10-Q 1 ccoi-20220930x10q.htm FORM 10-Q
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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, 2022

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 48,010,042 Shares Outstanding as of October 31, 2022

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, 2022 (Unaudited) and December 31, 2021

3

Condensed Consolidated Statements of Comprehensive (Loss) Income of Cogent Communications Holdings, Inc. and Subsidiaries for the Three Months Ended September 30, 2022 and September 30, 2021 (Unaudited)

4

Condensed Consolidated Statements of Comprehensive (Loss) Income of Cogent Communications Holdings, Inc. and Subsidiaries for the Nine Months Ended September 30, 2022 and September 30, 2021 (Unaudited)

5

Condensed Consolidated Statements of Cash Flows of Cogent Communications Holdings, Inc. and Subsidiaries for the Nine Months Ended September 30, 2022 and September 30, 2021 (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

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

Item 4.

Controls and Procedures

36

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

37

Item 1A.

Risk Factors

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 6.

Exhibits

39

SIGNATURES

40

CERTIFICATIONS

Page 2 of 40

PART I FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2022 AND DECEMBER 31, 2021

(IN THOUSANDS, EXCEPT SHARE DATA)

    

September 30, 

    

December 31, 

2022

2021

(Unaudited)

Assets

Current assets:

Cash and cash equivalents

$

268,945

$

319,609

Restricted cash

54,719

9,015

Accounts receivable, net of allowance for credit losses of $1,966 and $1,510, respectively

 

43,433

41,938

Prepaid expenses and other current assets

 

46,407

39,015

Total current assets

 

413,504

409,577

Property and equipment, net

503,763

457,880

Right-of-use leased assets

 

86,047

101,687

Deposits and other assets

 

17,388

15,413

Total assets

$

1,020,702

$

984,557

Liabilities and stockholders’ deficit

Current liabilities:

Accounts payable

$

18,398

$

11,923

Accrued and other current liabilities

 

67,290

39,057

Installment payment agreement, current portion, net of discount of $6

785

Current maturities, operating lease liabilities

11,784

12,197

Current maturities, finance lease obligations

24,135

17,048

Total current liabilities

 

121,607

81,010

Senior unsecured 2027 notes, net of unamortized debt costs of $1,228 and net of discount of $2,572

446,200

Senior secured 2026 notes, net of unamortized debt costs of $969 and $1,156, respectively, and net of discounts of $1,287 and $1,536, respectively

 

497,744

497,308

Senior unsecured 2024 Euro notes, net of unamortized debt costs of $2,121 and net of discount of $772

394,112

Operating lease liabilities, net of current maturities

99,438

111,794

Finance lease obligations, net of current maturities

 

263,750

228,822

Other long-term liabilities

 

83,728

44,609

Total liabilities

 

1,512,467

1,357,655

Commitments and contingencies:

Stockholders’ deficit:

Common stock, $0.001 par value; 75,000,000 shares authorized; 48,002,135 and 47,674,189 shares issued and outstanding, respectively

 

48

48

Additional paid-in capital

 

568,065

547,734

Accumulated other comprehensive loss — foreign currency translation

 

(28,413)

(11,003)

Accumulated deficit

 

(1,031,465)

(909,877)

Total stockholders’ deficit

 

(491,765)

(373,098)

Total liabilities and stockholders’ deficit

$

1,020,702

$

984,557

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

Page 3 of 40

COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 AND SEPTEMBER 30, 2021

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

    

Three Months Ended

    

Three Months Ended

September 30, 2022

September 30, 2021

    

(Unaudited)

    

(Unaudited)

Service revenue

$

150,000

$

147,927

Operating expenses:

Network operations (including $176 and $163 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)

 

57,220

56,645

Selling, general, and administrative (including $6,035 and $6,425 of equity-based compensation expense, respectively)

 

39,114

40,117

Acquisition costs – Sprint (T-Mobile Wireline) (Note 1)

2,004

Depreciation and amortization

 

22,897

22,609

Total operating expenses

 

121,235

119,371

Losses on lease transactions

(670)

Operating income

28,095

28,556

Interest expense

 

(17,948)

(14,273)

Change in valuation – interest rate swap

(16,923)

(3,076)

Foreign exchange gain – 2024 Euro Notes

10,169

Interest income and other expenses, net

(262)

648

Income before income taxes

 

(7,038)

22,024

Income tax expense

 

(969)

(8,704)

Net (loss) income

$

(8,007)

$

13,320

Comprehensive (loss) income:

Net (loss) income

$

(8,007)

$

13,320

Foreign currency translation adjustment

 

(7,752)

(3,818)

Comprehensive (loss) income

$

(15,759)

$

9,502

Net (loss) income per common share:

Basic net (loss) income per common share

$

(0.17)

$

0.29

Diluted net (loss) income per common share

$

(0.17)

$

0.28

Dividends declared per common share

$

0.905

$

0.805

Weighted-average common shares - basic

46,736,742

46,293,524

Weighted-average common shares - diluted

 

46,736,742

46,866,929

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

Page 4 of 40

COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND SEPTEMBER 30, 2021

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

    

Nine Months

    

Nine Months

Ended

Ended

    

September 30, 2022

    

September 30, 2021

(Unaudited)

(Unaudited)

Service revenue

$

447,625

$

442,584

Operating expenses:

 

 

Network operations (including $465 and $2,375 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)

 

171,183

 

169,920

Selling, general, and administrative (including $17,709 and $18,394 of equity-based compensation expense, respectively)

 

119,129

 

122,952

Acquisition costs – Sprint (T-Mobile Wireline) (Note 1)

2,004

Depreciation and amortization

 

68,659

 

66,675

Total operating expenses

 

360,975

 

359,547

(Losses) gains on lease terminations and equipment transactions

(210)

18

Operating income

 

86,440

 

83,055

Interest expense

 

(45,594)

 

(44,345)

Change in valuation – interest rate swap

(45,703)

(3,076)

Foreign exchange gain - 2024 Euro Notes

31,561

23,759

Loss on debt extinguishment and redemption- 2024 Euro Notes

 

(11,885)

 

Loss on debt extinguishment and redemption- 2022 Notes

 

 

(14,698)

Interest income and other expenses, net

 

(462)

 

1,460

Income before income taxes

 

14,357

 

46,155

Income tax expense

(10,063)

(16,477)

Net income

$

4,294

$

29,678

 

 

  

Comprehensive (loss) income:

Net income

$

4,294

$

29,678

Foreign currency translation adjustment

 

(17,410)

 

(7,252)

Comprehensive (loss) income

$

(13,116)

$

22,426

 

 

  

Net income per common share:

Basic net income per common share

$

0.09

$

0.64

Diluted net income per common share

$

0.09

$

0.63

Dividends declared per common share

$

2.64

$

2.34

 

 

Weighted-average common shares - basic

46,759,632

46,290,452

 

 

Weighted-average common shares - diluted

47,097,580

46,825,948

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

Page 5 of 40

COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND SEPTEMBER 30, 2021

(IN THOUSANDS)

    

Nine Months

    

Nine Months

Ended

Ended

September 30, 2022

September 30, 2021

(Unaudited)

(Unaudited)

Cash flows from operating activities:

Net income

$

4,294

$

29,678

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

Depreciation and amortization

 

68,659

66,675

Amortization of debt costs, discounts and premiums

 

1,144

1,333

Equity-based compensation expense (net of amounts capitalized)

 

18,174

20,769

Loss on debt extinguishment and redemption – 2024 Euro Notes

11,885

Loss on debt extinguishment and redemption – 2022 Notes

14,698

Gains on foreign exchange – 2024 Euro Notes

(31,561)

(23,759)

(Losses) gains - equipment transactions and other, net

3,531

(347)

Deferred income taxes

4,682

11,922

Changes in operating assets and liabilities:

Accounts receivable

(3,103)

(159)

Prepaid expenses and other current assets

(9,404)

1,734

Change in valuation – interest rate swap agreement

45,703

3,076

Accounts payable, accrued liabilities and other long-term liabilities

23,144

8,676

Deposits and other assets

 

236

(23)

Net cash provided by operating activities

 

137,384

134,273

Cash flows from investing activities:

Purchases of property and equipment

 

(59,380)

(54,620)

Net cash used in investing activities

 

(59,380)

(54,620)

Cash flows from financing activities:

Dividends paid

 

(125,882)

(110,736)

Redemption and extinguishment – 2024 Euro Notes

(375,354)

Redemption and extinguishment – 2022 Notes

(459,317)

Net proceeds from issuance of senior unsecured 2027 Notes - net of debt costs of $1,290

446,010

Net proceeds from issuance of senior secured 2026 Notes - net of debt costs of $1,317

 

496,933

Principal payments on installment payment agreement

(790)

(5,845)

Principal payments of finance lease obligations

(20,958)

(16,826)

Proceeds from exercises of stock options

426

1,237

Net cash used in financing activities

 

(76,548)

(94,554)

Effect of exchange rates changes on cash

 

(6,416)

(1,445)

Net decrease in cash, cash equivalents and restricted cash

 

(4,960)

 

(16,346)

Cash, cash equivalents and restricted cash, beginning of period

 

328,624

371,301

Cash, cash equivalents and restricted cash, end of period

$

323,664

$

354,955

Supplemental disclosure of non-cash investing and financing activities:

Fair value of equipment acquired in leases

$

1,969

$

Finance lease obligations incurred

$

74,633

$

38,411

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

Page 6 of 40

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” or the “Company”) 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”). Cogent Communications, Inc. is wholly owned by Group and the vast majority of Group’s assets, contractual arrangements, and operations are executed by Cogent Communications, Inc. and its subsidiaries.

Description of business

The Company is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation space and power. The Company’s network is specifically designed and optimized to transmit packet switched data. The Company delivers its services primarily to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations in 51 countries across North America, Europe, Asia, South America, Australia and Africa. The Company is a Delaware corporation and is headquartered in Washington, DC.

The Company offers on-net Internet access services exclusively through its own facilities, which run from its network to its customers’ premises. The Company offers its on-net services to customers located in buildings that are physically connected to its network. As a result, the Company is not dependent on local telephone companies or cable TV companies to serve its customers for its on-net Internet access and private network services. The Company’s on-net service consists of high-speed Internet access and private network services offered at speeds ranging from 100 megabits per second to 400 gigabits per second.

The Company provides its on-net Internet access and private network services to its corporate and net-centric customers. The Company’s corporate customers are located in multi-tenant office buildings (“MTOBs”) 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. The Company’s net-centric customers include bandwidth-intensive users that leverage its 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 access networks comprised of other Internet Service Providers (“ISPs”), telephone companies, mobile phone operators and cable television companies that collectively provide internet access to a substantial number of broadband subscribers and mobile phone subscribers across the world. These net-centric customers generally receive the Company’s services in carrier neutral colocation facilities and in the Company’s own data centers. The Company operates data centers throughout North America and Europe that allow its customers to collocate their equipment and access the Company’s network.

In addition to providing on-net services, the Company provides Internet access and private network services to customers that are not located in buildings directly connected to its network. The Company provides 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 the Company’s network. The Company also provides certain non-core services that resulted from acquisitions. The Company continues to support but does not actively sell these non-core services.

In connection with the Company’s Sprint acquisition (discussed below), the Company will begin to provide optical wavelength services over the Company’s fiber network. The Company will sell these wavelength services to its existing customers, Sprint customers and to new customers who require dedicated optical transport connectivity without the capital and ongoing expenses associated with owning and operating network infrastructure.

Page 7 of 40

Acquisition of Sprint Communications

On September 6, 2022, Cogent Infrastructure, Inc., a Delaware corporation (the “Buyer”) and a wholly owned subsidiary of Holdings, entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Sprint Communications LLC, a Kansas limited liability company (“Sprint”) and an indirect wholly owned subsidiary of T-Mobile US, Inc., a Delaware corporation (“T-Mobile”), and Sprint LLC, a Delaware limited liability company and a direct wholly owned subsidiary of T-Mobile (the “Seller”), pursuant to which Holdings will acquire the U.S. long-haul fiber network (including the non-U.S. extensions thereof) of Sprint Communications and its subsidiaries (the “Wireline Business”). The Purchase Agreement provides that, upon the terms and conditions set forth therein, Holdings will purchase from the Seller all of the issued and outstanding membership interests (the “Purchased Interests”) of a Delaware limited liability company that holds Sprints’ assets and liabilities relating to the Wireline Business (such transactions contemplated by the Purchase Agreement, collectively, the “Transaction”).

The parties have agreed to a $1 purchase price in consideration for the Purchased Interests, subject to customary adjustments set forth in the Purchase Agreement. In addition, at the consummation of the Transaction (the “Closing”), a T-Mobile affiliate will enter into an agreement for IP transit services, pursuant to which T-Mobile will pay Holdings an aggregate of $700 million, consisting of (i) $350 million in equal monthly installments during the first year after the Closing and (ii) $350 million in equal monthly installments over the subsequent 42 months.

The Purchase Agreement includes customary representations, warranties, indemnities and covenants, including regarding the conduct of the Wireline Business prior to the Closing. In addition, the Closing is subject to customary closing conditions, including as to the receipt of certain required regulatory approvals and consents. Subject to the satisfaction or waiver of certain conditions and the other terms and conditions of the Purchase Agreement, the Transaction is expected to close in the second half of 2023.

The Purchase Agreement contains certain termination rights for the Buyer and Seller, including that, subject to certain limitations, either the Buyer or the Seller may terminate the Purchase Agreement if the Transaction is not consummated by September 6, 2023, subject to two automatic six-month extensions if certain regulatory approvals have not been obtained. The Purchase Agreement also provides that each party may specifically enforce the other party’s obligations under the Purchase Agreement.

Holdings has agreed to guarantee the obligations of the Buyer under the Purchase Agreement pursuant to the terms of a Guaranty, dated as of September 6, 2022, by and between Holdings and the Seller (the “Parent Guaranty”). The Parent Guaranty contains customary representations, warranties and covenants of Holdings and the Seller.

Acquisition Related Costs

In connection with the Transaction and negotiation of the Purchase Agreement the Company incurred $2.0 million of professional fees in the three months ended September 30, 2022.

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 (“GAAP”) 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, 2021.

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

Page 8 of 40

Use of estimates

The preparation of consolidated financial statements in conformity with GAAP 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, 2022 and December 31, 2021, the carrying amount of cash and cash equivalents, restricted cash, 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 and restricted cash 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, 2022 the fair value of the Company’s $450.0 million senior unsecured notes due 2027 was $426.4 million, the fair value of the Company’s $500.0 million senior secured notes due 2026 was $438.8 million, and the estimated liability fair value of the Company’s interest rate swap agreement was $54.7 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 network operations expense. Excise taxes and surcharges billed to customers and recorded on a gross basis (as service revenue and network operations expense)were $4.1 million and $4.8 million for the three months ended September 30, 2022 and 2021, respectively, and $11.3 million and $14.2 million for the nine months ended September 30, 2022 and 2021, 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.

The following details the determination of diluted weighted average shares:

    

Three Months

    

Three Months

    

Nine Months

    

Nine Months

Ended

Ended

Ended

Ended

September 30, 2022

September 30, 2021

September 30, 2022

September 30, 2021

Weighted average common shares - basic

46,736,742

 

46,293,524

46,759,632

46,290,452

Dilutive effect of stock options

 

36,406

17,668

34,191

Dilutive effect of restricted stock

 

536,999

320,280

501,305

Weighted average common shares - diluted

46,736,742

 

46,866,929

47,097,580

46,825,948

Page 9 of 40

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

Three Months

Three Months

Nine Months

Nine Months

Ended

Ended

Ended

Ended

    

September 30, 2022

    

September 30, 2021

    

September 30, 2022

    

September 30, 2021

Unvested shares of restricted common stock

1,271,441

1,371,217

1,271,441

1,371,217

Anti-dilutive options for common stock

113,376

43,648

99,537

42,531

Anti-dilutive shares of restricted common stock

637,028

827

460,715

133,468

Stockholders’ Deficit

The following details the changes in stockholders’ deficit for the three and nine months ended September 30, 2022 and September 30, 2021 (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, 2022

48,003,724

$

48

$

561,161

$

(20,661)

$

(980,729)

$

(440,181)

Forfeitures of shares granted to employees

 

(14,492)

 

 

 

 

 

Equity-based compensation

 

 

 

6,812

 

 

 

6,812

Foreign currency translation

 

 

 

 

(7,752)

 

 

(7,752)

Issuances of common stock

 

10,748

 

 

 

 

 

Exercises of options

 

2,155

 

 

92

 

 

 

92

Dividends paid

 

 

 

 

 

(42,729)

 

(42,729)

Net (loss)

 

 

 

 

 

(8,007)

 

(8,007)

Balance at September 30, 2022

 

48,002,135

$

48

$

568,065

$

(28,413)

$

(1,031,465)

$

(491,765)

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity (Deficit)

Balance at June 30, 2021

 

47,655,131

$

48

$

533,049

$

(4,740)

$

(864,498)

$

(336,141)

Forfeitures of shares granted to employees

 

(10,933)

 

 

 

 

 

Equity-based compensation

 

 

 

7,164

 

 

 

7,164

Foreign currency translation

 

 

 

 

(3,818)

 

 

(3,818)

Issuances of common stock

 

11,820

 

 

 

 

 

Exercises of options

 

7,258

 

 

362

 

 

 

362

Dividends paid

 

 

 

 

 

(37,654)

 

(37,654)

Net income

 

 

 

 

 

13,320

 

13,320

Balance at September 30, 2021

 

47,663,276

$

48

$

540,575

$

(8,558)

$

(888,832)

$

(356,767)

Page 10 of 40

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity (Deficit)

Balance at December 31, 2021

    

47,674,189

    

$

48

    

$

547,734

    

$

(11,003)

    

$

(909,877)

    

$

(373,098)

Forfeitures of shares granted to employees

 

(66,857)

 

 

 

 

 

Equity-based compensation

 

 

 

19,905

 

 

 

19,905

Foreign currency translation

 

 

 

 

(17,410)

 

 

(17,410)

Issuances of common stock

 

384,028

 

 

 

 

 

Exercises of options

 

10,775

 

 

426

 

 

 

426

Dividends paid

 

 

 

 

 

(125,882)

 

(125,882)

Net income

 

 

 

 

 

4,294

 

4,294

Balance at September 30, 2022

 

48,002,135

$

48

$

568,065

$

(28,413)

$

(1,031,465)

$

(491,765)

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity (Deficit)

Balance at December 31, 2020

 

47,214,077

$

47

$

515,867

$

(1,306)

$

(807,774)

$

(293,166)

Forfeitures of shares granted to employees

 

(36,235)

 

 

 

 

 

Equity-based compensation

 

 

 

23,471

 

 

 

23,471

Foreign currency translation

 

 

 

 

(7,252)

 

 

(7,252)

Issuances of common stock

 

460,580

 

1

 

 

 

 

1

Exercises of options

 

24,854

 

 

1,237

 

 

 

1,237

Dividends paid

 

 

 

 

 

(110,736)

 

(110,736)

Net income

 

 

 

 

 

29,678

 

29,678

Balance at September 30, 2021

 

47,663,276

$

48

$

540,575

$

(8,558)

$

(888,832)

$

(356,767)

Revenue recognition

The Company recognizes revenue under Accounting Standards Update (“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.

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 one 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

Page 11 of 40

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, the Company satisfies a performance obligation

Fees billed in connection with customer installations are deferred (as deferred revenue) and recognized as noted above. If 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, 2022 was $1.8 million and during the three months ended September 30, 2021 was $1.9 million. Service revenue recognized from amounts in deferred revenue (contract liabilities) at the beginning of the period during the nine months ended September 30, 2022 was $4.4 million and during the nine months ended September 30, 2021 was $4.1 million. Amortization expense for contract costs was $4.9 million for the three months ended September 30, 2022 and $4.6 million for the three months ended September 30, 2021. Amortization expense for contract costs was $14.5 million for the nine months ended September 30, 2022 and $13.8 million for the nine months ended September 30, 2021.

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 replaced most existing lease accounting guidance. The operating lease liability under ASU 2016-02 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 non-lease components on its finance and operating leases.

    

Three Months

 

Three Months

    

Nine Months

 

Nine Months

Ended

 

Ended

Ended

 

Ended

    

September 30, 2022

    

September 30, 2021

    

September 30, 2022

    

September 30, 2021

Finance lease cost

 

  

 

Amortization of right-of-use assets

$

7,188

$

6,847

$

21,186

$

19,571

Interest expense on finance lease liabilities

 

5,382

4,977

15,579

14,888

Operating lease cost

 

4,547

4,572

13,948

13,660

Total lease costs

$

17,117

$

16,396

$

50,713

$

48,119

Page 12 of 40

    

Nine Months

    

Nine Months

Ended

Ended

September 30, 2022

September 30, 2021

Other lease information

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from finance leases

$

(13,478)

$

(12,694)

Operating cash flows from operating leases

(14,165)

(14,077)

Financing cash flows from finance leases

(20,958)

(16,826)

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

74,633

38,411

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

10,498

15,732

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

13.1

12.6

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

17.8

19.2

Weighted average discount rate — finance leases

8.6

%

9.3

%

Weighted average discount rate — operating leases

5.4

%

5.5

%

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. The implicit rates within the Company’s operating leases are generally not determinable and 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. The determination of the Company’s incremental borrowing rate requires judgment. Finance lease assets are included in property and equipment in the Company’s consolidated balance sheets. As of September 30, 2022, the Company had committed to additional dark fiber IRU lease agreements totaling $120.6 million in future payments to be paid over periods of up to 22 years. These obligations begin when the related fiber is accepted, which is generally expected to occur in the next 24 months.

Operating leases

The Company leases office space and 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 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. The determination of the Company’s incremental borrowing rate requires judgment. 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 is 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, and netted against, the right-of-use leased asset. Lease expense for lease payments is recognized on a straight-line basis over the term of the lease.

Page 13 of 40

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

    

Operating

    

Finance

For the Twelve Months Ending September 30,

Leases

Leases

2023

 

$

17,167

$

45,540

2024

16,738

39,425

2025

14,918

36,159

2026

12,821

31,383

2027

11,179

31,608

Thereafter

96,176

305,053

Total minimum lease obligations

168,999

489,168

Less—amounts representing interest

(57,777)

(201,283)

Present value of minimum lease obligations

111,222

287,885

Current maturities

(11,784)

(24,135)

Lease obligations, net of current maturities

$

99,438

$

263,750

Allowance for credit losses

The Company maintains an allowance for credit losses to cover its current expected credit losses 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.