What changed in this filing

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Item 1. Financial Statements

2020-11-05 compared with 2020-08-06 · 264 added, 271 removed, 721 unchanged (43% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2020 AND DECEMBER 31, 2019

AS OF SEPTEMBER 30, 2020 AND DECEMBER 31, 2019

(IN THOUSANDS, EXCEPT SHARE DATA)

September 30,

Current assets:

34 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

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

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

Service revenue

4 unchanged sentences

Total operating expenses

Loss on finance leases amendment

Gains on equipment transactions

1 unchanged sentence

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

(Loss) income before income taxes

Income tax benefit (provision)

Net (loss) income

Comprehensive income:

Net (loss) income

Foreign currency translation adjustment

Comprehensive income

Net income per common share:

Basic net income per common share

Diluted net income per common share

Net (loss) income per common share:

Basic net (loss) income per common share

Diluted net (loss) income per common share

Dividends declared per common share

4 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

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

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

Service revenue

4 unchanged sentences

Total operating expenses

Loss on finance lease amendments

Gains on equipment transactions

19 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

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

(IN THOUSANDS)

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

Cash flows from operating activities:

19 unchanged sentences

Dividends paid

Purchases of common stock

Redemption and extinguishment of 2021 Notes

5 unchanged sentences

Effect of exchange rates changes on cash

Net increase in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents, beginning of period

4 unchanged sentences

Finance lease obligations incurred

Fair value of equipment acquired in leases

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

9 unchanged sentences

and its subsidiaries.

Group and its subsidiaries represent the operating subsidiaries of Cogent and the vast majority of Cogent's assets, contractual arrangements, and operations are executed by Group and its subsidiaries.

Description of business

1 unchanged sentence

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 deliver our services primarily to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations in 47 countries across North America, Europe, Asia, South America, Australia and Africa.

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

27 unchanged sentences

Financial 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.

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

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

Based upon recent trading prices (Level 2— market approach) at 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.

Based upon recent trading prices (Level 2— market approach) at September 30, 2020 the fair value of the Company’s $ 445.0 million senior secured notes was $ 455.0 million and the fair value of the Company’s € 350.0 million Euro ($ 410.4 million USD) senior unsecured notes was $ 416.5 million.

Gross receipts taxes, universal service fund and other surcharges

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 $ 3.3 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.

Excise taxes and surcharges billed to customers and recorded on a gross basis (as service revenue and network operations expense) were $ 3.9 million and $ 4.0 million for the three months ended September 30, 2020 and September 30, 2019, respectively, and $ 10.9 million and $ 10.6 million for the nine months ended September 30, 2020 and September 30, 2019, respectively.

Basic and diluted net income per common share

5 unchanged sentences

Three Months Ended

Six Months Ended

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Nine Months Ended

September 30, 2020

September 30, 2019

September 30, 2020

September 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:

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

Unvested shares of restricted common stock

1 unchanged sentence

Anti-dilutive shares of restricted common stock

Stockholder’s Deficit

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):

Stockholders’ Deficit

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

Comprehensive

Stockholder’s

Stockholders’

Income (Loss)

Equity (Deficit)

Balance at March 31, 2020

Balance at June 30, 2020

Forfeitures of shares granted to employees

3 unchanged sentences

Exercises of options

Common stock purchases and retirement

Dividends paid

Balance at June 30, 2020

Balance at September 30, 2020

Comprehensive

Stockholder’s

Stockholders’

Income (Loss)

Equity (Deficit)

Balance at March 31, 2019

Balance at June 30, 2019

Forfeitures of shares granted to employees

4 unchanged sentences

Dividends paid

Balance at June 30, 2019

Balance at September 30, 2019

Comprehensive

Stockholder's

Stockholders'

Income (Loss)

6 unchanged sentences

Exercises of options

Common stock purchases and retirement

Dividends paid

Balance at June 30, 2020

Balance at September 30, 2020

Comprehensive

Stockholder's

Stockholders'

Income (Loss)

7 unchanged sentences

Dividends paid

Balance at June 30, 2019

Balance at September 30, 2019

Revenue recognition

24 unchanged sentences

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 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.

Service revenue recognized from amounts in deferred revenue (contract liabilities) at the beginning of the period during the three months ended September 30, 2020 was $ 1.6 million and during the three months ended September 30, 2019 was $ 1.7 million.

Service revenue recognized from amounts in deferred revenue (contract liabilities) at the beginning of the period during the nine months ended September 30, 2020 was $ 3.9 million and during the nine months ended September 30, 2019 was $ 5.1 million.

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

Amortization expense for contract costs was $ 12.6 million for the nine months ended September 30, 2020 and $ 13.0 million for the nine months ended September 30, 2019.

Recent Accounting Pronouncements— Adopted

4 unchanged sentences

ASU 2016-02 was effective for the Company beginning on January 1, 2019 and required the Company to record a right-of-use asset and a lease liability for most of its facilities leases.

Leases that were previously treated as operating leases.

These leases were previously treated as operating leases.

The effect of ASU 2016-02 was to record a cumulative-effect adjustment on January 1, 2019 as a right-of-use asset and an operating lease liability totaling $ 97.3 million.

2 unchanged sentences

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

September 30, 2020

September 30, 2019

Finance lease cost

3 unchanged sentences

Total lease costs

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

Finance lease cost

15 unchanged sentences

Finance leases—fiber lease agreements

The Company has entered into lease agreements with numerous providers of dark fiber under indefeasible-right-of use agreements (“IRU’s).

These IRU’s typically have initial terms of 15 - 20 years and include renewal options after the initial lease term.

The Company has entered into lease agreements with numerous providers of dark fiber under indefeasible-right-of use agreements (“IRUs).

These IRUs typically have initial terms of 15 - 20 years and include renewal options after the initial lease term.

The Company establishes the number of renewal option periods used in determining the lease term based upon its assessment at the inception of the lease of the number of option periods for which failure to renew the lease imposes a penalty in such amount that renewal appears to be reasonably certain.

3 unchanged sentences

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

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 .

As of September 30, 2020, the Company had committed to additional dark fiber IRU lease agreements totaling $ 20.7 million in future payments to be paid over periods of up to 20 years .

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

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

For the twelve months ending June 30,

For the twelve months ending September 30,

Total minimum finance lease obligations

18 unchanged sentences

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

For the twelve months ending June 30,

For the twelve months ending September 30,

Total minimum operating lease obligations

17 unchanged sentences

Charged Against

September 30,

Allowance for credit losses (deducted from accounts receivable)

Three months ending June 30, 2020

Three months ending September 30, 2020

Current-period

2 unchanged sentences

Charged Against

September 30,

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.

Nine months ending September 30, 2020

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

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

Property and equipment:

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.

Depreciation and amortization expense related to property and equipment and finance leases was $ 21.6 million and $ 20.0 million for the three months ended September 30, 2020, and 2019 respectively, and $ 61.0 million and $ 60.2 million for the nine months ended September 30, 2020 and 2019, respectively.

The Company capitalized salaries and related benefits of employees working directly on the construction and build-out of its network of $ 3.0 million and $ 2.7 million for the three months ended

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

Exchange agreement

In the three and 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.

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

The fair value of the equipment received was estimated to be $ 0.2 million and $ 0.3 million for the three months ended September 30, 2020 and 2019, respectively, and $ 1.1 million and $ 2.6 million for the nine months ended September 30, 2020 and 2019, respectively.

After considering the cash component the transactions resulted in gains of $ 0.1 million and $ 0.1 million for the three months ended September 30, 2020 and 2019, respectively, and $ 0.3 million and $ 0.8 million for the nine months ended September 30, 2020 and 2019, respectively.

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

1 unchanged sentence

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.

Under the IPA the Company was allowed to purchase network equipment in exchange for interest free note obligations each with a twenty-four month term until July 2020 when additional borrowings under the IPA expired.

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

As of 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.

As of September 30, 2020, and December 31, 2019 there was $ 10.4 million and $ 12.5 million, respectively, of note obligations outstanding under the IPA, secured by the related equipment.

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

The resulting discount was $ 0.3 million and $ 0.4 million as of 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.

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

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.

The Company has $ 445.0 million of senior secured notes (the "2022 Notes") and € 350.0 million ($ 410.4 million USD as of September 30, 2020) of senior unsecured notes (the "2024 Notes") outstanding.

The 2022 Notes are due on March 1, 2022 and bear interest at a rate of 5.375 % per year.

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

The € 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.

The 2024 Notes are due on June 30, 2024 and bear interest at a rate of 4.375 % per year.

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

2024 Notes issuances

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

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

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

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

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

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

9 unchanged sentences

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.

As of September 30, 2020 the carrying value of our 2024 Notes was $ 410.4 million.

The unrealized (loss) gain on foreign exchange on the Company’s 2024 Notes from converting the 2024 Notes into USD was $( 17.3 ) million for the three months ended September 30, 2020 and $ 6.2 million for the three months ended September 30, 2019 and was $( 17.8 ) million for the nine months ended September 30, 2020 and was $ 6.3 million for the nine months ended September 30, 2019.

Debt extinguishment and redemption 2021 Notes

15 unchanged sentences

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 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.

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

As of September 30, 2020, a total of $ 132.6 million was permitted for investment payments including dividends and stock purchases.

Commitments and contingencies :

3 unchanged sentences

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 June 30, 2020.

The Company has taken certain positions related to its obligations for leased circuits for which it is reasonably possible could result in a loss of up to $ 3.3 million in excess of the amount accrued at September 30, 2020.

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

7 unchanged sentences

Income taxes:

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

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

Three Months Ended

Six Months Ended

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Nine Months Ended

September 30, 2020

September 30, 2019

September 30, 2020

September 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, 2021.

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.

At September 30, 2020, there was approximately $ 34.6 million remaining for purchases under the Buyback Program.

In the three and nine months ended September 30, 2020 the Company purchased 4,567 shares of its common stock for $ 0.3 million.

There were no purchases of common stock during the three and nine months ended September 30, 2019.

Subsequent to September 30, 2020 the Company purchased 53,516 shares of its common stock for $ 3.1 million under the Buyback Program.

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

1 unchanged sentence

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.

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

Dividends on common stock:

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.

On November 4, 2020, the Company’s Board of Directors approved the payment of a quarterly dividend of $ 0.73 per common share.

This estimated $ 33.5 million dividend payment is expected to be paid on December 4, 2020.

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

5 unchanged sentences

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 is for five years which is cancellable by the Company upon 60 days ’ notice.

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

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

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

The Company paid $ 0.5 million and $ 0.5 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.

The Company paid $ 0.5 million and $ 0.3 million in the three months ended September 30, 2020 and 2019, respectively, and $ 1.3 million and $ 1.2 million in the nine months ended September 30, 2020 and 2019, respectively, for rent and related costs (including taxes and utilities) to Sodium LLC for this lease.

Segment information:

1 unchanged sentence

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 June 30, 2020

Three months Ended September 30, 2020

North America

Latin America

Three months Ended June 30, 2019

South America

Three months Ended September 30, 2019

North America

Latin America

Six months Ended June 30, 2020

South America

Nine months Ended September 30, 2020

North America

Latin America

Six months Ended June 30, 2019

South America

Nine months Ended September 30, 2019

North America

Latin America

South America

September 30,

Long-lived assets, net

10 unchanged sentences

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;

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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.

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 quarters ended March 31, 2020 and June 30, 2020 and our Annual Report on Form 10-K for the year ended December 31, 2019.

General Overview

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

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

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These buildings include 1,783 large multi-tenant office buildings (totaling 968.4 million square feet of office space) in major North American cities where we offer our services to a diverse set of high-quality, low churn corporate customers within close physical proximity of each other.

These buildings also include 1,029 carrier neutral colocation and unique data center buildings in North America, Europe, Asia and Latin America where our net-centric customers directly interconnect with our network.

In our multi-tenant office buildings and carrier neutral data centers we connect to a total of 3,060 unique points-of-presence as certain of these buildings can include multiple data centers.

These buildings also include 1,047 carrier neutral colocation and unique data center buildings in North America, Europe, Asia , South America and Africa where our net-centric customers directly interconnect with our network.

In our multi-tenant office buildings and carrier neutral data centers we connect to a total of 3,148 unique points-of-presence.

In our 1,047 carrier neutral data centers we connect to 1,225 points-of-presence as certain carrier neutral data center buildings include multiple data centers.

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Since its inception, our network has grown significantly in terms of its geographic reach, customer connections, and traffic.

We currently serve over 7,100 access networks including numerous large and small content providers and over 48,300 corporate customers.

We currently serve over 7,200 access networks including numerous large and small content providers and over 47,700 corporate customer connections.

As a result of these growing bases of customers who distribute (content providers) and receive (access networks) content on our network, we believe that the majority of all the traffic on our network originates and terminates on our network.

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Our senior management team is composed of seasoned executives with extensive expertise in the telecommunications industry as well as knowledge of the markets in which we operate.

The members of our senior management team have an average of over 20 years of experience in the telecommunications industry and many have been working together at the Company for several years.

The members of our senior management team have an average of over 20 years of experience in the telecommunications industry and many have been

working together at the Company for several years.

Several members of the senior management team have been working together at the Company since 2000.

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We are currently a leading provider of high speed internet access to a variety of content providers and over 7,200 access networks across the world.

We expect that we will continue to grow our share of the net-centric market as a result of the geographic breadth and depth of our network, which offers service in 47 countries and access to over 200 metro markets, a dedicated net-centric salesforce of over 200 professionals located in offices around the world, and a competitive pricing strategy designed to gain market share.

We intend to further load our high capacity network to respond to the growing demand for high speed internet access generated by bandwidth-intensive applications such as OTT media services, online gaming, video, Internet of Things (IoT), voice over IP (VOIP), remote data storage, and other services.

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Over the past five years we have increased the size of our quota bearing salesforce by 39% from 363 to 597.

We have also largely maintained the productivity of our salesforce as measured by monthly connections sold by salesperson per month.

We seek to pair this growth in the size our salesforce with a consistent level of productivity as measured by the number of connections sold per salesperson per month, taking into account adjustments to the changing mix of products sold as measured by monthly connections sold by salesperson per month.

In order to gain market share in our targeted businesses, we expect to continue to increase our sales efforts including increasing the number of sales representatives, implementing strategies to optimize sales productivity and expanding our on-net addressable market by adding service locations to our network.

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Results of Operations

Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019

Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

The following summary table presents a comparison of our results of operations with respect to certain key financial measures.

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Three months ended

September 30,

(in thousands)

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Depreciation and amortization expenses

Loss on debt extinguishment and redemption

Interest expense

Realized gain on foreign exchange – 2024 Notes

Unrealized (loss) gain on 2024 Notes

Income tax provision

(1) Includes equity-based compensation expenses of $305 and $226 in the three months ended June 30, 2020 and 2019, respectively.

(2) Includes equity-based compensation expenses of $5,778 and $5,063 in the three months ended June 30, 2020 and 2019, respectively.

Income tax benefit (provision)

(1) Includes equity-based compensation expenses of $346 and $282 in the three months ended September 30, 2020 and 2019, respectively.

(2) Includes equity-based compensation expenses of $6,176 and $4,515 in the three months ended September 30, 2020 and 2019, respectively.

NM – not meaningful

Three months ended

September 30,

(in thousands)

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We also seek to grow our service revenue by investing in our sales and marketing team.

Over the last 5 years we have grown our salesforce by 37% to 572 full time equivalent salespeople.

We seek to pair this growth in our salesforce with a consistent level of productivity as measured by the number of connections sold per salesperson per month.

Over the last five years we have grown our quota bearing salesforce by 39% to 597 full time equivalent salespeople.

We typically sell corporate connections at similar pricing to our competitors but our clients benefit from significantly faster speeds, enhanced Service Level Agreements and rapid installation times.

In the net-centric market we offer comparable services in terms of capacity but typically at significantly lower prices.

Our service revenue increased 4.6% for the three months ended June 30, 2020 from the three months ended June 30, 2019.

The impact of exchange rates resulted in a decrease in revenues for the three months ended June 30, 2020 of approximately $0.7 million.

All foreign currency comparisons herein reflect our second quarter 2020 results translated at the average foreign currency exchange rates for the second quarter of 2019.

Our service revenue increased 3.9% for the three months ended September 30, 2020 from the three months ended September 30, 2019.

The impact of exchange rates resulted in an increase in revenues for the three months ended September 30, 2020 of approximately $1.1 million.

All foreign currency comparisons herein reflect our third quarter 2020 results translated at the average foreign currency exchange rates for the third quarter of 2019.

We increased our total service revenue by increasing the number of sales representatives selling our services, expanding our network, adding additional buildings to our network, increasing our penetration into the buildings connected to our network and by gaining market share by offering our services at lower prices than our competitors.

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We record these taxes billed to our customers on a gross basis (as service revenue and network operations expense) in our consolidated statements of operations.

The impact of these taxes including the Universal Service Fund resulted in an increase in our revenues for the three months ended June 30, 2020 from the three months ended June 30, 2019 of approximately $0.1 million.

The impact of these taxes including the Universal Service Fund resulted in a decrease in our revenues for the three months ended September 30, 2020 from the three months ended September 30, 2019 of approximately $0.1 million.

Our corporate customers purchase their services on a price per connection basis.

Our net-centric customers purchase their services on a price per megabit basis.

Revenues from our corporate and net-centric customers represented 68.8% and 31.2% of total service revenue, respectively, for the three months ended June 30, 2020 and represented 68.5% and 31.5% of total service revenue, respectively, for the three months ended June 30, 2019.

Revenues from corporate customers increased 5.1% to $97.0 million for the three months ended June 30, 2020 from the three months ended June 30, 2019 primarily due to an increase in our number of our corporate customers.

Revenues from our net-centric customers increased by 3.6% to $44.0 million for the three months ended June 30, 2020 from the three months ended June 30, 2019 primarily due to an increase in our number of net-centric customers, partly offset by a decline in our average price per megabit and the impact of foreign exchange rates.

Our revenue from our corporate customers as a percentage of our total revenue has increased versus our net-centric customers over the past several years.

The mix has changed as we have grown our number of corporate connections and our corporate customers taken advantage of our superior speeds, service levels and installation times versus our competitors.

The growing trend of customers installing second lines for redundancy and in order to supplement their VPN capabilities has also led to this growing corporate share.

Our net-centric service revenue has grown at a slower rate primarily because our net-centric customers purchase our services based upon a price per megabit basis and our average price per megabit declined by 25.1% from the three months ended June 30, 2019 to the three months ended June 30, 2020.

Revenues from our corporate and net-centric customers represented 67.3% and 32.7% of total service revenue, respectively, for the three months ended September 30, 2020 and represented 69.0% and 31.0% of total service revenue, respectively, for the three months ended September 30, 2019.

Revenues from corporate customers increased 1.3% to $95.7 million for the three months ended September 30, 2020 from the three months ended September 30, 2019.

Revenues from our net-centric customers increased by 9.6% to $46.6 million for the three months ended September 30, 2020 from the three months ended September 30, 2019 primarily due to an increase in our number of net-centric customers partly offset by a decline in our average price per megabit.

Our revenue from our corporate customers has increased as our corporate customers take advantage of our superior speeds, service levels and installation times versus our competitors.

The growing trend of customers installing second lines for redundancy and in order to supplement their VPN capabilities has also led to our growing corporate revenues.

However, in the three months ended September 30, 2020, we saw corporate customers take a cautious approach to new configurations and upgrades as well as a reduction in demand for connecting smaller satellite offices as a result of the challenges and uncertainties of the COVID-19 pandemic.

We also witnessed a deteriorating real estate market in and around the buildings we service with rising vacancy levels and falling lease initiations or renewals.

Rising vacancy levels and falling lease initiations or renewals meant fewer sales opportunities for our salesforce.

As a result, during the three months ended September 30, 2020, we experienced a slowdown in new sales to our corporate customers which negatively impacted our corporate revenue growth.

While we believe that demand for office space in the buildings in which we operate will remain among the strongest in our markets, we may experience increased corporate customer turnover, fewer upgrades of existing corporate customer configurations and fewer new tenant opportunities which would negatively impact our corporate revenue growth.

Our net-centric customers purchase our services based upon a price per megabit basis.

The net-centric market exhibits significant pricing pressure due to the continued introduction of new technology which lowers the marginal cost of transmitting bits, and the commodity nature of the service where price is typically the only differentiating factor for these customers.

We expect that our average price per megabit for the net-centric market will continue to decline at similar rates which would result in our corporate revenues continuing to represent a greater portion of our total revenues and our net-centric revenues continuing to grow at a lower rate than our corporate revenues.

Additionally, the impact of foreign exchange rates has a more significant impact on our net-centric revenues.

Our on-net revenues increased 6.5% for the three months ended June 30, 2020 from the three months ended June 30, 2019.

We increased the number of our on-net customer connections by 4.8% at June 30, 2020 from June 30, 2019.

Our on-net ARPU increased by 1.1% from the three months ended June 30, 2019 to the three months ended June 30, 2020.

Our average price per megabit declined by 26.5% from the three months ended September 30, 2019 to the three months ended September 30, 2020.

We expect that our average price per megabit for the net-centric market will continue to decline at similar rates.

The impact of foreign exchange rates has a more significant impact on our net-centric revenues.

Our on-net revenues increased 5.7% for the three months ended September 30, 2020 from the three months ended September 30, 2019.

We increased the number of our on-net customer connections by 3.3% at September 30, 2020 from September 30, 2019.

Our on-net ARPU increased by 1.6% from the three months ended September 30, 2019 to the three months ended September 30, 2020.

ARPU is determined by dividing revenue for the period by the average customer connections for that period.

Our average price per megabit for our installed base of customers declined by 25.1% from the three months ended June 30, 2019 to the three months ended June 30, 2020.

Our average price per megabit for our installed base of customers declined by 26.5% from the three months ended September 30, 2019 to the three months ended September 30, 2020.

Our average price per megabit for our installed base of customers is determined by dividing the aggregate monthly recurring fixed charges for those customers by the aggregate committed data rate for the same customers.

Our off-net revenues decreased 0.4% for the three months ended June 30, 2020 from the three months ended June 30, 2019.

We increased the number of our off-net customer connections by 4.6% at June 30, 2020 from June 30, 2019.

Our off-net revenues decreased by 0.9% for the three months ended September 30, 2020 from the three months ended September 30, 2019.

We increased the number of our off-net customer connections by 3.0% at September 30, 2020 from September 30, 2019.

Our off-net customer connections increased at a greater rate than our off-net revenue primarily due to the 4.5% decrease in our off-net ARPU.

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Non-cash equity-based compensation expense is included in network operations expenses consistent with the classification of the employee’s salary and other compensation.

Our network operations expenses, including non-cash equity-based compensation expense, decreased 1.0% for the three months ended June 30, 2020 from the three months ended June 30, 2019.

We were connected to 4.8% more customer connections and we were connected to 117, or 4.3%, more on-net buildings as of June 30, 2020 compared to June 30, 2019.

The decrease in network operations expense is primarily attributable to an increase in costs related to our network and facilities expansion activities offset by price reductions obtained in certain of our circuit costs, fewer operating leases for fiber and the impact of a renewal of an IRU fiber lease agreement.

Our network operations expenses, including non-cash equity-based compensation expense, decreased 1.3% for the three months ended September 30, 2020 from the three months ended September 30, 2019.

We were connected to 3.3% more customer connections and we were connected to 113, or 4.1%, more on-net buildings as of September 30, 2020 compared to

September 30, 2019.

Under the accounting for the IRU lease renewal, the future minimum lease payments were capitalized as a finance lease and right-of-use leased asset totaling $34.0 million.

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Selling, General, and Administrative (“SG&A”) Expenses.

Our SG&A expenses, including non-cash equity-based compensation expense, increased by 3.3% for the three months ended June 30, 2020 from the three months ended June 30, 2019.

Non-cash equity-based compensation expense is included in SG&A expenses consistent with the classification of the employee’s salary and other compensation and was $5.8 million for the three months ended June 30, 2020 and $5.1 million for the three months ended June 30, 2019.

Our SG&A expenses, including non-cash equity-based compensation expense, increased by 10.4% for the three months ended September 30, 2020 from the three months ended September 30, 2019.

Non-cash equity-based compensation expense is included in SG&A expenses consistent with the classification of the employee’s salary and other compensation and was $6.2 million for the three months ended September 30, 2020 and $4.5 million for the three months ended September 30, 2019.

SG&A expenses increased primarily from an increase in salaries and related costs required to support our expansion and the increase in our sales efforts.

Our sales force headcount increased from 656 at June 30, 2019 to 716 at June 30, 2020, our quota bearing sales force increased from 519 at June 30, 2019 to 572 at June 30, 2020 and our total headcount increased from 1,026 at June 30, 2019 to 1,083 at June 30, 2020.

Our total sales force headcount increased from 667 at September 30, 2019 to 740 at September 30, 2020, our quota bearing sales force increased from 530 at September 30, 2019 to 597 at September 30, 2020 and our total headcount increased from 1,036 at September 30, 2019 to 1,110 at September 30, 2020.

Depreciation and Amortization Expenses.

Our depreciation and amortization expense decreased by 0.4% for the three months ended June 30, 2020 from the three months ended June 30, 2019.

The decrease is primarily due to certain deployed fixed assets becoming fully depreciated.

Interest Expense and Loss on Debt Extinguishment & Redemption.

Interest expense resulted from interest incurred on our $445.0 million of senior secured notes (“2022 Notes”), interest incurred on our $189.2 million of senior unsecured notes (“2021 Notes”), interest on our installment payment agreement, interest on our finance lease obligations and interest on our €350.0 million ($393.0 million) aggregate principal amount of 4.375% senior unsecured notes (“2024 Notes’).

Our depreciation and amortization expense increased by 8.1% for the three months ended September 30, 2020 from the three months ended September 30, 2019.

The increase is primarily due to an increase in our deployed fixed assets.

Interest Expense.

Our interest expense resulted from interest incurred on our $445.0 million of senior secured notes (“2022 Notes”), interest incurred on our $189.2 million of senior unsecured notes (“2021 Notes") until redeemed in June 2020, interest on our installment payment agreement, interest on our finance lease obligations and interest on our €350.0 million ($410.4 million) aggregate principal amount of 4.375% senior unsecured notes (“2024 Notes’).

We issued €215.0 million of our 2024 Notes in June 2020 and €135.0 million of our 2024 Notes in June 2019.

In June 2020 we redeemed and extinguished our $189.2 million of 2021 Notes at par value resulting in a loss on debt extinguishment of $0.6 million in the three months ended June 30, 2020.

Our interest expense increased by 14.0% for the three months ended June 30, 2020 from the three months ended June 30, 2019 primarily due to an increase in our finance lease obligations and the issuances of our 2024 Notes.

Realized gain and unrealized (loss) gain on foreign exchange – 2024 Notes.

In June 2020 we redeemed and extinguished our 2021 Notes at par value.

Our interest expense increased by 3.7% for the three months ended September 30, 2020 from the three months ended September 30, 2019 primarily due to an increase in our finance lease obligations and the issuances of our 2024 Notes, partly offset by the redemption of our 2021 Notes.

Unrealized (Loss) Gain on 2024 Notes.

In June 2020, we completed an offering of our €215.0 million principal amount of 2024 Notes.

In June 2019, we completed an offering of our €135.0 million principal amount of our 2024 Notes.

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

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

In June 2020 our €215.0 million 2024 Notes were issued at a Euro to USD rate of $1.112.

We received proceeds in USD on the 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.

Our 2024 Notes were issued in Euros and are reported in our reporting currency – US Dollars.

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

Our unrealized (loss) gain on foreign exchange on our 2024 Notes from converting our 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.

As of September 30, 2020 the carrying value of our 2024 Notes was $410.4 million.

Our unrealized (loss) gain on foreign exchange on our 2024 Notes from converting our 2024 Notes into USD was $(17.3) million for the three months ended September 30, 2020 and $6.2 million for the three months ended September 30, 2019.

We do not enter into hedges for our foreign currency obligations.

Income Tax Provision.

Our income tax provision was $2.7 million for the three months ended June 30, 2020 and $3.0 million for the three months ended June 30, 2019.

The change in our income tax provision is primarily related to changes in our taxable income.

Income Tax Benefit (Provision).

Our income tax benefit (provision) was $1.6 million for the three months ended September 30, 2020 and ($5.3) million for the three months ended September 30, 2019.

The change in our income tax benefit (provision) is primarily related due to changes in our income before income taxes including the change in the unrealized (loss) gain on foreign exchange on our 2024 Notes.

Buildings On-net.

As of June 30, 2020 and 2019, we had a total of 2,854 and 2,737 on-net buildings connected to our network, respectively.

As of September 30, 2020 and 2019, we had a total of 2,884 and 2,771 on-net buildings connected to our network, respectively.

The increase in on-net buildings was a result of our disciplined network expansion program.

We anticipate adding a similar number of buildings to our network for the next several years.

Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019

Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

The following summary table presents a comparison of our results of operations with respect to certain key financial measures.

The comparisons illustrated in the table are discussed in greater detail below.

Six months ended

Nine months ended

September 30,

(in thousands)

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Income tax provision

(1) Includes equity-based compensation expenses of $557 and $406 in the six months ended June 30, 2020 and 2019, respectively.

(2) Includes equity-based compensation expenses of $10,600 and $8,318 in the six months ended June 30, 2020 and 2019, respectively.

Includes equity-based compensation expenses of $903 and $688 in the nine months ended September 30, 2020 and 2019, respectively.

Includes equity-based compensation expenses of $16,776 and $12,832 in the nine months ended September 30, 2020 and 2019, respectively.

NM – not meaningful

Six Months Ended

Nine Months Ended

September 30,

Other Operating Data

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Service Revenue.

Our service revenue increased 4.8% for the six months ended June 30, 2020 from the six months ended June 30, 2019.

The impact of exchange rates resulted in a decrease in revenues for the six months ended June 30, 2020 of approximately $1.4 million.

All foreign currency comparisons herein reflect our results for the six months ended June 30, 2020 translated at the average foreign currency exchange rates for the six months ended June 30, 2019.

Our service revenue increased 4.5% for the nine months ended September 30, 2020 from the nine months ended September 30, 2019.

The impact of exchange rates resulted in a decrease in revenues for the nine months ended September 30, 2020 of approximately $0.3 million.

All foreign currency comparisons herein reflect our results for the nine months ended September 30, 2020 translated at the average foreign currency exchange rates for the nine months ended September 30, 2019.

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We record these taxes billed to our customers on a gross basis (as service revenue and network operations expense) in our consolidated statements of operations.

The impact of these taxes including the Universal Service Fund resulted in an increase in our revenues for the six months ended June 30, 2020 from the six months ended June 30, 2019 of approximately $0.5 million.

The impact of these taxes including the Universal Service Fund resulted in an increase in our revenues for the nine months ended September 30, 2020 from the nine months ended September 30, 2019 of approximately $0.4 million.

Our net-centric customers tend to purchase their service on a price per megabit basis.

Our corporate customers tend to utilize a small portion of their allocated bandwidth on their connections and tend to purchase their service on a per connection basis.

Revenues from our corporate and net-centric customers represented 68.8% and 31.2% of total service revenue, respectively, for the six months ended June 30, 2020 and represented 67.9% and 32.1% of total service revenue, respectively, for the six months ended June 30, 2019.

Revenues from corporate customers increased 6.3% to $194.0 million for the six months ended June 30, 2020 from the six months ended June 30, 2019 primarily due to an increase in our number of our corporate customers.

Revenues from our net-centric customers increased by 1.7% to $87.9 million for the six months ended June 30, 2020 from the six months ended June 30, 2019 primarily due to an increase in our number of net-centric customers, being partially offset by a decline in our average price per megabit and the impact of foreign exchange rates.

Our revenue from our net-centric customers has declined as a percentage of our total revenue and grew at a slower rate than our corporate customer revenue because net-centric customers purchase our services based upon a price per megabit basis and our average price per megabit declined by 23.4% from the six months ended June 30, 2019 to the six months ended June 30, 2020.

Revenues from our corporate and net-centric customers represented 68.3% and 31.7% of total service revenue, respectively, for the

nine months ended September 30, 2020 and represented 68.2% and 31.8% of total service revenue, respectively, for the nine months ended September 30, 2019.

Revenues from corporate customers increased 4.6% to $289.7 million for the nine months ended September 30, 2020 from the nine months ended September 30, 2019.

Our revenue from our corporate customers has increased as our corporate customers take advantage of our superior speeds, service levels and installation times versus our competitors.

The growing trend of customers installing second lines for redundancy and in order to supplement their VPN capabilities has also led to our growing corporate revenues.

However, primarily during the third quarter of 2020, we saw corporate customers take a cautious approach to new configurations and upgrades as well as a reduction in demand for connecting smaller satellite offices as a result of the challenges and uncertainties of the COVID-19 pandemic.

We also witnessed a deteriorating real estate market in and around the buildings we service with rising vacancy levels and falling lease initiations or renewals.

Rising vacancy levels and falling lease initiations or renewals meant fewer sales opportunities for our salesforce.

As a result, we experienced a slowdown in new sales to our corporate customers which negatively impacted our corporate revenue growth for the nine months ended September 30, 2019.

Revenues from our net-centric customers increased by 4.3% to $134.5 million for the nine months ended September 30, 2020 from the nine months ended September 30, 2019 primarily due to an increase in our number of net-centric customers, being partially offset by a decline in our average price per megabit and the impact of foreign exchange rates.

Our revenue from our net-centric customers has declined as a percentage of our total revenue and grew at a slower rate than our corporate customer revenue because net-centric customers purchase our services based upon a price per megabit basis and our average price per megabit declined by 24.4% from the nine months ended September 30, 2019 to the nine months ended September 30, 2020.

Additionally, the net-centric market experiences a greater level of pricing pressure than the corporate market and net-centric customers who renew their service with us expect their renewed service to be at a lower price than their current price.

We expect that our average price per megabit will continue to decline at similar rates which would result in our corporate revenues continuing to represent a greater portion of our total revenues and our net-centric revenues continuing to grow at a lower rate than our corporate revenues.

Additionally, the impact of foreign exchange rates has a more significant impact on our net-centric revenues.

Our on-net revenues increased 6.5% for the six months ended June 30, 2020 from the six months ended June 30, 2019.

We increased the number of our on-net customer connections by 4.8% at June 30, 2020 from June 30, 2019.

Our on-net ARPU decreased by 0.1% from the six months ended June 30, 2019 to the six months ended June 30, 2020.

We expect that our average price per megabit will continue to decline at similar rates.

The impact of foreign exchange rates has a more significant impact on our net-centric revenues.

Our on-net revenues increased 6.2% for the nine months ended September 30, 2020 from the nine months ended September 30, 2019.

We increased the number of our on-net customer connections by 3.3% at September 30, 2020 from September 30, 2019.

Our on-net ARPU increased by 0.4% from the nine months ended September 30, 2019 to the nine months ended September 30, 2020.

ARPU is determined by dividing revenue for the period by the average customer connections for that period.

The decline in on-net ARPU is partly attributed to volume and term based pricing discounts.

Additionally, on-net customers who cancel their service from our installed base of customers, in general, have an ARPU that is greater than the ARPU for our new customers due to declining prices primarily for our on-net services sold to our net-centric customers.

These trends resulted in the reduction to our on-net ARPU and a 23.4% decline in our average price per megabit for our installed base of customers.

Our off-net revenues increased 0.4% for the six months ended June 30, 2020 from the six months ended June 30, 2019.

Our off-net revenues increased as we increased the number of our off-net customer connections by 4.6% at June 30, 2020 from June 30, 2019.

On-net customers who cancel their service from our installed base of customers, in general, have an ARPU that is greater than the ARPU for our new customers due to declining prices primarily for our on-net services sold to our net-centric customers.

These trends resulted in a 24.4% decline in our average price per megabit for our installed base of customers.

Our off-net revenues were $111.5 million for the nine months ended September 30, 2020 and $111.5 million for the nine months ended September 30, 2019.

We increased the number of our off-net customer connections by 3.0% at September 30, 2020 from September 30, 2019.

Our off-net customer connections increased at a greater rate than our off-net revenue primarily due to the 4.4% decrease in our off-net ARPU.

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Non-cash equity-based compensation expense is included in network operations expenses consistent with the classification of the employee’s salary and other compensation.

Our network operations expenses, including non-cash equity-based compensation expense, increased 1.2% for the six months ended June 30, 2020 from the six months ended June 30, 2019.

We incurred the cost of being connected to 4.8% more customer connections and 117, or 4.3%, more on-net buildings as of June 30, 2020 compared to June 30, 2019 that was partially offset by price reductions in certain circuit costs and fewer operating leases for fiber and the impact of a renewal of an IRU fiber lease agreement.

Our network operations expenses, including non-cash equity-based compensation expense, increased 0.3% for the nine months ended September 30, 2020 from the nine months ended September 30, 2019.

We incurred the cost of being connected to 3.3% more customer connections and 113, or 4.1%, more on-net buildings as of September 30, 2020 compared to September 30, 2019 that was partially offset by price reductions in certain circuit costs and fewer operating leases for fiber and the impact of a renewal of an IRU fiber lease agreement in the second quarter of 2020.

Under the accounting for the IRU lease renewal, the future minimum lease payments were capitalized as a finance lease and right-of-use leased asset totaling $34.0 million.

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Selling, General, and Administrative (“SG&A”) Expenses.

Our SG&A expenses, including non-cash equity-based compensation expense, increased by 6.8% for the six months ended June 30, 2020 from the six months ended June 30, 2019.

Non-cash equity-based compensation expense is included in SG&A expenses consistent with the classification of the employee’s salary and other compensation and was $10.6 million for the six months ended June 30, 2020 and $8.3 million for the six months ended June 30, 2019.

Our SG&A expenses, including non-cash equity-based compensation expense, increased by 8.0% for the nine months ended September 30, 2020 from the nine months ended September 30,

Non-cash equity-based compensation expense is included in SG&A expenses consistent with the classification of the employee’s salary and other compensation and was $16.8 million for the nine months ended September 30, 2020 and $12.8 million for the nine months ended September 30, 2019.

SG&A expenses increased primarily from an increase in salaries and related costs required to support our expansion and the increase in our sales efforts.

Our sales force headcount increased from 667 at September 30, 2019 to 740 at September 30, 2020, our quota bearing sales force increased from 530 at September 30, 2019 to 597 at September 30, 2020 and our total headcount increased from 1,036 at September 30, 2019 to 1,110 at September 30, 2020.

Depreciation and Amortization Expenses.

Our depreciation and amortization expense decreased by 2.1% for the six months ended June 30, 2020 from the six months ended June 30, 2019.

The decrease is primarily due to certain deployed fixed assets becoming fully depreciated.

Our depreciation and amortization expense increased by 1.3% for the nine months ended September 30, 2020 from the nine months ended September 30, 2019.

The increase is primarily due to an increase in our deployed fixed assets.

Interest Expense and Loss on Debt Extinguishment & Redemption.

Our interest expense resulted from interest incurred on our $445.0 million of senior secured notes (“2022 Notes”), interest incurred on our $189.2 million of senior unsecured notes (“2021 Notes ") until redeemed in June 2020, interest on our installment payment agreement, interest on our finance lease obligations and interest on our €350.0 million ($410.4 million) aggregate principal amount of 4.375% senior unsecured notes (“2024 Notes’).

We issued €215.0 million of our 2024 Notes in June 2020 and €135.0 million of our 2024 Notes in June 2019.

We redeemed our 2021 Notes in June 2020 at par value resulting in a loss on debt extinguishment of $0.6 million in the six months ended June 30, 2020.

Our interest expense increased by 13.6% for the six months ended June 30, 2020 from the six months ended June 30, 2019 primarily due to an increase in our finance lease obligations and the issuances of our 2024 Notes.

We redeemed our 2021 Notes in June 2020 at par value resulting in a loss on debt extinguishment of $0.6 million in the nine months ended September 30, 2020.

Our interest expense increased by 10.0% for the nine months ended September 30, 2020 from the nine months ended September 30, 2019 primarily due to an increase in our finance lease obligations and the issuances of our 2024 Notes partly offset by the redemption of our 2021 Notes.

Realized Gain and Unrealized Gain (Loss) on Foreign Exchange – 2024 Notes .

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In June 2019, we completed an offering of our €135.0 million principal amount of 2024 Notes.

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

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

In June 2020 our €215.0 million 2024 Notes were issued at a Euro to USD rate of $1.112.

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Our 2024 Notes were issued in Euros and are reported in our reporting currency – US Dollars.

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

Our unrealized (loss) gain on foreign exchange on our 2024 Notes from converting our 2024 Notes into USD was $(0.5) million for the three months ended June 30, 2020 and $0.2 million for the three months ended June 30, 2019.

As of September 30, 2020 the carrying value of our 2024 Notes was $410.4 million.

Our unrealized (loss) gain on foreign exchange on our 2024 Notes from converting our 2024 Notes into USD was $(17.8) million for the nine months ended September 30, 2020 and $6.3 million for the nine months ended September 30, 2019.

We do not enter into hedges for our foreign currency obligations.

Income Tax Provision .

Our income tax provision was $6.3 million for the six months ended June 30, 2020 and $6.6 million for the six months ended June 30, 2019.

The change in our income tax provision is primarily related to changes in our taxable income.

Our income tax provision was $4.7 million for the nine months ended September 30, 2020 and $11.9 million for the nine months ended September 30, 2019.

The change in our income tax provision is primarily related to changes in our income before income taxes including the change in the unrealized (loss) gain on foreign exchange on our 2024 Notes.

Buildings On-net.

As of June 30, 2020 and 2019, we had a total of 2,854 and 2,737 on-net buildings connected to our network, respectively.

As of September 30, 2020 and 2019, we had a total of 2,884 and 2,771 on-net buildings connected to our network, respectively.

The increase in on-net buildings was a result of our disciplined network expansion program.

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We worked with local authorities and building owners to categorize our employees as essential workers who need priority access to buildings.

We believe that our disruption in access to buildings was effectively mitigated throughout our second quarter.

We believe that our disruption in access to buildings was effectively mitigated throughout our second and third quarters.

In April and May 2020, we waived late fees for customers who were unable to pay their bills due to the pandemic.

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There can be no assurance that we will continue to experience normal operations as economic dislocations may adversely affect our customers and may lead to higher customer turnover, bad debt expense and lower revenue and profitability.

During the second quarter of 2020, the impact of the COVID-19 pandemic on our business remained limited.

We saw a decrease in sales representative productivity, particularly in sales to corporate customers.

Traffic on our network continued to grow at an accelerated rate compared to our historical growth rates, but at a slower rate of growth as compared to the end of the first quarter of 2020.

We continue to operate with a high level of liquidity and as of June 30, 2020 we had cash and cash equivalents of approximately $417.0 million.

Due to uncertain market conditions in March 2020 we applied for and received from the Small Business Administration a Paycheck Protection Program (“PPP”) loan, as established by Section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

We received those funds on April 16, 2020.

Following changes to the criteria for PPP loans and greater clarity surrounding the public capital market, we repaid the entire loan on April 30, 2020.

We have received no other financial support from any governmental body in any of the countries we operate to date.

We continue to operate with a high level of liquidity and as of September 30, 2020 we had cash and cash equivalents of approximately $394.8 million.

During the three months ended September 30, 2020, we saw corporate customers take a cautious approach to new configurations and upgrades as well as a reduction in demand for connecting smaller satellite offices as a result of the challenges and uncertainties of the COVID-19 pandemic.

We witnessed a deteriorating real estate market in and around the buildings we service with rising vacancy levels and falling lease initiations or renewals.

Rising vacancy levels and falling lease initiations or renewals meant fewer sales opportunities for our salesforce.

As a result, during the three months ended September 30, 2020, we experienced a slowdown in new sales to our corporate customers which negatively impacted our corporate revenue growth.

While we believe that demand for office space in the buildings in which we operate will remain among the strongest in our markets, we may experience increased customer turnover, fewer upgrades of existing customer configurations and fewer new tenant opportunities.

These trends may negatively impact our revenue growth, cash flows and profitability.

Shortly after COVID-19 began its rapid spread around the world, domestic and worldwide capital markets ceased operating for a short period.

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In June 2020, we issued an additional €215 million of our 4.375% Senior Notes due 2024.

COVID-19 did not impact our credit rating, nor do we believe that it materially changed our cost of capital.

The COVID-19 pandemic has not impacted our credit rating to date, nor do we believe that it has materially changed our cost of capital.

We believe we are able to timely service our debt obligations and will not require any concessions to do so.

We believe we will have access to additional capital from a variety of sources including our vendor facility and the public capital markets for debt and equity.

We believe we will have access to additional capital from a variety of sources and the public capital markets for debt and equity.

The following table sets forth our consolidated cash flows.

Six months ended

Nine months ended

September 30,

(in thousands)

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Effect of exchange rates changes on cash

Net increase in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Net Cash Provided by Operating Activities.

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Our changes in cash provided by operating activities are primarily due to changes in our operating profit.

Cash provided by operating activities for the six months ended June 30, 2020 and 2019 includes interest payments on our note obligations of $27.5 million and $17.3 million, respectively.

Cash provided by operating activities for the nine months ended September 30, 2020 and 2019 includes interest payments on our note obligations of $32.5 million and $29.2 million, respectively.

Net Cash Used In Investing Activities.

Our primary use of cash for investing activities is for purchases of property and equipment.

Purchases of property and equipment were $26.8 million and $25.0 million for the six months ended June 30, 2020 and 2019, respectively.

Purchases of property and equipment were $40.1 million and $37.1 million for the nine months ended September 30, 2020 and 2019, respectively.

The changes in purchases of property and equipment are primarily due to the timing and scope of our network expansion activities including geographic expansion and adding buildings to our network.

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Our primary uses of cash for financing activities are for principal payments under our finance lease obligations, debt obligations, and our installment payment agreement, purchases of our common stock and dividend payments.

Principal payments under our finance lease obligations were $9.9 million and $5.0 million for the six months ended June 30, 2020 and 2019, respectively.

Principal payments under our installment payment agreement were $5.1 million and $4.8 million for the six months ended June 30, 2020 and 2019, respectively.

During the six months ended June 30, 2020 and 2019 we paid $62.3 million and $54.3 million, respectively, for our quarterly dividend payments.

Principal payments under our finance lease obligations were $19.4 million and $7.0 million for the nine months ended September 30, 2020 and 2019, respectively.

Principal payments under our installment payment agreement were $7.9 million and $7.3 million for the nine months ended September 30, 2020 and 2019, respectively.

During the nine months ended September 30, 2020 and 2019 we paid $95.0 million and $82.9 million, respectively, for our quarterly dividend payments.

In June 2019 we completed an offering of €135.0 million of our 2024 Notes.

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Cash Position and Indebtedness

Our total cash and cash equivalents at June 30, 2020 were $417.0 million.

Our total cash and cash equivalents at September 30, 2020 were $393.3 million.

We believe this level of liquidity reduces our exposure to refinancing risk, potential underperformance of the business or other unforeseen challenges and enhances our ability to pursue acquisitions or operating opportunities.

We intend upon holding levels of cash and cash equivalents in the future in order to enhance our ability to fund operations, refinance indebtedness and make dividend payments to our shareholders.

Our total indebtedness at June 30, 2020, at par value, was $1.1 billion.

Our total indebtedness at June 30, 2020 includes $203.8 million of finance lease obligations for dark fiber under long term IRU agreements.

We intend upon holding levels of cash and cash equivalents sufficient to maintain our ability to fund operations, refinance indebtedness and make dividend payments to our shareholders.

Our total indebtedness at September 30, 2020, at par value, was $1.1 billion.

Our total indebtedness at September 30, 2020 includes $212.9 million of finance lease obligations for dark fiber under long term IRU agreements.

Summarized Financial Information of Holdings

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Holdings is a guarantor under these notes.

Under the indentures we are required to disclose financial information of Holdings including its assets, liabilities and its operating results (“Holdings Financial Information”).

The Holdings Financial Information as of and for the six months ended June 30, 2020 is detailed below (in thousands).

June 30, 2020

Under the indentures we are required to disclose financial information of Holdings including its assets,

liabilities and its operating results (“Holdings Financial Information”).

The Holdings Financial Information as of and for the nine months ended September 30, 2020 is detailed below (in thousands).

September 30, 2020

Cash and cash equivalents

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Accumulated deficit

June 30, 2020

September 30, 2020

Equity-based compensation expense

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Our Board of Directors has approved purchases of our common stock under a buyback program (the “Buyback Program”).

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

As of June 30, 2020, there was a total of $34.9 million available under the Buyback Program which is authorized to continue through December 31, 2020.

In the three and nine months ended September 30, 2020 we purchased 4,567 shares of our common stock for $0.3 million.

There were no purchases of our common stock in the three and nine months ended September 30, 2019.

As of September 30, 2020, there was a total of $34.6 million available under the Buyback Program which is authorized to continue through December 31, 2021.

Subsequent to September 30, 2020 we purchased 53,516 shares of common stock for $3.1 million under the Buyback Program.

Dividends on Common Stock and Return of Capital Program

Dividends are recorded as a reduction to retained earnings.

On August 5, 2020, our Board of Directors approved the payment of our quarterly dividend of $0.705 per common share.

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

On November 4, 2020, our Board of Directors approved the payment of our quarterly dividend of $0.73 per common share.

This estimated $33.5 million dividend payment is expected to be paid on December 4, 2020.

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

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

We expect to use the remaining proceeds, after repayment of our 2021 Notes, for general corporate purposes including the repurchase of our common stock or for special or recurring dividends to our stockholders.

We expect to use the remaining proceeds, after repayment of our 2021 Notes, for general corporate purposes including the repurchase of our common stock or for special or recurring

dividends to our stockholders.

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

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

In June 2020, Group redeemed its $189.2 million of its 5.625% senior unsecured 2021 Notes with the proceeds from its June 2020 issuance of €215.0 million of 2024 Notes.

In June 2020, Group redeemed its 2021 Notes with the proceeds from its June 2020 issuance of its 2024 Notes.

Group redeemed its 2021 Notes at a redemption price of 100.00% of the $189.2 million principal amount thereof plus $1.6 million of accrued interest.

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

Under the agreement we are 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.

Under the agreement we are required to purchase $35.0 million of network equipment exclusively from the vendor per year.

Future Capital Requirements

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Critical Accounting Policies and Significant Estimates

Management believes that as of June 30, 2020, there have been no material changes to our critical accounting policies and significant estimates from those listed in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the year ended December 31, 2019.

Management believes that as of September 30, 2020, there have been no material changes to our critical accounting policies and significant estimates from those listed in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the year ended December 31, 2019.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management believes that as of June 30, 2020, there have been no material changes to our exposures to market risk from those disclosed in Item 7A “Quantitative and Qualitative Disclosures About Market Risk,” of our annual report on Form 10-K for the year ended December 31, 2019.

Management believes that as of September 30, 2020, there have been no material changes to our exposures to market risk from those disclosed in Item 7A “Quantitative and Qualitative Disclosures About Market Risk,” of our annual report on Form 10-K for the year ended December 31, 2019.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements