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EX-32.2 - EXHIBIT 32.2 - GTT Communications, Inc.ex-3221q17.htm
EX-32.1 - EXHIBIT 32.1 - GTT Communications, Inc.ex-3211q17.htm
EX-31.2 - EXHIBIT 31.2 - GTT Communications, Inc.ex-3121q17.htm
EX-31.1 - EXHIBIT 31.1 - GTT Communications, Inc.ex-3111q17.htm
EX-10.4 - EXHIBIT 10.4 - GTT Communications, Inc.sicoliemployeeamendmentno1.htm
EX-10.3 - EXHIBIT 10.3 - GTT Communications, Inc.mckeeemployeeamendmentno1.htm
EX-10.2 - EXHIBIT 10.2 - GTT Communications, Inc.calderemployeeamendmentno3.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
þ
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2017
 
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ____ to ____
 

Commission File Number 001-35965 
GTT Communications, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
20-2096338
(State or Other Jurisdiction of
 
(I.R.S. Employer Identification No.)
Incorporation or Organization)
 
 
 
7900 Tysons One Place
Suite 1450
McLean, Virginia 22102
(Address including zip code of principal executive offices)

(703) 442-5500
(Registrant's telephone number, including area code)
 
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 ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 þ No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large Accelerated Filer ¨
 
Accelerated Filer þ
 
 
 
Non-Accelerated Filer ¨
 
(Do not check if a smaller reporting company)
 
 
 
Smaller reporting company ¨
 
Emerging growth company ¨


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
 
As of May 9, 2017, 41,262,323 shares of common stock, par value $.0001 per share, of the registrant were outstanding.
 
 




 
Page
 
   

2



PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
GTT Communications, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(Amounts in thousands, except for share and per share data) 
 
March 31, 2017
 
December 31, 2016
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
32,970

 
$
29,748

Accounts receivable, net of allowances of $3,748 and $2,656, respectively
91,659

 
76,292

Deferred costs
4,707

 
3,415

Prepaid expenses
25,868

 
5,765

Other assets
1,487

 
3,565

Total current assets
156,691

 
118,785

Restricted cash and cash equivalents

 
304,266

Property and equipment, net
467,646

 
43,369

Intangible assets, net
367,610

 
193,936

Goodwill
467,131

  
280,593

Other long-term assets
35,263

 
12,312

Total assets
$
1,494,341

 
$
953,261

LIABILITIES AND STOCKHOLDERS EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
18,111

 
$
11,334

Accrued expenses and other current liabilities
57,865

 
36,888

Acquisition earn-outs and holdbacks
27,338

 
24,379

Current portion of capital lease obligations
815

 
1,015

Current portion of long-term debt
7,000

 
4,300

Deferred revenue
53,140

 
17,875

Total current liabilities
164,269

 
95,791

Capital lease obligations, net of current portion

 
120

Long-term debt
953,354

 
725,208

Deferred revenue, long-term portion
120,281

 
3,416

Deferred tax liability
26,726

 

Other long-term liabilities
13,173

 
967

Total liabilities
1,277,803

 
825,502

Commitments and contingencies


 


Stockholders equity:
 

 
 

Common stock, par value $.0001 per share, 80,000,000 shares authorized, 41,154,397 and 37,228,144 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively
4

 
3

Additional paid-in capital
287,582

 
197,326

Accumulated deficit
(66,505
)
 
(64,641
)
Accumulated other comprehensive loss
(4,543
)
 
(4,929
)
Total stockholders equity
216,538

 
127,759

Total liabilities and stockholders equity
$
1,494,341

 
$
953,261

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

3



GTT Communications, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except for share and per share data)
 
 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
Revenue:
 
 
 
Telecommunications services
$
182,365

 
$
124,437


 
 
 
Operating expenses:
 
 
 
Cost of telecommunications services
91,369

 
66,197

Selling, general and administrative expenses
52,933

 
32,194

Severance, restructuring and other exit costs
10,671

 
1,495

Depreciation and amortization
30,360

 
15,598


 
 
 
Total operating expenses
185,333

 
115,484


 
 
 
Operating (loss) income
(2,968
)
 
8,953


 
 
 
Other expense:
 
 
 
Interest expense, net
(15,833
)
 
(7,370
)
Loss on debt extinguishment
(5,659
)
 

Other expense, net
(107
)
 
(280
)

 
 
 
Total other expense
(21,599
)
 
(7,650
)

 
 
 
(Loss) income before income taxes
(24,567
)
 
1,303


 
 
 
(Benefit from) provision for income taxes
(11,456
)
 
405


 
 
 
Net (loss) income
$
(13,111
)
 
$
898


 
 
 
(Loss) earnings per share:
 
 
 
Basic
$
(0.32
)
 
$
0.02

Diluted
$
(0.32
)
 
$
0.02


 
 
 
Weighted average shares:
 
 
 
Basic
40,410,554

 
36,854,219

Diluted
40,410,554

 
37,455,379





 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements


4




GTT Communications, Inc.
Condensed Consolidated Statements of Comprehensive (Loss) Income
(Unaudited)
(Amounts in thousands)
 
 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
Net (loss) income
$
(13,111
)
 
$
898


 
 
 
Other comprehensive (loss) income:
 

 
 

Foreign currency translation adjustment
386

 
(178
)
Comprehensive (loss) income
$
(12,725
)
 
$
720

 


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
 

5




GTT Communications, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(Amounts in thousands, except for share data)
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
37,228,144

 
$
3

 
$
197,326

 
$
(64,641
)
 
$
(4,929
)
 
$
127,759

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share-based compensation for options issued

 

 
341

 

 

 
341

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share-based compensation for restricted stock issued
575,639

 

 
4,235

 

 

 
4,235

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax withholding related to the vesting of restricted stock units
(95,125
)
 

 
(1,371
)
 

 

 
(1,371
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock issued in connection with employee stock purchase plan
5,517

 

 
130

 

 

 
130

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock issued in connection with acquisition
3,329,872

 
1

 
86,091

 

 

 
86,092

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options exercised
110,350

 

 
830

 

 

 
830

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative effect of adjustment for unrecognized windfall benefits

 

 

 
11,247

 

 
11,247

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 
(13,111
)
 

 
(13,111
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation

 

 

 

 
386

 
386

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2017
41,154,397

 
$
4

 
$
287,582

 
$
(66,505
)
 
$
(4,543
)
 
$
216,538

 


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

6



GTT Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)

 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 

 
 

Net (loss) income
$
(13,111
)
 
$
898

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
30,360

 
15,598

Share-based compensation
4,576

 
1,553

Debt discount amortization
252

 
323

Loss on debt extinguishment
5,659

 

Amortization of debt issuance costs
741

 
445

Excess tax benefit from stock-based compensation
(5,340
)
 

Deferred income taxes
(7,597
)
 

Non-cash deferred revenue
(11,726
)
 
(1,711
)
Non-cash deferred costs
945

 
750

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable, net
5,501

 
(7,776
)
Prepaid expenses and other current assets
(1,224
)
 
(719
)
Deferred costs and other assets
(644
)
 
(500
)
Accounts payable
(10,470
)
 
(525
)
Accrued expenses and other current liabilities
3,759

 
(2,611
)
Deferred revenue and other liabilities
510

 
526

Net cash provided by operating activities
2,191

 
6,251

 
 
 
 
Cash flows from investing activities:
 

 
 
Acquisition of businesses, net of cash acquired
(513,113
)
 
(13,751
)
Purchase of customer contracts
(3,900
)
 

Change in restricted cash and cash equivalents
304,266

 

Purchases of property and equipment
(8,471
)
 
(7,517
)
Net cash used in investing activities
(221,218
)
 
(21,268
)
 
 
 
 
Cash flows from financing activities:
 

 
 
Proceeds from revolving line of credit

 
14,000

Repayment of revolving line of credit
(20,000
)
 

Proceeds from term loan
696,500

 

Repayment of term loan
(427,525
)
 
(1,000
)
Payment of earn-out and holdbacks
(1,800
)
 
(999
)
Debt issuance costs
(24,779
)
 

Repayment of capital leases
(320
)
 
(184
)
Proceeds from issuance of common stock under employee stock purchase plan
130

 

Tax withholding related to the vesting of restricted stock units
(1,371
)
 
(536
)
Exercise of stock options
830

 
163

Net cash provided by financing activities
221,665

 
11,444

 
 
 
 
Effect of exchange rate changes on cash
584

 
(880
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
3,222

 
(4,453
)
 
 
 
 
Cash and cash equivalents at beginning of period
29,748

 
14,630

 
 
 
 
Cash and cash equivalents at end of period
$
32,970

 
$
10,177

 
 
 
 
Supplemental disclosure of cash flow information:
 

 
 

Cash paid for interest
$
7,964

 
$
6,604

Cash paid for income taxes
$
68

 
$
209



 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
 

7



GTT Communications, Inc. 
Notes to Condensed Consolidated Financial Statements

NOTE 1 — ORGANIZATION AND BUSINESS
 
Organization and Business
 
GTT Communications, Inc. (“GTT” or the "Company") is a provider of cloud networking services to multinational clients. The Company offers a broad portfolio of global services including: private networking services, Internet services, optical transport, managed network and security services, voice and unified communication services, and video transport services.

GTT's global Tier 1 IP network delivers connectivity to clients around the world. The Company provides services to leading multinational enterprise, carrier and government customers.

Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the Company’s audited financial statements and footnotes thereto for the fiscal year ended December 31, 2016, included in the Company’s Annual Report on Form 10-K filed on March 8, 2017. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted pursuant to such rules and regulations.

The condensed consolidated financial statements reflect all adjustments (consisting primarily of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s consolidated financial position and its results of operations. The operating results for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the full fiscal year 2017 or for any other interim period. The December 31, 2016 consolidated balance sheet is condensed from the audited financial statements as of that date, but does not include all disclosures required by GAAP.
 
Reclassification Within Condensed Consolidated Statement of Cash Flows

As a result of further policy harmonization related to acquired businesses, certain prior period amounts in the condensed consolidated statements of cash flows, have been reclassified to conform with the current period presentation to better reflect the nature of these activities. The Company has reclassified $1.7 million from the "Deferred revenue and liabilities" line to the "Non-cash deferred revenue" line and $0.8 million from the "Deferred costs" line items to the "Non-cash deferred costs" line for the three months ended March 31, 2017. These reclassifications had no impact on the net change in cash and cash equivalents or cash flows from operating, investing and financing activities for any periods presented.

Use of Estimates and Assumptions
 
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates are used when establishing allowances for doubtful accounts and accruals for billing disputes, determining useful lives for depreciation and amortization and accruals for exit activities, assessing the need for impairment charges (including those related to intangible assets and goodwill), determining the fair values of assets acquired and liabilities assumed in business combinations, accounting for income taxes and related valuation allowances against deferred tax assets and estimating the grant date fair values used to compute the share-based compensation expense. Management evaluates these estimates and judgments on an ongoing basis and makes estimates based on historical experience, current conditions, and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions.

Segment Reporting

The Company reports operating results and financial data in one operating and reporting segment. The chief operating decision maker manages the Company as a single profit center in order to promote collaboration, provide comprehensive service offerings across its entire customer base, and provide incentives to employees based on the success of the organization as a whole. Although

8



certain information regarding selected products or services are discussed for purposes of promoting an understanding of the Company's complex business, the chief operating decision maker manages the Company and allocates resources at the consolidated level.

Revenue Recognition

The Company delivers six primary services to its customers — optical transport, WAN connectivity services, high bandwidth Internet connectivity services, managed network and security services, global communication and collaboration services, and video transport services. Certain of its current commercial activities have features that may be considered multiple elements, specifically when the Company sells its connectivity services in addition to customer premise equipment ("CPE"). The Company believes that there is sufficient evidence to determine each element’s fair value and, as a result, in those arrangements where there are multiple elements, the service revenue is recorded ratably over the term of the agreement and the equipment is accounted for as a sale, at the time of sale as long as collectability is reasonably assured.
 
The Company's services are provided under contracts that typically include an installation charge along with payments of recurring charges on a monthly basis for use of the services over a committed term. Its contracts with customers specify the terms and conditions for providing such services, including installation date, recurring and non-recurring fees, payment terms, and length of term. These contracts call for the Company to provide the service in question (e.g., data transmission between point A and point Z), to manage the activation process, and to provide ongoing support (in the form of service maintenance and trouble-shooting) during the service term. The contracts do not typically provide the customer any rights to use specifically identifiable assets. Furthermore, the contracts generally provide the Company with discretion to engineer (or re-engineer) a particular network solution to satisfy each customer’s data transmission requirement, and typically prohibit physical access by the customer to the network infrastructure used by the Company and its suppliers to deliver the services.

The Company recognizes revenue as follows:
 
Monthly Recurring Revenue. Monthly recurring revenue represents the substantial majority of the Company's revenue, and consists of fees charged for ongoing services that are generally fixed in price and billed on a recurring monthly basis (one month in advance) for a specified term. At the end of the term, most contracts provide for a continuation of services on the same terms, either for a specified renewal period (e.g., one year) or on a month-to-month basis. The Company records recurring revenue based on the fees agreed to in each contract, as long as the contract is in effect.

Usage Revenue. Usage revenue represents variable charges for certain services, based on specific usage of those services, or usage above a fixed threshold, billed monthly in arrears. The Company records usage revenue based on actual usage charges billed using the rates and/or thresholds specified in each contract.

Non-recurring Revenue. Non-recurring revenue consists of charges for installation in connection with the delivery of recurring communications services, late payments, cancellation fees, early termination fees, and equipment sales. Fees billed for installation services are initially recorded as deferred revenue then recognized ratably over the contractual term of the recurring service. Fees charged for late payments, cancellation (pre-installation) or early termination (post-installation) are typically fixed or determinable per the terms of the respective contract, and are recognized as revenue when billed. In addition, from time to time the Company sells communications and/or networking equipment to its customers in connection with its data networking services. The Company recognizes revenue from the sale of equipment at the contracted selling price when title to the equipment passes to the customer (generally F.O.B. origin).

Prepaid Capacity Sales and Indefeasible Right to Use. From time to time we sell capacity on a long-term basis, where a certain portion of the contracted revenue is prepaid upon acceptance of the service by the customer. This prepaid amount is initially recorded as deferred revenue and amortized ratably over the term of the contract. Certain of these prepaid capacity sales are in the form of Indefeasible Rights to Use ("IRUs"), where the customer has the right to use the capacity for the life of the fiber optic cable.  In the case of IRU’s, any up-front payments are recognized ratably over a 20 year term, consistent with our assumed useful life of the associated fiber optic cable.

The Company records revenue only when collectability is reasonably assured, irrespective of the type of revenue.

Universal Service Fund (USF), Gross Receipts Taxes and Other Surcharges

The Company is liable in certain cases for collecting regulatory fees and/or certain sales taxes from its customers and remitting the fees and taxes to the applicable governing authorities. Where the Company collects on behalf of a regulatory agency, the Company does not record any revenue. The Company records applicable taxes on a net basis.

9




Cost of Telecommunications Services

Cost of telecommunications services includes direct costs incurred in accessing other telecommunications providers’ networks in order to maintain the Company's global IP network and provide telecommunication services to the Company's customers, including access, co-location, and usage-based charges.

Share-Based Compensation
 
The Company issues three types of equity grants under its share-based compensation plan: time-based restricted stock, time-based stock options and performance-based restricted stock. The time-based restricted stock and stock options generally vest over a four-year period, contingent upon meeting the requisite service period requirement. Performance awards typically vest over a shorter period, e.g. two years, starting when the performance criteria established in the grant have been met.

The share price of the Company's common stock as reported on the NYSE MKT on the date of grant is used as the fair value for all restricted stock. The Company no longer issues stock options, but previously issued stock options used the Black-Scholes option-pricing model to determine the estimated fair value for stock options. Critical inputs into the Black-Scholes option-pricing model include the following: option exercise price; fair value of the stock price; expected life of the option; annualized volatility of the stock; annual rate of quarterly dividends on the stock; and risk-free interest rate.

Implied volatility is calculated as of each grant date based on our historical stock price volatility along with an assessment of a peer group. Other than the expected life of the option, volatility is the most sensitive input to our option grants. The risk-free interest rate used in the Black-Scholes option-pricing model is determined by referencing the U.S. Treasury yield curve rates with the remaining term equal to the expected life assumed at the date of grant. Forfeitures are estimated based on our historical analysis of attrition levels. Forfeiture estimates are updated quarterly for actual forfeitures.

The expense is recognized on a straight-line basis over the vesting period. The Company recognizes share-based compensation expense for performance awards when the Company considers the achievement of the performance criteria to be probable.

Income Taxes
 
Income taxes are accounted for under the asset and liability method pursuant to GAAP. Under this method, deferred tax assets and liabilities are recognized for the expected future consequences attributable to the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the change. Further, deferred tax assets are recognized for the expected realization of available net operating loss and tax credit carryforwards. A valuation allowance is recorded on gross deferred tax assets when it is “more likely than not” that such asset will not be realized. When evaluating the realizability of deferred tax assets, all evidence, both positive and negative is evaluated. Items considered in this analysis include the ability to carry back losses, the reversal of temporary differences, tax planning strategies, and expectations of future earnings. The Company reviews its deferred tax assets on a quarterly basis to determine if a valuation allowance is required based upon these factors. Changes in the Company's assessment of the need for a valuation allowance could give rise to a change in such allowance, potentially resulting in additional expense or benefit in the period of change.

The Company's income tax provision includes U.S. federal, state, local and foreign income taxes and is based on pre-tax income or loss. In determining the annual effective income tax rate, the Company analyzes various factors, including its annual earnings and taxing jurisdictions in which the earnings were generated, the impact of state and local income taxes and its ability to use tax credits and net operating loss carryforwards.

Under GAAP for income taxes, the amount of tax benefit to be recognized is the amount of benefit that is “more likely than not” to be sustained upon examination. The Company analyzes its tax filing positions in all of the U.S. federal, state, local and foreign tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, the Company determines that uncertainties in tax positions exist, a liability is established in the consolidated financial statements. The Company recognizes accrued interest and penalties related to unrecognized tax positions in the provision for income taxes.





10



Comprehensive (Loss) Income
 
In addition to net (loss) income, comprehensive (loss) income includes certain charges or credits to equity occurring other than as a result of transactions with stockholders. For the Company, this consists of foreign currency translation adjustments.

(Loss) Earnings Per Share

Basic (loss) earnings per share is computed by dividing net income or (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share reflect, in periods with earnings and in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options.

The table below details the calculations of (loss) earnings per share (in thousands, except for share and per share amounts):  
  
 
Three Months Ended March 31,
 
2017
 
2016
Numerator for basic and diluted EPS – (loss) earnings available to common stockholders
$
(13,111
)
 
$
898

Denominator for basic EPS – weighted average shares
40,410,554

 
36,854,219

Effect of dilutive securities

 
601,160

Denominator for diluted EPS – weighted average shares
40,410,554

 
37,455,379

 
 
 
 
(Loss) earnings per share: basic
$
(0.32
)
 
$
0.02

(Loss) earnings per share: diluted
$
(0.32
)
 
$
0.02

 
There were approximately 1,046,000 anti-dilutive common shares as of March 31, 2017 that were excluded from the computation of loss per share. There were approximately 254,000 anti-dilutive common shares that were excluded from the computation of loss per share as of March 31, 2016

Cash and Cash Equivalents
 
Cash and cash equivalents may include deposits with financial institutions as well as short-term money market instruments, certificates of deposit and debt instruments with maturities of three months or less when purchased.

Restricted Cash and Cash Equivalents

Cash and cash equivalents that are contractually restricted from operating use are classified as restricted cash and cash equivalents. In December 2016, the Company completed a private offering of $300.0 million aggregate principal amount of 7.875% senior unsecured notes due in 2024. The proceeds of the private offering plus 60 days of prepaid interest, were deposited into escrow, where the funds remained until the closing of the acquisition of Hibernia Networks ("Hibernia") that occurred in January 2017. The proceeds were released from escrow at closing to fund the Hibernia acquisition.

Accounts Receivable, Net
 
Accounts receivable balances are stated at amounts due from the customer net of an allowance for doubtful accounts. Credit extended is based on an evaluation of the customer’s financial condition and is granted to qualified customers on an unsecured basis.
 
The Company, pursuant to its standard service contracts, is entitled to impose a monthly finance charge of a certain percentage per month with respect to amounts that are past due. The Company’s standard terms require payment within 30 days of the date of the invoice. The Company treats invoices as past due when they remain unpaid, in whole or in part, beyond the payment date set forth in the applicable service contract.
 
The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade receivables are past due, the customer’s payment history and current ability to pay its obligation to the Company, and the condition of the general economy. Specific reserves are also established on a case-by-case basis by management. Credit losses have been within management's estimates. 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

11



to be collected, following the exercise of reasonable collection efforts, and upon management's determination that the costs of pursuing collection outweighs the likelihood of recovery. The allowance for doubtful accounts was $3.7 million and $2.7 million as of March 31, 2017 and December 31, 2016, respectively.
 
Deferred Costs

Installation costs related to provisioning of recurring communications services that the Company incurs from independent third party suppliers, directly attributable and necessary to fulfill a particular service contract, and which would not have been incurred but for the occurrence of that service contract, are recorded as deferred costs and expensed ratably over the contractual term of service in the same manner as the deferred revenue arising from that contract. Based on historical experience, the Company believes the initial contractual term is the best estimate for the period of earnings. If any installation costs exceed the amount of corresponding deferred revenue, the excess cost is recognized in the current period.

Property and Equipment
 
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation on these assets is computed on a straight-line basis over the estimated useful lives of the assets. Assets are recorded at acquired cost plus any internal labor to prepare the asset for installation to become functional. Assets and liabilities under capital leases are recorded at the lesser of the present value of the aggregate future minimum lease payments or the fair value of the assets under lease. Leasehold improvements and assets under capital leases are amortized over the shorter of the term of the lease, excluding optional extensions, or the useful life. Expenditures for maintenance and repairs are expensed as incurred. Depreciable lives used by the Company for its classes of assets are as follows:
 
Freehold Land and Buildings
30 years
Furniture and Fixtures
7 years
Fiber Optic Cable
20 years
Fiber Optic Network Equipment
5 - 15 years
Leasehold Improvements
up to 10 years
Computer Hardware and Software
3-5 years

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the carrying amount of an asset were to exceed its estimated future undiscounted cash flows, the asset would be considered to be impaired. Impairment losses would then be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of, if any, are reported at the lower of the carrying amount or fair value less costs to sell.

Software Capitalization
    
Software development costs include costs to develop software programs to be used solely to meet the Company's internal needs. The Company capitalizes development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a function it previously did not perform. Software maintenance, data conversion and training costs are expensed in the period in which they are incurred. The Company capitalized software costs of $0.4 million and $0.4 million for the three months ended March 31, 2017 and March 31, 2016, respectively.

Goodwill and Intangible Assets 

Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. Goodwill is reviewed for impairment at least annually, in October, or more frequently if a triggering event occurs between impairment testing dates. The Company operates as a single operating segment and as a single reporting unit for the purpose of evaluating goodwill impairment. The Company's impairment assessment begins with a qualitative assessment to determine whether it is more likely than not that fair value of the reporting unit is less than its carrying value. The qualitative assessment includes comparing the overall financial performance of the Company against the planned results used in the last quantitative goodwill impairment test. Additionally, the Company's fair value is assessed in light of certain events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity and Company specific events. The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves significant judgment and estimates. If it is determined under the qualitative assessment that

12



it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a two-step quantitative impairment test is performed. Under the first step, the estimated fair value of the Company would be compared with its carrying value (including goodwill). If the fair value of the Company exceeds its carrying value, step two does not need to be performed. If the estimated fair value of the Company is less than its carrying value, an indication of goodwill impairment exists for the Company and it would need to perform step two of the impairment test. Under step two, an impairment loss would be recognized for any excess of the carrying amount of the Company's goodwill over the implied fair value of that goodwill. Fair value of the Company under the two-step assessment is determined using a combination of both income and market-based approaches. There were no impairments identified for the three months ended March 31, 2017.

Intangible assets arising from business combinations, such as acquired customer contracts and relationships, (collectively "customer relationships"), trade names, intellectual property or know-how, are initially recorded at fair value. The Company amortizes these intangible assets over the determined useful life which ranges from three to seven years. The Company reviews its intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, an impairment loss is recognized for the difference between fair value and the carrying value of the asset. There were no impairments recognized for the three months ended March 31, 2017.

Business Combinations
    
The Company includes the results of operations of the businesses that it acquires commencing on the respective dates of acquisition. The Company allocates the fair value of the purchase price of its acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill.

Asset Purchases
 
Periodically the Company acquires customer contracts that it accounts for as an asset purchase and record a corresponding intangible asset that is amortized over its estimated useful life. No goodwill is recorded in an asset acquisition. During the three months ended March 31, 2017, the Company acquired one portfolio of customer contracts for an aggregate purchase price of $10.9 million, of which $3.9 million was paid in February at closing. The remaining $7.0 million is expected to be paid in 2017 and 2018, subject to any indemnification claims made through the final payment date. During 2016, the Company acquired two portfolios of customer contracts for an aggregate purchase price of $41.3 million, of which $20.0 million was paid in 2016 at the respective closing dates. The remaining $21.3 million is expected to be paid in 2017, subject to any indemnification claims made through the final payment dates.

Accrued Supplier Expenses
 
The Company accrues estimated charges owed to its suppliers for services. The Company bases this accrual on the supplier contract, the individual service order executed with the supplier for that service, and the length of time the service has been active.
 
Disputed Supplier Expenses
 
In the normal course of business, the Company identifies errors by suppliers with respect to the billing of services. The Company performs bill verification procedures to ensure that errors in the Company's suppliers' billed invoices are identified and resolved. If the Company concludes that a vendor has billed inaccurately, the Company will record a liability only for the amount that it believes is owed. As of March 31, 2017, the Company had open disputes not accrued for, of $5.2 million. As of December 31, 2016, the Company had open disputes of $5.8 million for which it had not accrued.

Acquisition Earn-outs and Holdbacks

Acquisition earn-outs and holdbacks represent either contingent consideration subject to re-measurement to fair value, or fixed deferred consideration to be paid out at some point in the future, typically on the one-year anniversary of an acquisition. Contingent consideration is remeasured to fair value at each reporting period. The portion of the deferred consideration due within one year is recorded as a current liability until paid, and any consideration due beyond one year is recorded in other long-term liabilities.

As of March 31, 2017 and December 31, 2016, there was no contingent consideration subject to re-measurement outstanding.



13




Debt Issuance Costs

Debt issuance costs represent costs that qualify for deferral associated with the issuance of new debt or the modification of existing debt facilities. The unamortized balance of debt issuance costs is presented as a reduction to the carrying value of long-term debt. Debt issuance costs are amortized and recognized on the condensed consolidated statements of operations as interest expense. The unamortized debt issuance costs were $29.6 million and $9.3 million as of March 31, 2017 and December 31, 2016, respectively.

Original Issue Discount

Original issue discount ("OID") is the difference between the face value of debt and the amount of principal received when the loan was originated. When the debt reaches maturity, the face value of the debt is payable. The Company recognizes OID by accretion of the discount as interest expense over the term of the debt. For periods ended March 31, 2017 and December 31, 2016, the unamortized portion of the OID was $8.3 million and $7.0 million, respectively.

Translation of Foreign Currencies
 
For non-U.S. subsidiaries, the local currency is the functional currency for financial reporting purposes. These condensed consolidated financial statements have been reported in U.S. Dollars by translating asset and liability amounts of foreign subsidiaries at the closing currency exchange rate, equity amounts at historical rates, and the results of operations and cash flow at the average currency exchange rate prevailing during the periods reported. The net effect of such translation gains and losses are reflected in accumulated other comprehensive (loss) income in the stockholders' equity section of the condensed consolidated balance sheets.

 Transactions denominated in foreign currencies other than a subsidiary's functional currency are recorded at the rates of exchange prevailing at the time of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange prevailing at the balance sheet date. Exchange differences arising upon settlement of a transaction are reported in the condensed consolidated statements of operations in other expense, net.

Fair Value Measurements
 
Fair value is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. The Company classifies certain assets and liabilities based on the following hierarchy of fair value:

Level 1:
Quoted prices for identical assets or liabilities in active markets that can be assessed at the measurement date.

Level 2:
Inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3:
Inputs reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument's valuation.

When determining the fair value measurements for assets and liabilities required to be recorded at fair value, management considers the principal or most advantageous market in which it would transact and considers risks, restrictions, or other assumptions that market participants would use when pricing the asset or liability.

As of March 31, 2017 and December 31, 2016, the carrying amounts reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, and other liabilities approximated fair value due to the short-term nature of these instruments.

The table below presents the fair values for the Company's long-term debt as well as the input level used to determine these fair values as of March 31, 2017 and December 31, 2016. The carrying amounts exclude any debt issuance costs or original issuance discount:


14



 
 
 
 
 
 
Fair Value Measurement Using
 
 
Total Carrying Value in Consolidated Balance Sheet
 
Unadjusted Quoted Prices in Active Markets for Identical Assets or Liabilities (1)
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
(amounts in thousands)
 
March 31,
2017
 
December 31, 2016
 
March 31,
2017
 
December 31, 2016
 
March 31,
2017
 
December 31, 2016
Liabilities not recorded at fair value in the Financial Statements:
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt, including the current portion:
 
 
 
 
 
 
 
 
 
 
 
 
Term loan
 
$
698,250

 
$
425,775

 
$
708,724

 
$
425,775

 
$

 
$

Senior notes
 
300,000

 
300,000

 
312,390

 
300,000

 

 

Capital leases
 
815

 
1,135

 

 

 
815

 
1,135

Total Long-term Debt, including current portion
 
$
999,065

 
$
726,910

 
$
1,021,114

 
$
725,775

 
$
815

 
$
1,135

(1) Fair value based on the average of the bid-ask quoted price.

As of March 31, 2017 and December 31, 2016, acquisition earn-out and holdback liabilities were$27.4 million and $24.4 million, respectively. The carrying value approximates the fair value as of March 31, 2017 and December 31, 2016, respectively.

Assets measured at fair value on a non-recurring basis include goodwill, tangible assets, and intangible assets. Such assets are reviewed quarterly for impairment indicators. If a triggering event has occurred, the assets are re-measured when the estimated fair value of the corresponding asset group is less than the carrying value. The fair value measurements, in such instances, are based on significant unobservable inputs (level 3).
 
Concentrations of Credit Risk

Financial instruments potentially subject to concentration of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. At times during the periods presented, the Company had funds in excess of $250,000 insured by the U.S. Federal Deposit Insurance Corporation, or in excess of similar Deposit Insurance programs outside of the United States, on deposit at various financial institutions. Management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.

The Company's trade accounts receivable are generally unsecured and geographically dispersed. No single customer's trade accounts receivable balance as of March 31, 2017 and December 31, 2016 exceeded 10% of the Company's consolidated accounts receivable, net. No single customer accounted for more than 10% of revenue for the three months ended March 31, 2017 and 2016.

Newly Adopted Accounting Principles

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to improve the accounting for share-based payment transactions. The ASU changes five aspects of the accounting for share-based payment award transactions: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for taxes. The Company adopted ASU 2016-09 effective January 1, 2017. Excess tax benefits for share-based payments are now recognized against income tax expense rather than additional paid-in capital and are included in operating cash flows rather than financing cash flows. The recognition of excess tax benefits has been applied on a modified retrospective basis through a cumulative-effect adjustment to the opening balance of retained earnings. As of January 1, 2017, the cumulative effect of adopting ASU 2016-09 was an increase in deferred tax assets of $11.2 million and a decrease in accumulated deficit of $11.2 million as a result of recognizing $27.8 million previously unrecognized excess tax benefits from stock-based compensation. The Company will continue to estimate forfeitures at grant. Cash paid by by the Company when directly withholding shares for tax withholding purposes will continue to be classified as a financing activity.





15



Recent Accounting Pronouncements
  
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The new revenue recognition standard will be effective for the Company in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. The Company currently anticipates adopting the new standard effective January 1, 2018. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). While the Company is still in the process of completing the analysis on the impact this guidance will have on its condensed consolidated financial statements and related disclosures, the Company is not aware of any material impact the new standard will have. The Company anticipates adopting the standard using the modified retrospective method. The Company has assigned internal resources, engaged a third party service provider, and has a project plan to finalize the evaluation and complete the implementation.

In February 2016, the FASB issued ASU 2016-02, Leases, which requires most leases (with the exception of leases with terms of less than one year) to be recognized on the balance sheet as an asset and a lease liability. Leases will be classified as an operating lease or a financing lease. Operating leases are expensed using the straight-line method, whereas financing leases will be treated similarly to a capital lease under the current standard. The new standard will be effective for annual and interim periods, within those fiscal years, beginning after December 15, 2018, but early adoption is permitted. The new standard must be presented using the modified retrospective method beginning with the earliest comparative period presented. The Company is currently evaluating the effect of the new standard on its condensed consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice of how certain transactions are classified and presented in the statement of cash flows in accordance with ASC 230. The ASU amends or clarifies guidance on eight specific cash flow issues, some of which include classification on debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and separately identifiable cash flows and application of the predominance principle. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those periods. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company is currently evaluating the effect of the new standard on its condensed consolidated financial statements and related disclosures, but the Company does not expect the new guidance to have a material impact.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect this new guidance to have a material impact on its condensed consolidated financial statements.

In March 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill (Step 2) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value (as determined in Step 1). The guidance is effective prospectively for public business entities for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the new guidance to have a material impact on its condensed consolidated financial statements.
 
Other recent accounting pronouncements issued by the FASB during 2016 and through the three month period ended March 31, 2017 are not believed to have a material impact on the Company's present or historical consolidated financial statements.




16



NOTE 2 — BUSINESS ACQUISITIONS

Since its formation, the Company has consummated a number of transactions accounted for as business combinations as part of its business strategy of expanding through acquisitions. The acquisitions of these businesses, which are in addition to periodic purchases of customer contracts, have allowed the Company to increase the scale at which it operates, which in turn affords the Company the ability to increase its operating leverage, extend its network, and broaden its customer base.

The accompanying condensed consolidated financial statements include the operations of the acquired entities from their respective acquisition dates. All of the acquisitions have been accounted for as a business combination. Accordingly, consideration paid by the Company to complete the acquisitions is initially allocated to the respective assets and liabilities based upon their estimated fair values as of the date of completion of the acquisition. The recorded amounts for acquired assets and liabilities assumed are provisional and subject to change during the measurement period, which is 12 months from the date of acquisition.

In January 2017, the Company acquired 100% of Hibernia. The Company paid $527.7 million in cash consideration, of which $14.6 million was net cash acquired, and 3,329,872 unregistered shares of the Company's common stock, initially valued at $75.0 million on the date of announcement, and ultimately valued at $86.1 million at closing. The purchase price is subject to a final post-closing reconciliation for net working capital. The results of Hibernia have been included in the results of the Company from January 1, 2017.

The table below reflects the Company's provisional estimates of the acquisition date fair values of the assets and liabilities assumed for its acquisition of Hibernia (amounts in thousands):
Purchase Price
Hibernia
Cash paid at closing, including working capital estimate
$
527,655

Common stock (1)
86,092

Purchase consideration
$
613,747

 
 
Purchase Price Allocation
 
Assets acquired:
 
Current assets
$
52,330

Property, plant and equipment
426,548

Other assets
359

Intangible assets - customer lists
171,240

Intangible assets - tradename
720

Intangible assets - other
6,800

Goodwill
186,538

Total assets acquired
844,535

 
 
Liabilities assumed:
 
Current liabilities
(40,762
)
Capital leases, long-term portion

Deferred revenue
(163,300
)
Deferred tax liability
(26,726
)
Total liabilities assumed
(230,788
)
Net assets acquired
$
613,747

(1) Common stock fair value equals the closing share price of $27.80 less a discount for lack of marketability

Intangible assets acquired include customer relationships, the Hibernia tradename and various indefeasible right to use ("IRU"). Intangible assets related to customer relationships, tradename and IRU's are subject to a straight-line amortization. The customer relationships have a weighted-average useful life of 10 years and the trademarks have a useful life of 2 years and the IRU's have a useful life of 10 years.


17



Amortization expense of $4.5 million has been recorded for the three months ended March 31, 2017. Estimated amortization expense related to intangible assets created as a result of the Hibernia acquisition for each of the years subsequent to March 31, 2017 is as follow (amounts in thousands):
2017 remaining
$
13,622

2018
18,163

2019
17,803

2020
17,803

2021
17,803

2022 and beyond
89,015

Total
$
174,209


Goodwill in the amount of $186.5 million was recorded as a result of the acquisition of Hibernia. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill is notexpected to be deductible for tax purposes. Goodwill will not be amortized but instead will be tested for impairment at least annually and more frequently if certain indicators of impairment are present.

For material acquisitions completed during 2016, 2015 and 2014, please refer to Note 3 to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Acquisition Method Accounting Estimates

The Company initially recognizes the assets and liabilities acquired from the aforementioned acquisitions based on its preliminary estimates of their acquisition date fair values. As additional information becomes known concerning the acquired assets and assumed liabilities, management may make adjustments to the opening balance sheet of the acquired company up to the end of the measurement period, which is no longer than a one year period following the acquisition date. The determination of the fair values of the acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment.

Transaction Costs

Transaction costs describe the broad category of costs the Company incurs in connection with signed and/or closed acquisitions. There are two types of costs that the Company accounts for:

Severance, restructuring and other exit costs
Transaction and integration costs

Severance, restructuring and other exit costs include severance and other one-time benefits for terminated employees; termination charges for leases and supplier contracts; and other costs incurred associated with an exit activity. These costs are reported separately in the condensed consolidated statements of operations during the three months ended March 31, 2017. Refer to Note 9 of these Condensed Consolidated Financial Statements for further information on severance, restructuring and other exit costs.

Transaction and integration costs include expenses associated with legal, accounting, regulatory and other transition services rendered in connection with acquisition, travel expense, and other non-recurring direct expenses associated with acquisitions. Transaction and integration costs are expensed as incurred in support of the integration. The Company incurred transaction and integration costs of $8.1 million and $1.3 million during the three months ended March 31, 2017 and 2016, respectively. Transaction and integration costs have been included in selling, general and administrative expenses on the condensed consolidated statements of operations and in cash flows from operating activities in the condensed consolidated statements of cash flows.
    
Pro forma Financial Information (Unaudited)

The pro forma results presented below include the effects of the Company's acquisitions during 2016 and 2017 as if the acquisitions occurred on January 1, 2016. The pro forma net (loss) income for the three months ended March 31, 2017 and 2016, respectively, includes the additional depreciation and amortization resulting from the adjustments to the value of property, plant and equipment and intangible assets resulting from acquisition accounting and adjustment to amortized revenue during first quarters

18



of 2017 and 2016, respectively, as a result of the acquisition date valuation of assumed deferred revenue. The pro forma results also include interest expense associated with debt used to fund the acquisitions. The pro forma results do not include any anticipated synergies or other expected benefits of the acquisitions. The unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions been consummated as of January 1, 2016.

 
Three Months Ended March 31,
 
2017
 
2016
(Amounts in thousands, except per share and share data)
 
 
 
Revenue
$
182,365

 
$
172,378

Net (loss) income
$
(13,111
)
 
$
4,582

 
 
 
 
(Loss) earnings per share:
 
 
 
Basic
$
(0.32
)
 
$
0.11

Diluted
$
(0.32
)
 
$
0.11

 
 
 
 
Denominator for basic EPS – weighted average shares
40,410,554

 
40,184,091

Denominator for diluted EPS – weighted average shares
40,410,554

 
40,785,251


NOTE 3 — GOODWILL AND INTANGIBLE ASSETS
 
The goodwill balance was $467.1 million and $280.6 million as of March 31, 2017 and December 31, 2016, respectively. Additionally, the Company's intangible asset balance was $367.6 million and $193.9 million as of March 31, 2017 and December 31, 2016, respectively. The additions to both goodwill and intangible assets during the three months ended March 31, 2017 relate to the acquisition of Hibernia (see Note 2 - Business Acquisitions) and asset purchase of customer contracts.

The change in the carrying amount of goodwill for the period ended March 31, 2017 was as follows (amounts in thousands):
 
Balance, December 31, 2016
$
280,593

  Goodwill associated with Hibernia acquisition
186,538

Balance, March 31, 2017
$
467,131


The following table summarizes the Company’s intangible assets as of March 31, 2017 and December 31, 2016 (amounts in thousands):
 
 
 
March 31, 2017
 
December 31, 2016
 
Amortization
Period
 
Gross Asset Cost
 
Accumulated Amortization
 
Net Book Value
 
Gross Asset Cost
 
Accumulated Amortization
 
Net Book Value
Customer contracts
3-10 years
 
$
456,718

 
$
106,226

 
$
350,492

 
$
267,755

 
$
91,136

 
$
176,619

Non-compete agreements
3-5 years
 
4,572

 
4,443

 
129

 
4,572

 
4,420

 
152

Point-to-point FCC license fees
3 years
 
1,697

 
1,414

 
283

 
1,695

 
1,268

 
427

Intellectual property
10 years
 
17,378

 
2,509

 
14,869

 
17,379

 
2,076

 
15,303

Trade name
3 years
 
3,812

 
1,975

 
1,837

 
3,092

 
1,657

 
1,435

 
 
 
$
484,177

 
$
116,567

 
$
367,610

 
$
294,493

 
$
100,557

 
$
193,936

  
Amortization expense was $16.0 million and $9.2 million for the three months ended March 31, 2017 and 2016, respectively.

Estimated amortization expense related to intangible assets subject to amortization at March 31, 2017 in each of the years subsequent to March 31, 2017 is as follows (amounts in thousands):


19



2017 remaining
$
47,356

2018
57,222

2019
52,006

2020
48,978

2021
47,433

2022 and beyond
114,615

Total
$
367,610

 
NOTE 4 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

The following table summarizes the Company’s accrued expenses and other current liabilities as of March 31, 2017 and December 31, 2016 (amounts in thousands):

 
March 31, 2017
 
December 31, 2016
Accrued compensation and benefits
$
4,795

 
$
10,035

Accrued selling, general and administrative
3,953

 
4,534

Accrued carrier costs
14,286

 
13,543

Accrued restructuring
7,001

 
3,247

Accrued interest
6,086

 

Accrued fiber pair repurchase
10,000

 

Accrued other
11,744

 
5,529

 
$
57,865

 
$
36,888


NOTE 5 — DEFERRED REVENUE

The total deferred revenue as of March 31, 2017 was $173.4 million, consisting of unamortized prepaid capacity sales, IRUs, deferred non-recurring revenue and unearned revenue for amounts billed in advance to customers. Deferred revenue is recognized as current and noncurrent deferred revenue on the condensed consolidated balance sheet.

As of March 31, 2017 and December 31, 2016, long-term deferred revenue was as follows (amounts in thousands):

 
March 31, 2017
 
December 31, 2016
Prepaid capacity sales and IRUs
$
138,530

 
$

Deferred non-recurring revenue
8,862

 
8,763

Unearned revenue
26,029

 
12,528

Total deferred revenue
173,421

 
21,291

Less current portion
(53,140
)
 
(17,875
)
 
$
120,281

 
$
3,416


Estimated remaining amortization related to prepaid capacity sales, IRUs and non-recurring revenue at March 31, 2017 in each of the years subsequent to March 31, 2017 is as follows (amounts in thousands):


20



 
Nonrecurring Revenue
 
Capacity Sales and IRUs
 
Total
2017 remaining
$
4,156

 
$
18,011

 
$
22,167

2018
2,858

 
16,212

 
19,070

2019
1,505

 
11,911

 
13,416

2020
276

 
11,221

 
11,497

2021
66

 
9,603

 
9,669

2022 and beyond
1

 
71,572

 
71,573

 
$
8,862

 
$
138,530

 
$
147,392





NOTE 6     — DEBT
  
As of March 31, 2017 and December 31, 2016, long-term debt was as follows (amounts in thousands):

 
March 31, 2017
 
December 31, 2016
 
 
 
 
Term loan
$
698,250

 
$
425,775

7.875% Senior unsecured notes
300,000

 
300,000

Revolving line of credit

 
20,000

Total debt obligations
998,250

 
745,775

Unamortized debt issuance costs
(29,618
)
 
(9,310
)
Unamortized original issuance discount
(8,278
)
 
(6,957
)
Carrying value of debt
960,354

 
729,508

Less current portion
(7,000
)
 
(4,300
)
Long-term debt less current portion
$
953,354

 
$
725,208


2017 Credit Agreement

On January 9, 2017, the Company entered into a credit agreement (the "2017 Credit Agreement") that provides a $700.0 million term loan facility and a $75.0 million revolving line of credit facility (which includes a $25.0 million letter of credit facility). In addition, the Company may request incremental term loan and/or incremental revolving loan commitments in an aggregate amount not to exceed the sum of $150.0 million and an unlimited amount that is subject to pro forma compliance with certain net secured leverage ratio tests provided, however, that incremental revolving loan commitments may not exceed $25.0 million. The term loan facility was issued at an original issuance discount of $3.5 million.

The maturity date of the term loan facility is January 9, 2024 and the maturity date of the revolving loan facility is January 9, 2022. Each maturity date may be extended per the terms of the 2017 Credit Agreement. The principal amount of the term loan facility is payable in equal quarterly installments of $1.8 million, commencing on March 31, 2017 and continuing thereafter until the maturity date, when the remaining balance of outstanding principal amount is payable in full.

The Company may prepay loans under the 2017 Credit Agreement at any time, subject to certain notice requirements and LIBOR breakage costs. If within six months after entering into the 2017 Credit Agreement certain prepayments are made or any amendment reduces the “effective yield” applicable to all or a portion of the term loan, such prepayment or repriced portions of the term loan will be subject to a penalty equal to 1.00% of the outstanding term loan being prepaid or repriced.

At the Company's election, the loans under the 2017 Credit Agreement may be made as either Base Rate Loans or Eurodollar Loans, with applicable margins at 3.00% for Base Rate Loans and 4.00% for Eurodollar loans. The Eurodollar Loans are subject to a floor of 1.00%, and the applicable margin for revolving loans is 2.50% for Base Rate Loans and 3.50% for Eurodollar Loans. The effective interest rate on outstanding debt at March 31, 2017 and December 31, 2016 was 5.0% and5.8%, respectively.

21




The obligations under the Credit Agreement are secured by the substantial majority of the tangible and intangible assets of the Company and the guarantors.

The 2017 Credit Agreement does not contain a financial covenant for the term loan facility, but includes a maximum consolidated net secured leverage ratio applicable to the revolving credit facility in the event that utilization exceeds 30% of the revolving loan facility commitment.

The proceeds of the term loan facility were used to finance the Hibernia acquisition, refinance the Company's existing credit facility and to pay costs and expenses associated with such transactions.

The aggregate contractual maturities of long-term debt (excluding unamortized discounts and unamortized debt issuance costs) were as follows at March 31, 2017 (amounts in thousands):

 
Total Debt
2017 remaining
$
5,250

2018
7,000

2019
7,000

2020
7,000

2021
7,000

2022
7,000

2023 and beyond
658,000

Total
$
698,250


7.875% Senior Unsecured Notes

In December 2016, we completed a private offering of $300.0 million aggregate principal amount 7.875% senior unsecured notes due in 2024 (the "Notes"). The proceeds of the Notes were deposited into escrow, where the funds remained until the closing of the acquisition of Hibernia in January 2017. The Company recognized the proceeds from the private offering as restricted cash and cash equivalents in its consolidated financial statements as of December 31, 2016, which were subsequently released with the closing of Hibernia. In connection with the offering, the Company incurred debt issuance costs of $9.7 million of which $0.5 million, was incurred in 2016 and the remainder was incurred in 2017.

Debt Issuance Costs and OID

In connection with the 2017 Credit Agreement and the Notes, the Company paid total new debt issuance costs of $24.8 million, of which $23.5 million qualified for deferral. $6.3 million of debt issuance costs were carried over from the prior term loan facility that qualified as a modification. These costs will be amortized to interest expense over the respective term of the underlying debt instruments using the effective interest method.

The unamortized balance of debt issuance costs as of March 31, 2017 and December 31, 2016 was $29.6 million and $9.3 million, respectively. Debt issuance costs are presented in the condensed consolidated balance sheets as a reduction to "Long-term debt". Interest expense associated with the amortization of debt issuance costs was $0.7 million and $0.4 million for the three months ended March 31, 2017 and 2016, respectively.

The term loan facility under the 2017 Credit Agreement was issued at an original issuance discount of $3.5 million. $5.0 million of the unamortized OID balance was carried over from the prior term loan facility that qualified as a modification. The total OID will be amortized to interest expense over the respective term of the term loan using the effective interest method.

The unamortized balance of OID for the periods ended March 31, 2017 and December 31, 2016, was $8.3 million and $7.0 million, respectively. OID are presented in the condensed consolidated balance sheets as a reduction to "Long-term debt". Interest expense associated with the amortization of OID was $0.3 million for each of the three months ended March 31, 2017 and 2016, respectively.



22



The Company expensed an aggregate $5.7 million of debt issuance costs and OID that did not qualify for deferral as a Loss on Debt Extinguishment in the condensed consolidated statement of operations.

Previous Debt Agreement - October 2015 Credit Agreement

On October 22, 2015, the Company entered into a credit agreement (the “October 2015 Credit Agreement”) that provided for a $400.0 million term loan facility and a $50.0 million revolving line of credit (which includes a $15.0 million letter of credit facility and a $10.0 million swingline facility). As of December 31, 2016, the Company had drawn $20.0 million under the revolving line of credit and had $29.5 million of borrowing capacity available. Amounts outstanding under October 2015 Credit agreement were paid in full at the closing of the 2017 Credit Agreement. The previous term loan was issued at an OID of $8.0 million.

NOTE 7 — SHARE-BASED COMPENSATION
     
Share-Based Compensation Plan
  
The Company grants share-based equity awards, including stock options and restricted stock, pursuant to three plans in effect as of March 31, 2017; the 2006 Plan adopted in October 2006, the 2011 Plan adopted in June 2011, and the 2015 Plan adopted in June 2015 (collectively referred to as the "GTT Stock Plan"). The GTT Stock Plan is limited to an aggregate 9,500,000 shares of which 8,037,337 have been issued and are outstanding as of March 31, 2017.

The GTT Stock Plan permits the granting of time-based stock options, time-based restricted stock and performance-based restricted stock to employees and consultants of the Company, and non-employee directors of the Company.

Time-based options granted under the GTT Stock 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 10 years from the grant date. The stock options generally vest over four years with 25% of the options becoming exercisable one year from the date of grant and the remaining 75% annually or quarterly over the following three years.

Time-based restricted stock granted under the GTT Stock Plan is valued at the closing stock price on the day of grant. Restricted stock generally vests over four years with 25% of the shares becoming unrestricted one year from the date of grant and the remaining 75% annually or quarterly over the following three years.

The Company uses the Black-Scholes option-pricing model to determine the fair value of its option awards at the time of grant. The fair value of the restricted stock awards was calculated using the value of GTT common stock on the grant date and is being amortized over the vesting periods in which the restrictions lapse.

Performance-based restricted stock is granted under the GTT Stock Plan subject to the achievement of certain performance measures. Once achievement of these performance measures is considered probable, the Company starts to expense the fair value of the grant over the vesting period. The performance-based restricted stock is valued at the closing price on the day of grant. The performance grant vests annually or quarterly over the vesting period once achievement of the performance measure has been met and approved by the Compensation Committee.

The Compensation Committee of the Board of Directors, as administrator of the Plan, has the discretion to authorize a different vesting schedule for any awards.

Share-Based Compensation Expense

The following tables summarize the share-based compensation expense recognized as a selling, general and administrative expense in the condensed consolidated statements of operations (amounts in thousands):
 
Three months ended March 31,
 
2017
 
2016
Stock options
$
341

 
$
427

Restricted stock
4,207

 
1,126

ESPP
28

 

Total
$
4,576

 
$
1,553

    

23



As of March 31, 2017, there was $37.4 million of total unrecognized compensation cost related to unvested share-based compensation awards. The following table summarizes the unrecognized compensation cost and the weighted average period over which the cost is expected to be amortized (amounts in thousands):

 
March 31, 2017
 
Unrecognized Compensation Cost
 
Weighted Average Remaining Period to be Recognized (Years)
Time-based stock options
$
2,790

 
1.77
Time-based restricted stock
28,115

 
2.39
Performance-based restricted stock
6,524

 
1.49
Total
$
37,429

 
2.18

The following tables summarize the stock options and restricted stock granted during the three months ended March 31, 2017 and 2016, respectively (amounts in thousands, except shares data):

 
Three months ended March 31,
 
2017
 
2016
Time-based stock options granted

 
144,958

Fair value of stock options granted
$

 
$
851

 
 
 
 
Time-based restricted stock granted
584,108

 
475,534

Fair value of time-based restricted stock granted
$
16,799

 
$
6,369

  
Performance-based Restricted Stock

The Company granted $8.5 million of restricted stock during 2014 and early 2015 contingent upon the achievement of certain performance criteria (the "2014 Performance Awards"). The fair value of the 2014 Performance Awards was calculated using the value of GTT common stock on the grant date. The Company started recognizing stock-based compensation expense for these grants when the achievement of the performance criteria became probable, which was in the third quarter of 2015. The 2014 Performance Awards started vesting in the fourth quarter of 2015 when the performance criteria were met and they will continue to vest ratably through the third quarter of 2017. As of March 31, 2017, unamortized compensation cost related to the unvested 2014 Performance Awards was $0.3 million.

In 2015, the Company granted $16.9 million of restricted stock contingent upon the achievement of certain performance criteria (the "2015 Performance Awards"). The fair value of the 2015 Performance Awards was calculated using the value of GTT common stock on the grant date. Upon announcement of the Hibernia acquisition in November 2016, the achievement of two of the four performance criteria became probable. The awards started vesting in the first quarter of 2017 and they will continue to vest ratably through the fourth quarter of 2018. Accordingly, the Company recognized share-based compensation expense of $1.1 million for the three months ended March 31, 2017. As of March 31, 2017, $8.4 million remains unrecorded for the two performance criteria that have not been met.

No additional performance awards were granted during the three months ended March 31, 2017.

Employee Stock Purchase Plan
    
The Company has an Employee Stock Purchase Plan ("ESPP") that permits eligible employees to purchase common stock through payroll deductions at the lessor of the opening stock price or 85% of the closing stock price of the common stock during each of the three-month offering periods. The offering periods generally commence on the first day and the last day of each quarter. At March 31, 2017, 409,513 shares were available for issuance under the ESPP. During the three months ended March 31, 2017, the compensation expense related to ESPP was immaterial. There was no ESPP expense for the three months ended March 31, 2016.
        
NOTE 8 — INCOME TAXES

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The Company’s provision for income taxes is determined using an estimate of its annual effective tax rate, adjusted for the effect of discrete items arising in the quarter. Each quarter we update our estimate of the annual effective tax rate.

The quarterly tax provision and the quarterly estimate of the Company's annual effective tax rate is subject to significant variation due to several factors, including variability in accurately predicting pre-tax and taxable income (loss) and the mix of jurisdictions to which they relate, effects of acquisitions and integrations, audit-related developments, changes in the Company's stock price, foreign currency gains (losses), and tax law developments. Additionally, the Company's effective tax rate may be more or less volatile based on the amount of pre-tax income or loss and impact of discrete items.

For the three months ended March 31, 2017, the Company recorded a tax benefit of $11.5 million, which included $5.3 million of net discrete tax benefits primarily attributable to excess tax benefits from stock-based compensation.

NOTE 9 — SEVERANCE, RESTRUCTURING AND OTHER EXIT COSTS

The Company incurred severance, restructuring and other exit costs associated with the acquisition of Hibernia. These costs include employee severance costs, termination costs associated with facility leases and network agreements, and other exit costs related to the transaction.

During the three months ended March 31, 2017, the Company incurred $10.7 million in charges associated with the acquisition of Hibernia. The Company paid $6.7 million in employee termination benefits related to Hibernia. The Company paid $0.1 million in lease terminations and $0.1 million in other contract terminations related to prior year acquisitions.

During the three months ended March 31, 2016, the Company incurred $1.5 million in charges associated with the acquisition of Telnes.

The total exit costs recorded and paid relating to the acquisitions mentioned above are summarized as follows for the three months ended March 31, 2017 (amounts in thousands):

 
Balance, December 31, 2016
 
Charges and Adjustments
 
Payments
 
Balance, March 31, 2017
Employee Termination Benefits
$
42

 
$
9,640

 
$
(6,696
)
 
$
2,986

Contract Terminations:
 
 
 
 
 
 
 
  Lease terminations
859

 
500

 
(98
)
 
1,261

  Other contract terminations
2,346

 
531

 
(123
)
 
2,754

 
$
3,247

 
$
10,671

 
$
(6,917
)
 
$
7,001


NOTE 10 — COMMITMENTS AND CONTINGENCIES

Estimated annual commitments under contractual obligations are as follows at March 31, 2017 (amounts in thousands):
 
Network Supply
 
Office Space
 
Capital Leases
 
Other
2017
$
95,268

 
$
2,536

  
$
815

 
$
4,442

2018
77,663

 
3,481

  

 
397

2019
38,985

 
2,893

  

 
103

2020
11,125

 
1,990

 

 

2021
5,666

 
1,478

 

 

2022 and beyond
43,606

 
5,235

 

 

 
$
272,313

 
$
17,613

 
$
815

 
$
4,942


Network Supply Agreements
 

25



As of March 31, 2017, the Company had purchase obligations of $272.3 million associated with the telecommunications services that the Company has contracted to purchase from its suppliers. The Company’s supplier agreements fall into two key categories, the Company's core IP backbone and customer specific locations (also referred to as 'last mile' locations). Supplier agreements associated with the Company's core IP backbone are typically contracted on a one-year term and do not relate to any specific underlying customer commitments. The short-term duration allows the Company to take advantage of favorable pricing trends.

Supplier agreements associated with the Company's customer specific locations, which represents the substantial majority of the Company's network spending are typically contracted so the terms and conditions in both the vendor and customer contracts are substantially the same in terms of duration and capacity. The back-to-back nature of the Company’s contracts means that its network supplier obligations are generally mirrored by its customers' commitments to purchase the services associated with those obligations.

Office Space and Leases
 
The Company is currently headquartered in McLean, Virginia and has 14 offices throughout North America, seven offices in Europe, one office in India and one office in Hong Kong. The Company records rent expense using the straight-line method over the term of the lease agreement. Office facility rent expense was $0.9 million and $1.0 million for the three months ended March 31, 2017 and 2016, respectively.

Legal Proceedings
 
From time to time, the Company is a party to legal proceedings arising in the normal course of its business. As of March 31, 2017, the Company does not believe that it is a party to any current or pending legal action that could reasonably be expected to have a material adverse effect on its financial condition or results of operations and cash flows. 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes and the other financial information included elsewhere in this Report, as well as the consolidated financial statements and Management's Discussion and Analysis ("MD&A") of our Annual Report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below. For a more complete description of the risks noted above and other risks that could cause our actual results to materially differ from our current expectations, please see Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which we refer to as our Annual Report. We assume no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

Executive Summary

GTT Communications, Inc. is a provider of cloud networking services to multinational clients. We offer a broad portfolio of global services including: private networking services, Internet services, optical transport, managed networking and security services, voice and unified communication services, and video transport services.

Our global Tier 1 IP network delivers connectivity for our clients around the world. We provide services to leading multinational enterprise, carrier and government customers in over 100 countries. We strive to differentiate ourselves from our competition by delivering service to our clients with simplicity, speed and agility.

We deliver six primary service offerings to our customers:

Private Networking Services

We provide Layer 2 (Ethernet) and Layer 3 (MPLS) private networking solutions to meet the growing needs of multinational enterprises, carriers, service providers and content delivery networks regardless of location. We design and implement custom private, public and hybrid cloud network solutions for our customers, offering bandwidth speeds from 10 Mbps to 100 Gbps per port with burstable and aggregate bandwidth capabilities. All services are available on a protected basis with the ability to specify pre-configured alternate routes to minimize the impact of any network disruption.


26



Through GTT's private networking services, clients can securely connect to cloud service providers in data centers and exchanges around the world. Our Cloud Connect feature provides private, secure, pre-established connectivity to leading cloud service providers. Clients can connect to GTT in one location and have access to a broad cloud service provider ecosystem from anywhere in the world.
 
Internet Services

We offer domestic and multinational customers scalable, high-bandwidth global Internet connectivity and IP transit with guaranteed availability and packet delivery. Our Internet services offer flexible connectivity with multiple port interfaces including Fast Ethernet, Gigabit Ethernet, 10 Gigabit Ethernet and 100 Gigabit Ethernet. We also offer broadband and wireless access services. We support a dual stack of IPv4 and IPv6 protocols, enabling the delivery of seamless IPv6 services alongside existing IPv4 services.

Optical Transport

We provide a full suite of optical transport services over a core fiber network, enabling cloud-based applications and the transport of high volume data between data centers, large enterprise office locations, and media hubs. Our native wavelength product is designed to deliver, scalable high performance optical connectivity over a state-of-the-art dense wave division multiplexing ("DWDM") platform. Our service is differentiated based on unique network diversity and low latency connections between major financial and commercial centers in North America and Europe. Our clients for these services include Internet-based technology companies and OTTs, large banks and other service providers requiring network infrastructure.

Additionally, we provide low latency services between the major financial centers and exchanges, tailored to meet the requirements of proprietary trading firms for the fastest connections. Our service provides the industry leading lowest latency performance of the Express transatlantic subsea cable connecting North America and Europe, which is wholly owned and operated by GTT.

Managed Services

We offer fully managed network services, including managed equipment, managed security services and managed secure access, enabling customers to focus on their core business. These end-to-end services cover the design, procurement, implementation, monitoring and maintenance of a customer’s network.

Managed CPE. Managed CPE provides a turnkey solution for the end-to-end management of customer premise equipment, from premises through the core network. This includes the design, procurement, implementation, monitoring and maintenance of equipment including routers, switches, servers and Wi-Fi access points.

Security Services. Our cloud-based and premises-based security services provide a comprehensive, multi-layered security solution that protects the network while meeting the most stringent security standards. Our Unified Threat Management (“UTM”) services include advanced firewall, intrusion detection, anti-virus, web filtering and anti-spam. UTM services also cover a broad range of compliance requirements, offering customers Security-as-a-Service versions of managed logging, vulnerability scanning and security information management that meet numerous security standards, including Payment Card Industry / Cardholder Information Security Program compliance.

Managed Remote Access. Our Managed Remote Access service provides clients of all sizes with secure remote access to their network applications from any device, anywhere, anytime from any authorized user. Managed Remote Access extends network reach, allowing trusted users to establish a secure data connection from any browser or device using Transport Layer Security to encrypt all traffic and protect the network from unauthorized users.

Managed Software Defined Wide Area Networking (“SD-WAN”).  Leveraging our success to date in delivering hybrid WAN services, GTT’s Managed SD-WAN service provides our clients with optimized application performance and cost-effective network expansion, as well as dynamic bandwidth management, and the ability to integrate cost-effective network technologies into the corporate WAN.  With a Tier 1 IP network, extensive connectivity to leading cloud service providers across 300+ global points of presence, and a broad portfolio of diverse last mile connectivity options to any location in the world, GTT is well positioned to deliver managed SD-WAN services.
        
Voice and Unified Communication Services

Our SIP Trunking service is an enterprise-built unified communications offering that integrates voice, video and chat onto a

27



single IP connection, driving efficiency and productivity organization-wide. Our Enterprise PBX service allows clients to eliminate traditional voice infrastructure with communication services delivered through the cloud. The offering includes fully hosted and hybrid models for maximum flexibility.

SIP Trunking. Our SIP Trunking service is an enterprise-built unified communications offering that integrates voice, video and chat onto a single IP connection, driving efficiency and productivity organization-wide. The service is interoperable with key unified communications platforms such as Cisco, Avaya, ShoreTel, Siemens and Microsoft to support collaboration requirements, as well as with legacy infrastructure. SIP Trunking brings substantial cost savings by eliminating legacy infrastructure and providing more predictable local and long-distance costs. SIP Trunking is delivered over our fully redundant and robust global network that is purpose-built to handle bandwidth-intensive communication services. The service includes a full suite of international telephony services, including direct inward dialing, toll-free numbers, termination and emergency services. We also offer customized redundancy options to meet clients' most stringent disaster recovery requirements, as well as a secure trunking option for encryption of sensitive call signaling and media.

Enterprise PBX. Our Enterprise PBX service allows clients to eliminate traditional voice infrastructure with communication services delivered through the cloud. The offering includes fully hosted and hybrid models for maximum flexibility. Enterprise PBX includes full PBX features, such as call transfer, music on hold, voicemail, unified messaging, company directory, auto attendant and enhanced call routing. The user management portal provides integrated and consistent functionality, regardless of user location. Clients can further expand capabilities through additional cloud-based features, such as contact center and audio conferencing.

Video Transport

We provide a suite of fully-managed video transport services. Our services are designed to support our clients' requirements for stringent broadcast quality, providing 100% quality of service for transmission of live events, sports entertainment and news. Our service options include Dedicated, Occasional Use and IP Video. We manage individual services, multicast distribution, and entire client networks, supporting all forms of signal management required for today's media workflow. GTT's video transport services are based on the core principle of "any signal, any format, anywhere." Our clients include many of the world's top broadcasters and cable programming providers.

Our customer contracts generally range from one to five years or more for the initial term. Following the initial term, these agreements typically provide for automatic renewal for specified periods ranging from one month to one year. Our prices are fixed for the duration of the contract, and we typically bill monthly 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 any underlying suppliers.

Our revenue is composed of three primary categories that include monthly recurring revenue (or "MRR"), non-recurring revenue, and usage revenue. MRR relates to contracted ongoing service that is generally fixed in price and paid by the customer on a monthly basis for the contracted term. For the three months ended March 31, 2017, MRR was approximately 92% of our total revenue. Non-recurring revenue primarily includes the amortization of previously collected installation and equipment charges to customers, and one-time termination charges for customers who cancel their services prior to the contract termination date. Usage revenue represents variable revenue based on whether a customer exceeds its committed usage threshold as specified in the contract.

Our network supplier contracts do not have any market related net settlement provisions. We have not entered into, and do not plan 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 us in the normal course of business.

Other than cost of telecommunication services provided, our most significant operating expenses are employment costs. As of March 31, 2017, we had 830 full-time equivalent employees. For the three months ended March 31, 2017, the total employee cash compensation and benefits represented approximately 13% of total revenue.

Recent Developments Affecting Our Results

Business Acquisitions

Since our formation, we have consummated a number of transactions accounted for as business combinations which were executed as part of our strategy of expanding through acquisitions. These acquisitions, which are in addition to our periodic purchases of customer contracts, have allowed us to increase the scale at which we operate which in turn affords us the ability to increase our

28



operating leverage, extend our network, and broaden our customer base. The accompanying condensed consolidated financial statements include the operations of the acquired entities from their respective acquisition dates.



Hibernia

In January 2017, we acquired Hibernia Networks ("Hibernia") for $527.6 million in cash consideration, of which $14.6 million was net cash acquired, and 3,329,872 unregistered shares of our common stock. The results of Hibernia have been included in our results from January 1, 2017.

Asset Purchases

Periodically we acquire customer contracts that we account for as an asset purchase and record a corresponding intangible asset that is amortized over its assumed useful life. During the three months ended March 31, 2017 we acquired one portfolio of customer contracts for an aggregate purchase price of $10.9 million, of which $3.9 million was paid in February at closing. The remaining $7.0 million is expected to be paid in 2017 and 2018, subject to any indemnification claims made through the final payment date. During 2016 we acquired two portfolios of customer contracts for an aggregate purchase price of $41.3 million, of which $20.0 million was paid in 2016 at the respective closing dates. The remaining $21.3 million is expected to be paid in 2017, subject to any indemnification claims made through the final payment dates.

Indebtedness

The following summarizes our long-term debt at March 31, 2017 and December 31, 2016 (amounts in thousands):

 
March 31, 2017
 
December 31, 2016
 
 
 
 
Term loan
$
698,250

 
$
425,775

7.875% Senior unsecured notes
300,000

 
300,000

Revolving line of credit

 
20,000

Total debt obligations
998,250

 
745,775

Unamortized debt issuance costs
(29,618
)
 
(9,310
)
Unamortized original issuance discount
(8,278
)
 
(6,957
)
Carrying value of debt
960,354

 
729,508

Less current portion
(7,000
)
 
(4,300
)
 
$
953,354

 
$
725,208


2017 Credit Agreement

In January 2017, we entered into a credit agreement (the "2017 Credit Agreement") that provides a $700.0 million term loan facility and a $75.0 million revolving line of credit facility (which includes a $25.0 million letter of credit facility). In addition, we may request incremental term loan and/or incremental revolving loan commitments in an aggregate amount not to exceed the sum of $150.0 million and an unlimited amount that is subject to pro forma compliance with certain net secured leverage ratio tests provided, however, that incremental revolving loan commitments may not exceed $25.0 million.

The maturity date of the term loan facility is January 2024 and the maturity date of the revolving loan facility is January 2022. Each maturity date may be extended per the terms of the 2017 Credit Agreement. The principal amount of the term loan facility is payable in equal quarterly installments of $1.8 million, commencing on March 31, 2017 and continuing thereafter until the maturity date, when the remaining balance of outstanding principal amount is payable in full.

We may prepay loans under the 2017 Credit Agreement at any time, subject to certain notice requirements and LIBOR breakage costs. If within six months after entering into the 2017 Credit Agreement certain prepayments are made or any amendment reduces the “effective yield” applicable to all or a portion of the term loan, such prepayment or repriced portions of the term loan will be subject to a penalty equal to 1.00% of the outstanding term loan being prepaid or repriced.


29



At our election, the loans under the 2017 Credit Agreement may be made as either Base Rate Loans or Eurodollar Loans, with applicable margins at 3.00% for Base Rate Loans and 4.00% for Eurodollar loans. The Eurodollar Loans are subject to a floor of 1.00%, and the applicable margin for revolving loans is 2.50% for Base Rate Loans and 3.50% for Eurodollar Loans. The obligations under the 2017 Credit Agreement are secured by the substantial majority of our tangible and intangible assets.

The 2017 Credit Agreement does not contain a financial covenant for the term loan facility, but includes a maximum consolidated net secured leverage ratio applicable to the revolving credit facility in the event that utilization exceeds 30% of the revolving loan facility commitment.

7.875% Senior Unsecured Notes

In December 2016 we completed a private offering of $300.0 million aggregate principal amount of 7.875% senior unsecured notes due in 2024 (the "Notes"). The proceeds of the Notes were deposited into escrow, where the funds remained until the closing of the acquisition of Hibernia in January 2017. We recognized the proceeds from the private offering as restricted cash and cash equivalents in our consolidated financial statements as of December 31, 2016, which were subsequently released with the closing of Hibernia. In connection with the offering, we incurred debt issuance costs of $11.2 million, of which $0.5 million was incurred in 2016 and the remainder was incurred in 2017.

Previous Debt Agreement

In October 2015, we entered into a the October 2015 Credit Agreement, which provided for a $400.0 million term loan facility and a $50.0 million revolving line of credit facility (which includes a $15.0 million letter of credit facility and a $10.0 million swingline facility). The maturity date of the term loan facility was October 22, 2022, and the maturity date of the revolving line of credit is October 22, 2020.

In May 2016, we entered into an incremental term loan agreement that increased outstanding term loans by $30.0 million, the proceeds of which were used to repay the then outstanding revolving loans.

In June 2016, we entered into Amendment No. 1 (the "Repricing Amendment") to the October 2015 Credit Agreement. The Repricing Amendment, among other things, reduced the applicable rate for term loans to LIBOR plus 4.75% (subject to a LIBOR floor of 1.00%) and reduced the applicable rate for revolving loans to LIBOR plus 4.25% (with no LIBOR floor).

As of December 31, 2016, we had drawn $20.0 million under the revolving line of credit and had $29.5 million of available borrowing capacity. Approximately $0.5 million of the revolving line of credit was utilized for outstanding letters of credit relating to our real estate lease obligations.

Our obligations under the October 2015 Credit Agreement were guaranteed by certain of our subsidiaries and secured by substantially all of our tangible and intangible assets. The October 2015 Credit Agreement was repaid in full in connection with the 2017 Credit Agreement.

In connection with the 2017 Credit Agreement and the issuance of the Notes, we expensed an aggregate $5.7 million of debt issuance costs and OID that did not qualify for deferral as a Loss on Debt Extinguishment in the condensed consolidated statement of operations.

Critical Accounting Policies and Estimates
 
Our consolidated financial statements have been prepared in accordance with GAAP. For information regarding our critical accounting policies and estimates, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and Note 1 to our consolidated financial statements contained therein. There have been no material changes to the critical accounting policies previously disclosed in that report.
 
Results of Operations

Three months ended March 31, 2017 compared to three months ended March 31, 2016
 
Overview. The financial information presented in the tables below is comprised of the unaudited condensed consolidated financial information for the three months ended March 31, 2017 and 2016 (amounts in thousands):
 

30



 
Three Months Ended March 31,
 
2017
 
2016
 
$ Variance
% Change
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
Telecommunications services
$
182,365

 
$
124,437

 
$
57,928

46.6
 %
 
 
 
 
 
 


Operating expenses:
 
 
 
 
 
 
Cost of telecommunications services
91,369

 
66,197

 
25,172

38.0
 %
Selling, general and administrative expenses
52,933

 
32,194

 
20,739

64.4
 %
Severance, restructuring and other exit costs
10,671

 
1,495

 
9,176

613.8
 %
Depreciation and amortization
30,360

 
15,598

 
14,762

94.6
 %
 
 
 
 
 
 
 
Total operating expenses
185,333

 
115,484

 
69,849

60.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 


Operating (loss) income
(2,968
)
 
8,953

 
(11,921
)
(133.2
)%
 
 
 
 
 
 


Other expense:
 
 
 
 
 
 
Interest expense, net
(15,833
)
 
(7,370
)
 
(8,463
)
114.8
 %
Loss on debt extinguishment
(5,659
)
 

 
(5,659
)
*

Other expense, net
(107
)
 
(280
)
 
173

(61.8
)%
 
 
 
 
 
 


Total other expense
(21,599
)
 
(7,650
)
 
(13,949
)
182.3
 %
 
 
 
 
 
 


(Loss) income before income taxes
(24,567
)
 
1,303

 
(25,870
)
(1,985.4
)%
 
 
 
 
 
 


(Benefit from) provision for income taxes
(11,456
)
 
405

 
(11,861
)
*

 
  

 
  

 
 


Net (loss) income
$
(13,111
)
 
$
898

 
$
(14,009
)
(1,560.0
)%
* - Not meaningful

The following table supplements the information presented above for selling, general and administrative expenses for the three months ended March 31, 2017 and 2016 (amounts in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Employee related compensation (excluding share-based compensation)
$
27,519

 
$
20,200

Share-based compensation
4,576

 
1,553

Transaction and integration expense
8,086

 
1,260

Other SG&A(1)
12,752

 
9,181

Total
$
52,933

 
$
32,194

(1) Includes professional fees, marketing costs, facilities and other general support costs.
 
Revenue
Our revenue increased by $57.9 million, or 46.6%, from $124.4 million for the three months ended March 31, 2016 to $182.4 million for the three months ended March 31, 2017. The increase was primarily due to the acquisition of Hibernia, as well as organic growth and the purchase of certain customer contracts.

On a constant currency basis using the average exchange rates in effect during the three months ended March 31, 2016 revenue would have been higher by $3.2 million for the three months ended March 31, 2017.

31



 
Cost of Telecommunications Services Provided
Cost of telecommunications services provided increased by $25.2 million, or 38.0%, from $66.2 million for the three months ended March 31, 2016 to $91.4 million for the three months ended March 31, 2017. Consistent with our increase in revenue, the increase in cost of telecommunications services provided was principally driven by the acquisition of Hibernia, as well as organic growth and the purchase of certain customer contracts.

On a constant currency basis using the average exchange rates in effect during the three months ended March 31, 2016, cost of telecommunications services provided would have been higher by $1.5 million for the three months ended March 31, 2017.
 
Operating Expenses
Selling, General and Administrative Expenses. SG&A expenses increased by $20.7 million, or 64.4%, from $32.2 million for the three months ended March 31, 2016 to $52.9 million for the three months ended March 31, 2017. Cash compensation expense increased $7.3 million or 36.2% from $20.2 million for the three months ended March 31, 2016 to $27.5 million for the three months ended March 31, 2017, primarily due to the Hibernia acquisition.

Share-based compensation expense increased by $3.0 million, or 187.5%, from $1.6 million for the three months ended March 31, 2016 to $4.6 million for the three months ended March 31, 2017 driven by the recognition of share-based compensation for performance awards where the performance criteria have been met and an overall increase in quantity of employee equity awards. Transaction and integration costs increased by $6.8 million, or 523.1% from $1.3 million for the three months ended March 31, 2016 to $8.1 million for the three months ended March 31, 2017. Other SG&A expense increased $3.6 million, or 39.1%, from $9.2 million for the three months ended March 31, 2016 to $12.8 million for the three months ended March 31, 2017, primarily as a result of the acquisition of Hibernia.

Severance, Restructuring and Other Exit Costs. For the three months ended March 31, 2017, we incurred restructuring charges of $10.7 million relating to the Hibernia acquisition. We incurred $1.5 million related to the acquisition of Telnes for the three months ended March 31, 2016.

Depreciation and Amortization. Amortization of intangible assets increased $6.8 million or 73.5%, from $9.2 million to $16.0 million for the three months ended March 31, 2017, due to the additional definite-lived intangible assets recorded in the Hibernia acquisitions. Depreciation expense increased $8.0 million, or 125.3% from $6.4 million to $14.4 million for the three months ended March 31, 2017, primarily due to the assets acquired from the Hibernia acquisition.

Other Expense. Other expense increased by $13.9 million to $21.6 million for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. This is primarily attributed to higher interest expense due to higher debt levels driven by the Hibernia acquisition.
 
On a constant currency basis using the average exchange rates in effect during the three months ended March 31, 2016, operating expenses would have been higher by $0.5 million for the three months ended March 31, 2017. Selling, general and administrative expenses are the only operating expenses that would have been impacted by the change in exchange rates.

Liquidity and Capital Resources

Our primary sources of liquidity have been cash provided by operations, equity offerings and debt financings. Our principal uses of cash have been for acquisitions, working capital, capital expenditures, and debt service requirements. We anticipate that our principal uses of cash in the future will be for acquisitions, capital expenditures, working capital, and debt service.
 
Management monitors cash flow and liquidity requirements on a regular basis, including an analysis of the anticipated working capital requirements for the next 12 months. This analysis assumes our ability to manage expenses, capital expenditures, indebtedness and the anticipated growth of revenue. 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 we are unable to fully fund our cash requirements through operations and current cash on hand, we may need to obtain additional financing through a combination of equity and debt financings and/or renegotiation of terms of our existing debt. If any such activities become necessary, there can be no assurance that we would be successful in obtaining additional financing or modifying our existing debt terms.

As of March 31, 2017, we had approximately $33.0 million in cash and cash equivalents, and our current liabilities were $164.3 million including $27.3 million of earn-outs and holdback obligations; accrued severance and exit costs totaling $7.0 million and $22.1 million of deferred revenue associated with prior period capacity sales we acquired from Hibernia. We believe that cash

32



currently on hand, expected cash flows from future operations and existing borrowing capacity are sufficient to fund operations for at least the next 12 months.

Our capital expenditures increased by $1.0 million, or 13.3% from $7.5 million for the three months ended March 31, 2016 to $8.5 million for the three months ended March 31, 2017. The increase in capital expenditures was due to our growth and the acquisition of Hibernia. We anticipate that we will incur capital expenditures in the range of 6% to 7% of revenue in 2017. We continue to expect that our capital expenditures will be primarily success-based, i.e., in support of specific revenue opportunities.

Cash Flows

We believe that our cash flows from operating activities, in addition to cash on-hand, will be sufficient to fund our operating activities and capital expenditures for the forseeable future, and in any event for at least the next 12 to 18 months. However, no assurance can be given that this will be the case.

The following table summarizes the components of our cash flows for the three months ended March 31, 2017 and 2016 (amounts in thousands):
Consolidated Statements of Cash Flows
Three Months Ended March 31,
 
2017
 
2016
Net cash provided by operating activities
$
2,191

 
$
6,251

Net cash used in investing activities
(221,218
)
 
(21,268
)
Net cash provided by financing activities
221,665

 
11,444


Cash Provided by Operating Activities
 
Our largest source of cash provided by operating activities is monthly recurring revenue from our customers. Our primary uses of cash are payments to network suppliers, compensation related costs and third-party vendors such as agents, contractors, and professional service providers.

Net cash flows from operating activities decreased by $4.1 million, or 64.9%, from $6.3 million for the three months ended March 31, 2016 to $2.2 million for the three months ended March 31, 2017. Cash provided by operating activities during the three months ended March 31, 2017 included $6.9 million cash paid for severance and exit costs, $8.1 million cash paid for transaction and integration costs, $11.6 million change in deferred revenue, driven principally by the amortization of prior prepaid capacity sales, and a working capital use of $2.5 million.

Cash Used in Investing Activities

Our primary uses of cash include acquisitions, purchases of customer contracts and capital expenditures.

Net cash flows used in investing activities increased by $199.9 million, or 938.5% from $21.3 million for the three months ended March 31, 2016 to $221.2 million for the three months ended March 31, 2017.

Cash used for the three months ended March 31, 2017 primarily consisted of $513.1 million for the Hibernia acquisition as well as certain customer contract purchases for which we paid $3.9 million, and capital expenditures of approximately $8.5 million.

Cash Provided by Financing Activities

Our primary source of cash for financing activities is debt financing proceeds. Our primary use of cash for financing activities is the refinancing of our debt and repayment of principal pursuant to the debt agreements.

Net cash flows from financing activities increased by $210.3 million, or 1,844.7% from $11.4 million for the three months ended March 31, 2016 to $221.7 million for the three months ended March 31, 2017, consisting primarily of net proceeds from the term loan to fund the Hibernia acquisition.

Off-Balance Sheet Arrangements, Contractual Obligations and Commitments
 
As of March 31, 2017, we had contractual payment obligations of approximately $1,293.9 million.

33




The following table summarizes our significant contractual obligations as of March 31, 2017 (amounts in thousands):
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Term loan
$
698,250

 
$
5,250

 
$
14,000

 
$
14,000

 
$
665,000

7.875% Senior unsecured note
300,000

 

 

 

 
300,000

Operating leases
17,613

 
2,536

 
6,374

 
3,468

 
5,235

Capital leases
815

 
815

 

 

 

Network supplier agreements
272,313

 
95,268

 
116,648

 
16,791

 
43,606

Other
4,942

 
4,442

 
500

 

 

 
$
1,293,933

 
$
108,311

 
$
137,522

 
$
34,259

 
$
1,013,841


As of March 31, 2017, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
 

Non-GAAP Financial Measures

In addition to financial measures prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), from time to time we may use or publicly disclose certain "non-GAAP financial measures" in the course of our financial presentations, earnings releases, earnings conference calls, and otherwise. For these purposes, the U.S. Securities and Exchange Commission (“SEC”) defines a "non-GAAP financial measure" as a numerical measure of historical or future financial performance, financial positions, or cash flows that (i) exclude amounts, or is subject to adjustments that effectively exclude amounts, included in the most directly comparable measure calculated and presented in accordance with GAAP in financial statements, and (ii) include amounts, or is subject to adjustments that effectively include amounts, that are excluded from the most directly comparable measure so calculated and presented.

Non-GAAP financial measures are provided as additional information to investors to provide an alternative method for assessing our financial condition and operating results. We believe that these non-GAAP measures, when taken together with our GAAP financial measures, allow us and our investors to better evaluate our performance and profitability. These measures are not in accordance with, or a substitute for, GAAP, and may be different from or inconsistent with non-GAAP financial measures used by other companies. These measures should be used in addition to and in conjunction with results presented in accordance with GAAP, and should not be relied upon to the exclusion of GAAP financial measures.

Pursuant to the requirements of Regulation G, whenever we refer to a non-GAAP financial measure we will also generally present the most directly comparable financial measure calculated and presented in accordance with GAAP, along with a reconciliation of the differences between the non-GAAP financial measure we reference with such comparable GAAP financial measure.

Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)

Adjusted EBITDA is defined by us as income/(loss) before interest, income taxes, depreciation and amortization ("EBITDA") adjusted to exclude severance, restructuring and other exit costs, acquisition-related transaction and integration costs, losses on extinguishment of debt, share-based compensation, and from time to time, other non-cash or non-recurring items.

We use Adjusted EBITDA to evaluate operating performance, and this financial measure is among the primary measures we use for planning and forecasting future periods. We further believe that the presentation of Adjusted EBITDA is relevant and useful for investors because it allows investors to view results in a manner similar to the method used by management and makes it easier to compare our results with the results of other companies that have different financing and capital structures. The 2017 Credit Agreement does not contain a financial covenant for the term loan facility, but includes a maximum consolidated net secured leverage ratio that utilizes a modified EBITDA calculation. The modified EBITDA calculation is similar to our definition of Adjusted EBITDA; however it includes the pro forma Adjusted EBITDA of and expected cost synergies from the companies acquired by us during the applicable reporting period. Finally, Adjusted EBITDA results, along with other quantitative and qualitative information, are utilized by management and our compensation committee for purposes of determining bonus payouts to our employees.

34




Adjusted EBITDA Less Capital Expenditures

Adjusted EBITDA less purchases of property and equipment, which we also refer to as capital expenditures or capex, is a performance measure that we use to evaluate the appropriate level of capital expenditures needed to support our expected revenue, and to provide a comparable view of our performance relative to other telecommunications companies who may utilize different strategies for providing access to fiber-based services and related infrastructure. We use a “capex light” strategy, which means we purchase fiber-based services and related infrastructure from other providers on an as-needed basis, pursuant to our customers’ requirements. Many other telecommunications companies spend significant amounts of capital expenditures to construct their own fiber networks and data centers, and attempt to purchase as little as possible from other providers. As a result of our strategy, we typically have lower Adjusted EBITDA margins compared to other providers, but also spend much less on capital expenditures relative to our revenue. We believe it is important to take both of these factors into account when evaluating our performance.
The following is a reconciliation of Adjusted EBITDA and Adjusted EBITDA less Capital Expenditures from Net (Loss) Income:

 
Three Months Ended March 31,
(Amounts in thousands, except share and per share data)
2017
 
2016
 
 
 
 
Adjusted EBITDA
 
 
 
Net (loss) income
$
(13,111
)
 
$
898

 (Benefit from) provision for income taxes
(11,456
)
 
405

Interest and other expense, net
15,940

 
7,650

Loss on debt extinguishment
5,659

 

Depreciation and amortization
30,360

 
15,598

Severance, restructuring and other exit costs
10,671

 
1,495

Transaction and integration costs
8,086

 
1,260

Share-based compensation
4,576

 
1,553

Adjusted EBITDA
50,725

 
28,859

 
 
 
 
Purchases of property and equipment
(8,471
)
 
(7,517
)
Adjusted EBITDA less capital expenditures
$
42,254

 
$
21,342


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks. These risks, which include interest rate risk and foreign currency exchange risk, arise in the normal course of business rather than from trading activities.

Interest Rate Sensitivity
 
Our exposure to market risk for changes in interest rates is primarily related to our outstanding term loans and revolving loans. As of March 31, 2017, we had $698.3 million in term loans and no revolving loans. The interest expense associated with our term loan and revolving loan will vary with market rates.

For purposes of the following hypothetical calculations, we have used the 2017 Credit Agreement, which carries an interest rate equal to either Base Rate Loans with applicable margin at 3.0% or Eurodollar Loans at 4.0%, subject to a floor of 1.0%. Based on current rates, a hypothetical 100 basis point increase in Eurodollar rate would increase annual interest expense by approximately $7.1 million, which would decrease our income and cash flows by the same amount. A hypothetical increase of the Eurodollar rate to 4%, the average historical three-month rate, would increase annual interest expense by approximately $20.2 million, which would decrease our income and cash flows by the same amount.

We do not currently use derivative financial instruments and have not entered into any interest rate hedging transactions, but we may do so in the future.

35




Exchange Rate Sensitivity
 
Our exposure to market risk for changes in foreign currency rate relates to our global operations. Our consolidated financial statements are denominated in U.S. Dollars, but a portion of our revenue, cost of telecommunications services provided and selling, general and administrative expenses are recorded in the local currency of our foreign subsidiaries. Accordingly, changes in exchange rates between the applicable foreign currency and the U.S. Dollar will affect the translation of each foreign subsidiary’s financial results into U.S. Dollars for purposes of reporting consolidated financial results.

Approximately 17% of our revenues for the three months ended March 31, 2017 were generated by non-US entities, of which approximately 11% was recorded in GBP, 4% was recorded in Euros and 2% remainder was recorded predominantly in Canadian dollars. Approximately 16% of our cost of telecommunications services provided and approximately 16% of our selling, general and administrative expenses for the three months ended March 31, 2017 were generated by the same non-US entities. Therefore, it is highly unlikely that changes in exchange rates would have a material impact on our financial condition or results of operations.

We do not currently use derivative financial instruments and have not entered into any foreign currency hedging transactions, but we may do so in the future.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management carried out an evaluation required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the supervision of and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15 and 15d-15 under the Exchange Act (“Disclosure Controls”).
 
Based on our evaluation, our CEO and CFO concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
 
Our evaluation excluded Hibernia which was acquired in January 2017. On a pro forma basis, as of and for the three months ended December 31, 2016 Hibernia represented approximately 38% of total assets and 23% of total revenue. These percentages did not differ significantly for the three months post acquisition. In accordance with guidance issued by the SEC, companies are allowed to exclude acquisitions from their assessment of internal controls over financial reporting during the first year subsequent to the acquisition while integrating the acquired operations.

The CEO and the CFO, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of March 31, 2017, and based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) as of March 31, 2017, that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.



36



PART II – OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
From time to time, we are party to legal proceedings arising in the normal course of business. We do not believe that we are party to any current or pending legal action that could reasonably be expected to have a material adverse effect on our financial condition or results of operations.

ITEM 1A. RISK FACTORS
 
There have been no material changes to the risk factors disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as filed with the SEC on March 9, 2017.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

On May 4, 2017, we entered into a third amendment to the employment agreement of Richard D. Calder, our President and Chief Executive Officer, a first amendment to the employment agreement of Chris McKee, our General Counsel and Executive Vice President, Corporate Development, and a first amendment to the employment agreement of Michael Sicoli, our Chief Financial Officer (together, the “Amendments”). Each Amendment provides that, in the event that our employment of one of Messrs. Calder, McKee or Sicoli, as applicable, (the “Executive”) is terminated by us without Cause (as such term is defined in the underlying employment agreement) or by the Executive for Good Reason (as such term is defined in the underlying employment agreement), then the Executive shall be entitled to (i) his base salary through the effective date of such termination, (ii) the continuation of his base salary and health benefits for a period of twelve months following such termination, (ii) his annual bonus on a pro-rated basis through the effective date of such termination as measured for that calendar year; and (iv) 100% of the target annual bonus the Executive would have been eligible to receive for the twelve month period after the date of such termination, except that the Amendment with Mr. Calder’s provides that Mr. Calder shall be entitled to 100% of the target annual bonus he would have been eligible to receive for the eighteen month period after the date of such termination.


The foregoing description of the Amendments is qualified in its entirety by reference to the full text of the Amendments, copies of which are attached hereto as Exhibits 10.2, 10.3 and 10.4, respectively, and are incorporated herein by reference.


During the three months ended March 31, 2017, there were no changes to the procedures by which our security holders may recommend nominees to our board of directors.


37



ITEM 6. 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
 
Number
Description of Document
 
 
4.1
First Supplemental Indenture, dated as of January 9, 2017, by and among the Company, the Guaranteeing Subsidiaries party thereto and Wilmington Trust, National Association, as trustee (previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed January 13, 2017, and incorporated herein by reference).
 
 
10.1
Credit Agreement, dated as of January 9, 2017, by and among (1) the Company, as borrower, (2) KeyBank National Association, as the administrative agent and as an LC Issuer, (3) KeyBanc Capital Markets Inc., Credit Suisse Securities (USA) LLC and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and joint bookrunners, (4) Credit Suisse AG, Cayman Islands Branch, and SunTrust Bank, as the syndication agents, (5) Citizens Bank, Wells Fargo Bank, National Association, and ING Capital LLC, as the documentation agents and (6) the lenders party thereto (previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed January 13, 2017, and incorporated herein by reference).
 
 
10.2*+
Amendment No. 3 to the Employment Agreement for Richard D. Calder, dated May 4, 2017.
 
 
10.3*+
Amendment No. 1 to the Employment Agreement for Christopher McKee, dated May 4, 2017.
 
 
10.4*+
Amendment No. 1 to the Employment Agreement for Michael Sicoli, dated May 4, 2017.
 
 
31.1*
Certification of Chief Executive Officer of the Registrant, pursuant to Rules 13a-14(a) of the Securities Exchange Act of 1934.
 
 
31.2*
Certification of Chief Financial Officer of the Registrant, pursuant to Rules 13a-14(a) of the Securities Exchange Act of 1934.
 
 
32.1*
Certification of Chief Executive Officer of the Registrant, 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 of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
99.1
GTT Communications, Inc. 2016 Employee Stock Purchase Plan (previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed March 30, 2016, and incorporated herein by reference).
 
 
101*
 The following financial statements and footnotes from GTT Communications, Inc.’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (unaudited); (ii) Condensed Consolidated Statements of Operations (unaudited); (iii) Condensed Consolidated Statements of Comprehensive Income (Loss); (iv) Condensed Consolidated Statement of Stockholders' Equity (unaudited); (v) Condensed Consolidated Statements of Cash Flows (unaudited); and (v) Notes to Condensed Consolidated Financial Statements.
 
*
Filed herewith
+
Denotes a management or compensatory plan or arrangement
  


38



SIGNATURES
 
Pursuant to the requirements 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.
 
 
 
GTT Communications, Inc.
 
 
 
 
 
 
By:
/s/ Richard D. Calder, Jr.
 
 
 
Richard D. Calder, Jr.
 
 
 
President, Chief Executive Officer and
 
 
 
Director (Principal Executive Officer)
 
 
 
 
 
 
By:
/s/ Michael T. Sicoli
 
 
 
Michael T. Sicoli
 
 
 
Chief Financial Officer