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, 2015
 
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, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large Accelerated Filer ¨
 
Accelerated Filer þ
 
 
 
Non-Accelerated Filer ¨
 
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
 
As of May 7, 2015 , 34,857,446 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
(Amounts in thousands, except for share and per share data) 
 
March 31, 2015
 
December 31, 2014
 
(Unaudited)
 
(Note 1)
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
52,087

 
$
49,256

Accounts receivable, net of allowances of $871 and $878, respectively
29,084

 
29,328

Deferred contract costs
3,457

 
2,351

Prepaid expenses and other current assets
3,345

 
3,913

Total current assets
87,973

 
84,848

Property and equipment, net
22,675

 
25,184

Intangible assets, net
54,222

 
58,630

Other assets
7,672

 
7,933

Goodwill
92,683

 
92,683

 Total assets
$
265,225

 
$
269,278

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
21,221

 
$
20,336

Accrued expenses and other current liabilities
31,200

 
35,464

Short-term debt
7,156

 
6,188

Deferred revenue
8,709

 
8,340

  Total current liabilities
68,286

 
70,328

Long-term debt
115,094

 
117,438

Deferred revenue
609

 
766

Other long-term liabilities
3,040

 
3,180

  Total liabilities
187,029

 
191,712

 
 
 
 
Commitments and contingencies (Note 11)


 


 
 
 
 
Stockholders' equity:
 

 
 

Common stock, par value $.0001 per share, 80,000,000 shares authorized, 34,026,212, and 33,848,543 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively
3

 
3

Additional paid-in capital
168,701

 
167,678

Accumulated deficit
(88,138
)
 
(89,205
)
Accumulated other comprehensive loss
(2,370
)
 
(910
)
       Total stockholders' equity
78,196

 
77,566

       Total liabilities and stockholders' equity
$
265,225

 
$
269,278

 
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, 2015
 
March 31, 2014
 
 
 
 
Revenue:


 


Telecommunications services sold
$
62,353

 
$
47,469




 


Operating expenses:


 


Cost of telecommunications services provided
37,697

 
29,888

Selling, general and administrative expense
14,869

 
9,656

Depreciation and amortization
7,498

 
5,556




 


Total operating expenses
60,064

 
45,100




 


Operating income
2,289

 
2,369




 


Other expense:


 


Interest expense, net
(1,581
)
 
(2,410
)
Other expense, net
(48
)
 
(8,879
)


 

Total other expense
(1,629
)
 
(11,289
)

  

 
  

Income (loss) before income taxes
660


(8,920
)



 


(Benefit from) provision for income taxes
(407
)
 
746


  

 
  

Net income (loss)
$
1,067

 
$
(9,666
)

  

 
  

Income (loss) per share:


 


Basic
$
0.03

 
$
(0.41
)
Diluted
$
0.03

 
$
(0.41
)



 


Weighted average shares:


 


Basic
33,935,481

 
23,444,384

Diluted
34,659,757

 
23,444,384

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


4



GTT Communications, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(Amounts in thousands)
 
 
 
Three Months Ended
 
 
March 31, 2015
 
March 31, 2014
 
 
 
 
 
Net income (loss)
 
$
1,067

 
$
(9,666
)

 


 


Other comprehensive income (loss):
 


 


Foreign currency translation
 
(1,460
)
 
(48
)
Comprehensive loss
 
$
(393
)
 
$
(9,714
)
 
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)
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
Common Stock
 
Additional
Paid -In
 
Accumulated
 
Other
Comprehensive
 
 
 
Shares
 
Amount
 
Capital
 
Deficit
 
Loss
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
33,848,543

 
$
3

 
$
167,678

 
$
(89,205
)
 
$
(910
)
 
$
77,566

 
 
 
 
 
 
 
 
 
 
 
 
Share-based compensation for options issued
—

 
—

 
344

 
—

 
—

 
344

 
 
 
 
 
 
 
 
 
 
 
 
Share-based compensation for restricted stock issued
115,670

 
—

 
1,015

 
—

 
—

 
1,015

 
 
 
 
 
 
 
 
 
 
 
 
Tax withholding related to the vesting of restricted stock units
(42,528
)
 
—

 
(529
)
 
—

 
—

 
(529
)
 
 
 
 
 
 
 
 
 
 
 
 
Stock options exercised
104,527

 
—

 
193

 
—

 
—

 
193

 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
—

 
1,067

 
—

 
1,067

 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation
—

 
—

 
—

 
—

 
(1,460
)
 
(1,460
)
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2015
34,026,212

 
$
3

 
$
168,701

 
$
(88,138
)
 
$
(2,370
)
 
$
78,196

 
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, 2015
 
March 31, 2014
Cash flows from operating activities:
 

 
 

Net income (loss)
$
1,067

 
$
(9,666
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Depreciation and amortization
7,498

 
5,556

Share-based compensation
1,359

 
489

Debt discount amortization
—

 
180

Change in fair value of warrant liability
—

 
7,216

Change in fair value of acquisition earn-out
—

 
1,554

Changes in operating assets and liabilities:
 

 
 

Accounts receivable, net
(738
)
 
361

Deferred contract costs
(1,167
)
 
(853
)
Prepaid expenses and other current assets
415

 
702

Other assets
(533
)
 
(354
)
Accounts payable
3,269

 
3,042

Accrued expenses and other current liabilities
(5,248
)
 
(5,784
)
Deferred revenue and other long-term liabilities
(54
)
 
356

 
 
 
 
Net cash provided by operating activities
5,868

 
2,799

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(3,433
)
 
(1,719
)
 
 
 
 
Net cash used in investing activities
(3,433
)
 
(1,719
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from line of credit
—

 
1,000

Repayment of term loan
(1,376
)
 
(1,625
)
Proceeds from mezzanine debt
—

 
1,500

Tax withholding related to the vesting of restricted stock units
(529
)
 
(842
)
Exercise of stock options
193

 
506

 
 
 
 
Net cash (used in) provided by financing activities
(1,712
)
 
539

 
 
 
 
Effect of exchange rate changes on cash
2,108

 
(163
)
 
 
 
 
Net increase in cash and cash equivalents
2,831

 
1,456

 
 
 
 
Cash and cash equivalents at beginning of period
49,256

 
5,785

 
 
 
 
Cash and cash equivalents at end of period
$
52,087

 
$
7,241

 
 
 
 
Supplemental disclosure of cash flow information:
 

 
 

Cash paid for interest
$
498

 
$
2,239

 
 
 
 
 
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. is a Delaware corporation (“GTT” and together with its consolidated subsidiaries, the “Company”)which was incorporated on January 3, 2005. The Company operates a global Tier 1 IP network connecting clients to locations and cloud applications around the world. The Company seeks to further extend its network globally while delivering exceptional client service with simplicity, speed and agility.
 
Unaudited Interim Financial Statements
 
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, 2014 , included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed on March 13, 2015. 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 the results of operations. The operating results for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full fiscal year 2015 or for any other interim period. The December 31, 2014 consolidated balance sheet has been derived from the audited financial statements as of that date, but does not include all disclosures required by GAAP.
 
There have been no changes in the Company’s significant accounting policies as of March 31, 2015 as compared to the significant accounting policies disclosed in Note 2, "Significant Accounting Policies" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31. 2014 that was filed with the SEC on March 13, 2015.
 
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. Actual results can, and in many cases will, differ from those estimates. 
   
Comprehensive Income (Loss)
 
In addition to net income (loss), comprehensive income (loss) includes charges or credits to equity occurring other than as a result of transactions with stockholders. For the Company, this consists of foreign currency translation adjustments.
 
NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS
 
On May 28, 2014, the Federal Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") Topic 606, Revenue From Contracts With Customers. The guidance in ASC Topic 606 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition , and most industry-specific guidance throughout the Industry Topics of the Codification. ASC Topic 606 states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. On April 2, 2015, the FASB proposed to defer the effective date of ASC Topic 606 by one year. The Company is assessing the impact of ASC Topic 606 and will adopt the guidance for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017.

On April 7, 2015, the FASB issued Accounting Standards Update ("ASU") No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs . The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments

8


in this ASU. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years; however, early adoption of the amendments is permitted. The amendments should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. The Company has not yet adopted the provisions in this ASU and is assessing the impact.

NOTE 3 — BUSINESS ACQUISITIONS

As discussed in the Company's Annual Report, in the fourth quarter of 2014, the Company acquired United Networks Services, Inc. ("UNSi"). The Company accounted for this acquisition as a business combination and have included its results of operations in the condensed consolidated financial statements starting on the acquisition date.

The following pro forma financial information summarizes the combined results of operations of the Company and UNSi as though it had been combined as of the beginning of fiscal 2014.

 
 
Three Months Ended March 31,
 
 
2015
 
2014
 Amounts in thousands, except per share and share data
 
 
 
 
 Revenue
 
$
62,353

 
$
62,569

 
 
 
 
 
Net income (loss)
 
$
1,067

 
$
(12,553
)
 
 
 
 
 
Net income (loss) per share:
 
 
 
 
 Basic
 
$
0.03

 
$
(0.54
)
 Diluted
 
$
0.03

 
$
(0.54
)
 
 
 
 
 
 Basic
 
33,935,481

 
23,444,384

 Diluted
 
34,659,757

 
23,444,384


The pro forma financial information presents unaudited consolidated pro forma results of operations as if the UNSi acquisition had occurred on January 1, 2014. This information does not purport to be indicative of the actual results that would have occurred if the UNSi acquisition had actually been completed on January 1, 2014, nor is it necessarily indicative of the future operating results or the financial position of the combined company. The unaudited pro forma results of operations do not reflect the cost of any integration activities or benefits that may result from synergies that may be derived from any integration activities.

NOTE 4 — GOODWILL AND INTANGIBLE ASSETS
 
There has been no change in the carrying amount of goodwill since December 31, 2014.

Intangible assets related to customer relationships and FCC licenses are subject to a straight-line amortization.

Goodwill and intangible assets with indefinite lives are not amortized, but rather tested for impairment at least annually by comparing the estimated fair values to their carrying values. Acquired trade names are assessed as indefinite lived assets because there is no foreseeable limit on the period of time over which they are expected to contribute cash flows.











9


The following table summarizes the Company’s intangible assets as of  March 31, 2015 and December 31, 2014 (amounts in thousands):
  
 
 
 
March 31, 2015
 
Amortization
Period
 
Gross Asset
Cost
 
Accumulated
Amortization
 
Net Book
Value
Customer contracts
3-7 years
 
$
85,759

 
$
33,878

 
$
51,881

Non-compete agreements
3-5 years
 
4,331

 
4,207

 
124

Point-to-point FCC License fees
3 years
 
1,695

 
278

 
1,417

Trade name (non-amortizing)
N/A
 
800

 
—

 
800

 
 
 
$
92,585

 
$
38,363

 
$
54,222

 
 
 
 
December 31, 2014
 
Amortization
Period
 
Gross Asset
Cost
 
Accumulated
Amortization
 
Net Book
Value
Customer contracts
3-7 years
 
$
85,759

 
$
29,639

 
$
56,120

Non-compete agreements
3-5 years
 
4,331

 
4,147

 
184

Point-to-point FCC License fees
3 years
 
1,665

 
139

 
1,526

Trade name (non-amortizing)
N/A
 
800

 
—

 
800

 
 
 
$
92,555

 
$
33,925

 
$
58,630

 
Amortization expense was $4.4 million and $3.0 million for the three months ended March 31, 2015 and 2014 , respectively.

Estimated amortization expense related to intangible assets subject to amortization at March 31, 2015 in each of the years subsequent to March 31, 2015 is as follows (amounts in thousands):

2015 remaining
$
12,327

2016
15,678

2017
13,869

2018
8,112

2019
3,436

Total
$
53,422

 
NOTE 5 — DEBT
 
The following summarizes the debt activity of the Company during the three months ended March 31, 2015 (amounts in thousands):

 
Total Debt
 
Senior Term Loan
 
Delayed Draw Term Loan
Debt obligation as of December 31, 2014
$
123,626

 
$
108,626

 
$
15,000

Payments
(1,376
)
 
(1,376
)
 
—

Debt obligation as of March 31, 2015
122,250

 
107,250

 
15,000

Less: Current portion of long-term debt
(7,156
)
 
(6,875
)
 
(281
)
Long-term debt, net of current portion
$
115,094

 
$
100,375

 
$
14,719


Estimated annual commitments for debt maturities are as follows at March 31, 2015 (amounts in thousands):

10


 
Total Debt
2015 remaining
$
4,812

2016
10,120

2017
12,331

2018
12,203

2019
82,784

Total
$
122,250


Senior Term Loan, Delayed Draw Term Loan and Line of Credit

On August 6, 2014, the Company completed a refinancing transaction (the “Refinancing Transaction”), which included amendments to the First Amended and Restated Credit Agreement ("Credit Agreement"). The Credit Agreement, as amended, provides for $110.0 million in term loans; a $15.0 million revolving credit facility; an available $15.0 million delayed draw term loan ("DDTL"); and an available uncommitted $30.0 million incremental term loan. The maturity of the facilities under the Credit Agreement, as amended, were extended to August 6, 2019.

On September 30, 2014, the Company drew down $15.0 million on the DDTL. No amounts have been drawn on the revolving credit facility nor the uncommitted incremental term loan. The DDTL facility will be repaid on a quarterly basis starting March 31, 2016 at 1.875% of the aggregate outstanding balance, increasing to 2.5% of the aggregate outstanding balance starting December 31, 2016, with any remaining amount due on August 6, 2019. The term loan of $110.0 million will be repaid on a quarterly basis starting December 31, 2014 at $1.4 million of the aggregate outstanding balance, increasing to $2.1 million on December 31, 2015, and lastly increasing to $2.7 million on December 31, 2016, with any remaining amount due on August 6, 2019.

The interest rate on the Credit Agreement, as amended, is a LIBOR-based tiered pricing tied to the Company's net leverage ratio. As of March 31, 2015 , the interest rate on the term loan and the DDTL was LIBOR plus 4.25% spread or 4.5% .

The obligations under the Credit Agreement, as amended, are secured by substantially all of the Company's assets. The Credit Agreement, as amended, contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants are limited to the following, in each case subject to certain exceptions: a maximum net total leverage ratio; a minimum consolidated fixed charge ratio; limitations on indebtedness and liens; mergers, consolidations or amalgamations, or liquidations, wind-ups or dissolutions; dispositions of property; restricted payments; investments; transactions with affiliates; sale and leaseback transactions; change in fiscal periods; negative pledges; restrictive agreements; limitations on line of business; limitations on speculative hedging and limitations on changes of names and jurisdictions. In addition, the Company is required to meet certain financial covenants at each quarter end, namely Maximum Consolidated Net Total Leverage and Consolidated Fixed Charge Coverage Ratio. Both these financial covenants were amended on April 1, 2015, when the Company entered into an amended credit agreement, which amended the Credit Agreement, dated as of August 6, 2014 (refer to Note 12). As of March 31, 2015, the Company was compliant with these covenants.

NOTE 6 — FAIR VALUE MEASUREMENTS
 
The Company accounts for fair value measurements in accordance with the fair value accounting standard as it relates to financial assets and financial liabilities. The Company establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). 

The fair value hierarchy consists of three broad levels, which prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (Level 1); inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2); and unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions (Level 3). The following section describes the valuation methodologies that the Company uses to measure financial instruments at fair value.

The remaining earn-out liability as of March 31, 2015 relates to business acquisitions in which the sellers will receive a cash payout based upon the performance of the entity the Company acquired. There have been no changes to the fair value of this contingent consideration.


11


The following table presents the liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of March 31, 2015 (amounts in thousands):

 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 

 
 

 
 

 
 

Acquisition earn-outs
$
—

 
$
—

 
$
3,224

 
$
3,224


Rollforward of Level 3 liabilities are as follows (amounts in thousands):

Acquisition Earn-outs
Balance, December 31, 2014
$
3,374

Paid in cash
(150
)
Balance, March 31, 2015
$
3,224


Assets and liabilities measured at a 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).
 
NOTE 7 — EMPLOYEE SHARE-BASED COMPENSATION BENEFITS
 
The Company adopted its 2006 Employee, Director and Consultant Stock Plan (the “2006 Plan”) in October 2006. In addition to stock options, the Company may also grant restricted stock or other stock-based awards under the 2006 Plan. The maximum number of shares issuable over the term of the 2006 Plan is limited to 3,500,000  shares.
 
The Company adopted its 2011 Employee, Director and Consultant Stock Plan (the “2011 Plan” and together with the 2006 Plan, the “Plan”) in June 2011.  In addition to stock options, the Company may also grant restricted stock or other stock-based awards under the 2011 Plan. The maximum number of shares issuable over the term of the 2011 Plan is limited to 3,000,000 shares.  The 2006 Plan will continue according to its terms.

The Plan permits the granting of stock options and restricted stock to employees (including employee directors and officers) and consultants of the Company, and non-employee directors of the Company. Options granted under the Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and expire no later than ten years from the grant date. The options generally vest over four years with 25% of the option shares becoming exercisable one year from the date of grant and the remaining 75% annually or quarterly over the following three years . The Compensation Committee of the Board of Directors, as administrator of the Plan, has the discretion to use a different vesting schedule.
 
Stock Options
 
The Company recognized compensation expense for stock options of approximately $344,000 and $151,000 for the three months ended March 31, 2015 and 2014 , respectively, related to stock options issued to employees and consultants, which is included in selling, general and administrative expense on the accompanying consolidated statements of operations. The Company granted to employees 85,000 and 349,700 stock options with a total fair value of $0.6 million and $2.6 million during the three months ended March 31, 2015 and 2014 , respectively.
 
Restricted Stock
 
During the three months ended March 31, 2015 and 2014 , respectively, the Company granted to certain employees and members of its Board of Directors restricted stock. This includes shares issued to non-employee members of the Company’s Board of Directors who elected to be paid a portion of their annual fees in restricted stock. Total non-cash compensation expense is recorded in selling, general and administrative expenses on the accompanying condensed consolidated statement of operations.

The following tables summarize the Company’s restricted stock for the three months ended March 31, 2015 and 2014 (amounts in thousands):
 

12


 
Employees
 
Non-Employee
Members of Board 
of Directors
 
Total
Three months ended March 31, 2015
 
 
 
 
 
Restricted stock shares granted
110

 
3

 
113

Fair value of shares granted
$
1,367

 
$
49

 
$
1,416

Restricted stock compensation expense
$
788

 
$
227

 
$
1,015

 
 
Employees
 
Non-Employee
Members of Board
of Directors
 
Total
Three Months Ended March 31, 2014
 
 
 
 
 
Restricted stock shares granted
210

 
3

 
213

Fair value of shares granted
$
2,621

 
$
36

 
$
2,657

Restricted stock compensation expense
$
302

 
$
36

 
$
338

   
NOTE 8 — INCOME TAXES
 
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. Valuation allowances are recorded against deferred tax assets when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. The scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies are evaluated in determining whether it is more likely than not that deferred tax assets will be realized. On the basis of this evaluation, a valuation allowance has been provided to offset the net deferred tax assets in the US and certain foreign jurisdictions.
 
The Company and certain of its subsidiaries file income tax returns in the U.S. Federal jurisdiction, various states and foreign jurisdictions. The Company’s foreign jurisdictions are primarily in Italy and the United Kingdom.
 
The Company recorded a tax benefit of $0.4 million for the three months ended March 31, 2015. The Company recorded a $1.0 million benefit to the Company’s provision for income taxes for the three months ended March 31, 2015 related to deferred income taxes of a foreign subsidiary that were adjusted to reflect the tax attributes and temporary items as filed on the income tax return. For the three months ended March 31, 2014, the Company recorded tax expense of $0.7 million .

NOTE 9 — RESTRUCTURING COSTS, EMPLOYEE TERMINATION AND OTHER ITEMS 

During the year ended December 31, 2014, the Company incurred  $6.1 million  in costs associated with the acquisition of United Networks Services, Inc (“UNSi”), including payroll and employee severance costs, professional fees, termination costs associated with network grooming, and travel expenses. As of December 31, 2014, the Company had paid $4 million in cash.

No additional charges were incurred during the three months ended March 31, 2015. Approximately $1.2 million was paid during the three months ended March 31, 2015. The restructuring charges and accruals established by the Company are summarized as follows for the period ending March 31, 2015 (amounts in thousands):


13


 
Charges Net of Reversals
 
Cash Payments
 
Balance, March 31, 2015
   Employment costs
$
3,725

 
$
3,725

 
$
—

   Professional fees
1,003

 
673

 
330

   Integration expenses
100

 
75

 
25

   Travel and other expenses
1,297

 
721

 
576

Total
$
6,125

 
$
5,194

 
$
931


NOTE 10 — EARNINGS (LOSS) PER SHARE
 
Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per share reflect, in periods with earnings and in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options and warrants.

The table below details the calculations of earnings (loss) per share ( amounts in thousands, except for share and per share amounts ):

 
Three Months Ended March 31,
 
2015
 
2014
Numerator for basic and diluted EPS – earnings (loss) available to common stockholders
$
1,067

 
$
(9,666
)
Denominator for basic EPS – weighted average shares
33,935,481

 
23,444,384

Effect of dilutive securities
724,276

 
—

Denominator for diluted EPS – weighted average shares
34,659,757

 
23,444,384

 
 
 
 
Income (loss) per share: basic
$
0.03

 
$
(0.41
)
Income (loss) per share: diluted
$
0.03

 
$
(0.41
)
 
The table below details the anti-dilutive items that were excluded in the computation of the earnings per share (amounts in thousands):  
 
Three months ended March 31,
 
2015
 
2014
BIA warrant
—

 
1,055

Plexus warrant
—

 
960

Alcentra warrant
—

 
329

Stock options
—

 
1,692

Totals
—

 
4,036




NOTE 11 — COMMITMENTS AND CONTINGENCIES

As of March 31, 2015 , the Company was not subject to any material legal proceedings. From time-to-time, the Company is a party to legal proceedings arising in the normal course of its business. The Company does not believe that it is a party to any pending legal action that could reasonably be expected to have a material adverse effect on its business or operating results, financial position or cash flows. 

  

14


NOTE 12 — SUBSEQUENT EVENTS

MegaPath Acquisition

On April 1, 2015, the Company completed the acquisition of MegaPath Corporation, which provides private wide-area-networking, Internet access services, managed services and managed security to multinational clients from MegaPath Group, Inc.

The Company paid MegaPath Group, Inc. an aggregate purchase price of $152.3 million , subject to adjustment, which included the following:

• $134.8 million paid in cash and the assumption of capital leases at the closing of the transaction, subject to various post-closing adjustments related to working capital, transaction expenses and indebtedness;

• $7.5 million paid at the closing of the transaction by delivery of 610,843 unregistered shares of the Company’s common stock, par value $0.0001 per share, valued for this purpose at $12.28 per share; and

• $10.0 million paid in cash on the first anniversary of the closing, subject to reduction for any indemnification claims made by the Purchaser prior to such date.

MegaPath Corporation produced recurring revenue of approximately $124 million in 2014, which we expect to continue in 2015.

The Company expects to incur a restructuring charge in the second quarter of 2015 for severance costs, professional fees, network grooming costs, and travel expenses related to the acquisition.

Amended Credit Agreement

On April 1, 2015, the Company entered into an amended credit agreement (the "Amendment Agreement"), which amends the Credit Agreement, dated as of August 6, 2014. The Amendment Agreement provides for a term loan facility, a revolving line of credit facility, a letter of credit facility, and an uncommitted incremental credit facility. 
 
The material amendments to the Credit Agreement implemented by the Amendment Agreement include the following:

• an increase in the term loan commitment from $110.0 million to $230.0 million ;

• an increase in the revolving credit commitment from $15.0 million to $25.0 million with a letter of credit facility sublimit of $7.5 million and a new swingline loan under the revolving credit commitment with a swingline loan sublimit of $5.0 million ;

• an increase in the uncommitted incremental credit facility from up to $30.0 million to $50.0 million in term loans and/or revolving credit commitments;

• extension of the maturity date of the loans to March 31, 2020; and

• adding (1) KeyBanc National Association, as the new administrative agent for the lenders and as a new lender, joint lead arranger, swingline lender and letter of credit issuer, (2) Webster Bank N.A., as a syndication agent, joint lead arranger, letter of credit issuer and a lender and (3) Pacific Western Bank, CoBank, ACB and MUFG Union Bank, N.A., as co-documentation agents.

The obligations under the Amendment Agreement are secured by substantially all of the Company's tangible and intangible assets . The Credit Agreement, as amended, contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants are limited to the following, in each case subject to certain exceptions: a maximum net total leverage ratio; a minimum consolidated fixed charge ratio; limitations on indebtedness and liens; mergers, consolidations or amalgamations, or liquidations, wind-ups or dissolutions; dispositions of property; restricted payments; investments; transactions with affiliates; sale and leaseback transactions; change in fiscal periods; negative pledges; restrictive agreements; limitations on line of business; limitations on speculative hedging and limitations on changes of names and jurisdictions. In addition, we are required to meet certain financial covenants at each quarter end, namely Maximum Consolidated Net Total Leverage in accordance with the table below and Minimum Consolidated Fixed Charge Coverage Ratio of 1.15 : 1 throughout the life of the loan.


15


Fiscal Quarters Ending
Maximum Consolidated Net Total Leverage Ratio
 
 
June 30, 2015 through December 31, 2015
4.25 : 1.00
March 31, 2016 through December 31, 2016
3.75 : 1.00
March 31, 2017 through December 31, 2017
3.25 : 1.00
March 31, 2018 through December 31, 2018
3.00 : 1.00
March 31, 2019 and all fiscal quarters thereafter
2.75 : 1.00


The interest rate on borrowings under the term loan facility is LIBOR plus 4.50% spread. The revolving credit facility margin is subject to the leveraged based pricing grid, as set forth in the Amendment Agreement; and the commitment fee is equal to 0.50% per annum of the available revolver.

The net result of the MegaPath Acquisition and the Amendment Agreement reduced the Company's available cash balance by approximately $28.2 million on April 1, 2015 and increased the total outstanding term debt to $230 million , of which approximately $11.5 million is due within the next 12 months.


16


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. 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, 2014. 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.

 
Overview
 
GTT Communications, Inc. is a Delaware corporation which was incorporated on January 3, 2005. As used in the following discussion and analysis of our financial condition and results of operations, “we”, “GTT”, the “Company”, “us”, or “our” and similar designations refer to GTT Communications, Inc. on a consolidated basis, unless otherwise indicated.

GTT operates a global Tier 1 IP network connecting clients to locations and cloud applications around the world. We seek to further extend our network globally while delivering exceptional client service with simplicity, speed and agility.
 
As of March 31, 2015 , our customer base was comprised of over 4,000 businesses. Our five largest customers accounted for approximately 17% of consolidated revenues for the three months ended March 31, 2015 .
 
Costs and Expenses
 
Our cost of revenue consists of the costs for our core network consisting of a global Layer 2 Switched Ethernet mesh network as well as IP Transit/Internet Access through over 250 Points of Presence and for network extensions from our core network using third party providers of services associated with customer services across North America; Europe, Middle East and Africa (“EMEA”) and Asia. The key off-net terms and conditions appearing in both supplier and customer agreements are substantially the same, with margin applied to the suppliers’ costs, and generally on back-to-back term lengths. There are no wages or overheads included in these costs. From time to time, we have agreed to certain special commitments with vendors in order to obtain better rates, terms and conditions for the procurement of services from those vendors. These commitments include volume purchase commitments and purchases on a longer-term basis than the term for which the applicable customer has committed. 

Our supplier contracts do not have any market related net settlement provisions. 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 revenue, our most significant operating expenses are employment costs. As of March 31, 2015 , we had 292 employees and full-time equivalents that comprised approximately 14% of total operating expenses.
 
Locations of Offices and Origins of Revenue
 
GTT’s headquarters are located in McLean, Virginia. We also lease corporate office space in the following cities around the world:
• North America : Chicago, IL; Denver, CO; New York, NY; East Rutherford, NJ; Dallas, TX; Scottsdale, AZ;
Lemont Furnace, PA
• Europe: London, England; Cagliari, Italy; Milan, Italy; Frankfurt, Germany; Belfast, Ireland
• Asia: Hong Kong, China
  






17


The table below presents the components of revenue for the three months ended March 31, 2015 and 2014 :
  
Geographical Revenue
 
2015
 
2014
United States
 
68
%
 
53
%
Italy
 
20
%
 
30
%
United Kingdom
 
10
%
 
15
%
Other
 
2
%
 
2
%
Totals
 
100
%
 
100
%


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, 2014 and Note 1 to our condensed 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, 2015 compared to three months ended March 31, 2014
 
Overview. The financial information presented in the tables below is comprised of the unaudited condensed consolidated financial information of the Company for the three months ended March 31, 2015 and 2014 (amounts in thousands):
 
 
Three Months Ended March 31,
 
 
 
2015
 
2014
 
% Change
 
 
 
 
 
 
Revenue
$
62,353

 
$
47,469

 
31.4
 %
Cost of revenue
37,697

 
29,888

 
26.1
 %
 


 


 
 
Gross margin
24,656

 
17,581

 
40.2
 %
 
39.5
%
 
37.0
%
 
6.8
 %
Operating expenses, depreciation and amortization
22,367

 
15,212

 
47.0
 %
 


 


 
 
Operating income
$
2,289

 
$
2,369

 
(3.4
)%
 


 


 
 
Net income (loss)
$
1,067

 
$
(9,666
)
 
(111.0
)%
 
Revenue. Revenue was $62.4 million and $47.5 million for the three months ended March 31, 2015 and 2014 , respectively. The increase is primarily due to the acquisition of United Network Services, Inc. ("UNSi") on October 1, 2014, which added approximately 2,000 customers. Had the UNSi acquisition been completed on January 1, 2014 our proforma revenue for the three months ended March 31, 2014 would have been approximately $62.6 million.
 
Cost of Revenue and Gross Margin. Cost of revenue and gross margin for the three months ended March 31, 2015 were $37.7 million and $24.7 million , respectively. For the three months ended March 31, 2014 , cost of revenue and gross margin were $29.9 million and $17.6 million , respectively. The cost of revenue increased due to the UNSi acquisition and the addition of new clients. Additionally, new sales and installations of services at higher gross margin percentages contributed to the growth in gross margin.
 
Operating Expenses. Operating expenses, exclusive of cost of revenue, were $22.4 million and $15.2 million for the three months ended March 31, 2015 and 2014 , respectively. The increase was due primarily to the UNSi acquisition with an increase in employment costs resulting from the addition of approximately 97 employees to support the additional new clients and expansion of the revenue

18


base, as well as an increase in rent expense, travel costs, and professional fees to support the broader global organization. The increase in non-cash compensation is driven by additional expense recorded on awards where the performance criteria has been determined to be probable resulting in accelerated recognition of the expense. These changes are illustrated in the table below (amounts in thousands):
 
 
Three Months Ended March 31,
 
 
 
2015
 
2014
 
% Change
 
 
 
 
 
 
Selling, general and administrative expenses (excluding non-cash compensation)
$
13,510

 
$
9,167

 
47.4
%
Non-cash compensation
1,359

 
489

 
177.9
%
Amortization of intangible assets
4,438

 
2,980

 
48.9
%
Depreciation
3,060

 
2,576

 
18.8
%
Totals
$
22,367

 
$
15,212

 
47.0
%


Liquidity and Capital Resources
 
The following summarizes the debt activity of the Company during the three months ended March 31, 2015 (amounts in thousands):

 
Total Debt
 
Senior Term Loan
 
Delayed Draw Term Loan
Debt obligation as of December 31, 2014
$
123,626

 
$
108,626

 
$
15,000

Payments
(1,376
)
 
(1,376
)
 
—

Debt obligation as of March 31, 2015
122,250

 
107,250

 
15,000

Less: Current portion of long-term debt
(7,156
)
 
(6,875
)
 
(281
)
Long-term debt, net of current portion
$
115,094

 
$
100,375

 
$
14,719


Estimated annual commitments for debt maturities are as follows at March 31, 2015 (amounts in thousands):
 
Total Debt
2015 remaining
$
4,812

2016
10,120

2017
12,331

2018
12,203

2019
82,784

Total
$
122,250


Senior Term Loan, Delayed Draw Term Loan and Line of Credit

On August 6, 2014, we completed a refinancing transaction (the “Refinancing Transaction”), which included amendments to the First Amended and Restated Credit Agreement ("Credit Agreement"). The Credit Agreement, as amended, provides for $110.0 million in term loans; a $15.0 million revolving credit facility; an available $15.0 million delayed draw term loan ("DDTL"); and an available uncommitted $30.0 million incremental term loan. The maturity of the facilities under the Credit Agreement, as amended, were extended to August 6, 2019. Our obligations under the Credit Agreement are secured by substantially all of the Company’s tangible and intangible assets. Additionally, we are in compliance with the reporting and financial covenants stated in the Credit Agreement.

On September 30, 2014, we drew down $15.0 million on the DDTL, no amounts had been drawn on the revolving credit facility nor the uncommitted incremental term loan. The DDTL facility will be repaid on a quarterly basis starting March 31, 2016 at 1.875% of the aggregate outstanding balance, increasing to 2.5% of the aggregate outstanding balance starting December 31, 2016, with any remaining amount due on August 6, 2019. The term loan of $110.0 million will be repaid on a quarterly basis starting December 31, 2014 at $1.4 million of the aggregate outstanding balance, increasing to $2.1 million on December 31, 2015, and lastly increasing

19


to $2.7 million on December 31, 2016, with any remaining amount due on August 6, 2019.

The interest rate on the Credit Agreement, as amended, is a LIBOR-based tiered pricing tied to our net leverage ratio. As of March 31, 2015 , the interest rate on the term loan and the DDTL was LIBOR plus 4.25% spread or 4.5%.

Liquidity Assessment
 
Cash provided by operating activities for the three months ended March 31, 2015 and 2014 was approximately $5.9 million and $2.8 million , respectively.
 
Cash used in investing activities was approximately $3.4 million and $1.7 million for the three months ended March 31, 2015 and 2014 , respectively.

Net cash used in financing activities was $1.7 million for the three months ended March 31, 2015 and net cash provided by financing activities for the three months ended March 31, 2014 was approximately $0.5 million .
 
Management monitors cash flow and liquidity requirements on a regular basis. We assess our cash and debt requirements including an analysis of the anticipated working capital requirements for the next 12 months. This analysis assumes our ability to manage expenses and the anticipated growth of revenue from service arrangements. In connection with the activities associated with the services, we expect to incur expenses, including provider fees, employee compensation and consulting fees, professional fees, sales and marketing, insurance and interest expense. Should the expected cash flows not be available, management believes it would have the ability to revise our operating plan and make reductions in expenses.

Our operations or expansion efforts may require substantial additional financial, operational and managerial resources. As of March 31, 2015 , we had approximately $52.1 million in cash and cash equivalents, and our current assets were $19.7 million greater than current liabilities. We believe that cash currently on hand, expected cash flows from future operations and existing borrowing capacity are sufficient to fund operations for at least the next twelve months, including the $7.2 million scheduled repayment of the senior term loan indebtedness. 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 would need to obtain additional financing through a combination of equity and subordinated 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.

Recent Developments Affecting Liquidity

MegaPath Acquisition

On April 1, 2015, the Company completed the acquisition of MegaPath Corporation, which provides private wide-area-networking, Internet access services, managed services and managed security to multinational clients from MegaPath Group, Inc.

The Company paid MegaPath Group, Inc. an aggregate purchase price of $152.3 million, subject to adjustment, which included the following:

• $134.8 million paid in cash and the assumption of capital leases at the closing of the transaction, subject to various post-closing adjustments related to working capital, transaction expenses and indebtedness;

• $7.5 million paid at the closing of the transaction by delivery of 610,843 unregistered shares of the Company’s common stock, par value $0.0001 per share, valued for this purpose at $12.28 per share; and

• $10.0 million paid in cash on the first anniversary of the closing, subject to reduction for any indemnification claims made by the Purchaser prior to such date.

The Company expects to incur a restructuring charge in the second quarter of 2015 for severance costs, professional fees, network grooming costs, and travel expenses related to the acquisition.




20


Amended Credit Agreement

On April 1, 2015, the Company entered into an amended credit agreement (the "Amendment Agreement"), which amends the Credit Agreement, dated as of August 6, 2014. The Amendment Agreement provides for a term loan facility, a revolving line of credit facility, a letter of credit facility, and an uncommitted incremental credit facility. 
 
The material amendments to the Credit Agreement implemented by the Amendment Agreement include the following:

• an increase in the term loan commitment from $110.0 million to $230.0 million;

• an increase in the revolving credit commitment from $15.0 million to $25.0 million with a letter of credit facility sublimit of $7.5 million and a new swingline loan under the revolving credit commitment with a swingline loan sublimit of $5.0 million;

• an increase in the uncommitted incremental credit facility from up to $30.0 million to $50.0 million in term loans and/or revolving credit commitments;

• extension of the maturity date of the loans to March 31, 2020; and

• adding (1) KeyBanc National Association, as the new administrative agent for the lenders and as a new lender, joint lead arranger, swingline lender and letter of credit issuer, (2) Webster Bank N.A., as a syndication agent, joint lead arranger, letter of credit issuer and a lender and (3) Pacific Western Bank, CoBank, ACB and MUFG Union Bank, N.A., as co-documentation agents.

The obligations under the Amendment Agreement are secured by substantially all of our tangible and intangible assets. The Credit Agreement, as amended, contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants are limited to the following, in each case subject to certain exceptions: a maximum net total leverage ratio; a minimum consolidated fixed charge ratio; limitations on indebtedness and liens; mergers, consolidations or amalgamations, or liquidations, wind-ups or dissolutions; dispositions of property; restricted payments; investments; transactions with affiliates; sale and leaseback transactions; change in fiscal periods; negative pledges; restrictive agreements; limitations on line of business; limitations on speculative hedging and limitations on changes of names and jurisdictions. In addition, we are required to meet certain financial covenants at each quarter end, namely Maximum Consolidated Net Total Leverage in accordance with the table below and Minimum Consolidated Fixed Charge Coverage Ratio of 1.15 : 1 throughout the life of the loan.

Fiscal Quarters Ending
Maximum Consolidated Net Total Leverage Ratio
 
 
June 30, 2015 through December 31, 2015
4.25 : 1.00
March 31, 2016 through December 31, 2016
3.75 : 1.00
March 31, 2017 through December 31, 2017
3.25 : 1.00
March 31, 2018 through December 31, 2018
3.00 : 1.00
March 31, 2019 and all fiscal quarters thereafter
2.75 : 1.00

The interest rate on borrowings under the term loan facility is LIBOR plus 4.50% spread. The revolving credit facility margin is subject to the leveraged based pricing grid, as set forth in the Amendment Agreement; and the commitment fee is equal to 0.50% per annum of the available revolver.

The net result of the MegaPath Acquisition and the Amendment Agreement reduced the Company's available cash balance by approximately $28.2 million on April 1, 2015 and increased the total outstanding term debt to $230 million, of which approximately $11.5 million is due within the next 12 months.

Capital Structure and Resources

Our stockholders’ equity amounted to $78.2 million as of March 31, 2015, an increase of $0.6 million compared to stockholders’ equity of $77.6 million as of December 31, 2014.

21



Off-Balance Sheet Arrangements

As of March 31, 2015, we did not have any off-balance sheet arrangements.

Capital Expenditures

Our capital expenditures primarily relate to the purchase of IP infrastructure equipment and customer premise equipment to support our global network. In addition, our capital expenditures include information technology-related software and infrastructure, leasehold improvements, and office equipment in support of our operations. Our capital expenditures for the three months ended March 31, 2015 and 2014 were $3.4 million and $1.7 million, respectively, primarily related to network infrastructure and information technology-related expenditures.

Commitments and Contingencies

From time-to-time, the Company is a party to legal proceedings arising in the normal course of its business. The Company does not believe that it is a party to any pending legal action that could reasonably be expected to have a material adverse effect on its business or operating results, financial position or cash flows. Refer to Note 11 to our condensed consolidated financial statements.

Additionally, there has been no material changes to the Contractual Obligations schedule disclosed within Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Special Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” ‘could,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” ‘plans,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed in the section entitled “Risk Factors” included in this Report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this Report and the documents that we reference in this Report and have filed with the Securities and Exchange Commission (“SEC”) as exhibits to this Report, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

Such forward-looking statements are and will be subject to many risks, uncertainties and factors relating to our operations and the business environment that may cause our actual results to be materially different from any future results, express or implied, by such forward-looking statements. Factors that could cause our actual results to differ materially from these forward-looking statements include, but are not limited to, the following:
• our ability to develop and market new products and services that meet customer demands and generate acceptable margins;
• our reliance on several large customers;
• our ability to negotiate and enter into acceptable contract terms with our suppliers;
• our ability to attract and retain qualified management and other personnel;
• competition in the industry in which we do business;
• failure of the third-party communications networks on which we depend;

22


• legislation or regulatory environments, requirements or changes adversely affecting the businesses in which we are engaged;
• our ability to maintain our databases, management systems and other intellectual property;
• our ability to maintain adequate liquidity and produce sufficient cash flow to fund our capital expenditures and debt service;
• our ability to obtain capital to grow our business;
• technological developments and changes in the industry;
• declining prices of IP transit;
• fluctuations in our effective tax rate;
• expectations regarding the trading price of our common stock;
• our ability to complete acquisitions or divestures and to integrate any business or operation acquired; and
• general economic conditions.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual future results to differ materially from those projected or contemplated in the forward-looking statements.

All forward-looking statements included herein attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events. You should be aware that the occurrence of the events described in the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 could have a material adverse effect on our business and our results of operations.


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 relates primarily to our outstanding debt and cash equivalents. As of March 31, 2015, we had $122.3 million and $52.0 million in term debt and cash and cash equivalents, respectively. The interest expense associated with our term loans and any loans under our revolving credit facility will vary with market rates.

Our exposure to market risk for changes in interest rates related to our outstanding debt will impact our senior secured loan facilities. A hypothetical 100 basis point increase in interest rates would increase annual interest expense related to the term loan and DDTL under our Credit Agreement by approximately $1.2 million and likewise decrease our income and cash flows. A hypothetical increase of LIBOR to 4%, the average historical three-month LIBOR, would increase annual interest expense related to the term loan and DDTL under our Credit Agreement by approximately $4.6 million and likewise decrease our income and cash flows.

The return on our cash and cash equivalents balance as of March 31, 2015 and 2014 was less than 1%. Therefore, although investment interest rates may continue to decrease in the future, the corresponding impact to our interest income, and likewise to our income and cash flow, would not be material.

We do not use derivative financial instruments in our investment portfolio and have not entered into any interest rate hedging transactions.

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 significant portion of our revenue and cost of revenue is generated in the local currency of our foreign subsidiaries. Accordingly, changes in exchange rates between the applicable foreign currency and the U.S. Dollar will affect the translation of each foreign subsidiary’s financial results into U.S. Dollars for purposes of reporting consolidated financial results.

23



Approximately 14% of our revenues for the three months ended March 31, 2015 are from services provided and billed outside of the United States, with substantially all of these services provided and billed in Europe. As a consequence, a material percentage of our revenue is billed in British Pounds Sterling or Euros. This amount of foreign currency risk is naturally hedged as approximately 18% of our cost of revenue for the three months ended March 31, 2015 is also provided and billed outside of the United States, with substantially of these services provided and billed in British Pounds Sterling or Euros. Additionally, we incur selling, general and administrative expenses in British Pounds Sterling or Euros. The net result yields an insignificant impact to our net income and cash flows, due to changes in the foreign currency exchange rates.

We do not use derivative financial instruments in our investment portfolio and have not entered into any foreign currency hedging transactions.

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.
 
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, 2015 , 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) of the Securities Exchange Act of 1934, that occurred during the three months ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Limitations on the Effectiveness of Controls

Management, including our CEO and CFO, does not expect that disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls.
 
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.  

24


PART II – OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
As of March 31, 2015 , the Company was not subject to any material legal proceedings. From time-to-time, the Company is a party to legal proceedings arising in the normal course of its business. The Company does not believe that it is a party to any pending legal action that could reasonably be expected to have a material adverse effect on its business or operating results, financial position or cash flows. 

ITEM 1A.  RISK FACTORS
 
There have been no material changes during the period covered by this Quarterly Report on Form 10-Q 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, 2014 filed with the SEC on March 13, 2015.
 
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

None.

25


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
 
 
10.1(1)
Stock Purchase Agreement, dated February 19, 2015, by and among Global Telecom & Technology Americas, Inc., GTT Communications, Inc. MegaPath Group, Inc., and MegaPath Corporation.
 
 
10.2*
Employment Agreement, dated April 13, 2015, by and among GTT Communications, Inc. and Michael T. Sicoli.
 
 
31.1*
Certification of Chief Executive Officer pursuant to Rules 13a-15e and 15d-15e – page 34 promulgated under the Securities Exchange Act of 1934.
 
 
31.2*
Certification of Chief Financial Officer pursuant to Rules 13a-15e and 15d-15e – page 34 promulgated under the Securities Exchange Act of 1934.
 
 
32.1*
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2*
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS**
XBRL Instance Document
 
 
101.SCH**
XBRL Taxonomy Extension Schema Document
 
 
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document
 
(1)
Previously filed as an Exhibit to the Registrant's Current Report on Form 8-K filed February 25, 2015, and incorporated herein by reference.
*
Filed herewith
**
XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
  


26


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 and Chief Executive Officer
 
 
 
 
 
 
By:
/s/ Michael T. Sicoli
 
 
 
Michael T. Sicoli
Date:
May 7, 2015
 
Chief Financial Officer
 
 
 
 
 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 




  Exhibit 31.1
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
 
I, Richard D. Calder, Jr., certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of GTT Communications, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and
 
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
 
(c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
 
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:
May 7, 2015
/s/ Richard D. Calder, Jr.
 
 
Richard D. Calder, Jr.
 
 
President and Chief Executive Officer

 




Exhibit 31.2
 

CERTIFICATION OF CHIEF FINANCIAL OFFICER
 
     I, Michael Sicoli, certify that:
 
     1. I have reviewed this quarterly report on Form 10-Q of GTT Communications, Inc.;
 
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
     4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
     (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
     (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
     (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
     (d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
     5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
     (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
     (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date:
May 7, 2015
/s/ Michael T. Sicoli
 
 
Michael T. Sicoli
 
 
Chief Financial Officer

 




Exhibit 32.1
 

CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of GTT Communications, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard D. Calder, Jr., Chief Executive Officer of the Company certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my best knowledge:
 
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date:
May 7, 2015
/s/ Richard D. Calder, Jr.
 
 
Richard D. Calder, Jr.
 
 
President and Chief Executive Officer
 


 


 




Exhibit 32.2
 

CERTIFICATION OF
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
     In connection with the Quarterly Report of GTT Communications, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael T. Sicoli, Chief Financial Officer of the Company certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my best knowledge:
 
     1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
     2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date:
May 7, 2015
/s/ Michael T. Sicoli
 
 
Michael T. Sicoli
 
 
Chief Financial Officer