10-K 1 inap-123119x10k.htm 10-K Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-K
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
¨
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
(State or Other Jurisdiction of
Incorporation of Organization)
91-2145721
(I.R.S. Employer
Identification No.)
 
 
12120 Sunset Hills Road, Suite 330
Reston, VA
(Address of Principal Executive Offices)
20190
(Zip Code)
(404) 302-9700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None


Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐
Accelerated filer x
Non-accelerated filer ☐
Smaller reporting company x
 
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ý
The aggregate market value of the registrant’s outstanding common stock held by non-affiliates of the registrant was $59,259,736 based on a closing price of $3.01 on June 28, 2019, as quoted on the Nasdaq Global Market.
As of May 4, 2020, 25,648,870 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III will be incorporated by reference from the Form 10-K/A to be filed with the Securities and Exchange Commission.

 




TABLE OF CONTENTS
 
 
 
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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, particularly the Business and Management’s Discussion and Analysis of Financial Condition and Results of Operations sections set forth below, and notes to our accompanying audited consolidated financial statements, contain "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, ability to continue as a going concern and the consequences thereby, our ability to operate and emerge from Chapter 11 bankruptcy, 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 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," "our," "INAP," or the "Company" refer to Internap Corporation and our subsidiaries.

PART I
 
ITEM 1. BUSINESS
 
Recent Developments

Restructuring Support Agreement and Chapter 11

On March 16, 2020, the Company filed voluntary petitions for relief (collectively, the “Chapter 11 Cases”) under Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York, White Plains Division (the “Bankruptcy Court”) under the caption In re Internap Technology Solutions Inc. et al. The Chapter 11 Cases were filed after consultation between the Company and committee of certain holders of term loans (the “Ad Hoc Committee”) under the Company’s senior secured credit facility, regarding the restructuring of the Company’s capital structure. In connection with such consultations, the Company entered into a Restructuring Support Agreement (the “RSA”) with holders (the “Consenting Lenders”) of approximately 77% of the Company’s outstanding term loans. As set forth in the RSA, including all exhibits, annexes and schedules attached thereto, the “Term Sheet”, the Company and Consenting Lenders agreed to the principal terms of a financial restructuring (the “Restructuring”) of the Company. The Restructuring is to be implemented through a prepackaged Chapter 11 plan of reorganization (the “Plan”).

The RSA contemplates a comprehensive deleveraging of the Company’s balance sheet. Specifically, the RSA and Term Sheet provide, in pertinent part, as follows:

The Company entered into debtor-in-possession financing structured as a delayed draw term loan (the “DIP Facility”) as discussed below.
The Company’s general unsecured creditors will be paid in full in the ordinary course of business.
The DIP Facility will convert into a priority exit facility (the “Priority Exit Facility”) upon the Company’s emergence from the Chapter 11 Cases. The Priority Exit Facility will have a 3-year maturity and bear interest at a rate of LIBOR + 1000 basis points payable in cash.
The Company will enter into a new term loan facility (the “New Term Loan Facility”) on the effective date of the Plan (the “Effective Date”). The New Term Loan Facility will provide for term loans in the principal amount of $225.0 million, mature 5 years after the Effective Date and bear interest at a rate of LIBOR + 650 basis points, 300 basis points of which will be paid in cash and 350 basis points will be paid in kind; provided that, at the election of the INAP board of directors post-Effective Date, 200 basis points of the LIBOR + 300 basis points cash interest may be payment in kind.
The lenders under the Credit Agreement dated April 6, 2017 by and among INAP, as borrower, certain of its subsidiaries as guarantors, Jefferies Finance LLC as administrative and collateral agent and the other lenders thereto (as amended, the “Credit Agreement”) will receive 100% of the new common stock initially issued by reorganized INAP post-Effective Date.
Holders of existing INAP common stock will receive warrants to purchase 10% of the new equity of reorganized INAP (the “Warrants”); provided that such holders provide releases. The Warrants will have a strike price calculated to imply an equity

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value at which the holders of claims under the Credit Agreement recover their principal amount of indebtedness under the Credit Agreement plus prepetition interest on their allowed loan claims (plus amounts outstanding under the New Term Loan Facility).

The RSA includes certain milestones for the progress of the Chapter 11 Cases, which include the dates by which the Company is required to, among other things, obtain certain court orders and consummate the Restructuring.

Financing Arrangements

New Incremental Loans

On March 13, 2020, the Company entered into an agreement to borrow $5.0 million of additional incremental term loans (the “New Incremental Loans”) under the Credit Agreement. The New Incremental Loans bear interest at a rate of LIBOR (with a 1.0% floor) + 1000 basis points.

Use of Proceeds The Company used the proceeds of the New Incremental Loans to, among other things, (i) fund the ordinary course payments, working capital needs and other expenditures of the Company in advance of and during the Chapter 11 Cases, (ii) pay certain fees, interest, payments and expenses related to the Chapter 11 Cases, and (iii) pay fees and expenses related to the transactions contemplated by the New Incremental Loans in accordance with such budget.

Priority.  Priority for the New Incremental Loans are pari passu with the existing term loans under the Credit Agreement.

Affirmative and Negative Covenants.  The New Incremental Loans are subject to the same as those under the Credit Agreement, as amended by the Eighth Amendment (as hereinafter defined).

Events of Default.  The events of default for the New Incremental Loans are the same as those under the Credit Agreement, as amended by the Eighth Amendment.

Maturity.  The New Incremental Loans will mature on the earliest of: (i) September 11, 2020; (ii) the sale of substantially all of the Company’s assets; (iii) the date of the consummation of the Plan or (iv) certain accelerations of the obligations under the Credit Agreement.

Incremental and Eighth Amendment to Credit Agreement

In connection with the New Incremental Loans, the Company entered into the Incremental and Eighth Amendment to Credit Agreement (the “Eighth Amendment”) on March 13, 2020. The Eighth Amendment, among other things: (i) authorizes the incremental commitment for the New Incremental Loans under the Credit Agreement; (ii) grants additional security interests in favor of the lenders for the Company’s motor vehicles and outstanding equity interests of certain foreign subsidiaries; and (iii) adds Internap Technology Solutions Inc. as a party to the Credit Agreement.

In addition, the Eighth Amendment amended (i) the affirmative covenants to, among other things, require the Company to provide a cash receipt and disbursement budget and rolling 13-week forecasts of the same and to meet certain milestones with respect to the Chapter 11 Cases, including solicitation of the Plan, entry into the DIP Facility, and confirmation of the Plan by the Bankruptcy Court; and (ii) the negative covenants to, among other things: (A) further limit the debt the Company can borrow and repay; (B) eliminate the ability of the Company to incur liens for sale and leaseback transactions, incremental debt and equity interests and real property; (C) further limit the ability of the Company to make investments; (D) eliminate the ability of the Company to engage in mergers; (E) further limit dispositions and acquisitions of certain property; (F) eliminate the ability of the Company to pay dividends or make redemptions; (G) further limit the Company’s ability to engage in transactions with affiliates and (H) eliminate the leverage and interest coverage ratio covenants.

The Eighth Amendment further amended the events of default to provide that it will be an event of default for the New Incremental Loans if, among other things, the Company uses the proceeds from the New Incremental Loans in a manner outside of the budget, subject to certain variances or in connection with the Chapter 11 Cases, or the Company supports a plan of reorganization or disclosure statement that does not repay the obligations as set forth in the RSA.

Event of Default

The filing of the Chapter 11 Cases constituted an event of default that accelerated the Company’s obligations under the Credit Agreement, as a result of which the principal and interest due thereunder became immediately due and payable. The ability of the lenders to enforce such payment obligations under the Credit Agreement is automatically stayed as a result of the Chapter 11 Cases, and the lenders’ rights of enforcement in respect of obligations under the Credit Agreement are subject to the applicable provisions of the Bankruptcy Code.

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DIP Facility

On March 19, 2020, the Company entered into a Senior Secured Super-Priority Debtor-In-Possession Credit Agreement (the “DIP Facility”) with Jefferies Finance LLC (“Jefferies”), as administrative agent and collateral agent, and the lenders party thereto (the “DIP Lenders”). On March 19, 2020, the Bankruptcy Court entered an interim order (the “Interim Order”) to approve the DIP Facility and the parties entered into such DIP Facility on the terms approved by the Bankruptcy Court.

The DIP Facility provides for, among other things, term loans in an aggregate principal amount of up to $75.0 million, (including the roll up of $5.0 million of New Incremental Loans) under the Credit Agreement. All loans under the DIP Facility bear interest at a rate of either: (i) an applicable base rate plus 9% per annum or (ii) LIBOR (with a floor of 1%) plus 10% per annum.

Use of Proceeds. The Company anticipates using the proceeds of the DIP Facility to, among other things: (i) pay certain fees, interest, payments and expenses related to the Chapter 11 Cases; (ii) fund the working capital needs and expenditures of the Company during the Chapter 11 Cases; (iii) fund the Carve-Out (as defined below); and (iv) pay other related fees and expenses in accordance with budgets provided to the DIP Lenders.

Priority and Collateral. The DIP Lenders (subject to the Carve-Out as discussed below): (i) are entitled to joint and several super-priority administrative expense claim status in the Chapter 11 Cases; (ii) have a first priority lien on substantially all unencumbered assets of the Company; and (iii) have a priming first priority lien on any assets encumbered by the Credit Agreement. The Company’s obligations to the DIP Lenders and the liens and super-priority claims are subject in each case to a carve out (the “Carve-Out”) that accounts for certain administrative, court and legal fees payable in connection with the Chapter 11 Cases.

Affirmative and Negative Covenants. The DIP Facility contains certain affirmative and negative covenants, including requiring the Company to provide to the DIP Lenders a budget for the use of the Company’s funds and the achievement of certain milestones for the Chapter 11 Cases, among other covenants customary in debtor-in-possession financings.

Events of Default. The DIP Facility contains certain events of default customary in debtor-in-possession financings, including: (i) the failure to pay loans made under the DIP Facility when due; (ii) appointment of a trustee, examiner or receiver in the Chapter 11 Cases; (iii) certain violations of the Restructuring Support Agreement dated March 13, 2020, between the Company and the lenders party thereto; and (iv) the failure of the Company to use the proceeds of the loans under the DIP Facility as set forth in the budget (subject to any approved variances).

Maturity. The DIP Facility will mature on the earliest of (i) September 16, 2020; (ii) the date on which the loans under the DIP Facility become due and payable, whether by acceleration or otherwise; (iii) the effective date of the Plan; (iv) the sale of substantially all of the assets of the Company; (v) the first business day on which the order approving the DIP Facility by the Bankruptcy Court expires by its terms, unless a final order has been entered and become effective prior thereto; (vi) the conversion or dismissal of the Chapter 11 Cases; (vii) dismissal of any of the Chapter 11 Cases unless consented to by the DIP Lenders or (viii) the final order approving the DIP Facility by the Bankruptcy Court is vacated, terminated, rescinded, revoked, declared null and void or otherwise ceases to be in full force and effect.

Nasdaq Delisting

On March 17, 2020, INAP received a letter (the “Nasdaq Letter”) from the staff of the Nasdaq Listing Qualifications Department (the “Staff”) notifying INAP that, as a result of the Chapter 11 Cases and in accordance with Nasdaq Listing Rules 5101, 5110(b) and IM-5101-1, INAP’s common stock will be delisted from The Nasdaq Stock Market (“Nasdaq”). The Nasdaq Letter stated that the Staff’s determination was based on: (i) the filing of the Chapter 11 Cases and associated public interest concerns raised by such Chapter 11 Cases; (ii) concerns regarding the residual equity interest of the existing listed securities holders; and (iii) concerns about INAP’s ability to sustain compliance with all requirements of continued listing on Nasdaq.

INAP elected not to appeal this determination to a Nasdaq Hearings Panel and the trading of the common stock was suspended at the opening of business on March 26, 2020, and a Form 25-NSE was filed with the Securities and Exchange Commission (the “SEC”), which removed the common stock from listing and registration on Nasdaq. INAP’s Common Stock is quoted on the Over-the-Counter (“OTC”) Market under the symbol “INAPQ.”





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Going Concern and Financial Reporting

The Company has experienced negative financial trends, such as operating losses, working capital deficiencies, negative cash flows and other adverse key financial ratios. These trends, along with the resulting liquidity constraints and debt covenant compliance considerations, led to INAP’s Chapter 11 Cases, which raise substantial doubt as to our ability to continue as a going concern. Accordingly, the audit report issued by our independent registered public accounting firm contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern. For additional information concerning our bankruptcy proceedings under the Chapter 11 Cases, see Note 2, "Summary of Significant Accounting Policies" to the Notes to Consolidated Financial Statements and Item 1A, “Risk Factors” in this Annual Report on Form 10-K.

Our Company
 
We are a global provider of premium data center infrastructure, cloud solutions, and network services. We provide comprehensive solutions to our customers through our full-spectrum portfolio of services, including high-density colocation facilities, managed cloud hosting, and high performance network connectivity.

We are targeting a large addressable market of business and enterprise customers, who range in size from Fortune 500 companies to emerging startups. We provide highly secure and redundant critical infrastructure across 21 major markets around the world. The locations of our facilities are strategically situated in metropolitan markets, primarily in North America, but with an extended reach through 94 network Points of Presence ("POPs") around the world.

We have over one million gross square feet in our portfolio and approximately 600,000 square feet of sellable data center space. Of the 21 major markets in our portfolio, we have a presence in 12 of the top 15 Metropolitan Statistical Areas ("MSAs") in the United States. Our major markets include: Atlanta, Boston, Chicago, Dallas, Houston, Los Angeles, Miami, New York/New Jersey, Northern Virginia, Phoenix, Seattle, and Silicon Valley. In addition, we have a strong presence in Montreal, the second largest city in Canada. Outside of North America, we have a strategic footprint in Amsterdam, Frankfurt, London, Hong Kong, Singapore, Sydney, Tokyo and Osaka.

In addition, we operate a global IP network capable of delivering connectivity and high performance IP and optimizing quality of service for the most sophisticated customers. The network is designed to serve customers who require redundancy and low latency transport, as well as end-to-end traffic monitoring. Our network interconnects our customers through our data centers and POPs around the world, giving INAP significant footprint and global reach to access internal workloads, cloud service providers and the public internet.

Our Business
 
The IT infrastructure services market comprises a range of offerings that have emerged in response to shifting business and technology drivers. INAP competes specifically in the markets for colocation, hosting and Infrastructure-as-a-Service ("IaaS") solutions.

Multi-tenant data center providers such as INAP can meet the growing demand for off-premises infrastructure deployments through colocation, complex managed hosting, and network connectivity. Our IaaS model is designed to be flexible and scalable to keep pace with growth trends in mobility, services that require low latency and performance, and ultimately the Internet of Things ("IoT"). We aim to meet the needs of enterprises who are shifting workloads that were historically on-premise to off-premise colocation, hosted private clouds, on-ramp to public cloud environments, or some hybrid environment. We believe that the interconnection of these environments will provide customers with a range of solutions that meets their needs over a sustainable planning horizon.

Our Competitive Strengths

High Quality Data Center Facilities in Key Metropolitan Areas. We provide services in high quality facilities across 21 major metropolitan areas in nine countries. Our facilities are geographically diversified so that no one metropolitan area represents more than 15% of our total revenue. Our data center footprint is significant, with over one million gross square feet under management and approximately 600,000 square feet of sellable data center space. A significant portion of this sellable space is in our fourteen (14) ‘flagship’ data center properties, which are best-in-class facilities where we are the sole tenant, designed and constructed to specifications to support the highest criteria of security, redundancy, and performance. We are present primarily in the top MSAs in North America where we believe we touch a large addressable market of businesses and enterprises who need the products and services we offer and positions us to expand our market share and drive revenue growth.



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Application-Driven Solution Engineering. The ever-evolving needs of IT environments are not one-size fits all. Applications and workloads perform optimally only when the underlying infrastructure is designed and configured to support their specific requirements. This is why we use an application-driven approach to solution engineering. We seek to understand the customer’s particular requirements, and only then do we recommend and build the best solution. Whether colocation, managed private cloud, or third party public cloud, our full-spectrum of services allow for best-fit solutions for our customers.

Full-Spectrum, High Performance Data Center, Cloud and Network Solutions. We believe our full-spectrum data center, cloud and network solutions are positioned to capture the growing demand for outsourced IT infrastructure, regardless of deployment model or service requirement. Whether an enterprise requires small or hyperscale colocation, private or public cloud, or a mix of these services in a multi-cloud or hybrid environment, we can support them, and we connect all of our locations with our Performance IP™ service. Through a combination of automation platforms and highly-skilled technical engineering, we are able to deliver best-in-class connectivity, speed, resiliency, and scalability around the world. We use technology and processes to optimize data routes, manage complex IT environments, and deliver a premium service that customers seek out for full solutions.

Diverse Customer Base. As of December 31, 2019, we have approximately 10,000 customers across various industries, including healthcare, advertising, technology, finance, technology infrastructure, gaming, and software. Our customer base is not concentrated in any particular industry; in each of the past three years, no single customer accounted for 10% or more of our revenues.

Market Opportunity
 
We compete in the large and growing market for IT infrastructure services (outsourced data center, compute resources, storage, network services, and managed services). Enterprises continue to migrate from on-premise IT environments to outsourced services: colocation, managed hosting, private and/or public clouds.

Three complementary macro-level trends are driving demand for IT infrastructure services: the rapid growth of the digital economy, the increases in outsourcing of IT, and the emergence of IoT.
 
The Growth of the Digital Economy
 
The digital economy continues to impact business models with a new generation of software and networked applications. Widespread adoption of mobile devices combined with rising expectations around the performance and availability of both consumer and business applications places increasing pressure on enterprises to deliver a seamless end-user experience on any device at any time in any location. Simultaneously, Software-as-a-Service models have changed data usage patterns with information traditionally maintained on individual machines and back-office servers which are now being streamed across the Internet. These applications require predictable performance and data security.

Further, the growth of big data analytics is giving rise to a new breed of "fast data" applications that collect and analyze massive amounts of data in real time to drive immediate business decisions - for example, real-time ad bidding platforms and personalized e-commerce portals. Finally, the emergence and adoption of the IoT is giving rise to the "edge," where data center and connectivity options are required to be closer to the end user.

The Outsourcing of IT Infrastructure

On-premise IT infrastructure still accounts for the largest overall share of the market but is in rapid decline due to workloads shifting to outsourced infrastructure models, such as colocation and cloud computing. This trend favors data center and cloud service providers that can offer a range of solutions to cater to the varying needs of medium and large enterprise IT. We expect that many customers will need technical expertise provided by companies like ours to migrate, secure, and manage third party public cloud workloads, particularly as dependence on cloud solutions and computing is expected to increase.

As distributed applications become more prevalent, security concerns and compliance issues are placing new burdens on the traditional IT model and driving new costs and complexity. As a result, IT organizations are increasingly turning to infrastructure outsourcing to free-up valuable internal resources to focus on their core businesses, improve service levels and lower the overall cost of their IT operations. We serve as a partner to those resource-limited businesses and enterprises by providing the necessary infrastructure and services to address the increasing complexity of IT environments in today’s digital-centric world. We serve as a partner to businesses and enterprises, as we provide those resources to customers who are limited.




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The Emergence of IoT and the ‘Edge’

The IoT continues to evolve as more and more products now have IP addresses. The volume of IoT projects being deployed has risen dramatically in recent years. This offers countless opportunities for multi-tenant data center and cloud service providers, especially ones with ‘edge’ reach, such as ours. The necessary combination of data center proximity to end-users and the ability to deliver extremely low latency for real-time application interaction, will dictate where infrastructure is deployed to enable IoT projects.

Rapid growth in data generated from IoT deployments will also continue to drive a need for low latency storage. Internet infrastructure providers with extensive data center footprints, cloud and storage options will be prime targets for IoT deployments. We believe we are well positioned to capitalize on this growing trend.

Our Growth Strategy

Our objective is to increase market share and deliver profitable growth as a trusted partner to our customers. We aim to offer complete solutions that utilize some or all of our full-spectrum of data center, cloud, and/or network services for businesses globally. Our strategy is driven by both organic and inorganic activities:

Improve Performance of Technical and Economic IT Outcomes for Global Organizations. By taking an application-driven approach to solution design and engineering, along with the use of our innovative automation platforms, we partner with IT managers to deploy solutions specifically aligned with their needs, reducing unnecessary complexities and costs. Regardless of deployment model (i.e., colocation, bare metal, complex managed hosting, private cloud, or managed AWS/Azure), we have the expertise and tools to support the right mix of infrastructure to optimize both technical and economic solutions.

Increase Brand Awareness. Continued focus on our go-to-market efforts through sales and marketing are intended to give broader awareness to our full-spectrum of data center, cloud and network solutions. Investments in marketing initiatives, sales training, and overall brand coverage are designed to give greater attention and coverage to us and support the efforts of our quota bearing sales representatives with both prospective and existing customers.

Expand IT Wallet Share with our Existing Customer Base. With our growing portfolio of data center and cloud services, and a customer base of approximately 10,000, we have the opportunity to support our customers’ expansion needs with production, test, development, and disaster recovery offerings in addition to 24/7 managed services. Customers desire a single trusted partner that can offer them solutions for their needs today, as well as their projected needs of the future. Our "land and expand" approach to customer lifecycle management enables us to remain tied closely to the customer’s IT and business roadmap and anticipate their evolving needs. We are staffed with account management and customer success organizations that align with our strategy to grow in these efforts.

Increase Scale and Capabilities. After our emergence from the Chapter 11 Cases, we expect to continue to look for strategic acquisitions, joint ventures or partnership opportunities that would add to or strengthen our service portfolio, expand our geographic reach or increase the scale of our business.

Our Products and Services

Colocation

Colocation involves providing conditioned power with back-up capacity and physical space within data centers along with associated services such as interconnection, remote hands, environmental controls, monitoring and security while allowing our customers to deploy and manage their servers, storage and other equipment in our secure data centers. We design, construct, and operate the critical data center infrastructure to service our customers.












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Data Center Locations

We offer premier data center services in 21 metropolitan markets worldwide, across 50 locations. The summary of locations is provided below.

North America
 
 
Europe
Asia Pacific
Atlanta (2)
 
Los Angeles (2)
Phoenix (3)
 
Amsterdam (4)
Hong Kong (2)
Boston
 
Miami
Seattle (2)
 
Frankfurt
Osaka
Chicago (3)
 
Montreal (4)
Silicon Valley (5)
 
London (3)
Singapore (3)
Dallas (3)
 
New York/New Jersey (3)
 
 
 
Sydney
Houston
 
N. Virginia/ DC (2)
 
 
 
Tokyo (3)

Network Locations

INAP provides network services at 94 POPs around the world, including the locations listed above. The summary of POP locations is provided below.
North America
 
Europe
Asia Pacific
Atlanta (4)
 
Los Angeles (7)
Phoenix (5)
 
Amsterdam (4)
Hong Kong (2)
Boston (3)
 
Miami (2)
Sacramento
 
Frankfurt (2)
Osaka
Chicago (5)
 
Montreal (6)
Seattle (3)
 
London (4)
Singapore (5)
Dallas (3)
 
New York/New Jersey (8)
Silicon Valley (11)
 
 
Sydney
Denver (2)
 
Northern Virginia/DC (8)
Toronto
 
 
Tokyo (3)
Houston
 
Philadelphia (2)
 
 
 
 

Cloud

Cloud services involve providing compute resources and storage services on demand via an integrated platform, connected with our Performance IP™ network fabric for low latency connectivity.

Bare Metal

Our Bare Metal Service is intended for workloads and applications that demand robust compute and reliable performance in a high-performance, single-tenant hosting solution.

Private Cloud

Private Cloud dedicates cloud computing resources to a single client that is either logically isolated (multi-tenant) or physically isolated (single tenant) from other users. Compute resources are reserved and dedicated for that client alone. Benefits of our private cloud include high levels of security, right-sized to the needs of the workloads, automated for speed of deployment, and transparent for direct visibility into ongoing environmental health.

Managed Third Party Cloud

24x7x365 technical and account support for third party cloud services. Our expertise, solution design, deployment and security allow our customers to focus on their business, not on their cloud infrastructure.

Disaster Recovery-as-a-Service ("DRaaS")

DRaaS offers protection to a customer’s business reputation by ensuring their applications work for their internal users and their customers during adverse IT events. DRaaS is a secondary environment in a geographically diverse location that enables our customers to continue operations during downtime of their primary production environments.



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Cloud Backups

Offsite cloud backups provide a simple, affordable and secure way to satisfy data protection needs.

Managed Storage

From dedicated Storage Area Network (SAN) to Cloud Object storage, our managed storage services provide access to on-demand storage and support for our customer’s applications with no upfront capital investment on their part.

Managed Security

Our managed security services mitigate attacks, improve performance and reduce data recovery costs. With 24/7 protection and flexible deployment options, our managed security services assist our customers in meeting regulatory and best practice requirements, such as FSA, DPA, Basel, ISO 17799, HIPAA and GLA.

Multi-cloud

Multi-cloud solutions are tailored to varying application and workload requirements, leveraging more than one cloud or infrastructure service, such as private cloud and third party cloud.

Network

Network services includes our patented Performance IP™ service, content delivery network services, and IP routing hardware and software platform. By intelligently routing traffic with redundant, high-speed connections over multiple major Internet backbones, our IP connectivity provides high performance and highly reliable delivery of content, applications and communications to end users globally.

Corporate Information

We incorporated in Washington in 1996 and reincorporated in Delaware in 2001. Historically, our common stock was listed on the Nasdaq Global Market under the symbol "INAP." On March 26, 2020, our common stock was delisted from Nasdaq and now is quoted on the OTC Market under the symbol “INAPQ.” Our principal executive offices are located at 12120 Sunset Hills Road, Suite 330, Reston, Virginia 20190.
 
Competition
 
The market for Internet infrastructure services is intensely competitive, remains highly fragmented and is characterized by rapid innovation, price sensitivity and consolidation. We believe that the principal factors of competition for service providers in our target markets include breadth of product offering, product features and performance, level of customer service and technical support, price, brand recognition and strength of company financial position. We believe that we can compete on the basis of these factors to varying degrees, but many of our competitors are larger and better capitalized than we are and have additional flexibility, particularly while we are in Chapter 11 bankruptcy. Our current and potential competition primarily consists of colocation providers, managed service and hosting providers, public and private cloud providers and network service providers.
  
Intellectual Property

Our success and ability to compete depend in part on our ability to develop and maintain the proprietary aspects of our IT infrastructure services and operate without infringing on the proprietary rights of others. We rely on a combination of patent, trademark, trade secret and contractual restrictions to protect our proprietary technology. As of December 31, 2019, we had 18 patents (15 issued in the United States and 3 issued internationally) that extend to various dates between 2020 and 2033, and 20 registered trademarks in the United States. Although we believe the protection afforded by our patents, trademarks and trade secrets has value, the rapidly changing technology in our industry and uncertainties in the legal process make our future success dependent primarily on the innovative skills, technological expertise and management abilities of our employees rather than on the protection afforded by patent, trademark and trade secret laws. We seek to limit disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us.





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Employees

As of December 31, 2019, we had approximately 540 employees. None of our employees are represented by a labor union, and we have not experienced any work stoppages. We generally believe our labor relations to be good.
 
Available Information
 
The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. The Company files annual reports, quarterly reports, proxy statements and other documents with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
 
The Company also makes available free of charge through its website (www.INAP.com) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. References to our website addressed in this Form 10-K are provided as a convenience and do not constitute, and should not be viewed as, an incorporation by reference of the information contained on, or available through, the website. Therefore, such information should not be considered part of this Form 10-K. 


ITEM 1A. RISK FACTORS

We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could have a materially adverse impact on our operations. The risks described below highlight some of the factors that have affected, and in the future could affect, our operations. You should carefully consider these risks. These risks are not the only ones we may face. Additional risks and uncertainties of which we are unaware or that we currently deem immaterial also may become important factors that affect us. If any of the events or circumstances described in the following risks occurs, our business, consolidated financial condition, results of operations, cash flows or any combination of the foregoing could be materially and adversely affected.

Risks Related to the Chapter 11 Cases

On March 16, 2020, we filed voluntary petitions commencing the Chapter 11 Cases under the Bankruptcy Code. The Chapter 11 Cases and the Restructuring may have a material adverse impact on our business, financial condition, results of operations, and cash flows. In addition, the Chapter 11 Cases and the Restructuring may have a material adverse impact on the trading price, and the Plan will result in the cancellation and discharge of our securities, including our common stock. The Plan governs distributions to and the recoveries of holders of our securities. 

As previously disclosed in our Current Report on Form 8-K filed with the SEC on March 16, 2020, we engaged financial and legal advisors to assist us in, among other things, analyzing various strategic financial alternatives to address our liquidity and capital structure, including strategic financial alternatives to restructure our indebtedness. These efforts led to the execution of the RSA on March 16, 2020 and the filing of the Chapter 11 Cases.

The Chapter 11 Cases could have a material adverse effect on our business, financial condition, results of operations and liquidity. So long as the Chapter 11 Cases continue, our management may be required to spend a significant amount of time and effort dealing with the Restructuring rather than focusing exclusively on our business operations. Bankruptcy Court protection and operating as debtors in possession also may make it more difficult to retain management and the key personnel necessary to the success and growth of our business. In addition, during the pendency of the Chapter 11 Cases, our customers and suppliers might lose confidence in our ability to reorganize our business successfully and may seek to establish alternative commercial relationships, which may cause, among other things, our suppliers, vendors, counterparties and service providers to renegotiate the terms of our agreements, attempt to terminate their relationship with us or require financial assurances from us. Although we remain committed to providing safe, reliable IT services and we believe that we have sufficient resources to do so, customers may lose confidence in our ability to provide them the level of service they expect, resulting in a significant decline in our revenues, profitability and cash flow. 

Other significant risks include or relate to the following:

our ability to obtain the Bankruptcy Court’s approval with respect to motions or other requests made to the Bankruptcy Court in the Chapter 11 Cases, including maintaining strategic control as debtor-in-possession;
our ability to consummate the Plan and emerge from bankruptcy protection;

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the effects of the filing of the Chapter 11 Cases on our business and the interest of various constituents, including our stockholders;
increased advisory costs to execute the Restructuring;
our ability to maintain relationships with suppliers, customers, employees and other third parties as a result of the Chapter 11 Cases;
Bankruptcy Court rulings in the Chapter 11 Cases as well as the outcome of other pending litigation and the outcome of the Chapter 11 Cases in general;
the length of time that we will operate with Chapter 11 protection and the continued availability of operating capital during the pendency of the proceedings;
third-party motions in the Chapter 11 Cases, which may interfere with our ability to consummate the Plan; and
the potential adverse effects of the Chapter 11 Cases on our liquidity and results of operations.

Further, under Chapter 11, transactions outside the ordinary course of business are subject to the prior approval of the Bankruptcy Court, which may limit our ability to respond in a timely manner to certain events or take advantage of certain opportunities or to adapt to changing market or industry conditions.

Because of the risks and uncertainties associated with the Chapter 11 Cases, we cannot predict or quantify the ultimate impact that events occurring during the Chapter 11 Cases may have on our business, cash flows, liquidity, financial condition and results of operations, nor can we predict the ultimate impact that events occurring during the Chapter 11 Cases may have on our corporate or capital structure.

Delays in the Chapter 11 Cases may increase the risks of our being unable to reorganize our business and emerge from bankruptcy and may increase our costs associated with the bankruptcy process.

The RSA contemplates the consummation of the Plan through a prepackaged plan of reorganization, but there can be no assurance that we will be able to consummate the Plan on the terms or on the timelines contemplated by the Plan. A prolonged Chapter 11 proceeding could adversely affect our relationships with customers, suppliers, landlords, vendors and employees, among other third parties, which in turn could adversely affect our business, competitive position, financial condition, liquidity and results of operations and our ability to continue as a going concern. A weakening of our financial condition, liquidity and results of operations could adversely affect our ability to implement the Plan. If we are unable to consummate the Plan, we may be forced to convert the Chapter 11 Cases into Chapter 7 proceedings and liquidate our assets.

In addition, the occurrence of the Effective Date of the Plan is subject to certain conditions and requirements that may not be satisfied or waived. Some of these conditions may be out of our control or subject to actions by third parties.

The Plan may not become effective.

The Plan may not become effective because it is subject to the satisfaction of certain conditions precedent (some of which are beyond our control). There can be no assurance that such conditions will be satisfied or waived and, therefore, that the Plan will become effective and that we will emerge from the Chapter 11 Cases as contemplated by the Plan. If the effective date of the Plan is delayed, we may not have sufficient cash or other sources of liquidity available to operate our business. In that case, we may need new or additional financing, which may increase the cost of consummating the Plan. There is no assurance of the terms on which such financing may be available or if such financing will be available. If the transactions contemplated by the Plan are not completed, it may become necessary to amend the Plan. The terms of any such amendment are uncertain and could result in material additional expense and result in material delays to the Chapter 11 Cases.

We may not be able to obtain Bankruptcy Court confirmation of the Plan or may have to modify the terms of the Plan.

Even if the Plan is approved by each class of holders of claims and interests entitled to vote, the Bankruptcy Court, which, as a court of equity, may exercise substantial discretion and may choose not to confirm the Plan. Bankruptcy Code Section 1129 requires, among other things, a showing that confirmation of the Plan will not be followed by liquidation or the need for further financial reorganization for us, and that the value of distributions to dissenting holders of claims and interests will not be less than the value such holders would receive if we, the debtors, liquidated under Chapter 7 of the Bankruptcy Code. Although we believe that the Plan will satisfy such tests, there can be no assurance that the Bankruptcy Court will reach the same conclusion.

Confirmation of the Plan will also be subject to certain conditions. These conditions may not be met and there can be no assurance that the Consenting Lenders will agree to modify or waive such conditions. Further, changed circumstances may necessitate changes to the Plan. Any such modifications could result in less favorable treatment than the treatment currently anticipated to be included in the Plan based upon the agreed terms of the RSA and Term Sheet. Such less favorable treatment could include a distribution of property (including

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the new common stock of reorganized INAP or another class of Warrants) to the class affected by the modification of a lesser value than currently anticipated to be included in the Plan or no distribution of property whatsoever under the Plan. Changes to the Plan may also delay the confirmation of the Plan and our emergence from bankruptcy, which could result in, among other things, incurred costs and expenses.

Even if the Plan or another Chapter 11 plan of reorganization is consummated, we may not be able to achieve our stated goals and continue as a going concern.

Even if the Plan, or any other plan of reorganization, is consummated, we may continue to face a number of risks, such as significant competition in the IT space, other changes in economic conditions, whether as a result of COVID-19 or other factors, changes in our industry, changes in demand for our services and increasing expenses. Accordingly, we cannot guarantee that the Plan, or any other plan of reorganization, will achieve our stated goals.

Furthermore, even if we implement the Restructuring with the goal of adjusting our balance sheet through the Plan or another plan of reorganization, we may need to raise additional funds through public or private debt or equity financing or other various means to fund our business after the completion of the Chapter 11 Cases. Our access to additional financing may be limited, if it is available at all. Therefore, adequate funds may not be available when needed or may not be available on favorable terms.

The Plan or another plan of reorganization that we may implement will be based upon assumptions and analyses developed by us. If these assumptions and analyses prove to be incorrect, we may not be able to successfully execute such plan.

The Plan or any other plan of reorganization that we may implement will affect both our capital structure and the ownership, structure and operation of our business and will reflect assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we consider appropriate under the circumstances. Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not limited to (i) our ability to appropriately adjust or otherwise change our capital structure and debt profile; (ii) our ability to obtain adequate liquidity and financing sources, if at all; (iii) our ability to maintain customers’ confidence in our viability as a continuing entity and to attract and retain sufficient business from them; (iv) our ability to retain key employees; and (v) the overall strength and stability of general economic conditions and conditions of the industries in which we compete, particularly in light of the economic disruptions caused by COVID-19. The failure of any of these factors could materially adversely affect the successful reorganization of our business and our ability to implement the Plan.

In addition, the Plan or any other plan of reorganization, will rely upon financial projections, including with respect to revenues, capital expenditures, debt service and cash flow. Financial forecasts are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial forecasts will not be accurate. Accordingly, we expect that our actual financial condition and results of operations will differ, perhaps materially, from what we have anticipated. Consequently, there can be no assurance that the results or developments contemplated by any plan of reorganization we may implement will occur or, even if they do occur, that they will have the anticipated effects on us or our business or operations. The failure of any such results or developments to materialize as anticipated could materially adversely affect the successful execution of our plan of reorganization.

Our cash flows may not provide sufficient liquidity during the Chapter 11 Cases. Our long-term liquidity requirements and the adequacy of our capital resources are difficult to predict at this time.

Our ability to fund our operations and our capital expenditures requires a significant amount of cash. Our current principal sources of liquidity include the available borrowing capacity under our DIP Facility and cash flow generated from operations. If our cash flow from operations decreases, we may not have the ability to expend the capital necessary to maintain or improve our current operations, negatively impacting our future revenues.

We face uncertainty regarding the adequacy of our liquidity and capital resources and have limited, if any, access to additional financing due to, among other things, the covenants contained in our DIP Facility. In addition to the cash requirements necessary to fund ongoing operations, we have incurred significant professional fees and other costs in connection with negotiating alternatives to entering Chapter 11, eventual negotiation and preparation for the filing of the Chapter 11 Cases and negotiation of funding sources, including the DIP Facility. We expect that we will continue to incur significant professional fees and costs throughout the pendency of the Chapter 11 Cases. Although we expect the Chapter 11 Cases to be completed with deliberate speed based on the milestones in the RSA, we may not be able to comply with the covenants of our DIP Facility and our cash on hand and cash flow from operations may not be sufficient to continue to fund our operations and allow us to satisfy our obligations related to the Chapter 11 Cases until we are able to emerge from the Chapter 11 Cases.


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Our liquidity, including our ability to meet our ongoing operational obligations, is dependent upon, among other things: (i) our ability to comply with the terms and conditions of our DIP Facility, (ii) our ability to comply with the terms and conditions of any order that may be entered by the Bankruptcy Court in connection with the Chapter 11 Cases, (iii) our ability to maintain adequate cash on hand, (iv) our ability to generate cash flow from operations, (v) our ability to confirm and consummate the Plan or other alternative restructuring transaction and (vi) the cost, duration and outcome of the Chapter 11 Cases.

We may be unable to comply with restrictions or with budget, liquidity, or other covenants imposed by the agreements governing our DIP Facility. Such non-compliance could result in an event of default under the terms of the DIP Facility that, if not cured or waived, would have a material adverse effect on our business, financial condition and results of operations.

Covenants of the DIP Facility will include general affirmative covenants, as well as negative covenants such as prohibiting us from incurring or permitting indebtedness or liens or making investments or dispositions unless specifically permitted. Our ability to comply with these provisions may be affected by events beyond our control and our failure to comply, or obtain a waiver in the event we cannot comply with a covenant, could result in an event of default under the DIP Facility and permit the lenders thereunder to accelerate the loans and otherwise exercise remedies allowable by the agreements governing the DIP Facility.

As a result of the Chapter 11 Cases, our historical financial information may not be indicative of our future performance, which may be volatile.

During the Chapter 11 Cases, we expect our financial results to continue to be volatile as restructuring activities and expenses significantly impact our consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after March 16, 2020. In addition, if we emerge from Chapter 11, the amounts reported in subsequent consolidated financial statements, if any, may materially change relative to our historical consolidated financial statements, including as a result of revisions to our operating plans pursuant to the Plan.

Trading in our securities during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks. The Plan will result in the cancellation of our common stock.

Under the Plan, all existing equity interests in INAP common stock will be extinguished. Amounts invested by the holders of our common stock will not be recoverable and such securities will have no value. Trading prices for INAP’s securities may bear little or no relationship to the actual recovery, if any, by holders of INAP’s securities in the Chapter 11 Cases. INAP expects that its equity holders will experience a significant or complete loss on their investment, depending on the outcome of the Chapter 11 Cases.

If the RSA is terminated, our ability to confirm and consummate the Plan could be materially and adversely affected.

The RSA contains a number of termination events, upon the occurrence of which certain of the RSA Parties may terminate the RSA. If the RSA is terminated as to all parties thereto, each of the parties thereto will be released from its obligations in accordance with the terms of the RSA. Such termination may result in the loss of support for the Plan by the parties to the RSA, which could adversely affect our ability to confirm and consummate the Plan. If the Plan is not consummated, there can be no assurance that the Chapter 11 Cases would not be converted to Chapter 7 liquidation cases or that any new Plan would be as favorable as contemplated by the RSA.

In certain instances, a Chapter 11 case may be converted to a case under Chapter 7 of the Bankruptcy Code.

Upon a showing of cause, the Bankruptcy Court may convert the Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code. We believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to our creditors than those provided for in the Plan because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a distressed fashion over a short period of time rather than in a controlled manner and as a going concern, (ii) additional administrative expenses involved in the appointment of a Chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of executory contracts in connection with a cessation of operations.

We may be subject to claims that will not be discharged in the Chapter 11 Cases, which could have a material adverse effect on our financial condition and results of operations.

The Bankruptcy Court provides that the confirmation of a plan of reorganization discharges a debtor from substantially all debts arising prior to consummation of a plan of reorganization. With few exceptions, all claims that arose prior to March 16, 2020 or before consummation of the Plan (i) would be subject to compromise and/or treatment under the Plan and/or (ii) would be discharged in accordance

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with the Bankruptcy Code and the terms of the Plan. Any claims not ultimately discharged pursuant to the Plan could be asserted against the reorganized entities and may have an adverse effect on our financial condition and results of operations on a post-reorganization basis.

The Chapter 11 Cases limit the flexibility of our management team in running our business.

While we operate our business as debtor-in-possession under supervision by the Bankruptcy Court, we are required to obtain the approval of the Bankruptcy Court and, in some cases, the Consenting Lenders, prior to engaging in activities or transactions outside the ordinary course of business. Bankruptcy Court approval of non-ordinary course activities entails, among other things, preparation and filing of appropriate motions with the Bankruptcy Court and one or more hearings. It is possible that third parties may be heard at any Bankruptcy Court hearing and may raise objections with respect to these motions.

This process may delay major transactions and limit our ability to respond in a timely manner to adapt to changing market or industry conditions or to take advantage of certain opportunities. Furthermore, in the event the Bankruptcy Court does not approve a proposed activity or transaction, we would be prevented from engaging in activities and transactions that we believe to be beneficial to us.

The commencement of the Chapter 11 Cases has consumed and will continue to consume a substantial portion of the time and attention of our management and will impact how our business is conducted, which may have an adverse effect on our business and results of operations.

The requirements of the Chapter 11 Cases have consumed and will continue to consume a substantial portion of our management’s time and attention and leave them with less time to devote to the operation of our business. This diversion of attention may materially adversely affect the conduct of our business and, as a result, our financial condition and results of operations.

We may experience employee attrition as a result of the Chapter 11 Cases.

As a result of the Chapter 11 Cases, we may experience employee attrition, and our employees may face considerable distraction and uncertainty, particularly in conjunction with remote working arrangements as a result of COVID-19. A loss of key personnel or material erosion of employee morale could adversely affect our business and results of operations. Our ability to engage, motivate and retain key employees or take other measures intended to motivate and incentivize key employees to remain with us through the pendency of the Chapter 11 Cases is limited by restrictions on implementation of incentive programs under the Bankruptcy Code. The loss of services of members of our senior management team could impair our ability to execute our strategy and implement operational initiatives, which could have a material adverse effect on our financial condition, liquidity and results of operations. Although we have entered into retention arrangements with certain of our senior executives, there is no assurance that such retention agreements will be sufficient to retain their services.

Adverse publicity in connection with the Chapter 11 Cases or otherwise could negatively affect our businesses.

Adverse publicity or news coverage relating to us, including, but not limited to, publicity or news coverage in connection with the Chapter 11 Cases, may negatively impact our efforts to establish and promote name recognition and a positive image after emergence from the Chapter 11 Cases. Although we have engaged experienced professionals to assist in our communication strategies, there is no guarantee that such strategies will operate as we intend.

The Plan contemplates that we will be a privately held company after emergence from the Chapter 11 Cases, which would result in less disclosure about us and may negatively affect our ability to raise additional funds.

Upon the Effective Date of the Plan, we anticipate being a privately held company due to no longer meeting the requirements for filing periodic or current reports under Section 12 of the Exchange Act. In connection with the Plan, we intend to file a Form 15 to voluntarily deregister our securities under Section 12(g) of the Exchange Act and suspend our reporting obligations under Section 15(d) of the Exchange Act. Following deregistration, we do not expect to publish periodic financial information or furnish such information to our stockholders except as may be required by applicable laws. These actions will result in less disclosure about us and may negatively affect our ability to raise additional funds.

The filing of the Chapter 11 Cases could detrimentally affect the trading liquidity of our common stock.

On March 17, 2020, Nasdaq notified us of its determination to delist our common stock from Nasdaq under its applicable rules. We did not appeal this determination and our common stock was delisted on March 26, 2020. Our common stock is currently quoted on the OTC under the symbol “INAPQ.” However, we cannot assure you that the quotation or trading of our common stock on the OTC or any other alternative market will provide sufficient trading liquidity.

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Securities quoted or traded on alternative markets such as the OTC generally have significantly less liquidity than securities traded on a national securities exchange due to factors such as the reduced number of (i) investors that will consider investing in the securities, (ii) market makers in the securities, and (iii) securities analysts that follow such securities. As a result, holders of shares of our common stock may find it difficult to resell their shares at prices quoted in the market or at all.

Furthermore, because of the limited market and generally low volume of trading in our common stock that could occur, the share price of our common stock could be more likely to be affected by broad market fluctuations, general market conditions, fluctuations in our operating results, changes in the markets perception of our business, and announcements made by us, our competitors, parties with whom we have business relationships or third parties with interests in the Chapter 11 Cases.

The delisting of our common stock could impair our ability to incentivize key personnel through equity-based compensation or to use our equity for other strategic purposes. A number of institutional investors have investment policies that prohibit them from trading in securities listed on an over-the-counter market. Similarly, many brokers may be restricted from recommending over-the-counter securities to their customers due to their firm’s trading policies or applicable regulations of self-regulatory agencies. As a result, investors may find it less convenient to sell, or to obtain accurate quotations in seeking to buy, our common stock on an over-the-counter market, which would significantly limit the liquidity of our common stock and may adversely affect the demand for and market price of our common stock.

The lack of liquidity in our common stock may also make it difficult for us to issue additional securities for financing or other purposes, or to otherwise arrange for any financing we may need in the future. For these and other reasons, we urge that extreme caution be exercised with respect to existing and future investments in our common stock.

We cannot predict the amount of time needed in Chapter 11 to implement the Plan, and lengthy Chapter 11 cases could disrupt its businesses, as well as impair prospects for reorganization on terms contained in the Plan and possibly provide an opportunity for other plans to be proposed
We cannot be certain that the Chapter 11 Cases, commenced solely for the purpose of implementing the Plan, would be of relatively short duration (e.g., 45 to 65 days) and would not unduly disrupt our businesses. It is impossible to predict with certainty the amount of time needed in bankruptcy, and we cannot be certain that the Plan will be confirmed. Moreover, the Bankruptcy Code limits the time during which a debtor has an exclusive right to file a plan before other proponents can propose and file their own plan.

Any additional time we spend in the Chapter 11 process would also involve additional expenses and divert the attention of management from operation of the businesses, as well as create concerns for personnel, vendors, suppliers, service providers, and customers. The disruption that extended time in Chapter 11 cases would inflict upon our businesses would increase with the length of time needed to complete the Restructuring, and the severity of that disruption would depend upon the attractiveness and feasibility of the Plan from the perspective of the constituent parties, including suppliers, service providers, vendors, personnel, and customers. Significant delay may result in the termination of the RSA or the DIP Facility due to missed milestones, other termination events, or other applicable events of default.

If we are unable to obtain confirmation of the Plan on a timely basis for any reason, we may be forced to operate in Chapter 11 for an extended period while trying to develop a different Chapter 11 plan that can be confirmed. Protracted Chapter 11 cases would increase both the probability and the magnitude of the adverse effects described above.

We may be unable to obtain confirmation of the Plan
Although we believe that the Plan will satisfy all requirements for confirmation under the Bankruptcy Code, there can be no assurance that the Bankruptcy Court will reach the same conclusion. Moreover, there can be no assurance that modifications to the Plan will not be required for confirmation or that such modifications would not be sufficiently material as to necessitate the re-solicitation of votes on the Plan.
If the Plan is not confirmed, there can be no assurance the Chapter 11 Cases will continue rather than be converted into Chapter 7 liquidation cases or that any alternative Chapter 11 plan or plans would be on terms as favorable to the holders of claims and interests as the terms of the Plan. If a liquidation or protracted reorganization of our bankruptcy estate were to occur, there is a substantial risk that our going concern value would be substantially eroded.


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There is a risk that certain parties could oppose and object to either the entirety of the Plan or specific provisions of the Plan. Although we believe that the Plan complies with all relevant Bankruptcy Code provisions, there can be no guarantee that a party in interest will not file an objection to the Plan or that the Bankruptcy Court will not sustain such an objection.

Risks Related to our Business

We cannot predict with certainty the future evolution of the IT infrastructure market in which we compete and may be unable to respond effectively or on a timely basis to rapid technological change.

The IT infrastructure market in which we compete is characterized by rapidly changing technology and new industry standards and customer needs, as well as by frequent new product and service introductions. Innovative new IT technologies and evolving industry standards have the potential to quickly gain widespread acceptance, either replacing or providing efficient, potentially lower-cost alternatives to more traditional IT communications services. The adoption of such new technologies or industry standards could render our existing services obsolete and unmarketable or require us to spend significant amounts of capital to develop, adapt or adopt new technologies or industry standards.

Our failure to anticipate new technology trends that may eventually become the preferred technology choice of our customers, to adapt our technology to any changes in the prevailing industry standards (or, conversely, for there to be an absence of generally accepted standards applicable to the industries we compete in) could materially and adversely affect our business. Our pursuit of and investment in necessary technological advances may require substantial time and expense, but may not guarantee that we can successfully adapt our network and services to alternative access devices and technologies. Technological advances in computer processing, hardware, storage, capacity, component size, artificial intelligence solutions, cloud computing solutions or power management could result in a decreased demand for our data center and hosting services. Likewise, if the Internet backbone becomes subject to a form of central management or gatekeeping control (whether by the government or another centralized entity), or if internet service providers ("ISPs") establish an economic settlement arrangement regarding the exchange of traffic between Internet networks that is passed on to Internet users, the demand for our services could be materially and adversely affected.

If we are unable to develop new and enhanced services and products that achieve widespread market acceptance, or if we are unable to improve the performance and features of our existing services and products or adapt our business model to keep pace with industry trends, our business and operating results could be adversely affected.

The markets in which we compete are constantly evolving. The process of expending research and development funds to create new services and products, and the technologies that support them, is expensive, time and labor intensive and uncertain. We may not understand or accurately assess the market demand for new services and products, price the new services and products on a competitive basis, or not be able to fix technical problems with new services and products. The demand for top research and development and technical talent is high, and there is significant competition for these scarce resources.

Our future success may depend on our ability to respond to the rapidly changing needs of our customers by expending research and development funds in an efficient manner to acquire talent and to develop, introduce and market new services, products and upgrades on a timely basis. New product development, introduction and marketing involves a significant commitment of time and resources and is subject to a number of risks and challenges, including:

developing or expanding efficient sales channels;
sourcing, identifying, obtaining and managing qualified research and development and technical staff with the appropriate skill and expertise;
managing the length and roll out of the development cycle for new products and product enhancements;
identifying and adapting to emerging and evolving industry standards and to technological developments by our competitors’ and customers’ services and products;
entering into new or unproven markets where we have limited experience or there is significant competition;
developing and managing new service and product service strategies and integrating them with our existing services and products;
incorporating acquired products, technologies and personnel;
trade compliance issues affecting our ability to ship new products to international markets; and
obtaining required technology licenses and technical access from operating system software vendors on reasonable terms to enable the development and deployment of interoperable products.

In addition, if we cannot innovate or improve our current products or adapt our business models to keep pace with industry trends, our revenue could be negatively impacted. If we are not successful in managing these risks and challenges, or if our new services, products

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and upgrades are not technologically competitive or do not achieve market acceptance, we may experience a material decrease in our revenues and earnings.

Failure to retain existing customers or attract new customers could cause our revenue to decline.

In addition to adding new customers, we must sell additional services to existing customers and encourage them to increase their usage levels to increase our revenue. If our existing and prospective customers do not perceive our services to be of sufficiently high value and quality, do not think that we can deliver on providing or do not provide the proper technological solutions or industry standard services, or the perception that our financial and operation condition is not sound, we may not be able to retain our current customers or attract new ones. Our customers have no obligation to renew their agreements for our services after the expiration of their initial commitment, and these agreements may not be renewed at the same price or level of service, if at all. Due to the upfront costs of implementing IT infrastructure services, if our customers do not renew or cancel their agreements, we may not be able to recover the initial costs associated with bringing additional IT infrastructure on-line.

Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including:

their level of satisfaction with our services;
our ability to provide features and functionality demanded by our customers;
the prices of our services compared to our competitors;
technological advances that allow customers to meet their needs with fewer infrastructure resources;
perceptions regarding us, our prospects and our financial and operating results, including as a result of filing the Chapter 11 Cases;
mergers and acquisitions affecting our customer base; which include a significant number of technology customers that are potentially attractive acquisition targets; and
reduction in our customers’ spending levels or economic decline in our customer’s markets.

If our customers do not renew their agreements with us or if they renew on less favorable terms than their existing agreements, our revenue would decline, and our results of operations may suffer. Similarly, our customer agreements may provide for minimum commitments that may be significantly below our customers’ historical usage levels. Consequently, these customers could significantly curtail their usage without incurring any incremental fees under our agreements. In this event, our revenue would be lower than expected and our operating results could suffer.

Our capital investment strategy for data center, cloud and IT infrastructure services expansion may contain erroneous assumptions causing our return on invested capital to be materially lower than expected and could materially impact our results of operations.

Our strategic decision to invest capital in expanding our data center, cloud and IT infrastructure services is based on, among other things, significant assumptions related to expected growth of these markets, our IT solutions program, our competitors’ perceived or actual plans and current and expected server utilization and data center occupancy rates. Adding data center space involves capital outlays well ahead of planned usage. Although we believe we can accurately project future space needs in particular markets, these plans require significant estimates and assumptions based on available market data. We have no way of ensuring the data or models we use to deploy capital into existing markets, or to create new markets, has been or will be accurate, particularly as technology and industry standards evolve. In addition, our investments may be impacted by the restrictions contained in our DIP Facility and as a result of filing the Chapter 11 Cases. Errors or imprecision in these estimates, especially those related to our cost of capital, customer demand or our competitors’ plans, could cause actual results to differ materially from our expected results and could adversely affect our business, consolidated financial condition, results of operations and cash flows.

We may experience difficulties in executing our capital investment strategy to expand our IT infrastructure services, upgrade existing facilities or establish new facilities, products, services or capabilities.

As part of our strategy, we may continue to expand our IT infrastructure services and may encounter challenges and difficulties in implementing our expansion plans. This could cause us to grow at a slower rate than projected in our capital investment modeling strategy. These challenges and difficulties relate to our ability to:

identify and obtain the use of locations meeting our selection criteria on competitive terms, if at all;
estimate costs and control delays for our services;
obtain necessary permits on a timely basis, if at all;
generate sufficient cash flow from operations or through current or additional debt or equity financings to support these expansion plans, particularly while we are in Chapter 11 bankruptcy and subject to the restrictions contained in our DIP Facility;

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establish or retain key relationships with IT infrastructure providers and other third party vendors required to deliver our services;
obtain the necessary power density, upgrades and supply from local utility companies at competitive rates;
hire, train, retain and manage sufficient operational and technical employees and supporting personnel;
avoid labor issues impacting our suppliers, such as a strike; and
identify and obtain contractors that perform on the agreed upon contract performance.

If we encounter greater than anticipated difficulties in implementing our expansion plans, are unable to deploy new IT infrastructure services or do not adequately control expenses associated with the deployment of new IT infrastructure services, it may be necessary to take additional remedial actions, which could divert management’s attention and strain our operational and financial resources. We may not successfully address any or all of these challenges, and our failure to do so would adversely affect our business, consolidated financial condition, results of operations and cash flows.

Our business could be harmed by prolonged power outages or shortages, increased costs of energy or general lack of availability of electrical resources.

Our data centers are susceptible to regional costs of power, power shortages, planned or unplanned power outages and limitations on the availability of adequate power resources.

Power outages, including, but not limited to those relating to large storms, hurricanes, terrorism, earthquakes, fires or other natural disasters or due to the breakout of disease or pandemics, could harm our customers and our business. We attempt to limit our exposure to system downtime by using backup generators and alternative power supplies; however, we may not be able to limit our exposure entirely even with these protections in place. Some of our data centers are located in leased buildings where, depending upon the lease requirements and number of tenants involved, we may or may not control some or all of the infrastructure necessary for power generation in adverse conditions, including generators and fuel tanks. As a result, in the event of a power outage, we may be dependent upon the landlord, as well as the utility company, to restore the power.

In addition, global fluctuations in the price of power can increase the cost of energy. In each of our markets, we rely on third parties to provide a sufficient amount of power for current and future customers. At the same time, the demand for power and cooling is growing. This means that we could face power limitations in our data centers if we are unable to obtain additional power from our service providers. This could have a negative impact on the effective available capacity of a given data center and limit our ability to grow our business, which could have a negative impact on our financial performance, operating results and cash flows. We may also have difficulty obtaining sufficient power capacity for potential sites in new or existing markets. We may experience significant delays and substantial increased costs demanded by the utilities to provide the level of electrical service required by our current data center designs.

Pricing pressure may continue to decrease our revenue for certain services.

Pricing for Internet connectivity, data transit and data storage services has declined in recent years and may continue to decline, which would continue to impact our business. By bundling their services and reducing the overall cost of their service offerings, certain of our competitors may be able to provide customers with reduced costs for their Internet connectivity, data transit and data storage services or private network services, thereby significantly increasing the pressure on us to decrease our prices, whether unbundled or bundled. Increased price competition, price deflation and other related competitive pressures have eroded, and could continue to erode, our revenue and margins and could materially and adversely affect our results of operations if we are unable to control or reduce our costs. Because we rely on ISPs to deliver our services and have agreed with some of these providers to purchase minimum amounts of service at predetermined prices, our profitability could be adversely affected by competitive price reductions offered to our customers even if accompanied with an increased number of customers.

Many of our competitors for cloud services have substantially greater financial resources and may also adopt more aggressive pricing policies and devote greater resources to the promotion, marketing and sales of their services. Other competitors may be financed in a manner which can allow them to experience losses for long periods of time in order to gain market share. Such competitive actions could cause us to lower prices for certain products or services to remain competitive in the market. In addition, we have seen and may continue to see increased competition for colocation services from wholesale data center providers, such as services from large real estate companies. Rather than leasing available space to large single tenants, wholesale data center providers may decide to convert the space instead to smaller units designed for retail colocation use. As a result of such competition, we could suffer from downward pricing pressure and the loss of customers, which would negatively impact our business, financial condition and results of operations.


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The market in which we operate is highly competitive and has experienced recent consolidation which may continue, and we may lack the financial and other resources, expertise, scale or capability necessary to capture increased market share or maintain our market share.

We compete in a rapidly evolving, highly competitive market which has been, and is likely to continue to be, characterized by overcapacity, industry consolidation and continued pricing pressure. In addition, our competitors may acquire software-application vendors, technology providers or other service providers, or develop similar products enabling them to more effectively compete with us. We believe that participants in this market must grow rapidly and achieve a significant presence to compete effectively, particularly as fixed costs increase for industry participants. This consolidation could affect prices and other competitive factors in ways that would impede our ability to compete successfully in the IT infrastructure market. As a result of this consolidation, many of our competitors have substantially greater financial, technical and market resources, greater name recognition and more established relationships in the industry and may be able to:

develop and expand their IT infrastructure and service offerings more rapidly;
adapt to new or emerging technologies and changes in customer requirements more quickly;
take advantage of acquisitions and other opportunities more readily;
borrow at more competitive rates or otherwise take advantage of capital resources not available to us;
attract or retain more qualified personnel to develop and market their service offerings; or
devote greater resources to the marketing and sale of their services and adopt more aggressive pricing policies than we can.

In addition, IT infrastructure providers may make technological advancements to enhance the quality of their services, which could negatively impact the demand for our IT infrastructure services. We also expect that we will face additional competition as we expand our product offerings, including competition from technology and telecommunications companies and non-technology companies which are entering the market through leveraging their existing or expanded network services and cloud infrastructure platforms. Further, the ability of some of these potential competitors to bundle other services and products with their network services could place us at a competitive disadvantage. Various companies also are exploring the possibility of providing, or are currently providing, high-speed, intelligent data services that use connections to more than one network or use alternative delivery methods, including the cable television infrastructure, direct broadcast satellites and wireless local loops.

We may lack financial and other resources, expertise or capability necessary to maintain or capture increased market share. Increased competition and technological advancements by our competitors could materially and adversely affect our business, consolidated financial condition, results of operations and cash flows.

We have a long sales cycle for our IT infrastructure services and the implementation efforts required by customers to activate them can be substantial.

Many of our IT infrastructure services are complex and require substantial sales efforts and technical consultation to implement. A customer’s decision to outsource some or all of its IT infrastructure typically involves a significant commitment of resources. Some customers may be reluctant to purchase our services due to their inability to accurately forecast future demand, delay in their internal decision-making, uncertainty over economic conditions or our ability to provide those services, particularly while we are in Chapter 11 bankruptcy, or inability to obtain necessary internal approvals to commit resources. We may expend time and resources pursuing a particular sale or customer that does not result in revenue or the revenue is less than we originally forecast when we pursued the customer. Delays due to the length of our sales cycle may harm our ability to meet our forecasts and materially and adversely affect our revenues and operating results.

We may fail to obtain or lose customers if they elect to develop or maintain some or all of their IT infrastructure services internally.

Our current and potential customers may decide to develop or maintain their own IT infrastructure rather than outsource to service providers like us. These in-house IT infrastructure services could be perceived to be superior, more secure or more cost effective compared to our services. If we fail to offer IT infrastructure services that compete favorably with in-sourced services or if we fail to differentiate or effectively market our IT infrastructure services, we may lose customers or fail to attract customers that may consider pursuing this in-sourced approach, and our business, consolidated financial condition and results of operations would suffer as a result.

In addition, our customers’ business models may change in ways that we do not anticipate, and these changes could reduce or eliminate our customers’ needs for our services. If this occurs, we could lose customers or potential customers, and our business and financial results would suffer. As a result of these or similar potential developments in the future, it is possible that competitive dynamics in our market may require us to reduce our prices, which could harm our revenue, gross margin and operating results.


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Finally, potential customers may be consolidated into larger companies that do not require our services because the larger company has IT solutions currently in place. If potential customers continue to consolidate, it may require us to seek an increasingly small number of potential customers, which could impact our margins and harm our revenue, gross margin and operating results.

Our network and software are subject to potential security breaches and similar threats that could result in liability and harm our reputation.

Threats to IT security can take a variety of forms. Individual and groups of hackers and sophisticated organizations, including state-sponsored organizations or nation-states, continuously undertake attacks that pose threats to our customers and our IT. These actors may use a wide variety of methods, which may include developing and deploying malicious software to attack our products and services and gain access to our networks and data centers, using social engineering techniques to induce our employees, users, partners, or customers to disclose passwords or other sensitive information or take other actions to gain access to our data or our users’ or customers’ data, or acting in a coordinated manner to launch distributed denial of service, ransomware or other coordinated attacks. Cyber threats are constantly evolving, increasing the difficulty of detecting and successfully defending against them. Cyber threats can have cascading impacts that unfold with increasing speed across our internal networks and systems and those of our customers.

A number of widespread and disabling attacks on public and private networks have occurred in the past in our industry. The number and severity of these attacks may increase in the future as network assailants take advantage of outdated software, hardware limitations, software vulnerabilities, inexperienced personnel, security breaches or incompatibility between or among networks. Computer viruses, intrusions and similar disruptive problems could cause us to be liable for damages under agreements with our customers and fines and penalties to governmental or regulatory agencies, and our reputation could suffer, thereby resulting in a loss of current customers and deterring potential customers from working with us. Security problems or other attacks caused by third parties could lead to interruptions and delays or to the cessation of service to our customers. Furthermore, inappropriate use of the network by third parties could also jeopardize the security of confidential information stored in our computer systems and in those of our customers and could expose us to liability under unsolicited commercial e-mail, or 'spam', regulations. Even the perception that our networks are lacking proper data security protocols could impact our business and result in the loss of customers.

In the past, third parties have occasionally circumvented some of these industry-standard measures. We can offer no assurance that the measures we implement will not be circumvented. Breaches of our network or data security could disrupt the security of our internal systems and business applications, impair our ability to provide services to our customers and protect the privacy of their data, result in product development delays, compromise confidential or technical business information harming our reputation or competitive position, result in theft or misuse of our intellectual property or other assets, require us to allocate more resources to improved technologies, divert management’s attention, or otherwise adversely affect our business. Affected customers might file claims against us under such circumstances or governmental entities may fine or otherwise sanction us, and our insurance may not be available or adequate to cover these claims.

Disclosure of personal data could result in liability and harm our reputation.

As we continue to grow our cloud services, we store and process increasingly large amounts of personally identifiable information of our customers. The continued occurrence of high-profile data breaches provides evidence of an external environment increasingly hostile to information security and illustrates the value of certain types of personally identifiable information. Despite our efforts to improve the security controls across our business groups and geographies, it is possible that the security controls we have implemented to safeguard personal data and our networks, our training of employees and vendors on data security, our vendor security requirements, and other practices we follow may not prevent or detect the compromise of our networks or the improper disclosure of customer data that we or our vendors store and manage. Improper disclosure could harm our reputation, create risks for customers, or subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue.

If governments modify or increase regulation of the Internet, or goods or services necessary to operate the Internet or our IT infrastructure, our services could become more costly.

International bodies and federal, state and local governments have adopted a number of laws and regulations that affect the Internet and are likely to continue to seek to implement additional laws and regulations. In addition, federal and state agencies have adopted or are actively considering regulation of various aspects of the Internet and/or IP services, including taxation of transactions, enhanced data privacy and data retention legislation and various energy regulations, as well as law enforcement surveillance and anti-terrorism initiatives targeting instant messaging applications. For example, if the Federal Communications Commission (the "FCC" or "Commission") were to impose federal Universal Service Fund requirements on a number of our managed hosting services such as virtual private network, dedicated IP and other enterprise customer services, that could raise our costs, and potentially require us to charge more for our services than we currently do and negatively impact our business. Additionally, we must comply with federal and state consumer protection

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laws. Finally, other potential laws and regulations targeted at goods or services that are cost inputs necessary to operate our managed service and colocation offerings could have a negative impact on us. These factors may impact the delivery of our services by driving up the cost of power, which is a significant cost of operating our data centers and other service points.

Ongoing changes to the so-called "open Internet" or "net neutrality" rules could also affect our business. At the end of 2017, the FCC adopted a new Open Internet order that largely repealed the Open Internet rules the Commission had approved in 2015. The 2015 rules reclassified broadband Internet access as a "telecommunications service," which subjected it to broad, "common carrier" regulation originally devised for telephone service. The 2015 order also established (among other things) "bright line rules" that prohibited an ISP from blocking, throttling (impairing or degrading lawful Internet traffic on the basis of content, applications or service), and paid prioritization or "fast lanes," including for ISP affiliates. It also included transparency requirements.

The 2017 order reclassified broadband Internet access back to be an "information service," eliminating the common carrier regulation (including blocking, throttling, and paid prioritization) and the FCC’s jurisdiction for imposing that type of regulation. Instead, broadband providers are subject only to a transparency requirement. On appeal, the D.C. Circuit upheld most of the 2017 order, but overturned the FCC’s decision to broadly prohibit state regulation of broadband Internet service, explaining that the FCC’s authority is limited to deciding on a case-by-case basis whether state laws actually conflict with the order. A petition for reconsideration is pending. If the request for reconsideration is successful, or the U.S. Supreme Court decides to take the case and reverses, some or all of the 2015 restrictions could become applicable once again. Proposals to impose Open Internet-style regulations are also pending in other governmental bodies, including the U.S. Congress and some states (which would face preemption challenges but on a narrower basis given the D.C. Circuit’s ruling). In light of these changes, challenges, and proposals, it is unclear what Open Internet regulations may exist in the future.

While we are not an ISP or a broadband Internet access provider, many of our customers have Internet businesses and rely on us for Web hosting, colocation of Web servers and routers and cloud services. If certain broadband access providers were to unreasonably interfere or disadvantage certain of our Internet edge provider customers by not allowing consumers to access them under comparable rates and service terms, then that could harm our business.

In another pending rulemaking, the FCC is proposing to regulate Internet-based video programming providers as multi-channel video programming distributors ("MVPDs") as it currently regulates established cable television providers and satellite providers. Approximately three years ago, during the previous administration, the FCC tentatively concluded that the traditional definition of MVPD requiring ownership of the video transmission path should be expanded to include Internet-based video programmers. Though it is unclear if the FCC will ever issue the proposed rules, if it does so, this proceeding could directly impact the ability of a number of our customers to compete for video programming, and thereby impact the future use of our services.

In addition, laws relating to the liability of private network operators and information carried on or disseminated through their networks are unsettled, both in the U.S. and abroad. The nature of any new laws and regulations and the interpretation of applicability to the Internet of existing laws governing intellectual property ownership and infringement, copyright, trademark, trade secret, national security, law enforcement, obscenity, libel, employment, personal privacy, consumer protection and other issues are uncertain and developing. We may become subject to legal claims such as defamation, invasion of privacy or copyright infringement in connection with content stored on or distributed through our network. We cannot predict the impact, if any, that future regulation or regulatory changes may have on our business.

If we fail to comply with privacy rules and regulations implemented by local or foreign governments and agencies, our business could be adversely affected, and we could face claims for liabilities.

On January 1, 2020, the California Consumer Privacy Act of 2018 ("CCPA") went into effect. Regulatory enforcement of the CCPA begins July 1, 2020. The CCPA imposes requirements on for-profit companies that conduct business in California, that collect or use personal information of California residents and that have gross revenues of over $25.0 million. The CCPA applies to companies that meet this description regardless of whether the company has physical operations in California. We have adopted internal and external policies, procedures and contracts governing our collection of data to the extent effected by and subject to the statutory provisions of the CCPA. The Attorney General for the State of California has not released final regulations implementing CCPA. Additionally, there exists the possibility that CCPA will be significantly amended by the California legislature or through a 2020 ballot initiative. We continue to monitor for the publication of the final regulations and are tracking the potential for amendments to the CCPA.

Our actual or alleged failure to comply with the CCPA could result in enforcement actions, and significant penalties against us. Our actual or alleged failure to protect personal data under the CCPA could result in a private right of action being brought against us. Both of these risks could result in negative publicity, increase our operating costs, subject us to claims or other remedies and have a material adverse effect on our business, financial condition, and results of operations. The EU’s General Data Protection Regulation ("GDPR")

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prohibits companies from transferring European Economic Area ("EEA") residents’ personal data from the EEA to a non-EEA country, unless the European Commission has deemed the laws of that country to provide 'adequate' protection for personal data or appropriate safeguards are in place or one of the specific derogations set forth in GDPR applies. Other than data transfers covered by the EU-U.S. Privacy shield ("Privacy Shield") framework, the European Commission has concluded that U.S. data privacy law is does not meet EU adequacy requirements. The European Commission does not consider U.S. data privacy laws to be adequate for outside transfers covered by the Privacy Shield framework. INAP and certain of its subsidiaries are certified to the EU-U.S. Privacy Shield and Swiss-U.S. Privacy Shield, which provide a legal framework for the transfer of personal data of EU and Swiss data subjects to the U.S. under EU and Swiss law. Privacy Shield, among other things, requires companies in the U.S. that receive personal data from the EU and Switzerland to adhere to certain privacy principles. Companies that certify to Privacy Shield, but fail to abide by its requirements, could be subject to enforcement actions by EU and Swiss data protection authorities or the U.S. Federal Trade Commission.

On October 23, 2019, the European Commission published a report in which it confirmed that Privacy Shield continues to ensure an adequate level of protection for personal data transferred from the EU to the U.S. The European Commission did, however, recommend that further steps should be taken to better ensure the effective functioning of the Privacy Shield in practice. Following the United Kingdom’s withdrawal from the EU on January 31, 2020, in order for Privacy Shield certified companies to transfer the personal data from the UK to the U.S., companies will need to comply with certain, additional requirements. Companies that are not certified under Privacy Shield may rely on other lawful data transfer mechanisms, such as standard contractual clauses or (for intra-company cross-border data transfers) binding corporate rules. Companies that transfer personal data from the EEA to the U.S. without an appropriate data transfer mechanism in place or in a circumstance where one of the GDPR’s specific derogations do not apply could be subject to enforcement actions by EU member state data protection authorities.

In addition to laws regulating the cross-border transfer of personal data, the GDPR, which went into effect on May 25, 2018, imposes requirements on all companies that offer goods and services to, or monitor the behavior of, data subjects in the EU. The GDPR applies to companies that meet this description regardless of whether such companies have physical operations in the EU. In light of these developments, we adopted internal and external policies, procedures, and contracts governing our processing of data that is subject to the GDPR, including the cross-border transfer of such data from the EEA to the U.S. We continue to monitor the regulation and enforcement of data privacy regulations as these regulations continue to evolve.

Our actual or alleged failure to comply with applicable EU laws and regulations, or to protect personal data, could result in enforcement actions and significant penalties against us, which could result in negative publicity, increase our operating costs, subject us to claims or other remedies and have a material adverse effect on our business, financial condition, and results of operations.

We may be liable for the material that content providers distribute over our network, and we may have to terminate customers that provide content that is determined to be illegal, which could adversely affect our operating results.

The law relating to the liability of private network operators for information carried on, stored on, or disseminated through their networks is still unsettled in many jurisdictions. We have been and expect to continue to be subject to legal claims relating to the content disseminated on our network, including allegations of defamation, invasion of privacy, copyright infringement or other similar claims under Digital Millennium Copyright Act, other legislation and common law. In addition, there are other potential customer activities, such as online gambling (if illegal in such state) and pornography, where we, in our role as a hosting provider, may be held liable as an aider or abettor of our customers. If we need to take costly measures to reduce our exposure to these risks, terminate customer relationships and the associated revenue or defend ourselves against such claims, our financial results could be negatively affected.

If we fail to comply with telecommunications services regulations our business could be negatively affected.

We must comply with various regulatory requirements to provide certain network services, such as the filing of tariffs, annual reports and universal service reports with governmental authorities. We also must comply with state consumer protection laws in every state in which we operate, which are subject to frequent changes and occasional uncertainty as to their application to us. Failure to comply with any of these requirements could negatively impact our business.

We depend on third party suppliers for key elements of our IT infrastructure services and products. If we are unable to obtain these elements on a cost- effective basis, or at all, or if such services are interrupted, limited or terminated, our growth prospects and business operations may be adversely affected.

In delivering our services, we rely on a number of Internet networks, many of which are built and operated by third parties. To provide high performance connectivity services through our network access points, we purchase connections from several ISPs. We can offer no assurances that these ISPs will continue to provide service to us on a continuous, cost-effective basis or on competitive terms, if at all, or that these providers will provide us with additional capacity to adequately meet customer demand or to expand our business.

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Consolidation among ISPs limits the number of vendors from which we obtain service, possibly resulting in higher network costs to us. We may be unable to establish and maintain relationships with other ISPs that may emerge or that are significant in geographic areas, such as Asia and Europe, in which we may locate our future network access points. Any of these situations could limit our growth prospects and materially and adversely affect our business.

We also depend on other companies to supply various key elements of our network infrastructure, including the network access loops between our network access points and our ISP, local loops between our network access points and our customers’ networks and certain end-user access networks. Pricing for such network access loops and local loops has risen over time and operators of these networks may take measures that could degrade, disrupt or increase the cost of our or our customers’ access to certain of these end-user access networks by restricting or prohibiting the use of their networks to support or facilitate our services, or by charging increased fees. Some of our competitors have their own network access loops and local loops and are, therefore, not subject to similar availability and pricing issues. The inability to access or obtain network loops such as these on a cost-effective basis could have a materially adverse effect on our results of operations.

For data center and hosting facilities, we rely on a number of landlords or vendors to provide physical space, convert or build space to our specifications, provide power, internal cabling and wiring, climate control, physical security and system redundancy. We typically obtain physical space through long-term leases. We utilize multiple other vendors to perform leasehold improvements necessary to make the physical space available for occupancy. The demand for premium data center and hosting space in several key markets has outpaced supply over recent years and the imbalance is projected to continue over the near term. This has limited our physical space options and increased, and will continue to increase, our costs to add capacity. If we are not able to procure space through renewing our existing leases or entering into new leases, acquiring the entities which have leases, or are not able to contain costs for physical space, or are not able to pass these costs on to our customers, our results will be adversely affected.

In addition, we currently purchase infrastructure equipment such as servers, routers, switches and storage components from a limited number of vendors. We do not carry significant inventories of the equipment we purchase, and we have no guaranteed supply arrangements with our vendors. A loss of a significant vendor, a vendor's bankruptcy or a vendor’s refusal to sell us equipment could delay any build-out of our infrastructure and increase our costs or even cause us to fail to provide services to any of our customers on a timely basis. If our limited source of suppliers fails to provide products or services that comply with evolving Internet standards or that interoperate with other products or services we use in our network infrastructure, we may be unable to meet all or a portion of our customer service commitments, which could materially and adversely affect our results.

Some of our products and services contain or use open source software, which may pose risks to our proprietary software and solutions.

We currently use open source software in our products and for certain services and will use open source software in the future. From time to time, we may face claims from third parties claiming ownership of, or demanding release of, the open source software or derivative works that we developed using such software (which could include our proprietary source code), or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to purchase a costly license or cease offering the implicated solutions unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional research and development resources and we may not be able to offer an effective solution after the conclusion of such a process. In addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third party commercial software because open source licensors generally do not provide warranties or controls on the origin of the software or the use of such software may expose us to a cybersecurity incident. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have a material adverse effect on our business and operating results.

Any failure of our physical IT infrastructure or applications could lead to unexpected costs and disruptions that could harm our business reputation, consolidated financial condition, results of operations and cash flows.

Our business depends on providing customers with highly-reliable services. We must protect our IT infrastructure and our customers’ data and their equipment located in our data centers. The services we provide in each of our data centers are subject to failure resulting from numerous factors, including:

human error or accidents;
physical or electronic security breaches;
network connectivity downtime;
fire, earthquake, hurricane, flood, tornado and other natural disasters;
improper maintenance by the landlords of the buildings in which our data centers are located;
water damage, extreme temperatures and fiber cuts;

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power loss, utility interruptions or equipment failure;
sabotage, vandalism and terrorism, pandemics; and
failure by us or our vendors to provide adequate service or maintenance to our equipment.

Additionally, in connection with the expansion or consolidation of our existing data center facilities from time to time, there is an increased risk that service interruptions may occur as a result of server relocation or other unforeseen construction-related issues or issues with moving and bringing equipment online.

Problems at one of our sites, whether or not within our control, could result in service interruptions or significant equipment damage. Most of our customers have service level agreements ("SLA") that require us to meet minimum performance obligations and to provide service credits to customers if we do not meet those obligations. If a service interruption impacts a significant portion of our customer base, the amount of service credits we are required to provide could adversely impact our business and financial condition. Also, if we experience a service interruption and we fail to provide a service credit under an SLA, we could face claims related to such failures, which could adversely impact our business and financial condition. Because our data centers are mission critical to our customers’ businesses, service interruptions or significant equipment damage in our data centers also could result in lost profits or other indirect or consequential damages to our customers. We cannot guarantee that a court would enforce any contractual limitations on our liability in the event that a customer brings a lawsuit against us as the result of a failure to meet performance obligations in our SLAs.

Any loss of services, equipment damage or inability to meet performance obligations in our SLAs could reduce the confidence of our customers and could result in lost customers or an inability to attract new customers, which would adversely affect both our ability to generate revenues and our operating results.

Furthermore, we are dependent upon ISPs and telecommunications carriers in the U.S., Europe and Asia-Pacific region, some of whom have experienced significant system failures and electrical outages in the past. Users of our services may experience difficulties due to system failures unrelated to our systems and services. If, for any reason, these providers fail to provide the required services, our business, consolidated financial condition, results of operations and cash flows could be materially adversely impacted.

Our inability to renew our data center leases, or renew on favorable terms, and potential unknown costs related to asset retirement obligations could negatively impact our financial results.

We do not own the facilities occupied by our current data centers, but occupy them pursuant to commercial leasing arrangements. Generally, our leases provide us with the opportunity to renew the leases at our option for periods typically ranging from five to ten years. Many of these options provide that rent for the renewal period will be the fair market rental rate at the time of renewal. If the fair market rental rates are higher than our current rental rates, we may be unable to offset these costs by charging more for our services, which could have a negative impact on our financial results. In addition, we have long-term agreements for certain of the leased properties which extend beyond ten years and such agreements specify the rental rates for such long-term periods. If rental rates drop in the near term, we would not be able to take advantage of the drop in market rates until the expiration of the then-existing lease.

For the leases that do not contain renewal options, or for which the option to renew has been exhausted or passed, we cannot guarantee the landlord will renew the lease, or will do so at a rate that will allow us to maintain profitability on that particular space. While we proactively monitor these leases and conduct ongoing negotiations with landlords, our ability to renegotiate renewals is inherently limited by the original contract language, including option renewal clauses. If we are unable to renew, we may incur substantial costs to move our infrastructure and/or customers and to restore the property to its required condition. There is no guarantee that our customers would move with us and we may not be able to find appropriate and sufficient space. The occurrence of any of these events could adversely impact our business, financial condition, results of operations and cash flows.

In addition, we have capital lease agreements that require us to decommission the physical space for which we have not yet recorded an asset retirement obligation ("ARO"). Due to the uncertainty of specific decommissioning obligations, timing and related costs, an ARO is not reasonably estimable for these properties and we have not recorded a liability at this time for such properties.

A failure in the redundancies in one or more of our NOCs, POPs or computer systems could cause a significant disruption in Internet connectivity which could impact our ability to serve our customers.

While we maintain multiple layers of redundancy in our operating facilities, if we experience a problem at one or more of our network operations centers ("NOCs"), including the failure of redundant systems, we may be unable to provide Internet connectivity services to our customers, provide customer service and support or monitor our network infrastructure or POPs, any of which would seriously harm our reputation, business and operating results. Also, because we are obligated to provide continuous Internet availability under our SLAs, we may be required to issue service credits as a result of such interruptions in service. If material, these credits could negatively

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affect our revenues and results of operations. In addition, interruptions in service to our customers could potentially harm our customer relations, expose us to potential lawsuits or necessitate additional capital expenditures.

A significant number of our POPs are located in facilities owned and operated by third parties. In many of those arrangements, we do not have property rights similar to those customarily possessed by a lessee or subtenant but instead have lesser rights of occupancy. In certain situations, the financial condition of those parties providing occupancy to us could have an adverse impact on the continued occupancy arrangement or the level of service delivered to us under such arrangements.

Our business requires the continued development of effective and efficient business support systems to support our customer growth and related services.

The growth of our business depends on our ability to continue to develop and successfully implement effective and efficient business support policies, processes and internal systems. This is a complicated undertaking requiring significant resources and expertise. Business support systems are needed for:

sourcing, evaluating and targeting potential customers and managing existing customers;
implementing customer orders for services;
delivering these services;
timely billing and collection for these services;
budgeting, forecasting, tracking and reporting our results of operations;
maintaining the Company’s internal control over financial reporting and
providing technical and operational support to customers and tracking the resolution of customer issues.

If the number of customers that we serve or our services portfolio increases, we may need to develop additional business support systems on a schedule sufficient to meet proposed service rollout dates. The failure to continue to develop effective and efficient business support systems, and update or optimize these systems to a level commensurate with the needs of our business and/or our competition, could harm our ability to implement our business plans, maintain competitiveness and meet our financial goals and objectives.

We are required to maintain, repair, upgrade, and replace our network and our facilities, the cost of which could materially impact our results and our failure to do so could irreparably harm our business.

Our business requires that we maintain, repair, upgrade, and periodically replace our facilities and networks. This requires management time, and attention as well as planning by our staff and potentially significant capital expenditures. In the event that we fail to maintain, repair, upgrade, or replace essential portions of our network or facilities, it could lead to a material degradation or interruption in the level of service that we provide to our customers. Our networks can be damaged in a number of ways, including by other parties engaged in construction close to our network facilities. In the event of such damage, we will be required to incur expenses to repair the network. We could be subject to significant network repair and replacement expenses in the event a terrorist attack or a natural disaster damages our network. Further, the operation of our network requires the coordination and integration of sophisticated and highly specialized hardware and software. Our failure to maintain or properly operate this could lead to degradations or interruptions in customer service. Our failure to provide proper customer service could result in claims from our customers due to failing to meet SLAs, early termination of contracts, and damage to our reputation.

Our global operations may not be successful.

We operate globally in various locations. We may develop or acquire POPs or complementary businesses in additional global markets. The risks associated with our global business operations include:

challenges in establishing and maintaining relationships with global customers, ISPs and local vendors, including data center and local network operators;
challenges in staffing and managing NOCs and POPs across disparate geographic areas;
potential loss of proprietary information due to misappropriation or laws that may be less protective of our intellectual property rights than the laws in the U.S.;
challenges in reducing operating expense or other costs required by local laws and longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
exposure to fluctuations in international currency exchange rates; and
costs of customizing POPs for foreign countries and customers.


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We may be unsuccessful in our efforts to address the risks associated with our global operations, which may limit our sales growth and materially and adversely affect our business and results of operations.

The bankruptcy, insolvency or financial difficulties of a major customer could have a material adverse effect on us.

The bankruptcy or insolvency of a major customer could have significant consequences for us. If any customer becomes a debtor in a case under the federal Bankruptcy Code, we cannot evict the customer solely because of the bankruptcy. In addition, the bankruptcy court might authorize the customer to reject and terminate its lease with us or otherwise attempt to recover amounts the customer paid to us. Our claim against the customer for unpaid future rent would be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease. In either case, our claim for unpaid rent would likely not be paid in full. If any of our significant customers were to become bankrupt or insolvent or suffer a downturn in their business, they may fail to renew, or reject or terminate, their leases with us and/or fail to pay unpaid or future rent owed to us, which could have a material adverse effect on us.

We are dependent on certain key personnel, the loss of which may adversely affect our financial condition or results of operations.

We depend, and will continue to depend in the foreseeable future, on the services our Chief Executive Officer, Peter Aquino, and other key personnel, which may consist of a relatively small number of individuals that possess sales, research and development, engineering, marketing, financial, legal, technical and other skills that are critical to the operation of our business. The ability to retain officers and key senior employees is important to our success and future growth. Competition for these professionals can be intense, and we may not be able to retain and motivate our existing management and key personnel, and continue to compensate such individuals competitively, particularly in Chapter 11 bankruptcy. The unexpected loss of the services of one or more of these individuals could have a detrimental effect on the financial condition or results of operations of our businesses, and could hinder our ability to effectively compete in the various industries in which we operate.

Because we face significant competition for acquisition and business opportunities from numerous companies with a business plan similar to ours, it may be difficult for us to fully execute our business strategy.

We have encountered and expect to encounter intense competition for acquisitions and business opportunities from other entities having a business objective similar to ours, including entities competing for the type of businesses that we may seek to acquire. Many of these competitors possess greater technical, human and other resources, more local industry knowledge, or greater access to capital, than we do, and our financial and operational resources may be relatively limited when contrasted with those of many of these competitors. These factors may place us at a competitive disadvantage in successfully identifying and completing future acquisitions and business opportunities.

In addition, while we believe that there are numerous target businesses that we could potentially acquire, our ability to compete with respect to the acquisition of certain target businesses that are sizable will be limited by our available financial resources. We may need to obtain additional financing in order to consummate future acquisitions and business opportunities and cannot assure you that any additional financing will be available to us on acceptable terms, or at all, or that the terms of our existing financing arrangements will not limit our ability to do so. This inherent competitive limitation could give others an advantage in pursuing acquisitions and business opportunities.

We face certain risks associated with the acquisition or disposition of businesses or entry into joint ventures.

In pursuing our corporate strategy, we may acquire, dispose of or exit businesses or reorganize our existing business. The success of this strategy is dependent upon our ability to identify appropriate opportunities, negotiate transactions on favorable terms, obtain funding and ultimately complete such transactions. Acquisitions (including SingleHop), dispositions, joint ventures and other complex transactions are accompanied by a number of risks, including the following:

difficulty integrating the operations, control environments and personnel of acquired companies;
potential disruption of our ongoing business;
potential distraction of management and other key personnel;
diversion of business resources from core operations;
expenses and potential liabilities related to the transactions, dispositions or acquired business;
failure to realize synergies or other expected benefits;
difficulty in maintaining controls, procedures, and policies,
obtaining funding or other sources of liquidity on competitive terms, if at all; and
increased accounting charges such as impairment of goodwill or intangible assets, amortization of intangible assets acquired and a reduction in the useful lives of intangible assets acquired.

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Any inability to identify and integrate completed acquisitions or combinations in an efficient and timely manner could have an adverse impact on our results of operations. As we complete acquisitions, we may encounter difficulty in incorporating acquired personnel, technologies and services into our offerings while maintaining the quality standards that are consistent with our business operations, brand and reputation. If we are not successful in completing acquisitions or other strategic transactions that we may pursue in the future, we may incur substantial expenses and devote significant management time and resources without a successful result. Future acquisitions could require use of substantial portions of our available cash, require us to borrow funds on terms that are less advantageous than our current borrowing arrangements or result in dilutive issuances of securities. Technology sharing or other strategic relationships we enter into may give rise to disputes over intellectual property ownership, operational responsibilities and other significant matters. Such disputes may be expensive and time-consuming to resolve and adversely impact our business and results of operations.

We intend to increase our size in the future, and may experience difficulties in managing growth.

We have adopted a business strategy that contemplates that we will expand our operations, including engaging future acquisitions or entering into other business opportunities, and as a result we are required to increase our level of corporate functions, which may include hiring additional personnel to perform such administrative functions and enhancing our IT systems. Any future growth may increase our corporate operating costs and expenses, administrative headcount and impose significant added responsibilities on members of our management, including the need to identify, recruit, maintain and integrate additional employees and implement enhanced IT systems. Our future financial performance and our ability to compete effectively will depend, in part, on our ability to manage any future growth effectively.

We may become involved in various types of litigation or other legal proceedings that may adversely impact our business.

From time to time, we are or may become involved in various legal proceedings relating to matters incidental to the ordinary course of our business, including patent, commercial, product liability, employment, class action, whistleblower and other litigation and claims, and governmental and other regulatory investigations and proceedings. Even if any individual matter is not material to our business, the effect of such matters can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses even if the claims are without merit.

Furthermore, because such matters are inherently unpredictable, there can be no assurance that the results of any of these matters will not have an adverse impact on our business, results of operations, financial condition, or cash flows. While we are protected by the automatic stay as a result of filing of the Chapter 11 Cases, litigation may be resolved against us after the conclusion of the Chapter 11 Cases.

Deterioration of global economic conditions could adversely affect our business.

The global economy and capital and credit markets have experienced exceptional turmoil and upheaval over the past several years and may experience similar issues in the future. Many major economies worldwide could enter significant economic slowdowns or recessions and continue to experience economic weakness, with the potential for another economic downturn to occur. For example, in early 2020, certain economies and economic conditions have experienced turmoil due to outbreaks of the coronavirus (COVID-19). To the extent economic conditions could impair our customers’ ability to profitably monetize the content we deliver on their behalf, they may reduce or eliminate the traffic we deliver for them. Such reductions in traffic could lead to a reduction in our revenue. Additionally, in a down-cycle or low growth economic environment, we may experience the negative effects of increased competitive pricing pressure, customer loss, a slowdown in commerce over the Internet and corresponding decrease in traffic delivered over our network and failures by customers to pay amounts owed to us on a timely basis or at all. Suppliers or vendors on which we rely on for various services could also be negatively impacted by economic conditions that, in turn, could have a negative impact on our operations or expenses.

The availability, cost and terms of credit also may continue to be adversely affected by illiquid markets and wider credit spreads. Concern about the stability of the markets generally, and the strength of counterparties specifically, may lead many lenders and institutional investors to reduce credit to businesses and consumers. These factors led to a decrease in spending by businesses and consumers over the past several years, and a corresponding slowdown in global infrastructure spending. Any of these credit problems could have a negative impact on our operations or expenses.

We and our customers and suppliers face various risks related to epidemics, pandemics and similar outbreaks of infectious diseases, which may have a material adverse effect on our business, financial condition, liquidity and results of operations.

Epidemics, pandemics or other outbreaks of an illness, disease or virus that affect countries, states, cities or regions in which we or our customers or suppliers operate, and actions taken to contain or prevent their further spread, may have a material and adverse impact on

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general commercial and economic activity and on our financial condition, results of operations and liquidity. Epidemics, pandemics or other outbreaks of an illness, disease or virus, such as the novel coronavirus (COVID-19), have already resulted in, and could result in further, governmental measures being implemented to control the spread of such illness, disease or virus, including quarantines, travel restrictions, social distancing, business restrictions, declarations of states of emergency, business shutdown, prioritization and allocation of resources, and restrictions on the movement of our employees and those of our customers and suppliers on which we rely. All of these could adversely affect our ability and their respective abilities to adequately manage our and their respective businesses. Risks related to epidemics, pandemics or other outbreaks of an illness, disease or virus could also lead to the complete or partial closure of one or more of our facilities or our customers’ or suppliers’ facilities, or otherwise result in significant disruptions to our or their business and operations. Such events could materially and adversely impact our operations and the revenue we generate from our customers.
We have instituted policies requiring most of our employees to work remotely in certain cases and such policies may remain in place for an indeterminate amount of time. There can be no assurance that our technological systems or infrastructure is or will be equipped to facilitate effective remote working arrangements for our employees. If key personnel that operate our data centers are prohibited from working on site or are otherwise unavailable to provide services, our business and operations will be adversely affected. Moreover, pandemics or outbreaks of an illness, disease or virus could disrupt our technology and other development activities and lead to service level disruptions. If any such delay or disruption were to occur, it could have a material adverse effect on our liquidity and financial condition.
In addition, risks related to epidemics, pandemics or other outbreaks of an illness, disease or virus have begun and may continue to adversely affect the economies in impacted countries, including the United States, and the global financial markets, which have begun and may continue to experience significant volatility, potentially leading to an economic downturn that could adversely affect our and our customers’ and suppliers’ respective businesses, financial condition, liquidity and results of operations. The ultimate extent of the impact of any epidemic, pandemic or other outbreak of an illness, disease or virus on our business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity or length of such epidemics, pandemics or other outbreaks of an illness, disease or virus and actions taken to contain or prevent their further spread, among others. These and other potential impacts of epidemics, pandemics or other outbreaks of an illness, disease or virus could therefore materially and adversely affect our business, financial condition, liquidity and results of operations.

We are subject to risks associated with our international operations.

We operate in international markets, and may in the future consummate additional investments in or acquisitions of foreign businesses. Our international operations are subject to a number of risks, including:

political conditions and events, including embargo;
restrictive actions by U.S. and foreign governments;
the imposition of withholding or other taxes on foreign income, tariffs or restrictions on foreign trade and investment;
adverse tax consequences, including the imposition of digital taxes by foreign governments;
limitations on repatriation of earnings and cash;
currency exchange controls and import/export quotas;
nationalization, expropriation, asset seizure, blockades and blacklisting;
limitations in the availability, amount or terms of insurance coverage;
loss of contract rights and inability to adequately enforce contracts;
political instability, war and civil disturbances or other risks that may limit or disrupt markets, such as terrorist attacks, piracy and kidnapping;
outbreaks of pandemic diseases, fear of such outbreaks or economic disturbances due to such outbreaks;
fluctuations in currency exchange rates associated with non-U.S. operations (including as a result of Brexit), hard currency shortages and controls on currency exchange that affect demand for our services and our profitability;
potential noncompliance with a wide variety of anti-corruption laws and regulations, such as the U.S. Foreign Corrupt Practices Act of 1977 (the "FCPA"), and other non-U.S. laws and regulations, including the U.K. Bribery Act 2010 (the "Bribery Act"), and Modern Slavery Act 2015;
labor strikes and shortages;
changes in general economic and political conditions;
adverse changes in foreign laws or regulatory requirements; and
different liability standards and legal systems that may be less developed and less predictable than those in the United States.

If we are unable to adequately address these risks, we could lose our ability to operate in certain international markets, face fines or sanctions, incur significant expenses or liabilities and our business, financial condition or results of operations could be materially adversely affected.

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The U.S. Departments of Justice, Commerce, Treasury and other agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against companies for violations of export controls, the FCPA, and other federal statutes, sanctions and regulations, including those established by the Office of Foreign Assets Control ("OFAC") and, increasingly, similar or more restrictive foreign laws, rules and regulations. By virtue of these laws and regulations, and under laws and regulations in other jurisdictions, including the European Union and the United Kingdom, we may be obliged to limit our business activities, we may incur costs for compliance programs and we may be subject to enforcement actions or penalties for noncompliance.

In recent years, U.S. and foreign governments have increased their oversight and enforcement activities with respect to these laws and we expect the relevant agencies to continue to increase these activities. A violation of these laws, sanctions or regulations could materially adversely affect our business, financial condition or results of operations.

The Company has compliance policies in place for its employees with respect to FCPA, OFAC and similar laws. However, there can be no assurance that our employees, consultants or agents, or those of our subsidiaries or investees, will not engage in conduct for which we may be held responsible. Violations of the FCPA, the Bribery Act, the rules and regulations established by OFAC and other laws, sanctions or regulations may result in severe criminal or civil penalties, and we may be subject to other liabilities, which could materially adversely affect our business, financial condition or results of operations.

Furthermore, significant developments stemming from the 2016 U.S. presidential election and subsequent 2018 mid-term elections could have a material adverse effect on us. The U.S. presidential administration has expressed antipathy towards existing trade agreements, and proposed trade agreements greater restrictions on free trade generally and significant increases on tariffs on goods imported into the United States, particularly from China. Changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently develop and sell products, and any negative sentiments towards the United States as a result of such changes, could adversely affect our business. In addition, negative sentiments towards the United States among non-U.S. customers and among non-U.S. employees or prospective employees could adversely affect sales or hiring and retention, respectively.

Global or local climate change and natural resource conservation regulations or requirements could adversely impact our business.

Our operations, including our data centers and server networks, require and consume significant energy resources, including electricity generated by the burning of fossil fuels. In response to concerns about global climate change, governments may adopt new regulations affecting the use of fossil fuels or requiring the use of alternative fuel sources to power energy resources that serve our operations. In addition, our customers and investors may require us to take steps to demonstrate that we are taking ecologically responsible measures in operating our business. The costs and any expenses we incur to make our network more energy efficient or administrative matters certifying our power usage or environmental impact could make us less profitable in future periods. Failure to comply with applicable laws and regulations or other requirements imposed on us could lead to fines, lost revenue and damage to our reputation.

Risks Related to our Capital Structure and Other Business Risks

We have a history of losses and may not achieve or sustain profitability.

For the years ended December 31, 2019, 2018, and 2017, we incurred a net loss attributable to shareholders of $138.3 million, $61.2 million, and $44.2 million, respectively. At December 31, 2019, our accumulated deficit was $1.5 billion and our working capital deficit was $442.0 million. Given the competitive and evolving nature of the industry in which we operate, we may not be able to achieve or sustain profitability, and our failure to do so could materially and adversely affect our business, including our ability to raise additional funds or refinance our current levels of indebtedness.

Our results of operations have fluctuated in the past and likely will continue to fluctuate, which could negatively impact our ability to raise additional capital and execute our business plan.

We have experienced fluctuations in our results of operations on a quarterly and annual basis. We expect to experience continued fluctuations in our operating results in the foreseeable future due to a variety of factors, including:

competition and the introduction of new services by our competitors;
continued pricing pressures;
fluctuations in the demand and sales cycle for our services;
fluctuations in the market for qualified sales, technical, customer support and retention and other personnel;
the cost and availability of adequate public utility services, including access to power;

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our ability to obtain local loop connections to our POPs at favorable prices; and
any impairment or restructuring charges that we may incur in the future.

In addition, fluctuations in our results of operations may arise from strategic decisions we have made or may make with respect to the timing and magnitude of capital expenditures such as those associated with the expansion of our data center facilities, the deployment of additional POPs, the terms of our network connectivity purchase agreements and the cost of servers, storage and other equipment necessary to deploy hosting and cloud services. A relatively large portion of our expenses are fixed in the short-term, particularly with respect to lease and personnel expense, depreciation and amortization and interest expense. Our results of operations, therefore, are particularly sensitive to fluctuations in revenue. We can offer no assurance that the results of any particular period are an indication of future performance in our business operations. Fluctuations in our results of operations could have a negative impact on our ability to raise additional capital and execute our business plan.

We have substantial goodwill and amortizable intangible assets.

Our financial statements reflect substantial goodwill and intangible assets, approximately $71.2 million and $46.6 million, respectively, as of December 31, 2019, that was recognized in connection with acquisitions.

We annually (and more frequently if changes in circumstances indicate that the asset may be impaired) review the carrying amount of our goodwill to determine whether it has been impaired for accounting purposes. In general, if the fair value of the corresponding reporting unit is less than the carrying amount of the reporting unit, we record an impairment. The determination of fair value is dependent upon a number of factors, including assumptions about future cash flows and growth rates that are based on our current and long-term business plans. With respect to the amortizable intangible assets, we test recoverability when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Examples of such circumstances include, but are not limited to, operating or cash flow losses from the use of such assets or changes in our intended uses of such assets. If we determine that an asset or asset group is not recoverable, then we would record an impairment charge if the carrying amount of the asset or asset group exceeds its fair value. Fair value is based on estimated discounted future cash flows expected to be generated by the asset or asset group. The assumptions underlying cash flow projections would represent management’s best estimates at the time of the impairment review.

As the ongoing expected cash flows and carrying amounts of our remaining goodwill and intangible assets are assessed, changes in the economic conditions, changes to our business strategy, changes in operating performance or other indicators of impairment could cause us to realize impairment charges in the future, including as a result of restructuring undertaken in connection with the integration of acquisitions.

If we determine an impairment exists, we may be required to write off all or a portion of the goodwill and associated intangible assets related to any impaired business. For additional information, see the discussion under "Critical Accounting Policies" in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. For the year ended December 31, 2019, we wrote off approximately $45.0 million of our goodwill and approximately $14.1 million of our intangible assets. For additional information regarding impairment of goodwill and intangible assets, see Note 2 of the Notes to Consolidated Financial Statements included elsewhere in this report.

We have incurred and may incur additional goodwill and other intangible asset impairment charges, restructuring charges or both.

The assumptions, inputs and judgments used in performing the valuation analysis and assessments of goodwill and other intangible assets are inherently subjective and reflect estimates based on known facts and circumstances at the time the valuation is performed. The use of different assumptions, inputs and judgments or changes in circumstances could materially affect the results of the valuation and assessments. Due to the inherent uncertainty involved in making these estimates, actual results could differ from our estimates. For the year ended December 31, 2019, we recorded an impairment of $45.0 million for goodwill and $14.1 million for intangible assets. Based on our evaluation of various estimates, further impairments may occur.

When circumstances warrant, we may elect to exit certain business activities or change the manner in which we conduct ongoing operations. When we make such a change, we will estimate the costs to exit a business or restructure ongoing operations. The components of the estimates may include estimates and assumptions regarding the timing and costs of future events and activities that represent our best expectations based on known facts and circumstances at the time of estimation. Should circumstances warrant, we will adjust our previous estimates to reflect what we then believe to be a more accurate representation of expected future costs. Because our estimates and assumptions regarding impairment and restructuring charges include probabilities of future events, such as expected operating results, future economic conditions, the ability to find a sublease tenant within a reasonable period of time or the rate at which a sublease tenant will pay for the available space, such estimates are inherently subject to changes due to unforeseen circumstances that could

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materially and adversely affect our results of operations. Adverse changes in any of these factors could result in additional impairment and restructuring charges in the future.

Changes in U.S. tax laws could have an effect on our business, cash flow, results of operations or financial condition.

Our business operations are subject to taxation in the U.S. and several other countries. Changes in tax laws or tax rulings, or changes to interpretations of existing laws, could materially affect our financial position and results from business operations.
We may not be able to fully utilize our U.S. net operating loss and other tax carryforwards.

As of December 31, 2019, we had net operating loss ("NOL") carryforwards for federal tax purposes of $341.2 million, of which $285.2 million will expire in tax years 2020 through 2037, and $56.0 million will not expire. Our ability to utilize our NOL carryforwards to reduce taxable income in future years may be limited if sufficient future taxable income is not timely generated. Additionally, our ability to fully utilize the NOL carryforwards are adversely affected by "ownership changes" within the meaning of Section 382 of the U.S. Internal Revenue Code of 1986, as amended (the "Tax Code"). An ownership change is generally defined as a greater than 50% increase in equity ownership by "5% shareholders" (as that term is defined for purposes of Sections 382 of the Tax Code) in any three-year period.
We entered into a rights agreement on December 18, 2019, with American Stock Transfer & Trust Company, LLC, as Rights Agent (the "NOL Rights Agreement") to reduce the risk that the Company’s ability to use its net operating losses and certain other tax assets (collectively, "Tax Benefits") would become subject to limitations due to an "ownership change" as defined in Section 382 of the Tax Code. The NOL Rights Agreement is designed to reduce the likelihood that the Company will experience an ownership change under Section 382 of the Tax Code by (i) discouraging any person or group from becoming a 4.9% stockholder and (ii) discouraging any existing 4.9% or more stockholder from acquiring additional shares of the Company’s stock.
Additionally, on March 16, 2020, the Company filed the Chapter 11 Cases and emergence from the Chapter 11 Cases under the Plan may result in an ownership change under Section 382. If an ownership change under Section 382 does occur, then the amount of NOLs available for utilization against future taxable income of the Company could be significantly limited.
We may face litigation and liability due to claims of infringement of third party intellectual property rights and due to our customers’ use of our IT infrastructure services.

The IT infrastructure services industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time-to-time, third parties may assert patent, copyright, trademark, trade secret and other intellectual property rights to technologies that are important to our business. Any claims that our IT infrastructure services infringe or may infringe proprietary rights of third parties, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel or require us to enter into royalty or licensing agreements, any of which could negatively impact our operating results. In addition, our customer agreements generally require us to indemnify our customers for expenses and liabilities resulting from claimed infringement of patents or copyrights of third parties, subject to certain limitations. If an infringement claim against us were to be successful, and we were not able to obtain a license to the relevant technology or a substitute technology on acceptable terms or redesign our services or products to avoid infringement, our ability to compete successfully in our market would be materially impaired.

In addition, our customers use our IT infrastructure services to operate and run certain aspects and functions of their businesses. From time-to-time, third parties may assert that our customers’ businesses, including the business aspects and functions for which they use our IT infrastructure services, infringe patent, copyright, trademark, trade secret or other intellectual property or legal rights. Our customers’ businesses may also be subject to regulatory oversight, governmental investigation, data breaches and lawsuits by their customers, competitors or other third parties based on a broad range of legal theories. Such third parties may seek to hold us liable on the basis of our contracts with them, contributory or vicarious liability or other legal theories. Any such claims, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel or require us to enter into royalty or licensing agreements, any of which could negatively impact our operating results. If any such claim against us were to be successful, damages could be material and our ability to compete successfully in our market would be materially impaired.

We may not be successful in protecting and enforcing our intellectual property rights, which could adversely affect our financial condition and operating results.

We rely primarily on patent, trademark, and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights, all of which provide only limited protection. We currently have 18 patents issued in the U.S. and internationally. Our issued patents may be contested, circumvented, found unenforceable or invalidated and we may expend significant amounts to protect our intellectual property.

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We endeavor to enter into agreements with our employees, contractors, and third parties with whom we do business to limit access to and disclosure of our proprietary information. The steps we have taken, however, may not prevent unauthorized use, disclosure or the reverse engineering of our technology. Moreover, others may independently develop technologies that are substantially equivalent, superior to, or otherwise competitive to the technologies we employ in our services or that infringe our intellectual property. We may be unable to prevent competitors from acquiring trademarks or service marks and other proprietary rights that are similar to, infringe upon, or diminish the value of our trademarks and service marks and our other proprietary rights. Enforcement of our intellectual property rights also depends on successful legal actions against infringers and parties who misappropriate our proprietary information and trade secrets, but these actions may not be successful, even when our rights have been infringed.

In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the U.S. Despite the measures taken by us, it may be possible for a third party to copy or otherwise obtain and use our technology and information without our authorization. Policing unauthorized use of our proprietary technologies and other intellectual property and our services is difficult, and litigation or other actions could become necessary in the future to enforce our intellectual property rights. Any litigation could be time consuming and expensive to prosecute or resolve, result in substantial diversion of management attention and resources, and harm our business, financial condition, and results of operations.

The insurance coverage that we purchase may prove to be inadequate, costly or unavailable when we need the coverage.

We carry liability, property, directors and officers, business interruption, Cyber and other insurance policies to cover insurable risks to our company. We select the types of insurance, the limits and the deductibles based on our specific risk profile, the cost of the insurance coverage versus its perceived benefit and general industry standards. Our insurance policies contain industry standard exclusions for events such as war. Although we generally attempt to select reputable insurance carriers, any economic disruptions may prevent us from using our insurance if the counterparty does not have the capital necessary to meet the coverage. In addition, our agreements with customers also contain obligations to carry comprehensive general liability, property, workers’ compensation, and automobile liability insurance. Any of the limits of insurance that we purchase could prove to be inadequate, or the cost of such insurance policies may be significant, which could materially and adversely impact our business, financial condition and results of operations.

Our significant amount of indebtedness could materially adversely affect our results of operations, cash flows, liquidity and ability to compete in our industry.

As of December 31, 2019, our total debt, including finance leases, was $608.3 million. In connection with the Chapter 11 Cases, we entered into the DIP Facility on March 19, 2020, which is described above under Item 1 "Business - Recent Developments.” Our DIP Facility requires us to, among other things, meet certain affirmative and negative financial covenants. These covenants protect the lenders and limit our ability to make certain operating and business decisions in the face of changing market dynamics. These covenants can be waived by the lenders. However, the cost of waivers, if obtained, could be material. In addition, our credit facility and the DIP Facility create liens on a majority of our assets. We can make no assurances that we will be able to comply with our covenants in the future or whether we will be able to obtain future amendments or waivers of the covenants in our financing agreements and instruments, if necessary, upon acceptable terms or at all. Furthermore, future amendments or waivers may place future restrictions on our ability to engage in certain activities, as well as increase the cost of our financing.

If our financial performance weakens or if we are unable to make interest or principal payments when due, meet our covenants or amend our financing agreements, particularly the DIP Facility to modify the covenants, we may default under such financing agreements. Such default would result in all principal and interest becoming due and payable, if not waived. This would have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows. If a waiver is required, we may not be able to obtain the waiver, or it could come at a material cost to us.

We also have other long-term commitments for operating leases and service and purchase contracts. If we are unable to make payments when due, we would be in breach of contractual terms of the agreements, which may result in disruptions of our services which, in turn, would have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows.

Our significant amount of indebtedness could materially adversely affect us. For example, it could: require us to (i) dedicate a significant portion of our cash flows from operations and investing activities to make payments on our debt, which would reduce our ability to fund working capital, make capital expenditures or other general corporate purposes, (ii) increase our vulnerability to general adverse economic and industry conditions (such as credit-related disruptions), (iii) place us at a competitive disadvantage to our competitors that have proportionately less debt or comparable debt at more favorable interest rates or on better terms; and (iv) limit our ability to react to competitive pressures, or make it difficult for us to carry out capital spending that is necessary or important to our strategy. Any of these factors could materially adversely affect our results of operations, cash flows, liquidity and ability to compete in our industry.

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To service our significant indebtedness, we will require a significant amount of cash. However, our ability to generate cash depends on many factors many of which are beyond our control.

Our ability to make payments on and refinance our indebtedness will depend on our ability to generate cash in the future. If we use more cash than we generate in the future or fail to generate cash, our level of indebtedness could adversely affect our future operations by increasing our vulnerability to adverse changes in general economic and industry conditions and by limiting or prohibiting our ability to obtain additional financing for future capital expenditures, acquisitions and general corporate and other purposes. We can make no assurances that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness when due, or to fund our other liquidity needs. In these circumstances, we may need to refinance all or a portion of our indebtedness on or before maturity. Without this financing, we could be forced to sell assets or secure additional financing to make up for any shortfall in our payment obligations under unfavorable circumstances. However, we may not be able to secure additional financing on terms favorable to us or at all.

There is substantial doubt about our ability to continue as a going concern.

The Company has experienced negative financial trends, such as operating losses, working capital deficiencies, negative cash flows and other adverse key financial ratios. The Company reported a net loss attributable to shareholders of $138.3 million and $61.2 million for the years ended December 31, 2019 and 2018, respectively. The working capital deficit as of December 31, 2019 was $442.0 million compared to $6.5 million as of December 31, 2018. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The audit report of our independent registered public accounting firm as of December 31, 2019 and 2018, and for the three years ended December 31, 2019 contains an explanatory paragraph, Going Concern Uncertainty, that raises substantial doubt as to our ability to continue as a going concern. Future reports on our financial statements may also include an explanatory paragraph with respect to our ability to continue as a going concern.

A failure of our controls and procedures could have a material adverse effect on our business, financial condition and results of operations.

We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system will be met. Any failure of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, financial condition and results of operations. If we identify material weaknesses in our internal control over financial reporting or are otherwise required to restate our financial statements, we could be required to implement expensive and time-consuming remedial measures. In addition, we could lose investor confidence in the accuracy and completeness of our financial reports, and expose us to legal or regulatory proceedings.

ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2. PROPERTIES
 
Our principal executive offices are located in Reston, Virginia and our primary operations and staff headquarters are located in Atlanta, Georgia.

Leased data center facilities in our top markets include Atlanta, Boston, Dallas, Houston, Los Angeles, Montreal, New York/New Jersey, Phoenix, Seattle, and Silicon Valley. These facilities are used in both our segments INAP US and INAP INTL.

We believe our existing facilities are adequate for our current needs and that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed. 

ITEM 3. LEGAL PROCEEDINGS
 
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.


32



On March 16, 2020, the Company filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code. For information on the Chapter 11 Cases, see Item 1 "Business - Recent Developments.”

ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.
 
PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
Historically, our common stock was listed on the Nasdaq Global Market under the symbol "INAP." On March 26, 2020, our common stock was delisted on Nasdaq and now is quoted on the OTC under the symbol “INAPQ.”

As of May 4, 2020, we had approximately 181 stockholders of record of our common stock. This does not include persons whose stock is in nominee or "street name" accounts through brokers.

Dividend Policy
 
We have never declared or paid any cash dividends on our capital stock. We are prohibited from paying cash dividends under our credit agreement and DIP Facility and do not anticipate paying any such dividends in the foreseeable future. We currently intend to retain our earnings, if any, for future growth. Future dividends on our common stock, if any, will be at the discretion of our board of directors and will depend on, among other things, our operations, capital requirements and surplus, general financial condition, contractual restrictions and such other factors as our board of directors may deem relevant.
 
Equity Compensation Plan Information
 
The following table provides information regarding our current equity compensation plans as of December 31, 2019 (shares in thousands):
 
Equity Compensation Plan Information
Plan category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)
 
Weighted-average exercise price of outstanding options, warrants and rights
(b)
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
Equity compensation plans approved by security holders(1)
 
175(2)

 
$
27.01

 
1,441(3)

Equity compensation plans not approved by security holders
 
150(4)

 

 
29(4)

Total
 
325

 
$
27.01

 
1,470


(1) 
Our equity compensation plans consist of the 2017 Stock Incentive Plan ("2017 Plan"), 2014 Stock Incentive Plan, 2005 Incentive Stock Plan as amended, 2000 Non-Officer Equity Incentive Plan and 1999 Non-Employee Directors' Stock Option Plan. Each plan contains customary anti-dilution provisions that are applicable in the event of a stock split or certain other changes in our capitalization.
(2) 
This number includes the following: 57,793 shares subject to outstanding awards granted under the 2014 Stock Incentive Plan, 116,215 shares subject to outstanding awards granted under the 2005 Incentive Stock Plan as amended and 1,153 shares subject to outstanding awards granted under the 2000 Non-Officer Equity Incentive Plan.
(3) 
This number includes shares remaining available for issuance under the 2017 Stock Incentive Plan. We may not issue additional equity awards under any other plan, including the 2014 Stock Incentive Plan, 2005 Incentive Stock Plan as amended, 2000 Non-Officer Equity Incentive Plan and 1999 Non-Employee Directors' Stock Option Plan.

33



(4) 
Peter D. Aquino was issued 1,585,000 shares (396,250 after the 1-for-4 reverse stock split of the shares of our common stock) pursuant to an award of restricted stock under the Restated Stock Inducement Award Agreement dated as of September 19, 2016 in accordance with NASDAQ Listing Rule 5635(c)(4). As of December 31, 2019, 29,166 shares remain unvested. Michael T. Sicoli was issued 150,000 shares pursuant to an award of restricted stock under the Restricted Stock Inducement Award Agreement, dated as of August 26, 2019, effective October 1, 2019, as a material inducement to his acceptance of employment with the Company, in accordance with NASDAQ Listing Rule 5635(c)(4).

In 2019, we issued 133,630 shares of common stock to our non-employee directors under the 2017 Plan.


34



ISSUER PURCHASES OF EQUITY SECURITIES

The following table sets forth information regarding our repurchases of securities for each calendar month in the three months ended December 31, 2019:
 
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
October 1 to 31, 2019
 

 
$
2.33

 

 
$
5,000,000

November 1 to 30, 2019
 

 
1.82

 

 
5,000,000

December 1 to 31, 2019
 

 
1.06

 

 
$
5,000,000

Total
 

 
$
1.74

 

 
 
 
 
 
 
 
 
 
 
 
(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.

Authorization of Stock Repurchase

In December 2018, INAP's Board of Directors authorized management to repurchase an initial $5.0 million of INAP common stock, as permitted under INAP's 2017 Credit Agreement. As of December 31, 2019, there have been no shares repurchased under this program and no shares will be repurchased during the pendency of the Chapter 11 Cases.    

NOL Rights Plan

We entered into a rights agreement on December 18, 2019, with American Stock Transfer & Trust Company, LLC, as Rights Agent (the "NOL Rights Agreement"). The purpose of the NOL Rights Agreement is to reduce the risk that the Company’s ability to use its net operating losses and certain other tax assets (collectively, "Tax Benefits") to reduce potential future U.S. federal income tax obligations would become subject to limitations by reason of the Company’s experiencing an "ownership change," as defined in Section 382 of the U.S. Internal Revenue Code of 1986, as amended (the "Tax Code"). A company generally experiences such an ownership change if the percentage of its stock owned by its > 5-percent shareholders, as defined in Section 382 of the Tax Code, increases by more than 50 percentage points over a rolling three-year period. The NOL Rights Agreement is designed to reduce the likelihood that the Company will experience an ownership change under Section 382 of the Tax Code by (i) discouraging any person or group from becoming a 4.9% stockholder and (ii) discouraging any existing 4.9% or more stockholder from acquiring additional shares of the Company’s stock.



35



ITEM 6. SELECTED FINANCIAL DATA
 
We have derived the selected financial data shown below from our audited consolidated financial statements. You should read the following in conjunction with the accompanying consolidated financial statements and related notes contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Annual Report on Form 10-K. 
 
 
Year Ended December 31,
 
 
2019
 
2018
 
2017
 
2016
 
2015
(in thousands, except per share data)
 
 

 
 

 
 

 
 

 
 

Consolidated Statements of Operations and Comprehensive Loss Data:
 
 

 
 

 
 

 
 

 
 

Net revenues
 
$
291,505

 
$
316,158

 
$
280,718

 
$
298,297

 
$
318,293

Operating costs and expenses:
 
 

 
 

 
 

 
 

 
 

Costs of sales and services, exclusive of depreciation and amortization, shown below
 
106,946

 
107,649

 
106,217

 
124,255

 
131,440

Costs of customer support
 
32,111

 
32,517

 
25,757

 
32,184

 
36,475

Sales, general and administrative
 
67,050

 
75,023

 
62,728

 
70,639

 
81,340

Depreciation and amortization
 
85,713

 
88,416

 
73,429

 
76,948

 
92,655

Goodwill and intangibles impairment
 
59,126

 

 

 
80,105

 

Exit activities, restructuring and impairments
 
8,986

 
5,406

 
6,249

 
7,236

 
2,278

Total operating costs and expenses
 
359,932

 
309,011

 
274,380

 
391,367

 
344,188

(Loss) income from operations
 
(68,427
)
 
7,147

 
6,338

 
(93,070
)
 
(25,895
)
Non-operating expenses
 
71,390

 
67,565

 
51,458

 
31,312

 
26,408

Loss before income taxes and equity in earnings of equity-method investment
 
(139,817
)
 
(60,418
)
 
(45,120
)
 
(124,382
)
 
(52,303
)
Income tax (benefit) expense
 
(1,648
)
 
657

 
253

 
530

 
(3,660
)
Equity in earnings of equity-method investment, net of taxes
 

 

 
(1,207
)
 
(170
)
 
(200
)
Net loss
 
(138,169
)
 
(61,075
)
 
(44,166
)
 
(124,742
)
 
(48,443
)
Less net income attributable to non-controlling interest
 
81

 
125

 
70

 

 

Net loss attributable to shareholders
 
$
(138,250
)
 
$
(61,200
)
 
$
(44,236
)
 
$
(124,742
)
 
$
(48,443
)
Net loss per share:
 
 

 
 

 
 

 
 

 
 

Basic and diluted
 
$
(5.81
)
 
$
(2.95
)
 
$
(2.33
)
 
$
(9.54
)
 
$
(3.73
)
 
 
 
December 31,
 
 
2019
 
2018
 
2017
 
2016
 
2015
Consolidated Balance Sheets Data:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
11,649

 
$
17,823

 
$
14,041

 
$
10,389

 
$
17,772

Total assets
 
599,354

 
750,745

 
588,594

 
430,615

 
554,611

Credit facilities, due after one year, and finance lease obligations, less current portion
 
170,042

 
689,527

 
520,833

 
367,376

 
370,693

Total stockholders' (deficit) equity
 
$
(132,822
)
 
$
2,969

 
$
580

 
$
(3,724
)
 
$
114,436


36



 
 
Year Ended December 31,
 
 
2019
 
2018
 
2017
 
2016
 
2015
Other Financial Data:
 
 

 
 

 
 

 
 

 
 

Capital expenditures, net of equipment sale-leaseback transactions
 
$
32,982

 
$
42,028

 
$
36,667

 
$
46,192

 
$
57,157

Net cash flows provided by operating activities
 
22,663

 
35,341

 
41,404

 
48,165

 
40,208

Net cash flows used in investing activities
 
(29,301
)
 
(173,114
)
 
(32,427
)
 
(45,650
)
 
(57,157
)
Net cash flows provided by (used in) financing activities
 
$
645

 
$
141,550

 
$
(5,455
)
 
$
(9,834
)
 
$
15,290



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion should be read in conjunction with the accompanying consolidated financial statements and notes provided under Part II, Item 8 of this Annual Report on Form 10-K.

Recent Developments

Reorganization, Chapter 11 Proceedings

As discussed above under Item 1 "Business - Recent Developments," the Company filed a petition for reorganization under Chapter 11 of the Bankruptcy Code on March 16, 2020 to restructure and de-leverage our balance sheet.

As a result of the commencement of the Chapter 11 Cases on March 16, 2020, we are operating as a debtor-in-possession pursuant to the authority granted under Chapter 11 of the Bankruptcy Code. Pursuant to the Chapter 11 Cases, we intend to de-leverage our balance sheet and reduce overall indebtedness upon completion of that process. Additionally, as a debtor-in-possession, certain of our activities are subject to review and approval by the Bankruptcy Court, including, among other things, the incurrence of indebtedness, material asset dispositions, and other transactions outside the ordinary course of business. There can be no guarantee that the Chapter 11 Cases will be completed successfully or in the time frame contemplated by the RSA. In connection with the Chapter 11 Cases, we entered into the RSA. Pursuant to the RSA, the Consenting Lenders and the Company made certain customary commitments to each other, including the Consenting Lenders committing to support the Restructuring to be effectuated through the Plan to be proposed by the Company.

Going Concern

The accompanying consolidated financial statements have been prepared in accordance with GAAP assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business.

The Company has experienced negative financial trends, such as operating losses, working capital deficiencies, negative cash flows and other adverse key financial ratios. The Company reported net losses of $138.3 million and $61.2 million for the years ended December 31, 2019 and 2018, respectively. The working capital deficit as of December 31, 2019 was $442.0 million compared to $6.5 million as of December 31, 2018. These trends, along with the resulting liquidity constraints and debt covenant compliance considerations, led to INAP’s Chapter 11 Cases, which raise substantial doubt about the Company’s ability to continue as a going concern.

As a result of this uncertainty and the substantial doubt about our ability to continue as a going concern as of December 31, 2019, the report of our independent registered public accounting firm in this Annual Report on Form 10-K for the years ended December 31, 2019 and 2018 includes a going concern explanatory paragraph.

The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

2019 Highlights

Our revenue was $291.5 million for the year ended December 31, 2019, compared to $316.2 million for the same period in 2018. Our net loss attributable to shareholders was $138.3 million for the year ended December 31, 2019, compared to $61.2 million for the same period in 2018. Our adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA"), a non-GAAP

37



performance measure defined below in "Non-GAAP Financial Measures," was $92.4 million for the year ended December 31, 2019, compared to $110.0 million for the same period in 2018.

Factors Affecting Our Performance
 
We believe increased competition, planned data center exits and concerns regarding the financial position and future of the Company were the main factors contributing to the increase in net loss and declines in revenue and Adjusted EBITDA.
 
Non-GAAP Financial Measures
 
We report our consolidated financial statements in accordance with GAAP. We present the non-GAAP performance measure of Adjusted EBITDA to assist us in the evaluation of underlying performance trends in our business, which we believe will enhance investors' ability to analyze trends in our business, and the evaluation of our performance relative to other companies. We define Adjusted EBITDA as GAAP net loss attributable to INAP shareholders plus depreciation and amortization, interest expense, income tax (benefit) expense, other expense (income), loss (gain) on disposal of property and equipment, exit activities, restructuring and impairments, stock-based compensation, non-income tax contingency, strategic alternatives and related costs, organizational realignment costs, claim settlement and acquisition costs. We calculate Adjusted EBITDA margin as Adjusted EBITDA as a percentage of revenues.
 
As a non-GAAP financial measure, Adjusted EBITDA should not be considered in isolation of, or as a substitute for, net loss, income from operations or other GAAP measures as an indicator 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 net loss attributable to shareholders as presented in our consolidated statements of operations and comprehensive loss to Adjusted EBITDA (non-GAAP) (dollars in thousands): 
 
 
Year Ended December 31,
 
 
2019
 
2018
 
2017
 
 
Amount

 
Percent

 
Amount

 
Percent

 
Amount

 
Percent

Net revenues
 
$
291,505

 
100.0
 %
 
$
316,158

 
100.0
 %
 
$
280,718

 
100.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss attributable to shareholders
 
$
(138,250
)
 
(47.4
)%
 
$
(61,200
)
 
(19.4
)%
 
$
(44,236
)
 
(15.8
)%
Add:
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
85,713

 
29.4
 %
 
88,416

 
28.0
 %
 
73,429

 
26.2
 %
Interest expense
 
75,142

 
25.8
 %
 
67,823

 
21.5
 %
 
50,933

 
18.1
 %
Income tax (benefit) expense
 
(1,648
)
 
(0.6
)%
 
657

 
0.2
 %
 
253

 
0.1
 %
Other expense (income)
 
444

 
0.2
 %
 
(252
)
 
(0.1
)%
 
(682
)
 
(0.2
)%
Loss (gain) on disposal of property and equipment, net
 
527

 
0.2
 %
 
(109
)
 
 %
 
(353
)
 
(0.1
)%
Gain on sale of business
 
(4,196
)
 
(1.4
)%
 

 
—%

 

 
 %
Exit activities, restructuring and impairments
 
8,986

 
3.1
 %
 
5,406

 
1.7
 %
 
6,249

 
2.2
 %
Goodwill and intangibles impairment
 
59,126

 
20.3
 %
 

 
 %
 

 
 %
Stock-based compensation
 
4,239

 
1.5
 %
 
4,678

 
1.5
 %
 
3,040

 
1.1
 %
Non-income tax contingency
 
150

 
0.1
 %
 
842

 
0.3
 %
 
1,500

 
0.5
 %
Strategic alternatives and related costs(1)
 
81

 
 %
 
125

 
 %
 
70

 
 %
Organizational realignment costs(2)
 
1,277

 
0.4
 %
 
791

 
0.3
 %
 
957

 
0.3
 %
Claim settlement
 

 
 %
 

 
 %
 
713

 
0.3
 %
Acquisition costs(3)
 
817

 
0.3
 %
 
2,869

 
0.9
 %
 
373

 
0.1
 %
Adjusted EBITDA
 
$
92,408

 
31.7
 %
 
$
110,046

 
34.8
 %
 
$
92,246

 
32.9
 %

(1) 
Primarily legal and other professional fees incurred in connection with the evaluation by our board of directors of strategic alternatives. We include these costs in "Sales, general and administrative" ("SG&A") in the accompanying consolidated statements of operations and comprehensive loss for the years ended December 31, 2019, 2018 and 2017.

38



(2) 
Primarily professional fees, employee retention bonus, severance and executive search costs incurred related to our organizational realignment. We include these costs in SG&A in the accompanying consolidated statements of operations and comprehensive loss for the years ended December 31, 2019, 2018 and 2017.
(3) 
Primarily legal and other professional fees incurred in connection with potential acquisitions and the potential sale of non-core assets. For the year ended December 31, 2018, acquisition costs are higher due to the acquisition of SingleHop.

Critical Accounting Policies and Estimates
 
This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which we have prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those summarized below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances; the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.
 
In addition to our significant accounting policies summarized in Note 2 to our accompanying consolidated financial statements, we believe the following policies are the most sensitive to judgments and estimates in the preparation of our consolidated financial statements.
 
Revenue Recognition
 
We generate revenues primarily from the sale of data center services, including colocation, hosting and cloud, as well as network services. Our revenues typically consist of monthly recurring revenues from contracts with terms of one year or more and we typically recognize the monthly minimum as revenue each month. We record installation fees as deferred revenue and recognize the revenue ratably over the estimated customer life. The Company adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606") on January 1, 2018.

Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the Company expects to be entitled to 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. 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 contract's 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, additional usage and late fees, discounts and promotions, and customer care credits. The majority of 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, the Company allocates the contract's transaction price to each performance obligation based on its relative standalone selling price ("SSP").

The 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.

The most significant impact of the adoption of the new standard was 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 does not equal the initial commission.

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


39



Most performance obligations, with the exception of occasional 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 routinely reviews the collectability of its accounts receivable and payment status of customers. If the Company determines that collection of revenue is uncertain, it does not recognize revenue until collection is reasonably assured. Additionally, the Company maintains an allowance for doubtful accounts resulting from the inability of the Company's customers to make required payments on accounts receivable. The allowance for doubtful accounts is based on historical write-offs as a percentage of revenues. The Company assesses the payment status of customers by reference to the terms under which it provides services or goods, with any payments not made on or before their due date considered past-due. Once all collection efforts have been exhausted, the uncollectible balance is written off against the allowance for doubtful accounts. The Company routinely performs credit checks for new and existing customers and requires deposits or prepayments for customers that are perceived as being a credit risk. In addition, the Company records a reserve amount for potential credits to be issued under service level agreements and other sales adjustments.

Goodwill and Other Intangible and Long-lived Assets
 
Our annual assessment of goodwill for impairment, performed each year on August 1 absent any impairment indicators or other changes that may cause more frequent analysis, includes comparing the fair value of each reporting unit to the carrying value, referred to as "step one." If the fair value of a reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is necessary. If the carrying value of a reporting unit exceeds its fair value, we record the amount of impairment to goodwill, if any.
 
In order to determine the estimated fair value of our reporting units, the Company considers the discounted cash flow method. INAP has consistently considered this method in its goodwill impairment assessments. The discounted cash flow method is specific to the anticipated future results of the reporting unit. The Company determines the assumptions supporting the discounted cash flow method, including the discount rate, using estimates as of the date of the impairment review. To determine the reasonableness of these assumptions, the Company considered the past performance and empirical trending of results, looked to market and industry expectations used in the discounted cash flow method, such as forecasted revenues and discount rate. The Company used reasonable judgment in developing its estimates and assumptions. 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. Due to the 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.
 
Other intangible assets have finite lives and we record these assets at cost less accumulated amortization. We record amortization of acquired technologies using the greater of (a) the ratio of current revenues to total and anticipated future revenues for the applicable technology or (b) the straight-line method over the remaining estimated useful life. The intangible assets are being amortized over periods which reflect the pattern in which economic benefits of the assets are expected to be realized. We amortize the cost of the acquired technologies and noncompete agreements over their useful lives of 4 to 8 years and 8 to 15 years for trade names. Customer relationships are being amortized on an accelerated basis over their estimated useful life of 10 to 30 years. We assess other intangible assets and long-lived assets on a quarterly basis whenever any events have occurred or circumstances have changed that would indicate impairment could exist. Our assessment is based on estimated future cash flows directly associated with the asset or asset group. If we determine that the carrying value is not recoverable, we may record an impairment charge, reduce the estimated remaining useful life or both.

When the Company performed its impairment test as of August 1, 2019, 2018 and 2017, the fair value for all reporting units was higher than their respective carrying values, and no impairment was recorded. Due to the triggering events such as the significant decline in stock price in 2018 and the further decline in the stock price in 2019, interim goodwill and intangibles impairment tests were performed. An impairment charge of $45.0 million for goodwill and $14.1 million for intangibles was recognized when the Company performed an impairment test as of December 1, 2019 for its seven reporting units. Goodwill impairment charges were recorded for the Cloud reporting unit within INAP US of $22.9 million and for the Cloud and Ubersmith reporting units within INAP INTL of $21.2 million and $0.9 million, respectively, due to the carrying amounts for the three reporting units exceeding their fair value. The goodwill impairment is primarily due to declines in projected revenues and operating results due to increased customer churn and reduced sales projections. The goodwill for INAP INTL was fully impaired as of December 31, 2019. For INAP US, approximately 25% of goodwill was impaired as of December 31, 2019. For the other reporting units in INAP US, Network and Colocation, the fair value exceeded the carrying values resulting in no impairment. In performing the impairment test as of December 1, 2019, the Company utilized discount rates ranging from 12.0% to 16.0% which increased compared to the annual testing as of August 1, 2019 where the discount rates ranged from 8.0% to 13.0%, to reflect changes in market conditions. The Company also reduced long-term growth rate assumptions from 2.0% to 1.0% for some reporting units.

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The result of our intangibles assessment was that the projected undiscounted net cash flows for the Cloud and Ubersmith reporting units in INAP INTL were below the carrying value of the related assets. Therefore, we recorded an impairment of $12.9 million for Cloud customer relationships, and $1.2 million for Ubersmith of which $1.0 million related to acquired and developed technology and $0.2 million related to customer relationships.

Exit Activities and Restructuring
 
When circumstances warrant, we may elect to exit certain business activities or change the manner in which we conduct ongoing operations. If we make such a change, we will estimate the costs to exit a business, location, service contract or restructure ongoing operations. The components of the estimates may include estimates and assumptions regarding the timing and costs of future events and activities that represent our best expectations based on known facts and circumstances at the time of estimation. If circumstances warrant, we will adjust our previous estimates to reflect what we then believe to be a more accurate representation of expected future costs. Because our estimates and assumptions regarding exit activities and restructuring charges include probabilities of future events, such as our ability to find a sublease tenant within a reasonable period of time or the rate at which a sublease tenant will pay for the available space, such estimates are inherently vulnerable to changes due to unforeseen circumstances that could materially and adversely affect our results of operations. We monitor market conditions at each period end reporting date and will continue to assess our key assumptions and estimates used in the calculation of our exit activities and restructuring accrual.

Income Taxes

The Company accounts for deferred income taxes using the asset and liability approach. Under this approach, deferred income taxes are recognized based on the tax effects of temporary differences between the financial statement and tax bases of assets and liabilities, as measured by current enacted tax rates. Valuation allowances are recorded to reduce the deferred tax assets to an amount that will more likely than not be realized. The Company regularly reviews its deferred tax assets by taxing jurisdiction for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company’s management has determined that the Company has a going concern uncertainty under ASC 205-40 which constitutes significant negative evidence as to the realizability of its deferred tax assets.

On March 16, 2020, the Company filed a voluntary petition for relief under the Bankruptcy Code to affect a plan of reorganization of its existing debt arrangements with certain Lenders. The Company is currently evaluating the impact the Chapter 11 bankruptcy filing will have on the recoverability of its deferred tax assets. Emergence from the bankruptcy filing under the Plan may result in an ownership change under section 382 of the Tax Code. If an ownership change under section 382 does occur, then the amount of deferred tax assets available for utilization against future taxable income of the Company could be significantly impaired.
For uncertain tax positions, the Company applies the provisions of all relevant authoritative guidance, which requires application of a “more likely than not” threshold to the recognition and derecognition of tax positions. The Company’s ongoing assessments of the more likely than not outcomes of tax authority examinations and related tax positions require significant judgment and can increase or decrease the Company’s effective tax rate, as well as impact operating results.
The Company’s effective tax rate differs from the statutory rate, primarily due to the tax impact of state taxes, foreign tax rates, and valuation allowances. Significant judgment is required in evaluating uncertain tax positions, determining valuation allowances recorded against deferred tax assets, and ultimately, the income tax provision.
Stock-Based Compensation
 
We measure stock-based compensation cost at the grant date based on the calculated fair value of the award. We recognize the expense over the employee's requisite service period, generally the vesting period of the award. The fair value of restricted stock is the market value on the date of grant. The fair value of stock options is estimated at the grant date using the Black-Scholes option pricing model with weighted average assumptions for the activity under our stock plans. Option pricing model input assumptions, such as expected term, expected volatility and risk-free interest rate, impact the fair value estimate. Further, the forfeiture rate impacts the amount of aggregate compensation. These assumptions are subjective and generally require significant analysis and judgment to develop.
 
The expected term represents the weighted average period of time that we expect granted options to be outstanding, considering the vesting schedules and our historical exercise patterns. Because our options are not publicly traded, we assume volatility based on the historical volatility of our stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding to the expected option term. We have also used historical data to estimate option exercises, employee termination and stock option forfeiture rates. Changes in any of these assumptions could materially impact our results of operations in the period the change is made.

41



 
Capitalized Software Costs
 
We capitalize internal-use software development costs incurred during the application development stage. Depreciation begins once the software is ready for its intended use and is computed based on the straight-line method over the economic life. Judgment is required in determining which software projects are capitalized and the resulting economic life.
 
We capitalize certain costs associated with software to be sold. Capitalized costs include all costs incurred to produce the software or the purchase price paid for a master copy of the software that will be sold. Internally incurred costs to develop software are expensed when incurred as research and development costs until technological feasibility is established.

Results of Operations
 
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): 
 
 
Year Ended December 31,
 
Increase (decrease) from 2018 to 2019
 
Increase (decrease) from 2017 to 2018
 
 
2019
 
2018
 
2017
 
Amount
 
Percent
 
Amount
 
Percent
Revenues:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

INAP US
 
$
228,744

 
$
247,146

 
$
215,770

 
$
(18,402
)
 
(7.4
)%
 
$
31,376

 
14.5
 %
INAP INTL
 
62,761

 
69,012

 
64,948

 
(6,251
)
 
(9.1
)
 
4,064

 
6.3

Net revenues
 
291,505

 
316,158

 
280,718

 
(24,653
)
 
(7.8
)
 
35,440

 
12.6

Operating costs and expenses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Costs of sales and services, exclusive of depreciation and amortization, shown below:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

INAP US
 
80,678

 
80,937

 
82,997

 
(259
)
 
(0.3
)
 
(2,060
)
 
(2.5
)
INAP INTL
 
26,268

 
26,712

 
23,220

 
(444
)
 
(1.7
)
 
3,492

 
15.0

Costs of customer support
 
32,111

 
32,517

 
25,757

 
(406
)
 
(1.2
)
 
6,760

 
26.2

Sales, general and administrative
 
67,050

 
75,023

 
62,728

 
(7,973
)
 
(10.6
)
 
12,295

 
19.6

Depreciation and amortization
 
85,713

 
88,416

 
73,429

 
(2,703
)
 
(3.1
)
 
14,987

 
20.4

Goodwill and intangibles impairment
 
59,126

 

 

 
59,126

 

 

 

Exit activities, restructuring and impairments
 
8,986

 
5,406

 
6,249

 
3,580

 
66.2

 
(843
)
 
(13.5
)
Total operating costs and expenses
 
359,932

 
309,011

 
274,380

 
50,921

 
16.5

 
34,631

 
12.6

(Loss) income from operations
 
$
(68,427
)
 
$
7,147

 
$
6,338

 
$
(75,574
)
 
(1,057.4
)
 
$
809

 
(12.8
)
Interest expense
 
$
75,142

 
$
67,823

 
$
50,933

 
$
7,319

 
10.8

 
$
16,890

 
33.2

Income tax (benefit) expense
 
$
(1,648
)
 
$
657

 
$
253

 
$
(2,305
)
 
(350.8
)%
 
$
404

 
159.7
 %
 
Revenues
 
We generate revenues primarily from the sale of data center services, including colocation, hosting and cloud, as well as network services.
 
Costs of Sales and Services
 
Costs of sales and services are comprised primarily of:

Facility and occupancy costs, including power and utilities, for hosting and operating our equipment and our customers' equipment;
costs related to IP services and to connect our POPs;
costs incurred for providing additional third party services to our customers; and
royalties and costs of license fees for software included in our services to customers.
 
Costs of sales and services do not include compensation, depreciation or amortization.

42



 
Costs of Customer Support
 
Costs of customer support consist primarily of compensation and other personnel costs for employees engaged in connecting customers to our network, installing customer equipment into POPs facilities and servicing customers through our NOCs. In addition, direct costs of customer support include facilities costs associated with the NOCs, including costs related to servicing our data center customers.

Sales, General and Administrative
 
Sales, general and administrative costs consist primarily of costs related to sales and marketing, compensation and other expense for executive, finance, product development, human resources and administrative personnel, professional fees and other general corporate costs.
 
Segment Information
 
Effective January 1, 2018, as further described in Note 10, "Operating Segments and Geographic Information," to the accompanying consolidated financial statements, we operate in two business segments: INAP US and INAP INTL. Segment results for each of the three years ended December 31, 2019 are summarized as follows (in thousands): 
 
 
Year Ended December 31,
 
 
2019
 
2018
 
2017
Revenues:
 
 

 
 

 
 

INAP US
 
$
228,744

 
$
247,146

 
$
215,770

INAP INTL
 
62,761

 
69,012

 
64,948

Net revenues
 
291,505

 
316,158

 
280,718

 
 
 
 
 
 
 
Costs of sales and services, customer support and sales and marketing:
 
 

 
 

 
 

INAP US
 
129,329

 
135,179

 
128,062

INAP INTL
 
39,270

 
45,124

 
37,829

Total costs of sales and services, customer support and sales and marketing
 
168,599

 
180,303

 
165,891

 
 
 
 
 
 
 
Segment profit:
 
 

 
 

 
 

INAP US
 
99,415

 
111,967

 
87,708

INAP INTL
 
23,491

 
23,888

 
27,119

Total segment profit
 
122,906

 
135,855

 
114,827

 
 
 
 
 
 
 
Goodwill and intangibles impairment
 
59,126

 

 

Exit activities, restructuring and impairments
 
8,986

 
5,406

 
6,249

Other operating expenses, including sales, general and administrative and depreciation and amortization expenses
 
123,221

 
123,302

 
102,240

(Loss) income from operations
 
(68,427
)
 
7,147

 
6,338

Non-operating expenses
 
71,390

 
67,565

 
51,458

Loss before income taxes and equity in earnings of equity-method investment
 
$
(139,817
)
 
$
(60,418
)
 
$
(45,120
)
 
Segment profit is calculated as segment revenues less costs of sales and services, customer support and sales and marketing. We view costs of sales and services as generally less-controllable, external costs and we regularly monitor the margin of revenues in excess of these direct costs. We also view the costs of customer support to be an important component of costs of revenues, but believe that the costs of customer support are more within our control and, to some degree, discretionary in that we can adjust those costs by managing personnel needs. We also have excluded depreciation and amortization from segment profit because it is based on estimated useful lives of tangible and intangible assets. Further, we base depreciation and amortization on historical costs incurred to build out our deployed network and the historical costs of these assets may not be indicative of current or future capital expenditures.
 

43



Years Ended December 31, 2019 and 2018
 
INAP US
 
Revenues for our INAP US segment decreased 7.4% to $228.7 million for the year ended December 31, 2019 compared to $247.1 million for the same period in 2018. The decrease in revenue is primarily due to planned data center exits and churn from several larger customers in the second half of 2018 impacting 2019, partially offset by the addition of SingleHop.

Costs of sales and services, exclusive of depreciation and amortization, decreased 0.3%, to $80.7 million for the year ended December 31, 2019, compared to $80.9 million for the same period in 2018. The decrease was primarily due to cost savings initiatives and lower space and power costs from ongoing data center exits, partially offset by SingleHop costs and a global transfer pricing adjustment between segments.

INAP INTL
 
Revenues for our INAP INTL segment decreased 9.1% to $62.8 million for the year ended December 31, 2019 compared to $69.0 million for the same period in 2018. The decrease of $6.2 million is primarily due to churn from large customers in the second half of 2018 impacting 2019.

Costs of sales and services, exclusive of depreciation and amortization, decreased 1.7%, to $26.3 million for the year ended December 31, 2019, compared to $26.7 million for the same period in 2018. The decrease was primarily due to ongoing cost savings initiatives and a global transfer pricing adjustment between segments.

Geographic Information
 
Revenues are allocated to countries based on location of services. Revenues, by country with revenues over 10% of total revenues, are as follows (in thousands): 
 
 
2019
 
2018
United States
 
$
232,735

 
$
251,444

Canada
 
33,089

 
37,956

Other
 
25,681

 
26,758

 
 
$
291,505

 
$
316,158


Other Operating Costs and Expenses
 
Compensation. Total compensation and benefits, including stock-based compensation, decreased to $65.4 million for the year ended December 31, 2019 compared to $68.9 million for the same period in 2018 as a result of ongoing cost savings initiatives.
 
Stock-based compensation, net of amount capitalized, decreased to $4.2 million during the year ended December 31, 2019 from $4.7 million during the same period in 2018. The decrease is due to lower headcount as a result of costs savings initiatives.

Costs of Customer Support. Costs of customer support decreased to $32.1 million during the year ended December 31, 2019 compared to $32.5 million during the same period in 2018. The slight decrease was primarily due to cost savings initiatives.

Sales, General and Administrative. Sales, general and administrative costs decreased to $67.1 million during the year ended December 31, 2019 compared to $75.0 million during the same period in 2018. The decrease was primarily due to cost savings initiatives and certain costs incurred in 2018 that did not recur in 2019, such as acquisition costs and a non-income tax settlement.

Depreciation and Amortization. Depreciation and amortization decreased to $85.7 million during the year ended December 31, 2019 compared to $88.4 million during the same period in 2018. The decrease is primarily due to lower capital expenditures and continued use of depreciated assets.

Goodwill and Intangibles Impairment. Goodwill and intangibles impairment of $45.0 million and $14.1 million, respectively, was recorded during the year ended December 31, 2019 primarily for the Cloud business. The goodwill impairment is primarily due to declines in projected revenues and operating results due to increased customer churn and reduced sales projections. There was no goodwill and

44



intangibles impairment during the year ended December 31, 2018. See Note 6, "Goodwill and Other Intangible Assets," to the Notes to Consolidated Financial Statements for further information.
 
Exit activities, Restructuring and Impairments. Exit activities, restructuring and impairments increased to $9.0 million during the year ended December 31, 2019 compared to $5.4 million during the same period in 2018. The increase is primarily due to data center exits in 2019 and impairment for a data center that we plan to exit in 2020.

Interest Expense. Interest expense increased to $75.1 million during the year ended December 31, 2019 from $67.8 million during the same period in 2018. The increase is primarily due to increased borrowings and additional interest expense related to finance leases.

Income Tax (Benefit) Expense. Income tax (benefit) expense changed $2.3 million to a benefit of $1.6 million during the year ended December 31, 2019 from a provision of $0.7 million during the same period in 2018. The change is primarily due to changes in the valuation allowance.

Years Ended December 31, 2018 and 2017
 
INAP US
 
Revenues for our INAP US segment increased 14.5%, to $247.1 million for the year ended December 31, 2018, compared to $215.8 million for the same period in 2017. The increase was primarily due to the acquisition of SingleHop and the initiation of organic growth contributed by the new salesforce offset by data center exits.

Costs of sales and services, exclusive of depreciation and amortization, decreased 2.5%, to $80.9 million for the year ended December 31, 2018, compared to $83.0 million for the same period in 2017. The decrease was primarily due to $10.5 million of lower costs related to data center exits, conversion of operating to capital leases, lower variable costs related to revenue decline, and on-going cost reduction efforts. Offsetting those decreases were $8.4 million of increases primarily due to the SingleHop and data center acquisitions.

INAP INTL
 
Revenues for our INAP INTL segment increased 6.3% to $69.0 million for the year ended December 31, 2018, compared to $64.9 million for the same period in 2017. The increase of $4.1 million is primarily due to the consolidation of INAP Japan and the SingleHop acquisition partially offset by a slight decline in small business revenue.

Costs of sales and services, exclusive of depreciation and amortization, increased 15.0%, to $26.7 million for the year ended December 31, 2018, compared to $23.2 million for the same period in 2017. The increase of $3.5 million was primarily due to the consolidation of INAP Japan and the SingleHop acquisition as well as the acquisition of new data center space.

Geographic Information
 
Revenues are allocated to countries based on location of services. Revenues, by country with revenues over 10% of total revenues, are as follows (in thousands): 
 
 
2018
 
2017
United States
 
$
251,444

 
$
220,018

Canada
 
37,956

 
38,750

Other
 
26,758

 
21,950

 
 
$
316,158

 
$
280,718


Other Operating Costs and Expenses
 
Compensation. Total compensation and benefits, including stock-based compensation, was $68.9 million for the year ended December 31, 2018, compared to $58.0 million for the same period in 2017. The increase was primarily due to the addition of SingleHop employees resulting in $6.0 million increase in cash-based compensation and payroll taxes, $1.7 million increase in stock-based compensation, and $0.6 million increase in bonus accrual, offset by $1.3 million decrease in commissions.
 
Stock-based compensation, net of amount capitalized, increased to $4.7 million during the year ended December 31, 2018, from $3.0 million during the same period in 2017 primarily due to the addition of SingleHop employees.

45




Costs of Customer Support. Costs of customer support increased to $32.5 million during the year ended December 31, 2018 compared to $25.8 million during the same period in 2017. The increase was due to $6.7 million of wages and payroll taxes primarily due to the addition of SingleHop employees.

Sales, General and Administrative. Sales, general and administrative costs increased to $75.0 million during the year ended December 31, 2018 compared to $62.7 million during the same period in 2017. The increase of $12.3 million was primarily due to the SingleHop acquisition consisting of higher compensation of $3.5 million, $2.5 million of increased acquisition costs, $1.9 million increase primarily due to channel partner commissions, $1.7 million increase in stock-based compensation, $0.9 million increase in facility expenses, $0.8 million decrease in internal software costs that were capitalized (resulting in increased compensation costs in "Sales, general and administrative" expenses), $0.6 million increase in bonus expense and $0.8 million increase in other miscellaneous expenses.

Depreciation and Amortization. Depreciation and amortization increased to $88.4 million during the year ended December 31, 2018 compared to $73.4 million during the same period in 2017. The increase is primarily due to higher capital purchases and capital leases entered during the year ended December 31, 2018.

Goodwill and Intangibles Impairment. There was no goodwill and intangibles impairment during the years ended December 31, 2018 and 2017.
 
Exit activities, Restructuring and Impairments. Exit activities, restructuring and impairments decreased to $5.4 million during the year ended December 31, 2018 compared to $6.2 million during the same period in 2017. The decrease is primarily due to higher restructuring expenses due to closures of data centers in the prior year.

Interest Expense. Interest expense increased to $67.8 million during the year ended December 31, 2018 from $50.9 million during the same period in 2017. The increase is primarily due to entering into the new incremental $135.0 million term loan facility and new capital leases entered during the year ended December 31, 2018.

Income Tax (Benefit) Expense. Income tax (benefit) expense increased to $0.7 million during the year ended December 31, 2018 from $0.3 million during the same period in 2017. The increase was primarily due to the consolidation of INAP Japan in 2018 and an increase in our unrecognized tax benefits.
 
Liquidity and Capital Resources
 
As a result of the commencement of the Chapter 11 Cases on March 16, 2020, we are operating as a debtor-in-possession pursuant to the authority granted under Chapter 11 of the Bankruptcy Code. Pursuant to the Chapter 11 Cases, we intend to significantly de-leverage our balance sheet and reduce overall indebtedness upon completion of that process. Additionally, as a debtor-in-possession, certain of our activities are subject to review and approval by the Bankruptcy Court, including, among other things, the incurrence of indebtedness, material asset dispositions, and other transactions outside the ordinary course of business. There can be no guarantee that the Chapter 11 Cases will be completed successfully or in the time frame contemplated by the RSA.

The filing of the Chapter 11 Cases constituted an event of default that accelerated the Company’s obligations under the Credit Agreement, as a result of which the principal and interest due thereunder became immediately due and payable. The ability of the lenders to enforce such payment obligations under the Credit Agreement is automatically stayed as a result of the Chapter 11 Cases, and the lenders’ rights of enforcement in respect of obligations under the Credit Agreement are subject to the applicable provisions of the Bankruptcy Code.

DIP Facility

On March 19, 2020, the Company entered into the DIP Facility. The DIP Facility provides for, among other things, term loans in an aggregate principal amount of up to $75.0 million, (including the roll up of $5.0 million of New Incremental Loans made on March 13, 2020) pursuant to the Credit Agreement. All loans under the DIP Facility bear interest at a rate of either: (i) an applicable base rate plus 9% per annum or (ii) LIBOR (with a floor of 1%) plus 10% per annum.

Use of Proceeds. The Company anticipates using the proceeds of the DIP Facility to, among other things: (i) pay certain fees, interest, payments and expenses related to the Chapter 11 Cases; (ii) fund the working capital needs and expenditures of the Company during the Chapter 11 Cases; (iii) fund the Carve-Out (as defined below); and (iv) pay other related fees and expenses in accordance with budgets provided to the DIP Lenders.


46



Priority and Collateral. The DIP Lenders (subject to the Carve-Out as discussed below): (i) are entitled to joint and several super-priority administrative expense claim status in the Chapter 11 Cases; (ii) have a first priority lien on substantially all unencumbered assets of the Company; and (iii) have a priming first priority lien on any assets encumbered by the Credit Agreement. The Company’s obligations to the DIP Lenders and the liens and super-priority claims are subject in each case to a carve out (the “Carve-Out”) that accounts for certain administrative, court and legal fees payable in connection with the Chapter 11 Cases.

Affirmative and Negative Covenants. The DIP Facility contains certain affirmative and negative covenants, including requiring the Company to provide to the DIP Lenders a budget for the use of the Company’s funds and the achievement of certain milestones for the Chapter 11 Cases, among other covenants customary in debtor-in-possession financings.

Events of Default. The DIP Facility contains certain events of default customary in debtor-in-possession financings, including: (i) the failure to pay loans made under the DIP Facility when due; (ii) appointment of a trustee, examiner or receiver in the Chapter 11 Cases; (iii) certain violations of the RSA and (iv) the failure of the Company to use the proceeds of the loans under the DIP Facility as set forth in the budget (subject to any approved variances).

Maturity. The DIP Facility will mature on the earliest of (i) September 16, 2020; (ii) the date on which the loans under the DIP Facility become due and payable, whether by acceleration or otherwise; (iii) the effective date of the Plan; (iv) the sale of substantially all of the assets of the Company; (v) the first business day on which the order approving the DIP Facility by the Bankruptcy Court expires by its terms, unless a final order has been entered and become effective prior thereto; (vi) the conversion or dismissal of the Chapter 11 Cases; (vii) dismissal of any of the Chapter 11 Cases unless consented to by the DIP Lenders or (viii) the final order approving the DIP Facility by the Bankruptcy Court is vacated, terminated, rescinded, revoked, declared null and void or otherwise ceases to be in full force and effect.

2017 Credit Agreement

On April 6, 2017, we entered into a new Credit Agreement (the "2017 Credit Agreement"), which provided for a $300.0 million term loan facility ("2017 Term Loan") and a $25.0 million Revolving Credit Facility (the "2017 Revolving Credit Facility"). The proceeds of the 2017 Term Loan were used to refinance the Company's existing credit facility and to pay costs and expenses associated with the 2017 Credit Agreement. As described above, on March 16, 2020, as a result of the filing of the Chapter 11 Cases, the Company incurred an event of default under the Credit Agreement.

Certain portions of the refinancing transaction were considered an extinguishment of debt and certain portions were considered a modification. A total of $5.7 million was paid for debt issuance costs related to the 2017 Credit Agreement. Of the $5.7 million in costs paid, $1.9 million related to the exchange of debt and was expensed, $3.3 million related to 2017 Term Loan third party costs and will be amortized over the 2017 Term Loan and $0.4 million prepaid debt issuance costs related to the 2017 Revolving Credit Facility and will be amortized over the term of the 2017 Revolving Credit Facility. In addition, $4.8 million of debt discount and debt issuance costs related to the previous credit facility were expensed due to the extinguishment of that credit facility. The maturity date of the 2017 Term Loan is April 6, 2022 and the maturity date of the 2017 Revolving Credit Facility is October 6, 2021. As of December 31, 2019, the outstanding balance of the 2017 Term Loan and the 2017 Revolving Credit Facility were $413.3 million and $20.0 million, respectively. The interest rate on the 2017 Term Loan and the 2017 Revolving Credit Facility as of December 31, 2019 were 8.0% and 8.7%, respectively.

Borrowings under the 2017 Credit Agreement bear interest at a rate per annum equal to an applicable margin plus, at our option, a base rate or an adjusted LIBOR rate. The applicable margin for loans under the 2017 Revolving Credit Facility is 6.0% for loans bearing interest calculated using the base rate ("Base Rate Loans") and 7.0% for loans bearing interest calculated using the adjusted LIBOR rate. The applicable margin for loans under the 2017 Term Loan is 4.75% for Base Rate Loans and 5.75% for adjusted LIBOR rate loans. The base rate is equal to the highest of (a) the adjusted U.S. Prime Lending Rate as published in the Wall Street Journal, (b) with respect to term loans issued on the closing date, 2.00%, (c) the federal funds effective rate from time to time, plus 0.50%, and (d) the adjusted LIBOR rate, as defined below, for a one-month interest period, plus 1.00%. The adjusted LIBOR rate is equal to the rate per annum (adjusted for statutory reserve requirements for Eurocurrency liabilities) at which Eurodollar deposits are offered in the interbank Eurodollar market for the applicable interest period (one, two, three or six months), as quoted on Reuters screen LIBOR (or any successor page or service). The financing commitments of the lenders extending the 2017 Revolving Credit Facility are subject to various conditions, as set forth in the 2017 Credit Agreement. As of December 31, 2019, the Company has been in compliance with all covenants, however, on March 16, 2020, the Company was no longer in compliance with all covenants. 
 
First Amendment

On June 28, 2017, the Company entered into an amendment to the 2017 Credit Agreement ("First Amendment"), by and among the Company, each of the lenders party thereto, and Jefferies Finance LLC, as Administrative Agent. The First Amendment clarified that for

47



all purposes the Company's liabilities pursuant to any lease that was treated as rental and lease expense, and not as a capital lease obligation or indebtedness on the closing date of the 2017 Credit Agreement, would continue to be treated as a rental and lease expense, and not as a capital lease obligations or indebtedness, for all purposes of the 2017 Credit Agreement, notwithstanding any amendment of the lease that results in the treatment of such lease as a capital lease obligation or indebtedness for financial reporting purposes.

Second Amendment

On February 6, 2018, the Company, the Lenders party thereto and Jefferies Finance LLC, as Administrative Agent, entered into a Second Amendment to Credit Agreement (the "Second Amendment") that amended the 2017 Credit Agreement.

The Second Amendment, among other things, amends the 2017 Credit Agreement to (i) permit the Company to incur incremental term loans under the 2017 Credit Agreement of up to $135.0 million to finance the Company's acquisition of SingleHop and to pay related fees, costs and expenses, and (ii) revise the maximum total net leverage ratio and minimum consolidated interest coverage ratio covenants.  The financial covenant amendments became effective upon the consummation of the SingleHop acquisition, while the other provisions of the Second Amendment became effective upon the execution and delivery of the Second Amendment. This transaction was considered a modification.

A total of $1.0 million was paid for debt issuance costs related to the Second Amendment. Of the $1.0 million in costs paid, $0.2 million related to the payment of legal and professional fees which were expensed, $0.8 million related to term loan lender fees and will be amortized over the term of the 2017 Credit Agreement.

Third Amendment

On February 28, 2018, INAP entered into the Incremental and Third Amendment to the Credit Agreement among the Company, the Lenders party thereto and Jefferies Finance LLC, as Administrative Agent (the "Third Amendment"). The Third Amendment provides for a funding of the new incremental term loan facility under the 2017 Credit Agreement of $135.0 million (the "Incremental Term Loan"). The Incremental Term Loan has terms and conditions identical to the existing loans under the 2017 Credit Agreement, as amended.  Proceeds of the Incremental Term Loan were used to complete the acquisition of SingleHop and to pay fees, costs and expenses related to the acquisition, the Third Amendment and the Incremental Term Loan. This transaction was considered a modification. 

A total of $5.0 million was paid for debt issuance costs related to the Third Amendment. Of the $5.0 million in costs paid, $0.1 million related to the payment of legal and professional fees which were expensed, $4.9 million related to term loan lender fees and will be amortized over the term of the 2017 Credit Agreement.

Fourth Amendment

On April 9, 2018, the Company entered into the Fourth Amendment to 2017 Credit Agreement, among the Company, the Lenders party thereto and Jefferies Finance LLC, as Administrative Agent (the "Fourth Amendment"). The Fourth Amendment amends the 2017 Credit Agreement to lower the interest rate margins applicable to the outstanding term loans under the 2017 Credit Agreement by 1.25%. This transaction was considered a modification.

A total of $1.7 million was paid for debt issuance costs related to the Fourth Amendment. Of the $1.7 million in costs paid, $0.1 million related to the payment of legal and professional fees which were expensed, $1.6 million related to term loan lender fees and will be amortized over the term of the 2017 Credit Agreement.

Fifth Amendment
On August 28, 2018, the Company entered into the Fifth Amendment to 2017 Credit Agreement, among the Company, the Lenders party thereto and Jefferies Finance LLC, as Administrative Agent (the "Fifth Amendment"). The Fifth Amendment amended the 2017 Credit Agreement by increasing the aggregate revolving commitment capacity by $10.0 million to $35.0 million.
Sixth Amendment
On May 8, 2019, the Company entered into the Sixth Amendment to the 2017 Credit Agreement, among the Company, the Lenders party thereto and Jefferies Finance LLC, as Administrative Agent (the “Sixth Amendment”). The Sixth Amendment (i) adjusted the applicable interest rates under the 2017 Credit Agreement, (ii) modified the maximum total net leverage ratio requirements and the minimum consolidated interest coverage ratio requirements and (iii) modified certain other covenants.

Pursuant to the Sixth Amendment, the applicable margin for the alternate base rate loan was increased from 4.75% per annum to 5.25%

48



per annum and for the Eurodollar loan was increased from 5.75% per annum to 6.25% per annum, with such interest payable in cash, and in addition such term loans bear interest payable in kind at the rate of 0.75% per annum.

The Sixth Amendment also made the following modifications:

Added an additional basket of $500,000 for finance lease obligations.

The maximum amount of permitted asset dispositions was decreased from $150,000,000 to $50,000,000.

The amount of net cash proceeds from asset sales that may be reinvested is limited to $2,500,000 in any fiscal year of the Company, with net cash proceeds that are not so reinvested used to prepay loans under the 2017 Credit Agreement.

The restricted payment basket was decreased from $5,000,000 to $1,000,000.

The maximum total leverage ratio increases to 6.80 to 1 as of June 30, 2019, 6.90 to 1 as of September 30, 2019 - December 31, 2019, decreases to 6.75 to 1 as of March 31, 2020, 6.25 to 1 as of June 30, 2020, 6.00 to 1 as of September 30, 2020, 5.75 to 1 as of December 31, 2020, 5.50 to 1 as of March 2021, 5.00 to 1 as of June 30, 2021 and 4.50 to 1 as of September 30, 2021 and thereafter.

The minimum consolidated interest coverage ratio decreases to 1.75 to 1 as of June 30, 2019, 1.70 to 1 as of September 30, 2019 - March 31, 2020, increases to 1.80 to 1 as of June 30, 2020, 1.85 to 1 as of September 2020 and 2.00 to 1 as of December 31, 2020 and thereafter. This transaction was considered a modification.
A total of $2.9 million was paid for debt issuance costs related to the Sixth Amendment. Of the $2.9 million in costs paid, $0.1 million related to the payment of legal and professional fees which were expensed, $2.8 million related to term loan lender fees and will be amortized over the term of the 2017 Credit Agreement.
Seventh Amendment
On October 29, 2019, the Company entered into the Seventh Amendment to 2017 Credit Agreement, among the Company, the Lenders party thereto and Jefferies Finance LLC, as Administrative Agent (the “Seventh Amendment”). The Seventh Amendment (i) modified the maximum total net leverage ratio requirements and the minimum consolidated interest coverage ratio requirements under the 2017 Credit Agreement and (ii) effected certain other modifications, including changes to certain baskets.

The maximum total leverage ratio increases to 7.25 to 1 as of December 31, 2019 - December 31, 2020, 5.50 to 1 as of March 31, 2021, 5.00 to 1 as of June 30, 2021, 4.50 to 1 as of September 30, 2021 and thereafter.

The minimum consolidated interest coverage ratio decreases to 1.60 to 1 as of December 31, 2019 - December 31, 2020, 2.00 to 1.00 as of March 31, 2021 and thereafter.

The Seventh Amendment also made the following modifications:

Reduced the disposition of property basket from $50.0 million to $25.0 million.
Reduced reinvestment of net cash proceeds from asset sales from $2.5 million to $1.0 million.
Reduced investment basket from greater of $25.0 million and 30% of EBITDA to greater of $12.5 million and 15% of EBITDA.
Reduced incremental facility from $50.0 million to $25.0 million.
Reduced foreign subsidiary debt basket from greater of $15.0 million and 18% of EBITDA to greater of $5.0 million and 6% of EBITDA.
Reduced general basket from greater of $50.0 million and 61% of EBITDA to greater of $25.0 million and 30% of EBITDA.

A total of $1.3 million was paid for debt issuance costs related to the Seventh Amendment. Of the $1.3 million in costs paid, $0.1 million related to the payment of legal and professional fees which were expensed and $1.2 million related to term loan lender fees and will be amortized over the term of the 2017 Credit Agreement.

Eighth Amendment

The Company entered into the Incremental and Eighth Amendment to Credit Agreement (the “Eighth Amendment”) on March 13, 2020. The Eighth Amendment, among other things: (i) authorized the incremental commitment for the $5.0 million of new incremental loans (the “New Incremental Loans”) under the Credit Agreement; (ii) granted additional security interests in favor of the lenders for the

49



Company’s motor vehicles and outstanding equity interests of certain foreign subsidiaries; and (iii) added Internap Technology Solutions Inc. as a party to the Credit Agreement.

In addition, the Eighth Amendment amended (i) the affirmative covenants to, among other things, require the Company to provide a cash receipt and disbursement budget and rolling 13-week forecasts of the same and to meet certain milestones with respect to the Chapter 11 Cases, including solicitation of the Plan, entry into the DIP Facility, and confirmation of the Plan by the Bankruptcy Court; and (ii) the negative covenants to, among other things: (A) further limit the debt the Company can borrow and repay; (B) eliminate the ability of the Company to incur liens for sale and leaseback transactions, incremental debt and equity interests and real property; (C) further limit the ability of the Company to make investments; (D) eliminate the ability of the Company to engage in mergers; (E) further limit dispositions and acquisitions of certain property; (F) eliminate the ability of the Company to pay dividends or make redemptions; (G) further limit the Company’s ability to engage in transactions with affiliates and (H) eliminate the leverage and interest coverage ratio covenants.

The Eighth Amendment further amended the events of default to provide that it will be an event of default for the New Incremental Loans if, among other things, the Company uses the proceeds from the New Incremental Loans in a manner outside of the budget, subject to certain variances or in connection with the Chapter 11 Cases, or the Company supports a plan of reorganization or disclosure statement that does not repay the obligations as set forth in the RSA.

The table below sets forth information with respect to the current financial covenants as well as the calculation of our performance in relation to the covenant requirements at December 31, 2019
 
 
Covenants Requirements
 
Ratios at December 31, 2019
Maximum Total Net Leverage Ratio should be equal to or less than:
 
7.25

 
7.03

Maximum Consolidated Interest Coverage Ratio should be equal to or greater than:
 
1.60

 
1.84


Refer to Note 9, "Commitments, Contingencies and Litigation," in our accompanying consolidated financial statements for additional information about our credit agreement.

Equity 

Authorization of Stock Repurchase

In December 2018, INAP's Board of Directors authorized management to repurchase an initial $5.0 million of INAP common stock, as permitted under INAP's 2017 Credit Agreement. As of December 31, 2019, there have been no shares repurchased under this program and no shares will be repurchased during the pendency of the Chapter 11 Cases.    
    
Public Offering

On October 23, 2018, the Company closed a public offering of 4,210,527 shares of common stock at $9.50 per share to the public and received net proceeds of approximately $37.1 million (net of underwriting discounts and commissions, and other offering expenses of $0.5 million).

Securities Purchase Agreement
 
On February 22, 2017, the Company entered into a securities purchase agreement (the "Securities Purchase Agreement") with certain purchasers (the "Purchasers"), pursuant to which the Company issued to the Purchasers an aggregate of 5,950,712 shares of the Company's common stock at a price of $7.24 per share, for the aggregate purchase price of $43.1 million, which closed on February 27, 2017. Conditions for the Securities Purchase Agreement included the following: (i) a requirement for the Company to use the funds of the sale of such common stock to repay indebtedness under the Credit Agreement, (ii) a 90-day "lock-up" period whereby the Company is restricted from certain sales of equity securities, and (iii) a requirement for the Company to pay certain transaction expenses of the Purchasers up to $100,000. The Company used $39.2 million of the proceeds to pay down our debt.
 
Registration Rights Agreement
 
On February 22, 2017, the Company entered into a registration rights agreement (the "Registration Rights Agreement") with the Purchasers, which provides the Purchasers under the Securities Purchase Agreement the ability to request registration of such securities. Pursuant to the Registration Rights Agreement, the Company filed a registration statement in March 2017 that was declared effective during April

50



2017.

Reverse Stock Split

On November 16, 2017, the Company filed a Certificate of Amendment of the Restated Certificate of Incorporation (the "Certificate of Amendment") with the Secretary of State of Delaware to effect a 1-for-4 reverse stock split of the shares of our common stock, either issued and outstanding or held by the Company as treasury stock, effective as of 5:00 p.m. (Delaware time) on November 20, 2017 (the "Reverse Stock Split").

As a result of the Reverse Stock Split, every four shares of issued and outstanding Common Stock were automatically combined into one issued and outstanding share of Common Stock, without any change in the par value per share.

All prior year share amounts and per share calculations included herein have been restated to reflect the impact of the Reverse Stock Split and to provide data on a comparable basis. Such restatements include calculations regarding the Company's weighted-average shares and loss per share, as well as disclosures regarding the Company's stock-based compensation plan and share repurchase.

In addition, proportionate adjustments were made to the per share exercise price and the number of shares of Common Stock that may be purchased upon exercise of outstanding stock options and restricted stock granted by the Company, and the number of shares of Common Stock reserved for future issuance under the 2017 Stock Plan.

General – Sources and Uses of Capital
 
On an ongoing basis, we require capital to fund our current operations, expand our IT infrastructure services, upgrade existing facilities or establish new facilities, products, services or capabilities and to fund customer support initiatives, as well as various advertising and marketing programs to facilitate sales. As of December 31, 2019, we had $10.1 million of borrowing capacity under our 2017 Revolving Credit Facility. The working capital deficit as of December 31, 2019 was $442.0 million compared to $6.5 million as of December 31, 2018. The increase was primarily due to the term loan of $413.3 million being classified as a current liability as of December 31, 2019.

The Company has experienced negative financial trends, such as operating losses, working capital deficiencies, negative cash flows and other adverse key financial ratios. The Company reported net losses of $138.3 million and $61.2 million for the years ended December 31, 2019 and 2018, respectively. Given the negative financial trends, we believe that cash flows from operations, together with our cash and cash equivalents and borrowing capacity under our 2017 Revolving Credit Facility, will not be sufficient to meet our cash requirements for the next 12 months. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern. As discussed above, we entered into the DIP Facility to provide liquidity during the pendency of the Chapter 11 Cases.

Finance Leases. Our future minimum lease payments on all remaining finance lease obligations at December 31, 2019 were $175.0 million. We summarize our existing finance lease obligations in Note 14, "Leases," to the accompanying consolidated financial statements.
 
Commitments and Other Obligations. We have commitments and other obligations that are contractual in nature and will represent a use of cash in the future unless the agreements are modified. Service and purchase commitments primarily relate to IP, telecommunications and data center services. Our ability to improve cash provided by operations in the future would be negatively impacted if we do not grow our business at a rate that would allow us to offset the purchase and service commitments with corresponding revenue growth.
 

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The following table summarizes our commitments and other obligations as of December 31, 2019 (in thousands):
 
 
Payments Due by Period
 
 
Total
 
2020
 
2021-2022
 
2023-2024
 
Thereafter
Current Credit Agreement:
 
 
 
 
 
 
 
 
 
 
   Term loan, including interest
 
$
426,688

 
$
426,688

 
$

 
$

 
$

   Revolving credit facility, including interest
 
20,111

 
20,111

 

 

 

Finance lease obligations
 
557,182

 
24,574

 
50,908

 
47,675

 
434,025

Exit activities and restructuring
 
200

 
200

 

 

 

Asset retirement obligation
 
3,384

 

 

 

 
3,384

Operating lease commitments
 
130,211

 
18,059

 
36,042

 
31,701

 
44,409

Service and purchase commitments
 
3,345

 
2,390

 
936

 
19

 

 
 
$
1,141,121

 
$
492,022

 
$
87,886

 
$
79,395

 
$
481,818


COVID-19. While the Company has not currently experienced a significant adverse impact to operating results as a result of COVID-19, the pandemic could result in complete or partial closure of one or more of our facilities or our customers’ or suppliers’ facilities, or otherwise result in significant disruptions to our or their business and operations. Such events could materially and adversely impact our operations and the revenue we generate from our customers. The Company could experience other potential impacts as a result of COVID-19, including, but not limited to, charges from potential adjustments to the carrying amount of goodwill, indefinite-lived intangibles and long-lived asset impairment charges. Actual results may differ materially from the Company’s current estimates as the scope of COVID-19 evolves or if the duration of business disruptions is longer than initially anticipated.

On March 27, 2020, the “Coronavirus Aid, Relief, and Economic Security (CARES) Act" was enacted as a response to the COVID-19 outbreak discussed above and is meant to provide companies with economic relief. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. Due to the Company’s filing for relief under Title 11 of the Bankruptcy Code, the Company is not eligible to receive funds under the CARES Act.
 
Cash Flows
 
Operating Activities
 
Year Ended December 31, 2019. Net cash provided by operating activities during the year ended December 31, 2019 was $22.7 million. We generated cash from operations of $23.3 million, while changes in operating assets and liabilities used cash from operations of $0.6 million. 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 paying our outstanding debt.

Year Ended December 31, 2018. Net cash provided by operating activities during the year ended December 31, 2018 was $35.3 million. We generated cash from operations of $43.4 million, while changes in operating assets and liabilities used cash from operations of $8.1 million.
 
Year Ended December 31, 2017. Net cash provided by operating activities during the year ended December 31, 2017 was $41.4 million. We generated cash from operations of $46.0 million, while changes in operating assets and liabilities generated cash from operations of $4.6 million.
 
Investing Activities
 
Year Ended December 31, 2019. Net cash used in investing activities during the year ended December 31, 2019 was $29.3 million, primarily due to $33.0 million of net capital expenditures offset by $3.2 million of proceeds from the sale of a business. These capital expenditures were related to the installation of services for our customers as well as continued enhancement of our company-controlled data centers and network infrastructure.
 

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Year Ended December 31, 2018. Net cash used in investing activities during the year ended December 31, 2018 was $173.1 million, primarily due to $42.0 million net capital expenditures and the $131.7 million of acquisition of SingleHop. These capital expenditures were related to the continued expansion and upgrade of our company-controlled data centers and network infrastructure.
 
Year Ended December 31, 2017. Net cash used in investing activities during the year ended December 31, 2017 was $32.4 million, primarily due to $36.7 million net capital expenditures. These capital expenditures were related to the continued expansion and upgrade of our company-controlled data centers and network infrastructure.

Financing Activities
 
Year Ended December 31, 2019. Net cash provided by financing activities during the year ended December 31, 2019 was $0.6 million, primarily due to proceeds from the 2017 Credit Agreement of $20.0 million, offset by $13.5 million of payments on the 2017 Credit Agreement and finance lease obligations, and debt amendment costs of $4.1 million.
 
Year Ended December 31, 2018. Net cash provided by financing activities during the year ended December 31, 2018 was $141.6 million, primarily due to proceeds of $148.5 million from the 2017 Credit Agreement and $37.2 million from the sale of common stock, offset by $35.3 million of principal payments on the 2017 Credit Agreement and capital lease obligations, and debt issuance costs of $7.3 million.
 
Year Ended December 31, 2017. Net cash used in financing activities during the year ended December 31, 2017 was $5.5 million, primarily due to $349.6 million of principal payments on the 2017 Credit Agreement and capital lease obligations, offset by proceeds from the 2017 Credit Agreement of $316.9 million and proceeds from stock issuance, net of $40.2 million.

 Off-Balance Sheet Arrangements
 
As of December 31, 2019, 2018 and 2017, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Other Investments
 
On February 28, 2018, the Company acquired SingleHop LLC ("SingleHop"), a provider of high-performance data center services including colocation, managed hosting, cloud and network services for $132.0 million net of working capital adjustments of $0.4 million, liabilities assumed, and net of cash acquired.

In the normal course of business, INAP enters into various types of investment arrangements, each having unique terms and conditions. These investments may include equity interests held by INAP in business entities, including general or limited partnerships, contractual ventures, or other forms of equity participation. The Company determines whether such investments involve a variable interest entity ("VIE") based on the characteristics of the subject entity. If the entity is determined to be a VIE, then management determines if INAP is the primary beneficiary of the entity and whether or not consolidation of the VIE is required. The primary beneficiary consolidating the VIE must normally have both (i) the power to direct the activities of a VIE that most significantly affect the VIE's economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE, in either case that could potentially be significant to the VIE. When INAP is deemed to be the primary beneficiary, the VIE is consolidated and the other party's equity interest in the VIE is accounted for as a noncontrolling interest.

If an entity fails to meet the characteristics of a VIE, the Company then evaluates such entity under the voting model. Under the voting model, the Company consolidates the entity if they determine that they, directly or indirectly, have greater than 50% of the voting shares, and determine that other equity holders do not have substantive participating rights.


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In previous years, INAP invested $4.1 million in Internap Japan Co., Ltd., our joint venture with NTT-ME Corporation ("NTT-ME") and Nippon Telegraph and Telephone Corporation. Through August 15, 2017, we qualified and accounted for this investment using the equity method. We recorded our proportional share of the income and losses of Internap Japan one month in arrears on the accompanying consolidated balance sheets as a long-term investment and our share of Internap Japan's income and losses, net of taxes, as a separate caption in our accompanying consolidated statements of operations and comprehensive loss.

On August 15, 2017, INAP exercised certain rights to obtain a controlling interest in Internap Japan Co., Ltd. Upon obtaining control of the venture, we recognized Internap Japan's assets and liabilities at fair value resulting in a gain of $1.1 million. Once INAP obtained control of the Internap Japan Co., Ltd. venture, the investment was consolidated with INAP using the voting model.

On January 15, 2019, NTT-ME exercised its first put option that resulted in NTT-ME having an ownership of 15% and INAP of 85%. The put option was exercised at $1.0 million which represents the fair market value of the shares purchased.

INAP accelerated its second call option to purchase NTT - ME’s remaining shares in Internap Japan on December 25, 2019, completing the purchase of NTT - ME’s shares at a fair market value of approximately $0.5 million.

Interest Rate Risk
 
As of December 31, 2019, the outstanding balance of the 2017 Term Loan and the 2017 Revolving Credit Facility were $413.3 million and $20.0 million, respectively. The interest rates on the 2017 Term Loan and 2017 Revolving Credit Facility are variable, based on LIBOR plus an applicable margin, and as of December 31, 2019 these effective rates were 8.0% and 8.7%, respectively. We summarize the 2017 Credit Agreement in "Liquidity and Capital Resources-New Credit Agreement" and in Note 9, "Commitments, Contingencies and Litigation" to the accompanying consolidated financial statements. We do not currently have any interest rate hedging agreements in place.
 
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 $4.5 million per year, assuming we do not increase our amount outstanding.
 
Foreign Currency Risk
 
As of December 31, 2019, the majority of our revenue and expenses are denominated 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 year ended December 31, 2019, we realized foreign currency losses of $0.4 million, which we included in "Non-operating expenses," and we recorded unrealized foreign currency translation gain of $0.4 million, which we included in "Other comprehensive income (loss)," both in the accompanying consolidated statements of operations and comprehensive loss.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Our accompanying consolidated financial statements, financial statement schedule and the report of our independent registered public accounting firm appear in Part IV of this Annual Report on Form 10-K. Our report on internal control over financial reporting appears in Item 9A of this Form 10-K.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 

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ITEM 9A. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Our senior management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Form 10-K. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2019, due to the existence of the material weaknesses in our internal control over financial reporting, as described below, our disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

Management's Report on Internal Control over Financial Reporting 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, issued in 2013.

Based on this assessment, our management concluded that we did not maintain effective internal control over financial reporting as of
December 31, 2019, due to the existence of the material weaknesses described below.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

In 2019, we did not design and maintain effective internal controls over the review of our consolidated cash flow statements and fixed assets and depreciation. Specifically, the review of our cash flows and fixed assets and depreciation was not designed and maintained at an appropriate level of precision and rigor commensurate with our financial reporting requirements. During the year ended December 31, 2019, the Company twice revised its prior period financial statements related to the presentation of the statement of cash flows and property, plant and equipment and related depreciation balances. Accordingly, management has determined that this control deficiency constitutes a material weakness.

In 2019, we did not design and maintain effective internal controls over the review of our goodwill and intangible assets and analysis of impairments with respect to such goodwill and such assets. Specifically, the review of our goodwill and intangible impairment analysis was not designed and maintained at an appropriate level of precision and rigor commensurate with our financial reporting requirements. This control deficiency could result in a misstatement or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, our management has determined that this control deficiency constitutes a material weakness.

The effectiveness of our internal control over financial reporting as of December 31, 2019 and 2018 has been audited by BDO USA, LLP, an independent registered certified public accounting firm, as stated in their report which appears herein.

Plan for Remediation
 
We have taken and are currently taking actions to remediate the material weaknesses in our internal control over financial reporting and are implementing additional processes and controls designed to address the underlying causes associated with the above mentioned material weaknesses. We are in the process of reassessing the design of our review control over the cash flows and analysis of fixed assets in addition to the analysis of our carrying values for goodwill and intangible assets to add greater precision to detect and prevent material misstatements, including the establishment of processes and controls to evaluate adequate review over these financial reporting items.
 
As the Company continues to evaluate and