GTT-2013.09.30 10Q

10-Q 1 gtt-2013093010q.htm 10-Q GTT-2013.09.30 10Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2013

Commission File Number 000-51211

Global Telecom & Technology, Inc.

(Exact Name of Registrant as Specified in Its Charter)



Delaware		20-2096338
(State or Other Jurisdiction of		(I.R.S. Employer Identification No.)
Incorporation or Organization)

8484 Westpark Drive

Suite 720

McLean, Virginia 22102

(703) 442-5500

(Address including zip code, and telephone number, including area

code of principal executive officers)

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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):



Large Accelerated Filer ¨	Accelerated Filer ¨	Non-Accelerated Filer ¨	Smaller reporting company þ
(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 November 14, 2013, 23,289,453 shares of common stock, par value $.0001 per share, of the registrant were outstanding.



	Page
PART I — FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Operations	4
Condensed Consolidated Statements of Comprehensive Loss	5
Condensed Consolidated Statement of Stockholders’ Equity	6
Condensed Consolidated Statements of Cash Flows	7
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures about Market Risk	27
Item 4. Controls and Procedures	28
PART II — OTHER INFORMATION	29
Item 1. Legal Proceedings	29
Item 1A. Risk Factors	29
Item 6. Exhibits	39
SIGNATURES	40
CERTIFICATIONS

PART I – Financial Information

ITEM 1. FINANCIAL STATEMENTS

Global Telecom & Technology, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except for share and per share data)



	September 30, 2013			December 31, 2012
	(Unaudited)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	4,897		$	4,726
Accounts receivable, net of allowances of $1,093 and $748, respectively	26,166			11,003
Deferred contract costs	3,394			1,346
Prepaid expenses and other current assets	1,518			1,877
Total current assets	35,975			18,952
Property and equipment, net	20,401			5,494
Intangible assets, net	44,013			20,903
Other assets	5,515			2,614
Goodwill	74,604			49,793
Total assets	$	180,508		$	97,756

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	26,732		$	12,857
Accrued expenses and other current liabilities	27,544			13,301
Short-term debt	6,521			7,848
Deferred revenue	7,238			6,588
Total current liabilities	68,035			40,594
Long-term debt	82,905			34,981
Deferred revenue	1,607			234
Other long-term liabilities	17,181			4,908
Total liabilities	169,728			80,717

Commitments and contingencies

Stockholders' equity:
Common stock, par value $.0001 per share, 80,000,000 shares authorized, 22,983,331, and 19,129,765 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively	2			2
Additional paid-in capital	73,912			63,207
Accumulated deficit	(62,533		)	(45,437		)
Accumulated other comprehensive loss	(601		)	(733		)
Total stockholders' equity	10,780			17,039
Total liabilities and stockholders' equity	$	180,508		$	97,756

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

Global Telecom & Technology, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(Amounts in thousands, except for share and per share data)



	Three Months Ended						Nine Months Ended
	September 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012

Revenue:
Telecommunications services sold	$	45,106		$	28,412		$	111,267		$	80,293

Operating expenses:
Cost of telecommunications services provided	29,538			19,982			73,421			56,491
Selling, general and administrative expense	8,391			4,871			22,409			14,558
Restructuring costs, employee termination and other items	—			—			7,677			701
Depreciation and amortization	5,157			2,202			11,902			4,930

Total operating expenses	43,086			27,055			115,409			76,680

Operating (loss) income	2,020			1,357			(4,142		)	3,613

Other expense:
Interest expense, net	(2,445		)	(1,336		)	(5,624		)	(3,341		)
Debt extinguishment loss	—			—			(706		)	—
Other expense, net	(3,449		)	(300		)	(6,187		)	(1,040		)

Total other expense	(5,894		)	(1,636		)	(12,517		)	(4,381		)

Loss before income taxes	(3,874		)	(279		)	(16,659		)	(768		)

Provision for income taxes	416			219			437			479

Net loss	$	(4,290	)	$	(498	)	$	(17,096	)	$	(1,247	)

Loss per share:
Basic	$	(0.19	)	$	(0.03	)	$	(0.79	)	$	(0.07	)
Diluted	$	(0.19	)	$	(0.03	)	$	(0.79	)	$	(0.07	)

Weighted average shares:
Basic	22,932,515			19,014,825			21,578,315			18,916,658
Diluted	22,932,515			19,014,825			21,578,315			18,916,658

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

Global Telecom & Technology, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(Amounts in thousands)



	Three Months Ended						Nine Months Ended
	September 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012

Net loss	$	(4,290	)	$	(498	)	$	(17,096	)	$	(1,247	)

Other comprehensive income (loss):
Change in accumulated foreign currency translation income (loss)	262			(66		)	132			(209		)
Comprehensive loss	$	(4,028	)	$	(564	)	$	(16,964	)	$	(1,456	)

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

Global Telecom & Technology, 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, 2012	19,129,765		$	2	$	63,207		$	(45,437	)	$	(733	)	$	17,039

Share-based compensation for options issued	—		—		255			—			—			255

Share-based compensation for restricted stock issued	712,476		—		638			—			—			638

Forfeiture of stock in lieu of cash tax payment	(26,361	)	—		(117		)	—			—			(117		)

Shares issued in connection with nLayer earn-out	50,000		—		123			—			—			123

Stock issued in private offering	2,060,595		—		6,182			—			—			6,182

Stock options exercised	74,500		—		38			—			—			38

Stock issued on debt extinguishment	982,356		—		3,586			—			—			3,586

Net loss	—		—		—			(17,096		)	—			(17,096		)

Change in accumulated foreign currency translation loss	—		—		—			—			132			132

Balance, September 30, 2013	22,983,331		$	2	$	73,912		$	(62,533	)	$	(601	)	$	10,780

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

Global Telecom & Technology, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)



	Nine Months Ended
	September 30, 2013			September 30, 2012

Cash flows from operating activities:
Net loss	$	(17,096	)	$	(1,247	)

Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	11,902			4,930
Shared-based compensation	893			441
Debt discount amortization	420			219
Change in fair value of warrant liability	4,548			1,042
Loss on debt extinguishment	706			—
Change in fair value of nLayer earn-out	1,300			—

Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net	(3,425		)	348
Deferred contract costs	(2,049		)	175
Prepaid expenses and other current assets	6,596			1,054
Other assets	(2,358		)	(631		)
Accounts payable	7,089			(2,210		)
Accrued expenses and other current liabilities	(7,262		)	(2,206		)
Deferred revenue and other long-term liabilities	(328		)	237

Net cash provided by operating activities	936			2,152

Cash flows from investing activities:
Acquisition of businesses, net of cash acquired	(51,884		)	(13,493		)
Purchase of customer list	(1,502		)	(1,723		)
Purchases of property and equipment	(2,328		)	(1,685		)

Net cash used in investing activities	(55,714		)	(16,901		)

Cash flows from financing activities:
Principal payments on promissory note	(237		)	(472		)
Borrowing from (repayment of) line of credit, net	3,000			(1,600		)
Repayment of term loan	(26,919		)	(2,250		)
Issuance of term loan	65,794			14,500
Issuance of mezzanine debt, net of discount	7,151			5,436
Payment of subordinate notes payable	(63		)	(105		)
Forfeiture of stock in lieu of cash tax payment	(117		)	—
Exercise of stock options	38			3
Stock issued in private offering	6,182			—

Net cash provided by financing activities	54,829			15,512

Effect of exchange rate changes on cash	120			249

Net increase in cash and cash equivalents	171			1,012

Cash and cash equivalents at beginning of period	4,726			3,249

Cash and cash equivalents at end of period	$	4,897		$	4,261

Supplemental disclosure of cash flow information:
Cash paid for interest	$	4,824		$	3,595

Supplemental disclosure of non-cash investing and financing activities:
Fair value of Tinet net assets acquired (Note 3)	$	59,925		$	—
Exchange of subordinated notes for equity	2,880			—
Measurement period adjustment related to PacketExchange acquisition	—			744
Adjustment related to August 2010 sales novations	—			2,885
Shares issued in connection with nLayer earn-out	123			—

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

Global Telecom & Technology, Inc.

Notes to Condensed Consolidated Financial Statements

NOTE 1 — ORGANIZATION AND BUSINESS

Organization and Business

Global Telecom & Technology, Inc. (“GTT” or the “Company”) is a Delaware corporation which was incorporated on January 3, 2005. GTT operates a global Tier 1 IP network with one of the most interconnected Ethernet service platforms around the world. We provide highly reliable, scalable and secure cloud networking services. Our clients trust us to deliver solutions 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 year ended December 31, 2012, included in the Company’s Annual Report on Form 10-K filed on March 19, 2013. 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. However, the Company believes that the disclosures are adequate to prevent the information from being misleading. 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 and nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the full fiscal year 2013 or for any other interim period. The December 31, 2012 condensed 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 September 30, 2013 as compared to the significant accounting policies disclosed in Note 2, “Significant Accounting Policies” in the 2012 Annual Report on Form 10-K.

Use of Estimates and Assumptions

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results can, and in many cases will, differ from those estimates.

Accounting for Derivative Instruments

The Company accounts for derivative instruments in accordance with the Accounting Standards Codification ("ASC") 815, Derivatives and Hedging, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts. The Company also considers the ASC 815 Subtopic 40, Contracts in Entity’s Own Equity, which provides criteria for determining whether freestanding contracts that are settled in a company’s own stock, including common stock warrants, should be designated as either an equity instrument, an asset or as a liability.

The Company also considers in ASC 815, the guidance for determining whether an equity-linked financial instrument (or embedded feature) issued by an entity is indexed to the entity’s stock, and therefore, qualifying for the first part of the scope exception in paragraph 15-74 of ASC 718, Compensation—Stock Compensation. During the quarter ended June 30, 2013, the Company issued $1.3 million in additional warrants, which is further disclosed in Note 7. During the nine months ended September 30, 2013, the warrant liability was marked to market which resulted in a loss of $4.5 million. The warrant liability was $8.2 million and $2.3 million as of September 30, 2013 and December 31, 2012, respectively, which is included in other long-term liabilities.

Comprehensive Loss

Comprehensive loss consists of net loss and other comprehensive income (loss). Other comprehensive income (loss) refers to revenues, expenses, gains and losses that are included in comprehensive loss, but that are excluded from net loss. Specifically, foreign currency translation adjustments are included in comprehensive loss and accumulated other comprehensive loss.

NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS

There are no recent accounting pronouncements that are expected to have a material effect on the Company’s financial statements.

NOTE 3 — ACQUISITIONS

IDC

On February 1, 2013, the Company entered into a stock purchase agreement with IDC Global Incorporated (“IDC”), a privately held company in Chicago. IDC owns and operates two data co-location facilities and its own metro optical fiber network in Chicago. The two data facilities fiber connects to 350 East Cermak, which is the largest multi-story data center property in the world. IDC provides cloud networking, co-location, and managed cloud services to nearly 100 clients with a focus on providing multi-location enterprises with a complete portfolio of cloud infrastructure services.

Pursuant to the agreement, the Company acquired 100% of the issued and outstanding shares of capital stock of IDC for an aggregate purchase price of $4.6 million, which amount is subject to adjustment to the extent that IDC’s net working capital as of the closing of the transaction is determined to be greater or less than the estimated net working capital as of such date provided by IDC.

The Company accounted for the acquisition using the acquisition method of accounting with GTT treated as the acquiring entity. Accordingly, consideration paid by the Company to complete the acquisition of IDC has been preliminarily allocated to IDC’s assets and liabilities based upon their estimated fair values as of the date of completion of the acquisition, February 1, 2013. The Company estimated the fair value of IDC’s assets and liabilities based on discussions with IDC’s management, due diligence and information presented in financial statements. As part of the purchase agreement, the Company may elect to treat this acquisition as an asset purchase for tax purposes. If the Company makes such an election, there will be additional purchase price paid to the sellers, which could result in reallocation of the purchase price. The following table summarizes the purchase price and the assets acquired and liabilities assumed as of the acquisition date at estimated fair value:



	Amounts in thousands
Purchase Price:
Cash consideration paid	$	3,593
Fair value of liabilities assumed	1,338
Total consideration	$	4,931

Purchase Price Allocation:
Acquired Assets
Current assets	$	187
Property and equipment	798
Other assets	82
Intangible assets	3,100
Total fair value of assets acquired	4,167
Goodwill	764
Total consideration	$	4,931

Tinet

On April 30, 2013, the Company acquired from Neutral Tandem, Inc. (doing business as Inteliquent) all of the equity interests (the “Interests”) in NT Network Services, LLC and NT Network Services, LLC SCS (collectively, “Tinet”), which, together with the subsidiaries of such companies, comprise the data transport business of Inteliquent. The acquisition was pursuant to an equity purchase agreement between the Company and Inteliquent on April 30, 2013.

Pursuant to the agreement, the Company paid Inteliquent an aggregate purchase price of $52.5 million for the Interests, in cash, subject to a net working capital adjustment and an adjustment based on the cash and cash equivalents and amount of indebtedness of Tinet immediately prior to the acquisition. In addition, the Company will provide certain services to Inteliquent without charge for up to three years after the closing. These services are provided under a separate service agreement that is valued at $2.0 million.

To fund the Company’s acquisition of Tinet, the Company arranged financing with a new senior lender, Webster Bank, N.A. (“Webster”), on April 30, 2013. The Company entered into a credit agreement with Webster that, among other matters, provided for a term loan in the aggregate principal amount of $65.0 million and a revolving line of credit in the aggregate principal amount of $5.0 million. The financing is described in detail in Note 7.

The recorded amounts for acquired assets and liabilities assumed are provisional and subject to change. The Company will finalize the amounts recognized as it obtains the information necessary to complete the analysis. In accordance with US GAAP, the Company expects to finalize these amounts before April 30, 2014. The following table summarizes the purchase price and the assets acquired and liabilities assumed as of the acquisition date at estimated fair value:



	Amounts in thousands
Purchase Price:
Cash consideration paid	$	49,158
Liabilities assumed
Accounts payable	4,179
Accrued expenses and other current liabilities	20,607
Deferred revenue	2,443
Other long-term liabilities	7,585
Total fair value of liabilities assumed	34,814
Total consideration	$	83,972

Purchase Price Allocation:
Acquired assets
Accounts receivable	$	11,601
Prepaid expenses	1,137
Other current assets	5,101
Property and equipment	15,004
Other assets	1,282
Intangible assets	25,800
Total fair value of assets acquired	59,925
Goodwill	24,047
Total consideration	$	83,972

Intangible assets acquired include $25.0 million related to customer relationships with a weighted-average useful life of 5 years and $0.8 million related to the trade name. Customer relationships are amortized on a straight-line basis based on the expected period of benefit. The trade name is assessed as an indefinite-lived asset and is not amortized, but rather tested for impairment at least annually by comparing the estimated fair values to their carrying values.

Amortization expense of $2.1 million has been recorded for the nine months ended September 30, 2013. Estimated amortization expense related to customer relationships created as a result of the Tinet acquisition for each of the years subsequent to September 30, 2013, is as follows (amounts in thousands):



2013 remaining	$	1,250
2014	5,000
2015	5,000
2016	5,000
2017	5,000
Thereafter	1,667
Total	$	22,917

Goodwill in the amount of $24.0 million was recorded as a result of the acquisition of Tinet. 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 following schedule presents unaudited consolidated pro forma results of operations as if the Tinet acquisition had occurred on January 1, 2012. This information does not purport to be indicative of the actual results that would have occurred if the Tinet acquisition had actually been completed January 1, 2012, 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.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Amounts in thousands, except per share and share data
Revenue	$	45,106		$	44,980		$	136,753		$	131,442

Net loss	$	(4,290	)	$	(3,628	)	$	(14,838	)	$	(5,974	)

Net loss per share:
Basic	$	(0.19	)	$	(0.19	)	$	(0.69	)	$	(0.32	)
Diluted	$	(0.19	)	$	(0.19	)	$	(0.69	)	$	(0.32	)

Basic	22,932,515			19,014,825			21,578,315			18,916,658
Diluted	22,932,515			19,014,825			21,578,315			18,916,658

NOTE 4 — GOODWILL AND INTANGIBLE ASSETS

During the third quarter of 2013, the Company completed its annual goodwill impairment testing in accordance with ASC Topic 350, Intangibles—Goodwill and Other. After performing the qualitative assessment, the Company determined that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount; therefore, the first and second steps of the goodwill impairment test are unnecessary and concluded that no impairment existed.

The Company recorded goodwill in the amount of $0.8 million during the quarter ended March 31, 2013 in connection with the IDC acquisition and in accordance with ASC Topic 350, Intangibles—Goodwill and Other. Additionally, $3.1 million of the IDC purchase price was allocated to intangible assets related to customer relationships which are subject to straight-line amortization.

The Company entered into a sales novation agreement during the quarter ended March 31, 2013, which assigned and transferred to the Company certain service level agreements and all rights under those agreements, as well as certain supply agreements and obligations thereunder. The Company valued the customer relationships from the novation and recorded $1.5 million in intangible assets.

During the quarter ended June 30, 2013, the Company recorded goodwill in the amount of $24.0 million in connection with the Tinet acquisition and in accordance with ASC Topic 350, Intangibles—Goodwill and Other. Additionally, $25.0 million of the Tinet purchase price was allocated to intangible assets related to customer relationships and $0.8 million to the trade name.

In accordance with US GAAP, 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.

The changes in the carrying amount of goodwill for the nine months ended September 30, 2013 are as follows (amounts in thousands):



Balance, December 31, 2012	$	49,793
Goodwill associated with the IDC acquisition	764
Goodwill associated with the Tinet acquisition	24,047
Balance, September 30, 2013	$	74,604

The following table summarizes the Company’s intangible assets as of September 30, 2013 and December 31, 2012 (amounts in thousands):



		September 30, 2013
	Amortization Period	Gross Asset Cost		Accumulated Amortization		Net Book Value
Customer contracts	3-7 years	$	56,071	$	13,384	$	42,687
Carrier contracts	1 year	151		151		—
Noncompete agreements	3-5 years	4,331		3,830		501
Software	7 years	4,935		4,910		25
Trade name (non-amortizing)	N/A	800		—		800
		$	66,288	$	22,275	$	44,013



		December 31, 2012
	Amortization Period	Gross Asset Cost		Accumulated Amortization		Net Book Value
Customer contracts	4-7 years	$	26,471	$	6,802	$	19,669
Carrier contracts	1 year	151		151		—
Noncompete agreements	4-5 years	4,331		3,593		738
Software	7 years	4,935		4,439		496
		$	35,888	$	14,985	$	20,903

Amortization expense was $3.0 million and $1.5 million for the three months ended September 30, 2013 and 2012, respectively. Amortization expense was $7.3 million and $3.3 million for the nine months ended September 30, 2013 and 2012, respectively.

Estimated amortization expense related to intangible assets subject to amortization at September 30, 2013 in each of the years subsequent to September 30, 2013 is as follows (amounts in thousands):



2013 remaining	$	2,893
2014	11,375
2015	10,031
2016	9,121
2017	7,546
Thereafter	2,247
Total	$	43,213

NOTE 5 — FAIR VALUE MEASUREMENTS

The Company accounts for fair value measurements in accordance with ASC 820, Fair Value Measurements, as it relates to financial assets and financial liabilities. ASC 820 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America and expands disclosures about fair value measurements. ASC 820 applies under other previously issued accounting pronouncements that require or permit fair value measurements, but does not require any new fair value measurements.

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 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 gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC 820 are described as follows:


•	Level 1- Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.

•

Level 2- Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.


•	Level 3- Inputs that are unobservable for the asset or liability.

The following section describes the valuation methodologies that we used to measure financial instruments at fair value.

The Company considers the valuation of its warrant liability as a Level 3 liability based on unobservable inputs. The Company uses the Black-Scholes pricing model to measure the fair value of the warrant liability. The model required the input of highly subjective assumptions including volatility of 63%, expected term of 3 years, risk-free interest rate of 0% and a dividend yield of 0%.

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 September 30, 2013 (amounts in thousands):



	Level 1		Level 2		Level 3		Total
Liabilities:
Warrant liability	$	—	$	—	$	8,185	$	8,185

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



Balance, December 31, 2012	$	2,288
Issuance of warrants	1,349
Change in fair value of warrant liability	4,548
Balance, September 30, 2013	$	8,185

The carrying amounts of cash equivalents, receivables, accounts payable, and accrued expenses approximate fair value due to the immediate or short-term maturity of these financial instruments. The fair value of notes payable is determined using current applicable rates for similar instruments as of the balance sheet date and approximates the carrying value of such debt.

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 remeasured 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). There were no impairments recorded during the nine months ended September 30, 2013

NOTE 6 — 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”) 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 $103,000 and $47,000 for the three months ended September 30, 2013 and 2012, respectively, and approximately $254,000 and $151,000 for the nine months ended September 30, 2013 and 2012, respectively, related to stock options issued to employees and consultants, which is included in selling, general and administrative expense on the accompanying condensed consolidated statements of operations. The Company granted to employees 121,000 and 5,000 stock options with a total fair value of $301,000 and $7,000 during the three months ended September 30, 2013 and 2012, respectively. For the nine months ended September 30, 2013 and 2012, the Company granted to employees 472,000 and 461,000 stock options with a total fair value of $961,000 and $507,000, respectively.

Restricted Stock

During the three and nine months ended September 30, 2013, 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.



Amounts in thousands	Employees		Non-Employee Members of Board of Directors		Total

Three months ended September 30, 2013
Restricted stock shares granted	91		7		98
Fair value of shares granted	$	392	$	36	$	428
Restricted stock compensation expense	$	258	$	36	$	294



Amounts in thousands	Employees		Non-Employee Members of Board of Directors		Total

Nine months ended September 30, 2013
Restricted stock shares granted	587		131		718
Fair value of shares granted	$	2,037	$	509	$	2,546
Restricted stock compensation expense	$	507	$	131	$	638

NOTE 7 — DEBT

The following summarizes the debt activity of the Company during the nine months ended September 30, 2013 (amounts in thousands):



	Total Debt			Webster Term Loan			Mezzanine Debt		SVB Term Loan			Line of Credit			Subordinated Notes			Promissory Note

Debt obligation as of December 31, 2012	$	42,829		$	—		$	15,481	$	24,500		$	—		$	2,611		$	237
Issuance, net of discount	78,945			65,000			7,151		794			6,000			—			—
Debt discount amortization	420			—			397		—			—			23			—
Payments	(30,219		)	(1,625		)	—		(25,294		)	(3,000		)	(63		)	(237		)
Extinguishment of debt	(2,549		)	—			—		—			—			(2,549		)	—
Debt obligation as of September 30, 2013	$	89,426		$	63,375		$	23,029	$	—		$	3,000		$	22		$	—

Estimated annual commitments for debt maturities net of unamortized discounts are as follows at September 30, 2013 (amounts in thousands):



	Total Debt
2013 remaining	$	1,647
2014	6,500
2015	6,500
2016	74,779
Total	$	89,426

Senior Debt

On April 30, 2013, to fund the Company’s acquisition of Tinet, the Company arranged financing with a new senior lender, Webster. The Company entered into an agreement (the "Credit Agreement") with Webster that provided for a term loan in the aggregate principal amount of $65.0 million and a revolving line of credit in the aggregate principal amount of $5.0 million.

The term loan matures on March 31, 2016, unless, on or before December 31, 2015, the maturity date of the mezzanine facility has been extended to (or beyond) September 30, 2018, or repaid in full or refinanced with the written consent of the lenders holding more than 50% of the outstanding obligations (the “Required Lenders") and replaced with subordinated indebtedness having a maturity date acceptable to the Required Lenders, in which case the maturity date will automatically extend to April 30, 2018.

The Company will repay the Webster term loan in twenty (20) quarterly principal installments with each payment of principal being accompanied by a payment of accrued interest, beginning in September 2013. The interest rate applicable to the Credit Agreement is the higher of LIBOR or 1% plus a margin of 5.5%. As of September 30, 2013, the interest rate was 6.5%.

On April 30, 2013, the Company prepaid in full all indebtedness outstanding under its existing credit facilities with Silicon Valley Bank and terminated the collateral agreements related thereto, including under the syndicated credit agreement dated as of May 23, 2012, as amended, by and among the Company and certain of its United States subsidiaries, which consisted of approximately $26.0 million in principal and accrued and unpaid interest, and under the Amended and Restated Loan and Security Agreement dated as of June 29, 2011, as amended, by and among certain of the Company’s foreign subsidiaries, which consisted of approximately $1.5 million in principal and accrued and unpaid interest.

On July 11, 2013, the Company entered into an amendment to the Credit Agreement that increased the revolving line-of-credit from $5.0 million to $7.5 million. As part of the amendment, Webster and GTT achieved broader-based commitments, expanding the Credit Agreement to include, East West Bank, Fifth Third Bank, Brown Brothers Harriman and Co., BDCA Funding LLC, and Crescent Capital. The obligations of the Company under the Credit Agreement are secured by substantially all of the Company’s tangible and intangible assets. As of September 30, 2013, the Company is in compliance with the reporting and financial covenants stated in the Credit Agreement.

Mezzanine Debt

On June 6, 2011, the Company entered into a note purchase agreement (the “Purchase Agreement”) with the BIA Digital Partners SBIC II LP (“BIA”). The Purchase Agreement provided for a total commitment of $12.5 million, of which $7.5 million was immediately funded (the “BIA Notes”). The BIA Notes were issued at a discount to face value of $0.4 million and the discount is being amortized, into interest expense, over the life of the notes. The remaining $5.0 million of the committed financing was available to be called by the Company on or before August 11, 2011, subject to extension to December 31, 2011 at the sole option of BIA. On September 19, 2011, BIA agreed to extend the commitment period and funded the Company an additional $1.0 million. The additional funding was issued at a discount to face value of $45,000, due to the warrants issued, and the discount is being amortized, into interest expense, over the life of the notes.

On April 30, 2012, in connection with the nLayer acquisition, the Company entered into an amended and restated note purchase agreement (the "Amended Note Purchase Agreement") with BIA and Plexus Fund II, L.P. (“Plexus”) . The Amended Note Purchase Agreement provided for an increase in the total financing commitment by $8.0 million, of which $6.0 million was immediately funded (the "Plexus Notes"). The Company called on the remaining $2.0 million on December 31, 2012. The funding by Plexus was issued at a total discount to face value of $0.8 million, due to the warrants issued, and the discount is being amortized into interest expense over the life of the notes.

On April 30, 2013, the Company arranged financing through an increase in the Company’s existing mezzanine financing arrangement, in the form of a modification to its existing note purchase agreement (the “Second Amended Note Purchase Agreement”) with BIA and Plexus that expands the amount of borrowing under the Amended Note Purchase Agreement on April 30, 2012 and adds BNY Mellon-Alcentra Mezzanine III, L.P. (“Alcentra”) as a new note purchaser and lender thereunder (together with BIA and Plexus, the “Note Holders”). The Second Amended Note Purchase Agreement provides for a total financing commitment of $11.5 million, of which $8.5 million was immediately funded (the “BIA Notes” and together with the "Plexus Notes", the “Notes”). The remaining $3.0 million of the committed financing may be called by the Company, subject to certain conditions, on or before December 31, 2013. The additional funding was issued at a discount to face value of $1.3 million, due to the warrants issued, and the discount is being amortized, into interest expense, over the life of the Notes.

The Notes mature on June 6, 2016. The obligations evidenced by the Notes shall bear interest at a rate of 13.5% per annum, of which (i) at least 11.5% per annum shall be payable, in cash, monthly (“Cash Interest Portion”) and (ii) 2.0% per annum shall be, at the Company’s option, paid in cash or paid-in-kind. If the Company achieves certain performance criteria, the obligations evidenced by the Notes shall bear interest at a rate of 12.0% per annum, with a Cash Interest Portion of at least 11.0% per annum.

The obligations of the Company under the Second Amended Note Purchase Agreement are secured by a second lien on substantially all of Company’s tangible and intangible assets. Pursuant to a pledge agreement, dated June 6, 2011, by and between BIA and the Company, the obligations of the Company are also secured by a pledge in all of the equity interests of the Company in its respective United States subsidiaries and a pledge of 65% of the voting equity interests and all of the non-voting equity interests of the Company in its respective non-United States subsidiaries.

Concurrent with entering into the Second Amended Note Purchase Agreement, Webster and the Note Holders entered into an intercreditor and subordination agreement which governs, among other things, ranking and collateral access for the respective lenders.

Warrants

On June 6, 2011, pursuant to the Purchase Agreement, the Company issued to BIA a warrant to purchase from the Company 634,648 shares of the Company’s common stock, at an exercise price equal to $1.144 per share (as adjusted from time to time as provided in the Purchase Agreement). Upon the additional $1.0 million funding, the Company issued to BIA an additional warrant to purchase from the Company 63,225 shares of the Company’s common stock, at an exercise price equal to $1.181 per share.

On April 30, 2012, pursuant to the Amended Note Purchase Agreement, the Company issued to Plexus a warrant to purchase from the Company 535,135 shares of the Company’s common stock at an exercise price equal to $2.208 per share (as adjusted from time to time as provided in the warrant). On December 31, 2012, the Company issued to Plexus an additional warrant to purchase from the Company 178,378 shares of the Company’s common stock, at an exercise price equal to $2.542 per share (as adjusted from time to time as provided in the warrant). Upon a change of control (as defined in the Amended Note Purchase Agreement), the repayment of the Notes prior to the maturity date of the Notes, the occurrence of an event of default under the Notes or the maturity date of the Notes, the holder of the warrant shall have the option to require the Company to repurchase from the holder the warrant and any shares received upon exercise of the warrant and then held by the holder, which repurchase would be at a price equal to the greater of the closing price of the Company’s common stock on such date or a price determined by reference to the Company’s adjusted enterprise value on such date, in each case, with respect to any warrant, less the exercise price per share.

On April 30, 2013, pursuant to the Second Amended Note Purchase Agreement, the Company issued to Plexus a warrant to purchase from the Company 246,911 shares of the Company’s common stock, to BIA a warrant to purchase 356,649 shares of the Company’s common stock, and to Alcentra a warrant to purchase from the Company 329,214 shares of the Company’s common stock, each at an exercise price equal to $3.306 per share.

The Company evaluated the down round ratchet feature embedded in the warrants and after considering ASC 480, Distinguishing Liabilities from Equity, which establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity, and ASC 815, Derivatives and Hedging, the Company concluded the warrants should be treated as a derivative and recorded a liability for the original fair value amount of $2.6 million on the respective dates of issuance. During the nine months ended September 30, 2013, the warrant liability was marked to market which resulted in a loss of $4.5 million. The balance of the warrant liability was $8.2 million as of September 30, 2013, which is included in other long-term liabilities.

Subordinated Notes

On February 8, 2010, the Company completed a financing transaction in which it sold debt and common stock (“February 2010 Units”), resulting in $2.4 million of proceeds to the Company. The February 2010 Units consisted of $1.5 million in aggregated principal amount of the Company’s subordinated promissory notes due February 8, 2012, and $0.9 million of the Company’s common stock. The subordinated promissory notes were issued at a discount to face value of $0.2 million and the discount is being amortized into interest expense over the life of the Notes. Interest on the subordinated promissory notes accrues at 10% per annum. In May 2011, $1.4 million of the February 2010 Units subordinated notes were amended to mature in four equal installments on March 31, June 30, September 30 and December 31, 2013. The remaining $0.1 million of the February 2010 Units subordinated notes were paid off in February 2012.

principal amount of the Company’s subordinated promissory notes due December 31, 2013 and $1.1 million of the Company’s common stock. On February 16, 2011, the Company and the holders of the December 2010 Units amended the offering solely to increase the aggregate principal amount available for issuance, resulting in an additional $0.4 million of proceeds to the Company, consisting of $0.2 million in the aggregate principal amount of the Company’s subordinated promissory notes due December 31, 2013, and $0.2 million of the Company’s common stock. The subordinated promissory notes were issued at a discount to face value of $0.3 million and the discount is being amortized into interest expense over the life of the Notes. Interest on the subordinated promissory notes accrues at 10% per annum. All accrued interest as of December 31, 2012 was paid.

On March 28, 2013, the Company issued 2,259,617 shares of its common stock in a transaction exempt from registration under the Securities Act of 1933, as amended. The purchase price of the common stock in this private offering was $3.00 per share, representing a 15% discount to the average closing price of the common stock for the 30-day period preceding the closing of the offering. On April 30, 2013, the Company issued 783,334 shares of its common stock for a purchase price of $3.00 per share, representing the average closing price of the stock for that day.

Among the purchasers of the common stock in the private offering on March 28, 2013, were certain of the holders of subordinated promissory notes due 2013, who agreed to accept payment for the principal amount of their notes and the accrued but unpaid interest thereon in the form of common stock. Out of the $2.7 million aggregate principal amount of the Company’s subordinate promissory notes due 2013 outstanding before this private offering, the holders of $2.6 million in aggregate principal amount of the notes accepted common stock in the private offering in full satisfaction of their notes. The Company issued an aggregate of 982,356 shares of common stock to these investors, in payment of the principal amount of their notes and accrued but unpaid interest in the aggregate amount of $0.3 million. The remainder of the common stock issued in the private offering was paid for in cash.

As a result of the 15% discount to the average closing price of the common stock, GTT recorded a loss in the amount of $0.7 million on the 982,356 shares that were issued to extinguish the subordinate promissory notes. In accordance with ASC Section 470-50-40, Derecognition – General, these losses were included in debt extinguishment loss in the condensed consolidated statements of operations for the nine months ended September 30, 2013.

The shares of common stock sold in the private offering are restricted securities under the Securities Act of 1933. The Company entered into a Registration Rights Agreement with the purchasers of common stock in the private offering, pursuant to which the Company agreed to file with the Securities and Exchange Commission a registration statement related to the resale of such common stock by the investors.

The previous balance of the subordinate promissory notes of $2.7 million included $2.3 million due to a related party, Universal Telecommunications, Inc. H. Brian Thompson, the Company’s Executive Chairman of the Board of Directors, is also the head of Universal Telecommunications, Inc., his own private equity investment and advisory firm. Also, included in the previous balance was $0.2 million of the subordinated promissory notes held by officers and directors of the Company.

The remaining total subordinate promissory notes of $22,000 are included in short-term debt as of September 30, 2013. Accrued but unpaid interest was $2,000 as of September 30, 2013.

Promissory Note

As part of the June 2011 acquisition of PacketExchange, the Company assumed a promissory note of approximately $0.7 million. During the quarter ended March 31, 2013, the remaining balance of $0.2 million was paid.

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.

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.

A valuation allowance has been recorded against the Company’s deferred tax assets to the extent those assets are not offset by deferred tax liabilities which have a structural certainty of reversal or those assets that cannot be realized against prior period taxable income.

NOTE 9 — RESTRUCTURING COSTS, EMPLOYEE TERMINATION AND OTHER ITEMS

During the nine months ended September 30, 2013, the Company incurred costs associated with executing and closing the IDC and Tinet acquisition, including payroll and employee severance costs, professional fees, termination costs associated with network grooming, and travel expenses. During the nine months ended September 30, 2013, the Company incurred $7.7 million in costs associated with executing and closing the IDC and Tinet acquisition.

The restructuring charges and accruals established by the Company, and activities related thereto, are summarized as follows for the nine months ended September 30, 2013 (amounts in thousands):



	Charges Net of Reversals		Cash Payments		Total

Balance, December 31, 2012	$	—	$	—	$	—
Employment costs	4,600		4,532		68
Professional fees	1,565		1,157		408
Integration expenses	1,282		566		716
Travel and other expenses	230		220		10
Balance, September 30, 2013	$	7,677	$	6,475	$	1,202

NOTE 10 — LOSS PER SHARE

Basic loss per share is computed by dividing net 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 and warrants.

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Numerator for basic and diluted EPS – loss available to common stockholders	$	(4,290	)	$	(498	)	$	(17,096	)	$	(1,247	)
Denominator for basic EPS – weighted average shares	22,932,515			19,014,825			21,578,315			18,916,658
Effect of dilutive securities	—			—			—			—
Denominator for diluted EPS – weighted average shares	22,932,515			19,014,825			21,578,315			18,916,658

Loss per share: basic	$	(0.19	)	$	(0.03	)	$	(0.79	)	$	(0.07	)
Loss per share: diluted	$	(0.19	)	$	(0.03	)	$	(0.79	)	$	(0.07	)

The table below details the anti-dilutive items that were excluded in the computation of earnings per share (amounts in thousands):



	Three Months Ended September 30,		Nine Months Ended September 30,
	2013	2012	2013	2012
BIA warrant	1,055	698	1,055	698
Plexus warrant	960	535	960	535
Alcentra warrant	329	—	329	—
Stock options	1,711	1,354	1,711	1,354
Totals	4,055	2,587	4,055	2,587

NOTE 11 — SUBSEQUENT EVENT

On November 1, 2013, the Company amended the Second Amended Note Purchase Agreement with the Note Holders, to reduce the interest rate from 13.5% per annum to 11.0% per annum. The remaining $3.0 million of the committed financing was called by the Company. The Note Holders waived the Company’s requirement to issue additional warrants.

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 in conjunction with our financial statements and related notes that appear elsewhere in this report and in our annual report on Form 10-K, as amended, for the year ended December 31, 2012. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect plans, estimates and beliefs of management of the Company. When used in this document, the words “anticipate”, “believe”, “plan”, “estimate” and “expect” and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. Such statements reflect the current views of management with respect to future events and are subject to certain risks, uncertainties and assumptions. Our actual results could differ materially from those discussed in the forward-looking statements. For a more detailed description of these risks and factors, please see the Company’s 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission and Part II Item 1A of this quarterly report on Form 10-Q.

Overview

As of September 30, 2013, our customer base was comprised of over 2,000 businesses. Our five largest customers accounted for approximately 19% of consolidated revenues for the nine months ended September 30, 2013.

Costs and Expenses

The Company’s cost of revenue consists of the costs for its core network consisting of a global Layer 2 Switched Ethernet mesh network as well as IP Transit/Internet Access through approximately 200 PoPs and for off-net procurement of services associated with customer services across North America, 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, the Company has agreed to certain special commitments with vendors in order to obtain better rates, terms and conditions for the procurement of services from those vendors. These commitments include volume purchase commitments and purchases on a longer-term basis than the term for which the applicable customer has committed.

Our supplier contracts do not have any market related net settlement provisions. The Company has not entered into, and has no plans to enter into, any supplier contracts which involve financial or derivative instruments. The supplier contracts are entered into solely for the direct purchase of telecommunications capacity, which is resold by the Company in its normal course of business.

Other than cost of revenue, the Company’s most significant operating expenses are employment costs. As of September 30, 2013, the Company had 182 employees and employment costs comprised approximately 11% of total operating expenses.

Locations of Offices and Origins of Revenue

We are headquartered just outside of Washington, DC, in McLean, Virginia, and have offices in London, Chicago, Denver, Frankfurt, Germany and Milan and Cagliari, Italy. For the nine months ended September 30, 2013, approximately 59% of our consolidated revenue was earned from operations based in the United States. Approximately 23% of our was generated from operations based in Italy, 15% based in the United Kingdom, and 3% from operations in other countries.

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 year ended December

31, 2012 and Note 2 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 of the Company

Three months ended September 30, 2013 compared to three months ended September 30, 2012

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 September 30, 2013 and 2012 (amounts in thousands):



	Three Months Ended September 30,
	2013			2012

Revenue	$	45,106		$	28,412
Cost of revenue	29,538			19,982

Gross margin	15,568			8,430
	34.5		%	29.7		%
Operating expenses, depreciation and amortization	13,548			7,073

Operating income	$	2,020		$	1,357

Net loss	$	(4,290	)	$	(498	)

Revenue. Revenue for the three months ended September 30, 2013, was $45.1 million. Revenue for the three months ended September 30, 2012, was $28.4 million. The increase in revenue is primarily due to the acquisition of Tinet on April 30, 2013, as well as increased sales to new and existing customers offset by disconnected services.

Cost of Revenue and Gross Margin. Cost of revenue and gross margin for the three months ended September 30, 2013, were $29.5 million and $15.6 million, respectively. For the three months ended September 30, 2012, cost of revenue and gross margin were $20.0 million and $8.4 million, respectively. The increase is primarily due to the Tinet acquisition, as well as increased sales to new and existing customers offset by disconnected services. The gross margin percentage improvement is due to the higher margins of Tinet as well as an increase in network-based sales.

Operating Expenses. Operating expenses, exclusive of cost of revenue, were $13.5 million and $7.1 million for the three months ended September 30, 2013 and 2012, respectively. The increase was due primarily to the depreciation and amortization of the network and intangible assets obtained in the Tinet acquisition, and the increase in employment costs resulting from the increase in employees following the Tinet acquisition. These changes are illustrated in the table below (amounts in thousands):



	Three Months Ended September 30,
	2013		2012

Selling, general and administrative expenses (excluding noncash compensation)	$	8,005	$	4,723
Noncash compensation	386		148
Amortization of intangible assets	3,029		1,488
Depreciation	2,128		714

Totals	$	13,548	$	7,073

Nine months ended September 30, 2013 compared to nine months ended September 30, 2012

Overview. The financial information presented in the tables below is comprised of the unaudited condensed consolidated financial information of the Company for the nine months ended September 30, 2013 and 2012 (amounts in thousands):



	Nine months ended September 30,
	2013			2012

Revenue	$	111,267		$	80,293
Cost of revenue	73,421			56,491

Gross margin	37,846			23,802
	34.0		%	29.6		%
Operating expenses, depreciation and amortization	41,988			20,189

Operating (loss) income	$	(4,142	)	$	3,613

Net loss	$	(17,096	)	$	(1,247	)

Revenue. Revenue for the nine months ended September 30, 2013, was $111.3 million. Revenue for the nine months ended September 30, 2012, was $80.3 million. The increase in revenue is primarily due to the acquisitions of nLayer on April 30, 2012, and Tinet on April 30, 2013, as well as increased sales to new and existing customers offset by disconnected services.

Cost of Revenue and Gross Margin. Cost of revenue and gross margin for the nine months ended September 30, 2013, were $73.4 million and $37.8 million, respectively. For the nine months ended September 30, 2012, cost of revenue and gross margin were $56.5 million and $23.8 million, respectively. The increase is primarily due to the nLayer and Tinet acquisitions, as well as increased sales to new and existing customers offset by disconnected services. The gross margin percentage improvement is due to the higher margins of nLayer and Tinet as well as an increase in network-based sales.

Operating Expenses. Operating expenses, exclusive of cost of revenue, were $42.0 million and $20.2 million for the nine months ended September 30, 2013 and 2012, respectively. The increase was due primarily to the depreciation and amortization of the network and intangible assets obtained in the nLayer and Tinet acquisitions, the employment costs resulting from the increase in employees following the Tinet acquisition, and the restructuring costs, employee termination and other items incurred in the Tinet acquisition. These changes are illustrated in the table below (amounts in thousands):



	Nine Months Ended September 30,
	2013		2012

Selling, general and administrative expenses (excluding noncash compensation)	$	21,516	$	14,117
Noncash compensation	893		441
Restructuring costs, employee termination and other items	7,677		701
Amortization of intangible assets	7,293		3,263
Depreciation	4,609		1,667

Totals	$	41,988	$	20,189

Liquidity and Capital Resources

The following summarizes the debt activity of the Company during the nine months ended September 30, 2013 (amounts in thousands):



	Total Debt			Webster Term Loan			Mezzanine Debt		SVB Term Loan			Line of Credit			Subordinated Notes			Promissory Note

Debt obligation as of December 31, 2012	$	42,829		$	—		$	15,481	$	24,500		$	—		$	2,611		$	237
Issuance, net of discount	78,945			65,000			7,151		794			6,000			—			—
Debt discount amortization	420			—			397		—			—			23			—
Payments	(30,219		)	(1,625		)	—		(25,294		)	(3,000		)	(63		)	(237		)
Extinguishment of debt	(2,549		)	—			—		—			—			(2,549		)	—
Debt obligation as of September 30, 2013	$	89,426		$	63,375		$	23,029	$	—		$	3,000		$	22		$	—

Senior Debt

Mezzanine Debt

funding was issued at a discount to face value of $45,000, due to the warrants issued, and the discount is being amortized, into interest expense, over the life of the notes.

Warrants

Subordinated Notes

On December 31, 2010, the Company completed a financing transaction in which it sold debt and common stock (“December 2010 Units”), resulting in $2.2 million of proceeds to the Company. The December 2010 Units consisted of $1.1 million in aggregate principal amount of the Company’s subordinated promissory notes due December 31, 2013 and $1.1 million of the Company’s common stock. On February 16, 2011, the Company and the holders of the December 2010 Units amended the offering solely to increase the aggregate principal amount available for issuance, resulting in an additional $0.4 million of proceeds to the Company, consisting of $0.2 million in the aggregate principal amount of the Company’s subordinated promissory notes due December 31, 2013, and $0.2 million of the Company’s common stock. The subordinated promissory notes were issued at a discount to face value of $0.3 million and the discount is being amortized into interest expense over the life of the Notes. Interest on the subordinated promissory notes accrues at 10% per annum. All accrued interest as of December 31, 2012 was paid.

The remaining total subordinate promissory notes of $22,000 are included in short-term debt as of September 30, 2013. Accrued but unpaid interest was $2,000 as of September 30, 2013.

Promissory Note

Liquidity Assessment

Cash provided by operating activities for the nine months ended September 30, 2013, was $0.9 million. Cash provided by operating activities for the nine months ended September 30, 2012 was $2.2 million.

Cash used in investing activities was approximately $55.7 million for the nine months ended September 30, 2013, consisting primarily of the $51.9 million of cash used, net of cash acquired, in the acquisition of Tinet and IDC. Cash flows used in investing activities were $16.9 million for the nine months ended September 30, 2012.

Net cash provided by financing activities for the nine months ended September 30, 2013, was $54.8 million, consisting primarily of the $65.0 million draw on the Webster term loan. Cash flows provided by financing activities were $15.5 million for the nine months ended September 30, 2012.

Management monitors cash flow and liquidity requirements. Based on the Company’s cash, the Webster Credit Agreement, and analysis of the anticipated working capital requirements, management believes the Company has sufficient liquidity to fund the business and meet its contractual obligations for at least the next twelve months. The Company’s current planned cash requirements for the next twelve months are based upon certain assumptions, including its ability to manage expenses and the growth of revenue from service arrangements. In connection with the activities associated with the services, the Company expects to incur expenses, including provider fees, employee compensation and consulting fees, professional fees, sales and marketing, insurance and interest expense.

If the Company’s operating performance differs significantly from our forecasts, we may be required to reduce our operating expenses and curtail capital spending, and we may not remain in compliance with our debt covenants. In addition, if the Company were unable to fully fund its cash requirements through operations and current cash on hand, the Company would need to obtain additional financing through a combination of equity and subordinated debt financings and/or renegotiation of terms of its existing debt. If any such activities become necessary, there can be no assurance that the Company would be successful in obtaining additional financing or modifying its existing debt terms.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

Interest due on the Company’s loans is based upon the applicable stated fixed contractual rate with the lender. Interest earned on the Company’s bank accounts is linked to the applicable base interest rate. For the nine months ended September 30, 2013 and 2012, the Company had interest expense, net of interest income, of approximately $5.6 million and $3.3 million, respectively. The Company believes that its results of operations are not materially affected by changes in interest rates.

Exchange Rate Sensitivity

Approximately 41% of the Company’s revenues for the nine months ended September 30, 2013, are from services provided outside of the United States. As a consequence, a material percentage of the Company’s revenues are billed in British Pounds Sterling or Euros. Since we operate on a global basis, we are exposed to various foreign currency risks. First, our consolidated financial statements are denominated in U.S. Dollars, but a significant portion of our revenue is generated in the local currency of our foreign subsidiaries. Accordingly, changes in exchange rates between the applicable foreign currency and the U.S. Dollar will affect the translation of each foreign subsidiary’s financial results into U.S. Dollars for purposes of reporting consolidated financial results.

In addition, because of the global nature of our business, we may from time to time be required to pay a supplier in one currency while receiving payments from the underlying customer of the service in another currency. Although it is the Company’s general policy to pay its suppliers in the same currency that it will receive cash from customers, where these circumstances arise with respect to supplier invoices in one currency and customer billings in another currency, the Company’s gross margins may increase or decrease

based upon changes in the exchange rate. Such factors did not have a material impact on the Company’s results in the nine months ended September 30, 2013.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s 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 its 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 September 30, 2013, 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 have not been any changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s 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 its 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.

PART II – Other Information

ITEM 1. LEGAL PROCEEDINGS

We are subject to legal proceedings, claims and litigation arising in the ordinary course of business. Although the outcome of these matters is currently not determinable, GTT believes it has adequate provisions for any such matters and we do not expect that the ultimate costs to resolve these matters will have a material adverse impact on our financial condition, results of operations or cash flows. As of September 30, 2013, the Company was not subject to any material legal proceedings.

ITEM 1A. RISK FACTORS

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. Below are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or telecommunications and/or technology companies in general, may also impair our business operations. If any of these risks or uncertainties actually occurs, our business, financial condition and operating results could be materially adversely affected.

Risks Relating to Our Business and Operations

We depend on several large customers, and the loss of one or more of these customers, or a significant decrease in total revenue from any of these customers, would likely reduce our revenue and income.

As of September 30, 2013, our five largest customers accounted for approximately 19% of our total service revenue. If we were to lose all of the underlying services from one or more of our large customers, or if one or more of our large customers were to significantly reduce the services purchased from us or otherwise renegotiate the terms on which services are purchased from us, our revenue could decline and our results of operations would suffer.

If our customers elect to terminate their agreements with us, our business, financial condition and results of operations may be adversely affected.

Our services are sold under agreements that generally have initial terms of between one and three years. Following the initial terms, these agreements generally automatically renew for successive month-to-month, quarterly or annual periods, but can be terminated by the customer without cause with relatively little notice during a renewal period. In addition, certain government customers may have rights under Federal law with respect to termination for convenience that can serve to minimize or eliminate altogether the liability payable by that customer in the event of early termination. Our customers may elect to terminate their agreements as a result of a number of factors, including their level of satisfaction with the services they are receiving, their ability to continue their operations due to budgetary or other concerns and the availability and pricing of competing services. If customers elect to terminate their agreements with us, our business, financial condition and results of operation may be adversely affected.

Competition in the industry in which we do business is intense and growing, and our failure to compete successfully could make it difficult for us to add and retain customers or increase or maintain revenue.

The markets in which we operate are rapidly evolving and highly competitive. We currently or potentially compete with a variety of companies, including some of our transport suppliers, with respect to their products and services, including global and regional telecommunications service providers such as AT&T, British Telecom, NTT, Level 3, Qwest and Verizon, among others.

The industry in which we operate is consolidating, which is increasing the size and scope of our competitors. Competitors could benefit from assets or businesses acquired from other carriers or from strategic alliances in the telecommunications industry. New entrants could enter the market with a business model similar to ours. Our target markets may support only a limited number of competitors. Operations in such markets with multiple competitive providers may be unprofitable for one or more of such providers. Prices in the data transmission and internet access business have declined in recent years and may continue to decline.

Many of our potential competitors have certain advantages over us, including:


•	substantially greater financial, technical, marketing, and other resources, including brand or corporate name recognition;


•	substantially lower cost structures, including cost structures of facility-based providers who have reduced debt and other obligations through bankruptcy or other restructuring proceedings;


•	larger client bases;


•	longer operating histories;


•	more established relationships in the industry; and


•	larger geographic presence.

Our competitors may be able to use these advantages to:


•	develop or adapt to new or emerging technologies and changes in client requirements more quickly;


•	take advantage of acquisitions and other opportunities more readily;


•	enter into strategic relationships to rapidly grow the reach of their networks and capacity;


•	devote greater resources to the marketing and sale of their services;


•	adopt more aggressive pricing and incentive policies, which could drive down margins; and


•	expand their offerings more quickly.

If we are unable to compete successfully against our current and future competitors, our revenue and gross margin could decline and we would lose market share, which could materially and adversely affect our business.

We might require additional capital to support business growth, and this capital might not be available on favorable terms, or at all.

Our operations or expansion efforts may require substantial additional financial, operational and managerial resources. As of September 30, 2013, we had approximately $4.9 million in cash, and our current liabilities were $32.1 million greater than current assets. We may have insufficient cash to fund our working capital or other capital requirements and may be required to raise additional funds to continue or expand our operations. If we are required to obtain additional funding in the future, we may have to sell assets, seek debt financing, or obtain additional equity capital. Our ability to sell assets or raise additional equity or debt capital will depend on the condition of the capital and credit markets and our financial condition at such time. Accordingly, additional capital may not be available to us, or may only be available on terms that adversely affect our existing stockholders, or that restrict our operations. For example, if we raise additional funds through issuances of equity or convertible debt securities, our existing stockholders could suffer dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our common stock. Also, if we were forced to sell assets, there can be no assurance regarding the terms and conditions we could obtain for any such sale, and if we were required to sell assets that are important to our current or future business, our current and future results of operations could be materially and adversely affected. We have granted security interests in substantially all of our assets to secure the repayment of our indebtedness maturing between 2013 and 2016, and if we are unable to satisfy our obligations, the lenders could foreclose on their security interests.

Because our business is dependent upon selling telecommunications network capacity purchased from third parties, the failure of our suppliers and other service providers to provide us with services, or disputes with those suppliers and service providers, could affect our ability to provide quality services to our customers and have an adverse effect on our operations and financial condition.

Much of our business consists of integrating and selling network capacity purchased from facility-based telecommunications carriers. Accordingly, we will be largely dependent on third parties to supply us with services. Occasionally in the past, our operating companies have experienced delays or other problems in receiving services from third party providers. Disputes also arise from time to time with suppliers with respect to billing or interpretation of contract terms. Any failure on the part of third parties to adequately supply us or to maintain the quality of their facilities and services in the future, or the termination of any significant contracts by a supplier, could cause customers to experience delays in service and lower levels of customer care, which could cause them to switch providers. Furthermore, disputes over billed amounts or interpretation of contract terms could lead to claims against us, some of

which if resolved against us could have an adverse impact on our results of operations and/or financial condition. Suppliers may also attempt to impose onerous terms as part of purchase contract negotiations. Although we know of no pending or threatened claims with respect to past compliance with any such terms, claims asserting any past noncompliance, if successful, could have a material adverse effect on our operations and/or financial condition. Moreover, to the extent that key suppliers were to attempt to impose such provisions as part of future contract negotiations, such developments could have an adverse impact on the company’s operations. Finally, some of our suppliers are potential competitors. We cannot guarantee that we will be able to obtain use of facilities or services in a timely manner or on terms acceptable and in quantities satisfactory to us.

Industry consolidation may affect our ability to obtain services from suppliers on a timely or cost-efficient basis.

A principal method of connecting with our customers is through local transport and last mile circuits we purchase from incumbent carriers such as AT&T and Verizon, or competitive carriers such as Time Warner Telecom, XO, or Level 3. In recent years, AT&T, Verizon, and Level 3 have acquired competitors with significant local and/or long-haul network assets. Industry consolidation has occurred on a lesser scale as well through mergers and acquisitions involving regional or smaller national or international competitors. Generally speaking, we believe that a marketplace with multiple supplier options for transport access is important to the long-term availability of competitive pricing, service quality, and carrier responsiveness. It is unclear at this time what the long-term impact of such consolidation will be, or whether it will continue at the same pace as it has in recent years; we cannot guarantee that we will continue to be able to obtain use of facilities or services in a timely manner or on terms acceptable and in quantities satisfactory to us from such suppliers.

We may occasionally have certain sales commitments to customers that extend beyond the Company’s commitments from its underlying suppliers.

The Company’s financial results could be adversely affected if the Company were unable to purchase extended service from a supplier at a cost sufficiently low to maintain the Company’s margin for the remaining term of its commitment to a customer. While the Company has not encountered material price increases from suppliers with respect to continuation or renewal of services after expiration of initial contract terms, the Company cannot be certain that it would be able to obtain similar terms and conditions from suppliers. In most cases where the Company has faced any price increase from a supplier following contract expiration, the Company has been able to locate another supplier to provide the service at a similar or reduced future cost; however, the Company’s suppliers may not provide services at such cost levels in the future.

We may make purchase commitments to vendors for longer terms or in excess of the volumes committed by our underlying customers.

The Company attempts to match its purchase of network capacity from its suppliers and its service commitments from its customers. However, from time to time, the Company has obligations to its suppliers that exceed the duration of the Company’s related customer contracts or that are for capacity in excess of the amount for which it has Customer commitments. This could arise based upon the terms and conditions available from the Company’s suppliers, from an expectation of the Company that we will be able to utilize the excess capacity, as a result of a breach of a customer’s commitment to us, or to support fixed elements of the Company’s network. Under any of these circumstances, the Company would incur the cost of the network capacity from its supplier without having corresponding revenue from its customers, which could result in a material and adverse impact on the Company’s operating results.

System disruptions, either in our network or in third party networks on which we depend, could cause delays or interruptions of our service, which could cause us to lose customers, or incur additional expenses.

Our customers depend on our ability to provide network availability with minimal interruption or degradation in services. The ability to provide this service depends in part on the networks of third party transport suppliers. The networks of transport suppliers may be interrupted as a result of various events, many of which they cannot control, including fire, human error, earthquakes and other natural disasters, power loss, telecommunications failures, terrorism, sabotage, vandalism, computer viruses or other infiltration by third parties or the financial distress or other event adversely affecting a supplier, such as bankruptcy or liquidation.

Although we have attempted to design our network services to minimize the possibility of service disruptions or other outages, in addition to risks associated with third party provider networks, our services may be disrupted by problems on our own systems, that affect our central offices, corporate headquarters, network operations centers, or network equipment.

Disruptions or degradations in our service, could subject us to legal claims and liability for losses suffered by customers due to our inability to provide service. If our network failure rates are higher than permitted under the applicable customer contracts, we may incur significant expenses related to network outage credits, which would reduce our revenue and gross margin. In addition, customers

may, under certain contracts, have the ability to terminate services in case of prolonged or severe service disruptions or other outages which would also adversely impact our results of operations. Our reputation could be harmed if we fail to provide a reasonably adequate level of network availability, and as a result we could find it more difficult to attract and retain customers.

If the products or services that we market or sell do not maintain market acceptance, our results of operations will be adversely affected.

Certain segments of the telecommunications industry are dependent on developing and marketing new products and services that respond to technological and competitive developments and changing customer needs. We cannot assure you that our products and services will gain or obtain increased market acceptance. Any significant delay or failure in developing new or enhanced technology, including new product and service offerings, could result in a loss of actual or potential market share and a decrease in revenue.

The communications market in which we operate is highly competitive; we could be forced to reduce prices, may lose customers to other providers that offer lower prices and have problems attracting new customers.

The communications industry is highly competitive and pricing for some of our key service offerings, such as our dedicated IP transport services, have been generally declining. If our costs of service, including the cost of leasing underlying facilities, do not decline in a similar fashion, we could experience significant margin compression, reduction of profitability and loss of business.

If carrier and enterprise connectivity demand does not continue to expand, we may experience a shortfall in revenue or earnings or otherwise fail to meet public market expectations.

The growth of our business will be dependent, in part, upon the increased use of carrier and enterprise connectivity services and our ability to capture a higher proportion of this market. Increased usage of enterprise connectivity services depends on numerous factors, including:


•	the willingness of enterprises to make additional information technology expenditures;


•	the availability of security products necessary to ensure data privacy over the public networks;


•	the quality, cost, and functionality of these services and competing services;


•	the increased adoption of wired and wireless broadband access methods;


•	the continued growth of broadband-intensive applications; and


•	the proliferation of electronic devices and related applications.

Our long sales and service deployment cycles require us to incur substantial sales costs that may not result in related revenue.

Our business is characterized by long sales cycles between the time a potential customer is contacted and a customer contract is signed. The average sales cycle can be as little as two to six weeks for existing customers and three to six months or longer for new customers with complicated service requirements. Furthermore, once a customer contract is signed, there is typically an extended period of between 30 and 120 days before the customer actually begins to use the services, which is when we begin to realize revenue. As a result, we may invest a significant amount of time and effort in attempting to secure a customer, which investment may not result in near term, if any, revenue. Even if we enter into a contract, we will have incurred substantial sales-related expenses well before we recognize any related revenue. If the expenses associated with sales increase, if we are not successful in our sales efforts, or if we are unable to generate associated offsetting revenue in a timely manner, our operating results could be materially and adversely affected.

Because much of our business is international, our financial results may be affected by foreign exchange rate fluctuations.

Approximately 41% of our revenue comes from countries outside of the United States. As such, other currencies, particularly the Euro and the British Pound Sterling can have an impact on the Company’s results (expressed in U.S. Dollars). Currency variations also contribute to variations in sales in impacted jurisdictions. Accordingly, fluctuations in foreign currency rates, most notably the strengthening of the dollar against the euro and the pound, could have a material impact on our revenue growth in future periods. In

addition, currency variations can adversely affect margins on sales of our products in countries outside of the United States and margins on sales of products that include components obtained from suppliers located outside of the United States.

Because much of our business is international, we may be subject to local taxes, tariffs, statutory requirements, or other restrictions in foreign countries, which may reduce our profitability.

The Company is subject to various risks associated with conducting business worldwide. Revenue from our foreign subsidiaries, or other locations where we provide or procure services internationally, may be subject to additional taxes in some foreign jurisdictions. Additionally, some foreign jurisdictions may subject us to additional withholding tax requirements or the imposition of tariffs, exchange controls, or other restrictions on foreign earnings. The Company is also subject to foreign government employment standards, labor strikes and work stoppages. These risks and any other restrictions imposed on our foreign operations may increase our costs of business in those jurisdictions, which in turn may reduce our profitability.

If our goodwill or amortizable intangible assets become further impaired we may be required to record a significant charge to earnings.

Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include reduced future cash flow estimates, a decline in stock price and market capitalization, and slower growth rates in our industry. During the years ended December 31, 2012 and 2011, the Company recorded no impairment to goodwill and amortizable intangible assets. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, negatively impacting our results of operations.

The ability to implement and maintain our databases and management information systems is a critical business requirement, and if we cannot obtain or maintain accurate data or maintain these systems, we might be unable to cost-effectively provide solutions to our customers.

To be successful, we must increase and update information in our databases about network pricing, capacity and availability. Our ability to provide cost-effective network availability and access cost management depends upon the information we collect from our transport suppliers regarding their networks. These suppliers are not obligated to provide this information and could decide to stop providing it to us at any time. Moreover, we cannot be certain that the information that these suppliers share with us is accurate. If we cannot continue to maintain and expand the existing databases, we may be unable to increase revenue or to facilitate the supply of services in a cost-effective manner.

Furthermore, we are in the process of reviewing, integrating, and augmenting our management information systems to facilitate management of client orders, client service, billing, and financial applications. Our ability to manage our businesses could be materially adversely affected if we fail to successfully and promptly maintain and upgrade the existing management information systems.

If we are unable to protect our intellectual property rights, competitors may be able to use our technology or trademarks, which could weaken our competitive position.

We own certain proprietary programs, software and technology. However, we do not have any patented technology that would preclude competitors from replicating our business model; instead, we rely upon a combination of know-how, trade secret laws, contractual restrictions, and copyright, trademark and service mark laws to establish and protect our intellectual property. Our success will depend in part on our ability to maintain or obtain (as applicable) and enforce intellectual property rights for those assets, both in the United States and in other countries. Although our Americas operating company has registered some of its service marks in the United States, we have not otherwise applied for registration of any marks in any other jurisdiction. Instead, with the exception of the few registered service marks in the United States, we rely exclusively on common law trademark rights in the countries in which we operate.

We may file applications for patents, copyrights and trademarks as our management deems appropriate. We cannot assure you that these applications, if filed, will be approved or that we will have the financial and other resources necessary to enforce our proprietary rights against infringement by others. Additionally, we cannot assure you that any patent, trademark, or copyright obtained by us will not be challenged, invalidated, or circumvented, and the laws of certain foreign countries may not protect intellectual property rights to the same extent as do the laws of the United States or the member states of the European Union. Finally, although we intend to undertake reasonable measures to protect the proprietary assets of our combined operations, we cannot guarantee that

we will be successful in all cases in protecting the trade secret status of certain significant intellectual property assets. If these assets should be misappropriated, if our intellectual property rights are otherwise infringed, or if a competitor should independently develop similar intellectual property, this could harm our ability to attract new clients, retain existing customers and generate revenue.

Intellectual property and proprietary rights of others could prevent us from using necessary technology to provide our services or otherwise operate our business.

We utilize data and processing capabilities available through commercially available third-party software tools and databases to assist in the efficient analysis of network engineering and pricing options. Where such technology is held under patent or other intellectual property rights by third parties, we are required to negotiate license agreements in order to use that technology. In the future, we may not be able to negotiate such license agreements at acceptable prices or on acceptable terms. If an adequate substitute is not available on acceptable terms and at an acceptable price from another software licensor, we could be compelled to undertake additional efforts to obtain the relevant network and pricing data independently from other, disparate sources, which, if available at all, could involve significant time and expense and adversely affect our ability to deliver network services to customers in an efficient manner.

Furthermore, to the extent that we are subject to litigation regarding the ownership of our intellectual property or the licensing and use of others’ intellectual property, this litigation could:


•	be time-consuming and expensive;


•	divert attention and resources away from our daily business;


•	impede or prevent delivery of our products and services; and


•	require us to pay significant royalties, licensing fees, and damages.

Parties making claims of infringement may be able to obtain injunctive or other equitable relief that could effectively block our ability to provide our services and could cause us to pay substantial damages. In the event of a successful claim of infringement, we may need to obtain one or more licenses from third parties, which may not be available at a reasonable cost, if at all. The defense of any lawsuit could result in time-consuming and expensive litigation, regardless of the merits of such claims, and could also result in damages, license fees, royalty payments, and restrictions on our ability to provide our services, any of which could harm our business.

We continue to evaluate merger and acquisition opportunities and may purchase additional companies in the future, and the failure to integrate them successfully with our existing business may adversely affect our financial condition and results of operations.

We continue to explore merger and acquisition opportunities and we may face difficulties if we acquire other businesses in the future including:


•	integrating the management personnel, services, products, systems and technologies of the acquired businesses into our existing operations;


•	retaining key personnel of the acquired businesses;


•	failing to adequately identify or assess liabilities of acquired businesses;


•	retaining existing customers and/or vendors of both companies;


•	failing to achieve the synergies, revenue growth and other expected benefits we used to determine the purchase price of the acquired businesses;


•	failing to realize the anticipated benefits of a particular merger and acquisition;


•	incurring significant transaction and acquisition-related costs;


•	incurring unanticipated problems or legal liabilities;


•	being subject to business uncertainties and contractual restrictions while an acquisition is pending that could adversely affect our business; and


•	diverting our management’s attention from the day-to-day operation of our business.

These difficulties could disrupt our ongoing business and increase our expenses. As of September 30, 2013, we have no agreement or memorandum of understanding to enter into any acquisition transaction.

In addition, our ability to complete acquisitions may depend, in part, on our ability to finance these acquisitions, including both the costs of the acquisition and the cost of the subsequent integration activities. Our ability may be constrained by our cash flow, the level of our indebtedness, restrictive covenants in the agreements governing our indebtedness, conditions in the securities and credit markets and other factors, most of which are generally beyond our control. If we proceed with one or more acquisitions in which the consideration consists of cash, we may use a substantial portion of our available cash to complete such acquisitions, thereby reducing our liquidity. If we finance one or more acquisitions with the proceeds of indebtedness, our interest expense and debt service requirements could increase materially. Thus, the financial impact of future acquisitions, including the costs to pursue acquisitions that do not ultimately close, could materially affect our business and could cause substantial fluctuations in our quarterly and yearly operating results.

Our efforts to develop new service offerings may not be successful, in which case our revenue may not grow as we anticipate or may decline.

The market for telecommunications services is characterized by rapid change, as new technologies are developed and introduced, often rendering established technologies obsolete. For our business to remain competitive, we must continually update our service offerings to make new technologies available to our customers and prospects. To do so, we may have to expend significant management and sales resources, which may increase our operating costs. The success of our potential new service offerings is uncertain and would depend on a number of factors, including the acceptance by end-user customers of the telecommunications technologies which would underlie these new service offerings, the compatibility of these technologies with existing customer information technology systems and processes, the compatibility of these technologies with our then-existing systems and processes, and our ability to find third-party vendors that would be willing to provide these new technologies to us for delivery to our users. If we are unsuccessful in developing and selling new service offerings, our revenue may not grow as we anticipate, or may decline.

If we do not continue to train, manage and retain employees, clients may reduce purchases of services.

Our employees are responsible for providing clients with technical and operational support, and for identifying and developing opportunities to provide additional services to existing clients. In order to perform these activities, our employees must have expertise in areas such as telecommunications network technologies, network design, network implementation and network management, including the ability to integrate services offered by multiple telecommunications carriers. They must also accept and incorporate training on our systems and databases developed to support our operations and business model. Employees with this level of expertise tend to be in high demand in the telecommunications industry, which may make it more difficult for us to attract and retain qualified employees. If we fail to train, manage, and retain our employees, we may be limited in our ability to gain more business from existing clients, and we may be unable to obtain or maintain current information regarding our clients’ and suppliers’ communications networks, which could limit our ability to provide future services.

The regulatory framework under which we operate could require substantial time and resources for compliance, which could make it difficult and costly for us to operate the businesses.

In providing certain interstate and international telecommunications services, we must comply, or cause our customers or carriers to comply, with applicable telecommunications laws and regulations prescribed by the FCC and applicable foreign regulatory authorities. In offering services on an intrastate basis, we may also be subject to state laws and to regulation by state public utility commissions. Our international services may also be subject to regulation by foreign authorities and, in some markets, multinational authorities, such as the European Union. The costs of compliance with these regulations, including legal, operational and administrative expenses, may be substantial. In addition, delays in receiving or failure to obtain required regulatory approvals or the enactment of new or adverse legislation, regulations or regulatory requirements may have a material adverse effect on our financial condition, results of operations and cash flow.

If we fail to obtain required authorizations from the FCC or other applicable authorities, or if we are found to have failed to comply, or are alleged to have failed to comply, with the rules of the FCC or other authorities, our right to offer certain services could be

challenged and/or fines or other penalties could be imposed on us. Any such challenges or fines could be substantial and could cause us to incur substantial legal and administrative expenses as well; these costs in the forms of fines, penalties, and legal and administrative expenses could have a material adverse impact on our business and operations. Furthermore, we are dependent in certain cases on the services other carriers provide, and therefore on other carriers’ abilities to retain their respective licenses in the regions of the world in which they operate. We are also dependent, in some circumstances, on our customers’ abilities to obtain and retain the necessary licenses. The failure of a customer or carrier to obtain or retain any necessary license could have an adverse effect on our ability to conduct operations.

Future changes in regulatory requirement, new interpretations of existing regulatory requirements, or determinations that we violated existing regulatory requirements may impair our ability to provide services, result in financial losses or otherwise reduce our profitability.

Many of the laws and regulations that apply to providers of telecommunications services are subject to frequent changes and different interpretations and may vary between jurisdictions. Changes to existing legislation or regulations in particular markets may limit the opportunities that are available to enter into markets, may increase the legal, administrative, or operational costs of operating in those markets, or may constrain other activities, including our ability to complete subsequent acquisitions, or purchase services or products, in ways that we cannot anticipate. Because we purchase telecommunications services from other carriers, our costs and manner of doing business can also be adversely affected by changes in regulatory policies affecting these other carriers.

In addition, any determination that we, including companies that we have acquired, have violated applicable regulatory requirements could result in material fines, penalties, forfeitures, interest or retroactive assessments. For example, a determination that we have not paid all required universal service fund contributions could result in substantial retroactive assessment of universal service fund contributions, together with applicable interest, penalties, fines or forfeitures.

We depend on key personnel to manage our businesses effectively in a rapidly changing market, and our ability to generate revenue will suffer if we are unable to retain key personnel and hire additional personnel.

The future success, strategic development and execution of our business will depend upon the continued services of our executive officers and other key sales, marketing and support personnel. We do not maintain “key person” life insurance policies with respect to any of our employees, nor are we certain if any such policies will be obtained or maintained in the future. We may need to hire additional personnel in the future and we believe the success of the combined business depends, in large part, upon our ability to attract and retain key employees. The loss of the services of any key employees, the inability to attract or retain qualified personnel in the future, or delays in hiring required personnel could limit our ability to generate revenue and to operate our business.

Interruption or failure of our information technology and communications systems could hurt our ability to effectively provide our products and services, which could damage our reputation and harm our operating results.

The availability of our products and services depends on the continuing operation of our information technology and communications systems. Our systems are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to harm our systems. Some of our systems are not fully redundant and our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster, a decision to close a facility we are using without adequate notice for financial reasons, or other unanticipated problems at our data centers could result in lengthy interruptions in our service.

Risks Relating to Our Indebtedness

Our failure to comply with covenants in our loan agreements could result in our indebtedness being immediately due and payable and the loss of our assets.

Pursuant to the terms of our loan agreements, we have pledged substantially all of our assets to the lenders as security for our payment obligations under the loan agreements. If we fail to pay any of our indebtedness under the loan agreements when due, or if we breach any of the other covenants in the loan agreements, it may result in one or more events of default. An event of default under our loan agreements would permit the lenders to declare all amounts owing to be immediately due and payable and, if we were unable to repay any indebtedness owed, the lenders could proceed against the collateral securing that indebtedness.

Covenants in our loan agreements and outstanding notes, and in any future debt agreements, may restrict our future operations.

The loan agreements related to our outstanding senior and mezzanine indebtedness impose financial restrictions that limit our discretion on some business matters, which could make it more difficult for us to expand our business, finance our operations and engage in other business activities that may be in our interest. These restrictions include compliance with, or maintenance of, certain financial tests and ratios and restrictions that limit our ability and that of our subsidiaries to, among other things:


•	incur additional indebtedness or place additional liens on our assets;


•	pay dividends or make other distributions on, redeem or repurchase our capital stock;


•	make investments or repay subordinated indebtedness;


•	enter into transactions with affiliates;


•	sell assets;


•	engage in a merger, consolidation or other business combination; or


•	change the nature of our businesses.

Any additional indebtedness we may incur in the future may subject us to similar or even more restrictive conditions.

Our substantial level of indebtedness and debt service obligations could impair our financial condition, hinder our growth and put us at a competitive disadvantage.

As of September 30, 2013, our indebtedness was substantial in comparison to our available cash and our net loss. Our substantial level of indebtedness could have important consequences for our business, results of operations and financial condition. For example, a high level of indebtedness could, among other things:


•	make it more difficult for us to satisfy our financial obligations;


•	increase our vulnerability to general adverse economic and industry conditions, including interest rate fluctuations;


•	increase the risk that a substantial decrease in cash flows from operating activities or an increase in expenses will make it difficult for us to meet our debt service requirements and will require us to modify our operations;


•	require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund future business opportunities, working capital, capital expenditures and other general corporate purposes;


•	limit our ability to borrow additional funds to expand our business or ease liquidity constraints;


•	limit our ability to refinance all or a portion of our indebtedness on or before maturity;


•	limit our ability to pursue future acquisitions;


•	limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and


•	place us at a competitive disadvantage relative to competitors that have less indebtedness.

Risks Related to our Common Stock and the Securities Markets

Because we do not currently intend to pay dividends on our common stock, stockholders will benefit from an investment in our common stock only if it appreciates in value.

We do not currently anticipate paying any dividends on shares of our common stock. Any determination to pay dividends in the future will be made by our Board of Directors and will depend upon results of operations, financial conditions, contractual restrictions, restrictions imposed by applicable law and other factors our Board of Directors deems relevant. Accordingly, realization of a gain on stockholders’ investments will depend on the appreciation of the price of our common stock. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders purchased their shares.

Our outstanding warrants may have an adverse effect on the market price of our common stock.

As of September 30, 2013, we had outstanding warrants to purchase approximately 2.3 million shares of common stock at a weighted-average exercise price equal to $2.34 per share. The common stock underlying the warrants is entitled to registration rights for sale in the public market at or soon after exercise or conversion. If, and to the extent, these warrants are exercised, stockholders may experience dilution to their ownership interests in the Company. The presence of this additional number of shares of common stock and warrants eligible for trading in the public market may have an adverse effect on the market price of our common stock.

The concentration of our capital stock ownership will likely limit a stockholder’s ability to influence corporate matters, and could discourage a takeover that stockholders may consider favorable and make it more difficult for a stockholder to elect directors of its choosing.

H. Brian Thompson, the Company’s Executive Chairman of the Board of Directors, and Universal Telecommunications, Inc., his own private equity investment and advisory firm, owned 6,709,171 shares of our common stock at September 30, 2013. Based on the number of shares of our common stock outstanding on September 30, 2013, Mr. Thompson and Universal Telecommunication, Inc. would beneficially own approximately 29% of our common stock. Based on public filings with the SEC made by J. Carlo Cannell, we believe that, as of September 30, 2013, funds associated with Cannell Capital LLC owned 3,436,495 shares of our common stock. Based on the number of shares of our common stock outstanding on September 30, 2013, these funds would beneficially own approximately 15% of our common stock. In addition, as of September 30, 2013, our executive officers, directors and affiliated entities, excluding H. Brian Thompson and Universal Telecommunications, together beneficially owned common stock, without taking into account their unexercised options, representing approximately 13% of our common stock. As a result, these stockholders have the ability to exert significant control over matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. The interests of these stockholders might conflict with your interests as a holder of our securities, and it may cause us to pursue transactions that, in their judgment, could enhance their equity investments, even though such transactions may involve significant risks to you as a security holder. The large concentration of ownership in a small group of stockholders might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.

It may be difficult for you to resell shares of our common stock if an active market for our common stock does not develop.

Our common stock has only recently been listed on the NYSE MKT, and prior to this listing the common stock was thinly traded on the OTC Markets. If a liquid market for the common stock does not develop on the NYSE MKT, then, in addition to the concentrated ownership of our capital stock, this may further impair your ability to sell your shares when you want to do so and could depress our stock price. As a result, you may find it difficult to dispose of, or to obtain accurate quotations of the price of, our securities because smaller quantities of shares could be bought and sold, transactions could be delayed, and security analyst and news coverage of the Company may be limited. These factors could result in lower prices and larger spreads in the bid and ask prices for our shares.

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

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



*	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.

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.



		GLOBAL TELECOM & TECHNOLOGY, INC.

		By:	/s/ Richard D. Calder, Jr.
			Richard D. Calder, Jr.
			President and Chief Executive Officer

Date:	November 14, 2013