What changed in this filing

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Item 1. Financial Statements

2020-08-06 compared with 2020-05-07 · 687 added, 93 removed, 305 unchanged (72% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2020 AND DECEMBER 31, 2019

AS OF JUNE 30, 2020 AND DECEMBER 31, 2019

(IN THOUSANDS, EXCEPT SHARE DATA)

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Right-of-use leased assets

Deferred tax assets

Deposits and other assets

3 unchanged sentences

Accrued and other current liabilities

Installment payment agreement, current portion, net of discount of $ 313 and $ 350 , respectively

Installment payment agreement, current portion, net of discounts of $ 291 and $ 350 , respectively

Current maturities, operating lease liabilities

1 unchanged sentence

Total current liabilities

Senior unsecured 2024 Euro notes, net of unamortized debt costs of $ 1,341 and $ 1,410 , respectively

Senior secured 2022 notes, net of unamortized debt costs of $ 1,690 and $ 1,897 , respectively and including premium of $ 877 and $ 985 , respectively

Senior unsecured 2021 notes, net of unamortized debt costs of $ 696 and $ 857 , respectively

Senior secured 2022 notes, net of unamortized debt costs of $ 1,480 and $ 1,897 , respectively and including premiums of $ 767 and $ 985 , respectively

Senior unsecured 2024 Euro notes, net of unamortized debt costs of $ 3,365 and $ 1,410 , respectively and net of discounts of $ 1,183 and $ 0 , respectively

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

Operating lease liabilities, net of current maturities

15 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND MARCH 31, 2019

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

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

March 31, 2020

March 31, 2019

June 30, 2020

June 30, 2019

Service revenue

6 unchanged sentences

Operating income

Interest expense

Realized foreign exchange gain on issuance on 2024 Euro Notes

Unrealized foreign exchange (loss) gain on 2024 Euro Notes

Loss on debt extinguishment and redemption – 2021 Notes

Interest income and other, net

Income before income taxes

Income tax provision

Comprehensive income:

Foreign currency translation adjustment

Comprehensive 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 statements.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND JUNE 30, 2019

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

June 30, 2020

June 30, 2019

Service revenue

Operating expenses:

Network operations (including $ 557 and $ 406 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)

Selling, general, and administrative (including $ 10,600 and $ 8,318 of equity-based compensation expense, respectively)

Depreciation and amortization

Total operating expenses

Gains on equipment transactions

Operating income

Interest expense

Realized foreign exchange gain on issuance of 2024 Euro Notes

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

Interest income and other, net

Loss on debt extinguishment and redemption- 2021 Notes

Income before income taxes

4 unchanged sentences

Net income per common share:

Basic and diluted net income per common share

Basic net income per common share

Diluted net income per common share

Dividends declared per common share

4 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND MARCH 31, 2019

FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND JUNE 30, 2019

(IN THOUSANDS)

March 31, 2020

March 31, 2019

June 30, 2020

June 30, 2019

Cash flows from operating activities:

1 unchanged sentence

Depreciation and amortization

Amortization of debt discount and premium

Amortization of debt costs, discounts and premiums

Equity-based compensation expense (net of amounts capitalized)

Loss on debt extinguishment and redemption – 2021 Notes

Unrealized losses (gains) on foreign exchange

Realized foreign exchange gain on issuance of 2024 Notes

Gains - equipment transactions and other, net

Unrealized foreign currency exchange gain on 2024 Euro notes

Deferred income taxes

10 unchanged sentences

Dividends paid

Proceeds from exercises of stock options

Redemption and extinguishment of 2021 Notes

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

Principal payments on installment payment agreement

Principal payments of finance lease obligations

Net cash used in financing activities

Proceeds from exercises of stock options

Net cash (used in) provided by financing activities

Effect of exchange rates changes on cash

Net decrease in cash and cash equivalents

Net increase in cash and cash equivalents

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

Supplemental disclosure of non-cash financing activities:

Supplemental disclosure of non-cash investing and financing activities:

Non-cash component of network equipment obtained in exchange transactions

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Description of the business:

Description of the business and recent developments:

Reorganization and merger

On May 15, 2014, pursuant to the Agreement and Plan of Reorganization by and among Cogent Communications Group, Inc.

On May 15, 2014, pursuant to the Agreement and Plan of Reorganization (the “Merger Agreement”) by and among Cogent Communications Group, Inc.

(“Group”), a Delaware corporation, Cogent Communications Holdings, Inc., a Delaware corporation (“Holdings”) and Cogent Communications Merger Sub, Inc., a Delaware corporation, Group adopted a new holding company organizational structure whereby Group is now a wholly owned subsidiary of Holdings.

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Description of business

The Company is a Delaware corporation and is headquartered in Washington, DC.

The Company is a facilities-based provider of low-cost, high-speed Internet access services, private network services and data center colocation space.

The Company’s network is specifically designed and optimized to transmit packet routed data.

The Company delivers its services primarily to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations in North America, Europe, Asia, Latin America and Australia.

The Company offers on-net Internet access and private network services exclusively through its own facilities, which run from its network to its customers’ premises.

The Company is not dependent on local telephone companies or cable TV companies to serve its customers for its on-net Internet access services because of its integrated network architecture.

The Company offers its on-net services to customers located in buildings that are physically connected to its network.

The Company’s on-net service consists of high-speed Internet access and private network services offered at speeds ranging from 100 megabits per second to 100 gigabits per second of bandwidth.

The Company provides its on-net Internet access services and private network services to its corporate and net-centric customers.

The Company’s corporate customers are located in multi-tenant office buildings and typically include law firms, financial services firms, advertising and marketing firms and other professional services businesses.

The Company’s net-centric customers include bandwidth-intensive users such as other Internet service providers, telephone companies, cable television companies, web hosting companies, content delivery network companies and commercial content and application service providers.

These net-centric customers obtain the Company’s services in colocation facilities and in the Company’s 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 its on-net services, the Company provides Internet connectivity and private network services to customers that are not located in buildings directly connected to its network.

The Company provides this off-net service primarily to corporate customers using other carriers’ facilities 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.

We are a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation space.

Our network is specifically designed and optimized to transmit packet switched data.

We deliver our services primarily to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations in 46 countries across North America, Europe, Asia, Latin America, Australia and Africa.

We are a Delaware corporation and we are headquartered in Washington, DC.

We offer on-net Internet access services exclusively through our own facilities, which run from our network to our customers’ premises.

We offer our on-net services to customers located in buildings that are physically connected to our network.

As a result, we are not dependent on local telephone companies or cable TV companies to serve our customers for our on-net Internet access and private network service.

Our on- net service consists of high-speed Internet access and private network services offered at speeds ranging from 100 Megabits per second to 100 Gigabits per second.

We provide our on-net Internet access and private network services to our corporate and net-centric customers.

Our corporate customers are located in multi-tenant office buildings and typically include law firms, financial services firms, advertising and marketing firms as well as health care providers, educational institutions and other professional services businesses.

Our net-centric customers include bandwidth-intensive users which leverage our network to either deliver content to end users or to provide access to residential or commercial internet users.

Content delivery customers include over the top (“OTT”) media service providers, content delivery networks, web hosting companies, and commercial content and application software providers.

Access customers include over 7,100 access networks comprised of other Internet access providers, telephone companies, and cable television companies that collectively provide internet access to a substantial number of broadband subscribers across the world.

These net-centric customers generally receive our services in carrier neutral colocation facilities and in our data centers.

We operate data centers throughout North America and Europe that allow our customers to collocate their equipment and access our network.

In addition to providing our on-net services, we provide Internet access and private network services to customers that are not located in buildings directly connected to our network.

We provide these off-net services primarily to corporate customers using other carriers’ circuits to provide the “last mile” portion of the link from the customers’ premises to our network.

We also provide certain non-core services that resulted from acquisitions.

We continue to support but do not actively sell these non-core services.

Basis of presentation

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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.

generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.

The operating results for interim periods are not necessarily indicative of the operating results for the entire year.

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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.

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

Actual results may differ from these estimates.

Financial instruments

At March 31, 2020 the carrying amount of cash and cash equivalents, accounts receivable, prepaid and other current assets, accounts payable, and accrued expenses approximated fair value because of the short-term nature of these instruments.

At June 30, 2020, the carrying amount of cash and cash equivalents, accounts receivable, prepaid and other current assets, accounts payable and accrued expenses approximated fair value because of the short-term nature of these instruments.

The Company measures its cash equivalents at amortized cost, which approximates fair value based upon quoted market prices (Level 1).

Based upon recent trading prices (Level 2—market approach) at March 31, 2020 the fair value of the Company’s $ 189.2 million senior unsecured notes was $ 187.3 million, the fair value of the Company’s $ 445.0 million senior secured notes was $ 447.2 million and the fair value of the Company’s € 135.0 million ($ 148.5 million) senior unsecured notes was $ 151.5 million.

Based upon recent trading prices (Level 2— market approach) at June 30, 2020 the fair value of the Company’s $ 445.0 million senior secured notes was $ 456.1 million and the fair value of the Company’s € 350.0 million Euro ($ 393.0 million USD) senior unsecured notes was $ 393.5 million.

Gross receipts taxes, universal service fund and other surcharges

2 unchanged sentences

The Company records certain excise taxes and surcharges on a gross basis and includes them in its revenues and costs of network operations.

Excise taxes and surcharges billed to customers and recorded on a gross basis (as service revenue and network operations expense) were $ 3.7 million and $ 3.4 million for the three months ended March 31, 2020 and March 31, 2019, respectively.

Excise taxes and surcharges billed to customers and recorded on a gross basis (as service revenue and network operations expense) were $ 3.3 million and $ 3.2 million for the three months ended June 30, 2020 and June 30, 2019, respectively, and $ 7.0 million and $ 6.6 million for the six months ended June 30, 2020 and June 30, 2019, respectively.

Basic and diluted net income per common share

5 unchanged sentences

Three Months Ended

March 31, 2020

March 31, 2019

Six Months Ended

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Weighted average common shares - basic

3 unchanged sentences

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

March 31, 2020

March 31, 2019

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Unvested shares of restricted common stock

2 unchanged sentences

Stockholder’s Deficit

The following details the changes in stockholder’s deficit for the three months ended March 31, 2020 and March 31, 2019 (in thousands except share amounts):

The following details the changes in stockholder’s deficit for the three and six months ended June 30, 2020 and June 30, 2019 (in thousands except share amounts):

Comprehensive

2 unchanged sentences

Equity (Deficit)

Balance at December 31, 2018

Balance at March 31, 2020

Forfeitures of shares granted to employees

4 unchanged sentences

Dividends paid

Balance at June 30, 2020

Comprehensive

Stockholder’s

Income (Loss)

Equity (Deficit)

Balance at March 31, 2019

Forfeitures of shares granted to employees

Equity-based compensation

Foreign currency translation

Issuances of common stock

Exercises of options

Dividends paid

Balance at June 30, 2019

Comprehensive

3 unchanged sentences

Balance at December 31, 2019

Cumulative effect adjustment from adoption of ASC 606

Forfeitures of shares granted to employees

4 unchanged sentences

Dividends paid

Balance at March 31, 2020

Balance at June 30, 2020

Comprehensive

Stockholder's

Income (Loss)

Equity (Deficit)

Balance at December 31, 2018

Forfeitures of shares granted to employees

Equity-based compensation

Foreign currency translation

Issuances of common stock

Exercises of options

Dividends paid

Balance at June 30, 2019

Revenue recognition

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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 March 31, 2020 was $ 1.6 million and during the three months ended March 31, 2019 was $ 1.7 million.

Amortization expense for contract costs was $ 4.2 million for the three months ended March 31, 2020 and $ 4.4 million for the three months ended March 31, 2019.

Service revenue recognized from amounts in deferred revenue (contract liabilities) at the beginning of the period during the three months ended June 30, 2020 was $ 1.8 million and during the three months ended June 30, 2019 was $ 1.7 million.

Service revenue recognized from amounts in deferred revenue (contract liabilities) at the beginning of the period during the six months ended June 30, 2020 was $ 3.0 million and during the six months ended June 30, 2019 was $ 3.4 million.

Amortization expense for contract costs was $ 4.2 million for the three months ended June 30, 2020 and $ 4.3 million for the three months ended June 30, 2019.

Amortization expense for contract costs was $ 8.4 million for the six months ended June 30, 2020 and $ 8.7 million for the three months ended June 30, 2019.

Recent Accounting Pronouncements— Adopted

In February 2016, the FASB issued ASU No.

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The Company has made an accounting policy election to not apply the recognition requirements of ASU 2016-02 to its short-term leases - leases with a term of one year or less.

The Company has also elected to apply certain practical expedients under ASU 2016-02 including not separating lease and nonlease

components on its finance and operating leases, not reassessing whether any existing contracts contained leases, not reconsidering lease classification, not reassessing initial direct costs and using hindsight in determining the reasonably certain term of its leases.

March 31, 2020

March 31, 2019

The Company has also elected to apply certain practical expedients under ASU 2016-02 including not separating lease and nonlease components on its finance and operating leases, not reassessing whether any existing contracts contained leases, not reconsidering lease classification, not reassessing initial direct costs and using hindsight in determining the lease reasonably certain term of its leases.

June 30, 2020

June 30, 2019

Finance lease cost

3 unchanged sentences

Total lease costs

June 30, 2020

June 30, 2019

Finance lease cost

Amortization of right-of-use assets

Interest expense on finance lease liabilities

Operating lease cost

Total lease costs

Other lease information

17 unchanged sentences

Finance lease assets are included in property and equipment in the Company’s consolidated balance sheets.

As of March 31, 2020, the Company had committed to additional dark fiber IRU lease agreements totaling $ 19.5 million in future payments to be paid over periods of up to 20 years .

As of June 30, 2020, the Company had committed to additional dark fiber IRU lease agreements totaling $ 17.6 million in future payments to be paid over periods of up to 20 years .

These obligations begin when the related fiber is accepted, which is generally expected to occur in the next 12 months.

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

For the twelve months ending March 31,

For the twelve months ending June 30,

Total minimum finance lease obligations

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

For the twelve months ending March 31,

For the twelve months ending June 30,

Total minimum operating lease obligations

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Allowance for credit losses (deducted from accounts receivable)

Three months ending March 31, 2020

Net bad debt expense for the three months ended March 31, 2020 was $ 1.1 million which is net of bad debt recoveries of $ 0.2 million.

Three months ending June 30, 2020

Current-period

Provision for

Expected Credit

Charged Against

Allowance for credit losses (deducted from accounts receivable)

Six months ending June 30, 2020

Net bad debt expense for the three months ended June 30, 2020 was $1.3 million which is net of bad debt recoveries of $ 0.2 million.

Net bad debt expense for the six months ended June 30, 2020 was $2.3 million which is net of bad debt recoveries of $ 0.4 million.

Property and equipment:

Depreciation and amortization expense related to property and equipment and finance leases was $ 19.5 million and $ 20.3 million for the three months ended March 31, 2020 and 2019, respectively.

The Company capitalized salaries and related benefits of employees working directly on the construction and build-out of its network of $ 2.9 million and $ 2.6 million for the three months ended March 31, 2020 and 2019, respectively.

Depreciation and amortization expense related to property and equipment and finance leases was $ 19.9 million and $ 20.0 million for the three months ended June 30, 2020, and 2019 respectively, and $ 39.4 million and $ 40.2 million for the six months ended June 30, 2020 and 2019, respectively.

The Company capitalized salaries and related benefits of employees working directly on the construction and build-out of its network of $ 3.0 million and $ 2.7 million for the three months ended June 30, 2020 and 2019, respectively, and $ 5.9 million and $ 5.3 million for the six months ended June 30, 2020 and 2019, respectively.

Exchange agreement

In the three months ended March 31, 2020 and 2019, the Company exchanged certain used network equipment and cash consideration for new network equipment.

The fair value of the equipment received was estimated to be $ 0.1 million and $ 1.7 million, respectively, and after considering the cash component, the transactions resulted in gains of less than $ 0.1 million and $ 0.5 million, respectively.

In the three and six months ended June 30, 2020 and 2019, the Company exchanged certain used network equipment and cash consideration for new network equipment.

The fair value of the equipment received was estimated to be $ 0.7 million and $ 0.5 million for the three months ended June 30, 2020 and 2019, respectively, and $ 0.8 million and $ 2.2 million for the six months ended June 30, 2020 and 2019, respectively.

After considering the cash component the transactions resulted in gains of $ 0.2 million and $ 0.1 million for the three months ended June 30, 2020 and 2019, respectively, and $ 0.2 million and $ 0.7 million for the six months ended June 30, 2020 and 2019, respectively.

The estimated fair value of the equipment received was based upon the cash consideration price the Company pays for the new network equipment on a standalone basis (Level 3).

Installment payment agreement

The Company has entered into an installment payment agreement (“IPA”) with a vendor.

In March 2015, the Company entered into an installment payment agreement (“IPA”) with a vendor.

Under the IPA the Company may purchase network equipment in exchange for interest free note obligations each with a twenty-four month term.

There are no payments under each note obligation for the first six months followed by eighteen equal installment payments for the remaining eighteen month term.

As of March 31, 2020 and December 31, 2019 there was $ 12.3 million and $ 12.5 million, respectively, of note obligations outstanding under the IPA, secured by the related equipment.

As of June 30, 2020, and December 31, 2019 there was $ 12.8 million and $ 12.5 million, respectively, of note obligations outstanding under the IPA, secured by the related equipment.

The Company recorded the assets purchased and the net present value of the note obligation utilizing an imputed interest rate.

The resulting discount was $ 0.3 million and $ 0.4 million as of March 31, 2020 and December 31, 2019, respectively, and is being amortized over the note term using the effective interest rate method.

The resulting discount was $ 0.3 million and $ 0.4 million as of June 30, 2020 and December 31, 2019, respectively, and is being amortized over the note term using the effective interest rate method.

Purchase agreement

In July 2020 the Company entered into an agreement to purchase network equipment for a three-year period ending in July 2023.

Under the agreement the Company is required to purchase $ 35.0 million of network equipment exclusively from the vendor per year of which $ 20.0 million has been ordered and $ 6.8 million has shipped.

Long-term debt:

The Company has $ 445.0 million of senior secured notes and € 350.0 million ($ 393.0 million USD) of senior unsecured notes outstanding.

The $445.0 million of senior secured notes are due on March 1, 2022 (the “2022 Notes”) and bear interest at a rate of 5.375 % per year.

Interest on the 2022 Notes is paid semi-annually on March 1 and September 1.

The € 350.0 million of senior unsecured notes are due on June 30, 2024 (the “2024 Notes”) and bear interest at a rate of 4.375 % per year.

Interest on the 2024 is paid semi-annually on June 30 and December 30.

2024 Notes issuances

In June 2020, Group completed an offering of € 215.0 million aggregate principal amount of 4.375 % senior unsecured notes due 2024.

The net proceeds from the June 2020 offering, after deducting offering expenses, were $ 240.3 million.

In June 2019, Group completed an offering of € 135.0 million aggregate principal amount of 4.375 % senior unsecured notes due 2024.

The net proceeds from the June 2019 offering, after deducting offering expenses, were $ 152.1 million.

The Company expects to use the proceeds from these offerings for general corporate purposes, to repay debt obligations, to repurchase the Company’s common stock or for special or recurring dividends to the Company’s stockholders.

The 2024 Notes bear interest at a rate of 4.375% per annum.

Interest began to accrue on the 2024 Notes issued in June 2020, on June 4, 2020 and interest began to accrue on the 2024 Notes issued in June 2019 on June 25, 2019.

Interest is paid semi-annually in arrears on June 30 and December 30 of each year.

Unless earlier redeemed, the 2024 Notes will mature on June 30, 2024.

The June 2020 issuance of € 215.0 million 2024 Notes were issued at a discount of 99.5 % for € 213.9 million Euros ($ 240.0 million USD) on June 3, 2020 at a Euro to USD rate of $ 1.112 .

The discount is amortized to interest expense to the maturity date under the effective interest rate method.

The Company received proceeds in USD on the June 2020 2024 Notes on June 9, 2020 at a Euro to USD rate of $ 1.133 resulting in a realized gain on foreign exchange of $ 2.5 million.

The June 2019 issuance of 2024 Notes were issued at par for € 135.0 million on June 25, 2019.

The issuances of the 2024 Notes were in Euros and are reported in the Company’s reporting currency – US Dollars.

As of June 30, 2020 the 2024 Notes were valued at $ 393.0 million.

The unrealized (loss) gain on foreign exchange on the Company’s 2024 Notes from converting the 2024 Notes into USD was $( 3.4 ) million for the three months ended June 30, 2020 and $ 0.2 million for the three months ended June 30, 2019.

The 2024 Notes were offered and sold only to persons reasonably believed to be qualified institutional buyers in an unregistered offering pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Act”), and to certain non-U.S.

persons in transactions outside the United States in compliance with Regulation S under the Act.

The 2024 Notes have not been registered under the Act, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

Application will be made for the 2024 Notes to be listed on the Official List of The International Stock Exchange;

however, there can be no assurance that the application will be successful or that any such listing will be granted or maintained.

Group may redeem some or all of the 2024 Notes at any time prior to June 30, 2021 at a price equal to 100 % of the principal amount of the 2024 Notes, plus a “make-whole” premium as set forth in the indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption.

Thereafter, Group may redeem the 2024 Notes, in whole or in part, at a redemption price ranging from 102.188 % to par (depending on the year), as set forth in the indenture.

Group may also redeem up to 35 % of the principal amount of the 2024 Notes using proceeds of certain equity offerings completed prior to June 30, 2021 at a redemption price equal to 104.375 %, plus accrued and unpaid interest, if any, to, but not including, the date of redemption, subject to certain exceptions.

Group may also redeem the 2024 Notes, in whole but not in part, in the event of certain changes in the tax laws of the United States (or any taxing authority in the United States).

This redemption would be at 100% of the principal amount of the 2024 Notes to be redeemed (plus any accrued interest and additional amounts then payable with respect to the 2024 Notes to, but not including, the redemption date).

If Group undergoes specific kinds of change in control accompanied by certain ratings events, it will be required to offer to repurchase the 2024 Notes from holders at a price equal to 101 % of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the date of repurchase.

Additionally, if Group or any of its restricted subsidiaries sells assets and does not apply the proceeds from such sale in a certain manner or certain other events have not occurred, under certain circumstances, Group will be required to use the excess net proceeds to make an offer to purchase the 2024 Notes at an offer price in cash equal to 100% of the principal amount of the 2024 Notes, plus accrued and unpaid interest, if any, to, but not including, the repurchase date.

In connection with any offer to purchase all or any of the 2024 Notes (including a change of control offer, asset sale offer or any tender offer), if holders of no less than 90 % of the aggregate principal amount of the 2024 Notes validly tender their 2024 Notes, Group or a third party is entitled to redeem any remaining 2024 Notes at the price offered to each holder.

The 2024 Notes are guaranteed (the “Guarantees”) on a senior unsecured basis, jointly and severally, by the Company’s material domestic subsidiaries, subject to certain exceptions, and by the Company (collectively, the “Guarantors”).

Under certain circumstances, the Guarantors may be released from these Guarantees without the consent of the holders of the 2024 Notes.

The 2024 Notes and the Guarantees are Group’s and the Guarantors’ senior unsecured obligations.

The 2024 Notes and the Guarantees are effectively subordinated to all of Groups’s and the Guarantors’ existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness, and are structurally subordinated to all indebtedness and other liabilities of subsidiaries that are not Guarantors.

Without giving effect to collateral arrangements, the 2024 Notes and the Guarantees rank pari passu in right of payment with Group’s and the Guarantors’ existing and future senior indebtedness.

The 2024 Notes and the Guarantees rank contractually senior in right of payment to all of Group’s and the Guarantors’ existing and future subordinated indebtedness.

The 2024 Notes indenture includes covenants that restrict Group and its restricted subsidiaries’ ability to, among other things:

incur indebtedness;

issue certain preferred stock or similar equity securities;

pay dividends or make other distributions in respect of, or repurchase or redeem, capital stock;

make certain investments and other restricted payments, such as prepayment, redemption or repurchase of certain indebtedness;

create liens;

consolidate, merge, sell or otherwise dispose of all or substantially all of the assets of Group and its restricted subsidiaries taken as a whole;

incur restrictions on the ability of a subsidiary to pay dividends or make other payments;

and enter into transactions with affiliates.

However, the covenants provide for certain exceptions to these restrictions and the Company is not subject to the covenants under the 2024 Notes indenture.

Certain covenants will cease to apply to the 2024 Notes if, and for so long as, the 2024 Notes have investment grade ratings from any two of Moody’s Investors Service, Inc., Fitch Ratings, Inc.

and S&P Global Ratings and so long as no default or event of default under the Indenture has occurred and is continuing.

The principal amount of the 2024 Notes would become immediately due and payable upon the occurrence of certain bankruptcy or insolvency events involving Group or certain of its subsidiaries, and may be declared immediately due and payable by the trustee or the holders of at least 25 % of the aggregate principal amount of the then-outstanding 2024 Notes upon the occurrence of certain events of default under the indenture.

Debt extinguishment and redemption 2021 Notes

In June 2020, Group redeemed its 5.625 % senior unsecured notes due in 2021 (the "2021 Notes") with the proceeds from its June 2020 issuance of € 215.0 million 2024 Notes.

The Company redeemed the entire outstanding amount of the 2021 Notes at a redemption price of 100.00 % of the $ 189.2 million principal amount plus $ 1.6 million of accrued interest.

As a result of this transaction the Company incurred a loss on debt extinguishment and redemption of $ 0.6 million from the amortization of the remaining unamortized notes cost and certain transaction expenses.

Limitations under the indentures

The indentures governing the Company's 2024 Notes, 2022 Notes and 2021 Notes, among other things, limit the Company’s ability to incur indebtedness;

The indentures governing the 2024 Notes and 2022 Notes among other things, limit the Company’s ability to incur indebtedness;

to pay dividends or make other distributions;

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and to enter into certain transactions with its affiliates.

Limitations on the ability to incur additional indebtedness (excluding IRU agreements incurred in the normal course of business) include a restriction on incurring additional indebtedness if the Company’s consolidated leverage ratio, as defined in the indentures, is greater than 6.0 for the 2024 Notes and greater than 5.0 for the 2022 Notes and 2021 Notes.

Limitations on the ability to incur additional secured indebtedness include a restriction on incurring additional secured indebtedness if the Company’s consolidated secured leverage ratio, as defined in the indentures, is greater than 4.0 for the 2024 Notes and greater than 3.5 for the 2022 Notes and 2021 Notes.

The indentures prohibit certain payments, such as dividends and stock purchases, when the Company’s consolidated leverage ratio, as defined by the indentures, is greater than 4.25 .

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The unrestricted payment amount may be increased by the Company’s consolidated cash flow, as defined in the indentures, as long as the Company’s consolidated leverage ratio is less than 4.25 .

The Company’s consolidated leverage ratio was above 4.25 as of March 31, 2020.

As of March 31, 2020, a total of $ 80.5 million (held by Holdings in cash and cash equivalents) was permitted for investment payments including dividends and stock purchases.

The Company’s consolidated leverage ratio was above 4.25 as of June 30, 2020.

As of June 30, 2020, a total of $ 165.5 million (held by Holdings in cash and cash equivalents) was permitted for investment payments including dividends and stock purchases.

Commitments and contingencies :

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In accordance with the accounting guidance for contingencies, the Company accrues its estimate of a contingent liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

Where it is probable that a liability has been incurred and there is a range of expected loss for which no amount in the range is more likely than any other

amount, the Company accrues at the low end of the range.

Where it is probable that a liability has been incurred and there is a range of expected loss for which no amount in the range is more likely than any other amount, the Company accrues at the low end of the range.

The Company reviews its accruals at least quarterly and adjusts them to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter.

The Company has taken certain positions related to its obligations for leased circuits for which it is reasonably possible could result in a loss of up to $ 3.2 million in excess of the amount accrued at March 31, 2020.

The Company is engaged in an arbitration proceeding in Spain in which a former provider of optical fiber to the Company is seeking approximately $ 9 million for the Company’s early termination of the optical fiber leases, which amount the Company accrued in 2015.

The Company is engaged in an arbitration proceeding in Spain in which a former provider of optical fiber to the Company is seeking approximately $ 9.0 million for Company’s early termination of the optical fiber leases, which amount the Company accrued in 2015.

The Company has counterclaimed for damages and is contesting its obligation to pay the termination liability.

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Three Months Ended

March 31, 2020

March 31, 2019

Common stock buyback program and stock options and award plan:

Six Months Ended

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Common stock buyback program stock option and award plan:

The Company’s Board of Directors has approved purchases of the Company’s common stock under a buyback program (the “Buyback Program”) through December 31, 2020.

At March 31, 2020, there was approximately $ 34.9 million remaining for purchases under the Buyback Program.

There were no purchases of common stock during the three months ended March 31, 2020 and three months ended March 31, 2019.

In the first quarter of 2020 the Company granted 0.3 million shares of common stock to its executive employees and directors valued at $ 23.7 million.

The vesting of 94,050 of these shares are subject to certain performance conditions and the vesting of 35,000 shares granted to the Company’s CEO are subject to the total shareholder return of the Company’s common stock compared to the total shareholder return of the Nasdaq Telecommunications Index.

The remaining shares primarily vest over periods ending in December 2023.

At June 30, 2020, there was approximately $ 34.9 million remaining for purchases under the Buyback Program.

There were no purchases of common stock during the three and six months ended June 30, 2020 and June 30, 2019.

In the first quarter of 2020 the Company granted 319,750 shares of common stock to its executive employees and directors valued at $ 23.7 million.

Included in this first quarter grant were 94,050 performance shares that vest subject to certain Company performance conditions and 35,000 performance shares granted to the Company’s CEO that are subject to the total shareholder return of the Company’s common stock compared to the total shareholder return of the Nasdaq Telecommunications Index.

In the second quarter of 2020 the Company granted 135,280 shares of common stock to its employees and directors valued at $ 10.6 million.

Shares granted in to the Company’s directors vest upon grant and the shares granted to the Company’s employees that are not subject to performance conditions generally vest over periods ending in December 2023.

Dividends on common stock:

On May 6, 2020, the Company’s Board of Directors approved the payment of a quarterly dividend of $ 0.68 per common share.

This estimated $ 31.1 million dividend payment is expected to be made on June 5, 2020.

On August 5, 2020, the Company’s Board of Directors approved the payment of a quarterly dividend of $ 0.705 per common share.

This estimated $ 32.2 million dividend payment is expected to be paid on September 4, 2020.

The payment of any future dividends and any other returns of capital, including stock buybacks will be at the discretion of the Company’s Board of Directors and may be reduced, eliminated or increased and will be dependent upon the Company’s financial position, results of operations, available cash, cash flow, capital requirements, limitations under the Company’s debt indentures and other factors deemed relevant by the Company’s Board of Directors.

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The fixed annual rent for the headquarters building is $ 1.0 million per year plus an allocation of taxes and utilities.

The lease began in May 2015 and the lease term was for five years .

The lease began in May 2015 and the lease term is for five years which is cancellable by the Company upon 60 days ’ notice.

In February 2020 the lease term was extended to May 2025.

The lease is cancellable by the Company upon 60 days ’ notice.

The Company’s audit committee reviews and approves all transactions with related parties.

The Company paid $ 0.4 million and $ 0.3 million in the three months ended March 31, 2020 and 2019, respectively, for rent and related costs (including taxes and utilities) to Sodium LLC for this lease.

The Company paid $ 0.5 million and $ 0.5 million in the three months ended June 30, 2020 and 2019, respectively, and $ 0.8 million and $ 0.9 million in the six months ended June 30, 2020 and 2019, respectively, for rent and related costs (including taxes and utilities) to Sodium LLC for this lease.

Segment information:

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The Company’s service revenue by geographic region and product class and long lived assets by geographic region are as follows (in thousands):

Three months Ended March 31, 2019

Three months Ended June 30, 2020

North America

Latin America

Three months Ended March 31, 2020

Three months Ended June 30, 2019

North America

Latin America

Six months Ended June 30, 2020

North America

Latin America

Six months Ended June 30, 2019

North America

Latin America

Long lived assets, net

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The majority of North American revenue consists of services delivered within the United States.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis together with our condensed consolidated financial statements and related notes included in this report.

The discussion in this report contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions.

The cautionary statements made in this report should be read as applying to all related forward-looking statements wherever they appear in this report.

Our actual results could differ materially from those discussed here.

Factors that could cause or contribute to these differences include, but are not limited to:

The COVID-19 pandemic and accompanying government policies worldwide;

future economic instability in the global economy, which could affect spending on Internet services;

the impact of changing foreign exchange rates (in particular the Euro to US dollar and Canadian dollar to US dollar exchange rates) on the translation of our non-US dollar denominated revenues, expenses, assets and liabilities;

legal and operational difficulties in new markets;

the imposition of a requirement that we contribute to the US Universal Service Fund on the basis of our Internet revenue;

changes in government policy and/or regulation, including rules regarding data protection, cyber security and net neutrality;

increasing competition leading to lower prices for our services;

our ability to attract new customers and to increase and maintain the volume of traffic on our network;

the ability to maintain our Internet peering arrangements on favorable terms;

our ability to renew our long-term leases of optical fiber that comprise our network;

our reliance on an equipment vendor, Cisco Systems Inc., and the potential for hardware or software problems associated with such equipment;

the dependence of our network on the quality and dependability of third-party fiber providers;

our ability to retain certain customers that comprise a significant portion of our revenue base;

the management of network failures and/or disruptions;

our ability to make payments on our indebtedness as they become due and outcomes in litigation as well as other risks discussed from time to time in our filings with the Securities and Exchange Commission, including, without limitation, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and our annual report on Form 10-K for the year ended December 31, 2019.

General Overview