through October 31, 2007 — 10%; (d) from November 1, 2007 through December 31, 2007 — 12%; (e) from January 1, 2008 through March 31, 2008 — 14%; and (f) from April 1, 2008 and thereafter — 16%.
F-45
On November 12, 2007, the Company and the holders of promissory notes due April 30, 2008 ($5.9 million) and December 29, 2008 ($4 million) entered into agreements to restructure the notes payable. Please see Note 10 — Subsequent Events for further discussion of this restructuring of notes payable.
As of September 30, 2007, the Company was obligated as follows:
| | | | |
| | September 30, 2007 | |
Notes payable to former GII shareholders, due December 29, 2008 (subsequently amended to December 31, 2010, see Note 10 — Subsequent Events) | | $ | 4,000,000 | |
| | | | |
Notes payable to former ETT and GII Shareholders, due April 30, 2008 (subsequently amended to December 31, 2010, see Note 10 — Subsequent Events) | | | 5,916,667 | |
| | | | |
Other notes payable | | | 51,679 | |
| | | |
| | | | |
| | | 9,968,346 | |
| | | | |
Less current portion | | | 51,679 | |
| | | |
| | | | |
Long-term debt | | $ | 9,916,667 | |
| | | | |
NOTE 10 — SUBSEQUENT EVENTS
On November 12, 2007, the Company and the holders of the approximately $5.9 million of promissory notes due on April 30, 2008 (the “April 2008 Notes”) entered into agreements to convert not less than 30% of the amounts due under the April 2008 Notes as of November 13, 2007 (including principal and accrued interest) into shares of the Company’s common stock, and to obtain 10% convertible unsecured subordinated promissory notes due on December 31, 2010 (the “December 2010 Notes”) for the remaining indebtedness then due under the April 2008 Notes. Pursuant to the conversion, a total of 2,570,143 shares of the Company’s common stock (with a quoted market price of $2,929,963) were issued for $3,528,987 of principal and accrued interest due under the April 2008 Notes as of November 13, 2007. All principal and accrued interest under the December 2010 Notes is payable on December 31, 2010.
In addition, on November 12, 2007, the holders of the $4.0 million of promissory notes due on December 29, 2008 agreed to amend those notes to extend the maturity date to December 31, 2010, subject to increasing the interest rate to 10% per annum, beginning January 1, 2009. Under the terms of the notes, as amended (the “Amended Notes”), 50% of all interest accrued during 2008 and 2009 is payable on each of December 31, 2008 and 2009, respectively, and all principal and remaining accrued interest is payable on December 31, 2010.
On November 13, 2007, the Company sold an additional $1.9 million of December 2010 Notes to certain accredited investors.
The holders of the December 2010 Notes can convert the principal due under the December 2010 Notes into shares of the Company’s common stock, at any time, at a price per share equal to $1.70. The Company has the right to require the holders of the December 2010 Notes to convert the principal amount due under the December 2010 Notes at any time after the closing price of the Company’s common stock shall be equal to or greater than $2.64 for 15 consecutive business days. The conversion provisions of the December 2010 Notes include protection against dilutive issuances of the Company’s common stock, subject to certain exceptions. The December 2010 Notes and the Amended Notes are subordinate to any future credit facility entered into by the Company, up to an amount of $4.0 million. The Company has agreed to register with the Securities and Exchange Commission the shares of Company’s common stock issued to the holders of the December 2010 Notes upon their conversion, subject to certain limitations.
The Company is currently evaluating the impact of these transactions pursuant to EITF 96-19, “Debtors Accounting for a Modification or Exchange of Debt Instrument,” and will recognize the impact of such in the quarter ending December 31, 2007.
F-46
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
GTT — EMEA Limited
We have audited the accompanying consolidated statements of operations, comprehensive income (loss), changes in shareholders’ deficit and cash flows of GTT — EMEA Limited and Subsidiaries (formerly European Telecommunications & Technology Limited) for the period from January 1, 2006 to October 15, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements 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 the 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of GTT-EMEA Limited and Subsidiaries for the period from January 1, 2006 to October 15, 2006, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2, the Company changed its method of accounting for stock-based compensation upon adoption of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”.
Jericho, New York
April 16, 2007
F-47
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
European Telecommunications & Technology Limited
We have audited the accompanying consolidated balance sheet of European Telecommunications & Technology Limited and subsidiaries as of December 31, 2005 and the related consolidated statement of income and comprehensive income, stockholders’ deficit, and cash flows for the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of European Telecommunications & Technology Limited and subsidiaries at December 31, 2005, and the results of its operations and its cash flows for the period ended December 31, 2005,in conformity with accounting principles generally accepted in the United States of America.
Signed BDO Stoy Hayward LLP
London, England
June 1, 2006
F-48
Report of Independent Auditors
To the Board of Directors and Shareholders of
GTT — EMEA Limited (formerly European Telecommunications & Technology Limited)
We have audited the accompanying consolidated statements of operation, comprehensive loss, changes in stockholders’ deficit and cash flows of GTT — EMEA Limited and its subsidiaries (‘the Company’) for the year ended 31 December 2004. These consolidated financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations, comprehensive loss, changes in stockholders’ deficit and cash flows of GTT — EMEA Limited for the year in the period ended 31 December 2004, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations since inception and has a net capital deficiency. Management’s plans with regard to these matters are also described in Note 1.
/s/ PricewaterhouseCoopers LLP
London, England
21 June 2006
F-49
GTT — EMEA Limited and Subsidiaries
(formerly European Telecommunications & Technology Limited)
| | | | |
| | As at
|
| | December 31,
|
| | 2005 |
| | $ |
|
ASSETS |
Current assets: | | | | |
Cash and cash equivalents | | | 4,087,053 | |
Accounts receivable, net of allowance for doubtful accounts of $ $67,519 at December 31, 2005 | | | 4,393,640 | |
Deferred contract costs | | | 1,080,317 | |
Prepaid expenses and other current assets | | | 297,449 | |
| | | | |
Total current assets | | | 9,858,459 | |
Property and equipment, net | | | 440,572 | |
Deferred contract costs and other assets | | | 977,756 | |
| | | | |
Total assets | | | 11,276,787 | |
| | | | |
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT |
Current liabilities: | | | | |
Current maturities of long-term obligations | | | 899,244 | |
Accounts payable | | | 8,963,031 | |
Accrued expenses and other current liabilities | | | 2,104,549 | |
Deferred revenue | | | 2,039,332 | |
| | | | |
Total current liabilities | | | 14,006,156 | |
Long-term obligations, less current maturities | | | 499,029 | |
Deferred revenue | | | 158,867 | |
| | | | |
Total non current liabilities | | | 657,896 | |
Commitments and contingencies (Note 10) | | | — | |
Shareholders’ deficit | | | | |
Preferred ordinary shares; par value $0.000186 (£0.0001); 100,000,000 shares authorized; 72,366,941 shares issued and outstanding at December 31, 2005 | | | 10,597 | |
Ordinary shares; par value $0.000186 (£0.0001); 100,000,000 shares authorized; 64,445,538 shares issued and outstanding at December 31, 2005 | | | 10,170 | |
A Ordinary shares; par value $0.000186 (£0.0001); 100,000,000 shares authorized; 37,700,006 shares issued and outstanding at December 31, 2005 | | | 5,967 | |
Additional paid-in capital | | | 19,293,471 | |
Accumulated deficit | | | (24,739,313 | ) |
Accumulated other comprehensive income | | | 2,653,843 | |
Treasury shares, at cost | | | (622,000 | ) |
| | | | |
Total shareholders’ deficit | | | (3,387,265 | ) |
| | | | |
Total liabilities and shareholders’ deficit | | | 11,276,787 | |
| | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-50
GTT — EMEA Limited and Subsidiaries
(formerly European Telecommunications & Technology Limited)
For the Period from January 1, 2006 to October 15, 2006 and For the Years Ended
December 31, 2005 and 2004
| | | | | | | | | | | | |
| | January 1, 2006 to
| | Year Ended
| | Year Ended
|
| | October 15, 2006 | | December 31, 2005 | | December 31, 2004 |
| | $ | | $ | | $ |
|
Revenue | | | 26,122,950 | | | | 34,711,639 | | | | 35,075,501 | |
Cost of revenue | | | 18,583,780 | | | | 24,506,895 | | | | 25,754,951 | |
| | | | | | | | | | | | |
Gross profit | | | 7,539,170 | | | | 10,204,744 | | | | 9,320,550 | |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Selling expenses | | | 3,979,261 | | | | 5,150,563 | | | | 5,070,455 | |
General and administrative | | | 4,840,440 | | | | 5,288,986 | | | | 4,810,101 | |
| | | | | | | | | | | | |
Total operating expenses | | | 8,819,701 | | | | 10,439,549 | | | | 9,880,556 | |
| | | | | | | | | | | | |
Operating loss | | | (1,280,531 | ) | | | (234,805 | ) | | | (560,006 | ) |
| | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | |
Interest income | | | 98,515 | | | | 181,938 | | | | 117,955 | |
Interest expense | | | (86,130 | ) | | | (178,133 | ) | | | (48,147 | ) |
| | | | | | | | | | | | |
Total other income (expense) | | | 12,385 | | | | 3,805 | | | | 69,808 | |
| | | | | | | | | | | | |
Loss before income taxes | | | (1,268,146 | ) | | | (231,000 | ) | | | (490,198 | ) |
Income taxes | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Net loss | | | (1,268,146 | ) | | | (231,000 | ) | | | (490,198 | ) |
| | | | | | | | | | | | |
Net loss per share: | | | | | | | | | | | | |
Basic and diluted | | | (0.01 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Weighted average shares: | | | | | | | | | | | | |
Basic and diluted | | | 174,512,485 | | | | 174,512,485 | | | | 174,512,485 | |
| | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-51
GTT — EMEA Limited and Subsidiaries
(formerly European Telecommunications & Technology Limited)
For the Period from January 1, 2006 to October 15, 2006 and For the Years Ended
December 31, 2005 and 2004
| | | | | | | | | | | | |
| | January 1, 2006 to
| | | | |
| | October 15, 2006 | | December 31, 2005 | | December 31, 2004 |
| | $ | | $ | | $ |
|
Net loss | | | (1,268,146 | ) | | | (231,000 | ) | | | (490,198 | ) |
Foreign currency gain (loss) on translation | | | (635,811 | ) | | | 507,455 | | | | (200,503 | ) |
| | | | | | | | | | | | |
Total comprehensive income (loss) | | | (1,903,957 | ) | | | 276,455 | | | | (690,701 | ) |
| | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-52
GTT — EMEA Limited and Subsidiaries
(formerly European Telecommunications & Technology Limited)
For the Period from January 1, 2006 to October 15, 2006 and For the Years Ended
December 31, 2005 and 2004
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | Accumulated
| | | | |
| | | | | | | | | | | | | | | | | | Additional
| | | | Other
| | | | |
| | Ordinary Shares | | A Ordinary Shares | | Preferred Ordinary Shares | | Deferred Shares | | Paid-in
| | Treasury
| | Comprehensive
| | Accumulated
| | |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Capital | | Shares | | Income | | Deficit | | Total |
| | | | $ | | | | $ | | | | $ | | | | $ | | $ | | $ | | $ | | $ | | $ |
|
Balance, January 1, 2004 | | | 64,445,538 | | | | 10,170 | | | | 37,700,006 | | | | 5,967 | | | | 72,366,941 | | | | 10,597 | | | | — | | | | — | | | | 19,293,471 | | | | (622,000 | ) | | | 2,346,891 | | | | (24,018,115 | ) | | | (2,973,019 | ) |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (490,198 | ) | | | (490,198 | ) |
Foreign currency translation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (200,503 | ) | | | — | | | | (200,503 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2004 | | | 64,445,538 | | | | 10,170 | | | | 37,700,006 | | | | 5,967 | | | | 72,366,941 | | | | 10,597 | | | | — | | | | — | | | | 19,293,471 | | | | (622,000 | ) | | | 2,146,388 | | | | (24,508,313 | ) | | | (3,663,720 | ) |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (231,000 | ) | | | (231,000 | ) |
Foreign currency translation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 507,455 | | | | — | | | | 507,455 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2005 | | | 64,445,538 | | | | 10,170 | | | | 37,700,006 | | | | 5,967 | | | | 72,366,941 | | | | 10,597 | | | | — | | | | — | | | | 19,293,471 | | | | (622,000 | ) | | | 2,653,843 | | | | (24,739,313 | ) | | | (3,387,265 | ) |
Net loss, October 15. 2006 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,268,146 | ) | | | (1,268,146 | ) |
Foreign currency translation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (635,811 | ) | | | — | | | | (635,811 | ) |
Conversion to Deferred Ordinary Stock | | | (49,365,866 | ) | | | (7,790 | ) | | | (28,980,103 | ) | | | (4,587 | ) | | | — | | | | — | | | | 78,345,969 | | | | 12,377 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Share-based compensation expense | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 375,754 | | | | — | | | | — | | | | — | | | | 375,754 | |
Sale of treasury shares | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 82,053 | | | | 622,000 | | | | — | | | | — | | | | 704,053 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, October 15, 2006 | | | 15,079,672 | | | | 2,380 | | | | 8,719,903 | | | | 1,380 | | | | 72,366,941 | | | | 10,597 | | | | 78,345,969 | | | | 12,377 | | | | 19,751,278 | | | | — | | | | 2,018,032 | | | | (26,007,459 | ) | | | (4,211,415 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-53
GTT — EMEA Limited and Subsidiaries
(formerly European Telecommunications & Technology Limited)
For the Period from January 1, 2006 to October 15, 2006 and For the Years Ended
December 31, 2005 and 2004
| | | | | | | | | | | | |
| | January 1, 2006 to
| | | | |
| | October 15, 2006 | | December 31, 2005 | | December 31, 2004 |
| | $ | | $ | | $ |
|
Cash Flows From Operating Activities: | | | | | | | | | | | | |
Net loss | | | (1,268,146 | ) | | | (231,000 | ) | | | (490,198 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | | | | | |
Depreciation | | | 194,468 | | | | 269,513 | | | | 298,764 | |
Share-based compensation expense | | | 375,754 | | | | — | | | | — | |
Other | | | — | | | | 21,027 | | | | — | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | (2,795,355 | ) | | | (118,562 | ) | | | (984,392 | ) |
Deferred contract costs, prepaid expenses and other assets | | | 833,811 | | | | 1,051,281 | | | | (667,933 | ) |
Accounts payable | | | 488,498 | | | | (192,227 | ) | | | 1,988,044 | |
Accrued expenses and other current liabilities | | | (518,076 | ) | | | (35,006 | ) | | | 554,279 | |
Deferred revenue | | | 1,200,295 | | | | (522,955 | ) | | | 536,190 | |
| | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | (1,488,751 | ) | | | 242,071 | | | | 1,234,754 | |
| | | | | | | | | | | | |
Cash Flows From Investing Activities: | | | | | | | | | | | | |
Property and equipment purchases | | | (166,119 | ) | | | (291,167 | ) | | | (98,704 | ) |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (166,119 | ) | | | (291,167 | ) | | | (98,704 | ) |
| | | | | | | | | | | | |
Cash Flows From Financing Activities: | | | | | | | | | | | | |
Principal payments on long-term obligations | | | (529,877 | ) | | | (637,760 | ) | | | (396,938 | ) |
Cash proceeds from long-term obligations | | | — | | | | — | | | | 1,832,770 | |
| | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (529,877 | ) | | | (637,760 | ) | | | 1,435,832 | |
| | | | | | | | | | | | |
Effect of exchange rate changes on cash | | | 239,155 | | | | (491,954 | ) | | | 302,114 | |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (1,945,592 | ) | | | (1,178,810 | ) | | | 2,873,996 | |
Cash and cash equivalents at beginning of period | | | 4,087,053 | | | | 5,265,863 | | | | 2,391,867 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of period | | | 2,141,461 | | | | 4,087,053 | | | | 5,265,863 | |
| | | | | | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | | | | | |
Cash paid for interest during the period | | | 86,130 | | | | 178,133 | | | | 48,147 | |
| | | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
F-54
GTT — EMEA Limited and Subsidiaries
(formerly European Telecommunications & Technology Limited)
Note 1. Nature of Operations
GTT — EMEA Limited and its subsidiaries (the “Company” or “GTT”), is a non-facilities based supplier of dedicated managed data networks and value-added services serving over 100 multinational enterprise customers in 45 countries. The Company is headquartered in London, England, and its customers are located throughout the world.
The Company incurred a consolidated net loss of $1,268,146 for the period from January 1, 2006 to October 15, 2006, and current liabilities exceeded current assets by $4,817,561 at October 15, 2006. In view of these matters, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon future profitable operations of the Company and generation of cash flow sufficient to meet its obligations. The directors have reviewed the current trading position, forecasts and prospects of the Company, the funding position from lenders and shareholders (which includes a letter of financial support from its parent company, Global Telecom & Technology, Inc.), and the terms of trade in operation with customers and suppliers. The Company believes that current cash resources and bank facilities available to the Company will provide the Company with adequate liquidity to allow support for its business operations through October 15, 2007.
On October 15, 2006, the Company’s outstanding voting stock was acquired by Mercator Partners Acquisition Corp., a company registered in the United States. For further detail on the acquisition, refer to Note 12 (“Subsequent Events”).
Note 2. Summary of Significant Accounting Policies
Basis of consolidation
The accompanying consolidated financial statements include the accounts of GTT — EMEA Limited and its wholly owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation. The Company held 100% of the ordinary share capital in the following subsidiary undertakings at October 15 2006 and December 31, 2005:
European Telecommunications & Technology SARL, incorporated in France
European Telecommunications & Technology Inc., incorporated in the United States of America
ETT European Telecommunications & Technology Deutschland GmbH, incorporated in Germany
ETT (European Telecommunications & Technology) Private Limited, incorporated in India
European Telecommunications & Technology (S) Pte Limited, incorporated in Singapore
ETT Network Services Limited, incorporated in UK
The subsidiary undertakings are telecommunication integration companies and have December year-ends, except for India which has a March year-end.
Translation of foreign currencies
Foreign currency assets and liabilities of the Company’s foreign subsidiaries are translated using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rates prevailing throughout the year. The effects of exchange rate fluctuations on translating foreign currency assets and liabilities are accumulated as part of the foreign currency translation adjustment in shareholders’ deficit. The Company has determined the functional currency to be the UK Pound.
These financial statements have been reported in US Dollars by translating asset and liability amounts at the closing exchange rate, the equity amounts at historical rates, and the results of operations and cash flows at the
F-55
GTT — EMEA Limited and Subsidiaries
(formerly European Telecommunications & Technology Limited)
Notes to consolidated financial statements — (Continued)
average exchange rate in effect during the periods reported. Certain per share information is disclosed in the Great UK Pound as well as the US Dollar.
A summary of exchange rates used is as follows:
| | | | | | | | | | | | |
| | October 15,
| | December 31,
| | December 31,
|
| | 2006 | | 2005 | | 2004 |
|
Closing exchange rate | | | 1.85650 | | | | 1.72079 | | | | 1.92620 | |
Average exchange rate during the period | | | 1.82112 | | | | 1.82069 | | | | 1.83277 | |
Transactions denominated in foreign currencies are recorded at the rates of exchange ruling at the time of the transaction. Exchange differences arising are recorded in the accompanying consolidated statement of operations.
Use of estimates
The preparation of financial statements and related disclosures in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary. Actual results could differ from those estimates. Significant estimates are used in the deferred tax valuation allowance and impairment decisions. Significant changes in the estimate of the deferred tax valuation allowance could materially affect the consolidated financial statements.
Revenue recognition
Revenue is primarily derived from arrangements with multiple elements such as monthly connection charges, installation, maintenance, equipment and usage charges. The arrangements are separated into units of accounting based on the following criteria; whether the delivered items have value to the customer on a standalone basis, there is objective and reliable evidence of the fair value of the undelivered items and there is a general right of return and delivery or performance of the undelivered items is considered probable and substantially within the control of the Company. When the fair value of the undelivered elements is unable to be determined revenue is recognized evenly over the term of the contract from the date that completion of the installation is verified by customer acceptance. Deferred revenue relates to up-front payments received on contracts and amounts received in advance from customers for services yet to be rendered.
The Company also evaluates relevant facts and circumstances regarding recording revenue at gross or net and records revenue at the gross amount billed to customers because management has determined the Company has earned the revenue from the sale of the goods or services.
Installation costs that are directly attributable to a managed service contract are capitalised as deferred contract costs and expensed over the term of the contract from the date the installation is verified by the customer.
Monthly connection charges and installation are determined to be one unit of accounting as there is no stand alone value to the customer and the revenue is recognized over the life of the contract. Maintenance revenue is determined to be a separate unit of accounting and the revenue is recognized over the life of the contract.
Equipment revenue is recognized when there is persuasive evidence of an agreement with the customer, the equipment is shipped and title has passed, the amount due from the customer is fixed and determinable, and collectibility is reasonably assured.
Usage charge revenue is recognized as the connection is utilized by the customer in accordance with the agreement.
F-56
GTT — EMEA Limited and Subsidiaries
(formerly European Telecommunications & Technology Limited)
Notes to consolidated financial statements — (Continued)
Accounts receivable
Credit extended is based on an evaluation of the customer’s financial condition and is granted to customers on an unsecured basis. Accounts receivable from sales of services and monthly connection billings are typically due from customers within 30 days of invoicing.
Accounts receivable balances are stated at amounts due from the customer net of an allowance for doubtful accounts listed below. Accounts outstanding longer than the contractual payments terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade receivables are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. Specific reserves are also established on acase-by-case basis by management. The Company writes-off accounts receivable when they become uncollectible. Credit losses have historically been within management’s expectations.
Information related to the activity of the allowance for doubtful accounts is as follows:
| | | | | | | | | | | | |
| | October 15,
| | December 31,
| | December 31,
|
| | 2006 | | 2005 | | 2004 |
| | $ | | $ | | $ |
|
Beginning balance | | | 67,519 | | | | 75,578 | | | | 130,521 | |
Bad debt expense | | | — | | | | 9,255 | | | | 49 | |
Reversals | | | — | | | | — | | | | (52,175 | ) |
Write-offs | | | — | | | | (9,255 | ) | | | (10,465 | ) |
Foreign currency exchange | | | 5,324 | | | | (8,059 | ) | | | 7,648 | |
| | | | | | | | | | | | |
Ending balance | | | 72,843 | | | | 67,519 | | | | 75,578 | |
| | | | | | | | | | | | |
Cash
Cash includes cash on hand and cash held in banks. The Company does not maintain insurance for cash deposits. Foreign cash balances held at various financial institutions located in countries outside the UK totaled $1,172,724 at December 31, 2005.
Property and equipment
Property and equipment, including leasehold improvements, are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Computer equipment and furniture is depreciated over lives ranging from three to five years, and leasehold improvements are depreciated over the term of the lease or estimated useful life, whichever is shorter. Upon retirement or other disposition of the assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss, if any, is reflected in results of operations. Expenditures for maintenance, repairs and renewals of minor items are charged to expense as incurred. Major renewals and improvements are capitalized when they increase the estimated useful life of the asset.
Leased assets
Where the Company retains substantially all the risks and rewards of ownership of an asset subject to a lease, the lease is treated as a capital lease. The amount capitalised in property and equipment is the lesser of fair value or present value of the minimum lease payments payable during the lease term and is depreciated over the shorter of the lease term or its estimated useful life. The corresponding lease commitments are recorded as capital lease obligations. Leases other than capital leases are treated as operating leases. Costs in respect of operating leases are charged on a straight-line basis over the lease term.
F-57
GTT — EMEA Limited and Subsidiaries
(formerly European Telecommunications & Technology Limited)
Notes to consolidated financial statements — (Continued)
Impairment of long-lived assets
The Company reviews long-lived assets to beheld-and-used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows the asset is considered to be impaired. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Income taxes
The Company accounts for income taxes under the liability method. Deferred tax liabilities are recognized for temporary differences that will result in taxable amounts in future years. Deferred tax assets are recognized for deductible temporary differences and tax operating losses and tax credit carry-forwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. A valuation allowance is provided to offset the net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company has concluded that a full valuation allowance against its deferred tax assets is appropriate.
Treasury shares
The Company accounts for purchases of its own shares as treasury shares under the cost method. All of the shares held as treasury shares are expected to be used to meet exercises of share options granted to employees.
Other comprehensive income
In addition to net income (loss), comprehensive income (loss) includes charges or credits to equity that are not as a result of transactions with shareholders. For the Company this consists of foreign currency translation adjustments.
Fair value of financial instruments
The Company’s financial instruments including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses are carried at cost, which approximates fair value due to the short-term maturity of these instruments. Long-term obligations approximate fair value as the instruments are stated at variable interest rates.
Defined contribution plans
The Company does not operate a company sponsored pension plan but makes discretionary contributions of up to 10% of the gross salary to the defined contribution plans. The expense is charged to the operations in the year to which it relates.
Share-based compensation
Until December 31, 2005, the Company applied SFAS 123 and used the intrinsic value method to value the share options issued to employees and directors. Under the intrinsic value method the difference between the market value of the shares at the measurement date and the exercise price of the option is credited to shareholders’ equity and charged to the profit and loss account over the vesting period. As of January 1, 2006, the Company applies SFAS 123(R) and uses the fair value method, where share options issued to employees and directors recognized as expenses in the consolidated statements of operations when options are granted. Had the fair value method been applied in the years to December 31, 2005 and 2004, the compensation expense would not have been
F-58
GTT — EMEA Limited and Subsidiaries
(formerly European Telecommunications & Technology Limited)
Notes to consolidated financial statements — (Continued)
different in the periods presented as all options only vest upon a certain event (see Note 6). The Company did not grant any options in the period from January 1, 2006 to October 15, 2006.
The weighted average fair value of employee share options granted was $0.04 per share during the years ended December 31, 2005 and 2004. The fair value of options granted was estimated on the date of grant using the minimum value model, with the following assumptions; average expected life of 5 years, average risk-free interest rate of 2.82%, and no dividend yield.
Net loss per share
Basic net loss per share is computed using the weighted daily average number of shares of common shares outstanding during the period. Diluted loss per common share incorporates the incremental shares issuable upon the assumed exercise of share options and warrants, if dilutive. Share options totaling nil, 14,175,000 and 14,670,000 for the periods ended October 15, 2006, December 31, 2005 and 2004, were excluded from the diluted calculation because their effect was anti-dilutive. Warrants for the purchase of shares were excluded from the dilutive calculation because they are contingently convertible (see Note 5).
Segment Reporting
The Company determines and discloses its segment in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”), which uses a “management” approach for determining segments.
The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of a company’s reportable segments. SFAS No. 131 also requires disclosures about products or services, geographic areas and major customers. The Company operates in three geographic regions in addition to corporate activities: (i) the United Kingdom, (ii) Germany, and (iii) rest of world.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which is an interpretation of SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently in the process of assessing the impact the adoption of FIN 48 will have on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Upon adoption of SFAS 159, an entity may elect the fair value option for eligible items that exist at the adoption date. Subsequent to the initial adoption, the election of the fair value option should only be made at initial recognition of the asset or liability or upon a remeasurement event that gives rise to new-basis accounting. SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value nor does it eliminate disclosure requirements included in other accounting standards. SFAS 159 is effective for fiscal years beginning after November 15, 2007 and may be adopted earlier but only if the adoption is in the first quarter of the fiscal year.
F-59
GTT — EMEA Limited and Subsidiaries
(formerly European Telecommunications & Technology Limited)
Notes to consolidated financial statements — (Continued)
Note 3. Property and Equipment
Property and equipment are as follows:
| | | | |
| | As at
|
| | December 31, 2005 |
| | $ |
|
Cost | | | | |
Computer equipment | | | 1,303,466 | |
Furniture | | | 266,950 | |
Leasehold improvements | | | 321,611 | |
| | | | |
| | | 1,892,027 | |
| | | | |
Accumulated depreciation | | | | |
Computer equipment | | | 1,032,696 | |
Furniture | | | 221,035 | |
Leasehold improvements | | | 197,724 | |
| | | | |
| | | 1,451,455 | |
| | | | |
Net book value | | | 440,572 | |
| | | | |
Depreciation expense was as follows:
| | | | | | | | | | | | |
| | January 1, 2006 to
| | Year Ended
| | Year Ended
|
| | October 15,
| | December 31,
| | December 31,
|
| | 2006 | | 2005 | | 2004 |
| | $ | | $ | | $ |
|
Selling expenses | | | 58,340 | | | | 101,292 | | | | 110,924 | |
General and administrative | | | 136,128 | | | | 168,221 | | | | 187,840 | |
| | | | | | | | | | | | |
| | | 194,468 | | | | 269,513 | | | | 298,764 | |
| | | | | | | | | | | | |
F-60
GTT — EMEA Limited and Subsidiaries
(formerly European Telecommunications & Technology Limited)
Notes to consolidated financial statements — (Continued)
Note 4. Financing
The Company has the following financing agreements:
| | | | |
| | As at
|
| | December 31,
|
| | 2005 |
| | $ |
|
Finance leases with the Bank of Scotland to purchase equipment for use in the provision of services to customers. Repayments are due in monthly installments of $11,690 and the lease bears implicit interest at 8.5% and is collateralized by the equipment leased. There are no covenants with this agreement | | | 107,680 | |
A term loan with the Bank of Scotland was fully paid by September 2006 and bore interest at 2.5% over the bank’s base rate (effective rate of 7.00% at December 31, 2005).(* *) | | | 240,911 | |
$1,438,050 term loan with the Bank of Scotland for the purpose of capital expenditure originated in December 2004. The loan is due in monthly instalments commencing in June 2005 through November 2007 and bears interest at 2.5% over the bank’s base rate (effective rate of 7.00% at December 31, 2005) (* *) | | | 1,049,682 | |
| | | | |
| | | 1,398,273 | |
Less current maturities of long-term obligations | | | 899,244 | |
| | | | |
Long-term obligations | | | 499,029 | |
| | | | |
Maturities of long-term obligations for the years ended December 31 are as follows: | | | | |
2006 | | | 899,244 | |
2007 | | | 499,029 | |
| | | | |
| | | 1,398,273 | |
| | | | |
| | |
(* *) | | Both term loans are collateralized against all of the Company’s assets (including future assets) through a debenture originally put in place on February 7, 2002, and granted by the Company in favour of the Bank of Scotland. The term loans are both subject to a series of affirmative covenants as well as the following specific financial covenants: |
| | |
| a) | The ratio of EBITDA to senior interest shall not be less than 1:1 prior to 31 March 2006. On 31 March 2006 and thereafter, the ratio of EBITDA to senior interest shall not be less than 2:1 unless other wise agreed. |
|
| b) | The ratio of trade debtors to net borrowings due to the Bank of Scotland shall not at any time be less than 2:1. |
The Company was in compliance with the above covenants as of December 31, 2005.
Both of the term loans were repaid in full, the first term loan for $453,525 in September 2006 and the second term loan for $1,438,050 on November 10, 2006.
The Company had a $430,197 credit facility outstanding with the Bank of Scotland which could be drawn as an overdraft, guarantees or letters of credit. The credit facility did not have an expiration date, but was rather reviewed annually by the bank. The rate of interest applicable to the facility is 2.5% plus the bank’s base rate (effective rate of 7% at December 31, 2005). The credit facility is collateralized against all of the Company’s assets through the debenture disclosed above. As long as the credit facility remains outstanding, the Company shall maintain a ratio of Good Trade Debtors to Bank Borrowings of 2:1 or higher, to be tested on a monthly basis.
F-61
GTT — EMEA Limited and Subsidiaries
(formerly European Telecommunications & Technology Limited)
Notes to consolidated financial statements — (Continued)
Note 5. Shareholders’ Equity
During the periods ended October 15, 2006, December 31, 2005 and December 31, 2004, no new shares were issued. The Company’s Preferred Ordinary Shares are non-cumulative and rank pari passu with the other shares in voting rights. On a return of assets on liquidation, or other reduction of capital, the holders of the Preferred Ordinary Shares will be entitled, after payment of the Company’s liabilities, in priority to other shareholders, to receive an amount equivalent to their original investment, with the balance being distributed pro rata amongst all shareholders, including the holders of Preferred Ordinary Shares.
On a sale of the whole or substantial part of the Company where proceeds are distributed to shareholders, a buyer acquiring 50% or more of the total voting rights of the shares in the Company or an initial public offering, a proportion of the Ordinary and A Ordinary Shares will be converted into Deferred shares, which have no voting rights and no rights to capital or income. The number of shares to be so converted will be determined in the event of one of the above occurring in accordance with the terms set out in the Articles of Association of the Company.
The investors who purchased Preferred Ordinary Shares (“Original Preferred Investors”) also received warrants as part of the share purchase agreements. The warrant holder can subscribe for further preferred shares in the circumstances detailed as follows; the number of shares to purchase with the warrants is variable based on a formula related to subsequent issuance. The holder would only exercise if subsequent share subscriptions were at a lesser price per share than that at which the Original Preferred Investors purchased their shares (£0.159). If shares are never issued below the share price the Original Preferred Investors paid, then the warrant holders would not exercise their rights. The warrants are exercisable for £.0001.
On the date immediately preceding the offer becoming conditional in all respects, a proportion of the Ordinary and A Ordinary Shares were converted into Deferred shares. The number of A Ordinary and Ordinary shares converting into Deferred shares resulted (on a fully diluted basis) in the holders of Preferred Ordinary shares receiving their Investor Return, as defined in the Company’s Articles of Association. Deferred shares were liable for compulsory acquisition by the Company at their fair value forthwith after the offer was declared unconditional in all respects. Deferred shares carry no right to vote and no right to any distribution of profit. They are therefore considered to be of limited value.
On October 15, 2006, the Company sold the remaining treasury shares for $704,053 which had a cost basis of $622,000. The proceeds reclassed in excess of the cost of treasury shares of $82,053 was recorded within additional paid-in capital.
Note 6. Share Options
The Company had three separate share option plans that had similar terms. The Company purchased 14,016,667 shares of treasury shares reserved for share options and can also issue up to 5% of issued share capital (Preferred Ordinary Shares, Ordinary Shares and A Ordinary Shares) in share options. In respect of the plans an option holder could exercise all or any of his options, subject to meeting any performance conditions that may apply, in whole or in part only on or after: (1) the making of an application for a public listing (as defined in the rules of the plan) (2) the receipt of a notice from the directors that negotiations for a disposal (as defined in the rules of the plans) are proceeding and (3) the receipt of a notice from the Directors that negotiations are proceeding which may give rise to a person becoming an acquiring group or an acquiring person (as defined in the rules of the plans).
Certain options granted were subject to the achievement of certain performance targets. These targets related to revenue and sales growth in respective years. All these performance targets were achieved in relation to each year.
F-62
GTT — EMEA Limited and Subsidiaries
(formerly European Telecommunications & Technology Limited)
Notes to consolidated financial statements — (Continued)
Share options at October 15, 2006, and December 31, 2005 and 2004 are as follows:
| | | | | | | | | | | | |
| | | | Weighted Average
| | Weighted Average
|
| | Number of Shares | | Exercise Price | | Exercise Price |
| | | | ($’s) | | (£’s) |
|
Outstanding at January 1 2004 | | | 13,615,000 | | | $ | 0.226 | | | £ | 0.127 | |
Granted | | | 5,415,000 | | | $ | 0.288 | | | £ | 0.159 | |
Exercised | | | — | | | | — | | | | — | |
Forfeited | | | (4,360,000 | ) | | $ | (0.276 | ) | | £ | (0.148 | ) |
| | | | | | | | | | | | |
Outstanding at December 31 2004 | | | 14,670,000 | | | $ | 0.260 | | | £ | 0.135 | |
Granted | | | 19,556,000 | | | $ | 0.053 | | | £ | 0.030 | |
Exercised | | | — | | | | — | | | | — | |
Cancelled | | | (18,756,000 | ) | | $ | (0.194 | ) | | £ | (0.109 | ) |
Forfeited | | | (1,295,000 | ) | | $ | (0.134 | ) | | £ | (0.073 | ) |
| | | | | | | | | | | | |
Outstanding at December 31 2005 | | | 14,175,000 | | | $ | 0.052 | | | £ | 0.030 | |
Granted | | | — | | | | — | | | | — | |
Exercised | | | (12,365,000 | ) | | $ | (0.056 | ) | | £ | (0.030 | ) |
Cancelled | | | — | | | | — | | | | — | |
Forfeited | | | (1,810,000 | ) | | $ | (0.055 | ) | | £ | (0.030 | ) |
| | | | | | | | | | | | |
Outstanding at October 15 2006 | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
In July 2005, the Company wrote to share option holders stating that it had agreed to re-value all share options granted under the above plans at an exercise price of $0.283 (£0.159). This involved the respective option holders waiving their rights over the old options in return for new options to be granted at an exercise price of $0.053 (£0.03). On August 4, 2005, the Company granted new unapproved share options at the revised value of $0.053 (£0.03) and the old share options were cancelled. The Company determined that the options have the same exercise price as the fair value on the date that they re-priced the options and therefore no compensation expense was required to be recognized on the date of re-pricing.
In December 2005, the Company wrote to certain share option holders stating that it had agreed to re-grant unapproved share options granted in July 2005 (see above) under its Enterprise Management Incentive scheme (EMI) where option holders were eligible under the EMI scheme. The valuation was agreed with the Inland Revenue in December 2005. This involved the respective option holders waiving their rights over the old options in return for new options to be granted at an exercise price of $0.053 (£0.03). On December 19, 2005, the Company granted new EMI share options at the revised value of $0.053 (£0.03) and the old share options were cancelled. The Company determined that the options have the same exercise price as the fair value on the date that they re-priced the options and therefore no compensation expense was required to be recognized on the date of re-pricing.
In June 2006, the Directors advised option holders of the plans regarding the possible acquisition of the Company by Mercator Partners Acquisition Corp. (“MPAC”). Immediately prior to the completion of the acquisition on October 15, 2006, all outstanding options were settled for cash payment of approximately $0.7 million. Accordingly, there were no options that had vested or were exercisable at October 15, 2006 or December 31, 2005. No share option was exercisable later than 10 years from its date of grant. Due to the cancellation and re-granting of the share options the share option plans are accounted for as variable plans. On October 15, 2006, the share options became exercisable when the Company agreed to a disposal of the entity as defined in the plan agreement. The shares became exercisable and the Company recognized a charge of $375,754.
F-63
GTT — EMEA Limited and Subsidiaries
(formerly European Telecommunications & Technology Limited)
Notes to consolidated financial statements — (Continued)
Note 7. Taxation
There are no current income taxes payable, domestic or foreign for the period ended October 15, 2006 and the years ended December 31, 2005 and 2004 due to the losses incurred. The Company’s provision for income taxes differs from the expected tax benefit amount as a result of the valuation allowance recorded against all net deferred tax assets.
The following reconciles income taxes based on the domestic statutory tax rate to the Company’s income tax expense:
| | | | | | | | | | | | |
| | | | Year Ended
| | Year Ended
|
| | January 1, 2006 to
| | December 31,
| | December 31,
|
| | October 15, 2006 | | 2005 | | 2004 |
| | $ | | $ | | $ |
|
Statutory rate | | | (380,444 | ) | | | (69,301 | ) | | | (147,060 | ) |
Non-deductible differences | | | 55,985 | | | | 105,808 | | | | 99,113 | |
Foreign and other tax affects | | | (92,840 | ) | | | (38,082 | ) | | | 189,674 | |
Change in valuation allowance | | | 417,299 | | | | 1,575 | | | | (141,727 | ) |
| | | | | | | | | | | | |
| | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Deferred tax assets consisting primarily of the carryforward of net operating losses totaling $6,936,190 at December 31, 2005. The Company has established a valuation allowance against the net deferred tax asset due to the uncertainty of future taxable income, which is necessary to realize the benefits of the deferred tax assets.
Information related to the activity of the valuation allowance for deferred tax assets is as follows:
| | | | | | | | |
| | As at December 31,
| | As at December 31,
|
| | 2005 | | 2004 |
| | $ | | $ |
|
Beginning balance | | | 7,762,494 | | | | 7,304,800 | |
Increase (decrease) in valuation allowance | | | 1,575 | | | | (141,727 | ) |
Foreign currency exchange | | | (827,879 | ) | | | 599,421 | |
| | | | | | | | |
Ending balance | | | 6,936,190 | | | | 7,762,494 | |
| | | | | | | | |
Note 8. Defined contribution plans
The Company made contributions to defined contribution plans of $194,312, $209,643 and $203,590 for the period ended October 15, 2006 and the years ended December 31, 2005 and 2004, which was charged to the accompanying consolidated statements of operations at the time of payment.
F-64
GTT — EMEA Limited and Subsidiaries
(formerly European Telecommunications & Technology Limited)
Notes to consolidated financial statements — (Continued)
Note 9. Segment reporting
The Company has determined it operates under one reportable segment as the chief financial decision maker reviews operating results and makes decisions on a consolidated basis. A summary of the Company’s operations by geographic area follows:
| | | | | | | | | | | | |
| | January 1, 2006 to
| | Year Ended
| | Year Ended
|
| | October 15, 2006 | | December 31, 2005 | | December 31, 2004 |
| | $ | | $ | | $ |
|
Revenue | | | | | | | | | | | | |
UK | | | 17,205,816 | | | | 23,271,310 | | | | 26,009,250 | |
Germany | | | 5,603,184 | | | | 6,431,810 | | | | 5,991,873 | |
Other | | | 3,313,950 | | | | 5,008,519 | | | | 3,074,378 | |
| | | | | | | | | | | | |
| | | 26,122,950 | | | | 34,711,639 | | | | 35,075,501 | |
| | | | | | | | | | | | |
Sales are attributed to countries or region based on the location of the customer.
Note 10. Commitments and contingencies
Leases
The Company has entered into certain non-cancellable operating lease agreements related to office, equipment and vehicles. The lease terms vary from 1 to 5 years and the land and building lease has a 5 year provision for renewal. Total rent expense under operating leases was $663,560, $754,363 and $770,033 for the period ended October 15, 2006 and the years ended December 31, 2005 and 2004. Estimated annual commitments under non-cancellable operating leases are as follows at October 15, 2006:
| | | | | | | | |
| | Land and
| | |
| | Buildings | | Other |
| | $ | | $ |
|
2007 | | | 707,783 | | | | 68,440 | |
2008 | | | 594,453 | | | | 42,328 | |
2009 | | | 448,653 | | | | 19,347 | |
2010 | | | 366,470 | | | | — | |
2011 | | | 362,776 | | | | — | |
Thereafter | | | 257,454 | | | | — | |
| | | | | | | | |
| | | 2,737,589 | | | | 130,115 | |
| | | | | | | | |
F-65
GTT — EMEA Limited and Subsidiaries
(formerly European Telecommunications & Technology Limited)
Notes to consolidated financial statements — (Continued)
Supply agreements
In the ordinary course of business, the Company enters into contracts with suppliers to provide telecommunication services typically for a period between 12 and 36 months. These supplier contracts are entered into when the Company has entered into sales contracts with customers. The key terms and conditions of the supplier and customer contracts are substantially the same. As at October 15, 2006, the Company has commitments of $16,658,306 (2005: $17,124,036) in respect of such agreements and the Company has in excess of this value as contractual commitments from its customers over matching periods.
Legal proceedings
The Company is subject to legal proceedings arising in the ordinary course of business. In the opinion of management, the ultimate disposition of those matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity. No material reserves have been established for any pending legal proceeding, either because a loss is not probable or the amount of a loss, if any, cannot be reasonably estimated.
Note 11. Concentrations
Significant concentrations are as follows:
| | | | | | | | | | | | |
| | January 1, 2006 to
| | Year Ended
| | Year Ended
|
| | October 15, 2006 | | December 31, 2005 | | December 31, 2004 |
|
Revenue | | | | | | | | | | | | |
Customer A | | | 26.14 | % | | | 24.62 | % | | | 34.05 | % |
Customer B | | | 15.98 | % | | | 20.94 | % | | | 21.11 | % |
Customer C | | | 15.33 | % | | | * | | | | * | |
Customer D | | | 10.93 | % | | | * | | | | * | |
Costs of revenue | | | | | | | | | | | | |
Vendor A | | | 13.62 | % | | | 14.62 | % | | | 12.32 | % |
Vendor B | | | * | | | | * | | | | 10.35 | % |
| | | | | | | | | | | | |
Accounts receivable | | | | | | | | | | | | |
| | | | | | | As at | | | | As at | |
| | | | | | | December 31, | | | | December 31, | |
| | | | | | | 2005 | | | | 2004 | |
Customer A | | | | | | | 27.07 | % | | | 53.13 | % |
Approximately 51% of revenue is currently generated by managed and IP services (in contrast to pure connectivity), under contracts having terms ranging from 12 to 42 months. These contracts are mainly with large multi-national companies. The most significant operating expense is the cost of contracting for the leasing of bandwidth and other services from suppliers. The Company’s contracts with suppliers generally have terms ranging from 12 to 36 months. The Company is subject to risks and uncertainties common to rapidly growing technology-based companies, including rapid technology change, actions of competitors, dependence on key personnel and availability of sufficient capital.
F-66
GTT — EMEA Limited and Subsidiaries
(formerly European Telecommunications & Technology Limited)
Notes to consolidated financial statements — (Continued)
Note 12. Subsequent Events
On October 15, 2006, the Company’s outstanding voting stock was acquired by MPAC, a company registered in the United States. This was subsequent to an offer, which was sent to the Company’s shareholders on June 13, 2006. On the date immediately preceding the offer becoming conditional in all respects, a proportion of the Ordinary and A Ordinary Shares were converted into Deferred shares. The number of A Ordinary and Ordinary shares converting into Deferred shares resulted (on a fully diluted basis) in the holders of Preferred Ordinary shares receiving their Investor Return, as defined in the Company’s Articles of Association. Deferred shares were liable for compulsory acquisition by the Company at their fair value forthwith after the offer was declared unconditional in all respects. Deferred shares carry no right to vote and no right to any distribution of profit. They are therefore considered to be of limited value.
MPAC changed it name to Global Telecom & Technology, Inc. following consummation of the acquisition. On December 8, 2006, the Company changed its name from European Telecommunications & Technology Limited to GTT — EMEA Limited.
F-67
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Global Internetworking, Inc.
We have audited the accompanying consolidated balance sheet of Global Internetworking, Inc. and Subsidiaries as of September 30, 2006, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the year then ended and for the period from October 1, 2006 to October 15, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 Global Internetworking, Inc. and Subsidiaries as of September 30, 2006, and their results of operations and cash flows for the year then ended and the period from October 1, 2006 to October 15, 2006, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1, the Company changed its method of accounting for stock-based compensation upon adoption of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”.
Jericho, New York
April 16, 2007
F-68
Independent Auditors’ Report
To the Board of Directors and Shareholders,
Global Internetworking, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Global Internetworking, Inc. as of September 30, 2005 and 2004 and the related consolidated statements of operations, cash flows, shareholders’ equity and other comprehensive income (loss) for each of the two years in the period ended September 30, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted accounting standards. 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 consolidated 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Global Internetworking, Inc. at September 30, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the two years in the period ended September 30, 2005, in conformity with U.S. generally accepted accounting principles.
/s/ Schwartz, Weissman & Co. P.C.
Fairfax, Virginia
September 27, 2006
F-69
Global Internetworking, Inc. and Subsidiaries
September 30, 2006 and 2005
| | | | | | | | |
| | September 30,
| | | September 30,
| |
| | 2006 | | | 2005 | |
|
ASSETS |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 616,828 | | | $ | 141,900 | |
Certificates of deposit, unrestricted | | | 409,745 | | | | 479,120 | |
Certificates of deposit, restricted | | | 138,000 | | | | — | |
Accounts receivable, net | | | 1,012,485 | | | | 1,353,966 | |
Income tax refunds receivable | | | 327,504 | | | | 371,515 | |
Deferred contract costs | | | 209,095 | | | | 200,063 | |
Prepaid expenses and other current assets | | | 646,127 | | | | 455,924 | |
| | | | | | | | |
Total current assets | | | 3,359,784 | | | | 3,002,488 | |
Property and equipment, net | | | 459,183 | | | | 422,045 | |
Other assets | | | 396,029 | | | | 546,748 | |
| | | | | | | | |
Total assets | | $ | 4,214,996 | | | $ | 3,971,281 | |
| | | | | | | | |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 865,357 | | | $ | 476,743 | |
Unearned and deferred revenue | | | 1,910,432 | | | | 1,631,468 | |
Regulatory and sales taxes payable | | | 283,673 | | | | 317,425 | |
Other accrued expenses | | | 1,036,517 | | | | 1,172,856 | |
| | | | | | | | |
Total current liabilities | | | 4,095,979 | | | | 3,598,492 | |
Deferrals and other accrued liabilities | | | 187,874 | | | | 90,665 | |
| | | | | | | | |
Total liabilities | | | 4,283,853 | | | | 3,689,157 | |
| | | | | | | | |
Commitments and contingencies | | | | | | | | |
Shareholders’ equity (deficit): | | | | | | | | |
Common stock: | | | | | | | | |
Class A, $.01 par value; 9,000,000 shares authorized, 2,500,000 shares issued and outstanding | | | 25,000 | | | | 25,000 | |
Class B, $.01 par value; 1,000,000 shares authorized, no shares issued or outstanding | | | — | | | | — | |
Additional paid-in capital | | | 279,461 | | | | 279,461 | |
Accumulated deficit | | | (373,318 | ) | | | (22,337 | ) |
| | | | | | | | |
Total shareholders’ equity (deficit) | | | (68,857 | ) | | | 282,124 | |
| | | | | | | | |
Total liabilities and shareholders’ equity (deficit) | | $ | 4,214,996 | | | $ | 3,971,281 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-70
Global Internetworking, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Period From October 1, 2006 to October 15, 2006
and For the Years Ended September 30, 2006, 2005 and 2004
| | | | | | | | | | | | | | | | |
| | For the Period from
| | | Year Ended September 30, | |
| | October 1 - 15, 2006 | | | 2006 | | | 2005 | | | 2004 | |
|
Revenues: | | | | | | | | | | | | | | | | |
Telecommunications services sold | | $ | 825,082 | | | $ | 17,960,062 | | | $ | 14,167,849 | | | $ | 9,263,497 | |
Operating expenses: | | | | | | | | | | | | | | | | |
Cost of telecommunications services provided | | | 545,648 | | | | 12,821,008 | | | | 9,424,964 | | | | 6,062,912 | |
Selling, general and administrative expenses | | | 209,050 | | | | 5,463,521 | | | | 5,335,053 | | | | 3,571,549 | |
Depreciation and amortization | | | 4,751 | | | | 47,464 | | | | 109,135 | | | | 58,224 | |
| | | | | | | | | | | | | | | | |
Operating income (loss) | | | 65,633 | | | | (371,931 | ) | | | (701,303 | ) | | | (429,188 | ) |
| | | | | | | | | | | | | | | | |
Other income: | | | | | | | | | | | | | | | | |
Interest income, net of expense | | | 1,113 | | | | 36,542 | | | | 32,008 | | | | 23,273 | |
Other income, net of expense | | | (31,744 | ) | | | 28,419 | | | | 19,142 | | | | 16,029 | |
| | | | | | | | | | | | | | | | |
Total other income (expense) | | | (30,631 | ) | | | 64,961 | | | | 51,150 | | | | 39,302 | |
| | | | | | | | | | | | | | | | |
Income (loss) before provision (benefit) for income taxes | | | 35,002 | | | | (306,970 | ) | | | (650,153 | ) | | | (389,886 | ) |
Provision (benefit) for income taxes | | | — | | | | 44,011 | | | | (205,189 | ) | | | (166,326 | ) |
| | | | | | | | | | | | | | | | |
Net (loss) income | | $ | 35,002 | | | $ | (350,981 | ) | | $ | (444,964 | ) | | $ | (223,560 | ) |
| | | | | | | | | | | | | | | | |
Earnings (loss) per share calculation: | | | | | | | | | | | | | | | | |
Net (loss) income per share | | | | | | | | | | | | | | | | |
Basic | | $ | 0.01 | | | $ | (0.14 | ) | | $ | (0.18 | ) | | $ | (0.09 | ) |
| | | | | | | | | | | | | | | | |
Diluted | | $ | 0.01 | | | $ | (0.14 | ) | | $ | (0.18 | ) | | $ | (0.09 | ) |
| | | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | | | | | | | | | | | | | | |
Basic | | | 2,500,000 | | | | 2,500,000 | | | | 2,500,000 | | | | 2,500,000 | |
| | | | | | | | | | | | | | | | |
Diluted | | | 2,500,000 | | | | 2,500,000 | | | | 2,500,000 | | | | 2,500,000 | |
| | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-71
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Retained
| | | | |
| | Common Stock
| | | Common Stock
| | | Additional
| | | Stock
| | | Earnings
| | | | |
| | Class A | | | Class B | | | Paid-In
| | | Subscription
| | | (Accumulated
| | | | |
| | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Receivable | | | Deficit) | | | Total | |
|
Balance, October 1, 2003 | | | 2,500,000 | | | $ | 25,000 | | | | 1,000,000 | | | $ | — | | | $ | 279,461 | | | $ | (500 | ) | | $ | 646,187 | | | $ | 950,148 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (223,560 | ) | | | (223,560 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, September 30, 2004 | | | 2,500,000 | | | | 25,000 | | | | 1,000,000 | | | | — | | | | 279,461 | | | | (500 | ) | | | 422,627 | | | | 726,588 | |
Stock subscription paid | | | — | | | | — | | | | — | | | | — | | | | — | | | | 500 | | | | — | | | | 500 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (444,964 | ) | | | (444,964 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, September 30, 2005 | | | 2,500,000 | | | | 25,000 | | | | 1,000,000 | | | | — | | | | 279,461 | | | | — | | | | (22,337 | ) | | | 282,124 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (350,981 | ) | | | (350,981 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, September 30, 2006 | | | 2,500,000 | | | | 25,000 | | | | 1,000,000 | | | | — | | | | 279,461 | | | | — | | | | (373,318 | ) | | | (68,857 | ) |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 35,002 | | | | 35,002 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, October 15, 2006 | | | 2,500,000 | | | $ | 25,000 | | | | 1,000,000 | | | $ | — | | | $ | 279,461 | | | $ | — | | | $ | (338,316 | ) | | $ | (33,855 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-72
Global Internetworking, Inc. and Subsidiaries.
Consolidated Statements of Cash Flows
For the Period From October 1, 2006 to October 15, 2006
and For the Years Ended September 30, 2006, 2005 and 2004
| | | | | | | | | | | | | | | | |
| | For the Period From
| | | Year Ended September 30, | |
| | October 1 - 15, 2006 | | | 2006 | | | 2005 | | | 2004 | |
|
Cash flows from operating activities: | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 35,002 | | | $ | (350,981 | ) | | $ | (444,964 | ) | | $ | (223,560 | ) |
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 4,751 | | | | 47,464 | | | | 109,135 | | | | 58,224 | |
Provision for bad debt | | | — | | | | — | | | | — | | | | 34,482 | |
Gain on sale of property and equipment | | | — | | | | — | | | | 3,692 | | | | — | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | |
Accounts receivable, net | | | (1,109,689 | ) | | | 341,482 | | | | (696,221 | ) | | | (266,491 | ) |
Income tax refunds receivable | | | — | | | | 44,011 | | | | (205,189 | ) | | | (166,326 | ) |
Deferred contract cost | | | — | | | | (9,032 | ) | | | (54,753 | ) | | | (145,310 | ) |
Prepaid expenses and other current assets | | | 234,358 | | | | (190,203 | ) | | | (94,718 | ) | | | (148,375 | ) |
Deferred contract costs and other assets | | | — | | | | (1,063 | ) | | | — | | | | — | |
Other assets | | | — | | | | — | | | | (161,880 | ) | | | (384,869 | ) |
Accounts payable | | | 392,046 | | | | 388,614 | | | | 264,765 | | | | 106,225 | |
Accrued carrier expenses | | | — | | | | — | | | | 469,580 | | | | (165,616 | ) |
Accrued compensation | | | — | | | | — | | | | (55,510 | ) | | | 155,802 | |
Unearned and deferred revenue | | | 755,500 | | | | 278,964 | | | | 478,354 | | | | (12,017 | ) |
Regulatory and sales taxes payable | | | 58,111 | | | | (33,752 | ) | | | 176,441 | | | | (24,001 | ) |
Long-term deferrals | | | 580 | | | | 97,209 | | | | — | | | | 210,827 | |
Other accrued expenses | | | (479,510 | ) | | | (136,339 | ) | | | (61,082 | ) | | | 75,258 | |
Income taxes payable | | | — | | | | — | | | | — | | | | (18,602 | ) |
| | | | | | | | | | | | | | | | |
Net cash (used in) provided by operating activities | | | (108,851 | ) | | | 476,374 | | | | (272,350 | ) | | | (914,349 | ) |
| | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Purchases of property and equipment | | | (5,132 | ) | | | (84,605 | ) | | | (413,348 | ) | | | (81,105 | ) |
Loans repaid — Shareholder | | | — | | | | — | | | | 39,508 | | | | — | |
(Purchases) redemptions of certificates of deposit | | | (114,904 | ) | | | 83,159 | | | | (11,043 | ) | | | 815,204 | |
Purchase of certificate of deposit backing letter of credit | | | — | | | | — | | | | — | | | | (268,000 | ) |
| | | | | | | | | | | | | | | | |
Net cash (used in) provided by investing activities | | | (120,036 | ) | | | (1,446 | ) | | | (384,883 | ) | | | 466,099 | |
| | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Payment received for stock subscription | | | — | | | | — | | | | 500 | | | | — | |
| | | | | | | | | | | | | | | | |
Net cash provided by financing activities | | | — | | | | — | | | | 500 | | | | — | |
| | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (228,887 | ) | | | 474,928 | | | | (656,733 | ) | | | (448,250 | ) |
Cash and cash equivalents, beginning of period | | | 616,828 | | | | 141,900 | | | | 798,633 | | | | 1,246,883 | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 387,941 | | | $ | 616,828 | | | $ | 141,900 | | | $ | 798,633 | |
| | | | | | | | | | | | | | | | |
Supplementary cash flow information: | | | | | | | | | | | | | | | | |
Interest paid | | | — | | | | — | | | | — | | | $ | 1,748 | |
| | | | | | | | | | | | | | | | |
Income taxes paid | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-73
Global Internetworking, Inc. and Subsidiaries
Note 1 — Organization, Basis of Presentation and Summary of Significant Accounting Policies
The Company
Founded in 1998, Global Internetworking, Inc. (“GII” or the “Company”) is a knowledge-based, facilities-neutral, high capacity communications network solutions provider for carriers, service providers, systems integrators, government agencies and communications-intensive enterprise customers. The Company’s fiscal year end is September 30th.
Within the wholesale telecom market, the Company helps customers obtain diverse, cost-effective,off-net connectivity, throughout the United States and to over 40 overseas markets. Within the enterprise and government sectors, the Company specializes in providing diverse, high-capacity solutions for wide area network applications. The Company offers a turn-key,single-point-of-contact approach which allows customers to achieve optimalend-to-end solutions without having to find, manage and interconnect multiple local and long-haul telecom carriers.
On October 15, 2006, the Company was acquired in a stock purchase transaction. See Note 13 below for further discussion with respect to this acquisition.
Basis of Presentation
The Company has three wholly-owned subsidiaries:
| | |
| • | Global Internetworking, LLC |
|
| • | Global Internetworking Government Services, LLC |
|
| • | Global Internetworking of Virginia, Inc. |
These subsidiaries were formed to provide the same products and services provided by the Company but in separate entities for marketing, legal and regulatory purposes. The subsidiaries adhere to the accounting policies of the Company. None of the subsidiaries purchased assets, incurred liabilities, earned revenue or incurred expenses in the fiscal years ended September 30, 2005, and 2004. Beginning in the fiscal year ended September 30, 2006, the subsidiaries commenced operations. Intercompany balances and transactions have been eliminated in consolidation.
Summary of Significant Accounting Policies
Revenue Recognition
GII provides data connectivity solutions (i.e., dedicated circuit access, access aggregation, and hubbing), managed network services, and professional services to its customers. It recognizes revenue in connection with each service as follows:
Data Connectivity: Data connectivity services are provided pursuant to service contracts that typically provide for payments of recurring charges on a monthly basis for use of the services over a committed term.
| | |
| • | Recurring Revenue: Recurring charges for data connectivity are generally billed pursuant to fixed price contracts one month in advance and are recorded as unearned revenue when billed. This unearned revenue is recognized monthly for as long as such service is provided and collectibility is reasonably assured, in accordance with SEC Staff Accounting Bulletin No. 104. Pursuant to the service contracts, service is first considered provided upon the issuance of a start of service notice. |
|
| • | Non-recurring Fees. Non-recurring fees for data connectivity typically take the form of one-time, non-refundable provisioning fees established pursuant to service contracts. The amount of the provisioning fee included in each contract is generally determined by marking up or passing through the corresponding charge from GII’s supplier imposed pursuant to GII’s purchase agreement. Starting with the fiscal year |
F-74
Global Internetworking, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| | |
| | ended September 30, 2004, non-recurring revenues related to provisioning in connection with the delivery of recurring communications services are recognized ratably over the term of service starting upon commencement of the service contract term. Installation costs related to provisioning that are incurred by GII from independent third party suppliers, that are 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 capitalized as deferred contract costs and expensed proportionally over the term of service in the same manner as the deferred revenue arising from that contract. |
| | |
| • | Other Revenue: From time to time, GII recognizes revenue in the form of fixed or determinable cancellation (pre-installation) or termination (post-installation) charges imposed pursuant to the service contract. These revenues are earned when a customer cancels or terminates a service agreement prior to the end of its committed term. These revenues are recognized when billed if collectibility is reasonably assured. In addition, GII occasionally sells equipment in connection with data networking applications. GII recognizes revenue from the sale of equipment at the contracted selling price when title to the equipment passes to the customer (generally F.O.B. origin) and when collectibility is reasonably assured. |
Managed Network Services: Because the same general contract terms apply to these services and because the services are typically billed in the same manner, GII recognizes revenue for managed network services in the same manner as it does for data connectivity.
Professional Services: Fees for professional services are typically specified as applying on a fee per hour basis pursuant to agreements with customers and are computed based on the hours of service provided by GII. Invoices for professional services performed on an hourly basis are rendered in the month following that in which the professional services have been performed. Because such invoices for hourly fees are for services that have already been performed by GII and because such work is undertaken pursuant to an executed statement of work with the customer that specifies the applicable hourly rate, GII recognizes revenues based upon hourly fees as billed if collectibility is reasonably assured. Less than 1% of GII’s revenues for the fiscal year ended September 30, 2006 were attributable to professional services provided to customers and such revenues were not material to any prior periods.
In certain circumstances, GII engages in professional services projects pursuant to master agreements and statements of work for each project. Fees from the performance of projects by GII are specified in each executed statement of work by reference to certainagreed-upon and defined milestonesand/or the project as a whole. Invoices for professional services projects are rendered pursuant to the payment plans that are specified in the executed statement of work with the customer.
Recognition of revenue is determined independently of issuance of the invoice to the customer or receipt of payment from the customer. Instead, revenue is recognized based upon the degree of delivery, performance and completion of such professional services projects as stated expressly in the contractual statement of work. The performance, completion and delivery of obligations on projects are determinable by GII based upon the underlying contract or statement of work terms, particularly by reference to any customer acceptance provisions or other performance criteria that may be defined in the contract or statement of work. Furthermore, even if a project has been performed, completed and delivered in accordance with all applicable contractual requirements and an invoice has been issued consistent with those contractual requirements, professional services revenues are not recognized unless collectibility is reasonably assured (assuming payment has not already been made).
In cases where a project is billed on a milestone or other partial basis, revenue is allocated for recognition purposes based upon the fair market value of the individual milestone or deliverable. For this purpose, fair market value is determined by reference to factors such as how GII would price the particular deliverable on a standalone basisand/or what competitors may charge for a similar standalone product. Where GII is unable for whatever reason to make an objective determination of fair market value of a deliverable by reference to such factors, the amount paid will only be recognized upon performance, completion and delivery of the project as a whole.
F-75
Global Internetworking, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Each service contract for data connectivity and managed services has a fixed monthly cost and a fixed term, in addition to a fixed installation charge (if applicable). At the end of the initial term of most service contracts for data connectivity and managed services, the contracts roll forward on amonth-to-month basis and continue to bill at the same fixed recurring rate. If any cancellation or termination charges become due from the customer as a result of early cancellation or termination of a service contract, those amounts are calculated pursuant to a formula specified in each contract. With respect to professional services, each service contract has a specified project scope and terms for payments on either an hourly basis or on a project milestone basis.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and money market funds.
Fair Value of Financial Instruments
The carrying values of current assets and liabilities approximated their fair values at the respective balance sheet dates.
Accounts Receivable
Accounts receivable balances are stated at amounts due from the customer net of an allowance for doubtful accounts. For the years ending September 30, 2006 and 2005, the Company reported $55,599 and $23,034, respectively, as allowance for doubtful accounts. These estimates are based upon management’s assessment of the Company’s ability to collect its outstanding accounts receivable. The Company, pursuant to its standard service contracts, is entitled to impose a finance charge of 1.5% per month with respect to all amounts that are past due. The Company’s standard terms require payment within 30 days of the date of the invoice. The Company treats invoices as past due when they remain unpaid, in whole or in part, beyond the payment time set forth in the applicable service contract. At such time as an invoice becomes past due the Company applies the finance charge as stated in the applicable service contract.
The Company utilizes the allowance method of accruing for bad debt expense. The Company accrues for bad debt expense at a rate of 0.55% of billed revenue on a monthly basis; this percentage is based upon management’s historical experiences with respect to bad debt. Actual bad debts, when determined, reduce the allowance, the adequacy of which management then reassesses. The Company writes off accounts after a determination by management that the amounts at issue are no longer likely to be collected, following the exercise of reasonable collection efforts and upon management’s determination that the costs of pursuing collection outweigh the likelihood of recovery.
Information related to the activity of the allowance for doubtful accounts is as follows:
| | | | | | | | |
| | 2006 | | | 2005 | |
|
Allowance for Uncollectible Accounts-Beginning | | $ | (23,034 | ) | | $ | (73,074 | ) |
Provision for bad debt | | | (77,990 | ) | | | (78,635 | ) |
Reversals | | | — | | | | — | |
Specific charges against allowance | | | 45,425 | | | | 128,675 | |
| | | | | | | | |
Allowance for Uncollectible Accounts-Ending | | $ | (55,599 | ) | | $ | (23,034 | ) |
| | | | | | | | |
Property and Equipment, Software Capitalization
Property and equipment are stated at cost, net of accumulated depreciation computed using the straight-line method. Depreciation on these assets was computed over the estimated useful lives of the assets ranging from three
F-76
Global Internetworking, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
to seven years. Leasehold improvements are amortized over the life of the lease, 10 years, excluding optional extensions.
The Company purchases software for internal use. The Company accounts for these costs, including employee compensation and related costs, in accordance with AICPASOP 98-1,Accounting for Costs of Computer Software Developed or Obtained for Internal Use. Software costs are amortized on a straight-line basis over a three year period.
Depreciable lives used by the Company for its classes of asset are as follows:
| | | | |
Furniture and Fixtures | | | 7 years | |
Leasehold Improvements | | | 10 years | |
Computer Software | | | 3 years | |
Computer Hardware, Office and telephone equipment | | | 3-7 years | |
Gains or losses on disposition of property and equipment are recognized currently in the consolidated statement of operations with the related cost and accumulated depreciation removed from the consolidated balance sheet. Repairs and maintenance, which do not significantly extend the life of the related assets, are expensed as incurred.
Total depreciation and amortization expense was $4,751, $47,464, $109,135 and $58,224 for the period from October 1, 2006 to October 15, 2006 and the years ended September 30, 2006, 2005 and 2004, respectively.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, primarily property, equipment and security deposits, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company estimates, where applicable, the future cash flows expected from the asset. If the sum of the expected undiscounted cash flows is less than the carrying amount of the long-lived asset, the Company recognizes an impairment loss by reducing the depreciated or amortized cost of the long-lived asset to its estimated fair value.
Accrued Carrier Expenses
The Company accrues for 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. 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 accrued costs of revenue category on the Company’s 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 monthly, and reconciles the estimates with actual results quarterly as the liabilities are paid, as disputes are resolved, or as the appropriate statute of limitations with respect to a given dispute expires.
As of September 30, 2006 and 2005, open disputes totaled $344,949 and $1,006,460, respectively. As of September 30, 2006 and 2005, based upon its experience with each vendor and similar disputes in the past, and based upon its individual 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 $75,740 and $138,367, respectively, in connection with these disputes, for which accruals were recorded.
F-77
Global Internetworking, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The summary below reflects the reserve account balances and activity in the accounts for each of the periods indicated:
| | | | | | | | | | | | | | | | | | | | |
| | Beginning
| | Charges
| | Reserves for
| | Ending
| | Unresolved Vendor
|
| | Reserve
| | Against
| | New Vendor
| | Reserve
| | Billing Errors at
|
Fiscal Year | | Balance | | Reserve | | Billing Errors | | Balance | | End of Period |
|
2005 | | $ | 95,823 | | | $ | (51,691 | ) | | $ | 94,235 | | | $ | 138,367 | | | $ | 1,006,460 | |
2006 | | | 138,367 | | | | (144,677 | ) | | | 82,050 | | | | 75,740 | | | | 344,949 | |
Net Income (Loss) Per Share
Basic Net Income (Loss) per share is computed using the weighted average number of shares of Class A and Class B common stock outstanding during the period. Diluted income (loss) per share does not differ from basic loss per share since the potential dilutive effect of common shares issuable from the exercise of stock options are anti-dilutive for all periods presented.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Stock-Based Compensation
At September 30, 2006, the Company has a stock-based employee compensation plan, which is more fully described in Note 10. The Company accounts for stock-based employee compensation arrangements in accordance with the recognition and measurement provisions of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees(“APB 25”). Under APB 25, compensation expense is based on the difference, if any, between the fair value of the Company’s stock at the grant date and the exercise price of the option. No compensation expense has been reflected for options issued to employees or directors as these options were granted at exercise prices no less than the fair market value of the Company’s stock at the date of the grant. As permitted, the Company elected not to adopt the fair value recognition provisions of FASB Statement No. 123,Accounting for Stock-Based Compensation (“SFAS No. 123”). In accordance with the provisions of FASB Statement No. 148,Accounting for Stock-Based Compensation-Transition and Disclosure, the following table illustrates the effect on
F-78
Global Internetworking, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
net income and earnings per share if the fair value method of SFAS No. 123 had been applied to all outstanding and unvested awards in each period.
| | | | | | | | | | | | |
| | Fiscal Year Ended September 30 | |
| | 2006 | | | 2005 | | | 2004 | |
|
Net loss as reported | | $ | (350,981 | ) | | $ | (444,964 | ) | | $ | (223,560 | ) |
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects | | | (37,944 | ) | | | (60,679 | ) | | | (36,352 | ) |
| | | | | | | | | | | | |
Proforma net (loss) | | $ | (388,925 | ) | | $ | (505,643 | ) | | $ | (259,912 | ) |
| | | | | | | | | | | | |
(Loss) per share: basic and diluted as reported | | $ | (0.14 | ) | | $ | (0.18 | ) | | $ | (0.09 | ) |
| | | | | | | | | | | | |
(Loss) per share: basic and diluted, proforma | | $ | (0.16 | ) | | $ | (0.20 | ) | | $ | (0.10 | ) |
| | | | | | | | | | | | |
Volatility | | | — | % | | | .01 | % | | | .01 | % |
Dividend yield | | | — | % | | | 0 | % | | | 0 | % |
Risk-free interest rate | | | — | % | | | 4.85 | % | | | 4.88 | % |
Expected life in years | | | — | | | | 10 | | | | 10 | |
As permitted for privately held companies, the Company uses the minimum value method to estimate volatility for all employee and director options. The Company adopted SFAS No. 123(R) effective October 1, 2006. At September 30, 2006, as part of the purchase price in connection with its acquisition by MPAC, the Company entered into agreements with the individual option holders under which all of the rights existing under the outstanding options, both vested and unvested but not forfeited as of September 30, 2006, would be settled in connection with the purchase by MPAC, in exchange for cash payments to the option holders totaling approximately $987,000.
Recent Accounting Pronouncements
During December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), “Share Based Payment” (“SFAS No. 123R”), which requires all share based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the consolidated financial statements based on their fair value. As amended by SEC Staff Accounting Bulletin No. 107 (“SAB 107”), in March, 2005, SFAS No. 123R is effective for annual periods beginning after December 15, 2005, and includes two transition methods. Upon adoption, the Company is required to use either the modified prospective or the modified retrospective transition method. Under the modified retrospective approach, the previously reported amounts are restated for all periods presented to reflect the SFAS No. 123 amounts on the income statement. Under the modified prospective method, awards granted, modified or settled after the adoption date should be measured and accounted for in accordance with SFAS No. 123R. Unvested equity-classified awards that were granted prior to the effective date should continue to be accounted for in accordance with SFAS No. 123 except that amounts must be recognized in the income statement. The Company adopted SFAS No. 123R on October 1, 2006, the beginning of its fiscal year, and will utilize the modified prospective application transition alternative.
In May 2006, the FASB issued SFAS No. 156,“Accounting for Servicing of Financial Assets: an amendment of FASB Statement No. 140”(“SFAS No. 156”). SFAS No. 156 requires that all separately recognized servicing assets and liabilities be initially measured at fair value, if practicable. SFAS No. 156 also permits an entity to choose to subsequently measure each class of recognized servicing assets or servicing liabilities using either the amortization method specified in SFAS No. 140 or the fair value measurement method. The adoption of SFAS No. 156 is not expected to have a material impact on the Company’s consolidated financial statements.
F-79
Global Internetworking, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
In June 2006, the FASB issued Interpretation No. 48,“Accounting For Uncertainty in Income Taxes”(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109,“Accounting For Income Taxes”and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 will be effective for the Company beginning January 1, 2007. The Company is evaluating the effect FIN 48 will have on its consolidated financial statements and related disclosures.
In September 2006, the FASB issued FASB Statement No. 157,“Fair Value Measurements”(“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. The Company will evaluate the potential impact, if any, of the adoption of SFAS No. 157 on its consolidated financial position, results of operations and cash flows.
In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Upon adoption of SFAS No. 159, an entity may elect the fair value option for eligible items that exist at the adoption date. Subsequent to the initial adoption, the election of the fair value option should only be made at initial recognition of the asset or liability or upon a remeasurement event that gives rise to new-basis accounting. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value nor does it eliminate disclosure requirements included in other accounting standards. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and may be adopted earlier but only if the adoption is in the first quarter of the fiscal year.
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the Company’s consolidated financial statements.
Note 2 — Certificates of Deposit
At September 30, 2006 and 2005, the Company had three current certificates of deposits totaling $547,745 and $479,120. At September 30, 2006 and September 30, 2005, the Company had $130,000 and $281,784 in certificates of deposit, respectively, that did not mature currently and was included in other assets. All certificates of deposit included in current assets either mature within 12 months of the date of these statements, or and have a non-penalty withdrawal feature, or both.
Note 3 — Property and Equipment
Property and equipment consists of the following at September 30, 2006 and 2005
| | | | | | | | |
| | Fiscal 2006 | | | Fiscal 2005 | |
|
Furniture and fixtures | | $ | 139,461 | | | $ | 134,048 | |
Computer hardware and software | | | 248,878 | | | | 218,611 | |
Telecommunications equipment | | | 268,350 | | | | 223,270 | |
Leasehold improvements | | | 113,703 | | | | 109,958 | |
| | | | | | | | |
Property and equipment, gross | | | 770,392 | | | | 685,887 | |
Less Accumulated depreciation | | | (311,209 | ) | | | (263,842 | ) |
| | | | | | | | |
Property and equipment, net | | $ | 459,183 | | | $ | 422,045 | |
| | | | | | | | |
F-80
Global Internetworking, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Note 4 — Other Assets
Other assets at September 30, 2006 and 2005 include the following:
| | | | | | | | |
| | Fiscal 2006 | | | Fiscal 2005 | |
|
Restricted certificates of deposit securing facilities lease (see Notes 2 and 9) | | $ | 130,000 | | | $ | 281,784 | |
Security deposits placed with vendors | | | 73,616 | | | | 73,616 | |
Receivable from vendor net of allowance | | | — | | | | 120,396 | |
Long-term deferred contract costs | | | 17,551 | | | | 70,952 | |
Organization costs | | | 174,862 | | | | — | |
| | | | | | | | |
Total Other Assets | | $ | 396,029 | | | $ | 546,748 | |
| | | | | | | | |
Note 5 — Related Party Transactions
During the year ended September 30, 2005, the Company rented storage space on amonth-to-month basis from a shareholder at a rate approximating market rental rates for similar space. Related party expense for the year ended September 30, 2005, was $3,600. This rental terminated in February 2005 and there were no related party transactions in the year ended September 30, 2006.
Note 6 — Income Taxes
The Company reports its income taxes in accordance with SFAS No. 109. Under this method, a deferred tax asset or liability is recognized based on the difference between the financial statement and income tax basis of accounting for assets and liabilities, then measured using existing income tax rates. At September 30, 2006, the deferred tax asset was comprised principally of net operating loss (NOL) carryforwards and differences in depreciation for book purposes versus tax depreciation, as well as adjustments for deferrals and accruals as described more fully in the table below. At September 30, 2005, the deferred tax asset was comprised principally of net operating loss (NOL) carryforwards and differences in depreciation for book purposes versus tax depreciation.
For the period ended October 15, 2006, the Company earned taxable income totaling $35,002. During the fiscal years ended September 30, 2006, 2005, and 2004, the Company incurred taxable losses of $306,970, $650,153 and $389,886, respectively. The fiscal 2006 NOL creates $122,769 of future tax benefit calculated at a 42.66% combined federal and state tax rate, the 2005 NOL created $277,355 of future tax benefit calculated at a 42.66% combined federal and state tax rate, and the fiscal 2004 NOL created $166,326 of future tax benefit calculated at a 42.66% combined federal and state tax rate.
Under current tax law, tax NOLs must be carried back for two years before being carried forward. In the event of a change in ownership of the Company, these income tax benefits are subjected to limitations described in Internal Revenue Code Section 382 (b)(1), which require the Company to limit thepost-change-in-control carryforwards to an amount not to exceed the value of the Company immediately before the change of control, multiplied by the Federal long-term tax-exempt rate.
The entire $287,785 tax loss in fiscal 2006 will be carried forward through, if not utilized prior to, 2021 net of the deferred tax liability arising from book/tax depreciation and other timing differences referred to in the chart below. $480,987 of the Company’s tax loss in fiscal 2005 was offset by taxable income from the fiscal year ended September 30, 2003, and $169,166 will be offset by future income, net of the deferred tax liability arising from book/tax depreciation differences. The Company’s NOL in fiscal 2004 was fully offset by taxable income from the fiscal year ended September 30, 2002. This NOL gives rise to income tax refunds receivable of $205,189 arising from the fiscal 2005 loss, and $166,326 arising from the fiscal 2004 loss, totaling $371,515 in tax refunds receivable at September 30, 2005.
F-81
Global Internetworking, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
In order for GII to recognize the tax benefit arising from the fiscal 2006 and 2005 NOL carryforwards, or from other net tax assets resulting from timing differences, management is required to identify objective factors which indicate that GII is more likely than not to achieve near-term future profitability sufficient to absorb the previous losses. The losses incurred over the current and preceding fiscal years were planned and anticipated by management in connection with its strategic plan to accelerate hiring to promote sales growth through additional market penetration and operational capabilities. GII has continued to carefully manage its expenses and its contract and other business risks, and believes that it has made steady progress toward future profitability beginning in fiscal 2007. However, in recognition of the fact that these factors constitute subjective rather than objective evidence of future profitability, GII’s management has elected to recognize a valuation allowance of 100% with respect to the $121,476 and $122,769 future tax benefits at October 15, 2006 and September 30, 2006, and 100% with respect to the $15,471 and $15,601 future tax benefits at October 15, 2006 and September 30, 2006, respectively.
The remaining $17,859 and $17,260 of net tax benefit arising from the October 15, 2006 short period and the fiscal 2006 losses, respectively, are also the subject of a 100% valuation allowance, bringing the net realizable future value of the remaining October 15, 2006 and September 30, 2006 net operating loss carryforward to zero. $72,167 of tax benefit arising from the fiscal 2005 loss, less $9,985 of tax liability arising from the book to tax depreciation difference, is the subject of a $62,182 valuation allowance, bringing the net realizable future value of the remaining fiscal 2005 net operating loss carryforward to zero. Amended tax returns for fiscal 2002 and fiscal 2003 were filed during the fourth calendar quarter of 2006 to claim the refunds from the NOL created in fiscal 2002, 2003 and 2004.
Components of the deferred income tax asset are as follows:
| | | | | | | | | | | | |
| | September 30, | |
| | 2006 | | | 2005 | | | 2004 | |
|
Deferred Tax Asset-Beginning of Year | | $ | — | | | $ | — | | | $ | — | |
Income tax expense from current year operations | | | — | | | | — | | | | — | |
Income tax expense from recalculating prior year refunds | | | 44,011 | | | | — | | | | — | |
Deferred Income Tax Benefit Arising from: | | | | | | | | | | | | |
Net operating loss carryback to 2002 | | | — | | | | — | | | | 17,504 | |
Net operating loss carryforward to 2020 | | | 15,601 | | | | 72,167 | | | | — | |
Net operating loss carryforward to 2021 | | | 122,769 | | | | | | | | | |
Net book tax differences for accruals and deferrals | | | 17,260 | | | | | | | | | |
Deferred Income Tax Liability Arising from: | | | | | | | | | | | | |
Depreciation-book/tax differences of, $62,496, $23,408, and $41,032, respectively | | | (26,661 | ) | | | (9,985 | ) | | | (17,504 | ) |
Deferred tax asset valuation allowance | | | (128,969 | ) | | | (62,182 | ) | | | — | |
| | | | | | | | | | | | |
Deferred Tax Asset-End of Year | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
Income Tax Refunds Due | | | | | | | | | | | | |
Carryback to 2002 | | $ | — | | | $ | — | | | $ | 131,528 | |
Carryback to 2003 | | | | | | | 205,189 | | | | 34,798 | |
Current Year Income Tax Benefit (Provision) | | | (44,011 | ) | | | 205,189 | | | | 166,326 | |
Other Taxes
The Company is liable for collecting Universal Service Fees and certain sales taxes from its customers and remitting the fees and taxes to the governing authorities. Estimates of the liability and associated receivables are presented in the financial statements.
F-82
Global Internetworking, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Note 7 — Other Accrued Expenses
| | | | | | | | |
| | September 30, | |
| | 2006 | | | 2005 | |
|
Accrued compensation and benefits | | $ | 146,111 | | | $ | 267,457 | |
Accrued professional fees | | | 15,556 | | | | — | |
Accrued taxes | | | 26,352 | | | | 9,997 | |
Accrued carrier costs | | | 832,996 | | | | 895,402 | |
Accrued other | | | 15,502 | | | | — | |
| | | | | | | | |
| | $ | 1,036,517 | | | $ | 1,172,856 | |
| | | | | | | | |
Note 8 — Concentrations
Concentration — Revenue and Accounts Receivable
For the years ended September 30, 2006, 2005, and 2004, four customers represent an aggregate of 36%, 38%, and 43% of revenue, in each year, respectively. At September 30, 2006, two customer(s) represented 15.7% of accounts receivable and at September 30, 2005, two customers represented 28% of accounts receivable. If these individually significant customers ceased to be customers or became unable to meet their financial obligations, results of operations of the Company could be adversely affected.
Concentration — Cash Balances
At times during the fiscal years ended September 30, 2006 and 2005, the Company had funds in excess of the $100,000 insured by the Federal Deposit Insurance Corporation on deposit at financial institutions. At September 30, 2006 and 2005, the uninsured amounts, including the CD backing the letter of credit, were $1,347,974 and $1,168,056, respectively.
Note 9 — Commitments and Contingencies
Commitment — Capacity Purchases
The Company’s purchases of communications capacity can generally be divided into two types of purchases:a) “Take-or-Pay” Purchase Commitments; orb) Service-by-Service Commitments.
“Take-or-Pay” Purchase Commitments
Some of the Company’s capacity purchase contracts call for the Company to make monthly payments to suppliers whether or not the Company is currently utilizing the underlying capacity (commonly referred to in the industry as“take-or-pay” commitments). As of September 30, 2006 and 2005, the Company’s aggregate monthly obligations under suchtake-or-pay commitments over the remaining term of all of those contracts totaled $1,155,000 and $1,725,000, respectively. All capacity purchase commitments undertake-or-pay contracts were fully utilized by the Company’s customers throughout the years ended September 30, 2006 and 2005.
Service-by-Service Commitments — Early Termination Liability
The Company, to the extent practicable, matches the quantity, duration and other terms of individual purchases of communications capacity with agreements to supply communications to individual customers on aservice-by-service basis. The Company recognizes profit on communications sales to the extent its revenue from supplying communications exceeds its cost to purchase the underlying capacity. In the year ended September 30, 2004, the Company began purchasing capacity under five-year commitments from one of its vendors in order to secure more competitive pricing. These five-year purchase commitments are not, in all cases, matched with five-
F-83
Global Internetworking, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
year supply agreements to customers. In such cases, if a customer disconnects its service before the five-year term ordered from the vendor expires, and if the Company is unable to find another customer for the capacity, the Company would be subject to an early termination liability. Under standard telecommunications industry practice (commonly referred to in the industry as “portability”), this early termination liability may be waived by the vendor if the Company orders replacement service with the vendor of equal or greater revenue to the service cancelled. As of September 30, 2006 and 2005, the total potential early termination liability exposure to the Company was $396,265 and $288,119, respectively.
Commitment — Leases
Office Lease, letter of credit
In November 2001, the Company entered into a thirty-six month (36) lease for office space in Vienna, Virginia which expired November 30, 2004. In June 2004, the Company entered into a ten-year lease for office space in McLean, Virginia. Rent payments commenced on January 1, 2005. Under the terms of the 2005 office lease, the Company is required to provide the landlord with a letter of credit to provide protection from default under the lease. The Company has provided the landlord with a letter of credit in the amount of $268,000 supported by hypothecation of a CD held by the bank in the same amount. Office lease expense for the period from October 1, 2006 to October 15, 2006 was $12,041, and for the years ended September 30, 2006, 2005 and 2004 was $362,299, $164,081 and $113,197, respectively.
Minimum Future Office Lease Obligation:
| | | | |
Fiscal Year Ending September 30, | | | | |
2007 | | $ | 280,229 | |
2008 | | | 287,234 | |
2009 | | | 294,415 | |
2010 | | | 301,776 | |
2011 | | | 309,320 | |
2012 and thereafter | | | 1,058,923 | |
| | | | |
Total | | $ | 2,531,897 | |
| | | | |
Automobile Lease
In June 2005 the Company entered into a thirty-six (36) month operating lease for an automobile.
Minimum Future Auto Lease Obligation:
| | | | |
Fiscal Year Ending September 30, 2007 | | $ | 10,668 | |
2008 | | | 5,334 | |
| | | | |
Total | | $ | 16,002 | |
| | | | |
Contingency — Legal Proceedings
The Company is not a party to any material litigation and is not aware of any pending or threatened litigation that could have a material adverse effect upon the Company’s business, operating results or financial condition.
F-84
Global Internetworking, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Note 10 — Retirement Plan
In 2002, the Company established a 401(k) plan for its employees. In 2005 and 2004, the Company matched 50% of employees’ contributions to the plan. At the fiscal year ended September 30, 2006, the Company had not accrued any expenses for employer contribution. During the fiscal year ended September 30, 2005, 401(k) expense was $87,560, all of which was accrued at September 30, 2005. During the fiscal year ended September 30, 2004, 401(k) expense was $56,638, all of which was accrued at September 30, 2004.
Stock Option Plan and Options Outstanding
In 2001, the Company adopted a stock option plan (the “Plan”). The total number of shares reserved for issuance under the Plan is 300,000 effective January 31, 2005. Prior to January 31, 2005, 250,000 were reserved for the Plan. Stock options granted under the Plan are non-qualified stock options for its Class B common stock. Management determines who will receive options under the Plan and determines the vesting period pursuant to authority granted by the Board of Directors. Exercise prices are no less than the fair market value of the Class B common stock at the grant dates, as determined by management. All options granted under the Plan through September 30, 2006 were to employees or members of the Board of Directors, with the exception of 75,000 fully vested options granted to a consultant in 2000. In the event of a change of control of the Company, the Board of Directors may, in its sole discretion, accelerate the awards, pay a cash amount in exchange for cancellation of the awards,and/or require issuance of substitute awards. The weighted average fair value of the options granted in 2006, 2005 and 2004 was $1.90, $1.88 and $1.88, respectively. There were no options granted in the period from October 1, 2006 to October 15, 2006.
| | | | | | | | |
| | Number of Class B
| | | Weighted Average
| |
| | Option Shares | | | Exercise Price | |
|
Balance at September 30, 2003 | | | 149,100 | | | $ | 3.97 | |
Granted | | | 75,000 | | | $ | 5.50 | |
Exercised | | | — | | | | | |
Forfeited | | | — | | | | | |
| | | | | | | | |
Balance at September 30, 2004 | | | 224,100 | | | $ | 4.48 | |
Granted | | | 58,500 | | | $ | 5.67 | |
Exercised | | | — | | | | | |
Forfeited | | | — | | | | | |
| | | | | | | | |
Balance at September 30, 2005 | | | 282,600 | | | $ | 4.73 | |
Granted | | | — | | | | | |
Exercised | | | — | | | | | |
Forfeited | | | — | | | | | |
Balance at September 30, 2006 | | | 282,600 | | | $ | 4.73 | |
| | | | | | | | |
The options outstanding at September 30, 2006 have exercise prices ranging from $2.50 to $6.00 per share. Additional information with regard to the outstanding options is as follows:
| | | | | | | | | | | | |
| | | | Weighted Average
| | |
| | Outstanding at
| | Remaining
| | Weighted Average
|
Exercise Price | | Fiscal Year End | | Contractual Life | | Exercise Price |
|
$2.50 | | | 76,000 | | | | 4.67 years | | | $ | 2.50 | |
$5.50 | | | 186,600 | | | | 6.80 years | | | $ | 5.50 | |
$6.00 | | | 20,000 | | | | 9.40 years | | | $ | 6.00 | |
F-85
Global Internetworking, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Note 11 — Capital Stock
The Company has two classes of common stock authorized, Class A and Class B common stock. At September 30, 2006 and 2005 there were 2,500,000 shares of Class A common stock issued and outstanding and no shares of Class B common stock issued and outstanding. The Class A common stock and the Class B common stock have identical rights except that the Class B common shares are non-voting.
Note 12 — Communication Supply Arrangements
At September 30, 2006 and 2005, the Company had entered into agreements to supply communications capacity in the future to 130 customers and 94 customers, respectively, at fixed rates in the dollar amounts for the years shown, as follows:
At September 30, 2006
| | | | | | | | | | | | | | | | | | | | |
FYE 2007 | | FYE 2008 | | FYE 2009 | | FYE 2010 | | FYE 2011 | | Total |
|
$10,510,049 | | $ | 4,448,192 | | | $ | 2,941,689 | | | $ | 1,402,866 | | | $ | 787,398 | | | $ | 20,090,194 | |
At September 30, 2005
| | | | | | | | | | | | | | | | | | | | |
FYE 2006 | | FYE 2007 | | FYE 2008 | | FYE 2009 | | FYE 2010 | | Total |
|
$11,209,018 | | $ | 4,529,418 | | | $ | 3,197,061 | | | $ | 1,669,826 | | | $ | 357,992 | | | $ | 20,963,315 | |
Note 13 — Subsequent Events
On October 15, 2006, all of the outstanding capital stock of the Company was acquired by MPAC, a special purpose acquisition company. GII’s shareholders exchanged 100% of the outstanding shares of the Company’s common stock for consideration consisting of cash, notes, and equity of MPAC. MPAC’s name was changed to Global Telecom and Technology, Inc. following consummation of the acquisition, and the Company’s name has since been changed to Global Telecom and Technology Americas, Inc.
F-86
5,242,717 Shares
Global Telecom & Technology, Inc.
Common Stock
, 2008
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than the underwriting discount, payable by us in connection with the sale of common stock being registered. All amounts are estimated, except the SEC registration fee.
| | | | | | | | |
Securities and Exchange Commission Registration Fee | | $ | 225 | | | $ | 225 | |
Printing Expenses | | * | | | 30,000 | |
Accounting Fees and Expenses | | * | | | 30,000 | |
Legal Fees and Expenses | | * | | | 25,000 | |
Transfer Agent and Registrar | | * | | |
| | |
Total | | $ | * | | | $ | 85,225 | |
| | |
* | | To be filed by amendment |
Item 14. Indemnification of Directors and Officers.
Our second amended and restated certificate of incorporation and bylaws provide that each of our directors and officers shall be entitled to be indemnified by us to the fullest extent permitted by law. Our second amended and restated certificate of incorporation provides that we may indemnify to the fullest extent permitted by law all of our employees. Our bylaws provide that, if authorized by the board of directors, we may indemnify any other person whom the board of directors has the power to indemnify under section 145 of the Delaware General Corporation Law.
Paragraph B of Article Eight of our second amended and restated certificate of incorporation provides:
“The Corporation shall indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director or officer of the Corporation or any predecessor of the Corporation or serves or served at any other enterprise as a director or officer at the request of the Corporation or predecessor Corporation.”
Paragraph C of Article Eight of our second amended and restated certificate of incorporation provides:
“The Corporation may indemnify to the fullest extent permitted by law any person made or threatened to be made a party to any action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was an employee of the Corporation or any predecessor of the Corporation or serves or served at any other enterprise as an employee at the request of the Corporation or any predecessor to the Corporation.”
Section 145 of the Delaware General Corporation Law concerning indemnification of officers, directors, employees and agents is set forth below.
“Section 145. Indemnification of officers, directors, employees and agents; insurance.
(a) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person’s conduct was unlawful.
II-1
(b) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.
(c) To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders.
(e) Expenses (including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys’ fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office.
(g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section.
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(h) For purposes of this section, references to “the corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued.
(i) For purposes of this section, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to “serving at the request of the corporation” shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the corporation” as referred to in this section.
(j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation’s obligation to advance expenses (including attorneys’ fees).”
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by a director, officer or controlling person in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question of whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of the issue by such court.
Item 15. Recent sales of unregistered securities.
In the three years preceding the filing of this registration statement, we have issued the following securities that were not registered under the Securities Act of 1933, as amended, or the Securities Act:
In connection with our formation, in January 2005, we issued the following shares of common stock, Class W warrants and Class Z warrants pursuant to an exemption from registration contained in Section 4(2) of the Securities Act:
| | | | | | | | | | | | |
| | Number of | | Number of | | Number of |
Name | | Shares of Common Stock | | Class W Warrants | | Class Z Warrants |
Universal Telecommunications, Inc. | | | 25 | | | | 618,750 | | | | 618,750 | |
The Hackman Family Trust | | | 25 | | | | 495,000 | | | | 495,000 | |
Lior Samuelson | | | 25 | | | | 495,000 | | | | 495,000 | |
David Ballarini | | | 25 | | | | 495,000 | | | | 495,000 | |
Mercator Capital L.L.C. | | | — | | | | 371,250 | | | | 371,250 | |
The shares of common stock were sold at a purchase price of $5.00 per share for $500 and the Class W warrants and Class Z warrants were sold at a purchase price of $0.05 per warrant for $247,500. Subsequent to the purchase by the individuals and entities of the securities referenced in the above table, Mercator Capital and Universal
II-3
Telecommunications sold at fair market value, in the aggregate, 25,000 Class W warrants and 25,000 Class Z warrants to each of Mr. Morgan O’Brien and Mr. Alex Mandl. No underwriting discounts or commissions were paid with respect to such sales.
In October 2006, as partial consideration for our acquisition of GII, we issued 1,300,000 shares of common stock, 1,450,000 Class W warrants and 1,450,000 Class Z warrants to the shareholders of GII. The shares of common stock were valued at $5.18 per share for an aggregate value of $6,734,000, the Class W warrants were valued at $.47 per warrant for an aggregate value of $681,500 and the Class Z warrants were valued at $.49 per warrant for an aggregate value of $710,500. The securities were issued pursuant to an exemption from registration contained in Section 4(2) of the Securities Act.
In November 2007, we issued 2,570,143 shares of common stock to the holders of certain of our promissory notes. The shares of common stock were issued for $3,528,987 of principal and accrued interest due under the notes and valued at a premium of their average closing price for the 10-trading days ended November 12, 2007, which was $1.37 per share. The shares of common stock were issued pursuant to an exemption from registration contained in Rule 506 of Regulation D under the Securities Act.
In November 2007, we issued approximately $4.8 million of 10% convertible unsecured subordinated promissory notes to the holders of certain of our promissory notes and certain other accredited investors. No commission or other compensation was paid in connection with the issuance. The 10% convertible unsecured subordinated promissory notes were issued pursuant to an exemption from registration contained in Rule 506 of Regulation D under the Securities Act.
Item 16. Exhibits and financial statement schedules.
(a) Exhibit Index
A list of exhibits filed with this registration statement on Form S-1 is set forth on the Exhibit Index and is incorporated in this Item 16(a) by reference.
(b) Financial Statement Schedule.
None.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) (§ 230.424(b) of this chapter) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
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(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for purposes of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by the controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this amendment no. 1 to this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of Fairfax and Commonwealth of Virginia on the 14th5th day of January,February, 2008.
| | | | |
| GLOBAL TELECOM & TECHNOLOGY, INC. | |
| By: | /s/ RICHARD D. CALDER, JR. | |
| | Richard D. Calder, Jr. | |
| | President and Chief Executive Officer | |
|
KNOWN ALL MEN BY THESE PRESENTS that each person whose signature to this registration statement appears below hereby constitutes and appoints each of Richard D. Calder, Jr. and Kevin J. Welch as such person’s true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for such person and in such person’s name, place and stead, in any and all capacities, to sign any and all amendments to the registration statement, including post-effective amendments, and registration statements filed pursuant to Rule 462 under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, and does hereby grant unto each 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 and about the premises, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that each said attorney-in-fact and agents or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated on the 14th5th day of January,February, 2008.
| | | | |
Signature | | Title | | Date |
| | | | |
/s/ RICHARD D. CALDER, JR. Richard D. Calder, Jr. | | President, Chief Executive Officer and Director (Principal Executive Officer) | | January 14,February 5, 2008 |
| | | | |
/s/ KEVIN J. WELCH Kevin J. Welch | | Chief Financial Officer and Treasurer (Principal Financial Officer) | | January 14,February 5, 2008 |
| | | | |
/s/ H. BRIAN THOMPSON* H. Brian Thompson | | Chairman of the Board and Executive Chairman | | January 14,February 5, 2008 |
| | | | |
/s/ S. JOSEPH BRUNO* S. Joseph Bruno | | Director | | January 14,February 5, 2008 |
| | | | |
/s/ DIDIER DELEPINE* Didier Delepine | | Director | | January 14,February 5, 2008 |
| | | | |
/s/ RHODRIC C. HACKMAN* Rhodric C. Hackman | | Director | | January 14,February 5, 2008 |
| | | | |
/s/ HOWARD JANZEN* Howard Janzen | | Director | | January 14,February 5, 2008 |
| | | | |
/s/ D. MICHAEL KEENAN* D. Michael Keenan | | Director | | January 14,February 5, 2008 |
| | | | |
/s/ MORGAN E. O’BRIEN* Morgan E. O’Brien | | Director | | January 14,February 5, 2008 |
| | | | |
/s/ SUDHAKAR SHENOY* Sudhakar Shenoy | | Director | | January 14,February 5, 2008 |
| | | | |
/s/ THEODORE B. SMITH, III* Theodore B. Smith, III | | Director | | January 14,February 5, 2008 |
| | | | |
| | |
* By: | /s/ KEVIN J. WELCH | | February 5, 2008 |
| Kevin J. Welch | | |
| Attorney-in-Fact | | |
|
II-6
EXHIBIT INDEX
| | | | | | | | |
Exhibit | Exhibit | | | Exhibit | | |
Number | Number | | Description of Document | Number | | Description of Document |
| 2.1 | (1) | | Stock Purchase Agreement dated May 23, 2006, among the Registrant, Global Internetworking, Inc. and the shareholders of Global Internetworking, Inc. | 2.1 | (1) | | Stock Purchase Agreement dated May 23, 2006, among the Registrant, Global Internetworking, Inc. and the shareholders of Global Internetworking, Inc. |
|
| 3.1 | (2) | | Second Amended and Restated Certificate of Incorporation dated October 16, 2006. | 3.1 | (2) | | Second Amended and Restated Certificate of Incorporation dated October 16, 2006. |
|
| 3.2 | (2) | | Amended and Restated Bylaws dated October 15, 2006. | 3.2 | (2) | | Amended and Restated Bylaws dated October 15, 2006. |
|
| 4.1 | (3) | | Specimen of Series A Unit Certificate of the Company. | 4.1 | (3) | | Specimen of Series A Unit Certificate of the Company. |
|
| 4.2 | (3) | | Specimen of Series B Unit Certificate of the Company. | 4.2 | (3) | | Specimen of Series B Unit Certificate of the Company. |
|
| 4.3 | (8) | | Specimen of Common Stock Certificate of the Company. | 4.3 | (8) | | Specimen of Common Stock Certificate of the Company. |
|
| 4.4 | (8) | | Specimen of Class W Warrant Certificate of the Company. | 4.4 | (8) | | Specimen of Class W Warrant Certificate of the Company. |
|
| 4.5 | (8) | | Specimen of Class Z Warrant Certificate of the Company. | 4.5 | (8) | | Specimen of Class Z Warrant Certificate of the Company. |
|
| 4.6 | (5) | | Unit Purchase Option granted to HCFP/Brenner Securities LLC. | 4.6 | (5) | | Unit Purchase Option granted to HCFP/Brenner Securities LLC. |
|
| 4.7 | (5) | | Warrant Agreement between American Stock Transfer & Trust Company and the Registrant. | 4.7 | (5) | | Warrant Agreement between American Stock Transfer & Trust Company and the Registrant. |
|
| 5.1 | ** | | Legal Opinion of Greenberg Traurig, LLP. |
| 5.1* | | | Legal Opinion of Greenberg Traurig, LLP. |
| 10.1 | (3) | | Letter Agreement among the Registrant, HCFP/Brenner Securities LLC and Rhodric C. Hackman. |
|
| 10.2 | (3) | | Letter Agreement among the Registrant, HCFP/Brenner Securities LLC and H. Brian Thompson. | 10.1 | (3) | | Letter Agreement among the Registrant, HCFP/Brenner Securities LLC and Rhodric C. Hackman. |
|
| 10.3 | (4) | | Letter Agreement among the Registrant, HCFP/Brenner Securities LLC and Morgan E. O’Brien. | 10.2 | (3) | | Letter Agreement among the Registrant, HCFP/Brenner Securities LLC and H. Brian Thompson. |
|
| 10.4 | (4) | | Letter Agreement among the Registrant, HCFP/Brenner Securities LLC and Alex Mandl. | 10.3 | (4) | | Letter Agreement among the Registrant, HCFP/Brenner Securities LLC and Morgan E. O’Brien. |
|
| 10.5 | (5) | | Investment Management Trust Agreement between American Stock Transfer & Trust Company and the Registrant. | 10.4 | (4) | | Letter Agreement among the Registrant, HCFP/Brenner Securities LLC and Alex Mandl. |
|
| 10.6 | (2) | | Employment Agreement for H. Brian Thompson, dated October 15, 2006. | 10.5 | (5) | | Investment Management Trust Agreement between American Stock Transfer & Trust Company and the Registrant. |
|
| 10.7 | (2) | | Employment Agreement for Todd Vecchio, dated October 15, 2006. | 10.6 | (2) | | Employment Agreement for H. Brian Thompson, dated October 15, 2006. |
|
| 10.8 | (2) | | Form of Lock-up letter agreement entered into by the Registrant and the stockholders of Global Internetworking, Inc., dated October 15, 2006. | 10.7 | (2) | | Employment Agreement for Todd Vecchio, dated October 15, 2006. |
|
| 10.9 | (7) | | 2006 Employee, Director and Consultant Stock Plan, as amended. On November 30, 2006, the Plan was amended to (i) change the termination date to May 21, 2016 and (ii) reflect the Company’s new corporate name. | 10.8 | (2) | | Form of Lock-up letter agreement entered into by the Registrant and the stockholders of Global Internetworking, Inc., dated October 15, 2006. |
|
| 10.10 | (4) | | Form of Registration Rights Agreement. | 10.9 | (7) | | 2006 Employee, Director and Consultant Stock Plan, as amended. On November 30, 2006, the Plan was amended to (i) change the termination date to May 21, 2016 and (ii) reflect the Company’s new corporate name. |
|
| 10.11 | (2) | | Form of Promissory Note issued to the stockholders of Global Internetworking, Inc., dated October 15, 2006. | 10.10 | (4) | | Form of Registration Rights Agreement. |
|
| 10.12 | (8) | | Note Amendment Agreement entered into by the Registrant and the former stockholders of Global Internetworking, Inc., dated November 13, 2007. | 10.11 | (2) | | Form of Promissory Note issued to the stockholders of Global Internetworking, Inc., dated October 15, 2006. |
|
| 10.13 | (9) | | Form of Stock Option Agreement. | 10.12 | (8) | | Note Amendment Agreement entered into by the Registrant and the former stockholders of Global Internetworking, Inc., dated November 13, 2007. |
| |
| | 10.13 | (9) | | Form of Stock Option Agreement. |
II-7