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, 2019
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 every Interactive Data File required to be submitted 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
ý
 
 
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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common stock, $0.001 par value
 
INAP
 
Nasdaq Global Market

As of November 8, 2019, 26,621,105 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, 2019
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






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,
 
 
2019
 
2018
 
2019
 
2018
Net revenues
 
$
72,878

 
$
82,972

 
$
219,576

 
$
239,135

 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 

 
 

 
 
 
 
Costs of sales and services, exclusive of depreciation and amortization
 
27,504

 
28,221

 
79,186

 
80,160

Costs of customer support
 
8,145

 
7,984

 
25,661

 
24,212

Sales, general and administrative
 
15,791

 
18,170

 
48,995

 
57,625

Depreciation and amortization
 
21,582

 
23,553

 
65,715

 
67,422

Exit activities, restructuring and impairments
 
3,792

 
2,347

 
5,439

 
3,140

Total operating costs and expenses
 
76,814

 
80,275

 
224,996

 
232,559

(Loss) income from operations
 
(3,936
)
 
2,697

 
(5,420
)
 
6,576

 
 
 
 
 
 
 
 
 
Interest expense
 
19,913

 
17,794

 
56,578

 
50,138

Loss on foreign currency, net
 
6

 
195

 
328

 
5

Total 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
)
(Benefit) provision for income taxes
 
(6
)
 
162

 
(320
)
 
404

 
 
 
 
 
 
 
 
 
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
)
Other comprehensive (loss) income:
 
 

 
 

 
 
 
 
Foreign currency translation adjustment
 
(18
)
 
(98
)
 
152

 
24

Total other comprehensive (loss) income
 
(18
)
 
(98
)
 
152

 
24

 
 
 
 
 
 
 
 
 
Comprehensive loss
 
$
(23,888
)
 
$
(15,577
)
 
$
(61,917
)
 
$
(44,022
)
 
 
 
 
 
 
 
 
 
Basic and diluted net loss per share
 
$
(1.01
)
 
$
(0.77
)
 
$
(2.62
)
 
$
(2.21
)
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding used in computing basic and diluted net loss per share
 
23,671

 
20,206

 
23,703

 
19,968

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,
2019
 
December 31, 2018
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
10,895

 
$
17,823

Accounts receivable, net of allowance for doubtful accounts of $1,077 and $1,547, respectively
 
17,948

 
20,054

Contract assets
 
9,202

 
8,844

Term loan, less discount and issuance costs of $4,909

 
552

 

Prepaid expenses and other assets
 
7,572

 
7,377

Total current assets
 
46,169

 
54,098

 
 
 
 
 
Property and equipment, net
 
216,548

 
478,061

Operating lease right-of-use assets
 
33,723

 

Finance lease right-of-use assets
 
226,619

 

Intangible assets, net
 
64,215

 
73,042

Goodwill
 
116,217

 
116,217

Contract assets
 
15,032

 
16,104

Deposits and other assets
 
6,178

 
7,409

Total assets
 
$
724,701

 
$
744,931

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
25,287

 
$
23,435

Accrued liabilities
 
9,813

 
15,540

Deferred revenues
 
7,493

 
8,022

Capital lease obligations
 

 
9,080

Revolving credit facility
 
14,000

 

Term loan, less discount and issuance costs of $4,036
 

 
321

Exit activities and restructuring liability
 
550

 
2,526

Short-term operating lease liabilities
 
6,686

 

Short-term finance lease liabilities
 
5,867

 

Other current liabilities
 
70

 
1,063

Total current liabilities
 
69,766

 
59,987

 
 
 
 
 
Deferred revenues
 
259

 
511

Operating lease liabilities
 
30,382

 

Finance lease liabilities
 
264,223

 

Capital lease obligations
 

 
262,382

Term loan, less discount and issuance costs of $7,587 and $9,508, respectively
 
415,126

 
415,278

Deferred tax liability
 
1,443

 
2,211

Other long-term liabilities
 
3,714

 
4,505

Total liabilities
 
784,913

 
744,874

Commitments and contingencies (Refer to Note 10)
 


 


Stockholders’ (deficit) equity:
 
 

 
 

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; 26,486 and 25,455 shares outstanding, respectively
 
26

 
25

Additional paid-in capital
 
1,372,016

 
1,368,968

Treasury stock, at cost, 388 and 330 shares, respectively
 
(7,958
)
 
(7,646
)
Accumulated deficit
 
(1,425,140
)
 
(1,363,019
)
Accumulated items of other comprehensive loss
 
(913
)
 
(1,065
)
Total INAP stockholders’ deficit
 
(61,969
)
 
(2,737
)
Non-controlling interests
 
1,757

 
2,794

Total stockholders’ (deficit) equity
 
(60,212
)
 
57

Total liabilities and stockholders’ (deficit) equity
 
$
724,701

 
$
744,931

See Notes to Condensed Consolidated Financial Statements.

2



INTERNAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(In thousands)
(Unaudited)

 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Par Value
 
Additional Paid-In Capital
 
Treasury Stock
 
Accumulated Deficit
 
Accumulated Items of Other Comprehensive Loss
 
Non-Controlling Interest
 
Total Stockholders' (Deficit) Equity
Three and Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
20,804

 
$
21

 
$
1,327,084

 
$
(7,159
)
 
$
(1,323,723
)
 
$
(1,324
)
 
$
4,069

 
$
(1,032
)
Adoption of ASC 606

 

 

 

 
24,185

 

 

 
24,185

Net loss

 

 

 

 
(14,261
)
 

 

 
(14,261
)
Net income attributable to non-controlling interest

 

 

 

 
(27
)
 

 
27

 

Foreign currency translation

 

 

 

 

 
61

 

 
61

Movement in non-controlling interest

 

 

 

 

 

 
(990
)
 
(990
)
Common stock issuance, net
343

 

 

 

 

 

 

 

Employee taxes paid on withholding shares
(20
)
 

 

 
(270
)
 

 

 

 
(270
)
Stock-based compensation

 

 
869

 

 

 

 

 
869

Proceeds from exercise of stock options, net
4

 

 
32

 

 

 

 

 
32

Balance, March 31, 2018
21,131

 
21

 
1,327,985

 
(7,429
)
 
(1,313,826
)
 
(1,263
)
 
3,106

 
8,594

Adoption of ASC 606

 

 

 

 
(981
)
 

 

 
(981
)
Net loss

 

 

 

 
(14,256
)
 

 

 
(14,256
)
Net income attributable to non-controlling interest

 

 

 

 
(23
)
 

 
23

 

Foreign currency translation

 

 

 

 

 
61

 

 
61

Movement in non-controlling interest


 

 

 

 

 

 
(205
)
 
(205
)
Common stock issuance, net
104

 

 

 

 

 

 

 

Employee taxes paid on withholding shares
(16
)
 

 

 
(201
)
 

 

 

 
(201
)
Stock-based compensation

 

 
1,382

 

 

 

 

 
1,382

Proceeds from exercise of stock options, net

 

 
1

 

 

 

 

 
1

Balance, June 30, 2018
21,219

 
$
21

 
$
1,329,368

 
$
(7,630
)
 
$
(1,329,086
)
 
$
(1,202
)
 
$
2,924

 
$
(5,605
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
 
 
 
 

3


INTERNAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY (CONTINUED)
 (In thousands)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Par Value
 
Additional Paid-In Capital
 
Treasury Stock
 
Accumulated Deficit
 
Accumulated Items of Other Comprehensive Loss
 
Non-Controlling Interest
 
Total Stockholders' (Deficit) Equity
Balance, June 30, 2018
21,219

 
$
21

 
$
1,329,368

 
$
(7,630
)
 
$
(1,329,086
)
 
$
(1,202
)
 
$
2,924

 
$
(5,605
)
Adoption of ASC 606

 

 

 

 
(1
)
 

 

 
(1
)
Net loss

 

 

 

 
(15,454
)
 

 

 
(15,454
)
Net income attributable to non-controlling interest

 

 

 

 
(25
)
 

 
25

 

Foreign currency translation

 

 

 

 

 
(98
)
 

 
(98
)
Movement in non-controlling interest

 

 

 

 

 

 
(133
)
 
(133
)
Common stock issuance, net
82

 

 

 

 

 

 

 

Employee taxes paid on withholding shares
(1
)
 

 

 
(15
)
 

 

 

 
(15
)
Stock-based compensation

 

 
1,320

 

 

 

 

 
1,320

Proceeds from exercise of stock options, net
2

 

 
63

 

 

 

 

 
63

Balance, September 30, 2018
21,302

 
$
21

 
$
1,330,751

 
$
(7,645
)
 
$
(1,344,566
)
 
$
(1,300
)
 
$
2,816

 
$
(19,923
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
 
 
 

4


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
INTERNAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY (CONTINUED)
 (In thousands)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Par Value
 
Additional Paid-In Capital
 
Treasury Stock
 
Accumulated Deficit
 
Accumulated Items of Other Comprehensive Loss
 
Non-Controlling Interest
 
Total Stockholders' (Deficit) Equity
Three and Nine Months Ended September 30, 2019
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
25,455

 
$
25

 
$
1,368,968

 
$
(7,646
)
 
$
(1,363,019
)
 
$
(1,065
)
 
$
2,794

 
$
57

Adoption of ASC 842

 

 

 

 
(52
)
 

 

 
(52
)
Net loss

 

 

 

 
(19,622
)
 

 

 
(19,622
)
Net income attributable to non-controlling interest

 

 

 

 
(22
)
 

 
22

 

Foreign currency translation

 

 

 

 

 
197

 

 
197

Movement in non-controlling interest

 

 

 

 

 

 
(1,133
)
 
(1,133
)
Common stock issuance, net
1,339

 
2

 
(43
)
 

 

 

 

 
(41
)
Employee taxes paid on withholding shares
(48
)
 

 

 
(268
)
 

 

 

 
(268
)
Stock-based compensation

 

 
890

 

 

 

 

 
890

Balance, March 31, 2019
26,746

 
27

 
1,369,815

 
(7,914
)
 
(1,382,715
)
 
(868
)
 
1,683

 
(19,972
)
Net loss

 

 

 

 
(18,535
)
 

 

 
(18,535
)
Net income attributable to non-controlling interest

 

 

 

 
(20
)
 

 
20

 

Foreign currency translation

 

 

 

 

 
(27
)
 

 
(27
)
Movement in non-controlling interest

 

 

 

 

 

 
23

 
23

Common stock issuance, net
33

 

 

 

 

 

 

 

Employee taxes paid on withholding shares
(9
)
 

 

 
(42
)
 

 

 

 
(42
)
Stock-based compensation

 

 
1,020

 

 

 

 

 
1,020

Balance, June 30, 2019
26,770

 
$
27

 
$
1,370,835

 
$
(7,956
)
 
$
(1,401,270
)
 
$
(895
)
 
$
1,726

 
$
(37,533
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
 
 
 

5


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
INTERNAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY (CONTINUED)
 (In thousands)
(Unaudited)
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Par Value
 
Additional Paid-In Capital
 
Treasury Stock
 
Accumulated Deficit
 
Accumulated Items of Other Comprehensive Loss
 
Non-Controlling Interest
 
Total Stockholders' (Deficit) Equity
Balance, June 30, 2019
26,770

 
$
27

 
$
1,370,835

 
$
(7,956
)
 
$
(1,401,270
)
 
$
(895
)
 
$
1,726

 
$
(37,533
)
Net loss

 

 

 

 
(23,849
)
 

 

 
(23,849
)
Net income attributable to non-controlling interest

 

 

 

 
(21
)
 

 
21

 

Foreign currency translation

 

 

 

 

 
(18
)
 

 
(18
)
Movement in non-controlling interest

 

 

 

 

 

 
10

 
10

Common stock issuance, net
(283
)
 
(1
)
 

 

 

 

 

 
(1
)
Employee taxes paid on withholding shares
(1
)
 

 

 
(2
)
 

 

 

 
(2
)
Stock-based compensation

 

 
1,181

 

 

 

 

 
1,181

Balance, September 30, 2019
26,486

 
$
26

 
$
1,372,016

 
$
(7,958
)
 
$
(1,425,140
)
 
$
(913
)
 
$
1,757

 
$
(60,212
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
 
 
 




6


INTERNAP CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2019
 
2018
Cash Flows from Operating Activities:
 
 

 
 

Net loss
 
$
(62,006
)
 
$
(43,971
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
65,715

 
67,422

Loss (gain) on disposal of property and equipment
 
468

 
(98
)
Amortization of debt discount and issuance costs
 
4,109

 
2,798

Stock-based compensation expense, net of capitalized amount
 
3,074

 
3,573

Provision for doubtful accounts
 
629

 
706

Non-cash change in finance lease liabilities
 
4,863

 
(241
)
Non-cash change in exit activities and restructuring liability
 
5,164

 
3,198

Non-cash change in deferred rent
 

 
(778
)
Deferred taxes
 
(787
)
 
65

Accreted interest
 
1,194

 

Other, net
 
(78
)
 
(6
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
1,593

 
(4,990
)
Prepaid expenses, deposits and other assets
 
1,355

 
(3,531
)
Operating lease right-of-use assets
 
(5,211
)
 

Accounts payable
 
756

 
5,155

Accrued and other liabilities
 
(5,378
)
 
(601
)
Deferred revenues
 
(804
)
 
617

Exit activities and restructuring liability
 
(3,870
)
 
(4,597
)
Short and long-term operating lease liabilities
 
7,614

 

Asset retirement obligation
 
202

 
(141
)
Other liabilities
 
57

 
(199
)
Net cash provided by operating activities
 
18,659

 
24,381

 
 
 
 
 
Cash Flows from Investing Activities:
 
 
 
 
Purchases of property and equipment
 
(23,277
)
 
(23,100
)
Proceeds from disposal of property and equipment
 
272

 
570

Business acquisition, net of cash acquired
 

 
(131,748
)
Additions to acquired and developed technology
 
(881
)
 
(2,128
)
Net cash used in investing activities
 
(23,886
)
 
(156,406
)
 
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
 
Proceeds from credit agreements
 
14,000

 
148,500

Principal payments on credit agreements
 
(3,268
)
 
(3,267
)
Debt issuance costs
 
(2,815
)
 
(7,696
)
Payments on finance lease liabilities
 
(8,212
)
 
(6,643
)
Acquisition of non-controlling interests
 
(973
)
 
(1,130
)
Proceeds from exercise of stock options
 

 
(210
)
Acquisition of common stock for income tax withholdings
 
(311
)
 
(487
)
Other, net
 
50

 
175

Net cash (used in) provided by financing activities
 
(1,529
)
 
129,242

Effect of exchange rates on cash and cash equivalents
 
(172
)
 
24

Net decrease in cash and cash equivalents
 
(6,928
)
 
(2,759
)
Cash and cash equivalents at beginning of period
 
17,823

 
14,603

Cash and cash equivalents at end of period
 
$
10,895

 
$
11,844

 
 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 

 
 

Cash paid for interest
 
$
46,540

 
$
46,676

Additions to property and equipment included in accounts payable
 
5,153

 
10,235

 
See Notes to Condensed Consolidated Financial Statements.

7



 

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 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.



8


The adjustments to the Company’s previously issued consolidated statements of cash flows are as follows (in thousands):

 
Three Months Ended
March 31, 2017
 
As reported
Adjustments
As restated
 
 
 
 
Accounts payable
$
(2,247
)
$
(512
)
$
(2,759
)
Net cash provided by operating activities
7,264

(512
)
6,752

 
 
 
 
Purchases of property and equipment
(5,789
)
512

(5,277
)
Net cash used in investing activities
(5,989
)
512

(5,477
)
 
 
 
 
Additions to property and equipment included in accounts payable
$
1,247

$
2,744

$
3,991


 
Six Months Ended
June 30, 2017
 
As reported
Adjustments
As restated
 
 
 
 
Accounts payable
$
477

$
(2,100
)
$
(1,623
)
Net cash provided by operating activities
24,634

(2,100
)
22,534

 
 
 
 
Purchases of property and equipment
(12,293
)
2,100

(10,193
)
Net cash used in investing activities
(12,737
)
2,100

(10,637
)
 
 
 
 
Additions to property and equipment included in accounts payable
$
1,269

$
4,331

$
5,600


 
Nine Months Ended
September 30, 2017
 
As reported
Adjustments
As restated
 
 
 
 
Accounts payable
$
(3,498
)
$
1,330

$
(2,168
)
Net cash provided by operating activities
27,940

1,330

29,270

 
 
 
 
Purchases of property and equipment
(23,198
)
(1,330
)
(24,528
)
Net cash used in investing activities
(19,789
)
(1,330
)
(21,119
)
 
 
 
 
Additions to property and equipment included in accounts payable
$
701

$
901

$
1,602



9


 
Year Ended
December 31, 2017
 
As reported
Adjustments
As restated
 
 
 
 
Accounts payable
$
(1,167
)
$
218

$
(949
)
Net cash provided by operating activities
41,748

218

41,966

 
 
 
 
Purchases of property and equipment
(35,714
)
(218
)
(35,932
)
Net cash used in investing activities
(32,209
)
(218
)
(32,427
)
 
 
 
 
Additions to property and equipment included in accounts payable
$
1,932

$
2,014

$
3,946


 
Three Months Ended
March 31, 2018
 
As reported
Adjustments
As restated
 
 
 
 
Accounts payable
$
(636
)
$
(124
)
$
(760
)
Net cash provided by operating activities
3,697

(124
)
3,573

 
 
 
 
Purchases of property and equipment
(6,082
)
124

(5,958
)
Net cash used in investing activities
(138,065
)
124

(137,941
)
 
 
 
 
Additions to property and equipment included in accounts payable
$
2,287

$
2,138

$
4,425


 
Six Months Ended
June 30, 2018
 
As reported
Adjustments
As restated
 
 
 
 
Accounts payable
$
6,939

$
(3,598
)
$
3,341

Net cash provided by operating activities
18,533

(3,598
)
14,935

 
 
 
 
Purchases of property and equipment
(16,102
)
3,598

(12,504
)
Net cash used in investing activities
(148,649
)
3,598

(145,051
)
 
 
 
 
Additions to property and equipment included in accounts payable
$
4,023

$
5,613

$
9,636



10


 
Nine Months Ended
September 30, 2018
 
As reported
Adjustments
As restated
 
 
 
 
Accounts payable
$
9,372

$
(4,217
)
$
5,155

Net cash provided by operating activities
28,598

(4,217
)
24,381

 
 
 
 
Purchases of property and equipment
(27,317
)
4,217

(23,100
)
Net cash used in investing activities
(160,623
)
4,217

(156,406
)
 
 
 
 
Additions to property and equipment included in accounts payable
$
4,004

$
6,231

$
10,235


 
Year Ended
December 31, 2018
 
As reported
Adjustments
As restated
 
 
 
 
Accounts payable
$
1,339

$
207

$
1,546

Net cash provided by operating activities
34,572

207

34,779

 
 
 
 
Purchases of property and equipment
(38,298
)
(207
)
(38,505
)
Net cash used in investing activities
(174,037
)
(207
)
(174,244
)
 
 
 
 
Additions to property and equipment included in accounts payable
$
2,459

$
1,807

$
4,266


 
Three Months Ended
March 31, 2019
 
As reported
Adjustments
As restated
 
 
 
 
Accounts payable
$
763

$
(556
)
$
207

Net cash provided by operating activities
2,262

(556
)
1,706

 
 
 
 
Purchases of property and equipment
(8,094
)
556

(7,538
)
Net cash used in investing activities
(8,568
)
556

(8,012
)
 
 
 
 
Additions to property and equipment included in accounts payable
$
1,850

$
1,881

$
3,731



11


 
Six Months Ended
June 30, 2019
 
As reported
Adjustments
As restated
 
 
 
 
Accounts payable
$
3,375

$
(944
)
$
2,431

Net cash provided by operating activities
14,081

(944
)
13,137

 
 
 
 
Purchases of property and equipment
(15,642
)
944

(14,698
)
Net cash used in investing activities
(16,359
)
944

(15,415
)
 
 
 
 
Additions to property and equipment included in accounts payable
$
1,268

$
2,751

$
4,019



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):
 
Three and Nine Months Ended
September 30, 2018
 
As reported
Adjustments
As adjusted
 
 
 
 
Costs of sales and services, exclusive of depreciation and amortization - QTD
$
28,866

$
(645
)
$
28,221

Costs of sales and services, exclusive of depreciation and amortization - YTD
81,880

(1,720
)
80,160

Depreciation and amortization - QTD
23,431

122

23,553

Depreciation and amortization - YTD
67,097

325

67,422

Interest expense - QTD
16,898

896

17,794

Interest expense - YTD
47,786

2,352

50,138

Net loss attributable to INAP shareholders - QTD
(15,106
)
(373
)
(15,479
)
Net loss attributable to INAP shareholders - YTD
(43,089
)
(957
)
(44,046
)
Property and equipment, net
477,423

10,193

487,616

Total assets
746,038

10,193

756,231

Capital lease obligations - non-current
252,599

11,077

263,676

Total liabilities
765,004

11,150

776,154

Accumulated deficit
(1,343,609
)
(957
)
(1,344,566
)
Total stockholders' (deficit) equity
$
(18,966
)
$
(957
)
$
(19,923
)


12


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-

13


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.

14



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.

15



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
&#