Item 1. Financial Statements
ITEM 1.
FINANCIAL STATEMENTS
COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2022 AND DECEMBER 31, 2021
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30,
December 31,
2022
2021
(Unaudited)
Assets
Current assets:
Cash and cash equivalents
$
268,945
$
319,609
Restricted cash
54,719
9,015
Accounts receivable, net of allowance for credit losses of $ 1,966 and $ 1,510 , respectively
43,433
41,938
Prepaid expenses and other current assets
46,407
39,015
Total current assets
413,504
409,577
Property and equipment, net
503,763
457,880
Right-of-use leased assets
86,047
101,687
Deposits and other assets
17,388
15,413
Total assets
$
1,020,702
$
984,557
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable
$
18,398
$
11,923
Accrued and other current liabilities
67,290
39,057
Installment payment agreement, current portion, net of discount of $ 6
—
785
Current maturities, operating lease liabilities
11,784
12,197
Current maturities, finance lease obligations
24,135
17,048
Total current liabilities
121,607
81,010
Senior unsecured 2027 notes, net of unamortized debt costs of $ 1,228 and net of discount of $ 2,572
446,200
—
Senior secured 2026 notes, net of unamortized debt costs of $ 969 and $ 1,156 , respectively, and net of discounts of $ 1,287 and $ 1,536 , respectively
497,744
497,308
Senior unsecured 2024 Euro notes, net of unamortized debt costs of $ 2,121 and net of discount of $ 772
—
394,112
Operating lease liabilities, net of current maturities
99,438
111,794
Finance lease obligations, net of current maturities
263,750
228,822
Other long-term liabilities
83,728
44,609
Total liabilities
1,512,467
1,357,655
Commitments and contingencies:
Stockholders’ deficit:
Common stock, $ 0.001 par value; 75,000,000 shares authorized; 48,002,135 and 47,674,189 shares issued and outstanding , respectively
48
48
Additional paid-in capital
568,065
547,734
Accumulated other comprehensive loss — foreign currency translation
( 28,413 )
( 11,003 )
Accumulated deficit
( 1,031,465 )
( 909,877 )
Total stockholders’ deficit
( 491,765 )
( 373,098 )
Total liabilities and stockholders’ deficit
$
1,020,702
$
984,557
The accompanying notes are an integral part of these condensed consolidated balance sheets.
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COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 AND SEPTEMBER 30, 2021
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Three Months Ended
Three Months Ended
September 30, 2022
September 30, 2021
(Unaudited)
(Unaudited)
Service revenue
$
150,000
$
147,927
Operating expenses:
Network operations (including $ 176 and $ 163 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)
57,220
56,645
Selling, general, and administrative (including $ 6,035 and $ 6,425 of equity-based compensation expense, respectively)
39,114
40,117
Acquisition costs – Sprint (T-Mobile Wireline) (Note 1)
2,004
—
Depreciation and amortization
22,897
22,609
Total operating expenses
121,235
119,371
Losses on lease transactions
( 670 )
—
Operating income
28,095
28,556
Interest expense
( 17,948 )
( 14,273 )
Change in valuation – interest rate swap
( 16,923 )
( 3,076 )
Foreign exchange gain – 2024 Euro Notes
—
10,169
Interest income and other expenses, net
( 262 )
648
Income before income taxes
( 7,038 )
22,024
Income tax expense
( 969 )
( 8,704 )
Net (loss) income
$
( 8,007 )
$
13,320
Comprehensive (loss) income:
Net (loss) income
$
( 8,007 )
$
13,320
Foreign currency translation adjustment
( 7,752 )
( 3,818 )
Comprehensive (loss) income
$
( 15,759 )
$
9,502
Net (loss) income per common share:
Basic net (loss) income per common share
$
( 0.17 )
$
0.29
Diluted net (loss) income per common share
$
( 0.17 )
$
0.28
Dividends declared per common share
$
0.905
$
0.805
Weighted-average common shares - basic
46,736,742
46,293,524
Weighted-average common shares - diluted
46,736,742
46,866,929
The accompanying notes are an integral part of these condensed consolidated financial statements.
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COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND SEPTEMBER 30, 2021
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Nine Months
Nine Months
Ended
Ended
September 30, 2022
September 30, 2021
(Unaudited)
(Unaudited)
Service revenue
$
447,625
$
442,584
Operating expenses:
Network operations (including $ 465 and $ 2,375 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)
171,183
169,920
Selling, general, and administrative (including $ 17,709 and $ 18,394 of equity-based compensation expense, respectively)
119,129
122,952
Acquisition costs – Sprint (T-Mobile Wireline) (Note 1)
2,004
—
Depreciation and amortization
68,659
66,675
Total operating expenses
360,975
359,547
(Losses) gains on lease terminations and equipment transactions
( 210 )
18
Operating income
86,440
83,055
Interest expense
( 45,594 )
( 44,345 )
Change in valuation – interest rate swap
( 45,703 )
( 3,076 )
Foreign exchange gain - 2024 Euro Notes
31,561
23,759
Loss on debt extinguishment and redemption- 2024 Euro Notes
( 11,885 )
—
Loss on debt extinguishment and redemption- 2022 Notes
—
( 14,698 )
Interest income and other expenses, net
( 462 )
1,460
Income before income taxes
14,357
46,155
Income tax expense
( 10,063 )
( 16,477 )
Net income
$
4,294
$
29,678
Comprehensive (loss) income:
Net income
$
4,294
$
29,678
Foreign currency translation adjustment
( 17,410 )
( 7,252 )
Comprehensive (loss) income
$
( 13,116 )
$
22,426
Net income per common share:
Basic net income per common share
$
0.09
$
0.64
Diluted net income per common share
$
0.09
$
0.63
Dividends declared per common share
$
2.64
$
2.34
Weighted-average common shares - basic
46,759,632
46,290,452
Weighted-average common shares - diluted
47,097,580
46,825,948
The accompanying notes are an integral part of these condensed consolidated financial statements.
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COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND SEPTEMBER 30, 2021
(IN THOUSANDS)
Nine Months
Nine Months
Ended
Ended
September 30, 2022
September 30, 2021
(Unaudited)
(Unaudited)
Cash flows from operating activities:
Net income
$
4,294
$
29,678
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
68,659
66,675
Amortization of debt costs, discounts and premiums
1,144
1,333
Equity-based compensation expense (net of amounts capitalized)
18,174
20,769
Loss on debt extinguishment and redemption – 2024 Euro Notes
11,885
—
Loss on debt extinguishment and redemption – 2022 Notes
—
14,698
Gains on foreign exchange – 2024 Euro Notes
( 31,561 )
( 23,759 )
(Losses) gains - equipment transactions and other, net
3,531
( 347 )
Deferred income taxes
4,682
11,922
Changes in operating assets and liabilities:
Accounts receivable
( 3,103 )
( 159 )
Prepaid expenses and other current assets
( 9,404 )
1,734
Change in valuation – interest rate swap agreement
45,703
3,076
Accounts payable, accrued liabilities and other long-term liabilities
23,144
8,676
Deposits and other assets
236
( 23 )
Net cash provided by operating activities
137,384
134,273
Cash flows from investing activities:
Purchases of property and equipment
( 59,380 )
( 54,620 )
Net cash used in investing activities
( 59,380 )
( 54,620 )
Cash flows from financing activities:
Dividends paid
( 125,882 )
( 110,736 )
Redemption and extinguishment – 2024 Euro Notes
( 375,354 )
—
Redemption and extinguishment – 2022 Notes
—
( 459,317 )
Net proceeds from issuance of senior unsecured 2027 Notes - net of debt costs of $ 1,290
446,010
—
Net proceeds from issuance of senior secured 2026 Notes - net of debt costs of $ 1,317
—
496,933
Principal payments on installment payment agreement
( 790 )
( 5,845 )
Principal payments of finance lease obligations
( 20,958 )
( 16,826 )
Proceeds from exercises of stock options
426
1,237
Net cash used in financing activities
( 76,548 )
( 94,554 )
Effect of exchange rates changes on cash
( 6,416 )
( 1,445 )
Net decrease in cash, cash equivalents and restricted cash
( 4,960 )
( 16,346 )
Cash, cash equivalents and restricted cash, beginning of period
328,624
371,301
Cash, cash equivalents and restricted cash, end of period
$
323,664
$
354,955
Supplemental disclosure of non-cash investing and financing activities:
Fair value of equipment acquired in leases
$
1,969
$
—
Finance lease obligations incurred
$
74,633
$
38,411
The accompanying notes are an integral part of these condensed consolidated financial statements.
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COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the business and recent developments:
Reorganization and merger
On May 15, 2014, pursuant to the Agreement and Plan of Reorganization (the “Merger Agreement”) by and among Cogent Communications Group, Inc. (“Group”), a Delaware corporation, Cogent Communications Holdings, Inc., a Delaware corporation (“Holdings” or the “Company”) and Cogent Communications Merger Sub, Inc., a Delaware corporation, Group adopted a new holding company organizational structure whereby Group is now a wholly owned subsidiary of Holdings. Holdings is a “successor issuer” to Group pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Cogent Communications, Inc. is wholly owned by Group and the vast majority of Group’s assets, contractual arrangements, and operations are executed by Cogent Communications, Inc. and its subsidiaries.
Description of business
The Company is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation space and power. The Company’s network is specifically designed and optimized to transmit packet switched data. The Company delivers its services primarily to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations in 51 countries across North America, Europe, Asia, South America, Australia and Africa. The Company is a Delaware corporation and is headquartered in Washington, DC.
The Company offers on-net Internet access services exclusively through its own facilities, which run from its network to its customers’ premises. The Company offers its on-net services to customers located in buildings that are physically connected to its network. As a result, the Company is not dependent on local telephone companies or cable TV companies to serve its customers for its on-net Internet access and private network services. The Company’s on-net service consists of high-speed Internet access and private network services offered at speeds ranging from 100 megabits per second to 400 gigabits per second.
The Company provides its on-net Internet access and private network services to its corporate and net-centric customers. The Company’s corporate customers are located in multi-tenant office buildings (“MTOBs”) and typically include law firms, financial services firms, advertising and marketing firms, as well as health care providers, educational institutions and other professional services businesses. The Company’s net-centric customers include bandwidth-intensive users that leverage its network to either deliver content to end users or to provide access to residential or commercial internet users. Content delivery customers include over the top (“OTT”) media service providers, content delivery networks, web hosting companies, and commercial content and application software providers. Access customers include access networks comprised of other Internet Service Providers (“ISPs”), telephone companies, mobile phone operators and cable television companies that collectively provide internet access to a substantial number of broadband subscribers and mobile phone subscribers across the world. These net-centric customers generally receive the Company’s services in carrier neutral colocation facilities and in the Company’s own data centers. The Company operates data centers throughout North America and Europe that allow its customers to collocate their equipment and access the Company’s network.
In addition to providing on-net services, the Company provides Internet access and private network services to customers that are not located in buildings directly connected to its network. The Company provides these off-net services primarily to corporate customers using other carriers’ circuits to provide the “last mile” portion of the link from the customers’ premises to the Company’s network. The Company also provides certain non-core services that resulted from acquisitions. The Company continues to support but does not actively sell these non-core services.
In connection with the Company’s Sprint acquisition (discussed below), the Company will begin to provide optical wavelength services over the Company’s fiber network. The Company will sell these wavelength services to its existing customers, Sprint customers and to new customers who require dedicated optical transport connectivity without the capital and ongoing expenses associated with owning and operating network infrastructure.
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Acquisition of Sprint Communications
On September 6, 2022, Cogent Infrastructure, Inc., a Delaware corporation (the “Buyer”) and a wholly owned subsidiary of Holdings, entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Sprint Communications LLC, a Kansas limited liability company (“Sprint”) and an indirect wholly owned subsidiary of T-Mobile US, Inc., a Delaware corporation (“T-Mobile”), and Sprint LLC, a Delaware limited liability company and a direct wholly owned subsidiary of T-Mobile (the “Seller”), pursuant to which Holdings will acquire the U.S. long-haul fiber network (including the non-U.S. extensions thereof) of Sprint Communications and its subsidiaries (the “Wireline Business”). The Purchase Agreement provides that, upon the terms and conditions set forth therein, Holdings will purchase from the Seller all of the issued and outstanding membership interests (the “Purchased Interests”) of a Delaware limited liability company that holds Sprints’ assets and liabilities relating to the Wireline Business (such transactions contemplated by the Purchase Agreement, collectively, the “Transaction”).
The parties have agreed to a $ 1 purchase price in consideration for the Purchased Interests, subject to customary adjustments set forth in the Purchase Agreement. In addition, at the consummation of the Transaction (the “Closing”), a T-Mobile affiliate will enter into an agreement for IP transit services, pursuant to which T-Mobile will pay Holdings an aggregate of $ 700 million, consisting of (i) $ 350 million in equal monthly installments during the first year after the Closing and (ii) $ 350 million in equal monthly installments over the subsequent 42 months.
The Purchase Agreement includes customary representations, warranties, indemnities and covenants, including regarding the conduct of the Wireline Business prior to the Closing. In addition, the Closing is subject to customary closing conditions, including as to the receipt of certain required regulatory approvals and consents. Subject to the satisfaction or waiver of certain conditions and the other terms and conditions of the Purchase Agreement, the Transaction is expected to close in the second half of 2023.
The Purchase Agreement contains certain termination rights for the Buyer and Seller, including that, subject to certain limitations, either the Buyer or the Seller may terminate the Purchase Agreement if the Transaction is not consummated by September 6, 2023, subject to two automatic six-month extensions if certain regulatory approvals have not been obtained. The Purchase Agreement also provides that each party may specifically enforce the other party’s obligations under the Purchase Agreement.
Holdings has agreed to guarantee the obligations of the Buyer under the Purchase Agreement pursuant to the terms of a Guaranty, dated as of September 6, 2022, by and between Holdings and the Seller (the “Parent Guaranty”). The Parent Guaranty contains customary representations, warranties and covenants of Holdings and the Seller.
Acquisition Related Costs
In connection with the Transaction and negotiation of the Purchase Agreement the Company incurred $ 2.0 million of professional fees in the three months ended September 30, 2022.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments that the Company considers necessary for the fair presentation of its results of operations and cash flows for the interim periods covered, and of the financial position of the Company at the date of the interim condensed consolidated balance sheet. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. While the Company believes that the disclosures are adequate to not make the information misleading, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in its annual report on Form 10-K for the year ended December 31, 2021.
The accompanying unaudited condensed consolidated financial statements include all wholly owned subsidiaries. All inter-company accounts and activity have been eliminated.
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Use of estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.
Financial instruments
At September 30, 2022 and December 31, 2021, the carrying amount of cash and cash equivalents, restricted cash, accounts receivable, prepaid and other current assets, accounts payable, and accrued expenses approximated fair value because of the short-term nature of these instruments. The Company measures its cash equivalents and restricted cash at amortized cost, which approximates fair value based upon quoted market prices (Level 1). Based upon recent trading prices (Level 2—market approach) at September 30, 2022 the fair value of the Company’s $ 450.0 million senior unsecured notes due 2027 was $ 426.4 million, the fair value of the Company’s $ 500.0 million senior secured notes due 2026 was $ 438.8 million, and the estimated liability fair value of the Company’s interest rate swap agreement was $ 54.7 million.
Gross receipts taxes, universal service fund and other surcharges
Revenue recognition standards include guidance relating to taxes or surcharges assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer and may include, but are not limited to, gross receipts taxes, excise taxes, Universal Service Fund fees and certain state regulatory fees. Such charges may be presented gross or net based upon the Company’s accounting policy election. The Company records certain excise taxes and surcharges on a gross basis and includes them in its revenues and network operations expense. Excise taxes and surcharges billed to customers and recorded on a gross basis (as service revenue and network operations expense)were $ 4.1 million and $ 4.8 million for the three months ended September 30, 2022 and 2021, respectively, and $ 11.3 million and $ 14.2 million for the nine months ended September 30, 2022 and 2021, respectively.
Basic and diluted net income per common share
Basic earnings per share (“EPS”) excludes dilution for common stock equivalents and is computed by dividing net income or (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares of common stock outstanding during each period, adjusted for the effect of dilutive common stock equivalents. Shares of restricted stock are included in the computation of basic EPS as they vest and are included in diluted EPS, to the extent they are dilutive, determined using the treasury stock method.
The following details the determination of diluted weighted average shares:
Three Months
Three Months
Nine Months
Nine Months
Ended
Ended
Ended
Ended
September 30, 2022
September 30, 2021
September 30, 2022
September 30, 2021
Weighted average common shares - basic
46,736,742
46,293,524
46,759,632
46,290,452
Dilutive effect of stock options
—
36,406
17,668
34,191
Dilutive effect of restricted stock
—
536,999
320,280
501,305
Weighted average common shares - diluted
46,736,742
46,866,929
47,097,580
46,825,948
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The following details unvested shares of restricted common stock as well as anti-dilutive stock options and restricted stock awards outstanding:
Three Months
Three Months
Nine Months
Nine Months
Ended
Ended
Ended
Ended
September 30, 2022
September 30, 2021
September 30, 2022
September 30, 2021
Unvested shares of restricted common stock
1,271,441
1,371,217
1,271,441
1,371,217
Anti-dilutive options for common stock
113,376
43,648
99,537
42,531
Anti-dilutive shares of restricted common stock
637,028
827
460,715
133,468
Stockholders’ Deficit
The following details the changes in stockholders’ deficit for the three and nine months ended September 30, 2022 and September 30, 2021 (in thousands except share amounts):
Accumulated
Additional
Other
Total
Common Stock
Paid-in
Comprehensive
Accumulated
Stockholders’
Shares
Amount
Capital
Income (Loss)
Deficit
Equity (Deficit)
Balance at June 30, 2022
48,003,724
$
48
$
561,161
$
( 20,661 )
$
( 980,729 )
$
( 440,181 )
Forfeitures of shares granted to employees
( 14,492 )
—
—
—
—
—
Equity-based compensation
—
—
6,812
—
—
6,812
Foreign currency translation
—
—
—
( 7,752 )
—
( 7,752 )
Issuances of common stock
10,748
—
—
—
—
—
Exercises of options
2,155
—
92
—
—
92
Dividends paid
—
—
—
—
( 42,729 )
( 42,729 )
Net (loss)
—
—
—
—
( 8,007 )
( 8,007 )
Balance at September 30, 2022
48,002,135
$
48
$
568,065
$
( 28,413 )
$
( 1,031,465 )
$
( 491,765 )
Accumulated
Additional
Other
Total
Common Stock
Paid-in
Comprehensive
Accumulated
Stockholders’
Shares
Amount
Capital
Income (Loss)
Deficit
Equity (Deficit)
Balance at June 30, 2021
47,655,131
$
48
$
533,049
$
( 4,740 )
$
( 864,498 )
$
( 336,141 )
Forfeitures of shares granted to employees
( 10,933 )
—
—
—
—
—
Equity-based compensation
—
—
7,164
—
—
7,164
Foreign currency translation
—
—
—
( 3,818 )
—
( 3,818 )
Issuances of common stock
11,820
—
—
—
—
—
Exercises of options
7,258
—
362
—
—
362
Dividends paid
—
—
—
—
( 37,654 )
( 37,654 )
Net income
—
—
—
—
13,320
13,320
Balance at September 30, 2021
47,663,276
$
48
$
540,575
$
( 8,558 )
$
( 888,832 )
$
( 356,767 )
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Accumulated
Additional
Other
Total
Common Stock
Paid-in
Comprehensive
Accumulated
Stockholders’
Shares
Amount
Capital
Income (Loss)
Deficit
Equity (Deficit)
Balance at December 31, 2021
47,674,189
$
48
$
547,734
$
( 11,003 )
$
( 909,877 )
$
( 373,098 )
Forfeitures of shares granted to employees
( 66,857 )
—
—
—
—
—
Equity-based compensation
—
—
19,905
—
—
19,905
Foreign currency translation
—
—
—
( 17,410 )
—
( 17,410 )
Issuances of common stock
384,028
—
—
—
—
—
Exercises of options
10,775
—
426
—
—
426
Dividends paid
—
—
—
—
( 125,882 )
( 125,882 )
Net income
—
—
—
—
4,294
4,294
Balance at September 30, 2022
48,002,135
$
48
$
568,065
$
( 28,413 )
$
( 1,031,465 )
$
( 491,765 )
Accumulated
Additional
Other
Total
Common Stock
Paid-in
Comprehensive
Accumulated
Stockholders’
Shares
Amount
Capital
Income (Loss)
Deficit
Equity (Deficit)
Balance at December 31, 2020
47,214,077
$
47
$
515,867
$
( 1,306 )
$
( 807,774 )
$
( 293,166 )
Forfeitures of shares granted to employees
( 36,235 )
—
—
—
—
—
Equity-based compensation
—
—
23,471
—
—
23,471
Foreign currency translation
—
—
—
( 7,252 )
—
( 7,252 )
Issuances of common stock
460,580
1
—
—
—
1
Exercises of options
24,854
—
1,237
—
—
1,237
Dividends paid
—
—
—
—
( 110,736 )
( 110,736 )
Net income
—
—
—
—
29,678
29,678
Balance at September 30, 2021
47,663,276
$
48
$
540,575
$
( 8,558 )
$
( 888,832 )
$
( 356,767 )
Revenue recognition
The Company recognizes revenue under Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASC 606”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Under ASC 606 installation fees for contracts with terms longer than month-to-month are recognized over the contract term. The Company believes that the installation fee does not give rise to a material right as defined by ASC 606 for contracts with terms longer than month-to-month. The Company recognizes revenue over the estimated average customer life for installation fees associated with month-to-month contracts, because the fee represents a material right as defined by ASC 606. The Company capitalizes certain contract acquisition costs that relate directly to a customer contract, including commissions paid to its sales team and sales agents and amortizes these costs on straight-line basis over the period the services are transferred to the customer for commissions paid to its sales team (estimated customer life) and over the remaining original contract term for agent commissions. Management assesses these costs for impairment at least quarterly and as “triggering” events occur that indicate it is more likely than not that an impairment exists.
The Company’s service offerings consist of on-net and off-net telecommunications services. Fixed fees are billed monthly in advance and usage fees are billed monthly in arrears. Amounts billed are due upon receipt and contract lengths range from one month to 60 months . The Company satisfies its performance obligations to provide services to customers over time as the services are rendered. In accordance with ASC 606, revenue is recognized when a customer obtains the promised service. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. The Company has adopted the practical expedient related to certain performance obligation disclosures since it has a right to consideration from its customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date.
To achieve this core principle, the Company follows the following five steps:
1) Identification of the contract, or contracts with a customer
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2) Identification of the performance obligations in the contract
3) Determination of the transaction price
4) Allocation of the transaction price to the performance obligations in the contract
5) Recognition of revenue when, or as, the Company satisfies a performance obligation
Fees billed in connection with customer installations are deferred (as deferred revenue) and recognized as noted above. If a customer contract is terminated prior to its contractual end, the customer is subject to termination fees. The Company vigorously seeks payment of these amounts. The Company recognizes revenue for these amounts as they are collected.
Service revenue recognized from amounts in deferred revenue (contract liabilities) at the beginning of the period during the three months ended September 30, 2022 was $ 1.8 million and during the three months ended September 30, 2021 was $ 1.9 million. Service revenue recognized from amounts in deferred revenue (contract liabilities) at the beginning of the period during the nine months ended September 30, 2022 was $ 4.4 million and during the nine months ended September 30, 2021 was $ 4.1 million. Amortization expense for contract costs was $ 4.9 million for the three months ended September 30, 2022 and $ 4.6 million for the three months ended September 30, 2021. Amortization expense for contract costs was $ 14.5 million for the nine months ended September 30, 2022 and $ 13.8 million for the nine months ended September 30, 2021.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 replaced most existing lease accounting guidance. The operating lease liability under ASU 2016-02 is not considered a liability under the consolidated leverage ratio calculations in the indentures governing the Company’s senior unsecured and senior secured note obligations. The Company has made an accounting policy election to not apply the recognition requirements of ASU 2016-02 to its short-term leases - leases with a term of one year or less. The Company has also elected to apply certain practical expedients under ASU 2016-02 including not separating lease and non-lease components on its finance and operating leases.
Three Months
Three Months
Nine Months
Nine Months
Ended
Ended
Ended
Ended
September 30, 2022
September 30, 2021
September 30, 2022
September 30, 2021
Finance lease cost
Amortization of right-of-use assets
$
7,188
$
6,847
$
21,186
$
19,571
Interest expense on finance lease liabilities
5,382
4,977
15,579
14,888
Operating lease cost
4,547
4,572
13,948
13,660
Total lease costs
$
17,117
$
16,396
$
50,713
$
48,119
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Nine Months
Nine Months
Ended
Ended
September 30, 2022
September 30, 2021
Other lease information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases
$
( 13,478 )
$
( 12,694 )
Operating cash flows from operating leases
( 14,165 )
( 14,077 )
Financing cash flows from finance leases
( 20,958 )
( 16,826 )
Right-of-use assets obtained in exchange for new finance lease liabilities
74,633
38,411
Right-of-use assets obtained in exchange for new operating lease liabilities
10,498
15,732
Weighted-average remaining lease term — finance leases (in years)
13.1
12.6
Weighted-average remaining lease term — operating leases (in years)
17.8
19.2
Weighted average discount rate — finance leases
8.6
%
9.3
%
Weighted average discount rate — operating leases
5.4
%
5.5
%
Finance leases—fiber lease agreements
The Company has entered into lease agreements with numerous providers of dark fiber under indefeasible-right-of use agreements (“IRUs”). These IRUs typically have initial terms of 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. The option to renew may be automatic, at the option of the Company or mutually agreed to between the dark fiber provider and the Company. Once the Company has accepted the related fiber route, leases that meet the criteria for treatment as finance leases are recorded as a finance lease obligation and an IRU asset. The interest rate used in determining the present value of the aggregate future minimum lease payments is the Company’s incremental borrowing rate for the reasonably certain lease term. The implicit rates within the Company’s operating leases are generally not determinable and the Company determines its incremental borrowing rate for each lease using its current borrowing rate, adjusted for various factors including level of collateralization and term to align with the term of the lease. The determination of the Company’s incremental borrowing rate requires judgment. Finance lease assets are included in property and equipment in the Company’s consolidated balance sheets. As of September 30, 2022, the Company had committed to additional dark fiber IRU lease agreements totaling $ 120.6 million in future payments to be paid over periods of up to 22 years . These obligations begin when the related fiber is accepted, which is generally expected to occur in the next 24 months.
Operating leases
The Company leases office space and data center facilities under operating leases. In certain cases the Company also enters into short-term operating leases for dark fiber. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments under the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the reasonably certain lease term. The implicit rates within the Company’s operating leases are generally not determinable and the Company uses its incremental borrowing rate at the lease commencement date to determine the present value of its lease payments. The Company determines its incremental borrowing rate for each lease using its current borrowing rate, adjusted for various factors including level of collateralization and term to align with the term of the lease. The determination of the Company’s incremental borrowing rate requires judgment. Certain of the Company’s leases include options to extend or terminate the lease. The Company establishes the number of renewal option periods used in determining the operating lease term based upon its assessment at the inception of the operating lease of the number of option periods for which failure to renew the lease imposes a penalty in such amount that renewal appears to be reasonably certain. The option to renew may be automatic, at the option of the Company or mutually agreed to between the landlord or dark fiber provider and the Company. Once the Company has accepted the related fiber route or the facility lease term has begun, the present value of the aggregate future minimum operating lease payments is recorded as an operating lease liability and a right-of-use leased asset. Lease incentives and deferred rent liabilities for facilities operating leases are presented with, and netted against, the right-of-use leased asset. Lease expense for lease payments is recognized on a straight-line basis over the term of the lease.
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The future minimum payments under these operating lease and finance lease agreements are as follows (in thousands):
Operating
Finance
For the Twelve Months Ending September 30,
Leases
Leases
2023
$
17,167
$
45,540
2024
16,738
39,425
2025
14,918
36,159
2026
12,821
31,383
2027
11,179
31,608
Thereafter
96,176
305,053
Total minimum lease obligations
168,999
489,168
Less—amounts representing interest
( 57,777 )
( 201,283 )
Present value of minimum lease obligations
111,222
287,885
Current maturities
( 11,784 )
( 24,135 )
Lease obligations, net of current maturities
$
99,438
$
263,750
Allowance for credit losses
The Company maintains an allowance for credit losses to cover its current expected credit losses on its trade receivables arising from the failure of customers to make contractual payments. The Company estimates credit losses expected over the life of its trade receivables based on historical information combined with current conditions that may affect a customer’s ability to pay and reasonable and supportable forecasts. While the Company uses various credit quality metrics, it primarily monitors collectability by reviewing the duration of collection pursuits on its delinquent trade receivables. Based on the Company’s experience, the customer’s delinquency status is the strongest indicator of the credit quality of the underlying trade receivables, which is analyzed monthly.
Current-period
Provision for
Write offs
Beginning
Expected Credit
Charged Against
Ending
Description
Balance
Losses
Allowance
Balance
Allowance for credit losses (deducted from accounts receivable)
Three months ended September 30, 2022
$
1,717
$
1,054
$
( 805 )
$
1,966
Three months ended September 30, 2021
$
1,673
$
1,340
$
( 1,600 )
$
1,413
Nine months ended September 30, 2022
$
1,510
$
3,059
$
( 2,603 )
$
1,966
Nine months ended September 30, 2021
$
1,921
$
4,539
$
( 5,047 )
$
1,413
Net bad debt expense for the three and nine months ended September 30, 2022 was $ 0.5 million and $ 1.5 million, respectively, which is net of bad debt recoveries of $ 0.5 million and $ 1.5 million respectively. Net bad debt expense for the three and nine months ended September 30, 2021 was $ 1.0 million and $ 2.6 million, respectively, which is net of bad debt recoveries of $ 0.3 million and $ 1.9 million, respectively.
2. Property and equipment:
Depreciation and amortization expense related to property and equipment and finance leases was $ 22.9 million and $ 22.6 million for the three months ended September 30, 2022 and 2021, respectively, and $ 68.7 million and $ 66.7 million for the nine months ended September 30, 2022 and 2021, 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 $ 3.1 million for the three months ended September 30, 2022 and 2021, respectively, and $ 9.3 million and $ 10.4 million for the nine months ended September 30, 2022 and 2021, respectively.
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3. Long-term debt:
As of September 30, 2022, the Company had outstanding $ 450.0 million aggregate principal amount of Senior Unsecured Notes due 2027 (the “2027 Notes”) and $ 500.0 million aggregate principal amount of Senior Secured Notes due 2026 (the “2026 Notes”). The 2027 Notes were issued in June 2022, are due on June 15, 2027 and bear interest at a rate of 7.00 % per year. Interest on the 2027 Notes is paid semi-annually on June 15 and December 15 of each year. The 2026 Notes were issued in May 2021, are due on May 1, 2026 and bear interest at a rate of 3.50 % per year. Interest on the 2026 Notes is paid semi-annually on May 1 and November 1 of each year. In June 2022 the Company redeemed and extinguished its € 350.0 million aggregate principal amount of Senior Unsecured Euro Notes due 2024 (the “2024 Notes”). The 2024 Notes were due on June 30, 2024 and bore interest at a rate of 4.375 % per year. Interest on the 2024 Notes was paid semi-annually on June 30 and December 30 of each year.
Issuance of 2027 Notes and redemption of 2024 Notes
On June 22, 2022 (the “2027 Notes Closing Date”), Group completed its offering of $ 450.0 million aggregate principal amount of its 2027 Notes for issuance in a private placement not registered under the Securities Act of 1933, as amended (the “Securities Act”). The 2027 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 and to certain non-U.S. persons in transactions outside the United States in compliance with Regulation S under the Securities Act. The 2027 Notes were issued pursuant to, and are governed by, an indenture (the “2027 Notes Indenture”), dated the 2027 Notes Closing Date by and among Group, Holdings, the other guarantors named therein and the trustee. The 2027 Notes are jointly and severally guaranteed on a senior unsecured basis by each of the Company’s existing and future material domestic subsidiaries, subject to certain exceptions, and by the Company. Under certain circumstances, the Guarantors may be released from these Guarantees without the consent of the holders of the 2027 Notes.
The net proceeds from the 2027 Notes offering were $ 446.0 million after deducting the $ 2.7 million discount and $ 1.3 million of offering expenses. The Company used a portion of the net proceeds from the 2027 Notes offering to redeem its 2024 Notes. The Company expects to use the remaining net proceeds from the 2027 Notes offering for general corporate purposes, and/or to repurchase the Company’s common stock or for special or recurring dividends to the Company’s stockholders. In connection with full redemption of its 2024 Notes, Group issued a conditional notice of full redemption to holders of the 2024 Notes, specifying June 30, 2022 as the redemption date (the “Redemption Date”). On the 2027 Notes Closing Date, Group satisfied and discharged its obligations under the 2024 Notes by depositing with a designee of the trustee for the 2024 Notes sufficient funds to pay the principal of the Premium (defined below) and accrued and unpaid interest on the Euro Notes to the Redemption Date. The 2024 Notes were issued in Euros and were reported in the Company’s reporting currency, US Dollars, until they were extinguished and redeemed. Prior to the redemption of the 2024 Notes, the gain on foreign exchange on the 2024 Notes from converting the 2024 Notes into US Dollars was $ 10.2 million for the three months ended September 30, 2021, $ 31.6 million for the nine months ended September 30, 2022 and $ 23.8 million for the nine months ended September 30, 2021.
Unless earlier redeemed or repurchased, the 2027 Notes will mature on June 15, 2027. Group may redeem some or all of the 2027 Notes at any time prior to June 15, 2024 at a price equal to 100 % of the principal amount of the 2027 Notes, plus a “make-whole” premium, as set forth in the 2027 Notes Indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption, or may redeem up to 40.0 % of the 2027 Notes using proceeds of certain equity offerings completed prior to June 15, 2024 at 107.0 % of the principal amount plus accrued and unpaid interest, if any. Thereafter, Group may redeem the 2027 Notes, in whole or in part, at a redemption price ranging from 103.5 % of the aggregate principal amount of the 2027 Notes redeemed to par (depending on the year), in each case, as set forth in the 2027 Notes Indenture, plus accrued and unpaid interest, if any.
On the Redemption Date, Group redeemed its € 350.0 million of 2024 Notes at a price of 101.094 % (€ 353.8 million or $ 375.2 million) of the principal amount (the “Premium”) plus € 7.7 million ($ 8.1 million) of interest paid through June 30, 2022, the Redemption Date where the Premium reduced to 101.094 %, for a total payment of € 361.5 million ($ 383.4 million). Group entered into a short-term USD to Euro forward purchase agreement to mitigate the risk of foreign currency fluctuations. As a result of these transactions, the Company incurred a loss on debt extinguishment and redemption of $ 11.9 million.
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Issuance of the 2026 Notes and redemption of 2022 Notes
On May 7, 2021 (the “2026 Notes Closing Date”), Group completed an offering of $ 500.0 million aggregate principal amount of its 2026 Notes for issuance in a private placement exempt from registration under the Securities Act. The 2026 Notes were offered and sold only to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in transactions outside the United States in compliance with Regulation S under the Securities Act. The 2026 Notes were issued pursuant to, and are governed by, an indenture (the “2026 Notes Indenture”), dated the 2026 Notes Closing Date by and among Group, Holdings, the other guarantors named therein, the trustee and the collateral agent. The 2026 Notes are guaranteed on a senior secured basis, jointly and severally, by Group’s material domestic subsidiaries, subject to certain exceptions (the “Subsidiary Guarantors”). In addition, the 2026 Notes are guaranteed on a senior unsecured basis by Holdings (together with the Subsidiary Guarantors, the “Guarantors”). Under certain circumstances, the Guarantors may be released from these guarantees without the consent of the holders of the 2026 Notes. The net proceeds from the 2026 Notes offering were $ 496.9 million after deducting the $ 1.8 million discount and $ 1.3 million of offering expenses.
Unless earlier redeemed or repurchased, the 2026 Notes will mature on May 1, 2026. Group may redeem some or all of the 2026 Notes at any time prior to February 1, 2026 at a price equal to 100 % of the principal amount of the 2026 Notes, plus a “make-whole” premium as set forth in the 2026 Notes Indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption. Thereafter, Group may redeem the 2026 Notes, in whole or in part, at a price equal to 100 % of the principal amount of the 2026 Notes, plus accrued and unpaid interest, if any, to, but not including, the date of redemption.
In March 2021, Group redeemed $ 115.9 million aggregate principal amount of its 5.375 % Senior Secured Notes due 2022 (the “2022 Notes”) at an average price of 103.2 % of the principal amount plus $ 0.4 million of accrued and unpaid interest. As a result of this transaction, the Company incurred a loss on debt extinguishment and redemption of $ 3.9 million from the premium payment above par value, the amortization of the remaining unamortized notes cost and certain transaction expenses. In May 2021, Group redeemed $ 45.0 million aggregate principal amount of its 2022 Notes at par plus the “make-whole amount” as defined in the 2022 Notes indenture of $ 1.9 million ($ 41.41533 per $1,000 aggregate principal amount) plus accrued interest to, but excluding, the redemption date of $ 0.4 million ($ 9.70486 per aggregate principal amount). Following the $ 115.9 million and the $ 45.0 million redemptions there was $ 284.1 million aggregate principal amount of 2022 Notes remaining. On the 2026 Notes Closing Date, Group used the net proceeds from the offering of its 2026 Notes to fully satisfy and discharge its remaining obligations under its 2022 Notes. As a result of these transactions, the Company incurred an additional loss on debt extinguishment and redemption of $ 10.8 million from the payment of $ 11.5 million of interest on the 2022 Notes through December 1, 2021 and the amortization of the remaining unamortized notes costs and debt premium.
Limitations under the Indentures
The 2027 Notes Indenture and the 2026 Notes Indenture (the “Indentures”), among other things, limit the Company’s ability to incur indebtedness; to pay dividends or make other distributions; to make certain investments and other restricted payments; to create liens; to 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. There are certain exceptions to the limitations on the Company’s ability to incur indebtedness under the Indentures, including IRU agreements incurred in the normal course of business and any additional indebtedness if the Company’s consolidated leverage ratio, as defined in the Indentures, is less than 6.0 to 1.0 or the Company’s fixed charge coverage ratio, as defined in the Indentures, is 2.0 to 1.0 or greater. The Company can also incur unlimited liens (which can be used, together with capacity under the debt covenant, to incur additional secured indebtedness) if the Company’s consolidated secured leverage ratio, as defined in the Indentures, is less than 4.0 to 1.0 . Under the Indentures, the Company can pay dividends, make other distributions, make certain investments and make other restricted payments under certain circumstances, including if, after giving pro forma effect to such restricted payment, the Company could still incur $ 1 of indebtedness, as defined (i.e., either its consolidated leverage ratio is less than 6.0 to 1.0 or its fixed charge coverage ratio is 2.0 to 1.0 or greater). The Company’s consolidated leverage ratio was below 6.0 , the Company’s consolidated secured leverage ratio was below 4.0 and the Company’s fixed charge coverage ratio was above 2.0 as of September 30, 2022. As of September 30, 2022, a total of $ 207.4 million was unrestricted and permitted for restricted payments including dividends and stock purchases.
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Interest rate swap agreement
As of September 30, 2022, the Company was party to an interest rate swap agreement (the “Swap Agreement”) that has the economic effect of modifying the fixed interest rate obligation associated with its 2026 Notes to a variable interest rate obligation based on the Secured Overnight Financing Rate (“SOFR”) so that the interest payable on the 2026 Notes effectively became variable based on overnight SOFR. The critical terms of the Swap Agreement match the terms of the 2026 Notes, including the notional amount and the optional redemption date on February 1, 2026. The Company did not elect hedge accounting for the Swap Agreement. The Swap Agreement is recorded at its fair value at each reporting period, and the Company incurs gains and losses due to changes in market interest rates. By entering into the Swap Agreement, the Company has assumed the risk associated with variable interest rates. Changes in interest rates affect the valuation of the Swap Agreement that the Company recognizes in its consolidated statements of comprehensive income. The values that the Company reports for the Swap Agreement as of each reporting date are recognized as “change in valuation – interest rate swap” with the corresponding amounts included in assets or liabilities in the Company’s consolidated balance sheets. As of September 30, 2022 the fair value of the Swap Agreement was a net liability of $ 54.7 million of which $ 12.1 million is presented with accrued and other current liabilities and $ 42.6 million is presented with other long-term liabilities. The Company recorded an unrealized loss related to the Swap Agreement of $ 16.9 million and $ 45.7 million in the three and nine months ended September 30, 2022, respectively. The Company recorded an unrealized loss related to the Swap Agreement of $ 3.1 million and $ 3.1 million in the three and nine months ended September 30, 2021, respectively. The Company has made a $ 57.2 million deposit with the counterparty to the Swap Agreement. If the fair value of the Swap Agreement exceeds a net liability of $ 57.2 million the Company will be required to deposit additional funds with the counterparty equal to the net liability fair value. As of September 30, 2022, $ 54.7 million of the deposit was restricted and $ 2.4 million was unrestricted.
Under the Swap Agreement, the Company pays the counterparty a semi-annual payment based upon overnight SOFR plus a contractual interest rate spread, and the counterparty pays the Company a semi-annual fixed 3.50 % interest payment. The settlement payment is made each November and May until the Swap Agreement expires in February 2026. Under the first Swap Agreement settlement in November 2021, the Company received a payment of $ 0.6 million from the counterparty for a net cash savings of $ 0.6 million for the period from August 9, 2021 (the Swap Agreement inception date) to October 31, 2021. Under the settlement payment made in May 2022, the Company received a payment of $ 1.2 million from the counterparty for a net cash savings of $ 1.2 million for the period from November 1, 2021 to April 30, 2022. Under the settlement payment made in November 2022, the Company made a payment of $ 3.4 million to the counterparty for a net cash interest cost of $ 3.4 million for the period from May 1, 2022 to October 31, 2022.
4. Commitments and contingencies :
Current and potential litigation
In accordance with the accounting guidance for contingencies, the Company accrues its estimate of a contingent liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Where it is probable that a liability has been incurred and there is a range of expected loss for which no amount in the range is more likely than any other amount, the Company accrues at the low end of the range. 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 to result in a loss of up to $ 3.8 million in excess of the amount accrued at September 30, 2022. The Company was engaged in litigation in Virginia in which a former provider of transoceanic capacity to the Company was seeking approximately $ 0.6 million for alleged unpaid fees and the Company’s early termination of the arrangement. The complaint was filed in December 2021 in the Circuit Court of Fairfax County, Virginia. The trial took place in July 2022, and in August 2022, the Circuit Court issued an order requiring the Company to pay approximately $ 0.4 million in damages, inclusive of attorneys’ fees. The Company paid a final payment of approximately $ 0.4 million, reflecting accumulated interest and additional attorneys’ fees, in October 2022.
In the ordinary course of business the Company is involved in other legal activities and claims. Because such matters are subject to many uncertainties and the outcomes are not predictable with assurance, the liability related to these legal actions and claims cannot be determined with certainty. Management does not believe that such claims and actions will have a material impact on the Company’s financial condition or results of operations. Judgment is required in estimating the ultimate outcome of any dispute resolution process, as well as any other amounts that may be incurred to conclude the negotiations or settle any litigation. Actual results may differ from these estimates under different assumptions or conditions and such differences could be material.
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5. Income taxes:
The components of (loss) income before income taxes consist of the following (in thousands):
Three Months Ended
Three Months Ended
Nine Months Ended
Nine Months Ended
September 30, 2022
September 30, 2021
September 30, 2022
September 30, 2021
Domestic
$
( 3,382 )
$
24,849
$
22,953
$
54,179
Foreign
( 3,656 )
( 2,825 )
( 8,596 )
( 8,024 )
Total
$
( 7,038 )
$
22,024
$
14,357
$
46,155
6. Common stock buyback program:
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, 2023. At September 30, 2022, there was approximately $ 30.4 million remaining for purchases under the Buyback Program. There were no purchases of common stock during the three or nine months ended September 30, 2022 and the three or nine months ended September 30, 2021.
7. Dividends on common stock:
On November 2, 2022, the Company’s Board of Directors approved the payment of a quarterly dividend of $ 0.915 per common share. This estimated $ 42.8 million dividend payment is expected to be made on December 2, 2022.
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. The Company is a Delaware corporation and under the General Corporation 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 the Company’s notes limit the Company’s ability to return cash to its stockholders.
8. Related party transactions:
Office lease
The Company’s headquarters is located in an office building owned by Sodium LLC whose owner is the Company’s Chief Executive Officer. The fixed annual rent for the headquarters building is $ 1.0 million per year plus an allocation of taxes and utilities. The lease began in May 2015 and the lease term was for five years . In February 2020 the lease term was extended to May 2025 and is cancellable by the Company upon 60 days ’ notice. The Company’s audit committee reviews and approves all transactions with related parties. The Company paid $ 0.5 million and $ 0.5 million in the three months ended September 30, 2022 and 2021, respectively, and $ 1.4 million and $ 1.3 million in the nine months ended September 30, 2022 and 2021, respectively, for rent and related costs (including taxes and utilities) to Sodium LLC for this lease.
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9. Segment information:
The Company operates as one operating segment. 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 September 30, 2022
Revenues
On-net
Off-net
Non-core
Total
North America
$
88,298
$
32,325
$
162
$
120,785
Europe
19,853
3,929
8
23,790
Latin America
1,358
34
—
1,392
Asia Pacific
3,530
299
—
3,829
Africa
180
24
—
204
Total
$
113,219
$
36,611
$
170
$
150,000
Three Months Ended September 30, 2021
Revenues
On-net
Off-net
Non-core
Total
North America
$
85,569
$
31,945
$
147
$
117,661
Europe
21,658
4,379
25
26,062
Latin America
1,042
54
—
1,096
Asia Pacific
2,657
277
—
2,934
Africa
173
1
—
174
Total
$
111,099
$
36,656
$
172
$
147,927
Nine Months Ended September 30, 2022
Revenues
On-net
Off-net
Non-core
Total
North America
$
261,427
$
95,873
$
475
$
357,775
Europe
61,807
12,249
39
74,095
Latin America
4,080
150
2
4,232
Asia Pacific
9,992
956
1
10,949
Africa
523
51
—
574
Total
$
337,829
$
109,279
$
517
$
447,625
Nine Months Ended September 30, 2021
Revenues
On-net
Off-net
Non-core
Total
North America
$
255,157
$
95,680
$
361
$
351,198
Europe
66,450
13,465
57
79,972
Latin America
2,859
119
—
2,978
Asia Pacific
7,279
812
—
8,091
Africa
342
3
—
345
Total
$
332,087
$
110,079
$
418
$
442,584
September 30,
December 31,
2022
2021
Long lived assets, net
North America
$
373,879
$
331,537
Europe and other
129,892
126,355
Total
$
503,771
$
457,892
The majority of North American revenue consists of services delivered within the United States.
Page 19 of 40
Table of Contents
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