Item 7. Management’s Discussion and Analysis
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with our 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. Factors that could cause or contribute to these differences include those discussed in "Item 1A. Risk Factors," as well as those discussed elsewhere. You should read "Item 1A. Risk Factors" and "Special Note Regarding Forward-Looking Statements." 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 into US dollars; 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, this Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q.
Results of Operations
Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
In this section, we discuss the results of our operations for the year ended December 31, 2020 compared to the year ended December 31, 2019. For a discussion of the year ended December 31, 2019 compared to the year ended December 31, 2018, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2019.
Our management reviews and analyzes several key financial measures in order to manage our business and assess the quality and variability of our service revenue, operating results and cash flows. The following summary tables present a comparison of our results of operations with respect to certain key financial measures. The comparisons illustrated in the tables are discussed in greater detail below.
Year Ended
December 31,
Percent
2020
2019
Change
(in thousands)
Service revenue
$
568,103
$
546,159
4.0
%
On-net revenues
419,454
396,753
5.7
%
Off-net revenues
148,128
148,931
(0.5)
%
Network operations expenses(1)
219,157
219,801
(0.3)
%
Selling, general, and administrative expenses(2)
158,476
146,913
7.9
%
Depreciation and amortization expenses
83,477
80,247
4.0
%
Realized gain on foreign exchange – 2024 Notes
2,533
—
NM
Unrealized (loss) gain on foreign exchange - 2024 Notes
(36,997)
2,271
NM
Loss on debt extinguishment and redemption - 2021 Notes
(638)
—
NM
Interest expense
62,486
57,453
8.8
%
Income tax expense
4,096
15,154
(73.0)
%
(1) Includes non-cash equity-based compensation expense of $1,219 and $994 for 2020 and 2019, respectively.
(2) Includes non-cash equity-based compensation expense of $22,306 and $17,466 for 2020 and 2019, respectively.
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NM - not meaningful
Year Ended
December 31,
Percent
2020
2019
Change
Other Operating Data
Average Revenue Per Unit (ARPU)
ARPU—on-net
$
460
$
461
(0.2)
%
ARPU—off-net
$
1,045
$
1,097
(4.7)
%
Average price per megabit
$
0.46
$
0.62
(25.5)
%
Customer Connections—end of period
On-net
77,305
74,554
3.7
%
Off-net
11,970
11,660
2.7
%
Service Revenue. We continually work to grow our total service revenue by increasing the number of potential customers that we can reach on our network. We do this by investing capital to expand the geographic footprint of our network and by increasing the number of buildings that we are connected to, including carrier neutral data centers and multi-tenant office buildings. These efforts broaden the global reach of our network and increase the size of our potential addressable market. We also seek to grow our service revenue by investing in our sales and marketing team. Over the last five years we have grown our quota bearing salesforce by 34% to 569 full time equivalent salespeople. We typically sell corporate connections at similar pricing to our competitors, but our clients benefit from our 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 by 4.0% from 2019 to 2020. Exchange rates positively impacted our increase in service revenue by $1.5 million. All foreign currency comparisons herein reflect results for 2020 translated at the average foreign currency exchange rates for 2019. We increased our total service revenue by increasing the number of sales representatives selling our services, by expanding our network, by adding additional buildings to our network, by 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.
Revenue recognition standards include guidance relating to any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, gross receipts taxes, Universal Service Fund fees and certain state regulatory fees. 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 to our revenues from 2019 to 2020 of $0.2 million.
Our corporate customers purchase their services on a price per connection basis. Our net-centric customers generally purchase their services on a price per megabit basis. Revenues from our corporate and net-centric customers represented 67.5% and 32.5% of total service revenue, respectively, for 2020 and represented 68.4% and 31.6% of total service revenue, respectively, for 2019. Revenues from corporate customers increased by 2.6% to $383.4 million for 2020 from 2019. Revenues from our net-centric customers increased by 7.1% to $184.7 million for 2020 from 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, in 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 resulting in fewer sales opportunities for our salesforce. As a result, during 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 revenue from our net-centric customers increased primarily due to an increase in our number of net-centric customers partly offset by a decline in our average price per megabit. Our net-centric customers purchase our services on 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. Our average price per megabit declined by 25.5% from 2019 to 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 by 5.7% from 2019 to 2020. Our on-net revenues increased as we increased the number of our on-net customer connections by 3.7% at December 31, 2020 from December 31, 2019. On-net revenues increased at a greater rate than on-net customer connections primarily due to an increase in our usage based revenues, a relatively stable on-net ARPU from 2019 to
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2020 and the positive impact of foreign exchange. ARPU is determined by dividing revenue for the period by the average customer connections for that period.
Our off-net revenues decreased by 0.5% from 2019 to 2020. Our off-net revenues decreased as the 4.7% decrease in our off-net ARPU more than offset the 2.7% increase in the number of our off-net customer connections from December 31, 2019 to December 31, 2020.
Network Operations Expenses. Network operations expenses include the costs of personnel associated with service delivery, network management, and customer support, network facilities costs, fiber and equipment maintenance fees, leased circuit costs, access and facilities fees paid to building owners and excise taxes billed to our customers and recorded on a gross basis. 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 by 0.3% from 2019 to 2020. 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 leased circuit costs, fewer operating leases for dark fiber and the impact of a renewal of an IRU fiber lease agreement in the second quarter of 2020. We adopted Leases (“ASU 2016-02”) on January 1, 2019. When we adopted ASU 2016-02 we elected to apply certain practical expedients under ASU 2016-02 including not separating lease and nonlease components on our finance and operating leases. As a result of accounting for this IRU renewal under ASU 2016-02, the present value of $1.8 million of quarterly maintenance and co-location fees (non-lease components) that were previously accounted for as network operations expenses prior to the second quarter of 2020, were capitalized as a finance lease liability and right-of-use leased asset totaling $34.0 million. Amortization of the right-of-use asset is recorded as depreciation and amortization expense and the payments that are made toward the finance lease liability are recorded as a reduction of the finance lease liability and interest expense.
Selling, General, and Administrative Expenses (“SG&A”). Our SG&A expenses, including non-cash equity-based compensation expense, increased by 7.9% from 2019 to 2020. 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 $22.3 million for 2020 and $17.5 million for 2019. SG&A expenses increased primarily from an increase in salaries and related costs required to support our expansion and increases in our sales efforts and an increase in our headcount. Our sales force headcount increased by 3.8% from 686 at December 31, 2019 to 712 at December 31, 2020 and our total headcount increased by 2.7% from 1,055 at December 31, 2019 to 1,083 at December 31, 2020.
Depreciation and Amortization Expenses . Our depreciation and amortization expenses increased by 4.0% from 2019 to 2020. The increase is primarily due to the depreciation expense associated with the increase related to newly deployed fixed assets associated with our network expansion activities and the impact of the renewal of an IRU lease as discussed above.
Interest Expense. Our interest expense resulted from interest incurred on our $445.0 million of senior secured notes due 2022 (“2022 Notes”), interest incurred on our $189.2 million of senior unsecured notes due 2021 (“2021 Notes") until these notes were redeemed in June 2020, interest on our installment payment agreement, interest on our finance lease obligations and interest incurred on our €350.0 million aggregate principal amount of 4.375% senior unsecured notes due 2024 (“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 2021 Notes at par value resulting in a loss on debt extinguishment and redemption of $0.6 million. Our interest expense increased by 8.8% for 2020 from 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 (Loss) Gain on Foreign Exchange on 2024 Notes. Our 2024 Notes were issued in Euros and are reported in our reporting currency – US Dollars. As of December 31, 2020, the carrying value of our 2024 Notes was $429.3 million and as of December 31, 2019, the carrying value of our 2024 Notes was $151.4 million. In June 2020, we issued our €215.0 million 2024 Notes 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 unrealized (loss) gain on foreign exchange on our 2024 Notes from converting our 2024 Notes into USD was an unrealized loss of $(37.0) million for 2020 and an unrealized gain of $2.3 million for 2019. We have not entered into hedges for our foreign currency obligations.
Income Tax Expense. Our income tax expense was $4.1 million for 2020 and $15.2 million for 2019. The reduction in our income tax expense is primarily related to a reduction in our income before income taxes.
Buildings On-net. As of December 31, 2020 and 2019 we had a total of 2,914 and 2,801 on-net buildings connected to our network, respectively.
Liquidity and Capital Resources
In assessing our liquidity, management reviews and analyzes our current cash balances, accounts receivable, accounts payable, accrued liabilities, capital expenditure commitments, and required finance lease and debt payments and other obligations. As our business has grown as a result of an increasing customer base, broader geographic coverage and increased traffic, we have produced a growing level of operating cash flow. As a result of the operating leverage of our network, our annual capital expenditures as
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measured as a percentage of revenues has fallen over the last decade. We have also had increasing success in raising capital by issuing notes and arranging financing and leases that have had a lower cost and more flexible terms. The combination of this improved operating performance and access to capital has enhanced our financial flexibility and increased our ability to make distributions to shareholders in the form of cash dividends or through share repurchases. Since our initial public offering, we have returned over $894 million to our shareholders through share repurchases and dividends. We will continue to assess our capital and liquidity needs and, where appropriate, return capital to shareholders.
Over the next several years we have significant contractual and anticipated cash outlays including our indicative dividend payments on our common stock, our maturing debt obligations, interest payments on our debt obligations and our projected capital expenditure requirements in order to help execute our business plan. Based upon our historical growth rate of our dividend, we expect that we would have to provide approximately $310 million in order to meet our quarterly dividend payments over the next two years. Our $445.0 million of Senior Secured Notes mature in March 2022 and include annual interest payments of $23.9 million until maturity. Our €350 million of Senior Unsecured Notes mature in June 2024 and include annual interest payments €15.3 million until maturity. Our €350 million of Senior Unsecured Notes are denominated in Euros and expose us to potentially unfavorable adverse movements in foreign currency rate changes. Our overseas operations provides us access to Euros, however these amounts may be insufficient to fund our obligations under our Senior Unsecured Notes. Additionally, we have not entered into forward exchange contracts related to our foreign currency exposure.
Any future acquisitions or other significant unplanned costs or cash requirements in excess of amounts we currently hold may require that we raise additional funds through the issuance of debt or equity. We cannot assure you that such financing will be available on terms acceptable to us or our stockholders, or at all. Insufficient funds may require us to delay or scale back the number of buildings and markets that we add to our network, reduce our planned increase in our sales and marketing efforts, or require us to otherwise alter our business plan or take other actions that could have a material adverse effect on our business, results of operations and financial condition. If issuing equity securities raises additional funds, substantial dilution to existing stockholders may result.
We may need to or elect to refinance all or a portion of our indebtedness at or before maturity and we cannot provide assurances that we will be able to refinance any such indebtedness on commercially reasonable terms or at all. In addition, we may elect to secure additional capital in the future, at acceptable terms, to improve our liquidity or fund acquisitions or for general corporate purposes. In addition, in an effort to reduce future cash interest payments as well as future amounts due at maturity or to extend debt maturities, we may, from time to time, issue new debt, enter into debt for debt, or cash transactions to purchase our outstanding debt securities in the open market or through privately negotiated transactions. We will evaluate any such transactions in light of the existing market conditions. The amounts involved in any such transaction, individually or in the aggregate, may be material.
We or our affiliates may, at any time and from time to time, seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
In light of the economic uncertainties associated with the COVID-19 pandemic, our executive officers and Board have continued to carefully monitor our liquidity and cash requirements. Based on current circumstances, we plan to continue our current dividend policy. Given uncertainties regarding the duration of the pandemic and timing for economic recovery, we will continue to monitor our capital spending. As we do each year, we will continue to monitor our future sources and uses of cash, and anticipate that we will make adjustments to our capital allocation strategies when, as and if determined by our Board of Directors.
Impact of COVID-19 on Our Liquidity and Operating Performance
In late March 2020, we adopted a mandatory work-from-home policy through which we required all employees to work from home and follow shelter in place guidelines issued by state and local authorities. We believe we have been able to continue to operate effectively with the use of laptops, remote connectivity and the continued support of our critical support employees. Further, we severely curtailed all business travel and adopted new safety procedures for our on-site technical personnel and customers accessing our data centers. While we are contemplating a voluntary return to in-office presence for a small number of our offices, we expect to continue to have the vast majority of our workforce to work remotely for the foreseeable future. We believe the policies followed by our workforce and the support provided by our IT and other groups has enabled our employees to continue to perform tasks and activities that are essential for the operation of our network, our sales and marketing efforts and other support functions.
We experienced some delays with respect to the installation of new services in March and April of 2020 when certain multi-tenant office buildings were closed to our personnel. 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 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. We have not encountered any material change in the payment profile of our customers or seen any significant increase in customer turnover since the beginning of the pandemic. There can be no assurance that we will continue to experience normal operations as economic
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dislocations may adversely affect our customers and may lead to higher customer turnover, bad debt expense and lower revenue and profitability.
We continue to operate with a high level of liquidity and as of December 31, 2020 we had cash and cash equivalents of approximately $371.3 million. We have recently experienced certain corporate customers taking a more 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 have 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 in 2020. 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. While worldwide capital markets have remained unstable or unpredictable since then, particularly for non-investment grade issuers, legislative bodies and reserve banks have taken various actions in response to the pandemic that have impacted the capital markets, and we expect that these efforts may continue. In June 2020, we issued an additional €215 million of our 4.375% Senior Unsecured Notes due 2024. 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 and the public capital markets for debt and equity.
Cash Flows
The following table sets forth our consolidated cash flows.
Year Ended December 31,
2020
2019
2018
(in thousands)
Net cash provided by operating activities
$
140,320
$
148,809
$
133,921
Net cash used in investing activities
(55,952)
(46,958)
(49,937)
Net cash (used in) provided by financing activities
(116,002)
22,020
(52,545)
Effect of exchange rates on cash
3,513
(542)
(2,357)
Net (decrease) increase in cash and cash equivalents during the year
$
(28,121)
$
123,329
$
29,082
Net Cash Provided By Operating Activities. Our primary source of operating cash is receipts from our customers who are billed on a monthly basis for our services. Our primary uses of operating cash are payments made to our vendors, employees and interest payments made to our finance lease vendors and our note holders. Our changes in cash provided by operating activities are primarily due to changes in our operating profit and changes in our interest payments. Cash provided by operating activities for 2020, 2019 and 2018 included interest payments on our note obligations of $48.8 million, $38.0 million and $32.7 million, respectively.
Net Cash Used In Investing Activities. Our primary use of investing cash is for purchases of property and equipment. These amounts were $56.0 million, $47.0 million and $49.9 million for 2020, 2019 and 2018, respectively. The annual 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. In 2020, 2019 and 2018 we obtained $5.8 million, $11.3 million and $9.9 million, respectively, of network equipment and software in non-cash exchanges for notes payable under an installment payment agreement.
Net Cash (Used In) Provided By Financing Activities. Our primary uses of cash for financing activities are for dividend payments, stock purchases and principal payments under our debt and finance lease obligations. During 2020, 2019 and 2018 we paid $129.4 million, $112.6 million and $97.9 million, respectively, for our quarterly dividend payments. Our quarterly dividend payments have increased due to regular quarterly increases in our quarterly dividend per share amounts. Amounts paid under our stock buyback program were $4.5 million for 2020 and $6.6 million for 2018. There were no stock purchases during 2019. Principal payments under our finance lease obligations were $24.0 million, $9.1 million and $10.3 million for 2020, 2019 and 2018, respectively, and are impacted by the timing and extent of our network expansion activities. Total installment payment agreement principal payments were $10.5 million, $10.0 million and $9.4 million for 2020, 2019 and 2018, respectively. Our financing activities also include proceeds from and repayments of our debt offerings. In June 2020, we received net proceeds of $240.3 million from the issuance of €215.0 million of our 2024 Notes and we redeemed $189.2 million of our 2021 Notes at par value, thereby extinguishing the remaining principal amount owed. In June 2019 we received net proceeds of $152.1 million from the issuance of €135.0 million of our 2024 Notes. In August 2018 we received net proceeds of $69.9 million from the issuance of $70.0 million of our 2022 Notes.
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Indebtedness
Our total cash and cash equivalents at December 31, 2020 were $371.3 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 sufficient to maintain our ability to fund operations, refinance indebtedness and make dividend payments to our shareholders.
Our total indebtedness at December 31, 2020, at par value, was $1.1 billion. Our total indebtedness at December 31, 2020 includes $219.1 million of finance lease obligations for dark fiber under long-term IRU agreements.
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 (“Merger Sub”), Group adopted a new holding company organizational structure whereby Group is now a wholly owned subsidiary of Holdings. Holdings is a “successor issuer” to Group pursuant to Rule 12g-3(a) under the Exchange Act.
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Senior unsecured notes—€350.0 million
In June 2019, Group completed an offering of €135.0 million aggregate principal amount of 2024 Notes. In June 2020, Group completed an offering of €215.0 million aggregate principal amount of 2024 Notes. The 2024 Notes were sold in private offerings for resale to qualified institutional buyers pursuant to SEC Rule 144A and mature on June 30, 2024. Interest accrues at 4.375% and is paid semi-annually in arrears on June 30 and December 30 of each year. Holdings provided a guarantee of the 2024 Notes but Holdings is not subject to the covenants under the indenture.
Senior secured notes—$445.0 million
In February 2015, Group issued $250.0 million of 5.375% senior secured notes due 2022 (the “2022 Notes”). In December 2016, we issued an additional $125.0 million of our 2022 Notes at a premium of 100.365%. In August 2018, we issued an additional $70.0 million of our 2022 Notes at a premium of 101.75%. The 2022 Notes were sold in private offerings for resale to qualified institutional buyers pursuant to SEC Rule 144A and mature on March 1, 2022. Interest accrues at 5.375% and is paid semi-annually in arrears on March 1 and September 1 of each year. Holdings provided a guarantee of the 2022 Notes but Holdings is not subject to the covenants under the indenture.
Limitations under the indentures
The indentures governing the 2024 Notes and 2022 Notes, among other things, limits our ability to incur indebtedness; to pay dividends or make other distributions; to make certain investments and other restricted payments; to create liens; consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; to incur restrictions on the ability of a subsidiary to pay dividends or make other payments; 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 our 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. Limitations on the ability to incur additional secured indebtedness include a restriction on incurring additional secured indebtedness if our 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. The indentures prohibit certain payments, such as dividends and stock purchases, when our consolidated leverage ratio, as defined by the indentures, is greater than 4.25. A certain amount of such unrestricted payments is permitted notwithstanding this prohibition. The unrestricted payment amount may be increased by our consolidated cash flow, as defined in the indentures, as long as our consolidated leverage ratio is less than 4.25. Our consolidated leverage ratio was above 4.25 as of December 31, 2020. As of December 31, 2020, a total of $94.0 million was permitted for investment payments including dividends and stock purchases.
Summarized Financial Information of Holdings
Holdings is a guarantor under the 2024 and 2022 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 year ended December 31, 2020 is detailed below (in thousands).
December 31, 2020
(Unaudited)
Cash and cash equivalents
$
93,986
Accrued interest receivable
1
Total assets
$
93,987
Investment from subsidiaries
$
246,722
Common stock
47
Accumulated deficit
(152,782)
Total equity
$
93,987
Year Ended
December 31, 2020
(Unaudited)
Equity‑based compensation expense
$
25,800
Interest income
584
Net loss
$
(25,216)
Common Stock Buyback Program
Our Board of Directors has approved through December 31, 2021, purchases of our common stock under a buyback program (the “Buyback Program”). We purchased 79,056 shares of our common stock for $4.5 million during the year ended December 31, 2020 and 147,995 shares of our common stock for $6.6 million during the year ended December 31, 2018. There were no purchases of common stock during the year ended December 31, 2019. As of December 31, 2020 there was a total of $30.4 million available under the Buyback Program.
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Dividends on Common Stock
Dividends are recorded as a reduction to retained earnings. Dividends on unvested restricted shares of common stock are paid as the awards vest. Our initial quarterly dividend payment was made in the third quarter of 2012. On February 24, 2021, our Board of Directors approved the payment of our quarterly dividend of $0.755 per common share. The dividend for the first quarter of 2021 will be paid to holders of record on March 12, 2021. This estimated $34.6 million dividend payment is expected to be made on March 26, 2021.
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. We are a Delaware Corporation and under the General Corporate Law of the State of Delaware distributions may be restricted including a restriction that distributions, including stock purchases and dividends, do not result in an impairment of a corporation’s capital, as defined under Delaware Law. The indentures governing our notes limit our ability to return cash to our stockholders. See Note 4 to our consolidated financial statements for additional discussion of limitations on distributions.
Future Capital Requirements
We believe that our cash on hand and cash generated from our operating activities will be adequate to meet our working capital, capital expenditure, debt service, dividend payments and other cash requirements for the next twelve months if we execute our business plan.
Any future acquisitions or other significant unplanned costs or cash requirements in excess of amounts we currently hold may require that we raise additional funds through the issuance of debt or equity. We cannot assure you that such financing will be available on terms acceptable to us or our stockholders, or at all. Insufficient funds may require us to delay or scale back the number of buildings and markets that we add to our network, reduce our planned increase in our sales and marketing efforts, or require us to otherwise alter our business plan or take other actions that could have a material adverse effect on our business, results of operations and financial condition. If issuing equity securities raises additional funds, substantial dilution to existing stockholders may result.
We may need to or elect to refinance all or a portion of our indebtedness at or before maturity and we cannot provide assurances that we will be able to refinance any such indebtedness on commercially reasonable terms or at all. In addition, we may elect to secure additional capital in the future, at acceptable terms, to improve our liquidity or fund acquisitions or for general corporate purposes. In addition, in an effort to reduce future cash interest payments as well as future amounts due at maturity or to extend debt maturities, we may, from time to time, issue new debt, enter into debt for debt, or cash transactions to purchase our outstanding debt securities in the open market or through privately negotiated transactions. We will evaluate any such transactions in light of the existing market conditions. The amounts involved in any such transaction, individually or in the aggregate, may be material.
Off-Balance Sheet Arrangements
We do not have relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Income Taxes
Section 382 of the Internal Revenue Code in the United States limits the utilization of net operating losses when ownership changes, as defined by that section, occur. We have performed an analysis of our Section 382 ownership changes and have determined that the utilization of certain of our net operating loss carryforwards in the United States is limited.
Critical Accounting Policies and Significant Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The accounting policies we believe to be most critical to understanding our financial results and condition or that require complex, significant and subjective management judgments are discussed below.
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Finance Lease Obligations
We record assets and liabilities under finance leases at the lesser of the present value of the aggregate future minimum lease payments or the fair value of the assets under lease. We establish the number of renewal option periods used in determining the lease term, if any, based upon our assessment at the inception of the lease of the number of option periods for which failure to renew the lease imposes a penalty on us in such amount that renewal appears to be reasonably certain. Useful lives are determined based on historical usage with consideration given to technological changes and trends in the industry that could impact the asset utilization. We estimate the fair value of leased assets primarily using estimated replacement cost data for similar assets. We determine the incremental borrowing rate for each lease using our current borrowing rate adjusted for various factors including the level of collateralization and term to align with the term of the lease.
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