INTERNAP CORPORATION The following discussion should be read in conjunction with the accompanying consolidated financial statements and notes provided under Part II, Item 8 of this Annual Report on Form 10-K.
Recent Developments
Reorganization, Chapter 11 Proceedings
As discussed above under Item 1 "Business - Recent Developments," the Company filed a petition for reorganization under Chapter 11 of the Bankruptcy Code onMarch 16, 2020 to restructure and de-leverage our balance sheet. As a result of the commencement of the Chapter 11 Cases onMarch 16, 2020 , we are operating as a debtor-in-possession pursuant to the authority granted under Chapter 11 of the Bankruptcy Code. Pursuant to the Chapter 11 Cases, we intend to de-leverage our balance sheet and reduce overall indebtedness upon completion of that process. Additionally, as a debtor-in-possession, certain of our activities are subject to review and approval by theBankruptcy Court , including, among other things, the incurrence of indebtedness, material asset dispositions, and other transactions outside the ordinary course of business. There can be no guarantee that the Chapter 11 Cases will be completed successfully or in the time frame contemplated by the RSA. In connection with the Chapter 11 Cases, we entered into the RSA. Pursuant to the RSA, the Consenting Lenders and the Company made certain customary commitments to each other, including the Consenting Lenders committing to support the Restructuring to be effectuated through the Plan to be proposed by the Company.
Going Concern
The accompanying consolidated financial statements have been prepared in accordance with GAAP assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business.
The Company has experienced negative financial trends, such as operating losses, working capital deficiencies, negative cash flows and other adverse key financial ratios. The Company reported net losses of$138.3 million and$61.2 million for the years endedDecember 31, 2019 and 2018, respectively. The working capital deficit as ofDecember 31, 2019 was$442.0 million compared to$6.5 million as ofDecember 31, 2018 . These trends, along with the resulting liquidity constraints and debt covenant compliance considerations, led to INAP's Chapter 11 Cases, which raise substantial doubt about the Company's ability to continue as a going concern. As a result of this uncertainty and the substantial doubt about our ability to continue as a going concern as ofDecember 31, 2019 , the report of our independent registered public accounting firm in this Annual Report on Form 10-K for the years endedDecember 31, 2019 and 2018 includes a going concern explanatory paragraph.
The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
2019 Highlights
Our revenue was$291.5 million for the year endedDecember 31, 2019 , compared to$316.2 million for the same period in 2018. Our net loss attributable to shareholders was$138.3 million for the year endedDecember 31, 2019 , compared to$61.2 million for the same period in 2018. Our adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA"), a non-GAAP 37 -------------------------------------------------------------------------------- performance measure defined below in "Non-GAAP Financial Measures," was$92.4 million for the year endedDecember 31, 2019 , compared to$110.0 million for the same period in 2018.
Factors Affecting Our Performance
We believe increased competition, planned data center exits and concerns regarding the financial position and future of the Company were the main factors contributing to the increase in net loss and declines in revenue and Adjusted EBITDA. Non-GAAP Financial Measures We report our consolidated financial statements in accordance with GAAP. We present the non-GAAP performance measure of Adjusted EBITDA to assist us in the evaluation of underlying performance trends in our business, which we believe will enhance investors' ability to analyze trends in our business, and the evaluation of our performance relative to other companies. We define Adjusted EBITDA as GAAP net loss attributable to INAP shareholders plus depreciation and amortization, interest expense, income tax (benefit) expense, other expense (income), loss (gain) on disposal of property and equipment, exit activities, restructuring and impairments, stock-based compensation, non-income tax contingency, strategic alternatives and related costs, organizational realignment costs, claim settlement and acquisition costs. We calculate Adjusted EBITDA margin as Adjusted EBITDA as a percentage of revenues. As a non-GAAP financial measure, Adjusted EBITDA should not be considered in isolation of, or as a substitute for, net loss, income from operations or other GAAP measures as an indicator of operating performance. Our calculation of Adjusted EBITDA may differ from others in our industry and is not necessarily comparable with similar titles used by other companies.
The following table reconciles net loss attributable to shareholders as presented in our consolidated statements of operations and comprehensive loss to Adjusted EBITDA (non-GAAP) (dollars in thousands):
Year Ended December 31,
2019 2018 2017
Amount Percent Amount Percent Amount Percent
Net revenues $ 291,505 100.0 % $ 316,158 100.0 % $ 280,718 100.0 %
Net loss attributable to
shareholders $ (138,250 ) (47.4 )% $ (61,200 ) (19.4 )% $ (44,236 ) (15.8 )%
Add:
Depreciation and amortization 85,713 29.4 % 88,416 28.0 % 73,429 26.2 %
Interest expense 75,142 25.8 % 67,823 21.5 % 50,933 18.1 %
Income tax (benefit) expense (1,648 ) (0.6 )% 657 0.2 % 253 0.1 %
Other expense (income) 444 0.2 % (252 ) (0.1 )% (682 ) (0.2 )%
Loss (gain) on disposal of
property and equipment, net 527 0.2 % (109 ) - % (353 ) (0.1 )%
Gain on sale of business (4,196 ) (1.4 )% - -% - - %
Exit activities, restructuring and
impairments 8,986 3.1 % 5,406 1.7 % 6,249 2.2 %
Goodwill and intangibles
impairment 59,126 20.3 % - - % - - %
Stock-based compensation 4,239 1.5 % 4,678 1.5 % 3,040 1.1 %
Non-income tax contingency 150 0.1 % 842 0.3 % 1,500 0.5 %
Strategic alternatives and related
costs(1) 81 - % 125 - % 70 - %
Organizational realignment
costs(2) 1,277 0.4 % 791 0.3 % 957 0.3 %
Claim settlement - - % - - % 713 0.3 %
Acquisition costs(3) 817 0.3 % 2,869 0.9 % 373 0.1 %
Adjusted EBITDA $ 92,408 31.7 % $ 110,046 34.8 % $ 92,246 32.9 %
(1) Primarily legal and other professional fees incurred in connection with the
evaluation by our board of directors of strategic alternatives. We include
these costs in "Sales, general and administrative" ("SG&A") in the
accompanying consolidated statements of operations and comprehensive loss
for the years ended December 31, 2019 , 2018 and 2017.
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(2) Primarily professional fees, employee retention bonus, severance and
executive search costs incurred related to our organizational realignment.
We include these costs in SG&A in the accompanying consolidated statements
of operations and comprehensive loss for the years ended
2018 and 2017.
(3) Primarily legal and other professional fees incurred in connection with
potential acquisitions and the potential sale of non-core assets. For the
year ended December 31, 2018 , acquisition costs are higher due to the
acquisition of SingleHop .
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which we have prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those summarized below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances; the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates. In addition to our significant accounting policies summarized in Note 2 to our accompanying consolidated financial statements, we believe the following policies are the most sensitive to judgments and estimates in the preparation of our consolidated financial statements.
Revenue Recognition
We generate revenues primarily from the sale of data center services, including
colocation, hosting and cloud, as well as network services. Our revenues
typically consist of monthly recurring revenues from contracts with terms of one
year or more and we typically recognize the monthly minimum as revenue each
month. We record installation fees as deferred revenue and recognize the revenue
ratably over the estimated customer life. The Company adopted Accounting
Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers
(Topic 606) ("ASC 606") on January 1, 2018 .
Revenue is recognized to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration the Company expects to be
entitled to exchange for those goods or services. The Company enters into
contracts that can include various combinations of products and services, which
are generally capable of being distinct and accounted for as separate
performance obligations.
The Company's contracts with customers often include performance obligations to
transfer multiple products and services to a customer. Common performance
obligations of the Company include delivery of services. Determining whether
products and services are considered distinct performance obligations that
should be accounted for separately versus together requires significant judgment
by the Company.
A performance obligation is a promise in a contract to transfer a distinct good
or service to the customer and is the unit of account in ASC 606. A contract's
transaction price is allocated to each distinct performance obligation and
recognized as revenue when, or as, the performance obligation is satisfied.
Total transaction price is estimated for impact of variable consideration, such
as INAP's service level arrangements, additional usage and late fees, discounts
and promotions, and customer care credits. The majority of contracts have
multiple performance obligations, as the promise to transfer individual goods or
services is separately identifiable from other promises in the contracts and,
therefore, is distinct. For contracts with multiple performance obligations, the
Company allocates the contract's transaction price to each performance
obligation based on its relative standalone selling price ("SSP").
The SSP is determined based on observable price. In instances where the SSP is
not directly observable, such as when the Company does not sell the product or
service separately, INAP determines the SSP using information that may include
market conditions and other observable inputs. The Company typically has more
than one SSP for individual products and services due to the stratification of
those products and services by customers and circumstances. In these instances,
the Company may use information such as the size of the customer and geographic
region in determining the SSP.
The most significant impact of the adoption of the new standard was the
requirement for incremental costs to obtain a customer, such as commissions,
which previously were expensed as incurred, to be deferred and amortized over
the period of contract performance or a longer period if renewals are expected
and the renewal commission does not equal the initial commission.
In addition, installation revenues are recognized over the initial contract life
rather than over the estimated customer life, as installation revenues are not
significant to the total contract and therefore do not represent a material
right.
39
--------------------------------------------------------------------------------Most performance obligations, with the exception of occasional sales of equipment or hardware, are satisfied over time as the customer consumes the benefits as we perform. For equipment and hardware sales, the performance obligation is satisfied when control transfers to the customer.
The Company routinely reviews the collectability of its accounts receivable and payment status of customers. If the Company determines that collection of revenue is uncertain, it does not recognize revenue until collection is reasonably assured. Additionally, the Company maintains an allowance for doubtful accounts resulting from the inability of the Company's customers to make required payments on accounts receivable. The allowance for doubtful accounts is based on historical write-offs as a percentage of revenues. The Company assesses the payment status of customers by reference to the terms under which it provides services or goods, with any payments not made on or before their due date considered past-due. Once all collection efforts have been exhausted, the uncollectible balance is written off against the allowance for doubtful accounts. The Company routinely performs credit checks for new and existing customers and requires deposits or prepayments for customers that are perceived as being a credit risk. In addition, the Company records a reserve amount for potential credits to be issued under service level agreements and other sales adjustments.
Our annual assessment of goodwill for impairment, performed each year onAugust 1 absent any impairment indicators or other changes that may cause more frequent analysis, includes comparing the fair value of each reporting unit to the carrying value, referred to as "step one." If the fair value of a reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is necessary. If the carrying value of a reporting unit exceeds its fair value, we record the amount of impairment to goodwill, if any. In order to determine the estimated fair value of our reporting units, the Company considers the discounted cash flow method. INAP has consistently considered this method in its goodwill impairment assessments. The discounted cash flow method is specific to the anticipated future results of the reporting unit. The Company determines the assumptions supporting the discounted cash flow method, including the discount rate, using estimates as of the date of the impairment review. To determine the reasonableness of these assumptions, the Company considered the past performance and empirical trending of results, looked to market and industry expectations used in the discounted cash flow method, such as forecasted revenues and discount rate. The Company used reasonable judgment in developing its estimates and assumptions. The assumptions, inputs and judgments used in performing the valuation analysis are inherently subjective and reflect estimates based on known facts and circumstances at the time we perform the valuation. These estimates and assumptions primarily include, but are not limited to, discount rates; terminal growth rates; projected revenues and costs; earnings before interest, taxes, depreciation and amortization for expected cash flows; market comparables and capital expenditure forecasts. Due to the inherent uncertainty involved in making these estimates, actual results could differ from our estimates and could result in additional non-cash impairment charges in the future. Other intangible assets have finite lives and we record these assets at cost less accumulated amortization. We record amortization of acquired technologies using the greater of (a) the ratio of current revenues to total and anticipated future revenues for the applicable technology or (b) the straight-line method over the remaining estimated useful life. The intangible assets are being amortized over periods which reflect the pattern in which economic benefits of the assets are expected to be realized. We amortize the cost of the acquired technologies and noncompete agreements over their useful lives of 4 to 8 years and 8 to 15 years for trade names. Customer relationships are being amortized on an accelerated basis over their estimated useful life of 10 to 30 years. We assess other intangible assets and long-lived assets on a quarterly basis whenever any events have occurred or circumstances have changed that would indicate impairment could exist. Our assessment is based on estimated future cash flows directly associated with the asset or asset group. If we determine that the carrying value is not recoverable, we may record an impairment charge, reduce the estimated remaining useful life or both. When the Company performed its impairment test as ofAugust 1, 2019 , 2018 and 2017, the fair value for all reporting units was higher than their respective carrying values, and no impairment was recorded. Due to the triggering events such as the significant decline in stock price in 2018 and the further decline in the stock price in 2019, interim goodwill and intangibles impairment tests were performed. An impairment charge of$45.0 million for goodwill and$14.1 million for intangibles was recognized when the Company performed an impairment test as ofDecember 1, 2019 for its seven reporting units.Goodwill impairment charges were recorded for the Cloud reporting unit within INAP US of$22.9 million and for the Cloud andUbersmith reporting units within INAP INTL of$21.2 million and$0.9 million , respectively, due to the carrying amounts for the three reporting units exceeding their fair value. The goodwill impairment is primarily due to declines in projected revenues and operating results due to increased customer churn and reduced sales projections. The goodwill for INAP INTL was fully impaired as ofDecember 31, 2019 . For INAP US, approximately 25% of goodwill was impaired as ofDecember 31, 2019 . For the other reporting units in INAP US, Network and Colocation, the fair value exceeded the carrying values resulting in no impairment. In performing the impairment test as ofDecember 1, 2019 , the Company utilized discount rates ranging from 12.0% to 16.0% which increased compared to the annual testing as ofAugust 1, 2019 where the discount rates ranged from 8.0% to 13.0%, to reflect changes in market conditions. The Company also reduced long-term growth rate assumptions from 2.0% to 1.0% for some reporting units. 40 -------------------------------------------------------------------------------- The result of our intangibles assessment was that the projected undiscounted net cash flows for the Cloud andUbersmith reporting units in INAP INTL were below the carrying value of the related assets. Therefore, we recorded an impairment of$12.9 million for Cloud customer relationships, and$1.2 million forUbersmith of which$1.0 million related to acquired and developed technology and$0.2 million related to customer relationships.
Exit Activities and Restructuring
When circumstances warrant, we may elect to exit certain business activities or change the manner in which we conduct ongoing operations. If we make such a change, we will estimate the costs to exit a business, location, service contract or restructure ongoing operations. The components of the estimates may include estimates and assumptions regarding the timing and costs of future events and activities that represent our best expectations based on known facts and circumstances at the time of estimation. If circumstances warrant, we will adjust our previous estimates to reflect what we then believe to be a more accurate representation of expected future costs. Because our estimates and assumptions regarding exit activities and restructuring charges include probabilities of future events, such as our ability to find a sublease tenant within a reasonable period of time or the rate at which a sublease tenant will pay for the available space, such estimates are inherently vulnerable to changes due to unforeseen circumstances that could materially and adversely affect our results of operations. We monitor market conditions at each period end reporting date and will continue to assess our key assumptions and estimates used in the calculation of our exit activities and restructuring accrual.
Income Taxes
The Company accounts for deferred income taxes using the asset and liability approach. Under this approach, deferred income taxes are recognized based on the tax effects of temporary differences between the financial statement and tax bases of assets and liabilities, as measured by current enacted tax rates. Valuation allowances are recorded to reduce the deferred tax assets to an amount that will more likely than not be realized. The Company regularly reviews its deferred tax assets by taxing jurisdiction for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company's management has determined that the Company has a going concern uncertainty under ASC 205-40 which constitutes significant negative evidence as to the realizability of its deferred tax assets. OnMarch 16, 2020 , the Company filed a voluntary petition for relief under the Bankruptcy Code to affect a plan of reorganization of its existing debt arrangements with certain Lenders. The Company is currently evaluating the impact the Chapter 11 bankruptcy filing will have on the recoverability of its deferred tax assets. Emergence from the bankruptcy filing under the Plan may result in an ownership change under section 382 of the Tax Code. If an ownership change under section 382 does occur, then the amount of deferred tax assets available for utilization against future taxable income of the Company could be significantly impaired. For uncertain tax positions, the Company applies the provisions of all relevant authoritative guidance, which requires application of a "more likely than not" threshold to the recognition and derecognition of tax positions. The Company's ongoing assessments of the more likely than not outcomes of tax authority examinations and related tax positions require significant judgment and can increase or decrease the Company's effective tax rate, as well as impact operating results. The Company's effective tax rate differs from the statutory rate, primarily due to the tax impact of state taxes, foreign tax rates, and valuation allowances. Significant judgment is required in evaluating uncertain tax positions, determining valuation allowances recorded against deferred tax assets, and ultimately, the income tax provision. Stock-Based Compensation We measure stock-based compensation cost at the grant date based on the calculated fair value of the award. We recognize the expense over the employee's requisite service period, generally the vesting period of the award. The fair value of restricted stock is the market value on the date of grant. The fair value of stock options is estimated at the grant date using the Black-Scholes option pricing model with weighted average assumptions for the activity under our stock plans. Option pricing model input assumptions, such as expected term, expected volatility and risk-free interest rate, impact the fair value estimate. Further, the forfeiture rate impacts the amount of aggregate compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. The expected term represents the weighted average period of time that we expect granted options to be outstanding, considering the vesting schedules and our historical exercise patterns. Because our options are not publicly traded, we assume volatility based on the historical volatility of our stock. The risk-free interest rate is based on theU.S. Treasury yield curve in effect at the time of grant for periods corresponding to the expected option term. We have also used historical data to estimate option exercises, employee termination and stock option forfeiture rates. Changes in any of these assumptions could materially impact our results of operations in the period the change is made. 41 --------------------------------------------------------------------------------
Capitalized Software Costs
We capitalize internal-use software development costs incurred during the application development stage. Depreciation begins once the software is ready for its intended use and is computed based on the straight-line method over the economic life. Judgment is required in determining which software projects are capitalized and the resulting economic life. We capitalize certain costs associated with software to be sold. Capitalized costs include all costs incurred to produce the software or the purchase price paid for a master copy of the software that will be sold. Internally incurred costs to develop software are expensed when incurred as research and development costs until technological feasibility is established.
Results of Operations
The following table sets forth selected consolidated statements of operations
and comprehensive loss data during the periods presented, including comparative
information between the periods (dollars in thousands):
Increase (decrease) from 2018 Increase (decrease) from
Year Ended December 31, to 2019 2017 to 2018
2019 2018 2017 Amount Percent Amount Percent
Revenues:
INAP US $ 228,744 $ 247,146 $ 215,770 $ (18,402 ) (7.4 )% $ 31,376 14.5 %
INAP INTL 62,761 69,012 64,948 (6,251 ) (9.1 ) 4,064 6.3
Net revenues 291,505 316,158 280,718 (24,653 ) (7.8 ) 35,440 12.6
Operating costs and
expenses:
Costs of sales and services,
exclusive of depreciation
and amortization, shown
below:
INAP US 80,678 80,937 82,997 (259 ) (0.3 ) (2,060 ) (2.5 )
INAP INTL 26,268 26,712 23,220 (444 ) (1.7 ) 3,492 15.0
Costs of customer support 32,111 32,517 25,757 (406 ) (1.2 ) 6,760 26.2
Sales, general and
administrative 67,050 75,023 62,728 (7,973 ) (10.6 ) 12,295 19.6
Depreciation and
amortization 85,713 88,416 73,429 (2,703 ) (3.1 ) 14,987 20.4
Goodwill and intangibles
impairment 59,126 - - 59,126 - - -
Exit activities,
restructuring and
impairments 8,986 5,406 6,249 3,580 66.2 (843 ) (13.5 )
Total operating costs and
expenses 359,932 309,011 274,380 50,921 16.5 34,631 12.6
(Loss) income from
operations $ (68,427 ) $ 7,147 $ 6,338 $ (75,574 ) (1,057.4 ) $ 809 (12.8 )
Interest expense $ 75,142 $ 67,823 $ 50,933 $ 7,319 10.8 $ 16,890 33.2
Income tax (benefit) expense
(2,305 ) (350.8 )%$ 404 159.7 % Revenues
We generate revenues primarily from the sale of data center services, including colocation, hosting and cloud, as well as network services.
Costs of Sales and Services
Costs of sales and services are comprised primarily of:
• Facility and occupancy costs, including power and utilities, for hosting
and operating our equipment and our customers' equipment;
• costs related to IP services and to connect our POPs;
• costs incurred for providing additional third party services to our
customers; and
• royalties and costs of license fees for software included in our services
to customers.
Costs of sales and services do not include compensation, depreciation or amortization.
42
--------------------------------------------------------------------------------Costs of Customer Support
Costs of customer support consist primarily of compensation and other personnel costs for employees engaged in connecting customers to our network, installing customer equipment into POPs facilities and servicing customers through our NOCs. In addition, direct costs of customer support include facilities costs associated with the NOCs, including costs related to servicing our data center customers.
Sales, General and Administrative
Sales, general and administrative costs consist primarily of costs related to sales and marketing, compensation and other expense for executive, finance, product development, human resources and administrative personnel, professional fees and other general corporate costs.
Segment Information
EffectiveJanuary 1, 2018 , as further described in Note 10, "Operating Segments and Geographic Information," to the accompanying consolidated financial statements, we operate in two business segments: INAP US and INAP INTL. Segment results for each of the three years endedDecember 31, 2019 are summarized as follows (in thousands): Year Ended December 31, 2019 2018 2017 Revenues: INAP US$ 228,744 $ 247,146 $ 215,770 INAP INTL 62,761 69,012 64,948 Net revenues 291,505 316,158 280,718 Costs of sales and services, customer support and sales and marketing: INAP US 129,329 135,179 128,062 INAP INTL 39,270 45,124 37,829 Total costs of sales and services, customer support and sales and marketing 168,599 180,303 165,891 Segment profit: INAP US 99,415 111,967 87,708 INAP INTL 23,491 23,888 27,119 Total segment profit 122,906 135,855 114,827 Goodwill and intangibles impairment 59,126 - - Exit activities, restructuring and impairments 8,986 5,406 6,249 Other operating expenses, including sales, general and administrative and depreciation and amortization expenses 123,221 123,302 102,240 (Loss) income from operations (68,427 ) 7,147 6,338 Non-operating expenses 71,390 67,565 51,458 Loss before income taxes and equity in earnings of equity-method investment$ (139,817 ) $ (60,418 ) $ (45,120 ) Segment profit is calculated as segment revenues less costs of sales and services, customer support and sales and marketing. We view costs of sales and services as generally less-controllable, external costs and we regularly monitor the margin of revenues in excess of these direct costs. We also view the costs of customer support to be an important component of costs of revenues, but believe that the costs of customer support are more within our control and, to some degree, discretionary in that we can adjust those costs by managing personnel needs. We also have excluded depreciation and amortization from segment profit because it is based on estimated useful lives of tangible and intangible assets. Further, we base depreciation and amortization on historical costs incurred to build out our deployed network and the historical costs of these assets may not be indicative of current or future capital expenditures. 43 --------------------------------------------------------------------------------
Years Ended
INAP US
Revenues for our INAP US segment decreased 7.4% to$228.7 million for the year endedDecember 31, 2019 compared to$247.1 million for the same period in 2018. The decrease in revenue is primarily due to planned data center exits and churn from several larger customers in the second half of 2018 impacting 2019, partially offset by the addition ofSingleHop . Costs of sales and services, exclusive of depreciation and amortization, decreased 0.3%, to$80.7 million for the year endedDecember 31, 2019 , compared to$80.9 million for the same period in 2018. The decrease was primarily due to cost savings initiatives and lower space and power costs from ongoing data center exits, partially offset bySingleHop costs and a global transfer pricing adjustment between segments. INAP INTL Revenues for our INAP INTL segment decreased 9.1% to$62.8 million for the year endedDecember 31, 2019 compared to$69.0 million for the same period in 2018. The decrease of$6.2 million is primarily due to churn from large customers in the second half of 2018 impacting 2019. Costs of sales and services, exclusive of depreciation and amortization, decreased 1.7%, to$26.3 million for the year endedDecember 31, 2019 , compared to$26.7 million for the same period in 2018. The decrease was primarily due to ongoing cost savings initiatives and a global transfer pricing adjustment between segments.
Geographic Information
Revenues are allocated to countries based on location of services. Revenues, by
country with revenues over 10% of total revenues, are as follows (in
thousands):
2019 2018
United States $ 232,735 $ 251,444
Canada 33,089 37,956
Other 25,681 26,758
$ 291,505 $ 316,158 Other Operating Costs and Expenses
Compensation. Total compensation and benefits, including stock-based compensation, decreased to$65.4 million for the year endedDecember 31, 2019 compared to$68.9 million for the same period in 2018 as a result of ongoing cost savings initiatives. Stock-based compensation, net of amount capitalized, decreased to$4.2 million during the year endedDecember 31, 2019 from$4.7 million during the same period in 2018. The decrease is due to lower headcount as a result of costs savings initiatives. Costs of Customer Support. Costs of customer support decreased to$32.1 million during the year endedDecember 31, 2019 compared to$32.5 million during the same period in 2018. The slight decrease was primarily due to cost savings initiatives. Sales, General and Administrative. Sales, general and administrative costs decreased to$67.1 million during the year endedDecember 31, 2019 compared to$75.0 million during the same period in 2018. The decrease was primarily due to cost savings initiatives and certain costs incurred in 2018 that did not recur in 2019, such as acquisition costs and a non-income tax settlement. Depreciation and Amortization. Depreciation and amortization decreased to$85.7 million during the year endedDecember 31, 2019 compared to$88.4 million during the same period in 2018. The decrease is primarily due to lower capital expenditures and continued use of depreciated assets.
44
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intangibles impairment during the year ended
Exit activities, Restructuring and Impairments. Exit activities, restructuring and impairments increased to$9.0 million during the year endedDecember 31, 2019 compared to$5.4 million during the same period in 2018. The increase is primarily due to data center exits in 2019 and impairment for a data center that we plan to exit in 2020. Interest Expense. Interest expense increased to$75.1 million during the year endedDecember 31, 2019 from$67.8 million during the same period in 2018. The increase is primarily due to increased borrowings and additional interest expense related to finance leases.
Income Tax (Benefit) Expense. Income tax (benefit) expense changed
Years Ended
INAP US
Revenues for our INAP US segment increased 14.5%, to$247.1 million for the year endedDecember 31, 2018 , compared to$215.8 million for the same period in 2017. The increase was primarily due to the acquisition ofSingleHop and the initiation of organic growth contributed by the new salesforce offset by data center exits. Costs of sales and services, exclusive of depreciation and amortization, decreased 2.5%, to$80.9 million for the year endedDecember 31, 2018 , compared to$83.0 million for the same period in 2017. The decrease was primarily due to$10.5 million of lower costs related to data center exits, conversion of operating to capital leases, lower variable costs related to revenue decline, and on-going cost reduction efforts. Offsetting those decreases were$8.4 million of increases primarily due to theSingleHop and data center acquisitions.
INAP INTL
Revenues for our INAP INTL segment increased 6.3% to$69.0 million for the year endedDecember 31, 2018 , compared to$64.9 million for the same period in 2017. The increase of$4.1 million is primarily due to the consolidation of INAP Japan and theSingleHop acquisition partially offset by a slight decline in small business revenue. Costs of sales and services, exclusive of depreciation and amortization, increased 15.0%, to$26.7 million for the year endedDecember 31, 2018 , compared to$23.2 million for the same period in 2017. The increase of$3.5 million was primarily due to the consolidation of INAP Japan and theSingleHop acquisition as well as the acquisition of new data center space.
Geographic Information
Revenues are allocated to countries based on location of services. Revenues, by
country with revenues over 10% of total revenues, are as follows (in
thousands):
2018 2017
United States $ 251,444 $ 220,018
Canada 37,956 38,750
Other 26,758 21,950
$ 316,158 $ 280,718 Other Operating Costs and Expenses
Compensation. Total compensation and benefits, including stock-based compensation, was$68.9 million for the year endedDecember 31, 2018 , compared to$58.0 million for the same period in 2017. The increase was primarily due to the addition ofSingleHop employees resulting in$6.0 million increase in cash-based compensation and payroll taxes,$1.7 million increase in stock-based compensation, and$0.6 million increase in bonus accrual, offset by$1.3 million decrease in commissions.
Stock-based compensation, net of amount capitalized, increased to
45
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Costs of Customer Support. Costs of customer support increased to $32.5 million
during the year ended December 31, 2018 compared to $25.8 million during the
same period in 2017. The increase was due to $6.7 million of wages and payroll
taxes primarily due to the addition of SingleHop employees.
Sales, General and Administrative. Sales, general and administrative costs
increased to $75.0 million during the year ended December 31, 2018 compared to
$62.7 million during the same period in 2017. The increase of $12.3 million was
primarily due to the SingleHop acquisition consisting of higher compensation of
$3.5 million , $2.5 million of increased acquisition costs, $1.9 million increase
primarily due to channel partner commissions, $1.7 million increase in
stock-based compensation, $0.9 million increase in facility expenses, $0.8
million decrease in internal software costs that were capitalized (resulting in
increased compensation costs in "Sales, general and administrative" expenses),
$0.6 million increase in bonus expense and $0.8 million increase in other
miscellaneous expenses.
Depreciation and Amortization. Depreciation and amortization increased to $88.4
million during the year ended December 31, 2018 compared to $73.4 million during
the same period in 2017. The increase is primarily due to higher capital
purchases and capital leases entered during the year ended December 31, 2018 .
Exit activities, Restructuring and Impairments. Exit activities, restructuring and impairments decreased to$5.4 million during the year endedDecember 31, 2018 compared to$6.2 million during the same period in 2017. The decrease is primarily due to higher restructuring expenses due to closures of data centers in the prior year. Interest Expense. Interest expense increased to$67.8 million during the year endedDecember 31, 2018 from$50.9 million during the same period in 2017. The increase is primarily due to entering into the new incremental$135.0 million term loan facility and new capital leases entered during the year endedDecember 31, 2018 . Income Tax (Benefit) Expense. Income tax (benefit) expense increased to$0.7 million during the year endedDecember 31, 2018 from$0.3 million during the same period in 2017. The increase was primarily due to the consolidation of INAPJapan in 2018 and an increase in our unrecognized tax benefits.
Liquidity and Capital Resources
As a result of the commencement of the Chapter 11 Cases onMarch 16, 2020 , we are operating as a debtor-in-possession pursuant to the authority granted under Chapter 11 of the Bankruptcy Code. Pursuant to the Chapter 11 Cases, we intend to significantly de-leverage our balance sheet and reduce overall indebtedness upon completion of that process. Additionally, as a debtor-in-possession, certain of our activities are subject to review and approval by theBankruptcy Court , including, among other things, the incurrence of indebtedness, material asset dispositions, and other transactions outside the ordinary course of business. There can be no guarantee that the Chapter 11 Cases will be completed successfully or in the time frame contemplated by the RSA. The filing of the Chapter 11 Cases constituted an event of default that accelerated the Company's obligations under the Credit Agreement, as a result of which the principal and interest due thereunder became immediately due and payable. The ability of the lenders to enforce such payment obligations under the Credit Agreement is automatically stayed as a result of the Chapter 11 Cases, and the lenders' rights of enforcement in respect of obligations under the Credit Agreement are subject to the applicable provisions of the Bankruptcy Code. DIP Facility OnMarch 19, 2020 , the Company entered into the DIP Facility. The DIP Facility provides for, among other things, term loans in an aggregate principal amount of up to$75.0 million , (including the roll up of$5.0 million of New Incremental Loans made onMarch 13, 2020 ) pursuant to the Credit Agreement. All loans under the DIP Facility bear interest at a rate of either: (i) an applicable base rate plus 9% per annum or (ii) LIBOR (with a floor of 1%) plus 10% per annum. Use of Proceeds. The Company anticipates using the proceeds of the DIP Facility to, among other things: (i) pay certain fees, interest, payments and expenses related to the Chapter 11 Cases; (ii) fund the working capital needs and expenditures of the Company during the Chapter 11 Cases; (iii) fund the Carve-Out (as defined below); and (iv) pay other related fees and expenses in accordance with budgets provided to the DIP Lenders. 46 -------------------------------------------------------------------------------- Priority and Collateral. The DIP Lenders (subject to the Carve-Out as discussed below): (i) are entitled to joint and several super-priority administrative expense claim status in the Chapter 11 Cases; (ii) have a first priority lien on substantially all unencumbered assets of the Company; and (iii) have a priming first priority lien on any assets encumbered by the Credit Agreement. The Company's obligations to the DIP Lenders and the liens and super-priority claims are subject in each case to a carve out (the "Carve-Out") that accounts for certain administrative, court and legal fees payable in connection with the Chapter 11 Cases.
Affirmative and Negative Covenants. The DIP Facility contains certain affirmative and negative covenants, including requiring the Company to provide to the DIP Lenders a budget for the use of the Company's funds and the achievement of certain milestones for the Chapter 11 Cases, among other covenants customary in debtor-in-possession financings.
Events of Default. The DIP Facility contains certain events of default customary in debtor-in-possession financings, including: (i) the failure to pay loans made under the DIP Facility when due; (ii) appointment of a trustee, examiner or receiver in the Chapter 11 Cases; (iii) certain violations of the RSA and (iv) the failure of the Company to use the proceeds of the loans under the DIP Facility as set forth in the budget (subject to any approved variances). Maturity. The DIP Facility will mature on the earliest of (i)September 16, 2020 ; (ii) the date on which the loans under the DIP Facility become due and payable, whether by acceleration or otherwise; (iii) the effective date of the Plan; (iv) the sale of substantially all of the assets of the Company; (v) the first business day on which the order approving the DIP Facility by theBankruptcy Court expires by its terms, unless a final order has been entered and become effective prior thereto; (vi) the conversion or dismissal of the Chapter 11 Cases; (vii) dismissal of any of the Chapter 11 Cases unless consented to by the DIP Lenders or (viii) the final order approving the DIP Facility by theBankruptcy Court is vacated, terminated, rescinded, revoked, declared null and void or otherwise ceases to be in full force and effect.
2017 Credit Agreement
OnApril 6, 2017 , we entered into a new Credit Agreement (the "2017 Credit Agreement"), which provided for a$300.0 million term loan facility ("2017 Term Loan") and a$25.0 million Revolving Credit Facility (the "2017 Revolving Credit Facility"). The proceeds of the 2017 Term Loan were used to refinance the Company's existing credit facility and to pay costs and expenses associated with the 2017 Credit Agreement. As described above, onMarch 16, 2020 , as a result of the filing of the Chapter 11 Cases, the Company incurred an event of default under the Credit Agreement. Certain portions of the refinancing transaction were considered an extinguishment of debt and certain portions were considered a modification. A total of$5.7 million was paid for debt issuance costs related to the 2017 Credit Agreement. Of the$5.7 million in costs paid,$1.9 million related to the exchange of debt and was expensed,$3.3 million related to 2017 Term Loan third party costs and will be amortized over the 2017 Term Loan and$0.4 million prepaid debt issuance costs related to the 2017 Revolving Credit Facility and will be amortized over the term of the 2017 Revolving Credit Facility. In addition,$4.8 million of debt discount and debt issuance costs related to the previous credit facility were expensed due to the extinguishment of that credit facility. The maturity date of the 2017 Term Loan isApril 6, 2022 and the maturity date of the 2017 Revolving Credit Facility isOctober 6, 2021 . As ofDecember 31, 2019 , the outstanding balance of the 2017 Term Loan and the 2017 Revolving Credit Facility were$413.3 million and$20.0 million , respectively. The interest rate on the 2017 Term Loan and the 2017 Revolving Credit Facility as ofDecember 31, 2019 were 8.0% and 8.7%, respectively. Borrowings under the 2017 Credit Agreement bear interest at a rate per annum equal to an applicable margin plus, at our option, a base rate or an adjusted LIBOR rate. The applicable margin for loans under the 2017 Revolving Credit Facility is 6.0% for loans bearing interest calculated using the base rate ("Base Rate Loans") and 7.0% for loans bearing interest calculated using the adjusted LIBOR rate. The applicable margin for loans under the 2017 Term Loan is 4.75% for Base Rate Loans and 5.75% for adjusted LIBOR rate loans. The base rate is equal to the highest of (a) the adjustedU.S. Prime Lending Rate as published in theWall Street Journal , (b) with respect to term loans issued on the closing date, 2.00%, (c) the federal funds effective rate from time to time, plus 0.50%, and (d) the adjusted LIBOR rate, as defined below, for a one-month interest period, plus 1.00%. The adjusted LIBOR rate is equal to the rate per annum (adjusted for statutory reserve requirements for Eurocurrency liabilities) at which Eurodollar deposits are offered in the interbank Eurodollar market for the applicable interest period (one, two, three or six months), as quoted on Reuters screen LIBOR (or any successor page or service). The financing commitments of the lenders extending the 2017 Revolving Credit Facility are subject to various conditions, as set forth in the 2017 Credit Agreement. As ofDecember 31, 2019 , the Company has been in compliance with all covenants, however, onMarch 16, 2020 , the Company was no longer in compliance with all covenants.
First Amendment
OnJune 28, 2017 , the Company entered into an amendment to the 2017 Credit Agreement ("First Amendment"), by and among the Company, each of the lenders party thereto, andJefferies Finance LLC , as Administrative Agent. The First Amendment clarified that for 47 -------------------------------------------------------------------------------- all purposes the Company's liabilities pursuant to any lease that was treated as rental and lease expense, and not as a capital lease obligation or indebtedness on the closing date of the 2017 Credit Agreement, would continue to be treated as a rental and lease expense, and not as a capital lease obligations or indebtedness, for all purposes of the 2017 Credit Agreement, notwithstanding any amendment of the lease that results in the treatment of such lease as a capital lease obligation or indebtedness for financial reporting purposes.
Second Amendment
On
The Second Amendment, among other things, amends the 2017 Credit Agreement to (i) permit the Company to incur incremental term loans under the 2017 Credit Agreement of up to$135.0 million to finance the Company's acquisition ofSingleHop and to pay related fees, costs and expenses, and (ii) revise the maximum total net leverage ratio and minimum consolidated interest coverage ratio covenants. The financial covenant amendments became effective upon the consummation of theSingleHop acquisition, while the other provisions of the Second Amendment became effective upon the execution and delivery of the Second Amendment. This transaction was considered a modification. A total of$1.0 million was paid for debt issuance costs related to the Second Amendment. Of the$1.0 million in costs paid,$0.2 million related to the payment of legal and professional fees which were expensed,$0.8 million related to term loan lender fees and will be amortized over the term of the 2017 Credit Agreement. Third Amendment OnFebruary 28, 2018 , INAP entered into the Incremental and Third Amendment to the Credit Agreement among the Company, the Lenders party thereto andJefferies Finance LLC , as Administrative Agent (the "Third Amendment"). The Third Amendment provides for a funding of the new incremental term loan facility under the 2017 Credit Agreement of$135.0 million (the "Incremental Term Loan"). The Incremental Term Loan has terms and conditions identical to the existing loans under the 2017 Credit Agreement, as amended. Proceeds of the Incremental Term Loan were used to complete the acquisition ofSingleHop and to pay fees, costs and expenses related to the acquisition, the Third Amendment and the Incremental Term Loan. This transaction was considered a modification. A total of$5.0 million was paid for debt issuance costs related to the Third Amendment. Of the$5.0 million in costs paid,$0.1 million related to the payment of legal and professional fees which were expensed,$4.9 million related to term loan lender fees and will be amortized over the term of the 2017 Credit Agreement. Fourth Amendment OnApril 9, 2018 , the Company entered into the Fourth Amendment to 2017 Credit Agreement, among the Company, the Lenders party thereto andJefferies Finance LLC , as Administrative Agent (the "Fourth Amendment"). The Fourth Amendment amends the 2017 Credit Agreement to lower the interest rate margins applicable to the outstanding term loans under the 2017 Credit Agreement by 1.25%. This transaction was considered a modification. A total of$1.7 million was paid for debt issuance costs related to the Fourth Amendment. Of the$1.7 million in costs paid,$0.1 million related to the payment of legal and professional fees which were expensed,$1.6 million related to term loan lender fees and will be amortized over the term of the 2017 Credit Agreement. Fifth Amendment OnAugust 28, 2018 , the Company entered into the Fifth Amendment to 2017 Credit Agreement, among the Company, the Lenders party thereto andJefferies Finance LLC , as Administrative Agent (the "Fifth Amendment"). The Fifth Amendment amended the 2017 Credit Agreement by increasing the aggregate revolving commitment capacity by$10.0 million to$35.0 million . Sixth Amendment OnMay 8, 2019 , the Company entered into the Sixth Amendment to the 2017 Credit Agreement, among the Company, the Lenders party thereto andJefferies Finance LLC , as Administrative Agent (the "Sixth Amendment"). The Sixth Amendment (i) adjusted the applicable interest rates under the 2017 Credit Agreement, (ii) modified the maximum total net leverage ratio requirements and the minimum consolidated interest coverage ratio requirements and (iii) modified certain other covenants.
Pursuant to the Sixth Amendment, the applicable margin for the alternate base rate loan was increased from 4.75% per annum to 5.25%
48
--------------------------------------------------------------------------------per annum and for the Eurodollar loan was increased from 5.75% per annum to 6.25% per annum, with such interest payable in cash, and in addition such term loans bear interest payable in kind at the rate of 0.75% per annum.
The Sixth Amendment also made the following modifications:
• Added an additional basket of
• The maximum amount of permitted asset dispositions was decreased from
$150,000,000 to $50,000,000 .
• The amount of net cash proceeds from asset sales that may be reinvested is
limited to $2,500,000 in any fiscal year of the Company, with net cash
proceeds that are not so reinvested used to prepay loans under the 2017
Credit Agreement.
• The restricted payment basket was decreased from
The maximum total leverage ratio increases to 6.80 to 1 as ofJune 30, 2019 , 6.90 to 1 as ofSeptember 30, 2019 -December 31, 2019 , decreases to 6.75 to 1 as ofMarch 31, 2020 , 6.25 to 1 as ofJune 30, 2020 , 6.00 to 1 as ofSeptember 30, 2020 , 5.75 to 1 as ofDecember 31, 2020 , 5.50 to 1 as ofMarch 2021 , 5.00 to 1 as ofJune 30, 2021 and 4.50 to 1 as ofSeptember 30, 2021 and thereafter. The minimum consolidated interest coverage ratio decreases to 1.75 to 1 as ofJune 30, 2019 , 1.70 to 1 as ofSeptember 30, 2019 -March 31, 2020 , increases to 1.80 to 1 as ofJune 30, 2020 , 1.85 to 1 as ofSeptember 2020 and 2.00 to 1 as ofDecember 31, 2020 and thereafter. This transaction was considered a modification. A total of$2.9 million was paid for debt issuance costs related to the Sixth Amendment. Of the$2.9 million in costs paid,$0.1 million related to the payment of legal and professional fees which were expensed,$2.8 million related to term loan lender fees and will be amortized over the term of the 2017 Credit Agreement. Seventh Amendment OnOctober 29, 2019 , the Company entered into the Seventh Amendment to 2017 Credit Agreement, among the Company, the Lenders party thereto andJefferies Finance LLC , as Administrative Agent (the "Seventh Amendment"). The Seventh Amendment (i) modified the maximum total net leverage ratio requirements and the minimum consolidated interest coverage ratio requirements under the 2017 Credit Agreement and (ii) effected certain other modifications, including changes to certain baskets. The maximum total leverage ratio increases to 7.25 to 1 as ofDecember 31, 2019 -December 31, 2020 , 5.50 to 1 as ofMarch 31, 2021 , 5.00 to 1 as ofJune 30, 2021 , 4.50 to 1 as ofSeptember 30, 2021 and thereafter. The minimum consolidated interest coverage ratio decreases to 1.60 to 1 as ofDecember 31, 2019 -December 31, 2020 , 2.00 to 1.00 as ofMarch 31, 2021 and thereafter.
The Seventh Amendment also made the following modifications:
• Reduced the disposition of property basket from
million.
• Reduced reinvestment of net cash proceeds from asset sales from
million to
• Reduced investment basket from greater of
to greater of
• Reduced incremental facility from
• Reduced foreign subsidiary debt basket from greater of
18% of EBITDA to greater of
• Reduced general basket from greater of
greater of
A total of$1.3 million was paid for debt issuance costs related to the Seventh Amendment. Of the$1.3 million in costs paid,$0.1 million related to the payment of legal and professional fees which were expensed and$1.2 million related to term loan lender fees and will be amortized over the term of the 2017 Credit Agreement. Eighth Amendment The Company entered into the Incremental and Eighth Amendment to Credit Agreement (the "Eighth Amendment") onMarch 13, 2020 . The Eighth Amendment, among other things: (i) authorized the incremental commitment for the$5.0 million of new incremental loans (the "New Incremental Loans") under the Credit Agreement; (ii) granted additional security interests in favor of the lenders for the 49 -------------------------------------------------------------------------------- Company's motor vehicles and outstanding equity interests of certain foreign subsidiaries; and (iii) addedInternap Technology Solutions Inc. as a party to the Credit Agreement. In addition, the Eighth Amendment amended (i) the affirmative covenants to, among other things, require the Company to provide a cash receipt and disbursement budget and rolling 13-week forecasts of the same and to meet certain milestones with respect to the Chapter 11 Cases, including solicitation of the Plan, entry into the DIP Facility, and confirmation of the Plan by theBankruptcy Court ; and (ii) the negative covenants to, among other things: (A) further limit the debt the Company can borrow and repay; (B) eliminate the ability of the Company to incur liens for sale and leaseback transactions, incremental debt and equity interests and real property; (C) further limit the ability of the Company to make investments; (D) eliminate the ability of the Company to engage in mergers; (E) further limit dispositions and acquisitions of certain property; (F) eliminate the ability of the Company to pay dividends or make redemptions; (G) further limit the Company's ability to engage in transactions with affiliates and (H) eliminate the leverage and interest coverage ratio covenants. The Eighth Amendment further amended the events of default to provide that it will be an event of default for the New Incremental Loans if, among other things, the Company uses the proceeds from the New Incremental Loans in a manner outside of the budget, subject to certain variances or in connection with the Chapter 11 Cases, or the Company supports a plan of reorganization or disclosure statement that does not repay the obligations as set forth in the RSA.
The table below sets forth information with respect to the current financial
covenants as well as the calculation of our performance in relation to the
covenant requirements at
Ratios at
Covenants December 31 ,
Requirements 2019
Maximum Total Net Leverage Ratio should be equal
to or less than: 7.25 7.03
Maximum Consolidated Interest Coverage Ratio should be equal to or greater than: 1.60
1.84
Refer to Note 9, "Commitments, Contingencies and Litigation," in our accompanying consolidated financial statements for additional information about our credit agreement.
Equity
Authorization of Stock Repurchase
InDecember 2018 , INAP's Board of Directors authorized management to repurchase an initial$5.0 million of INAP common stock, as permitted under INAP's 2017 Credit Agreement. As ofDecember 31, 2019 , there have been no shares repurchased under this program and no shares will be repurchased during the pendency of the Chapter 11 Cases. Public Offering OnOctober 23, 2018 , the Company closed a public offering of 4,210,527 shares of common stock at$9.50 per share to the public and received net proceeds of approximately$37.1 million (net of underwriting discounts and commissions, and other offering expenses of$0.5 million ).
Securities Purchase Agreement
OnFebruary 22, 2017 , the Company entered into a securities purchase agreement (the "Securities Purchase Agreement") with certain purchasers (the "Purchasers"), pursuant to which the Company issued to the Purchasers an aggregate of 5,950,712 shares of the Company's common stock at a price of$7.24 per share, for the aggregate purchase price of$43.1 million , which closed onFebruary 27, 2017 . Conditions for the Securities Purchase Agreement included the following: (i) a requirement for the Company to use the funds of the sale of such common stock to repay indebtedness under the Credit Agreement, (ii) a 90-day "lock-up" period whereby the Company is restricted from certain sales of equity securities, and (iii) a requirement for the Company to pay certain transaction expenses of the Purchasers up to$100,000 . The Company used$39.2 million of the proceeds to pay down our debt.
Registration Rights Agreement
OnFebruary 22, 2017 , the Company entered into a registration rights agreement (the "Registration Rights Agreement") with the Purchasers, which provides the Purchasers under the Securities Purchase Agreement the ability to request registration of such securities. Pursuant to the Registration Rights Agreement, the Company filed a registration statement inMarch 2017 that was declared effective during April 50 --------------------------------------------------------------------------------
2017. Reverse Stock Split OnNovember 16, 2017 , the Company filed a Certificate of Amendment of the Restated Certificate of Incorporation (the "Certificate of Amendment") with the Secretary ofState of Delaware to effect a 1-for-4 reverse stock split of the shares of our common stock, either issued and outstanding or held by the Company as treasury stock, effective as of5:00 p.m. (Delaware time) onNovember 20, 2017 (the "Reverse Stock Split").
As a result of the Reverse Stock Split, every four shares of issued and outstanding Common Stock were automatically combined into one issued and outstanding share of Common Stock, without any change in the par value per share.
All prior year share amounts and per share calculations included herein have been restated to reflect the impact of the Reverse Stock Split and to provide data on a comparable basis. Such restatements include calculations regarding the Company's weighted-average shares and loss per share, as well as disclosures regarding the Company's stock-based compensation plan and share repurchase. In addition, proportionate adjustments were made to the per share exercise price and the number of shares of Common Stock that may be purchased upon exercise of outstanding stock options and restricted stock granted by the Company, and the number of shares of Common Stock reserved for future issuance under the 2017 Stock Plan.
General - Sources and Uses of Capital
On an ongoing basis, we require capital to fund our current operations, expand our IT infrastructure services, upgrade existing facilities or establish new facilities, products, services or capabilities and to fund customer support initiatives, as well as various advertising and marketing programs to facilitate sales. As ofDecember 31, 2019 , we had$10.1 million of borrowing capacity under our 2017 Revolving Credit Facility. The working capital deficit as ofDecember 31, 2019 was$442.0 million compared to$6.5 million as ofDecember 31, 2018 . The increase was primarily due to the term loan of$413.3 million being classified as a current liability as ofDecember 31, 2019 . The Company has experienced negative financial trends, such as operating losses, working capital deficiencies, negative cash flows and other adverse key financial ratios. The Company reported net losses of$138.3 million and$61.2 million for the years endedDecember 31, 2019 and 2018, respectively. Given the negative financial trends, we believe that cash flows from operations, together with our cash and cash equivalents and borrowing capacity under our 2017 Revolving Credit Facility, will not be sufficient to meet our cash requirements for the next 12 months. These matters, among others, raise substantial doubt about the Company's ability to continue as a going concern. As discussed above, we entered into the DIP Facility to provide liquidity during the pendency of the Chapter 11 Cases. Finance Leases. Our future minimum lease payments on all remaining finance lease obligations atDecember 31, 2019 were$175.0 million . We summarize our existing finance lease obligations in Note 14, "Leases," to the accompanying consolidated financial statements. Commitments and Other Obligations. We have commitments and other obligations that are contractual in nature and will represent a use of cash in the future unless the agreements are modified. Service and purchase commitments primarily relate to IP, telecommunications and data center services. Our ability to improve cash provided by operations in the future would be negatively impacted if we do not grow our business at a rate that would allow us to offset the purchase and service commitments with corresponding revenue growth. 51 --------------------------------------------------------------------------------
The following table summarizes our commitments and other obligations as of
Payments Due by Period
Total 2020 2021-2022 2023-2024 Thereafter
Current Credit Agreement:
Term loan, including interest
- $ - $ -
Revolving credit facility,
including interest 20,111 20,111 - - -
Finance lease obligations 557,182 24,574 50,908 47,675 434,025
Exit activities and restructuring 200 200 - - -
Asset retirement obligation 3,384 - - - 3,384
Operating lease commitments 130,211 18,059 36,042 31,701 44,409
Service and purchase commitments 3,345 2,390 936 19 -
$ 1,141,121 $ 492,022 $ 87,886 $ 79,395 $ 481,818
COVID-19. While the Company has not currently experienced a significant adverse
impact to operating results as a result of COVID-19, the pandemic could result
in complete or partial closure of one or more of our facilities or our
customers' or suppliers' facilities, or otherwise result in significant
disruptions to our or their business and operations. Such events could
materially and adversely impact our operations and the revenue we generate from
our customers. The Company could experience other potential impacts as a result
of COVID-19, including, but not limited to, charges from potential adjustments
to the carrying amount of goodwill, indefinite-lived intangibles and long-lived
asset impairment charges. Actual results may differ materially from the
Company's current estimates as the scope of COVID-19 evolves or if the duration
of business disruptions is longer than initially anticipated.
On March 27, 2020 , the "Coronavirus Aid, Relief, and Economic Security (CARES)
Act" was enacted as a response to the COVID-19 outbreak discussed above and is
meant to provide companies with economic relief. The CARES Act, among other
things, includes provisions relating to refundable payroll tax credits,
deferment of employer side social security payments, net operating loss
carryback periods, alternative minimum tax credit refunds, modifications to the
net interest deduction limitations, increased limitations on qualified
charitable contributions, and technical corrections to tax depreciation methods
for qualified improvement property. Due to the Company's filing for relief under
Title 11 of the Bankruptcy Code, the Company is not eligible to receive funds
under the CARES Act.
Cash Flows
Operating Activities
Year Ended December 31, 2019 . Net cash provided by operating activities during
the year ended December 31, 2019 was $22.7 million . We generated cash from
operations of $23.3 million , while changes in operating assets and liabilities
used cash from operations of $0.6 million . We expect to use cash flows from
operating activities to fund a portion of our capital expenditures and other
requirements and to meet our other commitments and obligations, including paying
our outstanding debt.
Year Ended December 31, 2018 . Net cash provided by operating activities during
the year ended December 31, 2018 was $35.3 million . We generated cash from
operations of $43.4 million , while changes in operating assets and liabilities
used cash from operations of $8.1 million .
Year Ended December 31, 2017 . Net cash provided by operating activities during
the year ended December 31, 2017 was $41.4 million . We generated cash from
operations of $46.0 million , while changes in operating assets and liabilities
generated cash from operations of $4.6 million .
Investing Activities
Year EndedDecember 31, 2019 . Net cash used in investing activities during the year endedDecember 31, 2019 was$29.3 million , primarily due to$33.0 million of net capital expenditures offset by$3.2 million of proceeds from the sale of a business. These capital expenditures were related to the installation of services for our customers as well as continued enhancement of our company-controlled data centers and network infrastructure. 52 -------------------------------------------------------------------------------- Year EndedDecember 31, 2018 . Net cash used in investing activities during the year endedDecember 31, 2018 was$173.1 million , primarily due to$42.0 million net capital expenditures and the$131.7 million of acquisition ofSingleHop . These capital expenditures were related to the continued expansion and upgrade of our company-controlled data centers and network infrastructure. Year EndedDecember 31, 2017 . Net cash used in investing activities during the year endedDecember 31, 2017 was$32.4 million , primarily due to$36.7 million net capital expenditures. These capital expenditures were related to the continued expansion and upgrade of our company-controlled data centers and network infrastructure.
Financing Activities
Year EndedDecember 31, 2019 . Net cash provided by financing activities during the year endedDecember 31, 2019 was$0.6 million , primarily due to proceeds from the 2017 Credit Agreement of$20.0 million , offset by$13.5 million of payments on the 2017 Credit Agreement and finance lease obligations, and debt amendment costs of$4.1 million . Year EndedDecember 31, 2018 . Net cash provided by financing activities during the year endedDecember 31, 2018 was$141.6 million , primarily due to proceeds of$148.5 million from the 2017 Credit Agreement and$37.2 million from the sale of common stock, offset by$35.3 million of principal payments on the 2017 Credit Agreement and capital lease obligations, and debt issuance costs of$7.3 million . Year EndedDecember 31, 2017 . Net cash used in financing activities during the year endedDecember 31, 2017 was$5.5 million , primarily due to$349.6 million of principal payments on the 2017 Credit Agreement and capital lease obligations, offset by proceeds from the 2017 Credit Agreement of$316.9 million and proceeds from stock issuance, net of$40.2 million .
Off-Balance Sheet Arrangements
As ofDecember 31, 2019 , 2018 and 2017, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
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