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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-51829

COGENT COMMUNICATIONS HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

46-5706863

(State of Incorporation)

(I.R.S. Employer

Identification Number)

2450 N Street N.W.

Washington, D.C. 20037

(Address of Principal Executive Offices and Zip Code)

(202295-4200

(Registrant’s Telephone Number, Including Area Code)

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, par value $0.001 per share

CCOI

NASDAQ Global Select Market

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  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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.001 par value 47,251,320 Shares Outstanding as of October 31, 2020

INDEX

PART I

    

FINANCIAL INFORMATION

Item 1.

Financial Statements

3

Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets of Cogent Communications Holdings, Inc., and Subsidiaries as of September 30, 2020 (Unaudited) and December 31, 2019

3

Condensed Consolidated Statements of Comprehensive Income of Cogent Communications Holdings, Inc., and Subsidiaries for the Three Months Ended September 30, 2020 and September 30, 2019 (Unaudited)

4

Condensed Consolidated Statements of Comprehensive Income of Cogent Communications Holdings, Inc., and Subsidiaries for the Nine Months Ended September 30, 2020 and September 30, 2019 (Unaudited)

5

Condensed Consolidated Statements of Cash Flows of Cogent Communications Holdings, Inc., and Subsidiaries for the Nine Months Ended September 30, 2020 and September 30, 2019 (Unaudited)

6

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

32

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

33

Item 1A

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

Item 6.

Exhibits

35

SIGNATURES

36

CERTIFICATIONS

2

PART I FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2020 AND DECEMBER 31, 2019

(IN THOUSANDS, EXCEPT SHARE DATA)

    

September 30, 

    

December 31, 

2020

2019

(Unaudited)

Assets

Current assets:

Cash and cash equivalents

$

393,293

$

399,422

Accounts receivable, net of allowance for credit losses of $2,204 and $1,771, respectively

 

42,053

 

40,484

Prepaid expenses and other current assets

 

40,007

 

35,822

Total current assets

 

475,353

 

475,728

Property and equipment, net

421,251

368,929

Right-of-use leased assets

90,400

73,460

Deposits and other assets

 

13,910

 

14,007

Total assets

$

1,000,914

$

932,124

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$

11,983

$

11,075

Accrued and other current liabilities

 

47,714

 

51,301

Installment payment agreement, current portion, net of discounts of $245 and $350, respectively

8,292

9,063

Current maturities, operating lease liabilities

12,006

10,101

Current maturities, finance lease obligations

 

15,252

 

8,154

Total current liabilities

 

95,247

 

89,694

Senior secured 2022 notes, net of unamortized debt costs of $1,267 and $1,897, respectively and including premiums of $656 and $985, respectively

444,389

444,088

Senior unsecured 2024 Euro notes, net of unamortized debt costs of $3,166 and $1,410, respectively and net of discounts of $1,164 and $0, respectively

 

406,034

 

150,001

Senior unsecured 2021 notes, net of unamortized debt costs of $857

188,368

Operating lease liabilities, net of current maturities

101,447

86,690

Finance lease obligations, net of current maturities

 

197,688

 

161,635

Other long term liabilities

 

16,800

 

15,327

Total liabilities

 

1,261,605

 

1,135,803

Commitments and contingencies:

Stockholders’ equity:

Common stock, $0.001 par value; 75,000,000 shares authorized; 47,284,336 and 46,840,434 shares issued and outstanding, respectively

 

47

 

47

Additional paid-in capital

 

513,454

 

493,178

Accumulated other comprehensive income — foreign currency translation

 

(7,498)

 

(12,326)

Accumulated deficit

 

(766,694)

 

(684,578)

Total stockholders’ deficit

 

(260,691)

 

(203,679)

Total liabilities and stockholders’ deficit

$

1,000,914

$

932,124

The accompanying notes are an integral part of these condensed consolidated balance sheets.

3

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND SEPTEMBER 30, 2019

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

    

Three Months

    

Three Months

Ended

Ended

September 30, 2020

September 30, 2019

(Unaudited)

(Unaudited)

Service revenue

$

142,302

$

136,942

Operating expenses:

Network operations (including $346 and $282 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)

 

54,519

 

55,253

Selling, general, and administrative (including $6,176 and $4,515 of equity-based compensation expense, respectively)

 

39,722

 

35,971

Depreciation and amortization

 

21,619

 

20,006

Total operating expenses

115,860

111,230

Loss on finance leases amendment

(505)

Gains on equipment transactions

99

87

Operating income

 

26,036

 

25,799

Interest expense

(15,760)

(15,191)

Unrealized foreign exchange (loss) gain on 2024 Euro Notes

(17,315)

6,162

Interest income and other, net

 

484

 

2,185

(Loss) income before income taxes

 

(6,555)

 

18,955

Income tax benefit (provision)

 

1,600

 

(5,254)

Net (loss) income

$

(4,955)

$

13,701

Comprehensive income:

Net (loss) income

$

(4,955)

$

13,701

Foreign currency translation adjustment

 

5,408

 

(4,709)

Comprehensive income

$

453

$

8,992

Net (loss) income per common share:

Basic net (loss) income per common share

$

(0.11)

$

0.30

Diluted net (loss) income per common share

$

(0.11)

$

0.30

Dividends declared per common share

$

0.705

$

0.620

Weighted-average common shares - basic

 

45,815,718

 

45,438,656

Weighted-average common shares - diluted

 

45,815,718

 

46,019,691

The accompanying notes are an integral part of these condensed consolidated statements.

4

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND SEPTEMBER 30, 2019

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

    

Nine Months

    

Nine Months

Ended

Ended

September 30, 2020

September 30, 2019

(Unaudited)

(Unaudited)

Service revenue

$

424,205

$

405,866

Operating expenses:

 

 

Network operations (including $903 and $688 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)

 

164,326

 

163,811

Selling, general, and administrative (including $16,776 and $12,832 of equity-based compensation expense, respectively)

 

119,232

 

110,396

Depreciation and amortization

 

61,022

 

60,246

Total operating expenses

 

344,580

 

334,453

Loss on finance lease amendments

(423)

Gains on equipment transactions

 

343

 

808

Operating income

 

79,545

 

72,221

Interest expense

(46,481)

(42,243)

Realized foreign exchange gain on issuance of 2024 Euro Notes

2,547

Unrealized (loss) gain on foreign exchange on 2024 Euro Notes

 

(17,827)

 

6,339

Interest income and other, net

 

430

 

5,588

Loss on debt extinguishment and redemption- 2021 Notes

 

(638)

 

Income before income taxes

 

17,576

 

41,905

Income tax provision

(4,740)

(11,851)

Net income

$

12,836

$

30,054

 

  

 

  

Comprehensive income:

Net income

$

12,836

$

30,054

Foreign currency translation adjustment

 

4,828

 

(4,748)

Comprehensive income

$

17,664

$

25,306

 

  

 

  

Net income per common share:

Basic net income per common share

$

0.28

$

0.66

Diluted net income per common share

$

0.28

$

0.65

Dividends declared per common share

$

2.045

$

1.800

 

 

Weighted-average common shares - basic

45,818,677

45,428,305

 

 

Weighted-average common shares - diluted

46,598,870

45,948,331

The accompanying notes are an integral part of these condensed consolidated statements.

5

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND SEPTEMBER 30, 2019

(IN THOUSANDS)

    

Nine months

    

Nine months

Ended

Ended

September 30, 2020

September 30, 2019

(Unaudited)

(Unaudited)

Cash flows from operating activities:

Net income

$

12,836

$

30,054

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

 

61,022

 

60,246

Amortization of debt costs, discounts and premiums

 

1,426

 

1,328

Equity-based compensation expense (net of amounts capitalized)

 

17,679

 

13,520

Loss on debt extinguishment and redemption – 2021 Notes

 

638

 

Unrealized losses (gains) on foreign exchange

17,281

(6,305)

Realized foreign exchange gain on issuance of 2024 Notes

(2,547)

Gains - equipment transactions and other, net

80

(131)

Deferred income taxes

 

2,100

 

9,285

Changes in operating assets and liabilities:

Accounts receivable

 

(1,102)

 

(43)

Prepaid expenses and other current assets

 

(3,253)

 

(4,862)

Accounts payable, accrued liabilities and other long-term liabilities

(2,783)

1,350

Deposits and other assets

(628)

(1,730)

Net cash provided by operating activities

 

102,749

 

102,712

Cash flows from investing activities:

Purchases of property and equipment

 

(40,092)

 

(37,059)

Net cash used in investing activities

 

(40,092)

 

(37,059)

Cash flows from financing activities:

Dividends paid

 

(94,952)

 

(82,871)

Purchases of common stock

(270)

Redemption and extinguishment of 2021 Notes

(189,225)

Net proceeds from issuance of senior unsecured 2024 Euro Notes - net of debt costs of $2,137 and $1,556, respectively

240,285

152,128

Principal payments on installment payment agreement

(7,855)

(7,348)

Principal payments of finance lease obligations

 

(19,392)

 

(7,035)

Proceeds from exercises of stock options

1,175

1,270

Net cash (used in) provided by financing activities

 

(70,234)

 

56,144

Effect of exchange rates changes on cash

 

1,448

 

(1,619)

Net (decrease) increase in cash and cash equivalents

 

(6,129)

 

120,178

Cash and cash equivalents, beginning of period

 

399,422

 

276,093

Cash and cash equivalents, end of period

$

393,293

$

396,271

Supplemental disclosure of non-cash investing and financing activities:

Non-cash component of network equipment obtained in exchange transactions

$

310

$

771

PP&E obtained for installment payment agreement

$

5,771

$

8,945

Finance lease obligations incurred

$

61,504

$

11,342

Fair value of equipment acquired in leases

$

536

$

1,207

The accompanying notes are an integral part of these condensed consolidated statements.

6

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  Description of the business and recent developments:

Reorganization and merger

On May 15, 2014, pursuant to the Agreement and Plan of Reorganization (the “Merger Agreement”) by and among Cogent Communications Group, Inc. (“Group”), a Delaware corporation, Cogent Communications Holdings, Inc., a Delaware corporation (“Holdings”) and Cogent Communications Merger Sub, Inc., a Delaware corporation, Group adopted a new holding company organizational structure whereby Group is now a wholly owned subsidiary of Holdings. Holdings is a “successor issuer” to Group pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). References to the “Company” for events that occurred prior to May 15, 2014 refer to Cogent Communications Group, Inc. and its subsidiaries and on and after May 15, 2014 the “Company” refers to Cogent Communications Holdings, Inc. and its subsidiaries. Group and its subsidiaries represent the operating subsidiaries of Cogent and the vast majority of Cogent's assets, contractual arrangements, and operations are executed by Group and its subsidiaries.

Description of business

We are a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation space. Our network is specifically designed and optimized to transmit packet switched data. We deliver our services primarily to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations in 47 countries across North America, Europe, Asia, South America, Australia and Africa. We are a Delaware corporation and we are headquartered in Washington, DC.

We offer on-net Internet access services exclusively through our own facilities, which run from our network to our customers’ premises. We offer our on-net services to customers located in buildings that are physically connected to our network. As a result, we are not dependent on local telephone companies or cable TV companies to serve our customers for our on-net Internet access and private network service. Our on- net service consists of high-speed Internet access and private network services offered at speeds ranging from 100 Megabits per second to 100 Gigabits per second.

We provide our on-net Internet access and private network services to our corporate and net-centric customers. Our corporate customers are located in multi-tenant office buildings and typically include law firms, financial services firms, advertising and marketing firms as well as health care providers, educational institutions and other professional services businesses. Our net-centric customers include bandwidth-intensive users which leverage our network to either deliver content to end users or to provide access to residential or commercial internet users. Content delivery customers include over the top (“OTT”) media service providers, content delivery networks, web hosting companies, and commercial content and application software providers. Access customers include over 7,200 access networks comprised of other Internet access providers, telephone companies, and cable television companies that collectively provide internet access to a substantial number of broadband subscribers across the world. These net-centric customers generally receive our services in carrier neutral colocation facilities and in our data centers. We operate data centers throughout North America and Europe that allow our customers to collocate their equipment and access our network.

In addition to providing our on-net services, we provide Internet access and private network services to customers that are not located in buildings directly connected to our network. We provide these off-net services primarily to corporate customers using other carriers’ circuits to provide the “last mile” portion of the link from the customers’ premises to our network. We also provide certain non-core services that resulted from acquisitions. We continue to support but do not actively sell these non-core services.

7

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments that the Company considers necessary for the fair presentation of its results of operations and cash flows for the interim periods covered, and of the financial position of the Company at the date of the interim condensed consolidated balance sheet. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. While the Company believes that the disclosures are adequate to not make the information misleading, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in its annual report on Form 10-K for the year ended December 31, 2019.

The accompanying unaudited condensed consolidated financial statements include all wholly owned subsidiaries. All inter-company accounts and activity have been eliminated.

Use of estimates

The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.

Financial instruments

At September 30, 2020, the carrying amount of cash and cash equivalents, accounts receivable, prepaid and other current assets, accounts payable and accrued expenses approximated fair value because of the short-term nature of these instruments. The Company measures its cash equivalents at amortized cost, which approximates fair value based upon quoted market prices (Level 1). Based upon recent trading prices (Level 2— market approach) at September 30, 2020 the fair value of the Company’s $445.0 million senior secured notes was $455.0 million and the fair value of the Company’s €350.0 million Euro ($410.4 million USD) senior unsecured notes was $416.5 million.

Gross receipts taxes, universal service fund and other surcharges

Revenue recognition standards include guidance relating to taxes or surcharges assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer and may include, but are not limited to, gross receipts taxes, excise taxes, Universal Service Fund fees and certain state regulatory fees. Such charges may be presented gross or net based upon the Company’s accounting policy election. The Company records certain excise taxes and surcharges on a gross basis and includes them in its revenues and costs of network operations. Excise taxes and surcharges billed to customers and recorded on a gross basis (as service revenue and network operations expense) were $3.9 million and $4.0  million for the three months ended September 30, 2020 and September 30, 2019, respectively, and $10.9 million and $10.6 million for the nine months ended September 30, 2020 and September 30, 2019, respectively.

Basic and diluted net income per common share

Basic earnings per share (“EPS”) excludes dilution for common stock equivalents and is computed by dividing net income or (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares of common stock outstanding during each period, adjusted for the effect of dilutive common stock equivalents. Shares of restricted stock are included in the computation of basic EPS as they vest and are included in diluted EPS, to the extent they are dilutive, determined using the treasury stock method.

8

The following details the determination of diluted weighted average shares:

    

Three Months Ended

    

Three Months Ended

    

Nine Months Ended

    

Nine Months Ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

Weighted average common shares - basic

 

45,815,718

45,438,656

45,818,677

45,428,305

Dilutive effect of stock options

 

34,593

99,581

32,179

Dilutive effect of restricted stock

 

546,442

680,612

487,847

Weighted average common shares - diluted

 

45,815,718

46,019,691

46,598,870

45,948,331

The following details unvested shares of restricted common stock as well as the anti-dilutive effects of stock options and restricted stock awards outstanding:

 

Three Months

Three Months

 

Nine Months

Nine Months

Ended

Ended

Ended

Ended

    

September 30, 2020

    

September 30, 2019

    

September 30, 2020

    

September 30, 2019

Unvested shares of restricted common stock

 

1,472,572

 

1,379,446

 

1,472,572

 

1,379,446

Anti-dilutive options for common stock

87,214

37,606

24,453

50,928

Anti-dilutive shares of restricted common stock

 

925,866

 

 

191

 

50,292

Stockholders’ Deficit

The following details the changes in stockholders’ deficit for the three and nine months ended September 30, 2020 and September 30, 2019 (in thousands except share amounts):

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity (Deficit)

Balance at June 30, 2020

 

47,279,201

$

47

$

506,391

$

(12,906)

$

(729,082)

$

(235,550)

Forfeitures of shares granted to employees

 

(4,932)

 

 

 

 

 

Equity-based compensation

 

 

 

7,147

 

 

 

7,147

Foreign currency translation

 

 

 

 

5,408

 

 

5,408

Issuances of common stock

 

10,500

 

 

 

 

 

Exercises of options

 

4,134

 

 

185

 

 

 

185

Common stock purchases and retirement

(4,567)

(269)

(269)

Dividends paid

 

 

 

 

 

(32,657)

 

(32,657)

Net loss

 

 

 

 

 

(4,955)

 

(4,955)

Balance at September 30, 2020

 

47,284,336

$

47

$

513,454

$

(7,498)

$

(766,694)

$

(260,691)

9

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity (Deficit)

Balance at June 30, 2019

46,806,370

$

47

$

481,734

$

(10,967)

$

(647,404)

$

(176,590)

Forfeitures of shares granted to employees

 

(4,508)

 

 

 

 

 

Equity-based compensation

 

 

 

5,311

 

 

 

5,311

Foreign currency translation

 

 

 

 

(4,709)

 

 

(4,709)

Issuances of common stock

 

10,572

 

 

 

 

 

Exercises of options

 

9,152

 

 

351

 

 

 

351

Dividends paid

 

 

 

 

 

(28,565)

 

(28,565)

Net income

 

 

 

 

 

13,701

 

13,701

Balance at September 30, 2019

 

46,821,586

$

47

$

487,396

$

(15,676)

$

(662,268)

$

(190,501)

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders'

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity (Deficit)

Balance at December 31, 2019

46,840,434

$

47

$

493,178

$

(12,326)

$

(684,578)

$

(203,679)

Forfeitures of shares granted to employees

 

(42,212)

 

 

 

 

 

Equity-based compensation

 

 

 

19,371

 

 

 

19,371

Foreign currency translation

 

 

 

 

4,828

 

 

4,828

Issuances of common stock

 

465,530

 

 

 

 

 

Exercises of options

 

25,151

 

 

1,174

 

 

 

1,174

Common stock purchases and retirement

(4,567)

(269)

(269)

Dividends paid

 

 

 

 

 

(94,952)

 

(94,952)

Net income

 

 

 

 

 

12,836

 

12,836

Balance at September 30, 2020

 

47,284,336

$

47

$

513,454

$

(7,498)

$

(766,694)

$

(260,691)

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders'

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity (Deficit)

Balance at December 31, 2018

46,336,499

$

46

$

471,331

$

(10,928)

$

(609,451)

$

(149,002)

Forfeitures of shares granted to employees

 

(8,394)

 

 

 

 

 

Equity-based compensation

 

 

 

14,796

 

 

 

14,796

Foreign currency translation

 

 

 

 

(4,748)

 

 

(4,748)

Issuances of common stock

 

459,550

 

1

 

 

 

 

1

Exercises of options

 

33,931

 

 

1,269

 

 

 

1,269

Dividends paid

 

 

 

 

 

(82,871)

 

(82,871)

Net income

 

 

 

 

 

30,054

 

30,054

Balance at September 30, 2019

 

46,821,586

$

47

$

487,396

$

(15,676)

$

(662,268)

$

(190,501)

Revenue recognition

The Company recognizes revenue under ASU No. 2014-09, Revenue from Contracts with Customers (“ASC 606”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Under ASC 606 installation fees for contracts with terms longer than month-to-month are recognized over the contract term. The Company believes that the installation fee does not give rise to a material right as defined by ASC 606 for contracts with terms longer than month-to-month. The Company recognizes revenue over the estimated average customer life for installation fees associated with month-to-month contracts, because the fee represents a material right as defined by ASC 606. The Company capitalizes certain contract acquisition costs that relate directly to a customer contract, including commissions paid to its sales team and sales agents and amortizes these costs on straight-line basis over the period the services are transferred to the customer for commissions paid to its sales team (estimated customer life) and over the remaining original contract term for agent commissions. Management assesses these costs for impairment at least quarterly and as "triggering" events occur that indicate it is more likely than not that an impairment exists.

10

The Company’s service offerings consist of on-net and off-net telecommunications services. Fixed fees are billed monthly in advance and usage fees are billed monthly in arrears. Amounts billed are due upon receipt and contract lengths range from month to month to 60 months. The Company satisfies its performance obligations to provide services to customers over time as the services are rendered. In accordance with ASC 606, revenue is recognized when a customer obtains the promised service. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. The Company has adopted the practical expedient related to certain performance obligation disclosures since it has a right to consideration from its customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date.

To achieve this core principle, the Company follows the following five steps:

1) Identification of the contract, or contracts with a customer
2) Identification of the performance obligations in the contract
3) Determination of the transaction price
4) Allocation of the transaction price to the performance obligations in the contract
5) Recognition of revenue when, or as, we satisfy a performance obligation

Fees billed in connection with customer installations are deferred (as deferred revenue) and recognized as noted above. To the extent a customer contract is terminated prior to its contractual end the customer is subject to termination fees. The Company vigorously seeks payment of these amounts. The Company recognizes revenue for these amounts as they are collected.

Service revenue recognized from amounts in deferred revenue (contract liabilities) at the beginning of the period during the three months ended September 30, 2020 was $1.6 million and during the three months ended September 30, 2019 was $1.7 million. Service revenue recognized from amounts in deferred revenue (contract liabilities) at the beginning of the period during the nine months ended September 30, 2020 was $3.9  million and during the nine months ended September 30, 2019 was $5.1 million. Amortization expense for contract costs was $4.2  million for the three months ended September 30, 2020 and $4.3 million for the three months ended September 30, 2019. Amortization expense for contract costs was $12.6  million for the nine months ended September 30, 2020 and $13.0  million for the nine months ended September 30, 2019.

11

Recent Accounting Pronouncements— Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 replaced most existing lease accounting guidance. In July 2018 the FASB approved an Accounting Standards Update which, among other changes, allowed a company to elect to adopt ASU 2016-02 using the modified retrospective method applying the transition provisions at the beginning of the period of adoption, rather than at the beginning of the earliest comparative period presented in these financial statements. ASU 2016-02 was effective for the Company beginning on January 1, 2019 and required the Company to record a right-of-use asset and a lease liability for most of its facilities leases. These leases were previously treated as operating leases. The effect of ASU 2016-02 was to record a cumulative-effect adjustment on January 1, 2019 as a right-of-use asset and an operating lease liability totaling $97.3 million. The operating lease liability is not considered a liability under the consolidated leverage ratio calculations in the indentures governing the Company’s senior unsecured and senior secured note obligations. The Company has made an accounting policy election to not apply the recognition requirements of ASU 2016-02 to its short-term leases - leases with a term of one year or less. The Company has also elected to apply certain practical expedients under ASU 2016-02 including not separating lease and nonlease components on its finance and operating leases, not reassessing whether any existing contracts contained leases, not reconsidering lease classification, not reassessing initial direct costs and using hindsight in determining the lease reasonably certain term of its leases.

    

Three Months

 

Three Months

Ended

 

Ended

    

September 30, 2020

    

September 30, 2019

 

Finance lease cost

 

  

Amortization of right-of-use assets

$

6,382

$

4,963

Interest expense on finance lease liabilities

 

4,804

4,414

Operating lease cost

 

4,269

3,716

Total lease costs

$

15,455

$

13,093

    

Nine Months

    

Nine Months

 

Ended

 

Ended

 

September 30, 2020

 

September 30, 2019

 

Finance lease cost

Amortization of right-of-use assets

$

16,117

$

14,851

Interest expense on finance lease liabilities

 

13,794

 

13,230

Operating lease cost

 

12,860

 

10,497

Total lease costs

$

42,771

$

38,578

Other lease information

 

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

Operating cash flows from finance leases

$

(14,150)

$

(12,957)

Operating cash flows from operating leases

 

(13,785)

 

(8,443)

Financing cash flows from finance leases

 

(19,392)

 

(7,035)

Right-of-use assets obtained in exchange for new finance lease liabilities

 

61,504

 

11,342

Right-of-use assets obtained in exchange for new operating lease liabilities

 

24,866

 

6,912

Weighted-average remaining lease term — finance leases (in years)

 

12.3

 

14.5

Weighted-average remaining lease term — operating leases (in years)

 

20.4

 

21.7

Weighted average discount rate — finance leases

 

10.5

%

 

10.5

%

Weighted average discount rate — operating leases

 

5.4

%

 

5.7

%

12

Finance leases—fiber lease agreements

The Company has entered into lease agreements with numerous providers of dark fiber under indefeasible-right-of use agreements (“IRUs). These IRUs typically have initial terms of 15- 20 years and include renewal options after the initial lease term. The Company establishes the number of renewal option periods used in determining the lease term based upon its assessment at the inception of the lease of the number of option periods for which failure to renew the lease imposes a penalty in such amount that renewal appears to be reasonably certain. The option to renew may be automatic, at the option of the Company or mutually agreed to between the dark fiber provider and the Company. Once the Company has accepted the related fiber route, leases that meet the criteria for treatment as finance leases are recorded as a finance lease obligation and an IRU asset. The interest rate used in determining the present value of the aggregate future minimum lease payments is the Company’s incremental borrowing rate for the reasonably certain lease term. Finance lease assets are included in property and equipment in the Company’s consolidated balance sheets. As of September 30, 2020, the Company had committed to additional dark fiber IRU lease agreements totaling $20.7 million in future payments to be paid over periods of up to 20 years. These obligations begin when the related fiber is accepted, which is generally expected to occur in the next 12 months.

The future minimum payments (principal and interest) under these finance leases are as follows (in thousands):

For the twelve months ending September 30,

    

2021

$

33,471

2022

 

32,638

2023

 

31,650

2024

 

31,753

2025

 

28,495

Thereafter

 

225,320

Total minimum finance lease obligations

 

383,327

Less—amounts representing interest

 

(170,387)

Present value of minimum finance lease obligations

 

212,940

Current maturities

 

(15,252)

Finance lease obligations, net of current maturities

$

197,688

Operating leases

The Company leases office space and certain data center facilities under operating leases. In certain cases the Company also enters into short term operating leases for dark fiber. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments under the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the reasonably certain lease term. The implicit rates within the Company’s operating leases are generally not determinable and the Company uses its incremental borrowing rate at the lease commencement date to determine the present value of its lease payments. The determination of the Company’s incremental borrowing rate requires judgment. The Company determines its incremental borrowing rate for each lease using its current borrowing rate, adjusted for various factors including level of collateralization and term to align with the term of the lease. Certain of the Company’s leases include options to extend or terminate the lease. The Company establishes the number of renewal option periods used in determining the operating lease term based upon its assessment at the inception of the operating lease of the number of option periods for which failure to renew the lease imposes a penalty in such amount that renewal appears to be reasonably certain. The option to renew may be automatic, at the option of the Company or mutually agreed to between the landlord or dark fiber provider and the Company. Once the Company has accepted the related fiber route or the facility lease term has begun, the present value of the aggregate future minimum operating lease payments are recorded as an operating lease liability and a right-of-use leased asset. Lease incentives and deferred rent liabilities for facilities operating leases are presented with the right-of-use leased asset. Lease expense for lease payments is recognized on a straight-line basis over the term of the lease.

13

The future minimum payments under these operating lease agreements are as follows (in thousands):

For the twelve months ending September 30,

    

2021

$

17,579

2022

 

16,535

2023

 

15,674

2024

 

14,198

2025

 

12,124

Thereafter

 

103,809

Total minimum operating lease obligations

 

179,919

Less—amounts representing interest

 

(66,466)

Present value of minimum operating lease obligations

 

113,453

Current maturities

 

(12,006)

Lease obligations, net of current maturities

$

101,447

Adopted accounting pronouncements

Effective January 1, 2020, the Company adopted Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") later codified as Accounting Standards Codification ("ASC") 326 ("ASC 326"), using the modified retrospective transition approach. This guidance introduces a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. As of January 1, 2020, the Company maintained an allowance for credit losses to cover its current expected credit losses ("CECL") on its trade receivables arising from the failure of customers to make contractual payments. The Company estimates credit losses expected over the life of its trade receivables based on historical information combined with current conditions that may affect a customer's ability to pay and reasonable and supportable forecasts. While the Company uses various credit quality metrics, it primarily monitors collectability by reviewing the duration of collection pursuits on its delinquent trade receivables. Based on the Company's experience, the customer's delinquency status is the strongest indicator of the credit quality of the underlying trade receivables, which is analyzed monthly. Adoption of ASU 2016-13 did not have a material impact on the Company's consolidated financial statements and related disclosures and no cumulative adjustment was recorded.

    

Current-period

    

    

    

Balance at

Provision for

Write offs

Balance at

June 30,

Expected Credit

Charged Against

September 30,

Description

    

2020

    

Losses

    

Allowance

    

2020

Allowance for credit losses (deducted from accounts receivable)

Three months ending September 30, 2020

$

2,115

$

1,174

$

(1,085)

$

2,204

    

    

Current-period

    

    

    

Balance at

Provision for

Write offs

Balance at

December 31,

Expected Credit

Charged Against

September 30,

Description

    

2019

    

Losses

    

Allowance

    

2020

Allowance for credit losses (deducted from accounts receivable)

  

  

  

  

Nine months ending September 30, 2020

$

1,771

$

3,942

$

(3,509)

$

2,204

Net bad debt expense for the three months ended September 30, 2020 was $0.8 million which is net of bad debt recoveries of $0.4 million. Net bad debt expense for the nine months ended September 30, 2020 was $3.2 million which is net of bad debt recoveries of $0.8 million.

2.  Property and equipment:

Depreciation and amortization expense related to property and equipment and finance leases was $21.6 million and $20.0 million for the three months ended September 30, 2020, and 2019 respectively, and $61.0 million and $60.2  million for the nine months ended September 30, 2020 and 2019, respectively. The Company capitalized salaries and related benefits of employees working directly on the construction and build-out of its network of $3.0 million and $2.7 million for the three months ended

14

September 30, 2020 and 2019, respectively, and $8.9 million and $8.0 million for the nine months ended September 30, 2020 and 2019, respectively.

Exchange agreement

In the three and nine months ended September 30, 2020 and 2019, the Company exchanged certain used network equipment and cash consideration for new network equipment. The fair value of the equipment received was estimated to be $0.2 million and $0.3 million for the three months ended September 30, 2020 and 2019, respectively, and $1.1 million and $2.6 million for the nine months ended September 30, 2020 and 2019, respectively. After considering the cash component the transactions resulted in gains of $0.1 million and $0.1 million for the three months ended September 30, 2020 and 2019, respectively, and $0.3 million and $0.8 million for the nine months ended September 30, 2020 and 2019, respectively. The estimated fair value of the equipment received was based upon the cash consideration price the Company pays for the new network equipment on a standalone basis (Level 3).

Installment payment agreement

In March 2015, the Company entered into an installment payment agreement (“IPA”) with a vendor. Under the IPA the Company was allowed to purchase network equipment in exchange for interest free note obligations each with a twenty-four month term until July 2020 when additional borrowings under the IPA expired. There are no payments under each note obligation for the first six months followed by eighteen equal installment payments for the remaining eighteen month term. As of September 30, 2020, and December 31, 2019 there was $10.4 million and $12.5 million, respectively, of note obligations outstanding under the IPA, secured by the related equipment. The Company recorded the assets purchased and the net present value of the note obligation utilizing an imputed interest rate. The resulting discount was $0.3 million and $0.4 million as of September 30, 2020 and December 31, 2019, respectively, and is being amortized over the note term using the effective interest rate method.

3.  Long-term debt:

The Company has $445.0 million of senior secured notes (the "2022 Notes") and €350.0 million ($410.4 million USD as of September 30, 2020) of senior unsecured notes (the "2024 Notes") outstanding. The 2022 Notes are due on March 1, 2022 and bear interest at a rate of 5.375% per year. Interest on the 2022 Notes is paid semi-annually on March 1 and September 1. The 2024 Notes are due on June 30, 2024 and bear interest at a rate of 4.375% per year. Interest on the 2024 Notes is paid semi-annually on June 30 and December 30.

2024 Notes issuances

In June 2020, Group completed an offering of €215.0 million aggregate principal amount of 4.375% senior unsecured notes. The net proceeds from the June 2020 offering, after deducting offering expenses, were $240.3 million. In June 2019, Group completed an offering of €135.0 million aggregate principal amount of 4.375% senior unsecured notes. The net proceeds from the June 2019 offering, after deducting offering expenses, were $152.1 million. The Company expects to use the proceeds from these offerings for general corporate purposes, to repay debt obligations, to repurchase the Company’s common stock or for special or recurring dividends to the Company’s stockholders.

The 2024 Notes bear interest at a rate of 4.375% per annum. Interest began to accrue on the 2024 Notes issued in June 2020, on June 4, 2020 and interest began to accrue on the 2024 Notes issued in June 2019 on June 25, 2019. Interest is paid semi-annually in arrears on June 30 and December 30 of each year. Unless earlier redeemed, the 2024 Notes will mature on June 30, 2024. The June 2020 issuance of €215.0 million 2024 Notes were issued at a discount of 99.5% for €213.9 million Euros ($240.0 million USD) on June 3, 2020 at a Euro to USD rate of $1.112. The discount is amortized to interest expense to the maturity date under the effective interest rate method. The Company received proceeds in USD on the June 2020 2024 Notes on June 9, 2020 at a Euro to USD rate of $1.133 resulting in a realized gain on foreign exchange of $2.5 million. The June 2019 issuance of 2024 Notes were issued at par for €135.0 million on June 25, 2019. The issuances of the 2024 Notes were in Euros and are reported in the Company’s reporting currency – US Dollars. As of September 30, 2020 the carrying value of our 2024 Notes was $410.4 million. The unrealized (loss) gain on foreign exchange on the Company’s 2024 Notes from converting the 2024 Notes into USD was $(17.3) million for the three months ended September 30, 2020 and $6.2 million for the three months ended September 30, 2019 and was $(17.8) million for the nine months ended September 30, 2020 and was $6.3 million for the nine months ended September 30, 2019.

15

Debt extinguishment and redemption 2021 Notes

In June 2020, Group redeemed its 5.625% senior unsecured notes due in 2021 (the "2021 Notes") with the proceeds from its June 2020 issuance of €215.0 million 2024 Notes. The Company redeemed the entire outstanding amount of the 2021 Notes at a redemption price of 100.00% of the $189.2 million principal amount plus $1.6 million of accrued interest. As a result of this transaction the Company incurred a loss on debt extinguishment and redemption of $0.6 million from the amortization of the remaining unamortized notes cost and certain transaction expenses.

Limitations under the indentures

The indentures governing the 2024 Notes and 2022 Notes among other things, limit the Company’s ability to incur indebtedness; to pay dividends or make other distributions; to make certain investments and other restricted payments; to create liens; consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; to incur restrictions on the ability of a subsidiary to pay dividends or make other payments; and to enter into certain transactions with its affiliates. Limitations on the ability to incur additional indebtedness (excluding IRU agreements incurred in the normal course of business) include a restriction on incurring additional indebtedness if the Company’s consolidated leverage ratio, as defined in the indentures, is greater than 6.0 for the 2024 Notes and greater than 5.0 for the 2022 Notes. Limitations on the ability to incur additional secured indebtedness include a restriction on incurring additional secured indebtedness if the Company’s consolidated secured leverage ratio, as defined in the indentures, is greater than 4.0 for the 2024 Notes and greater than 3.5 for the 2022 Notes. The indentures prohibit certain payments, such as dividends and stock purchases, when the Company’s consolidated leverage ratio, as defined by the indentures, is greater than 4.25. A certain amount of such unrestricted payments is permitted notwithstanding this prohibition. The unrestricted payment amount may be increased by the Company’s consolidated cash flow, as defined in the indentures, as long as the Company’s consolidated leverage ratio is less than 4.25. The Company’s consolidated leverage ratio was above 4.25 as of September 30, 2020. As of September 30, 2020, a total of $132.6 million was permitted for investment payments including dividends and stock purchases.

4.  Commitments and contingencies:

Current and potential litigation

In accordance with the accounting guidance for contingencies, the Company accrues its estimate of a contingent liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Where it is probable that a liability has been incurred and there is a range of expected loss for which no amount in the range is more likely than any other amount, the Company accrues at the low end of the range. The Company reviews its accruals at least quarterly and adjusts them to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter. The Company has taken certain positions related to its obligations for leased circuits for which it is reasonably possible could result in a loss of up to $3.3 million in excess of the amount accrued at September 30, 2020.

The Company is engaged in an arbitration proceeding in Spain in which a former provider of optical fiber to the Company is seeking approximately $9.0 million for Company’s early termination of the optical fiber leases, which amount the Company accrued in 2015. The Company has counterclaimed for damages and is contesting its obligation to pay the termination liability. The arbitration is being conducted by the Civil and Commercial Arbitration Court (CIMA) in Madrid, Spain.

In the ordinary course of business the Company is involved in other legal activities and claims. Because such matters are subject to many uncertainties and the outcomes are not predictable with assurance, the liability related to these legal actions and claims cannot be determined with certainty. Management does not believe that such claims and actions will have a material impact on the Company’s financial condition or results of operations. Judgment is required in estimating the ultimate outcome of any dispute resolution process, as well as any other amounts that may be incurred to conclude the negotiations or settle any litigation. Actual results may differ from these estimates under different assumptions or conditions and such differences could be material.

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5.  Income taxes:

The components of (loss) income before income taxes consist of the following (in thousands):

    

Three Months Ended

    

Three Months Ended

    

Nine Months Ended

    

Nine Months Ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

Domestic

$

(4,084)

$

24,452

$

27,818

$

59,537

Foreign

 

(2,471)

 

(5,497)

 

(10,242)

 

(17,632)

Total

$

(6,555)

$

18,955

$

17,576

$

41,905

6.  Common stock buyback program stock option and award plan:

The Company’s Board of Directors has approved purchases of the Company’s common stock under a buyback program (the “Buyback Program”) through December 31, 2021. At September 30, 2020, there was approximately $34.6 million remaining for purchases under the Buyback Program. In the three and nine months ended September 30, 2020 the Company purchased 4,567 shares of its common stock for $0.3 million. There were no purchases of common stock during the three and nine months ended September 30, 2019. Subsequent to September 30, 2020 the Company purchased 53,516 shares of its common stock for $3.1 million under the Buyback Program.

In the first quarter of 2020 the Company granted 319,750 shares of common stock to its executive employees and directors valued at $23.7 million. Included in this first quarter grant were 94,050 performance shares that vest subject to certain Company performance conditions and 35,000 performance shares granted to the Company’s CEO that are subject to the total shareholder return of the Company’s common stock compared to the total shareholder return of the Nasdaq Telecommunications Index. In the second quarter of 2020 the Company granted 135,280 shares of common stock to its employees and directors valued at $10.6 million. Shares granted to the Company’s directors vest upon grant and the shares granted to the Company’s employees that are not subject to performance conditions generally vest over periods ending in December 2023.

7.  Dividends on common stock:

On November 4, 2020, the Company’s Board of Directors approved the payment of a quarterly dividend of $0.73 per common share. This estimated $33.5 million dividend payment is expected to be paid on December 4, 2020.

The payment of any future dividends and any other returns of capital, including stock buybacks will be at the discretion of the Company’s Board of Directors and may be reduced, eliminated or increased and will be dependent upon the Company’s financial position, results of operations, available cash, cash flow, capital requirements, limitations under the Company’s debt indentures and other factors deemed relevant by the Company’s Board of Directors. The Company is a Delaware corporation and under the General Corporate Law of the State of Delaware distributions may be restricted including a restriction that distributions, including stock purchases and dividends, do not result in an impairment of a corporation’s capital, as defined under Delaware Law. The indentures governing the Company’s notes limit the Company’s ability to return cash to its stockholders.

8.  Related party transactions:

Office leases

The Company’s headquarters is located in an office building owned by Sodium LLC whose owner is the Company’s Chief Executive Officer. The fixed annual rent for the headquarters building is $1.0 million per year plus an allocation of taxes and utilities. The lease began in May 2015 and the original lease term was for five years which was cancellable by the Company upon 60 days’ notice. In February 2020 the lease term was extended to May 2025. The Company’s audit committee reviews and approves all transactions with related parties. The Company paid $0.5 million and $0.3 million in the three months ended September 30, 2020 and 2019, respectively, and $1.3 million and $1.2 million in the nine months ended September 30, 2020 and 2019, respectively, for rent and related costs (including taxes and utilities) to Sodium LLC for this lease.

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9.  Segment information:

The Company operates as one operating segment. The Company’s service revenue by geographic region and product class and long-lived assets by geographic region are as follows (in thousands):

Three months Ended September 30, 2020

Revenues

    

On-net

    

Off-net

    

Non-core

    

Total

North America

$

82,730

$

32,416

$

107

$

115,253

Europe

 

19,966

 

4,422

 

12

 

24,400

South America

599

14

613

Asia Pacific

1,786

240

2,026

Africa

10

10

Total

$

105,091

$

37,092

$

119

$

142,302

Three months Ended September 30, 2019

Revenues

    

On-net

    

Off-net

    

Non-core

    

Total

North America

$

80,176

$

33,172

$

104

$

113,452

Europe

17,921

4,053

4

21,978

South America

139

5

144

Asia Pacific

1,180

188

1,368

Africa

Total

$

99,416

$

37,418

$

108

$

136,942

Nine months Ended September 30, 2020

Revenues

    

On-net

    

Off-net

    

Non-core

    

Total

North America

$

247,679

$

97,951

$

369

$

345,999

Europe

58,433

12,781

32

71,246

South America

1,344

34

1,378

Asia Pacific

4,880

692