UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2010
Commission file number
000-51211
Global Telecom &
Technology, Inc.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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20-2096338
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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8484 Westpark
Drive
Suite 720
McLean, Virginia 22102
(703) 442-5500
(Address
including zip code, and telephone number, including area
code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, par value $.0001 per share
Class Z Warrants
(Title of Class)
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):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company þ
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the common stock held by
non-affiliates of the registrant (7,077,710 shares) based
on the $0.96 closing price of the registrants common stock
as reported on the
Over-the-Counter
Bulletin Board on June 30, 2010, was $6,794,602. For
purposes of this computation, all officers, directors and 10%
beneficial owners of the registrant are deemed to be affiliates.
Such determination should not be deemed to be an admission that
such officers, directors or 10% beneficial owners are, in fact,
affiliates of the registrant.
As of March 11, 2011 there were outstanding
18,656,754 shares of the registrants common stock,
par value $.0001 per share.
Documents
Incorporated by Reference
Portions of our definitive proxy statement for the 2011 Annual
Meeting of Stockholders, to be filed within 120 days after
the end of the fiscal year covered by this
Form 10-K,
are incorporated by reference into Part III hereof.
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 consider any further disclosures on related subjects
in our quarterly reports on
Form 10-Q
and current reports on
Form 8-K
filed with the SEC.
Such forward-looking statements are and will be subject to 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:
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our ability to develop and market new products and services that
meet customer demands and generate acceptable margins;
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our reliance on several large customers;
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our ability to negotiate and enter into acceptable contract
terms with our suppliers;
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our ability to attract and retain qualified management and other
personnel;
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competition in the industry in which we do business;
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failure of the third-party communications networks on which we
depend;
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legislation or regulatory environments, requirements or changes
adversely affecting the businesses in which we are engaged;
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our ability to maintain our databases, management systems and
other intellectual property;
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our ability to maintain adequate liquidity and produce
sufficient cash flow to fund our capital expenditures and debt
service;
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our ability to obtain capital to grow our business;
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technological developments and changes in the industry;
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our ability to complete acquisitions or divestures and to
integrate any business or operation acquired;
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general economic conditions.
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You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of
this report. Forward-looking statements involve known and
unknown risks and uncertainties that may cause our actual future
results to differ materially from those projected or
contemplated in the forward-looking statements.
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All forward-looking statements included herein attributable to
us or any person acting on our behalf are expressly qualified in
their entirety by the cautionary statements contained or
referred to in this section. Except to the extent required by
applicable laws and regulations, we undertake no obligation to
update these forward-looking statements to reflect events or
circumstances after the date of this report or to reflect the
occurrence of unanticipated events. You should be aware that the
occurrence of the events described in the Risk
Factors section and elsewhere in this report could have a
material adverse effect on our business and our results of
operations.
Unless the context otherwise requires, when we use the words
the Company, GTT, we,
us, or our Company in 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
Background
Global Telecom & Technology, Inc. (GTT or
the Company) is a Delaware corporation which was
incorporated on January 3, 2005. GTT is a global
telecommunications carrier and leading network integrator
serving the data communications needs of large enterprise,
government and carrier clients in over 80 countries. We combine
our own network assets with the networks of over 800 suppliers
worldwide to deliver cost-effective, scalable solutions
supporting each clients unique requirements. Through our
proprietary Client Management Database (CMD), GTT provides
streamlined service design and quotation, rapid service
implementation, and global 24x7 monitoring and support. GTT is
headquartered in the Washington, DC metro region with offices in
London, Dusseldorf, and Denver.
Our
Customers
As of December 31, 2010, our customer base was comprised of
over 700 businesses. For the year ended December 31, 2010,
no single customer accounted for more than 5% of our total
consolidated revenues. Our five largest customers accounted for
approximately 19% of consolidated revenues during the same
period.
We provide services in over 80 countries, with the ability to
expand into new geographic areas by adding new regional partners
and suppliers. Our service expansion is largely customer-driven.
We have designed, delivered, and subsequently managed services
in all six populated continents around the world.
For the year ended December 31, 2010, approximately 76% of
our revenue was attributable to our operations based in the
United States, 15% was attributable to operations based in the
United Kingdom, and 9% was attributable to operations based in
Germany.
Our customer contracts for network services and support are
generally for initial terms of one to three years, with some
contracts calling for terms in excess of five years. Following
the initial terms, these agreements typically provide for
renewal automatically for specified periods ranging from one
month to one year. Our prices are fixed for the duration of the
contract, and we typically bill in advance for such services. If
a customer terminates its agreement, the terms of our customer
contracts typically require full recovery of any amounts due for
the remainder of the term (or at a minimum, our liability to the
underlying suppliers).
Our
Suppliers and Network
As of December 31, 2010, we had over 800 supplier
relationships worldwide from which we source bandwidth and other
services and combine our own network assets to meet our
customers requirements. Through our extensive supplier
relationships, our customers have access to an array of service
providers without having to manage multiple contracts.
GTTs network has deployed assets in North America and
Europe to provide Dedicated Internet Access and Ethernet
Transport services. GTTs network has connectivity in all
major U.S. hubs and major European cities, established
Ethernet hubs with various carriers, multiple high speed
connections to Tier 1 IP providers, highly competitive
rates, and
on-net
provisioning time which results in faster deployment and
installation.
Our supplier management teams work with our suppliers to acquire
updated pricing and network asset information and negotiate
purchase agreements when appropriate. In some cases, we have
electronic interfaces into our suppliers pricing systems
to provide our customers with real time pricing updates. Our
supplier management teams are constantly seeking out strategic
partnerships with new carriers, negotiating favorable terms on
existing contracts, and looking to expand each 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.
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Sales and
Marketing
Because our markets are highly competitive, we believe that
personal relationships and quality of service delivery remain
important in winning new and repeat customer business. We
therefore sell our services largely through a direct sales force
located across the globe, as well as strong agent channel
relationships, with principal concentration in the United
States, the United Kingdom, and Germany. Most of our sales
representatives have many years of experience in selling to
multinational corporations, enterprises, service providers, and
carriers. We also employ sales engineers to provide presales
support to our sales representatives. The average sales cycle
can be as little as two to six weeks for existing customers and
three to six months or longer for new customers with complicated
service requirements.
Our sales and marketing efforts are focused on generating new
business opportunities through industry contacts, new product
offerings, and long-term relationships with new and existing
customers. Our sales activities are specifically focused on
recruiting seasoned industry experts with deep ties to the
direct enterprise, system integrator and carrier markets,
building relationships with our new clients, and driving
expansion within existing accounts. Our marketing activities are
designed to generate awareness and familiarity of our value
proposition with our target accounts, develop new products to
meet the needs of our customer base, and communicate to our
target markets, thereby reinforcing our value proposition among
our customers key decision makers.
Operations
Our global operations consist of two parts: global customer
operations, and global network operations and engineering.
Customer operations include project management and development
of our CMD system. The global project management team assures
the successful implementation of customer services after the
sale. A project manager is assigned to each customer order to
ensure that the underlying network facilities required for the
solution are provisioned, that the customer is provided with
status reports on its service, and that any difficulties related
to the installation of a customer order are proactively managed.
Network operations and engineering is comprised of the global
Network Operations Center (NOC), Engineering and
Information and Communications Technology (ICT). The
NOC receives, prioritizes, tracks, and resolves network outages
or other customer needs, along with provisioning and testing of
new services. Engineering provides support for the NOC and the
sales team, as well as carrying out all provisioning for
services utilizing GTTs owned network assets (GTT Network
Services). ICT manages all internal desktop, and network and
server infrastructure.
Competition
Our competition consists primarily of traditional,
facilities-based providers, including companies that provide
network connectivity and internet access principally within one
continent or geographical region, such as Level 3, Qwest,
KPN, XO, Comcast Communications, and COLT. We also compete
against carriers who provide network connectivity on a
multi-continent, or global basis, such as Verizon Business,
AT&T, British Telecom, NTT and Deutsche Telekom.
Government
Regulation
In connection with certain of our service offerings, we may be
subject to federal, state, and foreign regulations. United
States Federal laws and Federal Communications Commission, or
FCC, regulations generally apply to interstate
telecommunications and international telecommunications that
originate or terminate in the United States, while state
laws and regulations apply to telecommunications transmissions
ultimately terminating within the same state as the point of
origination. A foreign 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
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authorities relating to the provision of services within the
relevant jurisdiction. Another potential ongoing responsibility
relates to payment of regulatory fees and the collection and
remittance of surcharges and fees associated with the provision
of telecommunications services. Some of our services are subject
to these assessments, depending upon the jurisdiction, the type
of service, and the type of customer.
Federal
Regulation
Generally, the FCC has chosen not to heavily regulate the
charges or practices of non-dominant carriers. For example, we
are not required to tariff the interstate inter-exchange private
line services we provide, but need only to post terms and
conditions for such services on our website. In providing
certain telecommunications services, however, we may remain
subject to the regulatory requirements applicable to common
carriers, such as providing services at just and reasonable
rates, filing the requisite reports, and paying regulatory fees
and contributing to universal service. The FCC also releases
orders and takes other actions from time to time that modify the
regulations applicable to services provided by carriers such as
us; these orders and actions can result in additional (or
reduced) reporting or payments requirements, or changes in the
relative rights and obligations of carriers with respect to
services they provide to each other or to other categories of
customers. These changes in regulation can affect the services
that we 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, 2010, we had a total of
81 employees.
5
Executive
Officers
Our executive officers and their respective ages and positions
as of March 11, 2011 are as follows:
H. Brian Thompson, 72, has served as Chairman of our
Board of Directors since January 2005, as our Executive Chairman
since October 2006, and as our interim Chief Executive Officer
from January 2005 to October 2006 and from February 2007 to May
2007. Mr. Thompson continues to head his own private equity
investment and advisory firm, Universal Telecommunications, Inc.
From December 2002 to June 2007, Mr. Thompson was Chairman
of Comsat International, one of the largest independent
telecommunications operators serving all of Latin America.
He also served as Chairman and Chief Executive Officer of Global
TeleSystems Group, Inc. from March 1999 through September of
2000. Mr. Thompson was Chairman and CEO of LCI
International from 1991 until its merger with Qwest
Communications International Inc. in June 1998, and became Vice
Chairman of the board for Qwest until his resignation in
December 1998. He previously served as Executive Vice President
of MCI Communications Corporation from 1981 to 1990, and prior
to MCI, was a management consultant with the Washington, DC
offices of McKinsey & Company for nine years, where he
specialized in the management of telecommunications.
Mr. Thompson currently serves as a member of the board of
directors of Axcelis Technologies, Inc, ICO Global
Communications (Holdings) Ltd, Penske Automotive Group, and
Sonus Networks, Inc., and is a member of the Irish Prime
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., 47, has served as our
President, Chief Executive Officer and Director since May 2007.
Prior to joining us, from 2004 to 2006 Mr. Calder served as
President & Chief Operating Officer of InPhonic, Inc.,
a publicly-traded online seller of wireless services and
products. From 2001 to 2003, Mr. Calder served in a variety
of executive roles for Broadwing Communications, Inc., including
President Business Enterprises and Carrier Markets.
From 1996 to 2001, Mr. Calder held several senior
management positions with Winstar Communications, including
Chief Marketing Officer, and President of the 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, 43, has served as our Chief Financial Officer
since February 2009. Prior to joining us, Mr. Swank served
as the Treasurer and Senior Vice President of Finance at Mobile
Satellite Ventures (now Light Squared), a Reston, Virginia-based
developer and supplier of mobile satellite communications
services from November 2001 to April 2008. From 1994 to 2001,
Mr. Swank served in various positions, including Director,
Corporate Development and Investor Relations, and Vice
President, Corporate Planning and Investor Relations, at Motient
Corporation (now TerreStar Corporation), a publicly-held,
Reston, Virginia-based integrated mobile satellite and
terrestrial communications network provider. Prior to joining
Motient, from 1989 to 1994, Mr. Swank served as Director,
Operations and Manager, Business Development for C-Tec
Corporation, a diversified telecommunications holding company
organized to hold Commonwealth Telephone Inc. and other
non-regulated telecommunications businesses. Mr. Swank
received a Bachelors degree in Finance from Kings
College.
Chris McKee, 43, has served as our General Counsel and
Secretary since May 2008. Prior to joining us, Mr. McKee
served as the Vice President and General Counsel of StarVox
Communications, Inc. from June, 2007 to April 2008. From 2005 to
2007, Mr. McKee was the Vice President and Assistant
General Counsel of Covad Communications Group Inc., a publicly
held San Jose, California-based broadband provider of
integrated voice and data communications nationwide. Prior to
joining Covad, from 2002 to 2005, Mr. McKee served as
Executive Director of Legal and Regulatory Affairs for XO
Communications, Inc., a publicly held Reston, Virginia-based
broadband provider of integrated voice and data communications
nationwide. Mr. McKee previously, from 1998 to 2002, served
as Deputy General Counsel of Net2000 Communications Inc., a
publicly traded Herndon,
Virginia-based
telecommunications services provider. Prior to that, from 1994
to 1998, Mr. McKee was an associate at
Washington, D.C.-based law firms Dickstein Shapiro LLP and
Dow Lohnes PLLC. Mr. McKee received a Bachelors
degree from Colby College and a Juris Doctor from Syracuse
University.
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Available
Information
The public may read and copy any materials we file with the SEC
at the 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.
We operate in a rapidly changing environment that involves a
number of risks, some of which are beyond our control. Below are
the risks and uncertainties we believe are most important for
you to consider. Additional risks and uncertainties not
presently known to us, which we currently deem immaterial or
which are similar to those faced by other companies in our
industry or telecommunications
and/or
technology companies in general, may also impair our business
operations. If any of these risks or uncertainties actually
occurs, our business, financial condition and operating results
could be materially adversely affected.
Risks
Relating to Our Business and Operations
We
depend on several large customers, and the loss of one or more
of these customers, or a significant decrease in total revenues
from any of these customers, would likely reduce our revenue and
income.
For the year ended December 31, 2010, our five largest
customers accounted for approximately 19% of our total service
revenues. If we were to lose all of the underlying services from
one or more of our large customers, or if one or more of our
large customers were to significantly reduce the services
purchased from us or otherwise renegotiate the terms on which
services are purchased from us, our revenues could decline and
our results of operations would suffer.
If our
customers elect to terminate their agreements with us, our
business, financial condition and results of operations may be
adversely affected.
Our services are sold under agreements that generally have
initial terms of between one and three years. Following the
initial terms, these agreements generally automatically renew
for 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.
The markets in which we operate are rapidly evolving and highly
competitive. We currently or potentially compete with a variety
of companies, including some of our transport suppliers, with
respect to their products and services, including global and
regional telecommunications service providers such as AT&T,
British Telecom, NTT, Level 3, Qwest and Verizon, among
others.
The industry in which we operate is consolidating, which is
increasing the size and scope of our competitors. Competitors
could benefit from assets or businesses acquired from other
carriers or from strategic alliances in the telecommunications
industry. New entrants could enter the market with a business
model similar to ours. Our target markets may support only a
limited number of competitors. Operations in such markets with
multiple competitive
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providers may be unprofitable for one or more of such providers.
Prices in the data transmission and internet access business
have declined in recent years and may continue to decline.
Many of our potential competitors have certain advantages over
us, including:
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substantially greater financial, technical, marketing, and other
resources, including brand or corporate name recognition;
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substantially lower cost structures, including cost structures
of facility-based providers who have reduced debt and other
obligations through bankruptcy or other restructuring
proceedings;
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larger client bases;
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longer operating histories;
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more established relationships in the industry; and
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larger geographic presence.
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Our competitors may be able to use these advantages to:
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develop or adapt to new or emerging technologies and changes in
client requirements more quickly;
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take advantage of acquisitions and other opportunities more
readily;
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enter into strategic relationships to rapidly grow the reach of
their networks and capacity;
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devote greater resources to the marketing and sale of their
services;
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adopt more aggressive pricing and incentive policies, which
could drive down margins; and
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expand their offerings more quickly.
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If we are unable to compete successfully against our current and
future competitors, our revenues and gross margins could decline
and we would lose market share, which could materially and
adversely affect our business.
We
might require additional capital to support business growth, and
this capital might not be available on favorable terms, or at
all.
Our operations or expansion efforts may require substantial
additional financial, operational, and managerial resources. As
of December 31, 2010, we had approximately
$6.6 million in cash and cash equivalents and current
liabilities $10.3 million greater than current assets. We
may have insufficient cash to fund our working capital or other
capital requirements and may be required to raise additional
funds to continue or expand our operations. If we are required
to obtain additional funding in the future, we may have to sell
assets, seek debt financing, or obtain additional equity
capital. Our ability to sell assets or raise additional equity
or debt capital will depend on the condition of the capital and
credit markets and our financial condition at such time.
Accordingly, additional capital may not be available to us, or
may only be available on terms that adversely affect our
existing stockholders, or that restrict our operations. For
example, if we raise additional funds through issuances of
equity or convertible debt securities, our existing stockholders
could suffer dilution, and any new equity securities we issue
could have rights, preferences, and privileges superior to those
of holders of our common stock. Also, if we were forced to sell
assets, there can be no assurance regarding the terms and
conditions we could obtain for any such sale, and if we were
required to sell assets that are important to our current or
future business, our current and future results of operations
could be materially and adversely affected. We have granted
security interests in substantially all of our assets to secure
the repayment of our indebtedness maturing in 2012 and 2015, and
if we are unable to satisfy our obligations the lenders could
foreclose on their security interests.
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Because
our business consists primarily of reselling telecommunications
network capacity purchased from third parties, the failure of
our suppliers and other service providers to provide us with
services, or disputes with those suppliers and service
providers, could affect our ability to provide quality services
to our customers and have an adverse effect on our operations
and financial condition.
The majority of our business consists of integrating and
reselling network capacity purchased from facility-based
telecommunications carriers. Accordingly, we will be largely
dependent on third parties to supply us with services.
Occasionally in the past, our operating companies have
experienced delays or other problems in receiving services from
third party providers. Disputes also arise from time to time
with suppliers with respect to billing or interpretation of
contract terms. Any failure on the part of third parties to
adequately supply us or to maintain the quality of their
facilities and services in the future, or the termination of any
significant contracts by a supplier, could cause customers to
experience delays in service and lower levels of customer care,
which could cause them to switch providers. Furthermore,
disputes over billed amounts or interpretation of contract terms
could lead to claims against us, some of which if resolved
against us could have an adverse impact on our results of
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
9
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 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.
10
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:
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the willingness of enterprises to make additional information
technology expenditures;
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the availability of security products necessary to ensure data
privacy over the public networks;
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the quality, cost, and functionality of these services and
competing services;
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the increased adoption of wired and wireless broadband access
methods;
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the continued growth of broadband-intensive
applications; and
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the proliferation of electronic devices and related applications.
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Our
long sales and service deployment cycles require us to incur
substantial sales costs that may not result in related
revenues.
Our business is characterized by long sales cycles, which are
often in the range of 45 days or more, between the time a
potential customer is contacted and a customer contract is
signed. Furthermore, once a customer contract is signed, there
is typically an extended period of between 30 and 120 days
before the customer actually begins to use the services, which
is when we begin to realize revenues. As a result, we may invest
a significant amount of time and effort in attempting to secure
a customer, which investment may not result in near term, if
any, revenues. Even if we enter into a contract, we will have
incurred substantial sales-related expenses well before we
recognize any related revenues. If the expenses associated with
sales increase, if we are not successful in our sales efforts,
or if we are unable to generate associated offsetting revenues
in a timely manner, our operating results could be materially
and adversely affected.
Because
much of our business is international, our financial results may
be affected by foreign exchange rate fluctuations.
Approximately 24% of our revenue comes from countries outside of
the United States. As such, other currencies, particularly the
Euro and the British Pound Sterling, can have an impact on the
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.
Because
much of our business is international, we may be subject to
local taxes, tariffs, or other restrictions in foreign
countries, which may reduce our profitability.
Revenues from our foreign subsidiaries, or other locations where
we provide or procure services internationally, may be subject
to additional taxes in some foreign jurisdictions. Additionally,
some foreign jurisdictions may subject us to additional
withholding tax requirements or the imposition of tariffs,
exchange controls, or other restrictions on foreign earnings.
Any such taxes, tariffs, controls, and other restrictions
imposed on our foreign operations may increase our costs of
business in those jurisdictions, which in turn may reduce our
profitability.
If our
goodwill or amortizable intangible assets become further
impaired we may be required to record a significant charge to
earnings.
Under generally accepted accounting principles, we review our
amortizable intangible assets for impairment when events or
changes in circumstances indicate the carrying value may not be
recoverable. Goodwill is tested for impairment at least
annually. Factors that may be considered a change in
circumstances indicating that the carrying
11
value of our goodwill or amortizable intangible assets may not
be recoverable include reduced future cash flow estimates, a
decline in stock price and market capitalization, and slower
growth rates in our industry. During the years ended
December 31, 2010 and 2009, the Company recorded no
impairment to goodwill and amortizable intangible assets. We may
be required to record a significant charge to earnings in our
financial statements during the period in which any impairment
of our goodwill or amortizable intangible assets is determined,
negatively impacting our results of operations.
The
ability to implement and maintain our databases and management
information systems is a critical business requirement, and if
we cannot obtain or maintain accurate data or maintain these
systems, we might be unable to cost-effectively provide
solutions to our customers.
To be successful, we must increase and update information in our
databases about network pricing, capacity, and availability. Our
ability to provide cost-effective network availability and
access cost management depends upon the information we collect
from our transport suppliers regarding their networks. These
suppliers are not obligated to provide this information and
could decide to stop providing it to us at any time. Moreover,
we cannot be certain that the information that these suppliers
share with us is accurate. If we cannot continue to maintain and
expand the existing databases, we may be unable to increase
revenues or to facilitate the supply of services in a
cost-effective manner.
Furthermore, we are in the process of reviewing, integrating,
and augmenting our management information systems to facilitate
management of client orders, client service, billing, and
financial applications. Our ability to manage our businesses
could be materially adversely affected if we fail to
successfully and promptly maintain and upgrade the existing
management information systems.
If we
are unable to protect our intellectual property rights,
competitors may be able to use our technology or trademarks,
which could weaken our competitive position.
We own certain proprietary programs, software, and technology.
However, we do not have any patented technology that would
preclude competitors from replicating our business model;
instead, we rely upon a combination of know-how, trade secret
laws, contractual restrictions, and copyright, trademark and
service mark laws to establish and protect our intellectual
property. Our success will depend in part on our ability to
maintain or obtain (as applicable) and enforce intellectual
property rights for those assets, both in the United States and
in other countries. Although our Americas operating company has
registered some of its service marks in the United States, we
have not otherwise applied for registration of any marks in any
other jurisdiction. Instead, with the exception of the few
registered service marks in the United States, we rely
exclusively on common law trademark rights in the countries in
which we operate.
We may file applications for patents, copyrights and trademarks
as our management deems appropriate. We cannot assure you that
these applications, if filed, will be approved, or that we will
have the financial and other resources necessary to enforce our
proprietary rights against infringement by others. Additionally,
we cannot assure you that any patent, trademark, or copyright
obtained by us will not be challenged, invalidated, or
circumvented, and the laws of certain foreign countries may not
protect intellectual property rights to the same extent as do
the laws of the United States or the member states of the
European Union. Finally, although we intend to undertake
reasonable measures to protect the proprietary assets of our
combined operations, we cannot guarantee that we will be
successful in all cases in protecting the trade secret status of
certain significant intellectual property assets. If these
assets should be misappropriated, if our intellectual property
rights are otherwise infringed, or if a competitor should
independently develop similar intellectual property, this could
harm our ability to attract new clients, retain existing
customers, and generate revenues.
Intellectual
property and proprietary rights of others could prevent us from
using necessary technology to provide our services or otherwise
operate our business.
We utilize data and processing capabilities available through
commercially available third-party software tools and databases
to assist in the efficient analysis of network engineering and
pricing options. Where such technology is held under patent or
other intellectual property rights by third parties, we are
required to negotiate license
12
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:
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be time-consuming and expensive;
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divert attention and resources away from our daily business;
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impede or prevent delivery of our products and services; and
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require us to pay significant royalties, licensing fees, and
damages.
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Parties making claims of infringement may be able to obtain
injunctive or other equitable relief that could effectively
block our ability to provide our services and could cause us to
pay substantial damages. In the event of a successful claim of
infringement, we may need to obtain one or more licenses from
third parties, which may not be available at a reasonable cost,
if at all. The defense of any lawsuit could result in
time-consuming and expensive litigation, regardless of the
merits of such claims, and could also result in damages, license
fees, royalty payments, and restrictions on our ability to
provide our services, any of which could harm our business.
We
continue to evaluate merger and acquisition opportunities and
may purchase additional companies in the future, and the failure
to integrate them successfully with our existing business may
adversely affect our financial condition and results of
operations.
We continue to explore merger and acquisition opportunities, and
we may face difficulties if we acquire other businesses in the
future, including:
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integrating the personnel, services, products and technologies
of the acquired businesses into our existing operations;
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retaining key personnel of the acquired businesses;
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failing to adequately identify or assess liabilities of acquired
businesses;
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failing to achieve the synergies, revenue growth and other
expected benefits we used to determine the purchase price of the
acquired businesses;
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failing to realize the anticipated benefits of a particular
merger and acquisition;
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incurring significant transaction and acquisition-related costs;
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incurring significant amounts of additional debt;
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creating significant contingent earn-out obligations and other
financial liabilities;
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incurring unanticipated problems or legal liabilities;
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being subject to business uncertainties and contractual
restrictions while an acquisition is pending that could
adversely affect our business; and
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diverting our managements attention from the
day-to-day
operation of our business.
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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
13
agreements governing our indebtedness, conditions in the
securities and credit markets and other factors, most of which
are generally beyond our control. If we proceed with one or more
acquisitions in which the consideration consists of cash, we may
use a substantial portion of our available cash to complete such
acquisitions, thereby reducing our liquidity. If we finance one
or more acquisitions with the proceeds of indebtedness, our
interest expense and debt service requirements could increase
materially. Thus, the financial impact of future acquisitions,
including the costs to pursue acquisitions that do not
ultimately close, could materially affect our business and could
cause substantial fluctuations in our quarterly and yearly
operating results.
Our
efforts to develop new service offerings may not be successful,
in which case our revenues may not grow as we anticipate or may
decline.
The market for telecommunications services is characterized by
rapid change, as new technologies are developed and introduced,
often rendering established technologies obsolete. For our
business to remain competitive, we must continually update our
service offerings to make new technologies available to our
customers and prospects. To do so, we may have to expend
significant management and sales resources, which may increase
our operating costs. The success of our potential new service
offerings is uncertain and would depend on a number of factors,
including the acceptance by end-user customers of the
telecommunications technologies which would underlie these new
service offerings, the compatibility of these technologies with
existing customer information technology systems and processes,
the compatibility of these technologies with our then-existing
systems and processes, and our ability to find third-party
vendors that would be willing to provide these new technologies
to us for delivery to our users. If we are unsuccessful in
developing and selling new service offerings, our revenues may
not grow as we anticipate, or may decline.
If we
do not continue to train, manage and retain employees, clients
may reduce purchases of services.
Our employees are responsible for providing clients with
technical and operational support, and for identifying and
developing opportunities to provide additional services to
existing clients. In order to perform these activities, our
employees must have expertise in areas such as
telecommunications network technologies, network design, network
implementation, and network management, including the ability to
integrate services offered by multiple telecommunications
carriers. They must also accept and incorporate training on our
systems and databases developed to support our operations and
business model. Employees with this level of expertise tend to
be in high demand in the telecommunications industry, which may
make it more difficult for us to attract and retain qualified
employees. If we fail to train, manage, and retain our
employees, we may be limited in our ability to gain more
business from existing clients, and we may be unable to obtain
or maintain current information regarding our clients and
suppliers communications networks, which could limit our
ability to provide future services.
The
regulatory framework under which we operate could require
substantial time and resources for compliance, which could make
it difficult and costly for us to operate the
businesses.
In providing certain interstate and international
telecommunications services, we must comply, or cause our
customers or carriers to comply, with applicable
telecommunications laws and regulations prescribed by the
Federal Communications Commission (FCC) and
applicable foreign regulatory authorities. In offering services
on an intrastate basis, we may also be subject to state laws and
to regulation by state public utility commissions. Our
international services may also be subject to regulation by
foreign authorities and, in some markets, multinational
authorities, such as the European Union. The costs of compliance
with these regulations, including legal, operational, and
administrative expenses, may be substantial. In addition, delays
in receiving or failure to obtain required regulatory approvals
or the enactment of new or adverse legislation, regulations, or
regulatory requirements may have a material adverse effect on
our financial condition, results of operations, and cash flow.
If we fail to obtain required authorizations from the FCC or
other applicable authorities, or if we are found to have failed
to comply, or are alleged to have failed to comply, with the
rules of the FCC or other authorities, our right to offer
certain services could be challenged
and/or fines
or other penalties could be imposed on us. Any such challenges
or fines could be substantial and could cause us to incur
substantial legal and administrative expenses as well; these
costs in the forms of fines, penalties, and legal and
administrative expenses could have a material adverse impact on
our business and operations. Furthermore, we are dependent in
certain cases on the services other carriers
14
provide, and therefore on other carriers abilities to
retain their respective licenses in the regions of the world in
which they operate. We are also dependent, in some
circumstances, on our customers abilities to obtain and
retain the necessary licenses. The failure of a customer or
carrier to obtain or retain any necessary license could have an
adverse effect on our ability to conduct operations.
Future
changes in regulatory requirement, new interpretations of
existing regulatory requirements, or determinations that we
violated existing regulatory requirements may impair our ability
to provide services, result in financial losses or otherwise
reduce our profitability.
Many of the laws and regulations that apply to providers of
telecommunications services are subject to frequent changes and
different interpretations and may vary between jurisdictions.
Changes to existing legislation or regulations in particular
markets may limit the opportunities that are available to enter
into markets, may increase the legal, administrative, or
operational costs of operating in those markets, or may
constrain other activities, including our ability to complete
subsequent acquisitions, or purchase services or products, in
ways that we cannot anticipate. Because we purchase
telecommunications services from other carriers, our costs and
manner of doing business can also be adversely affected by
changes in regulatory policies affecting these other carriers.
In addition, any determination that we, including companies that
we have acquired, have violated applicable regulatory
requirements could result in material fines, penalties,
forfeitures, interest or retroactive assessments. For example, a
determination that we have not paid all required universal
service fund contributions could result in substantial
retroactive assessment of universal service fund contributions,
together with applicable interest, penalties, fines or
forfeitures.
We
depend on key personnel to manage our businesses effectively in
a rapidly changing market, and our ability to generate revenues
will suffer if we are unable to retain key personnel and hire
additional personnel.
The future success, strategic development, and execution of our
business will depend upon the continued services of our
executive officers and other key sales, marketing, and support
personnel. We do not maintain key person life
insurance policies with respect to any of our employees, nor are
we certain if any such policies will be obtained or maintained
in the future. We may need to hire additional personnel in the
future, and we believe the success of the combined business
depends, in large part, upon our ability to attract and retain
key employees. The loss of the services of any key employees,
the inability to attract or retain qualified personnel in the
future, or delays in hiring required personnel could limit our
ability to generate revenues and to operate our business.
Risks
Relating to Our Indebtedness
Our
failure to comply with covenants in our Loan Agreement could
result in our indebtedness being immediately due and payable and
the loss of our assets.
Pursuant to the terms of our Loan Agreement with Silicon Valley
Bank we have pledged substantially all of our assets to the
lender as security for our payment obligations under the Loan
Agreement. If we fail to pay any of our indebtedness under this
Loan Agreement when due, or if we breach any of the other
covenants in the Loan Agreement, it may result in one or more
events of default. An event of default under our Loan Agreement
would permit the lender to declare all amounts owing to be
immediately due and payable and, if we were unable to repay any
indebtedness owed, the lender could proceed against the
collateral securing that indebtedness.
Covenants
in our Loan Agreement and outstanding notes, and in any future
debt agreement, may restrict our future
operations.
The indenture governing the notes and the Loan Agreement will
impose financial restrictions that limit our discretion on some
business matters, which could make it more difficult for us to
expand our business, finance our operations and engage in other
business activities that may be in our interest. These
restrictions include compliance
15
with, or maintenance of, certain financial tests and ratios and
restrictions that limit our ability and that of our subsidiaries
to, among other things:
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incur additional indebtedness or place additional liens on our
assets;
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pay dividends or make other distributions on, redeem or
repurchase our capital stock;
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make investments or repay subordinated indebtedness;
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enter into transactions with affiliates;
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sell assets;
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engage in a merger, consolidation or other business
combination; or
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change the nature of our businesses.
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Any additional indebtedness we may incur in the future may
subject us to similar or even more restrictive conditions.
Our
substantial level of indebtedness and debt service obligations
could impair our financial condition, hinder our growth and put
us at a competitive disadvantage.
As of December 31, 2010, our indebtedness was substantial
in comparison to our available cash and our net income. Our
substantial level of indebtedness could have important
consequences for our business, results of operations and
financial condition. For example, a high level of indebtedness
could, among other things:
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make it more difficult for us to satisfy our financial
obligations;
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increase our vulnerability to general adverse economic and
industry conditions, including interest rate fluctuations;
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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;
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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;
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limit our ability to borrow additional funds to expand our
business or ease liquidity constraints;
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limit our ability to refinance all or a portion of our
indebtedness on or before maturity;
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limit our ability to pursue future acquisitions;
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limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate; and
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place us at a competitive disadvantage relative to competitors
that have less indebtedness.
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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.
16
Our
outstanding warrants may have an adverse effect on the market
price of our common stock.
As of December 31, 2010, we had 12,090,000 Class Z
warrants, each of which entitles the holder to purchase a share
of our common stock at an exercise price of $5.00 per share on
or before April 10, 2012. The common stocks underlying the
warrants has been registered for sale under the Securities Act
or is entitled to registration rights or are otherwise generally
eligible for sale in the public market at or soon after exercise
or conversion. If, and to the extent, these warrants are
exercised, stockholders may experience dilution to their
ownership interests in the Company. The presence of this
additional number of shares of common stock and warrants
eligible for trading in the public market may have an adverse
effect on the market price of our common stock.
The
concentration of our capital stock ownership will likely limit a
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.
H. Brian Thompson, the Companys Executive Chairman of
the Board of Directors, and Universal Telecommunications, Inc.,
his own private equity investment and advisory firm, owned
5,294,829 shares of our common stock and 699,750
Class Z warrants, each exercisable to purchase one share of
our common stock. Based on the number of shares of our common
stock outstanding on December 31, 2010 without taking into
account their unexercised warrants, these funds would
beneficially own approximately 30% of our common stock. Based on
public filings with the SEC made by J. Carlo Cannell, we believe
that as of December 31, 2010, funds associated with Cannell
Capital LLC owned 3,734,381 shares of our common stock and
923,900 Class Z warrants, each exercisable to purchase one
share of our common stock. Based on the number of shares of our
common stock outstanding on December 31, 2010 without
taking into account their unexercised warrants, these funds
would beneficially own approximately 21% of our common stock. In
addition, as of December 31, 2010, our executive officers,
directors and affiliated entities, excluding H. Brian Thompson
and Universal Telecommunications, together beneficially owned
common stock, without taking into account their unexercised and
unconverted warrants and options, representing approximately 10%
of our common stock. As a result, these stockholders have the
ability to exert significant control over matters that require
approval by our stockholders, including the election of
directors and approval of significant corporate transactions.
The interests of these stockholders might conflict with your
interests as a holder of our securities, and it may cause us to
pursue transactions that, in their judgment, could enhance their
equity investments, even though such transactions may involve
significant risks to you as a security holder. The large
concentration of ownership in a small group of stockholders
might also have the effect of delaying or preventing a change of
control of our company that other stockholders may view as
beneficial.
It may
be difficult for you to resell shares of our common stock if an
active market for our common stock does not
develop.
Our common stock is not actively traded on a securities exchange
and we currently do not meet the initial listing criteria for
any registered securities exchange, including the NASDAQ
National Market System. It is quoted on the less recognized
Over-the-Counter
Bulletin Board. This factor, in addition to the
concentrated ownership of our capital stock, may further impair
your ability to sell your shares when you 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.
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.
17
We believe our properties, taken as a whole, are in good
operating condition and are adequate for our business needs.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
The Company is not currently subject to any material legal
proceedings. From time to time, however, we or our operating
companies may be party to other various legal proceedings that
arise in the normal course of business. In the opinion of
management, none of these proceedings, individually or in the
aggregate, are likely to have a material adverse effect on our
consolidated financial position, consolidated results of
operations or cash flows. However, we cannot provide assurance
that any adverse outcome would not be material to our
consolidated financial position or consolidated results of
operations or cash flows.
PART II
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|
ITEM 5.
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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 Z
warrants trade under the symbol GTLTZ. At March 11, 2011,
we had outstanding 18,290,254 shares of our common stock
and 12,090,000 Class Z Warrants. On April 10, 2010,
our Class W Warrants of 12,090,000 expired at 5:00pm, New
York City time.
The Class Z warrant entitles the holder to purchase from us
one share of common stock at an exercise price of $5.00. The
Class Z warrants will expire at 5:00 p.m., New York
City time, on April 10, 2012, or earlier upon redemption.
The trading of our securities, especially our Class Z
warrants, is limited, and therefore there may not be deemed to
be an established public trading market under guidelines set
forth by the SEC.
The following table sets forth, for the calendar quarters
indicated, the quarterly high and low bid information of our
common stock, warrants, and units as reported on 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.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Common Stock
|
|
Class Z Warrants
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
0.50
|
|
|
$
|
0.36
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Second Quarter
|
|
$
|
1.40
|
|
|
$
|
0.62
|
|
|
$
|
0.06
|
|
|
$
|
0.00
|
|
Third Quarter
|
|
$
|
1.44
|
|
|
$
|
1.26
|
|
|
$
|
0.06
|
|
|
$
|
0.01
|
|
Fourth Quarter
|
|
$
|
1.25
|
|
|
$
|
0.95
|
|
|
$
|
0.03
|
|
|
$
|
0.01
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|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
1.34
|
|
|
$
|
0.90
|
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
Second Quarter
|
|
$
|
1.32
|
|
|
$
|
0.96
|
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
Third Quarter
|
|
$
|
1.32
|
|
|
$
|
0.82
|
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
Fourth Quarter
|
|
$
|
1.30
|
|
|
$
|
0.95
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
As of March 11, 2011 there were approximately 15 holders of
record of our Class Z warrants.
Dividends
We have not paid any dividends on our common stock to date, and
do not anticipate paying any dividends in the foreseeable
future. Moreover, restrictive covenants existing in certain
promissory notes that we have issued preclude us from paying
dividends until those notes are paid in full.
18
|
|
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 Notes Regarding Forward-Looking
Statements on page 1 hereof, which describes
important factors that could cause actual results to differ from
expectations and non-historical information contained herein.
Overview
GTT is a global telecommunications carrier and leading network
integrator serving the data communications needs of large
enterprise, government and carrier clients in over 80 countries.
We combine our own network assets with the networks of over 800
suppliers worldwide to deliver cost-effective, scalable
solutions supporting each clients unique requirements.
Through our proprietary Client Management Database (CMD), GTT
provides streamlined service design and quotation, rapid service
implementation, and global 24x7 monitoring and support. GTT is
headquartered in the Washington, DC metro region with offices in
London, Dusseldorf, and Denver.
The Company sells services largely through a direct sales force
located across the globe, as well as strong agent channel
relationships. The Company generally competes with traditional,
facilities-based providers and other services providers in each
of our global markets. As of December 31, 2010, our
customer base was comprised of over 700 businesses. Our five
largest customers accounted for approximately 19% of
consolidated revenues during the year ended December 31,
2010.
Costs
and Expenses
The Companys cost of revenue consists almost entirely of
the costs for procurement of services associated with customer
services. The key terms and conditions appearing in both
supplier and customer agreements are substantially the same,
with margin applied to the suppliers costs. There are no
wages or overheads included in these costs. From time to time,
the Company has agreed to certain special commitments with
vendors in order to obtain better rates, terms and conditions
for the procurement of services from those vendors. These
commitments include volume purchase commitments and purchases on
a longer-term basis than the term for which the applicable
customer has committed.
Our supplier contracts do not have any market related net
settlement provisions. The Company has not entered into, and has
no plans to enter into, any supplier contracts which involve
financial or derivative instruments. The supplier contracts are
entered into solely for the direct purchase of
telecommunications capacity, which is resold by the Company in
its normal course of business.
Other than cost of revenue, the Companys most significant
operating expenses are employment costs. As of December 31,
2010, the Company had 81 employees and employment costs
comprised approximately 13% of total operating expenses for the
year ended December 31, 2010.
Critical
Accounting Policies and Estimates
The 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.
19
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 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.
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.
20
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.
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.
These disputes with suppliers generally fall into four
categories: pricing errors, network design, start of service
date or disconnection errors, and taxation and regulatory
surcharge errors. In the instances where the billed amount
exceeds the applicable contractual rate the Company does not
accrue the full face amount of obvious billing errors in
accounts payable because to do so would present a misleading and
confusing picture of the 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, 2010, the Company had
$1.9 million in billing errors disputed with suppliers, for
which we have accrued $0.7 million in liabilities.
In instances where the Company has been billed less than the
applicable contractual rate, the accruals remain on the
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)
21
Accounting Standards Codification (ASC) Topic 350,
Intangibles Goodwill and Other (formerly
Statement of Financial Accounting Standards SFAS
No. 142). ASC Topic 350 provides guidance on financial
accounting and reporting related to goodwill and other
intangibles, other than the accounting at acquisition for
goodwill and other intangibles. A reporting unit is an operating
segment, or component of an operating segment, for which
discrete financial information is available and is regularly
reviewed by management. We have one reporting unit to which
goodwill is assigned.
A two-step approach is required to test goodwill for impairment.
The first step tests for impairment by applying fair value-based
tests. The second step, if deemed necessary, measures the
impairment by applying fair value-based tests to specific assets
and liabilities. Application of the goodwill impairment test
requires significant judgments including estimation of future
cash flows, which is dependent on internal forecasts, estimation
of the long-term rate of growth for the Company, the useful life
over which cash flows will occur, and determination of the
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 2010
and 2009 and concluded that no impairment existed.
Intangible assets are assets that lack physical substance, and
are accounted for in accordance with ASC Topic 350 and
ASC Topic 360, Impairment or Disposal of Long-Lived Assets
(formerly SFAS 144). ASC Topic 360 provides
guidance for recognition and measurement of the impairment of
long-lived assets to be held, used and disposed of by sale.
Intangible assets arose from business combinations and consist
of customer contracts, acquired technology and restrictive
covenants related to employment agreements that are amortized,
on a straight-line basis, over periods of up to five years.
Intangible assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may
not be recoverable. During the third quarter of 2010 and 2009,
the Company tested their intangible assets and concluded that no
impairment existed.
Income
Taxes
The Company accounts for income taxes in accordance with ASC
Topic 740, Income Taxes (formerly SFAS 109). Under
ASC Topic 740, deferred tax assets are recognized for future
deductible temporary differences and for tax net operating loss
and tax credit carry-forwards, and deferred tax liabilities are
recognized for temporary differences that will result in taxable
amounts in future years. Deferred tax assets and liabilities are
measured using the enacted tax rates expected to apply to
taxable income in the periods in which the deferred tax asset or
liability is expected to be realized or settled. A valuation
allowance is provided to offset the net deferred tax asset if,
based upon the available evidence, management determines that it
is more likely than not that some or all of the deferred tax
asset will not be realized.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 was codified into ASC
Topic 740, which clarifies the accounting for uncertainty in
income taxes recognized in an 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. The Companys federal tax returns for 2006, 2007,
2008 and 2009 are still open. 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
22
payment awards made to employees, directors, and consultants
based on estimated fair values. In March 2005, the Securities
and Exchange Commission issued Staff Accounting
Bulletin No. 107 (SAB 107) relating
to SFAS 123(R). The Company has applied the provisions of
SAB 107 in its adoption of SFAS 123(R).
SFAS 123(R) was codified into ASC Topic 718,
Compensation Stock Compensation.
ASC Topic 718 requires companies to estimate the fair value of
share-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that
is ultimately expected to vest is recognized as expense over the
requisite service periods in the 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 uses 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 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.
23
Results
of Operations of the Company
Fiscal
Year Ended December 31, 2010 compared to Fiscal Year Ended
December 31, 2009
Overview. The financial information presented
in the table below comprises the audited consolidated financial
information of the Company for the years ended December 31,
2010 and 2009 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Telecommunications services sold
|
|
$
|
81,075
|
|
|
$
|
64,221
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of telecommunications services provided
|
|
|
57,022
|
|
|
|
45,868
|
|
Selling, general and administrative expense
|
|
|
18,021
|
|
|
|
14,684
|
|
Restructuring costs, employee termination and non- recurring
items
|
|
|
|
|
|
|
641
|
|
Depreciation and amortization
|
|
|
2,791
|
|
|
|
1,733
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
77,834
|
|
|
|
62,926
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3,241
|
|
|
|
1,295
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(1,407
|
)
|
|
|
(849
|
)
|
Other income (expense), net
|
|
|
(368
|
)
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(1,775
|
)
|
|
|
(825
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,466
|
|
|
|
470
|
|
Provision for income taxes
|
|
|
96
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,370
|
|
|
$
|
454
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.08
|
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
0.08
|
|
|
$
|
0.03
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,740,882
|
|
|
|
15,268,826
|
|
Diluted
|
|
|
16,971,396
|
|
|
|
15,470,763
|
|
Revenues. The table below presents the
components of revenues for the years ended December 31,
2010 and 2009:
|
|
|
|
|
|
|
|
|
Geographical Revenue
|
|
2010
|
|
|
2009
|
|
|
United States
|
|
|
76
|
%
|
|
|
58
|
%
|
United Kingdom
|
|
|
15
|
%
|
|
|
29
|
%
|
Germany
|
|
|
9
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
The shift in Revenue geographically is the result of the
acquisition of WBS Connect which occurred on December 16,
2009 and the sales novations in the third quarter of 2010, both
of which had predominantly US-based Revenues.
Total revenue increased $16.9 million, or 26%, for the year
ended December 31, 2010 compared to the year ended
December 31, 2009 primarily due to the over 400 new
customers from the acquisition of WBS Connect which occurred on
December 16, 2009 and new sales activities in the third
quarter of 2010, including sales novations.
24
Costs of Service. Total costs of service
increased $11.2 million, or 24%, for the year ended
December 31, 2010 compared to the year ended
December 31, 2009 primarily due to the WBS Connect
acquisition and new sales activities in the third quarter of
2010, including sales novations. As part of the WBS Connect
acquisition, GTT added WBS Connects network infrastructure
assets with over 60 points of presence and a substantial
increase in services to provide our new customers.
Selling, General and Administrative
Expenses. SG&A increased $3.3 million,
or 23% for the year ended December 31, 2010 compared to the
year ended December 31, 2009. The increase was due
primarily to the WBS Connect acquisition and new sales
activities in the third quarter of 2010, including sales
novations, which resulted in an increase in agent commission
expenses.
Depreciation and Amortization. Depreciation
and amortization expense increased $1.1 million, or 61%, to
$2.8 million for the year ended December 31, 2010,
compared to the year ended December 31, 2009. The increase
was due primarily to the WBS Connect acquisition in which GTT
added WBS Connects network infrastructure assets with over
60 points of presence.
Interest Expense. Interest expense increased
$0.6 million, or 66%, to $1.4 million for the year
ended December 31, 2010 compared to the year ended
December 31, 2009. The increase was primarily due to
additional debt assumed and incurred in connection with the WBS
Connect acquisition.
Liquidity
and Capital Resources (amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
Cash and cash equivalents and short-term investments
|
|
$
|
6,562
|
|
|
$
|
5,548
|
|
Debt
|
|
$
|
14,265
|
|
|
$
|
12,707
|
|
Management monitors cash flow and liquidity requirements. Based
on the Companys cash and cash equivalents, the Silicon
Valley Bank credit facility, and analysis of the anticipated
working capital requirements, Management believes the Company
has sufficient liquidity to fund the business and meet its
contractual obligations for 2011. The Companys current
planned cash requirements for 2011 are based upon certain
assumptions, including its ability to manage expenses and the
growth of revenue from services arrangements. In connection with
the activities associated with the services, the Company expects
to incur expenses, including provider fees, employee
compensation and consulting fees, professional fees, sales and
marketing, insurance and interest expense. Should the expected
cash flows not be available, management believes it would have
the ability to revise its operating plan and make reductions in
expenses.
The Company believes that cash currently on hand, expected cash
flows from future operations and existing borrowing capacity are
sufficient to fund operations for at least the next twelve
months, including the scheduled repayment of indebtedness
pursuant to the Silicon Valley Bank Term Loan. If our operating
performance differs significantly from our forecasts, we may be
required to reduce our operating expenses and curtail capital
spending, and we may not remain in compliance with our debt
covenants. In addition, if the Company were unable to fully fund
its cash requirements through operations and current cash on
hand, the Company would need to obtain additional financing
through a combination of equity and subordinated debt 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.
Operating Activities. Net cash used in
operating activities was $2.2 million for the year ended
December 31, 2010, driven primarily by the reduction of
approximately $7.0 million in accounts payable, accrued
expenses and other current liabilities assumed in the WBS
Connect acquisition, and payment of upfront cash to be applied
as a recoverable draw on commissions of approximately
$3.0 million, offset by net income excluding non-cash
expenditures.
During 2010 and 2009, we made cash payments for interest
totaling $0.6 million and $0.3 million, respectively.
The increase in interest payments was a result of the term loan
that was issued during the third quarter of 2010.
25
Investing Activities. Net cash used in
investing activities decreased to $0.2 million for the year
ended December 31, 2010 as compared to $4.1 million
for the year ended December 31, 2009. The decrease was
primarily due to the purchase of WBS Connect in December 2009.
The $0.2 million in investing activities for the year ended
December 31, 2010 consists primarily of capital
expenditures.
Financing Activities. Net cash provided by
financing activities increased to $3.5 million for the year
ended December 31, 2010 as compared to $3.1 million
for the year ended December 31, 2009. This increase was due
to the issuance of a new term loan and subordinate notes in the
third and fourth quarter of 2010, respectively.
Effect of Exchange Rate Changes on
Cash. Effect of Exchange Rate Changes decreased
$0.5 million to $0.1 million for the year ended
December 31, 2010 as compared to an effect of
$0.6 million for the year ended December 31, 2009, due
primarily to cash balances denominated in currencies that
weakened against the US Dollar during 2010 as well as
impacts to the Companys current assets and liabilities
denominated in currencies that weakened against the
US Dollar.
Debt
The following summarizes the debt activity of the Company for
the year ended December 31, 2010 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
Line of
|
|
|
Subordinated
|
|
|
Note/Capital
|
|
|
Notes
|
|
|
Notes
|
|
|
|
Total Debt
|
|
|
Term Loan
|
|
|
Credit
|
|
|
Notes
|
|
|
Lease
|
|
|
Payable
|
|
|
Payable
|
|
|
Debt obligation as of December 31, 2009
|
|
$
|
12,707
|
|
|
$
|
|
|
|
$
|
3,078
|
|
|
$
|
|
|
|
$
|
833
|
|
|
$
|
4,000
|
|
|
$
|
4,796
|
|
Subordinated notes issuance
|
|
|
2,183
|
|
|
|
|
|
|
|
|
|
|
|
2,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayment on senior secured credit facility
|
|
|
(740
|
)
|
|
|
|
|
|
|
(740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WBS promissory note repayment
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
Principal payments on capital lease
|
|
|
(339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(339
|
)
|
|
|
|
|
|
|
|
|
Issuance of term loan
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of term loan
|
|
|
(500
|
)
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of notes payable
|
|
|
(8,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,000
|
)
|
|
|
(4,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt obligation as of December 31, 2010
|
|
$
|
14,265
|
|
|
$
|
9,500
|
|
|
$
|
2,338
|
|
|
$
|
2,183
|
|
|
$
|
244
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan
and Line of Credit
In December 2009, the Company and Silicon Valley Bank entered
into a Second Amended and Restated Credit Facility (the
Restated Credit Facility). Under the terms of the
Restated Credit Facility, the 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
Restated Credit Facility had a
364-day term.
On September 30, 2010, the Company entered into a Loan and
Security Agreement (the Loan Agreement) with Silicon
Valley Bank. The Loan Agreement provides for a term loan
facility of $10 million (the Term Loan), and a
revolving line of credit facility, which replaced the Second
Amended and Restated Credit Facility, in the aggregate principal
amount of up to $5 million (the Line of
Credit). The Loan Agreement contains customary
representations and warranties of the Borrower and customary
events of default. The obligations of the Company under the Loan
Agreement are secured by substantially all of the Companys
tangible and intangible assets pursuant to the Loan Agreement.
The availability under the Line of Credit is calculated during
any month as a percentage of
26
eligible accounts receivable and is subject to certain
conditions, including the continued accuracy of the
Companys representations, warranties and covenants. The
Term Loan matures on September 30, 2015. The Company shall
repay the Term Loan in sixty equal installments of principal and
interest, with interest accruing at a floating per annum rate
equal to Silicon Valley Banks prime rate plus 3%, unless
the Company achieves certain performance criteria, in which case
the interest rate shall be equal to Silicon Valley Banks
prime rate plus 2%. The Company had $9.5 million
outstanding on the Term Loan as of December 31, 2010. The
Line of Credit matures on September 29, 2012. The principal
amount outstanding under the Line of Credit shall accrue
interest at a floating per annum rate equal to Silicon Valley
Banks prime rate plus 2%, unless the Company achieves
certain performance criteria, in which case the interest rate
shall be equal to the Banks prime rate plus 1%. The
Company had $2.3 million outstanding on the Line of Credit
at December 31, 2010. On November 12, 2007, the
holders of the $4.0 million of notes payable due on
December 29, 2008 agreed to amend those notes to extend the
maturity date to December 31, 2010, subject to increasing
the interest rate to 10% per annum, beginning January 1,
2009. Under the terms of the notes, 50% of all interest accrued
during 2008 and 2009 was payable on each of December 31,
2008 and 2009, respectively, and all principal and remaining
accrued interest was payable on December 31, 2010.
Subordinated
Notes
On February 8, 2010, the Company completed a units offering
(February 2012 Units) in which it sold
500 units consisting of debt and common stock at a purchase
price of $10,000 per unit, resulting in $5.0 million of
proceeds to the Company. Each unit consisted of
2,970 shares of the Companys common stock, and $7,000
in principal amount of the Companys subordinated
promissory notes due February 8, 2012. The subordinated
promissory notes were issued at a discount to face value of
$0.2 million and the discount is being amortized, into
interest expense, over the life of the notes. Interest on the
subordinated promissory notes accrues at 10% per annum. Accrued
but unpaid interest will be payable on February 8, 2011 and
2012.
The proceeds from the February 2012 Units were to be applied by
the Company to finance a portion of the purchase price under an
asset purchase agreement with Global Capacity. On April 30,
2010 the asset purchase agreement with Global Capacity expired
without consummation of the acquisition. On May 13, 2010,
investors representing $1.5 million in aggregated principal
amount of the Companys subordinated promissory notes and
$0.9 million of the Companys common stock waived the
right to receive their refund and elected to retain some or all
of their subordinated promissory notes, which are recorded in
long-term debt on the Companys condensed consolidated
balance sheet as of December 31, 2010
On December 31, 2010, the Company completed a financing
transaction in which it issued 212 Units, valued at $10,000 per
unit (December 2013 Units). Each unit consisted of
5,000 shares of the Companys common stock, and $5,000
in principal amount of the Companys subordinated
promissory notes due December 31, 2013. The subordinated
promissory notes were issued at a discount to face value of
$0.2 million and the discount is being amortized, into
interest expense, over the life of the notes. In total, the
Company issued 1,060,000 shares of the Companys
common stock and $1.1 million in principal amount of
subordinated promissory notes.
As of December 31, 2010, the subordinated notes payable had
a balance of $2.2 million. The balance includes notes
totaling $1.9 million due to a related party, Universal
Telecommunications, Inc. H. Brian Thompson, the Companys
Executive Chairman of the Board of Directors, is also the head
of Universal Telecommunications, Inc., his own private equity
investment and advisory firm. Also, included in the balance is
$0.1 million of the notes held by officers and directors of
the Company.
Promissory
Note and Capital Lease
As part of the WBS Connect acquisition, the Company assumed in
the acquisition approximately $0.6 million in capital lease
obligations payable in monthly installments through April 2011
and issued approximately $0.3 million in subordinated
seller notes to the sellers of WBS Connect, due in monthly
installments and payable in full by October 2010. The Company
paid the $0.3 million in subordinated seller notes in full
and has approximately $0.3 million outstanding in capital
lease obligations as of December 31, 2010.
27
Notes
Payable and Convertible Notes Payable
The holders of the convertible notes payable (December
2010 Notes) had the right to convert the principal due
under the December 2010 Notes into shares of the Companys
common stock, at any time, at a price per share equal to $1.70.
The Company had the right to require the holders of the December
2010 Notes to convert the principal amount due under the
December 2010 Notes at any time after the closing price of the
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 included protection
against dilutive issuances of the Companys common stock,
subject to certain exceptions. The Company had 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.
On September 30, 2010, proceeds from the Term Loan were
used to repay the Companys $4.0 million of notes
payable and $3.1 million of the December 2010 Notes, both
due December 31, 2010, as well as $1.5 million in
interest accrued on the notes payable and convertible notes.
The December 2013 Units were issued in exchange for the
repayment obligation created by the maturity of the December
2010 Notes. The amount of the repayment obligation was equal to
the outstanding principal amount (valued at face value) of
$1.6 million and accrued but unpaid interest of
$0.5 million. Since this was a cashless exchange, there
were no cash proceeds to the Company. The December 2010 Notes
involved in the exchange were held by Universal
Telecommunications, Inc., which is an affiliate of H. Brian
Thompson, Howard E. Janzen and Theodore B Smith, III.
Messrs. Thompson, Janzen and Smith are members of the
Companys Board of Directors. Given these relationships,
the exchange and the terms of the December 2013 Units were
reviewed and approved by an independent committee of our Board
of Directors.
Contractual
Obligations and Commitments
As of December 31, 2010, the Company had total contractual
obligations of approximately $52.1 million. Of these
obligations, approximately $38.6 million, or 74% are
supplier agreements associated with the telecommunications
services that the Company has contracted to purchase from its
vendors through 2015. The Company generally tries to structure
its contracts so the terms and conditions in the vendor and
client customer contracts are substantially the same in terms of
duration and capacity. 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 $11.7 million, or 23%, of the total
contractual obligations are associated with subordinated
promissory notes and a term loan which mature between 2012 and
2015.
Operating leases amount to $1.8 million, or 3% of total
contractual obligations, which consist of building and vehicle
leases.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Interest
Rate Sensitivity
Interest due on the 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, 2010 and 2009, the Company had interest
expense, net of income, of approximately $1.4 million and
$0.8 million, respectively. The Company believes that its
results of operations are not materially affected by changes in
interest rates.
Exchange
Rate Sensitivity
Approximately 24% of the Companys revenues for the year
ended December 31, 2010 are derived from services provided
outside of the United States. As a consequence, a material
percentage of the Companys revenues
28
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 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, 2010.
|
|
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.
|
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
29
accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosures. Our Chief
Executive Officer and Chief Financial Officer evaluated the
effectiveness of the our disclosure controls and procedures in
place at the end of the period covered by this Annual Report
pursuant 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, 2010.
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
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, 2010.
This annual report does not include an attestation report of the
Companys independent registered public accounting firm
regarding internal control over financial reporting.
Managements report was not subject to attestation by the
Companys independent registered public accounting firm
pursuant to 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, 2010 that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by this Item relating to our directors
and corporate governance is incorporated herein by reference to
the definitive Proxy Statement to be filed pursuant to
Regulation 14A of the Exchange Act for our 2011 Annual
Meeting of Stockholders. The information required by this Item
relating to our executive officers is included in Item 1,
Business Executive Officers of this
report.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant
to Regulation 14A of the Exchange Act for our 2011 Annual
Meeting of Stockholders.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant
to Regulation 14A of the Exchange Act for our 2011 Annual
Meeting of Stockholders.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant
to Regulation 14A of the Exchange Act for our 2011 Annual
Meeting of Stockholders.
30
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant
to Regulation 14A of the Exchange Act for our 2011 Annual
Meeting of Stockholders.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) Financial Statements
|
|
|
|
(1)
|
Financial Statements are listed in the Index to Financial
Statements on page F-1 of this report.
|
|
|
(2)
|
Schedules have been omitted because they are not applicable or
because the information required to be set forth therein is
included in the consolidated financial statements or notes
thereto.
|
(b) Exhibits
The following exhibits, which are numbered in accordance with
Item 601 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.
|
31
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.21(11)
|
|
Employment Agreement for Eric A. Swank, dated February 2,
2009.
|
|
10
|
.22(12)
|
|
Amended and Restated Loan and Security Agreement, dated
June 16, 2009, between Silicon Valley Bank, Global
Telecom & Technology, Inc. and Global
Telecom & Technology Americas, Inc.
|
|
10
|
.23(13)
|
|
Purchase Agreement, dated as of November 3, 2009, by and
among Global Telecom & Technology Americas, Inc.,
GTT-EMEA, Limited, WBS Connect, LLC, TEK Channel Consulting,
LLC, WBS Connect Europe Ltd., Scott Charter and Michael
Hollander.
|
|
10
|
.24(14)
|
|
Amendment, dated December 16, 2009, to the Purchase
Agreement, dated as of November 2, 2009, by and among
Global Telecom & Technology Americas, Inc., GTT-EMEA,
Limited, WBS Connect, LLC, TEK Channel Consulting, LLC, WBS
Connect Europe Ltd., Scott Charter and Michael Hollander.
|
|
10
|
.25(14)
|
|
Waiver, dated December 16, 2009, executed by Global
Telecom & Technology Americas, Inc.
|
|
10
|
.26(14)
|
|
Promissory Note, dated December 16, 2009, executed by
Global Telecom & Technology Americas, Inc. in favor of
Scott Charter.
|
|
10
|
.27(14)
|
|
Promissory Note, dated December 16, 2009, executed by
Global Telecom & Technology Americas, Inc. in favor
Michael Hollander.
|
|
10
|
.28(14)
|
|
Guaranty, dated December 16, 2009, between Global
Telecom & Technology, Inc. and Scott Charter.
|
|
10
|
.29(14)
|
|
Guaranty, dated December 16, 2009, between Global
Telecom & Technology, Inc. and Michael Hollander.
|
|
10
|
.30(14)
|
|
Second Amended and Restated Loan and Security Agreement, dated
December 16, 2009, between Silicon Valley Bank, Global
Telecom & Technology, Inc., Global Telecom &
Technology Americas, Inc., WBS Connect, LLC and GTT-EMEA, Ltd.
|
|
10
|
.31(14)
|
|
Amended and Restated Unconditional Guaranty, dated
December 16, 2009, executed by TEK Channel Consulting, LLC
and GTT Global Telecom Government Services, LLC in favor of
Silicon Valley Bank
|
|
10
|
.32(14)
|
|
GTT-EMEA, Ltd. Debenture in favor of Silicon Valley Bank.
|
|
10
|
.33(15)
|
|
Asset Purchase Agreement, dated December 31, 2009, by and
among Capital Growth Systems, Inc., Global Capacity Group, Inc.,
Global Capacity Direct, LLC (f/k/a Vanco Direct USA,
LLC) and Global Telecom & Technology Americas,
Inc.
|
|
10
|
.34(16)
|
|
Form of Promissory Note of Global Telecom &
Technology, Inc. due February 8, 2012.
|
|
10
|
.35(16)
|
|
Form of Note Amendment No. 2, dated as of January 14,
2010, by and between Global Telecom & Technology, Inc.
and each holder of Global Telecom & 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
|
.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. |
32
|
|
|
(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
Date: March 11, 2011
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Richard D.
Calder, Jr. and Eric A. Swank, jointly and severally, his
attorney-in-fact, each with the full power of substitution, for
such person, in any and all capacities, to sign any and all
amendments to this Annual Report 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 11,
2011 by the following persons on behalf of the registrant and in
the capacities indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Richard
D. Calder, Jr.
Richard
D. Calder, Jr.
|
|
President, Chief Executive Officer and
Director (Principal Executive Officer)
|
|
|
|
/s/ Eric
A. Swank
Eric
A. Swank
|
|
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
|
|
|
|
/s/ H.
Brian Thompson
H.
Brian Thompson
|
|
Chairman of the Board and Executive
Chairman
|
|
|
|
/s/ S.
Joseph Bruno
S.
Joseph Bruno
|
|
Director
|
|
|
|
/s/ Didier
Delepine
Didier
Delepine
|
|
Director
|
|
|
|
/s/ Rhodric
C. Hackman
Rhodric
C. Hackman
|
|
Director
|
34
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Howard
Janzen
Howard
Janzen
|
|
Director
|
|
|
|
/s/ Morgan
E. 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 Stockholders of Global
Telecom & Technology, Inc.
We have audited the accompanying consolidated balance sheets of
Global Telecom & Technology, Inc. and Subsidiaries as
of December 31, 2010 and 2009, and the related consolidated
statements of operations, stockholders equity and cash
flows for the years then ended. These consolidated financial
statements are the responsibility of the 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, 2010
and 2009, and their consolidated results of operations and cash
flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ J.H. Cohn LLP
Jericho, New York
March 11, 2011
F-2
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,562
|
|
|
$
|
5,548
|
|
Accounts receivable, net
|
|
|
5,787
|
|
|
|
9,389
|
|
Deferred contract costs
|
|
|
536
|
|
|
|
454
|
|
Prepaid expenses and other current assets
|
|
|
1,105
|
|
|
|
937
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
13,990
|
|
|
|
16,328
|
|
Property and equipment, net
|
|
|
1,674
|
|
|
|
2,235
|
|
Intangible assets, net
|
|
|
5,732
|
|
|
|
7,613
|
|
Other assets
|
|
|
3,519
|
|
|
|
429
|
|
Goodwill
|
|
|
29,046
|
|
|
|
29,156
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
53,961
|
|
|
$
|
55,761
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
9,279
|
|
|
$
|
12,204
|
|
Accrued expenses and other current liabilities
|
|
|
6,831
|
|
|
|
11,372
|
|
Short-term debt
|
|
|
2,245
|
|
|
|
12,463
|
|
Deferred revenue
|
|
|
5,898
|
|
|
|
6,112
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
24,253
|
|
|
|
42,151
|
|
Long-term debt
|
|
|
12,020
|
|
|
|
244
|
|
Deferred revenue and other long-term liabilities
|
|
|
605
|
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
36,878
|
|
|
|
42,747
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, par value $.0001 per share, 80,000,000 shares
authorized, 17,880,254 and 15,472,912 shares issued and
outstanding as of December 31, 2010 and 2009, respectively
|
|
|
2
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
61,497
|
|
|
|
58,710
|
|
Accumulated deficit
|
|
|
(44,129
|
)
|
|
|
(45,499
|
)
|
Accumulated other comprehensive loss
|
|
|
(287
|
)
|
|
|
(199
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
17,083
|
|
|
|
13,014
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
53,961
|
|
|
$
|
55,761
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-3
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Telecommunications services sold
|
|
$
|
81,075
|
|
|
$
|
64,221
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of telecommunications services provided
|
|
|
57,022
|
|
|
|
45,868
|
|
Selling, general and administrative expense
|
|
|
18,021
|
|
|
|
14,684
|
|
Restructuring costs, employee termination and non-recurring items
|
|
|
|
|
|
|
641
|
|
Depreciation and amortization
|
|
|
2,791
|
|
|
|
1,733
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
77,834
|
|
|
|
62,926
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3,241
|
|
|
|
1,295
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(1,407
|
)
|
|
|
(849
|
)
|
Other income (expense), net
|
|
|
(368
|
)
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(1,775
|
)
|
|
|
(825
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,466
|
|
|
|
470
|
|
Provision for income taxes
|
|
|
96
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,370
|
|
|
$
|
454
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.08
|
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
0.08
|
|
|
$
|
0.03
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,740,882
|
|
|
|
15,268,826
|
|
Diluted
|
|
|
16,971,396
|
|
|
|
15,470,763
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid -In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (loss)
|
|
|
Total
|
|
|
Balance, December 31, 2008
|
|
|
14,942,840
|
|
|
$
|
1
|
|
|
$
|
57,584
|
|
|
$
|
(45,953
|
)
|
|
$
|
498
|
|
|
$
|
12,130
|
|
Share-based compensation for options issued
|
|
|
|
|
|
|
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
169
|
|
Share-based compensation for restricted stock issued
|
|
|
443,115
|
|
|
|
1
|
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
|
382
|
|
Share-based compensation for restricted stock issued related to
WBS acquisition
|
|
|
86,957
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
Shares to be issued related to WBS acquisition
|
|
|
|
|
|
|
|
|
|
|
476
|
|
|
|
|
|
|
|
|
|
|
|
476
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
454
|
|
|
|
|
|
|
|
454
|
|
Change in accumulated foreign currency gain on translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(697
|
)
|
|
|
(697
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
15,472,912
|
|
|
|
2
|
|
|
|
58,710
|
|
|
|
(45,499
|
)
|
|
|
(199
|
)
|
|
|
13,014
|
|
Share-based compensation for options issued
|
|
|
|
|
|
|
|
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
|
171
|
|
Share-based compensation for restricted stock issued
|
|
|
417,682
|
|
|
|
|
|
|
|
473
|
|
|
|
|
|
|
|
|
|
|
|
473
|
|
Common shares issued in February 2010 units offering, net
of refund
|
|
|
925,660
|
|
|
|
|
|
|
|
1,139
|
|
|
|
|
|
|
|
|
|
|
|
1,139
|
|
Stock options exercised
|
|
|
4,000
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Shares issued in connection with December 2010 units
offering
|
|
|
1,060,000
|
|
|
|
|
|
|
|
1,279
|
|
|
|
|
|
|
|
|
|
|
|
1,279
|
|
Cancellation of shares to be issued related to WBS Connect
acquisition
|
|
|
|
|
|
|
|
|
|
|
(276
|
)
|
|
|
|
|
|
|
|
|
|
|
(276
|
)
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,370
|
|
|
|
|
|
|
|
1,370
|
|
Change in accumulated foreign currency loss on translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(88
|
)
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
17,880,254
|
|
|
$
|
2
|
|
|
$
|
61,497
|
|
|
$
|
(44,129
|
)
|
|
$
|
(287
|
)
|
|
$
|
17,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,370
|
|
|
$
|
454
|
|
Adjustments to reconcile net income to net cash (used in)
provided by
|
|
|
|
|
|
|
|
|
operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,791
|
|
|
|
1,733
|
|
Shared-based compensation
|
|
|
644
|
|
|
|
551
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
3,310
|
|
|
|
3,191
|
|
Deferred contract cost, prepaid expenses, income tax refund
receivable and other current assets
|
|
|
(265
|
)
|
|
|
1,905
|
|
Other assets
|
|
|
(3,120
|
)
|
|
|
459
|
|
Accounts payable
|
|
|
(2,981
|
)
|
|
|
(6,676
|
)
|
Accrued expenses and other current liabilities
|
|
|
(3,988
|
)
|
|
|
558
|
|
Deferred revenue and other long-term liabilities
|
|
|
51
|
|
|
|
(812
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(2,188
|
)
|
|
|
1,363
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
|
|
|
|
|
|
(3,711
|
)
|
Purchases of property and equipment
|
|
|
(186
|
)
|
|
|
(389
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(186
|
)
|
|
|
(4,100
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
WBS promissory note repayment
|
|
|
(250
|
)
|
|
|
|
|
Principal payments on capital lease
|
|
|
(339
|
)
|
|
|
|
|
Borrowing (repayment) on line of credit
|
|
|
(740
|
)
|
|
|
3,078
|
|
Issuance of term loan
|
|
|
9,500
|
|
|
|
|
|
Payment of covertible notes payable
|
|
|
(3,171
|
)
|
|
|
|
|
Payment of notes payable
|
|
|
(4,000
|
)
|
|
|
|
|
Issuance of subordinated notes
|
|
|
1,546
|
|
|
|
|
|
Issuance of units offering common shares
|
|
|
936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
3,482
|
|
|
|
3,078
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(94
|
)
|
|
|
(578
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
1,014
|
|
|
|
(237
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
5,548
|
|
|
|
5,785
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
6,562
|
|
|
$
|
5,548
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
559
|
|
|
$
|
343
|
|
Supplemental disclosure of non cash investing and financing
activities
|
|
|
|
|
|
|
|
|
Common shares issued
|
|
|
1,060
|
|
|
|
|
|
Subordinated notes issued
|
|
$
|
1,060
|
|
|
$
|
|
|
Accrued interest payable on convertible notes payable retired
|
|
$
|
(400
|
)
|
|
$
|
|
|
Convertible notes payable retired
|
|
$
|
(1,625
|
)
|
|
$
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-6
Global
Telecom & Technology, Inc.
|
|
NOTE 1
|
ORGANIZATION
AND BUSINESS
|
Organization
and Business
Global Telecom & Techonolgy, Inc. (GTT or
the Company) is a Delaware corporation which was
incorporated on January 3, 2005. GTT is a global
telecommunications carrier and leading network integrator
serving the data communications needs of large enterprise,
government and carrier clients in over 80 countries. We combine
our own network assets with the networks of over 800 suppliers
worldwide to deliver cost-effective, scalable solutions
supporting each clients unique requirements. Through our
proprietary Client Management Database (CMD), GTT provides
streamlined service design and quotation, rapid service
implementation, and global 24x7 monitoring and support. GTT is
headquartered in the Washington, DC metro region with offices in
London, Dusseldorf, and Denver.
GTT serves as the holding company for two operating
subsidiaries, Global Telecom & Technology Americas,
Inc. (GTTA) and GTT EMEA Ltd.
(GTTE) and their respective subsidiaries
(collectively, hereinafter, the Company).
|
|
NOTE 2
|
SIGNIFICANT
ACCOUNTING POLICIES
|
Basis
of Presentation of Consolidated Financial Statements and Use of
Estimates
The consolidated financial statements include the accounts of
the Company, GTTA, GTTE, and 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
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
The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Significant accounting estimates to be made by
management include allowances for doubtful accounts, valuation
of goodwill and other long-lived assets, accrual for billing
disputes, and valuation of equity instruments. Because of the
uncertainty inherent in such estimates, actual results may
differ from these estimates.
F-7
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Revenue
Recognition
The Company provides data connectivity solutions, such as
dedicated circuit access, access aggregation and hubbing and
managed network services to its customers. Certain of the
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.
Translation
of Foreign Currencies
These consolidated financial statements have been reported in
U.S. Dollars by translating asset and liability amounts at
the closing exchange rate, equity amounts at historical rates,
and the results of operations and cash flow at the average
exchange rate prevailing during the periods reported.
F-8
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
A summary of exchange rates used is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollars/
|
|
|
|
|
British Pounds
|
|
U.S. Dollars/
|
|
|
Sterling
|
|
Euro
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Closing exchange rate at December 31,
|
|
|
1.55
|
|
|
|
1.61
|
|
|
|
1.33
|
|
|
|
1.44
|
|
Average exchange rate during the period
|
|
|
1.55
|
|
|
|
1.57
|
|
|
|
1.33
|
|
|
|
1.39
|
|
Transactions denominated in foreign currencies are recorded at
the rates of exchange prevailing at the time of the transaction.
Monetary assets and liabilities denominated in foreign
currencies are translated at the rate of exchange prevailing at
the balance sheet date. Exchange differences arising upon
settlement of a transaction are reported in the consolidated
statements of operations in other income.
Other
Income (Expense)
The Company recognized other expense (income), net of
approximately $368,000 in expense and $24,000 of income for the
years ended December 31, 2010 and 2009, respectively,
primarily comprised of the unrealized and realized gain and loss
on foreign exchange.
Accounts
Receivable, Net
Accounts receivable balances are stated at amounts due from the
customer net of an allowance for doubtful accounts. Credit
extended is based on an evaluation of the 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, 2010 and 2009,
the total allowance for doubtful accounts was $4.1 million
and $0.6 million, respectively.
Other
Comprehensive Income
In addition to net income, comprehensive income (loss) includes
charges or credits to equity occurring other than as a result of
transactions with stockholders. For the Company, this consists
of foreign currency translation adjustments.
Share-Based
Compensation
ASC Topic 718, Compensation Stock Compensation
(formerly SFAS 123(R)), requires the Company to measure
and recognize compensation expense for all share-based payment
awards made to employees and directors based on estimated fair
values.
F-9
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Share-based compensation expense recognized under ASC Topic 718
was $0.6 million for both the years ended December 31,
2010 and 2009. Both 2010 and 2009 amounts consisted of
approximately $0.2 million of share-based compensation
expense related to stock option grants and approximately
$0.4 million in restricted stock awards. Share-based
compensation expense is included in selling general and
administrative expense on the accompanying consolidated
statements of operations. See Note 9 for additional
information.
ASC Topic 718 requires companies to estimate the fair value of
share-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that
is ultimately expected to vest is recognized as expense over the
requisite service periods in the Companys consolidated
statement of operations.
Share-based compensation expense recognized in the
Companys consolidated statements of operations for the
years ended December 31, 2010 and 2009, included
compensation expense for share-based payment awards based on the
grant date fair value estimated in accordance with the
provisions of ASC Topic 718. The Company follows the
straight-line single option method of attributing the value of
stock-based compensation to expense. As stock-based compensation
expense recognized in the consolidated statement of operations
for the years ended December 31, 2010 and 2009 is based on
awards ultimately expected to vest, it has been reduced for
estimated forfeitures. ASC Topic 718 requires forfeitures to be
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates.
The Company uses the Black-Scholes option-pricing model as its
method of valuation for share-based awards granted. The
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
107,502 shares in 2010.
Cash
and Cash Equivalents
Included in cash and cash equivalents are deposits with
financial institutions as well as short-term money market
instruments, certificates of deposit and debt instruments with
maturities of three months or less when purchased.
Accounting
for Derivative Instruments
The Company accounts for derivative instruments in accordance
with ASC Topic 815, Accounting for Derivative Instruments and
Hedging Activities, as amended (SFAS 133),
which establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain
derivative instruments imbedded in other financial instruments
or contracts. The Company also considers ASC Topic
815-40-05,
Contracts in Entitys Own Entity, as amended
(EITF
No. 00-19)
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.
The Company also considers ASC Topic
815-40-15,
Evaluating Whether an Instrument is Considered Indexed to an
Entitys Own Stock, as amended (EITF
No. 07-5),
which was effective for the Company on January 1, 2009.
This ASC Topic provides guidance for determining whether an
equity-linked financial instrument (or embedded feature) issued
by an entity is indexed to the entitys stock, and
therefore, qualifying for the first part of the scope exception
in
paragraph 815-10-15.
The Company evaluated the conversion feature embedded in its
convertible notes payable based on the criteria of ASC Topic 815
to determine whether the conversion feature would be required to
be bifurcated from the convertible notes and accounted for
separately as derivative liabilities. These instruments do not
exist at December 31, 2010.
F-10
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Taxes
The Company accounts for income taxes in accordance with ASC
Topic 740, Income Taxes (formerly
SFAS No. 109). Under ASC Topic 740, deferred tax
assets are recognized for future deductible temporary
differences and for tax net operating loss and tax credit
carry-forwards, and deferred tax liabilities are recognized for
temporary differences that will result in taxable amounts in
future years. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income
in the periods in which the deferred tax asset or liability is
expected to be realized or settled. A valuation allowance is
provided to offset the net deferred tax asset if, based upon the
available evidence, management determines that it is more likely
than not that some or all of the deferred tax asset will not be
realized.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
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. The Companys federal tax returns for 2006, 2007,
2008 and 2009 are still open. 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 Per Share
Basic income per share is computed by dividing income available
to common stockholders by the weighted average number of common
shares outstanding. Diluted earnings per share reflect, in
periods with earnings and in which they have a dilutive effect,
the effect of common shares issuable upon exercise of stock
options, warrants, and convertible securities.
The table below details the calculations of earnings per share
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Numerator for basic and diluted EPS income available
to common shareholders
|
|
$
|
1,370
|
|
|
$
|
454
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic EPS weighted average shares
|
|
|
16,741
|
|
|
|
15,269
|
|
Effect of dilutive securities
|
|
|
230
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted EPS weighted average shares
|
|
|
16,971
|
|
|
|
15,471
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: Basic and diluted
|
|
$
|
0.08
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
F-11
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
The table below details the anti-dilutive items that were
excluded in the computation of earnings per share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Class W warrants
|
|
|
|
|
|
|
12,090
|
|
Class Z warrants
|
|
|
12,090
|
|
|
|
12,090
|
|
Convertible notes
|
|
|
|
|
|
|
2,819
|
|
Stock options
|
|
|
504
|
|
|
|
414
|
|
Series A units
|
|
|
|
|
|
|
250
|
|
Series B units
|
|
|
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,594
|
|
|
|
28,123
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, we had 12,090,000 Class Z
warrants outstanding, each of which entitles the holder to
purchase a share of our common stock at an exercise price of
$5.00 per share on or before April 10, 2012.
Software
Capitalization
Internal Use Software The Company recognizes
internal use software in accordance with ASC Topic
350-40,
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 shorter of the
term of the lease, excluding optional extensions, or the useful
life. Depreciable lives used by the Company for its classes of
assets are as follows:
|
|
|
Furniture and Fixtures
|
|
7 years
|
Telecommunication Equipment
|
|
5 years
|
Leasehold Improvements
|
|
up to 10 years
|
Computer Hardware and Software
|
|
3-5 years
|
Internal Use Software
|
|
3 years
|
Goodwill
Goodwill is the excess purchase price paid over identified
intangible and tangible net assets of acquired businesses.
Goodwill is not amortized, and is tested for impairment at the
reporting unit level annually or when there are any indications
of impairment, as required by ASC Topic 350,
Intangibles Goodwill and Other (formerly
SFAS 142). ASC Topic 350 provides guidance on financial
accounting and reporting related to goodwill and other
intangibles, other than the accounting at acquisition for
goodwill and other intangibles. A reporting unit is an operating
segment, or component of an operating segment, for which
discrete financial information is available and is regularly
reviewed by management. We have one reporting unit to which
goodwill is assigned.
A two-step approach is required to test goodwill for impairment.
The first step tests for impairment by applying fair value-based
tests. The second step, if deemed necessary, measures the
impairment by applying fair values to specific assets and
liabilities. Application of the goodwill impairment test
requires significant judgments including estimation of future
cash flows, which is dependent on internal forecasts, estimation
of the long-term rate of growth for the Company, the useful life
over which cash flows will occur, and determination of the
Companys cost of
F-12
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
capital. Changes in these estimates and assumptions could
materially affect the determination of fair value and
conclusions on goodwill impairment.
Intangibles
Intangible assets are accounted for in accordance with ASC Topic
350 and ASC Topic 360, Impairment or Disposal of Long-Lived
Assets. ASC Topic 360 provides guidance for recognition and
measurement of the impairment of long-lived assets to be held,
used and disposed of by sale. Intangible assets arose from
business combinations and consist of customer contracts,
acquired technology and restrictive covenants related to
employment agreements that are amortized, on a straight-line
basis, over periods of up to five years.
In accordance with ASC Topic 350, the Company reviews
long-lived assets to be held and used for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. If the carrying
amount of an asset exceeds its estimated future undiscounted
cash flows the asset is considered to be impaired. Impairment
losses are measured as the amount by which the carrying amount
of the asset exceeds the fair value of the asset. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
Fair
Value of Financial Instruments
The fair values of the Companys assets and liabilities
that qualify as financial instruments under ASC Topic 825,
Financial Instruments, including cash and cash
equivalents, accounts receivable, accounts payable, short-term
debt, and accrued expenses are carried at cost, which
approximates fair value due to the short-term maturity of these
instruments. The reported amounts of long-term obligations
approximate fair value, given managements evaluation of
the instruments current rates compared to market rates of
interest and other factors.
Comprehensive
Income
Comprehensive income (loss) consists of net income and other
comprehensive income (loss). Other comprehensive income (loss)
includes certain changes in equity that are excluded from net
income. Specifically, cumulative foreign currency translation
adjustments are included in accumulated other comprehensive
income (loss).
Accrued
Carrier Expenses
The Company accrues estimated charges owed to its suppliers for
services. The Company bases this accrual on the supplier
contract, the individual service order executed with the
supplier for that service, the length of time the service has
been active, and the overall supplier relationship.
Disputed
Carrier Expenses
It is common in the telecommunications industry for users and
suppliers to engage in disputes over amounts billed (or not
billed) in error or over interpretation of contract terms. The
disputed carrier cost included in the consolidated financial
statements includes disputed but unresolved amounts claimed as
due by suppliers, unless management is confident, based upon its
experience and its review of the relevant facts and contract
terms, that the outcome of the dispute will not result in
liability for the Company. Management estimates this liability
and reconciles the estimates with actual results as disputes are
resolved, or as the appropriate statute of limitations with
respect to a given dispute expires.
As of December 31, 2010, open disputes totaled
approximately $1.9 million. Based upon its experience with
each vendor and similar disputes in the past, and based upon
management review of the facts and contract terms applicable to
each dispute, management has determined that the most likely
outcome is that the Company will be
F-13
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
liable for approximately $0.7 million in connection with
these disputes, for which accrued liabilities are included on
the accompanying consolidated balance sheet at December 31,
2010.
Recent
Accounting Pronouncements
In September 2009, the FASB ratified the consensus approach
reached at the September 9-10 Emerging Issues Task Force (EITF)
meeting on two EITF issues related to revenue recognition. The
first, EITF 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 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.
On December 16, 2009, GTT acquired privately-held WBS
Connect. Based in Denver, Colorado, WBS Connect provides wide
area network and dedicated Internet access services to over 400
customers worldwide. The acquisition of WBS Connect expanded
GTTs portfolio of dedicated Internet access and Ethernet
services. Additionally, GTT added WBS Connects network
infrastructure assets with over 60 points of presence in major
North American, Asian and European metro centers.
The Company accounted for the Acquisition using the purchase
method of accounting with GTT treated as the acquiring entity.
Accordingly, consideration paid by the Company to complete the
acquisition of WBS Connect has been allocated to WBS
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
|
|
|
|
|
|
|
F-14
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
Amounts in
|
|
|
|
thousands
|
|
|
Purchase Price Allocation:
|
|
|
|
|
Tangible net assets acquired
|
|
|
|
|
Acquired Assets
|
|
|
|
|
Current assets
|
|
$
|
4,613
|
|
Property and equipment
|
|
|
1,175
|
|
Intangible assets
|
|
|
4,800
|
|
Other assets
|
|
|
35
|
|
|
|
|
|
|
Total fair value of assets acquired
|
|
|
10,623
|
|
Goodwill
|
|
|
7,156
|
|
|
|
|
|
|
Total consideration
|
|
$
|
17,779
|
|
|
|
|
|
|
The Company settled with the WBS sellers on the number of shares
to be delivered under the purchase agreement. Accordingly, there
was a measurement period adjustment recorded for the year ended
December 31, 2010.
The following schedule presents unaudited consolidated pro forma
results of operations as if the Acquisition had occurred on
January 1, 2009. This information does not purport to be
indicative of the actual results that would have occurred if the
Acquisition had actually been completed January 1, 2009,
nor is it necessarily indicative of the future operating results
or the financial position of the combined company. The unaudited
pro forma results of operations do not reflect the cost of any
integration activities or benefits that may result from
synergies that may be derived from any integration activities.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
Amounts in thousands,
|
|
|
|
|
except per share data
|
|
|
|
Revenue
|
|
$
|
90,917
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,344
|
)
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.28
|
)
|
|
|
|
|
Diluted
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
NOTE 4
|
GOODWILL
AND INTANGIBLE ASSETS
|
During the third quarter of 2010, the Company completed its
annual goodwill impairment testing in accordance with ASC Topic
350. As part of step one, the Company considered three
methodologies to determine the fair-value of our entity:
|
|
|
|
|
A market capitalization approach, which measures market
capitalization at the measurement date.
|
|
|
|
A discounted cash flow approach, which entails determining fair
value using a discounted cash flow methodology. This method
requires significant judgment to estimate the future cash flows
and to determine the appropriate discount rates, growth rates,
and other assumptions.
|
|
|
|
A guideline company approach, which entails analysis of
comparable, publicly traded companies.
|
Each of these methodologies the Company believes has merit in
estimating the value of its goodwill. The Company accordingly
employed each of these three methodologies in our analysis and
concluded that no impairment existed.
F-15
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
The following table summarizes the Companys intangible
assets as of December 31, 2010 and 2009 (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Amortization
|
|
|
Gross Asset
|
|
|
Accumulated
|
|
|
|
|
|
Net Book
|
|
|
|
Period
|
|
|
Cost
|
|
|
Amortization
|
|
|
Impairment
|
|
|
Value
|
|
|
Customer contracts
|
|
|
4-5 years
|
|
|
$
|
4,800
|
|
|
$
|
1,186
|
|
|
$
|
|
|
|
$
|
3,614
|
|
Carrier contracts
|
|
|
1 year
|
|
|
|
151
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
Noncompete agreements
|
|
|
4-5 years
|
|
|
|
4,800
|
|
|
|
3,165
|
|
|
|
1,269
|
|
|
|
366
|
|
Software
|
|
|
7 years
|
|
|
|
6,600
|
|
|
|
3,183
|
|
|
|
1,665
|
|
|
|
1,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,351
|
|
|
$
|
7,685
|
|
|
$
|
2,934
|
|
|
$
|
5,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Amortization
|
|
|
Gross Asset
|
|
|
Accumulated
|
|
|
|
|
|
Net Book
|
|
|
|
Period
|
|
|
Cost
|
|
|
Amortization
|
|
|
Impairment
|
|
|
Value
|
|
|
Customer contracts
|
|
|
4-5 years
|
|
|
$
|
4,800
|
|
|
$
|
193
|
|
|
$
|
|
|
|
$
|
4,607
|
|
Carrier contracts
|
|
|
1 year
|
|
|
|
151
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
Noncompete agreements
|
|
|
4-5 years
|
|
|
|
4,800
|
|
|
|
2,634
|
|
|
|
1,269
|
|
|
|
897
|
|
Software
|
|
|
7 years
|
|
|
|
6,600
|
|
|
|
2,826
|
|
|
|
1,665
|
|
|
|
2,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,351
|
|
|
$
|
5,804
|
|
|
$
|
2,934
|
|
|
$
|
7,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $1.9 million and $1.2 million
for the years ended December 31, 2010 and 2009,
respectively.
During the year ended December 31, 2010, the Company
adjusted its reported goodwill amount for the settlement with
WBS sellers on the amount of shares delivered under the purchase
agreement. This resulted in an approximately $0.1 million
decrease to goodwill.
Estimated amortization expense related to intangible assets
subject to amortization at December 31, 2010 in each of the
years subsequent to December 31, 2010 is as follows
(amounts in thousands):
Estimated Future Amortization of Intangibles
|
|
|
|
|
2011
|
|
$
|
1,758
|
|
2012
|
|
|
1,603
|
|
2013
|
|
|
1,471
|
|
2014
|
|
|
900
|
|
|
|
|
|
|
Total
|
|
$
|
5,732
|
|
|
|
|
|
|
The following table summarizes the Companys goodwill
activity during the years ended December 31, 2010 and 2009
(amounts in thousands):
|
|
|
|
|
Balance December 31, 2008
|
|
$
|
22,000
|
|
Goodwill acquired related to WBS Connect acquisition
|
|
|
7,156
|
|
|
|
|
|
|
Balance December 31, 2009
|
|
$
|
29,156
|
|
Measurement period adjustment related to WBS Connect acquisition
|
|
|
(110
|
)
|
|
|
|
|
|
Balance December 31, 2010
|
|
$
|
29,046
|
|
|
|
|
|
|
F-16
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
NOTE 5
|
PROPERTY
AND EQUIPMENT
|
The following table summarizes the Companys property and
equipment at December 31, 2010 and 2009 (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Computer equipment
|
|
$
|
3,803
|
|
|
$
|
3,550
|
|
Computer software
|
|
|
528
|
|
|
|
478
|
|
Leasehold improvements
|
|
|
527
|
|
|
|
539
|
|
Furniture and fixtures
|
|
|
248
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, gross
|
|
|
5,106
|
|
|
|
4,809
|
|
Less accumulated depreciation and amortization
|
|
|
(3,432
|
)
|
|
|
(2,574
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
1,674
|
|
|
$
|
2,235
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense associated with property and equipment was
$0.9 million and $0.5 million for the years ended
December 31, 2010 and 2009, respectively.
|
|
NOTE 6
|
ACCRUED
EXPENSES AND OTHER CURRENT LIABILITIES
|
The following table summarizes the Companys accrued
expenses and other current liabilities as of December 31,
2010 and 2009 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Accrued compensation and benefits
|
|
$
|
1,217
|
|
|
$
|
1,880
|
|
Accrued interest payable
|
|
|
184
|
|
|
|
1,546
|
|
Accrued taxes
|
|
|
1,343
|
|
|
|
2,277
|
|
Accrued carrier costs
|
|
|
3,792
|
|
|
|
4,599
|
|
Accrued other
|
|
|
295
|
|
|
|
1,070
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,831
|
|
|
$
|
11,372
|
|
|
|
|
|
|
|
|
|
|
The components of the provision for (benefit from) income taxes
for the years ended December 31, 2010 and 2009 are as
follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
70
|
|
|
$
|
|
|
State
|
|
|
26
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
96
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(452
|
)
|
|
|
(332
|
)
|
State
|
|
|
(58
|
)
|
|
|
(58
|
)
|
Foreign
|
|
|
545
|
|
|
|
(206
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
35
|
|
|
|
(596
|
)
|
|
|
|
|
|
|
|
|
|
Change in Valuation Allowance
|
|
|
35
|
|
|
|
596
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
96
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
F-17
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
The provision for or benefit from income taxes differs from the
amount computed by applying the U.S. federal statutory
income tax rates for federal, state, and local to income before
income taxes for the reasons set forth below for the years ended
December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
US federal statutory income tax rate
|
|
|
35.00
|
%
|
|
|
35.00
|
%
|
Permanent Items
|
|
|
0.00
|
%
|
|
|
1.02
|
%
|
State Taxes
|
|
|
(2.81
|
)%
|
|
|
(3.75
|
)%
|
Foreign tax rate differential
|
|
|
(21.06
|
)%
|
|
|
(15.10
|
)%
|
Change in Valuation Allowance
|
|
|
(12.12
|
)%
|
|
|
(23.03
|
)%
|
Other Items
|
|
|
7.57
|
%
|
|
|
9.29
|
%
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate
|
|
|
6.58
|
%
|
|
|
3.43
|
%
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the Company has net operating loss
(NOL) carryforwards of approximately
$20.2 million for tax purposes which will be available to
offset future income. These net operating loss carryforwards
were generated in a number of jurisdictions. If not used, these
carryforwards will expire between 2020 and 2029. Approximately
$1.4 million of the 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, 2010 and 2009 are as
follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
5,201
|
|
|
$
|
6,394
|
|
Allowance for Doubtful Accounts
|
|
|
260
|
|
|
|
12
|
|
Fixed Assets
|
|
|
338
|
|
|
|
390
|
|
Stock Compensation
|
|
|
1,325
|
|
|
|
1,136
|
|
Miscellaneous items
|
|
|
150
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets before valuation allowance
|
|
|
7,274
|
|
|
|
8,182
|
|
Less: Valuation Allowance
|
|
|
(6,739
|
)
|
|
|
(7,017
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
535
|
|
|
|
1,165
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Identified intangibles
|
|
|
(345
|
)
|
|
|
(1,165
|
)
|
Other miscellaneous items
|
|
|
(190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(535
|
)
|
|
|
(1,165
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
ASC Topic 740 provides for the recognition of deferred tax
assets if realization of such assets is more likely than not.
The Company believes that it is more likely than not that all of
the deferred tax assets will be realized against future taxable
income but does not have objective evidence to support this
future assumption. Based upon
F-18
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
the weight of available evidence, which includes the
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.
The majority of the Companys valuation allowance relates
to deferred tax assets in the United Kingdom, the United States,
France and Germany.
On August 31, 2010, the Company entered into sales novation
agreements with RevNet International, LLC, a Florida limited
liability company (RevNet) and with Revelation
Networks Incorporated, a Florida corporation (RNI).
In the agreements, RevNet and RNI assigned and transferred to
the Company certain service level agreements and all rights
under those agreements, as well as certain supply agreements and
obligations there under.
In exchange for the assignment and transfer, the Company paid to
RevNet $2.1 million and RNI $0.9 million as upfront
cash to be applied as recoverable draws against future agent
commission payments, which are included in prepaid expenses and
other assets as of December 31, 2010. In addition, the
Company agreed to pay to RevNet agent commissions for the
seven-year period ending August 31, 2017 and agreed to pay
RNI agent commissions for the five-year period ending
August 31, 2015. Commencing in September 2011, the Company
has the option to reduce the agent commissions to RevNet and RNI
by up to 50% until such time as the aggregate dollar amount of
such monthly reductions by the Company is equal to the upfront
cash payment amounts.
|
|
NOTE 9
|
EMPLOYEE
SHARE-BASED COMPENSATION BENEFITS
|
Stock-Based
Compensation Plan
The Company adopted its 2006 Employee, Director and Consultant
Stock Plan (the Plan) in October 2006. In addition
to stock options, the Company may also grant restricted stock or
other stock-based awards under the Plan. The maximum number of
shares issuable over the term of the Plan is limited to
3,500,000 shares.
The Plan permits the granting of stock options and restricted
stock to employees (including employee directors and officers)
and consultants of the Company, and non-employee directors of
the Company. Options granted under the Plan have an exercise
price of at least 100% of the fair market value of the
underlying stock on the grant date and expire no later than ten
years from the grant date. The options generally vest over four
years with 25% of the option shares becoming exercisable one
year from the date of grant and the remaining 75% annually or
quarterly over the following three years. The Compensation
committee of the Board of Directors, as administrator of the
Plan, has the discretion to use a different vesting schedule.
Stock
Options
Due to the 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,
F-19
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Compensation Stock Compensation, to estimate
the options expected term. Assumptions used in the
calculation of the stock option expense were as follows:
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Volatility
|
|
93.5% - 97.2%
|
|
92.2% - 98.5%
|
Risk free rate
|
|
1.5% - 3.0%
|
|
1.9% - 3.7%
|
Term
|
|
6.25
|
|
6.25 - 9.16
|
Dividend yield
|
|
0.0%
|
|
0.0%
|
Stock-based compensation expense recognized in the accompanying
consolidated statement of operations for the year ended
December 31, 2010 is based on awards ultimately expected to
vest, reduced for estimated forfeitures. ASC Topic 718 requires
forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates. Forfeiture assumptions were based upon
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, 2010 and 2009, the
Company recognized compensation expense of $0.2 million and
$0.2 million, respectively, related to stock options issued
to employees and consultants, which is included in selling,
general and administrative expense on the accompanying
consolidated statements of operations.
During the year ended December 31, 2010, 338,000 options
were granted pursuant to the Plan. The following table
summarizes information concerning options outstanding as of
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Fair
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Value
|
|
|
Life (Years)
|
|
|
Value
|
|
|
Balance at December 31, 2009
|
|
|
689,500
|
|
|
$
|
1.20
|
|
|
$
|
0.82
|
|
|
|
8.32
|
|
|
$
|
305,660
|
|
Granted
|
|
|
338,000
|
|
|
|
1.19
|
|
|
|
0.94
|
|
|
|
|
|
|
|
3,260
|
|
Exercised
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,196
|
|
Forfeited
|
|
|
(151,344
|
)
|
|
|
0.97
|
|
|
|
0.57
|
|
|
|
|
|
|
|
84,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
880,156
|
|
|
$
|
1.20
|
|
|
$
|
0.86
|
|
|
|
7.86
|
|
|
$
|
281,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
208,448
|
|
|
$
|
0.50
|
|
|
$
|
0.37
|
|
|
|
7.06
|
|
|
$
|
351,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the unvested portion of
share-based compensation expense attributable to stock options
and the period in which such expense is expected to vest and be
recognized is as follows (amounts in thousands):
|
|
|
|
|
2011
|
|
$
|
129
|
|
2012
|
|
|
88
|
|
2013
|
|
|
69
|
|
2014
|
|
|
17
|
|
|
|
|
|
|
Total
|
|
$
|
303
|
|
|
|
|
|
|
The fair value of share based compensation for options that
vested as of December 31, 2010 was $0.3 million.
F-20
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Restricted
Stock
The Company expenses restricted shares granted in accordance
with the provisions of ASC Topic 718. The fair value of the
restricted shares issued is amortized on a straight-line basis
over the vesting periods. During the years ended
December 31, 2010 and 2009, the Company recognized
compensation expense related to restricted stock of
approximately $0.5 million and $0.4 million,
respectively, which is included in selling, general and
administrative expense on the accompanying consolidated
statements of operations.
The following table summarizes restricted stock activity during
the years ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Nonvested Balance at January 1,
|
|
|
617,499
|
|
|
$
|
0.72
|
|
|
|
566,752
|
|
|
$
|
1.12
|
|
Granted
|
|
|
417,682
|
|
|
|
1.24
|
|
|
|
454,365
|
|
|
|
0.48
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
(11,250
|
)
|
|
|
0.52
|
|
Vested
|
|
|
(367,682
|
)
|
|
|
1.19
|
|
|
|
(392,368
|
)
|
|
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested Balance at December 31,
|
|
|
667,499
|
|
|
$
|
0.91
|
|
|
|
617,499
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the unvested portion of
share-based compensation expense attributable to restricted
stock amounts to $0.3 million which is expected to vest and
be recognized during a weighted-average period of 1.2 years.
|
|
NOTE 10
|
DEFINED
CONTRIBUTION PLAN
|
The Company has a defined contribution retirement plan under
Section 401(k) of the Internal Revenue Code that covers
substantially all US based employees. Eligible employees may
contribute amounts to the plan, via payroll withholding, subject
to certain limitations. During 2010, the Company matched 25% of
employees contributions to the plan. The Companys
401(k) expense was $63,000 in 2010 and $42,000 in 2009.
The following summarizes the debt activity of the Company during
2010 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
Total
|
|
|
Term
|
|
|
Line of
|
|
|
Subordinated
|
|
|
Promissory Note/
|
|
|
Notes
|
|
|
Notes
|
|
|
|
Debt
|
|
|
Loan
|
|
|
Credit
|
|
|
Notes
|
|
|
Capital Lease
|
|
|
Payable
|
|
|
Payable
|
|
|
Debt obligation as of December 31, 2009
|
|
$
|
12,707
|
|
|
$
|
|
|
|
$
|
3,078
|
|
|
$
|
|
|
|
$
|
833
|
|
|
$
|
4,000
|
|
|
$
|
4,796
|
|
Subordinated notes issuance
|
|
|
2,183
|
|
|
|
|
|
|
|
|
|
|
|
2,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayment on senior secured credit facility
|
|
|
(740
|
)
|
|
|
|
|
|
|
(740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WBS promissory note repayment
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
Principal payments on capital lease
|
|
|
(339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(339
|
)
|
|
|
|
|
|
|
|
|
Issuance of term loan
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of term loan
|
|
|
(500
|
)
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of notes payable
|
|
|
(8,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,000
|
)
|
|
|
(4,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt obligation as of December 31, 2010
|
|
$
|
14,265
|
|
|
$
|
9,500
|
|
|
$
|
2,338
|
|
|
$
|
2,183
|
|
|
$
|
244
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Estimated annual commitments for debt maturities are as follows
at December 31, 2010 (amounts in thousands):
|
|
|
|
|
|
|
Total Debt
|
|
|
2011
|
|
$
|
2,245
|
|
2012
|
|
|
5,679
|
|
2013
|
|
|
2,841
|
|
2014
|
|
|
2,000
|
|
2015
|
|
|
1,500
|
|
|
|
|
|
|
|
|
$
|
14,265
|
|
|
|
|
|
|
Term
Loan and Line of Credit
In December 2009, the Company and Silicon Valley Bank entered
into a Second Amended and Restated Credit Facility (the
Restated Credit Facility). Under the terms of the
Restated Credit Facility, the 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
Restated Credit Facility had a
364-day term.
On September 30, 2010, the Company entered into a Loan and
Security Agreement (the Loan Agreement) with Silicon
Valley Bank. The Loan Agreement provides for a term loan
facility of $10 million (the Term Loan), and a
revolving line of credit facility, which replaced the Second
Amended and Restated Credit Facility, in the aggregate principal
amount of up to $5 million (the Line of
Credit). The Loan Agreement contains customary
representations and warranties of the Borrower and customary
events of default. The obligations of the Company under the Loan
Agreement are secured by substantially all of the Companys
tangible and intangible assets pursuant to the Loan Agreement.
The availability under the Line of Credit is calculated during
any month as a percentage of eligible accounts receivable and is
subject to certain conditions, including the continued accuracy
of the Companys representations, warranties and covenants.
The Term Loan matures on September 30, 2015. The Company
shall repay the Term Loan in sixty equal installments of
principal and interest, with interest accruing at a floating per
annum rate equal to Silicon Valley Banks prime rate plus
3%, unless the Company achieves certain performance criteria, in
which case the interest rate shall be equal to Silicon Valley
Banks prime rate plus 2%. The Company had
$9.5 million outstanding on the Term Loan as of
December 31, 2010. The Line of Credit matures on
September 29, 2012. The principal amount outstanding under
the Line of Credit shall accrue interest at a floating per annum
rate equal to Silicon Valley Banks prime rate plus 2%,
unless the Company achieves certain performance criteria, in
which case the interest rate shall be equal to the Banks
prime rate plus 1%. The Company had $2.3 million
outstanding on the Line of Credit at December 31, 2010. On
November 12, 2007, the holders of the $4.0 million of
notes payable due on December 29, 2008 agreed to amend
those notes to extend the maturity date to December 31,
2010, subject to increasing the interest rate to 10% per annum,
beginning January 1, 2009. Under the terms of the notes,
50% of all interest accrued during 2008 and 2009 was payable on
each of December 31, 2008 and 2009, respectively, and all
principal and remaining accrued interest was payable on
December 31, 2010.
Subordinated
Notes
On February 8, 2010, the Company completed a units offering
(February 2012 Units) in which it sold
500 units consisting of debt and common stock at a purchase
price of $10,000 per unit, resulting in $5.0 million of
proceeds to the Company. Each unit consisted of
2,970 shares of the Companys common stock, and $7,000
in principal amount of the Companys subordinated
promissory notes due February 8, 2012. The subordinated
promissory notes were issued at a discount to face value of
$0.2 million and the discount is being amortized, into
F-22
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
interest expense, over the life of the notes. Interest on the
subordinated promissory notes accrues at 10% per annum. Accrued
but unpaid interest will be payable on February 8, 2011 and
2012.
The proceeds from the February 2012 Units were to be applied by
the Company to finance a portion of the purchase price under an
asset purchase agreement with Global Capacity. On April 30,
2010 the asset purchase agreement with Global Capacity expired
without consummation of the acquisition. On May 13, 2010,
investors representing $1.5 million in aggregated principal
amount of the Companys subordinated promissory notes and
$0.9 million of the Companys common stock waived the
right to receive their refund and elected to retain some or all
of their subordinated promissory notes, which are recorded in
long-term debt on the Companys condensed consolidated
balance sheet as of December 31, 2010
On December 31, 2010, the Company completed a financing
transaction in which it issued 212 Units, valued at $10,000 per
unit (December 2013 Units). Each unit consisted of
5,000 shares of the Companys common stock, and $5,000
in principal amount of the Companys subordinated
promissory notes due December 31, 2013. The subordinated
promissory notes were issued at a discount to face value of
$0.2 million and the discount is being amortized, into
interest expense, over the life of the notes. In total, the
Company issued 1,060,000 shares of the Companys
common stock and $1.1 million in principal amount of
subordinated promissory notes.
As of December 31, 2010, the subordinated notes payable had
a balance of $2.2 million. The balance includes notes
totaling $1.9 million due to a related party, Universal
Telecommunications, Inc. H. Brian Thompson, the Companys
Executive Chairman of the Board of Directors, is also the head
of Universal Telecommunications, Inc., his own private equity
investment and advisory firm. Also, included in the balance is
$0.1 million of the notes held by officers and directors of
the Company.
Promissory
Note and Capital Lease
As part of the WBS Connect acquisition, the Company assumed in
the acquisition approximately $0.6 million in capital lease
obligations payable in monthly installments through April 2011
and issued approximately $0.3 million in subordinated
seller notes to the sellers of WBS Connect, due in monthly
installments and payable in full by October 2010. The Company
paid the $0.3 million in subordinated seller notes in full
and has approximately $0.3 million outstanding in capital
lease obligations as of December 31, 2010.
Notes
Payable and Convertible Notes Payable
The holders of the convertible notes payable (December
2010 Notes) had the right to convert the principal due
under the December 2010 Notes into shares of the Companys
common stock, at any time, at a price per share equal to $1.70.
The Company had the right to require the holders of the December
2010 Notes to convert the principal amount due under the
December 2010 Notes at any time after the closing price of the
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 included protection
against dilutive issuances of the Companys common stock,
subject to certain exceptions. The Company had 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.
On September 30, 2010, proceeds from the Term Loan were
used to repay the Companys $4.0 million of notes
payable and $3.1 million of the December 2010 Notes, both
due December 31, 2010, as well as $1.5 million in
interest accrued on the notes payable and convertible notes.
The December 2013 Units were issued in exchange for the
repayment obligation created by the maturity of the December
2010 Notes. The amount of the repayment obligation was equal to
the outstanding principal amount (valued at face value) of
$1.6 million and accrued but unpaid interest of
$0.5 million. Since this was a cashless exchange, there
were no cash proceeds to the Company. The December 2010 Notes
involved in the exchange were held by Universal
Telecommunications, Inc., which is an affiliate of H. Brian
Thompson, Howard E. Janzen and
F-23
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Theodore B Smith, III. Messrs. Thompson, Janzen and
Smith are members of the Companys Board of Directors.
Given these relationships, the exchange and the terms of the
December 2013 Units were reviewed and approved by an independent
committee of our Board of Directors.
Financial instruments potentially subjecting the Company to a
significant concentration of credit risk consist primarily of
cash and cash equivalents and designated cash. At times during
the periods presented, the Company had funds in excess of
$250,000 insured by the US Federal Deposit Insurance
Corporation, or in excess of similar Deposit Insurance programs
outside of the United States, on deposit at various financial
institutions. As of December 31, 2010, approximately
$5.8 million of the 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, 2010, no single customer
exceeded 5% of total consolidated revenues. For the year ended
December 31, 2009, no single customer exceeded 10% of total
consolidated revenues.
|
|
NOTE 13
|
COMMITMENTS
AND CONTINGENCIES
|
Commitment
Leases
GTTA is required to provide its landlord with a letter of credit
to provide protection from default under the lease for the
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
$0.8 million and $0.9 million for the years ended
December 31, 2010 and 2009, respectively.
The Company has also entered into certain non-cancelable
operating lease agreements related to vehicles. Total expense
under vehicle leases was $33,000 and $100,000 for the years
ended December 31, 2010 and 2009, respectively.
Estimated annual commitments under non-cancelable operating
leases are as follows at December 31, 2010 (amounts in
thousands):
|
|
|
|
|
|
|
Office
|
|
|
|
Space
|
|
|
2011
|
|
$
|
679
|
|
2012
|
|
|
421
|
|
2013
|
|
|
327
|
|
2014
|
|
|
335
|
|
|
|
|
|
|
|
|
$
|
1,762
|
|
|
|
|
|
|
F-24
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Commitments-Supply
agreements
As of December 31, 2010, the Company had supplier agreement
purchase obligations of $38.6 million associated with the
telecommunications services that the Company has contracted to
purchase from its vendors. The 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.
Estimated annual commitments under supplier contractual
agreements are as follows at December 31, 2010 (amounts in
thousands):
|
|
|
|
|
|
|
Supplier
|
|
|
|
Agreements
|
|
|
2011
|
|
$
|
12,630
|
|
2012
|
|
|
14,094
|
|
2013
|
|
|
9,316
|
|
2014
|
|
|
1,518
|
|
2015
|
|
|
1,070
|
|
|
|
|
|
|
|
|
$
|
38,628
|
|
|
|
|
|
|
If a customer disconnects its service before the term ordered
from the vendor expires, and if GTT were unable to find another
customer for the capacity, GTT may be subject to an early
termination liability. Under standard telecommunications
industry practice (commonly referred to in the industry as
portability), this early termination liability may
be waived by the vendor if GTT were to order replacement service
with the vendor of equal or greater value to the service
cancelled. Additionally, the Company maintains some fixed
network costs and from time to time if it deems portions of the
network are not economically beneficial, the Company may
disconnect those portions and potentially incur early
termination liabilities. As of December 31, 2010, the
Company has $0.2 million accrued for early termination
liabilities.
Take-or-Pay
Purchase Commitments
Some of the 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, 2010 and 2009, the
Companys aggregate monthly obligations under such
take-or-pay
commitments over the remaining term of all of those contracts
totaled $2.6 million and $4.7 million, respectively.
Contingencies-Legal
proceedings
The Company is subject to legal proceedings arising in the
ordinary course of business. In the opinion of management, the
ultimate disposition of those matters will not have a material
adverse effect on the 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.
F-25
Global
Telecom & Technology, Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
NOTE 14
|
FOREIGN
OPERATIONS
|
Our operations are located primarily in the United States and
Europe. Our financial data by geographic area is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
|
|
UK
|
|
Germany
|
|
Total GTT
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area
|
|
$
|
61,685
|
|
|
$
|
11,857
|
|
|
$
|
7,533
|
|
|
$
|
81,075
|
|
Long-lived assets at December 31
|
|
|
39,571
|
|
|
|
509
|
|
|
|
8
|
|
|
|
40,088
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area
|
|
$
|
36,941
|
|
|
$
|
18,917
|
|
|
$
|
8,363
|
|
|
$
|
64,221
|
|
Long-lived assets at December 31
|
|
|
38,873
|
|
|
|
561
|
|
|
|
(0
|
)
|
|
|
39,433
|
|
|
|
NOTE 15
|
SUBSEQUENT
EVENTS
|
On February 16, 2011, the Company and the holders of the
December 2013 Units amended the offering solely to increase the
aggregate principal amount available for issuance from
$1.1 million to $1.6 million. On February 16,
2011, the Company also completed a financing transaction in
which it issued 40 Units, at a purchase price of $10,000 per
Unit, for gross proceeds of $400,000. Each Unit was comprised of
5,000 shares of the Companys common stock, and $5,000
in principal amount of subordinated promissory notes. The
subordinated promissory notes were issued at a discount to face
value and the discount is being amortized over the life of the
notes. The aggregate proceeds of the financing transaction was
applied towards working capital.
F-26