INTERNAP CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data center and network services
|
|
$
|
50,459
|
|
|
$
|
53,521
|
|
|
$
|
101,331
|
|
|
$
|
107,589
|
|
Cloud and hosting services
|
|
|
23,856
|
|
|
|
26,911
|
|
|
|
48,908
|
|
|
|
53,629
|
|
Total revenues
|
|
|
74,315
|
|
|
|
80,432
|
|
|
|
150,239
|
|
|
|
161,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs of sales and services, exclusive of depreciation and amortization, shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data center and network services
|
|
|
24,650
|
|
|
|
26,116
|
|
|
|
49,023
|
|
|
|
52,597
|
|
Cloud and hosting services
|
|
|
6,720
|
|
|
|
6,862
|
|
|
|
13,424
|
|
|
|
13,727
|
|
Direct costs of customer support
|
|
|
7,919
|
|
|
|
9,090
|
|
|
|
16,723
|
|
|
|
18,208
|
|
Sales, general and administrative
|
|
|
18,131
|
|
|
|
21,577
|
|
|
|
37,061
|
|
|
|
43,544
|
|
Depreciation and amortization
|
|
|
19,217
|
|
|
|
22,566
|
|
|
|
38,330
|
|
|
|
42,774
|
|
Exit activities, restructuring and impairments
|
|
|
152
|
|
|
|
59
|
|
|
|
353
|
|
|
|
325
|
|
Total operating costs and expenses
|
|
|
76,789
|
|
|
|
86,270
|
|
|
|
154,914
|
|
|
|
171,175
|
|
Loss from operations
|
|
|
(2,474
|
)
|
|
|
(5,838
|
)
|
|
|
(4,675
|
)
|
|
|
(9,957
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
8,082
|
|
|
|
6,825
|
|
|
|
15,067
|
|
|
|
13,689
|
|
Other, net
|
|
|
116
|
|
|
|
55
|
|
|
|
471
|
|
|
|
(474
|
)
|
Total non-operating expenses
|
|
|
8,198
|
|
|
|
6,880
|
|
|
|
15,538
|
|
|
|
13,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and equity in earnings of equity-method investment
|
|
|
(10,672
|
)
|
|
|
(12,718
|
)
|
|
|
(20,213
|
)
|
|
|
(23,172
|
)
|
Provision (benefit) for income taxes
|
|
|
62
|
|
|
|
(137
|
)
|
|
|
200
|
|
|
|
(111
|
)
|
Equity in earnings of equity-method investment, net of taxes
|
|
|
(41
|
)
|
|
|
(47
|
)
|
|
|
(77
|
)
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(10,693
|
)
|
|
|
(12,534
|
)
|
|
|
(20,336
|
)
|
|
|
(22,976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
9
|
|
|
|
(16
|
)
|
|
|
117
|
|
|
|
(158
|
)
|
Unrealized gain (loss) on foreign currency contracts
|
|
|
75
|
|
|
|
168
|
|
|
|
713
|
|
|
|
(187
|
)
|
Unrealized gain (loss) on interest rate swap
|
|
|
189
|
|
|
|
67
|
|
|
|
336
|
|
|
|
(149
|
)
|
Total other comprehensive income (loss)
|
|
|
273
|
|
|
|
219
|
|
|
|
1,166
|
|
|
|
(494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(10,420
|
)
|
|
$
|
(12,315
|
)
|
|
$
|
(19,170
|
)
|
|
$
|
(23,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.21
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used in computing basic and diluted net loss per share:
|
|
|
52,062
|
|
|
|
51,579
|
|
|
|
52,241
|
|
|
|
51,590
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
INTERNAP CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE
SHEETS
(In thousands, except par value amounts)
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,868
|
|
|
$
|
17,772
|
|
Accounts receivable, net of allowance for doubtful accounts of $1,319 and $1,751, respectively
|
|
|
18,358
|
|
|
|
20,292
|
|
Prepaid expenses and other assets
|
|
|
11,975
|
|
|
|
12,405
|
|
Total current assets
|
|
|
44,201
|
|
|
|
50,469
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
325,136
|
|
|
|
328,700
|
|
Investment in joint venture
|
|
|
3,020
|
|
|
|
2,768
|
|
Intangible assets, net
|
|
|
31,159
|
|
|
|
32,887
|
|
Goodwill
|
|
|
130,313
|
|
|
|
130,313
|
|
Deposits and other assets
|
|
|
8,998
|
|
|
|
9,474
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
542,827
|
|
|
$
|
554,611
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
26,054
|
|
|
$
|
22,607
|
|
Accrued liabilities
|
|
|
10,467
|
|
|
|
10,737
|
|
Deferred revenues
|
|
|
6,540
|
|
|
|
6,603
|
|
Capital lease obligations
|
|
|
9,586
|
|
|
|
8,421
|
|
Term loan, less discount and prepaid costs of $2,192 and $1,784, respectively
|
|
|
808
|
|
|
|
1,215
|
|
Exit activities and restructuring liability
|
|
|
1,432
|
|
|
|
2,034
|
|
Other current liabilities
|
|
|
1,358
|
|
|
|
2,566
|
|
Total current liabilities
|
|
|
56,245
|
|
|
|
54,183
|
|
|
|
|
|
|
|
|
|
|
Deferred revenues
|
|
|
4,967
|
|
|
|
4,759
|
|
Capital lease obligations
|
|
|
48,149
|
|
|
|
48,692
|
|
Revolving credit facility
|
|
|
35,500
|
|
|
|
31,000
|
|
Term loan, less discount and prepaid costs of $5,721 and $5,703, respectively
|
|
|
283,779
|
|
|
|
285,298
|
|
Exit activities and restructuring liability
|
|
|
1,486
|
|
|
|
1,844
|
|
Deferred rent
|
|
|
7,879
|
|
|
|
8,879
|
|
Deferred tax liability
|
|
|
1,223
|
|
|
|
880
|
|
Other long-term liabilities
|
|
|
4,424
|
|
|
|
4,640
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
443,652
|
|
|
|
440,175
|
|
Commitments and contingencies (note 8)
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 20,000 shares authorized; no shares issued or outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.001 par value; 120,000 shares authorized; 56,689 and 55,971 shares outstanding, respectively
|
|
|
57
|
|
|
|
56
|
|
Additional paid-in capital
|
|
|
1,281,762
|
|
|
|
1,277,511
|
|
Treasury stock, at cost; 962 and 826 shares, respectively
|
|
|
(6,736
|
)
|
|
|
(6,393
|
)
|
Accumulated deficit
|
|
|
(1,174,293
|
)
|
|
|
(1,153,957
|
)
|
Accumulated items of other comprehensive loss
|
|
|
(1,615
|
)
|
|
|
(2,781
|
)
|
Total stockholders’ equity
|
|
|
99,175
|
|
|
|
114,436
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
542,827
|
|
|
$
|
554,611
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
INTERNAP CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In thousands)
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(20,336
|
)
|
|
$
|
(22,976
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
38,330
|
|
|
|
42,774
|
|
Amortization of debt discount and issuance costs
|
|
|
1,233
|
|
|
|
990
|
|
Stock-based compensation expense, net of capitalized amount
|
|
|
3,464
|
|
|
|
3,764
|
|
Equity in earnings of equity-method investment
|
|
|
(77
|
)
|
|
|
(85
|
)
|
Provision for doubtful accounts
|
|
|
580
|
|
|
|
606
|
|
Non-cash change in capital lease obligations
|
|
|
527
|
|
|
|
(640
|
)
|
Non-cash change in exit activities and restructuring liability
|
|
|
619
|
|
|
|
536
|
|
Non-cash change in deferred rent
|
|
|
(1,000
|
)
|
|
|
(788
|
)
|
Deferred taxes
|
|
|
39
|
|
|
|
(157
|
)
|
Payment of debt lender fees
|
|
|
(1,716
|
)
|
|
|
—
|
|
Other, net
|
|
|
186
|
|
|
|
19
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,702
|
|
|
|
(1,647
|
)
|
Prepaid expenses, deposits and other assets
|
|
|
4,606
|
|
|
|
(962
|
)
|
Accounts payable
|
|
|
2,269
|
|
|
|
(8,162
|
)
|
Accrued and other liabilities
|
|
|
(3,931
|
)
|
|
|
(1,554
|
)
|
Deferred revenues
|
|
|
94
|
|
|
|
1,153
|
|
Exit activities and restructuring liability
|
|
|
(1,579
|
)
|
|
|
(1,342
|
)
|
Asset retirement obligation
|
|
|
(174
|
)
|
|
|
—
|
|
Other liabilities
|
|
|
(35
|
)
|
|
|
35
|
|
Net cash flows provided by operating activities
|
|
|
24,801
|
|
|
|
11,564
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(26,314
|
)
|
|
|
(30,689
|
)
|
Additions to acquired and developed technology
|
|
|
(769
|
)
|
|
|
(810
|
)
|
Net cash flows used in investing activities
|
|
|
(27,083
|
)
|
|
|
(31,499
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from credit agreements
|
|
|
4,500
|
|
|
|
17,000
|
|
Principal payments on credit agreements
|
|
|
(1,500
|
)
|
|
|
(1,500
|
)
|
Payments on capital lease obligations
|
|
|
(4,827
|
)
|
|
|
(3,717
|
)
|
Proceeds from exercise of stock options
|
|
|
675
|
|
|
|
4,489
|
|
Acquisition of common stock for income tax withholdings
|
|
|
(343
|
)
|
|
|
(868
|
)
|
Other, net
|
|
|
(192
|
)
|
|
|
943
|
|
Net cash flows (used in) provided by financing activities
|
|
|
(1,687
|
)
|
|
|
16,347
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
65
|
|
|
|
(84
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(3,904
|
)
|
|
|
(3,672
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
17,772
|
|
|
|
20,084
|
|
Cash and cash equivalents at end of period
|
|
$
|
13,868
|
|
|
$
|
16,412
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
14,356
|
|
|
$
|
13,052
|
|
Non-cash acquisition of property and equipment under capital leases
|
|
|
4,921
|
|
|
|
1,176
|
|
Additions to property and equipment included in accounts payable
|
|
|
6,334
|
|
|
|
4,298
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
INTERNAP CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
|
1.
|
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
|
Internap Corporation (“we,” “us” or
“our”) provides high-performance Internet infrastructure services at 50 data centers across North America, Europe and
the Asia-Pacific region and through 83 Internet Protocol (“IP”) service points.
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.
We have condensed or omitted certain information and note disclosures
normally included in annual financial statements prepared in accordance with GAAP. In the opinion of management, 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 June 30, 2016 and our operating results and cash flows for the interim periods
presented. The balance sheet at December 31, 2015 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, 2015 filed with the Securities
and Exchange Commission.
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 six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for any future periods.
|
2.
|
CHANGE IN ORGANIZATIONAL STRUCTURE AND REALIGNMENT OF EXPENSES
|
During the three months ended March 31, 2016, 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, our chief executive officer, who is also our chief operating decision maker, revised the information that he regularly
reviews for purposes of allocating resources and assessing performance. As a result, beginning January 1, 2016, we now report our
financial performance based on our new segments, described in note 9 “Operating Segments.” We have reclassified prior
period amounts to conform to the current presentation.
In addition, in conjunction with the change in our organizational
structure, we reclassified certain costs included in the expense categories on our consolidated statement of operations, which
resulted in the following:
a reclassification of
“Sales and marketing”
and “General and administrative” to “Sales, general and administrative” and “Direct costs of amortization
of acquired and developed technologies” to “Depreciation and amortization” included on our accompanying consolidated
statements of operations. We have reclassified prior period amounts to conform to the current presentation.
The prior year reclassifications, which did not affect total
revenues, total direct costs of sales and services, operating loss or net loss, are summarized as follows (in thousands):
|
|
Three Months Ended June 30, 2015
|
|
|
|
As Previously
Reported
|
|
|
Reclassification
|
|
|
As Reported
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Data center services
|
|
$
|
59,422
|
|
|
$
|
(59,422
|
)
|
|
$
|
—
|
|
IP services
|
|
|
21,010
|
|
|
|
(21,010
|
)
|
|
|
—
|
|
Data center and network services
|
|
|
—
|
|
|
|
53,521
|
|
|
|
53,521
|
|
Cloud and hosting services
|
|
|
—
|
|
|
|
26,911
|
|
|
|
26,911
|
|
Direct costs of sales and services, exclusive of depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Data center services
|
|
|
24,335
|
|
|
|
(24,335
|
)
|
|
|
—
|
|
IP services
|
|
|
8,643
|
|
|
|
(8,643
|
)
|
|
|
—
|
|
Data center and network services
|
|
|
—
|
|
|
|
26,116
|
|
|
|
26,116
|
|
Cloud and hosting services
|
|
|
—
|
|
|
|
6,862
|
|
|
|
6,862
|
|
Direct costs of amortization of acquired and developed technologies
|
|
|
592
|
|
|
|
(592
|
)
|
|
|
—
|
|
Sales and marketing
|
|
|
9,759
|
|
|
|
(9,759
|
)
|
|
|
—
|
|
General and administrative
|
|
|
11,818
|
|
|
|
(11,818
|
)
|
|
|
—
|
|
Sales, general and administrative (“SGA”)
|
|
|
—
|
|
|
|
21,577
|
|
|
|
21,577
|
|
Depreciation and amortization
|
|
|
21,974
|
|
|
|
592
|
|
|
|
22,566
|
|
|
|
Six Months Ended June 30, 2015
|
|
|
|
As Previously
Reported
|
|
|
Reclassification
|
|
|
As Reported
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Data center services
|
|
$
|
118,520
|
|
|
$
|
(118,520
|
)
|
|
$
|
—
|
|
IP services
|
|
|
42,698
|
|
|
|
(42,698
|
)
|
|
|
—
|
|
Data center and network services
|
|
|
—
|
|
|
|
107,589
|
|
|
|
107,589
|
|
Cloud and hosting services
|
|
|
—
|
|
|
|
53,629
|
|
|
|
53,629
|
|
Direct costs of sales and services, exclusive of depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Data center services
|
|
|
48,599
|
|
|
|
(48,599
|
)
|
|
|
—
|
|
IP services
|
|
|
17,725
|
|
|
|
(17,725
|
)
|
|
|
—
|
|
Data center and network services
|
|
|
—
|
|
|
|
52,597
|
|
|
|
52,597
|
|
Cloud and hosting services
|
|
|
—
|
|
|
|
13,727
|
|
|
|
13,727
|
|
Direct costs of amortization of acquired and developed technologies
|
|
|
1,742
|
|
|
|
(1,742
|
)
|
|
|
—
|
|
Sales and marketing
|
|
|
20,042
|
|
|
|
(20,042
|
)
|
|
|
—
|
|
General and administrative
|
|
|
23,502
|
|
|
|
(23,502
|
)
|
|
|
—
|
|
SGA
|
|
|
—
|
|
|
|
43,544
|
|
|
|
43,544
|
|
Depreciation and amortization
|
|
|
41,032
|
|
|
|
1,742
|
|
|
|
42,774
|
|
SGA expense consists primarily of costs related to sales and
marketing, compensation and other expense for executive, finance, product development, human resources and administrative personnel,
professional fees and other general corporate costs.
|
3.
|
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
|
|
June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts (note 7)
|
|
$
|
—
|
|
|
$
|
43
|
|
|
$
|
—
|
|
|
$
|
43
|
|
Interest rate swap (note 7)
|
|
|
—
|
|
|
|
392
|
|
|
|
—
|
|
|
|
392
|
|
Asset retirement obligations
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
2,706
|
|
|
|
2,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts (note 7)
|
|
|
—
|
|
|
|
1,019
|
|
|
|
—
|
|
|
|
1,019
|
|
Interest rate swap (note 7)
|
|
|
—
|
|
|
|
728
|
|
|
|
—
|
|
|
|
728
|
|
Asset retirement obligations
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
2,803
|
|
|
|
2,803
|
|
|
(1)
|
We calculate the fair value of asset retirement obligations by discounting the estimated amount using the current Treasury
bill rate adjusted for our credit non-performance. At June 30, 2016 and December 31, 2015, the balance of the asset retirement
obligation was $0 and $0.2 million, respectively, which we included in “Other current liabilities,” and $2.7 million
and $2.6 million, respectively, which we included in “Other long-term liabilities,” in the accompanying consolidated
balance sheets.
|
The following table provides a summary of changes in our Level
3 asset retirement obligations for the six months ended June 30, 2016 (in thousands):
Balance, January 1, 2016
|
|
$
|
2,803
|
|
Accretion
|
|
|
103
|
|
Payments
|
|
|
(174
|
)
|
Gain on settlement
|
|
|
(26
|
)
|
Balance, June 30, 2016
|
|
$
|
2,706
|
|
The fair values of our other Level 3 debt liabilities, estimated
using a discounted cash flow analysis based on incremental borrowing rates for similar types of borrowing arrangements, are as
follows (in thousands):
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Term loan
|
|
$
|
292,500
|
|
|
$
|
307,000
|
|
|
$
|
294,000
|
|
|
$
|
303,000
|
|
Revolving credit facility
|
|
|
35,500
|
|
|
|
35,600
|
|
|
|
31,000
|
|
|
|
30,400
|
|
During the three months
ended March 31, 2016, we changed our operating segments, as discussed in note 9 “Operating Segments,” and, subsequently,
our reporting units. We now have the following five reporting units: IP services, IP products, data center services (“DCS”),
cloud and hosting services and hosting products. 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.
During the three
months ended June 30, 2016, we revised the allocation of goodwill to our reportable segments and we considered the likelihood
of triggering events that might cause us to reassess goodwill on an interim basis and concluded that we had an impairment
indictor as a result of a sustained decline in the price of our common stock. We recalculated the fair value of our reporting
units and all units exceeded their carrying values. However, as of June 30, 2016, the fair value of DCS exceeded its carrying
value by only 2%. At June 30, 2016, goodwill attributable to DCS was $40.6 million. If revenue or other significant
assumptions for such reporting unit decline, we may be at risk for future impairment.
In addition, if our
overall results of operations and/or the share price of our common stock do not increase, and there was no expectation of an improvement
within a reasonable period of time, we may be required to recognize an impairment charge in future periods, which could be material.
During the six months ended June 30, 2016, we re-allocated goodwill as follows (in thousands):
|
|
December
31,
2015
|
|
Re-allocations
|
|
June 30,
2016
|
Reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Data center services
|
|
$
|
90,849
|
|
|
$
|
(90,849
|
)
|
|
$
|
—
|
|
IP services
|
|
|
39,464
|
|
|
|
(39,464
|
)
|
|
|
—
|
|
Data center and network services
|
|
|
—
|
|
|
|
80,104
|
|
|
|
80,104
|
|
Cloud and hosting services
|
|
|
—
|
|
|
|
50,209
|
|
|
|
50,209
|
|
Total
|
|
$
|
130,313
|
|
|
$
|
—
|
|
|
$
|
130,313
|
|
During the three months ended June 30, 2016, we entered into
an amendment to our credit agreement, which, among other things, amended the interest coverage ratio and leverage ratio covenants
to make them less restrictive and increased the applicable margin for the revolving credit facility and term loan by 1.0%. We paid
a one-time aggregate fee of $1.7 million to the lenders for the amendment, which was recorded as a debt discount of $1.5 million
related to the term loan and prepaid debt issuance costs of $0.2 million related to the revolving credit facility. In addition,
we paid $0.4 million in third-party fees, which we recorded as expense of $0.3 million related to the term loan and as prepaid
debt issuance costs of $0.1 million related to the revolving credit facility.
Since the recording of the amendment
was a modification of our previous credit agreement, we will continue to amortize the debt discount and prepaid issuance costs
on our previous credit agreement. During the three and six months ended June 30, 2016, we amortized, as interest expense,
$0.7 million and $1.2 million, respectively, of the total debt discount and prepaid debt issuance costs.
|
6.
|
EXIT ACTIVITIES AND RESTRUCTURING LIABILITIES
|
During the six months ended June 30, 2016, we recorded initial
restructuring charges primarily due to ceasing use of office facilities. We also recorded subsequent plan adjustments in sublease
income assumptions for certain properties included in our previously-disclosed plans. We include the initial charges and plan adjustments
in “Exit activities, restructuring and impairments” in the accompanying statements of operations and comprehensive
loss for the three and six months ended June 30, 2016 and 2015.
The following table displays the transactions and balances for
exit activities and restructuring charges, substantially related to our data center and network services segment, during the six
months ended June 30, 2016 and 2015 (in thousands):
|
|
December 31,
2015
|
|
|
Initial
Charges
|
|
|
Plan
Adjustments
|
|
|
Cash
Payments
|
|
|
June 30,
2016
|
|
Real estate obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 exit activities
|
|
$
|
—
|
|
|
$
|
239
|
|
|
$
|
(11
|
)
|
|
$
|
(113
|
)
|
|
$
|
115
|
|
2015 exit activities
|
|
|
1,007
|
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
(221
|
)
|
|
|
782
|
|
2014 exit activities
|
|
|
1,701
|
|
|
|
—
|
|
|
|
28
|
|
|
|
(286
|
)
|
|
|
1,443
|
|
2007 restructuring
|
|
|
1,170
|
|
|
|
—
|
|
|
|
366
|
|
|
|
(958
|
)
|
|
|
578
|
|
Total
|
|
$
|
3,878
|
|
|
$
|
239
|
|
|
$
|
379
|
|
|
$
|
(1,578
|
)
|
|
$
|
2,918
|
|
|
|
December 31,
2014
|
|
|
Initial
Charges
|
|
|
Plan
Adjustments
|
|
|
Cash
Payments
|
|
|
June 30,
2015
|
|
Real estate obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 exit activities
|
|
$
|
2,010
|
|
|
$
|
—
|
|
|
$
|
217
|
|
|
$
|
(264
|
)
|
|
$
|
1,963
|
|
2007 restructuring
|
|
|
2,325
|
|
|
|
—
|
|
|
|
324
|
|
|
|
(908
|
)
|
|
|
1,741
|
|
Other
|
|
|
175
|
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
(169
|
)
|
|
|
—
|
|
Total
|
|
$
|
4,510
|
|
|
$
|
—
|
|
|
$
|
535
|
|
|
$
|
(1,341
|
)
|
|
$
|
3,704
|
|
Foreign Currency Contracts
We have foreign currency contracts to mitigate the risk of a
portion of our Canadian compensation expense. These contracts will hedge foreign exchange variations between the United States
and Canadian dollar and commit us to purchase a total of $12.0 million Canadian dollars at an exchange rate of 1.2855 through June
2017. As of June 30, 2016 and December 31, 2015, the fair value of our foreign currency contracts was less than $0.1 million and
$0.7 million, respectively, included in “Other current liabilities,” and $0 and $0.3 million, respectively, included
in “Other long-term liabilities,” in the accompanying consolidated balance sheets.
The activity of the foreign currency contracts was as follows
(in thousands):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Unrealized gain (loss), net of less than $0.1 million income tax, included in “Accumulated items of other comprehensive loss” in the accompanying consolidated balance sheets
|
|
$
|
75
|
|
|
$
|
168
|
|
|
$
|
713
|
|
|
$
|
(187
|
)
|
Realized loss on effective portion, included as compensation expense in “Direct costs of customer support” and “Sales, general and administrative” in the accompanying consolidated statements of operations and comprehensive loss
|
|
|
(20
|
)
|
|
|
(95
|
)
|
|
|
(199
|
)
|
|
|
(202
|
)
|
Interest Rate Swap
We have an interest rate swap to manage exposure to interest
rate movements of our credit agreement. Our interest rate swap involves the receipt of variable rate amounts from a counterparty
in exchange for us making fixed-rate payments, over 1.5%, over the life of the agreement without exchange of the underlying notional
amount. The cash flow hedge has a notional amount starting at $150.0 million through December 31, 2016.
As of June 30, 2016 and December 31, 2015, the fair value of
our interest rate swap was $0.4 million and $0.7 million, respectively, and is included in “Other current liabilities”
in the accompanying consolidated balance sheets. We record the effective portion of the change in fair value of our interest rate
swap in “Accumulated items of other comprehensive loss” in the accompanying consolidated balance sheets. We did not
recognize any hedge ineffectiveness during either of the three and six months ended June 30, 2016 and 2015.
We will reclassify amounts reported in “Accumulated items
of other comprehensive loss” related to our interest rate swaps to “Interest expense” in our accompanying consolidated
statements of operations and comprehensive loss as we accrue interest payments on our variable-rate debt. Through December 31,
2016, we estimate that we will reclassify an additional $0.4 million as an increase to interest expense since the hedge interest
rate currently exceeds the variable interest rate on our debt.
The activity of our interest rate swap is summarized as follows
(in thousands):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Gain (loss) recorded as the effective portion of the change in fair value
|
|
$
|
189
|
|
|
$
|
67
|
|
|
$
|
336
|
|
|
$
|
(149
|
)
|
Interest payments reclassified as an increase to interest expense
|
|
|
197
|
|
|
|
199
|
|
|
|
395
|
|
|
|
397
|
|
|
8.
|
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.
During the three months ended March 31, 2016, 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, our chief operating decision maker (our chief executive officer) revised the information that he regularly
reviews for purposes of allocating resources and assessing performance. As a result, beginning January 1, 2016, we now report our
financial performance based on our two new reportable segments, Data Center and Network Services and Cloud and Hosting Services,
as follows:
Data Center and Network Services
Our Data Center and Network Services segment consists of colocation
and Internet Protocol (“IP”) connectivity services.
Colocation
Colocation involves providing physical space within data centers
and associated services such as power, interconnection, 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 sell our colocation services at
50 data centers across North America, Europe and the Asia-Pacific region. We refer to 15 of these facilities as “company-controlled,”
meaning we control the data center operations, staffing and infrastructure and have negotiated long-term leases for the facilities.
For company-controlled facilities, in most cases we design the data center infrastructure, procure the capital equipment, deploy
the infrastructure and are responsible for the operation and maintenance of the facility. We refer to the remaining 35 data centers
as “partner” sites. In these locations, a third party designs and deploys the infrastructure and provides for the operation
and maintenance of the facility.
IP Connectivity
IP connectivity includes our patented Performance IP™
service, content delivery network services, IP routing hardware and software platform and Managed Internet Route Optimizer™
Controller. 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 83 IP service points around the world.
Cloud and Hosting Services
Our cloud and hosting services segment consists of hosted Infrastructure-as-a-Service
as a cloud platform or via managed hosting. For both Infrastructure-as-a-Service options, we provision and maintain the hardware,
data center infrastructure and interconnection, while allowing our customers to own and manage their software applications and
content.
Cloud
Cloud services involve providing compute and storage services
via an integrated platform that includes servers, storage and network. We built our next generation cloud platform with our high-density
colocation, Performance IP service and OpenStack, a leading open source technology for cloud services. We deliver our cloud services
in eight locations across North America, Europe and the Asia-Pacific region.
Managed Hosting
Managed hosting involves providing a single tenant infrastructure
environment consisting of servers, storage and network. We deliver this customizable infrastructure platform based on enterprise-class
technology to support complex application and compliance requirements for our customers. We deliver our managed hosting services
in 11 locations across North America, Europe and the Asia-Pacific region.
Segment Results
The following table provides segment results, with prior period
amounts reclassified to conform to the current presentation (in thousands):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data center and network services
|
|
$
|
50,459
|
|
|
$
|
53,521
|
|
|
$
|
101,331
|
|
|
$
|
107,589
|
|
Cloud and hosting services
|
|
|
23,856
|
|
|
|
26,911
|
|
|
|
48,908
|
|
|
|
53,629
|
|
Total revenues
|
|
|
74,315
|
|
|
|
80,432
|
|
|
|
150,239
|
|
|
|
161,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs of sales and services, exclusive of depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data center and network services
|
|
|
24,650
|
|
|
|
26,116
|
|
|
|
49,023
|
|
|
|
52,597
|
|
Cloud and hosting services
|
|
|
6,720
|
|
|
|
6,862
|
|
|
|
13,424
|
|
|
|
13,727
|
|
Total direct costs of network, sales and services, exclusive of depreciation and amortization
|
|
|
31,370
|
|
|
|
32,978
|
|
|
|
62,447
|
|
|
|
66,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data center and network services
|
|
|
25,809
|
|
|
|
27,405
|
|
|
|
52,308
|
|
|
|
54,992
|
|
Cloud and hosting services
|
|
|
17,136
|
|
|
|
20,049
|
|
|
|
35,484
|
|
|
|
39,902
|
|
Total segment profit
|
|
|
42,945
|
|
|
|
47,454
|
|
|
|
87,792
|
|
|
|
94,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exit activities, restructuring and impairments
|
|
|
152
|
|
|
|
59
|
|
|
|
353
|
|
|
|
325
|
|
Other operating expenses, including direct costs of customer support, depreciation and amortization
|
|
|
45,267
|
|
|
|
53,233
|
|
|
|
92,114
|
|
|
|
104,526
|
|
Loss from operations
|
|
|
(2,474
|
)
|
|
|
(5,838
|
)
|
|
|
(4,675
|
)
|
|
|
(9,957
|
)
|
Non-operating expense
|
|
|
8,198
|
|
|
|
6,880
|
|
|
|
15,538
|
|
|
|
13,215
|
|
Loss before income taxes and equity in (earnings) of equity-method investment
|
|
$
|
(10,672
|
)
|
|
$
|
(12,718
|
)
|
|
$
|
(20,213
|
)
|
|
$
|
(23,172
|
)
|
The prior year reclassifications, which did not affect total
segment profit, are summarized as follows (in thousands):
|
|
Three Months Ended June 30, 2015
|
|
|
|
As Previously
Reported
|
|
|
Reclassification
|
|
|
As Reported
|
|
Segment profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Data center services
|
|
$
|
35,087
|
|
|
$
|
(35,087
|
)
|
|
$
|
—
|
|
IP services
|
|
|
12,367
|
|
|
|
(12,367
|
)
|
|
|
—
|
|
Data center and network services
|
|
|
—
|
|
|
|
27,405
|
|
|
|
27,405
|
|
Cloud and hosting services
|
|
|
—
|
|
|
|
20,049
|
|
|
|
20,049
|
|
Total segment profit
|
|
$
|
47,454
|
|
|
$
|
—
|
|
|
$
|
47,454
|
|
|
|
Six Months Ended June 30, 2015
|
|
|
|
As Previously
Reported
|
|
|
Reclassification
|
|
|
As Reported
|
|
Segment profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Data center services
|
|
$
|
69,921
|
|
|
$
|
(69,921
|
)
|
|
$
|
—
|
|
IP services
|
|
|
24,973
|
|
|
|
(24,973
|
)
|
|
|
—
|
|
Data center and network services
|
|
|
—
|
|
|
|
54,992
|
|
|
|
54,992
|
|
Cloud and hosting services
|
|
|
—
|
|
|
|
39,902
|
|
|
|
39,902
|
|
Total segment profit
|
|
$
|
94,894
|
|
|
$
|
—
|
|
|
$
|
94,894
|
|
Segment profit is calculated as segment revenues less direct
costs of sales and services, exclusive of depreciation and amortization for the segment, and does not include any depreciation
or amortization associated with direct costs. We view direct costs of sales and services as generally less-controllable, external
costs and we regularly monitor the margin of revenues in excess of these direct costs. We have excluded depreciation and amortization
from segment profit because it is based on estimated useful lives of tangible and intangible assets. We base depreciation and amortization
on historical costs incurred to build out our deployed network and the historical costs of these assets may not be indicative of
current or future capital expenditures.
We compute basic net loss per share by dividing net loss attributable
to our common stockholders by the weighted average number of shares of common stock outstanding during the period. We exclude all
outstanding options and unvested restricted stock as such securities are anti-dilutive for all periods presented.
Basic and diluted net loss per share is calculated as follows
(in thousands, except per share amounts):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net loss attributable to common stock
|
|
$
|
(10,693
|
)
|
|
$
|
(12,534
|
)
|
|
$
|
(20,336
|
)
|
|
$
|
(22,976
|
)
|
Weighted average shares outstanding, basic and diluted
|
|
|
52,062
|
|
|
|
51,579
|
|
|
|
52,241
|
|
|
|
51,590
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.21
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.45
|
)
|
Anti-dilutive securities excluded from diluted net loss per share calculation for stock-based compensation plans
|
|
|
6,084
|
|
|
|
6,866
|
|
|
|
6,084
|
|
|
|
6,866
|
|
|
11.
|
RECENT ACCOUNTING PRONOUNCEMENTS
|
During the three months ended March 31, 2016, we adopted
new guidance that required debt issuance costs related to a recognized debt liability to be presented in the balance sheet as
a direct deduction from the carrying amount of that debt liability, which is consistent with the presentation of debt
discounts. The guidance, applied retrospectively, was effective for financial statements issued for fiscal years beginning
after December 15, 2015, and interim periods within those fiscal years. Adoption did not have a material impact on our
financial condition and had no impact on our result of operations. Our restatement of prior year amounts was as follows:
|
|
December 31, 2015
|
|
|
|
As Previously
Reported
|
|
|
Restatements
|
|
|
As Reported
|
|
Prepaid expenses and other assets
|
|
$
|
12,646
|
|
|
$
|
(241
|
)
|
|
$
|
12,405
|
|
Deposits and other assets
|
|
|
10,177
|
|
|
|
(703
|
)
|
|
|
9,474
|
|
Term loan, current
|
|
|
(1,456
|
)
|
|
|
241
|
|
|
|
(1,215
|
)
|
Term loan, long-term
|
|
|
(286,001
|
)
|
|
|
703
|
|
|
|
(285,298
|
)
|
In March 2016, the Financial Accounting Standards Board (“FASB”)
issued new guidance that amends several aspects of the accounting for share-based payment transactions, including the income tax
consequences, classification of awards as either equity or liabilities, and classification within the statement of cash flows.
Certain of the amendments in this accounting standard update are to be applied using a modified retrospective approach by means
of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted, while other amendments
can be applied prospectively or retrospectively. The guidance is effective for periods beginning after December 15, 2016. Early
adoption is permitted. If an entity early adopts the amendments in an interim period, any adjustments will be reflected as of the
beginning of the fiscal year that includes that interim period. We are currently evaluating the impact of the provisions of this
accounting standard update.
In February 2016, FASB issued new guidance on lease accounting,
which requires all leases in excess of 12 months to be recognized on the balance sheet as lease assets and lease liabilities. For
operating leases, a lessee is required to recognize a right-of-use asset and lease liability, initially measured at the present
value of the lease payment; recognize a single lease cost over the lease term generally on a straight-line basis; and classify
all cash payments within operating activities on the cash flow statement. The guidance is effective for annual and interim periods
beginning after December 15, 2018. Earlier adoption is permitted. We are currently evaluating the impact that adoption will have
on our consolidated financial statements and related disclosures.
In August 2014, FASB issued new guidance which requires management
to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are
conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as
a going concern within one year after the date the financial statements are issued (or within one year after the date that the
financial statements are available to be issued when applicable) and provide related disclosures. The guidance is effective for
the annual and interim periods ending after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact
that adoption will have on our consolidated financial statements and related disclosures.
In May 2014, FASB issued new guidance which provides a single
model for revenue arising from contracts with customers and supersedes current revenue recognition guidance. The guidance is effective
for periods beginning January 1, 2018. The guidance permits the application of its requirements retrospectively to all prior periods
presented or in the year of adoption through a cumulative adjustment. We are currently evaluating the impact that adoption will
have on our consolidated financial statements and related disclosures. As we have not completed our evaluation, we cannot make
a determination of the impact and have not yet selected a transition method or determined the impact of the standard on our ongoing
financial reporting.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULT OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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 currently available. 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 forward-looking statements. Important factors currently known to our management that could cause or
contribute to such differences include, but are not limited to, those referenced in our Annual Report on Form 10-K for the year
ended December 31, 2015 under Item 1A “Risk Factors.” We undertake no obligation to update any forward-looking statements
as a result of new information, future events or otherwise.
As used herein, except as otherwise indicated by context, references
to “we,” “us” or “our” refer to Internap Corporation and our subsidiaries.
Overview
Internap’s diverse Internet infrastructure services deliver
“performance without compromise” – blending virtual and bare-metal cloud, hosting and colocation services across
a global network of data centers, optimized from the application to the end user and backed by our team of dedicated professionals.
Many of the world’s most innovative companies rely on Internap to make their applications faster and more scalable.
Change in Organizational Structure and Realignment of Expenses
During the three months ended March 31, 2016, 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, our chief executive officer, who is also our chief operating decision maker, revised the information that
he regularly reviews for purposes of allocating resources and assessing performance. As a result, beginning January 1, 2016, we
report our financial performance based on our two new segments, data center and network services and cloud and hosting services.
The new operating segments are further described in note 9 “Operating Segments” in the accompanying consolidated financial
statements. We have reclassified prior period amounts to conform to the current presentation.
In addition, in conjunction with the change in our organizational
structure, we reclassified certain costs included in the expense categories on our consolidated statement of operations, which
resulted in the following:
a reclassification of
“Sales and marketing”
and “General and administrative” to “Sales, general and administrative” (“SGA”) and “Direct
costs of amortization of acquired and developed technologies” to “Depreciation and amortization” included on
our accompanying consolidated statements of operations. We have reclassified prior period amounts to conform to the current presentation.
SGA expense consists primarily of costs related to sales and marketing, compensation and other expense for executive, finance,
product development, human resources and administrative personnel, professional fees and other general corporate costs.
Recent Accounting Pronouncements
Recent accounting pronouncements are summarized in note 11 to
the accompanying consolidated financial statements.
Results of Operations
As of June 30, 2016, we had approximately 10,000 customers.
Our customer base is not concentrated in any particular industry and, for the three and six months ended June 30, 2016, no single
customer accounted for 10% or more of our revenues.
Three Months Ended June 30, 2016 and 2015
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
June 30,
|
|
|
Increase (Decrease) from
2015 to 2016
|
|
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
Percent
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data center and network services
|
|
$
|
50,459
|
|
|
$
|
53,521
|
|
|
$
|
(3,062
|
)
|
|
|
(6
|
)%
|
Cloud and hosting services
|
|
|
23,856
|
|
|
|
26,911
|
|
|
|
(3,055
|
)
|
|
|
(11
|
)
|
Total revenues
|
|
|
74,315
|
|
|
|
80,432
|
|
|
|
(6,117
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs of sales and services, exclusive of depreciation and amortization, shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data center and network services:
|
|
|
24,650
|
|
|
|
26,116
|
|
|
|
(1,466
|
)
|
|
|
(6
|
)
|
Cloud and hosting services
|
|
|
6,720
|
|
|
|
6,862
|
|
|
|
(142
|
)
|
|
|
(2
|
)
|
Direct cost of customer support
|
|
|
7,919
|
|
|
|
9,090
|
|
|
|
(1,171
|
)
|
|
|
(13
|
)
|
Sales, general and administrative
|
|
|
18,131
|
|
|
|
21,577
|
|
|
|
(3,446
|
)
|
|
|
(16
|
)
|
Depreciation and amortization
|
|
|
19,217
|
|
|
|
22,566
|
|
|
|
(3,349
|
)
|
|
|
(15
|
)
|
Exit activities, restructuring and impairments
|
|
|
152
|
|
|
|
59
|
|
|
|
93
|
|
|
|
157
|
|
Total operating costs and expenses
|
|
|
76,789
|
|
|
|
86,270
|
|
|
|
(9,481
|
)
|
|
|
(11
|
)
|
Loss from operations
|
|
$
|
(2,474
|
)
|
|
$
|
(5,838
|
)
|
|
$
|
(3,364
|
)
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
8,082
|
|
|
$
|
6,825
|
|
|
$
|
1,257
|
|
|
|
18
|
%
|
Data Center and Network Services
Revenues for data center and network services decreased 6%,
to $50.5 million for the three months ended June 30, 2016, compared to $53.5 million for the same period in 2015. The decrease
was primarily due to $3.3 million of lower IP connectivity revenue related to the continued decline in pricing for new and renewing
customers and loss of legacy contracts and a $0.9 million decrease in partner colocation revenue, offset by a $1.1 million increase
in company-controlled colocation revenue.
Direct costs of data center and network services, exclusive
of depreciation and amortization, decreased 6%, to $24.7 million for the three months ended June 30, 2016, compared to $26.1 million
for the same period in 2015. The decrease was primarily due to lower variable costs related to a decline in revenue and cost reduction
efforts.
Cloud and Hosting Services
Revenues for cloud and hosting services decreased 11% to $23.9
million for the three months ended June 30, 2016, compared to $26.9 million for the same period in 2015. The decrease is primarily
due to churn from a small number of large customers.
Direct costs of cloud and hosting services, exclusive of depreciation
and amortization, remained fairly constant at $6.7 million for the three months ended June 30, 2016, compared to $6.9 million for
the same period in 2015.
Other Operating Costs and Expenses
Compensation.
Total compensation and benefits, including
stock-based compensation, was $16.9 million for the three months ended June 30, 2016, compared to $21.0 million for the same period
in 2015. The decrease was primarily due to a $2.8 million decrease in cash-based compensation and bonus, a $0.7 million decrease
in severance and a $0.6 million decrease in stock-based compensation.
Stock-based compensation, net of amount capitalized, decreased
to $1.5 million during the three months ended June 30, 2016 from $2.2 million during the same period in 2015. The decrease is primarily
due to the vesting schedule of compensation awards to our chief executive officer. The following table summarizes stock-based compensation,
net of estimated forfeitures, included in the accompanying consolidated statements of operations and comprehensive loss (in thousands):
|
|
Three Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Direct costs of customer support
|
|
$
|
267
|
|
|
$
|
367
|
|
Sales, general and administrative
|
|
|
1,275
|
|
|
|
1,818
|
|
|
|
$
|
1,542
|
|
|
$
|
2,185
|
|
Direct Costs of Customer Support.
Direct costs of customer
support decreased to $7.9 million during the three months ended June 30, 2016 compared to $9.1 million during the same period in
2015. The decrease was primarily due to decreased cash-based compensation and bonus.
Sales, General and Administrative
. Sales, general and
administrative costs decreased to $18.1 million during the three months ended June 30, 2016 compared to $21.6 million during the
same period in 2015. The decrease was primarily due to a $2.2 million decrease in cash-based compensation and bonus, a $0.9 million
decrease in marketing costs, a $0.7 million decrease in severance, a $0.5 decrease of stock-based compensation and $0.4 million
decrease of professional fees, partially offset by a $1.7 million increase in organizational realignment costs.
Depreciation and Amortization.
Depreciation and amortization
decreased to $19.2 million during the three months ended June 30, 2016 compared to $22.6 million during the same period in 2015.
The decrease was primarily due to the additional amortization expense in the prior period of $4.5 million for the accelerated useful
life of the iWeb trade name.
Interest Expense
. Interest expense increased to $8.1
million during the three months ended June 30, 2016 from $6.8 million during the same period in 2015. The increase is primarily
due to the higher interest rate from the recent debt amendment and increased borrowings on the revolving credit facility.
Six Months Ended June 30, 2016 and 2015
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):
|
|
Six Months Ended
June 30,
|
|
|
Increase (Decrease) from
2015 to 2016
|
|
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
Percent
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data center and network services
|
|
$
|
101,331
|
|
|
$
|
107,589
|
|
|
$
|
(6,258
|
)
|
|
|
(6
|
)%
|
Cloud and hosting services
|
|
|
48,908
|
|
|
|
53,629
|
|
|
|
(4,721
|
)
|
|
|
(9
|
)
|
Total revenues
|
|
|
150,239
|
|
|
|
161,218
|
|
|
|
(10,979
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs of sales and services, exclusive of depreciation and amortization, shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data center and network services:
|
|
|
49,023
|
|
|
|
52,597
|
|
|
|
(3,574
|
)
|
|
|
(7
|
)
|
Cloud and hosting services
|
|
|
13,424
|
|
|
|
13,727
|
|
|
|
(303
|
)
|
|
|
(2
|
)
|
Direct cost of customer support
|
|
|
16,723
|
|
|
|
18,208
|
|
|
|
(1,485
|
)
|
|
|
(8
|
)
|
Sales, general and administrative
|
|
|
37,061
|
|
|
|
43,544
|
|
|
|
(6,483
|
)
|
|
|
(15
|
)
|
Depreciation and amortization
|
|
|
38,330
|
|
|
|
42,774
|
|
|
|
(4,444
|
)
|
|
|
(10
|
)
|
Exit activities, restructuring and impairments
|
|
|
353
|
|
|
|
325
|
|
|
|
28
|
|
|
|
9
|
|
Total operating costs and expenses
|
|
|
154,914
|
|
|
|
171,175
|
|
|
|
(16,261
|
)
|
|
|
(9
|
)
|
Loss from operations
|
|
$
|
(4,675
|
)
|
|
$
|
(9,957
|
)
|
|
$
|
(5,282
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
15,067
|
|
|
$
|
13,689
|
|
|
$
|
1,378
|
|
|
|
10
|
%
|
Data Center and Network Services
Revenues for data center and network services decreased 6%,
to $101.3 million for the six months ended June 30, 2016, compared to $107.6 million for the same period in 2015. The decrease
was primarily due to $6.3 million of lower IP connectivity revenue related to the continued decline in pricing for new and renewing
customers and loss of legacy contracts and a $2.1 million decrease in partner colocation revenue, offset by a $2.1 million increase
in company-controlled colocation revenue.
Direct costs of data center and network services, exclusive
of depreciation and amortization, decreased 7%, to $49.0 million for the six months ended June 30, 2016, compared to $52.6 million
for the same period in 2015. The decrease was primarily due to lower variable costs related to a decline in revenue and cost reduction
efforts.
Cloud and Hosting Services
Revenues for cloud and hosting services decreased 9% to $48.9
million for the six months ended June 30, 2016, compared to $53.6 million for the same period in 2015. The decrease is primarily
due to churn from a small number of large customers.
Direct costs of cloud and hosting services, exclusive of depreciation
and amortization, remained fairly constant at $13.4 million for the six months ended June 30, 2016, compared to $13.7 million for
the same period in 2015.
Other Operating Costs and Expenses
Compensation.
Total compensation and benefits, including
stock-based compensation, was $35.5 million for the six months ended June 30, 2016, compared to $42.2 million for the same period
in 2015. The decrease was primarily due to a $5.3 million decrease in cash-based compensation and bonus, a $0.8 million decrease
in severance and a $0.5 million decrease in commissions.
Stock-based compensation, net of amount capitalized, remained
fairly constant at $3.5 million during the six months ended June 30, 2016 from $3.8 million during the same period in 2015. The
following table summarizes stock-based compensation, net of estimated forfeitures, included in the accompanying consolidated statements
of operations and comprehensive loss (in thousands):
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Direct costs of customer support
|
|
$
|
681
|
|
|
$
|
741
|
|
Sales, general and administrative
|
|
|
2,783
|
|
|
|
3,023
|
|
|
|
$
|
3,464
|
|
|
$
|
3,764
|
|
Direct Costs of Customer Support.
Direct costs of customer
support decreased to $16.7 million during the six months ended June 30, 2016 compared to $18.2 million during the same period in
2015. The decrease was primarily due to decreased cash-based compensation and bonus.
Sales, General and Administrative
. Sales, general and
administrative costs decreased to $37.1 million during the six months ended June 30, 2016 compared to $43.5 million during the
same period in 2015. The decrease was primarily due to a $4.4 million decrease in cash-based compensation and bonus, a $2.1 million
decrease in marketing costs, a $0.8 million decrease in severance, a $0.6 million decrease of professional fees and a $0.5 million
decrease in commissions, partially offset by a $2.9 million increase in organizational realignment costs.
Depreciation and Amortization.
Depreciation and amortization
decreased to $38.3 million during the six months ended June 30, 2016 compared to $42.8 million during the same period in 2015.
The decrease was primarily due to the additional amortization expense in the prior period of $5.0 million for the accelerated useful
life of the iWeb trade name.
Interest Expense
. Interest expense increased to $15.1
million during the six months ended June 30, 2016 from $13.7 million during the same period in 2015. The increase is primarily
due to the higher interest rate from the recent debt amendment and increased borrowings on the revolving credit facility.
Non-GAAP Financial Measure
We report our consolidated financial statements in accordance
with GAAP. We present the non-GAAP performance measure of adjusted EBITDA to assist us in explaining underlying performance trends
in our business, which we believe will enhance investors’ ability to analyze trends in our business and evaluate our performance
relative to other companies. We define adjusted EBITDA as loss from operations plus depreciation and amortization, loss on disposal
of property and equipment, exit activities, restructuring and impairments, stock-based compensation, strategic alternatives and
related costs, organizational realignment costs and acquisition costs.
As a non-GAAP financial measure, adjusted EBITDA should not
be considered in isolation of, or as a substitute for, net loss, loss from operations or other GAAP measures as an indicator of
operating performance. Our calculation of adjusted EBITDA may differ from others in our industry and is not necessarily comparable
with similar titles used by other companies.
The following table reconciles adjusted EBITDA to loss from
operations as presented in our consolidated statements of operations and comprehensive loss:
|
|
Three Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Loss from operations
|
|
$
|
(2,474
|
)
|
|
$
|
(5,838
|
)
|
Depreciation and amortization
|
|
|
19,217
|
|
|
|
22,566
|
|
Loss on disposal of property and equipment, net
|
|
|
31
|
|
|
|
137
|
|
Exit activities, restructuring and impairments
|
|
|
152
|
|
|
|
59
|
|
Stock-based compensation
|
|
|
1,542
|
|
|
|
2,185
|
|
Strategic alternatives and related costs
(1)
|
|
|
282
|
|
|
|
—
|
|
Organizational realignment costs
(2)
|
|
|
1,417
|
|
|
|
—
|
|
Adjusted EBITDA
|
|
$
|
20,167
|
|
|
$
|
19,109
|
|
|
(1)
|
Primarily legal and other professional fees incurred in connection with the evaluation by our board
of directors of strategic alternatives and related shareholder communications. We include these costs in SGA in the accompanying
consolidated statements of operations and comprehensive loss for the three months ended June 30, 2016.
|
|
(2)
|
Primarily professional fees, employee retention bonus and severance costs incurred related to our
organization realignment. We include these costs in SGA in the accompanying consolidated statements of operations and comprehensive
loss for the three months ended June 30, 2016.
|
Liquidity and Capital Resources
Liquidity
As of June 30, 2016, we had a deficit in working capital, which
represented an excess of current liabilities over current assets due to our strategy to minimize interest costs by not accessing
additional borrowing capacity under our revolving credit facility. We believe that cash flows from operations, together with our
cash and cash equivalents and borrowing capacity under our revolving credit facility, will be sufficient to meet our cash requirements
for the next 12 months and for the foreseeable future. If our cash requirements vary materially from what we expect or if we fail
to generate sufficient cash flows from selling our services, we may require additional financing sooner than anticipated. We can
offer no assurance that we will be able to obtain additional financing on commercially favorable terms, or at all, and provisions
in our credit agreement limit our ability to incur additional indebtedness.
We have a history of quarterly and annual period net losses.
During the three and six months ended June 30, 2016, we had a net loss of $10.7 million and $20.3 million, respectively. As of
June 30, 2016, our accumulated deficit was $1.2 billion.
Capital Resources
Credit Agreement
. We have a $350.0 million credit agreement,
which provides for an initial $300.0 million term loan and a $50.0 million revolving credit facility. During the three months ended
June 30, 2016, we entered into an amendment to our credit agreement, which among other things, amended the interest coverage ratio
and leverage ratio covenants to make them less restrictive and increased the applicable margin for revolving credit facility and
term loan by 1.0%. We paid a one-time aggregate fee of $1.7 million to the lenders for the amendment.
As of June 30, 2016, the term loan had an outstanding principal
amount of $292.5 million, which we repay in $750,000 quarterly installments on the last day of each fiscal quarter with the remaining
unpaid balance due November 26, 2019. As of June 30, 2016, the revolving credit facility, expiring in November 2018, had an outstanding
balance of $35.5 million and we issued $4.1 million in letters of credit, resulting in $10.4 million in borrowing capacity. As
of June 30, 2016, the interest rate on the term loan was 7% and the interest rate on the revolving credit facility was 6%.
The credit agreement includes customary representations, warranties,
negative and affirmative covenants, including certain financial covenants relating to maximum total leverage ratio, minimum consolidated
interest coverage ratio and limitation on capital expenditures. As of June 30, 2016, we were in compliance with these covenants.
Cash Flows
Operating Activities
During the six months ended June 30, 2016, net cash provided
by operating activities was $24.8 million. We generated cash from operations of $21.9 million, while changes in operating assets
and liabilities provided cash of $2.9 million.
During the six months ended June 30, 2015, net cash provided
by operating activities during the six months ended June 30, 2015 was $11.6 million. We generated cash from operations of $24.0
million, while changes in operating assets and liabilities used cash from operations of $12.4 million.
Investing Activities
During the six months ended June 30, 2016 and 2015, net cash
used in investing activities was $27.1 million and $31.5 million, respectively, primarily due to capital expenditures related to
the continued expansion and upgrade of our company-controlled data centers and network infrastructure.
Financing Activities
During the six months ended June 30, 2016, net cash used by
financing activities was $1.7 million, primarily due to principal payments of $6.3 million on the term loan and capital lease obligations, partially offset by $4.5 million of proceeds from the revolving credit facility.
During the six months ended June 30, 2015, net cash provided
by financing activities was $16.3 million, primarily due to $17.0 million of proceeds from the revolving credit facility and a
net $4.5 million from stock option activity, partially offset by principal payments of $5.2 million on the credit agreement and
capital lease obligations.