Document


    
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 

FORM 10-Q
 

(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
 
Commission File Number: 001-31989
 
 
INTERNAP CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware
91-2145721
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
 12120 Sunset Hills Road, Suite 330
Reston, VA 20190
(Address of Principal Executive Offices, Including Zip Code)
 
(404) 302-9700
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

As of November 1, 2018, 25,512,514 shares of the registrant’s outstanding common stock, $0.001 par value per share, were outstanding.




 




INTERNAP CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018
TABLE OF CONTENTS
 
 
 
 

 

 
 
 

 

 
 
 

 
2

 
 
 

 
3

 
 
 

 
4

 
 
 

19

 
 
 

29

 
 
 

30

 
 
 

 
 
 

31

 
 
 


 
 
 


 
 
 
33

 
 
 

36

 
 
 

 







ITEM 1. FINANCIAL STATEMENTS

INTERNAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
(Unaudited)

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net revenues
 
$
82,972

 
$
68,907

 
$
239,135

 
$
210,682

 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 

 
 

 
 
 
 
Costs of sales and services, exclusive of depreciation and amortization
 
28,866

 
24,945

 
81,880

 
80,419

Costs of customer support
 
7,984

 
6,237

 
24,212

 
19,634

Sales, general and administrative
 
18,170

 
15,331

 
57,625

 
47,466

Depreciation and amortization
 
23,431

 
20,917

 
67,097

 
57,596

Exit activities, restructuring and impairments
 
2,347

 
745

 
3,140

 
6,396

Total operating costs and expenses
 
80,798

 
68,175

 
233,954

 
211,511

Income (loss) from operations
 
2,174

 
732

 
5,181

 
(829
)
 
 
 
 
 
 
 
 
 
Interest expense
 
16,898

 
12,299

 
47,786

 
37,581

Loss on foreign currency, net
 
195

 
197

 
5

 
485

Total non-operating expenses
 
17,093

 
12,496

 
47,791

 
38,066

 
 
 
 
 
 
 
 
 
Loss before income taxes and equity in earnings of equity-method investment
 
(14,919
)
 
(11,764
)
 
(42,610
)
 
(38,895
)
Provision for income taxes
 
162

 
221

 
404

 
689

Equity in earnings of equity-method investment, net of taxes
 

 
(1,122
)
 

 
(1,207
)
 
 
 
 
 
 
 
 
 
Net loss
 
(15,081
)
 
(10,863
)
 
(43,014
)
 
(38,377
)
   Less net income attributable to non-controlling interests
 
25

 
32

 
75

 
32

Net loss attributable to INAP stockholders
 
(15,106
)
 
(10,895
)
 
(43,089
)
 
(38,409
)
Other comprehensive (loss) income:
 
 

 
 

 
 
 
 
Foreign currency translation adjustment
 
(98
)
 
(91
)
 
24

 
14

Unrealized gain on foreign currency contracts
 

 

 

 
145

Total other comprehensive (loss) income
 
(98
)
 
(91
)
 
24

 
159

 
 
 
 
 
 
 
 
 
Comprehensive loss
 
$
(15,204
)
 
$
(10,986
)
 
$
(43,065
)
 
$
(38,250
)
 
 
 
 
 
 
 
 
 
Basic and diluted net loss per share
 
$
(0.75
)
 
$
(0.56
)
 
$
(2.16
)
 
$
(2.04
)
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding used in computing basic and diluted net loss per share
 
20,206

 
19,929

 
19,968

 
18,645

See Notes to Condensed Consolidated Financial Statements.


1




INTERNAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
(Unaudited)
 
 
September 30,
2018
 
December 31, 2017
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
11,844

 
$
14,603

Accounts receivable, net of allowance for doubtful accounts of $1,418 and $1,487, respectively
 
22,999

 
17,794

Contract assets
 
8,026

 

Prepaid expenses and other assets
 
9,497

 
8,673

Total current assets
 
52,366

 
41,070

 
 
 
 
 
Property and equipment, net
 
477,423

 
458,565

Intangible assets, net
 
74,738

 
25,666

Goodwill
 
116,705

 
50,209

Non-current contract assets
 
12,756

 

Deposits and other assets
 
12,050

 
11,015

Total assets
 
$
746,038

 
$
586,525

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
32,243

 
$
20,388

Accrued liabilities
 
17,866

 
15,908

Deferred revenues
 
4,696

 
4,861

Capital lease obligations
 
9,399

 
11,711

Revolving credit facility
 
18,500

 
5,000

Term loan, less discount and prepaid costs of $3,912 and $2,133, respectively
 
444

 
867

Exit activities and restructuring liability
 
3,255

 
4,152

Other current liabilities
 
3,637

 
1,707

Total current liabilities
 
90,040

 
64,594

 
 
 
 
 
 
 
 
 
 
Capital lease obligations
 
252,599

 
223,749

Term loan, less discount and prepaid costs of $10,625 and $7,655, respectively
 
415,251

 
287,845

Exit activities and restructuring liability
 
162

 
664

Deferred rent
 
940

 
1,310

Deferred tax liability
 
1,952

 
1,651

Other long-term liabilities
 
4,060

 
7,744

Total liabilities
 
765,004

 
587,557

Commitments and contingencies (Refer to Note 9)
 


 


Stockholders’ deficit:
 
 

 
 

Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued or outstanding
 

 

Common stock, $0.001 par value; 50,000 shares authorized; 21,302 and 20,804 shares issued and outstanding, respectively
 
21

 
21

Additional paid-in capital
 
1,330,751

 
1,327,084

Treasury stock, at cost, 329 and 293, respectively
 
(7,645
)
 
(7,159
)
Accumulated deficit
 
(1,343,609
)
 
(1,323,723
)
Accumulated items of other comprehensive loss
 
(1,300
)
 
(1,324
)
Total INAP stockholders’ deficit
 
(21,782
)
 
(5,101
)
Non-controlling interests
 
2,816

 
4,069

Total stockholders’ deficit
 
(18,966
)
 
(1,032
)
Total liabilities and stockholders’ deficit
 
$
746,038

 
$
586,525

See Notes to Condensed Consolidated Financial Statements.


2



     
INTERNAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Cash Flows from Operating Activities:
 
 

 
 

Net loss
 
$
(43,014
)
 
$
(38,377
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
67,097

 
57,596

(Gain) loss on disposal of fixed asset
 
(98
)
 
503

Amortization of debt discount and issuance costs
 
2,798

 
1,890

Stock-based compensation expense, net of capitalized amount
 
3,573

 
2,061

Equity in earnings of equity-method investment
 

 
(1,207
)
Provision for doubtful accounts
 
706

 
808

Non-cash change in capital lease obligations
 
(241
)
 
564

Non-cash change in exit activities and restructuring liability
 
3,198

 
5,824

Non-cash change in deferred rent
 
(851
)
 
(3,335
)
Deferred taxes
 
65

 
209

Loss on extinguishment and modification of debt
 

 
6,785

Other, net
 
(6
)
 
(49
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(4,990
)
 
243

Prepaid expenses, deposits and other assets
 
(3,531
)
 
1,979

Accounts payable
 
9,372

 
(3,498
)
Accrued and other liabilities
 
(601
)
 
1,691

Deferred revenues
 
617

 
(1,233
)
Exit activities and restructuring liability
 
(4,597
)
 
(4,727
)
Asset retirement obligation
 
(141
)
 
191

Other liabilities
 
(199
)
 
22

Net cash provided by operating activities
 
29,157

 
27,940

 
 
 
 
 
Cash Flows from Investing Activities:
 
 
 
 
Purchases of property and equipment
 
(27,317
)
 
(23,198
)
Proceeds from disposal of property and equipment
 
570

 
206

Business acquisition, net of cash acquired
 
(131,748
)
 
3,838

Acquisition of non-controlling interests
 
(1,130
)
 

Additions to acquired and developed technology
 
(2,128
)
 
(635
)
Net cash used in investing activities
 
(161,753
)
 
(19,789
)
 
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
 
Proceeds from credit agreements
 
148,500

 
295,500

Proceeds from stock issuance
 

 
40,165

Principal payments on credit agreements
 
(3,267
)
 
(327,250
)
Debt issuance costs
 
(7,696
)
 
(8,277
)
Payments on capital lease obligations
 
(7,202
)
 
(6,562
)
Proceeds from exercise of stock options
 
(210
)
 
159

Acquisition of common stock for income tax withholdings
 
(487
)
 
(222
)
Other, net
 
175

 
(302
)
Net cash provided by (used in) in financing activities
 
129,813

 
(6,789
)
Effect of exchange rates on cash and cash equivalents
 
24

 
217

Net (decrease) increase in cash and cash equivalents
 
(2,759
)
 
1,579

Cash and cash equivalents at beginning of period
 
14,603

 
10,389

Cash and cash equivalents at end of period
 
$
11,844

 
$
11,968

 
 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 

 
 

Cash paid for interest
 
$
44,324

 
$
25,898

Non-cash acquisition of property and equipment under capital leases
 
33,381

 
169,679

Additions to property and equipment included in accounts payable
 
4,004

 
701

 
See Notes to Condensed Consolidated Financial Statements.

3



INTERNAP CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Internap Corporation (“we,” “us,” “our,” “INAP,” or “the Company”) is a global provider of high-performance data center services, including colocation, cloud and network. INAP partners with its customers, who range from the Fortune 500 to emerging start-ups, to create secure, scalable and reliable IT infrastructure solutions that meet the customer’s unique business requirements. INAP operates in 53, primarily Tier 3, data centers in 21 metropolitan markets and has 102 points of presence ("POPs") around the world. INAP has over 1 million gross square feet in its portfolio, and approximately 600,000 square feet of sellable data center space. 

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 3, "Revenues."
 
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, 2018 and our operating results and cash flows for the interim periods presented. The balance sheet at December 31, 2017 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, 2017 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, 2018 are not necessarily indicative of the results that may be expected for the 2018 fiscal year or any future periods. 

2.    RECENT ACCOUNTING PRONOUNCEMENTS
 
In May 2014, the Financial Accounting Standard Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606"). This standard update, along with related subsequently issued updates, clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP. The standard update also amends current guidance for the recognition of costs to obtain and fulfill contracts with customers such that incremental costs of obtaining and direct costs of fulfilling contracts with customers will be deferred and amortized consistent with the transfer of the related good or service. ASC 606 intends to provide a more robust framework for addressing revenue issues; improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; and provide more useful information to users of financial statements through improved disclosure requirements. The Company adopted this guidance on January 1, 2018 using the modified retrospective method. Following the adoption of this guidance, the revenue recognition for our sales arrangements remained materially consistent with our historical practice. For more information, see Note 3, "Revenues."
 
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which states that a lessee should recognize the assets and liabilities that arise from leases. The guidance is effective for annual and interim periods beginning after December 15, 2018. Earlier adoption is permitted. We expect to adopt the new standard on January 1, 2019. 

The Company’s adoption process of the new standard is ongoing, including evaluating and quantifying the impact on its consolidated financial statements, identifying the population of leases (and embedded leases), implementing a selected technology solution and collecting and validating lease data. Additionally, the Company is in the process of assessing any potential impacts on the internal controls and process related to both the implementation and ongoing compliance of the new guidance. While the Company is continuing to assess all potential impacts of the standard, it currently believes the most significant impact relates to the recognition on the Company’s balance sheet of right-of-use 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 will depend 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.

4




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 plans to adopt the 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 Company is currently planning on electing the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and is evaluating the other practical expedients available under the guidance.

On August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, a consensus of the FASB’s Emerging Issues Task Force. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. We adopted this guidance in the first quarter of 2018 and it did not have a significant impact on our condensed consolidated financial statements.

On January 2017, the FASB issued final guidance that revises the definition of a business, ASU No. 2017-01: Clarifying the Definition of a Business (Topic 805). The definition of a business affects many areas of accounting (e.g., acquisitions, disposals, goodwill impairment, or consolidation). The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. We adopted this guidance in the first quarter of 2018 and it did not impact our condensed consolidated financial statements. The guidance may have an impact on the Company as it pursues its strategy to develop its business.

On May 2017, the FASB issued guidance ASU No. 2017-09: Scope of Modification Accounting (Topic 718), to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. We adopted this guidance in the first quarter of 2018 and it did not impact our condensed consolidated financial statements.


3.    REVENUES

Upon adoption of ASC 606, the Company applied certain transition practical expedients available for modified retrospective adoption.

The Company adopted the practical expedient for the portfolio approach of contracts with similar characteristics in which the Company reasonably expects that the effects on the financial statements of applying this practical expedient to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio.

The Company also adopted the practical expedient to not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts for which INAP recognizes revenue at the amount to which the Company has the right to invoice for services performed, and (iii) the value for variable consideration that is applied to individual performance obligations in a series.

The Company elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (e.g., sales, use, and value added taxes).

Changes in Accounting Policies

The most significant impact of the adoption of the new standard is 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 is not commensurate with the initial commission.

In addition, installation revenues are recognized over the initial contract life rather than over the estimated customer life, as they are not significant to the total contract and therefore do not represent a material right.


5



Most performance obligations, with the exception of certain 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. However, our approach did not result in any material differences to our condensed consolidated financial statements.

Adjustments to Reported Financial Statements from the Adoption

The following table presents the effect of the adoption of ASC 606 on the Company’s consolidated balance sheet as of January 1, 2018 (in thousands):
 
December 31, 2017, as reported
 
Adjustments
 
January 1, 2018, as adjusted
ASSETS
 
 
 

 
 

Prepaid expenses and other assets
$
8,673

 
$
6,814

 
$
15,487

Deposits and other assets
11,015

 
11,234

 
22,249

 


 


 


LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 

 
 

Deferred revenues
4,861

 
(749
)
 
4,112

Deferred tax liability
1,651

 
209

 
1,860

Other long-term liabilities
7,744

 
(4,616
)
 
3,128

Accumulated deficit
(1,323,723
)
 
23,204

 
(1,300,519
)

Current Impact from the Adoption

In accordance with the new revenue standard requirements, the disclosure of the current period impact of adoption on our
condensed consolidated statement of operations and comprehensive loss and balance sheet is as follows (in thousands, except for per share amounts):
 
For the Three Months Ended September 30, 2018
 
As Reported
 
Balances without Adoption of ASC 606
 
Effect of Change Higher/ (Lower)
Net revenues
$
82,972

 
$
82,822

 
$
150

 
 
 
 
 
 
Sales, general and administrative
18,170

 
18,100

 
70

Total operating costs and expenses
80,798

 
80,728

 
70

Income from operations
2,174

 
2,094

 
80

 
 
 
 
 
 
Loss before income taxes and equity in earnings of equity-method investment
(14,919
)
 
(14,999
)
 
80

 
 
 
 
 
 
Net loss
(15,081
)
 
(15,161
)
 
80

   Less net income attributable to non-controlling interest
25

 
25

 

Net loss attributable to INAP stockholders
(15,106
)
 
(15,186
)
 
80

 
 
 
 
 
 
Comprehensive loss
$
(15,204
)
 
$
(15,186
)
 
$
80




6



 
For the Nine Months Ended September 30, 2018
 
As Reported
 
Balances without Adoption of ASC 606
 
Effect of Change Higher/ (Lower)
Net revenues
$
239,135

 
$
238,539

 
$
596

 
 
 
 
 
 
Sales, general and administrative
57,625

 
57,671

 
(46
)
Total operating costs and expenses
233,954

 
234,000

 
(46
)
Income from operations
5,181

 
4,539

 
642

 
 
 
 
 
 
Loss before income taxes and equity in earnings of equity-method investment
(42,610
)
 
(43,252
)
 
642

 
 
 
 
 
 
Net loss
(43,014
)
 
(43,656
)
 
642

   Less net income attributable to non-controlling interest
75

 
75

 

Net loss attributable to INAP stockholders
(43,089
)
 
(43,731
)
 
642

 
 
 
 
 
 
Comprehensive loss
$
(43,065
)
 
$
(43,707
)
 
$
642




 
September 30, 2018
 
As Reported
 
Balances without Adoption of ASC 606
 
Effect of Change Higher/ (Lower)
ASSETS
 
 
 

 
 

Contract assets
$
8,026

 
$
8,022

 
$
4

Non-current contract assets
12,756

 
12,756

 

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 

 
 

Deferred revenues
4,696

 
4,771

 
(75
)
Other long-term liabilities
4,060

 
4,060

 

Accumulated deficit
(1,343,609
)
 
(1,343,534
)
 
(75
)

Adoption of ASC 606 did not have a significant impact on the Company's condensed consolidated statement of cash flows.

The Company accounts for revenue in accordance with ASC 606. 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, which are discussed in more detail below. 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 contracts 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 our contracts have multiple performance obligations, as the promise to transfer individual goods or services is separately identifiable

7



from other promises in the contracts and, therefore, is distinct. For contracts with multiple performance obligations, we allocate the contract's transaction price to each performance obligation based on its relative stand-alone selling price.

The stand-alone selling price (“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.

Revenue by source, with sales and usage-based taxes excluded, is as follows (in thousands):
 
 
Three Months Ended
September 30, 2018
 
Three Months Ended
September 30, 2017
 
 
INAP US
 
INAP INTL
 
INAP US
 
INAP INTL
Colocation
 
$
32,946

 
$
1,372

 
$
29,114

 
$
1,166

Network services
 
13,015

 
2,719

 
14,486

 
2,281

Cloud
 
19,717

 
13,203

 
9,370

 
12,490

 
 
$
65,678

 
$
17,294

 
$
52,970

 
$
15,937


 
 
Nine Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2017
 
 
INAP US
 
INAP INTL
 
INAP US
 
INAP INTL
Colocation
 
$
94,747

 
$
4,349

 
$
88,740

 
$
3,745

Network services
 
40,398

 
8,482

 
45,108

 
5,329

Cloud
 
51,676

 
39,483

 
28,696

 
39,064

 
 
$
186,821

 
$
52,314

 
$
162,544

 
$
48,138



Revenue by geography is as follows (in thousands):
 
 
Three Months Ended
September 30, 2018
 
Three Months Ended
September 30, 2017
 
 
INAP US
 
INAP INTL
 
INAP US
 
INAP INTL
United States
 
$
66,825

 
$

 
$
54,006

 
$

Canada
 

 
9,187

 

 
9,421

Other countries
 

 
6,960

 

 
5,480

 
 
$
66,825

 
$
16,147

 
$
54,006

 
$
14,901


 
 
Nine Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2017
 
 
INAP US
 
INAP INTL
 
INAP US
 
INAP INTL
United States
 
$
190,071

 
$

 
$
165,757

 
$

Canada
 

 
27,846

 

 
29,320

Other countries
 

 
21,218

 

 
15,605

 
 
$
190,071

 
$
49,064

 
$
165,757

 
$
44,925



For the nine months ended September 30, 2018, revenue recognized that was included in the contract liability balance at the beginning of each year was $1.7 million.


8



Management expects that fulfillment costs and commission fees paid to sales representatives as a result of obtaining service contracts and contract renewals are recoverable and therefore the Company capitalized them as contract costs in the amount of $28.6 million at September 30, 2018. Capitalized fulfillment and commission fees are amortized on a straight-line basis over the determined life, which vary based on the customer segment. For the three and nine months ended September 30, 2018, amortization recognized was $3.1 million and $8.9 million, respectively. There was no impairment loss recorded on capitalized contract costs in the nine months ended 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.


9



4. 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, 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 an amendment 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 7, "Debt."

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date and reflects purchase accounting adjustments subsequent to the acquisition date (in thousands):
 
Preliminary Valuation as of March 31, 2018
 
Measurement Period Adjustments
 
Preliminary Valuation as of September 30, 2018
Cash
$
2,857

 
$
(34
)
 
$
2,823

Prepaid expenses and other assets
1,683

 
544

 
2,227

Property, plant and equipment
14,885

 

 
14,885

Other long term assets
39

 
537

 
576

Intangible assets:
 
 
 
 
 
Noncompete agreements
4,000

 

 
4,000

Trade names
1,700

 

 
1,700

Technology
15,100

 

 
15,100

Customer relationships
34,100

 

 
34,100

Goodwill
67,868

 
(1,372
)
 
66,496

Total assets acquired
142,232

 
(325
)
 
141.907

Accounts payable and accrued liabilities
5,098

 
(224
)
 
4,874

Deferred revenue
1,600

 
(101
)
 
1,499

Long term liabilities
534

 

 
534

Net assets acquired
$
135,000

 
$

 
$
135,000


The above estimated fair values of consideration transferred, assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date. Measurement period adjustments reflect new information obtained about facts and circumstances that existed as of the acquisition date. The measurement period adjustments primarily related to working capital and ASC 606. The Company believes that information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed. Thus, the preliminary measurements of fair value set forth above maybe subject to change. The Company is in the process of finalizing the fair value adjustments. The Company expects to finalize the valuation as soon as practicable but no later than one year from the acquisition date.
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.
 
Acquisition-related costs recognized during the nine months ended September 30, 2018 including transaction costs such as legal, accounting, valuation and other professional services, were $2.9 million and are included in "Sales, general and administrative" expenses on the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss.


10



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):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues
 
$
82,972

 
$
80,622

 
$
247,260

 
$
246,622

Net loss
 
(15,081
)
 
(11,708
)
 
(44,216
)
 
(39,817
)
Basic and diluted net loss per share
 
(0.75
)
 
(0.59
)
 
(2.22
)
 
(2.14
)
Weighted average shares outstanding used in computing basic and diluted net loss per share
 
20,206

 
19,929

 
19,968

 
18,645


 
5.    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, 2018
 
 

 
 

 
 

 
 

Asset retirement obligations(1)
 
$

 
$

 
$
1,813

 
$
1,813

 
 
 
 
 
 
 
 
 
December 31, 2017
 
 

 
 

 
 

 
 

Asset retirement obligations(1)
 

 

 
1,936

 
1,936

 
 
 
 
 
 
 
 
 
(1) 
We calculated the fair value of asset retirement obligations by discounting the estimated amount using the current Treasury bill rate adjusted for our credit risk. At September 30, 2018, the balance is included in “Other long-term liabilities,” in the accompanying Condensed Consolidated Balance Sheets. At December 31, 2017, $0.2 million and $1.7 million were included in "Other current liabilities" and "Other long-term liabilities," respectively, 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, 2018 (in thousands): 
Balance, January 1, 2018
$
1,936

Accretion
127

Payments
(250
)
Balance, September 30, 2018
$
1,813

 

11



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, 2018
 
December 31, 2017
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Term loan
 
$
430,232

 
$
433,998

 
$
298,500

 
$
301,485

Revolving credit facility
 
18,500

 
18,662

 
5,000

 
5,050

 
6.    GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

General
 
The Company tests goodwill and intangible assets with indefinite lives for impairment annually in the third quarter. 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.
In 2017, the Company adopted the new guidance under ASU No. 2017-04: Intangibles - Goodwill and Other: Simplifying the Accounting for Goodwill Impairment (Topic 350) which eliminated step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation to measure goodwill impairment loss as of January 1, 2018.  A goodwill impairment loss under the new guidance is instead measured using a single step test based on the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill.  Based on the Company’s impairment test, no impairments were noted.

Annual Testing
2018
During the nine months ended September 30, 2018, we changed our operating segments, as discussed in Note 10, “Operating Segments,” and, subsequently, our reporting units. We now have seven reporting units: US Colocation, US Cloud, US Network, INTL Colocation, INTL Cloud, INTL Network, and Ubersmith. We allocated goodwill to our new reporting units using a relative fair value approach. In addition, we completed an assessment of any potential goodwill impairment for all reporting units immediately prior to and after the reallocation and determined that no impairment existed.

We performed our annual impairment review as of August 1, 2018. 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

12



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. 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, 2018.

During the nine months ended September 30, 2018, our goodwill activity is as follows (in thousands):
 
 
December 31, 2017
 
Re-allocations
 
SingleHop Acquisition (Note 4)
 
September 30, 2018
Operating segments:
 
 

 
 

 
 
 
 

INAP COLO
 
$
6,003

 
$
(6,003
)
 
$

 
$

INAP CLOUD
 
44,206

 
(44,206
)
 

 

INAP US
 

 
28,304

 
66,496

 
94,800

INAP INTL
 

 
21,905

 

 
21,905

Total
 
$
50,209

 
$

 
$
66,496

 
$
116,705

 
Other Intangible Assets

The components of our amortizing intangible assets, including capitalized software, are as follows (in thousands):

 
 
September 30, 2018
 
December 31, 2017
 
 
Gross Carrying Amount
 
AccumulatedAmortization
 
Gross Carrying Amount
 
AccumulatedAmortization
Acquired and developed technology
 
$
70,201

 
$
(50,997
)
 
$
52,825

 
$
(48,063
)
Customer relationships, trade names and noncompete
 
110,774

 
(55,240
)
 
71,116

 
(50,212
)
 
 
$
180,975

 
$
(106,237
)
 
$
123,941

 
$
(98,275
)

During the three months ended September 30, 2018 and 2017, amortization expense for intangible assets was approximately $3.2 million and $1.8 million, respectively. Amortization expense for intangible assets was approximately $8.0 million and $4.0 million for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, remaining amortization expense is as follows (in thousands):
Three months remaining in 2018
$
3,598

2019
13,961

2020
13,394

2021
11,210

2022
8,251

2023
7,747

Thereafter
16,577

Total
$
74,738



13



7.    DEBT

Credit Agreement

On April 6, 2017, we entered into a new Credit Agreement (the “2017 Credit Agreement”), which provides 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 related to the exchange of debt and was expensed, $3.3 million related to term loan third party costs and will be amortized over the term of the 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, 2018, the balance of the 2017 term loan and the 2017 revolving credit facility was $430.2 million and $18.5 million, respectively. As of September 30, 2018, the interest rate on the 2017 term loan and the 2017 revolving credit facility was 7.90% and 9.25%, 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 7.0% for loans bearing interest calculated using the base rate (“Base Rate Loans”) and 6.0% for loans bearing interest calculated using the adjusted LIBOR rate. The applicable margin for loans under the 2017 term loan is 5.75% for Base Rate Loans and 4.75% 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, 2018, 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 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 obligations or indebtedness, for all purposes of the 2017 Credit Agreement, 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) revise 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.


14



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 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 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%.

In addition, the Fourth Amendment amends the 2017 Credit Agreement such that if the Company incurs a “Repricing Event” (as defined in the 2017 Credit Agreement), before October 9, 2018, then the Company will incur a 1.00% prepayment premium on any term loans that are subject to such Repricing Event. 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 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.
8.    EXIT ACTIVITIES AND RESTRUCTURING LIABILITIES
 
During 2017 and 2018, we recorded exit activity charges due to ceasing use of office 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, 2018 and 2017.

The following table displays the transactions and balances for exit activities and restructuring charges during the nine months ended September 30, 2018 and 2017 (in thousands). Our real estate and severance obligations are substantially related to our INAP US segment.
 

15



 
 
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

 
 
 
Balance
 
 
 
 
 
 
 
Balance
 
 
December 31, 2016
 
Initial
Charges
 
Plan
Adjustments
 
Cash
Payments
 
September 30,
2017
Activity for 2017 restructuring charge:
 
 
 
 
 
 
 
 
 
 
Real estate obligations
 
$

 
$
4,024

 
$
654

 
$
(881
)
 
$
3,797

Activity for 2016 restructuring charge:
 
 

 
 

 
 

 
 

 
 

Severance
 
1,911

 

 
958

 
(2,467
)
 
402

Real estate obligations
 
933

 

 
76

 
(730
)
 
279

Activity for 2015 restructuring charge:
 
 

 
 
 
 
 
 

 
 

Real estate obligation
 
111

 

 
2

 
(38
)
 
75

Service contracts
 
565

 

 
15

 
(148
)
 
432

Activity for 2014 restructuring charge:
 
 

 
 
 
 

 
 

 
 

Real estate obligation
 
1,183

 

 
95

 
(463
)
 
815

 
 
$
4,703

 
$
4,024

 
$
1,800

 
$
(4,727
)
 
$
5,800

 
9.    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.
 
10.    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.

During the three months ended March 31, 2018, we changed our organizational structure in an effort to create more effective and efficient operations and to improve customer and product focus. In that regard, we revised the information that our chief executive officer, who is also our Chief Operating Decision Maker (“CODM”), regularly reviews for purposes of allocating resources and assessing performance. As a result, we report our financial performance based on our revised segment structure. We have reclassified prior period amounts to conform to the current presentation.

16




The prior year reclassifications, which did not affect total revenues, total costs of sales and services, operating loss or net loss, are summarized as follows (in thousands): 
 
 
Three Months Ended September 30, 2017
 
 
As Previously
Reported
 
Reclassification
 
As Reported
Revenues:
 
 

 
 

 
 

INAP COLO
 
$
51,344

 
$
(51,344
)
 
$

INAP CLOUD
 
17,563

 
(17,563
)
 

INAP US
 

 
52,970

 
52,970

INAP INTL
 

 
15,937

 
15,937

Costs of sales and services, exclusive of depreciation and amortization:
 
 

 
 

 
 

INAP COLO
 
$
20,785

 
$
(20,785
)
 
$

INAP CLOUD
 
4,160

 
(4,160
)
 

INAP US
 

 
18,906

 
18,906

INAP INTL
 

 
6,039

 
6,039


 
 
Nine Months Ended September 30, 2017
 
 
As Previously
Reported
 
Reclassification
 
As Reported
Revenues:
 
 

 
 

 
 

INAP COLO
 
$
156,727

 
$
(156,727
)
 
$

INAP CLOUD
 
53,955

 
(53,955
)
 

INAP US
 

 
162,544

 
162,544

INAP INTL
 

 
48,138

 
48,138

Costs of sales and services, exclusive of depreciation and amortization:
 
 

 
 

 
 

INAP COLO
 
$
67,661

 
$
(67,661
)
 
$

INAP CLOUD
 
12,758

 
(12,758
)
 

INAP US
 

 
63,589

 
63,589

INAP INTL
 

 
16,830

 
16,830



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 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

17



 
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, 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 102 POPs around the world.

The following table provides segment results with prior period amounts reclassified to conform to the current presentation (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 

 
 

 
 
 
 
INAP US
 
$
65,678

 
$
52,970

 
$
186,821

 
$
162,544

INAP INTL
 
17,294

 
15,937

 
52,314

 
48,138

Net revenues
 
82,972

 
68,907

 
239,135

 
210,682

 
 
 
 
 
 
 
 
 
Cost of sales and services, customer support and sales and marketing:
 
 

 
 

 
 
 
 
INAP US
 
35,842

 
29,600

 
101,252

 
97,832

INAP INTL
 
11,478

 
9,874

 
34,483

 
27,339

Total costs of sales and services, customer support and sales and marketing
 
47,320

 
39,474

 
135,735

 
125,171

 
 
 
 
 
 
 
 
 
Segment profit:
 
 

 
 

 
 
 
 
INAP US
 
29,836

 
23,370

 
85,569

 
64,712

INAP INTL
 
5,816

 
6,063

 
17,831

 
20,799

Total segment profit
 
35,652

 
29,433

 
103,400

 
85,511

 
 
 
 
 
 
 
 
 
Exit activities, restructuring and impairments
 
2,347

 
745

 
3,140

 
6,396

Other operating expenses, including sales, general and administrative and depreciation and amortization expenses
 
31,131

 
27,956

 
95,079

 
79,944

Income (loss) from operations
 
2,174

 
732

 
5,181

 
(829
)
Non-operating expenses
 
17,093

 
12,496

 
47,791

 
38,066

Loss before income taxes and equity in earnings of equity-method investment
 
$
(14,919
)
 
$
(11,764
)
 
$
(42,610
)
 
$
(38,895
)

The CODM does not manage the operating segments based on asset allocations. Therefore, assets by operating segment have not been provided.

11. 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.

18




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,
 
 
2018
 
2017
 
2018
 
2017
Net loss
 
$
(15,081
)
 
$
(10,863
)
 
$
(43,014
)
 
$
(38,377
)
Less net income attributable to non-controlling interests
 
25

 
32

 
75

 
32

Net loss attributable to common stock
 
$
(15,106
)

$
(10,895
)
 
$
(43,089
)
 
$
(38,409
)
Weighted average shares outstanding, basic and diluted
 
20,206

 
19,929

 
19,968

 
18,645

Net loss per share, basic and diluted
 
$
(0.75
)
 
$
(0.56
)
 
$
(2.16
)
 
$
(2.04
)
Anti-dilutive securities excluded from diluted net loss per share calculation for stock-based compensation plans
 
1,065

 
1,460

 
1,065

 
1,460


12. SUBSEQUENT EVENTS

On October 23, 2018, the Company closed a public offering of 4,210,527 shares of common stock at $9.50 per share to the public and received from the underwriter net proceeds of $36.6 million (net of underwriting discounts and commissions, and other offering expenses). We have granted the underwriters a 30-day option to purchase up to 631,579 additional shares of common stock on the same terms and conditions as the shares offered in the public offering.


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
 
As used herein, except as otherwise indicated by context, references to “we,” “us,” “our,” “INAP.” or “the Company” refers to Internap Corporation and our subsidiaries.

Forward-Looking Statements
This Form 10-Q contains forward-looking statements. Forward-looking statements include statements regarding industry trends, our future financial position and performance, business strategy, revenues and expenses in future periods, projected levels of growth and other matters that do not relate strictly to historical facts. These statements are often identified by words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “projects,” “forecasts,” “plans,” “intends,” “continue,” “could” or “should,” that an “opportunity” exists, that we are “positioned” for a particular result, statements regarding our vision or similar expressions or variations. These statements are based on the beliefs and expectations of our management team based on information available at the time such statements are made. Such forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by such forward-looking statements.
Therefore, actual future results and trends may differ materially from what is forecast in such forward-looking statements due to a variety of factors, including, without limitation: to drive growth while reducing costs; our ability to maintain current customers and obtain new ones, whether in a cost-effective manner or at all; the robustness of the IT infrastructure services market; our ability to achieve or sustain profitability; our ability to expand margins and drive higher returns on investment; our ability to sell into new and existing data center space; the actual performance of our IT infrastructure services and improving operations; our ability to correctly forecast capital needs, demand planning and space utilization; our ability to respond successfully to technological change and the resulting competition; the geographic concentration of the company’s data centers in certain markets and any adverse developments in local economic conditions or the demand for data center space in these markets; ability to identify any suitable strategic transactions; INAP's ability to realize anticipated revenue, growth, synergies and cost savings from the acquisition of SingleHop; INAP's ability to successfully integrate SingleHop’s sales, operations, technology, and products generally; the availability of services from Internet network service providers or network service providers providing network access loops and local loops on favorable terms, or at all; failure of third party suppliers to deliver their products and services on favorable terms, or at all; failures in our network operations centers, data centers, network access points or computer systems; our ability to provide or improve Internet infrastructure services to our customers; our ability to protect our intellectual property; our substantial amount of indebtedness, our possibility to raise additional capital when needed, on attractive terms, or at all, our ability to service existing

19



debt or maintain compliance with financial and other covenants contained in our credit agreement; our compliance with and changes in complex laws and regulations in the U.S. and internationally; our ability to attract and retain qualified management and other personnel; and volatility in the trading price of INAP common stock.
These risks and other important factors discussed under the caption “Risk Factors” in our most recent Annual Report on Form 10-K filed with the SEC, and our other reports filed with the SEC could cause actual results to differ materially from those indicated by the forward-looking statements made in this Form 10-Q.
Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. All forward-looking statements attributable to INAP or persons acting on its behalf are expressly qualified in their entirety by the foregoing forward-looking statements. All such statements speak only as of the date made, and INAP undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
 
INAP is a global provider of high-performance data center services, including colocation, cloud and network. INAP partners with its customers, who range from the Fortune 500 to emerging start-ups, to create secure, scalable and reliable IT infrastructure solutions that meet the customer’s unique business requirements. INAP operates in 53, primarily Tier 3, data centers in 21 metropolitan markets and has 102 POPs around the world. INAP has over 1 million gross square feet in its portfolio, and approximately 600,000 square feet of sellable data center space.  

Change in Organizational Structure
 
During the three months ended March 31, 2018, we changed our organizational structure in an effort to create more effective and efficient business operations and to improve customer and product focus. In that regard, we revised the information that our chief executive officer, who is also our chief operating decision maker, regularly reviews for purposes of allocating resources and assessing performance. As a result, we report our financial performance based on our two revised segments, INAP US and INAP INTL. The new operating segments are described in Note 10, “Operating Segments” in the accompanying condensed consolidated financial statements. We have reclassified prior period amounts to conform to the current presentation.
 
Recent Accounting Pronouncements
 
Recent accounting pronouncements are summarized in Note 2, "Recent Accounting Pronouncements," in the accompanying condensed consolidated financial statements.
 

20



Results of Operations
 
Three Months Ended September 30, 2018 and 2017
 
The following table sets forth selected consolidated statements of operations and comprehensive loss data during the periods presented, including comparative information between the periods (dollars in thousands):
 
 
 
Three Months Ended
September 30,
 
Increase (Decrease) from
2017 to 2018
 
 
2018
 
2017
 
Amount
 
Percent
Net revenues
 
$
82,972

 
$
68,907

 
$
14,065

 
20
 %
 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 

 
 

 
 

 
 

Costs of sales and services, exclusive of depreciation and amortization
 
28,866

 
24,945

 
3,921

 
16
 %
Costs of customer support
 
7,984

 
6,237

 
1,747

 
28
 %
Sales, general and administrative
 
18,170

 
15,331

 
2,839

 
19
 %
Depreciation and amortization
 
23,431

 
20,917

 
2,514

 
12
 %
Exit activities, restructuring and impairments
 
2,347

 
745

 
1,602

 
215
 %
Total operating costs and expenses
 
80,798

 
68,175

 
12,623

 
19
 %
Income (loss) from operations
 
$
2,174

 
$
732

 
$
1,442

 
(197
)%
 
 
 
 
 
 
 
 
 
Interest expense
 
$
16,898

 
$
12,299

 
$
4,599

 
37
 %


Supplemental Schedule

 
 
Three Months Ended
September 30,
 
Increase (Decrease) from
2017 to 2018
 
 
2018
 
2017
 
Amount
 
Percent
Revenues:
 
 
 
 
 


 


INAP US
 
$
65,678

 
$
52,970

 
$
12,708

 
24
%
INAP INTL
 
17,294

 
15,937

 
1,357

 
9
%
Net revenues
 
82,972

 
68,907

 
14,065

 
20
%
 
 
 
 
 
 


 


Cost of sales and services:
 
 
 
 
 


 


INAP US
 
21,853

 
18,906

 
2,947

 
16
%
INAP INTL
 
7,013

 
6,039

 
974

 
16
%
Total costs of sales and services, exclusive of depreciation and amortization
 
$
28,866

 
$
24,945

 
$
3,921

 
16
%

INAP US
 
Revenues for our INAP US segment increased 24% to $65.7 million for the three months ended September 30, 2018, compared to $53.0 million for the same period in 2017. The increase was primarily due to revenue from organic growth, and the addition of SingleHop.

Direct costs of our INAP US segment, exclusive of depreciation and amortization, increased 16%, to $21.9 million for the three
months ended September 30, 2018, compared to $18.9 million for the same period in 2017. The increase was primarily due to SingleHop costs, partially offset by lower space and power costs from planned data center exits and network cost savings initiatives.
 

INAP INTL

21



 
Revenues for our INAP INTL segment increased 9% to $17.3 million for the three months ended September 30, 2018, compared to $15.9 million for the same period in 2017. The increase was primarily due to revenue from the INAP Japan consolidation, the addition of SingleHop and lower churn.

Direct costs of our INAP INTL segment, exclusive of depreciation and amortization, increased 16%, to $7.0 million for the three months ended September 30, 2018, compared to $6.0 million for the same period in 2017. The increase was primarily due to $0.9 million in costs from the INAP Japan consolidation and costs from SingleHop.

Other Operating Costs and Expenses
 
Compensation. Total compensation and benefits, including stock-based compensation, was $16.9 million for the three months ended September 30, 2018, compared to $14.4 million for the same period in 2017. The increase was due to $2.8 million increase in cash-based compensation and $0.4 million increase in stock-based compensation, offset by $0.6 million decrease in commissions and $0.1 million decrease in bonus accrual.
 
Stock-based compensation, net of amount capitalized, increased to $1.3 million during the three months ended September 30, 2018, from $0.9 million during the same period in 2017. The increase is due to additional employees receiving equity grants, and directors receiving their fees in shares of common stock in lieu of cash. The following table summarizes stock-based compensation included in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands): 
 
 
Three Months Ended
June 30,
 
 
2018
 
2017
Costs of customer support
 
$
38

 
$
38

Sales, general and administrative
 
1,303

 
891