Attached files
file | filename |
---|---|
EX-31.1 - EX-31.1 - GTT Communications, Inc. | w77852exv31w1.htm |
EX-31.2 - EX-31.2 - GTT Communications, Inc. | w77852exv31w2.htm |
EX-23.1 - EX-23.1 - GTT Communications, Inc. | w77852exv23w1.htm |
EX-21.1 - EX-21.1 - GTT Communications, Inc. | w77852exv21w1.htm |
EX-32.1 - EX-32.1 - GTT Communications, Inc. | w77852exv32w1.htm |
EX-32.2 - EX-32.2 - GTT Communications, Inc. | w77852exv32w2.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
Commission file number 000-51211
Global Telecom & Technology, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 20-2096338 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
8484 Westpark Drive
Suite 720
McLean, Virginia 22102
(703) 442-5500
Suite 720
McLean, Virginia 22102
(703) 442-5500
(Address including zip code, and telephone number, including area
code, of principal executive offices)
code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
Class W Warrants
Class Z Warrants
(Title of Class)
Class W Warrants
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 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). 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 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy statements or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 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 in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of the common stock held by non-affiliates of the registrant
(7,098,043 shares) based on the $1.30 closing price of the registrants common stock as reported on
the Over-the-Counter Bulletin Board on June 30, 2009, was $9,227,456. For purposes
of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed
to be affiliates. Such determination should not be deemed to be an admission that such officers,
directors or 10% beneficial owners are, in fact, affiliates of the registrant.
As of March 24, 2010 there were outstanding 17,216,390 shares of the registrants common
stock, par value $.0001 per share.
Documents Incorporated by Reference
Portions of our definitive proxy statement for the 2010 Annual Meeting of Stockholders, to be
filed within 120 days after the end of the fiscal year covered by this Form 10-K, are incorporated
by reference into Part III hereof.
TABLE OF CONTENTS
CAUTIONARY NOTES REGARDING FORWARD-LOOKING STATEMENTS
Our Form 10-K (Annual Report) includes certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, which reflect the current views of
Global Telecom & Technology, Inc., with respect to current events and financial performance. You
can identify these statements by forward-looking words such as may, will, expect, intend,
anticipate, believe, estimate, plan, could, should, and continue or similar words.
These forward-looking statements may also use different phrases. From time to time, Global Telecom
& Technology, Inc., which we refer to as we, us or our and in some cases, GTT or the
Company, also provides forward-looking statements in other materials GTT releases to the public
or files with the United States Securities & Exchange Commission (SEC), as well as oral
forward-looking statements. You should consult any further disclosures on related subjects in our
quarterly reports on Form 10-Q and current reports on Form 8-K filed with the SEC.
Such forward-looking statements are and will be subject to many risks, uncertainties and
factors relating to our operations and the business environment that may cause our actual results
to be materially different from any future results, express or implied, by such forward-looking
statements. Factors that could cause GTTs actual results to differ materially from these
forward-looking statements include, but are not limited to, the following:
| our ability to renegotiate or refinance our indebtedness due in 2010 and the financial and other terms of any renegotiated or refinanced indebtedness; | ||
| our ability to obtain capital; | ||
| 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; | ||
| 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.
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
1
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 this Form 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.
2
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 network integrator providing a broad portfolio of
Wide-Area Network (WAN), dedicated Internet access, and managed data services. With over 800
supplier relationships worldwide, GTT combines multiple networks and technologies such as
traditional OC-x, MPLS and Ethernet, to deliver cost-effective solutions specifically designed for
each clients unique requirements. GTT enhances its client performance through its proprietary
Client Management Database (CMD), providing customers with an integrated support system for all of
their services. GTT is committed to providing comprehensive solutions, project management and 24x7
global operations support.
On December 16, 2009, GTT acquired privately-held WBS Connect, L.L.C., TEK Channel Consulting,
LLC and WBS Connect Europe Ltd. (collectively WBS Connect). WBS Connect, based in Denver,
Colorado, is a provider of global IP transit and data transport services worldwide.
Headquartered in McLean, Virginia, GTT has offices in Denver, London and Dusseldorf, and
provides services to more than 700 enterprise, government, and carrier clients in over 80 countries
worldwide.
Our Customers
Our customer base includes direct enterprise customers (including government agencies), system
integrators and telecommunications carriers.
As of December 31, 2009, our customer base was comprised of over 700 businesses. These
customers included Global 500 companies, some of which are in the global banking, manufacturing,
communications, and media industries. For the year ended December 31, 2009, no single customer
accounted for more than 10% of our total consolidated revenues. Our five largest customers
accounted for approximately 36% 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, 2009, approximately 58% of our revenue was attributable to our
operations based in the United States, 29% was attributable to operations based in the United
Kingdom, and 13% 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.
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
As of December 31, 2009, we had over 800 supplier relationships worldwide from which we source
bandwidth and other services to meet our customers requirements. Through our extensive supplier
relationships, our customers have access to an array of service providers without having to manage
multiple contracts. For example, on many point-to-point private line connections we may contract
with three different suppliers, such as an access supplier at each end of the connection and a
third network services provider for the long-haul connection between them.
Our supplier management teams interact 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
3
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 suppliers 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.
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 larger
new customers.
Our sales and marketing efforts are focused on generating new business opportunities through
industry contacts, new product offerings, and long-term relationships with new and existing
customers. Our sales activities are specifically focused on recruiting seasoned industry experts
with deep ties to the direct enterprise, system 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 includes project management and development of our CMD system. Global
project management assures the successful implementation of a 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 global Network Operations Center (NOC)
and 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 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 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 countrys laws and regulations apply to telecommunications that originate or
terminate in, or in some instances traverse, that country. The regulation of the telecommunications
industry is changing rapidly, and varies from state to state and from country to country.
Where certification or licensing is required, carriers are required to comply with certain
ongoing responsibilities. For example, we may be required to submit periodic reports to various
telecommunications regulatory authorities relating to the provision of services within the relevant
jurisdiction. Another potential ongoing responsibility relates to payment of regulatory fees and
the
4
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 procure and/or
provide and, in some instances, may affect demand for or the costs of providing our services.
State Regulation
The Telecommunications Act of 1996, as amended generally prohibits state and local governments
from enforcing any law, rule, or legal requirement that prohibits or has the effect of prohibiting
any person from providing any interstate or intrastate telecommunications service. However, states
retain jurisdiction to adopt regulations necessary to preserve universal service, protect public
safety and welfare, ensure the continued quality of communications services, and safeguard the
rights of consumers. Generally, each carrier must obtain and maintain certificates of authority
from regulatory bodies in states in which it offers intrastate telecommunications services. In most
states, a carrier must also file and obtain prior regulatory approval of tariffs containing the
rates, terms and conditions of service for its regulated intrastate services. A state may also
impose telecommunications regulatory fees, fees related to the support for universal service, and
other costs and reporting obligations on providers of services in that state. We are currently
authorized to provide intrastate services in more than 20 states and the District of Columbia as an
interexchange carrier and/or a competitive local provider.
Foreign Regulation
Generally, the provisioning to U.S. customers of international telecommunications services
originating or terminating in the United States is governed by the FCC. In addition, the regulatory
requirements to operate within a foreign country or to provide services to customers within that
foreign country vary from jurisdiction to jurisdiction, although in some respects regulation in the
Western European markets is harmonized under the regulatory structure of the European Union. As
opportunities arise in particular nations, we may need to apply for and acquire various
authorizations to operate and provide certain kinds of telecommunications services. Although some
countries require complex applications procedures for authorizations and/or impose certain
reporting and fee payment requirements, others simply require registration with or notification to
the regulatory agency and some simply operate through general authorization with no filing
requirement at all.
Intellectual Property
We do not own any patent registrations, applications or licenses. We maintain and protect
trade secrets, know-how, and other proprietary information regarding many of our business processes
and related systems and databases.
Employees
As of December 31, 2009, we had a total of 83 employees.
Executive Officers
Our executive officers and their respective ages and positions as of March 24, 2010 are
as follows:
H. Brian Thompson, 71, 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
5
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 Ministers Ireland-America
Economic Advisory Board. Mr. Thompson holds a Master of Business Administration from Harvard
Business School, and holds an undergraduate degree in chemical engineering from the University of
Massachusetts.
Richard D. Calder, Jr., 46, 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 companys 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, 42, 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 SkyTerra Communications), a publicly-held, Reston, Virginia-based developer
and supplier of mobile satellite communications services from November 2001 to April 2008. From
1994 to 2001, Mr. Swank served in various positions, including Director, Corporate Development and
Investor Relations, and Vice President, Corporate Planning and Investor Relations, at Motient
Corporation (now TerreStar Corporation), a publicly-held, Reston, Virginia-based integrated mobile
satellite and terrestrial communications network provider. Prior to joining Motient, from 1989 to
1994, Mr. Swank served as Director, Operations and Manager, Business Development for C-Tec
Corporation, a diversified telecommunications holding company organized to hold Commonwealth
Telephone Inc. and other non-regulated telecommunications businesses. Mr. Swank received a
Bachelors degree in Finance from Kings College.
Chris McKee, 42, 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 Bachelors degree from Colby College and a Juris Doctor from Syracuse
University.
Available Information
The public may read and copy any materials we file with the SEC at the SECs 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 at 1-800-SEC-0330. Our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to such
reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 are available free of charge on the SEC website at www.sec.gov and on
our website at www.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
6
known to us, which we currently deem immaterial or which are similar to those faced by other
companies in our industry or telecommunications and/or technology companies in general, may also
impair our business operations. If any of these risks or uncertainties actually occurs, our
business, financial condition and operating results could be materially adversely affected.
Risks Relating to Our Business and Operations
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, 2009, we had approximately $5.5 million in cash and
cash equivalents and current liabilities $25.8 million greater than current assets. We may have
insufficient cash to fund our working capital or other capital requirements (including our
outstanding debt obligations maturing during 2010), and may be required to raise additional funds
to continue or expand our operations. If we are required to obtain additional funding in the
future, we may have to sell assets, seek debt financing, or obtain additional equity capital. Our
ability to sell assets or raise additional equity or debt capital will depend on the condition of
the capital and credit markets and our financial condition at such time. Accordingly, additional
capital may not be available to us, or may only be available on terms that adversely affect our
existing stockholders, or that restrict our operations. For example, if we raise additional funds
through issuances of equity or convertible debt securities, our existing stockholders could suffer
dilution, and any new equity securities we issue could have rights, preferences, and privileges
superior to those of holders of our common stock. In addition, certain promissory notes that we
have issued contain anti-dilution provisions related to their conversion into our common stock.
The issuance of new equity securities or convertible debt securities could trigger an anti-dilution
adjustment pursuant to these promissory notes, and our existing stockholders would suffer dilution
if these notes are converted into shares of our common stock. Also, if we were forced to sell
assets, there can be no assurance regarding the terms and conditions we could obtain for any such
sale, and if we were required to sell assets that are important to our current or future business,
out current and future results of operations could be materially and adversely affected. We have
granted security interests in substantially all of our assets to secure the repayment of our
indebtedness maturing in 2010, and if we are unable to satisfy our obligations the lenders could
foreclose on their security interests. Our need for capital to satisfy our outstanding
indebtedness due in 2010 is discussed below under the risk factor captioned Risks Relating to Our
Indebtedness We are obligated to repay several debt instruments that mature during 2010. If we
are unable to raise additional capital or renegotiate the terms of that debt, we may be unable to
make the required payments with respect to one or more of these debt instruments.
We depend on several large customers, and the loss of one or more of these clients, or a
significant decrease in total revenues from any of these customers, would likely reduce our revenue
and income.
For the year ended December 31, 2009, our five largest customers accounted for approximately
36% of our total service revenues. If we were to lose one or more of our large clients, or if one
or more of our large clients were to 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
successive month-to-month, quarterly, or annual periods, but can be terminated by the customer
without cause with relatively little notice during a renewal period. In addition, certain
government customers may have rights under federal law with respect to termination for convenience
that can serve to minimize or eliminate altogether the liability payable by that customer in the
event of early termination. Our customers may elect to terminate their agreements as a result of a
number of factors, including their level of satisfaction with the services they are receiving,
their ability to continue their operations due to budgetary or other concerns, and the availability
and pricing of competing services. If customers elect to terminate their agreements with us, our
business, financial condition, and results of operation may be adversely affected.
Competition in the industry in which we do business is intense and growing, and our failure to
compete successfully could make it difficult for us to add and retain customers or increase or
maintain revenues.
7
The markets in which we operate are rapidly evolving and highly competitive. We currently or
potentially compete with a variety of companies, including some of our transport suppliers, with
respect to their products and services, including global and regional telecommunications service
providers such as AT&T, British Telecom, NTT, Level 3, Qwest and Verizon, among others.
The industry in which we operate is consolidating, which is increasing the size and scope of
our competitors. Competitors could benefit from assets or businesses acquired from other carriers
or from strategic alliances in the telecommunications industry. New entrants could enter the market
with a business model similar to ours. Our target markets may support only a limited number of
competitors. Operations in such markets with multiple competitive providers may be unprofitable for
one or more of such providers. Prices in the data transmission and internet access business have
declined in recent years and may continue to decline.
Many of our potential competitors have certain advantages over us, including:
| substantially greater financial, technical, marketing, and other resources, including brand or corporate name recognition; | ||
| substantially lower cost structures, including cost structures of facility-based providers who have reduced debt and other obligations through bankruptcy or other restructuring proceedings; | ||
| larger client bases; | ||
| longer operating histories; | ||
| more established relationships in the industry; and | ||
| larger geographic presence. |
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.
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
8
claims against us, some of which if resolved against us could have an adverse impact on our
results of operations and/or financial condition. Suppliers may also attempt to impose onerous
terms as part of purchase contract negotiations. Although we know of no pending or threatened
claims with respect to past compliance with any such terms, claims asserting any past
noncompliance, if successful, could have a material adverse effect on our operations and/or
financial condition. Moreover, to the extent that key suppliers were to attempt to impose such
provisions as part of future contract negotiations, such developments could have an adverse impact
on the companys 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 local and/or long-haul network assets. Industry consolidation has
occurred on a lesser scale as well through mergers and acquisitions involving regional or smaller
national or international competitors. Generally speaking, we believe that a marketplace with
multiple supplier options for transport access is important to the long-term availability of
competitive pricing, service quality, and carrier responsiveness. It is unclear at this time what
the long-term impact of such consolidation will be, or whether it will continue at the same pace as
it has in recent years; we cannot guarantee that we will continue to be able to obtain use of
facilities or services in a timely manner or on terms acceptable and in quantities satisfactory to
us from such suppliers.
We may occasionally have certain sales commitments to customers that extend beyond the Companys
commitments from its underlying suppliers.
The Companys 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 Companys
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
Companys 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 Companys 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 Companys 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
customers commitment to us, or to support fixed elements of the Companys 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 Companys 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 communications rights-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
9
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.
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. |
If the demand for carrier and enterprise connectivity services does not continue to grow, we
may not be able to grow our business, achieve profitability, or meet public market expectations.
10
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 42% of our revenue comes from countries outside of the United States. As such,
other currencies, particularly the Euro and the British Pound Sterling, can have an impact on the
Companys 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.
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 value of our goodwill or amortizable
intangible assets may not be recoverable include reduced future cash flow estimates, a decline in
stock price and market capitalization, and slower growth rates in our industry. During the year
ending December 31, 2008, the Company recorded impairment to goodwill and amortizable intangible
assets of $41.9 million in aggregate. During the year ended December 31, 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.
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.
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.
11
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 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.
12
We may experience difficulties integrating the recently acquired business of WBS
Connect, which could adversely affect our financial condition and results of operations.
On December 16, 2009 we acquired WBS Connect. The success of this acquisition will depend in
part on our success in integrating this business with our own. If we are unable to meet the
challenges involved in successfully integrating the operations of WBS Connect or if we are
otherwise unable to realize the anticipated benefits of this acquisition, our results of operations
and financial condition could be seriously harmed. In addition, the overall integration of the
acquired business will require substantial attention from our management, which could further harm
our results of operations and financial condition.
The challenges involved in integrating the business of WBS Connect include:
| integrating the companys operations, processes, people, technologies, products and services; |
| coordinating and integrating sales and marketing functions; |
| demonstrating to the WBS Connect customers and suppliers that the acquisition will not result in adverse changes in business focus, products or service (including customer satisfaction); |
| assimilating and retaining the key personnel; and |
| consolidating administrative infrastructures and eliminating duplicative operations and administrative functions. |
We may not be able to successfully integrate the business of WBS Connect with our own business in a
timely manner, or at all, and we may not realize the anticipated benefits of the acquisition,
including potential synergies or sales or growth opportunities, to the extent or in the time frame
anticipated.
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 have recently grown through the acquisition of WBS Connect. 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 managements attention from the day-to-day operation of our business. |
13
These difficulties could disrupt our ongoing business and increase our expenses. As of the
date of this Form 10-K, we have no agreement or memorandum of understanding to enter into any
acquisition transaction.
In addition, our ability to complete acquisitions may depend, in part, on our ability to
finance these acquisitions, including both the costs of the acquisition and the cost of the
subsequent integration activities. Our ability may be constrained by our cash flow, the level of
our indebtedness, restrictive covenants in the agreements governing our indebtedness, conditions in
the securities and credit markets and other factors, most of which are generally beyond our
control. If we proceed with one or more acquisitions in which the consideration consists of cash,
we may use a substantial portion of our available cash to complete such acquisitions, thereby
reducing our liquidity. If we finance one or more acquisitions with the proceeds of indebtedness,
our interest expense and debt service requirements could increase materially. Thus, the financial
impact of future acquisitions 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 challenged and/or
fines or other penalties could be imposed on us. Any such challenges or fines could be substantial
and could cause us to incur substantial legal and administrative expenses as well; these costs in
the forms of fines, penalties, and legal and
14
administrative expenses could have a material adverse impact on our business and operations.
Furthermore, we are dependent in certain cases on the services other carriers provide, and
therefore on other carriers abilities to retain their respective licenses in the regions of the
world in which they operate. We are also dependent, in some circumstances, on our customers
abilities to obtain and retain the necessary licenses. The failure of a customer or carrier to
obtain or retain any necessary license could have an adverse effect on our ability to conduct
operations.
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 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
We are obligated to repay several debt instruments that mature during 2010. If we are unable to
raise additional capital or to renegotiate the terms of that debt, we may be unable to make the
required principal payments with respect to one or more of these debt instruments.
A significant amount of our indebtedness for borrowed money will become due in December 2010,
including (i) approximately $4.8 million in principal, plus accrued interest, of promissory notes
we issued in November 2007, (ii) $4.0 million in principal, plus accrued interest, with respect to
promissory notes we issued in October 2006 and, (iii) the then outstanding amount of our revolving
credit facility with Silicon Valley Bank (under which we had $3.1 million outstanding at December
31, 2009 and $3.0 million outstanding at March 20, 2010. Also, in connection with the WBS Connect
acquisition, we issued and assumed indebtedness in the aggregate amount of $0.8 million, of which
approximately $0.6 million is due during 2010.
If we are unable to raise additional capital or arrange other refinancing options, we may be
unable to make the principal payments and/or payments of accrued interest when due with respect to
one or more of these promissory notes. We do not have sufficient cash currently available to pay
all of these obligations, and absent the renewal or replacement of our revolving credit facility,
we do not expect that our results of operations will provide sufficient funds to enable us to pay
these obligations in full. Accordingly, we expect that we will need to extend these debt
obligations or obtain additional capital to satisfy these debt obligations through one or more
alternatives, such as raising equity capital, raising new debt capital or selling assets. Our
ability to sell assets or raise additional equity or debt capital, and our ability to extend or
refinance our existing indebtedness will depend on the condition of the capital and credit markets
and our financial condition at such time. As a result, we may not be able to extend the maturity
of our indebtedness maturing in 2010, or obtain additional capital to satisfy these obligations on
terms acceptable to us or at all. Any
15
additional capital may be available only on terms that adversely affect our existing
stockholders, or that restrict our operations. For example, if we raise additional funds through
issuances of equity or convertible debt securities, our existing stockholders could suffer
dilution, and any new equity securities we issue could have rights, preferences, and privileges
superior to those of holders of our common stock. In addition, certain promissory notes that we
have issued contain anti-dilution provisions related to their conversion into our common stock.
The issuance of new equity securities or convertible debt securities could trigger an anti-dilution
adjustment pursuant to these promissory notes, and our existing stockholders would suffer dilution
if these notes are converted into shares of our common stock. Also, if we were forced to sell
assets, there can be no assurance regarding the terms and conditions we could obtain for any such
sale, and if we were required to sell assets that are important to our current or future business,
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 2010, and if we are unable to satisfy our obligations the lenders could
foreclose on their security interests. The impact of our debt obligations on our other operating
requirements is discussed above under the risk factor captioned Risks Related to Our Business and
Operations We might require additional capital to support business growth, and this capital might
not be available on favorable terms, or at all.
Our failure to renew our credit facility on terms acceptable to the Company, if at all, could
result in the loss of future borrowing capacity and/or higher costs to maintain or access the
borrowing capacity.
On December 16, 2009, the Company entered into the Second Amended and Restated Loan and
Security Agreement (the SVB Amended Loan Agreement) with Silicon Valley Bank. The SVB Amended
Loan Agreement and related documents amend and restate the existing SVB credit facility to provide,
among other things, for an increase in available borrowing to $5.0 million with provision for
further increase to an aggregate facility amount of $8.0 million if the Company acquires certain
customer accounts from a third party and obtains certain additional financing. The facility
expires and is subject to renewal by December 10, 2010. The Company had drawn approximately $3.1
million on the facility at December 31, 2009.
If the Company were to lose access to the borrowing capacity under the credit agreement, or if
any refinancing or replacement facility were on terms that are burdensome to the Company, the
Company could lose access to this borrowing capacity or incur higher costs to maintain and access
such borrowing capacity.
Our failure to comply with covenants in our credit facility could result in our indebtedness being
immediately due and payable and the loss of our assets.
Pursuant to the terms of our credit facility with Silicon Valley Bank we have pledged
substantially all of our assets to the lender as security for our payment obligations under the
credit facility. If we fail to pay any of our indebtedness under this credit facility when due, or
if we breach any of the other covenants in the credit facility, it may result in one or more events
of default. An event of default under our credit facility would permit the lender to declare all
amounts owing to be immediately due and payable and, if we were unable to repay any indebtedness
owed, the lender could proceed against the collateral securing that indebtedness.
Covenants in our credit facility and outstanding notes, and in any future debt agreement, may
restrict our future operations.
The indenture governing the notes and the New Credit Facility 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 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 |
16
| 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, 2009 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.
Our outstanding warrants may have an adverse effect on the market price of our common stock.
At March 24, 2010, we had 12,090,000 Class W 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, 2010. In addition, at March 24, 2010 we had 12,090,000 Class Z warrants, each of which
entitles the holder to purchase a share of our common stock at an exercise price of $5.00 per share
on or before April 10, 2012. We also have outstanding approximately $4.8 million in principal
amount of promissory notes due in December 2010 that are convertible into common stock at a
conversion price of $1.70 per share. We also issued to the representative of the underwriters in
our initial public offering an option to purchase at any time on or before April 10, 2010, 25,000
Series A units at an exercise price of $17.325 per Series A unit (each of which is comprised of
two shares of common stock, five Class W warrants and five Class Z warrants) and/or 230,000 Series
B units at an exercise price of $16.665 per Series B unit (each of which is comprised of two
shares of common stock, one Class W warrant and one Class Z warrant), except that (a) the exercise
17
price for these Class W warrants and Class Z warrants is $5.50 per share and these Class Z
warrants expire on April 10, 2010. If the Series A units and Series B units are issued, it would
result in the issuance of an additional 710,000 warrants. The common stock underlying the
warrants, the convertible notes and the underwriters options have been registered for sale under
the Securities Act or are 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 stockholders 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.
Based on public filings with the SEC made by J. Carlo Cannell, we believe that as of December
31, 2009, funds associated with Cannell Capital LLC owned 3,419,106 shares of our common stock and
warrants to acquire 2,224,000 shares of our common stock. Based on the number of shares of our
common stock outstanding on March 20, 2010 without taking into account their unexercised warrants,
these funds would beneficially own approximately 20% of our common stock. In addition, as of March
24, 2010, our executive officers, directors and affiliated entities together beneficially owned
common stock, without taking into account their unexercised and unconverted warrants, options and
convertible notes, representing approximately 32% 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 recognized Over-the-Counter Bulletin Board. This factor may
further impair your ability to sell your shares when you want and/or could depress our stock price.
As a result, you may find it difficult to dispose of, or to obtain accurate quotations of the price
of, our securities because smaller quantities of shares could be bought and sold, transactions
could be delayed, and security analyst and news coverage of our company may be limited. These
factors could result in lower prices and larger spreads in the bid and ask prices for our shares.
ITEM 2. | PROPERTIES |
The Company does not own any real estate. Instead, all of the Companys facilities are
leased. GTTs 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 Companys offices in
Denver, Colorado are leased under a three month lease that renews for successive three month
periods unless either GTT or the landlord gives a notice of non-renewal. We are currently
evaluating our options with respect to our offices in Düsseldorf, Germany, and Denver, Colorado.
We believe the necessary office space in these locations will be available on commercially
reasonable terms.
We believe our properties, taken as a whole, are in good operating condition and are adequate
for our business needs.
ITEM 3. | LEGAL PROCEEDINGS |
The Company is not currently subject to any material legal proceedings. From time to time,
however, we or our operating companies may party to other various legal proceedings that 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
18
position or 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 REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market for Equity Securities
Our common stock trades on the Over-the-Counter Bulletin Board under the symbol GTLT, and our
Class W warrants and Class Z warrants trade under the symbols GTLTW and GTLTZ, respectively. At
March 24, 2010, we had outstanding 17,216,390 shares of our common stock, 12,090,000 Class W
Warrants and 12,090,000 Class Z Warrants.
Each Class W and Class Z warrant entitles the holder to purchase from us one share of common
stock at an exercise price of $5.00. The Class W warrants will expire at 5:00 p.m., New York City
time, on April 10, 2010, or earlier upon redemption. 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 W warrants and 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 the Over-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 W Warrants | Class Z Warrants | ||||||||||||||||||||||
High | Low | High | Low | High | Low | |||||||||||||||||||
2008 |
||||||||||||||||||||||||
First Quarter |
$ | 1.10 | $ | 0.33 | $ | 0.05 | $ | 0.03 | $ | 0.10 | $ | 0.02 | ||||||||||||
Second Quarter |
$ | 0.75 | $ | 0.40 | $ | 0.05 | $ | 0.04 | $ | 0.14 | $ | 0.06 | ||||||||||||
Third Quarter |
$ | 0.65 | $ | 0.33 | $ | 0.04 | $ | 0.01 | $ | 0.05 | $ | 0.01 | ||||||||||||
Fourth Quarter |
$ | 0.59 | $ | 0.26 | $ | 0.01 | $ | 0.00 | $ | 0.03 | $ | 0.01 | ||||||||||||
2009 |
||||||||||||||||||||||||
First Quarter |
$ | 0.50 | $ | 0.36 | $ | 0.00 | $ | 0.00 | $ | 0.01 | $ | 0.01 | ||||||||||||
Second Quarter |
$ | 1.40 | $ | 0.62 | $ | 0.02 | $ | 0.00 | $ | 0.06 | $ | 0.00 | ||||||||||||
Third Quarter |
$ | 1.44 | $ | 1.26 | $ | 0.01 | $ | 0.00 | $ | 0.06 | $ | 0.01 | ||||||||||||
Fourth Quarter |
$ | 1.25 | $ | 0.95 | $ | 0.00 | $ | 0.00 | $ | 0.03 | $ | 0.01 |
As of February 23, 2010 there were approximately 33 holders of record of our common
stock, 16 holders of record of our Class W warrants, and 21 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.
ITEM 7. | MANAGEMENTS 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.
Managements Discussion and Analysis of Financial Condition and Results of Operations of the
Company
The following discussion and analysis should be read together with the Companys Consolidated
Financial Statements and related notes thereto beginning on page F-1. Reference is made to
Cautionary Statement Regarding Forward-Looking Statements
19
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 network integrator providing a broad portfolio of Wide-Area Network (WAN),
dedicated Internet access, and managed date services. With over 800 supplier relationships
worldwide, GTT combines multiple networks and technologies such as traditional OC-x, MPLS and
Ethernet, to deliver cost-effective solutions specifically designed for each clients unique
requirements. GTT enhances its client performance through its proprietary Client Management
Database (CMD), providing customers with an integrated support system for all of its services. GTT
is committed to providing comprehensive solutions, project management and 24x7 global operations
support.
The Company sells through a direct sales force on a global basis. The Company generally
competes with large, facilities-based providers and other services providers in each of our global
markets. As of December 31, 2009, our customer base was comprised of over 700 businesses. Our five
largest customers accounted for approximately 36% of consolidated revenues during the year ended
December 31, 2009.
Costs and Expenses
The Companys cost of revenue consists almost entirely of the costs for procurement of
services associated with customer solutions. 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. As such, the Company considers its contracts with its suppliers to be normal purchases,
according to the criteria in 10(b) of SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, which was codified into ASC Topic 815, Derivatives and Hedging.
Other than cost of revenue, the Companys most significant operating expenses are employment
costs. As of December 31, 2009, the Company had 83 employees and employment costs comprised
approximately 15% of total operating expenses for the year ended December 31, 2009.
Critical Accounting Policies and Estimates
The Companys significant accounting policies are described in Note 2 to its accompanying
consolidated financial statements. The Company considers the following accounting policies to be
those that require the most significant judgments and estimates in the preparation of its
consolidated financial statements, and believes that an understanding of these policies is
important to a proper evaluation of the reported consolidated financial results.
Revenue Recognition
The Company provides data connectivity solutions, such as dedicated circuit access, access
aggregation and hubbing and managed network services to its customers. Certain of the Companys
current revenue activities have features that may be considered multiple elements. The Company
believes that there is insufficient evidence to determine each elements 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 Companys 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
20
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 customers 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 Companys services are provided pursuant to contracts that
typically provide for payments of recurring charges on a monthly basis for use of the services over
a committed term. Each service contract typically has a fixed monthly cost and a fixed term, in
addition to a fixed installation charge (if applicable). Variable usage charges are applied when
incurred for certain product offerings. At the end of the initial term of most service contracts
the contracts roll forward on a month-to-month or other periodic basis and continue to bill at the
same fixed recurring rate. If any cancellation or termination charges become due from the customer
as a result of early cancellation or termination of a service contract, those amounts are
calculated pursuant to a formula specified in each contract. Recurring costs relating to supply
contracts are recognized ratably over the term of the contract.
Non-recurring fees, Deferred Revenue. Non-recurring fees for data connectivity typically take
the form of one-time, non-refundable provisioning fees established pursuant to service contracts.
The amount of the provisioning fee included in each contract is generally determined by marking up
or passing through the corresponding charge from the Companys supplier, imposed pursuant to the
Companys 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 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.
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 a month-to-month or other periodic basis and the Company continues to bill at the
same fixed recurring rate. If any cancellation or disconnection 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.
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 customers
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 Companys operating systems,
comparison of circuits billed to the Companys 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.
21
These disputes with suppliers generally fall into three categories: pricing errors, network
design 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 Companys current liabilities by accounting for liabilities
that are erroneous based upon a detailed review of
objective evidence. If the Company ultimately pays less than the corresponding accrual in
resolution of an erroneously over-billed amount, the Company recognizes the resultant decrease in
cost of revenue in the period in which the resolution is reached. If the Company ultimately pays
more than the corresponding accrual in resolution of an erroneously billed amount, the Company
recognizes the resultant cost of revenue increase in the period in which the resolution is reached
and during which period the Company makes payment to resolve such account.
Although the Company disputes erroneously billed amounts in good faith and historically has
prevailed in most cases, it recognizes that it may not prevail in all cases (or in full) with a
particular supplier with respect to such billing errors or it may choose to settle the matter
because of the quality of the supplier relationship or the cost and time associated with continuing
the dispute. Careful judgment is required in estimating the ultimate outcome of disputing each
error, and each reserve is based upon a specific evaluation by management of the merits of each
billing error (based upon the bill verification process) and the potential for loss with respect to
that billing error. In making such a case-by-case evaluation, the Company considers, among other
things, the documentation available to support its assertions with respect to the billing errors,
its past experience with the supplier in question, and its past experience with similar errors and
disputes. As of December 31, 2009, the Company had $1.7 million in billing errors disputed with
suppliers, for which we have accrued $1.0 million in liabilities.
In instances where the Company has been billed less than the applicable contractual rate, the
accruals remain on the Companys 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
Companys internal policy, have passed. If the Company ultimately determines it has no further
obligation related to the under-billed amounts, the Company recognizes a decrease in expense in the
period in which the determination is made.
Goodwill and Intangible Assets
Goodwill is the excess purchase price paid over identified intangible and tangible net assets
of acquired companies. Goodwill is not amortized, and is tested for impairment at the reporting
unit level annually or when there are any indications of impairment, as required by the Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 350,
Intangibles Goodwill and Other (formerly Statement of Financial Accounting Standards SFAS No.
142). 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 Companys 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 2009 and concluded that no impairment
existed. In 2008, the Company tested its goodwill and concluded that impairment existed and
recorded an impairment charge to goodwill of $38.9 million.
Intangible assets are assets that lack physical substance, and are accounted for in accordance
with ASC Topic 350 and ASC Topic 360, Impairment or Disposal of Long-Lived Assets (formerly SFAS
144). Intangible assets arose from business combinations and consist of customer contracts,
acquired technology and restrictive covenants related to employment agreements that are amortized,
on a straight-line basis, over periods of up to five years. Intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. During the third quarter of 2009, the Company tested their intangible assets and
concluded that no impairment existed. In 2008, we determined that certain of our intangible assets
were impaired and recorded an impairment charge to intangible assets of $2.9 million.
22
In December 2009, the Company recorded an additional $7.2 million of goodwill and $4.8 million
of intangible assets related to the purchase of WBS Connect. The intangible assets consist
primarily of customer contracts and relationships as well as restrictive covenants related to
employment agreements.
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 enterprises 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 Companys consolidated financial statements
We may from time to time be assessed interest and/or penalties by taxing jurisdictions,
although any such assessments historically have been minimal and immaterial to our financial
results. In the event we have received an assessment for interest and/or penalties, it has been
classified in the statement of operations as other general and administrative costs.
Share-Based Compensation
On October 16, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS 123(R)) which requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees, directors, and consultants based on estimated fair
values. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
107 (SAB 107) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its
adoption of SFAS 123(R). SFAS 123(R) was codified into ASC Topic 718, Compensation Stock
Compensation. The adoption of the new FASB ASC Topic did not have a material effect on the
Companys consolidated financial statements.
ASC Topic 718 requires companies to estimate the fair value of share-based payment awards on
the date of grant using an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the requisite service periods in the
Companys 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 elected the Black-Scholes option-pricing model as its method of valuation for
share-based awards granted. The Companys determination of fair value of share-based payment awards
on the date of grant using an option-pricing model is affected by the Companys stock price as well
as assumptions regarding a number of highly complex and subjective variables. These variables
include, but are not limited to the Companys expected stock price volatility over the term of the
awards and the expected term of the awards. The Company accounts for non-employee share-based
compensation expense in accordance with ASC Topic 505, Equity Based Payments to Non-Employees
(formerly EITF Issue No. 96-18).
Use of Estimates and Assumptions
The preparation of financial statements in accordance with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect certain reported amounts of assets and liabilities and
23
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.
Results of Operations of the Company
Fiscal Year Ended December 31, 2009 compared to Fiscal Year Ended December 31, 2008
Overview. The financial information presented in the table below comprises the audited
consolidated financial information of the Company for the years ended December 31, 2009 and 2008
(amounts in thousands):
Year Ended | Year Ended | |||||||
December 31, 2009 | December 31, 2008 | |||||||
Revenue: |
||||||||
Telecommunications services sold |
$ | 64,221 | $ | 66,974 | ||||
Operating expenses: |
||||||||
Cost of telecommunications services provided |
45,868 | 47,568 | ||||||
Selling, general and administrative expense |
14,684 | 18,197 | ||||||
Impairment of goodwill and intangibles |
| 41,854 | ||||||
Restructuring costs, employee termination and non-recurring items |
641 | | ||||||
Depreciation and amortization |
1,733 | 2,211 | ||||||
Total operating expenses |
62,926 | 109,830 | ||||||
Operating income (loss) |
1,295 | (42,856 | ) | |||||
Other income (expense): |
||||||||
Interest income (expense), net |
(849 | ) | (781 | ) | ||||
Other income (expense), net |
24 | (28 | ) | |||||
Total other expense, net |
(825 | ) | (809 | ) | ||||
Income (loss) before income taxes |
470 | (43,665 | ) | |||||
Provision for (benefit from) income taxes |
16 | (1,291 | ) | |||||
Net income (loss) |
$ | 454 | $ | (42,374 | ) | |||
Net income (loss) per share: |
||||||||
Basic |
$ | 0.03 | $ | (2.85 | ) | |||
Diluted |
$ | 0.03 | $ | (2.85 | ) | |||
Weighted average shares: |
||||||||
Basic |
15,268,826 | 14,863,658 | ||||||
Diluted |
15,470,763 | 14,863,658 |
Revenues. The table below presents the components of revenues for the years ended December 31,
2009 and 2008:
24
Geographical Revenue Source | 2009 | 2008 | ||||||
United States |
58 | % | 51 | % | ||||
United Kingdom |
29 | 35 | ||||||
Germany |
13 | 13 | ||||||
Other Countries |
| 1 | ||||||
Totals |
100 | % | 100 | % | ||||
Total revenue decreased $2.8 million, or 4.1%, for the year ended December 31, 2009
compared to the year ended December 31, 2008 primarily due to the impact of changes in foreign
currency valuations as they related to our revenue generated outside of the United States offset by
the Companys resulting sales and installation of additional services for new and existing
customers. Absent currency translation impacts, total revenue increased approximately 2% over
2008.
Costs of Service. Total costs of service decreased $1.7 million, or 3.6%, for the year ended
December 31, 2009 compared to the year ended December 31, 2008 primarily due to the impact of
foreign currency valuation as related to our revenue and costs outside of the United States, as
well as the installation of higher margin services and customer disconnections with lower margins.
Selling, General and Administrative Expenses. SG&A decreased $3.5 million, or 19.3%, for the
year ended December 31, 2009 compared to the year ended December 31, 2008. This reduction is due
to the Companys plan in 2009 to significantly reduce all general and administrative expenses, as
well as the impact of foreign currency translations.
Depreciation and Amortization. Depreciation and amortization expense decreased $0.5 million,
or 21.6%, to $1.7 million for the year ended December 31, 2009, compared to the year ended December
31, 2008. The net decrease was primarily due to a reduction in amortization expense resulting from
the impairment of the Companys intangible assets in the third quarter of 2008.
Impairment of goodwill and intangible assets. Impairment of goodwill and intangible asset
expense decreased from $41.9 million for the year ended December 31, 2008, to $0 for the year ended
December 31, 2009.
Interest Expense. Interest expense increased $0.1 million, or 8.8%, to $0.8 million for the
year ended December 31, 2009 compared to the year ended December 31, 2008. The net increase was
primarily due to interest on draw-downs against the Companys line of credit during the third and
fourth quarter of 2009.
Liquidity and Capital Resources (amounts in thousands)
December 31, 2009 | December 31, 2008 | |||||||
Cash and cash equivalents and short-term investments |
$ | 5,548 | $ | 5,785 | ||||
Debt |
$ | 12,707 | $ | 8,796 |
During 2009, the Company generated positive operating cash flow, inclusive of significant
reductions in accounts payable, and generated positive net income. The Company also consummated
the acquisition of WBS Connect in the last half of December 2009. As a result, the Company assumed
additional current liabilities of WBS Connect and drew approximately $3.1 million on its credit
facility to support cash payments required to consummate the acquisition.
The Company believes that cash currently on hand, expected cash flows from future operations
and potential future borrowing capacity are sufficient to fund operations for the next twelve
months, including the repayment, extension or refinancing of indebtedness pursuant to multiple
agreements including: (i) approximately $4.8 million in principal, plus accrued interest, of
promissory notes we issued in November 2007, (ii) $4.0 million in principal, plus accrued
interest, with respect to promissory notes
25
we issued in October 2006, (iii) the then outstanding
amount of our revolving credit facility with Silicon Valley Bank (under which we had $3.1 million
outstanding at December 31, 2009 and 3.0 million outstanding at March 20, 2010, and (iv)
indebtedness issued or assumed in connection with the WBS Connect acquisition of which
approximately $0.6 million is due during 2010.
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 debt financings and/or renegotiation of
terms of its existing debt. If any such activities become necessary, there can be no assurance
that the Company would be successful in obtaining additional financing or modifying its existing
debt terms, particularly in light of the general economic downturn that began in 2008 and the
general reduction in lending activity by many lending institutions.
Operating Activities. Net cash provided by operating activities was $1.4 million for the year
ended December 31, 2009, reflecting a net income of $0.5, a change in operating assets and
liabilities of $1.4 million, offset by $2.3 million in non-cash operating items. The source of
cash in working capital was primarily due to an overall decrease in accounts receivable resulting
from improved customer collections, offset by a decrease in accounts payable as a result of faster
vendor payment. The decrease in working capital on the Companys balance sheet was primarily due
to an increase in short-term debt and an increase in accrued expenses and accounts payable in
connection with the acquisition of WBS Connect in December 2009.
During 2009 and 2008, we made cash payments for interest totaling $0.3 million and $0.1
million, respectively. The increase in interest payments was a result of a contractual increase in
the amount of cash interest due, as well as interest on draw-downs against the Companys line of
credit during the third and fourth quarter of 2009.
Investing Activities. Net cash used in investing activities was $4.1 million in the year
ended December 31, 2009, consisting primarily of the $3.7 million of cash used in the purchase of
WBS Connect, and $0.4 million of capital expenditures.
As a global network integrator, the Company typically has very low levels of capital
expenditures, especially when compared to infrastructure-owning traditional telecommunications
competitors. Additionally, the Companys cost structure is somewhat variable and provides
management an ability to manage costs as appropriate. The Companys capital expenditures are
predominantly related to the maintenance of computer facilities, office fixtures and furnishings,
and the network elements, and are very low as a proportion of revenue. The Company may require
additional capital investment as part of growing it base of customer services.
Financing Activities. Net cash provided by financing activities increased to $3.1 million for
the year ended December 31, 2009 as compared to $0.0 million for the year ended December 31, 2008.
This increase was due to borrowings under its expanded SVB Credit facility, used to fund the WBS
Connect acquisition.
Effect of Exchange Rate Changes on Cash. Effect of Exchange Rate Changes decreased $0.5
million to $0.6 million for the year ended December 31, 2009 as compared to an effect of $1.1
million for the year ended December 31, 2008, due primarily to cash balances denominated in
currencies that weakened against the US Dollar during 2009 as well as impacts to the Companys
current assets and liabilities denominated in currencies that weakened against the US Dollar.
Debt
As of December 31, 2009, the Company had $12.7 million of debt, consisting of
the $3.1 million of borrowings under our revolving credit facility that matures in December 2010,
approximately $8.8 million of promissory notes that mature in December 2010, approximately $0.3
million of promissory notes due during 2010 that were issued to the former owners of WBS Connect in
connection with our acquisition of WBS Connect, and $0.6 million of capital lease obligations
assumed in the acquisition (amounts in thousands):
26
Notes Payable to former | Notes Payable to former | Notes Payable to Other | Promissory Note / | Senior Secured Credit | ||||||||||||||||||||
Total Debt | GII Shareholders | ETT and GII Shareholders | Investors | Capital Lease | Facility | |||||||||||||||||||
Debt obligation as of December 31, 2008 |
$ | 8,796 | $ | 4,000 | $ | 2,871 | $ | 1,925 | $ | | $ | | ||||||||||||
Draw on Senior Secured Credit Facility |
3,078 | | | | | 3,078 | ||||||||||||||||||
Promissory Note Issued |
250 | | | | 250 | | ||||||||||||||||||
Captial lease obligation assumed |
583 | | | | 583 | | ||||||||||||||||||
Debt obligation as of December 31, 2009 |
$ | 12,707 | $ | 4,000 | $ | 2,871 | $ | 1,925 | $ | 833 | $ | 3,078 | ||||||||||||
On November 12, 2007, the Company and the holders of the approximately $5.9 million of
promissory notes due on April 30, 2008 (the April 2008 Notes) entered into agreements to pursuant
to which the holders of the April 2008 Notes (i) exchanged $3.5 million in aggregate principal
amount of the April 2008 Notes for an aggregate of 2,570,144 shares of the Companys common stock,
and (ii) exchanged the remaining $2.4 million in aggregate principal amount of the April 2008
Notes, plus accrued interest, for $2.9 million aggregate principal amount of the 10% convertible
unsecured subordinated promissory notes due on December 31, 2010 (the December 2010 Notes). All
principal and accrued interest under the December 2010 Notes is payable on December 31, 2010. In
addition, on November 13, 2007, the Company sold an additional $1.9 million of December 2010 Notes
to certain accredited investors including approximately $1.7 million of December 2010 Notes to
certain members of the Companys board of directors and entities affiliated with members of the
Companys board of directors. An aggregate of $4.8 million in principal amount of the December
2010 Notes was outstanding as of December 31, 2009.
The holders of the December 2010 Notes can convert the principal due under the December 2010
Notes into shares of the Companys common stock, at any time, at a price per share equal to $1.70.
The Company has the right to require the holders of the December 2010 Notes to convert the
principal amount due under the December 2010 Notes at any time after the closing price of the
Companys common stock shall be equal to or greater than $2.64 for 15 consecutive trading days. The
conversion provisions of the December 2010 Notes include protection against dilutive issuances of
the Companys common stock, subject to certain exceptions. The December 2010 Notes and the Amended
Notes permit the incurrence of senior indebtedness up to an aggregate principal amount of $4.0
million. The Company has agreed to register with the Securities and Exchange Commission the shares
of Companys common stock issued to the holders of the December 2010 Notes upon their conversion,
subject to certain limitations.
In addition, on November 13, 2007, the holders of the $4.0 million of promissory notes due on
December 29, 2008 agreed to amend those notes to extend the maturity date to December 31, 2010,
subject to increasing the interest rate to 10% per annum, beginning January 1, 2009. Under the
terms of the notes, as amended (the Amended Notes), 50% of all interest accrued during 2008 and
2009 is payable on each of December 31, 2008 and 2009, respectively, and all principal and
remaining accrued interest is payable on December 31, 2010.
On March 17, 2008, the Company entered into a Loan and Security Agreement (the credit
facility) with Silicon Valley Bank. Under the terms of the credit facility, the Company could
borrow up to a maximum amount of $2.0 million; with the actual amount available being based upon
criteria related to accounts receivable and cash collections. Advances under the credit facility
would bear interest at the banks prime rate plus either 1.5% or 2.0%, and would also be subject to
a monthly collateral handling fee ranging from 0.25% to 0.50%, in each case depending on certain
financial criteria. The credit facility had a 364 day term and contained customary covenants, but
there were no covenants that required compliance with financial criteria. The Companys payment
obligations under the credit facility were secured by a pledge of substantially all of its assets,
including a pledge of 67% of the outstanding stock of the Companys foreign subsidiaries.
On June 16, 2009, the Company and Silicon Valley Bank entered into an Amended and Restated
Loan and Security Agreement (the amended credit facility). Under the terms of the amended credit
facility, the Companys revolving line of credit was increased to a maximum amount of $2.5 million,
with the actual amount available being based upon criteria related to accounts receivable.
Advances under the credit facility would bear interest at the banks prime rate plus either 1.75%
or 2.0%, and would also be subject to a monthly collateral handling fee ranging from 0.15% to
0.35%, in each case depending on certain financial criteria. The
amended credit facility had a 364 day term and contained customary covenants, but there were
no covenants that required compliance with financial criteria. The Companys payment obligations
under the amended credit facility were secured by a pledge of substantially all of its assets,
including a pledge of 67% of the outstanding stock of the Companys foreign subsidiaries.
27
In December 2009, the Company and Silicon Valley Bank entered into a Second Amended and
Restated Credit Facility (the current credit facility). Under the terms of the current credit
facility, the Companys 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 Companys 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 Companys accounts receivable in Europe (but not to
exceed $2.0 million with respect to the European receivables). The revolving line of credit can be
increased to $8.0 million if the Company raises at least $4.5 million of additional equity and
subordinated debt capital and completes the Global Capacity acquisition. Advances under the
current credit facility bear interest at the banks prime rate plus 1.75% or 2.0%, and would also
be subject to a monthly collateral handling fee ranging from 0.15% to 0.35%, in each case depending
on certain financial criteria. The current credit facility has a 364 day term and matures in
December 2010. The current credit facility contains customary covenants, including covenants not
included in the amended credit facility that require the Company to maintain, on a consolidated
basis, specified amounts of net operating cash flow over certain specified periods of time. The
Companys payment obligations under the current credit facility are secured by a pledge of
substantially all of all of its assets, including a pledge of 67% of the outstanding stock of the
Companys foreign subsidiaries.
In connection with the closing 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 of promissory notes to the sellers of WBS
Connect, due in monthly installments payable in full by October 2010.
Contractual Obligations and Commitments
As of December 31, 2009, the Company had total contractual obligations of approximately $45.9
million. Of these obligations, approximately $33.0 million, or 71.9%, are supplier agreements
associated with the telecommunications services that the Company has contracted to purchase from
its vendors. The Company generally tries to structure its contracts so the terms and conditions in
the vendor and client customer contracts are substantially the same in terms of duration and
capacity. The back-to-back nature of the Companys contracts means that the largest component of
its contractual obligations is generally mirrored by its customers commitment to purchase the
services associated with those obligations. However, in certain instances relating to network
infrastructure, the Company will enter into purchase commitments with vendors that do not directly
tie to underlying customer commitments.
Approximately $10.5 million, or 22.9%, of the total contractual obligations are associated
with promissory notes issued by the Company which are due December 31, 2010.
Operating leases amount to $2.4 million, or 5.2% 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 Companys loans is based upon the applicable stated fixed contractual rate
with the lender. Interest earned on the Companys bank accounts is linked to the applicable base
interest rate. For the year ended December 31, 2009, the Company had interest expense, net of
income, of approximately $0.8 million. The Company believes that its results of operations are not
materially affected by changes in interest rates. For the year ended December 31, 2008, the Company
had no material net interest income.
Exchange Rate Sensitivity
Approximately 42% of the Companys revenues for the year ended December 31, 2009 are derived
from services provided outside of the United States. As a consequence, a material percentage of the
Companys revenues 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 subsidiarys 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 Companys general
28
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
Companys gross margins may increase or decrease based upon changes in the exchange rate. Such
factors did not have a material impact on the Companys results in the year ended December 31,
2009.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the consolidated financial statements, the notes thereto, and the reports
thereon, commencing on page F-1 of this report, which consolidated financial statements, notes, and
report are incorporated herein by reference.
ITEM 9A(T). 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 Companys management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934) and internal control over financial reporting.
The evaluation of the Companys 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 Companys 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 Companys reports filed under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms and (ii) information is 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 to Rule 13a-15(b) of the Exchange Act. Based on
this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures (as defined in the Exchange Act Rule 13(a)-15(e)) were
effective as of December 31, 2009.
Managements Report on Internal Control over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the
supervision and with the participation of the Company
29
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 in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
our evaluation under the framework in Internal Control Integrated Framework, our management
concluded that our internal control over financial reporting was effective as of December 31, 2009.
This annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to provide only
managements 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, 2009
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 2009 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 2010 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 2010 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 2010 Annual
Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the definitive
Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2010 Annual
Meeting of Stockholders.
30
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 of Regulation 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 of Lock-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 Companys 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. | |
10 .21(11)
|
Employment Agreement for Eric A. Swank, dated February 2, 2009. |
31
Exhibit | ||
Number | Description of Document | |
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 & Technologys 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 & Technologys 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 to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934. | |
31 .2*
|
Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934. |
32
Exhibit | ||
Number | Description of Document | |
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 Registrants Form 8-K filed October 19, 2006, and incorporated herein by reference. | |
(2) | Previously filed as an Exhibit to the Registrants Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 333-122303) and incorporated herein by reference. | |
(3) | Previously filed as an Exhibit to the Registrants Annual Report on Form 10-K filed March 30, 2006, and incorporated herein by reference. | |
(4) | Previously filed as an Exhibit to the Registrants Form 10-Q filed November 14, 2006 and incorporated herein by reference. | |
(5) | Previously filed as an Exhibit to the Registrants Form 8-K filed November 14, 2007 and incorporated herein by reference. | |
(6) | Previously filed as an Exhibit to the Registrants Annual Report on Form 10-K filed April 17, 2007, and incorporated herein by reference. | |
(7) | Previously filed as an Exhibit to the Registrants Form 8-K filed February 23, 2007, and incorporated herein by reference. | |
(8) | Previously filed as an Exhibit to the Registrants Form 8-K filed May 10, 2007, and incorporated herein by reference. | |
(9) | Previously filed as an Exhibit to the Registrants Form 8-K filed March 20, 2008, and incorporated herein by reference. | |
(10) | Previously filed as an Exhibit to the Registrants Form 8-K filed August 4, 2008, and incorporated herein by reference. | |
(11) | Previously filed as an Exhibit to the Registrants Form 8-K filed February 5, 2009, and incorporated herein by reference. | |
(12) | Previously filed as an exhibit to the Registrants Form 8-K filed June 22, 2009, and incorporated herein by reference | |
(13) | Previously filed as an exhibit to the Registrants Form 8-K filed June 22, 2009, and incorporated herein by reference | |
(14) | Previously filed as an exhibit to the Registrants Form 8-K filed December 22, 2009, and incorporated herein by reference. | |
(15) | Previously filed as an exhibit to the Registrants Form 8-K filed January 6, 2010, and incorporated herein by reference. | |
(16) | Previously filed as an exhibit to the Registrants Form 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
President and Chief Executive Officer
Date: March 24, 2010
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 on Form 10-K, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might do or could do in person hereby ratifying and confirming all that
each of said attorneys-in-fact and agents, or his substitute, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed on or before March 24, 2010 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 | |
/s/ Howard Janzen Howard Janzen |
Director |
34
Signature | Title | |
/s/ Morgan E. OBrien Morgan E. OBrien |
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 Shareholders of
Global Telecom & Technology, Inc.
Global Telecom & Technology, Inc.
We have audited the accompanying consolidated balance sheets of Global Telecom & Technology, Inc.
and Subsidiaries as of December 31, 2009 and 2008, 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 Companys 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, 2009 and 2008, 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 24, 2010
Jericho, New York
March 24, 2010
F-2
Global Telecom & Technology, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except for share and per share data)
December 31, 2009 | December 31, 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 5,548 | $ | 5,785 | ||||
Accounts receivable, net |
9,389 | 8,687 | ||||||
Deferred contract costs |
454 | 1,226 | ||||||
Prepaid expenses and other current assets |
937 | 853 | ||||||
Total current assets |
16,328 | 16,551 | ||||||
Property and equipment, net |
2,235 | 1,303 | ||||||
Intangible assets, net |
7,613 | 4,051 | ||||||
Other assets |
429 | 692 | ||||||
Goodwill |
29,156 | 22,000 | ||||||
Total assets |
$ | 55,761 | $ | 44,597 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 12,204 | $ | 13,284 | ||||
Accrued expenses and other current liabilities |
11,372 | 5,300 | ||||||
Short-term debt |
12,463 | | ||||||
Deferred revenue |
6,112 | 3,961 | ||||||
Total current liabilities |
42,151 | 22,545 | ||||||
Long-term debt |
244 | 8,796 | ||||||
Deferred revenue and other long-term liabilities |
352 | 1,126 | ||||||
Total liabilities |
42,747 | 32,467 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock, par value $.0001 per share,
80,000,000 shares authorized, 15,472,912, and
14,942,840 shares issued and outstanding as
of December 31 ,2009 and 2008, respectively |
2 | 1 | ||||||
Additional paid-in capital |
58,710 | 57,584 | ||||||
Accumulated deficit |
(45,499 | ) | (45,953 | ) | ||||
Accumulated other comprehensive income (loss) |
(199 | ) | 498 | |||||
Total stockholders equity |
13,014 | 12,130 | ||||||
Total liabilities and stockholders equity |
$ | 55,761 | $ | 44,597 | ||||
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)
Year Ended | Year Ended | |||||||
December 31, 2009 | December 31, 2008 | |||||||
Revenue: |
||||||||
Telecommunications services sold |
$ | 64,221 | $ | 66,974 | ||||
Operating expenses: |
||||||||
Cost of telecommunications services provided |
45,868 | 47,568 | ||||||
Selling, general and administrative expense |
14,684 | 18,197 | ||||||
Impairment of goodwill and intangibles |
| 41,854 | ||||||
Restructuring costs, employee termination and non-recurring items |
641 | | ||||||
Depreciation and amortization |
1,733 | 2,211 | ||||||
Total operating expenses |
62,926 | 109,830 | ||||||
Operating income (loss) |
1,295 | (42,856 | ) | |||||
Other income (expense): |
||||||||
Interest income (expense), net |
(849 | ) | (781 | ) | ||||
Other income (expense), net |
24 | (28 | ) | |||||
Total other expense, net |
(825 | ) | (809 | ) | ||||
Income (loss) before income taxes |
470 | (43,665 | ) | |||||
Provision for (benefit from) income taxes |
16 | (1,291 | ) | |||||
Net income (loss) |
$ | 454 | $ | (42,374 | ) | |||
Net income (loss) per share: |
||||||||
Basic |
$ | 0.03 | $ | (2.85 | ) | |||
Diluted |
$ | 0.03 | $ | (2.85 | ) | |||
Weighted average shares: |
||||||||
Basic |
15,268,826 | 14,863,658 | ||||||
Diluted |
15,470,763 | 14,863,658 |
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)
(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, 2007 |
14,479,678 | $ | 1 | $ | 56,771 | $ | (3,579 | ) | $ | 241 | $ | 53,434 | ||||||||||||
Share-based compensation for options issued |
| | 107 | | | 107 | ||||||||||||||||||
Share-based compensation for restricted stock issued |
621,428 | 1 | 732 | | | 733 | ||||||||||||||||||
Repurchase of restricted stock |
(158,266 | ) | (1 | ) | (26 | ) | | | (27 | ) | ||||||||||||||
Comprehensive income (loss) |
||||||||||||||||||||||||
Net loss |
| | | (42,374 | ) | | (42,374 | ) | ||||||||||||||||
Change in accumulated foreign currency gain on
translation |
| | | | 257 | 257 | ||||||||||||||||||
Comprehensive loss |
(42,117 | ) | ||||||||||||||||||||||
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 | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-5
Global
Telecom & Technology, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Amounts in thousands)
Year Ended | Year Ended | |||||||
December 31, 2009 | December 31, 2008 | |||||||
Cash Flows From Operating Activities: |
||||||||
Net Income (loss) |
454 | $ | (42,374 | ) | ||||
Adjustments to reconcile net income (loss) to net cash provided
by operating activities |
||||||||
Depreciation and amortization |
1,733 | 2,211 | ||||||
Impairment of goodwill and intangible assets |
| 41,854 | ||||||
Shared-based compensation |
551 | 813 | ||||||
Deferred income taxes |
| (1,227 | ) | |||||
Changes in operating assets and liabilities, net of acquisition: |
||||||||
Accounts receivable, net |
3,191 | (3,765 | ) | |||||
Deferred contract cost, prepaid expenses, income tax
refund receivable and other current assets |
1,905 | (268 | ) | |||||
Other assets |
459 | (35 | ) | |||||
Accounts payable |
(6,676 | ) | 3,943 | |||||
Accrued expenses and other liabilities |
558 | 1,210 | ||||||
Deferred revenue and other long-term liabilities |
(812 | ) | 1,796 | |||||
Net cash provided by operating activities |
1,363 | 4,158 | ||||||
Cash Flows from Investing Activities: |
||||||||
Acquisition of businesses, net of cash acquired |
(3,711 | ) | ||||||
Purchases of property and equipment |
(389 | ) | (609 | ) | ||||
Net cash used in investing activities |
(4,100 | ) | (609 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Borrowing on line of credit |
3,078 | | ||||||
Net cash provided by financing activities |
3,078 | | ||||||
Effect of exchange rate changes on cash |
(578 | ) | (1,097 | ) | ||||
Net (decrease) increase in cash and cash equivalents |
(237 | ) | 2,452 | |||||
Cash and cash equivalents at beginning of year |
5,785 | 3,333 | ||||||
Cash and cash equivalents at end of year |
$ | 5,548 | $ | 5,785 | ||||
Supplemental disclosure of cash flow information |
||||||||
Cash paid for interest |
$ | 343 | $ | 136 | ||||
Supplemental disclosure of non cash investing and
financing activities (Note 3) |
||||||||
WBS Connect acquisition related: |
||||||||
Fair value of liabilities assumed |
$ | 13,054 | $ | | ||||
Fair value of GTT common shares, to be issued |
476 | | ||||||
Fair value of earn out consideration |
100 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-6
Global
Telecom & Technology, Inc.
Notes to Consolidated Financial Statements
NOTE 1 ORGANIZATION AND BUSINESS
Organization and Business
Global Telecom & Technology, Inc. (GTT) is a Delaware corporation which was incorporated on
January 3, 2005. GTT is a global network integrator providing a broad portfolio of Wide-Area
Network (WAN), dedicated Internet access, and managed data services. With over 800 supplier
relationships worldwide, GTT combines multiple networks and technologies such as traditional OC-x,
MPLS and Ethernet, to deliver cost-effective solutions specifically designed for each clients
unique requirements. GTT enhances its client performance through its proprietary Client Management
Database (CMD), providing customers with an integrated support system for all of its services.
GTT is committed to providing comprehensive solutions, project management and 24x7 global
operations support.
GTT serves as the holding company for two operating subsidiaries, Global Telecom & Technology
Americas, Inc. (GTTA) and GTT EMEA Ltd. (GTTE) and their respective subsidiaries
(collectively, hereinafter, the Company).
On December 16, 2009, GTT acquired privately-held WBS Connect LLC, TEK Channel Consulting, LLC
and WBS Connect Europe, Ltd. (collectively WBS Connect). WBS Connect, based in Denver, Colorado,
is a provider of global IP transit and data transport services worldwide.
Headquartered in McLean, Virginia, GTT has offices in Denver, London and Dusseldorf, and
provides services to more than 700 enterprise, government and carrier clients in over 80 countries
worldwide.
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
GTTAs and GTTEs operating subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
GTTAs subsidiaries:
GTT Global Telecom, LLC
GTT Global Telecom Government Services, LLC
WBS Connect LLC
TEK Channel Consulting, LLC
GTT Global Telecom Government Services, LLC
WBS Connect LLC
TEK Channel Consulting, LLC
GTTEs 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
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
F-7
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 expected valuation of equity
instruments. Because of the uncertainty inherent in such estimates, actual results may differ from
these estimates.
Revenue Recognition
The Company provides data connectivity solutions, such as dedicated circuit access, access
aggregation and hubbing and managed network services to its customers. Certain of the Companys
current revenue activities have features that may be considered multiple elements. The Company
believes that there is insufficient evidence to determine each elements 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 Companys services are provided pursuant to contracts that
typically provide for payments of recurring charges on a monthly basis for use of the services over
a committed term. Each service contract has a fixed monthly cost and a fixed term, in addition to a
fixed installation charge (if applicable). At the end of the initial term of most service contracts
the contracts roll forward on a month-to-month or other periodic basis and continue to bill at the
same fixed recurring rate. If any cancellation or termination charges become due from the customer
as a result of early cancellation or termination of a service contract, those amounts are
calculated pursuant to a formula specified in each contract. Recurring costs relating to supply
contracts are recognized ratably over the term of the contract.
Non-recurring fees, 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 Companys supplier, imposed pursuant to the
Companys 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.
F-8
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.
A summary of exchange rates used is as follows:
U.S. Dollars /British | ||||||||||||||||
Pounds Sterling | U.S. Dollars / Euro | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Closing exchange rate at December 31, |
1.59 | 1.45 | 1.43 | 1.41 | ||||||||||||
Average exchange rate during the
period |
1.62 | 1.86 | 1.46 | 1.47 |
Transactions denominated in foreign currencies are recorded at the rates of exchange
prevailing at the time of the transaction. Monetary assets and liabilities denominated in foreign
currencies are translated at the rate of exchange prevailing at the balance sheet date. Exchange
differences arising upon settlement of a transaction are reported in the consolidated statements of
operations.
Other Income (Expense)
The Company recognized other income (expense), net of approximately $24,000 in income and
$28,000 of expense for the years ended December 31, 2009 and 2008, 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 customers 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
Companys 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 customers current ability to pay
its obligation to the Company, and the condition of the general economy and the industry as a
whole. Specific reserves are also established on a case-by-case basis by management. The Company
writes off accounts receivable when they become uncollectible. Credit losses have historically been
within managements 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 managements determination that the costs of
pursuing collection outweigh the likelihood of recovery. As of December 31, 2009 and 2008, the
total allowance for doubtful accounts was $0.6 million and $0.4 million, respectively.
Other Comprehensive Income
In addition to net income, comprehensive income (loss) includes charges or credits to equity
occurring
F-9
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.
Share-based compensation expense recognized under ASC Topic 718 for the years ended December
31, 2009 and 2008 was $0.6 million and $0.8 million respectively. 2009 amounts consisted of $0.2
million of share-based compensation expense related to stock option grants and $0.4 million in
restricted stock awards. 2008 amounts consisted of $0.1 million of share-based compensation
expense related to stock option grants and $0.7 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
Companys consolidated statement of operations.
Share-based compensation expense recognized in the Companys consolidated statements of
operations for the years ended December 31, 2009 and 2008 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, 2009 and
2008 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 used the Black-Scholes option-pricing model (Black-Scholes model) as its method
of valuation for share-based awards granted. The Companys determination of fair value of
share-based payment awards on the date of grant using an option-pricing model is affected by the
Companys stock price as well as assumptions regarding a number of complex and subjective
variables. These variables include, but are not limited to; the Companys expected stock price
volatility over the term of the awards and the expected term of the awards.
The Company accounts for non-employee stock-based compensation expense in accordance with ASC
Topic 505, Equity Based Payments to Non-Employees (formerly EITF Issue No. 96-18). The Company
issued non-employee grants totaling 91,957 share options in 2009.
Cash and Cash Equivalents
Included in cash and cash equivalents are deposits with financial institutions as well as
short-term money market instruments, certificates of deposit and debt instruments with maturities
of three months or less when purchased.
Accounting for Derivative Instruments
The Company accounts for derivative instruments in accordance with SFAS No. 133, 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
F-10
the EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and
Settled in, a Companys Own Stock, which provides criteria for determining whether freestanding
contracts that are settled in a companys own stock, including common stock warrants, should be
designated as either an equity instrument, an asset or as a liability under SFAS 133. EITF 00-19
and SFAS 133 were codified into ASC Topic 815, Derivatives and Hedging and ASC Topic 718,
Compensation Stock Compensation. The adoption of these new FASB ASC Topics did not have a
material effect on the Companys consolidated financial statements.
The Company also considers EITF No. 07-5, Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entitys Own Stock which was effective for the Company on January 1,
2009. EITF No. 07-5 was codified into ASC Topic 815, which provides guidance for determining
whether an equity-linked financial instrument (or embedded feature) issued by an entity is indexed
to the entitys stock, and therefore, qualifying for the first part of the scope exception in
paragraph 15-74 of ASC Topic 718. 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. Based on managements evaluation, the embedded conversion
feature did not require bifurcation and derivative accounting as of December 31, 2009.
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
enterprises 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 interest and/or penalties by taxing
jurisdictions, although any such assessments historically have been minimal and immaterial to its
financial results. In the event the Company has received an assessment for interest and/or
penalties, it has been classified in the statements of operations as other general and
administrative costs.
The Company is liable in certain cases for collecting regulatory fees and/or certain sales
taxes from its customers and remitting the fees and taxes to the applicable governing authorities.
The Company records taxes applicable under ASC Topic 605, Subtopic 45, Revenue Recognition
Principal Agent Considerations (formerly EITF No. 06-3), on a net basis.
Net Income (loss) Per Share
Basic income per share is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding. Diluted earnings per share reflect, in
periods with earnings and in which they have a dilutive effect, the effect of common shares
issuable upon exercise of stock options and warrants. Diluted loss per share for the years ended
December 31, 2009 and 2008
F-11
excludes potentially issuable common shares of 28,633,056 and
28,237,931, respectively, primarily related to the Companys outstanding stock options, warrants,
and convertible notes, and because the assumed issuance of such potential common shares is
anti-dilutive as the exercise prices of such securities are greater than the average closing price
of the Companys common stock during the period.
At March 24, 2010, we had 12,090,000 Class W 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, 2010. In addition, at March 24, 2010 we had 12,090,000 Class Z warrants, each of
which entitles the holder to purchase a share of our common stock at an exercise price of $5.00 per
share on or before April 10, 2012. We also have outstanding approximately $4.8 million in
principal amount of promissory notes due in December 2010 that are convertible into common stock
at a conversion price of $1.70 per share. We also issued to the representative of underwriters in
our initial public offering an option to purchase at any time on or before April 10, 2010, 25,000
Series A units at an exercise price of $17.325 per Series A unit (each of which is comprised of
two shares of common stock, five Class W warrants and five Class Z warrants) and/or 230,000 Series
B units at an exercise price of $16.665 per Series B unit (each of which is comprised of two
shares of common stock, one Class W warrant and one Class Z warrant), except that (a) the exercise
price for these Class W warrants and Class Z warrants is $5.50 per share and these Class Z warrants
expire on April 10, 2010.
Software Capitalization
Internal Use Software The Company recognizes internal use software in accordance with ASC
Topic 350, Sub-topic 40, Internal-Use Software (formerly SOP 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 term of
the lease, excluding optional extensions. Depreciable lives used by the Company for its classes of
assets are as follows:
Furniture and Fixtures | 7 years | |||
Telecommunication Equipment | 5 years | |||
Leasehold Improvements | up to 10 years | |||
Computer Hardware and Software | 3-5 years | |||
Internal Use Software | 3 years |
Goodwill
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 ASC Topic 350,
Intangibles Goodwill and Other (formerly SFAS 142). 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
F-12
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 Companys cost
of 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.
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 Companys assets and liabilities that qualify as financial instruments
under ASC Topic 825, Financial Instruments (formerly SFAS No. 107), including cash and cash
equivalents, accounts receivable, accounts payable, short-term debt, and accrued expenses are
carried at cost, which approximates fair value due to the short-term maturity of these instruments.
Long-term obligations approximate fair value, given managements evaluation of the instruments
current rates compared to market rates of interest and other factors.
Accrued Carrier Expenses
The Company accrues estimated charges owed to its suppliers for services. The Company bases
this accrual on the supplier contract, the individual service order executed with the supplier for
that service, the length of time the service has been active, and the overall supplier
relationship.
Disputed Carrier Expenses
It is common in the telecommunications industry for users and suppliers to engage in disputes
over amounts billed (or not billed) in error or over interpretation of contract terms. The disputed
carrier cost included in the consolidated financial statements includes disputed but unresolved
amounts claimed as due by suppliers, unless management is confident, based upon its experience and
its review of the relevant facts and contract terms, that the outcome of the dispute will not
result in liability for the Company. Management estimates this liability and reconciles the
estimates with actual results as disputes are resolved, or as the appropriate statute of
limitations with respect to a given dispute expires.
As of December 31, 2009, open disputes totaled approximately $1.7 million. Based upon its
experience with each vendor and similar disputes in the past, and based upon management review of
the facts and contract terms applicable to each dispute, management has determined that the most
likely outcome is that the Company will be liable for approximately $1.0 million in connection with
these disputes, for which accrued liabilities are included on the accompanying consolidated balance
sheet at December 31, 2009.
F-13
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)) and
SFAS No.160, Non-controlling Interests in Consolidated Financial Statements (SFAS 160) that took
effect January 1, 2009. These two standards changed the accounting for and the reporting for
business combination transactions and non-controlling (minority) interests in the consolidated
financial statements, respectively. SFAS No. 141 was codified into ASC Topic 805, Business
Combinations and SFAS No. 160 was codified into ASC Topic 810 (Consolidation), which relates to
non-controlling interests and classified as a component of equity. The adoption of these new FASB
ASC Topics did not have a material effect on the Companys consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162,
(SFAS 168), which is effective for the Company on July 1, 2009. The accounting standard was
codified into ASC Topic 105, Generally Accepted Accounting Principles, which establishes the FASB
Accounting Standards Codification as the sole source of authoritative GAAP. The replacement of the
new FASB ASC Topic did not have a material effect on the Companys consolidated financial
statements.
In September 2009, the FASB ratified the consensus approach reached at the Sept. 9-10 Emerging
Issues Task Force (EITF) meeting on two EITF issues related to revenue recognition. The first,
EITF Issue no. 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) Subtopic 605-25 and the second, EITF Issue no. 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 other recently issued, but not yet effective, accounting
standards if currently adopted would have a material effect on the Companys consolidated financial
statements or the Companys 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 will expand the portfolio of dedicated Internet access
and Ethernet services. Additionally, GTT will add WBS Connects network infrastructure assets with
over 60 points of presence in major North American, Asian and European metro centers.
The Company acquired 100 percent of the outstanding equity of WBS Connect from its two members
(collectively the Sellers) in exchange for an aggregate transaction consideration consisting of
the following:
| Issuance to the Sellers of 500,870 shares of the Company common stock issued over 18 months after the transaction closes. The value of common stock to be issued is valued based on the closing price of GTTs common stock on December 16, 2009 of $0.95 per share, or a total value of $0.5 million | ||
| Payment to the Sellers of $1.1 million in cash at Closing | ||
| Issuance to the Sellers of promissory notes from the Company with an aggregate initial principal amount of approximately $0.3 million |
F-14
| Up to $0.5 million in contingent earn out payments to the Sellers based upon the realization of certain accounts receivable that may be achieved within 36 months of the Sale. The fair value of the earn out liability as of December 16, 2009 as determined by management is $0.1 million | ||
| Repayment in full of the outstanding balance on the Promissory notes owed by WBS Connect of $0.8 million | ||
| Repayment in full of the outstanding balances and accrued interest totaling $2.1 million on the Companys Bank Loan | ||
| Assumption of WBS Connect liabilities of $13.1 million |
The results of operations for WBS Connect have been included in the Companys consolidated
results of operations beginning December 17, 2009. The Acquisition has been accounted for under the
purchase method of accounting and resulted in the transaction being valued at $17.8 million.
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 Connects 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 Connects assets and liabilities based on discussions
with WBS Connects management, due diligence and information presented in financial statements.
Amounts in | ||||
thousands | ||||
Purchase Price: |
||||
Cash consideration paid at closing |
$ | 1,050 | ||
WBS debt extinguished by GTT at closing,
including accrued interest and other fees |
2,849 | |||
Total cash consideration |
3,899 | |||
Fair value of liabilities assumed |
13,054 | |||
Fair value of GTT common shares, to be
issued over 18 months following the
transaction |
476 | |||
Fair value of earn out consideration |
100 | |||
Fair value of promissory note issued to
former WBS Connect owners |
250 | |||
Total consideration rendered |
$ | 17,779 | ||
Purchase Price Allocation: |
||||
Tangible net assets acquired |
||||
Acquired Assets |
||||
Current assets |
$ | 4,613 | ||
Property and equipment |
1,175 | |||
Intangible assets |
4,800 | |||
Other assets |
35 | |||
Total fair value of assets acquired |
10,623 | |||
Goodwill |
7,156 | |||
Total consideration |
$ | 17,779 | ||
The following schedule presents unaudited consolidated pro forma results of operations as if
the Acquisition had occurred on January 1, 2008. 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, 2008, nor is it necessarily indicative of the future operating results or the financial
position of the combined company. The unaudited pro forma results of operations do not reflect the
cost of any integration activities or benefits that may result from synergies that may be derived
from any integration activities. In addition, the
F-15
unaudited pro forma combined consolidated financial statements do not reflect one-time fees and expenses of approximately $0.6 million
payable by GTT as a result of the merger.
Year ended December 31, | ||||||||
Amounts in thousands, except per share data | 2009 | 2008 | ||||||
Revenue |
$ | 90,917 | $ | 93,033 | ||||
Net loss |
$ | (4,344 | ) | $ | (46,508 | ) | ||
Net loss per share basic and diluted |
$ | (0.28 | ) | $ | (3.13 | ) |
NOTE 4 GOODWILL AND INTANGIBLE ASSETS
During the third quarter of 2009, 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. The
Company tested its goodwill during the third quarter of 2009 and concluded that no impairment
existed.
In 2008, the Company concluded that an impairment charge of $38.9 million should be
recognized. This was a non-cash charge and was recognized in the third quarter of 2008. During the
third quarter of 2008, we further determined that the carrying amount of certain intangible assets
may not be recoverable. We analyzed these assets in accordance with ASC Topic 350 and ASC Topic 360
and concluded that intangible assets were impaired by $2.9 million.
During the fourth quarter of 2009, the Company recorded goodwill in the amount of $7.2 million
in connection with the WBS Connect acquisition. Additionally, $4.8 million of the purchase price
was allocated to certain finite-lived intangible assets of WBS Connect which are subject to
straight-line amortization. Acquired finite-lived intangible assets included $4.5 million
associated with customer relationship and $0.3 million associated with non-compete agreements.
The following table summarizes the Companys intangible assets as of December 31, 2009 and
2008 (amounts in thousands):
December 31, 2009 | ||||||||||||||||||||
Amortization | Gross Asset | Accumulated | Net Book | |||||||||||||||||
Period | Cost | Amortization | Impairment | Value | ||||||||||||||||
Customer contracts |
4-5 years | $ | 4,800 | $ | 193 | $ | | $ | 4,607 | |||||||||||
Carrier contracts |
1 year | 151 | 151 | | | |||||||||||||||
Noncompete
agreements |
4-5 years | 4,800 | 2,634 | 1,269 | 897 | |||||||||||||||
Software |
7 years | 6,600 | 2,826 | 1,665 | 2,109 | |||||||||||||||
$ | 16,351 | $ | 5,804 | $ | 2,934 | $ | 7,613 | |||||||||||||
F-16
December 31, 2008 | ||||||||||||||||||||
Amortization | Gross Asset | Accumulated | Net Book | |||||||||||||||||
Period | Cost | Amortization | Impairment | Value | ||||||||||||||||
Customer contracts |
4-5 years | $ | 300 | $ | 133 | $ | | $ | 167 | |||||||||||
Carrier contracts |
1 year | 151 | 151 | | | |||||||||||||||
Noncompete
agreements |
4-5 years | 4,500 | 2,084 | 1,269 | 1,147 | |||||||||||||||
Software |
7 years | 6,600 | 2,198 | 1,665 | 2,737 | |||||||||||||||
$ | 11,551 | $ | 4,566 | $ | 2,934 | $ | 4,051 | |||||||||||||
Amortization expense was $1.2 million and $1.8 million for the years ended December 31, 2009
and 2008, respectively.
Estimated amortization expense related to intangible assets subject to amortization at
December 31, 2009 for each of the years in the five-year period ending December 31, 2014 is as
follows (amounts in thousands):
2010 |
$ | 1,845 | ||
2011 |
1,794 | |||
2012 |
1,603 | |||
2013 |
1,471 | |||
2014 |
900 | |||
Total |
$ | 7,613 | ||
NOTE 5 PROPERTY AND EQUIPMENT
The following table summarizes the Companys property and equipment as of December 31, 2009
and 2008 (amounts in thousands):
2009 | 2008 | |||||||
Furniture and fixtures |
$ | 242 | $ | 222 | ||||
Computer equipment |
2,375 | 1,046 | ||||||
Computer software |
478 | 437 | ||||||
Leasehold improvements |
539 | 501 | ||||||
Property and equipment, gross |
3,634 | 2,206 | ||||||
Less accumulated depreciation and amortization |
(1,399 | ) | (903 | ) | ||||
Property and equipment, net |
$ | 2,235 | $ | 1,303 | ||||
Depreciation expense associated with property and equipment was $0.5 million and $0.4 million
for the years ended December 31, 2009 and 2008, respectively.
F-17
NOTE 6 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following table summarizes the Companys accrued expenses and other current liabilities as
of December 31, 2009 and 2008 (amounts in thousands):
2009 | 2008 | |||||||
Accrued compensation and benefits |
$ | 1,880 | $ | 1,187 | ||||
Accrued selling and administrative |
347 | 70 | ||||||
Accrued interest payable |
1,546 | 394 | ||||||
Accrued taxes |
2,277 | 2,078 | ||||||
Accrued carrier costs |
4,599 | 774 | ||||||
Accrued early termination liability |
580 | | ||||||
Accrued other |
143 | 797 | ||||||
$ | 11,372 | $ | 5,300 | |||||
NOTE 7 INCOME TAXES
The components of the provision for (benefit from) income taxes for the years ended
December 31, 2009 and 2008 are as follows (amounts in thousands):
2009 | 2008 | |||||||
Current: |
||||||||
Federal |
$ | | $ | (189 | ) | |||
State |
| (23 | ) | |||||
Foreign |
16 | 358 | ||||||
Subtotal |
16 | 146 | ||||||
Deferred: |
||||||||
Federal |
(332 | ) | (1,407 | ) | ||||
State |
(58 | ) | (143 | ) | ||||
Foreign |
(206 | ) | (617 | ) | ||||
Subtotal |
(596 | ) | (2,167 | ) | ||||
Change in Valuation Allowance |
596 | 730 | ||||||
Provision for (benefit from)
income taxes |
$ | 16 | $ | (1,291 | ) | |||
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, 2009 and 2008:
F-18
2009 | 2008 | |||||||
US federal statutory income tax rate |
35.00 | % | 35.00 | % | ||||
Permanent Items |
1.02 | % | -31.27 | % | ||||
State Taxes |
-3.75 | % | 0.35 | % | ||||
Foreign tax rate differential |
-15.10 | % | 0.62 | % | ||||
Change in Valuation Allowance |
-23.03 | % | -1.67 | % | ||||
Other Items |
9.29 | % | 0.07 | % | ||||
Effective Tax Rate |
3.43 | % | 3.10 | % | ||||
Permanent items in 2008 consist primarily of the write-off of goodwill that had no tax
basis. (See Note 4 Goodwill and Intangible Assets)
As of December 31, 2009, the Company has net operating loss (NOL) carryforwards of
approximately $20.6 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 $2.8 million of the Companys
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
Companys deferred tax assets and liabilities at December 31, 2009 and 2008 are as follows (amounts
in thousands):
2009 | 2008 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carryforwards |
$ | 6,394 | $ | 6,332 | ||||
Allowance for Doubtful Accounts |
12 | 104 | ||||||
Fixed Assets |
390 | 285 | ||||||
Stock Compensation |
1,136 | 862 | ||||||
Accrued Bonuses |
| 137 | ||||||
Miscellaneous items |
250 | 121 | ||||||
Total deferred tax assets before valuation allowance |
8,182 | 7,841 | ||||||
Less: Valuation Allowance |
(7,017 | ) | (6,260 | ) | ||||
Total deferred tax assets |
1,165 | 1,581 | ||||||
Deferred tax liabilities: |
||||||||
Identified intangibles |
(1,165 | ) | (1,539 | ) | ||||
Tax Accounting Method Changes and other miscellaneous items |
| (42 | ) | |||||
Total deferred tax liabilities |
(1,165 | ) | (1,581 | ) | ||||
Net deferred tax liability |
$ | | $ | | ||||
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 the weight of available evidence, which
includes the Companys 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
Companys deferred tax liabilities for intangible assets.
F-19
The majority of the Companys valuation
allowance relates to deferred tax assets in the United Kingdom, the United States, France and
Germany.
NOTE 8 RESTRUCTURING COSTS, EMPLOYEE TERMINATION AND NON-RECURRING ITEMS
In the fourth quarter of 2009, the Company implemented various organizational restructuring
plans in connection with the acquisition of WBS Connect to enable the combined organization to
realize operating cost reductions or synergy and to best align its global sales strategy post
acquisition. In connection with this, the Company incurred severance costs and contract
termination costs related to the realigned organization. In addition, the Company incurred
non-recurring costs associated with executing and closing the WBS Connect acquisition, including
legal fees, professional fees and travel.
The restructuring charges and accruals established by the Company, and activities related
thereto, are summarized as follows (amounts in thousands):
Severance | Other | Total | ||||||||||
Balance, December 31, 2008 |
$ | | $ | | $ | | ||||||
Charges net of reversals |
264 | 377 | 641 | |||||||||
Cash uses |
(204 | ) | (307 | ) | (511 | ) | ||||||
Balance, December 31, 2009 |
$ | 60 | $ | 70 | $ | 130 | ||||||
The remaining balance of restructuring costs, employee termination and non-recurring
items as of December 31, 2009 is expected to be paid in 2010.
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 Companys 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 Companys employee stock options. The dividend yield
assumption is based on the Companys intent not to issue a dividend under its dividend policy. The
Company uses the simplified method under ASC Topic 718, Compensation Stock Compensation, to
estimate the options expected term. Assumptions used in the calculation of the stock option
expense were as follows:
F-20
2009 | 2008 | |||||||
Volatility |
92.2% - 98.5% | 80.0% - 88.5% | ||||||
Risk free rate |
1.9% - 3.7 | % | 1.7% - 4.7 | % | ||||
Term |
6.25 - 9.16 | 6.0 - 6.25 | ||||||
Dividend yield |
0.0 | % | 0.0 | % |
Stock-based compensation expense recognized in the accompanying consolidated statement of
operations for the year ended December 31, 2009 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 managements 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, 2009 and 2008, the Company recognized compensation expense
of $0.2 million and $0.1 million, respectively, related to stock options issued to employees and
consultants, which is included in selling, general and administrative expense on the accompanying
consolidated statements of operations.
During the year ended December 31, 2009, 321,500 options were granted pursuant to the Plan.
The following table summarizes information concerning options outstanding as of December 31, 2009
(amounts in thousands):
Weighted | ||||||||||||||||||||
Average | ||||||||||||||||||||
Weighted | Weighted | Remaining | Aggregate | |||||||||||||||||
Average | Average | Contractual | Intrinsic | |||||||||||||||||
Options | Price | Fair Value | Life (Years) | Value | ||||||||||||||||
Balance at December 31, 2008 |
528,375 | $ | 1.66 | $ | 1.04 | 8.78 | $ | | ||||||||||||
Granted |
321,500 | 0.48 | 0.39 | |||||||||||||||||
Exercised |
| |||||||||||||||||||
Forfeited |
(160,375 | ) | 1.62 | 1.33 | ||||||||||||||||
Balance at December 31, 2009 |
689,500 | $ | 1.20 | $ | 0.82 | 8.32 | $ | 305,660 | ||||||||||||
Exercisable |
77,535 | $ | 0.57 | $ | 0.45 | 8.30 | $ | 150,655 | ||||||||||||
As of December 31, 2009, the unvested portion of share-based compensation expense attributable
to stock options and the period in which such expense is expected to vest and be recognized is as
follows (amounts in thousands):
Year ending December 2010 |
$ | 139 | ||
Year ending December 2011 |
74 | |||
Year ending December 2012 |
30 | |||
Year ending December 2013 |
7 | |||
Total |
$ | 250 | ||
F-21
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, 2009 and 2008, the Company recognized
compensation expense related to restricted stock of $0.4 million and $0.7 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, 2009
and 2008:
2009 | 2008 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Fair | Fair | |||||||||||||||
Shares | Value | Shares | Value | |||||||||||||
Nonvested Balance at January 1, |
566,752 | $ | 1.12 | 420,320 | $ | 2.64 | ||||||||||
Granted |
454,365 | 0.48 | 621,428 | 0.59 | ||||||||||||
Forfeited |
(11,250 | ) | 0.52 | (103,867 | ) | 1.23 | ||||||||||
Vested |
(392,368 | ) | 0.71 | (371,129 | ) | 1.92 | ||||||||||
Nonvested Balance at December 31, |
617,499 | $ | 0.72 | 566,752 | $ | 1.12 | ||||||||||
As of December 31, 2009, the unvested portion of share-based compensation expense attributable
to restricted stock amounts to $0.4 million which is expected to vest and be recognized during a
weighted-average period of 1.4 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
2009, the Company matched 25% of employees contributions to the plan. The Companys 401(k) expense
was $42,000 in 2009 and $32,000 in 2008.
NOTE 11 DEBT
The following summarizes the debt activity of the Company during 2009 (amounts in thousands):
Notes Payable to | Notes Payable to | |||||||||||||||||||||||
former GII | former ETT and GII | Notes Payable to | Promissory Note / | Senior Secured | ||||||||||||||||||||
Total Debt | Shareholders | Shareholders | Other Investors | Capital Lease | Credit Facility | |||||||||||||||||||
Debt obligation as of December 31, 2008 |
$ | 8,796 | $ | 4,000 | $ | 2,871 | $ | 1,925 | $ | | $ | | ||||||||||||
Draw on Senior Secured Credit Facility |
3,078 | | | | | 3,078 | ||||||||||||||||||
Promissory Note Issued |
250 | | | | 250 | | ||||||||||||||||||
Captial lease obligation assumed |
583 | | | | 583 | | ||||||||||||||||||
Debt obligation as of December 31, 2009 |
$ | 12,707 | $ | 4,000 | $ | 2,871 | $ | 1,925 | $ | 833 | $ | 3,078 | ||||||||||||
F-22
On November 12, 2007, the Company and the holders of the approximately $5.9 million of
promissory notes due on April 30, 2008 (the April 2008 Notes) entered into agreements to convert
not less than 30% of the amounts due under the April 2008 Notes as of November 13, 2007 (including
principal and accrued interest) into shares of the Companys common stock, and to obtain 10%
convertible unsecured subordinated promissory notes due on December 31, 2010 (the December 2010
Notes) for the remaining indebtedness then due under the April 2008 Notes. Pursuant to the
conversion, a total of 2,570,143 shares of the Companys common stock (with a quoted market price
of $2,929,963) were issued for $3,528,987 of principal and accrued interest due under the April
2008 Notes as of November 13, 2007. All principal and accrued interest under the December 2010
Notes is payable on December 31, 2010. These exchanges are considered an extinguishment of debt in
which the aggregate fair value of common stock and new convertible notes is less than the carrying
value of the original notes. Accordingly, the Company recorded a gain, included in other income
(expense), of $0.6 million for the year ended December 31, 2007 on the extinguishment of the
original notes in accordance with ASC Topic 470, Debt Modifications and Extinguishes (formerly
EITF No. 96-19).
The holders of the December 2010 Notes can convert the principal due under the December 2010
Notes into shares of the Companys common stock, at any time, at a price per share equal to $1.70.
The Company has the right to require the holders of the December 2010 Notes to convert the
principal amount due under the December 2010 Notes at any time after the closing price of the
Companys common stock shall be equal to or greater than $2.64 for 15 consecutive business days.
The conversion provisions of the December 2010 Notes include protection against dilutive issuances
of the Companys common stock, subject to certain exceptions. The December 2010 Notes and the
Amended Notes are subordinate to any future credit facility entered into by the Company, up to an
amount of $4.0 million. The Company has agreed to register with the Securities and Exchange
Commission the shares of Companys common stock issued to the holders of the December 2010 Notes
upon their conversion, subject to certain limitations.
Included in the December 2010 Notes are notes totaling $1.5 million due to a related party,
Universal Telecommunications, Inc. Brian Thompson, the Companys Executive Chairman of the Board
of Directors, is also the head of Universal Telecommunications, Inc, his own private equity
investment and advisory firm.
On November 12, 2007, the holders of the $4.0 million of promissory notes due on December 29,
2008 agreed to amend those notes to extend the maturity date to December 31, 2010, subject to
increasing the interest rate to 10% per annum, beginning January 1, 2009. Under the terms of the
notes, as amended (the Amended Notes), 50% of all interest accrued during 2008 and 2009 is
payable on each of December 31, 2008 and 2009, respectively, and all principal and remaining
accrued interest is payable on December 31, 2010.
On March 17, 2008, the Company entered into a Loan and Security Agreement (the credit
facility) with Silicon Valley Bank. Under the terms of the credit facility, the Company could
borrow up to a maximum amount of $2.0 million; with the actual amount available being based upon
criteria related to accounts receivable and cash collections. Advances under the credit facility
would bear interest at the banks prime rate plus either 1.5% or 2.0%, and would also be subject to
a monthly collateral handling fee ranging from 0.25% to 0.50%, in each case depending on certain
financial criteria. The credit facility had a 364 day term and contained customary covenants, but
there were no covenants that required compliance with financial criteria. The Companys payment
obligations under the credit facility were secured by a pledge of substantially all of its assets,
including a pledge of 67% of the outstanding stock of the Companys foreign subsidiaries.
On June 16, 2009, the Company and Silicon Valley Bank entered into an Amended and Restated
Loan and Security Agreement (the amended credit facility). Under the terms of the amended credit
facility, the Companys revolving line of credit was increased to a maximum amount of $2.5 million,
with the actual amount available being based upon criteria related to accounts receivable.
Advances under the credit facility would bear interest at the banks prime rate plus either 1.75%
or 2.0%, and would also be subject to a monthly collateral handling fee ranging from 0.15% to
0.35%, in each case depending on certain financial criteria. The amended credit facility had a 364
day term and contained customary covenants, but there were
F-23
no covenants that required compliance with financial criteria. The Companys payment
obligations under the amended credit facility were secured by a pledge of substantially all of its
assets, including a pledge of 67% of the outstanding stock of the Companys foreign subsidiaries.
In December 2009, the Company and Silicon Valley Bank entered into a Second Amended and
Restated Credit Facility (the current credit facility). Under the terms of the current credit
facility, the Companys 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 Companys 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 Companys accounts receivable in Europe (but not to
exceed $2.0 million with respect to the European receivables). The revolving line of credit would
be increased to $8.0 million if the Company raised at least $4.5 million of additional equity and
subordinated debt capital and completes the Global Capacity acquisition. Advances under the
current credit facility bear interest at the banks prime rate plus 1.75% or 2.0%, and would also
be subject to a monthly collateral handling fee ranging from 0.15% to 0.35%, in each case depending
on certain financial criteria. The current credit facility has a 364 day term and matures in
December 2010. The current credit facility contains customary covenants, including covenants not
included in the amended credit facility that require the Company to maintain, on a consolidated
basis, specified amounts of net operating cash flow over certain specified periods of time. The
Companys payment obligations under the current credit facility are secured by a pledge of
substantially all of all of its assets, including a pledge of 67% of the outstanding stock of the
Companys foreign subsidiaries.
The Company had approximately $3.1 million outstanding on its SVB Credit facility at December
31, 2009. The facility is subject to renewal by December 10, 2010.
In addition to amounts drawn on the Companys SVB credit facility to facilitate the closing of
the WBS Connect acquisition, the Company also 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 payable in full by October 2010.
As of December 31, 2009, the Companys total short-term debt obligation is $12.5 million,
which is due on or before December 31, 2010.
Interest expense for 2009 and 2008 was $0.9 and $0.8 million, respectively. Total short-term
accrued interest associated with these notes at each of the years ended December 31, 2009 and 2008
was $1.6 million and $0.4 million respectively. Total long-term accrued interest at December 31,
2009 and 2008 was $0.0 million and $0.7 million, respectively.
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, 2009, approximately $4.8
million of the Companys deposits were held at institutions as balances in excess of the US Federal
Deposit Insurance Corporation and international insured deposit limits for those institutions.
However, management believes the Company is not exposed to significant credit risk due to the
financial position of the depository institutions in which those deposits are held.
For the year ended December 31, 2009, no single customer exceeded 10% of total consolidated
revenues. For the year ended December 31, 2008, one customer accounted for 12% of total
consolidated revenues.
F-24
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 Companys 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 $0.9 million and $1.2 million for the years ended December 31, 2009 and 2008,
respectively.
The Company has also entered into certain non-cancelable operating lease agreements related to
vehicles. Total expense under vehicle leases was $0.1 million for each of the years ended December
31, 2009 and 2008.
Estimated annual commitments under non-cancelable operating leases are as follows at December
31, 2009 (amounts in thousands):
Office Space | Other | |||||||
2010 |
$ | 688 | $ | 28 | ||||
2011 |
598 | 11 | ||||||
2012 |
424 | | ||||||
2013 |
327 | | ||||||
2014 |
335 | | ||||||
$ | 2,372 | $ | 39 | |||||
Commitments-Supply agreements
As of December 31, 2009, the Company had supplier agreement purchase obligations of $33.0
million associated with the telecommunications services that the Company has contracted to purchase
from its vendors. The Companys contracts are generally such that the terms and conditions in the
vendor and client customer contracts are substantially the same in terms of duration. The
back-to-back nature of the Companys contracts means that the largest component of its contractual
obligations is generally mirrored by its customers commitment to purchase the services associated
with those obligations.
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, 2009, the Company
has $0.6 million accrued for early termination liabilities.
F-25
Take-or-Pay Purchase Commitments
Some of the Companys 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, 2009 and 2008, the Companys aggregate monthly obligations under such take-or-pay
commitments over the remaining term of all of those contracts totaled $4.7 million and $0.0,
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 Companys consolidated financial position, results of operations or liquidity. No
material reserves have been established for any pending legal proceeding, either because a loss is
not probable or the amount of a loss, if any, cannot be reasonably estimated.
NOTE 14 FOREIGN OPERATIONS
Our operations are located primarily in the United States and Europe. Our financial data by
geographic area is as follows:
US | UK | Other | Total GTT | |||||||||||||
2009 |
||||||||||||||||
Revenues by geographic area |
$ | 36,941 | $ | 18,917 | $ | 8,363 | $ | 64,221 | ||||||||
Long-lived assets at December 31 |
38,872 | 561 | | 39,433 | ||||||||||||
2008 |
||||||||||||||||
Revenues by geographic area |
34,087 | 23,308 | 9,579 | 66,974 | ||||||||||||
Long-lived assets at December 31 |
27,084 | 591 | 51 | 27,726 |
NOTE 15 SUBSEQUENT EVENTS
On December 31, 2009, GTT entered into an agreement to acquire from Capital Growth Systems,
Inc., Global Capacity Group, Inc. and Global Capacity Direct, LLC (collectively Global Capacity)
certain customer contracts and other assets related to point-to-point circuits for the transmission
of data. The closing of the Global Capacity acquisition has not yet occurred.
In exchange for the purchased assets, the Company agreed to pay the Global Capacity an
aggregate purchase price of $8.0 million, provided that all customer contracts, and the
corresponding underlying contracts for the supply of the circuits, are duly assigned. To the
extent any Customer Contract is not assigned to the Buyer, the purchase price shall be reduced on a
ratable basis.
On February 8, 2010, the Company completed a financing transaction in which it sold 500 units
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 Companys common stock, and $7,000 in principal amount
of the Companys subordinated promissory notes due February 8, 2012. The proceeds of the notes
will be applied by the Company to finance a portion of the purchase price under the asset purchase
agreement with Global Capacity. If the Global Capacity transaction in not consummated, the units
will be redeemed by the Company at the purchase price paid by the investors without penalty and
without premium.
F-26