UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No.
(Exact Name of Registrant as Specified in Its Charter)
(State of Incorporation) | (I.R.S. Employer | |
Identification Number) |
(Address of Principal Executive Offices and Zip Code)
(
(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 |
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.
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).
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.
☒ | 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
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
INDEX
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3 | |||
3 | |||
4 | |||
5 | |||
6 | |||
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) | 7 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 | ||
36 | |||
36 | |||
37 | |||
37 | |||
38 | |||
39 | |||
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 | $ | | $ | | ||
Restricted cash | | | ||||
Accounts receivable, net of allowance for credit losses of $ |
| |
| | ||
Prepaid expenses and other current assets |
| |
| | ||
Total current assets |
| |
| | ||
Property and equipment, net | | | ||||
Right-of-use leased assets |
| |
| | ||
Deposits and other assets |
| |
| | ||
Total assets | $ | | $ | | ||
Liabilities and stockholders’ deficit | ||||||
Current liabilities: | ||||||
Accounts payable | $ | | $ | | ||
Accrued and other current liabilities |
| |
| | ||
Installment payment agreement, current portion, net of discount of $ | — | | ||||
Current maturities, operating lease liabilities | | | ||||
Current maturities, finance lease obligations | | | ||||
Total current liabilities |
| |
| | ||
Senior unsecured 2027 notes, net of unamortized debt costs of $ | | |||||
Senior secured 2026 notes, net of unamortized debt costs of $ |
| |
| | ||
Senior unsecured 2024 Euro notes, net of unamortized debt costs of $ | — | | ||||
Operating lease liabilities, net of current maturities | | | ||||
Finance lease obligations, net of current maturities |
| |
| | ||
Other long-term liabilities |
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| | ||
Total liabilities |
| |
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Commitments and contingencies: | ||||||
Stockholders’ deficit: | ||||||
Common stock, $ |
| |
| | ||
Additional paid-in capital |
| |
| | ||
Accumulated other comprehensive loss — foreign currency translation |
| ( |
| ( | ||
Accumulated deficit |
| ( |
| ( | ||
Total stockholders’ deficit |
| ( |
| ( | ||
Total liabilities and stockholders’ deficit | $ | | $ | |
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 | $ | | $ | | ||
Operating expenses: | ||||||
Network operations (including $ |
| |
| | ||
Selling, general, and administrative (including $ |
| |
| | ||
Acquisition costs – Sprint (T-Mobile Wireline) (Note 1) | | — | ||||
Depreciation and amortization |
| |
| | ||
Total operating expenses |
| |
| | ||
Losses on lease transactions | ( |
| — | |||
Operating income | | | ||||
Interest expense |
| ( |
| ( | ||
Change in valuation – interest rate swap | ( | ( | ||||
Foreign exchange gain – 2024 Euro Notes | — | | ||||
Interest income and other expenses, net | ( | | ||||
Income before income taxes |
| ( |
| | ||
Income tax expense |
| ( |
| ( | ||
Net (loss) income | $ | ( | $ | | ||
Comprehensive (loss) income: | ||||||
Net (loss) income | $ | ( | $ | | ||
Foreign currency translation adjustment |
| ( |
| ( | ||
Comprehensive (loss) income | $ | ( | $ | | ||
Net (loss) income per common share: | ||||||
Basic net (loss) income per common share | $ | ( | $ | | ||
Diluted net (loss) income per common share | $ | ( | $ | | ||
Dividends declared per common share | $ | | $ | | ||
Weighted-average common shares - basic | | | ||||
Weighted-average common shares - diluted |
| |
| |
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 | $ | | $ | | ||
Operating expenses: |
|
|
|
| ||
Network operations (including $ |
| |
| | ||
Selling, general, and administrative (including $ |
| |
| | ||
Acquisition costs – Sprint (T-Mobile Wireline) (Note 1) | | — | ||||
Depreciation and amortization |
| |
| | ||
Total operating expenses |
| |
| | ||
(Losses) gains on lease terminations and equipment transactions | ( | | ||||
Operating income |
| |
| | ||
Interest expense |
| ( |
| ( | ||
Change in valuation – interest rate swap | ( | ( | ||||
Foreign exchange gain - 2024 Euro Notes | | | ||||
Loss on debt extinguishment and redemption- 2024 Euro Notes |
| ( |
| — | ||
Loss on debt extinguishment and redemption- 2022 Notes |
| — |
| ( | ||
Interest income and other expenses, net |
| ( |
| | ||
Income before income taxes |
| |
| | ||
Income tax expense | ( | ( | ||||
Net income | $ | | $ | | ||
|
|
| ||||
Comprehensive (loss) income: | ||||||
Net income | $ | | $ | | ||
Foreign currency translation adjustment |
| ( |
| ( | ||
Comprehensive (loss) income | $ | ( | $ | | ||
|
|
| ||||
Net income per common share: | ||||||
Basic net income per common share | $ | | $ | | ||
Diluted net income per common share | $ | | $ | | ||
Dividends declared per common share | $ | | $ | | ||
|
| |||||
Weighted-average common shares - basic | | | ||||
|
| |||||
Weighted-average common shares - diluted | | |
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 | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depreciation and amortization |
| |
| | ||
Amortization of debt costs, discounts and premiums |
| |
| | ||
Equity-based compensation expense (net of amounts capitalized) |
| |
| | ||
Loss on debt extinguishment and redemption – 2024 Euro Notes | | — | ||||
Loss on debt extinguishment and redemption – 2022 Notes | — | | ||||
Gains on foreign exchange – 2024 Euro Notes | ( | ( | ||||
(Losses) gains - equipment transactions and other, net | | ( | ||||
Deferred income taxes | | | ||||
Changes in operating assets and liabilities: | ||||||
Accounts receivable | ( | ( | ||||
Prepaid expenses and other current assets | ( | | ||||
Change in valuation – interest rate swap agreement | | | ||||
Accounts payable, accrued liabilities and other long-term liabilities | | | ||||
Deposits and other assets |
| |
| ( | ||
Net cash provided by operating activities |
| |
| | ||
Cash flows from investing activities: | ||||||
Purchases of property and equipment |
| ( |
| ( | ||
Net cash used in investing activities |
| ( |
| ( | ||
Cash flows from financing activities: | ||||||
Dividends paid |
| ( | ( | |||
Redemption and extinguishment – 2024 Euro Notes | ( | |||||
Redemption and extinguishment – 2022 Notes | — | ( | ||||
Net proceeds from issuance of senior unsecured 2027 Notes - net of debt costs of $ | | |||||
Net proceeds from issuance of senior secured 2026 Notes - net of debt costs of $ |
| — | | |||
Principal payments on installment payment agreement | ( | ( | ||||
Principal payments of finance lease obligations | ( | ( | ||||
Proceeds from exercises of stock options | | | ||||
Net cash used in financing activities |
| ( |
| ( | ||
Effect of exchange rates changes on cash |
| ( |
| ( | ||
Net decrease in cash, cash equivalents and restricted cash |
| ( |
| ( | ||
Cash, cash equivalents and restricted cash, beginning of period |
| |
| | ||
Cash, cash equivalents and restricted cash, end of period | $ | | $ | | ||
Supplemental disclosure of non-cash investing and financing activities: | ||||||
Fair value of equipment acquired in leases | $ | | $ | — | ||
Finance lease obligations incurred | $ | | $ | |
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
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
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 $
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
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 $
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 $
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 $
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 | |
| |
| |
| | |
Dilutive effect of stock options | — |
| |
| |
| | |
Dilutive effect of restricted stock | — |
| |
| |
| | |
Weighted average common shares - diluted | |
| |
| |
| |
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 | |
| | | | |||
Anti-dilutive options for common stock | | | | | ||||
Anti-dilutive shares of restricted common stock | |
| |
| | |
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 | | $ | | $ | | $ | ( | $ | ( | $ | ( | ||||||
Forfeitures of shares granted to employees |
| ( |
| — |
| — |
| — |
| — |
| — | |||||
Equity-based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||
Foreign currency translation |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Issuances of common stock |
| |
| — |
| — |
| — |
| — |
| — | |||||
Exercises of options |
| |
| — |
| |
| — |
| — |
| | |||||
Dividends paid |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Net (loss) |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Balance at September 30, 2022 |
| | $ | | $ | | $ | ( | $ | ( | $ | ( |
Accumulated | |||||||||||||||||
Additional | Other | Total | |||||||||||||||
Common Stock | Paid-in | Comprehensive | Accumulated | Stockholders’ | |||||||||||||
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Deficit |
| Equity (Deficit) | ||||||
Balance at June 30, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | ( | |||||
Forfeitures of shares granted to employees |
| ( |
| — |
| — |
| — |
| — |
| — | |||||
Equity-based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||
Foreign currency translation |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Issuances of common stock |
| |
| — |
| — |
| — |
| — |
| — | |||||
Exercises of options |
| |
| — |
| |
| — |
| — |
| | |||||
Dividends paid |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Net income |
| — |
| — |
| — |
| — |
| |
| | |||||
Balance at September 30, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | ( |
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 |
| |
| $ | |
| $ | |
| $ | ( |
| $ | ( |
| $ | ( |
Forfeitures of shares granted to employees |
| ( |
| — |
| — |
| — |
| — |
| — | |||||
Equity-based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||
Foreign currency translation |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Issuances of common stock |
| |
| — |
| — |
| — |
| — |
| — | |||||
Exercises of options |
| |
| — |
| |
| — |
| — |
| | |||||
Dividends paid |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Net income |
| — |
| — |
| — |
| — |
| |
| | |||||
Balance at September 30, 2022 |
| | $ | | $ | | $ | ( | $ | ( | $ | ( |
Accumulated | |||||||||||||||||
Additional | Other | Total | |||||||||||||||
Common Stock | Paid-in | Comprehensive | Accumulated | Stockholders’ | |||||||||||||
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Deficit |
| Equity (Deficit) | ||||||
Balance at December 31, 2020 |
| | $ | | $ | | $ | ( | $ | ( | $ | ( | |||||
Forfeitures of shares granted to employees |
| ( |
| — |
| — |
| — |
| — |
| — | |||||
Equity-based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||
Foreign currency translation |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Issuances of common stock |
| |
| |
| — |
| — |
| — |
| | |||||
Exercises of options |
| |
| — |
| |
| — |
| — |
| | |||||
Dividends paid |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Net income |
| — |
| — |
| — |
| — |
| |
| | |||||
Balance at September 30, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | ( |
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
To achieve this core principle, the Company follows the following five steps:
1) | Identification of the contract, or contracts with a customer |
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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 $
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 | $ | | $ | | $ | | $ | | ||||
Interest expense on finance lease liabilities |
| | | | | |||||||
Operating lease cost |
| | | | | |||||||
Total lease costs | $ | | $ | | $ | | $ | |
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| 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 | $ | ( | $ | ( | |||
Operating cash flows from operating leases | ( | ( | |||||
Financing cash flows from finance leases | ( | ( | |||||
Right-of-use assets obtained in exchange for new finance lease liabilities | | | |||||
Right-of-use assets obtained in exchange for new operating lease liabilities | | | |||||
Weighted-average remaining lease term — finance leases (in years) | |||||||
Weighted-average remaining lease term — operating leases (in years) | |||||||
Weighted average discount rate — finance leases | | % | | % | |||
Weighted average discount rate — operating leases | | % | | % |
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
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.
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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 |
| $ | | $ | | |
2024 | | | ||||
2025 | | | ||||
2026 | | | ||||
2027 | | | ||||
Thereafter | | | ||||
Total minimum lease obligations | | | ||||
Less—amounts representing interest | ( | ( | ||||
Present value of minimum lease obligations | | | ||||
Current maturities | ( | ( | ||||
Lease obligations, net of current maturities | $ | | $ | |
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.