REVENUES

Upon adoption of ASC 606, the Company applied certain transition practical expedients available for modified retrospective adoption.

The Company adopted the practical expedient for the portfolio approach of contracts with similar characteristics in which the company reasonably expects that the effects on the financial statements of applying this practical expedient to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio.

The Company also adopted the practical expedient to not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts for which INAP recognizes revenue at the amount to which the Company has the right to invoice for services performed, and (iii) the value for variable consideration that is applied to individual performance obligations in a series.

The Company elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (for example, sales, use, and value added taxes).

Changes in Accounting Policies

The most significant impact of the adoption of the new standard is the requirement for incremental costs to obtain a customer, such as commissions, which previously were expensed as incurred, to be deferred and amortized over the period of contract performance or a longer period if renewals are expected and the renewal commission is not commensurate with the initial commission.

In addition, installation revenues are recognized over the initial contract life rather than over the estimated customer life, as they are not significant to the total contract and therefore do not represent a material right.

Most performance obligations, with the exception of certain sales of equipment or hardware, are satisfied over time as the customer consumes the benefits as we perform. For equipment and hardware sales, the performance obligation is satisfied when control transfers to the customer.

The Company exercised more judgment in deferring installation revenue as well as expense fulfillment and commission costs over the appropriate life. With the exception of the revenues noted above, revenue recognition remains materially consistent with historical practice. However, neither caused a material difference in the financial statement.

Adjustments to Reported Financial Statements from the Adoption

The following table presents the effect of the adoption of ASC 606 on the Company’s balance sheet as of January 1, 2018 (in thousands):



	December 31, 2017, as reported			Adjustments			January 1, 2018, as adjusted
ASSETS
Current assets:
Cash and cash equivalents	$	14,603		$	—		$	14,603
Accounts receivable, net of allowance for doubtful accounts of $1,487	17,794			—			17,794
Prepaid expenses and other assets	8,673			6,814			15,487
Total current assets	41,070			6,814			47,884

Property and equipment, net	458,565			—			458,565
Intangible assets, net	25,666			—			25,666
Goodwill	50,209			—			50,209
Deposits and other assets	11,015			12,214			23,229
Total assets	$	586,525		$	19,028		$	605,553

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	20,388		$	—		$	20,388
Accrued liabilities	15,908			—			15,908
Deferred revenues	4,861			(749		)	4,112
Capital lease obligations	11,711			—			11,711
Revolving credit facility	5,000			—			5,000
Term loan, less discount and prepaid costs of $2,133	867			—			867
Exit activities and restructuring liability	4,152			—			4,152
Other current liabilities	1,707			—			1,707
Total current liabilities	64,594			(749		)	63,845

Capital lease obligations	223,749			—			223,749
Term loan, less discount and prepaid costs of $7,655	287,845			—			287,845
Exit activities and restructuring liability	664			—			664
Deferred rent	1,310			—			1,310
Deferred tax liability	1,651			209			1,860
Other long-term liabilities	7,744			(4,616		)	3,128
Total liabilities	587,557			(5,156		)	582,401
Commitments and contingencies
Stockholders’ deficit:
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued or outstanding	—			—			—
Common stock, $0.001 par value; 30,000 shares authorized; 20,804 shares outstanding	21			—			21
Additional paid-in capital	1,327,084			—			1,327,084
Treasury stock, at cost, 293 shares	(7,159		)	—			(7,159		)
Accumulated deficit	(1,323,723		)	24,184			(1,299,539		)
Accumulated items of other comprehensive loss	(1,324		)	—			(1,324		)
Total INAP stockholders’ deficit	(5,101		)	24,184			19,083
Non-controlling interests	4,069			—			4,069
Total stockholders’ deficit	(1,032		)	24,184			23,152
Total liabilities and stockholders’ deficit	$	586,525		$	19,028		$	605,553

Current Impact from the Adoption

In accordance with the new revenue standard requirements, the disclosure of the current period impact of adoption on our

unaudited condensed consolidated statement of operations and comprehensive loss and balance sheet is as follows (in thousands, except for per share amounts):



	For the Three Months Ended March 31, 2018
	As Reported			Balances without Adoption of ASC 606			Effect of Change Higher/ (Lower)
Revenues:
INAP US	$	57,076		$	56,835		$	241
INAP INTL	17,125			17,125			—
Total revenues	74,201			73,960			241

Operating costs and expenses:
Costs of sales and services, exclusive of depreciation and amortization, shown below:
INAP US	18,435			18,435			—
INAP INTL	6,602			6,602			—
Costs of customer support	7,387			7,387			—
Sales, general and administrative	19,854			19,948			(94		)
Depreciation and amortization	21,077			21,077			—
Exit activities, restructuring and impairments	(33		)	(33		)	—
Total operating costs and expenses	73,322			73,416			(94		)
Income from operations	879			544			335

Non-operating expenses:
Interest expense	15,027			15,027			—
Gain on foreign currency, net	(215		)	(215		)	—
Total non-operating expenses	14,812			14,812			—

Loss before income taxes and non-controlling interest	(13,933		)	(14,268		)	335
Provision for income taxes	100			100			—

Net loss	(14,033		)	(14,368		)	335
Less net income attributable to non-controlling interest	27			27			—
Net loss attributable to INAP stockholders	(14,060		)	(14,395		)	335

Other comprehensive income:
Foreign currency translation adjustment	61			61			—

Comprehensive loss	$	(13,999	)	$	(14,334	)	$	335

Basic and diluted net loss per share	$	(0.70	)	$	(0.72	)	$	0.02

Weighted average shares outstanding used in computing basic and diluted net loss per share	20,052			20,052



	March 31, 2018
	As Reported			Balances without Adoption of ASC 606			Effect of Change Higher/ (Lower)
ASSETS
Current assets:
Cash and cash equivalents	$	16,159		$	16,159		$	—
Accounts receivable, net of allowance for doubtful accounts of $1,700	17,524			17,524			—
Contract assets	7,131			6,872			259
Prepaid expenses and other assets	8,690			8,690			—
Total current assets	49,504			49,245			259

Property and equipment, net	461,314			461,314			—
Intangible assets, net	79,185			79,185			—
Goodwill	118,077			118,077			—
Non-current contract assets	12,056			12,027			29
Deposits and other assets	11,784			11,784			—
Total assets	$	731,920		$	731,632		$	288

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	21,699		$	21,699		$	—
Accrued liabilities	14,279			14,279			—
Deferred revenues	5,871			6,062			(191		)
Capital lease obligations	10,095			10,095			—
Revolving credit facility	16,000			16,000			—
Term loan, less discount and prepaid costs of $3,539	818			818			—
Exit activities and restructuring liability	3,391			3,391			—
Other current liabilities	4,197			4,197			—
Total current liabilities	76,350			76,541			(191		)

Capital lease obligations	223,549			223,549			—
Term loan, less discount and prepaid costs of $11,286	416,766			416,766			—
Exit activities and restructuring liability	408			408			—
Deferred rent	1,138			1,138			—
Deferred tax liability	1,841			1,841			—
Other long-term liabilities	3,046			2,902			144
Total liabilities	723,098			723,145			(47		)
Commitments and contingencies
Stockholders’ deficit:
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued or outstanding	—			—			—
Common stock, $0.001 par value; 30,000 shares authorized; 21,131 shares outstanding	21			21			—
Additional paid-in capital	1,327,985			1,327,985			—
Treasury stock, at cost, 313 shares	(7,429		)	(7,429		)	—
Accumulated deficit	(1,313,598		)	(1,313,933		)	335
Accumulated items of other comprehensive loss	(1,263		)	(1,263		)	—
Total INAP stockholders’ deficit	5,716			5,381			335
Non-controlling interests	3,106			3,106			—
Total stockholders’ deficit	8,822			8,487			335
Total liabilities and stockholders’ deficit	$	731,920		$	731,632		$	288

ASC 606 did not have a significant impact on the Company's unaudited condensed consolidated statement of cash flows.

The Company accounts for revenue in accordance with ASC 606. Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations.

The Company’s contracts with customers often include performance obligations to transfer multiple products and services to a customer. Common performance obligations of the Company include delivery of services, which are discussed in more detail below. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together requires significant judgment by the Company.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contracts transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Total transaction price is estimated for impact of variable consideration, such as INAP’s service level arrangements ("SLA"), additional usage and late fees, discounts and promotions, and customer care credits. The majority of our contracts have multiple performance obligations, as the promise to transfer individual goods or services is separately identifiable from other promises in the contracts and, therefore, is distinct. For contracts with multiple performance obligations, we allocate the contracts transaction price to each performance obligation based on its relative standalone selling price.

The stand-alone selling price (“SSP”) is determined based on observable price. In instances where the SSP is not directly observable, such as when the Company does not sell the product or service separately, INAP determines the SSP using information that may include market conditions and other observable inputs. The Company typically has more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, the Company may use information such as the size of the customer and geographic region in determining the SSP.

Revenue by source, with sales and usage-based taxes excluded, is as follows (in thousands, unaudited):



	Three Months Ended March 31, 2018
	INAP US		INAP INTL
Colocation	$	30,936	$	1,517
Network services	13,820		2,971
Cloud	12,320		12,637
	$	57,076	$	17,125

Revenue by geography is as follows (in thousands, unaudited):



	Three Months Ended March 31, 2018
	INAP US		INAP INTL
United States	$	57,076	$	—
Canada	—		9,291
Other countries	—		7,834
	$	57,076	$	17,125

For the three months ended March 31, 2018, revenue recognized that was included in the contract liability balance at the beginning of each year was $0.5 million.

Management expects that fulfillment costs and commission fees paid to sales representative as a result of obtaining service contracts and contract renewals are recoverable and therefore the Company capitalized them as contract costs in the amount of $26.3 million at March 31, 2018. Capitalized fulfillment and commission fees are amortized on a straight-line basis over the determined life, which vary based on the customer segment. For the three months ended March 31, 2018, amortization recognized was $2.9 million. There was no impairment loss in relation to the costs capitalized.

Applying the practical expedient pertaining to contract costs, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in selling, general and administrative expenses.