NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1.
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NATURE OF OPERATIONS AND BASIS OF PRESENTATION
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Internap Corporation ("we," "us," "our," "INAP," or "the Company") is a leading-edge provider of high-performance data center and cloud solutions with 100 network Points of Presence (“POP”) worldwide. INAP's full-spectrum portfolio of high-density colocation, managed cloud hosting and network solutions supports evolving IT infrastructure requirements for customers ranging from the Fortune 500 to emerging startups. INAP operates in 21 metropolitan markets, primarily in North America, with 14 INAP Data Center Flagships connected by a low-latency, high-capacity network.
We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. These financial statements include all of our accounts and those of our wholly-owned subsidiaries. We have eliminated all intercompany transactions and balances in the accompanying financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the interim results have been reflected therein. All such adjustments were of a normal and recurring nature with the exception of those related to the adoption of new accounting standards as discussed in Note 2, "Recent Accounting Pronouncements" and Note 4, "Leases."
We have condensed or omitted certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP. The accompanying financial statements reflect all adjustments, which consist of normal recurring adjustments unless otherwise disclosed, necessary for a fair statement of our financial position as of September 30, 2019 and our operating results and cash flows for the interim periods presented. The balance sheet at December 31, 2018 was derived from our audited financial statements, but does not include all disclosures required by GAAP. You should read the accompanying financial statements and the related notes in conjunction with our financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission ("SEC").
The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ materially from these estimates. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the 2019 fiscal year or any future periods.
Correction of Immaterial Error
The Company corrected an error in the consolidated statements of cash flows for all periods in 2017, 2018, the three months ended March 31, 2019 and the six months ended June 30, 2019. The Company had previously included only a portion of the additions to property and equipment that were outstanding in accounts payable in the supplemental disclosures of cash flow information, “Additions to property and equipment included in accounts payable,” and the related adjustments to "Accounts payable" and "Purchases of property and equipment" on the consolidated statements of cash flows. The correction had no impact on the consolidated statements of operations and comprehensive loss or the consolidated balance sheets. The Company has evaluated this correction in accordance with Accounting Standards Codification ("ASC") 250-10-S99, SEC Materials (formerly SEC Staff Accounting Bulletin 99, Materiality) and concluded that the correction was not material.
The adjustments to the Company’s previously issued consolidated statements of cash flows are as follows (in thousands):
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Three Months Ended
March 31, 2017
|
|
As reported
|
Adjustments
|
As restated
|
|
|
|
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Accounts payable
|
$
|
(2,247
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)
|
$
|
(512
|
)
|
$
|
(2,759
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)
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Net cash provided by operating activities
|
7,264
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(512
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)
|
6,752
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|
|
|
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Purchases of property and equipment
|
(5,789
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)
|
512
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(5,277
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)
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Net cash used in investing activities
|
(5,989
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)
|
512
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|
(5,477
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)
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|
|
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Additions to property and equipment included in accounts payable
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$
|
1,247
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|
$
|
2,744
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$
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3,991
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|
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Six Months Ended
June 30, 2017
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As reported
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Adjustments
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As restated
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Accounts payable
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$
|
477
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$
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(2,100
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)
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$
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(1,623
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)
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Net cash provided by operating activities
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24,634
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(2,100
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)
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22,534
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Purchases of property and equipment
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(12,293
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)
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2,100
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(10,193
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)
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Net cash used in investing activities
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(12,737
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)
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2,100
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(10,637
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)
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Additions to property and equipment included in accounts payable
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$
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1,269
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$
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4,331
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$
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5,600
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Nine Months Ended
September 30, 2017
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As reported
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Adjustments
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As restated
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Accounts payable
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$
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(3,498
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)
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$
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1,330
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$
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(2,168
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)
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Net cash provided by operating activities
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27,940
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1,330
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29,270
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Purchases of property and equipment
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(23,198
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)
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(1,330
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)
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(24,528
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)
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Net cash used in investing activities
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(19,789
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)
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(1,330
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)
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(21,119
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)
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Additions to property and equipment included in accounts payable
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$
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701
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$
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901
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$
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1,602
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Year Ended
December 31, 2017
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As reported
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Adjustments
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As restated
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Accounts payable
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$
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(1,167
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)
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$
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218
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$
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(949
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)
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Net cash provided by operating activities
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41,748
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218
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41,966
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Purchases of property and equipment
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(35,714
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)
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(218
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)
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(35,932
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)
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Net cash used in investing activities
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(32,209
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)
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(218
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)
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(32,427
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)
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Additions to property and equipment included in accounts payable
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$
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1,932
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$
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2,014
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$
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3,946
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Three Months Ended
March 31, 2018
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As reported
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Adjustments
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As restated
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Accounts payable
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$
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(636
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)
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$
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(124
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)
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$
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(760
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)
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Net cash provided by operating activities
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3,697
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(124
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)
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3,573
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Purchases of property and equipment
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(6,082
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)
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124
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(5,958
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)
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Net cash used in investing activities
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(138,065
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)
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124
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(137,941
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)
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Additions to property and equipment included in accounts payable
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$
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2,287
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$
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2,138
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$
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4,425
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Six Months Ended
June 30, 2018
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As reported
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Adjustments
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As restated
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Accounts payable
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$
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6,939
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$
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(3,598
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)
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$
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3,341
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Net cash provided by operating activities
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18,533
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(3,598
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)
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14,935
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Purchases of property and equipment
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(16,102
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)
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3,598
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(12,504
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)
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Net cash used in investing activities
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(148,649
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)
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3,598
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(145,051
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)
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Additions to property and equipment included in accounts payable
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$
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4,023
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$
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5,613
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$
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9,636
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|
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|
|
|
|
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Nine Months Ended
September 30, 2018
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As reported
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Adjustments
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As restated
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|
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Accounts payable
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$
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9,372
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$
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(4,217
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)
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$
|
5,155
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Net cash provided by operating activities
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28,598
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(4,217
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)
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24,381
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|
|
|
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Purchases of property and equipment
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(27,317
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)
|
4,217
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(23,100
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)
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Net cash used in investing activities
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(160,623
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)
|
4,217
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(156,406
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)
|
|
|
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Additions to property and equipment included in accounts payable
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$
|
4,004
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$
|
6,231
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$
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10,235
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Year Ended
December 31, 2018
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As reported
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Adjustments
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As restated
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Accounts payable
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$
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1,339
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$
|
207
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$
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1,546
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Net cash provided by operating activities
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34,572
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|
207
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|
34,779
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|
|
|
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Purchases of property and equipment
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(38,298
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)
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(207
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)
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(38,505
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)
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Net cash used in investing activities
|
(174,037
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)
|
(207
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)
|
(174,244
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)
|
|
|
|
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Additions to property and equipment included in accounts payable
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$
|
2,459
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|
$
|
1,807
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$
|
4,266
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|
|
|
|
|
|
|
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Three Months Ended
March 31, 2019
|
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As reported
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Adjustments
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As restated
|
|
|
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Accounts payable
|
$
|
763
|
|
$
|
(556
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)
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$
|
207
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Net cash provided by operating activities
|
2,262
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|
(556
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)
|
1,706
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|
|
|
|
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Purchases of property and equipment
|
(8,094
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)
|
556
|
|
(7,538
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)
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Net cash used in investing activities
|
(8,568
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)
|
556
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|
(8,012
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)
|
|
|
|
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Additions to property and equipment included in accounts payable
|
$
|
1,850
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|
$
|
1,881
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$
|
3,731
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|
|
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|
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Six Months Ended
June 30, 2019
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As reported
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Adjustments
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As restated
|
|
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Accounts payable
|
$
|
3,375
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|
$
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(944
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)
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$
|
2,431
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Net cash provided by operating activities
|
14,081
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|
(944
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)
|
13,137
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|
|
|
|
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Purchases of property and equipment
|
(15,642
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)
|
944
|
|
(14,698
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)
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Net cash used in investing activities
|
(16,359
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)
|
944
|
|
(15,415
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)
|
|
|
|
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Additions to property and equipment included in accounts payable
|
$
|
1,268
|
|
$
|
2,751
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$
|
4,019
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Out of Period Adjustment
In connection with the preparation, review and audit of the Company's consolidated financial statements required to be included in the Annual Report on Form 10-K for the year ended December 31, 2018, management identified certain errors in the Company's historical financial statements, resulting in a conclusion that certain corrections need to be made to the Company's unaudited quarters during 2018. The Company has revised its prior period consolidated financial statements accordingly and included such revisions herein. Based on an analysis of quantitative and qualitative factors, the Company concluded that these errors were not material to the consolidated financial position, results of operations or cash flows as presented in the Company’s quarterly financial statements that have been previously filed in the Company’s Quarterly Reports on Form 10-Q. As a result, amendment of such reports was not required. The revisions to correct errors relate to the correction of accounting for an amendment to a capital lease executed in February 2018.
The adjustments to the Company’s previously issued quarterly financial statements for the three and nine months ended September 30, 2018 are as follows (in thousands):
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|
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Three and Nine Months Ended
September 30, 2018
|
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As reported
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Adjustments
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As adjusted
|
|
|
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Costs of sales and services, exclusive of depreciation and amortization - QTD
|
$
|
28,866
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|
$
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(645
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)
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$
|
28,221
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|
Costs of sales and services, exclusive of depreciation and amortization - YTD
|
81,880
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|
(1,720
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)
|
80,160
|
|
Depreciation and amortization - QTD
|
23,431
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|
122
|
|
23,553
|
|
Depreciation and amortization - YTD
|
67,097
|
|
325
|
|
67,422
|
|
Interest expense - QTD
|
16,898
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|
896
|
|
17,794
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|
Interest expense - YTD
|
47,786
|
|
2,352
|
|
50,138
|
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Net loss attributable to INAP shareholders - QTD
|
(15,106
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)
|
(373
|
)
|
(15,479
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)
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Net loss attributable to INAP shareholders - YTD
|
(43,089
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)
|
(957
|
)
|
(44,046
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)
|
Property and equipment, net
|
477,423
|
|
10,193
|
|
487,616
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|
Total assets
|
746,038
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|
10,193
|
|
756,231
|
|
Capital lease obligations - non-current
|
252,599
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|
11,077
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|
263,676
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Total liabilities
|
765,004
|
|
11,150
|
|
776,154
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|
Accumulated deficit
|
(1,343,609
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)
|
(957
|
)
|
(1,344,566
|
)
|
Total stockholders' (deficit) equity
|
$
|
(18,966
|
)
|
$
|
(957
|
)
|
$
|
(19,923
|
)
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2. RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which states that a lessee should recognize the assets and liabilities that arise from leases. The standard has since been modified with several ASUs (collectively, the "new lease standard"). The new lease standard is effective for annual and interim periods beginning after December 15, 2018. Earlier adoption is permitted. The Company adopted the new lease standard on January 1, 2019, the beginning of fiscal 2019. Prior periods presented in our condensed consolidated financial statements continue to be presented in accordance with the former lease standard, Topic 840, Leases.
The new lease standard provides entities two options for applying the modified retrospective approach (1) retrospectively to each prior reporting period presented in the financial statements with the cumulative-effect adjustment recognized at the beginning of the earliest comparative period presented or (2) retrospectively at the beginning of the period of adoption (January 1, 2019) through a cumulative-effect adjustment recognized then. The Company adopted the new lease standard by recognizing and measuring leases at the adoption date with a cumulative effect of initially applying the guidance recognized at the date of initial application. The most significant impact relates to the recognition on the Company's balance sheet of right-of-use ("ROU") assets and lease liabilities for all operating leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily depends on its classification. For income statement purposes, operating leases will result in a straight-line expense while finance leases will result in a front-loaded expense pattern.
The Company elected the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. The Company did not separately record lease components from non-lease components, and accounts for them together as a single lease component. INAP made an accounting policy election to not record leases with an initial term of 12 months or less on the balance sheet. The Company recognizes lease expense for these short-term leases on a straight-line basis over the lease term in the consolidated statements of operations and comprehensive loss. The Company has elected to not record a ROU asset or ROU liability for leases with an asset or liability balance that would be less than one thousand dollars ($1,000) on the adoption date on the basis of materiality. This threshold continues to be consistent with the Company’s Property and Equipment capitalization threshold.
As a result of our adoption of the new lease standard, we have implemented a new lease accounting system, accounting policies and processes which changed the Company's internal controls over financial reporting for lease accounting.
The Company has capital leases which have been recorded on the consolidated balance sheets and as of the January 1, 2019 transition date, the capital leases became finance leases establishing the ROU asset and liability. The ROU assets and liabilities for operating leases were $28.5 million and $31.0 million of total Company assets and liabilities, respectively, as of January 1, 2019.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets including trade receivables, loans and held-to-maturity debt securities held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This will result in the earlier recognition of credit losses. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction to the carrying value of the asset. If expected cash flows improve, an entity will reduce the allowance and reverse the expense through income. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Entities will have to make more disclosures, including disclosures by year of origination for certain financing receivables. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is evaluating the impact, if any, that this pronouncement will have on its condensed consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220). This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive income (loss) (“AOCI”) to retained earnings due to the U.S. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017. This standard was effective for interim and annual reporting periods beginning after December 15, 2018. We did not exercise the option to make this reclassification.
In June 2018, the FASB issued ASU 2018-07, Improvements to Non-employee Share-Based Payment Accounting. This standard broadens the scope of FASB ASC Topic 718, Compensation — Stock Compensation, which currently covers only share-based payments to employees. The change substantially aligns the accounting for share-based payments for both employees and non-
employees. The ASU supersedes Subtopic 505-50, Equity — Equity-Based Payments to Non-Employees. The measurement of equity-classified non-employee awards will be fixed at the grant date, and entities will measure the cost of awards subject to a performance condition using the outcome that is probable at the balance sheet date. Entities may use the expected term to measure non-employee options or elect to use the contractual term as the expected term, on an award-by-award basis. Entities will recognize a cumulative-effect adjustment to retained earnings for equity classified non-employee awards for which a measurement date has not been established and liability-classified non-employee awards that have not been settled. The guidance is effective for calendar-year public business entities in annual periods beginning after December 15, 2018, and interim periods within those years. The Company adopted this pronouncement in the first quarter of 2019 and it did not have a material impact on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), relating to a customer's accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by a vendor (i.e., a service contract). Under the new guidance, a customer will apply the same criteria for capitalizing implementation costs as it would for an arrangement that has a software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application is permitted. The Company can choose to adopt the new guidance (1) prospectively to eligible costs incurred on or after the date this guidance is first applied, or (2) retrospectively. The Company is evaluating the impact, if any, that this pronouncement will have on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which removes, adds and modifies certain disclosure requirements for fair value measurements in Topic 820. The Company will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and the valuation processes of Level 3 fair value measurements. However, the Company will be required to additionally disclose the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements, and the range and weighted average of assumptions used to develop significant unobservable inputs for Level 3 fair value measurements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments relating to additional disclosure requirements will be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments will be applied retrospectively to all periods presented upon their effective date. The Company is permitted to early adopt either the entire ASU or only the provisions that eliminate or modify the requirements. The Company is evaluating the impact, if any, that this pronouncement will have on its condensed consolidated financial statements.
3. REVENUES
We generate revenues primarily from the sale of data center services, including colocation, hosting and cloud, and IP services. Our revenues typically consist of monthly recurring revenues from contracts with terms of one year or more and we typically recognize the monthly minimum as revenue each month as our performance obligations are fulfilled. We record installation fees as deferred revenue and recognized the revenue ratably over the estimated customer life.
For our data center service revenues, we typically determine colocation revenues by occupied square feet and both allocated and variable-based usage, which includes both physical space for hosting customers' network and other equipment plus associated services such as power and network connectivity, environmental controls and security. We typically determine hosting revenues by the number of servers utilized (physical or virtual) and cloud revenues by the amount of processing and storage consumed. We typically determine IP services revenues on fixed-commitment or usage-based pricing. IP service contracts usually have fixed minimum commitments based on a certain level of bandwidth usage with additional charges for any usage over a specified limit. If a customer's usage of our services exceeds the monthly minimum, we recognize revenue for such excess in the period of the usage. We use contracts and sales or purchase orders as evidence of an arrangement. We test for availability or connectivity to verify delivery of our services.
We assess whether:
|
|
a.
|
the parties to the contract have an approved contract;
|
|
|
b.
|
the Company can identify each party's rights regarding the goods and services to be transferred;
|
|
|
c.
|
the Company can identify the payment terms for the goods or services to be transferred;
|
|
|
d.
|
the contract has commercial substance; and
|
|
|
e.
|
it is probable that the Company will collect substantially all of the consideration to which it will be entitled in exchange for the goods and services that will be transferred to the customer.
|
The transaction price reflects INAP’s expectations about the consideration it will be entitled to receive from the customer. The Company considers the terms of the contract and its customary business practices to determine the transaction price. The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. After contract inception, the transaction price can change for various reasons, including the resolution of uncertain events or other changes in circumstances that change the amount of consideration to which INAP expects to be entitled in exchange for the promised goods or services. Once the separate performance obligations are identified and the transaction price has been determined, the Company allocates the transaction price to the performance obligations in proportion to their standalone selling price ("SSP"). When allocating on a relative SSP basis, any discount within the contract generally is allocated proportionately to all of the performance obligations in the contract.
To allocate the transaction price on a relative SSP basis, the Company first determines the SSP of the distinct good or service underlying each performance obligation. It is the price at which the Company would sell a good or service on a standalone (or separate) basis at contract inception. The observable price of a good or service sold separately provides the best evidence of SSP. If a SSP is not directly observable, the Company will estimate the SSP. The Company will be able to consider its facts and circumstances in order to determine how frequently it will need to update the estimates. If the information used to estimate the SSP for similar transactions has not changed, the Company will determine that it is reasonable to use the previously determined SSP.
Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations.
The Company's contracts with customers often include performance obligations to transfer multiple products and services to a customer. Common performance obligations of the Company include delivery of services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together requires significant judgment by the Company.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Total transaction price is estimated for impact of variable consideration, such as INAP's service level arrangements, additional usage and late fees, discounts and promotions, and customer care credits. The majority of contracts have multiple performance obligations, as the promise to transfer individual goods or services is separately identifiable from other promises in the contracts and, therefore, is distinct. For contracts with multiple performance obligations, the Company allocates the contract's transaction price to each performance obligation based on its relative SSP.
The SSP is determined based on observable price. In instances where the SSP is not directly observable, such as when the Company does not sell the product or service separately, INAP determines the SSP using information that may include market conditions and other observable inputs. The Company typically has more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, the Company may use information such as the size of the customer and geographic region in determining the SSP.
The most significant impact of the adoption of the new standard was the requirement for incremental costs to obtain a customer, such as commissions, which previously were expensed as incurred, to be deferred and amortized over the period of contract performance or a longer period if renewals are expected and the renewal commission does not equal the initial commission.
In addition, installation revenues are recognized over the initial contract life rather than over the estimated customer life, as installation revenues are not significant to the total contract and therefore do not represent a material right.
Most performance obligations, with the exception of occasional sales of equipment or hardware, are satisfied over time as the customer consumes the benefits as we perform. For equipment and hardware sales, the performance obligation is satisfied when control transfers to the customer.
In evaluating the treatment of certain contracts, the Company exercised heightened judgment in deferring installation revenue as well as expense fulfillment and commission costs over the appropriate life. With the exception of the revenues noted above, revenue recognition remains materially consistent with historical practice.
The Company routinely reviews the collectability of its accounts receivable and payment status of customers. If the Company determines that collection of revenue is uncertain, it does not recognize revenue until collection is reasonably assured. Additionally, the Company maintains an allowance for doubtful accounts resulting from the inability of the Company's customers to make required payments on accounts receivable. The allowance for doubtful accounts is based on historical write-offs as a percentage of revenues. The Company assesses the payment status of customers by reference to the terms under which it provides services or goods, with any payments not made on or before their due date considered past-due. Once all collection efforts have been exhausted, the uncollectible balance is written off against the allowance for doubtful accounts. The Company routinely performs credit checks for new and existing customers and requires deposits or prepayments for customers that are perceived as being a credit risk. In addition, the Company records a reserve amount for potential credits to be issued under service level agreements and other sales adjustments.
Management expects that commission fees paid to sales representatives as a result of obtaining service contracts and contract renewals are recoverable and therefore the Company deferred them as contract costs in the amount of $24.2 million and $24.9 million at September 30, 2019 and December 31, 2018, respectively. Capitalized commission fees are amortized on a straight-line basis over the determined life, which vary based on the customer segment. For the three months ended September 30, 2019 and September 30, 2018, amortization recognized was $2.5 million for both years. For the nine months ended September 30, 2019 and September 30, 2018, amortization recognized was $7.3 million and $7.2 million, respectively. There was no impairment loss recorded on capitalized contract costs for the three and nine months ended September 30, 2019 and September 30, 2018.
Applying the practical expedient pertaining to contract costs, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in "Sales, general and administrative" expenses in the accompanying condensed consolidated statements of operations and comprehensive loss. The Company includes only those incremental costs that would not have been incurred if the contracts had not been entered into as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
Non-current
|
Balance at December 31, 2018
|
|
$
|
8,844
|
|
|
$
|
16,104
|
|
Deferred customer acquisition costs incurred in the period
|
|
1,345
|
|
|
5,274
|
|
Amounts recognized as expense in the period
|
|
(7,333
|
)
|
|
—
|
|
Transition between short-term and long-term
|
|
6,346
|
|
|
(6,346
|
)
|
Balance at September 30, 2019
|
|
$
|
9,202
|
|
|
$
|
15,032
|
|
The Company classifies its right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). For example, the Company recognizes a receivable for revenues related to its time and materials and transaction or volume-based contracts. The Company presents such receivables in "Accounts receivable, net" it its condensed consolidated balance sheets at their net estimated realizable value.
As of September 30, 2019, approximately $198.0 million of total revenues and deferred revenues are expected to be recognized in future periods with a weighted average life of 2.13 years for remaining performance obligations under the initial contract terms. The remaining performance obligations do not include variable consideration related to unsatisfied performance obligations such as the level of bandwidth usage, physical space for hosting customers’ network, and associated services for power and network connectivity.
Amounts collected in advance of services being provided are accounted for as contract liabilities, which are presented as "Deferred revenues" on the accompanying condensed consolidated balance sheets and are realized with the associated revenue recognized under the contract. Nearly all of the Company's contract liabilities balance is related to service revenue.
Significant changes in the deferred revenues balance (current and non-current) during the period are as follows (in thousands):
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
8,533
|
|
Revenue recognized that was included in the deferred revenue balance at December 31, 2018
|
|
(5,931
|
)
|
Increases due to cash received, excluding amounts recognized as revenue during the period
|
|
5,150
|
|
Balance at September 30, 2019
|
|
$
|
7,752
|
|
In accordance with ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606"), the Company disaggregates revenue from contracts with customers based on the timing of revenue recognition. The Company determined that disaggregating revenue into these categories depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. As discussed in this note and Note 11, "Operating Segments," the Company business consists of INAP US and INAP INTL colocation, cloud and network services. The following table presents disaggregated revenues by category as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2019
|
|
Three Months Ended
September 30, 2018
|
|
|
INAP US
|
|
INAP INTL
|
|
INAP US
|
|
INAP INTL
|
Colocation
|
|
$
|
27,334
|
|
|
$
|
1,452
|
|
|
$
|
32,946
|
|
|
$
|
1,372
|
|
Network services
|
|
11,225
|
|
|
2,772
|
|
|
13,015
|
|
|
2,719
|
|
Cloud
|
|
18,388
|
|
|
11,707
|
|
|
19,717
|
|
|
13,203
|
|
|
|
$
|
56,947
|
|
|
$
|
15,931
|
|
|
$
|
65,678
|
|
|
$
|
17,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2019
|
|
Nine Months Ended
September 30, 2018
|
|
|
INAP US
|
|
INAP INTL
|
|
INAP US
|
|
INAP INTL
|
Colocation
|
|
$
|
82,245
|
|
|
$
|
4,344
|
|
|
$
|
94,747
|
|
|
$
|
4,349
|
|
Network services
|
|
34,381
|
|
|
8,224
|
|
|
40,398
|
|
|
8,482
|
|
Cloud
|
|
55,302
|
|
|
35,080
|
|
|
51,676
|
|
|
39,483
|
|
|
|
$
|
171,928
|
|
|
$
|
47,648
|
|
|
$
|
186,821
|
|
|
$
|
52,314
|
|
Revenue by geography is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2019
|
|
Three Months Ended
September 30, 2018
|
|
|
INAP US
|
|
INAP INTL
|
|
INAP US
|
|
INAP INTL
|
United States
|
|
$
|
57,939
|
|
|
$
|
—
|
|
|
$
|
66,752
|
|
|
$
|
—
|
|
Canada
|
|
—
|
|
|
8,181
|
|
|
—
|
|
|
9,187
|
|
Other countries
|
|
—
|
|
|
6,758
|
|
|
—
|
|
|
7,033
|
|
|
|
$
|
57,939
|
|
|
$
|
14,939
|
|
|
$
|
66,752
|
|
|
$
|
16,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2019
|
|
Nine Months Ended
September 30, 2018
|
|
|
INAP US
|
|
INAP INTL
|
|
INAP US
|
|
INAP INTL
|
United States
|
|
$
|
174,964
|
|
|
$
|
—
|
|
|
$
|
190,071
|
|
|
$
|
—
|
|
Canada
|
|
—
|
|
|
24,208
|
|
|
—
|
|
|
27,846
|
|
Other countries
|
|
—
|
|
|
20,404
|
|
|
—
|
|
|
21,218
|
|
|
|
$
|
174,964
|
|
|
$
|
44,612
|
|
|
$
|
190,071
|
|
|
$
|
49,064
|
|
4. LEASES
We have commitments under lease arrangements for data centers, office space, partner sites and equipment. Our leases have initial lease terms ranging from 2 years to 34 years, most of which include options to extend or renew the leases for 5 to 15 years, and some of which may include options to terminate the leases within 4 to 120 months.
At contract inception, we evaluate whether an arrangement is or contains a lease for which we are the lessee (that is, arrangements which provide us with the right to control a physical asset for a period of time). Operating leases are accounted for on the condensed consolidated balance sheets with ROU assets being recognized in "Operating lease right-of-use assets" and lease liabilities recognized in "Short-term operating lease liabilities" and "Operating lease liabilities." Finance leases are accounted for on the condensed consolidated balance sheets with ROU assets being recognized in "Finance lease right-of-use assets" and lease liabilities recognized in "Short-term finance lease liabilities" and "Finance lease liabilities."
All lease liabilities are measured at the present value of the unpaid lease payments, discounted using our incremental borrowing rate based on the information available at commencement date or modification date of the lease. ROU assets, for both operating and finance leases, are initially measured based on the lease liability, adjusted for initial direct costs, prepaid rent, and lease incentives received. The operating lease ROU assets are subsequently measured at the carrying amount of the lease liability adjusted for initial direct costs, prepaid or accrued lease payments and lease incentives. The finance lease ROU assets are subsequently amortized using the straight-line method.
Operating lease expenses are recognized on a straight-line basis over the lease term. With respect to finance leases, amortization of the ROU asset is presented separately from interest expense related to the finance lease liability.
We have elected to combine lease and non-lease components for all lease contracts where we are the lessee. Additionally, for arrangements with lease terms of 12 months or less, we do not recognize ROU assets and lease liabilities and lease payments are recognized on a straight-line basis over the lease term with variable lease payments recognized in the period in which the obligation is incurred.
Lease-related costs for the three and nine months ended September 30, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
Nine Months Ended September 30, 2019
|
Finance lease cost
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
3,861
|
|
|
$
|
12,384
|
|
Interest on lease liabilities
|
|
7,445
|
|
|
22,124
|
|
Finance lease cost
|
|
$
|
11,306
|
|
|
$
|
34,508
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
2,269
|
|
|
$
|
5,964
|
|
Short-term lease cost
|
|
1,106
|
|
|
4,302
|
|
Total lease cost
|
|
$
|
14,681
|
|
|
$
|
44,774
|
|
Other information related to leases as of September 30, 2019 is as follows (in thousands, except lease term and rate):
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
Right-of-use assets
|
|
$
|
33,723
|
|
|
$
|
226,619
|
|
Lease liabilities
|
|
37,068
|
|
|
270,090
|
|
|
|
|
|
|
Weighted-average remaining lease term (years)
|
|
5.26
|
|
|
19.05
|
|
Weighted-average discount rate
|
|
7.25
|
%
|
|
13.80
|
%
|
The following table provides certain cash flow and supplemental noncash information related to our lease liabilities for the nine months ended September 30, 2019 (in thousands):
|
|
|
|
|
|
Operating Leases
|
Operating cash paid to settle operating lease liabilities
|
|
$
|
5,913
|
|
|
|
|
Right-of-use assets obtained in exchange for lease liabilities
|
|
921
|
|
|
|
|
Finance Leases
|
Operating cash paid for interest
|
|
$
|
17,577
|
|
|
|
|
Right-of-use assets obtained in exchange for lease liabilities
|
|
1,639
|
|
Future minimum lease payments under non-cancellable leases as of September 30, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
2019 (excluding the nine months ended September 30, 2019)
|
|
$
|
2,270
|
|
|
|
|
$
|
8,412
|
|
|
2020
|
|
9,073
|
|
|
|
|
33,406
|
|
|
2021
|
|
9,098
|
|
|
|
|
35,243
|
|
|
2022
|
|
8,519
|
|
|
|
|
33,995
|
|
|
2023
|
|
7,541
|
|
|
|
|
33,244
|
|
|
Thereafter
|
|
8,698
|
|
|
|
|
633,139
|
|
|
Total undiscounted lease payments
|
|
$
|
45,199
|
|
|
|
|
$
|
777,439
|
|
|
Less: Imputed interest
|
|
8,131
|
|
|
|
|
507,349
|
|
|
Total lease liabilities
|
|
$
|
37,068
|
|
|
|
|
$
|
270,090
|
|
|
As of September 30, 2019, we did not have additional operating and finance leases that have not yet commenced.
5. ACQUISITION
On February 28, 2018, the Company acquired SingleHop LLC ("SingleHop"), a provider of high-performance data center services including colocation, managed hosting, cloud and network services for $132.0 million net of working capital adjustments of approximately $0.4 million, liabilities assumed, and net of cash acquired. The transaction was funded with an incremental term loan and cash from the balance sheet. As part of the financing, INAP obtained amendments to its credit agreement to allow for the incremental term loan and to provide further operational flexibility under the credit agreement covenants. The amendments to the credit agreement are described in more detail in Note 8, "Debt."
The following table summarizes the final fair values of the assets acquired and liabilities assumed at the acquisition date and includes purchase accounting adjustments subsequent to the acquisition date (in thousands):
|
|
|
|
|
|
Final Valuation as of December 31, 2018
|
Cash
|
$
|
2,823
|
|
Prepaid expenses and other assets
|
2,227
|
|
Property, plant and equipment
|
14,253
|
|
Other long-term assets
|
576
|
|
Intangible assets:
|
|
Noncompete agreements
|
4,000
|
|
Trade names
|
1,700
|
|
Technology
|
15,100
|
|
Customer relationships
|
34,100
|
|
Goodwill
|
66,008
|
|
Total assets acquired
|
140,787
|
|
Accounts payable and accrued liabilities
|
2,819
|
|
Deferred revenue
|
2,434
|
|
Long term liabilities
|
534
|
|
Net assets acquired
|
$
|
135,000
|
|
The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions made by management. The intangible assets are being amortized over periods which reflect the pattern in which economic benefits of the assets are expected to be realized. The customer relationships are being amortized on an accelerated basis over an estimated useful life of ten years and the noncompete agreements, trade names, and technology are being amortized on a straight-line basis over four, eight, and seven years, respectively.
Goodwill represents the excess of the consideration transferred over the aggregate fair values of assets acquired and liabilities assumed. The goodwill recorded in connection with this acquisition was based on operating synergies and other benefits expected to result from the combined operations and the assembled workforce acquired. The goodwill acquired is deductible for tax purposes.
Pro Forma Financial Information
The following unaudited pro forma financial information presents the combined results of operations of INAP and SingleHop as if the acquisition had occurred on January 1, 2017. The unaudited pro forma financial information is not intended to represent or be indicative of our consolidated results of operations that would have been reported had the INAP and SingleHop acquisition been completed as of January 1, 2017, and should not be taken as indicative of our future consolidated results of operations. The pro forma results are as follows (in thousands, except for per share amounts):
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
2018
|
Net revenues
|
|
$
|
247,260
|
|
Net loss
|
|
(45,173
|
)
|
Basic and diluted net loss per share
|
|
(2.27
|
)
|
Weighted average shares outstanding used in computing basic and diluted net loss per share
|
|
19,968
|
|
6. FAIR VALUE MEASUREMENTS
We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
|
|
•
|
Level 1: Quoted prices in active markets for identical assets or liabilities;
|
|
|
•
|
Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
|
|
|
•
|
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
Assets and liabilities measured at fair value on a recurring basis are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
—
|
|
|
$
|
2,386
|
|
|
$
|
—
|
|
|
$
|
2,386
|
|
Asset retirement obligations(1)
|
|
—
|
|
|
—
|
|
|
2,292
|
|
|
2,292
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
—
|
|
|
$
|
2,309
|
|
|
$
|
—
|
|
|
$
|
2,309
|
|
Asset retirement obligations(1)
|
|
—
|
|
|
—
|
|
|
2,090
|
|
|
2,090
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
We calculated the fair value of asset retirement obligations by discounting the estimated amount using the Treasury bill rate adjusted for our credit risk. At September 30, 2019 and December 31, 2018, the balances are included in "Other long-term liabilities," in the accompanying condensed consolidated balance sheets.
|
The following table provides a summary of changes in our Level 3 asset retirement obligations for the nine months ended September 30, 2019 (in thousands):
|
|
|
|
|
|
2019
|
Balance, January 1, 2019
|
$
|
2,090
|
|
Accretion
|
202
|
|
Payments
|
—
|
|
Balance, September 30, 2019
|
$
|
2,292
|
|
As of September 30, 2019, the Company held $2.4 million of available-for-sale debt securities which are reported at fair value on the Company's condensed consolidated balance sheets in "Deposits and other assets." A decline in the fair value of a marketable security below the Company's cost basis is determined to be other than temporary, such marketable security is written down to its estimated fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. The Company may sell certain of its marketable securities prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and maturity management.
The fair values of our Level 2 available-for-sale debt securities, based upon quoted prices for similar items in active markets, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
Cost
|
|
Unrealized Gain
|
|
Unrealized Loss
|
|
Fair Value
|
Japanese Corporate Bonds
|
|
$
|
2,221
|
|
|
$
|
189
|
|
|
$
|
(114
|
)
|
|
$
|
2,296
|
|
Japanese Government Bonds
|
|
88
|
|
|
7
|
|
|
(5
|
)
|
|
90
|
|
Total Bonds
|
|
$
|
2,309
|
|
|
$
|
196
|
|
|
$
|
(119
|
)
|
|
$
|
2,386
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Cost
|
|
Unrealized Gain
|
|
Unrealized Loss
|
|
Fair Value
|
Japanese Corporate Bonds
|
|
$
|
2,184
|
|
|
$
|
144
|
|
|
$
|
(107
|
)
|
|
$
|
2,221
|
|
Japanese Government Bonds
|
|
87
|
|
|
5
|
|
|
(4
|
)
|
|
88
|
|
Total Bonds
|
|
$
|
2,271
|
|
|
$
|
149
|
|
|
$
|
(111
|
)
|
|
$
|
2,309
|
|
The fair values of our Level 2 debt liabilities, based upon quoted prices for similar items in active markets, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Term loan
|
|
$
|
427,070
|
|
|
$
|
330,979
|
|
|
$
|
429,143
|
|
|
$
|
428,071
|
|
Revolving credit facility
|
|
14,000
|
|
|
10,850
|
|
|
—
|
|
|
—
|
|
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The Company tests goodwill and intangible assets with indefinite lives for impairment annually as of August 1. Additionally, the Company may perform interim tests if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit or indefinite lived intangible asset below its carrying amount. The carrying value of each reporting unit is determined by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units.
The Company tests goodwill for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors, including reporting unit specific operating results as well as industry, market and general economic conditions, to determine whether it is more likely than not that the fair values of a reporting unit is less than its carrying amount, including goodwill. The Company may elect to bypass this qualitative assessment for some or all of its reporting units and perform a quantitative test.
Goodwill is considered impaired if the carrying amount of the net assets exceeds the fair value of the reporting unit. Impairment, if any, would be recorded in operating income / (loss) and this could result in a material impact to net income / (loss) and income / (loss) per share.
Annual Testing
2019
We performed our annual impairment review as of August 1, 2019. To determine the estimated fair value of our reporting units, we utilized the discounted cash flow and market methods. We have consistently utilized both methods in our goodwill impairment assessments and weighted both as appropriate based on relevant factors for each reporting unit. The discounted cash flow method is specific to our anticipated future results of the reporting unit, while the market method is based on our market sector including our competitors.
We determined the assumptions supporting the discounted cash flow method, including the discount rate, using our estimates as of the date of the impairment review. To determine the reasonableness of these assumptions, we considered our past performance and empirical trending of results, looked to market and industry expectations used in the discounted cash flow method, such as forecasted revenues and discount rate. We used reasonable judgment in developing our estimates and assumptions. The market method estimates fair value based on market multiples of revenue and earnings derived from comparable companies with similar operating and investment characteristics as the reporting unit.
The assumptions, inputs and judgments used in performing the valuation analysis are inherently subjective and reflect estimates based on known facts and circumstances at the time we perform the valuation. These estimates and assumptions primarily include, but are not limited to, discount rates; terminal growth rates; projected revenues and costs; earnings before interest, taxes, depreciation and amortization for expected cash flows; market comparables and capital expenditure forecasts. In performing this test as of August 1, 2019, the Company utilized a long-term growth rate for its reporting units of 2.0% in its estimation of fair value and discount rates ranging from 8.0% to 13.0% versus the prior year discount rates of 9.0% to 16.0% to reflect changes in market conditions. The assumptions used in evaluating goodwill for impairment are subject to change and are tracked against historical results by management. The use of different assumptions, inputs and judgments, or changes in circumstances, could materially affect the results of the valuation. Due to inherent uncertainty involved in making these estimates, actual results could differ from our estimates and could result in additional non-cash impairment charges in the future.
The Company determined, after performing the fair value analysis above, that all reporting units’ fair values were in excess of its carrying value. No impairment of goodwill has been identified for the nine months ended September 30, 2019.
8. DEBT
Credit Agreement
On April 6, 2017, we entered into a new credit agreement (the “2017 Credit Agreement”), which provided for a $300.0 million term loan facility ("2017 Term Loan") and a $25.0 million Revolving Credit Facility (the "2017 Revolving Credit Facility"). The proceeds of the 2017 Term Loan were used to refinance the Company’s existing credit facility and to pay costs and expenses associated with the 2017 Credit Agreement.
Certain portions of refinancing transaction were considered an extinguishment of debt and certain portions were considered a modification. A total of $5.7 million was paid for debt issuance costs related to the 2017 Credit Agreement. Of the $5.7 million in costs paid, $1.9 million was related to the exchange of debt and was expensed, $3.3 million related to 2017 Term Loan third party costs and will be amortized over the 2017 Term Loan and $0.4 million prepaid debt issuance costs related to the 2017 Revolving Credit Facility and will be amortized over the term of the 2017 Revolving Credit Facility. In addition, $4.8 million of debt discount and debt issuance costs related to the previous credit facility were expensed due to the extinguishment of that credit facility. The maturity date of the 2017 Term Loan is April 6, 2022 and the maturity date of the 2017 Revolving Credit Facility is October 6, 2021. As of September 30, 2019, the outstanding balance of the 2017 Term Loan and the 2017 Revolving Credit Facility was $414.6 million and $14.0 million, respectively. The interest rate on the 2017 Term Loan and the 2017 Revolving Credit Facility as of September 30, 2019 were 8.31% and 11.00%, respectively.
Borrowings under the 2017 Credit Agreement bear interest at a rate per annum equal to an applicable margin plus, at our option, a base rate or an adjusted LIBOR rate. The applicable margin for loans under the 2017 Revolving Credit Facility is 6.00% for loans bearing interest calculated using the base rate (“Base Rate Loans”) and 7.00% for loans bearing interest calculated using the adjusted LIBOR rate. The applicable margin for loans under the 2017 Term Loan is 4.75% for Base Rate Loans and 5.75% for adjusted LIBOR rate loans. The base rate is equal to the highest of (a) the adjusted U.S. Prime Lending Rate as published in the Wall Street Journal, (b) with respect to term loans issued on the closing date, 2.00%, (c) the federal funds effective rate from time to time, plus 0.50%, and (d) the adjusted LIBOR rate, as defined below, for a one-month interest period, plus 1.00%. The adjusted LIBOR rate is equal to the rate per annum (adjusted for statutory reserve requirements for Eurocurrency liabilities) at which Eurodollar deposits are offered in the interbank Eurodollar market for the applicable interest period (one, two, three or six months), as quoted on Reuters screen LIBOR (or any successor page or service). The financing commitments of the lenders extending the 2017 Revolving Credit Facility are subject to various conditions, as set forth in the 2017 Credit Agreement. As of September 30, 2019, the Company has been in compliance with all covenants.
First Amendment
On June 28, 2017, the Company entered into an amendment to the 2017 Credit Agreement ("First Amendment"), by and among the Company, each of the Lenders party thereto, and Jefferies Finance LLC, as Administrative Agent. The First Amendment clarified
that for all purposes of the 2017 Credit Agreement the Company's liabilities pursuant to any lease that was treated as rental and lease expense, and not as a capital lease obligation or indebtedness on the closing date of the 2017 Credit Agreement, would continue to be treated as a rental and lease expense, and not as a capital lease obligation or indebtedness notwithstanding any amendment of the lease that results in the treatment of such lease as a capital lease obligation or indebtedness for financial reporting purposes.
Second Amendment
On February 6, 2018, the Company, the Lenders party thereto and Jefferies Finance LLC, as Administrative Agent, entered into a Second Amendment to Credit Agreement (the "Second Amendment") that amended the 2017 Credit Agreement.
The Second Amendment, among other things, amends the 2017 Credit Agreement to (i) permit the Company to incur incremental term loans under the 2017 Credit Agreement of up to $135.0 million to finance the Company's acquisition of SingleHop and to pay related fees, costs and expenses, and (ii) revises the maximum total net leverage ratio and minimum consolidated interest coverage ratio covenants. The financial covenant amendments became effective upon the consummation of the SingleHop acquisition, while the other provisions of the Second Amendment became effective upon the execution and delivery of the Second Amendment. This transaction was considered a modification.
A total of $1.0 million was paid for debt issuance costs related to the Second Amendment. Of the $1.0 million in costs paid, $0.2 million related to the payment of legal and professional fees which were expensed, $0.8 million related to term loan lender fees and will be amortized over the term of the 2017 Credit Agreement.
Third Amendment
On February 28, 2018, INAP entered into the Incremental and Third Amendment to the Credit Agreement among the Company, the Lenders party thereto and Jefferies Finance LLC, as Administrative Agent (the "Third Amendment"). The Third Amendment provides for a funding of the new incremental term loan facility under the 2017 Credit Agreement of $135.0 million (the "Incremental Term Loan"). The Incremental Term Loan has terms and conditions identical to the existing loans under the 2017 Credit Agreement, as amended. Proceeds of the Incremental Term Loan were used to complete the acquisition of SingleHop and to pay fees, costs and expenses related to the acquisition, the Third Amendment and the Incremental Term Loan. This transaction was considered a modification.
A total of $5.0 million was paid for debt issuance costs related to the Third Amendment. Of the $5.0 million in costs paid, $0.1 million related to the payment of legal and professional fees which were expensed, $4.9 million related to term loan lender fees and will be amortized over the term of the 2017 Credit Agreement.
Fourth Amendment
On April 9, 2018, the Company entered into the Fourth Amendment to the 2017 Credit Agreement, among the Company, the Lenders party thereto and Jefferies Finance LLC, as Administrative Agent (the "Fourth Amendment"). The Fourth Amendment amends the 2017 Credit Agreement to lower the interest rate margins applicable to the outstanding term loans under the 2017 Credit Agreement by 1.25%. This transaction was considered a modification.
A total of $1.7 million was paid for debt issuance costs related to the Fourth Amendment. Of the $1.7 million in costs paid, $0.1 million related to the payment of legal and professional fees which were expensed, $1.6 million related to term loan lender fees and will be amortized over the term of the 2017 Credit Agreement.
Fifth Amendment
On August 28, 2018, the Company entered into the Fifth Amendment to the 2017 Credit Agreement, among the Company, the Lenders party thereto and Jefferies Finance LLC, as Administrative Agent (the “Fifth Amendment”). The Fifth Amendment amended the 2017 Credit Agreement by increasing the aggregate revolving commitment capacity by $10.0 million to $35.0 million.
Sixth Amendment
On May 8, 2019, the Company entered into the Sixth Amendment to the 2017 Credit Agreement, among the Company, the Lenders party thereto and Jefferies Finance LLC, as Administrative Agent (the “Sixth Amendment”). The Sixth Amendment (i) adjusted the applicable interest rates under the 2017 Credit Agreement, (ii) modified the maximum total net leverage ratio requirements and the minimum consolidated interest coverage ratio requirements and (iii) modified certain other covenants.
Pursuant to the Sixth Amendment, the applicable margin for the alternate base rate loan was increased from 4.75% per annum to 5.25% per annum and for the Eurodollar loan was increased from 5.75% per annum to 6.25% per annum, with such interest payable in cash, and in addition such term loans bear interest payable in kind at the rate of 0.75% per annum.
The Sixth Amendment also made the following modifications:
|
|
•
|
Added an additional basket of $500,000 for finance lease obligations.
|
|
|
•
|
The maximum amount of permitted asset dispositions was decreased from $150,000,000 to $50,000,000.
|
|
|
•
|
The amount of net cash proceeds from asset sales that may be reinvested is limited to $2,500,000 in any fiscal year of the Company, with net cash proceeds that are not so reinvested used to prepay loans under the 2017 Credit Agreement.
|
|
|
•
|
The restricted payment basket was decreased from $5,000,000 to $1,000,000.
|
The maximum total leverage ratio increases to 6.80 to 1 as of June 30, 2019, 6.90 to 1 as of September 30, 2019 - December 31, 2019, decreases to 6.75 to 1 as of March 31, 2020, 6.25 to 1 as of June 30, 2020, 6.00 to 1 as of September 30, 2020, 5.75 to 1 as of December 31, 2020, 5.50 to 1 as of March 2021, 5.00 to 1 as of June 30, 2021 and 4.50 to 1 as of September 30, 2021 and thereafter.
The minimum consolidated interest coverage ratio decreases to 1.75 to 1 as of June 30, 2019, 1.70 to 1 as of September 30, 2019 - March 31, 2020, increases to 1.80 to 1 as of June 30, 2020, 1.85 to 1 as of September 2020 and 2.00 to 1 as of December 31, 2020 and thereafter. This transaction was considered a modification.
A total of $2.9 million was paid for debt issuance costs related to the Sixth Amendment. Of the $2.9 million in costs paid, $0.1 million related to the payment of legal and professional fees which were expensed, $2.8 million related to term loan lender fees and will be amortized over the term of the 2017 Credit Agreement.
9. EXIT ACTIVITIES AND RESTRUCTURING LIABILITIES
During 2019 and 2018, we recorded exit activity charges due to ceasing use of office and data center space. We include initial charges and plan adjustments in "Exit activities, restructuring and impairments" in the accompanying condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2019 and 2018.
The following table displays the transactions and balances for exit activities and restructuring charges during the nine months ended September 30, 2019 and 2018 (in thousands). Our real estate and severance obligations are substantially related to our INAP US segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
Balance
|
|
|
December 31, 2018
|
|
Initial
Charges (1)
|
|
Plan
Adjustments
|
|
Cash
Payments
|
|
September 30,
2019
|
Activity for 2019 restructuring charge:
|
|
|
|
|
|
|
|
|
|
|
Real estate obligations
|
|
$
|
—
|
|
|
$
|
1,629
|
|
|
$
|
(115
|
)
|
|
$
|
(1,098
|
)
|
|
$
|
416
|
|
Activity for 2018 restructuring charge:
|
|
|
|
|
|
|
|
|
|
|
Real estate obligations
|
|
1,922
|
|
|
—
|
|
|
186
|
|
|
(2,108
|
)
|
|
—
|
|
Activity for 2017 restructuring charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate obligations
|
|
100
|
|
|
—
|
|
|
(10
|
)
|
|
(90
|
)
|
|
—
|
|
Activity for 2016 restructuring charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate obligations
|
|
125
|
|
|
—
|
|
|
16
|
|
|
(116
|
)
|
|
25
|
|
Activity for 2015 restructuring charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate obligation
|
|
27
|
|
|
—
|
|
|
29
|
|
|
(49
|
)
|
|
7
|
|
Service contracts
|
|
221
|
|
|
—
|
|
|
30
|
|
|
(149
|
)
|
|
102
|
|
Activity for 2014 restructuring charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate obligation
|
|
206
|
|
|
—
|
|
|
54
|
|
|
(260
|
)
|
|
—
|
|
|
|
$
|
2,601
|
|
|
$
|
1,629
|
|
|
$
|
190
|
|
|
$
|
(3,870
|
)
|
|
$
|
550
|
|
(1) Additional expense related to the disposal of leasehold improvements of $3,345 was recorded for the three and nine months ended September 30, 2019 and not included in the table above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
Balance
|
|
|
December 31, 2017
|
|
Initial
Charges
|
|
Plan
Adjustments
|
|
Cash
Payments
|
|
September 30,
2018
|
Activity for 2018 restructuring charge:
|
|
|
|
|
|
|
|
|
|
|
Real estate obligations
|
|
$
|
—
|
|
|
$
|
1,821
|
|
|
$
|
902
|
|
|
$
|
(961
|
)
|
|
$
|
1,762
|
|
Activity for 2017 restructuring charge:
|
|
|
|
|
|
|
|
|
|
|
Real estate obligations
|
|
3,380
|
|
|
—
|
|
|
220
|
|
|
(2,747
|
)
|
|
853
|
|
Activity for 2016 restructuring charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
46
|
|
|
—
|
|
|
35
|
|
|
(35
|
)
|
|
46
|
|
Real estate obligations
|
|
247
|
|
|
—
|
|
|
29
|
|
|
(122
|
)
|
|
154
|
|
Activity for 2015 restructuring charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate obligation
|
|
64
|
|
|
—
|
|
|
8
|
|
|
(36
|
)
|
|
36
|
|
Service contracts
|
|
388
|
|
|
—
|
|
|
22
|
|
|
(148
|
)
|
|
262
|
|
Activity for 2014 restructuring charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate obligation
|
|
691
|
|
|
—
|
|
|
161
|
|
|
(548
|
)
|
|
304
|
|
|
|
$
|
4,816
|
|
|
$
|
1,821
|
|
|
$
|
1,377
|
|
|
$
|
(4,597
|
)
|
|
$
|
3,417
|
|
10. COMMITMENTS, CONTINGENCIES AND LITIGATION
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, 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.
11. OPERATING SEGMENTS
The Company has two reportable segments: INAP US and INAP INTL. These segments are comprised of strategic businesses that are defined by the location of the service offerings. Our INAP US segment consists of US Colocation, US Cloud, and US Network services based in the United States. Our INAP INTL segment consists of these same services based in countries other than the United States, and Ubersmith.
Each segment is managed as an operation with well-established strategic directions and performance requirements. Each segment is led by a separate General Manager who reports to the Chief Operating Officer. The Chief Operating Officer reports directly to the Company's CODM. The CODM evaluates segment performance using business unit contribution which is defined as business unit revenues less direct costs of sales and services, customer support, and sales and marketing, exclusive of depreciation and amortization.
Our services, which are included within both our reportable segments, are described as follows:
Colocation
Colocation involves providing conditioned power with back-up capacity and physical space within data centers along with associated services such as interconnection, remote hands, environmental controls, monitoring and security while allowing our customers to deploy and manage their servers, storage and other equipment in our secure data centers. We design the data center infrastructure, procure the capital equipment, deploy the infrastructure and are responsible for the operation and maintenance of the facility.
Cloud
Cloud services involve providing compute resources and storage services on demand via an integrated platform that includes our automated bare metal solutions. We offer our next generation cloud platforms in our high density colocation facilities and utilize the INAP Performance IP for low latency connectivity.
Network
Network services includes our patented Performance IP™ service, content delivery network services, as well as our IP routing hardware and software platform. By intelligently routing traffic with redundant, high-speed connections over multiple, major Internet backbones, our IP connectivity provides high-performance and highly-reliable delivery of content, applications and communications to end users globally. We deliver our IP connectivity through 100 network POPs around the world.
The following table provides segment results (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
INAP US
|
|
$
|
56,947
|
|
|
$
|
65,678
|
|
|
$
|
171,928
|
|
|
$
|
186,821
|
|
INAP INTL
|
|
15,931
|
|
|
17,294
|
|
|
47,648
|
|
|
52,314
|
|
Net revenues
|
|
72,878
|
|
|
82,972
|
|
|
219,576
|
|
|
239,135
|
|
|
|
|
|
|
|
|
|
|
Cost of sales and services, customer support and sales and marketing:
|
|
|
|
|
|
|
|
|
|
|
INAP US
|
|
32,920
|
|
|
35,197
|
|
|
97,780
|
|
|
99,532
|
|
INAP INTL
|
|
10,148
|
|
|
11,478
|
|
|
29,892
|
|
|
34,483
|
|
Total costs of sales and services, customer support and sales and marketing
|
|
43,068
|
|
|
46,675
|
|
|
127,672
|
|
|
134,015
|
|
|
|
|
|
|
|
|
|
.
|
|
Segment profit:
|
|
|
|
|
|
|
|
|
|
|
INAP US
|
|
24,027
|
|
|
30,481
|
|
|
74,148
|
|
|
87,289
|
|
INAP INTL
|
|
5,783
|
|
|
5,816
|
|
|
17,756
|
|
|
17,831
|
|
Total segment profit
|
|
29,810
|
|
|
36,297
|
|
|
91,904
|
|
|
105,120
|
|
|
|
|
|
|
|
|
|
|
Exit activities, restructuring and impairments
|
|
3,792
|
|
|
2,347
|
|
|
5,439
|
|
|
3,140
|
|
Other operating expenses, including sales, general and administrative and depreciation and amortization expenses
|
|
29,954
|
|
|
31,253
|
|
|
91,885
|
|
|
95,404
|
|
(Loss) income from operations
|
|
(3,936
|
)
|
|
2,697
|
|
|
(5,420
|
)
|
|
6,576
|
|
Non-operating expenses
|
|
19,919
|
|
|
17,989
|
|
|
56,906
|
|
|
50,143
|
|
Loss before income taxes and equity in earnings of equity-method investment
|
|
$
|
(23,855
|
)
|
|
$
|
(15,292
|
)
|
|
$
|
(62,326
|
)
|
|
$
|
(43,567
|
)
|
The CODM does not manage the operating segments based on asset allocations. Therefore, assets by operating segment have not been provided.
12. NET LOSS PER SHARE
We compute basic net loss per share by dividing net loss attributable to our common stockholders by the weighted average number of shares of common stock outstanding during the period. We exclude all outstanding options and unvested restricted stock as such securities are anti-dilutive for all periods presented.
Basic and diluted net loss per share is calculated as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months
Ended
September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net loss
|
|
$
|
(23,849
|
)
|
|
$
|
(15,454
|
)
|
|
$
|
(62,006
|
)
|
|
$
|
(43,971
|
)
|
|
Less net income attributable to non-controlling interests
|
|
21
|
|
|
25
|
|
|
63
|
|
|
75
|
|
|
Net loss attributable to shareholders
|
|
$
|
(23,870
|
)
|
|
$
|
(15,479
|
)
|
|
$
|
(62,069
|
)
|
|
$
|
(44,046
|
)
|
|
Weighted average shares outstanding, basic and diluted
|
|
23,671
|
|
|
20,206
|
|
|
23,703
|
|
|
19,968
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(1.01
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
(2.62
|
)
|
|
$
|
(2.21
|
)
|
|
Anti-dilutive securities excluded from diluted net loss per share calculation for stock-based compensation plans
|
|
1,920
|
|
|
1,065
|
|
|
1,920
|
|
|
1,065
|
|
|
13. INVESTMENT IN AFFLIATES AND OTHER ENTITIES
In the normal course of business, INAP enters into various types of investment arrangements, each having unique terms and conditions.
In previous years, INAP invested $4.1 million in Internap Japan Co., Ltd., ("INAP Japan") our joint venture with NTT-ME Corporation ("NTT-ME") and Nippon Telegraph and Telephone Corporation. Through August 15, 2017, we qualified and accounted for this investment using the equity method. We recorded our proportional share of the income and losses of INAP Japan one month in arrears on the accompanying consolidated balance sheets as a long-term investment and our share of INAP Japan's income and losses, net of taxes, as a separate caption in our accompanying consolidated statements of operations and comprehensive loss.
On August 15, 2017, INAP exercised certain rights to obtain a controlling interest in Internap Japan Co., Ltd. Upon obtaining control of the venture, we recognized INAP Japan's assets and liabilities at fair value resulting in a gain of $1.1 million. Once INAP obtained control of the Internap Japan Co., Ltd. venture, the investment was consolidated with INAP using the voting model.
On January 15, 2019, NTT-ME exercised its first put option that resulted in NTT-ME having an ownership of 15% and INAP of 85%. The put option was exercised at $1.0 million which represents the fair market value of the shares purchased.
14. SUBSEQUENT EVENTS
On October 29, 2019, the Company entered into the Seventh Amendment to 2017 Credit Agreement, among the Company, the Lenders party thereto and Jefferies Finance LLC, as Administrative Agent (the “Seventh Amendment”). The Seventh Amendment (i) modified the maximum total net leverage ratio requirements and the minimum consolidated interest coverage ratio requirements under the 2017 Credit Agreement and (ii) effected certain other modifications, including changes to certain baskets.
The maximum total leverage ratio increases to 7.25 to 1 as of December 31, 2019 - December 31, 2020, 5.50 to 1 as of March 31, 2021, 5.00 to 1 as of June 30, 2021, 4.50 to 1 as of September 30, 2021 and thereafter.
The minimum consolidated interest coverage ratio decreases to 1.60 to 1 as of December 31, 2019 - December 31, 2020, 2.00 to 1.00 as of March 31, 2021 and thereafter.
The Seventh Amendment also made the following modifications:
|
|
•
|
Reduced the disposition of property basket from $50.0 million to $25.0 million.
|
|
|
•
|
Reduced reinvestment of net cash proceeds from asset sales from $2.5 million to $1.0 million.
|
|
|
•
|
Reduced investment basket from greater of $25.0 million and 30% of EBITDA to greater of $12.5 million and 15% of EBITDA.
|
|
|
•
|
Reduced incremental facility from $50.0 million to $25.0 million.
|
|
|
•
|
Reduced foreign subsidiary debt basket from greater of $15.0 million and 18% of EBITDA to greater of $5.0 million and 6% of EBITDA.
|
|
|
•
|
Reduced general basket from greater of $50.0 million and 61% of EBITDA to greater of $25.0 million and 30% of EBITDA.
|