Description of the business: (Policies)

3 Months Ended

Mar. 31, 2021

Description of the business:

Basis of presentation

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments that the Company considers necessary for the fair presentation of its results of operations and cash flows for the interim periods covered, and of the financial position of the Company at the date of the interim condensed consolidated balance sheet. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to such rules and regulations. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. While the Company believes that the disclosures are adequate to not make the information misleading, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in its annual report on Form 10-K for the year ended December 31, 2020.

The accompanying unaudited condensed consolidated financial statements include all wholly owned subsidiaries. All inter-company accounts and activity have been eliminated.

Use of estimates

Use of estimates

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.

Financial instruments

Financial instruments

At March 31, 2021 the carrying amount of cash and cash equivalents, accounts receivable, prepaid and other current assets, accounts payable, and accrued expenses approximated fair value because of the short-term nature of these instruments. The Company measures its cash equivalents at amortized cost, which approximates fair value based upon quoted market prices (Level 1). Based upon recent trading prices (Level 2— market approach) at March 31, 2021 the fair value of the Company’s remaining $329.1 million senior secured notes due in 2022 (“2022 Notes”) was $337.3 million and the fair value of the Company’s €350.0 million ($410.5 million) senior unsecured notes due in 2024 (“2024 Notes”) was $419.7 million.

Gross receipts taxes, universal service fund and other surcharges

Gross receipts taxes, universal service fund and other surcharges

Revenue recognition standards include guidance relating to taxes or surcharges assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer and may include, but are not limited to, gross receipts taxes, excise taxes, Universal Service Fund fees and certain state regulatory fees. Such charges may be presented gross or net based upon the Company’s accounting policy election. The Company records certain excise taxes and surcharges on a gross basis and includes them in its revenue and network operations expense. Excise taxes and surcharges billed to customers and recorded on a gross basis (as service revenue and network operations expense)were $4.5 million and $3.7  million for the three months ended March 31, 2021 and March 31, 2020, respectively.

Basic and diluted net income per common share

Basic and diluted net income per common share

Basic earnings per share (“EPS”) excludes dilution for common stock equivalents and is computed by dividing net income or (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares of common stock outstanding during each period, adjusted for the effect of dilutive common stock equivalents. Shares of restricted stock are included in the computation of basic EPS as they vest and are included in diluted EPS, to the extent they are dilutive, determined using the treasury stock method.

The following details the determination of diluted weighted average shares:

	Three Months Ended	Three Months Ended
	March 31, 2021	March 31, 2020
Weighted average common shares - basic	46,067,096	45,658,565
Dilutive effect of stock options	26,065	51,131
Dilutive effect of restricted stock	414,097	681,370
Weighted average common shares - diluted	46,507,258	46,391,066

The following details unvested shares of restricted common stock as well as the anti-dilutive effects of stock options and restricted stock awards outstanding:

	March 31, 2021	March 31, 2020
Unvested shares of restricted common stock	1,454,033	1,493,821
Anti-dilutive options for common stock	77,832	11,884
Anti-dilutive shares of restricted common stock	392,410	93,070

Stockholders' Deficit

Stockholders’ Deficit

The following details the changes in stockholders’ deficit for the three months ended March 31, 2021 and March 31, 2020 (in thousands except share amounts):

						Accumulated
				Additional		Other				Total
	Common Stock			Paid-in		Comprehensive		Accumulated		Stockholders’
	Shares	Amount		Capital		Income (Loss)		Deficit		Equity (Deficit)
Balance at December 31, 2020	47,214,077	$	47	$	515,867	$	(1,306)	$	(807,774)	$	(293,166)
Forfeitures of shares granted to employees	(19,676)		—		—		—		—		—
Equity-based compensation	—		—		7,831		—		—		7,831
Foreign currency translation	—		—		—		(5,210)		—		(5,210)
Issuances of common stock	323,700		1		—		—		—		1
Exercises of options	4,571		—		215		—		—		215
Dividends paid	—		—		—		—		(36,081)		(36,081)
Net income	—		—		—		—		18,851		18,851
Balance at March 31, 2021	47,522,672	$	48	$	523,913	$	(6,516)	$	(825,004)	$	(307,559)

						Accumulated
				Additional		Other				Total
	Common Stock			Paid-in		Comprehensive		Accumulated		Stockholders’
	Shares	Amount		Capital		Income (Loss)		Deficit		Equity (Deficit)
Balance at December 31, 2019	46,840,434	$	47	$	493,178	$	(12,326)	$	(684,578)	$	(203,679)
Forfeitures of shares granted to employees	(36,308)		—		—		—		—		—
Equity-based compensation	—		—		5,559		—		—		5,559
Foreign currency translation	—		—		—		(3,493)		—		(3,493)
Issuances of common stock	319,750		—		—		—		—		—
Exercises of options	15,493		—		719		—		—		719
Dividends paid	—		—		—		—		(30,557)		(30,557)
Net income	—		—		—		—		9,227		9,227
Balance at March 31, 2020	47,139,369	$	47	$	499,455	$	(15,819)	$	(705,908)	$	(222,225)

Revenue recognition

Revenue recognition

The Company recognizes revenue under ASU No. 2014-09, Revenue from Contracts with Customers (“ASC 606”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Under ASC 606 the Company recognizes installation fees for contracts with terms longer than month-to-month over the contract term. The Company believes that for contracts with terms longer than month-to-month the installation fee does not give rise to a material right as defined by ASC 606. The Company recognizes revenue over the estimated average customer life for installation fees associated with month-to-month contracts, because the installation fee represents a material right as defined by ASC 606. The Company capitalizes certain contract acquisition costs that relate directly to a customer contract, including commissions paid to its sales team and sales agents and amortizes these costs on straight-line basis over the period the services are transferred to the customer for commissions paid to its sales team (estimated customer life) and over the remaining original contract term for agent commissions. Management assesses these costs for impairment at least quarterly and as "triggering" events occur that indicate it is more likely than not that an impairment exists.

The Company’s service offerings consist of on-net and off-net telecommunications services. Fixed fees are billed monthly in advance and usage fees are billed monthly in arrears. Amounts billed are due upon receipt and contract lengths range from month to month to 60 months. The Company satisfies its performance obligations to provide services to customers over time as the services are rendered. In accordance with ASC 606, revenue is recognized when a customer obtains the promised service. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. The Company has adopted the practical expedient related to certain performance obligation disclosures since it has a right to consideration from its customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date.

To achieve this core principle, the Company follows the following five steps:

1) Identification of the contract, or contracts with a customer

2) Identification of the performance obligations in the contract

3) Determination of the transaction price

4) Allocation of the transaction price to the performance obligations in the contract

5) Recognition of revenue when, or as, the Company satisfies its performance obligations

Fees billed in connection with customer installations are deferred (as deferred revenue) and recognized as noted above. To the extent a customer contract is terminated prior to its contractual end the customer is subject to termination fees. The Company vigorously seeks payment of these termination fees. The Company recognizes revenue for termination fees as they are collected.

Service revenue recognized from amounts in deferred revenue (contract liabilities) at the beginning of the period during the three months ended March 31, 2021 was $1.8 million and during the three months ended March 31, 2020 was $1.6 million. Amortization expense for contract costs was $4.6  million for the three months ended March 31, 2021 and $4.2 million for the three months ended March 31, 2020.

Leases

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 replaced most existing lease accounting guidance. In July 2018 the FASB approved an Accounting Standards Update which, among other changes, allowed a company to elect to adopt ASU 2016-02 using the modified retrospective method applying the transition provisions at the beginning of the period of adoption, rather than at the beginning of the earliest comparative period presented in these financial statements. ASU 2016-02 was effective for the Company beginning on January 1, 2019 and required the Company to record a right-of-use asset and a lease liability for most of its facilities leases. These leases were previously treated as operating leases. The effect of ASU 2016-02 was to record a cumulative-effect adjustment on January 1, 2019 as a right-of-use asset and an operating lease liability totaling $97.3 million. The operating lease liability is not considered a liability under the consolidated leverage ratio calculations in the indentures governing the Company’s senior unsecured and senior secured note obligations. The Company has made an accounting policy election to not apply the recognition requirements of ASU 2016-02 to its short-term leases - leases with a term of one year or less. The Company has also elected to apply certain practical expedients under ASU 2016-02 including not separating lease and nonlease components on its finance and operating leases.

	Three Months			Three Months
	Ended			Ended
	March 31, 2021			March 31, 2020
Finance lease costs
Amortization of right-of-use assets	$	6,346		$	4,762
Interest expense on finance lease liabilities		5,226			4,473
Operating lease cost		4,417			4,187
Total lease costs		15,989			13,422
Other lease information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases		(5,396)			(4,780)
Operating cash flows from operating leases		(4,993)			(4,441)
Financing cash flows from finance leases		(5,744)			(6,167)
Right-of-use assets obtained in exchange for new finance lease liabilities		6,336			3,164
Right-of-use assets obtained in exchange for new operating lease liabilities		2,720			5,530
Weighted-average remaining lease term — finance leases (in years)		12.4			14.1
Weighted-average remaining lease term — operating leases (in years)		19.9			20.9
Weighted average discount rate — finance leases		10.1	%		10.9	%
Weighted average discount rate — operating leases		5.6	%		5.6	%

Finance leases—fiber lease agreements

The Company has entered into lease agreements with numerous providers of dark fiber under indefeasible-right-of use agreements (“IRUs”). These IRUs typically have initial terms of 15- 20 years and include renewal options after the initial lease term. The Company establishes the number of renewal option periods used in determining the lease term based upon its assessment at the inception of the lease of the number of option periods for which failure to renew the lease imposes a penalty in such amount that renewal appears to be reasonably certain. The option to renew may be automatic, at the option of the Company or mutually agreed to between the dark fiber provider and the Company. Once the Company has accepted the related fiber route, leases that meet the criteria for treatment as finance leases are recorded as a finance lease obligation and an IRU asset. The interest rate used in determining the present value of the aggregate future minimum lease payments is the Company’s incremental borrowing rate for the reasonably certain lease term. The Company determines its incremental borrowing rate for each lease using its current borrowing rate, adjusted for various factors including level of collateralization and term to align with the term of the lease. The determination of the Company's incremental borrowing rate requires judgment. Finance lease assets are included in property and equipment in the Company’s consolidated balance sheets. As of March 31, 2021, the Company had committed to additional dark fiber IRU lease agreements totaling $25.4 million in future payments to be paid over periods of up to 20 years. These obligations begin when the related fiber is accepted, which is generally expected to occur in the next 12 months.

The future minimum payments (principal and interest) under these finance leases are as follows (in thousands):

For the twelve months ending March 31,
2022	$	34,395
2023		33,263
2024		32,461
2025		32,907
2026		25,673
Thereafter		229,069
Total minimum finance lease obligations		387,768
Less—amounts representing interest		(169,258)
Present value of minimum finance lease obligations		218,510
Current maturities		(15,996)
Finance lease obligations, net of current maturities	$	202,514

Operating leases

The Company leases office space and data center facilities under operating leases. In certain cases the Company also enters into short-term operating leases for dark fiber. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments under the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the reasonably certain lease term. The implicit rates within the Company’s operating leases are generally not determinable and the Company uses its incremental borrowing rate at the lease commencement date to determine the present value of its lease payments. The Company determines its incremental borrowing rate for each lease using its current borrowing rate, adjusted for various factors including level of collateralization and term to align with the term of the lease. The determination of the Company’s incremental borrowing rate requires judgment. Certain of the Company’s leases include options to extend or terminate the lease. The Company establishes the number of renewal option periods used in determining the operating lease term based upon its assessment at the inception of the operating lease of the number of option periods for which failure to renew the lease imposes a penalty in such amount that renewal appears to be reasonably certain. The option to renew may be automatic, at the option of the Company or mutually agreed to between the landlord or dark fiber provider and the Company. Once the Company has accepted the related fiber route or the facility lease term has begun, the present value of the aggregate future minimum operating lease payments is recorded as an operating lease liability and a right-of-use leased asset. Lease incentives and deferred rent liabilities for facilities operating leases are presented with, and netted against, the right-of-use leased asset. Lease expense for lease payments is recognized on a straight-line basis over the term of the lease.

The future minimum payments under these operating lease agreements are as follows (in thousands):

For the twelve months ending March 31,
2022	$	17,434
2023		16,627
2024		16,398
2025		14,924
2026		12,126
Thereafter		114,121
Total minimum operating lease obligations		191,630
Less—amounts representing interest		(71,198)
Present value of minimum operating lease obligations		120,432
Current maturities		(11,055)
Lease obligations, net of current maturities	$	109,377

Allowance for credit losses

Allowance for credit losses

Effective January 1, 2020, the Company adopted Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") later codified as Accounting Standards Codification ("ASC") 326 ("ASC 326"), using the modified retrospective transition approach. This guidance introduces a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. As of January 1, 2020, the Company maintained an allowance for credit losses to cover its current expected credit losses ("CECL") on its trade receivables arising from the failure of customers to make contractual payments. The Company estimates credit losses expected over the life of its trade receivables based on historical information combined with current conditions that may affect a customer's ability to pay and reasonable and supportable forecasts. While the Company uses various credit quality metrics, it primarily monitors collectability by reviewing the duration of collection pursuits on its delinquent trade receivables. Based on the Company's experience, the customer's delinquency status is the strongest indicator of the credit quality of the underlying trade receivables, which is analyzed monthly. Adoption of ASU 2016-13 did not have a material impact on the Company's consolidated financial statements and related disclosures and no cumulative adjustment was recorded.

			Current-period
			Provision for		Write offs
	Beginning		Expected Credit		Charged Against		Ending
Description	Balance		Losses		Allowance		Balance
Allowance for credit losses (deducted from accounts receivable)
Three months ending March 31, 2021	$	1,921	$	2,012	$	(2,476)	$	1,457
Three months ending March 31, 2020	$	1,771	$	1,336	$	(1,131)	$	1,976

Net bad debt expense for the three months ended March 31, 2021 was $0.8 million which is net of bad debt recoveries of $1.2 million. Net bad debt expense for the three months ended March 31, 2020 was $1.1 million which is net of bad debt recoveries of $0.2 million.