UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
Commission file number000-51211
Global Telecom & Technology, Inc.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 20-2096338 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
8484 Westpark Drive
Suite 720
McLean, Virginia 22102
(703) 442-5500
(Address including zip code, and telephone number, including area
code, of principal executive offices)
Suite 720
McLean, Virginia 22102
(703) 442-5500
(Address including zip code, and telephone number, including area
code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
Class Z Warrants
(Title of Class)
Class Z Warrants
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy statements or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the common stock held by non-affiliates of the registrant (7,077,710 shares) based on the $0.96 closing price of the registrant’s common stock as reported on theOver-the-Counter Bulletin Board on June 30, 2010, was $6,794,602. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.
As of March 11, 2011 there were outstanding 18,656,754 shares of the registrant’s common stock, par value $.0001 per share.
Documents Incorporated by Reference
Portions of our definitive proxy statement for the 2011 Annual Meeting of Stockholders, to be filed within 120 days after the end of the fiscal year covered by thisForm 10-K, are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
CAUTIONARY NOTES REGARDING FORWARD-LOOKING STATEMENTS
OurForm 10-K (“Annual Report”) includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect the current views of Global Telecom & Technology, Inc., with respect to current events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “could,” “should,” and “continue” or similar words. These forward-looking statements may also use different phrases. From time to time, Global Telecom & Technology, Inc., which we refer to as “we”, “us” or “our” and in some cases, “GTT” or the “Company”, also provides forward-looking statements in other materials GTT releases to the public or files with the United States Securities & Exchange Commission (“SEC”), as well as oral forward-looking statements. You should consider any further disclosures on related subjects in our quarterly reports onForm 10-Q and current reports onForm 8-K filed with the SEC.
Such forward-looking statements are and will be subject to many risks, uncertainties and factors relating to our operations and the business environment that may cause our actual results to be materially different from any future results, express or implied, by such forward-looking statements. Factors that could cause GTT’s actual results to differ materially from these forward-looking statements include, but are not limited to, the following:
| • | our ability to develop and market new products and services that meet customer demands and generate acceptable margins; | |
| • | our reliance on several large customers; | |
| • | our ability to negotiate and enter into acceptable contract terms with our suppliers; | |
| • | our ability to attract and retain qualified management and other personnel; | |
| • | competition in the industry in which we do business; | |
| • | failure of the third-party communications networks on which we depend; | |
| • | legislation or regulatory environments, requirements or changes adversely affecting the businesses in which we are engaged; | |
| • | our ability to maintain our databases, management systems and other intellectual property; | |
| • | our ability to maintain adequate liquidity and produce sufficient cash flow to fund our capital expenditures and debt service; | |
| • | our ability to obtain capital to grow our business; | |
| • | technological developments and changes in the industry; | |
| • | our ability to complete acquisitions or divestures and to integrate any business or operation acquired; | |
| • | general economic conditions. |
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual future results to differ materially from those projected or contemplated in the forward-looking statements.
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All forward-looking statements included herein attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. You should be aware that the occurrence of the events described in the “Risk Factors” section and elsewhere in this report could have a material adverse effect on our business and our results of operations.
Unless the context otherwise requires, when we use the words ‘‘the Company,” “GTT,” “we”, “us,” or “our Company” in thisForm 10-K, we are referring to Global Telecom & Technology, Inc., a Delaware corporation, and its subsidiaries, unless it is clear from the context or expressly stated that these references are only to Global Telecom & Technology, Inc.
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PART I
| ITEM 1. | BUSINESS |
Background
Global Telecom & Technology, Inc. (“GTT” or the “Company”) is a Delaware corporation which was incorporated on January 3, 2005. GTT is a global telecommunications carrier and leading network integrator serving the data communications needs of large enterprise, government and carrier clients in over 80 countries. We combine our own network assets with the networks of over 800 suppliers worldwide to deliver cost-effective, scalable solutions supporting each client’s unique requirements. Through our proprietary Client Management Database (CMD), GTT provides streamlined service design and quotation, rapid service implementation, and global 24x7 monitoring and support. GTT is headquartered in the Washington, DC metro region with offices in London, Dusseldorf, and Denver.
Our Customers
As of December 31, 2010, our customer base was comprised of over 700 businesses. For the year ended December 31, 2010, no single customer accounted for more than 5% of our total consolidated revenues. Our five largest customers accounted for approximately 19% of consolidated revenues during the same period.
We provide services in over 80 countries, with the ability to expand into new geographic areas by adding new regional partners and suppliers. Our service expansion is largely customer-driven. We have designed, delivered, and subsequently managed services in all six populated continents around the world.
For the year ended December 31, 2010, approximately 76% of our revenue was attributable to our operations based in the United States, 15% was attributable to operations based in the United Kingdom, and 9% was attributable to operations based in Germany.
Our customer contracts for network services and support are generally for initial terms of one to three years, with some contracts calling for terms in excess of five years. Following the initial terms, these agreements typically provide for renewal automatically for specified periods ranging from one month to one year. Our prices are fixed for the duration of the contract, and we typically bill in advance for such services. If a customer terminates its agreement, the terms of our customer contracts typically require full recovery of any amounts due for the remainder of the term (or at a minimum, our liability to the underlying suppliers).
Our Suppliers and Network
As of December 31, 2010, we had over 800 supplier relationships worldwide from which we source bandwidth and other services and combine our own network assets to meet our customers’ requirements. Through our extensive supplier relationships, our customers have access to an array of service providers without having to manage multiple contracts.
GTT’s network has deployed assets in North America and Europe to provide Dedicated Internet Access and Ethernet Transport services. GTT’s network has connectivity in all major U.S. hubs and major European cities, established Ethernet hubs with various carriers, multiple high speed connections to Tier 1 IP providers, highly competitive rates, and“on-net” provisioning time which results in faster deployment and installation.
Our supplier management teams work with our suppliers to acquire updated pricing and network asset information and negotiate purchase agreements when appropriate. In some cases, we have electronic interfaces into our suppliers’ pricing systems to provide our customers with real time pricing updates. Our supplier management teams are constantly seeking out strategic partnerships with new carriers, negotiating favorable terms on existing contracts, and looking to expand each supplier’s product portfolio. These partnerships are reflected in long-term contracts, commonly referred to as Master Service Agreements. All of these efforts are aimed at providing greater choice, flexibility, and cost savings for our customers. We are committed to using high-quality suppliers, and our supplier management teams continually monitor supplier performance.
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Sales and Marketing
Because our markets are highly competitive, we believe that personal relationships and quality of service delivery remain important in winning new and repeat customer business. We therefore sell our services largely through a direct sales force located across the globe, as well as strong agent channel relationships, with principal concentration in the United States, the United Kingdom, and Germany. Most of our sales representatives have many years of experience in selling to multinational corporations, enterprises, service providers, and carriers. We also employ sales engineers to provide presales support to our sales representatives. The average sales cycle can be as little as two to six weeks for existing customers and three to six months or longer for new customers with complicated service requirements.
Our sales and marketing efforts are focused on generating new business opportunities through industry contacts, new product offerings, and long-term relationships with new and existing customers. Our sales activities are specifically focused on recruiting seasoned industry experts with deep ties to the direct enterprise, system integrator and carrier markets, building relationships with our new clients, and driving expansion within existing accounts. Our marketing activities are designed to generate awareness and familiarity of our value proposition with our target accounts, develop new products to meet the needs of our customer base, and communicate to our target markets, thereby reinforcing our value proposition among our customers’ key decision makers.
Operations
Our global operations consist of two parts: global customer operations, and global network operations and engineering.
Customer operations include project management and development of our CMD system. The global project management team assures the successful implementation of customer services after the sale. A project manager is assigned to each customer order to ensure that the underlying network facilities required for the solution are provisioned, that the customer is provided with status reports on its service, and that any difficulties related to the installation of a customer order are proactively managed.
Network operations and engineering is comprised of the global Network Operations Center (“NOC”), Engineering and Information and Communications Technology (“ICT”). The NOC receives, prioritizes, tracks, and resolves network outages or other customer needs, along with provisioning and testing of new services. Engineering provides support for the NOC and the sales team, as well as carrying out all provisioning for services utilizing GTT’s owned network assets (GTT Network Services). ICT manages all internal desktop, and network and server infrastructure.
Competition
Our competition consists primarily of traditional, facilities-based providers, including companies that provide network connectivity and internet access principally within one continent or geographical region, such as Level 3, Qwest, KPN, XO, Comcast Communications, and COLT. We also compete against carriers who provide network connectivity on a multi-continent, or global basis, such as Verizon Business, AT&T, British Telecom, NTT and Deutsche Telekom.
Government Regulation
In connection with certain of our service offerings, we may be subject to federal, state, and foreign regulations. United States Federal laws and Federal Communications Commission, or FCC, regulations generally apply to interstate telecommunications and international telecommunications that originate or terminate in the United States, while state laws and regulations apply to telecommunications transmissions ultimately terminating within the same state as the point of origination. A foreign country’s laws and regulations apply to telecommunications that originate or terminate in, or in some instances traverse, that country. The regulation of the telecommunications industry is changing rapidly, and varies from state to state and from country to country.
Where certification or licensing is required, carriers are required to comply with certain ongoing responsibilities. For example, we may be required to submit periodic reports to various telecommunications regulatory
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authorities relating to the provision of services within the relevant jurisdiction. Another potential ongoing responsibility relates to payment of regulatory fees and the collection and remittance of surcharges and fees associated with the provision of telecommunications services. Some of our services are subject to these assessments, depending upon the jurisdiction, the type of service, and the type of customer.
Federal Regulation
Generally, the FCC has chosen not to heavily regulate the charges or practices of non-dominant carriers. For example, we are not required to tariff the interstate inter-exchange private line services we provide, but need only to post terms and conditions for such services on our website. In providing certain telecommunications services, however, we may remain subject to the regulatory requirements applicable to common carriers, such as providing services at just and reasonable rates, filing the requisite reports, and paying regulatory fees and contributing to universal service. The FCC also releases orders and takes other actions from time to time that modify the regulations applicable to services provided by carriers such as us; these orders and actions can result in additional (or reduced) reporting or payments requirements, or changes in the relative rights and obligations of carriers with respect to services they provide to each other or to other categories of customers. These changes in regulation can affect the services that we procureand/or provide and, in some instances, may affect demand for or the costs of providing our services.
State Regulation
The Telecommunications Act of 1996, as amended generally prohibits state and local governments from enforcing any law, rule, or legal requirement that prohibits or has the effect of prohibiting any person from providing any interstate or intrastate telecommunications service. However, states retain jurisdiction to adopt regulations necessary to preserve universal service, protect public safety and welfare, ensure the continued quality of communications services, and safeguard the rights of consumers. Generally, each carrier must obtain and maintain certificates of authority from regulatory bodies in states in which it offers intrastate telecommunications services. In most states, a carrier must also file and obtain prior regulatory approval of tariffs containing the rates, terms and conditions of service for its regulated intrastate services. A state may also impose telecommunications regulatory fees, fees related to the support for universal service, and other costs and reporting obligations on providers of services in that state. We are currently authorized to provide intrastate services in more than 20 states and the District of Columbia as an interexchange carrierand/or a competitive local provider.
Foreign Regulation
Generally, the provisioning to U.S. customers of international telecommunications services originating or terminating in the United States is governed by the FCC. In addition, the regulatory requirements to operate within a foreign country or to provide services to customers within that foreign country vary from jurisdiction to jurisdiction, although in some respects regulation in the Western European markets is harmonized under the regulatory structure of the European Union. As opportunities arise in particular nations, we may need to apply for and acquire various authorizations to operate and provide certain kinds of telecommunications services. Although some countries require complex applications procedures for authorizationsand/or impose certain reporting and fee payment requirements, others simply require registration with or notification to the regulatory agency and some simply operate through general authorization with no filing requirement at all.
Intellectual Property
We do not own any patent registrations, applications or licenses. We maintain and protect trade secrets, know-how, and other proprietary information regarding many of our business processes and related systems and databases.
Employees
As of December 31, 2010, we had a total of 81 employees.
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Executive Officers
Our executive officers and their respective ages and positions as of March 11, 2011 are as follows:
H. Brian Thompson, 72, has served as Chairman of our Board of Directors since January 2005, as our Executive Chairman since October 2006, and as our interim Chief Executive Officer from January 2005 to October 2006 and from February 2007 to May 2007. Mr. Thompson continues to head his own private equity investment and advisory firm, Universal Telecommunications, Inc. From December 2002 to June 2007, Mr. Thompson was Chairman of Comsat International, one of the largest independent telecommunications operators serving all of Latin America. He also served as Chairman and Chief Executive Officer of Global TeleSystems Group, Inc. from March 1999 through September of 2000. Mr. Thompson was Chairman and CEO of LCI International from 1991 until its merger with Qwest Communications International Inc. in June 1998, and became Vice Chairman of the board for Qwest until his resignation in December 1998. He previously served as Executive Vice President of MCI Communications Corporation from 1981 to 1990, and prior to MCI, was a management consultant with the Washington, DC offices of McKinsey & Company for nine years, where he specialized in the management of telecommunications. Mr. Thompson currently serves as a member of the board of directors of Axcelis Technologies, Inc, ICO Global Communications (Holdings) Ltd, Penske Automotive Group, and Sonus Networks, Inc., and is a member of the Irish Prime Minister’sIreland-America Economic Advisory Board. Mr. Thompson holds a Master of Business Administration from Harvard Business School, and holds an undergraduate degree in chemical engineering from the University of Massachusetts.
Richard D. Calder, Jr., 47, has served as our President, Chief Executive Officer and Director since May 2007. Prior to joining us, from 2004 to 2006 Mr. Calder served as President & Chief Operating Officer of InPhonic, Inc., a publicly-traded online seller of wireless services and products. From 2001 to 2003, Mr. Calder served in a variety of executive roles for Broadwing Communications, Inc., including President — Business Enterprises and Carrier Markets. From 1996 to 2001, Mr. Calder held several senior management positions with Winstar Communications, including Chief Marketing Officer, and President of the company’s South Division. In 1994 Mr. Calder co-founded Go Communications, a wireless communications company, and served as its Vice President of Corporate Development from its founding until 1996. Mr. Calder previously held a variety of marketing, business development, and engineering positions within MCI Communications, Inc. and Tellabs, Inc. Mr. Calder holds a Master of Business Administration from Harvard Business School and a Bachelor of Science in Electrical Engineering from Yale University.
Eric Swank, 43, has served as our Chief Financial Officer since February 2009. Prior to joining us, Mr. Swank served as the Treasurer and Senior Vice President of Finance at Mobile Satellite Ventures (now Light Squared), a Reston, Virginia-based developer and supplier of mobile satellite communications services from November 2001 to April 2008. From 1994 to 2001, Mr. Swank served in various positions, including Director, Corporate Development and Investor Relations, and Vice President, Corporate Planning and Investor Relations, at Motient Corporation (now TerreStar Corporation), a publicly-held, Reston, Virginia-based integrated mobile satellite and terrestrial communications network provider. Prior to joining Motient, from 1989 to 1994, Mr. Swank served as Director, Operations and Manager, Business Development for C-Tec Corporation, a diversified telecommunications holding company organized to hold Commonwealth Telephone Inc. and other non-regulated telecommunications businesses. Mr. Swank received a Bachelor’s degree in Finance from King’s College.
Chris McKee, 43, has served as our General Counsel and Secretary since May 2008. Prior to joining us, Mr. McKee served as the Vice President and General Counsel of StarVox Communications, Inc. from June, 2007 to April 2008. From 2005 to 2007, Mr. McKee was the Vice President and Assistant General Counsel of Covad Communications Group Inc., a publicly held San Jose, California-based broadband provider of integrated voice and data communications nationwide. Prior to joining Covad, from 2002 to 2005, Mr. McKee served as Executive Director of Legal and Regulatory Affairs for XO Communications, Inc., a publicly held Reston, Virginia-based broadband provider of integrated voice and data communications nationwide. Mr. McKee previously, from 1998 to 2002, served as Deputy General Counsel of Net2000 Communications Inc., a publicly traded Herndon,Virginia-based telecommunications services provider. Prior to that, from 1994 to 1998, Mr. McKee was an associate at Washington, D.C.-based law firms Dickstein Shapiro LLP and Dow Lohnes PLLC. Mr. McKee received a Bachelor’s degree from Colby College and a Juris Doctor from Syracuse University.
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Available Information
The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. Our annual reports onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 8-K and all amendments to such reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on the SEC website atwww.sec.gov and on our website atwww.gt-t.net as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
| ITEM 1A. | RISK FACTORS |
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. Below are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or telecommunicationsand/or technology companies in general, may also impair our business operations. If any of these risks or uncertainties actually occurs, our business, financial condition and operating results could be materially adversely affected.
Risks Relating to Our Business and Operations
We depend on several large customers, and the loss of one or more of these customers, or a significant decrease in total revenues from any of these customers, would likely reduce our revenue and income.
For the year ended December 31, 2010, our five largest customers accounted for approximately 19% of our total service revenues. If we were to lose all of the underlying services from one or more of our large customers, or if one or more of our large customers were to significantly reduce the services purchased from us or otherwise renegotiate the terms on which services are purchased from us, our revenues could decline and our results of operations would suffer.
If our customers elect to terminate their agreements with us, our business, financial condition and results of operations may be adversely affected.
Our services are sold under agreements that generally have initial terms of between one and three years. Following the initial terms, these agreements generally automatically renew for successivemonth-to-month, quarterly, or annual periods, but can be terminated by the customer without cause with relatively little notice during a renewal period. In addition, certain government customers may have rights under federal law with respect to termination for convenience that can serve to minimize or eliminate altogether the liability payable by that customer in the event of early termination. Our customers may elect to terminate their agreements as a result of a number of factors, including their level of satisfaction with the services they are receiving, their ability to continue their operations due to budgetary or other concerns, and the availability and pricing of competing services. If customers elect to terminate their agreements with us, our business, financial condition, and results of operation may be adversely affected.
Competition in the industry in which we do business is intense and growing, and our failure to compete successfully could make it difficult for us to add and retain customers or increase or maintain revenues.
The markets in which we operate are rapidly evolving and highly competitive. We currently or potentially compete with a variety of companies, including some of our transport suppliers, with respect to their products and services, including global and regional telecommunications service providers such as AT&T, British Telecom, NTT, Level 3, Qwest and Verizon, among others.
The industry in which we operate is consolidating, which is increasing the size and scope of our competitors. Competitors could benefit from assets or businesses acquired from other carriers or from strategic alliances in the telecommunications industry. New entrants could enter the market with a business model similar to ours. Our target markets may support only a limited number of competitors. Operations in such markets with multiple competitive
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providers may be unprofitable for one or more of such providers. Prices in the data transmission and internet access business have declined in recent years and may continue to decline.
Many of our potential competitors have certain advantages over us, including:
| • | substantially greater financial, technical, marketing, and other resources, including brand or corporate name recognition; | |
| • | substantially lower cost structures, including cost structures of facility-based providers who have reduced debt and other obligations through bankruptcy or other restructuring proceedings; | |
| • | larger client bases; | |
| • | longer operating histories; | |
| • | more established relationships in the industry; and | |
| • | larger geographic presence. |
Our competitors may be able to use these advantages to:
| • | develop or adapt to new or emerging technologies and changes in client requirements more quickly; | |
| • | take advantage of acquisitions and other opportunities more readily; | |
| • | enter into strategic relationships to rapidly grow the reach of their networks and capacity; | |
| • | devote greater resources to the marketing and sale of their services; | |
| • | adopt more aggressive pricing and incentive policies, which could drive down margins; and | |
| • | expand their offerings more quickly. |
If we are unable to compete successfully against our current and future competitors, our revenues and gross margins could decline and we would lose market share, which could materially and adversely affect our business.
We might require additional capital to support business growth, and this capital might not be available on favorable terms, or at all.
Our operations or expansion efforts may require substantial additional financial, operational, and managerial resources. As of December 31, 2010, we had approximately $6.6 million in cash and cash equivalents and current liabilities $10.3 million greater than current assets. We may have insufficient cash to fund our working capital or other capital requirements and may be required to raise additional funds to continue or expand our operations. If we are required to obtain additional funding in the future, we may have to sell assets, seek debt financing, or obtain additional equity capital. Our ability to sell assets or raise additional equity or debt capital will depend on the condition of the capital and credit markets and our financial condition at such time. Accordingly, additional capital may not be available to us, or may only be available on terms that adversely affect our existing stockholders, or that restrict our operations. For example, if we raise additional funds through issuances of equity or convertible debt securities, our existing stockholders could suffer dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our common stock. Also, if we were forced to sell assets, there can be no assurance regarding the terms and conditions we could obtain for any such sale, and if we were required to sell assets that are important to our current or future business, our current and future results of operations could be materially and adversely affected. We have granted security interests in substantially all of our assets to secure the repayment of our indebtedness maturing in 2012 and 2015, and if we are unable to satisfy our obligations the lenders could foreclose on their security interests.
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Because our business consists primarily of reselling telecommunications network capacity purchased from third parties, the failure of our suppliers and other service providers to provide us with services, or disputes with those suppliers and service providers, could affect our ability to provide quality services to our customers and have an adverse effect on our operations and financial condition.
The majority of our business consists of integrating and reselling network capacity purchased from facility-based telecommunications carriers. Accordingly, we will be largely dependent on third parties to supply us with services. Occasionally in the past, our operating companies have experienced delays or other problems in receiving services from third party providers. Disputes also arise from time to time with suppliers with respect to billing or interpretation of contract terms. Any failure on the part of third parties to adequately supply us or to maintain the quality of their facilities and services in the future, or the termination of any significant contracts by a supplier, could cause customers to experience delays in service and lower levels of customer care, which could cause them to switch providers. Furthermore, disputes over billed amounts or interpretation of contract terms could lead to claims against us, some of which if resolved against us could have an adverse impact on our results of operationsand/or financial condition. Suppliers may also attempt to impose onerous terms as part of purchase contract negotiations. Although we know of no pending or threatened claims with respect to past compliance with any such terms, claims asserting any past noncompliance, if successful, could have a material adverse effect on our operationsand/or financial condition. Moreover, to the extent that key suppliers were to attempt to impose such provisions as part of future contract negotiations, such developments could have an adverse impact on the company’s operations. Finally, some of our suppliers are potential competitors. We cannot guarantee that we will be able to obtain use of facilities or services in a timely manner or on terms acceptable and in quantities satisfactory to us.
Industry consolidation may affect our ability to obtain services from suppliers on a timely or cost-efficient basis.
A principal method of connecting with our customers is through local transport and last mile circuits we purchase from incumbent carriers such as AT&T and Verizon, or competitive carriers such as Time Warner Telecom, XO, or Level 3. In recent years, AT&T, Verizon, and Level 3 have acquired competitors with significant localand/or long-haul network assets. Industry consolidation has occurred on a lesser scale as well through mergers and acquisitions involving regional or smaller national or international competitors. Generally speaking, we believe that a marketplace with multiple supplier options for transport access is important to the long-term availability of competitive pricing, service quality, and carrier responsiveness. It is unclear at this time what the long-term impact of such consolidation will be, or whether it will continue at the same pace as it has in recent years; we cannot guarantee that we will continue to be able to obtain use of facilities or services in a timely manner or on terms acceptable and in quantities satisfactory to us from such suppliers.
We may occasionally have certain sales commitments to customers that extend beyond the Company’s commitments from its underlying suppliers.
The Company’s financial results could be adversely affected if the Company were unable to purchase extended service from a supplier at a cost sufficiently low to maintain the Company’s margin for the remaining term of its commitment to a customer. While the Company has not encountered material price increases from suppliers with respect to continuation or renewal of services after expiration of initial contract terms, the Company cannot be certain that it would be able to obtain similar terms and conditions from suppliers. In most cases where the Company has faced any price increase from a supplier following contract expiration, the Company has been able to locate another supplier to provide the service at a similar or reduced future cost; however, the Company’s suppliers may not provide services at such cost levels in the future.
We may make purchase commitments to vendors for longer terms or in excess of the volumes committed by our underlying customers.
The Company attempts to match its purchase of network capacity from its suppliers and its service commitments from its customers. However, from time to time the Company has obligations to its suppliers that exceed the duration of the Company’s related customer contracts or that are for capacity in excess of the amount for which it has Customer commitments. This could arise based upon the terms and conditions available from the
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Company’s suppliers, from an expectation of the Company that we will be able to utilize the excess capacity, as a result of a breach of a customer’s commitment to us, or to support fixed elements of the Company’s network. Under any of these circumstances, the Company would incur the cost of the network capacity from its supplier without having corresponding revenues from its customers, which could result in a material and adverse impact on the Company’s operating results.
The networks on which we depend may fail, which would interrupt the network availability they provide and make it difficult to retain and attract customers.
Our customers depend on our ability to provide network availability with minimal interruption. The ability to provide this service depends in part on the networks of third party transport suppliers. The networks of transport suppliers may be interrupted as a result of various events, many of which they cannot control, including fire, human error, earthquakes and other natural disasters, disasters along communicationsrights-of-way, power loss, telecommunications failures, terrorism, sabotage, vandalism, or the financial distress or other event adversely affecting a supplier, such as bankruptcy or liquidation.
We may be subject to legal claims and be liable for losses suffered by customers due to our inability to provide service. If our network failure rates are higher than permitted under the applicable customer contracts, we may incur significant expenses related to network outage credits, which would reduce our revenues and gross margins. Our reputation could be harmed if we fail to provide a reasonably adequate level of network availability, and in certain cases, customers may be entitled to seek to terminate their contracts with us in case of prolonged or severe service disruptions or other outages.
System disruptions could cause delays or interruptions of our service due to terrorism, natural disasters and other events beyond our control, which could cause us to lose customers or incur additional expenses.
Our success depends on our ability to provide reliable service. Although we have attempted to design our network services to minimize the possibility of service disruptions or other outages, in addition to risks associated with third party provider networks, our services may be disrupted by problems on our own systems, including events beyond our control such as terrorism, computer viruses, or other infiltration by third parties that affect our central offices, corporate headquarters, network operations centers, or network equipment. Such events could disrupt our service, damage our facilities, and damage our reputation. In addition, customers may, under certain contracts, have the ability to terminate services in case of prolonged or severe service disruptions or other outages. Accordingly, service disruptions or other outages may cause us to, among other things, lose customers and could harm our results of operations.
If the products or services that we market or sell do not maintain market acceptance, our results of operations will be adversely affected.
Certain segments of the telecommunications industry are dependent on developing and marketing new products and services that respond to technological and competitive developments and changing customer needs. We cannot assure you that our products and services will gain or obtain increased market acceptance. Any significant delay or failure in developing new or enhanced technology, including new product and service offerings, could result in a loss of actual or potential market share and a decrease in revenues.
The communications market in which we operate is highly competitive; we could be forced to reduce prices, may lose customers to other providers that offer lower prices and have problems attracting new customers.
The communications industry is highly competitive and pricing for some of our key service offerings, such as our dedicated IP transport services, have been generally declining. If our costs of service, including the cost of leasing underlying facilities, do not decline in a similar fashion, we could experience significant margin compression, reduction of profitability and loss of business.
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If carrier and enterprise connectivity demand does not continue to expand, we may experience a shortfall in revenues or earnings or otherwise fail to meet public market expectations.
The growth of our business will be dependent, in part, upon the increased use of carrier and enterprise connectivity services and our ability to capture a higher proportion of this market. Increased usage of enterprise connectivity services depends on numerous factors, including:
| • | the willingness of enterprises to make additional information technology expenditures; | |
| • | the availability of security products necessary to ensure data privacy over the public networks; | |
| • | the quality, cost, and functionality of these services and competing services; | |
| • | the increased adoption of wired and wireless broadband access methods; | |
| • | the continued growth of broadband-intensive applications; and | |
| • | the proliferation of electronic devices and related applications. |
Our long sales and service deployment cycles require us to incur substantial sales costs that may not result in related revenues.
Our business is characterized by long sales cycles, which are often in the range of 45 days or more, between the time a potential customer is contacted and a customer contract is signed. Furthermore, once a customer contract is signed, there is typically an extended period of between 30 and 120 days before the customer actually begins to use the services, which is when we begin to realize revenues. As a result, we may invest a significant amount of time and effort in attempting to secure a customer, which investment may not result in near term, if any, revenues. Even if we enter into a contract, we will have incurred substantial sales-related expenses well before we recognize any related revenues. If the expenses associated with sales increase, if we are not successful in our sales efforts, or if we are unable to generate associated offsetting revenues in a timely manner, our operating results could be materially and adversely affected.
Because much of our business is international, our financial results may be affected by foreign exchange rate fluctuations.
Approximately 24% of our revenue comes from countries outside of the United States. As such, other currencies, particularly the Euro and the British Pound Sterling, can have an impact on the Company’s results (expressed in U.S. Dollars). Currency variations also contribute to variations in sales in impacted jurisdictions. Accordingly, fluctuations in foreign currency rates, most notably the strengthening of the dollar against the euro and the pound, could have a material impact on our revenue growth in future periods. In addition, currency variations can adversely affect margins on sales of our products in countries outside of the United States and margins on sales of products that include components obtained from suppliers located outside of the United States.
Because much of our business is international, we may be subject to local taxes, tariffs, or other restrictions in foreign countries, which may reduce our profitability.
Revenues from our foreign subsidiaries, or other locations where we provide or procure services internationally, may be subject to additional taxes in some foreign jurisdictions. Additionally, some foreign jurisdictions may subject us to additional withholding tax requirements or the imposition of tariffs, exchange controls, or other restrictions on foreign earnings. Any such taxes, tariffs, controls, and other restrictions imposed on our foreign operations may increase our costs of business in those jurisdictions, which in turn may reduce our profitability.
If our goodwill or amortizable intangible assets become further impaired we may be required to record a significant charge to earnings.
Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying
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value of our goodwill or amortizable intangible assets may not be recoverable include reduced future cash flow estimates, a decline in stock price and market capitalization, and slower growth rates in our industry. During the years ended December 31, 2010 and 2009, the Company recorded no impairment to goodwill and amortizable intangible assets. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, negatively impacting our results of operations.
The ability to implement and maintain our databases and management information systems is a critical business requirement, and if we cannot obtain or maintain accurate data or maintain these systems, we might be unable to cost-effectively provide solutions to our customers.
To be successful, we must increase and update information in our databases about network pricing, capacity, and availability. Our ability to provide cost-effective network availability and access cost management depends upon the information we collect from our transport suppliers regarding their networks. These suppliers are not obligated to provide this information and could decide to stop providing it to us at any time. Moreover, we cannot be certain that the information that these suppliers share with us is accurate. If we cannot continue to maintain and expand the existing databases, we may be unable to increase revenues or to facilitate the supply of services in a cost-effective manner.
Furthermore, we are in the process of reviewing, integrating, and augmenting our management information systems to facilitate management of client orders, client service, billing, and financial applications. Our ability to manage our businesses could be materially adversely affected if we fail to successfully and promptly maintain and upgrade the existing management information systems.
If we are unable to protect our intellectual property rights, competitors may be able to use our technology or trademarks, which could weaken our competitive position.
We own certain proprietary programs, software, and technology. However, we do not have any patented technology that would preclude competitors from replicating our business model; instead, we rely upon a combination of know-how, trade secret laws, contractual restrictions, and copyright, trademark and service mark laws to establish and protect our intellectual property. Our success will depend in part on our ability to maintain or obtain (as applicable) and enforce intellectual property rights for those assets, both in the United States and in other countries. Although our Americas operating company has registered some of its service marks in the United States, we have not otherwise applied for registration of any marks in any other jurisdiction. Instead, with the exception of the few registered service marks in the United States, we rely exclusively on common law trademark rights in the countries in which we operate.
We may file applications for patents, copyrights and trademarks as our management deems appropriate. We cannot assure you that these applications, if filed, will be approved, or that we will have the financial and other resources necessary to enforce our proprietary rights against infringement by others. Additionally, we cannot assure you that any patent, trademark, or copyright obtained by us will not be challenged, invalidated, or circumvented, and the laws of certain foreign countries may not protect intellectual property rights to the same extent as do the laws of the United States or the member states of the European Union. Finally, although we intend to undertake reasonable measures to protect the proprietary assets of our combined operations, we cannot guarantee that we will be successful in all cases in protecting the trade secret status of certain significant intellectual property assets. If these assets should be misappropriated, if our intellectual property rights are otherwise infringed, or if a competitor should independently develop similar intellectual property, this could harm our ability to attract new clients, retain existing customers, and generate revenues.
Intellectual property and proprietary rights of others could prevent us from using necessary technology to provide our services or otherwise operate our business.
We utilize data and processing capabilities available through commercially available third-party software tools and databases to assist in the efficient analysis of network engineering and pricing options. Where such technology is held under patent or other intellectual property rights by third parties, we are required to negotiate license
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agreements in order to use that technology. In the future, we may not be able to negotiate such license agreements at acceptable prices or on acceptable terms. If an adequate substitute is not available on acceptable terms and at an acceptable price from another software licensor, we could be compelled to undertake additional efforts to obtain the relevant network and pricing data independently from other, disparate sources, which, if available at all, could involve significant time and expense and adversely affect our ability to deliver network services to customers in an efficient manner.
Furthermore, to the extent that we are subject to litigation regarding the ownership of our intellectual property or the licensing and use of others’ intellectual property, this litigation could:
| • | be time-consuming and expensive; | |
| • | divert attention and resources away from our daily business; | |
| • | impede or prevent delivery of our products and services; and | |
| • | require us to pay significant royalties, licensing fees, and damages. |
Parties making claims of infringement may be able to obtain injunctive or other equitable relief that could effectively block our ability to provide our services and could cause us to pay substantial damages. In the event of a successful claim of infringement, we may need to obtain one or more licenses from third parties, which may not be available at a reasonable cost, if at all. The defense of any lawsuit could result in time-consuming and expensive litigation, regardless of the merits of such claims, and could also result in damages, license fees, royalty payments, and restrictions on our ability to provide our services, any of which could harm our business.
We continue to evaluate merger and acquisition opportunities and may purchase additional companies in the future, and the failure to integrate them successfully with our existing business may adversely affect our financial condition and results of operations.
We continue to explore merger and acquisition opportunities, and we may face difficulties if we acquire other businesses in the future, including:
| • | integrating the personnel, services, products and technologies of the acquired businesses into our existing operations; | |
| • | retaining key personnel of the acquired businesses; | |
| • | failing to adequately identify or assess liabilities of acquired businesses; | |
| • | failing to achieve the synergies, revenue growth and other expected benefits we used to determine the purchase price of the acquired businesses; | |
| • | failing to realize the anticipated benefits of a particular merger and acquisition; | |
| • | incurring significant transaction and acquisition-related costs; | |
| • | incurring significant amounts of additional debt; | |
| • | creating significant contingent earn-out obligations and other financial liabilities; | |
| • | incurring unanticipated problems or legal liabilities; | |
| • | being subject to business uncertainties and contractual restrictions while an acquisition is pending that could adversely affect our business; and | |
| • | diverting our management’s attention from theday-to-day operation of our business. |
These difficulties could disrupt our ongoing business and increase our expenses. As of the date of thisForm 10-K, we have no agreement or memorandum of understanding to enter into any acquisition transaction.
In addition, our ability to complete acquisitions may depend, in part, on our ability to finance these acquisitions, including both the costs of the acquisition and the cost of the subsequent integration activities. Our ability may be constrained by our cash flow, the level of our indebtedness, restrictive covenants in the
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agreements governing our indebtedness, conditions in the securities and credit markets and other factors, most of which are generally beyond our control. If we proceed with one or more acquisitions in which the consideration consists of cash, we may use a substantial portion of our available cash to complete such acquisitions, thereby reducing our liquidity. If we finance one or more acquisitions with the proceeds of indebtedness, our interest expense and debt service requirements could increase materially. Thus, the financial impact of future acquisitions, including the costs to pursue acquisitions that do not ultimately close, could materially affect our business and could cause substantial fluctuations in our quarterly and yearly operating results.
Our efforts to develop new service offerings may not be successful, in which case our revenues may not grow as we anticipate or may decline.
The market for telecommunications services is characterized by rapid change, as new technologies are developed and introduced, often rendering established technologies obsolete. For our business to remain competitive, we must continually update our service offerings to make new technologies available to our customers and prospects. To do so, we may have to expend significant management and sales resources, which may increase our operating costs. The success of our potential new service offerings is uncertain and would depend on a number of factors, including the acceptance by end-user customers of the telecommunications technologies which would underlie these new service offerings, the compatibility of these technologies with existing customer information technology systems and processes, the compatibility of these technologies with our then-existing systems and processes, and our ability to find third-party vendors that would be willing to provide these new technologies to us for delivery to our users. If we are unsuccessful in developing and selling new service offerings, our revenues may not grow as we anticipate, or may decline.
If we do not continue to train, manage and retain employees, clients may reduce purchases of services.
Our employees are responsible for providing clients with technical and operational support, and for identifying and developing opportunities to provide additional services to existing clients. In order to perform these activities, our employees must have expertise in areas such as telecommunications network technologies, network design, network implementation, and network management, including the ability to integrate services offered by multiple telecommunications carriers. They must also accept and incorporate training on our systems and databases developed to support our operations and business model. Employees with this level of expertise tend to be in high demand in the telecommunications industry, which may make it more difficult for us to attract and retain qualified employees. If we fail to train, manage, and retain our employees, we may be limited in our ability to gain more business from existing clients, and we may be unable to obtain or maintain current information regarding our clients’ and suppliers’ communications networks, which could limit our ability to provide future services.
The regulatory framework under which we operate could require substantial time and resources for compliance, which could make it difficult and costly for us to operate the businesses.
In providing certain interstate and international telecommunications services, we must comply, or cause our customers or carriers to comply, with applicable telecommunications laws and regulations prescribed by the Federal Communications Commission (“FCC”) and applicable foreign regulatory authorities. In offering services on an intrastate basis, we may also be subject to state laws and to regulation by state public utility commissions. Our international services may also be subject to regulation by foreign authorities and, in some markets, multinational authorities, such as the European Union. The costs of compliance with these regulations, including legal, operational, and administrative expenses, may be substantial. In addition, delays in receiving or failure to obtain required regulatory approvals or the enactment of new or adverse legislation, regulations, or regulatory requirements may have a material adverse effect on our financial condition, results of operations, and cash flow.
If we fail to obtain required authorizations from the FCC or other applicable authorities, or if we are found to have failed to comply, or are alleged to have failed to comply, with the rules of the FCC or other authorities, our right to offer certain services could be challengedand/or fines or other penalties could be imposed on us. Any such challenges or fines could be substantial and could cause us to incur substantial legal and administrative expenses as well; these costs in the forms of fines, penalties, and legal and administrative expenses could have a material adverse impact on our business and operations. Furthermore, we are dependent in certain cases on the services other carriers
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provide, and therefore on other carriers’ abilities to retain their respective licenses in the regions of the world in which they operate. We are also dependent, in some circumstances, on our customers’ abilities to obtain and retain the necessary licenses. The failure of a customer or carrier to obtain or retain any necessary license could have an adverse effect on our ability to conduct operations.
Future changes in regulatory requirement, new interpretations of existing regulatory requirements, or determinations that we violated existing regulatory requirements may impair our ability to provide services, result in financial losses or otherwise reduce our profitability.
Many of the laws and regulations that apply to providers of telecommunications services are subject to frequent changes and different interpretations and may vary between jurisdictions. Changes to existing legislation or regulations in particular markets may limit the opportunities that are available to enter into markets, may increase the legal, administrative, or operational costs of operating in those markets, or may constrain other activities, including our ability to complete subsequent acquisitions, or purchase services or products, in ways that we cannot anticipate. Because we purchase telecommunications services from other carriers, our costs and manner of doing business can also be adversely affected by changes in regulatory policies affecting these other carriers.
In addition, any determination that we, including companies that we have acquired, have violated applicable regulatory requirements could result in material fines, penalties, forfeitures, interest or retroactive assessments. For example, a determination that we have not paid all required universal service fund contributions could result in substantial retroactive assessment of universal service fund contributions, together with applicable interest, penalties, fines or forfeitures.
We depend on key personnel to manage our businesses effectively in a rapidly changing market, and our ability to generate revenues will suffer if we are unable to retain key personnel and hire additional personnel.
The future success, strategic development, and execution of our business will depend upon the continued services of our executive officers and other key sales, marketing, and support personnel. We do not maintain “key person” life insurance policies with respect to any of our employees, nor are we certain if any such policies will be obtained or maintained in the future. We may need to hire additional personnel in the future, and we believe the success of the combined business depends, in large part, upon our ability to attract and retain key employees. The loss of the services of any key employees, the inability to attract or retain qualified personnel in the future, or delays in hiring required personnel could limit our ability to generate revenues and to operate our business.
Risks Relating to Our Indebtedness
Our failure to comply with covenants in our Loan Agreement could result in our indebtedness being immediately due and payable and the loss of our assets.
Pursuant to the terms of our Loan Agreement with Silicon Valley Bank we have pledged substantially all of our assets to the lender as security for our payment obligations under the Loan Agreement. If we fail to pay any of our indebtedness under this Loan Agreement when due, or if we breach any of the other covenants in the Loan Agreement, it may result in one or more events of default. An event of default under our Loan Agreement would permit the lender to declare all amounts owing to be immediately due and payable and, if we were unable to repay any indebtedness owed, the lender could proceed against the collateral securing that indebtedness.
Covenants in our Loan Agreement and outstanding notes, and in any future debt agreement, may restrict our future operations.
The indenture governing the notes and the Loan Agreement will impose financial restrictions that limit our discretion on some business matters, which could make it more difficult for us to expand our business, finance our operations and engage in other business activities that may be in our interest. These restrictions include compliance
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with, or maintenance of, certain financial tests and ratios and restrictions that limit our ability and that of our subsidiaries to, among other things:
| • | incur additional indebtedness or place additional liens on our assets; | |
| • | pay dividends or make other distributions on, redeem or repurchase our capital stock; | |
| • | make investments or repay subordinated indebtedness; | |
| • | enter into transactions with affiliates; | |
| • | sell assets; | |
| • | engage in a merger, consolidation or other business combination; or | |
| • | change the nature of our businesses. |
Any additional indebtedness we may incur in the future may subject us to similar or even more restrictive conditions.
Our substantial level of indebtedness and debt service obligations could impair our financial condition, hinder our growth and put us at a competitive disadvantage.
As of December 31, 2010, our indebtedness was substantial in comparison to our available cash and our net income. Our substantial level of indebtedness could have important consequences for our business, results of operations and financial condition. For example, a high level of indebtedness could, among other things:
| • | make it more difficult for us to satisfy our financial obligations; | |
| • | increase our vulnerability to general adverse economic and industry conditions, including interest rate fluctuations; | |
| • | increase the risk that a substantial decrease in cash flows from operating activities or an increase in expenses will make it difficult for us to meet our debt service requirements and will require us to modify our operations; | |
| • | require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund future business opportunities, working capital, capital expenditures and other general corporate purposes; | |
| • | limit our ability to borrow additional funds to expand our business or ease liquidity constraints; | |
| • | limit our ability to refinance all or a portion of our indebtedness on or before maturity; | |
| • | limit our ability to pursue future acquisitions; | |
| • | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and | |
| • | place us at a competitive disadvantage relative to competitors that have less indebtedness. |
Risks Related to our Common Stock and the Securities Markets
Because we do not currently intend to pay dividends on our common stock, stockholders will benefit from an investment in our common stock only if it appreciates in value.
We do not currently anticipate paying any dividends on shares of our common stock. Any determination to pay dividends in the future will be made by our Board of Directors and will depend upon results of operations, financial conditions, contractual restrictions, restrictions imposed by applicable law, and other factors our Board of Directors deems relevant. Accordingly, realization of a gain on stockholders’ investments will depend on the appreciation of the price of our common stock. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders purchased their shares.
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Our outstanding warrants may have an adverse effect on the market price of our common stock.
As of December 31, 2010, we had 12,090,000 Class Z warrants, each of which entitles the holder to purchase a share of our common stock at an exercise price of $5.00 per share on or before April 10, 2012. The common stocks underlying the warrants has been registered for sale under the Securities Act or is entitled to registration rights or are otherwise generally eligible for sale in the public market at or soon after exercise or conversion. If, and to the extent, these warrants are exercised, stockholders may experience dilution to their ownership interests in the Company. The presence of this additional number of shares of common stock and warrants eligible for trading in the public market may have an adverse effect on the market price of our common stock.
The concentration of our capital stock ownership will likely limit a stockholder’s ability to influence corporate matters, and could discourage a takeover that stockholders may consider favorable and make it more difficult for a stockholder to elect directors of its choosing.
H. Brian Thompson, the Company’s Executive Chairman of the Board of Directors, and Universal Telecommunications, Inc., his own private equity investment and advisory firm, owned 5,294,829 shares of our common stock and 699,750 Class Z warrants, each exercisable to purchase one share of our common stock. Based on the number of shares of our common stock outstanding on December 31, 2010 without taking into account their unexercised warrants, these funds would beneficially own approximately 30% of our common stock. Based on public filings with the SEC made by J. Carlo Cannell, we believe that as of December 31, 2010, funds associated with Cannell Capital LLC owned 3,734,381 shares of our common stock and 923,900 Class Z warrants, each exercisable to purchase one share of our common stock. Based on the number of shares of our common stock outstanding on December 31, 2010 without taking into account their unexercised warrants, these funds would beneficially own approximately 21% of our common stock. In addition, as of December 31, 2010, our executive officers, directors and affiliated entities, excluding H. Brian Thompson and Universal Telecommunications, together beneficially owned common stock, without taking into account their unexercised and unconverted warrants and options, representing approximately 10% of our common stock. As a result, these stockholders have the ability to exert significant control over matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. The interests of these stockholders might conflict with your interests as a holder of our securities, and it may cause us to pursue transactions that, in their judgment, could enhance their equity investments, even though such transactions may involve significant risks to you as a security holder. The large concentration of ownership in a small group of stockholders might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.
It may be difficult for you to resell shares of our common stock if an active market for our common stock does not develop.
Our common stock is not actively traded on a securities exchange and we currently do not meet the initial listing criteria for any registered securities exchange, including the NASDAQ National Market System. It is quoted on the less recognizedOver-the-Counter Bulletin Board. This factor, in addition to the concentrated ownership of our capital stock, may further impair your ability to sell your shares when you wantand/or could depress our stock price. As a result, you may find it difficult to dispose of, or to obtain accurate quotations of the price of our securities because smaller quantities of shares could be bought and sold, transactions could be delayed, and security analyst and news coverage of our company may be limited. These factors could result in lower prices and larger spreads in the bid and ask prices for our shares.
| ITEM 2. | PROPERTIES |
The Company does not own any real estate. Instead, all of the Company’s facilities are leased. GTT’s headquarters in McLean, Virginia are occupied under a lease that expires in December 2014. We also maintain offices in Denver, Colorado, London, England and Düsseldorf, Germany. The lease of our London, England facility expires in June 2012. The Company leases its facility in Düsseldorf, Germany under a multi-year lease that expires in July 2011. The Company’s offices in Denver, Colorado are leased under a three month lease that renews for successive three month periods unless either GTT or the landlord gives a notice of non-renewal. We are currently evaluating our options with respect to our offices in Düsseldorf, Germany, and Denver, Colorado. We believe the necessary office space in these locations will be available on commercially reasonable terms.
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We believe our properties, taken as a whole, are in good operating condition and are adequate for our business needs.
| ITEM 3. | LEGAL PROCEEDINGS |
The Company is not currently subject to any material legal proceedings. From time to time, however, we or our operating companies may be party to other various legal proceedings that arise in the normal course of business. In the opinion of management, none of these proceedings, individually or in the aggregate, are likely to have a material adverse effect on our consolidated financial position, consolidated results of operations or cash flows. However, we cannot provide assurance that any adverse outcome would not be material to our consolidated financial position or consolidated results of operations or cash flows.
PART II
| ITEM 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market for Equity Securities
Our common stock trades on theOver-the-Counter Bulletin Board under the symbol GTLT, and our Class Z warrants trade under the symbol GTLTZ. At March 11, 2011, we had outstanding 18,290,254 shares of our common stock and 12,090,000 Class Z Warrants. On April 10, 2010, our Class W Warrants of 12,090,000 expired at 5:00pm, New York City time.
The Class Z warrant entitles the holder to purchase from us one share of common stock at an exercise price of $5.00. The Class Z warrants will expire at 5:00 p.m., New York City time, on April 10, 2012, or earlier upon redemption. The trading of our securities, especially our Class Z warrants, is limited, and therefore there may not be deemed to be an established public trading market under guidelines set forth by the SEC.
The following table sets forth, for the calendar quarters indicated, the quarterly high and low bid information of our common stock, warrants, and units as reported on theOver-the-Counter Bulletin Board. The quotations listed below reflect interdealer prices, without retail markup, markdown, or commission, and may not necessarily represent actual transactions.
| Common Stock | Class Z Warrants | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| 2009 | ||||||||||||||||
| First Quarter | $ | 0.50 | $ | 0.36 | $ | 0.01 | $ | 0.01 | ||||||||
| Second Quarter | $ | 1.40 | $ | 0.62 | $ | 0.06 | $ | 0.00 | ||||||||
| Third Quarter | $ | 1.44 | $ | 1.26 | $ | 0.06 | $ | 0.01 | ||||||||
| Fourth Quarter | $ | 1.25 | $ | 0.95 | $ | 0.03 | $ | 0.01 | ||||||||
| 2010 | ||||||||||||||||
| First Quarter | $ | 1.34 | $ | 0.90 | $ | 0.04 | $ | 0.02 | ||||||||
| Second Quarter | $ | 1.32 | $ | 0.96 | $ | 0.04 | $ | 0.02 | ||||||||
| Third Quarter | $ | 1.32 | $ | 0.82 | $ | 0.02 | $ | 0.01 | ||||||||
| Fourth Quarter | $ | 1.30 | $ | 0.95 | $ | 0.01 | $ | 0.01 | ||||||||
As of March 11, 2011 there were approximately 15 holders of record of our Class Z warrants.
Dividends
We have not paid any dividends on our common stock to date, and do not anticipate paying any dividends in the foreseeable future. Moreover, restrictive covenants existing in certain promissory notes that we have issued preclude us from paying dividends until those notes are paid in full.
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with the financial statements and accompanying notes included elsewhere in this report.
Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company
The following discussion and analysis should be read together with the Company’s Consolidated Financial Statements and related notes thereto beginning on page F-1. Reference is made to “Cautionary Notes Regarding Forward-Looking Statements” on page 1 hereof, which describes important factors that could cause actual results to differ from expectations and non-historical information contained herein.
Overview
GTT is a global telecommunications carrier and leading network integrator serving the data communications needs of large enterprise, government and carrier clients in over 80 countries. We combine our own network assets with the networks of over 800 suppliers worldwide to deliver cost-effective, scalable solutions supporting each client’s unique requirements. Through our proprietary Client Management Database (CMD), GTT provides streamlined service design and quotation, rapid service implementation, and global 24x7 monitoring and support. GTT is headquartered in the Washington, DC metro region with offices in London, Dusseldorf, and Denver.
The Company sells services largely through a direct sales force located across the globe, as well as strong agent channel relationships. The Company generally competes with traditional, facilities-based providers and other services providers in each of our global markets. As of December 31, 2010, our customer base was comprised of over 700 businesses. Our five largest customers accounted for approximately 19% of consolidated revenues during the year ended December 31, 2010.
Costs and Expenses
The Company’s cost of revenue consists almost entirely of the costs for procurement of services associated with customer services. The key terms and conditions appearing in both supplier and customer agreements are substantially the same, with margin applied to the suppliers’ costs. There are no wages or overheads included in these costs. From time to time, the Company has agreed to certain special commitments with vendors in order to obtain better rates, terms and conditions for the procurement of services from those vendors. These commitments include volume purchase commitments and purchases on a longer-term basis than the term for which the applicable customer has committed.
Our supplier contracts do not have any market related net settlement provisions. The Company has not entered into, and has no plans to enter into, any supplier contracts which involve financial or derivative instruments. The supplier contracts are entered into solely for the direct purchase of telecommunications capacity, which is resold by the Company in its normal course of business.
Other than cost of revenue, the Company’s most significant operating expenses are employment costs. As of December 31, 2010, the Company had 81 employees and employment costs comprised approximately 13% of total operating expenses for the year ended December 31, 2010.
Critical Accounting Policies and Estimates
The Company’s significant accounting policies are described in Note 2 to its accompanying consolidated financial statements. The Company considers the following accounting policies to be those that require the most significant judgments and estimates in the preparation of its consolidated financial statements, and believes that an understanding of these policies is important to a proper evaluation of the reported consolidated financial results.
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Revenue Recognition
The Company provides data connectivity solutions, such as dedicated circuit access, access aggregation and hubbing and managed network services to its customers. Certain of the Company’s current revenue activities have features that may be considered multiple elements. The Company believes that there is insufficient evidence to determine each element’s fair value and as a result, in those arrangements where there are multiple elements, revenue is recorded ratably over the term of the arrangement.
The Company’s services are provided under contracts that typically provide for an installation charge along with payments of recurring charges on a monthly (or other periodic) basis for use of the services over a committed term. Our contracts with customers specify the terms and conditions for providing such services. These contracts call for the Company to provide the service in question (e.g., data transmission between point A and point Z), to manage the activation process, and to provide ongoing support (in the form of service maintenance and trouble-shooting) during the service term. The contracts do not typically provide the customer any rights to use specifically identifiable assets. Furthermore, the contracts generally provide us with discretion to engineer (or re-engineer) a particular network solution to satisfy each customer’s data transmission requirement, and typically prohibit physical access by the customer to the network infrastructure used by the Company and its suppliers to deliver the services.
The Company recognizes revenue as follows:
Network Services and Support. The Company’s services are provided pursuant to contracts that typically provide for payments of recurring charges on a monthly basis for use of the services over a committed term. Each service contract typically has a fixed monthly cost and a fixed term, in addition to a fixed installation charge (if applicable). Variable usage charges are applied when incurred for certain product offerings. At the end of the initial term of most service contracts the contracts roll forward on 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 contractual term of the recurring service starting upon commencement of the service contract term. Fees recorded or billed from these provisioning services are initially recorded as deferred revenue then recognized ratably over the contractual term of the recurring service. Installation costs related to provisioning incurred by the Company from independent third party suppliers, directly attributable and necessary to fulfill a particular service contract, and which costs would not have been incurred but for the occurrence of that service contract, are recorded as deferred contract costs and expensed proportionally over the contractual term of service in the same manner as the deferred revenue arising from that contract. Deferred costs do not exceed deferred upfront fees. The Company believes the initial contractual term is the best estimate of the period of earnings.
Other Revenue. From time to time, the Company recognizes revenue in the form 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.
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The Company does not use estimates in determining amounts of revenue to be recognized. Each service contract has a fixed monthly cost and a fixed term, in addition to a fixed installation charge (if applicable). At the end of the initial term of most service contracts, the contracts roll forward on amonth-to-month or other periodic basis and the Company continues to bill at the same fixed recurring rate.
Estimating Allowances and Accrued Liabilities
The Company employs the “allowance for bad debts” method to account for bad debts. The Company states its accounts receivable balances at amounts due from the customer net of an allowance for doubtful accounts. The Company determines this allowance by considering a number of factors, including the length of time receivables are past due, previous loss history, and the customer’s current ability to pay.
In the normal course of business from time to time, the Company identifies errors by suppliers with respect to the billing of services. The Company performs bill verification procedures to attempt to ensure that errors in its suppliers’ billed invoices are identified and resolved. The bill verification procedures include the examination of bills, comparison of billed rates to rates shown on the actual contract documentation and logged in the Company’s operating systems, comparison of circuits billed to the Company’s database of active circuits, and evaluation of the trend of invoiced amounts by suppliers, including the types of charges being assessed. If the Company concludes by reference to such objective factors that it has been billed inaccurately, the Company will record a liability for the amount that it believes is owed with reference to the applicable contractual rate and, in the instances where the billed amount exceeds the applicable contractual rate, the likelihood of prevailing with respect to any dispute.
These disputes with suppliers generally fall into four categories: pricing errors, network design, start of service date or disconnection errors, and taxation and regulatory surcharge errors. In the instances where the billed amount exceeds the applicable contractual rate the Company does not accrue the full face amount of obvious billing errors in accounts payable because to do so would present a misleading and confusing picture of the Company’s current liabilities by accounting for liabilities that are erroneous based upon a detailed review of objective evidence. If the Company ultimately pays less than the corresponding accrual in resolution of an erroneously over-billed amount, the Company recognizes the resultant decrease in cost of revenue in the period in which the resolution is reached. If the Company ultimately pays more than the corresponding accrual in resolution of an erroneously billed amount, the Company recognizes the resultant cost of revenue increase in the period in which the resolution is reached and during which period the Company makes payment to resolve such account.
Although the Company disputes erroneously billed amounts in good faith and historically has prevailed in most cases, it recognizes that it may not prevail in all cases (or in full) with a particular supplier with respect to such billing errors or it may choose to settle the matter because of the quality of the supplier relationship or the cost and time associated with continuing the dispute. Careful judgment is required in estimating the ultimate outcome of disputing each error, and each reserve is based upon a specific evaluation by management of the merits of each billing error (based upon the bill verification process) and the potential for loss with respect to that billing error. In making such acase-by-case evaluation, the Company considers, among other things, the documentation available to support its assertions with respect to the billing errors, its past experience with the supplier in question, and its past experience with similar errors and disputes. As of December 31, 2010, the Company had $1.9 million in billing errors disputed with suppliers, for which we have accrued $0.7 million in liabilities.
In instances where the Company has been billed less than the applicable contractual rate, the accruals remain on the Company’s consolidated financial statements until the vendor invoices for the under-billed amount or until such time as the obligations related to the under-billed amounts, based upon applicable contract terms and relevant statutory periods in accordance with the Company’s internal policy, have passed. If the Company ultimately determines it has no further obligation related to the under-billed amounts, the Company recognizes a decrease in expense in the period in which the determination is made.
Goodwill and Intangible Assets
Goodwill is the excess purchase price paid over identified intangible and tangible net assets of acquired companies. Goodwill is not amortized, and is tested for impairment at the reporting unit level annually or when there are any indications of impairment, as required by the Financial Accounting Standards Board (“FASB”)
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Accounting Standards Codification (“ASC”) Topic 350,Intangibles — Goodwill and Other(formerly Statement of Financial Accounting Standards“SFAS”No. 142). ASC Topic 350 provides guidance on financial accounting and reporting related to goodwill and other intangibles, other than the accounting at acquisition for goodwill and other intangibles. A reporting unit is an operating segment, or component of an operating segment, for which discrete financial information is available and is regularly reviewed by management. We have one reporting unit to which goodwill is assigned.
A two-step approach is required to test goodwill for impairment. The first step tests for impairment by applying fair value-based tests. The second step, if deemed necessary, measures the impairment by applying fair value-based tests to specific assets and liabilities. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the Company, the useful life over which cash flows will occur, and determination of the Company’s cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and conclusions on goodwill impairment.
The Company performs its annual goodwill impairment testing in the third quarter of each year, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. The Company tested its goodwill during the third quarter of 2010 and 2009 and concluded that no impairment existed.
Intangible assets are assets that lack physical substance, and are accounted for in accordance with ASC Topic 350 and ASC Topic 360,Impairment or Disposal of Long-Lived Assets(formerly SFAS 144). ASC Topic 360 provides guidance for recognition and measurement of the impairment of long-lived assets to be held, used and disposed of by sale. Intangible assets arose from business combinations and consist of customer contracts, acquired technology and restrictive covenants related to employment agreements that are amortized, on a straight-line basis, over periods of up to five years. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. During the third quarter of 2010 and 2009, the Company tested their intangible assets and concluded that no impairment existed.
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740,Income Taxes(formerly SFAS 109). Under ASC Topic 740, deferred tax assets are recognized for future deductible temporary differences and for tax net operating loss and tax credit carry-forwards, and deferred tax liabilities are recognized for temporary differences that will result in taxable amounts in future years. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. A valuation allowance is provided to offset the net deferred tax asset if, based upon the available evidence, management determines that it is more likely than not that some or all of the deferred tax asset will not be realized.
In June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes(“FIN 48”). FIN 48 was codified into ASC Topic 740, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements, and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of the new FASB ASC Topic did not have a material effect on the Company’s consolidated financial statements.
We may from time to time be assessed interestand/or penalties by taxing jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. The Company’s federal tax returns for 2006, 2007, 2008 and 2009 are still open. In the event we have received an assessment for interestand/or penalties, it has been classified in the statement of operations as other general and administrative costs.
Share-Based Compensation
On October 16, 2006, the Company adopted SFAS No. 123 (revised 2004),Share-Based Payment”(“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based
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payment awards made to employees, directors, and consultants based on estimated fair values. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). SFAS 123(R) was codified into ASC Topic 718,Compensation — Stock Compensation.
ASC Topic 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statement of operations. The Company follows the straight-line single option method of attributing the value of stock-based compensation to expense. As stock-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company uses the Black-Scholes option-pricing model as its method of valuation for share-based awards granted. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards and the expected term of the awards. The Company accounts fornon-employee share-based compensation expense in accordance with ASC Topic 505,Equity — Based Payments to Non-Employees (formerly EITF IssueNo. 96-18).
Use of Estimates and Assumptions
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results can, and in many cases will, differ from those estimates.
Recent Accounting Pronouncements
Reference is made to Note 2 (“Significant Accounting Policies”) of the consolidated financial statements, which commence on page F-1 of this report, which Note is incorporated herein by reference.
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Results of Operations of the Company
Fiscal Year Ended December 31, 2010 compared to Fiscal Year Ended December 31, 2009
Overview. The financial information presented in the table below comprises the audited consolidated financial information of the Company for the years ended December 31, 2010 and 2009 (amounts in thousands):
| Year Ended | Year Ended | |||||||
| December 31, 2010 | December 31, 2009 | |||||||
Revenue | ||||||||
| Telecommunications services sold | $ | 81,075 | $ | 64,221 | ||||
Operating expenses: | ||||||||
| Cost of telecommunications services provided | 57,022 | 45,868 | ||||||
| Selling, general and administrative expense | 18,021 | 14,684 | ||||||
| Restructuring costs, employee termination and non- recurring items | — | 641 | ||||||
| Depreciation and amortization | 2,791 | 1,733 | ||||||
| Total operating expenses | 77,834 | 62,926 | ||||||
| Operating income | 3,241 | 1,295 | ||||||
| Other income (expense): | ||||||||
| Interest expense, net | (1,407 | ) | (849 | ) | ||||
| Other income (expense), net | (368 | ) | 24 | |||||
| Total other income (expense) | (1,775 | ) | (825 | ) | ||||
| Income before income taxes | 1,466 | 470 | ||||||
| Provision for income taxes | 96 | 16 | ||||||
| Net income | $ | 1,370 | $ | 454 | ||||
| Earnings per share: | ||||||||
| Basic | $ | 0.08 | $ | 0.03 | ||||
| Diluted | $ | 0.08 | $ | 0.03 | ||||
| Weighted average shares: | ||||||||
| Basic | 16,740,882 | 15,268,826 | ||||||
| Diluted | 16,971,396 | 15,470,763 | ||||||
Revenues. The table below presents the components of revenues for the years ended December 31, 2010 and 2009:
Geographical Revenue | 2010 | 2009 | ||||||
| United States | 76 | % | 58 | % | ||||
| United Kingdom | 15 | % | 29 | % | ||||
| Germany | 9 | % | 13 | % | ||||
| Totals | 100 | % | 100 | % | ||||
The shift in Revenue geographically is the result of the acquisition of WBS Connect which occurred on December 16, 2009 and the sales novations in the third quarter of 2010, both of which had predominantly US-based Revenues.
Total revenue increased $16.9 million, or 26%, for the year ended December 31, 2010 compared to the year ended December 31, 2009 primarily due to the over 400 new customers from the acquisition of WBS Connect which occurred on December 16, 2009 and new sales activities in the third quarter of 2010, including sales novations.
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Costs of Service. Total costs of service increased $11.2 million, or 24%, for the year ended December 31, 2010 compared to the year ended December 31, 2009 primarily due to the WBS Connect acquisition and new sales activities in the third quarter of 2010, including sales novations. As part of the WBS Connect acquisition, GTT added WBS Connect’s network infrastructure assets with over 60 points of presence and a substantial increase in services to provide our new customers.
Selling, General and Administrative Expenses. SG&A increased $3.3 million, or 23% for the year ended December 31, 2010 compared to the year ended December 31, 2009. The increase was due primarily to the WBS Connect acquisition and new sales activities in the third quarter of 2010, including sales novations, which resulted in an increase in agent commission expenses.
Depreciation and Amortization. Depreciation and amortization expense increased $1.1 million, or 61%, to $2.8 million for the year ended December 31, 2010, compared to the year ended December 31, 2009. The increase was due primarily to the WBS Connect acquisition in which GTT added WBS Connect’s network infrastructure assets with over 60 points of presence.
Interest Expense. Interest expense increased $0.6 million, or 66%, to $1.4 million for the year ended December 31, 2010 compared to the year ended December 31, 2009. The increase was primarily due to additional debt assumed and incurred in connection with the WBS Connect acquisition.
Liquidity and Capital Resources (amounts in thousands)
| December 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
| Cash and cash equivalents and short-term investments | $ | 6,562 | $ | 5,548 | ||||
| Debt | $ | 14,265 | $ | 12,707 | ||||
Management monitors cash flow and liquidity requirements. Based on the Company’s cash and cash equivalents, the Silicon Valley Bank credit facility, and analysis of the anticipated working capital requirements, Management believes the Company has sufficient liquidity to fund the business and meet its contractual obligations for 2011. The Company’s current planned cash requirements for 2011 are based upon certain assumptions, including its ability to manage expenses and the growth of revenue from services arrangements. In connection with the activities associated with the services, the Company expects to incur expenses, including provider fees, employee compensation and consulting fees, professional fees, sales and marketing, insurance and interest expense. Should the expected cash flows not be available, management believes it would have the ability to revise its operating plan and make reductions in expenses.
The Company believes that cash currently on hand, expected cash flows from future operations and existing borrowing capacity are sufficient to fund operations for at least the next twelve months, including the scheduled repayment of indebtedness pursuant to the Silicon Valley Bank Term Loan. If our operating performance differs significantly from our forecasts, we may be required to reduce our operating expenses and curtail capital spending, and we may not remain in compliance with our debt covenants. In addition, if the Company were unable to fully fund its cash requirements through operations and current cash on hand, the Company would need to obtain additional financing through a combination of equity and subordinated debt financingsand/or renegotiation of terms of its existing debt. If any such activities become necessary, there can be no assurance that the Company would be successful in obtaining additional financing or modifying its existing debt terms.
Operating Activities. Net cash used in operating activities was $2.2 million for the year ended December 31, 2010, driven primarily by the reduction of approximately $7.0 million in accounts payable, accrued expenses and other current liabilities assumed in the WBS Connect acquisition, and payment of upfront cash to be applied as a recoverable draw on commissions of approximately $3.0 million, offset by net income excluding non-cash expenditures.
During 2010 and 2009, we made cash payments for interest totaling $0.6 million and $0.3 million, respectively. The increase in interest payments was a result of the term loan that was issued during the third quarter of 2010.
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Investing Activities. Net cash used in investing activities decreased to $0.2 million for the year ended December 31, 2010 as compared to $4.1 million for the year ended December 31, 2009. The decrease was primarily due to the purchase of WBS Connect in December 2009. The $0.2 million in investing activities for the year ended December 31, 2010 consists primarily of capital expenditures.
Financing Activities. Net cash provided by financing activities increased to $3.5 million for the year ended December 31, 2010 as compared to $3.1 million for the year ended December 31, 2009. This increase was due to the issuance of a new term loan and subordinate notes in the third and fourth quarter of 2010, respectively.
Effect of Exchange Rate Changes on Cash. Effect of Exchange Rate Changes decreased $0.5 million to $0.1 million for the year ended December 31, 2010 as compared to an effect of $0.6 million for the year ended December 31, 2009, due primarily to cash balances denominated in currencies that weakened against the US Dollar during 2010 as well as impacts to the Company’s current assets and liabilities denominated in currencies that weakened against the US Dollar.
Debt
The following summarizes the debt activity of the Company for the year ended December 31, 2010 (amounts in thousands):
| Promissory | Convertible | |||||||||||||||||||||||||||
| Line of | Subordinated | Note/Capital | Notes | Notes | ||||||||||||||||||||||||
| Total Debt | Term Loan | Credit | Notes | Lease | Payable | Payable | ||||||||||||||||||||||
| Debt obligation as of December 31, 2009 | $ | 12,707 | $ | — | $ | 3,078 | $ | — | $ | 833 | $ | 4,000 | $ | 4,796 | ||||||||||||||
| Subordinated notes issuance | 2,183 | — | — | 2,183 | — | — | — | |||||||||||||||||||||
| Net repayment on senior secured credit facility | (740 | ) | — | (740 | ) | — | — | — | — | |||||||||||||||||||
| WBS promissory note repayment | (250 | ) | — | — | — | (250 | ) | — | — | |||||||||||||||||||
| Principal payments on capital lease | (339 | ) | — | — | — | (339 | ) | — | — | |||||||||||||||||||
| Issuance of term loan | 10,000 | 10,000 | — | — | — | — | — | |||||||||||||||||||||
| Repayment of term loan | (500 | ) | (500 | ) | — | — | — | — | — | |||||||||||||||||||
| Retirement of notes payable | (8,796 | ) | — | — | — | — | (4,000 | ) | (4,796 | ) | ||||||||||||||||||
| Debt obligation as of December 31, 2010 | $ | 14,265 | $ | 9,500 | $ | 2,338 | $ | 2,183 | $ | 244 | $ | — | $ | — | ||||||||||||||
Term Loan and Line of Credit
In December 2009, the Company and Silicon Valley Bank entered into a Second Amended and Restated Credit Facility (the “Restated Credit Facility”). Under the terms of the Restated Credit Facility, the Company’s revolving line of credit was increased to a maximum amount of $5.0 million, with the actual amount available being based on criteria related to the Company’s accounts receivable in the United States (but not to exceed $3.4 million with respect to the United States receivables) and on criteria related to the Company’s accounts receivable in Europe (but not to exceed $2.0 million with respect to the European receivables). The Restated Credit Facility had a364-day term.
On September 30, 2010, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank. The Loan Agreement provides for a term loan facility of $10 million (the “Term Loan”), and a revolving line of credit facility, which replaced the Second Amended and Restated Credit Facility, in the aggregate principal amount of up to $5 million (the “Line of Credit”). The Loan Agreement contains customary representations and warranties of the Borrower and customary events of default. The obligations of the Company under the Loan Agreement are secured by substantially all of the Company’s tangible and intangible assets pursuant to the Loan Agreement. The availability under the Line of Credit is calculated during any month as a percentage of
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eligible accounts receivable and is subject to certain conditions, including the continued accuracy of the Company’s representations, warranties and covenants. The Term Loan matures on September 30, 2015. The Company shall repay the Term Loan in sixty equal installments of principal and interest, with interest accruing at a floating per annum rate equal to Silicon Valley Bank’s prime rate plus 3%, unless the Company achieves certain performance criteria, in which case the interest rate shall be equal to Silicon Valley Bank’s prime rate plus 2%. The Company had $9.5 million outstanding on the Term Loan as of December 31, 2010. The Line of Credit matures on September 29, 2012. The principal amount outstanding under the Line of Credit shall accrue interest at a floating per annum rate equal to Silicon Valley Bank’s prime rate plus 2%, unless the Company achieves certain performance criteria, in which case the interest rate shall be equal to the Bank’s prime rate plus 1%. The Company had $2.3 million outstanding on the Line of Credit at December 31, 2010. On November 12, 2007, the holders of the $4.0 million of notes payable 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, 50% of all interest accrued during 2008 and 2009 was payable on each of December 31, 2008 and 2009, respectively, and all principal and remaining accrued interest was payable on December 31, 2010.
Subordinated Notes
On February 8, 2010, the Company completed a units offering (“February 2012 Units”) in which it sold 500 units consisting of debt and common stock at a purchase price of $10,000 per unit, resulting in $5.0 million of proceeds to the Company. Each unit consisted of 2,970 shares of the Company’s common stock, and $7,000 in principal amount of the Company’s subordinated promissory notes due February 8, 2012. The subordinated promissory notes were issued at a discount to face value of $0.2 million and the discount is being amortized, into interest expense, over the life of the notes. Interest on the subordinated promissory notes accrues at 10% per annum. Accrued but unpaid interest will be payable on February 8, 2011 and 2012.
The proceeds from the February 2012 Units were to be applied by the Company to finance a portion of the purchase price under an asset purchase agreement with Global Capacity. On April 30, 2010 the asset purchase agreement with Global Capacity expired without consummation of the acquisition. On May 13, 2010, investors representing $1.5 million in aggregated principal amount of the Company’s subordinated promissory notes and $0.9 million of the Company’s common stock waived the right to receive their refund and elected to retain some or all of their subordinated promissory notes, which are recorded in long-term debt on the Company’s condensed consolidated balance sheet as of December 31, 2010
On December 31, 2010, the Company completed a financing transaction in which it issued 212 Units, valued at $10,000 per unit (“December 2013 Units”). Each unit consisted of 5,000 shares of the Company’s common stock, and $5,000 in principal amount of the Company’s subordinated promissory notes due December 31, 2013. The subordinated promissory notes were issued at a discount to face value of $0.2 million and the discount is being amortized, into interest expense, over the life of the notes. In total, the Company issued 1,060,000 shares of the Company’s common stock and $1.1 million in principal amount of subordinated promissory notes.
As of December 31, 2010, the subordinated notes payable had a balance of $2.2 million. The balance includes notes totaling $1.9 million due to a related party, Universal Telecommunications, Inc. H. Brian Thompson, the Company’s Executive Chairman of the Board of Directors, is also the head of Universal Telecommunications, Inc., his own private equity investment and advisory firm. Also, included in the balance is $0.1 million of the notes held by officers and directors of the Company.
Promissory Note and Capital Lease
As part of the WBS Connect acquisition, the Company assumed in the acquisition approximately $0.6 million in capital lease obligations payable in monthly installments through April 2011 and issued approximately $0.3 million in subordinated seller notes to the sellers of WBS Connect, due in monthly installments and payable in full by October 2010. The Company paid the $0.3 million in subordinated seller notes in full and has approximately $0.3 million outstanding in capital lease obligations as of December 31, 2010.
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Notes Payable and Convertible Notes Payable
The holders of the convertible notes payable (“December 2010 Notes”) had the right to 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 had 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 included protection against dilutive issuances of the Company’s common stock, subject to certain exceptions. The Company had 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.
On September 30, 2010, proceeds from the Term Loan were used to repay the Company’s $4.0 million of notes payable and $3.1 million of the December 2010 Notes, both due December 31, 2010, as well as $1.5 million in interest accrued on the notes payable and convertible notes.
The December 2013 Units were issued in exchange for the repayment obligation created by the maturity of the December 2010 Notes. The amount of the repayment obligation was equal to the outstanding principal amount (valued at face value) of $1.6 million and accrued but unpaid interest of $0.5 million. Since this was a cashless exchange, there were no cash proceeds to the Company. The December 2010 Notes involved in the exchange were held by Universal Telecommunications, Inc., which is an affiliate of H. Brian Thompson, Howard E. Janzen and Theodore B Smith, III. Messrs. Thompson, Janzen and Smith are members of the Company’s Board of Directors. Given these relationships, the exchange and the terms of the December 2013 Units were reviewed and approved by an independent committee of our Board of Directors.
Contractual Obligations and Commitments
As of December 31, 2010, the Company had total contractual obligations of approximately $52.1 million. Of these obligations, approximately $38.6 million, or 74% are supplier agreements associated with the telecommunications services that the Company has contracted to purchase from its vendors through 2015. The Company generally tries to structure its contracts so the terms and conditions in the vendor and client customer contracts are substantially the same in terms of duration and capacity. 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. However, in certain instances relating to network infrastructure, the Company will enter into purchase commitments with vendors that do not directly tie to underlying customer commitments.
Approximately $11.7 million, or 23%, of the total contractual obligations are associated with subordinated promissory notes and a term loan which mature between 2012 and 2015.
Operating leases amount to $1.8 million, or 3% of total contractual obligations, which consist of building and vehicle leases.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Sensitivity
Interest due on the Company’s loans is based upon the applicable stated fixed contractual rate with the lender. Interest earned on the Company’s bank accounts is linked to the applicable base interest rate. For the year ended December 31, 2010 and 2009, the Company had interest expense, net of income, of approximately $1.4 million and $0.8 million, respectively. The Company believes that its results of operations are not materially affected by changes in interest rates.
Exchange Rate Sensitivity
Approximately 24% of the Company’s revenues for the year ended December 31, 2010 are derived from services provided outside of the United States. As a consequence, a material percentage of the Company’s revenues
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are billed in British Pounds Sterling or Euros. Since we operate on a global basis, we are exposed to various foreign currency risks. First, our consolidated financial statements are denominated in U.S. Dollars, but a significant portion of our revenue is generated in the local currency of our foreign subsidiaries. Accordingly, changes in exchange rates between the applicable foreign currency and the U.S. Dollar will affect the translation of each foreign subsidiary’s financial results into U.S. Dollars for purposes of reporting consolidated financial results.
In addition, because of the global nature of our business, we may from time to time be required to pay a supplier in one currency while receiving payments from the underlying customer of the service in another currency. Although it is the Company’s general policy to pay its suppliers in the same currency that it will receive cash from customers, where these circumstances arise with respect to supplier invoices in one currency and customer billings in another currency, the Company’s gross margins may increase or decrease based upon changes in the exchange rate. Such factors did not have a material impact on the Company’s results in the year ended December 31, 2010.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Reference is made to the consolidated financial statements, the notes thereto, and the reports thereon, commencing onpage F-1 of this report, which consolidated financial statements, notes, and report are incorporated herein by reference.
| ITEM 9A. | CONTROLS AND PROCEDURES |
As of the end of the period covered by this Annual Report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined inRule 13a-15(e) under the Securities Exchange Act of 1934) and internal control over financial reporting.
The evaluation of the Company’s disclosure controls and procedures and internal control over financial reporting included a review of our objectives and processes, implementation by the Company and the effect on the information generated for use in this Annual Report. In the course of this evaluation and in accordance with Section 302 of the Sarbanes Oxley Act of 2002, we sought to identify material weaknesses in our controls, to determine whether we had identified any acts of fraud involving personnel who have a significant role in our internal control over financial reporting that would have a material effect on our consolidated financial statements, and to confirm that any necessary corrective action, including process improvements, were being undertaken. Our evaluation of our disclosure controls and procedures is done quarterly and management reports the effectiveness of our controls and procedures in our periodic reports filed with the SEC. Our internal control over financial reporting is also evaluated on an ongoing basis by personnel in the Company’s finance organization. The overall goals of these evaluation activities are to monitor our disclosure controls and procedures and internal control over financial reporting and to make modifications as necessary. We periodically evaluate our processes and procedures and make improvements as required.
Because of its inherent limitations, disclosure controls and procedures and internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Management applies its judgment in assessing the benefits of controls relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Disclosure Controls and Procedures
Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) information is
29
accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the our disclosure controls and procedures in place at the end of the period covered by this Annual Report pursuant toRule 13a-15(b) of the Exchange Act. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in the Exchange ActRule 13(a)-15(e)) were effective as of December 31, 2010.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange ActRule 13a-15(f). Under the supervision and with the participation of the Company management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework inInternal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2010.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting
There have been no significant changes in our internal control over financial reporting during the most recently completed fiscal quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this Item relating to our directors and corporate governance is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2011 Annual Meeting of Stockholders. The information required by this Item relating to our executive officers is included in Item 1, “Business — Executive Officers” of this report.
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2011 Annual Meeting of Stockholders.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2011 Annual Meeting of Stockholders.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2011 Annual Meeting of Stockholders.
30
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2011 Annual Meeting of Stockholders.
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) Financial Statements
| (1) | Financial Statements are listed in the Index to Financial Statements on page F-1 of this report. | |
| (2) | Schedules have been omitted because they are not applicable or because the information required to be set forth therein is included in the consolidated financial statements or notes thereto. |
(b) Exhibits
The following exhibits, which are numbered in accordance with Item 601 ofRegulation S-K, are filed herewith or, as noted, incorporated by reference herein:
EXHIBIT INDEX
| Exhibit | ||||
Number | Description of Document | |||
| 3 | .1(1) | Second Amended and Restated Certificate of Incorporation dated October 16, 2006. | ||
| 3 | .2(1) | Amended and Restated Bylaws dated October 15, 2006. | ||
| 4 | .1(4) | Specimen of Common Stock Certificate of the Company. | ||
| 4 | .2(4) | Specimen of Class W Warrant Certificate of the Company. | ||
| 4 | .3(4) | Specimen of Class Z Warrant Certificate of the Company. | ||
| 4 | .4(3) | Unit Purchase Option granted to HCFP/Brenner Securities LLC. | ||
| 4 | .5(3) | Warrant Agreement between American Stock Transfer & Trust Company and the Registrant. | ||
| 10 | .5(3) | Investment Management Trust Agreement between American Stock Transfer & Trust Company and the Registrant. | ||
| 10 | .6(1) | Employment Agreement for H. Brian Thompson, dated October 15, 2006. | ||
| 10 | .8(1) | Form ofLock-up letter agreement entered into by the Registrant and the stockholders of Global Internetworking, Inc., dated October 15, 2006. | ||
| 10 | .9(4) | 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 | .10(2) | Form of Registration Rights Agreement. | ||
| 10 | .11(1) | Form of Promissory Note issued to the stockholders of Global Internetworking, Inc., dated October 15, 2006. | ||
| 10 | .12(5) | Note Amendment Agreement entered into by the Registrant and the former stockholders of Global Internetworking, Inc., dated November 13, 2007. | ||
| 10 | .13(6) | Form of Stock Option Agreement. | ||
| 10 | .14(6) | Form of Restricted Stock Agreement. | ||
| 10 | .15(7) | Separation Agreement for D. Michael Keenan, dated February 23, 2007. | ||
| 10 | .16(8) | Employment Agreement for Richard D. Calder, Jr., dated May 7, 2007. | ||
| 10 | .17(5) | Form of Exchange Agreement entered into by the Registrant and certain holders of promissory notes. | ||
| 10 | .18(5) | Form of 10% Convertible Unsecured Subordinated Promissory Note. | ||
| 10 | .19(9) | Loan and Security Agreement entered into by the Registrant, its subsidiary Global Telecom & Technology Americas, Inc. and Silicon Valley Bank, dated March 17, 2008. | ||
| 10 | .20(10) | Amendment No. 1 to the Employment Agreement for Richard D. Calder, Jr., dated July 18, 2008. | ||
31
| Exhibit | ||||
Number | Description of Document | |||
| 10 | .21(11) | Employment Agreement for Eric A. Swank, dated February 2, 2009. | ||
| 10 | .22(12) | Amended and Restated Loan and Security Agreement, dated June 16, 2009, between Silicon Valley Bank, Global Telecom & Technology, Inc. and Global Telecom & Technology Americas, Inc. | ||
| 10 | .23(13) | Purchase Agreement, dated as of November 3, 2009, by and among Global Telecom & Technology Americas, Inc., GTT-EMEA, Limited, WBS Connect, LLC, TEK Channel Consulting, LLC, WBS Connect Europe Ltd., Scott Charter and Michael Hollander. | ||
| 10 | .24(14) | Amendment, dated December 16, 2009, to the Purchase Agreement, dated as of November 2, 2009, by and among Global Telecom & Technology Americas, Inc., GTT-EMEA, Limited, WBS Connect, LLC, TEK Channel Consulting, LLC, WBS Connect Europe Ltd., Scott Charter and Michael Hollander. | ||
| 10 | .25(14) | Waiver, dated December 16, 2009, executed by Global Telecom & Technology Americas, Inc. | ||
| 10 | .26(14) | Promissory Note, dated December 16, 2009, executed by Global Telecom & Technology Americas, Inc. in favor of Scott Charter. | ||
| 10 | .27(14) | Promissory Note, dated December 16, 2009, executed by Global Telecom & Technology Americas, Inc. in favor Michael Hollander. | ||
| 10 | .28(14) | Guaranty, dated December 16, 2009, between Global Telecom & Technology, Inc. and Scott Charter. | ||
| 10 | .29(14) | Guaranty, dated December 16, 2009, between Global Telecom & Technology, Inc. and Michael Hollander. | ||
| 10 | .30(14) | Second Amended and Restated Loan and Security Agreement, dated December 16, 2009, between Silicon Valley Bank, Global Telecom & Technology, Inc., Global Telecom & Technology Americas, Inc., WBS Connect, LLC and GTT-EMEA, Ltd. | ||
| 10 | .31(14) | Amended and Restated Unconditional Guaranty, dated December 16, 2009, executed by TEK Channel Consulting, LLC and GTT Global Telecom Government Services, LLC in favor of Silicon Valley Bank | ||
| 10 | .32(14) | GTT-EMEA, Ltd. Debenture in favor of Silicon Valley Bank. | ||
| 10 | .33(15) | Asset Purchase Agreement, dated December 31, 2009, by and among Capital Growth Systems, Inc., Global Capacity Group, Inc., Global Capacity Direct, LLC (f/k/a Vanco Direct USA, LLC) and Global Telecom & Technology Americas, Inc. | ||
| 10 | .34(16) | Form of Promissory Note of Global Telecom & Technology, Inc. due February 8, 2012. | ||
| 10 | .35(16) | Form of Note Amendment No. 2, dated as of January 14, 2010, by and between Global Telecom & Technology, Inc. and each holder of Global Telecom & Technology’s 10% promissory notes due December 31, 2010 and issued in October 2006. | ||
| 10 | .36(16) | Note Amendment effective as of January 14, 2010, by and among Global Telecom & Technology, Inc. and the holders of Global Telecom & Technology’s 10% promissory notes due December 31, 2010 and issued in November 2007. | ||
| 21 | .1* | Subsidiaries of the Registrant. | ||
| 23 | .1* | Consent of J.H. Cohn LLP. | ||
| 24 | .1* | Power of Attorney (included on the signature page to this report). | ||
| 31 | .1* | Certification of Chief Executive Officer pursuant toRules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934. | ||
| 31 | .2* | Certification of Chief Financial Officer pursuant toRules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934. | ||
| 32 | .1* | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .2* | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| * | Filed herewith | |
| (1) | Previously filed as an Exhibit to the Registrant’sForm 8-K filed October 19, 2006, and incorporated herein by reference. | |
| (2) | Previously filed as an Exhibit to the Registrant’s Amendment No. 1 to the Registration Statement onForm S-1 (RegistrationNo. 333-122303) and incorporated herein by reference. |
32
| (3) | Previously filed as an Exhibit to the Registrant’s Annual Report onForm 10-K filed March 30, 2006, and incorporated herein by reference. | |
| (4) | Previously filed as an Exhibit to the Registrant’sForm 10-Q filed November 14, 2006 and incorporated herein by reference. | |
| (5) | Previously filed as an Exhibit to the Registrant’sForm 8-K filed November 14, 2007 and incorporated herein by reference. | |
| (6) | Previously filed as an Exhibit to the Registrant’s Annual Report onForm 10-K filed April 17, 2007, and incorporated herein by reference. | |
| (7) | Previously filed as an Exhibit to the Registrant’sForm 8-K filed February 23, 2007, and incorporated herein by reference. | |
| (8) | Previously filed as an Exhibit to the Registrant’sForm 8-K filed May 10, 2007, and incorporated herein by reference. | |
| (9) | Previously filed as an Exhibit to the Registrant’sForm 8-K filed March 20, 2008, and incorporated herein by reference. | |
| (10) | Previously filed as an Exhibit to the Registrant’sForm 8-K filed August 4, 2008, and incorporated herein by reference. | |
| (11) | Previously filed as an Exhibit to the Registrant’sForm 8-K filed February 5, 2009, and incorporated herein by reference. | |
| (12) | Previously filed as an exhibit to the Registrant’sForm 8-K filed June 22, 2009, and incorporated herein by reference | |
| (13) | Previously filed as an exhibit to the Registrant’sForm 8-K filed June 22, 2009, and incorporated herein by reference | |
| (14) | Previously filed as an exhibit to the Registrant’sForm 8-K filed December 22, 2009, and incorporated herein by reference. | |
| (15) | Previously filed as an exhibit to the Registrant’sForm 8-K filed January 6, 2010, and incorporated herein by reference. | |
| (16) | Previously filed as an exhibit to the Registrant’sForm 8-K filed February 12, 2010, and incorporated herein by reference. |
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GLOBAL TELECOM & TECHNOLOGY, INC.
| By: | /s/ Richard D. Calder, Jr |
Richard D. Calder, Jr.
President and Chief Executive Officer
Date: March 11, 2011
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard D. Calder, Jr. and Eric A. Swank, jointly and severally, his attorney-in-fact, each with the full power of substitution, for such person, in any and all capacities, to sign any and all amendments to this Annual Report onForm 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might do or could do in person hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on or before March 11, 2011 by the following persons on behalf of the registrant and in the capacities indicated.
Signature | Title | |||
/s/ Richard D. Calder, Jr. Richard D. Calder, Jr. | President, Chief Executive Officer and Director (Principal Executive Officer) | |||
/s/ Eric A. Swank Eric A. Swank | Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | |||
/s/ H. Brian Thompson H. Brian Thompson | Chairman of the Board and Executive Chairman | |||
/s/ S. Joseph Bruno S. Joseph Bruno | Director | |||
/s/ Didier Delepine Didier Delepine | Director | |||
/s/ Rhodric C. Hackman Rhodric C. Hackman | Director | |||
34
Signature | Title | |||
/s/ Howard Janzen Howard Janzen | Director | |||
/s/ Morgan E. O’Brien Morgan E. O’Brien | Director | |||
/s/ Theodore B. Smith, III Theodore B. Smith, III | Director | |||
35
INDEX TO FINANCIAL STATEMENTS
Global Telecom & Technology, Inc. | ||||
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-7 |
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Global Telecom & Technology, Inc.
We have audited the accompanying consolidated balance sheets of Global Telecom & Technology, Inc. and Subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. 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, 2010 and 2009, and their consolidated results of operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ J.H. Cohn LLP
Jericho, New York
March 11, 2011
F-2
Global Telecom & Technology, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except for share and per share data)
Consolidated Balance Sheets
(Amounts in thousands, except for share and per share data)
| December 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
| Cash and cash equivalents | $ | 6,562 | $ | 5,548 | ||||
| Accounts receivable, net | 5,787 | 9,389 | ||||||
| Deferred contract costs | 536 | 454 | ||||||
| Prepaid expenses and other current assets | 1,105 | 937 | ||||||
Total current assets | 13,990 | 16,328 | ||||||
| Property and equipment, net | 1,674 | 2,235 | ||||||
| Intangible assets, net | 5,732 | 7,613 | ||||||
| Other assets | 3,519 | 429 | ||||||
| Goodwill | 29,046 | 29,156 | ||||||
Total assets | $ | 53,961 | $ | 55,761 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
| Accounts payable | $ | 9,279 | $ | 12,204 | ||||
| Accrued expenses and other current liabilities | 6,831 | 11,372 | ||||||
| Short-term debt | 2,245 | 12,463 | ||||||
| Deferred revenue | 5,898 | 6,112 | ||||||
Total current liabilities | 24,253 | 42,151 | ||||||
| Long-term debt | 12,020 | 244 | ||||||
| Deferred revenue and other long-term liabilities | 605 | 352 | ||||||
Total liabilities | 36,878 | 42,747 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
| Common stock, par value $.0001 per share, 80,000,000 shares authorized, 17,880,254 and 15,472,912 shares issued and outstanding as of December 31, 2010 and 2009, respectively | 2 | 2 | ||||||
| Additional paid-in capital | 61,497 | 58,710 | ||||||
| Accumulated deficit | (44,129 | ) | (45,499 | ) | ||||
| Accumulated other comprehensive loss | (287 | ) | (199 | ) | ||||
Total stockholders’ equity | 17,083 | 13,014 | ||||||
Total liabilities and stockholders’ equity | $ | 53,961 | $ | 55,761 | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-3
Global Telecom & Technology, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except for share and per share data)
Consolidated Statements of Operations
(Amounts in thousands, except for share and per share data)
| Year Ended | Year Ended | |||||||
| December 31, 2010 | December 31, 2009 | |||||||
Revenue | ||||||||
| Telecommunications services sold | $ | 81,075 | $ | 64,221 | ||||
Operating expenses: | ||||||||
| Cost of telecommunications services provided | 57,022 | 45,868 | ||||||
| Selling, general and administrative expense | 18,021 | 14,684 | ||||||
| Restructuring costs, employee termination and non-recurring items | — | 641 | ||||||
| Depreciation and amortization | 2,791 | 1,733 | ||||||
| Total operating expenses | 77,834 | 62,926 | ||||||
| Operating income | 3,241 | 1,295 | ||||||
| Other income (expense): | ||||||||
| Interest expense, net | (1,407 | ) | (849 | ) | ||||
| Other income (expense), net | (368 | ) | 24 | |||||
| Total other income (expense) | (1,775 | ) | (825 | ) | ||||
| Income before income taxes | 1,466 | 470 | ||||||
| Provision for income taxes | 96 | 16 | ||||||
| Net income | $ | 1,370 | $ | 454 | ||||
| Earnings per share: | ||||||||
| Basic | $ | 0.08 | $ | 0.03 | ||||
| Diluted | $ | 0.08 | $ | 0.03 | ||||
| Weighted average shares: | ||||||||
| Basic | 16,740,882 | 15,268,826 | ||||||
| Diluted | 16,971,396 | 15,470,763 | ||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-4
Global Telecom & Technology, Inc.
Consolidated Statements of Stockholders’ Equity
(Amounts in thousands, except for share and per share data)
Consolidated Statements of Stockholders’ Equity
(Amounts in thousands, except for share and per share data)
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common Stock | Paid -In | Accumulated | Comprehensive | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income (loss) | Total | |||||||||||||||||||
Balance, December 31, 2008 | 14,942,840 | $ | 1 | $ | 57,584 | $ | (45,953 | ) | $ | 498 | $ | 12,130 | ||||||||||||
| Share-based compensation for options issued | — | — | 169 | — | — | 169 | ||||||||||||||||||
| Share-based compensation for restricted stock issued | 443,115 | 1 | 381 | — | — | 382 | ||||||||||||||||||
| Share-based compensation for restricted stock issued related to WBS acquisition | 86,957 | — | 100 | — | — | 100 | ||||||||||||||||||
| Shares to be issued related to WBS acquisition | — | — | 476 | — | — | 476 | ||||||||||||||||||
| Comprehensive income (loss) | ||||||||||||||||||||||||
| Net income | — | — | — | 454 | — | 454 | ||||||||||||||||||
| Change in accumulated foreign currency gain on translation | — | — | — | — | (697 | ) | (697 | ) | ||||||||||||||||
| Comprehensive loss | (243 | ) | ||||||||||||||||||||||
Balance, December 31, 2009 | 15,472,912 | 2 | 58,710 | (45,499 | ) | (199 | ) | 13,014 | ||||||||||||||||
| Share-based compensation for options issued | — | — | 171 | — | — | 171 | ||||||||||||||||||
| Share-based compensation for restricted stock issued | 417,682 | — | 473 | — | — | 473 | ||||||||||||||||||
| Common shares issued in February 2010 units offering, net of refund | 925,660 | — | 1,139 | — | — | 1,139 | ||||||||||||||||||
| Stock options exercised | 4,000 | — | 1 | — | — | 1 | ||||||||||||||||||
| Shares issued in connection with December 2010 units offering | 1,060,000 | — | 1,279 | — | — | 1,279 | ||||||||||||||||||
| Cancellation of shares to be issued related to WBS Connect acquisition | — | — | (276 | ) | — | — | (276 | ) | ||||||||||||||||
| Comprehensive income (loss) | ||||||||||||||||||||||||
| Net income | — | — | — | 1,370 | — | 1,370 | ||||||||||||||||||
| Change in accumulated foreign currency loss on translation | — | — | — | — | (88 | ) | (88 | ) | ||||||||||||||||
| Comprehensive income | 1,282 | |||||||||||||||||||||||
Balance, December 31, 2010 | 17,880,254 | $ | 2 | $ | 61,497 | $ | (44,129 | ) | $ | (287 | ) | $ | 17,083 | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-5
| Year Ended | Year Ended | |||||||
| December 31, 2010 | December 31, 2009 | |||||||
Cash flows from operating activities: | ||||||||
| Net income | $ | 1,370 | $ | 454 | ||||
| Adjustments to reconcile net income to net cash (used in) provided by | ||||||||
| operating activities | ||||||||
| Depreciation and amortization | 2,791 | 1,733 | ||||||
| Shared-based compensation | 644 | 551 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | 3,310 | 3,191 | ||||||
| Deferred contract cost, prepaid expenses, income tax refund receivable and other current assets | (265 | ) | 1,905 | |||||
| Other assets | (3,120 | ) | 459 | |||||
| Accounts payable | (2,981 | ) | (6,676 | ) | ||||
| Accrued expenses and other current liabilities | (3,988 | ) | 558 | |||||
| Deferred revenue and other long-term liabilities | 51 | (812 | ) | |||||
Net cash (used in) provided by operating activities | (2,188 | ) | 1,363 | |||||
Cash flows from investing activities: | ||||||||
| Acquisition of businesses, net of cash acquired | — | (3,711 | ) | |||||
| Purchases of property and equipment | (186 | ) | (389 | ) | ||||
Net cash used in investing activities | (186 | ) | (4,100 | ) | ||||
Cash flows from financing activities: | ||||||||
| WBS promissory note repayment | (250 | ) | — | |||||
| Principal payments on capital lease | (339 | ) | — | |||||
| Borrowing (repayment) on line of credit | (740 | ) | 3,078 | |||||
| Issuance of term loan | 9,500 | — | ||||||
| Payment of covertible notes payable | (3,171 | ) | — | |||||
| Payment of notes payable | (4,000 | ) | — | |||||
| Issuance of subordinated notes | 1,546 | — | ||||||
| Issuance of units offering common shares | 936 | — | ||||||
Net cash provided by financing activities | 3,482 | 3,078 | ||||||
Effect of exchange rate changes on cash | (94 | ) | (578 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 1,014 | (237 | ) | |||||
Cash and cash equivalents at beginning of year | 5,548 | 5,785 | ||||||
Cash and cash equivalents at end of year | $ | 6,562 | $ | 5,548 | ||||
Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | 559 | $ | 343 | ||||
Supplemental disclosure of non cash investing and financing activities | ||||||||
| Common shares issued | 1,060 | — | ||||||
| Subordinated notes issued | $ | 1,060 | $ | — | ||||
| Accrued interest payable on convertible notes payable retired | $ | (400 | ) | $ | — | |||
| Convertible notes payable retired | $ | (1,625 | ) | $ | — | |||
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-6
Global Telecom & Technology, Inc.
| NOTE 1 — | ORGANIZATION AND BUSINESS |
Organization and Business
Global Telecom & Techonolgy, Inc. (“GTT” or the “Company”) is a Delaware corporation which was incorporated on January 3, 2005. GTT is a global telecommunications carrier and leading network integrator serving the data communications needs of large enterprise, government and carrier clients in over 80 countries. We combine our own network assets with the networks of over 800 suppliers worldwide to deliver cost-effective, scalable solutions supporting each client’s unique requirements. Through our proprietary Client Management Database (CMD), GTT provides streamlined service design and quotation, rapid service implementation, and global 24x7 monitoring and support. GTT is headquartered in the Washington, DC metro region with offices in London, Dusseldorf, and Denver.
GTT serves as the holding company for two operating subsidiaries, Global Telecom & Technology Americas, Inc. (“GTTA”) and GTT — EMEA Ltd. (“GTTE”) and their respective subsidiaries (collectively, hereinafter, the “Company”).
| NOTE 2 — | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation of Consolidated Financial Statements and Use of Estimates
The consolidated financial statements include the accounts of the Company, GTTA, GTTE, and GTTA’s and GTTE’s operating subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
GTTA’s subsidiaries:
GTT Global Telecom, LLC
GTT Global Telecom Government Services, LLC
WBS Connect LLC
TEK Channel Consulting, LLC
GTTE’s subsidiaries:
Global Telecom & Technology SARL (formerly called European Telecommunications & Technology SARL), a French corporation
European Telecommunications & Technology Inc., a Delaware corporation
Global Telecom & Technology Deutschland GmbH (formerly called ETT European Telecommunications & Technology Deutschland GmbH), a German corporation
ETT (European Telecommunications & Technology) Private Limited, an Indian corporation
European Telecommunications & Technology (S) Pte Limited, a Singapore corporation
ETT Network Services Limited, a United Kingdom corporation
WBS Connect Europe, Ltd., a company formed under the laws of Ireland
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 allowances for doubtful accounts, valuation of goodwill and other long-lived assets, accrual for billing disputes, and valuation of equity instruments. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.
F-7
Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
Revenue Recognition
The Company provides data connectivity solutions, such as dedicated circuit access, access aggregation and hubbing and managed network services to its customers. Certain of the Company’s current revenue activities have features that may be considered multiple elements. The Company believes that there is insufficient evidence to determine each element’s fair value and as a result, in those arrangements where there are multiple elements, revenue is recorded ratably over the term of the arrangement.
Network Services and Support. The Company’s services are provided pursuant to contracts that typically provide for payments of recurring charges on a monthly basis for use of the services over a committed term. Each service contract has a fixed monthly cost and a fixed term, in addition to a fixed installation charge (if applicable). At the end of the initial term of most service contracts the contracts roll forward on 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 contractual term of the recurring service starting upon commencement of the service contract term. Fees recorded or billed from these provisioning services are initially recorded as deferred revenue then recognized ratably over the contractual term of the recurring service. Installation costs related to provisioning incurred by the Company from independent third party suppliers, directly attributable and necessary to fulfill a particular service contract, and which costs would not have been incurred but for the occurrence of that service contract, are recorded as deferred contract costs and expensed proportionally over the contractual term of service in the same manner as the deferred revenue arising from that contract. Deferred costs do not exceed deferred upfront fees. Due to its limited operating history, the Company believes the initial contractual term is the best estimate of the period of earnings.
Other Revenue. From time to time, the Company recognizes revenue in the form 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.
Translation of Foreign Currencies
These consolidated financial statements have been reported in U.S. Dollars by translating asset and liability amounts at the closing exchange rate, equity amounts at historical rates, and the results of operations and cash flow at the average exchange rate prevailing during the periods reported.
F-8
Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
A summary of exchange rates used is as follows:
| U.S. Dollars/ | ||||||||||||||||
| British Pounds | U.S. Dollars/ | |||||||||||||||
| Sterling | Euro | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Closing exchange rate at December 31, | 1.55 | 1.61 | 1.33 | 1.44 | ||||||||||||
| Average exchange rate during the period | 1.55 | 1.57 | 1.33 | 1.39 | ||||||||||||
Transactions denominated in foreign currencies are recorded at the rates of exchange prevailing at the time of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange prevailing at the balance sheet date. Exchange differences arising upon settlement of a transaction are reported in the consolidated statements of operations in other income.
Other Income (Expense)
The Company recognized other expense (income), net of approximately $368,000 in expense and $24,000 of income for the years ended December 31, 2010 and 2009, respectively, primarily comprised of the unrealized and realized gain and loss on foreign exchange.
Accounts Receivable, Net
Accounts receivable balances are stated at amounts due from the customer net of an allowance for doubtful accounts. Credit extended is based on an evaluation of the customer’s financial condition and is granted to qualified customers on an unsecured basis.
The Company, pursuant to its standard service contracts, is entitled to impose a finance charge of a certain percentage per month with respect to all amounts that are past due. The Company’s standard terms require payment within 30 days of the date of the invoice. The Company treats invoices as past due when they remain unpaid, in whole or in part, beyond the payment time set forth in the applicable service contract.
The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade receivables are past due, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. Specific reserves are also established on 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, 2010 and 2009, the total allowance for doubtful accounts was $4.1 million and $0.6 million, respectively.
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.
Share-Based Compensation
ASC Topic 718,Compensation — Stock Compensation(formerly SFAS 123(R)), requires the Company to measure and recognize compensation expense for all share-based payment awards made to employees and directors based on estimated fair values.
F-9
Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
Share-based compensation expense recognized under ASC Topic 718 was $0.6 million for both the years ended December 31, 2010 and 2009. Both 2010 and 2009 amounts consisted of approximately $0.2 million of share-based compensation expense related to stock option grants and approximately $0.4 million in restricted stock awards. Share-based compensation expense is included in selling general and administrative expense on the accompanying consolidated statements of operations. See Note 9 for additional information.
ASC Topic 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statement of operations.
Share-based compensation expense recognized in the Company’s consolidated statements of operations for the years ended December 31, 2010 and 2009, included compensation expense for share-based payment awards based on the grant date fair value estimated in accordance with the provisions of ASC Topic 718. The Company follows the straight-line single option method of attributing the value of stock-based compensation to expense. As stock-based compensation expense recognized in the consolidated statement of operations for the years ended December 31, 2010 and 2009 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company uses the Black-Scholes option-pricing model as its method of valuation for share-based awards granted. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and the expected term of the awards.
The Company accounts for non-employee stock-based compensation expense in accordance with ASC Topic 505,Equity — Based Payments to Non-Employees(formerly EITF IssueNo. 96-18). The Company issued non-employee grants totaling 107,502 shares in 2010.
Cash and Cash Equivalents
Included in cash and cash equivalents are deposits with financial institutions as well as short-term money market instruments, certificates of deposit and debt instruments with maturities of three months or less when purchased.
Accounting for Derivative Instruments
The Company accounts for derivative instruments in accordance with ASC Topic 815,Accounting for Derivative Instruments and Hedging Activities,as amended (“SFAS 133”), which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments imbedded in other financial instruments or contracts. The Company also considers ASC Topic815-40-05,Contracts in Entity’s Own Entity,as amended (“EITFNo. 00-19”) which 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.
The Company also considers ASC Topic815-40-15,Evaluating Whether an Instrument is Considered Indexed to an Entity’s Own Stock,as amended (“EITFNo. 07-5”), which was effective for the Company on January 1, 2009. This ASC Topic provides guidance for determining whether an equity-linked financial instrument (or embedded feature) issued by an entity is indexed to the entity’s stock, and therefore, qualifying for the first part of the scope exception inparagraph 815-10-15. The Company evaluated the conversion feature embedded in its convertible notes payable based on the criteria of ASC Topic 815 to determine whether the conversion feature would be required to be bifurcated from the convertible notes and accounted for separately as derivative liabilities. These instruments do not exist at December 31, 2010.
F-10
Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
Taxes
The Company accounts for income taxes in accordance with ASC Topic 740,Income Taxes(formerly SFAS No. 109). Under ASC Topic 740, deferred tax assets are recognized for future deductible temporary differences and for tax net operating loss and tax credit carry-forwards, and deferred tax liabilities are recognized for temporary differences that will result in taxable amounts in future years. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. A valuation allowance is provided to offset the net deferred tax asset if, based upon the available evidence, management determines that it is more likely than not that some or all of the deferred tax asset will not be realized.
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 was codified into ASC Topic 740, which provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company may, from time to time, be assessed interestand/or penalties by taxing jurisdictions, although any such assessments historically have been minimal and immaterial to its financial results. The Company’s federal tax returns for 2006, 2007, 2008 and 2009 are still open. In the event the Company has received an assessment for interestand/or penalties, it has been classified in the statements of operations as other general and administrative costs.
The Company is liable in certain cases for collecting regulatory feesand/or certain sales taxes from its customers and remitting the fees and taxes to the applicable governing authorities. The Company records taxes applicable under ASC Topic 605, Subtopic 45,Revenue Recognition — Principal Agent Considerations(formerly EITFNo. 06-3), on a net basis.
Net Income Per Share
Basic income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share reflect, in periods with earnings and in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options, warrants, and convertible securities.
The table below details the calculations of earnings per share (in thousands):
| Year Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
| Numerator for basic and diluted EPS — income available to common shareholders | $ | 1,370 | $ | 454 | ||||
| Denominator for basic EPS — weighted average shares | 16,741 | 15,269 | ||||||
| Effect of dilutive securities | 230 | 202 | ||||||
| Denominator for diluted EPS — weighted average shares | 16,971 | 15,471 | ||||||
| Earnings per share: Basic and diluted | $ | 0.08 | $ | 0.03 | ||||
F-11
Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
The table below details the anti-dilutive items that were excluded in the computation of earnings per share (in thousands):
| Year Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
| Class W warrants | — | 12,090 | ||||||
| Class Z warrants | 12,090 | 12,090 | ||||||
| Convertible notes | — | 2,819 | ||||||
| Stock options | 504 | 414 | ||||||
| Series A units | — | 250 | ||||||
| Series B units | — | 460 | ||||||
| Total | 12,594 | 28,123 | ||||||
At December 31, 2010, we had 12,090,000 Class Z warrants outstanding, each of which entitles the holder to purchase a share of our common stock at an exercise price of $5.00 per share on or before April 10, 2012.
Software Capitalization
Internal Use Software —The Company recognizes internal use software in accordance with ASC Topic350-40,Internal-Use Software(formerlySOP 98-1). 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.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation computed using the straight-line method. Depreciation on these assets is computed over the estimated useful lives of the assets ranging from three to seven years. Leasehold improvements are amortized over the shorter of the term of the lease, excluding optional extensions, or the useful life. Depreciable lives used by the Company for its classes of assets are as follows:
| Furniture and Fixtures | 7 years | |
| Telecommunication Equipment | 5 years | |
| Leasehold Improvements | up to 10 years | |
| Computer Hardware and Software | 3-5 years | |
| Internal Use Software | 3 years |
Goodwill
Goodwill is the excess purchase price paid over identified intangible and tangible net assets of acquired businesses. Goodwill is not amortized, and is tested for impairment at the reporting unit level annually or when there are any indications of impairment, as required by ASC Topic 350,Intangibles — Goodwill and Other(formerly SFAS 142). ASC Topic 350 provides guidance on financial accounting and reporting related to goodwill and other intangibles, other than the accounting at acquisition for goodwill and other intangibles. A reporting unit is an operating segment, or component of an operating segment, for which discrete financial information is available and is regularly reviewed by management. We have one reporting unit to which goodwill is assigned.
A two-step approach is required to test goodwill for impairment. The first step tests for impairment by applying fair value-based tests. The second step, if deemed necessary, measures the impairment by applying fair values to specific assets and liabilities. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the Company, the useful life over which cash flows will occur, and determination of the Company’s cost of
F-12
Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
capital. Changes in these estimates and assumptions could materially affect the determination of fair value and conclusions on goodwill impairment.
Intangibles
Intangible assets are accounted for in accordance with ASC Topic 350 and ASC Topic 360,Impairment or Disposal of Long-Lived Assets.ASC Topic 360 provides guidance for recognition and measurement of the impairment of long-lived assets to be held, used and disposed of by sale. Intangible assets arose from business combinations and consist of customer contracts, acquired technology and restrictive covenants related to employment agreements that are amortized, on a straight-line basis, over periods of up to five years.
In accordance with ASC Topic 350,the Company reviews long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows the asset is considered to be impaired. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Fair Value of Financial Instruments
The fair values of the Company’s assets and liabilities that qualify as financial instruments under ASC Topic 825,Financial Instruments, including cash and cash equivalents, accounts receivable, accounts payable, short-term debt, and accrued expenses are carried at cost, which approximates fair value due to the short-term maturity of these instruments. The reported amounts of long-term obligations approximate fair value, given management’s evaluation of the instruments’ current rates compared to market rates of interest and other factors.
Comprehensive Income
Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in equity that are excluded from net income. Specifically, cumulative foreign currency translation adjustments are included in accumulated other comprehensive income (loss).
Accrued Carrier Expenses
The Company accrues estimated charges owed to its suppliers for services. The Company bases this accrual on the supplier contract, the individual service order executed with the supplier for that service, the length of time the service has been active, and the overall supplier relationship.
Disputed Carrier Expenses
It is common in the telecommunications industry for users and suppliers to engage in disputes over amounts billed (or not billed) in error or over interpretation of contract terms. The disputed carrier cost included in the consolidated financial statements includes disputed but unresolved amounts claimed as due by suppliers, unless management is confident, based upon its experience and its review of the relevant facts and contract terms, that the outcome of the dispute will not result in liability for the Company. Management estimates this liability and reconciles the estimates with actual results as disputes are resolved, or as the appropriate statute of limitations with respect to a given dispute expires.
As of December 31, 2010, open disputes totaled approximately $1.9 million. Based upon its experience with each vendor and similar disputes in the past, and based upon management review of the facts and contract terms applicable to each dispute, management has determined that the most likely outcome is that the Company will be
F-13
Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
liable for approximately $0.7 million in connection with these disputes, for which accrued liabilities are included on the accompanying consolidated balance sheet at December 31, 2010.
Recent Accounting Pronouncements
In September 2009, the FASB ratified the consensus approach reached at the September 9-10 Emerging Issues Task Force (EITF) meeting on two EITF issues related to revenue recognition. The first, EITF Issueno. 08-01,Revenue Arrangements with Multiple Deliverables, which applies to multiple-deliverable revenue arrangements that are currently within the scope of FASB Accounting Standards Codification (ASC) Subtopic605-25 and the second, EITF Issueno. 09-3,Certain Revenue Arrangements That Include Software Elements,which focuses on determining which arrangements are within the scope of the software revenue guidance in ASC Topic 985 and which are not. Both EITF issues are effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.
Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the Company’s consolidated financial statements or the Company’s future results of operations.
| NOTE 3 — | ACQUISITION |
On December 16, 2009, GTT acquired privately-held WBS Connect. Based in Denver, Colorado, WBS Connect provides wide area network and dedicated Internet access services to over 400 customers worldwide. The acquisition of WBS Connect expanded GTT’s portfolio of dedicated Internet access and Ethernet services. Additionally, GTT added WBS Connect’s network infrastructure assets with over 60 points of presence in major North American, Asian and European metro centers.
The Company accounted for the Acquisition using the purchase method of accounting with GTT treated as the acquiring entity. Accordingly, consideration paid by the Company to complete the acquisition of WBS Connect has been allocated to WBS Connect’s assets and liabilities based upon their estimated fair values as of the date of completion of the Acquisition, December 16, 2009. The Company estimated the fair value of WBS Connect’s assets and liabilities based on discussions with WBS Connect’s management, due diligence and information presented in financial statements.
| Amounts in | ||||
| thousands | ||||
| Purchase Price: | ||||
| Cash consideration paid at closing | $ | 1,050 | ||
| WBS debt extinguished by GTT at closing, including accrued interest and other fees | 2,849 | |||
| Total cash consideration | 3,899 | |||
| Fair value of liabilities assumed | 13,054 | |||
| Fair value of GTT common shares, to be issued over 18 months following the transaction | 476 | |||
| Fair value of earn out consideration | 100 | |||
| Fair value of promissory note issued to former WBS Connect owners | 250 | |||
| Total consideration rendered | $ | 17,779 | ||
F-14
Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
| Amounts in | ||||
| thousands | ||||
| Purchase Price Allocation: | ||||
| Tangible net assets acquired | ||||
| Acquired Assets | ||||
| Current assets | $ | 4,613 | ||
| Property and equipment | 1,175 | |||
| Intangible assets | 4,800 | |||
| Other assets | 35 | |||
| Total fair value of assets acquired | 10,623 | |||
| Goodwill | 7,156 | |||
| Total consideration | $ | 17,779 | ||
The Company settled with the WBS sellers on the number of shares to be delivered under the purchase agreement. Accordingly, there was a measurement period adjustment recorded for the year ended December 31, 2010.
The following schedule presents unaudited consolidated pro forma results of operations as if the Acquisition had occurred on January 1, 2009. This information does not purport to be indicative of the actual results that would have occurred if the Acquisition had actually been completed January 1, 2009, nor is it necessarily indicative of the future operating results or the financial position of the combined company. The unaudited pro forma results of operations do not reflect the cost of any integration activities or benefits that may result from synergies that may be derived from any integration activities.
| Year Ended December 31, 2009 | ||||||||
| Amounts in thousands, | ||||||||
| except per share data | ||||||||
| Revenue | $ | 90,917 | ||||||
| Net income (loss) | $ | (4,344 | ) | |||||
| Net income (loss) per share: | ||||||||
| Basic | $ | (0.28 | ) | |||||
| Diluted | $ | (0.28 | ) | |||||
| NOTE 4 — | GOODWILL AND INTANGIBLE ASSETS |
During the third quarter of 2010, the Company completed its annual goodwill impairment testing in accordance with ASC Topic 350. As part of step one, the Company considered three methodologies to determine the fair-value of our entity:
| • | A market capitalization approach, which measures market capitalization at the measurement date. | |
| • | A discounted cash flow approach, which entails determining fair value using a discounted cash flow methodology. This method requires significant judgment to estimate the future cash flows and to determine the appropriate discount rates, growth rates, and other assumptions. | |
| • | A guideline company approach, which entails analysis of comparable, publicly traded companies. |
Each of these methodologies the Company believes has merit in estimating the value of its goodwill. The Company accordingly employed each of these three methodologies in our analysis and concluded that no impairment existed.
F-15
Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
The following table summarizes the Company’s intangible assets as of December 31, 2010 and 2009 (amounts in thousands):
| December 31, 2010 | ||||||||||||||||||||
| Amortization | Gross Asset | Accumulated | Net Book | |||||||||||||||||
| Period | Cost | Amortization | Impairment | Value | ||||||||||||||||
| Customer contracts | 4-5 years | $ | 4,800 | $ | 1,186 | $ | — | $ | 3,614 | |||||||||||
| Carrier contracts | 1 year | 151 | 151 | — | — | |||||||||||||||
| Noncompete agreements | 4-5 years | 4,800 | 3,165 | 1,269 | 366 | |||||||||||||||
| Software | 7 years | 6,600 | 3,183 | 1,665 | 1,752 | |||||||||||||||
| $ | 16,351 | $ | 7,685 | $ | 2,934 | $ | 5,732 | |||||||||||||
| December 31, 2009 | ||||||||||||||||||||
| Amortization | Gross Asset | Accumulated | Net Book | |||||||||||||||||
| Period | Cost | Amortization | Impairment | Value | ||||||||||||||||
| Customer contracts | 4-5 years | $ | 4,800 | $ | 193 | $ | — | $ | 4,607 | |||||||||||
| Carrier contracts | 1 year | 151 | 151 | — | — | |||||||||||||||
| Noncompete agreements | 4-5 years | 4,800 | 2,634 | 1,269 | 897 | |||||||||||||||
| Software | 7 years | 6,600 | 2,826 | 1,665 | 2,109 | |||||||||||||||
| $ | 16,351 | $ | 5,804 | $ | 2,934 | $ | 7,613 | |||||||||||||
Amortization expense was $1.9 million and $1.2 million for the years ended December 31, 2010 and 2009, respectively.
During the year ended December 31, 2010, the Company adjusted its reported goodwill amount for the settlement with WBS sellers on the amount of shares delivered under the purchase agreement. This resulted in an approximately $0.1 million decrease to goodwill.
Estimated amortization expense related to intangible assets subject to amortization at December 31, 2010 in each of the years subsequent to December 31, 2010 is as follows (amounts in thousands):
Estimated Future Amortization of Intangibles
| 2011 | $ | 1,758 | ||
| 2012 | 1,603 | |||
| 2013 | 1,471 | |||
| 2014 | 900 | |||
| Total | $ | 5,732 | ||
The following table summarizes the Company’s goodwill activity during the years ended December 31, 2010 and 2009 (amounts in thousands):
| Balance December 31, 2008 | $ | 22,000 | ||
| Goodwill acquired related to WBS Connect acquisition | 7,156 | |||
| Balance December 31, 2009 | $ | 29,156 | ||
| Measurement period adjustment related to WBS Connect acquisition | (110 | ) | ||
| Balance December 31, 2010 | $ | 29,046 | ||
F-16
Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
| NOTE 5 — | PROPERTY AND EQUIPMENT |
The following table summarizes the Company’s property and equipment at December 31, 2010 and 2009 (amounts in thousands):
| 2010 | 2009 | |||||||
| Computer equipment | $ | 3,803 | $ | 3,550 | ||||
| Computer software | 528 | 478 | ||||||
| Leasehold improvements | 527 | 539 | ||||||
| Furniture and fixtures | 248 | 242 | ||||||
| Property and equipment, gross | 5,106 | 4,809 | ||||||
| Less accumulated depreciation and amortization | (3,432 | ) | (2,574 | ) | ||||
| Property and equipment, net | $ | 1,674 | $ | 2,235 | ||||
Depreciation expense associated with property and equipment was $0.9 million and $0.5 million for the years ended December 31, 2010 and 2009, respectively.
| NOTE 6 — | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
The following table summarizes the Company’s accrued expenses and other current liabilities as of December 31, 2010 and 2009 (amounts in thousands):
| 2010 | 2009 | |||||||
| Accrued compensation and benefits | $ | 1,217 | $ | 1,880 | ||||
| Accrued interest payable | 184 | 1,546 | ||||||
| Accrued taxes | 1,343 | 2,277 | ||||||
| Accrued carrier costs | 3,792 | 4,599 | ||||||
| Accrued other | 295 | 1,070 | ||||||
| $ | 6,831 | $ | 11,372 | |||||
| NOTE 7 — | INCOME TAXES |
The components of the provision for (benefit from) income taxes for the years ended December 31, 2010 and 2009 are as follows (amounts in thousands):
| 2010 | 2009 | |||||||
| Current: | ||||||||
| Federal | $ | 70 | $ | — | ||||
| State | 26 | — | ||||||
| Foreign | — | 16 | ||||||
| Subtotal | 96 | 16 | ||||||
| Deferred: | ||||||||
| Federal | (452 | ) | (332 | ) | ||||
| State | (58 | ) | (58 | ) | ||||
| Foreign | 545 | (206 | ) | |||||
| Subtotal | 35 | (596 | ) | |||||
| Change in Valuation Allowance | 35 | 596 | ||||||
| Provision for income taxes | $ | 96 | $ | 16 | ||||
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Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
The provision for or benefit from income taxes differs from the amount computed by applying the U.S. federal statutory income tax rates for federal, state, and local to income before income taxes for the reasons set forth below for the years ended December 31, 2010 and 2009:
| 2010 | 2009 | |||||||
| US federal statutory income tax rate | 35.00 | % | 35.00 | % | ||||
| Permanent Items | 0.00 | % | 1.02 | % | ||||
| State Taxes | (2.81 | )% | (3.75 | )% | ||||
| Foreign tax rate differential | (21.06 | )% | (15.10 | )% | ||||
| Change in Valuation Allowance | (12.12 | )% | (23.03 | )% | ||||
| Other Items | 7.57 | % | 9.29 | % | ||||
| Effective Tax Rate | 6.58 | % | 3.43 | % | ||||
As of December 31, 2010, the Company has net operating loss (“NOL”) carryforwards of approximately $20.2 million for tax purposes which will be available to offset future income. These net operating loss carryforwards were generated in a number of jurisdictions. If not used, these carryforwards will expire between 2020 and 2029. Approximately $1.4 million of the Company’s U.S. NOL carryforward may be significantly limited under Section 382 of the Internal Revenue Code (“IRC”). NOL carryforwards are limited under Section 382 when there is a significant “ownership change” as defined in the IRC. During 2006, the Company experienced such an ownership change.
Deferred income taxes reflect the net effects of net operating loss carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities at December 31, 2010 and 2009 are as follows (amounts in thousands):
| 2010 | 2009 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 5,201 | $ | 6,394 | ||||
| Allowance for Doubtful Accounts | 260 | 12 | ||||||
| Fixed Assets | 338 | 390 | ||||||
| Stock Compensation | 1,325 | 1,136 | ||||||
| Miscellaneous items | 150 | 250 | ||||||
| Total deferred tax assets before valuation allowance | 7,274 | 8,182 | ||||||
| Less: Valuation Allowance | (6,739 | ) | (7,017 | ) | ||||
| Total deferred tax assets | 535 | 1,165 | ||||||
| Deferred tax liabilities: | ||||||||
| Identified intangibles | (345 | ) | (1,165 | ) | ||||
| Other miscellaneous items | (190 | ) | — | |||||
| Total deferred tax liabilities | (535 | ) | (1,165 | ) | ||||
| Net deferred tax liability | $ | — | $ | — | ||||
ASC Topic 740 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. The Company believes that it is more likely than not that all of the deferred tax assets will be realized against future taxable income but does not have objective evidence to support this future assumption. Based upon
F-18
Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
the weight of available evidence, which includes the Company’s historical operating performance and the reported accumulated net losses to date, the Company has provided a full valuation allowance against its deferred tax assets, except to the extent that those assets are expected to be realized through continuing amortization of the Company’s deferred tax liabilities for intangible assets.
The majority of the Company’s valuation allowance relates to deferred tax assets in the United Kingdom, the United States, France and Germany.
| NOTE 8 — | SALES NOVATIONS |
On August 31, 2010, the Company entered into sales novation agreements with RevNet International, LLC, a Florida limited liability company (“RevNet”) and with Revelation Networks Incorporated, a Florida corporation (“RNI”). In the agreements, RevNet and RNI assigned and transferred to the Company certain service level agreements and all rights under those agreements, as well as certain supply agreements and obligations there under.
In exchange for the assignment and transfer, the Company paid to RevNet $2.1 million and RNI $0.9 million as upfront cash to be applied as recoverable draws against future agent commission payments, which are included in prepaid expenses and other assets as of December 31, 2010. In addition, the Company agreed to pay to RevNet agent commissions for the seven-year period ending August 31, 2017 and agreed to pay RNI agent commissions for the five-year period ending August 31, 2015. Commencing in September 2011, the Company has the option to reduce the agent commissions to RevNet and RNI by up to 50% until such time as the aggregate dollar amount of such monthly reductions by the Company is equal to the upfront cash payment amounts.
| NOTE 9 — | EMPLOYEE SHARE-BASED COMPENSATION BENEFITS |
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 3,500,000 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 the remaining 75% annually or quarterly over the following three years. The Compensation committee of the Board of Directors, as administrator of the Plan, has the discretion to use a different vesting schedule.
Stock Options
Due to the Company’s limited history as a public company, the Company has estimated expected volatility based on the historical volatility of certain comparable companies as determined by management. The risk-free interest rate assumption is based upon observed interest rates at the time of grant appropriate for the term of the Company’s employee stock options. The dividend yield assumption is based on the Company’s intent not to issue a dividend under its dividend policy. The Company uses the simplified method under ASC Topic 718,
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Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
Compensation — Stock Compensation, to estimate the options’ expected term. Assumptions used in the calculation of the stock option expense were as follows:
| 2010 | 2009 | |||
| Volatility | 93.5% - 97.2% | 92.2% - 98.5% | ||
| Risk free rate | 1.5% - 3.0% | 1.9% - 3.7% | ||
| Term | 6.25 | 6.25 - 9.16 | ||
| Dividend yield | 0.0% | 0.0% |
Stock-based compensation expense recognized in the accompanying consolidated statement of operations for the year ended December 31, 2010 is based on awards ultimately expected to vest, reduced for estimated forfeitures. ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. 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.
During the years ended December 31, 2010 and 2009, the Company recognized compensation expense of $0.2 million and $0.2 million, respectively, related to stock options issued to employees and consultants, which is included in selling, general and administrative expense on the accompanying consolidated statements of operations.
During the year ended December 31, 2010, 338,000 options were granted pursuant to the Plan. The following table summarizes information concerning options outstanding as of December 31, 2010:
| Weighted | ||||||||||||||||||||
| Weighted | Weighted | Average | ||||||||||||||||||
| Average | Average | Remaining | Aggregate | |||||||||||||||||
| Exercise | Fair | Contractual | Intrinsic | |||||||||||||||||
| Options | Price | Value | Life (Years) | Value | ||||||||||||||||
| Balance at December 31, 2009 | 689,500 | $ | 1.20 | $ | 0.82 | 8.32 | $ | 305,660 | ||||||||||||
| Granted | 338,000 | 1.19 | 0.94 | — | 3,260 | |||||||||||||||
| Exercised | 4,000 | 3,196 | ||||||||||||||||||
| Forfeited | (151,344 | ) | 0.97 | 0.57 | — | 84,905 | ||||||||||||||
| Balance at December 31, 2010 | 880,156 | $ | 1.20 | $ | 0.86 | 7.86 | $ | 281,330 | ||||||||||||
| Exercisable | 208,448 | $ | 0.50 | $ | 0.37 | 7.06 | $ | 351,145 | ||||||||||||
As of December 31, 2010, the unvested portion of share-based compensation expense attributable to stock options and the period in which such expense is expected to vest and be recognized is as follows (amounts in thousands):
| 2011 | $ | 129 | ||
| 2012 | 88 | |||
| 2013 | 69 | |||
| 2014 | 17 | |||
| Total | $ | 303 | ||
The fair value of share based compensation for options that vested as of December 31, 2010 was $0.3 million.
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Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
Restricted Stock
The Company expenses restricted shares granted in accordance with the provisions of ASC Topic 718. The fair value of the restricted shares issued is amortized on a straight-line basis over the vesting periods. During the years ended December 31, 2010 and 2009, the Company recognized compensation expense related to restricted stock of approximately $0.5 million and $0.4 million, respectively, which is included in selling, general and administrative expense on the accompanying consolidated statements of operations.
The following table summarizes restricted stock activity during the years ended December 31, 2010 and 2009:
| 2010 | 2009 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Fair | Fair | |||||||||||||||
| Shares | Value | Shares | Value | |||||||||||||
| Nonvested Balance at January 1, | 617,499 | $ | 0.72 | 566,752 | $ | 1.12 | ||||||||||
| Granted | 417,682 | 1.24 | 454,365 | 0.48 | ||||||||||||
| Forfeited | — | — | (11,250 | ) | 0.52 | |||||||||||
| Vested | (367,682 | ) | 1.19 | (392,368 | ) | 0.71 | ||||||||||
| Nonvested Balance at December 31, | 667,499 | $ | 0.91 | 617,499 | $ | 0.72 | ||||||||||
As of December 31, 2010, the unvested portion of share-based compensation expense attributable to restricted stock amounts to $0.3 million which is expected to vest and be recognized during a weighted-average period of 1.2 years.
| NOTE 10 — | DEFINED CONTRIBUTION PLAN |
The Company has a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code that covers substantially all US based employees. Eligible employees may contribute amounts to the plan, via payroll withholding, subject to certain limitations. During 2010, the Company matched 25% of employees’ contributions to the plan. The Company’s 401(k) expense was $63,000 in 2010 and $42,000 in 2009.
| NOTE 11 — | DEBT |
The following summarizes the debt activity of the Company during 2010 (amounts in thousands):
| Convertible | ||||||||||||||||||||||||||||
| Total | Term | Line of | Subordinated | Promissory Note/ | Notes | Notes | ||||||||||||||||||||||
| Debt | Loan | Credit | Notes | Capital Lease | Payable | Payable | ||||||||||||||||||||||
| Debt obligation as of December 31, 2009 | $ | 12,707 | $ | — | $ | 3,078 | $ | — | $ | 833 | $ | 4,000 | $ | 4,796 | ||||||||||||||
| Subordinated notes issuance | 2,183 | — | — | 2,183 | — | — | — | |||||||||||||||||||||
| Net repayment on senior secured credit facility | (740 | ) | — | (740 | ) | — | — | — | — | |||||||||||||||||||
| WBS promissory note repayment | (250 | ) | — | — | — | (250 | ) | — | — | |||||||||||||||||||
| Principal payments on capital lease | (339 | ) | — | — | — | (339 | ) | — | — | |||||||||||||||||||
| Issuance of term loan | 10,000 | 10,000 | — | — | — | — | — | |||||||||||||||||||||
| Repayment of term loan | (500 | ) | (500 | ) | — | — | — | — | — | |||||||||||||||||||
| Retirement of notes payable | (8,796 | ) | — | — | — | — | (4,000 | ) | (4,796 | ) | ||||||||||||||||||
| Debt obligation as of December 31, 2010 | $ | 14,265 | $ | 9,500 | $ | 2,338 | $ | 2,183 | $ | 244 | $ | — | $ | — | ||||||||||||||
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Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
Estimated annual commitments for debt maturities are as follows at December 31, 2010 (amounts in thousands):
| Total Debt | ||||
| 2011 | $ | 2,245 | ||
| 2012 | 5,679 | |||
| 2013 | 2,841 | |||
| 2014 | 2,000 | |||
| 2015 | 1,500 | |||
| $ | 14,265 | |||
Term Loan and Line of Credit
In December 2009, the Company and Silicon Valley Bank entered into a Second Amended and Restated Credit Facility (the “Restated Credit Facility”). Under the terms of the Restated Credit Facility, the Company’s revolving line of credit was increased to a maximum amount of $5.0 million, with the actual amount available being based on criteria related to the Company’s accounts receivable in the United States (but not to exceed $3.4 million with respect to the United States receivables) and on criteria related to the Company’s accounts receivable in Europe (but not to exceed $2.0 million with respect to the European receivables). The Restated Credit Facility had a364-day term.
On September 30, 2010, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank. The Loan Agreement provides for a term loan facility of $10 million (the “Term Loan”), and a revolving line of credit facility, which replaced the Second Amended and Restated Credit Facility, in the aggregate principal amount of up to $5 million (the “Line of Credit”). The Loan Agreement contains customary representations and warranties of the Borrower and customary events of default. The obligations of the Company under the Loan Agreement are secured by substantially all of the Company’s tangible and intangible assets pursuant to the Loan Agreement. The availability under the Line of Credit is calculated during any month as a percentage of eligible accounts receivable and is subject to certain conditions, including the continued accuracy of the Company’s representations, warranties and covenants. The Term Loan matures on September 30, 2015. The Company shall repay the Term Loan in sixty equal installments of principal and interest, with interest accruing at a floating per annum rate equal to Silicon Valley Bank’s prime rate plus 3%, unless the Company achieves certain performance criteria, in which case the interest rate shall be equal to Silicon Valley Bank’s prime rate plus 2%. The Company had $9.5 million outstanding on the Term Loan as of December 31, 2010. The Line of Credit matures on September 29, 2012. The principal amount outstanding under the Line of Credit shall accrue interest at a floating per annum rate equal to Silicon Valley Bank’s prime rate plus 2%, unless the Company achieves certain performance criteria, in which case the interest rate shall be equal to the Bank’s prime rate plus 1%. The Company had $2.3 million outstanding on the Line of Credit at December 31, 2010. On November 12, 2007, the holders of the $4.0 million of notes payable 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, 50% of all interest accrued during 2008 and 2009 was payable on each of December 31, 2008 and 2009, respectively, and all principal and remaining accrued interest was payable on December 31, 2010.
Subordinated Notes
On February 8, 2010, the Company completed a units offering (“February 2012 Units”) in which it sold 500 units consisting of debt and common stock at a purchase price of $10,000 per unit, resulting in $5.0 million of proceeds to the Company. Each unit consisted of 2,970 shares of the Company’s common stock, and $7,000 in principal amount of the Company’s subordinated promissory notes due February 8, 2012. The subordinated promissory notes were issued at a discount to face value of $0.2 million and the discount is being amortized, into
F-22
Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
interest expense, over the life of the notes. Interest on the subordinated promissory notes accrues at 10% per annum. Accrued but unpaid interest will be payable on February 8, 2011 and 2012.
The proceeds from the February 2012 Units were to be applied by the Company to finance a portion of the purchase price under an asset purchase agreement with Global Capacity. On April 30, 2010 the asset purchase agreement with Global Capacity expired without consummation of the acquisition. On May 13, 2010, investors representing $1.5 million in aggregated principal amount of the Company’s subordinated promissory notes and $0.9 million of the Company’s common stock waived the right to receive their refund and elected to retain some or all of their subordinated promissory notes, which are recorded in long-term debt on the Company’s condensed consolidated balance sheet as of December 31, 2010
On December 31, 2010, the Company completed a financing transaction in which it issued 212 Units, valued at $10,000 per unit (“December 2013 Units”). Each unit consisted of 5,000 shares of the Company’s common stock, and $5,000 in principal amount of the Company’s subordinated promissory notes due December 31, 2013. The subordinated promissory notes were issued at a discount to face value of $0.2 million and the discount is being amortized, into interest expense, over the life of the notes. In total, the Company issued 1,060,000 shares of the Company’s common stock and $1.1 million in principal amount of subordinated promissory notes.
As of December 31, 2010, the subordinated notes payable had a balance of $2.2 million. The balance includes notes totaling $1.9 million due to a related party, Universal Telecommunications, Inc. H. Brian Thompson, the Company’s Executive Chairman of the Board of Directors, is also the head of Universal Telecommunications, Inc., his own private equity investment and advisory firm. Also, included in the balance is $0.1 million of the notes held by officers and directors of the Company.
Promissory Note and Capital Lease
As part of the WBS Connect acquisition, the Company assumed in the acquisition approximately $0.6 million in capital lease obligations payable in monthly installments through April 2011 and issued approximately $0.3 million in subordinated seller notes to the sellers of WBS Connect, due in monthly installments and payable in full by October 2010. The Company paid the $0.3 million in subordinated seller notes in full and has approximately $0.3 million outstanding in capital lease obligations as of December 31, 2010.
Notes Payable and Convertible Notes Payable
The holders of the convertible notes payable (“December 2010 Notes”) had the right to 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 had 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 included protection against dilutive issuances of the Company’s common stock, subject to certain exceptions. The Company had 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.
On September 30, 2010, proceeds from the Term Loan were used to repay the Company’s $4.0 million of notes payable and $3.1 million of the December 2010 Notes, both due December 31, 2010, as well as $1.5 million in interest accrued on the notes payable and convertible notes.
The December 2013 Units were issued in exchange for the repayment obligation created by the maturity of the December 2010 Notes. The amount of the repayment obligation was equal to the outstanding principal amount (valued at face value) of $1.6 million and accrued but unpaid interest of $0.5 million. Since this was a cashless exchange, there were no cash proceeds to the Company. The December 2010 Notes involved in the exchange were held by Universal Telecommunications, Inc., which is an affiliate of H. Brian Thompson, Howard E. Janzen and
F-23
Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
Theodore B Smith, III. Messrs. Thompson, Janzen and Smith are members of the Company’s Board of Directors. Given these relationships, the exchange and the terms of the December 2013 Units were reviewed and approved by an independent committee of our Board of Directors.
| 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 $250,000 insured by the US Federal Deposit Insurance Corporation, or in excess of similar Deposit Insurance programs outside of the United States, on deposit at various financial institutions. As of December 31, 2010, approximately $5.8 million of the Company’s deposits were held at institutions as balances in excess of the US Federal Deposit Insurance Corporation and international insured deposit limits for those institutions. However, management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.
For the year ended December 31, 2010, no single customer exceeded 5% of total consolidated revenues. For the year ended December 31, 2009, no single customer exceeded 10% of total consolidated revenues.
| 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 $100,000 supported by hypothecation of a Certificate of Deposit held by the underlying bank in the same amount.
Office Space and Operating Leases
Office facility leases may provide for escalations of rent or rent abatements and payment of pro rata portions of building operating expenses. The Company currently leases facilities located in McLean, Virginia (lease expires December, 2014), London (United Kingdom), (lease expires June, 2012), Düsseldorf (Germany), (lease expires July, 2011) and Denver, Colorado (three month lease that automatically renews unless a notice of non-renewal is delivered). The Company records rent expense using the straight-line method over the term of the lease agreement. Office facility rent expense was $0.8 million and $0.9 million for the years ended December 31, 2010 and 2009, respectively.
The Company has also entered into certain non-cancelable operating lease agreements related to vehicles. Total expense under vehicle leases was $33,000 and $100,000 for the years ended December 31, 2010 and 2009, respectively.
Estimated annual commitments under non-cancelable operating leases are as follows at December 31, 2010 (amounts in thousands):
| Office | ||||
| Space | ||||
| 2011 | $ | 679 | ||
| 2012 | 421 | |||
| 2013 | 327 | |||
| 2014 | 335 | |||
| $ | 1,762 | |||
F-24
Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
Commitments-Supply agreements
As of December 31, 2010, the Company had supplier agreement purchase obligations of $38.6 million associated with the telecommunications services that the Company has contracted to purchase from its vendors. The Company’s contracts are generally such that the terms and conditions in the vendor and client customer contracts are substantially the same in terms of duration. 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.
Estimated annual commitments under supplier contractual agreements are as follows at December 31, 2010 (amounts in thousands):
| Supplier | ||||
| Agreements | ||||
| 2011 | $ | 12,630 | ||
| 2012 | 14,094 | |||
| 2013 | 9,316 | |||
| 2014 | 1,518 | |||
| 2015 | 1,070 | |||
| $ | 38,628 | |||
If a customer disconnects its service before the term ordered from the vendor expires, and if GTT were unable to find another customer for the capacity, GTT may be subject to an early termination liability. Under standard telecommunications industry practice (commonly referred to in the industry as “portability”), this early termination liability may be waived by the vendor if GTT were to order replacement service with the vendor of equal or greater value to the service cancelled. Additionally, the Company maintains some fixed network costs and from time to time if it deems portions of the network are not economically beneficial, the Company may disconnect those portions and potentially incur early termination liabilities. As of December 31, 2010, the Company has $0.2 million accrued for early termination liabilities.
“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, 2010 and 2009, the Company’s aggregate monthly obligations under suchtake-or-pay commitments over the remaining term of all of those contracts totaled $2.6 million and $4.7 million, respectively.
Contingencies-Legal proceedings
The Company is subject to legal proceedings arising in the ordinary course of business. In the opinion of management, the ultimate disposition of those matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity. No material reserves have been established for any pending legal proceeding, either because a loss is not probable or the amount of a loss, if any, cannot be reasonably estimated.
F-25
Global Telecom & Technology, Inc.
Notes to Consolidated Financial Statements — (Continued)
| NOTE 14 — | FOREIGN OPERATIONS |
Our operations are located primarily in the United States and Europe. Our financial data by geographic area is as follows:
| US | UK | Germany | Total GTT | |||||||||||||
| 2010 | ||||||||||||||||
| Revenues by geographic area | $ | 61,685 | $ | 11,857 | $ | 7,533 | $ | 81,075 | ||||||||
| Long-lived assets at December 31 | 39,571 | 509 | 8 | 40,088 | ||||||||||||
| 2009 | ||||||||||||||||
| Revenues by geographic area | $ | 36,941 | $ | 18,917 | $ | 8,363 | $ | 64,221 | ||||||||
| Long-lived assets at December 31 | 38,873 | 561 | (0 | ) | 39,433 | |||||||||||
| NOTE 15 — | SUBSEQUENT EVENTS |
On February 16, 2011, the Company and the holders of the December 2013 Units amended the offering solely to increase the aggregate principal amount available for issuance from $1.1 million to $1.6 million. On February 16, 2011, the Company also completed a financing transaction in which it issued 40 Units, at a purchase price of $10,000 per Unit, for gross proceeds of $400,000. Each Unit was comprised of 5,000 shares of the Company’s common stock, and $5,000 in principal amount of subordinated promissory notes. The subordinated promissory notes were issued at a discount to face value and the discount is being amortized over the life of the notes. The aggregate proceeds of the financing transaction was applied towards working capital.
F-26