UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549

 

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to ______

Commission File Number: 001-31989

 

INTERNAP CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

Delaware	91-2145721
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

One Ravinia Drive, Suite 1300
Atlanta, Georgia 30346
(Address of Principal Executive Offices, Including Zip Code)

 

(404) 302-9700
(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x     No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x     No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨     No  x

 

As of September 30, 2015, 56,036,236 shares of the registrant’s outstanding common stock, $0.001 par value per share, were outstanding.

 

 

INTERNAP CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2015
TABLE OF CONTENTS

		PART I. FINANCIAL INFORMATION
ITEM 1.		FINANCIAL STATEMENTS
		Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss		1
		Unaudited Condensed Consolidated Balance Sheets		2
		Unaudited Condensed Consolidated Statements of Cash Flows		3
		Unaudited Condensed Notes to Consolidated Financial Statements		4
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		9
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		16
ITEM 4.		CONTROLS AND PROCEDURES		16
		PART II. OTHER INFORMATION
ITEM 1.		LEGAL PROCEEDINGS		17
ITEM 1A.		RISK FACTORS		17
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		17
ITEM 6.		EXHIBITS		18
		SIGNATURES

 

 

ITEM 1. FINANCIAL STATMENTS

 

INTERNAP CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Revenues:
Data center services		$	58,622			$	61,640			$	177,142			$	181,318
Internet protocol (IP) services			19,696				23,027				62,394				69,378
Total revenues			78,318				84,667				239,536				250,696
Operating costs and expenses:
Direct costs of sales and services, exclusive of depreciation and amortization, shown below:
Data center services			25,111				27,716				73,711				80,170
IP services			8,570				9,432				26,295				29,300
Direct costs of customer support			9,173				9,114				27,381				27,594
Direct costs of amortization of acquired and developed technologies			816				1,524				2,557				4,535
Sales and marketing			8,305				8,858				28,347				28,938
General and administrative			10,793				11,611				34,295				34,471
Depreciation and amortization			23,815				19,391				64,847				54,773
Exit activities, restructuring and impairments			920				56				1,245				3,001
Total operating costs and expenses			87,503				87,702				258,678				262,782
Loss from operations			(9,185	)			(3,035	)			(19,142	)			(12,086	)
Non-operating (income) expenses:
Interest expense			6,923				6,699				20,613				19,996
Other, net			(288	)			(149	)			(763	)			335
Total non-operating (income) expenses			6,635				6,550				19,850				20,331
Loss before income taxes and equity in (earnings) of equity-method investment			(15,820	)			(9,585	)			(38,992	)			(32,417	)
Benefit for income taxes			(1,612	)			(128	)			(1,723	)			(982	)
Equity in (earnings) of equity-method investment, net of taxes			(11	)			(80	)			(96	)			(198	)
Net loss			(14,197	)			(9,377	)			(37,173	)			(31,237	)
Other comprehensive (loss) income:
Foreign currency translation adjustment			49				(264	)			(109	)			(94	)
Unrealized loss on foreign currency contracts			(192	)			—				(379	)			—
Unrealized gain (loss) on interest rate swap			47				341				(102	)			61
Total other comprehensive (loss) income			(96	)			77				(590	)			(33	)
Comprehensive loss		$	(14,293	)		$	(9,300	)		$	(37,763	)		$	(31,270	)
Basic and diluted net loss per share		$	(0.27	)		$	(0.18	)		$	(0.72	)		$	(0.61	)
Weighted average shares outstanding used in computing basic and diluted net loss per share:			51,699				51,063				51,763				51,180

 

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

 

 

INTERNAP CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)

 

		September 30, 2015				December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents		$	18,312			$	20,084
Accounts receivable, net of allowance for doubtful accounts of $1,830 and $2,121, respectively			22,007				19,606
Deferred tax asset			676				633
Prepaid expenses and other assets			10,994				12,276
Total current assets			51,989				52,599
Property and equipment, net			330,603				342,145
Investment in joint venture			2,733				2,622
Intangible assets, net			38,463				52,545
Goodwill			130,313				130,313
Deposits and other assets			10,790				9,923
Deferred tax asset			164				1,637
Total assets		$	565,055			$	591,784
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	18,047			$	30,589
Accrued liabilities			11,981				13,120
Deferred revenues			6,696				7,345
Capital lease obligations			8,218				7,366
Term loan, less discount of $1,523 and $1,463, respectively			1,477				1,537
Exit activities and restructuring liability			2,140				1,809
Other current liabilities			2,232				1,590
Total current liabilities			50,791				63,356
Deferred revenues			4,613				3,544
Capital lease obligations			49,291				52,686
Revolving credit facility			31,000				10,000
Term loan, less discount of $5,396 and $6,543, respectively			286,354				287,457
Exit activities and restructuring liability			1,756				2,701
Deferred rent			9,296				10,583
Deferred tax liability			3,610				7,293
Other long-term liabilities			4,668				3,828
Total liabilities			441,379				441,448
Commitments and contingencies (note 6)
Stockholders’ equity:
Preferred stock, $0.001 par value; 20,000 shares authorized; no shares issued or outstanding			—				—
Common stock, $0.001 par value; 120,000 shares authorized; 56,036 and 54,410 shares outstanding, respectively			56				54
Additional paid-in capital			1,274,834				1,262,402
Treasury stock, at cost; 768 and 621 shares, respectively			(6,014	)			(4,683	)
Accumulated deficit			(1,142,687	)			(1,105,514	)
Accumulated items of other comprehensive loss			(2,513	)			(1,923	)
Total stockholders’ equity			123,676				150,336
Total liabilities and stockholders’ equity		$	565,055			$	591,784

 

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

 

 

INTERNAP CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 

		Nine Months Ended September 30,
		2015				2014
Cash Flows from Operating Activities:
Net loss		$	(37,173	)		$	(31,237	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			67,404				59,308
Impairment of property and equipment			232				537
Amortization of debt discount and issuance costs			1,498				1,441
Stock-based compensation expense, net of capitalized amount			6,200				5,675
Equity in (earnings) of equity-method investment			(96	)			(198	)
Provision for doubtful accounts			922				811
Non-cash change in capital lease obligations			(1,167	)			(87	)
Non-cash change in exit activities and restructuring liability			1,400				2,996
Non-cash change in deferred rent			(1,287	)			(2,028	)
Deferred taxes			(2,181	)			(1,226	)
Other, net			230				197
Changes in operating assets and liabilities:
Accounts receivable			(3,459	)			3,198
Prepaid expenses, deposits and other assets			836				(3,080	)
Accounts payable			(7,748	)			(2,585	)
Accrued and other liabilities			(1,862	)			4,795
Deferred revenues			624				99
Exit activities and restructuring liability			(2,014	)			(2,296	)
Other liabilities			34				(90	)
Net cash flows provided by operating activities			22,393				36,230
Cash Flows from Investing Activities:
Purchases of property and equipment			(41,299	)			(51,312	)
Additions to acquired and developed technologies			(1,120	)			(2,004	)
Proceeds from sale-leaseback transactions			—				2,603
Acquisition, net of cash received			—				74
Net cash flows used in investing activities			(42,419	)			(50,639	)
Cash Flows from Financing Activities:
Proceeds from credit agreements			21,000				5,000
Principal payments on credit agreements			(2,250	)			(2,250	)
Return of deposit collateral on credit agreement			—				6,461
Payments on capital lease obligations			(5,718	)			(4,212	)
Proceeds from exercise of stock options			6,005				973
Acquisition of common stock for income tax withholdings			(1,332	)			(744	)
Other, net			869				(135	)
Net cash flows provided by financing activities			18,574				5,093
Effect of exchange rates on cash and cash equivalents			(320	)			(209	)
Net decrease in cash and cash equivalents			(1,772	)			(9,525	)
Cash and cash equivalents at beginning of period			20,084				35,018
Cash and cash equivalents at end of period		$	18,312			$	25,493
Supplemental disclosure of cash flow information:
Cash paid for interest		$	19,712			$	18,109
Non-cash acquisition of property and equipment under capital leases			4,342				7,757
Additions to property and equipment included in accounts payable			3,540				11,117

 

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

 

 

INTERNAP CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.

NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

Internap Corporation (“we,” “us” or “our”) provides high-performance information technology (“IT”) infrastructure services at 52 data centers across North America, Europe and the Asia-Pacific region and through 86 Internet Protocol (“IP”) service points.

 

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. These financial statements include all of our accounts and those of our wholly-owned subsidiaries. We have eliminated all intercompany transactions and balances in the accompanying financial statements.

 

We have condensed or omitted certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP. In the opinion of management, the accompanying financial statements reflect all adjustments, which consist of normal recurring adjustments unless otherwise disclosed, necessary for a fair statement of our financial position as of September 30, 2015 and our operating results and cash flows for the interim periods presented. The balance sheet at December 31, 2014 was derived from our audited financial statements, but does not include all disclosures required by GAAP. You should read the accompanying financial statements and the related notes in conjunction with our financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission.

 

The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ materially from these estimates. The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for any future periods.

 

2.

FAIR VALUE MEASUREMENTS

 

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

 

•

Level 1: Quoted prices in active markets for identical assets or liabilities;

•

Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

•

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Assets and liabilities measured at fair value on a recurring basis are summarized as follows (in thousands):

 

		Level 1				Level 2				Level 3				Total
September 30, 2015:
Foreign currency contracts(1)		$	—			$	518			$	—			$	518
Interest rate swap (note 5)			—				914				—				914
Asset retirement obligations(2)			—				—				2,668				2,668
December 31, 2014:
Interest rate swap (note 5)			—				813				—				813
Asset retirement obligations(2)			—				—				2,471				2,471

 

(1)

We include foreign currency contracts in “Other current liabilities” in the accompanying consolidated balance sheets as of September 30, 2015.

(2)

We calculate the fair value of asset retirement obligations by discounting the estimated amount using the current Treasury bill rate adjusted for our credit non-performance. We include asset retirement obligations in “Other long-term liabilities” in the accompanying consolidated balance sheets as of September 30, 2015 and December 31, 2014.

 

 

The following table provides a summary of changes in our Level 3 asset retirement obligations for the nine months ended September 30, 2015 (in thousands):

 

Balance, January 1, 2015		$	2,471
Accretion			197
Balance, September 30, 2015		$	2,668

 

The fair values of our other Level 3 debt liabilities, estimated using a discount cash flow analysis based on incremental borrowing rates for similar types of borrowing arrangements, are as follows (in thousands):

 

		September 30, 2015								December 31, 2014
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Revolving credit facility		$	31,000			$	30,400			$	10,000			$	9,900
Term loan			294,750				304,000				297,000				313,000

 

3.

TRADE NAME

 

As part of the acquisition of iWeb Technologies Inc. (“iWeb”) in November 2013, we ascribed a value of $15.1 million to the iWeb trade name. Since the acquisition, we have operated under two brands, Internap and iWeb. We have determined to phase-out the use of the iWeb trade name to support our long-term strategy. As a result, we changed the estimate of the trade name’s useful life to approximately nine months beginning in late March 2015. During the three and nine months ended September 30, 2015, the additional amortization expense was $4.5 million and $9.5 million, respectively. As of September 30, 2015, the unamortized balance was $4.7 million.

 

4.

GOODWILL

 

For purposes of valuing our goodwill, we have the following reporting units: IP services, IP products, data center services and data center products. We performed our annual impairment review as of August 1, 2015 and concluded that goodwill attributed to each of our reporting units was not impaired as the fair value of each reporting unit exceeded the carrying value, including goodwill.

 

To determine the fair value of our reporting units, we utilize the discounted cash flow and market methods. We have consistently utilized both methods in our goodwill impairment tests and weight both results equally because we believe both, in conjunction with each other, provide a reasonable estimate of the fair value of the reporting unit. The discounted cash flow method is specific to our anticipated future results of the reporting unit, while the market method is based on our market sector including our competitors.

 

We determined the assumptions supporting the discounted cash flow method, including the discount rate, using our estimates as of the date of the impairment review. To determine the reasonableness of these assumptions, we performed various sensitivity analyses on certain of the assumptions used in the discounted cash flow method, such as forecasted revenues and discount rate. We used reasonable judgment in developing our estimates and assumptions and there was no impairment indicated in our testing.

 

The assumptions, inputs and judgments used in performing the valuation analysis are inherently subjective and reflect estimates based on known facts and circumstances at the time we perform the valuation. These estimates and assumptions primarily include, but are not limited to, discount rates; terminal growth rates; projected revenues and costs; earnings before interest, taxes, depreciation and amortization for expected cash flows; market comparables and capital expenditure forecasts. The use of different assumptions, inputs and judgments, or changes in circumstances, could materially affect the results of the valuation. Due to inherent uncertainty involved in making these estimates, actual results could differ from our estimates and could result in additional non-cash impairment charges in the future.

 

While we did not identify any impairment indicators, the fair value of the IP services reporting unit exceeded its carrying value by 13%. At September 30, 2015, goodwill attributable to the IP services reporting unit was $33.7 million. If revenue for such reporting unit continues to decline, we may be at risk for impairment within this reporting unit. In addition, although the fair value of the IP products reporting unit substantially exceeded the carrying value, we calculated the fair value using revenue projections for the rollout of our new product, Managed Internet Route Optimizer Controller, which replaced our previous generation of route optimization hardware. Since this is a new product without an established historical revenue pattern, the IP products reporting unit may be at risk of impairment if we do not meet our projections. At September 30, 2015, goodwill attributable to the IP products reporting unit was $5.8 million.

 

As with all of our reporting units, we monitor potential triggering events on a quarterly basis, which could result in an interim impairment analysis. Through September 30, 2015, we concluded no impairment indicators existed that caused us to reassess our goodwill.

 

 

5.

INTEREST RATE SWAP

 

As of September 30, 2015, the fair value of our interest rate swap was $0.9 million, of which $0.8 million is included in “Other current liabilities” and $0.1 million is included in “Other long-term liabilities” in the accompanying consolidated balance sheets. As of December 31, 2014, the fair value of our interest rate swap was $0.8 million which we included in “Other long-term liabilities.” During the three and nine months ended September 30, 2015 and 2014, we recorded the effective portion of the change in fair value of our interest rate swap in “Accumulated items of other comprehensive loss” in the accompanying consolidated balance sheets. We did not recognize any hedge ineffectiveness during either the three and nine months ended September 30, 2015 and 2014.

 

We will reclassify amounts reported in “Accumulated items of other comprehensive loss” related to our interest rate swaps to “Interest expense” in our accompanying consolidated statements of operations and comprehensive loss as we accrue interest payments on our variable-rate debt. Through September 30, 2016, we estimated that we will reclassify an additional $0.8 million as an increase to interest expense since the hedge interest rate currently exceeds the variable interest rate on our debt.

 

The activity of our interest rate swap is summarized as follows (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Gain (loss) recorded as the effective portion of the change in fair value		$	47			$	341			$	(102	)		$	61
Interest payments reclassified as an increase to interest expense			201				203				598				604

 

6.

COMMITMENTS, CONTINGENCIES AND LITIGATION

 

On September 18, 2015, a purported stockholder filed a putative class action complaint in the Superior Court of Fulton County of the State of Georgia against us, the current members of our board of directors and Jefferies Finance LLC (“Jefferies”). The complaint is captioned Grisolia v. Internap Corp., et al., Case No. 2015cv265926 (Ga. Sup. Ct.). The complaint alleges, among other things, that the members of our board of directors breached their fiduciary duties, and that Jefferies aided and abetted such breaches, in connection with the credit agreement described in this filing. The complaint alleges that the credit agreement contains a so-called “dead hand proxy put” provision that (a) defines the election of a majority of directors whose initial nomination arose from an actual or threatened proxy contest to be an event of default that triggers the lenders’ right to accelerate payment of the debt outstanding under the credit agreement; and (b) thereby allegedly coerces stockholders and entrenches the members of the Board of Directors. The Plaintiff further claims that Jefferies aided and abetted the alleged breach of fiduciary duties by including the provisions in the credit agreement and encouraging our board of directors to accept them. The complaint seeks, among other things, declaratory and injunctive relief, as well as an award of costs and disbursements, including attorneys’ and experts’ fees. During the three months ended September 30, 2015, we recorded $0.5 million as litigation expense in “General and administrative” in the accompanying statements of operations and comprehensive loss for the three and nine months ended September 30, 2015.

 

On October 30, 2015, the Company and our lenders amended the credit agreement to remove the provision which is the subject of the litigation. We believe we have meritorious defenses to the claims asserted in the lawsuit including that the lawsuit is now moot.  We do not believe that the ultimate costs of this complaint will be material.

 

We are subject to other legal proceedings, claims and litigation arising in the ordinary course of business. Although the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse impact on our financial condition, results of operations or cash flows.

 

7.

EXIT ACTIVITIES AND RESTRUCTURING LIABILITIES

 

In prior years, we incurred costs related to certain exited facilities. In addition, during the nine months ended September 30, 2015, we recorded initial exit activity charges primarily due to ceasing use of an office facility and subsequent plan adjustments in sublease income assumptions for certain properties included in our previously-disclosed plans. We include subsequent plan adjustments in “Exit activities, restructuring and impairments” in the accompanying statements of operations and comprehensive loss for each of the three and nine months ended September 30, 2015 and 2014.

  

 

The following table displays the transactions and balances for exit activities and restructuring charges, substantially related to our data center services segment, during each of the nine months ended September 30, 2015 and 2014 (in thousands):

 

		December 31, 2014				Initial Charges				Plan Adjustments				Cash Payments				September 30, 2015
Real estate obligations:
2015 exit activities		$	—			$	683			$	—			$	(75	)		$	608
2014 exit activities			2,010				—				232				(407	)			1,835
2007 restructuring			2,325				—				490				(1,362	)			1,453
Other			175				—				(6	)			(169	)			—
Total		$	4,510			$	683			$	716			$	(2,013	)		$	3,896

 

		December 31, 2013				Initial Charges				Plan Adjustments				Cash Payments				September 30, 2014
Real estate obligations:
2014 exit activities		$	—			$	1,454			$	—			$	(205	)		$	1,249
2007 restructuring			3,296				—				1,521				(1,538	)			3,279
Other			867				—				21				(553	)			335
Total		$	4,163			$	1,454			$	1,542			$	(2,296	)		$	4,863

 

8.

OPERATING SEGMENTS

 

We operate in two business segments: data center services and IP services. The data center services segment includes colocation, hosting and cloud services. Colocation involves providing physical space within data centers and associated services such as power, interconnection, environmental controls and security while allowing our customers to deploy and manage their servers, storage and other equipment. Hosting and cloud services involve the provision and maintenance of hardware, operating system software, management and monitoring software, data center infrastructure and interconnection, while allowing our customers to own and manage their software applications and content. Our IP services segment includes our patented Performance IP™ service, content delivery network services and IP routing and hardware and software platform.

 

Segment profit is calculated as segment revenues less direct costs of sales and services, exclusive of depreciation and amortization for the segment and does not include direct costs of customer support, direct costs of amortization of acquired technologies or any other depreciation or amortization associated with direct costs.

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Revenues:
Data center services		$	58,622			$	61,640			$	177,142			$	181,318
IP services			19,696				23,027				62,394				69,378
Total revenues			78,318				84,667				239,536				250,696
Direct costs of sales and services, exclusive of depreciation and amortization:
Data center services			25,111				27,716				73,711				80,170
IP services			8,570				9,432				26,295				29,300
Total direct costs of network, sales and services, exclusive of depreciation and amortization			33,681				37,148				100,006				109,470
Segment profit:
Data center services			33,511				33,924				103,431				101,148
IP services			11,126				13,595				36,099				40,078
Total segment profit			44,637				47,519				139,530				141,226
Exit activities, restructuring and impairments			920				56				1,245				3,001
Other operating expenses, including direct costs of customer support, depreciation and amortization			52,902				50,498				157,427				150,311
Loss from operations			(9,185	)			(3,035	)			(19,142	)			(12,086	)
Non-operating expense			6,635				6,550				19,850				20,331
Loss before income taxes and equity in (earnings) of equity-method investment		$	(15,820	)		$	(9,585	)		$	(38,992	)		$	(32,417	)

 

 

9.

INCOME TAXES

 

We periodically evaluate the recoverability of our deferred tax assets and the appropriateness of a valuation allowance. During the three months ended June 30, 2015, we recorded a $1.7 million reserve against our U.K. net deferred tax asset. We record the resulting income tax expense for the reserve, netted with the tax benefit for the operational results of iWeb, in “Benefit for income taxes” in the accompanying consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2015.

 

10.

NET LOSS PER SHARE

 

We compute basic net loss per share by dividing net loss attributable to our common stockholders by the weighted average number of shares of common stock outstanding during the period. We exclude all outstanding options and unvested restricted stock as such securities are anti-dilutive for all periods presented.

 

Basic and diluted net loss per share is calculated as follows (in thousands, except per share amounts):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Net loss attributable to common stock		$	(14,197	)		$	(9,377	)		$	(37,173	)		$	(31,237	)
Weighted average shares outstanding, basic and diluted			51,699				51,063				51,763				51,180
Net loss per share, basic and diluted		$	(0.27	)		$	(0.18	)		$	(0.72	)		$	(0.61	)
Anti-dilutive securities excluded from diluted net loss per share calculation for stock-based compensation plans			6,868				7,141				6,868				7,141

 

11.

RECENT ACCOUNTING PRONOUNCEMENTS

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued guidance that requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, which is consistent with the presentation of debt discounts. The guidance, to be applied retrospectively, is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. We expect adoption will not have a material impact on our financial condition and no impact on our result of operations.

 

In February 2015, FASB issued guidance to improve targeted areas of the existing consolidation guidance and reduce the number of consolidation models. This update is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. We expect adoption will not have a material impact on our financial condition or result of operations.

 

In August 2014, FASB issued new guidance which requires management to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable) and provide related disclosures. The guidance is effective for the annual and interim periods ending after December 15, 2016. Early adoption is permitted. We expect adoption will not have a material impact on our financial condition or result of operations.

 

In May 2014, FASB issued new guidance which provides a single model for revenue arising from contracts with customers and supersedes current revenue recognition guidance. The guidance is effective for periods beginning January 1, 2018. The guidance permits the application of its requirements retrospectively to all prior periods presented or in the year of adoption through a cumulative adjustment. We are currently evaluating the impact that the adoption will have on our consolidated financial statements and related disclosures. As we have not completed our evaluation, we cannot make a determination of the impact and have not yet selected a transition method or determined the impact of the standard on our ongoing financial reporting.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements regarding industry trends, our future financial position and performance, business strategy, revenues and expenses in future periods, projected levels of growth and other matters that do not relate strictly to historical facts. These statements are often identified by words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “projects,” “forecasts,” “plans,” “intends,” “continue,” “could” or “should,” that an “opportunity” exists, that we are “positioned” for a particular result, statements regarding our vision or similar expressions or variations. These statements are based on the beliefs and expectations of our management team based on information currently available. Such forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by forward-looking statements. Important factors currently known to our management that could cause or contribute to such differences include, but are not limited to, those referenced in our Annual Report on Form 10-K for the year ended December 31, 2014 under Item 1A “Risk Factors.” We undertake no obligation to update any forward-looking statements as a result of new information, future events or otherwise.

 

As used herein, except as otherwise indicated by context, references to “we,” “us” or “our” refer to Internap Corporation and our subsidiaries.

 

Overview

 

Our vision is to help people build and manage the world’s best performing Internet infrastructure. Today, our infrastructure services power many of the applications that shape the way we live, work and play. Internap’s hybrid Internet infrastructure services deliver “performance without compromise” – blending virtual and bare-metal cloud, hosting and colocation services across a global network of data centers, optimized from the application to the end user and backed by our team of dedicated professionals. Many of the world’s most innovative companies rely on Internap to make their applications faster and more scalable.

 

Trade Name

 

Since the acquisition of iWeb Technologies Inc. (“iWeb”) in November 2013, we have operated under two brands, Internap and iWeb. In late March 2015, we determined to phase-out the use of the iWeb trade name to support our long-term strategy. We summarize the impact of the resulting acceleration of the trade name’s useful life in note 3 to the accompanying consolidated financial statements.

 

Operating Segments

 

Data Center Services

 

Our data center services segment includes colocation, hosting and cloud services. Colocation involves providing physical space within data centers and associated services such as power, interconnection, environmental controls, monitoring and security while allowing our customers to deploy and manage their servers, storage and other equipment in our secure data centers. Hosting and cloud services involve the provision and maintenance of hardware, operating system software, management and monitoring software, data center infrastructure and interconnection, while allowing our customers to own and manage their software applications and content.

 

We sell our data center services at 52 data centers across North America, Europe and the Asia-Pacific region. We refer to 16 of these facilities as “company-controlled,” meaning we control the data center operations, staffing and infrastructure and have negotiated long-term leases for the facilities. For company-controlled facilities, in most cases we design the data center infrastructure, procure the capital equipment, deploy the infrastructure and are responsible for the operation and maintenance of the facility. We refer to the remaining 36 data centers as “partner” sites. In these locations, a third party designs and deploys the infrastructure and provides for the operation and maintenance of the facility.

 

Within the data center services segment, we identify between “core” and “partner colocation” revenues. Core revenues are from our company-controlled colocation, hosting and cloud services. Partner colocation revenues are from our partner sites.

 

IP Services

 

Our Internet Protocol (“IP”) services segment includes our patented Performance IP™ service, content delivery network (“CDN”) services and IP routing hardware and software platform. By intelligently routing traffic with redundant, high-speed connections over multiple, major Internet backbones, our IP services provide high-performance and highly-reliable delivery of content, applications and communications to end users globally. We deliver our IP services through 86 IP service points around the world.

 

 

Our patented and patent-pending network route optimization technologies address inherent weaknesses of the Internet, allowing businesses to take advantage of the convenience, flexibility and reach of the Internet to connect to customers, suppliers and partners, and to adopt new IT delivery models in a scalable, reliable and predictable manner.

 

Our CDN services enable our customers to quickly and securely stream and distribute rich media and content, such as video, audio software and applications, to audiences across the globe through strategically located points of presence (“POPs”). Providing capacity-on-demand to handle large events and unanticipated traffic spikes, we deliver scalable high-quality content distribution and audience-analytic tools.

 

Recent Accounting Pronouncements

 

Recent accounting pronouncements are summarized in note 11 to the accompanying consolidated financial statements.

 

Results of Operations

 

As of September 30, 2015, we had approximately 11,000 customers. Our customer base is not concentrated in any particular industry and, for the three and nine months ended September 30, 2015, no single customer accounted for 10% or more of our revenues.

 

Three Months Ended September 30, 2015 and 2014

 

The following table sets forth selected consolidated statements of operations and comprehensive loss data during the periods presented, including comparative information between the periods (dollars in thousands):

 

		Three Months Ended  September 30,								Increase (decrease ) from 2014 to 2015
		2015				2014				Amount				Percent
Revenues:
Data center services:
Core		$	48,385			$	49,941			$	(1,556	)			(3	)%
Partner colocation			10,237				11,699				(1,462	)			(12	)
Total data center services			58,622				61,640				(3,018	)			(5	)
IP services			19,696				23,027				(3,331	)			(14	)
Total revenues			78,318				84,667				(6,349	)			(7	)
Operating costs and expenses:
Direct costs of sales and services, exclusive of depreciation and amortization, shown below:
Data center services:
Core			17,203				18,849				(1,646	)			(8	)
Partner colocation			7,908				8,867				(959	)			(11	)
Total data center services			25,111				27,716				(2,605	)			(9	)
IP services			8,570				9,432				(862	)			(9	)
Direct costs of customer support			9,173				9,114				59				—
Direct costs of amortization of acquired and developed technologies			816				1,524				(708	)			(46	)
Sales and marketing			8,305				8,858				(553	)			(6	)
General and administrative			10,793				11,611				(818	)			(7	)
Depreciation and amortization			23,815				19,391				4,424				23
Exit activities, restructuring and impairments			920				56				864				154
Total operating costs and expenses			87,503				87,702				199				—
Loss from operations		$	(9,185	)		$	(3,035	)		$	(6,150	)			(203	)
Interest expense		$	6,923			$	6,699			$	224				3
Benefit for income taxes		$	(1,612	)		$	(128	)		$	(1,484	)			(1,159	)

 

Data Center Services

 

Revenues for data center services decreased 5%, to $58.6 million for the three months ended September 30, 2015, compared to $61.6 million for the same period in 2014. The decrease in core revenue was primarily due to a $1.6 million loss resulting from customer churn as we migrated out of the New York metro data center into our Secaucus data center and other churn from a small number of large customers. The decrease in partner colocation revenue was primarily due to our strategy to focus on selling into our company-controlled data centers.

 

 

Direct costs of data center services, exclusive of depreciation and amortization, decreased 9%, to $25.1 million for the three months ended September 30, 2015, compared to $27.7 million for the same period in 2014. The decrease in direct costs was primarily due to the New York metro data center migration, ongoing cost reduction efforts and lower variable costs related to lower revenue.

 

Direct costs of data center services, exclusive of depreciation and amortization, have substantial fixed cost components, primarily rent for operating leases, but also significant demand-based pricing variables, such as utilities attributable to seasonal costs and customers’ changing power requirements. Direct costs of data center services as a percentage of revenues vary with the mix of usage between company-controlled data centers and partner sites, and the utilization of total available space. Since we recognize some of the initial operating costs of company-controlled data centers in advance of revenues or in advance of sites being fully utilized, these sites are less profitable in the early years of operation compared to partner sites and we expect them to be more profitable as occupancy increases. Conversely, costs in partner sites are more demand-based and therefore are more closely associated with the level of utilization.

 

We continue to focus on increasing revenues from company-controlled data centers as compared to partner sites. We also expect direct costs of data center services as a percentage of corresponding revenues to decrease as our new and recently-expanded company-controlled data centers continue to contribute to revenue and become more fully occupied. This is evidenced by the improvement in direct costs of data center services as a percentage of corresponding revenues of 43% during the three months ended September 30, 2015, compared to 45% during the same period in 2014.

 

IP Services

 

Revenues for IP services decreased 14%, to $19.7 million for the three months ended September 30, 2015, compared to $23.0 million for the same period in 2014. The decrease continues to be driven by a decline in IP pricing for new and renewing customers and customer churn.

 

Direct costs of IP services, exclusive of depreciation and amortization, decreased 9%, to $8.6 million for the three months ended September 30, 2015, compared to $9.4 million for the same period in 2014. The decrease was primarily due to lower variable costs related to lower revenue.

 

There have been ongoing industry-wide pricing declines over the last several years and this trend continued during each of the three months ended September 30, 2015 and 2014. Technological improvements and excess capacity have been the primary drivers for lower pricing of IP services.

 

Other Operating Costs and Expenses

 

Compensation. Total compensation and benefits, including stock-based compensation, was $19.7 million and $20.3 million for the three months ended September 30, 2015 and 2014, respectively.

 

Stock-based compensation, net of amount capitalized, increased to $2.4 million during the three months ended September 30, 2015 from $1.8 million during the same period in 2014. The increase was primarily due to a $0.8 million of executive transition stock-based compensation awards. The following table summarizes the amount of stock-based compensation, net of estimated forfeitures, included in the accompanying consolidated statements of operations and comprehensive loss (in thousands):

 

		Three Months Ended September 30,
		2015				2014
Direct costs of customer support		$	484			$	353
Sales and marketing			544				248
General and administrative			1,407				1,177
		$	2,435			$	1,778

 

Direct Costs of Customer Support. Direct costs of customer support increased slightly to $9.2 million during the three months ended September 30, 2015 compared to $9.1 million during the same period in 2014.

 

Direct Costs of Amortization of Acquired and Developed Technologies. Direct costs of amortization of acquired and developed technologies decreased to $0.8 million during the three months ended September 30, 2015 compared to $1.5 million during the same period in 2014. The decrease is primarily related to an intangible asset that we fully amortized in early 2015 resulting in no amortization expense in the current period.

 

 

Sales and Marketing. Sales and marketing costs decreased to $8.3 million during the three months ended September 30, 2015 compared to $8.9 million during the same period in 2014. The decrease is primarily related to the removal of redundancies in connection with the phase-out of the iWeb trade name and other marketing program efficiencies.

 

General and Administrative. General and administrative costs decreased to $10.8 million during the three months ended September, 30, 2015 compared to $11.6 million during the same period in 2014. The decrease was primarily due to a $1.2 million decrease in cash-based compensation from reduced headcount and bonus accrual, a $0.6 million decrease in outside professional services, a $0.6 million decrease in stock-based compensation, partially offset by $0.8 million in executive transition stock-based compensation awards and $0.9 million in strategic alternatives and related costs for legal and other professional fees.

 

Depreciation and Amortization. Depreciation and amortization increased to $23.8 million during the three months ended September 30, 2015 from $19.4 million during the same period in 2014. The increase was primarily due to the effects of expanding our company-controlled data centers, private network access point infrastructure and capitalized software and $4.5 million of additional amortization expense for the accelerated useful life of the iWeb trade name. We summarize the acceleration in note 3 to the accompanying consolidated financial statements.

 

Exit Activities, Restructuring and Impairments. Exit activities, restructuring and impairments increased to $0.9 million during the three months ended September 30, 2015 compared to $0.1 million during the same period in 2014. The increase was primarily due to initial exit activity charges related to ceasing use of an office facility.

 

Interest Expense. Interest expense increased slightly to $6.9 million during the three months ended September 20, 2015 from $6.7 million during the same period in 2014. The increase was primarily due to increased borrowings under our credit agreement.

 

Benefit for Income Taxes. The benefit for income taxes was $1.6 million during the three months ended September 30, 2015 compared to $0.1 million during the same period in 2014. The increase was primarily due to the change in benefit for the operational results of iWeb.

 

Nine Months Ended September 30, 2015 and 2014

 

The following table sets forth selected consolidated statements of operations and comprehensive loss data during the periods presented, including comparative information between the periods (dollars in thousands):

 

		Nine Months Ended September 30,								Increase (decrease) from 2014 to 2015
		2015				2014				Amount				Percent
Revenues:
Data center services:
Core		$	145,044			$	145,679			$	(635	)			—	%
Partner colocation			32,098				35,639				(3,541	)			(10	)
Total data center services			177,142				181,318				(4,176	)			(2	)
IP services			62,394				69,378				(6,984	)			(10	)
Total revenues			239,536				250,696				(11,160	)			(4	)
Operating costs and expenses:
Direct costs of sales and services, exclusive of depreciation and amortization, shown below:
Data center services:
Core			50,073				53,200				(3,127	)			(6	)
Partner colocation			23,638				26,970				(3,332	)			(12	)
Total data center services			73,711				80,170				(6,459	)			(8	)
IP services			26,295				29,300				(3,005	)			(10	)
Direct costs of customer support			27,381				27,594				(213	)			—
Direct costs of amortization of acquired and developed technologies			2,557				4,535				(1,978	)			(43	)
Sales and marketing			28,347				28,938				(591	)			(2	)
General and administrative			34,295				34,471				(176	)			—
Depreciation and amortization			64,847				54,773				10,074				18
Exit activities, restructuring and impairments			1,245				3,001				(1,756	)			(59	)
Total operating costs and expenses			258,678				262,782				(4,104	)			(2	)
Loss from operations		$	(19,142	)		$	(12,086	)		$	(7,056	)			(58	)
Non-operating (income) expenses:
Interest expense		$	20,613			$	19,996			$	617				3
Other, net		$	(763	)		$	335			$	(1,098	)			(328	)
Benefit for income taxes		$	(1,723	)		$	(982	)		$	(741	)			(75	)

 

 

Data Center Services

 

Revenues for data center services decreased 2%, to $177.1 million for the nine months ended September 30, 2015, compared to $181.3 million for the same period in 2014. The decrease in core revenue was primarily due to a $6.0 million loss resulting from customer churn as we migrated out of the New York metro data center into our Secaucus data center and other churn from a small number of large customers. The decrease in partner colocation revenue was primarily due to our strategy to focus on selling into our company-controlled data centers.

 

Direct costs of data center services, exclusive of depreciation and amortization, decreased 8%, to $73.7 million for the nine months ended September 30, 2015, compared to $80.2 million for the same period in 2014. The variance in direct costs was primarily due to the New York metro data center migration, ongoing cost reduction efforts and lower variable costs related to lower revenue. Direct costs of data center services as a percentage of corresponding revenues was 42% during the nine months ended September 30, 2015, compared to 44% during the same period in 2014.

 

IP Services

 

Revenues for IP services decreased 10%, to $62.4 million for the nine months ended September 30, 2015, compared to $69.4 million for the same period in 2014. The decrease continues to be driven by a decline in IP pricing for new and renewing customers and customer churn.

 

Direct costs of IP services, exclusive of depreciation and amortization, decreased 10%, to $26.3 million for the nine months ended September 30, 2015, compared to $29.3 million for the same period in 2014. This decrease was primarily due to lower variable costs related to lower revenue.

 

Other Operating Costs and Expenses

 

Compensation. Total compensation and benefits, including stock-based compensation, was $61.8 million and $63.0 million for the nine months ended September 30, 2015 and 2014, respectively.

 

Stock-based compensation, net of amount capitalized, increased to $6.2 million during the nine months ended September 30, 2015 compared to $5.7 million during the same period in 2014. The increase was due to a net $1.4 million of executive transition stock-based compensation awards and forfeitures, partially offset by the decreased vesting of awards in connection with the iWeb acquisition. The following table summarizes the amount of stock-based compensation, net of estimated forfeitures, included in the accompanying consolidated statements of operations and comprehensive loss (in thousands):

 

		Nine Months Ended September 30,
		2015				2014
Direct costs of customer support		$	1,225			$	970
Sales and marketing			1,371				788
General and administrative			3,604				3,917
		$	6,200			$	5,675

 

Direct Costs of Customer Support. Direct costs of customer support decreased slightly to $27.4 million during the nine months ended September 30, 2015 compared to $27.6 million during the same period in 2014.

 

Direct Costs of Amortization of Acquired and Developed Technologies. Direct costs of amortization of acquired and developed technologies decreased to $2.6 million during the nine months ended September 30, 2015 compared to $4.5 million during the same period in 2014. The decrease is primarily related to an intangible asset that we fully amortized in early 2015 resulting in less amortization expense in the nine-month period in 2015 than in the same period in 2014.

 

Sales and Marketing. Sales and marketing costs decreased to $28.3 million during the nine months ended September 30, 2015 compared to $28.9 million during the same period in 2014. The decrease is primarily related to a $0.9 million decrease in commissions, a $0.8 million decrease in marketing programs, partially offset by a $0.5 million increase in cash-based compensation and a $0.6 million increase in stock-based compensation.

 

 

General and Administrative. General and administrative costs decreased to $34.3 million during the nine months ended September 30, 2015 compared to $34.4 million during the same period in 2014. The decrease was primarily due to a $3.0 million decrease in cash-based compensation from reduced headcount and bonus accrual, a $1.7 million decrease in stock-based compensation, partially offset by executive transition costs of $1.7 million for bonus and severance, a net $1.4 million in executive transition stock-based compensation awards and $0.9 million in strategic alternatives and related costs for legal and other professional fees.

 

Depreciation and Amortization. Depreciation and amortization increased to $64.8 million during the nine months ended September 30, 2015 from $54.8 million during the same period in 2014. The increase was primarily due to the effects of expanding our company-controlled data centers, private network access point infrastructure and capitalized software and $9.5 million of additional amortization expense for the accelerated useful life of the iWeb trade name. We summarize the acceleration of the iWeb trade name in note 3 to the accompanying consolidated financial statements.

 

Exit Activities, Restructuring and Impairments. Exit activities, restructuring and impairments decreased to $1.2 million during the nine months ended September 30, 2015 compared to $3.0 million during the same period in 2014. The decrease was primarily due the more significant charges during the same period in 2014 related to initial exit activity charges related to ceasing use of a portion of data center space and subsequent plan adjustments.

 

Interest Expense. Interest expense increased to $20.6 million during the nine months ended September 30, 2015 from $20.0 million during the same period in 2014. The increase was primarily due to increased borrowings under our credit agreement.

 

Nonoperating (Income) Expenses - Other, Net. Nonoperating (income) expenses – other, net was $0.8 million of income during the nine months ended September 30, 2015, as compared to $0.3 million of expenses during the same period in 2014. The increase in income was primarily due to foreign currency gains during the nine months ended September 30, 2015.

 

Benefit for Income Taxes. The benefit for income taxes increased to $1.7 million during the nine months ended September 30, 2015 from $1.0 million during the same period in 2014. The increase was primarily due to the change in benefit for the operational results of iWeb, partially offset by a $1.7 million reserve recorded against U.K. net deferred tax assets.

 

Non-GAAP Financial Measure

 

We report our consolidated financial statements in accordance with GAAP. We present the non-GAAP performance measure of adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) to assist us in explaining underlying performance trends in our business, which we believe will enhance investors’ ability to analyze trends in our business and evaluate our performance relative to other companies. We define adjusted EBITDA as loss from operations plus depreciation and amortization, loss (gain) on disposals of property and equipment, exit activities, restructuring and impairments, stock-based compensation, acquisition costs and strategic alternatives and related costs.

 

As a non-GAAP financial measure, adjusted EBITDA should not be considered in isolation of, or as a substitute for, net loss or other GAAP measures as an indicator of operating performance. In addition, adjusted EBITDA should not be considered as an alternative to income from operations or net loss as a measure of operating performance. Our calculation of adjusted EBITDA may differ from others in our industry and is not necessarily comparable with similar titles used by other companies.

 

The following table reconciles adjusted EBITDA to loss from operations as presented in our consolidated statements of operations and comprehensive loss:

 

		Three Months Ended  September 30,
		2015				2014
Loss from operations		$	(9,185	)		$	(3,035	)
Depreciation and amortization, including amortization of acquired and developed technologies			24,631				20,915
Loss on disposal of property and equipment, net			99				—
Exit activities, restructuring and impairments			920				56
Stock-based compensation			2,435				1,778
Strategic alternatives and related costs(1)			852				—
Adjusted EBITDA		$	19,752			$	19,714

 

(1)

Primarily legal and other professional fees incurred in connection with the evaluation by our board of directors of strategic alternatives and related shareholder communications. We include these costs in “General and administrative” in the accompanying statements of operations and comprehensive loss for the three and nine months ended September 30, 2015.

 

 

Liquidity and Capital Resources

 

Liquidity

 

We believe that cash flows from operations, together with our cash and cash equivalents and borrowing capacity under our revolving credit facility, will be sufficient to meet our cash requirements for the next 12 months and for the foreseeable future. If our cash requirements vary materially from what we expect or if we fail to generate sufficient cash flows from selling our services, we may require additional financing sooner than anticipated. We can offer no assurance that we will be able to obtain additional financing on commercially favorable terms, or at all, and provisions in our credit agreement limit our ability to incur additional indebtedness. Our anticipated uses of cash include capital expenditures, working capital needs and required payments on our credit agreement and other commitments.

 

We have a history of quarterly and annual period net losses. During the three and nine months ended September 30, 2015, we had a net loss of $14.2 million and $37.2 million, respectively. As of September 30, 2015, our accumulated deficit was $1.1 billion. We continue to analyze our business to control our costs, principally through making process enhancements and renegotiating network contracts for more favorable pricing and terms. We may not be able to sustain or increase profitability on a quarterly basis, and our failure to do so may adversely affect our business, including our ability to raise additional funds.

 

We monitor and review our performance and operations in light of global economic conditions, which could impact the ability of our customers to meet their obligations to us, which could delay collection of accounts receivable and increase our provision for doubtful accounts.

 

Capital Resources

 

Credit Agreement. We have a $350.0 million credit agreement, which provides for an initial $300.0 million term loan and a $50.0 million revolving credit facility. As of September 30, 2015, the term loan had an outstanding principal amount of $294.8 million, which we repay in $750,000 quarterly installments on the last day of each fiscal quarter with the remaining unpaid balance due November 26, 2019. As of September 30, 2015, the revolving credit facility, expiring in November 2018, had an outstanding balance of $31.0 million and we issued $6.3 million in letters of credit, resulting in $12.7 million in borrowing capacity. As of September 30, 2015, the interest rate on the term loan was 6% and the revolving credit facility was 4.7%.

 

The credit agreement includes customary representations, warranties, negative and affirmative covenants, including certain financial covenants relating to maximum total leverage ratio, minimum consolidated interest coverage ratio and limitation on capital expenditures. As of September 30, 2015, we were in compliance with these covenants.

 

Cash Flows

 

Operating Activities

 

Net cash provided by operating activities during the nine months ended September 30, 2015 was $22.4 million. We positively impacted cash from operations as a result of adjustments for non-cash items from our net loss of $36.0 million, while changes in operating assets and liabilities used cash from operations of $13.6 million, which was primarily due to $11.6 million of payments on accounts payable and other operating liabilities. Together with our cash and cash equivalents and borrowing capacity under our revolving credit facility, we expect to use cash flows from operating activities to fund a portion of our capital expenditures and other requirements and to meet our other commitments and obligations, including outstanding debt.

 

Investing Activities

 

Net cash used in investing activities during the nine months ended September 30, 2015 was $42.4 million, primarily due to capital expenditures related to the continued expansion and upgrade of our company-controlled data centers and network infrastructure.

 

Financing Activities

 

Net cash provided by financing activities during the nine months ended September 30, 2015 was $18.6 million, primarily due to $21.0 million of proceeds from the revolving credit facility and a net $6.0 million from stock option activity, partially offset by principal payments of $8.0 million on the credit agreement and capital lease obligations.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Other Investments

 

In previous years, we invested $4.1 million in Internap Japan Co., Ltd., our joint venture with NTT-ME Corporation and Nippon Telegraph and Telephone Corporation. We account for this investment using the equity method and we have recognized $1.3 million in equity-method losses over the life of the investment, representing our proportionate share of the aggregate joint venture losses and income. The joint venture investment is subject to foreign currency exchange rate risk.

 

Interest Rate Risk

 

Our objective in managing interest rate risk is to maintain favorable long-term fixed rate or a balance of fixed and variable rate debt within reasonable risk parameters. At September 30, 2015, we had an interest rate swap on 50% of our current term loan balance through December 30, 2016 with a LIBOR floor fixed rate of 1.5%. We summarize the interest rate swap in note 5 to our accompanying consolidated financial statements.

 

As of September 30, 2015, the balance of our long-term debt was $294.8 million on the term loan and $31.0 million on the revolving credit facility. At September 30, 2015, the interest rates on the term loan and revolving credit facility were 6% and 4.7%, respectively. We summarize the credit agreement in “Liquidity and Capital Resources—Capital Resources—Credit Agreement.”

 

We are required to pay a commitment fee at a rate of 0.50% per annum on the average daily unused portion of the revolving credit facility, payable quarterly in arrears. In addition, we are required to pay certain participation fees and fronting fees in connection with standby letters of credit issued under the revolving credit facility.

 

We estimate that a change in the interest rate of 100 basis points would change our interest expense and payments by $3.3 million per year, assuming we do not increase our amount outstanding.

 

Foreign Currency Risk

 

As of September 30, 2015, the majority of our revenue is currently in U.S. dollars. However, our results of operations and cash flows are subject to fluctuations in foreign currency exchange rates. We also have exposure to foreign currency transaction gains and losses as the result of certain receivables due from our foreign subsidiaries. During the three and nine months ended September 30, 2015, we realized foreign currency gains of $0.3 million of $0.8 million, respectively, which we included as a non-operating item in “Other, net,” and we recorded unrealized foreign currency translation gains of less than $0.1 million and losses of $0.1 million, respectively, which we included in “Other comprehensive loss,” both in the accompanying consolidated statement of operations and comprehensive loss. As we grow our international operations, our exposure to foreign currency risk will become more significant.

 

We have foreign currency contracts to mitigate the risk of a portion of our Canadian employee benefit expense. These contracts will hedge foreign exchange variations between the United States and Canadian dollar through June 30, 2017. During the three and nine months ended September 30, 2015, we recorded unrealized losses of $0.2 million and $0.4 million, respectively, which we included in “Other comprehensive loss,” in the accompanying consolidated statement of operations and comprehensive loss.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Based on our management’s evaluation (with the participation of our Chief Executive Officer and Chief Financial Officer), as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2015 that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On September 18, 2015, a purported stockholder filed a putative class action complaint in the Superior Court of Fulton County of the State of Georgia against us, the current members of our board of directors and Jefferies Finance LLC (“Jefferies”). The complaint is captioned Grisolia v. Internap Corp., et al., Case No. 2015cv265926 (Ga. Sup. Ct.). The complaint alleges, among other things, that the members of our board of directors breached their fiduciary duties, and that Jefferies aided and abetted such breaches, in connection with the credit agreement described in this filing. The complaint alleges that the credit agreement contains a so-called “dead hand proxy put” provision that (a) defines the election of a majority of directors whose initial nomination arose from an actual or threatened proxy contest to be an event of default that triggers the lenders’ right to accelerate payment of the debt outstanding under the credit agreement; and (b) thereby allegedly coerces stockholders and entrenches the members of the Board of Directors. The Plaintiff further claims that Jefferies aided and abetted the alleged breach of fiduciary duties by including the provisions in the credit agreement and encouraging our board of directors to accept them. The complaint seeks, among other things, declaratory and injunctive relief, as well as an award of costs and disbursements, including attorneys’ and experts’ fees. During the three months ended September 30, 2015, we recorded $0.5 million as litigation expense in “General and administrative” in the accompanying statements of operations and comprehensive loss for the three and nine months ended September 30, 2015.

 

On October 30, 2015, the Company and our lenders amended the credit agreement to remove the provision which is the subject of the litigation (a copy of the amendment is attached as Exhibit 10.1 to the Current Report on Form 8-K filed by us on November 5, 2015). We believe we have meritorious defenses to the claims asserted in the lawsuit including that the lawsuit is now moot.  We do not believe that the ultimate costs of this complaint will be material.

 

We are subject to other legal proceedings, claims and litigation arising in the ordinary course of business. Although the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse impact on our financial condition, results of operations or cash flows.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes from the Risk Factors we previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission on February 19, 2015.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following table sets forth information regarding our repurchases of securities for each calendar month in the three months ended September 30, 2015:

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period		Total Number of Shares Purchased(1)				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Maximum Number (or Approximate Dollar Value)  of Shares That May Yet Be Purchased Under the Plans or Programs
July 1 to 31, 2015			883			$	9.43				—				—
August 1 to 31, 2015			51,094				8.55				—				—
September 1 to 30, 2015			3,108				5.92				—				—
Total			55,085			$	8.42				—				—

 

(1)

These shares were surrendered to us to satisfy tax withholding obligations in connection with the vesting of shares of restricted stock and restricted stock units previously issued to employees and directors.

 

 

ITEM 6. EXHIBITS

 

Exhibit Number			Description
3.1			Certificate of Elimination of the Series B Preferred Stock (incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K, filed March 2, 2010).
3.2			Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K, filed March 2, 2010).
3.3			Certificate of Amendment of Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed June 21, 2010).
3.4			Certificate of Amendment of Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed November 25, 2014).
31.1			Rule 13a-14(a)/15d-14(a) Certification, executed by Michael A. Ruffolo, President and Chief Executive Officer.
31.2			Rule 13a-14(a)/15d-14(a) Certification, executed by Kevin M. Dotts, Chief Financial Officer.
32.1			Section 1350 Certification, executed by Michael A. Ruffolo, President and Chief Executive Officer.
32.2			Section 1350 Certification, executed by Kevin M. Dotts, Chief Financial Officer.
101.INS			XBRL Instance Document.
101.SCH			XBRL Taxonomy Extension Schema Document.
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB			XBRL Taxonomy Extension Label Linkbase Document.
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document.

  

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	INTERNAP CORPORATION
	By:	/s/ John D. Maggard
		John D. Maggard
		Vice President and Corporate Controller
		(Principal Accounting Officer)
		Date: November 5, 2015