| ORGANIZATION AND BUSINESS | ORGANIZATION AND BUSINESS Organization and Business GTT Communications, Inc. (“GTT” or the "Company") is a provider of cloud networking services. The Company offers multinational clients a broad portfolio of global communications services including: EtherCloud® wide area network services; Internet services; managed network and security services; and voice and unified communication services. GTT's global Tier 1 IP network delivers connectivity to clients around the world. The Company provides services to leading multinational enterprises, carriers and government customers. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the Company’s audited financial statements and footnotes thereto for the fiscal year ended December 31, 2015 , included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on March 9, 2016. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted pursuant to such rules and regulations. The condensed consolidated financial statements reflect all adjustments (consisting primarily of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s consolidated financial position and its results of operations. The operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full fiscal year 2016 or for any other interim period. The December 31, 2015 consolidated balance sheet is condensed from the audited financial statements as of that date, but does not include all disclosures required by GAAP. Use of Estimates and Assumptions The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates are used when establishing allowances for doubtful accounts and accruals for billing disputes, determining useful lives for depreciation and amortization and accruals for exit activities, assessing the need for impairment charges (including those related to intangible assets and goodwill), determining the fair values of assets acquired and liabilities assumed in business combinations, accounting for income taxes and related valuation allowances against deferred tax assets and estimating the grant date fair values used to compute the share-based compensation expense. Management evaluates these estimates and judgments on an ongoing basis and makes estimates based on historical experience, current conditions, and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions. Segment Reporting The Company reports operating results and financial data in one operating and reporting segment. The chief operating decision maker manages the Company as a single profit center in order to promote collaboration, provide comprehensive service offerings across its entire customer base, and provide incentives to employees based on the success of the organization as a whole. Although certain information regarding selected products or services are discussed for purposes of promoting an understanding of the Company's complex business, the chief operating decision maker manages the Company and allocates resources at the consolidated level. Revenue Recognition The Company delivers four primary services to its customers — flexible Ethernet-based wide area connectivity services; high bandwidth internet connectivity services; managed network services and security services; and global communication and collaboration services. Certain of its revenue activities have features that may be considered multiple elements, specifically when the Company sells its subscription services in addition to customer premise equipment ("CPE"). The Company believes that there is sufficient evidence to determine each element’s fair value and, as a result, in those arrangements where there are multiple elements, the subscription revenue is recorded ratably over the term of the agreement and the equipment is accounted for as a sale, at the time of sale. The Company's services are provided under contracts that typically include an installation charge along with payments of recurring charges on a monthly basis for use of the services over a committed term. Its contracts with customers specify the terms and conditions for providing such services, including installation date, recurring and non-recurring fees, payment terms, and contract length. 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 the Company with discretion to engineer (or re-engineer) a particular network solution to satisfy each customer’s data transmission requirement, and typically prohibit physical access by the customer to the network infrastructure used by the Company and its suppliers to deliver the services. The Company recognizes revenue as follows: Monthly Recurring Revenue. Monthly recurring revenue represents the substantial majority of the Company's revenue, and consists of fees charged for ongoing services that are generally fixed in price and billed on a recurring monthly basis over the specified term of the commitment. At the end of the term, most contracts provide for a continuation of services on the same terms, either for a specified renewal period (e.g., one year) or on a month-to-month basis. The Company records recurring revenue based on the fees agreed to in each contract, as long as the contract is in effect, and as long as collectability is reasonably assured. Burst Revenue. Burst revenue represents variable charges for certain services, based on specific usage of those services, or usage above a fixed threshold, billed monthly in arrears. The Company records burst revenue based on actual usage charges billed using the rates and/or thresholds specified in each contract, as long as collectability is reasonably assured. Non-recurring Revenue. Non-recurring revenue consists of charges for installation in connection with the delivery of recurring communications services, late payments, cancellation fees, early termination fees, and equipment sales. Fees billed for installation services are initially recorded as deferred revenue then recognized ratably over the contractual term of the recurring service. Fees charged for late payments, cancellation (pre-installation) or early termination (post-installation) are typically fixed or determinable per the terms of the respective contract, and are recognized as revenue when billed if collectability is reasonably assured. In addition, from time to time the Company sells communications and/or networking equipment to its customers in connection with its data networking services. The Company recognizes revenue from the sale of equipment at the contracted selling price when title to the equipment passes to the customer (generally F.O.B. origin) and when collectability is reasonably assured. Universal Service Fund (USF), Gross Receipts Taxes and Other Surcharges The Company is liable in certain cases for collecting regulatory fees and/or certain sales taxes from its customers and remitting the fees and taxes to the applicable governing authorities. Where the Company collects on behalf of a regulatory agency, the Company does not record any revenue. The Company records applicable taxes on a net basis. Cost of Telecommunications Services Cost of telecommunications services includes direct costs incurred in accessing other telecommunications providers’ networks in order to provide telecommunication services to the Company's customers, and expenses for connection to other carriers. The cost of the Company's core network is usually renewed on an annual basis. Connectivity from the Company's core network to a customer premise is typically contracted using matching terms to the customer. Cost of telecommunications services also includes co-location charges, usage-based access charges and professional services fees incurred pursuant to a customer's service contract. Share-Based Compensation The Company recognizes share-based compensation expense for share-based payment awards based on the grant date fair value. The fair value of stock options is determined on the date of grant using the Black-Scholes option-pricing model. The expense is recognized on a straight-line basis over the requisite service period. Share-based compensation expense also includes restricted stock grants for performance awards. The Company recognizes share-based compensation expense for these grants when the achievement of the performance criteria is considered probable. Income Taxes Income taxes are accounted for under the asset and liability method pursuant to GAAP. Under this method, deferred tax assets and liabilities are recognized for the expected future results attributable to the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the change. Further, deferred tax assets are recognized for the expected realization of available net operating loss and tax credit carryforwards. A valuation allowance is recorded on gross deferred tax assets when it is “more likely than not” that such asset will not be realized. When evaluating the realizability of deferred tax assets, all evidence, both positive and negative is evaluated. Items considered in this analysis include the ability to carry back losses, the reversal of temporary differences, tax planning strategies, and expectations of future earnings. The Company reviews its deferred tax assets on a quarterly basis to determine if a valuation allowance is required based upon these factors. Changes in the Company's assessment of the need for a valuation allowance could give rise to a change in such allowance, potentially resulting in additional expense or benefit in the period of change. The Company's income tax provision includes U.S. federal, state, local and foreign income taxes and is based on pre-tax income or loss. In determining the annual effective income tax rate, the Company analyzes various factors, including its annual earnings and taxing jurisdictions in which the earnings were generated, the impact of state and local income taxes and its ability to use tax credits and net operating loss carryforwards. Under GAAP for income taxes, the amount of tax benefit to be recognized is the amount of benefit that is “more likely than not” to be sustained upon examination. The Company analyzes its tax filing positions in all of the U.S. federal, state, local and foreign tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, the Company determines that uncertainties in tax positions exist, a liability is established in the consolidated financial statements. The Company recognizes accrued interest and penalties related to unrecognized tax positions in the provision for income taxes. Comprehensive Income (Loss) In addition to net income (loss), comprehensive loss includes certain charges or credits to equity occurring other than as a result of transactions with stockholders. For the Company, this consists of foreign currency translation adjustments. Earnings (Loss) Per Share Basic earnings (loss) per share is computed by dividing net income or (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share reflect, in periods with earnings and in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options. The table below details the calculations of earnings (loss) per share (in thousands, except for share and per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2016 2015 2016 2015 Numerator for basic and diluted EPS – earnings (loss) available to common stockholders $ 5,127 $ 1,762 $ 6,114 $ (8,284 ) Denominator for basic EPS – weighted average shares 37,152,063 34,981,104 36,998,607 34,603,144 Effect of dilutive securities 633,858 907,421 482,807 — Denominator for diluted EPS – weighted average shares 37,785,921 35,888,525 37,481,414 34,603,144 Earnings (loss) per share: basic $ 0.14 $ 0.05 $ 0.17 $ (0.24 ) Earnings (loss) per share: diluted $ 0.14 $ 0.05 $ 0.16 $ (0.24 ) The anti-dilutive common share items that were excluded in the computation of earnings per share were approximately 4,000 shares as of September 30, 2016 . There were approximately 5,000 anti-dilutive common shares as of September 30, 2015 . Cash and Cash Equivalents Cash and cash equivalents may include deposits with financial institutions as well as short-term money market instruments, certificates of deposit and debt instruments with maturities of three months or less when purchased. 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 monthly finance charge with respect to 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 date set forth in the applicable service contract. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade receivables are past due, the customer’s payment history, current ability to pay its obligation, and the condition of the general economy and the industry as a whole. Specific reserves are also established on a case-by-case basis by management. Actual bad debts, when determined, reduce the allowance. The Company periodically evaluates the collectability of accounts receivable and writes off accounts after a determination is made that the amounts at issue are no longer likely to be collected, following the exercise of reasonable collection efforts. Deferred Costs Installation costs related to provisioning of recurring communications services that the Company incurs from independent third party suppliers, directly attributable and necessary to fulfill a particular service contract, and which would not have been incurred but for the occurrence of that service contract, are recorded as deferred costs and expensed ratably over the contractual term of service in the same manner as the deferred revenue arising from that contract. Based on historical experience, the Company believes the initial contractual term is the best estimate for the period of earnings. If any installation costs exceed the amount of corresponding deferred revenue, the excess cost is recognized in the current period. Property and Equipment Property and equipment is 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. Assets and liabilities under capital leases are recorded at the lesser of the present value of the aggregate future minimum lease payments or the fair value of the assets under lease. Leasehold improvements and assets under capital leases are amortized over the shorter of the term of the lease, excluding optional extensions, or the useful life. Depreciable lives used by the Company for its classes of assets are as follows: Furniture and Fixtures 7 years Network Equipment 5 years Leasehold Improvements up to 10 years Computer Hardware and Software 3-5 years The Company reviews long-lived assets 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 cost to sell or dispose. Software Capitalization Software development costs include costs to develop software programs to be used solely to meet the Company's internal needs. The Company capitalizes development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended. The Company capitalized approximately $0.4 million and $1.2 million for developing such software applications during the three and nine months ended September 30, 2016 . The capitalized costs were no t material in 2015. Goodwill and Intangible Assets The Company records as goodwill, the excess of purchase price over the fair value of the identifiable net assets acquired. The goodwill is assessed for impairment on at least an annual basis on October 1 unless interim indicators of impairment exist. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair value. The Company operates as a single operating segment and as a single reporting unit for the purpose of evaluating goodwill. Accounting guidance prescribes a two-step process for impairment testing of goodwill and intangibles with indefinite lives. The guidance also allows preparers to qualitatively assess goodwill impairment through a screening process, referred to as "Step 0", which would permit companies to forgo Step 1 of their annual goodwill impairment process. The Company has elected to perform Step 0 for its annual impairment assessment of goodwill on October 1, 2016. The Step 0 analysis focused on a number of events and circumstances that may be considered when making this qualitative assessment. Upon careful consideration of these events and circumstances the Company concluded that its fair value (primarily based on market capitalization) of the reporting unit was greater than the carrying amount. During the nine months ended September 30, 2016 and during 2015, the Company did not record any goodwill impairment. The Company's definite-lived intangible assets are acquired in business combinations and recorded at their fair value. The Company reviews its recorded definite-lived intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between fair value and the carrying value of the asset. The Company's definite-lived intangible assets, consisting of customer relationships, restrictive covenants related to employment agreements, license fees, and intellectual property are amortized on a straight-line basis, over their estimated useful lives of periods up to seven years. FCC Licenses are accounted for as a definite-lived intangible asset and amortized over the average remaining useful life of such licenses which approximates three years. Intellectual property consisting of know-how related to the SIP trunking platform is amortized over the estimated useful life of ten years. The Company's indefinite-lived intangible asset consists of a trade name that is not amortized, but is tested on at least an annual basis as of October 1 unless interim indicators of impairment exist. As of October 1, 2016, the Company performed its annual impairment test of the trade name, using the royalty relief method for valuation, and concluded that the fair value of the trade name was greater than the carrying amount. However, due to the re-branding of certain network operations associated to the acquired trade name, the Company concluded that the trade name should be deemed a definite-lived intangible asset with an estimated useful life of three years, to be amortized prospectively as of October 1, 2016. Business Combinations The Company includes the results of operations of the businesses that it acquires commencing on the respective dates of acquisition. The Company allocates the fair value of the purchase price of its acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. Accrued Supplier 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, and the length of time the service has been active. Disputed Supplier Expenses It is common in the telecommunications industry for customers and suppliers to engage in disputes over amounts billed (or not billed) in error or over interpretation of contract terms. Management estimates a liability for the amounts the Company believes are valid and that the Company owes to a supplier. This liability is reconciled with actual results as disputes are resolved, or as the appropriate statute of limitations with respect to a given dispute expires. As of September 30, 2016 , the Company had open disputes, not accrued for, of $8.3 million . As of December 31, 2015 , the Company had open disputes, not accrued for, of $6.9 million . Acquisition Earn-outs and Holdbacks Acquisition earn-outs and holdbacks represent either contingent consideration subject to re-measurement to fair value, or fixed deferred consideration due to be paid out typically on the one-year anniversary of an acquisition's closing. Contingent consideration is remeasured to fair value at each reporting period. The portion of the deferred consideration due within one year is recorded as a current liability until paid, and any consideration due beyond one year is recorded in other long-term liabilities. Debt Issuance Costs Debt issuance costs represent costs that qualify for deferral associated with the issuance of new debt or the modification of existing debt facilities. The unamortized balance of debt issuance costs is presented as a reduction to the carrying value of long-term debt. Debt issuance costs are amortized and recognized on the condensed consolidated statements of operations as interest expense. The unamortized debt issuance costs were $9.2 million and $10.9 million as of September 30, 2016 and December 31, 2015 , respectively. Original Issue Discount Original issue discount ("OID") is the difference between the face value of debt and the amount of principle received when the loan was originated. When the debt reaches maturity, the face value of the debt is payable. The Company recognizes OID by accretion of the discount as interest expense over the term of the debt. For periods ended September 30, 2016 and December 31, 2015 , the unamortized portion of the OID was $7.2 million and $7.8 million , respectively. Translation of Foreign Currencies For operations of subsidiaries located outside the U.S., the local currency is the functional currency for financial reporting purposes. These consolidated financial statements have been reported in U.S. Dollars by translating asset and liability amounts of foreign subsidiaries at the closing currency exchange rate, equity amounts at historical rates, and the results of operations and cash flow at the average currency exchange rate prevailing during the periods reported. The net effect of such translation gains and losses are reflected in accumulated other comprehensive loss in the stockholders' equity section of the condensed consolidated balance sheets. Transactions denominated in foreign currencies other than a subsidiary's functional currency are recorded at the rates of exchange prevailing at the time of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange prevailing at the balance sheet date. Exchange differences arising upon settlement of a transaction are reported in the condensed consolidated statements of operations in other expense, net. Fair Value Measurements Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the Company is required to classify certain assets and liabilities based on the following hierarchy: Level 1: Quoted prices for identical assets or liabilities in active markets that can be assessed at the measurement date. Level 2: Inputs other than quoted prices included in level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Inputs reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments valuation. The guidance requires the use of observable market data if such data is available without undue cost and effort. As of September 30, 2016 and December 31, 2015, the carrying amounts reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, and other liabilities approximated fair value due to the short-term nature of these instruments. The carrying value of the Company's long-term debt, net of unamortized debt issuance costs and unamortized original issuance discount was $416.5 million and $386.2 million , as of September 30, 2016 and December 31, 2015, respectively. Based on trading activity of the Company's specific debt, the fair value of the Company's long-term debt as of September 30, 2016 and December 31, 2015 was estimated to approximate its carrying value. The Company's fair value estimates of the long-term debt were based on level 2 inputs; quoted prices for similar instruments in active markets. The Company recorded an earn-out for an acquisition consummated in 2014 at fair value. The earn-out was fully settled in the second quarter of 2016 at the fair value as of December 31, 2015. The fair value of the earn-out was $0.5 million as of December 31, 2015, which was estimated to be the same as its carrying value, based on level 3 inputs. Assets measured at fair value on a non-recurring basis include goodwill, tangible assets, and intangible assets. Such assets are reviewed quarterly for impairment indicators. If a triggering event has occurred, the assets are re-measured when the estimated fair value of the corresponding asset group is less than the carrying value. The fair value measurements, in such instances, are based on significant unobservable inputs (level 3). C oncentrations of Credit Risk Financial instruments potentially subject to concentration of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. At times during the periods presented, the Company had funds in excess of $250,000 insured by the U.S. Federal Deposit Insurance Corporation, or in excess of similar Deposit Insurance programs outside of the United States, on deposit at various financial institutions. 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. The Company's trade accounts receivable are generally unsecured and geographically dispersed. No single customer's trade accounts receivable balance as of September 30, 2016 and December 31, 2015 exceeded 10% of the Company's consolidated accounts receivable, net. No single customer accounted for more than 10% of revenue for the nine months ended September 30, 2016 and 2015. Related Party Transactions From time to time and in the ordinary course of business, the Company engages in contracts with various vendors for certain networking services and equipment, to support the Company's broad range of communication services it provides to its clients. Several members of the Company's Board of Directors have relationships with these vendors that meet the definition of a related party transaction, as described in the SEC, Item 404 of Regulation S-K. The majority of these contracts were in place before the Board member joined the Company's Board of Directors, or the contracts were assumed as part of the Company's business acquisitions. The related party relationships and the contractual obligations paid and received by the Company for the nine months ended September 30, 2016 have not materially changed from fiscal 2015, as disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2015. As a matter of corporate governance policy and practice, related party transactions are presented and considered by the Audit Committee of the Company's Board of Directors in accordance with the Company's Code of Business Conduct and Ethics, Conflict of Interest Policy . Newly Adopted Accounting Principles For information regarding newly adopted accounting principles, please refer to the "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and Note 2 to our consolidated financial statements contained therein. The Company has not adopted any new accounting principles for the third quarter of 2016. Recent Accounting Pronouncements In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. As such, the updated standard will be effective in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. The Company is still evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures. In February 2016, the FASB issued ASU 2016-02, Leases , which will require most leases (with the exception of leases with terms of less than one year) to be recognized on the balance sheet as an asset and a lease liability. Leases will be classified as an operating lease or a financing lease. Operating leases are expensed using the straight-line method whereas financing leases will be treated similarly to a capital lease under the current standard. The new standard will be effective for annual and interim periods, within those fiscal years, beginning after December 15, 2018 but early adoption is permitted. The new standard must be presented using the modified retrospective method beginning with the earliest comparative period presented. The Company is currently evaluating the effect of the new standard on its consolidated financial statements and related disclosures. In March 2 |
