UNITED STATES


SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
x
FORM 10-K
ýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

2017

OR

o
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____.

Commission file number: 001-31989

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

Delaware91-2145721
Delaware
(State or Other Jurisdiction of
Incorporation of Organization)
91-2145721
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
  
One Ravinia Drive,
12120 Sunset Hills Road, Suite 1300
Atlanta, Georgia30346
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:

Title of each class Name of exchange on which registered
Common Stock, $0.001 par value 
The NASDAQNasdaq Stock Market LLC
(NASDAQNasdaq Global Market)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨ Noxý

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¨ Noxý

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. Yesxý No¨

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.xý

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes¨ Noxý

The aggregate market value of the registrant’s outstanding common stock held by non-affiliates of the registrant was $215,675,359$209,984,478 based on a closing price of $9.25$14.68 on June 30, 2015,2017, as quoted on the NASDAQNasdaq Global Market.

Market and adjusted for the registrant's reverse stock split effective on November 20, 2017.

As of FebruaryMarch 1, 2016, 55,895,0612018, 20,061,006 shares of the registrant’s common stock, par value $0.001 per share, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the registrant’s annual meeting of stockholders to be held May 26, 2016on June 7, 2018 are incorporated by reference into Part III of this report. Except as expressly incorporated by reference, the registrant’s Proxy Statement shall not be deemed to be a part of this report on Form 10-K.




TABLE OF CONTENTS

  Page
 
PART I
 
ITEM 1.
BUSINESS
1
1
ITEM 1A.
RISK FACTORS
5
5
ITEM 1B.
UNRESOLVED STAFF COMMENTS
23
15
ITEM 2.
PROPERTIES
23
15
ITEM 3.
LEGAL PROCEEDINGS
23
15
ITEM 4.
MINE SAFETY DISCLOSURES
23
16
   
 
PART II
 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
23
16
ITEM 6.
SELECTED FINANCIAL DATA
26
18
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
27
19
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
40
30
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
41
31
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
42
31
ITEM 9A.
CONTROLS AND PROCEDURES
42
31
ITEM 9B.
OTHER INFORMATION
44
31
   
 
PART III
 
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
44
31
ITEM 11.
EXECUTIVE COMPENSATION
45
32
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
45
32
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
45
32
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
3932
   
 
PART IV
 
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
47
33
ITEM 16.
FORM 10-K SUMMARY
47

   
 
SIGNATURES
4636

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FORWARD-LOOKING STATEMENTS


This Annual Report on Form 10-K, particularly Management’s Discussion and Analysis of Financial Condition and Results of Operations 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, 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,” “Internap”“INAP,” or the “Company” refer to Internap Corporation and our subsidiaries.


PART I

ITEM 1. BUSINESS

Overview

INAP is a provider of high-performance data center services including colocation, managed hosting, cloud, and network services. INAP partners with its clients, who range from the Fortune 500 to emerging start-ups, to create secure, scalable and reliable information technology (“IT”) infrastructure solutions that meet the client’s unique business requirements.

INAP is diversified in 21 major metropolitan areas where data centers and customers are concentrated, including Atlanta, Boston, Chicago, Dallas, Houston, Los Angeles, Miami, New York/New Jersey, Northern Virginia, Oakland, Phoenix, Seattle and Silicon Valley metropolitan markets in the United States, and Montreal in Canada. Outside of North America, INAP also has a global presence in: Amsterdam, Frankfurt, London metropolitan markets in Europe, Hong Kong, Singapore, Sydney, Tokyo and Osaka metropolitan markets in the Asia Pacific region. INAP’s facilities are in 12 of the top 15 metropolitan markets in the U.S. and in the number 2 market in Canada. INAP has over 1 million gross square feet under lease, with over 500,000 square feet of data center space dedicated to our customer's needs.

In addition, INAP global network services manages connectivity through 97 Points of Presence (“POP”) around the world. Our visionnetwork is capable of High performance IP, low latency, and high-touch telecom services enabling our data center customers to connect with the Internet.

We incorporated in Washington in 1996 and reincorporated in Delaware in 2001. Our common stock trades on the Nasdaq Global Market under the symbol “INAP.”

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.

Our Competitive Strengths

Strong Global Presence in Key Metropolitan Areas. Our portfolio contains data centers in 21 major metropolitan areas across nine countries. Our data center portfolio is geographically diversified so that no one metropolitan area represents more than 15% of revenue. Our properties contain a total of over 1 million gross square feet under lease, with over 500,000 square feet of data center space.

Partners with Customers to Create Solutions. INAP provides tailored solutions for customers, with an emphasis on optimal execution, low latency and scalable colocation, managed services and hosting, cloud and high- performance network services. Customers have seamless access to secure and instantaneous connectivity from colocation or hosting environments to public or private cloud providers. INAP backs its services with customer service level commitments to help people buildensure the solutions work as designed.



Targeted, Scalable Solutions. Unlike REITs or in-house data centers or unwieldy wholesale solutions, INAP’s scalable colocation allows customers to purchase the space and managepower they need without getting tied into over-sized contracts or massive capex deployments. In addition, modular colocation design provides customers the world’s best performing Internet infrastructure. Today, ourability to get up and running quickly. Most REITs provide only a big box approach where customers are offered minimum service levels and must use their own labor in the event of service interruptions.

Diverse Customer Base. As of December 31, 2017, INAP had approximately 7,000 customers across various industries, including healthcare, advertising technology, financial, technology infrastructure, services power manygaming and software. Our customer base is not concentrated in any particular industry; in each of the applications that shape the way we live, work and play. Internap’s hybrid Internet infrastructure services deliver “performance without compromise” – blending virtual and bare-metal cloud, hosting and colocation services across a global networkpast three years, no single customer accounted for 10% or more of data centers, optimized from the application to the end user and backed by our team of dedicated professionals. Many of the world’s most innovative companies rely on us to make their applications faster and more scalable.

revenues.


Our Industry

Internap

INAP competes in the large and fast-growing market for InternetIT infrastructure services (outsourced data center, compute resources, storage and network services). Three complementary trends are driving demand for Internet infrastructure services: the growth of the digital economy, the outsourcing of information technology (“IT”)IT and the adoptiongrowth of cloud computing.

The Growth of the Digital Economy

The digital economy continues to impact existing business models with a new generation of networked applications. Widespread adoption of mobile Internet 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 at any location. Simultaneously, Software-as-a-Service models have changed data usage patterns with information traditionally maintained on individual machines and back-office servers now being streamed across the Internet. These applications require new diligence and focus on predictable performance and data security. Finally, 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.


The Outsourcing of IT

While more capacity is being outsourced to public cloud data centers, a growing number of enterprises are also turning to colocation and hosting providers to manage their IT infrastructure. As distributed applications, security concerns and compliance issues are placing new burdens on the traditional IT model and driving new costs and complexity, IT organizations are increasingly turning to infrastructure outsourcing to free up valuable internal resources to focus on their core business,businesses, improve service levels and lower the overall cost of their IT operations. The macro-economic trends over the past several years have led to a reduction of operating and capital budgets. Companies are forced to balance this growing complexity with a cost-cutting culture and staff resource limitations that require they do more with less.

The AdoptionGrowth of Cloud Computing

Amidst this environment,

Cloud computing has yet to make its full impact, and the extent and the form of that impact on enterprise and commercial data centers is still developing. It will take several years to be determined, but we expect demand for on-premises capacity to be offset by the ability to more easily migrate workloads to cloud providers such as INAP.
The emergence of public cloud Infrastructure-as-a-Service (“IaaS”)IaaS offerings has accelerated digital innovation by lowering the barrier to entry for new business creation. IaaS offerings allow new enterprises to procure and pay for infrastructure on an as-needed basis while minimizing upfront operating expenses, reducing complexity and increasing agility.

Although most organizations initially rely on cloud services for non-mission critical workloads, such as testing and development, growing adoption and the maturation of cloud platforms have increased confidence in migrating key business applications to the cloud. This, in turn, has led to a new generation of applications that are being architected from the ground up, to run on standardized public cloud infrastructure.

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Our Business

Segments

Effective January 1, 2017, we changed our organizational structure in an effort to create more effective and efficient operations and to improve customer and product focus. In that regard, we revised the information that our chief executive officer, who is also our Chief Operating Decision Maker (“CODM”), regularly reviews for purposes of allocating resources and assessing performance. As a result, beginning January 1, 2017, we now report our financial performance based on our new reportable segments INAP COLO and INAP CLOUD. These segments are comprised of strategic businesses that are defined by the service offerings they provide. Each segment is


managed as an operation with well-established strategic directions and performance requirements. Each segment is led by a separate General Manager who reports directly to the Company’s CODM.

The Internet infrastructureCODM evaluates segment performance using business unit contribution which is defined as business unit revenues less direct costs of sales and services, market comprises a rangecustomer support, and sales and marketing, exclusive of infrastructure offerings thatdepreciation and amortization.

We have emerged in responsereclassified prior period amounts to shifting businessconform to the current presentation.

INAP COLO
Our INAP Colo segment consists of colocation, managed services and technology drivers. Internap competes specifically in the markets for retail colocation, hosting, and IaaS. Different customer use cases and business requirements dictate the need for specific services or a combination of services enabled through hybridization.

Internap provides high-performance, hybrid Internet infrastructure services that make our customers’ applications faster and more scalable. We offer:

●hybrid infrastructure services: customers can mix and match cloud, hosting and colocation for the optimal combination of services to meet specific application and business requirements;
●availability across a global network of data centers;
●patented network services that leverage our proprietary technologies to maximize uptime and minimize latency for customer applications; and
●services backed by service level agreements (“SLAs”) and our team of dedicated support professionals.

Our Segments

Data Center Services Segment

Our data center services segment includes colocation, hosting and cloud services.

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

We sell our data center services at 51 data centers across North America, Europe and the Asia-Pacific region. We refer to 15 of these facilities as “company-controlled,” meaning we control the data center operations, staffing and infrastructure and have negotiated long-term leases for the facilities. At December 31, 2015, we reclassified one of our previously identified company-controlled facilities, located in Montreal, to available for sale as we had put the property on the market to sell and migrated most of the customers to one of our other Montreal company-controlled locations. For company-controlled facilities, in most cases we design the data center infrastructure, procure the capital equipment, deploy the infrastructure and are responsible for the operation and maintenance of the facility. We refer to


Data Center Locations

INAP offers services in 21 metropolitan markets worldwide, with 56 data centers. The number of locations is provided for each market.
North AmericaEuropeAsia Pacific
Atlanta (3)Los Angeles (4)OaklandAmsterdam (4)Hong Kong (2)
Boston (2)MiamiPhoenix (2)FrankfurtJapan (4)
Chicago (4)Montreal (3)Seattle (2)London (2)Singapore (3)
Dallas (4)New York/New Jersey (5)Silicon Valley (6)Sydney
HoustonNorthern Virginia/ DC (1)

POP Locations

INAP has 97 POPs in the remaining 36 data centers as “partner” sites. In these locations, a third party designsfollowing metropolitan markets worldwide, and deploysfor each location the infrastructure and provides for the operation and maintenancenumber of the facility.

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

Internet Protocol Services Segment

Our Internet Protocol (“IP”) services segmentPOPs is provided.

North AmericaEuropeAsia Pacific
Atlanta (4)Los Angeles (9)Philadelphia (2)Amsterdam (4)Hong Kong (2)
Boston (3)Miami (2)Phoenix (5)Frankfurt (2)Japan (4)
Chicago (6)Montreal (3)SacramentoLondon (3)Singapore (6)
Dallas (4)New York/New Jersey (10)Seattle (3)ParisSydney
Denver (2)Northern Virginia/DC (7)Silicon Valley (10)
HoustonOaklandToronto

IP Connectivity
IP connectivity includes our patented Performance IP™ service, content delivery network (“CDN”) services, IP routing hardware and software platform and Managed Internet Route Optimizer Controller.platform. By intelligently routing traffic with redundant, high-speed connections over multiple, major Internet backbones, our IP services provideconnectivity provides high-performance and highly-reliable delivery of content, applications and communications to end users globally. We deliver our IP servicesconnectivity through 86 IP service points97 POPs around the world.




Managed Services and Hosting
Managed Services and Hosting consists of leasing dedicated servers as well as storage and network equipment along with other associated hardware to our customers.  We configure and administer the hardware and operating system, provide technical support, patch management, monitoring and updates.  We offer managed hosting around the globe, including North America, Europe and the Asia-Pacific region.

INAP CLOUD
Cloud services involve providing compute resources and storage services on demand via an integrated platform that includes our automated bare metal solutions. We offer our next generation cloud platforms in our high density colocation facilities and utilize the INAP performance IP for low latency connectivity.
Cloud and Hosting Services
Our patentedcloud and patent-pending network route optimization technologies address inherent weaknesseshosting services segment consists of hosted Infrastructure-as-a-Service as a cloud platform or via managed hosting. For both Infrastructure-as-a-Service options, we provision and maintain the Internet,hardware, data center infrastructure and interconnection, while allowing businesses to take advantage of the convenience, flexibility and reach of the Internet to connect to customers, suppliers and partners, and to adopt new IT delivery models in a scalable, reliable and predictable manner.

Our CDN services enable our customers to quicklyown and securely streammanage their software applications and distribute rich mediacontent.

Cloud
Cloud services involve providing compute and content, such as video, audio softwarestorage services via an integrated platform that includes servers, storage and applications,network. Our Cloud offering provides customers with the ability to audiencesmanage equally virtual and physical servers through an industry standard toolset and application program inerface ("API") interfaces. We deliver our cloud services in five locations across North America, Europe and the globe through strategically located pointsAsia-Pacific region.

Managed Services and Hosting
Managed hosting involves providing a single tenant infrastructure environment consisting of presence (“POPs”). Providing capacity-on-demandservers, storage and network. We deliver this customizable infrastructure platform based on enterprise-class technology to handle large eventssupport complex application and unanticipated traffic spikes, wecompliance requirements for our customers. We deliver scalable high-quality content distributionour managed hosting services in 11 locations across North America, Europe and audience-analytic tools.

the Asia-Pacific region.

Additional information regarding our segments, including our financial results for the previous three fiscal years, can be found in note 12Note 11 to the accompanying consolidated financial statements.

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Operational Alignment

As part of our ongoing efforts to streamline our operations and drive efficiencies, following year-end we evaluated our operational model and re-aligned several departmental structures and personnel. We have completed the following actions to date:

·combining the marketing and business development organizations into a single group with a unified vision;

·re-aligning parts of our customer support organization to enable enhanced focus on supporting individual lines of business; and

·merging management of our Network Operations Centers (“NOCs”) under the operations team which they support.

We will continue to evaluate and implement changes in people, process, and systems to improve efficiency and effectiveness. In addition, we are evaluating how these changes will affect our financial reporting.

Data Centers, Private Network Access Points and CDN POPs

Our data centers and private network access points (“P-NAPs”) feature multiple direct high-speed connections to major Internet service providers (“ISPs”). We have data centers, P-NAPs and CDN POPs in the following markets, some of which have multiple sites:

Internap operatedDomestic sites operated
under third party agreements		International sites operated
under third party agreements
AtlantaAtlantaOrange CountyAmsterdamParis
BostonBostonSan DiegoFrankfurtSingapore
DallasChicagoPhiladelphiaHong KongSydney
HoustonDallasPhoenixLondonTokyo(1)
Los AngelesDenverSan FranciscoOsaka(1)Toronto
MontrealLos AngelesSan Jose
New York MetroMiamiSanta Clara
Santa ClaraNew York MetroSeattle
SeattleOaklandWashington DC

(1)Through our joint venture in Internap Japan Co., Ltd. (“Internap Japan”) with NTT-ME Corporation and Nippon Telegraph and Telephone Corporation (“NTT Holdings”).

Financial Information about Geographic Areas

During

For each of the three years ended December 31, 2015 and 2014,2017, we derived more than 10%15% of our total revenues from operations outside the United States. During the year ended December 31, 2013, we derived less than 10% of our total revenues from operations outside the United States. We summarizeAdditional information regarding our geographic informationareas, including our financial results for the previous three fiscal years, can be found in note 1211 to the accompanying consolidated financial statements.


Research and Development

Research and development costs are included in general and administrative costs and are expensed as incurred. These costs primarily relate to our development and enhancement of IP routing technology, hosting and cloud technologies and network engineering costs associated with changes to the functionality of our services. Research and development costs were $2.2$1.5 million, $2.8$1.1 million, and $2.1$2.2 million during the years ended December 31, 2015, 20142017, 2016, and 2013,2015, respectively. These costs do not include $6.5$5.2 million, $8.5$6.3 million, and $7.5$6.5 million of internal-use and available for sale software costs capitalized during the years ended December 31, 2017, 2016, and 2015, 2014 and 2013, respectively.

Customers

As of December 31, 2015, we had approximately 11,000 customers in various industries. We serve the following key industries: software and Internet, including advertising technology; media and entertainment, including gaming; business services; hosting and IT infrastructure; health care technology infrastructure and telecommunications. 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.

Competition

The market for Internet infrastructure services is intensely competitive, remains highly fragmented and is characterized by rapid innovation, steady price erosionsensitivity 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 and brand recognition. We believe that we can compete on the basis of these factors to varying degrees. Our current and potential competition primarily consists of:

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●colocation, hosting and cloud providers, including Amazon Web Services; CenturyLink, Inc.; CyrusOne Inc.; Digital Realty Trust, Inc.; Equinix, Inc.; Microsoft Azure; Rackspace Hosting, Inc.; Softlayer (IBM); and QTS Realty Trust, Inc.; and
●ISPs that provide connectivity services and storage solutions, including AT&T Inc.; Akamai Technologies, Inc.; Cogent Communications Holdings, Inc.; Level 3 Communications, Inc.; Verizon Communications Inc. and Zayo Group, LLC.

Our Competitive Differentiation

Internap aims to be the partner of choice for people developing the world’s most innovative applications by creating



Colocation providers, including CyrusOne, Equinix, CoreSite, QTS Realty Trust, ZColo and operating the best-performing Internet infrastructure. We are uniquely positioned to help our customers make their applications faster and more scalable in the following ways:

Our High-Performance Service Offering

Providing the best performing infrastructure services is in Internap’s DNA. The company was founded 20 years ago to provide a better way to deliver packets across the Internet and, today, our Performance IP service is a leading standard for business Internet connectivity. As we have expanded and evolved our business, delivering the best performance has remained our focus starting with the design of company-controlled data centers, which are the foundation for our hybrid infrastructureCyxtera.

Managed services and feature industry-leading power densitieshosting providers, including: Rackspace, IBM Cloud, QTS, and complete infrastructure redundancy to efficiently support business growth while minimizing downtime.

Similarly, we have designed our public cloud offering to support high-performance workloads with bare-metalCenturyLink, Inc.

Cloud providers, including IBM Cloud, OVH.com, Amazon Web Services, Microsoft Azure, and virtual computing options built atop the open-source OpenStack cloud computing platform. Our bare-metal cloud supports big data applications better than virtualized cloud alternatives by delivering faster throughput and processing, more consistent performance by removing the “noisy neighbor effect” and more efficient price to performance – with significant cost savings over nominal virtual equivalents.

Our Hybrid Approach to Internet Infrastructure and Hosting Venue Interoperability

We believe the breadth of our services offering provides additional compelling differentiation. Customers require a range of infrastructure offerings to support specific workload, business and compliance, and we are unique in our ability to allow customers to easily mix and match colocation, cloud and hosting (virtual and physical, managed and unmanaged environments) to create the best-fit infrastructure for their application and business requirements.

Our infrastructure services seamlessly interconnect via a single unified network to enable hybridized IT environments for maximum scalability, efficiency and flexibility. Our unified customer portal provides a single pane of glass view into customers’ hybrid infrastructure, allowing them to provision, manage and monitor colocation, hosting and cloud environments through a single, robust interface. This simplifies management of the colocation footprint, minimizes expensive trips to the data center and enables customers to easily leverage cloud-to-colocation hybridization for immediate access to elastic, on-demand resources.

Our Customer Support

Ultimately, our services are only as strong as the people behind them. Internap’s award-winning, fully-redundant NOCs deliver outstanding service and act as a virtual extension of our customers’ infrastructure teams. Our NOCs are staffed by experienced engineers who proactively monitor our services and network to resolve issues before problems arise. The performance and availability of our services is mission-critical to our customers and we guarantee those services with a competitive SLA, which features proactive alerts and credits.

Google Cloud.

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, 2015,2017, we had 2223 patents (17(18 issued in the United States and 5 issued internationally) that extend to various dates between 20172018 and 2031,2034, and 14 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.

Employees


As of December 31, 2015,2017, we had approximately 650503 employees. None of our employees are represented by a labor union, and we have not experienced any work stoppages.

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We generally believe our labor relations to be good.

Additional

Available Information

We make available through our company web site, free of charge, our company filings with the

The Securities and Exchange Commission (the “SEC”(“SEC”) as soon as reasonably practicable after wemaintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically file them with or furnish them to the SEC. These include ourThe 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 public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The Company also makes available free of charge through its website (www.INAP.com) the Company’s Annual ReportsReport on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, registration statements and, anyif applicable, amendments to those documents. Our web site iswww.internap.com andreports filed or furnished pursuant to the linkExchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. References to our SEC filings is http://ir.internap.com/financials.cfm. Our principal executive officeswebsite addressed in this Form 10-K are located at One Ravinia Drive, Suite 1300, Atlanta, Georgia 30346,provided as a convenience and our telephone number is (404) 302-9700. We incorporated in Washington in 1996do not constitute, and reincorporated in Delaware in 2001. Our common stock trades on the Nasdaq Global Market under the symbol “INAP.”

The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may access information about the operationshould not be viewed as, an incorporation by reference of the Public Reference Room by callinginformation contained on, or available through, the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy andwebsite. Therefore, such information statements, and other information filed electronically with the SEC, athttp://www.sec.gov.

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.

Our risks are described in detail below; however, the more significant risks we face can be summarized into several broad categories, including:

The future evolution of the technology industries in which we operate is difficult to predict, highly competitive and requires continual innovation and development, strategic planning, capital investment, demand planning and space utilization management to remain viable. We face on-going challenges to develop new services and products to maintain current customers and obtain new ones. In addition, technological advantages can rapidly decrease value, creating constant pressure on pricing and cost structures and hindering our ability to maintain or increase margins.

We are dependent on numerous suppliers, vendors and other third-party providers across a wide spectrum of products and services to operate our business. These include real estate, network capacity and access points, network equipment and supplies, power and other vendors. In many cases the suppliers of these products and services are not only vendors, they are also competitors. While we maintain contractual agreements with these suppliers, we have limited ability to guarantee they will meet their obligations, or that we will be able to continue to obtain the products and services necessary to operate our business in sufficient supply, or at an acceptable cost.

Our business model involves designing, deploying and maintaining a complex set of network infrastructures at considerable capital expense. We invest significant resources to help maintain the integrity of our infrastructure and support our customers; however, we face constant challenges related to our infrastructure, including capital forecasting, demand planning, space utilization management, physical failures, obsolescence, maintaining redundancies, physical and electronic security breaches, power demand and other risks.

Our financial results have fluctuated over time and we have a history of losses, including in each of the past three years. We have also incurred significant charges related to impairments and restructuring efforts, which, along with other factors, may contribute to volatility in our stock price.


Risks Related to our Industries

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. As evidenced by our investment in and offering to our enterprise customers of a full portfolio of IT infrastructure solutions, innovativeInnovative new IT technologies and evolving industry standards have the potential to become the “new normal,” either replacing or providing efficient, potentially lower-cost alternatives to other, more traditional IT communications services. The adoption of such new technologies or industry standards could render our existing services obsolete and unmarketable.

unmarketable or require us to spend significant amounts of capital to 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)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 willmay 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, 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, or if ISPsinternet 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 IP and CDN services could be materially and adversely affected.

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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 or not be able to overcomefix 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 a cost-effectivean efficient manner to acquire talent and to develop and introduce new services, products and upgrades on a timely basis. New product development and introduction 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 maintaining qualified research and development staff with the appropriate skill and expertise;
●managing the length 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;
●managing new service and product service strategies and integrating them with our existing services and products;
●incorporating acquired products and technologies;
●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.


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 our 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 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 will 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 or do not provide the proper technological solutions or industry standard services, 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;
●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.

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;
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 existing agreements our revenue would decline and our business 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.

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

expected and could materially impact our results of operations.

Our strategic decision to invest capital in expanding our data center 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.accurate, particularly as technology and industry standards evolve. 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 pacerate than projected in our capital investment modeling. These challenges and difficulties relate to our ability to:

●identify and obtain the use of locations meeting our selection criteria on competitive terms;
●estimate costs and control delays;
●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;
●establish key relationships with IT infrastructure providers;
●hire, train, retain and manage sufficient operational and technical employees and supporting personnel;
●obtain the necessary power density and supply from local utility companies;
●avoid labor issues impacting our suppliers, such as a strike; and
●identify and obtain contractors that will not default on the agreed upon contract performance.


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;
establish key relationships with IT infrastructure providers and other third party vendors required to deliver our services;
obtain the necessary power density 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 estimation of future data center space needs may be inaccurate, leading to missed sales opportunities or additional expenses through unnecessary carrying costs.

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. Errors or imprecision in these estimates or the data on which the estimates are based could result in either an oversupply or undersupply of space in a particular market and cause actual results to differ materially from expected results and correspondingly have a material adverse impact on our business, consolidated financial condition, results of operations and cash flows.


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 IP services segment.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 in connection withfor their Internet connectivity, data transit and data storage services or private network services, thereby significantly increasing the pressure on us to decrease our prices.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.

Some of our competitors for data center services may adopt aggressive pricing policies.

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. 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, or technology providers or other service providers, or develop products similar, 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.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. 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; or
●devote greater resources to the marketing and sale of their services and adopt more aggressive pricing policies than we can.


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. 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 decision-making 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. 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 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.


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.
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 retention legislation and various energy regulations, as well as law enforcement surveillance and anti-terrorism initiatives targeting instant messaging applications, for example.applications. For example, if the FCCFederal 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 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.

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In April 2015,

At the Federal Communications Commission (the “FCC”)end of 2017, the FCC adopted a new Open Internet order that largely repealed the Open Internet rules reclassifyingthe Commission had approved in 2015. The 2015 rules reclassified broadband Internet access as a regulated Title II “telecommunications service.service,” which subjected it to broad, “common carrier” regulation originally devised for telephone service. The Title II regulation subjects ISPs2015 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 being 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. The 2017 order is subject to appeal. If an appeal is successful, depending on the content of any judicial order, some or all of the 2015 restrictions may become applicable once again. Proposals to impose Open Internet-style regulations are also pending in other governmental bodies, including prohibiting “unjustthe U.S. Congress and unreasonable practices”some states (which would have to overcome the 2017 order’s preemption provisions). In light of these changes, challenges, and discriminatory practices underproposals, it is unclear what Open Internet regulations may exist in the Communications Act, regulation of consumer privacy and other common carrier regulations. future.

While we are not an ISP noror 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.

The 2015 Open Internet Order also established “bright line rules” that prohibit 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. The new rules also enhance the existing transparency requirements for service quality disclosures to broadband services customers and set a standard of conduct for ISPs. Several challenges to the Commission’s 2015 Open Internet Order are pending before the D.C. Circuit Court of Appeals, which should be decided in 2016, including the Commission’s reclassification of broadband Internet access as a Title II telecommunications service. .

If upheld by the D.C. Court of Appeals, it is unclear what the long-term impact will be of the new Open Internet regulations. Commercial arrangements for the exchange of traffic with broadband Internet providers and treatment of edge provider offerings by broadband providers now fall within the scope of Title II, however, the Commission has stated that regulatory complaints about such issues as usage-based pricing plans by consumers or “zero rating” sponsored data plans by edge provider will be evaluated on a no-unreasonable interference/disadvantage standard on a case-by-case basis, making it very uncertain how such practices will be regulated, if at all.

A legislative amendment proposed in 2015 to amend the Communications Act remains pending. The legislation would amend the Communications Act to expressly (a) classify broadband as an information service; (b) allow ISPs to offer “specialized services” or “services other than broadband Internet access service that are offered over the same network”; and (c) prohibit blocking of lawful content, throttling data and paid prioritization. The proposed legislative reforms would apply to both wireless and wireline broadband services. The amendment would override the Commission’s reclassification of broadband as a telecommunications service in the 2015 Open Internet Order. If this proposed legislation or similar legislation is enacted which does not treat broadband Internet access or the service interconnecting Internet content edge providers with ISPs as a telecommunications service, it could disadvantage our edge provider customers and adversely impact 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 doesregulates established cable television providers and satellite providers. The FCC has tentatively concluded that the traditional definition of MVPD requiring ownership of the video transmission path should be expanded to include Internet-based video programmers. ThisThough 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, of a number of Internap’s customers, and thereby impact the future use of Internap’sour 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 foreign governments and agencies, our business could be adversely affected and we could face claims for liabilities.
The EU prohibits companies from transferring EU residents’ personal data from the EU to another country, unless the EU has deemed the laws of that country to provide “adequate” protection for personal data. The EU does not consider U.S. data privacy laws to be adequate. Therefore, companies that want to transfer EU residents’ personal data from the EU to the U.S. can do so only by using one of several available lawful data transfer mechanisms. For 15 years, one such lawful means was under the U.S.-EU Safe Harbor Agreement (“Safe Harbor Agreement”) between the European Commission and the U.S. Department of Commerce. The Safe Harbor Agreement provided a safe harbor for companies that transferred personal data from the EU to the U.S., as long as the receiving company in the U.S. abided by certain privacy principles. In October 2015, the European Court of Justice invalidated Decision 2000/520, which provided a safe harbor for businessesthe Safe Harbor Agreement, requiring companies to rely on other lawful data transfer mechanisms when they transferred personal data from European Union countriesthe EU to the United States if the recipient company agreed to comply with Safe Harbor Privacy Principles. Since that time,U.S. After several months of negotiation, on July 12, 2016, the European Commission and the U.S. Department of Commerce have been negotiatingadopted the E.U.-U.S. Privacy Shield (“the Privacy Shield”), which provides a next generation Safe Harbor agreement to enable the transfer of personal data from E.U. countries to the U.S. and reduce the risk of enforcement actions being brought by E.U. member privacy regulators against U.S. companiesnew legal framework for failing to adequately protect the transfer of personal data of E.U. citizens. On February 2, 2016, E.U. and U.S. officials announcedEU data subjects under EU law. Like the terms of a new U.S.-E.U. Safe Harbor agreement, referred to asAgreement, the E.U.-U.S. Privacy Shield. The actual text of the EU-US Privacy Shield, has yetamong other things, requires companies in the U.S. that receive personal data from the EU to adhere to certain privacy principles. Companies that certify to the Privacy Shield, but fail to abide by its requirements, could be agreed upon. Pending full agreement,subject to enforcement actions by EU data protection authorities or the lack of a Safe Harbor forU.S. Federal Trade Commission.

Companies that are not certified under the Privacy Shield may rely on other lawful data transfer mechanisms, such as standard contract clauses or binding corporate rules (for intra-company cross-border data transfers). Companies that transfer personal data from the EU to the U.S. without an appropriate data transfer mechanism in place 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 EU General Data Protection Regulation (“GDPR”), which will go into effect on May 25, 2018 and become immediately applicable in EU member states, will impose a host of new requirements on all companies that offer goods and services to, or monitor the behavior of, EU residents. The GDPR will apply to companies that meet this description, regardless of whether such companies have physical operations in the EU.

In light of these developments, we are reviewing our business practices and may find it necessary or desirable to make changes to our policies and procedures governing our processing of EU residents’ personal data, including the cross-border transfer of such data from E.U. countriesthe EU to the U.S. raises concernsThe regulation of potentialdata privacy in the EU continues to evolve, and it is not possible to predict the ultimate content, and therefore the effect, of data protection regulation over time.

Our actual or alleged failure to comply with applicable EU laws and regulations, or to protect personal data, could result in enforcement actions brought by EU countries.

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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 claims under the Digital Millennium Copyright Act, other similar legislation and common law. In addition, there are other potential customer activities, such as online gambling 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.
One of our subsidiaries offers Metro Connect Ethernet data transmission services to customers colocated at our data centers to enable expanded connectivity. These are regulated telecommunications services, which require our subsidiary to obtain regulatory certification(s)certifications and often to maintain an approved tariff in most states in which these services are offered. There are various regulatory compliance requirements to operate as a telecommunications carrier, such as the filing of tariffs, annual reports and universal service reports..reports. We also must comply with state consumer protection laws in every state in which we operate. Failure to comply with any of these requirements could negatively impact our business.

Risks Related to our Business



We depend on third-party suppliers for key elements of our IT infrastructure services.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. 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.


For data center and hosting facilities, we rely on a number of 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 could delay any build-out of our infrastructure and increase our costs. 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. 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. 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 service.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;
●physical or electronic security breaches;
●fire, earthquake, hurricane, flood, tornado and other natural disasters;
●improper maintenance of the buildings in which our data centers are located;
●water damage, extreme temperatures, fiber cuts;
●power loss or equipment failure;
●sabotage and vandalism; and
●failures experienced by underlying service providers upon which our business relies.

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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;
power loss, utility interruptions or equipment failure;
sabotage, vandalism and terrorism; 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 or more of our company-controlled facilities or our partner sites, whether or not within our control, could result in service interruptions or significant equipment damage. Most of our customers have SLAsservice 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 problem at one offailure to meet performance obligations in our data centers.

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 company-controlled data center leases provide us with the opportunity to renew the leases at our option for periods typically ranging from five to 10 years. Many of these options however, if renewed, 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. Conversely, ifIn addition, we have long-term agreements for certain of the leased properties which extend beyond 10 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 rates until the expiration of the lease as we would be bound by the terms of the 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 lessorlandlord 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 on-goingongoing negotiations with lessors,landlord, 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, therecondition. There is no guarantee that our customers willwould 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, P-NAPsPOPs 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 NOCs,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 P-NAPs,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 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 P-NAPsPOPs 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.

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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 datacenters, 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.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, 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.

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. Our effortsBreaches of our network or data security could disrupt the security of our internal systems and business applications, impair our ability to eliminate computer viruses and alleviate other security problems, or any circumvention of those efforts, may result in increased costs, interruptions, delays or cessation of serviceprovide services to our customers and negatively impact hosted customers’ on-lineprotect the privacy of their data, result in product development delays, compromise confidential or technical business transactions.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, or otherwise adversely affect our business. Affected customers might file claims against us under such circumstances, 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. 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 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.



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 for these services;
●budgeting, forecasting, tracking and reporting our results of operations; and
●providing technical and operational support to customers and tracking the resolution of customer issues.


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 for financial information; 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, planning by our staff and 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 can 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 P-NAPsPOPs 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 P-NAPs 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;
●costs of customizing P-NAPs for foreign countries and customers; and
●compliance with requirements of foreign laws, regulations and other governmental controls, including trade and labor restrictions and related laws that may reduce the flexibility of our business operations or favor local competition.

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.

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.

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, 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. 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.

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 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, 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.

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 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 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 future acquisitions or 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 functions and enhancing our IT systems. Any future growth may increase our corporate operating costs and expenses and impose significant added responsibilities on members of our management, including the need to identify, recruit, maintain and integrate additional employees and implement enhanced informational technology 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 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. 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.
Deterioration of global economic conditions could adversely affect our business.

The global economy and capital and credit markets may experience exceptional turmoil and upheaval over the past several years. Many major economies worldwide could enter significant economic recessions and continue to experience economic weakness, with the potential for another economic downturn to occur. 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 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 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 could lead to a decrease in spending by businesses and consumers over the past several years, and a corresponding slowdown in global infrastructure spending.

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;
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 or fear of such outbreaks;
fluctuations in currency exchange rates, 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 similar non-U.S. laws and regulations, including the U.K. Bribery Act 2010 (the “Bribery Act”);
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.

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 could have a material adverse effect on us. The U.S. presidential administration has expressed antipathy towards existing trade agreements, like NAFTA, 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 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 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 Substantial Indebtedness
If we are unable to comply with the restrictions and covenants in our credit agreement or other debt agreements, there would be a default under the terms of these agreements, and this could result in an acceleration of payment of funds that have been borrowed or may have other material adverse effects on our business, consolidated financial condition, results of operations and cash flows.
Our existing credit agreement requires us to, among other things, meet certain financial covenants related to (i) our maximum total net leverage ratio, (ii) our minimum consolidated interest coverage ratio, (iii) limitations on our capital expenditures and (iv) other negative and reporting 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 obtaining waivers, which could be material, must be weighed against the opportunity created by adjusting the covenants. In addition, our credit facility creates liens on a majority of our assets.
If we do not satisfy these covenants, we would be in default under the credit agreement. Any defaults, if not waived or cured, could result in our lenders ceasing to make loans or extending credit to us, accelerating or declaring all or any obligations immediately due or taking possession of or liquidating collateral. Defaults on our credit agreement could cause cross-defaults under other agreements or have negative impacts on other commercial arrangements with vendors that provide services to us or our lease agreements. If any of these events occur, we may not be able to borrow sufficient funds to refinance the credit agreement on terms that are acceptable to us, or at all, or obtain a waiver or forbearance of the covenants, which could materially and adversely impact our business, consolidated financial condition, results of operations and cash flows. Also, our ability to access sources of liquidity or the capital markets may be limited at a time when we would like or need to do so, which could have an impact on our flexibility to pursue expansion opportunities and maintain our desired level of revenue growth in the future.
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.
We currently have a significant amount of debt which we may not be able to repay when due. Any failure to meet or repay our debt or meet our debt obligations and other long-term commitments would have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows.

As of December 31, 2017, our total debt, including capital leases, was $539.0 million. Our revolving credit facility (“revolving credit facility”) matures on October 6, 2021 and our term loan facility (“term loan”) matures on April 6, 2022. On April 6, 2017, we entered into a new Credit Agreement (the “2017 Credit Agreement”), which provides for a $300 million term loan facility and a $25 million revolving credit facility. The proceeds of the term loan were used to refinance the Company’s existing credit facility and to pay costs and expenses associated with the 2017 Credit Agreement. We may need to refinance all or a portion of our indebtedness on or before the maturity thereof or incur additional debt. Our significant level of debt could make it more difficult for us to obtain additional debt financing in the future. In addition, if we raise additional funds by incurring additional debt, we will incur increased debt service costs or be subject to increased interest rates and may become subject to more restrictive financial and other covenants which could limit our ability to operate our business as we desire or in response to competitive pressure. We can make no assurances that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.


If our financial performance weakens or if we are unable to make interest or principal payments when due, meet our covenants or amend our credit facility to modify the covenants, we may default under our credit facility. 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 our results of operations, cash flows, liquidity and ability to compete in our industry.
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.
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, 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.
Disruptions in the financial markets or increases in interest rates could affect our ability to obtain debt or equity financing or to refinance our existing indebtedness on reasonable terms (or at all), could increase the cost of servicing our debt and have other adverse effects on us.
Disruptions in the commercial credit markets could result in a tightening of credit markets or an increase in interest rates or borrowing rates. The effects of credit market disruptions in the recent past were widespread, and it is impossible to predict future credit markets or interest rates. As a result, we may not be able to obtain debt or equity financing or to refinance our existing indebtedness on favorable terms, or at all, which could affect our strategic operations and our financial performance and force modifications to our operations. In addition, if interest rates increase between the time an existing financing arrangement is consummated and the time such financing arrangement is refinanced, the cost of servicing our debt would increase and our liquidity and results of operations could be materially adversely affected.

Risks Related to our Capital Stock and Other Business Risks

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

For the years ended December 31, 2015, 20142017, 2016, and 2013,2015, we incurred net losses attributable to INAP stockholders of $48.4$45.3 million, $39.5$124.7 million, and $19.8$48.4 million, respectively. At December 31, 2015,2017, our accumulated deficit was $1.2 billion.$1.3 billion and our working capital deficit was $23.5 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.

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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 the price of our common stock.

We have experienced fluctuations in our results of operations on a quarterly and annual basis. Fluctuation in our operating results may cause the market price of our common stock to decline. 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, customer support and retention and other personnel;
●the cost and availability of adequate public utilities, including power;
●our ability to obtain local loop connections to our P-NAPs at favorable prices; and
●any impairments or restructurings charges that we may incur in the future.


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;
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 P-NAPs,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 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.

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 vulnerablesubject to changes due to unforeseen circumstances that could materially and adversely affect our results of operations. Adverse changes in any of these factors could result in an additional impairment and restructuring charges in the future.

Our stock price may be volatile.

The market for our equity securities has been extremely volatile. Our stock price could suffer in the future as a result of any failure to meet the expectations of public market analysts and investors about our results of operations from quarter to quarter. The following factors could cause the price of our common stock in the public market to fluctuate significantly:

●actual or anticipated variations in our quarterly and annual results of operations;
●changes in market valuations of companies in the industries in which we may compete;
●changes in expectations of future financial performance or changes in estimates of securities analysts;
●fluctuations in stock market prices and volumes;
●future issuances of common stock or other securities;
●the addition or departure of key personnel; and
●announcements by us or our competitors of acquisitions, investments or strategic alliances.

Our existing credit agreement places certain


actual or anticipated variations in our quarterly and annual results of operations;
changes in market valuations of companies in the industries in which we may compete;
changes in expectations of future financial performance or changes in estimates of securities analysts;
fluctuations in stock market prices and volumes;
future issuances of common stock or other securities;
the addition or departure of key personnel;
announcements by us or our competitors of acquisitions, investments or strategic alliances; and
actions of our equity investors, including sales of our common stock by significant stockholders.



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

On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” (TCJA) that significantly reforms the Internal Revenue Code of 1986. The TCJA, among other things, includes lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, imposes significant additional limitations on us.

Our existing credit agreement requires us to meet certain financial covenants related to maximum total leverage ratio, minimum consolidated interest, coverage ratio and limitation onallows for the expensing of capital expenditures as well as negative and reporting covenants. These covenants protectputs into effect the lenders and limit our abilitymigration from a “worldwide” system of taxation to make certain operating decisions in the face of changing market dynamics. These covenants can be waived; however, the cost of doing so, which could be material, must be weighed against the opportunity created by adjusting the covenants. In addition, these covenants create liens on a majority our assets. If weterritorial system. We do not satisfy these covenants, we wouldexpect the tax reform to have a material impact on our projected cash taxes or to our net operating losses. Our net deferred tax assets and liabilities will be in default underrevalued at the credit agreement. Any defaults, if not waived, could resultnewly enacted U.S. corporate tax rate and the impact will be offset by a change in our lenders ceasingvaluation allowance. We will continue to make loans or extending credit to us, accelerating or declaring all or any obligations immediately due or taking possession of or liquidating collateral. If any of these events occur, weexamine the impact this tax reform legislation may have on our business.


We may not be able to borrow sufficient funds to refinance the credit agreement on terms that are acceptable to us, or at all, or obtain a waiver or forbearance of the covenants, which could materially and adversely impactfully utilize our business, consolidated financial condition, results of operations and cash flows. Finally, our ability to access the capital markets may be limited at a time when we would like or need to do so, which could have an impact on our flexibility to pursue expansion opportunities and maintain our desired level of revenue growth in the future.

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Any failure to meet our debt obligationsU.S. net operating loss and other long-term commitments would damage our business.

tax carryforwards.

As of December 31, 2015, our total debt, including capital leases, was $382.1 million. If we use more cash than we generate in the future, 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. In addition, if we are unable to make interest or principal payments when due, meet our covenants or amend our credit facility to modify the covenants, we would be in default under the terms of our long-term debt obligations, which would result in all principal and interest becoming due and payable, if not waived. The result of which would seriously harm our business. If a waiver is required, it would come at a material cost to us.

We also have other long-term commitments for operating leases and service and purchase contracts totaling $103.0 million in the future with a minimum of $33.8 million payable in 2016. 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 seriously harm our business.

Our ability to use U.S. net operating loss carryforwards might be limited.

As of December 31, 2015,2017, we had net operating loss (“NOLs”) carryforwards of $234.4$334.6 million for U.S. federal tax purposes. These loss carryforwards expire between 2018 and 2035. 2036. Our ability to utilize our NOL and other tax carryforward amounts to reduce taxable income in future years may be limited for various reasons, including if future taxable income is insufficient to recognize the full benefit of such NOL carryforward amounts prior to their expiration. Additionally, our ability to fully utilize these U.S. tax assets can also be adversely affected by “ownership changes” within the meaning of Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “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 and 383 of the Code) in any three-year period.


To the extent these net operating loss carryforwards are available; we intend to use them to reduce the corporate income tax liability associated with our operations. Section 382 of the U.S. Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that might be used to offset taxable income when a corporation has undergone significant changes in stock ownership. To the extent our use of net operating loss carryforwards is limited, our income could be subject to corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could result in lower profits.


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 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 23 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.
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 authorization. Policing unauthorized use of our proprietary technologies and other intellectual property and our services is difficult, and litigation 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 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. Any of the limits of insurance that we purchase could prove to be inadequate, which could materially and adversely impact our business, financial condition and results of operations.

We may require additional capital and may not be able to secure additional financing on favorable terms to meet our future capital needs, which could adversely affect our financial position and result in stockholder dilution.
In order to fund future growth, we will be dependent on significant capital expenditures. We may need to raise additional funds through equity or debt financings in the future in order to meet our operating and capital needs. We may not be able to secure additional debt or equity financing on favorable terms, or at all, at the time when we need such funding. If we are unable to raise additional funds, we may not be able to pursue our growth strategy, and our business could suffer. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences, and privileges senior to those of holders of our common stock. In addition, any debt financing that we may obtain in the future could have restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.

Provisions of our charter documents and Delaware law may have anti-takeover effects that could prevent a change in control even if the change in control would be beneficial to our stockholders.

Provisions of our Certificate of Incorporation and Bylaws, and provisions of Delaware law, could discourage, delay or prevent a merger, acquisition or other change in control of our company. These provisions are intended to protect stockholders’ interests by providing our board of directors a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a board of directors that is classified so that only one-third of directors stand for election each year. In addition, the board of directors can create and issue blank check preferred stock, without prior stockholder approval, with voting, liquidation, dividend, and other rights senior to those of our common stock. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions.

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The evaluation by our board of directors of strategic alternatives may have an adverse impact on our business and stock price.

A number of factors could adversely affect our business or stock price given this evaluation, including:

·continued uncertainty for our customers, employees and stockholders which could make it difficult to capture new business, attract and retain talent and finance our operations;
·distraction of management’s focus from executing on other strategic initiatives; and
·creation of litigation risk.

In addition, the market could react negatively to our announcement that the board of directors has completed its evaluation of strategic alternatives.

Actions of stockholders could cause us to incur substantial costs, divert management’s attention and resources, and have an adverse effect on our business.

We have been, and may be in the future, subject to proposals by stockholders urging us to take certain corporate actions. If stockholder activities develop, our business could be adversely affected as responding to proxy contests or stockholder proposals and reacting to other actions by stockholders can be costly and time-consuming, disrupt our operations and divert the attention of management and our employees. We have beenmay be required to retain the services of various professionals to advise us on certain stockholder matters, including legal, financial and communications advisors, the costs of which may negatively impact our future financial results. In addition, perceived uncertainties as to our future direction, strategy or leadership created as a consequence of stockholder initiatives may result in the loss


of potential business opportunities, harm our ability to attract new investors, customers, employees, and cause our stock price to experience periods of volatility or stagnation.


Concentration of ownership among our certain large stockholders and their affiliates may limit the influence of new investors on corporate decisions and the interests of such large stockholders may materially differ from your interests.
A majority of our outstanding shares are held by a relatively small number of our stockholders. As a result, if some of these stockholders vote in an aligned manner, they could be capable of meaningfully influencing the outcome of matters submitted to our stockholders for approval, including the election of directors and approval of significant corporate transactions, such as a merger or sale of our company or its assets. This concentration of ownership could limit the ability of other stockholders to influence corporate matters and may delay or preclude an acquisition or cause the market price of our stock to decline. Some of these persons or entities may have interests that may materially differ from the rest of our stockholders.
The trading price of our common stock may decline if our stockholders sell a large number of shares of our common stock or if we issue a large number of new shares of our common stock or shares convertible into our common stock.
A majority of our outstanding shares of common stock are held by a relatively small number of our stockholders. A sale of a substantial number of our shares in the public market by our significant stockholders or pursuant to new issuances by us could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities. In February 2017, we completed a private placement of common stock, which may be sold pursuant to the registration statement that was filed with the SEC or under Rule 144 of the Securities Act of 1933, as amended. Any sale by these stockholders or issuance of common stock could have material adverse effect on the market price of our common stock. In addition, new issuances of common stock or shares convertible into common stock by us would dilute the equity interests and voting power of our existing stockholders.
If we are unable to maintain compliance with the continued listing requirements as set forth in The Nasdaq Listing Rules, our common stock could be delisted from The Nasdaq Global Market, and if this were to occur, then the price and liquidity of our common stock and our ability to raise additional capital could be adversely affected.
Our common stock is currently listed on the Nasdaq Global Market. Continued listing of a security on the Nasdaq Global Market is conditioned upon compliance with certain continued listing requirements set forth in the Nasdaq Listing Rules. There can be no assurance we will continue to satisfy the requirements for listing on the Nasdaq Global Market.

If we are not able to maintain compliance with the continued listing standards as set forth in the Nasdaq Listing Rules for Nasdaq Global Market companies, our common stock may be delisted from The Nasdaq Global Market and an associated decrease in liquidity in the market for our common stock may occur.. The delisting of our common stock could materially adversely affect our access to the capital markets, and any limitation on liquidity or reduction in the price of our common stock could materially adversely affect our ability to raise capital on terms acceptable to us or at all. Delisting from The Nasdaq Global Market could also result in the potential loss of confidence by our business partners and suppliers, the loss of institutional investor interest and fewer business development opportunities.
Because we do not intend to pay dividends in the foreseeable future, stockholders will benefit from an investment in our common stock only if it appreciates in value.
We currently intend to retain our future earnings, if any, for use in the operation of our business and do not expect to pay any cash dividends in the foreseeable future on our common stock. In addition, the terms of our debt instruments impose limitations on our ability to pay dividends. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.

We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. In Item 9A, “Controls and Procedures” of this Annual Report on Form 10-K, management identified material weaknesses in our internal control over financial reporting.
As a result of the material weaknesses, our management concluded that our internal control over financial reporting was not effective as of December 31, 2017 and December 31, 2016. The material weakness for the year ended December 31, 2017 related to the review of property and equipment depreciation and amortization schedules. The material weakness for the year ended December 31, 2016


related to the review of cash flow forecasts used in support of certain fair value estimates. The assessment was based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We are actively engaged in remediating the material weakness related to the review of property and equipment depreciation and amortization schedules, but our remediation efforts are not complete and are ongoing. We have remediated the material weakness related to the review of cash flow forecasts used in support of certain fair value estimates as of December 31, 2017.

If our remedial measures are insufficient to address any material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, it may materially adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner and impact investor confidence in our Company.

Although we continually review and evaluate internal control systems to allow management to report on the sufficiency of our internal controls, we cannot assure you that we will not discover additional weaknesses in our internal control over financial reporting. The next time we evaluate our internal control over financial reporting, if we identify one or more new material weaknesses or are unable to timely remediate any existing weaknesses, we may be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our common stock and possibly impact our ability to obtain future financing on acceptable terms, if at all.


ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our principal executive offices are located in Reston, Virginia and our operations and staff headquarters are located in Atlanta, Georgia. Our Atlanta headquarters consists of 62,000 square feet under a lease, with renewal options, that expires in 2019.


Leased data center facilities in our top markets include Atlanta, Boston, Dallas, Houston, Los Angeles, Montreal, New York metro area, Northern CaliforniaYork/New Jersey, Oakland, Phoenix, Seattle and Seattle. Silicon Valley. These facilities are used in both our segments INAP COLO and INAP CLOUD.

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

On September 18, 2015, a purported stockholder filed a putative class action complaint in the Superior Court of Fulton County of the State of Georgia against us, the current members of our board of directors and Jefferies Finance LLC (“Jefferies”). The complaint was captioned Grisolia v. Internap Corp., et al., Case No. 2015cv265926 (Ga. Sup. Ct.) and alleged, among other things, that the members of our board of directors breached their fiduciary duties, and that Jefferies aided and abetted such breaches, in connection with the credit agreement described in this filing. The complaint alleged that the credit agreement contained a so-called “dead hand proxy put” provision that (a) defined the election of a majority of directors whose initial nomination arose from an actual or threatened proxy contest to be an event of default that triggers the lenders’ right to accelerate payment of the debt outstanding under the credit agreement; and (b) thereby allegedly coerced stockholders and entrenched the members of our board of directors. The Plaintiff further claimed that Jefferies aided and abetted the alleged breach of fiduciary duties by including the provisions in the credit agreement and encouraging our board of directors to accept them. The complaint sought, among other things, declaratory and injunctive relief, as well as an award of costs and disbursements, including attorneys’ and experts’ fees.

On October 30, 2015, we, along with our lenders, amended the credit agreement to remove the provision which was the subject of the litigation. The parties have agreed that the amendment moots the Plaintiff’s claims. The parties filed a stipulation of dismissal and, on January 28, 2016, the court entered an order dismissing the case. We recorded $0.4 million as litigation expense in “General and administrative” in the accompanying statements of operations and comprehensive loss for the year ended December 31, 2015.

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.

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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
Our common stock is listed on the NASDAQNasdaq Global Market under the symbol “INAP.” The following table presents, for the periods indicated, the range of high and low per share sales prices of our common stock, as reported on the NASDAQNasdaq Global Market. Our fiscal year ends on December 31.

Year Ended December 31, 2015: High  Low 
Fourth Quarter $7.80  $5.85 
Third Quarter  9.99   5.75 
Second Quarter  10.75   8.72 
First Quarter  10.30   7.87 

Year Ended December 31, 2014: High  Low 
Fourth Quarter $8.35  $6.52 
Third Quarter  7.39   6.27 
Second Quarter  7.68   6.35 
First Quarter  8.50   6.89 

Year Ended December 31, 2017: 
High(1)
 
Low(1)
Fourth Quarter $22.36
 $13.76
Third Quarter 19.16
 14.04
Second Quarter 15.12
 11.92
First Quarter 15.44
 6.08


Year Ended December 31, 2016: 
High(1)
 
Low(1)
Fourth Quarter $7.72
 $3.20
Third Quarter 10.76
 6.56
Second Quarter 11.76
 7.20
First Quarter 25.08
 7.16
     
(1)
Prices have been adjusted to reflect the reverse stock split that occurred on November 16, 2017. See Note 15 in the accompanying consolidated notes to financial statements for more information on the reverse stock split.

As of FebruaryMarch 1, 2016,2018, we had approximately 608491 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 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, 20152017 (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)  5,505(2) $7.35   2,165(3)
Equity compensation plans not approved by security holders            
Total  5,505  $7.35   2,165 

 

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)
 
316(2)
 $25.40
 
844(3)
       
(1)
Our equity compensation plans consist of the 2017 Stock Incentive 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: 1,257,527117,842 shares subject to outstanding awards granted under the 2014 Stock Incentive Plan, 4,109,635174,694 shares subject to outstanding awards granted under the 2005 Incentive Stock Plan as amended, 27,7271,473 shares subject to outstanding awards granted under the 2000 Non-Officer Equity Incentive Plan and 110,08022,268 shares subject to outstanding awards granted under the 1999 Non-Employee Directors’ Stock Option Plan.
(3)
This number includes shares remaining available for issuance under the 20142017 Stock Incentive Plan. We may not issue additional equity awards under any other plan.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.

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On May 30, 2015,In 2017, we issued 60,76077,075 shares of common stock to our non-employee directors, 1,190 under the 2014 Stock Incentive Plan and 75,885 under the 2017 Stock Incentive Plan. We relied on the exemption set forth under Section 4(a)(2) of the Securities Act.



ISSUER PURCHASES OF EQUITY SECURITIES

We have no publicly announced plans or programs for the repurchase of securities. The following table sets forth information regarding our repurchases of securities for each calendar month in the quarter ended December 31, 2015:

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, 2015  2,174  $6.05   —   — 
November 1 to 30, 2015  725   7.20   —   — 
December 1 to 31, 2015  55,599   6.48   —   — 
Total  58,498  $6.47   —   — 

2017:
 

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, 2017 632
 $17.40
 —
 —
November 1 to 30, 2017 181
 15.90
 —
 —
December 1 to 31, 2017 1,168
 15.70
 —
 —
Total 1,981
 $16.27
 —
 —
         
(1)
Employees surrendered these shares to us as payment of statutory minimum payroll taxes due in connection with the vesting of restricted stock.

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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, 
  2015  2014  2013(1)  2012  2011(2) 
(in thousands, except per share data)               
Consolidated Statements of Operations and Comprehensive Loss Data:                    
Revenues $318,293  $334,959  $283,342  $273,592  $244,628 
Operating costs and expenses:                    
Direct costs of network, sales and services, exclusive of depreciation and amortization, shown below  131,440   144,946   132,012   130,954   120,310 
Direct costs of customer support  36,475   36,804   29,687   26,664   21,278 
Direct costs of amortization of acquired and developed technologies  3,450   5,918   4,967   4,718   3,500 
Sales and marketing  37,497   37,845   31,800   31,343   29,715 
General and administrative  43,169   43,902   42,759   38,635   33,952 
Depreciation and amortization  89,205   75,251   48,181   36,147   36,926 
Loss (gain) on disposals of property and equipment, net  674   112   9   (55)  37 
Exit activities, restructuring and impairments  2,278   4,520   1,414   1,422   2,833 
Total operating costs and expenses  344,188   349,298   290,829   269,828   248,551 
(Loss) income from operations  (25,895)  (14,339)  (7,487)  3,764   (3,923)
Non-operating expenses  26,408   26,775   12,841   7,849   3,866 
Loss before income taxes and equity in (earnings) of equity-method investment  (52,303)  (41,114)  (20,328)  (4,085)  (7,789)
(Benefit) provision for income taxes  (3,660)  (1,361)  (285)  453   (5,612 
Equity in (earnings) of equity-method investment, net of taxes  (200)  (259)  (213)  (220)  (475)
Net loss $(48,443) $(39,494) $(19,830) $(4,318) $(1,702)
                     
Net loss per share:                    
Basic and diluted $(0.93) $(0.77) $(0.39) $(0.09) $(0.03)

  December 31, 
  2015  2014  2013(1)  2012  2011(2) 
Consolidated Balance Sheets Data:                    
Cash and cash equivalents $17,772  $20,084  $35,018  $28,553  $29,772 
Total assets  555,555   591,784   614,241   400,712   356,710 
Credit facilities, due after one year, and capital lease obligations, less current portion  370,693   356,686   346,800   136,555   94,673 
Total stockholders’ equity  114,436   150,336   182,210   195,605   192,170 

  Year Ended December 31, 
  2015  2014  2013  2012  2011 
Other Financial Data:                    
Capital expenditures, net of equipment sale-leaseback transactions $57,157  $77,408  $62,798  $74,947  $68,542 
Net cash flows provided by operating activities  40,208   53,248   33,683   43,742   28,630 
Net cash flows used in investing activities  (57,157)  (75,727)  (208,086)  (79,697)  (96,265)
Net cash flows provided by financing activities  15,290   7,924   180,810   34,571   37,901 

  Year Ended December 31,
  2017 2016 2015 2014 
2013(1)
(in thousands, except per share data)  
  
  
  
  
Consolidated Statements of Operations and Comprehensive Loss Data:  
  
  
  
  
Revenues $280,718
 $298,297
 $318,293
 $334,959
 $283,342
Operating costs and expenses:  
  
  
  
  
Costs of sales and services, exclusive of depreciation and amortization, shown below 106,217
 124,255
 131,440
 144,946
 132,012
Costs of customer support 25,757
 32,184
 36,475
 36,804
 29,687
Sales, general and administrative 62,728
 70,639
 81,340
 81,859
 74,568
Depreciation and amortization 74,993
 76,948
 92,655
 81,169
 53,148
Goodwill impairment —
 80,105
 —
 —
 —
Exit activities, restructuring and impairments 6,249
 7,236
 2,278
 4,520
 1,414
Total operating costs and expenses 275,944
 391,367
 344,188
 349,298
 290,829
Income (loss) from operations 4,774
 (93,070) (25,895) (14,339) (7,487)
Non-operating expenses 51,001
 31,312
 26,408
 26,775
 12,841
Loss before income taxes, non-controlling interest and equity in (earnings) of equity-method investment (46,227) (124,382) (52,303) (41,114) (20,328)
Provision (benefit) for income taxes 253
 530
 (3,660) (1,361) (285)
Equity in (earnings) of equity-method investment, net of taxes (1,207) (170) (200) (259) (213)
Net loss (45,273) (124,742) (48,443) (39,494) (19,830)
Less net income attributable to non-controlling interests (70) —
 —
 —
 —
Net loss attributable to INAP stockholders $(45,343) $(124,742) $(48,443) $(39,494) $(19,830)
Net loss per share:  
  
  
  
  
Basic and diluted $(2.39) $(9.54) $(3.73) $(3.08) $(1.55)
 

  December 31,
  2017 2016 2015 2014 2013
Consolidated Balance Sheets Data:  
  
  
  
  
Cash and cash equivalents $14,603
 $10,389
 $17,772
 $20,084
 $35,018
Total assets 586,525
 430,615
 554,611
 590,735
 612,979
Credit facilities, due after one year, and capital lease obligations, less current portion 519,249
 367,376
 370,693
 356,686
 346,800
Total stockholders’ (deficit) equity (1,032) (3,724) 114,436
 150,336
 182,210


  Year Ended December 31,
  2017 2016 2015 2014 
2013(1)
Other Financial Data:  
  
  
  
  
Capital expenditures, net of equipment sale-leaseback transactions $36,449
 $46,192
 $57,157
 $77,408
 $62,798
Net cash flows provided by operating activities 39,165
 46,449
 40,208
 53,248
 33,683
Net cash flows used in investing activities (32,209) (45,650) (57,157) (75,727) (208,086)
Net cash flows (used in) provided by financing activities (2,872) (8,118) 15,290
 7,924
 180,810
           
(1)
On November 26, 2013, we completed our acquisition of iWeb. We allocated the purchase price to iWeb’s net tangible and intangible assets based on their estimated fair values as of November 26, 2013. We recorded the excess purchase price over the value of the net tangible and identifiable intangible assets as goodwill.
(2)On December 30, 2011, we completed our acquisition of Voxel Holdings, Inc. (“Voxel”). We allocated the purchase price to Voxel’s net tangible and intangible assets based on their estimated fair values as of December 30, 2011. We recorded the excess purchase price over the value of the net tangible and identifiable intangible assets as goodwill. In addition, as a result of our purchase price accounting, our net loss was reduced by a $6.1 million deferred tax benefit that offset our existing income tax expense of $0.5 million.

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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.

2015 Financial


2017 Highlights and Outlook

2018 Acquisition

2017 was a transformative year for our Company. As part of our turnaround plan implemented by our CEO, Peter Aquino, we accomplished several critical financial and operating performance objectives:
Reorganized and Hired a New Leadership Team for the Future
Created business unit P&Ls with industry recognized General Managers
Completed the rebuild of the salesforce by year-end
Established a new pay for performance culture aligned with stockholders 

Raised Equity, Refinanced Debt, and Amended Financial Covenants for Flexibility
By early 2017, leading stockholders invested $43M in common stock
The equity raise was used to reduce debt and refinance $300M in a 5-year bank deal
INAP’s new credit facility included future covenant relief for management flexibility

Achieved Operational Objectives and Positioned for Growth in a Turnaround Year

Improved margins - approaching peer group metrics
•
Returned the Company to sequential revenue growth by the 4th quarter at $70M

On February 28, 2018, we acquired SingleHop LLC, a recognized leader in the managed hosting and infrastructure as a service (IaaS) business segment, which offers highly automated and on-demand IT infrastructure for $132.0 million in cash. This strategic combination allows INAP to immediately offer its customers advanced products and expertise. 

Our GAAP net loss attributable to INAP stockholders was $45.3 million for the year ended December 31, 2017, compared to $124.7 million for the same period in 2016. Our adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) margin, a non-GAAP performance measure, increased 540 basis points to 32.9% for the year ended December 31, 2017, compared to 27.5% for the same period in 2016. We calculate Adjusted EBITDA Margin as Adjusted EBITDA, defined below in “Non-GAAP Financial Measures,” as a percentage of revenues. We will continue to focus on enhancing margin in 2018 through product mix shift, product offerings and other efficiency initiatives.



Factors Affecting Our Performance
We believe all successful companies need to compete well in three dimensions: market, productproduct/technology and execution.

Market

We compete in a very large total addressable market that has seen recentis expected to grow at a CAGR of 15% over the next five years (Data Center and Network Services) and 23% (Cloud Bare Metal Market) and we believe that there is additional growth between 10%for the types of products and 20%.services we provide. In addition, the market remains fragmented and, given our current sizecompetitively differentiated products and revenue base,services, we believe we have an opportunity for growth.growth among a number of different customers. Our ability to take advantage of this market depends, in large part, on effective positioning with our target customers who understand and value the performance capabilities of our offerings.

We will continue to market our products and services to customers seeking solutions in our two segments.


Product

At a high level, there are two primary strategies to successfully compete in the IT infrastructure services market. The first strategy is to compete on scale and low cost.pricing. The second strategy is to compete as a value-added solutions provider with a differentiated and integrated product set.utilizing proprietary technology. We are pursuing this second strategy. Our high-performance, hybridreliable infrastructure services using proprietary solutions position us to compete with a performance-based value proposition. We continue to prudently invest in innovation through our commitment to research and development, talent acquisition, open source technology, key technological partnerships and patentable technology to enhance our differentiated high-performance value proposition, in the areas of cloud, hosting and patented IP.

Execution

We put in place key growth initiatives in 2015 to improve company-wide growth, including salesforce productivity initiatives, proactive churn mitigation and account management and new and enhanced product and service offerings. We will continue to focus on these and other initiatives with a goal to drive growth and efficiencies. In addition to these growth initiatives, in early 2016, we began to restructure our business as noted in “Part I – Item 1. Business” with a goal of re-aligning our operations to streamline processes, cut costs and gain efficiencies. We expect these initiatives to drive stockholder value over the next 12 to 18 months.

Results

We continued our efforts to shift our product mix to the more profitable parts of our business, specifically core data center services, which includes company-controlled colocation, hosting and cloud services. Shifting our product mix to higher margin core data center services allows us to more efficiently utilize our company-controlled data center space and increase the revenue per square foot of occupied space. Additionally, we believe our ability to increase average revenue per customer is indicative of not only the trend toward companies outsourcing their IT services, but also reflective of our ability to capture a larger proportion of the enterprise customers spend for high-performance IT infrastructure services.

Adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) margin, a non-GAAP performance measure, increased 150 basis points to 25.0% for the year ended December 31, 2015, compared to 23.5% for the same period in 2014. We calculate adjusted EBITDA margin as adjusted EBITDA, defined below in “—

Non-GAAP Financial Measures” as a percentage of revenues. We will continue to focus on enhancing margin in 2016 through product mix shift, hybridized product offerings and other efficiency initiatives.

Non-GAAP Financial Measures

We report our consolidated financial statements in accordance with GAAP. We present the non-GAAP performance measures of adjusted EBITDA and adjusted EBITDA margin, discussed above in “—2015 Financial“2017 Highlights and Outlook,2018 Acquisition,” to assist us in explainingthe evaluation of underlying performance trends in our business, which we believe will enhance investors’ ability to analyze trends in our business, and evaluatethe evaluation of our performance relative to other companies. We define adjusted EBITDA as GAAP net loss from operations plus depreciation and amortization, interest expense; provision (benefit) for income taxes, other expense (income), loss (gain) on disposals of property and equipment, exit activities, restructuring and impairments, stock-based compensation, strategic alternatives and related costs, organizational realignment costs and acquisition costs.

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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 adjusted EBITDA to net loss from operations as presented in our consolidated statements of operations and comprehensive loss:

  Year Ended December 31, 
  2015  2014  2013 
Loss from operations $(25,895) $(14,339) $(7,487)
Depreciation and amortization, including amortization of acquired and developed technologies  92,655   81,169   53,148 
Loss on disposals of property and equipment, net  674   112   9 
Exit activities, restructuring and impairments  2,278   4,520   1,414 
Stock-based compensation  8,781   7,182   6,743 
Strategic alternatives and related costs(1)  1,133   —   — 
Acquisition costs  —   85   4,210 
Adjusted EBITDA $79,626  $78,729  $58,037 

  Year Ended December 31,
  2017 2016 2015
Net loss attributable to INAP stockholders $(45,343) $(124,742) $(48,443)
Depreciation and amortization 74,993
 76,948
 92,655
Interest expense 50,476
 30,909
 27,596
Provision (benefit) for income taxes 253
 530
 (3,660)
Other (income) expense (682) 233
 (1,388)
(Gain) loss on disposal of property and equipment, net (353) 8
 674
Exit activities, restructuring and impairments, including goodwill impairment 6,249
 87,341
 2,278
Stock-based compensation 3,040
 4,997
 8,781
Non-income tax contingency 1,500
 —
 —
Strategic alternatives and related costs(1)
 70
 1,408
 1,133
Organizational realignment costs(2)
 957
 4,412
 —
Claim settlement 713
 —
 —
Pre-acquisition costs 373
 —
 —
Adjusted EBITDA $92,246
 $82,044
 $79,626
       
(1)
Primarily legal and other professional fees incurred in connection with the evaluation by our board of directors of strategic alternatives and related shareholder communications. We include these costs in “General“Sales, general and administrative” in the accompanying consolidated statements of operations and comprehensive loss for the yearyears ended December 31, 2015.2017 and 2016.

(2)
Primarily professional fees, employee retention bonus, severance and executive search costs incurred related to our organizational realignment. We include these costs in “Sales, general and administrative” in the accompanying statement of operations and comprehensive loss for the years ended December 31, 2017 and 2016.


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, and IP 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, which was approximately five years for 2017 and 2016 and six years for 2015, 2014 and 2013.

For multiple-deliverable revenue arrangements we allocate arrangement consideration at the inception of an arrangement to all deliverables using the relative selling price method. The hierarchy for determining the selling price of a deliverable includes (a) vendor-specific objective evidence, if available, (b) third-party evidence, if vendor-specific objective evidence is not available and (c) best estimated selling price, if neither vendor-specific nor third-party evidence is available.

We determine third-party evidence based on the prices charged by our competitors for a similar deliverable when sold separately. Our determination of best estimated selling price involves a weighting of several factors including, but not limited to, pricing practices and market conditions. We analyze the selling prices used in our allocation of arrangement consideration on an annual basis at a minimum.

We account for each deliverable within a multiple-deliverable revenue arrangement as a separate unit of accounting if both of the following criteria are met: (a) the delivered item or items have value to the customer on a standalone basis and (b) for an arrangement that includes a general right of return relative to the delivered item(s), we consider delivery or performance of the undelivered item(s) probable and substantially in our control. We consider a deliverable to have standalone value if we sell this item separately or if the item is sold by another vendor or could be resold by the customer. Further, our revenue arrangements generally do not include a right of return for delivered services. We combine deliverables not meeting the criteria for being a separate unit of accounting with a deliverable that does meet that criterion. We then determine the appropriate allocation of arrangement consideration and recognition of revenue for the combined unit of accounting.

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2015.

We routinely review the collectability of our accounts receivable and payment status of our customers. If we determine that collection of revenue is uncertain, we do not recognize revenue until collection is reasonably assured. Additionally, we maintain an allowance for doubtful accounts resulting from the inability of our customers to make required payments on accounts receivable. We base the allowance for doubtful accounts upon general customer information, which primarily includeson our historical cash collection experience and the agingwrite-offs as a percentage of our accounts receivable.revenue. We assess the payment status of customers by reference to the terms under which we provide services or goods, with any payments not made on or before their due date considered past-due. Once we have exhausted all collection efforts, we write the uncollectible balance off against the allowance for doubtful accounts. We routinely perform credit checks for new and existing customers and require deposits or prepayments for customers that we perceive as being a credit risk. In addition, we record a reserve amount for potential credits to be issued under our SLAsservice 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.” We estimate fair value using a combination of discounted cash flow models and market approaches. 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 perform a second test, referred to as “step two,” to measure the amount of impairment to goodwill, if any. To measure the amount of any impairment, we determine the implied fair value of goodwill in the same manner as if we were acquiring the affected reporting unit in a business combination. Specifically, we allocate the fair value of the affected reporting unit to all of the assets and liabilities of that unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill. If the implied fair value of goodwill is less than the goodwill recorded on our consolidated balance sheet, we record an impairment charge for the difference.

We base the impairment analysis of goodwill on estimated fair values. Our 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; projected EBITDA for expected cash flows; market comparables and capital expenditures forecasts. The use of different assumptions, inputs and judgments, or changes in circumstances, could materially affect the results of the valuation. 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 economicuseful life. We amortize the cost of the acquired technologies over their useful lives of five to eight years and 10 to 15 years for customer relationships and trade names. 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.

Property and Equipment

We carry property and equipment at original acquisition cost less accumulated depreciation and amortization. We calculate depreciation and amortization on a straight-line basis over the estimated useful lives of the assets. Estimated useful lives used for network equipment are generally five years; furniture, equipment and software are three to seven years; and leasehold improvements are 10 to 25 years or overthe shorter of the lease term depending on the nature of the improvement.or their estimated useful lives. We capitalize additions and improvements that increase the value or extend the life of an asset. We expense maintenance and repairs as incurred. We charge gains or losses from disposals of property and equipment to operations.

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.

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Income Taxes

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. We measure the tax benefits recognized in our accompanying consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. We recognize interest and penalties related to uncertain tax positions as part of the provision for income taxes and we accrue such items beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that we recognize the related tax benefits.


We maintain a valuation allowance to reduce our deferred tax assets to their estimated realizable value. Although we consider the potential for future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, if


we determine we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to reduce the valuation allowance would increase net income in the period we made such determination. We may recognize deferred tax assets in future periods if and when we estimate them to be realizable and supported by historical trends of profitability and expectations of future profits within each tax jurisdiction.


Based on an analysis of our historic and projected future U.S. pre-tax income, we do not have sufficient positive evidence to expect a release of our valuation allowance against our U.S. deferred tax assets currently or within the next 12 months; therefore, we continue to maintain the full valuation allowance in the U.S.


Based on an analysis of past 12 quarters and projected future pre-tax income, we concluded that there is no longer sufficient positive evidence to support U.K.’s deferred tax assets position. Therefore, we established a full valuation allowance against U.K. deferred tax assets in 2015.

U.K. continues to have a full valuation allowance against deferred tax assets in 2017.


We reached the same conclusion regarding our foreign jurisdictions, other than the Canada, Germany and the Netherlands. Accordingly, we continue to maintain the full valuation allowance in all foreign jurisdictions, other than Canada, Germany and the Netherlands.

During 2015, the weight of positive evidence exceeded the weight of negative evidence for Germany and the Netherlands’ deferred tax assets. Accordingly, we released the valuation allowance set against Germany and the Netherlands’ deferred tax assets.

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.

Capitalized Software Costs

We capitalize internal-use software development costs incurred during the application development stage. Amortization 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.

Recent Accounting Pronouncements

Recent accounting pronouncements

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 summarized in note 2 to the accompanying consolidated financial statements.

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 2016 to 2017 Increase (decrease) from 2015 to 2016
  2017 2016 2015 Amount Percent Amount Percent
Revenues:  
  
  
  
  
  
  
INAP COLO $209,580
 $221,678
 $234,859
 $(12,098) (5)% $(13,181) (6)%
INAP CLOUD 71,138
 76,619
 83,434
 (5,481) (7) (6,815) (8)
Total revenues 280,718
 298,297
 318,293
 (17,579) (6) (19,996) (6)
Operating costs and expenses:  
  
  
  
  
  
  
Costs of sales and services, exclusive of depreciation and amortization, shown below:  
  
  
  
  
  
  
INAP COLO 89,240
 105,620
 111,765
 (16,380) (15) (6,145) (5)
INAP CLOUD 16,977
 18,635
 19,675
 (1,658) (8) (1,040) (5)
Costs of customer support 25,757
 32,184
 36,475
 (6,427) (18) (4,291) (12)
Sales, general and administrative 62,728
 70,639
 81,340
 (7,911) (10) (10,701) (13)
Depreciation and amortization 74,993
 76,948
 92,655
 (1,955) (2) (15,707) (17)
Goodwill impairment —
 80,105
 —
 (80,105) (100) 80,105
 100
Exit activities, restructuring and impairments 6,249
 7,236
 2,278
 (987) (43) 4,958
 218
Total operating costs and expenses 275,944
 391,367
 344,188
 (115,423) (34) 47,179
 14
Income (loss) from operations $4,774
 $(93,070) $(25,895) $97,844
 —
 $(67,175) (259)
Interest expense $50,476
 $30,909
 $27,596
 $19,567
 63
 $3,313
 12
Provision (benefit) for income taxes $253
 $530
 $(3,660) $(277) (52)% $4,190
 114 %
Revenues

We generate revenues primarily from the sale of data center services, IP services and IPcloud and hosting services.

Direct

Costs of Network, Sales and Services

Direct costs

Costs of network, sales and services are comprised primarily of:

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●costs for connecting to and accessing ISPs and competitive local exchange providers;
●facility and occupancy costs, including power and utilities, for hosting and operating our equipment and hosting our customers’ equipment;
●costs incurred for providing additional third party services to our customers; and
●royalties and costs of license fees for operating systems software.

costs for connecting to and accessing ISPs and competitive local exchange providers;
facility and occupancy costs, including power and utilities, for hosting and operating our equipment and hosting our customers’ equipment;
costs incurred for providing additional third party services to our customers; and
royalties and costs of license fees for operating systems software.
If a network access point is not colocated with the respective ISP, we may incur additional local loop charges on a recurring basis. Connectivity costs vary depending on customer demands and pricing variables while P-NAP"POPS" facility costs are generally fixed. Direct costsCosts of network, sales and services do not include compensation, depreciation or amortization.

Direct

Costs of Customer Support

Direct costs

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 P-NAPPOPS 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.

Direct Costs of Amortization of Acquired and Developed Technologies

Direct costs of amortization of acquired and developed technologies are for technologies that are an integral part of the services we sell, which were acquired through business combinations or developed internally. We record amortization 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 economic life. We amortize the cost over their useful lives of five to eight years. At December 31, 2015, the carrying value of the acquired and developed technologies was $9.0 million and the weighted average remaining life was approximately 4.0 years.




Sales, and Marketing

Sales and marketing costs consist of compensation, commissions, bonuses and other costs for personnel engaged in marketing, sales and field service support functions, and advertising, online marketing, tradeshows, direct response programs, facility open houses, management of our external website and other promotional costs.

General and Administrative

General

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. General and administrative costs also include consultant fees and non-capitalized prototype costs related
Segment Information
Effective January 1, 2017, as further described in note 11 to the design, development and testing of our proprietary technology, enhancement of our network management software and development of internal systems. We capitalize costs associated with internal-use software when the software enters the application development stage until the software is ready for its intended use. We expense all other product development costs as incurred.

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Results of Operations

The following table sets forth selected consolidated financial 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 2014 to
2015		  Increase
(decrease)
from 2013 to
2014		 
  2015  2014  2013  Amount  Percent  Amount  Percent 
Revenues:                            
Data center services:                            
Core $194,102  $195,373  $133,970  $(1,271)  (1)% $61,403   46%
Partner  42,053   47,250   51,177   (5,197)  (11)  (3,927)  (8)
Total data center services  236,155   242,623   185,147   (6,468)  (3)  57,476   31 
IP services  82,138   92,336   98,195   (10,198)  (11)  (5,859)  (6)
Total revenues  318,293   334,959   283,342   (16,666)  (5)  51,617   18 
                             
Operating costs and expenses:                            
Direct costs of network, sales and services, exclusive of depreciation and amortization, shown below:                            
Data center services:                            
Core  66,462   70,998   55,270   (4,536)  (6)  15,728   28 
Partner  30,923   35,161   37,294   (4,238)  (12)  (2,133)  (6)
Total data center services  97,385   106,159   92,564   (8,774)  (8)  13,595   15 
IP services  34,055   38,787   39,448   (4,732)  (12)  (661)  (2)
Direct costs of customer support  36,475   36,804   29,687   (329)  (1)  7,117   24 
Direct costs of amortization of acquired and developed technologies  3,450   5,918   4,967   (2,468)  (42)  951   19 
Sales and marketing  37,497   37,845   31,800   (348)  (1)  6,045   19 
General and administrative  43,169   43,902   42,759   (733)  (2)  1,143   3 
Depreciation and amortization  89,205   75,251   48,181   13,954   19   27,070   56 
Loss on disposal of property and equipment, net  674   112   9   562   500   103   — 
Exit activities, restructuring and impairments  2,278   4,520   1,414   (2,242)  (50)  3,106   220 
Total operating costs and expenses  344,188   349,298   290,829   (5,110)  (1)  58,469   20 
Loss from operations $(25,895) $(14,339) $(7,487) $(11,556)  (81) $(6,852)  (92)
Interest expense $27,596  $26,742  $11,346  $854   3  $15,396   136 
Benefit for income taxes $(3,660) $(1,361) $(285) $(2,299)  (169)% $(1,076)  (378)%

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Segment Information

Wewe operate in two business segments: data center and network services and IPcloud and hosting services. Segment results for each of the three years ended December 31, 20152017 are summarized as follows (in thousands):

  Year Ended December 31, 
  2015  2014  2013 
Revenues:            
Data center services $236,155  $242,623  $185,147 
IP services  82,138   92,336   98,195 
Total revenues  318,293   334,959   283,342 
             
Direct costs of network, sales and services, exclusive of depreciation and amortization:            
Data center services  97,385   106,159   92,564 
IP services  34,055   38,787   39,448 
Total direct costs of network, sales and services, exclusive of depreciation and amortization  131,440   144,946   132,012 
             
Segment profit:            
Data center services  138,770   136,464   92,583 
IP services  48,083   53,549   58,747 
Total segment profit  186,853   190,013   151,330 
             
Exit activities, restructuring and impairments  2,278   4,520   1,414 
Other operating expenses, including direct costs of customer support, depreciation and amortization  210,470   199,832   157,403 
Loss from operations  (25,895)  (14,339)  (7,487)
Non-operating expense  26,408   26,775   12,841 
Loss before income taxes and equity in (earnings) of equity-method investment $(52,303) $(41,114) $(20,328)

  Year Ended December 31,
  2017 2016 2015
Revenues:  
  
  
INAP COLO $209,580
 $221,678
 $234,859
INAP CLOUD 71,138
 76,619
 83,434
Total revenues 280,718
 298,297
 318,293
       
Costs of sales and services, exclusive of depreciation and amortization:  
  
  
INAP COLO 89,240
 105,620
 111,765
INAP CLOUD 16,977
 18,635
 19,675
Total costs of sales and services, exclusive of depreciation and amortization 106,217
 124,255
 131,440
       
Segment profit:  
  
  
INAP COLO 120,340
 116,058
 123,094
INAP CLOUD 54,161
 57,984
 63,759
Total segment profit 174,501
 174,042
 186,853
       
Goodwill impairment —
 80,105
 —
Exit activities, restructuring and impairments 6,249
 7,236
 2,278
Other operating expenses, including direct costs of customer support, depreciation and amortization 163,478
 179,771
 210,470
Income (loss) from operations 4,774
 (93,070) (25,895)
Non-operating expense 51,001
 31,312
 26,408
Loss before income taxes, non-controlling interest and equity in earnings of equity-method investment $(46,227) $(124,382) $(52,303)
Segment profit is calculated as segment revenues less direct costs of network, sales and services, exclusive of depreciation and amortization for the segment, and does not include direct costs of customer support, direct costs of amortization of acquired technologies or any other depreciation or amortization associated with direct costs.support. We view direct costs of network, 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.

Years Ended December 31, 20152017 and 2014

Data Center Services

2016

INAP COLO
Revenues for data center servicesour Colocation segment decreased 3%5%, to $236.2$209.6 million for the year ended December 31, 2015,2017, compared to $242.6$221.7 million for the same period in 2014.2016. The decrease was primarily due to $3.3 million of lower network services revenue related to the downward pricing pressures and a $6.3$8.8 million reductiondecrease in colocation and managed hosting revenue due to the negative impact of churn from a


small number of large customers. This decrease includes a loss of revenue from a data center exit offset by revenues from the consolidation of INAP Japan and the acquisition of a new data center.

Costs of our Colocation segment, exclusive of depreciation and amortization, decreased 15%, to $89.2 million for the year ended December 31, 2017, compared to $105.6 million for the same period in 2016. The decrease was primarily due to $9.5 million lower expenses related to the conversion of our operating to capital leases, a data center exit, lower variable costs related to a decline in revenue resultingand additional cost reduction efforts.

INAP CLOUD
Revenues for our Cloud segment decreased 7% to $71.1 million for the year ended December 31, 2017, compared to $76.6 million for the same period in 2016. The decrease is primarily due to $0.3 million revenue loss from customer churn as we migrated outthe planned closure of theour 75 Broad Street, New York metro data center into our Secaucus data centerfacility and other$5.2 million revenue loss from the continued negative impact of churn from a small number of large customers. The decrease in partner colocation revenue was primarily due to

Costs of our strategy to focus on selling into our company-controlled data centers.

Direct costs of data center services,Cloud segment, exclusive of depreciation and amortization, decreased 8%, to $97.4$17.0 million for the year ended December 31, 2015,2017, compared to $106.2$18.6 million for the same period in 2014.2016. The decrease in direct costs was primarily due to $0.3 million reduced costs from the planned closure of our 75 Broad Street, New York metro data center migration, ongoing cost reduction effortsfacility and $1.3 million lower variable costs related to lowera decline in revenue.

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Direct costs

Geographic Information
Revenues are allocated to countries based on location of data center services, exclusive of depreciation and amortization, have substantial fixed cost components, primarily rent for operating leases, but also significant demand-based pricing variables, such as utilities attributable to seasonal costs and customers’ changing power requirements. Direct costs of data center services as a percentage ofservices. Revenues, by country with revenues vary with the mix of usage between company-controlled data centers and partner sites and the utilizationover 10% of total available space. Since we recognize some of the initial operating costs of company-controlled data centers in advance of revenues, or in advance of sites being fully utilized, these sites are less profitable in the early years of operation compared to partner sitesas follows (in thousands): 
  2017 2016
United States $220,018
 $231,943
Canada 38,750
 44,206
Other 21,950
 22,148
  $280,718
 $298,297

Other Operating Costs and we expect them to be more profitable as occupancy increases. Conversely, costs in partner sites are more demand-basedExpenses
Compensation. Total compensation and therefore are more closely associated with the level of utilization.

We will continue to focus on increasing revenues from company-controlled facilities as compared to partner sites. We also expect direct costs of data center services as a percentage of corresponding revenues to decrease as our new and recently-expanded company-controlled data centers continue to contribute to revenue and become more fully occupied. This is evidenced by the improvement in direct costs of data center services as a percentage of corresponding revenues of 41% during the year ended December 31, 2015, compared to 44% during the same period in 2014.

IP Services

Revenues for IP services decreased 11% to $82.1benefits, including stock-based compensation, was $58.0 million for the year ended December 31, 2015,2017, compared to $92.3$66.3 million for the same period in 2014.2016. The decrease continues to be driven by a decline in IP pricing for new and renewing customers and customer churn.

Direct costs of IP services, exclusive of depreciation and amortization, decreased 12% to $34.1 million for the year ended December 31, 2015, compared to $38.8 million for the same period in 2014. This decreasechange was primarily due to lower variable costs related to lower revenue.

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

Other Operating Costs and Expenses

Compensation. Totala $8.2 million decrease in cash-based compensation and benefits, includingpayroll taxes, a $2.0 million decrease in stock-based compensation, a $0.8 million decrease in sales commissions, a $0.5 million decrease in insurance benefit costs, partially offset by a $1.8 million increase in bonus accrual and a $1.6 million decrease in software costs that were $81.1 million and $81.0 million for the years ended December 31, 2015 and 2014, respectively.

capitalized (resulting in increased compensation costs).

Stock-based compensation, net of amount capitalized, increaseddecreased to $8.8$3.0 million during the year ended December 31, 20152017, from $7.2$5.0 million during the same period in 2014.2016. The increase wasdecrease is primarily due to a net $1.8 million of executive transitionlower stock-based compensation awards and forfeitures, partially offset by a net $0.7 million for the decreased vesting of awards in connection with the iWeb acquisition. Thefrom prior year terminations. The following table summarizes the amount of stock-based compensation net of estimated forfeitures, included in the accompanying consolidated statements of operations and comprehensive loss (in thousands):

  2015  2014 
Direct costs of customer support $1,901  $1,448 
Sales and marketing  2,101   1,147 
General and administrative  4,779   4,587 
  $8,781  $7,182 

Direct

  2017 2016
Customer support $167
 $1,159
Sales, general and administrative 2,873
 3,838
  $3,040
 $4,997

Costs of Customer Support. Direct costs Costs of customer support decreased to $36.5$25.8 million during the year ended December 31, 2015 from $36.82017 compared to $32.2 million during the same period in 2014.

Direct Costs2016. The decrease was primarily due to $4.9 million of Amortization of Acquiredlower cash-based compensation from reduced headcount, a $1.1 million decrease in facilities costs and Developed Technologies. Directa $1.0 million decrease in stock-based compensation, offset by a $1.0 million increase in bonus accrual.


Sales, General and Administrative. Sales, general and administrative costs of amortization of acquired and developed technologies decreased to $3.5$62.7 million during the year ended December 31, 2015 from $5.92017 compared to $70.6 million during the same period in 2014.2016. The decrease is primarily relateddue to an intangible asset that we fully amortized in early 2015 resulting in less amortization expense in 2015 than in 2014.

Sales and Marketing. Sales and marketing costs decreased to $37.5 million during the year ended December 31, 2015 from $37.8 million during the same period in 2014.The decrease is primarily related tofollowing: a $0.7$4.7 million decrease in commissions,organizational realignment costs, a $1.6 million decrease in marketing programs, partially offset by a $0.7 million increase in cash-based compensation and a $1.0 million increase in stock-based compensation.

General and Administrative. General and administrative costs decreased to $43.2 million during the year ended December 31, 2015 from $43.9 million during the same period in 2014.The decrease was primarily due to a $3.2$3.3 million decrease in cash-based compensation from reduced headcount, a $1.1 million decrease in office administration costs, a $1.0 million decrease in stock-based compensation, a $0.9 million decrease in sales commissions, a $0.8



million decrease in tax costs, and bonus accrual,a $0.6 million decrease in insurance benefit costs, partially offset by a $1.9 million increase in facilities costs, a $1.6 million decrease in stock-basedsoftware costs that were capitalized (resulting in increased compensation andcosts in SG&A), a $0.7$0.8 million decreaseincrease in taxes, partially offset by executive transition costs of $1.7 million for bonus and severance, a net $1.8accrual, $0.6 million in executive transition stock-based compensation awardssettlement costs and $1.1$0.4 million in strategic alternatives and related costs for legal and other professional fees.

- 26 -
pre-acquisition costs.


Depreciation and Amortization. Depreciation and amortization increaseddecreased slightly to $89.2$75.0 million during the year ended December 31, 2015 from $75.32017 compared to $76.9 million during the same period in 2014.2016. The increase wasdecrease is primarily due to lower capital purchases and older assets becoming fully depreciated during 2017.

Goodwill Impairment. There was no goodwill impairment during the effectsyear ended December 31, 2017 compared to an impairment charge of expanding our company-controlled data centers, including increased power capacity and servers, network infrastructure and capitalized software, and $14.0$80.1 million of additional amortization expense forduring the accelerated useful life of the iWeb trade name. We summarize the acceleration of the iWeb trade namesame period in note 7 to the accompanying consolidated financial statements.

2016.

Exit Activities,activities, Restructuring and Impairments.Impairments. Exit activities, restructuring and impairments decreased to $2.3$6.2 million during the year ended December 31, 2015 from $4.52017 compared to $7.2 million during the same period in 2014.2016. The decrease wasis primarily due the more significant chargesa non-recurring software impairment charge during the same period in 2014 related to initial exit activity charges related to ceasing use of a portion of data center space and subsequent plan adjustments.

2016.


Interest Expense.Expense. Interest expense increased to $27.6$50.5 million during the year ended December 31, 20152017 from $26.7$30.9 million during the same period in 2014.2016. The increase wasis primarily due to increased borrowings under our credit agreement.

Benefitadditional expense related to the modification and extinguishment of debt issuance costs of the previous term loan plus costs related to the new term loan and additional interest expense related to new capital leases.


Provision (Benefit) for Income Taxes. BenefitProvision for income taxes increaseddecreased to $3.7$0.3 million during the year ended December 31, 20152017 from $1.4$0.5 million during the same period in 2014.2016. The increasedecrease was primarily due to the change intax benefit forrelated to our alternative minimum tax credit becoming refundable due to the operational results of iWeb, partiallynewly enacted tax reform and offset by a $1.7 million reserve recorded against U.K. net deferred tax assets.

the positive operational improvement in some of our foreign operations.


Years Ended December 31, 20142016 and 2013

Data Center Services

2015

INAP COLO

Revenues for data center services increased 31%our Colocation segment decreased 6%, to $242.6$221.7 million for the year ended December 31, 2014,2016, compared to $185.1$234.9 million for the same period in 2013.2015. The increasedecrease was primarily due to net revenue growth in our core data center services, which includes company-controlled colocation, hosting and cloud services, and $43.2$11.3 million of lower network services revenue attributablerelated to iWeb. Revenue growth benefited from higher average revenue per customerthe continued downward pricing pressures and the capturing of a larger proportion of the enterprise customer spend for high performance services with our hybrid platform of$1.9 million decrease in colocation and managed hosting and cloud services. In addition, the benefitrevenue.

Costs of our hybrid strategy was also reflected in an increase in the revenue per square foot generated from our company-controlled data centers.

Direct costs of data center services,Colocation segment, exclusive of depreciation and amortization, increased 15%decreased 5%, to $106.2$105.6 million for the year ended December 31, 2014,2016, compared to $92.6$111.8 million for the same period in 2013.2015. The increase in direct costsdecrease was primarily due to lower variable costs related to a decline in revenue growth, with an increasing proportion of higher margin core data center services, and $7.8 million of direct costs attributable to iWeb, offset by cost reduction efforts. Our focus on company-controlled data centers helped drive the improvement in direct costs of data center services as a percentage of corresponding revenues of 44% during the year ended December 31, 2014, compared to 50% during the same period in 2013.

IP Services


INAP CLOUD

Revenues for IP servicesour Cloud segment decreased 6%8% to $92.3$76.6 million for the year ended December 31, 2014,2016, compared to $98.2$83.4 million for the same period in 2013.2015. The decrease continued to be driven by a decline in IP pricing for new and renewing customers and the loss of legacy contracts, partially offset by an increase in overall traffic. IP traffic increased approximately 11% for the year ended December 31, 2014, comparedis primarily due to the same period in 2013, calculated based on an average over thecontinued negative impact of churn from a small number of months in the respective periods.

Direct costslarge customers.


Costs of IP services,our Cloud segment, exclusive of depreciation and amortization, decreased 2%5%, to $38.8$18.6 million for the year ended December 31, 2014,2016, compared to $39.4$19.7 million for the same period in 2013. This2015. The decrease was primarily due to renegotiation of vendor contracts and cost reduction efforts.

There have been ongoing industry-wide pricing declines over the last several years and this trend continued during 2014. Technological improvements and excess capacity were the primary drivers for lower pricing of IP services. The increasevariable costs related to a decline in IP traffic resulted from both new and existing customers.

revenue.

Other Operating Costs and Expenses

Compensation. Total compensation and benefits, including stock-based compensation, were $81.0$66.3 million and $71.1$81.1 million for the years ended December 31, 20142016 and 2013,2015, respectively. The increasedecrease was primarily due to $12.0 million of expenses attributable to iWeb, partially offset by a $1.3$10.0 million decrease in cash-based compensation and bonus, a $0.9$3.8 decrease in stock-based compensation and a $1.0 million decrease in stock-based compensation.

severance.




Stock-based compensation, net of amount capitalized, increaseddecreased to $7.2$5.0 million during the year ended December 31, 20142016 from $6.7$8.8 million during the same period in 2013.2015. The increase wasdecrease is primarily due to $1.3 millionexecutive transition awards in the prior year for our former chief executive officer, reversal of stock-based compensation expense for grantsdue to certain iWeb employees after the acquisition, offset byterminations and a $0.9 million decrease in stock-based compensation unrelated to iWeb.the fair value of stock options awards. The following table summarizes the amount of stock-based compensation, net of estimated forfeitures, included in the accompanying consolidated statements of operations and comprehensive loss (in thousands):

- 27 -

  2014  2013 
Direct costs of customer support $1,448  $1,108 
Sales and marketing  1,147   1,110 
General and administrative  4,587   4,525 
  $7,182  $6,743 

Direct

  2016 2015
Costs of customer support $1,159
 $1,901
Sales, general and administrative 3,838
 6,880
  $4,997
 $8,781

Costs of Customer Support. Direct costs of customer support increaseddecreased to $36.8$32.2 million during the year ended December 31, 20142016 from $29.7$36.5 million during the same period in 2013.2015. The increasedecrease was primarily due to $6.6a $2.6 million of expenses attributabledecrease in cash-based compensation and bonus from reduced headcount, a $0.7 million decrease in professional fees and a $0.7 million decrease in stock-based compensation.

Sales, General and Administrative. Sales, general and administrative costs decreased to iWeb.

Direct Costs of Amortization of Acquired and Developed Technologies. Direct costs of amortization of acquired and developed technologies increased to $5.9$70.6 million during the year ended December 31, 20142016 from $5.0$81.3 million during the same period in 2013.2015. The increasedecrease was primarily due to amortization of acquired intangiblesa $7.2 million decrease in cash-based compensation and bonus from the iWeb acquisition.

Sales and Marketing. Sales andreduced headcount, a $3.0 million decrease in stock-based compensation, a $2.8 million decrease in marketing costs, increaseda $1.0 million decrease in severance and a $0.6 million decrease in facility costs, partially offset by a $4.5 million increase in organizational realignment costs and strategic alternatives and related costs and a $1.2 million increase in professional fees.


Goodwill Impairment. We determined that the fair value of each of our IP services, IP products and DCS reporting units, all included in our Data Center and Network Services segment, was below its book value. Accordingly, we performed step two of our assessment and recorded an initial impairment estimate of $78.2 million. In the fourth quarter of 2016, we finalized step two of our assessment and recorded an additional $1.9 million in impairment to $37.8goodwill. As of December 31, 2016, no goodwill remains in our Data Center and Network Services segment. The fair value of our Cloud and Hosting Services and Hosting Products reporting units within our Cloud and Hosting Services segment exceeds the carrying value of those reporting units.

Depreciation and Amortization. Depreciation and amortization decreased to $76.9 million during the year ended December 31, 20142016 from $31.8$92.7 million during the same period in 2013.2015. The increasedecrease was primarily due to $5.9the additional amortization expense in the prior year of $14.0 million for the accelerated useful life of expenses relatedthe iWeb trade name.

Exit Activities, Restructu6ring and Impairments. Exit activities, restructuring and impairments increased to iWeb and a $0.5 million increase in agent fees.

General and Administrative. General and administrative costs increased 3% to $43.9$7.2 million during the year ended December 31, 20142016 from $42.8$2.3 million during the same period in 2013.2015. The increase was primarily due to $8.1severance costs and facility exit costs of $4.0 million, impairments of expenses attributableinternal-use computer software development costs of $1.6 million and impairments related to iWeb, partially offset by a $3.3 million decrease in outside professional services, a $1.1 million decrease in bad debtavailable for sale software of $1.6 million.


Interest Expense. Interest expense a $0.9 million decrease in stock-based compensation unrelated to iWeb, a $0.7 million decrease in cash-based compensation and a $0.5 million decrease in net taxes as a result of passing additional taxes through to our customers.

Depreciation and Amortization. Depreciation and amortization increased to $75.3$30.9 million during the year ended December 31, 20142016 from $48.2$27.6 million during the same period in 2013.2015. The increase wasis primarily due to the effects of expanding our company-controlled data centers, includinghigher interest rate from the April 2016 debt amendment and increased power capacity and servers, network infrastructure and capitalized software, and $11.6 million of expense attributable to iWeb related toborrowings on the amortizationrevolving credit facility.


Provision (Benefit) for the acquired assets at purchase price accounting values.

Exit Activities, Restructuring and Impairments. Exit activities and impairmentsIncome Taxes. Provision (benefit) for income taxes increased to $4.5a provision of $0.5 million during the year ended December 31, 20142016 from $1.4a benefit of $(3.7) million during the same period in 2013.2015. The increase in provision was primarily due to initial exit activity charges relatedthe positive change in the operational results of iWeb. With respect to ceasing use of certain data center space of $3.5 million, as well as plan adjustmentsthe U.K., we maintain a full reserve against the net deferred tax assets, set up in sublease income assumptions for certain properties included2015, with no additional reserve recorded in our previously-disclosed plans of $1.1 million.

Interest Expense. Interest expense increased to $26.7 million during the year ended December 31, 2014 from $11.3 million during the same period in 2013. The increase was due to increased borrowings and interest rate under our credit agreement.

Benefit for Income Taxes. The benefit for income taxes increased to $1.4 million during the year ended December 31, 2014 from $0.3 million during the same period in 2013. The variance was primarily due to an income tax benefit created by the activity of iWeb and the reduction of a prior year uncertain tax position reserve.

2016.

Liquidity and Capital Resources

Liquidity

New Credit Agreement

On April 6, 2017, we entered into a new Credit Agreement (the “2017 Credit Agreement”), which provides for a $300 million term loan facility ("2017 term loan") and a $25 million revolving credit facility (" 2017 revolving credit facility"). The proceeds of the term loan were used to refinance the Company’s existing credit facility and to pay costs and expenses associated with the 2017 Credit Agreement.

Certain portions of 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 term of the loan and $0.4 million are prepaid debt issuance costs related to the 2017 revolving credit facility and will be amortized


over the term of the 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 term loan is April 6, 2022 and the maturity date of the 2017 revolving credit facility is October 6, 2021. As of December 31, 2015,2017, the balance of the term loan and the revolver was $298.5 million and $5.0 million, respectively. As of December 31, 2017, the interest rate on the 2017 term loan and the revolver was 8.4% and 10.3%, 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 4.5% for loans bearing interest calculated using the base rate (“Base Rate Loans”) and 5.50% for loans bearing interest calculated using the adjusted LIBOR rate (“Adjusted LIBOR Loans”). The applicable margin for loans under the term loan is 5.00% for Base Rate Loans and 6.00% 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.
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 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.
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, 2017. 
Covenants RequirementsRatios at December 31, 2017
Maximum total leverage ratio (the ratio of Consolidated Indebtedness to Consolidated EBITDA as defined in the 2017 Credit Agreement) should be equal to or less than:
5.9 (1)
4.69
Minimum consolidated interest coverage ratio (the ratio of Consolidated EBITDA to Consolidated Interest Expense as defined in the 2017 Credit Agreement) should be equal to or greater than:
2.0(2)
2.71
2017 Annual LimitTwelve months ended December 31, 2017
Limitation on capital expendituresNo limit$36 million

(1)
The maximum total leverage ratio decreases to 5.9 to 1 as of March 1, 2018, 5.9 to 1 as of June 30, 2018, 5.9 to 1 as of September 30, 2018, 5.9 to 1 as of December 31, 2018, 5.9 to 1 as of March 31, 2019, 5.9 to 1 as of June 30, 2019, 5.5 to 1 as of September 30, 2019, 5.5 to 1 as of December 31, 2019, 5.5 to 1 March 31, 2020, 5.25 to 1 as of June 30, 2020, 5.25 to 1 September 30, 2020, 4.75 to 1 as of December 31, 2020, 4.75 to 1 as of March 31, 2021, 4.75 to 1 as of June 30, 2021 and 4.5 to 1 as of September 30, 2021 and thereafter.
(2)
The minimum consolidated interest coverage ratio increases to 2.00 to 1 as of March 31, 2018, 2.00 to 1 as of June 30, 2018, 2.00 to 1 as of September 30, 2018, 2.00 to 1 as of December 31, 2018, 2.00 to 1 as of March 31, 2019, 2.00 to 1 as of June 30, 2019, 2.00 to 1 September 30, 2019, 2.00 to 1 as of December 31, 2019, 2.00 to 1 as of March 31, 2020, 2.00 to 1 as of June 30, 2020, 2.00 to 1 as of September 30, 2020, 2.25 to 1 December 31, 2020, 2.25 to 1 as of March 31, 2021, 2.25 to 1 as of June 30, 2021, 2.25 to 1 as of September 30, 2021 and thereafter.
Previous Credit Agreement



During 2013, we entered into a $350.0 million credit agreement (the “previous credit agreement”), which provides for a senior secured first lien term loan facility of an initial $300.0 million (“previous term loan”) and a second secured first lien revolving credit facility of $50.0 million (“previous revolving credit facility”). The previous revolving credit facility is due November 26, 2018. The term loan is due in installments of $750,000 on the last day of each fiscal quarter, with the remaining unpaid balance due November 26, 2019.

Second Amendment

During the three months ended June 30, 2016, we entered into an amendment to our previous credit agreement (the “Second Amendment”), which among other things, amended the interest coverage ratio and leverage ratio covenants to make them less restrictive and increased the applicable margin for revolving credit facility and term loan by 1.0%. We paid a one-time aggregate fee of $1.7 million to the lenders for the Second Amendment. Absent the Second Amendment we would not have been able to comply with our covenants in the previous credit agreement.

Third Amendment

During the three months ended March 31, 2017, we entered into an amendment to our previous credit agreement (the “Third Amendment”), which, among other things, amended the previous credit agreement (i) to make each of the interest coverage ratio and leverage ratio covenants less restrictive and (ii) to decrease the maximum level of permitted capital expenditures. We paid a one-time aggregate fee of $2.6 million to the lenders for the Third Amendment, which we recorded as a debt discount of $2.2 million related to the term loan and prepaid debt issuance costs of $0.4 million related to the revolving credit facility. In addition, we paid $0.3 million in third-party fees, which we recorded as expense of $0.3 million related to the term loan and as prepaid debt issuance costs of less than $0.1 million related to the previous revolving credit facility.
The Third Amendment was effective on February 28, 2017, upon the closing of the equity sale, which is described in "Equity" below. The effectiveness of the covenant amendments was conditioned on the Company completing one or more equity offerings on or before June 30, 2017 for gross cash proceeds of not less than $40 million, and net cash proceeds of not less than $37 million and the application of the net cash proceeds to the repayment of indebtedness under the previous credit agreement. The Company paid a fee of approximately $0.9 million to the lenders on January 26, 2017 and paid an additional fee of $1.6 million on February 28, 2017. Absent the Third Amendment, we may not have been able to comply with our covenants in the previous credit agreement.

Refer to Note 10 in our accompanying consolidated financial statements for additional information about our credit agreement.

Equity

On February 22, 2017, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain purchasers (the “Purchasers”), pursuant to which we issued to the Purchasers an aggregate of 5,950,712 shares of our 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.

On November 16, 2017, the Company amended its certificate of incorporation to effect a 1-for-4 reverse stock split of the shares of the Company’s common stock, par value $0.001 per share. This reverse stock split became effective as of the close of business on November 20, 2017. 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. Any fractional shares that would otherwise have resulted from the reverse stock split were paid in cash in a proportionate amount based on the closing price of on the effective date of the reverse stock split. The reverse stock split reduced the number of shares of common stock outstanding from 83.4 million shares to approximately 20.9 million shares, subject to adjustment for the payment of cash in lieu of fractional shares. The number of authorized shares were also be reduced: (i) Common Stock from 200 million shares to 50 million shares, and (ii) Preferred Stock from 20 million shares to 5 million shares. Accordingly, the authorized, issued and outstanding shares, stock options disclosures, net loss per share, and other per share disclosures for all periods presented have been retrospectively adjusted to reflect the impact of this reverse stock split.


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, 2017, we had $14.6 million of borrowing capacity under our 2017 revolving credit facility. Together with our cash and cash equivalents the Company’s liquidity as of December 31, 2017, was $29.2 million.


As of December 31, 2017, we had a deficit of $23.5 million in working capital, which represented an excess of current liabilities over current assets due to our strategy to minimize interest costs by not accessing additional borrowing capacity under our revolving credit facility.assets. We believe that cash flows from operations, together with our cash and cash equivalents and borrowing capacity under our 2017 revolving credit facility, will be sufficient to meet our cash requirements for the next 12 months and for the foreseeable future. If our cash requirements vary materially from what we expectour expectations or if we fail to generate sufficient cash flows from selling our services,operations or if we fail to implement our cost reduction strategies, we may require additional financing sooner than anticipated. We can offer no assurance that we will be able to obtain additional financing on commercially favorable terms, or at all, and provisions in our credit agreement2017 Credit Agreement limit our ability to incur additional indebtedness. Our anticipated uses of cash include capital expenditures in the range of $40.0 to $50.0$45.0 million in 2016,2018, working capital needs and required payments on our credit agreement and other commitments.

We intend to reduce expenses through implementing cost reductions through such strategies as reorganizing our business units, right-sizing headcounts and streamlining other operational aspects of our business. However, there can be no guarantee that we will achieve any of our cost reduction goals.

We have a history of quarterly and annual period net losses. During the year ended December 31, 2015,2017, we had a net loss attributable to INAP stockholders of $48.4 million.$45.3 million As of December 31, 2015,2017, our accumulated deficit was $1.2$1.3 billion. We may not be able to sustain or increaseachieve profitability on a quarterly basis, and our failure to do so may adversely affect our business, including our ability to raise additional funds.

Capital Resources

Credit Agreement. During 2013,


Our sources of capital include, but are not limited to, funds derived from selling our services and results of our operations, sales of assets, borrowings under our credit arrangement, the issuance of debt or equity securities or other possible recapitalization transactions. Our short term and long term liquidity depend primarily upon the funds derived from selling our services, working capital management (cash, accounts receivable, accounts payable and other liabilities), bank borrowings, reducing costs and bookings net of churn. In an effort to increase liquidity and generate cash, we entered into a $350.0 million credit agreement, which provides for an initial $300.0 million term loan and a $50.0 million revolvingmay pursue sales of non-strategic assets, reduce our expenses, amend our credit facility, due November 26, 2018. We summarize the credit agreement in note 11 to the accompanying consolidated financial statements. Concurrently with the effective date and fundingpursue sales of the term loan, we acquired iWeb and paid off our previous credit facility.

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debt or equity securities or other recapitalization transactions, or seek other external sources of funds. 


As of December 31, 2015, the revolving credit facility had an outstanding balance of $31.0 million and we issued $4.1 million in letters of credit, resulting in $14.9 million in borrowing capacity. As of December 31, 2015, the term loan had an outstanding principal amount of $294.0 million, which we repay in $750,000 quarterly installments on the last day of each fiscal quarter, with the remaining unpaid balance due November 26, 2019. As of December 31, 2015, the interest rate on the revolving credit facility was 6% and term loan was 4.7%.

The credit agreement includes customary representations, warranties, negative and affirmative covenants, including certain financial covenants relating to maximum total leverage ratio, minimum consolidated interest coverage ratio and limitation on capital expenditures. As of December 31 2015, we were in compliance with these covenants. To take advantage of market opportunities or to provide flexibility, we may consider amending our credit agreement. Amendments typically require an up-front consent fee, as well as higher annual interest costs.

Capital Leases. Our future minimum lease payments on all remaining capital lease obligations at December 31, 20152017 were $57.1$235.5 million. We summarize our existing capital lease obligations in note 1110 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.

The following table summarizes our commitments and other obligations as of December 31, 20152017 (in thousands):

  Payments Due by Period 
  Total  Less than
1 year		  1-3
Years		  3-5
Years		  More
than 5
years		 
                
Term loan, including interest $362,520  $20,816  $41,085  $300,619  $— 
Revolving credit facility, including interest  36,742   1,466   2,932   32,344   — 
Interest rate swap  728   728   —   —   — 
Foreign currency contracts  1,019   715   304   —   — 
Capital lease obligations, including interest  82,406   13,176   24,276   17,272   27,682 
Exit activities and restructuring  5,160   2,874   1,696   590   — 
Asset retirement obligation  4,950   200   1,366   —   3,384 
Operating lease commitments  91,838   26,727   42,609   14,134   8,368 
Service and purchase commitments  11,166   7,026   3,610   530   — 
  $596,529  $73,728  $117,878  $365,489  $39,434 

  Payments Due by Period
  Total 
Less than
1 year
 
1-3
Years
 
3-5
Years
 
More
than 5
years
Current Credit Agreement:          
   Term loan, including interest $404,814
 $28,356
 $83,601
 $292,857
 $—
   Revolving credit facility, including interest 5,513
 5,513
 —
 —
 —
Capital lease obligations, including interest 575,929
 32,511
 57,775
 50,696
 434,947
Exit activities and restructuring 6,039
 4,691
 1,348
 —
 —
Asset retirement obligation 3,634
 250
 —
 —
 3,384
Operating lease commitments 29,268
 12,138
 8,531
 5,107
 3,492
Service and purchase commitments 3,709
 2,357
 1,352
 —
 —
  $1,028,906
 $85,816
 $152,607
 $348,660
 $441,823
Cash Flows

Operating Activities

Year Ended December 31, 2017. Net cash provided by operating activities during the year ended December 31, 2017 was $39.2 million. We generated cash from operations of $43.4 million, while changes in operating assets and liabilities used cash from operations of $4.2 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 outstanding debt.



Year Ended December 31, 2016. Net cash provided by operating activities during the year ended December 31, 2016 was $46.4 million. We generated cash from operations of $45.3 million, while changes in operating assets and liabilities used cash from operations of $1.1 million.
Year Ended December 31, 2015. Net cash provided by operating activities during the year ended December 31, 2015 was $40.2 million. We generated cash from operations of $52.5 million, while changes in operating assets and liabilities usedgenerated cash from operations of $12.3 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 outstanding debt.

Investing Activities
Year Ended December 31, 2014.2017. Net cash provided by operatingused in investing activities during the year ended December 31, 20142017 was $53.2 million. We generated cash from operations$32.2 million, primarily due to capital expenditures. These capital expenditures were related to the continued expansion and upgrade of $52.6 million, while changes in operating assetsour company-controlled data centers and liabilities generated cash from operations of $0.6 million.

network infrastructure.

Year Ended December 31, 2013.2016. Net cash provided by operatingused in investing activities during the year ended December 31, 20132016 was $33.7 million. Our net loss, after adjustments for non-cash items, generated cash from operations$45.7 million, primarily due to capital expenditures. These capital expenditures were related to the continued expansion and upgrade of $43.1 million, while changes in operating assetsour company-controlled data centers and liabilities used cash from operations of $9.4 million.

Investing Activities

network infrastructure.

Year Ended December 31, 2015. Net cash used in investing activities during the year ended December 31, 2015 was $57.2 million, primarily due to 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, 2014.2017. Net cash used in investingby financing activities during the year ended December 31, 20142017 was $75.7$2.9 million, primarily due to $349.6 million of principal payments on the credit facilities and capital expenditureslease obligations, partially offset by $316.9 million of $77.4proceeds from the 2017 Credit Agreement and $40.2 million netproceeds from the sale of equipment sale-leaseback proceeds. Capital expenditures relatedcommon stock pursuant to the continued expansion and upgrade of our company-controlled data centers and network infrastructure.

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Securities Purchase Agreement.

Year Ended December 31, 2013.2016. Net cash used in investingprovided by financing activities during the year ended December 31, 20132016 was $208.1$8.1 million, primarily due to $4.5 million of proceeds received from the iWeb acquisition, netrevolving credit facility, partially offset by principal payments of cash received, of $144.5$12.5 million on our credit agreement and capital expenditures of $62.8 million. Capital expenditures related to the continued expansion and upgrade of our company-controlled data centers and network infrastructure.

Financing Activities

lease obligations.

Year Ended December 31, 2015. Net cash provided by financing activities during the year ended December 31, 2015 was $15.3 million, primarily due to $21.0 million of proceeds received from the revolving credit facility and a net $4.3 million proceeds from stock option activity, partially offset by principal payments of $10.9 million on our credit agreement and capital lease obligations.

Year Ended December 31, 2014. Net cash provided by financing activities during the year ended December 31, 2014 was $7.9 million, primarily due to $10.0 million of proceeds received from the revolving credit facility and a return of deposit collateral of $6.5 million, partially offset by principal payments of $8.9 million on our credit agreement and capital lease obligations.

Year Ended December 31, 2013. Net cash provided by financing activities during the year ended December 31, 2013 was $180.8 million, primarily due to $320.0 million proceeds received on the credit agreement, partially offset by principal payments of $120.7 million on our prior credit agreement and capital lease obligations and the payment of debt issuance costs of $12.4 million.


Off-Balance Sheet Arrangements

As of December 31, 2015, 20142017, 2016 and 2013,2015, 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. Other than our operating leases, we do not engage in off-balance sheet financial arrangements.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Other Investments

Prior to 2013, we

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

risk, prior to obtaining control of the venture on August 15, 2017.



Interest Rate Risk

Our objective in managing interest rate risk is to maintain favorable long-term fixed rate or a balance of fixed and variable rate debt within reasonable risk parameters. As of December 31, 2017, the balance of our long-term debt was $298.5 million on the 2017 term loan and $5.0 million on the 2017 revolving credit facility. At December 31, 2015, we had an2017, the interest rate swap with a notional amount starting at $150.0 million through December 30, 2016 with an interest rate of 1.5%.on the term loan and the revolver was 8.4% and 10.3%, respectively. We summarize our interest rate swap activitythe 2017 Credit Agreement in “Liquidity and Capital Resources—New Credit Agreement” and in note 10 to the accompanying consolidated financial statements.

As of December 31, 2015, our long-term debt consisted of $294.0 million borrowed under our term loan and $31.0 million borrowed under our revolving credit facility. At December 31, 2015, the interest rate on the term loan and revolving credit facility was 6% and 4.7%, respectively. We summarize the credit agreement in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Resources—Credit Agreement” and in note 11 to the accompanying consolidated financial statements.

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

We estimate that a change in the interest rate of 100 basis points would change our interest expense and payments by $3.3$3.0 million per year, assuming we do not increase our amount outstanding.

Foreign Currency Risk

As of December 31, 2015,2017, the majority of our revenue was 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 30, 2015,31, 2017, we realized foreign currency gainslosses of $0.8$0.5 million, which we included in "Non-operating expenses (income)," and we recorded unrealized foreign currency translation lossesgain of $0.2less than $0.1 million, which we included in “Other comprehensive income (loss) income,,” both in the accompanying consolidated statementstatements of operations and comprehensive loss. As we grow our international operations, our exposure to foreign currency risk could become more material.

We havehad foreign currency contracts to mitigate the risk of a portion of our Canadian employee benefit expense. These contracts will hedgehedged foreign exchange variations between the United States and Canadian dollar throughas of June 30, 2017. During the year ended December 31, 2015,2017, we recorded an unrealized lossesgain of $0.7$0.1 million, which we included in “Other comprehensive loss,income (loss),” in the accompanying consolidated statement of operations and comprehensive loss.

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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.



ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on our management’s evaluation (with

Our senior management has evaluated the participationeffectiveness of the design and operation of our Chief Executive Officerdisclosure controls and Chief Financial Officer),procedures (as defined under Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report,Form 10-K. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2017, our internal control over financial reporting, as described below, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) arewere not effective to ensureprovide 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 SECthe SEC's rules and forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.


Management’s Report of Management on Internal Control Overover 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 our evaluation under the framework


A material weakness is a deficiency, or a combination of deficiencies, in “Internal Control—Integrated Framework” issued by COSO, our management concluded that our 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 2017, management invested extra efforts to ensure the Company's internal control environment was effectiveappropriate. Despite these efforts management identified a material weakness in our internal controls over financial reporting related to the review of property and equipment depreciation and amortization schedules. The internal reviews were not designed and maintained at an appropriate level of precision and rigor commensurate with our financial reporting requirements. This control deficiency resulted in an immaterial audit adjustment to depreciation and amortization expense in the Company’s consolidated financial statements for the year ended December 31, 2017. Additionally, this control deficiency could result in misstatement of the aforementioned account balances 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.

In 2016, management identified material weaknesses in our internal controls over financial reporting related to the review of cash flow forecasts used in support of certain fair value estimates. Specifically, the review of cash flow forecasts used in our capitalized software impairment test, goodwill impairment test, long-lived asset impairment test and going concern assessment was not designed and maintained at an appropriate level of precision and rigor commensurate with our financial reporting requirements. Remediation of this weakness have been completed as of December 31, 2015. Our independent registered public accounting firm, PricewaterhouseCoopers LLP, audited2017. We will continue to take further steps in an attempt to strengthen our consolidated financial statements included in this Annual Report on Form 10-Kcontrol processes and issued an attestation report onprocedures. 

The effectiveness of our internal control over financial reporting as of December 31, 2015,2017 has been audited by BDO USA, LLP, an independent registered certified public accounting firm, as stated in their report which is includedappears herein.

Plan For Remediation of Material Weakness and Remediation of Previously Disclosed Material Weakness
Although the Company’s remediation plan with respect to property and equipment depreciation and amortization schedules remains under development, the Company has been actively engaged in remediation efforts and will continue initiatives to implement, document, and communicate appropriate policies, procedures, and internal controls regarding this material weakness. The Company’s remediation of the identified material weakness and strengthening of its internal control environment will require continued efforts in 2018.


As the Company continues to evaluate and work to improve internal control over financial reporting, the Company may determine to take additional measures to address the material weakness or determine to modify the remediation efforts described above. Until the remediation efforts discussed above, including any additional remediation efforts that the Company identifies as necessary, are implemented, tested and deemed to be operating effectively, the material weakness described above will continue to exist.
We have taken actions to remediate the material weakness in our internal control over financial reporting related to the review of cash flow forecasts used in support of certain fair value estimates and have implemented additional processes and controls designed to address the underlying causes associated with the forecast of cash flows. We reassessed the design of our review control over the forecasted cash flows utilized in the report included under Item 15related impairment models and going concern assessment to add greater precision to detect and prevent material misstatements, including the establishment of processes and controls to evaluate adequate review and inquiry over data and assumptions for financial forecasts. We conducted testing of these controls and management has concluded that the controls are operating effectively. As a result of our remediation efforts, remediation of this Annual Report on Form 10-K.

weakness has been completed as of December 31, 2017.


Changes in Internal Control over Financial Reporting

We have made substantial improvements in both the process for reviewing our forecasts and the procedures for ensuring consistency and precision of reviewed data. There was no other change in our internal control over financial reporting other than that occurred during the quarteryear ended December 31, 20152017 that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.


Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Internap Corporation
Atlanta, GA
Opinion on Internal Control over Financial Reporting
We have audited Internap Corporation’s (the “Company’s”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company and subsidiaries as of December 31, 2017, the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for the year ended December 31, 2017, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as “the consolidated financial statements”) and our report dated March 15, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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. A material weakness regarding management’s failure to design and maintain controls over the review of


property and equipment depreciation and amortization schedules has been identified and described in management’s assessment. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2017 financial statements, and this report does not affect our report dated March 15, 2018 on those financial statements.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
Atlanta, GA
March 15, 2018

ITEM 9B. OTHER INFORMATION

None.

None.
PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

We will include information regarding our directors and executive officers in our definitive proxy statement for our annual meeting of stockholders to be held in 2016,2018, which we will file within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. This information is incorporated herein by reference.

Code of Conduct

We have adopted a code of conduct that applies to all of our directors, officers and employees. A copy of the code of conduct is available on our website atwww.internap.com www.inap.com by clicking on the “Investor Relations—Corporate Governance—Governance Overview—Code of Conduct” links. We will furnish copies without charge upon request at the following address: Internap Corporation, Attn: SVP and General Counsel, One Ravinia Drive,12120 Sunset Hills Road, Suite 1300, Atlanta, Georgia 30346.

- 31 -
330, Reston, Virginia 20190.

If we make any amendments to the code of conduct other than technical, administrative or other non-substantive amendments, or grant any waivers, including implicit waivers, from the code of conduct, we will disclose the nature of the amendment or waiver, its effective date and to whom it applies on our website or in a Current Report on Form 8-K filed with the SEC.




ITEM 11. EXECUTIVE COMPENSATION

We will include information regarding executive compensation in our definitive proxy statement for our annual meeting of stockholders to be held in 2016,2018, which we will file within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. This information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

We will include information regarding security ownership of certain beneficial owners and management and related stockholder matters in our definitive proxy statement for our annual meeting of stockholders to be held in 2016,2018, which we will file within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. This information is incorporated herein by reference.

The information under the heading “Equity Compensation Plan Information” in Item 5 of this Annual Report on Form 10-K is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

We will include information regarding certain relationships, related transactions and director independence in our definitive proxy statement for our annual meeting of stockholders to be held in 2016,2018, which we will file within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. This information is incorporated herein by reference.



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

We will include information regarding principal accountant fees and services in our definitive proxy statement for our annual meeting of stockholders to be held in 2016,2018, which we will file within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. This information is incorporated herein by reference.

- 32 -




PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Item 15(a)(1).Financial Statements. The following consolidated financial statements are filed herewith:

Item 15(a)(1). Financial Statements. The following consolidated financial statements are filed herewith:
 
 Page
Report of Independent Registered Public Accounting FirmF-1
Report of Independent Registered Public Accounting Firm 2F-1F-2
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2017, 2016 and 2015F-2
F-3
Consolidated Balance Sheets as of December 31, 2017 and 2016F-3
F-4
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015F-4
F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015F-5
F-6
Notes to Consolidated Financial StatementsF-6
F-7
  
Item 15(a)(2).Financial Statement Schedules. The following financial statement schedule is filed herewith:
 
  
 Page
Schedule II - Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2017, 2016 and 2015
S-1



Item 15(a)(3). Exhibits. The following exhibits are filed as part of this report:
 S-1

- 33 -
Exhibit
Number

Item 15(a)(3).Exhibits. The following exhibits are filed as part of this report:

Exhibit
Number		 Description
   
2.1
 
Share Purchase Agreement made as of October 30, 2013 between iWeb Group Inc., its stockholders and stockholders’ representative and 8672377 Canada Inc. and Internap Network Services Corporation (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed October 31, 2013).†

   
2.2
Purchase and Sale Agreement, dated as of January 27, 2018, by and among Internap Corporation, SingleHop LLC, the members of SingleHop LLC set forth therein and Shareholder Representative Services LLC (incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, filed on January 29, 2018).†
3.1
 Certificate of Elimination of the Series B Preferred Stock (incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K, filed March 2, 2010).
   
3.2
 Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K, filed March 2, 2010).
   
3.3
 Certificate of Amendment of the Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed June 21, 2010).
   
3.4
 Certificate of Amendment toof the Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed November 25, 2014).
   
3.5
Certificate of Amendment to the Restated Certificate of Incorporation, dated June 22, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on June 23, 2017).
3.6
Certificate of Amendment of the Restated Certificate of Incorporation, as filed on November 16, 2017 (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on November 20, 2017).
3.7
 Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s CurrentQuarterly Report on Form 8-K,10-Q for the quarter ended June 30, 2017, filed November 25, 2014)on August 3, 2017).
   
10.1
 Internap Network Services Corporation 1999 Non-Employee Directors’ Stock Option Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K, filed March 13, 2009).+
   
10.2
 First Amendment to the Internap Network Services Corporation 1999 Non-Employee Directors’ Stock Option Plan (incorporated herein by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K, filed March 13, 2009).+
   
10.3
 Internap Network Services Corporation 2000 Non-Officer Equity Incentive Plan (incorporated herein by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8, File No. 333-37400, datedfiled May 19, 2000).+
   
10.4
 Internap Network Services Corporation 2005 Incentive Stock Plan, as amended (incorporated herein by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K, filed February 20, 2014).+
   
10.5
 Internap Network Services Corporation 2014 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8, File No. 333-196775, filed June 16, 2014).+


   
10.6
 Form of Stock Grant Certificate under the Internap Network Services Corporation 2014 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K, filed February 19, 2015).+
   
10.7
 Form of Stock Option Certificate under the Internap Network Services Corporation 2014 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K, filed February 19, 2015).+
   
10.8
 Form of Stock Grant Certificate (Canada) under the Internap Network Services Corporation 2014 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K, filed February 19, 2015).+
   
10.9
 Form of Stock Option Certificate (Canada) under the Internap Network Services Corporation 2014 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K, filed February 19, 2015).+
   
10.10
 Form of Indemnity Agreement for directors and officers of the Company (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed May 29, 2009).+
   
10.11
 Commitment Letter, dated as of October 30, 2013 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed October 31, 2013).
   
10.12
 Credit Agreement, dated as of November 26, 2013, by and among Internap Network Services Corporation,the Company, as Borrower; the Guarantors party thereto, as Guarantors; the Lenders party thereto; Jefferies Finance, LLC, as Administrative Agent and Collateral Agent; Jefferies Finance LLC and PNC Capital Markets LLC, as Joint Lead Arrangers and Joint Book Managers; PNC Bank National Association, as Syndication Agent; and Jefferies Finance LLC, as Issuing Bank and Swingline Lender (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on November 26, 2013).†

 - 34 - 

10.13
 Security Agreement, dated as of November 26, 2013, by and among Internap Network Services Corporation;the Company; the Guarantors party thereto; and Jefferies Finance LLC, as Collateral Agent (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on November 26, 2013).†
   
10.14
 First Amendment to the Credit Agreement, entered intodated as of October 30, 2015, by and among Internap Corporation,the Company, each of the Lenders party thereto and Jeffries Finance LLC, as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on November 5, 2015).
10.15
Second Amendment to the Credit Agreement, dated as of April 12, 2016 among the Company, each of the Lenders party thereto and Jeffries Finance LLC, as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed April 12, 2016 ).
10.16
Third Amendment and Waiver to the Credit Agreement, dated as of January 26, 2017, by and among the Company, each of the Lenders party thereto and Jeffries Finance LLC, as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on January 26, 2017).
10.17
Securities Purchase Agreement, by and among the Company and the Purchasers identified on Schedule 1 therein, dated as of February 22, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on February 28, 2017).
10.18
Registration Rights Agreement, by and among the Company and stockholders listed on the signature pages thereto, dated as of February 22, 2017 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed November 5, 2015)on February 28, 2017)


10.19
Employment Agreement, by and between the Company and Peter D. Aquino, dated September 12, 2016 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed September 13, 2016). †+
   
10.15
10.20
 LeaseRestricted Stock Inducement Award Agreement, by and between Cousins Properties Incorporatedthe Company and CO Space Services, LLC, originallyPeter D. Aquino, dated January 10, 2000 and as amended through February 26, 2007September 12, 2016 (incorporated herein by reference to Exhibit 10.2010.2 to the Company’s AnnualCurrent Report on Form 10-K,8-K, filed February 24, 2011)September 13, 2016).†§+
   
10.16
10.21
Notice of Award pursuant to Restricted Stock Inducement Award Agreement, by and between the Company and Peter D. Aquino, dated September 12, 2016 (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, as filed with the SEC on September 13, 2016).+
10.22*
 Offer Letter, by and between the Company and Michael Ruffolo,Robert Dennerlein, dated May 7, 2015October 28, 2016 +
10.23
Credit Agreement, dated as of April 6, 2017, by and among Internap Corporation, as Borrower; the Guarantors party thereto, as Guarantors; the Lenders party thereto; the Guarantors party thereto, the Lenders party thereto, Jefferies Finance LLC, as Administrative Agent and Collateral Agent, Jefferies Finance LLC and PNC Capital Markets LLC, as Joint Lead Arrangers, PNC Bank, National Association, as Syndication Agent and as Issuing Bank, and Jefferies Finance LLC, as Documentation Agent, Sole Book Manager and as Swingline Lender. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed April 6, 2017).

10.24
Security Agreement, dated as of April 6, 2017, by and among the Company, the Guarantors party thereto and Jefferies Finance LLC, as Collateral Agent.  (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed April 6, 2017)
10.25
Internap Corporation 2017 Stock Incentive Plan (incorporated herein by reference to Annex A to the Company’s Definitive Proxy Statement on Schedule 14A, filed April 25, 2017).+
10.26
Lease Agreement, dated as of June 15, 2007, by and between Internap Network Services Corporation and MainRock II Chandler, LLC. (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed August 4, 2015)3, 2017).+ #
   
10.17
10.27
 Employment Security Agreement
First Amendment to Lease, dated as of January 15, 2008, by and between the CompanyInternap Network Services Corporation and Michael Ruffolo, dated May 11, 2015MainRock II Chandler, LLC. (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q, filed August 4, 2015).+†3, 2017).#

   
10.18*
10.28
 Employment Security Agreement
Second Amendment to Lease, dated as of February 27, 2008, by and between the CompanyInternap Network Services Corporation and Kevin M. Dotts, dated February 15, 2016.+†
10.19*Employment Security Agreement between the Company and Steven A. Orchard, dated February 15, 2016.+†
10.20*Employment Security Agreement between the Company and Peter Bell, dated February 15, 2016.+†
10.21*Employment Security Agreement between the Company and Satish Hemachandran, dated February 15, 2016.+†
10.22General Release and Separation Agreement between the Company and J. Eric Cooney, dated June 11, 2015MainRock II Chandler, LLC. (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q, filed August 4, 2015).+3, 2017).#

   
10.23
10.29
 2015 Short Term Incentive PlanThird Amendment to Lease, dated as of September 22, 2014, by and between Internap Network Services Corporation and Digital 2121 South Price, LLC, as successor-in-interest to MainRock II Chandler, LLC. (incorporated herein by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q, filed August 3, 2017).#
10.30
Fourth Amendment to Lease, dated as of January 6, 2016, by and between Internap Network Services Corporation and Digital 2121 South Price, LLC, as successor-in-interest to MainRock II Chandler, LLC. (incorporated herein by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q, filed August 3, 2017).#
10.31
Fifth Amendment to Lease, dated as of June 30, 2016, by and between Internap Network Services Corporation and Digital 2121 South Price, LLC, as successor-in-interest to MainRock II Chandler, LLC. (incorporated herein by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q, filed August 3, 2017).#


10.32
Sixth Amendment to Lease, dated as of March 24, 2017, by and between Internap Network Services Corporation and Digital 2121 South Price, LLC, as successor-in-interest to MainRock II Chandler, LLC. (incorporated herein by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q, filed August 3, 2017).#
10.33
Seventh Amendment to Lease, dated as of June 29, 2017, by and between Internap Network Services Corporation and Digital 2121 South Price, LLC, as successor-in-interest to MainRock II Chandler, LLC. (incorporated herein by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q, filed August 3, 2017).#

10.34
First Amendment to Credit Agreement, dated as of June 28, 2017, by and among the Company, each of the Lenders parties thereto, and Jefferies Finance LLC, as Administrative Agent. (incorporated herein by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q, filed August 3, 2017).
10.35
Offer Letter, by and between the Company and Joanna Lanni, dated November 14, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed November 20, 2017).
10.36
Second Amendment to Credit Agreement entered into as of February 19, 2015)6, 2018 among Internap Corporation, each of the Lenders party thereto and Jefferies Finance LLC, as Administrative Agent. ( Incorporated herein by reference to Exhibit 10.36 to the Company's Current Report on Form 8-K, filed February 7, 2018).
10.37
Incremental and Third Amendment to Credit Agreement, dated as of February 28, 2018, 2018, among Internap Corporation, each of the Lenders thereto and Jefferies Finance LLC as Administrative Agent ( Incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed March 1, 2018).

10.38*
Amendment No. 1 to Employment Agreement, dated as of November 14, 2017, by and between Peter D. Aquino and the Company.+
   
21.1*
 List of Subsidiaries.
   
23.1*
 Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.
   
23.2*
Consent of BDO LLP, Independent Registered Public Accounting Firm.
31.1*
 Rule 13a-14(a)/15d-14(a) Certification, executed by Michael A. Ruffolo,Peter D. Aquino, President and Chief Executive Officer of the Company.
   
31.2*
 Rule 13a-14(a)/15d-14(a) Certification, executed by Kevin M. Dotts,Robert Dennerlein, Chief Financial Officer of the Company.
   
32.1*
 Section 1350 Certification, executed by Michael A. Ruffolo,Peter D. Aquino, President and Chief Executive Officer of the Company.
   
32.2*
 Section 1350 Certification, executed by Kevin M. Dotts,Robert Dennerlein, Chief Financial Officer of the Company.
   
101* Interactive Data File.



*Documents filed herewith.
+Management contract and compensatory plan and arrangement.
†Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish supplementally copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.
#§ConfidentialPortions of this exhibit have been omitted pursuant to a grant of confidential treatment hasand have been requested for this exhibit. The copy filed as an exhibit omitsseparately with the information subject to the request for confidential treatment.

- 35 -SEC.


ITEM 16. FORM 10-K SUMMARY
None.



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 INTERNAP CORPORATION
Date: February 18, 2016March 15, 2018  
 By:/s/ Kevin M. DottsRobert Dennerlein 
  Kevin M. DottsRobert Dennerlein
  Chief Financial Officer
  (Principal Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated:



Signature Title Date
     
/s/ Michael A. RuffoloPeter D. Aquino    
Michael A. RuffoloPeter D. Aquino President, Chief Executive OfficerCEO and Director February 18, 2016March 15, 2018
  (Principal Executive Officer)  
     
/s/ Kevin M. DottsRobert Dennerlein    
Kevin M. DottsRobert Dennerlein Chief Financial Officer February 18, 2016March 15, 2018
  (Principal Financial Officer)  
     
/s/ John D. MaggardJoanna Lanni   
John D. Maggard Joanna Lanni Vice PresidentVP and Corporate Controller February 18, 2016March 15, 2018
  (Principal Accounting Officer)  
     
/s/ Daniel C. Stanzione    
Daniel C. Stanzione Non-Executive Chairman and Director February 18, 2016March 15, 2018
     
/s/ Charles B. Coe    
Charles B. Coe Director February 18, 2016March 15, 2018
     
/s/ Patricia L. Higgins    
Patricia L. Higgins Director February 18, 2016March 15, 2018
     
/s/ Gary M. Pfeiffer    
Gary M. Pfeiffer Director February 18, 2016March 15, 2018
/s/ Peter J. Rogers, Jr.
Peter J. Rogers, Jr.DirectorMarch 15, 2018
     
/s/ Debora J. Wilson    
Debora J. Wilson Director February 18, 2016March 15, 2018

 - 36 - 
/s/ Lance Weaver
Lance WeaverDirectorMarch 15, 2018
/s/ David B. Potts
David B. PottsDirectorMarch 15, 2018



Internap Corporation

Index to Consolidated Financial Statements

  Page
Report of Independent Registered Public Accounting Firm
 
F-1
Report of Independent Registered Public Accounting Firm 2
F-2
Consolidated Statements of Operations and Comprehensive Loss
 F-2
F-3
Consolidated Balance Sheets
 F-3
F-4
Consolidated Statements of Stockholders’ Equity (Deficit)
 F-4
F-5
Consolidated Statements of Cash Flows
 F-5
F-6
Notes to Consolidated Financial Statements
 F-6
F-7
Financial Statement Schedule
 
S-1

- 37 -







Report of Independent Registered Public Accounting Firm

Tothe

Shareholders and Board of Directors
Internap Corporation
Atlanta, GA
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Internap Corporation (the “Company”) and subsidiaries as of December 31, 2017, the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for the year ended December 31, 2017, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2017, and the results of their operations and their cash flows for the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 15, 2018 expressed an adverse opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provide a reasonable basis for our opinion.


/s/ BDO USA, LLP
We have served as the Company's auditor since 2017.
Atlanta, GA
March 15, 2018




Report of Independent Registered Public Accounting Firm


To the Board of Directors and Stockholders of Internap Corporation:

Corporation



In our opinion, the consolidatedfinancialconsolidated balance sheet as of December 31, 2016 and the related consolidated statements listedof operations and comprehensive loss, of stockholders’ equity and of cash flows for each of the two years in the index appearing under Item 15(a)(1)period ended December 31, 2016 present fairly, in all material respects, the financial position of Internap CorporationandCorporation and its subsidiariesatDecember 31, 2015 andsubsidiaries as of December 31, 2014,2016, and the results of their operations and their cash flows for each of the threetwo years in the period endedDecemberended December 31, 2015in2016, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule appearing under Item 15(a)(2)for each of the two years in the period ended December 31, 2016 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidatedfinancialconsolidated financial statements. Also in our opinion,These financial statements and financial statement schedule are the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established inInternal Control - Integrated Framework2013issued by the Committee of Sponsoring Organizationsresponsibility of the Treadway Commission (COSO). The Company's managementmanagement. Our responsibility is responsible forto express an opinion on these financial statements and financial statement schedule for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Report of Management on Internal Control Over Financial Reporting appearing under item 9A.Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements includedmisstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regardingopinion.




/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
March 13, 2017, except for the reliabilitychange in composition of financial reportingreportable segments discussed in Note 2 and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositionseffects of the assets ofreverse stock split discussed in Note 15, as to which the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP
Atlanta, GA
February 18, 2016

F-1
date is March 15, 2018





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

  Year Ended December 31, 
  2015  2014  2013 
Revenues:            
Data center services $236,155  $242,623  $185,147 
Internet protocol (IP) services  82,138   92,336   98,195 
Total revenues  318,293   334,959   283,342 
             
Operating costs and expenses:            
Direct costs of sales and services, exclusive of depreciation and amortization, shown below:            
Data center services  97,385   106,159   92,564 
IP services  34,055   38,787   39,448 
Direct costs of customer support  36,475   36,804   29,687 
Direct costs of amortization of acquired and developed technologies  3,450   5,918   4,967 
Sales and marketing  37,497   37,845   31,800 
General and administrative  43,169   43,902   42,759 
Depreciation and amortization  89,205   75,251   48,181 
Loss on disposal of property and equipment, net  674   112   9 
Exit activities, restructuring and impairments  2,278   4,520   1,414 
Total operating costs and expenses  344,188   349,298   290,829 
Loss from operations  (25,895)  (14,339)  (7,487)
             
Non-operating expenses (income):            
Interest expense  27,596   26,742   11,346 
Loss on extinguishment of debt  —   —   881 
(Gain) loss on foreign currency, net  (771)  4   261 
Other (income) loss, net  (417)  29   353 
Total non-operating expenses (income)  26,408   26,775   12,841 
             
Loss before income taxes and equity in (earnings) of equity-method investment  (52,303)  (41,114)  (20,328)
Benefit for income taxes  (3,660)  (1,361)  (285)
Equity in (earnings) of equity-method investment, net of taxes  (200)  (259)  (213)
             
Net loss  (48,443)  (39,494)  (19,830)
             
Other comprehensive loss:            
Foreign currency translation adjustment  (197)  (431)  (464)
Unrealized loss on foreign currency contracts  (745)  —   — 
Unrealized gain (loss) on interest rate swap  84   (36)  (777)
Total other comprehensive loss  (858)  (467)  (1,241)
             
Comprehensive loss $(49,301) $(39,961) $(21,071)
             
Basic and diluted net loss per share $(0.93) $(0.77) $(0.39)
             
Weighted average shares outstanding used in computing basic and diluted net loss per share  51,898   51,237   51,135 

 Year Ended December 31,
 2017 2016 2015
Revenues: 
  
  
INAP COLO$209,580
 $221,678
 $234,859
INAP CLOUD71,138
 76,619
 83,434
Total revenues280,718
 298,297
 318,293
      
Operating costs and expenses: 
  
  
Costs of sales and services, exclusive of depreciation and amortization, shown below: 
  
  
INAP COLO89,240
 105,620
 111,765
INAP CLOUD16,977
 18,635
 19,675
Costs of customer support25,757
 32,184
 36,475
Sales, general and administrative62,728
 70,639
 81,340
Depreciation and amortization74,993
 76,948
 92,655
Goodwill impairment—
 80,105
 —
Exit activities, restructuring and impairments6,249
 7,236
 2,278
Total operating costs and expenses275,944
 391,367
 344,188
Income (loss) from operations4,774
 (93,070) (25,895)
      
Non-operating expenses (income): 
  
  
Interest expense50,476
 30,909
 27,596
Loss (gain) on foreign currency, net525
 485
 (771)
Other income, net—
 (82) (417)
Total non-operating expenses (income)51,001
 31,312
 26,408
      
Loss before income taxes, non-controlling interest and equity in earnings of equity-method investment(46,227) (124,382) (52,303)
Provision (benefit) for income taxes253
 530
 (3,660)
Equity in earnings of equity-method investment, net of taxes(1,207) (170) (200)
      
Net loss(45,273) (124,742) (48,443)
   Less net income attributable to non-controlling interest(70) —
 —
Net loss attributable to INAP stockholders(45,343) (124,742) (48,443)
      
Other comprehensive income (loss): 
  
  
Foreign currency translation adjustment23
 (39) (197)
Unrealized gain (loss) on foreign currency contracts145
 600
 (745)
Unrealized gain on interest rate swap—
 728
 84
Total other comprehensive income (loss)168
 1,289
 (858)
      
Comprehensive loss$(45,175) $(123,453) $(49,301)
      
Basic and diluted net loss per share$(2.39) $(9.54) $(3.73)
      
Weighted average shares outstanding used in computing basic and diluted net loss per share18,993
 13,083
 12,975
The accompanying notes are an integral part of these consolidated financial statements.

F-2


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

  December 31, 
  2015  2014 
ASSETS        
Current assets:        
Cash and cash equivalents $17,772  $20,084 
Accounts receivable, net of allowance for doubtful accounts of $1,751 and $2,121, respectively  20,292   19,606 
Deferred tax asset  —   633 
Prepaid expenses and other assets  12,646   12,276 
         
Total current assets  50,710   52,599 
         
Property and equipment, net  328,700   342,145 
Investment in joint venture  2,768   2,622 
Intangible assets, net  32,887   52,545 
Goodwill  130,313   130,313 
Deposits and other assets  10,177   9,923 
Deferred tax asset  —   1,637 
         
Total assets $555,555  $591,784 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable $22,607  $30,589 
Accrued liabilities  10,737   13,120 
Deferred revenues  6,603   7,345 
Capital lease obligations  8,421   7,366 
Term loan, less discount of $1,543 and $1,463, respectively  1,456   1,537 
Exit activities and restructuring liability  2,034   1,809 
Other current liabilities  2,566   1,590 
         
Total current liabilities  54,424   63,356 
         
Deferred revenues  4,759   3,544 
Capital lease obligations  48,692   52,686 
Revolving credit facility  31,000   10,000 
Term loan, less discount of $5,000 and $6,543, respectively  286,001   287,457 
Exit activities and restructuring liability  1,844   2,701 
Deferred rent  8,879   10,583 
Deferred tax liability  880   7,293 
Other long-term liabilities  4,640   3,828 
         
Total liabilities  441,119   441,448 
Commitments and contingencies (note 11)        
Stockholders’ equity:        
Preferred stock, $0.001 par value; 20,000 shares authorized; no shares issued or outstanding  —   — 
Common stock, $0.001 par value; 120,000 shares authorized; 55,971 and 54,410 shares outstanding, respectively  56   54 
Additional paid-in capital  1,277,511   1,262,402 
Treasury stock, at cost, 826 and 621 shares, respectively  (6,393)  (4,683)
Accumulated deficit  (1,153,957)  (1,105,514)
Accumulated items of other comprehensive loss  (2,781)  (1,923)
         
Total stockholders’ equity  114,436   150,336 
         
Total liabilities and stockholders’ equity $555,555  $591,784 

 December 31,
 2017 2016
ASSETS 
  
Current assets: 
  
Cash and cash equivalents$14,603
 $10,389
Accounts receivable, net of allowance for doubtful accounts of $1,487 and $1,246, respectively17,794
 18,044
Prepaid expenses and other assets8,673
 10,055
Total current assets41,070
 38,488
    
Property and equipment, net458,565
 302,680
Investment in joint venture—
 3,002
Intangible assets, net25,666
 27,978
Goodwill50,209
 50,209
Deposits and other assets11,015
 8,258
Total assets$586,525
 $430,615
    
LIABILITIES AND STOCKHOLDERS’ DEFICIT 
  
Current liabilities: 
  
Accounts payable$20,388
 $20,875
Accrued liabilities15,908
 10,603
Deferred revenues4,861
 5,746
Capital lease obligations11,711
 10,030
Revolving credit facility5,000
 —
Term loan, less discount and prepaid costs of $2,133 and $2,243, respectively867
 757
Exit activities and restructuring liability4,152
 3,177
Other current liabilities1,707
 3,171
Total current liabilities64,594
 54,359
    
Deferred revenues4,761
 5,144
Capital lease obligations223,749
 43,876
Revolving credit facility—
 35,500
Term loan, less discount and prepaid costs of $7,655 and $4,579, respectively287,845
 283,421
Exit activities and restructuring liability664
 1,526
Deferred rent1,310
 4,642
Deferred tax liability1,651
 1,513
Other long-term liabilities2,983
 4,358
    
Total liabilities587,557
 434,339
Commitments and contingencies (note 10)

 

Stockholders’ deficit: 
  
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued or outstanding

 

Common stock, $0.001 par value; 30,000 shares authorized; 20,804 and 14,450 shares outstanding, respectively21
 14
Additional paid-in capital1,327,084
 1,283,376
Treasury stock, at cost, 293 and 268 shares, respectively(7,159) (6,923)
Accumulated deficit(1,323,723) (1,278,699)
Accumulated items of other comprehensive loss(1,324) (1,492)
Total INAP stockholders’ deficit(5,101) (3,724)
Non-controlling interest4,069
 —
Total stockholder's deficit(1,032) (3,724)
Total liabilities and stockholders’ deficit$586,525
 $430,615
The accompanying notes are an integral part of these consolidated financial statements.

F-3


INTERNAP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(DEFICIT)
For the Three Years Ended December 31, 2015
2017
(In thousands)

  Common
Stock		                
  Shares  Par
Value		  Additional
Paid-In
Capital		  Treasury
Stock		  Accumulated
Deficit		  Accumulated
Items of
Comprehensive
Loss		  Total
Stockholders’
Equity		 
Balance, December 31, 2012  53,459  $54  $1,243,801  $(1,845) $(1,046,190) $(215) $195,605 
Net loss  —   —   —   —   (19,830)  —   (19,830)
Foreign currency translation  —   —   —   —   —   (464)  (464)
Interest rate swap  —   —   —   —   —   (777)  (777)
                             
Stock-based compensation  —   —   7,167   —   —   —   7,167 
Proceeds from exercise of stock options, net  564   —   2,138   (1,629)  —   —   509 
                             
Balance, December 31, 2013  54,023   54   1,253,106   (3,474)  (1,066,020)  (1,456)  182,210 
Net loss  —   —   —   —   (39,494)  —   (39,494)
Foreign currency translation  —   —   —   —   —   (431)  (431)
Interest rate swap  —   —   —   —   —   (36)  (36)
Stock-based compensation  —   —   7,522   —   —   —   7,522 
Proceeds from exercise of stock options, net  387   —   1,774   (1,209)  —   —   565 
                             
Balance, December 31, 2014  54,410   54   1,262,402   (4,683)  (1,105,514)  (1,923)  150,336 
Net loss  —   —   —   —   (48,443)  —   (48,443)
Foreign currency translation  —   —   —   —   —   (197)  (197)
Foreign currency contracts                      (745)  (745)
Interest rate swap  —   —   —   —   —   84   84 
Stock-based compensation  —   —   9,063   —   —   —   9,063 
Proceeds from exercise of stock options, net  1,561   2   6,046   (1,710)  —   —   4,338 
                             
Balance, December 31, 2015  55,971  $56  $1,277,511  $(6,393) $(1,153,957) $(2,781) $114,436 

 Common Stock            
 Shares Par Value Additional Paid-In Capital Treasury Stock Accumulated Deficit Accumulated Items of Comprehensive Loss Non-Controlling Interest Total Stockholders’ Equity (Deficit)
Balance, December 31, 201413,603
 $14
 $1,262,442
 $(4,683) $(1,105,514) $(1,923) $—
 $150,336
Net loss—
 —
 —
 —
 (48,443) —
 —
 (48,443)
Foreign currency translation—
 —
 —
 —
 —
 (197) —
 (197)
Interest rate swap          84
 —
 84
Foreign currency contracts—
 —
 —
 —
 —
 (745) —
 (745)
Stock-based compensation—
 —
 9,063
 —
 —
 —
 —
 9,063
Proceeds from exercise of stock options, net390
 —
 6,048
 (1,710) —
 —
 —
 4,338
                
Balance, December 31, 201513,993
 14
 1,277,553
 (6,393) (1,153,957) (2,781) —
 114,436
Net loss—
 —
 —
 —
 (124,742) —
 —
 (124,742)
Foreign currency translation—
 —
 —
 —
 —
 (39) —
 (39)
Foreign currency contracts—
 —
 —
 —
 —
 600
 —
 600
Interest rate swap—
 —
 —
 —
 —
 728
 —
 728
Stock-based compensation—
 —
 5,148
 —
 —
 —
 —
 5,148
Proceeds from exercise of stock options, net457
 —
 675
 (530) —
 —
 —
 145
                
Balance, December 31, 201614,450
 14
 1,283,376
 (6,923) (1,278,699) (1,492) —
 (3,724)
Adoption of ASU 2016-16—
 —
 —
 —
 319
 —
 —
 319
Net loss—
 —
 —
 —
 (45,273) —
 —
 (45,273)
Net income attributable to non-controlling interest—
 —
 —
 —
 (70) —
 70
 —
Foreign currency translation—
 —
 —
 —
 —
 23
 —
 23
Foreign currency contracts 
  
  
  
  
 145
 —
 145
INAP Japan—
 —
 —
 —
 —
 —
 3,999
 3,999
Common stock issuance5,951
 7
 40,156
 —
 —
 —
 —
 40,163
Stock-based compensation—
 —
 3,121
 —
 —
 —
 —
 3,121
Proceeds from exercise of stock options, net403
 —
 431
 (236) —
 —
 —
 195
                
Balance, December 31, 201720,804
 $21
 $1,327,084
 $(7,159) $(1,323,723) $(1,324) $4,069
 $(1,032)
The accompanying notes are an integral part of these consolidated financial statements.

F-4


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

  Year Ended December 31, 
  2015  2014  2013 
Cash Flows from Operating Activities:            
Net loss $(48,443) $(39,494) $(19,830)
Adjustments to reconcile net loss to net cash provided by operating activities:            
Depreciation and amortization  92,655   81,169   53,148 
Loss on disposal of property and equipment, net  674   112   9 
Impairment of property and equipment  232   537   520 
Amortization of debt discount and issuance costs  2,017   1,934   631 
Stock-based compensation expense, net of capitalized amount  8,781   7,182   6,743 
Equity in (earnings) of equity-method investment  (200)  (259)  (213)
Provision for doubtful accounts  1,354   1,306   1,861 
Non-cash portion of loss on extinguishment of debt  —   —   841 
Non-cash change in capital lease obligations  (1,437)  (412)  99 
Non-cash change in exit activities and restructuring liability  2,241   4,591   1,185 
Non-cash change in deferred rent  (1,704)  (2,577)  (1,907)
Deferred taxes  (3,966)  (1,555)  (67)
Other, net  261   81   75 
Changes in operating assets and liabilities:            
Accounts receivable  (2,211)  2,923   (5,777)
Prepaid expenses, deposits and other assets  1,099   1,839   (218)
Accounts payable  (4,814)  529   3,992 
Accrued and other liabilities  (4,206)  413   (5,062)
Deferred revenues  758   498   1,149 
Exit activities and restructuring liability  (2,873)  (4,245)  (2,895)
Asset retirement obligation  —   (1,319)  — 
Other liabilities  (10)  (5)  (601)
Net cash flows provided by operating activities  40,208   53,248   33,683 
             
Cash Flows from Investing Activities:            
Purchases of property and equipment  (55,695)  (77,363)  (62,798)
Additions to acquired and developed technology  (1,462)  (3,100)  (801)
Proceeds from sale-leaseback transactions  —   4,662   — 
Acquisition, net of cash received  —   74   (144,487)
Net cash flows used in investing activities  (57,157)  (75,727)  (208,086)
             
Cash Flows from Financing Activities:            
Proceeds from credit agreements  21,000   10,000   320,000 
Principal payments on credit agreements  (3,000)  (3,000)  (116,000)
Payment of debt issuance costs  —   —   (12,415)
Return (payment) of deposit collateral on credit agreement  —   6,461   (6,461)
Payments on capital lease obligations  (7,879)  (5,921)  (4,655)
Proceeds from exercise of stock options  6,046   1,774   2,138 
Acquisition of common stock for income tax withholdings  (1,710)  (1,209)  (1,630)
Other, net  833   (181)  (167)
Net cash flows provided by financing activities  15,290   7,924   180,810 
Effect of exchange rates on cash and cash equivalents  (653)  (379)  58 
Net (decrease) increase in cash and cash equivalents  (2,312)  (14,934)  6,465 
Cash and cash equivalents at beginning of period  20,084   35,018   28,553 
Cash and cash equivalents at end of period $17,772  $20,084  $35,018 
             
Supplemental disclosure of cash flow information:            
Cash paid for interest $26,427  $24,957  $11,678 
Non-cash acquisition of property and equipment under capital leases  6,377   9,626   9,815 
Additions to property and equipment included in accounts payable  5,170   8,249   7,884 

  Year Ended December 31,
  2017 2016 2015
Cash Flows from Operating Activities:  
  
  
Net loss $(45,273) $(124,742) $(48,443)
Adjustments to reconcile net loss to net cash provided by operating activities:  
  
  
Depreciation and amortization 74,993
 76,948
 92,655
Loss on disposal of property and equipment, net (353) 8
 674
Impairments 503
 83,377
 232
Amortization of debt discount and issuance costs 2,519
 2,534
 2,017
Stock-based compensation expense, net of capitalized amount 3,040
 4,997
 8,781
Equity in earnings of equity-method investment (1,207) (170) (200)
Provision for doubtful accounts 1,049
 1,093
 1,354
Non-cash change in capital lease obligations 520
 223
 (1,437)
Non-cash change in exit activities and restructuring liability 6,291
 4,409
 2,241
Non-cash change in deferred rent (3,554) (2,152) (1,704)
Deferred taxes 355
 325
 (3,966)
Payment of debt lender fees (2,583) (1,716) —
Loss on extinguishment and modification of debt 6,785
 —
 —
Other, net 304
 179
 261
Changes in operating assets and liabilities:  
  
  
Accounts receivable (207) 1,476
 (2,211)
Prepaid expenses, deposits and other assets 2,051
 2,297
 1,099
Accounts payable (1,167) 1,568
 (4,814)
Accrued and other liabilities 3,359
 81
 (4,206)
Deferred revenues (1,297) (476) 758
Exit activities and restructuring liability (6,178) (3,584) (2,873)
Asset retirement obligation (825) (174) —
Other liabilities 40
 (52) (10)
Net cash flows provided by operating activities 39,165
 46,449
 40,208
       
Cash Flows from Investing Activities:  
  
  
Proceeds from sale of building —
 542
 —
Purchases of property and equipment (35,714) (44,364) (55,695)
Additions to acquired and developed technology (735) (1,828) (1,462)
Proceeds from disposal of property and equipment 402
 —
 —
Acquisition, net of cash received 3,838
 —
 —
Net cash flows used in investing activities (32,209) (45,650) (57,157)
       
Cash Flows from Financing Activities:  
  
  
Proceeds from credit agreements 316,900
 4,500
 21,000
Proceeds from stock issuance 40,195
 —
 —
Principal payments on credit agreements (339,900) (3,000) (3,000)
Payment of debt issuance costs (10,194) —
 —
Payments on capital lease obligations (9,714) (9,472) (7,879)
Proceeds from exercise of stock options 421
 673
 6,046
Acquisition of common stock for income tax withholdings (235) (530) (1,710)
Other, net (345) (289) 833
Net cash flows (used in) provided by financing activities (2,872) (8,118) 15,290
Effect of exchange rates on cash and cash equivalents 130
 (64) (653)
Net increase (decrease) in cash and cash equivalents 4,214
 (7,383) (2,312)
Cash and cash equivalents at beginning of period 10,389
 17,772
 20,084
Cash and cash equivalents at end of period $14,603
 $10,389
 $17,772
       
Supplemental disclosure of cash flow information:  
  
  
Cash paid for interest $37,692
 $29,561
 $26,427
Non-cash acquisition of property and equipment under capital leases 189,679
 6,042
 6,377
Additions to property and equipment included in accounts payable 1,932
 1,873
 5,170
The accompanying notes are an integral part of these consolidated financial statements.

F-5





INTERNAP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.DESCRIPTION OF THE COMPANY AND NATURE OF OPERATIONS

Internap Corporation (“we,” “us”“us,” “our,” “INAP,” or “our”“the Company”) provides high-performance information technology (“IT”)Internet infrastructure services. We providethrough both Colocation Business and Enterprise Services (including colocation, network connectivity, IP, bandwidth, and managed services at 51and hosting), and Cloud Services (including enterprise-grade AgileCLOUD, bare-metal servers, and SMB iWeb platforms). INAP operates in Tier 3-type data centers acrossin 21 metropolitan markets, primarily in North America, Europewith 56 data centers and 97 POPs around the Asia-Pacific regionworld. Currently, INAP has approximately one million gross square feet under lease, with 500,000 square feet of data center space. INAP operates a premium business model that provides high-power density colocation, low-latency bandwidth, and through 86public and private cloud platforms in an expanding Internet Protocol (“IP”) service points.

infrastructure industry.

We have a history of quarterly and annual period net losses. As of December 31, 2017, our accumulated deficit was $1.3 billion and our working capital deficit was $22.4 million. We may not be able to achieve profitability on a quarterly basis, and our failure to do so may adversely affect our business, including our ability to raise additional funds. Our sources of capital include, but are not limited to, funds derived from selling our services and results of our operations, sales of assets, borrowings under our credit arrangement, the issuance of debt or equity securities or other possible recapitalization transactions. Our short term and long term liquidity depend primarily upon the funds derived from selling our services, working capital management (cash, accounts receivable, accounts payable and other liabilities), bank borrowings, reducing costs and bookings net of churn. In an effort to increase liquidity and generate cash, we may pursue sales of non-strategic assets, reduce our expenses, amend our credit facility, pursue sales of debt or equity securities or other recapitalization transactions, or seek other external sources of funds. 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Principles

We prepare our consolidated financial statements and accompanying notes in accordance with accounting principles generally accepted in the United States (“GAAP”). The consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. We have eliminated inter-company transactions and balances in consolidation.

Certain prior year amounts have been reclassified to conform to the current year presentation.

Estimates and Assumptions

The preparation of these financial statements requires us 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 related to revenue recognition, doubtful accounts, goodwill and intangible assets, accruals, stock-based compensation, income taxes, restructuring charges, leases, long-term service contracts, contingencies and litigation. 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.

Cash and Cash Equivalents

We consider all highly-liquid investments purchased with an original maturity of three months or less at the date of purchase and money market mutual funds to be cash equivalents. We maintain our cash and cash equivalents at major financial institutions and may at times exceed federally insured limits. We believe that the risk of loss is minimal. To date, we have not experienced any losses related to cash and cash equivalents.


AccountsReceivable and Allowance for Doubtful Accounts

Accounts receivable consist of amounts due to the Company from normal business activities. The Company maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. The Company estimates uncollectible amounts based upon historical bad debts, current customer receivable balances, the age of customer receivable balances, the customer’s financial condition and current economic trends.




Investment in Joint Venture

We account for investments that provide us with the ability to exercise significant influence, but not control, over an investee using the equity method of accounting. Significant influence, but not control, is generally deemed to exist if we have an ownership interest

In previous years, INAP invested $4.1 million in the voting stock of the investee of between 20% and 50%, although we consider other factors, such as minority interest protections, in determining whether the equity method of accounting is appropriate. As of December 31, 2015, Internap Japan Co., Ltd. (“Internap Japan”), aour joint venture with NTT-ME Corporation and Nippon Telegraph and Telephone Corporation (“NTT Holdings”),Corporation. Through August 15, 2017, we qualified and accounted for this investment using the equity method accounting.method. We recordrecorded our proportional share of the income and losses of InternapINAP Japan one month in arrears on the accompanying consolidated balance sheets as a long-term investment and our share of Internap Japan’sINAP 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 INAP Japan’s assets and liabilities at fair value resulting in a gain of $1.1 million which is reflected in "Equity in earnings of equity-method investment, net of taxes" in the accompanying consolidated statements of operations and comprehensive loss. See Note 5 for further information.
Noncontrolling Interest
Noncontrolling interests ("NCI") are evaluated by the Company and are shown as either a liability, temporary equity (shown between liabilities and equity) or as permanent equity depending on the nature of the redeemable features at amounts based on formulas specific to each entity. Generally, mandatorily redeemable NCIs are classified as liabilities and non-mandatorily redeemable NCIs are classified outside of stockholders' equity in the consolidated balance sheets as temporary equity under the caption, redeemable noncontrolling interests, and are measured at their redemption values at the end of each period. If the redemption value is greater than the carrying value, an adjustment is recorded in retained earnings to record the NCI at its redemption value. Redeemable NCIs that are mandatorily redeemable are classified as a liability in the consolidated balance sheets under either other current liabilities or other long-term liabilities, depending on the remaining duration until settlement, and are measured at the amount of cash that would be paid if settlement occurred at the balance sheet date with any change from the prior period recognized as interest expense.
If the NCI is not currently redeemable yet probable of becoming redeemable, we are required to either (1) accrete changes in the redemption value over the period from the date of issuance to the earliest redemption date of the instrument using an appropriate methodology, usually the interest method, or (2) recognize changes in the redemption value immediately as they occur and adjust the carrying value of the security to equal the redemption value at the end of each reporting period. We have elected to recognize changes in the redemption value immediately as they occur and adjust the carrying value of the NCI to the greater of the estimated redemption value, which approximates fair value, at the end of each reporting period or the initial carrying amount. 
Net income attributable to NCIs reflects the portion of the net loss of consolidated entities applicable to the NCI stockholders in the accompanying consolidated statements of operations. The net income attributable to NCI is classified in the consolidated statements of operations as part of consolidated net loss and deducted from total consolidated net loss to arrive at the net loss attributable to the Company.

Fair Value of Financial Instruments

The carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable and other current liabilities, approximate fair value due to the short-term nature of these assets and liabilities. Due toAs of December 31, 2017, the nature of our credit agreement and variable interest rates, the faircarrying value of our debt approximateswas $303.5 million and the carrying value.

fair value was $306.5 million.


We measure and report certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents. The major categories of nonfinancial assets and liabilities that we measure at fair value include reporting units measured at fair value in step one of our goodwill impairment test.

Financial Instrument Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk principally consist of cash, cash equivalents, marketable securities and trade receivables. Given the needs of our business, we may invest our cash and cash equivalents in money market funds.



Property and Equipment

We carry property and equipment at original acquisition cost less accumulated depreciation and amortization. We calculate depreciation and amortization on a straight-line basis over the estimated useful lives of the assets. Estimated useful lives used for network equipment are generally five years; furniture, equipment and software are three to seven years; and leasehold improvements are 10 to 25 years or overthe shorter of the lease term depending on the nature of the improvement.or their estimated useful lives. We capitalize additions and improvements that increase the value or extend the life of an asset. We expense maintenance and repairs as incurred. We charge gains or losses from disposals of property and equipment to operations.

F-6

Leases

We record leases in which we have substantially all of the benefits and risks of ownership as capital leases and all other leases as operating leases. For leases determined to be capital leases, we record the assets held under capital lease and related obligations at the lesser of the present value of aggregate future minimum lease payments or the fair value of the assets held under capital lease. We amortize the asset over its estimated useful life or over the lease term, depending on the nature of the asset. The duration of lease obligations and commitments ranges from three years for equipment to 25 years for facilities. For leases determined to be operating leases, we record lease expense on a straight-line basis over the lease term. Certain leases include renewal options that, at the inception of the lease, are considered reasonably assured of being renewed. The lease term begins when we control the leased property, which is typically before lease payments begin under the terms of the lease. We record the difference between the expense in our consolidated statements of operations and comprehensive loss and the amount we pay as deferred rent, which we include in our consolidated balance sheets.

Costs of Internal-Use Computer Software Development

We capitalize software development costs incurred during the application development stage. Amortization begins once the software is ready for its intended use and is computed based on the straight-line method over the economic life.estimated useful life, which was five years for 2017, 2016 and 2015. Judgment is required in determining which software projects are capitalized and the resulting economic life. We capitalized $4.6$4.4 million, $6.2$4.3 million and $7.5$4.6 million in internal-use software costs during the years ended December 31, 2015, 20142017, 2016 and 2013,2015, respectively. As of December 31, 20152017 and 2014,2016, the balance of unamortized internal-use software costs was $18.0$17.9 million and $17.7$20.0 million, respectively. During the years ended December 31, 2015, 20142017, 2016 and 2013,2015, amortization expense was $7.2 million, $8.3 million and $6.6 million, $6.7 million and $4.2 million, respectively.

Valuation of Long-Lived Assets

We periodically evaluate the carrying value of our long-lived assets, including, but not limited to, property and equipment. We consider the carrying value of a long-lived asset impaired when the undiscounted cash flows from such asset are separately identifiable and we estimate them to be less than its carrying value. In that event, we would recognize a loss based on the amount by which the carrying value exceeds the fair value of the long-lived asset. We determine fair value based on either market quotes, if available, or discounted cash flows using a discount rate commensurate with the risk inherent in our current business model for the specific asset being valued. We would determine losses on long-lived assets to be disposed of in a similar manner, except that we would reduce fair values by the cost of disposal. We charge losses due to impairment of long-lived assets to operations during the period in which we identify the impairment.


Goodwill and Other Intangible Assets

For purposes

As of valuingJanuary 1, 2017, we changed our goodwill, weoperating segments, as discussed in Note 11 “Operating Segment and Geographic Information,” and, subsequently, our reporting units. We now have the followingsix reporting units: IP services, IP products, data center services (“DCS”), managed hosting, cloud, and data center products. Ubersmith. We allocated goodwill to our new reporting units using a relative fair value approach. In addition, we completed an assessment of any potential goodwill impairment for all reporting units immediately prior to and after the reallocation and determined that no impairment existed.
We performed our annual impairment review as of August 1, 20152017, and concluded that goodwill attributed to each of our reporting units was not impaired as the fair value of each reporting unit exceeded the carrying value, including goodwill.

To determine the estimated fair value of our reporting units, we utilizeutilized the discounted cash flow and market methods. We have consistently utilized both methods in our goodwill impairment testsassessments and weighted both as we believe both, in conjunction withappropriate based on relevant factors for each other, provide a reasonable estimate of the fair value of the reporting unit. The discounted cash flow method is specific to our anticipated future results of the reporting unit, while the market method is based on our market sector including our competitors.


We determined the assumptions supporting the discounted cash flow method, including the discount rate and using our estimates as of the date of the impairment review. To determine the reasonableness of these assumptions, we performed various sensitivity analyses on certainconsidered our past performance and empirical trending of the assumptions used in the discounted cash flow method,results and looked to market and industry expectations, such as forecasted revenues and discount rate. We used


reasonable judgment in developing our estimates and assumptionsassumptions. The market method estimates fair value based on market multiples of revenue and there was no impairment indicated in our testing.

earnings derived from comparable companies with similar operating and investment characteristics as the reporting unit.


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

While we have not identified any impairment indicators in our IP services reporting unit subsequent to the annual impairment review, the fair value of this reporting unit exceeded its carrying value by 13% as of August 1, 2015. If revenue for such reporting unit continues to decline, we may be at risk for future impairment. At December 31, 2015, goodwill attributable to the IP services reporting unit was $33.7 million.

F-7


We did identify an impairment indicator for our IP products reporting unit in that actual 2015 revenue did not meet projections. At December 31, 2015, we recalculated the fair value using revised revenue projections for the rollout of our new product, Managed Internet Route Optimizer Controller, which replaced our previous generation of route optimization hardware, and the fair value of this reporting unit substantially exceed the carrying value. However, since this is a new product without an established historical revenue pattern, the IP products reporting unit may be at future risk of impairment if we do not meet our revised projections. At December 31, 2015, goodwill attributable to the IP products reporting unit was $5.8 million.

Other intangible assets have finite lives and we record these assets at cost less accumulated amortization. We record amortization of acquired and developed technologies to be sold 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 economic life, which is five to eight years. We amortize the cost of customer relationship and trade names over their useful lives of 10 to 15 years. During the years ended December 31, 2017, 2016 and 2015 amortization expense for acquired and developed technologies was $2.1 million, $3.0 million and $3.4 million, respectively. We assess other intangible assets on a quarterly basis whenever any events have occurred or circumstances have changed that would indicate that 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. We concluded that no impairment indicators existed, with the exception of the phase-out of the iWeb trade name further described in note 7, to cause us to reassess our other intangible assets during the year ended December 31, 2015.


Derivatives

We use derivatives only to reduce exposure to specific identified risks including managing the overall cost of capital and translational and transactional exposure arising from foreign transactions and ensuring the certainty of outcome as it relates to commodity pricing exposure. We do not use derivatives for any other purpose.

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.

Taxes

We account for income taxes under the liability method. We determine deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities, and we measure the tax assets and liabilities using the enacted tax rates and laws that will be in effect when we expect the differences to reverse. We maintain a valuation allowance to reduce our deferred tax assets to their estimated realizable value. We may recognize deferred tax assets in future periods if and when we estimate them to be realizable and supported by historical trends of profitability and future expectations within each tax jurisdiction.

We evaluate liabilities for uncertain tax positions, and we recognized $0 and $0.4$0.2 million for associated liabilities during the years ended December 31, 20152017 and 2014, respectively.2016. We recorded nominal interest and penalties arising from the underpayment of income taxes in “Benefit“Provision (benefit) for income taxes” in our accompanying consolidated statements of operations and comprehensive loss. As of December 31, 2015 and 2014, we accrued $0 for interest and penalties related to uncertain tax positions.

We account for telecommunication, sales and other similar taxes on a net basis in “General and administrative” expense in our accompanying consolidated statements of operations and comprehensive loss.



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.


We do not recognize a deferred tax asset for unrealized tax benefits associated with the tax deductions in excess of the compensation recorded (excess tax benefit). We apply the “with and without” approach for utilization of tax attributes upon realization of net operating losses in the future. This method allocates stock-based compensation benefits last among other tax benefits recognized. In addition, we apply the “direct only” method of calculating the amount of windfalls or shortfalls.

F-8

Treasury Stock

As permitted by our stock-based compensation plans, we acquire shares of treasury stock as payment of statutory minimum payroll taxes due from employees for stock-based compensation. However, we do not use shares of treasury stock acquired from employees in this manner to issue new equity awards under our stock-based compensation plans.

Revenue Recognition

We generate revenues primarily from the sale of data center services, including colocation, hosting and cloud, and IP services. Our revenues typically consist of monthly recurring revenues from contracts with terms of one year or more. We recognize the monthly minimum as revenue each month provided that we have entered into an enforceable contract, we have delivered the service to the customer, the fee for the service is fixed or determinable and collection is reasonably assured. We record installation fees as deferred revenue and recognize the revenue ratably over the estimated customer life.

For our data center services revenue, we determine colocation revenues by occupied square feet and both allocated and variable-based usage, which includes both physical space for hosting customers’ network and other equipment plus associated services such as power and network connectivity, environmental controls and security. We determine hosting revenues by the number of servers utilized (physical or virtual) and cloud revenues by the amount of processing and storage consumed.

We recognize IP services revenues on fixed-commitment or usage-based pricing. IP service contracts usually have fixed minimum commitments based on a certain level of bandwidth usage with additional charges for any usage over a specified limit. If a customer’s usage of our services exceeds the monthly minimum, we recognize revenue for such excess in the period of the usage.

We use contracts and sales or purchase orders as evidence of an arrangement. We test for availability or connectivity to verify delivery of our services. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.

We also enter into multiple-element arrangements, or bundled services. When we enter into such arrangements, we account for each element separately over its respective service period provided that we have objective evidence of fair value for the separate elements. Objective evidence of fair value includes the price charged for the element when sold separately. If we cannot objectively determine the fair value of each element, we recognize the total value of the arrangement ratably over the entire service period to the extent that we have begun to provide the services, and we have satisfied other revenue recognition criteria.

For multiple-deliverable revenue arrangements we allocate arrangement consideration at the inception of an arrangement to all deliverables using the relative selling price method. The hierarchy for determining the selling price of a deliverable includes (a) vendor-specific objective evidence, if available, (b) third-party evidence, if vendor-specific objective evidence is not available and (c) best estimated selling price, if neither vendor-specific nor third-party evidence is available.

Vendor-specific objective evidence is generally limited to the price charged when we sell the same or similar service separately. If we seldom sell a service separately, it is unlikely that we will determine vendor-specific objective evidence for the service. We define vendor-specific objective evidence as an average price of recent standalone transactions that we price within a narrow range that we define.

We determine third-party evidence based on the prices charged by our competitors for a similar deliverable when sold separately. It is difficult for us to obtain sufficient information on competitor pricing to substantiate third-party evidence and therefore we may not always be able to use this measure.

If we are unable to establish selling price using vendor-specific objective evidence or third-party evidence, we use best estimated selling price in our allocation of arrangement consideration. The objective of best estimated selling price is to determine the price at which we would transact if we sold the service on a standalone basis. Our determination of best estimated selling price involves a weighting of several factors including, but not limited to, pricing practices and market conditions.



We analyze the selling prices used in our allocation of arrangement consideration on an annual basis at a minimum. We will analyze selling prices on a more frequent basis if a significant change in our business necessitates a more timely analysis or if we experience significant variances in our selling prices.

We account for each deliverable within a multiple-deliverable revenue arrangement as a separate unit of accounting if both of the following criteria are met: (a) the delivered item or items have value to the customer on a standalone basis and (b) for an arrangement that includes a general right of return for the delivered item(s), we consider delivery or performance of the undelivered item(s) probable and substantially in our control. We consider a deliverable to have standalone value if we sell this item separately or if the item is sold by another vendor or could be resold by the customer. Further, our revenue arrangements generally do not include a right of return relative to delivered services.

F-9

We combine deliverables not meeting the criteria for being a separate unit of accounting with a deliverable that does meet that criterion. We then determine the appropriate allocation of arrangement consideration and recognition of revenue for the combined unit of accounting.

Deferred revenue consists of revenue for services to be delivered in the future and consists primarily of advance billings, which we amortize over the respective service period. We defer and amortize revenues associated with billings for installation of customer network equipment over the estimated life of the customer relationship, which was, on average, approximately five years for 2017, five years for 2016, and six years for 2015, 2014 and 2013.2015. We defer and amortize revenues for installation services because the installation service is integral to our primary service offering and does not have value to customers on a stand-alone basis. We also defer and amortize the associated incremental direct costs.

We routinely review the collectability of our accounts receivable and payment status of our customers. If we determine that collection of revenue is uncertain, we do not recognize revenue until collection is reasonably assured. Additionally, we maintain an allowance for doubtful accounts resulting from the inability of our customers to make required payments on accounts receivable. We base the allowance for doubtful accounts on general customer information, which primarily includes our historical cash collection experience and the aging of our accounts receivable, as well as historical write-offs as a percentage of revenue. We assess the payment status of customers by reference to the terms under which we provide services or goods, with any payments not made on or before their due date considered past-due. Once we have exhausted all collection efforts, we write the uncollectible balance off against the allowance for doubtful accounts. We routinely perform credit checks for new and existing customers and require deposits or prepayments for customers that we perceive as being a credit risk. In addition, we record a reserve amount for potential credits to be issued under our service level agreements and other sales adjustments.


Research and Development Costs

We include research and development costs in general and administrative costs and we expense them as incurred. These costs primarily relate to our development and enhancement of IP routing technology, hosting and cloud technologies and network engineering costs associated with changes to the functionality of our services. Research and development costs were $2.2$1.5 million, $2.8$1.1 million and $2.1$2.2 million during the years ended December 31, 2015, 20142017, 2016 and 2013,2015, respectively. These costs do not include $6.5$5.2 million, $8.5$6.3 million and $7.5$6.5 million of internal-use and available for sale software costs capitalized during the years ended December 31, 2017, 2016 and 2015, 2014 and 2013, respectively.

Advertising Costs

We expense all advertising costs as incurred. Advertising costs during the years ended December 31, 2017, 2016 and 2015 2014were $1.9 million, $2.1 million and 2013 were $4.9 million, $6.5 million and $3.1 million, respectively.

Net Loss Per Share

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

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

  Year Ended December 31, 
  2015  2014  2013 
Net loss and net loss available to common stockholders $(48,443) $(39,494) $(19,830)
Weighted average shares outstanding, basic and diluted  51,898   51,237   51,135 
             
Net loss per share, basic and diluted $(0.93) $(0.77) $(0.39)
             
Anti-dilutive securities excluded from diluted net loss per share calculation for stock-based compensation plans  6,655   6,696   6,795 

  Year Ended December 31,
  2017 2016 2015
Net loss and net loss available to common stockholders $(45,343) $(124,742) $(48,443)
Weighted average shares outstanding, basic and diluted 18,993
 13,083
 12,975
       
Net loss per share, basic and diluted $(2.39) $(9.54) $(3.73)
       
Anti-dilutive securities excluded from diluted net loss per share calculation for stock-based compensation plans 1,076
 1,350
 1,664


Segment Information

and Operating Costs and Expenses

We align our reportable segments with the internal reporting that management uses for making operating decisions and assessing performance. AsEffective January 1, 2017 and as further described in note 12,11, we operate in two business segments: data centerINAP COLO and INAP CLOUD.

The prior year reclassifications, which did not affect total revenues, total direct costs of sales and services, and IP services. We include the operations of iWeb Technologies Inc. (“iWeb”), acquired in November 2013, in our data center services segment.

F-10
operating loss or net loss, are summarized as follows (in thousands): 

  Year Ended December 31, 2016
  
As Previously
Reported
 Reclassification As Reported
Revenues:  
  
  
Data center and network services $200,660
 $(200,660) $—
Cloud and hosting services 97,637
 (97,637) —
INAP COLO —
 221,678
 221,678
INAP CLOUD —
 76,619
 76,619
Costs of sales and services, exclusive of depreciation and amortization:  
  
  
Data center and network services $98,351
 $(98,351) $—
Cloud and hosting services 25,904
 (25,904) —
INAP COLO —
 105,620
 105,620
INAP CLOUD —
 18,635
 18,635
  Year Ended December 31, 2015
  
As Previously
Reported
 Reclassification As Reported
Revenues:  
  
  
Data center and network services $213,040
 $(213,040) $—
Cloud and hosting services 105,253
 (105,253) —
INAP COLO —
 234,859
 234,859
INAP CLOUD —
 83,434
 83,434
Costs of sales and services, exclusive of depreciation and amortization:      
Data center and network services $104,105
 $(104,105) —
Cloud and hosting services 27,335
 (27,335) —
INAP COLO —
 111,765
 111,765
INAP CLOUD —
 19,675
 19,675
Recent Accounting Pronouncements

In November 2015, the Financial


Adoption of New Accounting Standards Board (“FASB”)

In January 2017, the FASB issued guidanceto simplifyASU No. 2017-04, "Intangibles Goodwill and Other (Topic 350): Simplifying the presentationAccounting for Goodwill Impairment" ("ASU 2017-04"), which simplifies the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. The guidance is effective for public companies’ annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We adopted ASU 2017-04 in the first quarter of 2017 and it did not impact our consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"), which allows the recognition of current and deferred income taxes which requirefor an intra-entity asset transfer, other than inventory, when the transfer occurs. Historically, recognition of the income tax consequence was not recognized until the asset was sold to an outside


party. This guidance should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. There are no new disclosure requirements. The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. Early adoption is permitted, and the Company adopted the provisions of ASU 2016-16 as of January 1, 2017. Relating to the adoption of the standard, the Company recorded a $2.2 million deferred tax liabilitiesasset and assetscorresponding $1.9 million valuation allowance with the net difference going to be classified as noncurrent in a classified statementretained earnings.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"), which includes multiple amendments intended to simplify aspects of financial position.share-based payment accounting, and was effective for us at January 1, 2017. We have elected earlyto account for forfeitures as they occur, rather than estimate expected forfeitures. In connection with the adoption as of December 31, 2015the standard, the Company recorded a $10.8 million deferred tax asset and prospectively applieda corresponding $10.8 million valuation allowance.

Accounting Pronouncements Issued But Not Yet Effective

In August 2016, the guidance. We did not retrospectively adjust prior periods. Had we retrospectively applied theFASB issued ASU No. 2016-15, "Statement of Cash Flow (Topic 230): Classification of Certain Cash Receipts and Cash Payments" which amends Accounting Standards Codification 230, to clarify guidance at December 31, 2014, the impact on the accompanying consolidated balance sheet would have been a decreaseclassification of certain cash receipts and payments in “Current deferred tax asset”the statement of $0.6 million with a decrease in “Long-term deferred tax liability” of $0.6 million.  

In April 2015,cash flows ("ASU 2016-15"). The FASB issued guidance that requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, which is consistentASU 2016-15 with the presentationintent of debt discounts. Thereducing diversity in practice with respect to eight types of cash flows. This guidance to be applied retrospectively, is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early2017, with early adoption is permitted. We expectare currently evaluating the impact that adoption will have on the presentation of our consolidated statements of cash flow.

In May 2014, the FASB issued ASU No. 2014-09 (Topic 606)-Revenue from Contracts with Customers (“ASU 2014-09”) which provides a new five-step model for revenue recognition. This ASU affects all contracts that we enter into with customers to transfer goods and services or for the transfer of nonfinancial assets. This ASU will supersede the revenue recognition requirements in Topic 605, and most industry specific guidance. This ASU also supersedes the cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts and provides new cost guidance under Sub Topic 340-40.

An entity has the option to apply the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented (the “full retrospective method”) or retrospectively with the cumulative effect of initially applying this standard recognized at the date of initial application (the “modified retrospective method”).

We will adopt the new revenue guidance effective January 1, 2018, using the modified retrospective method by recognizing the cumulative effect of initially applying the new standard as an increase to the opening balance of retained earnings. We currently expect to record an adoption adjustment on the effective date to be $23.6 million, which will be reflected in retained earnings.

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

We believe that most performance obligations, with the exception of certain sales of equipment or hardware, will continue to be 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.

We are required to exercise more judgment in deferring installation revenue as well as expense fulfillment and commission costs over the appropriate life. With the exception of the revenues noted above, we expect revenue recognition to remain materially consistent with historical practice. Additionally the standard will require us to implement new revenue accounting processes that will change internal controls over financial reporting for revenue recognition.

Based on currently available information, we estimate the following impacts on 2018 (all amounts are approximate):



2018 Opening Balance Sheet Impact (in millions): 
Pretax Retained Earnings Increase (Decrease): 
Commissions$23.6
Deferred revenue$5.4
Deferred costs$(6.3)
  
2018 Pretax Income Statement Impacts (in millions): 
Total Revenue Change$0.7
Total Expense Reduction$(2.1)

We do not anticipate the new standard to modify our current business practices nor do we expect to have a materialan impact on our financial conditiondebt covenants.  As we implement the new standard, we will develop internal controls to ensure that we adequately evaluate our portfolio of contracts under the five-step model and no impact on our result of operations.

accurately compute the cumulative adjustment to operating results under ASU 2014-09.


In February 2015,2016, the FASB issued guidanceASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which requires all leases in excess of 12 months to improve targeted areasbe recognized on the balance sheet as lease assets and lease liabilities. For operating leases, a lessee is required to recognize a right-of-use asset and lease liability, initially measured at the present value of the existing consolidationlease payment; recognize a single lease cost over the lease term generally on a straight-line basis; and classify all cash payments within operating activities on the cash flow statement. The guidance and reduce the number of consolidation models. This update is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. We expect adoption will not have a material impact on our financial condition or result of operations.

In August 2014, FASB issued new guidance which requires management to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable) and provide related disclosures. The guidance is effective for the annual and interim periods ending after December 15, 2016. Early2018. Earlier adoption is permitted. We expect adoption will not have a material impact on our financial condition or result of operations.

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



3.ACQUISITION

iWeb Acquisition

On November 26, 2013, we completed the acquisition of iWeb. Headquartered in Montreal, Quebec, Canada, iWeb, at the time of acquisition, had four company-controlled data centers supporting global hosting, cloud and colocation services. We include the results of iWeb from November 26, 2013 through December 31, 2013 in our data center services segment in the consolidated statements of operations, which consisted of revenue of $3.6 million and loss before income tax of $0.4 million.

We acquired all of the outstanding capital stock of iWeb for a total purchase price, net of working capital adjustments provided for under the purchase agreement, of $145.7 million. The net cash paid was $144.4 million, which included cash acquired of $1.3 million.

We incurred $4.2 million in acquisition costs, which we expensed and included in “General and administrative” in the consolidated statements of operations and comprehensive loss for the year ended December 31, 2013. We funded the purchase price and acquisition costs through a $350.0 million credit agreement, which we entered into contemporaneously with the acquisition, further described in note 11.

F-11

Purchase Price Allocation

We allocated the aggregate purchase price for iWeb to the net tangible and intangible assets based on their fair value as of November 26, 2013. We based the allocation of the purchase price on a valuation for property and equipment, intangible assets and deferred revenue and the carrying value for the remaining assets and liabilities, as the carrying value approximates fair value. The fair value of iWeb’s property and equipment was estimated using the market approach, using comparable market prices; the income approach, using present value of future income or cash flow; or the cost approach, using the replacement cost of assets, depending on the nature of the assets being valued. The fair value of identifiable intangible assets were measured at fair value primarily using various “income approaches,” which required a forecast of expected future cash flows, either for the use of a relief-from royalty method or a multi-period excess earnings method. We recorded the excess of the purchase price over the net tangible and intangible assets as goodwill. Factors that contributed to the recognition of goodwill included expected synergies and the trained workforce. We expect that none of the goodwill will be deductible for tax purposes. Our purchase price allocation was as follows (in thousands):

Current assets, including cash acquired of $1.3 million $4,284 
Property and equipment  52,497 
Goodwill  70,708 
Intangible assets  40,925 
Other long-term assets  689 
Current liabilities  (7,119)
Deferred revenue  (3,740)
Capital lease obligations  (1,301)
Other long-term liabilities  (2,981)
Net deferred income tax liability, long-term  (8,249)
  $145,713 

The intangible assets acquired were as follows (in thousands):

  Fair Value  Weighted
Average
Useful Life		 
Customer relationships $22,200   15 years 
Trade name(1)  15,100   30 years 
Beneficial leasehold interest  858   14 years 
Internally developed software  2,767   5 years 
Total intangible assets $40,925     

(1)During 2015, as further described in note 7, we accelerated the useful life of the iWeb trade name to support our long-term strategy. At December 31, 2015, the unamortized balance was zero.

Unaudited Supplemental Financial Information

Our unaudited pro forma results presented below, including iWeb, for the year ended December 31, 2013 are presented as if the acquisition had been completed on January 1, 2012. We calculated these amounts by adjusting the historical results of iWeb to reflect the additional interest, depreciation and amortization expenses that would have been recorded assuming the fair value adjustments to intangible assets had been applied from January 1, 2012, with the consequential tax effects. For the year ended December 31, 2013, the pro forma financial information below is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of 2012.

(in thousands)   
Unaudited pro forma revenue $323,000 
Unaudited pro forma net loss  (32,000)

4.3.FAIR VALUE MEASUREMENTS


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

lLevel 1: Quoted prices in active markets for identical assets or liabilities;
lLevel 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
lLevel 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

F-12

Level 1: Quoted prices in active markets for identical assets or liabilities;
Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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

  Level 1  Level 2  Level 3  Total 
December 31, 2015:                
Foreign currency contracts (note 10) $—  $1,019  $—  $1,019 
Interest rate swap (note 10)  —   728   —   728 
Asset retirement obligations(1) (note 11)  —   —   2,803   2,803 
                 
December 31, 2014:                
Interest rate swap (note 10)  —   813   —   813 
Asset retirement obligations(1) (note 11)  —   —   2,471   2,471 

  Level 1 Level 2 Level 3 Total
December 31, 2017:  
  
  
  
Cash and cash equivalents $14,603
 $—
 $—
 $—
Asset retirement obligations (1) (note 10)
 —
 —
 1,936
 1,936
         
December 31, 2016:  
  
  
  
Cash and cash equivalents $10,389
 $—
 $—
 $—
Foreign currency contracts (note 9) —
 195
 —
 195
Asset retirement obligations (1) (note 10)
 —
 —
 2,810
 2,810
         
(1)
We calculate the fair value of asset retirement obligations by discounting the estimated amount using the current Treasury bill rate adjusted for our credit non-performance.



The following table provides a summary of changes in our Level 3 asset retirement obligations (in thousands):

  December 31, 
  2015  2014 
Balance, January 1 $2,471  $2,357 
Accrued estimated obligation, less fair value adjustment  —   1,338 
Subsequent revision of estimated obligation  70   (68)
Accretion(1)  262   244 
Payments  —   (1,319)
Gain on settlement(2)  —   (81)
Balance, December 31 $2,803  $2,471 

  December 31,
  2017 2016 2015
Balance, January 1 $2,810
 $2,803
 $2,471
Accretion (1)
 197
 207
 262
Subsequent revision of estimated obligation 449
 —
 70
Payments (1,520) (200) —
Balance, December 31 $1,936
 $2,810
 $2,803
       
(1)
Included in data center services “Direct costsINAP COLO "Costs of network, sales and services”services" in the accompanying consolidated statements of operations and comprehensive loss.

(2)Included in “Other, net” in the accompanying consolidated statements of operations and comprehensive loss.


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

  December 31, 
  2015  2014 
  Carrying
Amount		  Fair
Value		  Carrying
Amount		  Fair
Value		 
Term loan $294,000   303,000  $297,000   313,000 
Revolving credit facility  31,000   30,400   10,000   9,900 

  December 31,
  2017 2016
  
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Term loan $298,500
 $301,485
 $291,000
 $267,700
Revolving credit facility 5,000
 5,050
 35,500
 32,600
5.
4.PROPERTY AND EQUIPMENT


Property and equipment consisted of the following (in thousands):

  December 31, 
  2015  2014 
Network equipment $215,333  $194,441 
Network equipment under capital lease  10,126   8,023 
Furniture and equipment  18,957   19,811 
Software  49,769   41,595 
Leasehold improvements  378,747   380,376 
Land  —   254 
Building  —   696 
Buildings under capital lease  63,117   64,323 
Property and equipment, gross  736,049   709,519 
Less: accumulated depreciation and amortization ($31,784 and $25,209 related to capital leases at December 31, 2015 and 2014, respectively)  (407,349)  (367,374)
  $328,700  $342,145 

F-13

  December 31,
  2017 2016
Network equipment $247,190
 $231,579
Network equipment under capital lease 14,206
 14,231
Furniture and equipment 26,246
 18,300
Software 43,930
 48,011
Leasehold improvements 412,631
 396,891
Buildings under capital lease 227,482
 63,117
Property and equipment, gross 971,685
 772,129
Less: accumulated depreciation and amortization ($50,253 and $40,218 related to capital leases at December 31, 2016 and 2015, respectively) (513,120) (469,449)
  $458,565
 $302,680


We disposed or retired $9.2 million of property and equipment with accumulated depreciation of $7.3 million during the year ended December 31, 2017, $5.0 million of assets with accumulated depreciation of $4.4 million during the year ended December 31, 2016 and $33.3 million of assets with accumulated depreciation of $32.6 million during the year ended December 31, 2015, $17.9 million of assets with accumulated depreciation of $17.4 million during the year ended December 31, 2014 and $8.1 million of assets with accumulated depreciation of $8.1 million during the year ended December 31, 2013. 2015.

We capitalized an immaterial amount of interest for each of the three years ended December 31, 2015.

2017. Also, during the year ended December 31, 2017, we determined that we would not use certain leasehold improvements from our recently exited data center property and recorded an impairment of $0.5 million. At the time of disposal, the leasehold improvements had a cost of $22.4 million with accumulated depreciation of $22.4 million. During the year ended December 31, 2016, we determined that we would not use certain internally-developed software related to our quoting and billing system and recorded an impairment of $1.6 million. At the time of disposal, the software had a cost of $2.4 million with accumulated depreciation of $0.8 million.


Depreciation and amortization of property and equipment consisted of the following (in thousands):

  Year ended December 31, 
  2015  2014  2013 
Direct costs of network, sales and services $70,080  $70,579  $44,799 
Other depreciation and amortization  19,125   4,672   3,382 
Subtotal  89,205   75,251   48,181 
Amortization of acquired and developed technologies  3,450   5,918   4,967 
Total depreciation and amortization $92,655  $81,169  $53,148 

  Year ended December 31,
  2017 2016 2015
Costs of sales and services $70,368
 $71,626
 $70,080
Other depreciation and amortization 2,478
 2,274
 19,125
Subtotal 72,846
 73,900
 89,205
Amortization of acquired and developed technologies 2,147
 3,048
 3,450
Total depreciation and amortization $74,993
 $76,948
 $92,655
6.
5.INVESTMENT ININAP JAPAN JOINT VENTURE

We have previously

In previous years, INAP invested $4.1 million for a 51% ownership interest in Internap Japan Co., Ltd, ("INAP Japan") a joint venture with NTT-ME Corporation and NTT Holdings. Given the minority interest protections in favorNippon Telegraph and Telephone Corporation. INAP Japan is a provider of our joint venture partners, we do not assert control over the joint venture’s operational and financial policies and practices required to accounthigh performance infrastructure services. We accounted for the joint venture as a subsidiary whose assets, liabilities, revenue and expense would be consolidated. We are, however, able to assert significant influence over the joint venture and, therefore, account for our joint venturethis investment using the equity method. On August 15, 2017, INAP exercised certain rights to obtain a controlling interest in INAP Japan, which will allow us to recognize the economic benefits. Upon obtaining control of the venture, we recognized INAP Japan's assets and liabilities at fair value resulting in a gain of $1.1 million which is reflected in "Equity in earnings of equity-method investment, net of accounting.

Our investment activitytaxes" in the joint venture is summarized belowaccompanying consolidated statements of operations and comprehensive loss.


We determined the preliminary fair value of the net assets as follows (in thousands):

  Year Ended December 31, 
  2015  2014 
Investment balance, January 1 $2,622  $2,602 
Proportional share of net income  200   259 
Unrealized foreign currency translation loss, net  (54)  (239)
Investment balance, December 31 $2,768  $2,622 

  Preliminary Purchase Price AllocationWeighted Average
Cash $3,838
 
Property and equipment 725
 
Customer relationships 1,231
21 years
License 634
 
Other assets 2,322
 
  Total assets acquired 8,750
 
Other liabilities 446
 
Noncontrolling interest 3,999
 
  Net assets acquired $4,305
 

The fair value of customer relationships was estimated by applying the multi-period excess earnings method. The fair value was determined by calculating the present value of estimated future operating cash flows generated from existing customers less costs to realize the revenue. The Company applied a discount rate of 8.5%, which reflected the nature of the assets as they relate to the risk and uncertainty of the estimated future operating cash flows. Other significant assumptions used to estimate the fair value of customer relationships include projected revenue growth, customer attrition rates, sales and marketing expenses and operating margins. The fair value measurements were based on significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in the accounting standard for fair value measurements.



The fair value of property and equipment was estimated by applying the cost approach. The cost approach is to use the replacement or reproduction cost as an indicator of fair value. The premise of the cost approach is that a market participant would pay no more for an asset than the amount for which the asset could be replaced or reproduced. The key assumptions of the cost approach include replacement cost new, physical deterioration, functional and economic obsolescence, economic useful life, remaining useful life, age and effective age.

Unaudited Pro-Forma Financial Information

The following unaudited pro forma financial information presents the combined results of operations of INAP and INAP Japan as if the acquisition had occurred on January 1, 2016. The unaudited pro forma financial information is not intended to represent or be indicative of our consolidated results of operations that would have been reported had the INAP and INAP Japan acquisition been completed as of January 1, 2016, and should not be taken as indicative of our future consolidated results of operations.
(in thousands, except per share amounts)Year Ended December 31,
  2017 2016
Revenue $286,570
 $305,733
Net loss attributable to INAP stockholders(45,240) (124,722)
Basic and diluted net loss per share(2.38) (9.53)

7.
6.GOODWILL AND OTHER INTANGIBLE ASSETS


Goodwill

As of January 1, 2017, we changed our operating segments, as discussed in Note 11, and, subsequently, our reporting units. We now have six reporting units: IP services, IP products, data center services (“DCS”), cloud, hosting services and hosting products. We allocated goodwill to our new reporting unit using a relative fair value approach. In addition, we completed an assessment of any potential goodwill impairment for all reporting units immediately prior to and after the reallocation and determined that no impairment existed.
We performed our annual impairment review as of August 1, 2017. To determine the estimated fair value of our reporting units, we utilized the discounted cash flow and market methods. We have consistently utilized both methods in our goodwill impairment assessments and weighted both as appropriate based on relevant factors for each reporting unit. The discounted cash flow method is specific to our anticipated future results of the reporting unit, while the market method is based on our market sector including our competitors.
We determined the assumptions supporting the discounted cash flow method, including the discount rate, using our estimates as of the date of the impairment review. To determine the reasonableness of these assumptions, we considered our 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. We used reasonable judgment in developing our estimates and assumptions. The market method estimates fair value based on market multiples of revenue and earnings derived from comparable companies with similar operating and investment characteristics as the reporting unit.
The assumptions, inputs and judgments used in performing the valuation analysis are inherently subjective and reflect estimates based on known facts and circumstances at the time we perform the valuation. These estimates and assumptions primarily include, but are not limited to, discount rates; terminal growth rates; projected revenues and costs; earnings before interest, taxes, depreciation and amortization for expected cash flows; market comparables and capital expenditure forecasts. The use of different assumptions, inputs and judgments, or changes in circumstances, could materially affect the results of the valuation. Due to inherent uncertainty involved in making these estimates, actual results could differ from our estimates and could result in additional non-cash impairment charges in the future.

The Company determined, after performing the fair value analysis above, that all reporting units’ fair values were in excess of its carrying value. No impairment of goodwill has been identified during the year ended December 31, 2017.

During the years ended December 31, 20152017 and 2014, we did not identify an impairment as a result of2016, our annual impairment test. However, at December 31, 2015, as further discussed in Note 2 “Goodwill and other intangible assets”, we considered the likelihood of triggering events that might cause us to reassess goodwill on an interim basis and concluded that we had an impairment indictor in our IP products reporting unit, included in our IP services reporting segment below. We recalculated the fair value and it substantially exceeded the carrying value. At December 31, 2015, goodwill attributable to the IP Products reporting unit was $5.8 million.

The carrying amount of goodwill for each of the two years ended December 31, 2015activity is as follows (in thousands):

  Data
Center
Services		  IP
Services		  Total 
Balance, December 31, 2014:            
Goodwill $90,849  $152,087  $242,936 
Accumulated impairment losses  —   (112,623)  (112,623)
Net  90,849   39,464   130,313 
             
Balance, December 31, 2015:            
Goodwill  90,849   152,087   242,936 
Accumulated impairment losses  —   (112,623)  (112,623)
Net $90,849  $39,464  $130,313 



  January 1, 2016 Re-allocations Impairment December 31, 2016 Re-allocations December 31, 2017
Reportable segments:        
  
  
Data center services $90,849
 $(90,849) $—
 $—
 $—
 $—
IP services 39,464
 (39,464) —
 —
 —
 —
Data center and network services —
 80,105
 (80,105) 

 —
 —
Cloud and hosting services —
 50,209
 —
 50,209
 (50,209) —
INAP COLO       —
 6,003
 6,003
INAP CLOUD       —
 44,206
 44,206
Total $130,313
 $—
 $(80,105) $50,209
 $—
 $50,209
Other Intangible Assets

During the yearsyear ended December 31, 2015 and 2014,2017, we concluded that no impairment indicators existed to cause us to reassess our other intangible assets.

F-14
The estimated useful lives range from 5 years to 15 years.

The components of our amortizing intangible assets, including capitalized software, are as follows (in thousands):

  December 31, 2015  December 31, 2014 
  Gross
Carrying
Amount		  Accumulated
Amortization		  Gross
Carrying
Amount		  Accumulated
Amortization		 
Acquired and developed technology $52,783   (43,807) $52,512  $(40,718)
Customer relationships and trade names(1)  69,548   (45,637)  69,548   (28,797)
  $122,331   (89,444) $122,060  $(69,515)

(1)During 2015, we determined to phase-out the use of the iWeb trade name to support our long-term strategy. As a result, we changed the estimate of the trade name’s useful life to approximately nine months beginning in late March 2015. During the year ended December 31, 2015, the additional amortization expense was $14.0 million. At December 31, 2015, the unamortized balance was zero.

  December 31, 2017 December 31, 2016
  
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Acquired and developed technology $52,825
 (48,063) $52,195
 $(45,995)
Customer relationships and trade names 71,116
 (50,212) 69,698
 (47,920)
  $123,941
 (98,275) $121,893
 $(93,915)
         

Amortization expense for intangible assets during the years ended December 31, 2017, 2016 and 2015 2014 and 2013 was $20.3$5.1 million, $9.1$5.3 million and $5.9$20.3 million, respectively. As of December 31, 2015,2017, remaining amortization expense is as follows (in thousands):

2016 $5,242 
2017  4,488 
2018  4,321 
2019  3,714 
2020  2,614 
Thereafter  12,508 
  $32,887 

2018$4,649
20194,146
20203,236
20212,753
20221,794
Thereafter9,088
 $25,666
8.
7.ACCRUED LIABILITIES


Accrued liabilities consist of the following (in thousands):

  December 31, 
  2015  2014 
Compensation and benefits payable $5,906  $7,239 
Property, sales, and other taxes  996   1,512 
Customer credit balances  1,179   1,815 
Other  2,656   2,554 
  $10,737  $13,120 

  December 31,
  2017 2016
Compensation and benefits payable $6,673
 $5,396
Property, sales, and other taxes 2,636
 1,627
Customer credit balances 1,616
 1,256
Accrued interest 1,690
 —
Other 3,293
 2,324
  $15,908
 $10,603


9.
8.EXIT ACTIVITIES AND RESTRUCTURING


During the year ended December 31, 2017, we recorded initial exit activity charges due to ceasing use of data center space. Payments for the data center space are expected through 2019.

During the year ended December 31, 2016, our new management team launched a series of turnaround initiatives designed to improve profitable growth. This included an initial round of cost cuts which resulted in restructuring charges for severance due to reduction in headcount. We also incurred initial restructuring charges for ceasing use of office facilities. Payments for severance are substantially complete and payments for the office facilities are expected through 2020.

During the year ended December 31, 2015, we recorded initial exit activity charges primarily due to the termination of contracts, with payments expected primarily through 2020, and subsequent plan adjustments in sublease income assumptions for properties included in our previously-disclosed plans, with payments expected from 2016 through 2019. During
The following table displays the year ended December 31, 2014, we recorded initialtransactions and balances for exit activityactivities and restructuring charges primarily due to ceasing use of certain data center space, with payments expected through 2019.(in thousands). We include initial charges and plan adjustments in “Exit activities, restructuring and impairments” in the accompanying statements of operations and comprehensive loss for the yearyears ended December 31, 20152017, 2016 and 2014.

The following table displays the transactions and balances for exit activities and restructuring charges,2015. Our real estate obligations are substantially related to our data center services segment, during each of the years ended December 31, 2015 and 2014 (in thousands):

  Balance
December 31, 2014		  Initial
Charges		  Plan
Adjustments		  Cash
Payments		  Balance
December 31, 2015		 
Real estate obligations:                    
2015 exit activities $—  $1,538  $—  $(531) $1,007 
2014 exit activities  2,010   —   244   (553)  1,701 
2007 restructuring  2,325   —   660   (1,815)  1,170 
Other  175   —   (6)  (169)  — 
  $4,510  $1,538  $898  $(3,068) $3,878 

  Balance
December 31, 2013		  Initial
Charges		  Plan
Adjustments		  Cash
Payments		  Balance
December 31, 2014		 
Real estate obligations:                    
2014 exit activities $—  $3,499  $17  $(1,506) $2,010 
2007 restructuring  3,296   —   1,055   (2,026)  2,325 
Other  867   —   21   (713)  175 
  $4,163  $3,499  $1,093  $(4,245) $4,510 

F-15
INAP COLO segment. Severance is spread across both reportable segments. 

  Balance December 31, 2016 
Initial
Charges
 
Plan
Adjustments
 
Cash
Payments
 Balance December 31, 2017
Activity for 2017 restructuring charge:  
  
  
  
  
Real estate obligations $—
 $3,359
 $1,741
 $(1,720) $3,380
Activity for 2016 restructuring charge:          
Severance 1,911
 —
 957
 (2,822) 46
Real estate obligations 933
 —
 82
 (768) 247
Activity for 2015 restructuring charge:  
  
  
  
  
Real estate obligation 111
 —
 —
 (47) 64
Service contracts 565
 —
 21
 (198) 388
Activity for 2014 restructuring charge:  
  
  
  
  
Real estate obligations 1,183
 —
 131
 (623) 691
  $4,703
 $3,359
 $2,932
 $(6,178) $4,816
  Balance December 31, 2015 
Initial
Charges
 
Plan
Adjustments
 
Cash
Payments
 Balance December 31, 2016
Activity for 2016 restructuring charge:          
Severance $—
 $2,444
 $—
 $(533) $1,911
Real estate obligations —
 1,082
 14
 (163) 933
Service contracts —
 42
 (21) (21) —
Activity for 2015 restructuring charge:  
  
  
  
  
Real estate obligation 164
 —
 (13) (40) 111
Service contracts 843
 —
 9
 (287) 565
Activity for 2014 restructuring charge:  
  
      
Real estate obligations 1,701
 —
 104
 (622) 1,183
Activity for 2007 restructuring charge:  
  
  
  
  
Real estate obligation 1,170
 —
 747
 (1,917) —
  $3,878
 $3,568
 $840
 $(3,583) $4,703


  Balance December 31, 2014 
Initial
Charges
 
Plan
Adjustments
 
Cash
Payments
 Balance December 31, 2015
Activity for 2015 restructuring charge:  
  
  
  
  
Real estate obligations $—
 $270
 $—
 $(106) $164
Service contracts —
 1,268
 —
 (425) 843
Activity for 2014 restructuring charge:  
  
  
  
  
Real estate obligation 2,010
 —
 244
 (553) 1,701
Activity for 2007 restructuring charge:          
Real estate obligation 2,325
 —
 660
 (1,815) 1,170
Other 175
 —
 (6) (169) —
  $4,510
 $1,538
 $898
 $(3,068) $3,878
10.
9.DERIVATIVES


Foreign Currency Contracts

During 2015, we entered into foreign currency contracts to mitigate the risk of a portion of our Canadian employee benefit expense. These contracts will hedge foreign exchange variations between the United States and Canadian dollar and commitcommitted us to purchase a total of $6.0 million Canadian dollars at an exchange rate of 1.268 through June 2016 and $12.0 million Canadian dollars at 1.2855 through June 2017. As of December 31, 2015,2017, there were no open foreign currency contracts. As of December 31, 2016, the fair value of our foreign currency contracts was $0.7$0.2 million and was included in “Other current liabilities” and $0.3 million included in “Other long-term liabilities” in the accompanying consolidated balance sheets. The fair value was calculated as the present value of the estimated future cash flows using an appropriate interest rate curve with adjustment for counterparty credit risk.

During the year ended December 31, 2015, the


The activity of the foreign currency contracts was as follows (in thousands):

Unrealized loss, net of $0.3 million income tax, included in “Accumulated items of other comprehensive loss” in the accompanying consolidated balance sheets $745 
Realized loss on effective portion, included as compensation expense primarily in “Direct costs of customer support” and “General and administrative” in the accompanying consolidated statements of operations and comprehensive loss  691 

 December 31,
 2017 2016
Unrealized gain, net of less than $0.1 million and $0.2 million income tax, included in “Accumulated items of other comprehensive loss” in the accompanying consolidated balance sheets$145
 $600
  
  
Realized loss on effective portion, included as compensation expense primarily in “Direct costs of customer support” and “Sales, general and administrative” in the accompanying consolidated statements of operations and comprehensive loss(171) 328
Interest Rate Swap

During December 2013,

In a prior year, we entered into and currently hold an interest rate swap to add stability to interest expense and to manage exposure to interest rate movements of our credit agreement. Our interest rate swap, which was designated and qualified as a cash flow hedge, involvesinvolved the receipt of variable rate amounts from a counterparty in exchange for us making fixed-rate, over 1.5%, payments over the life of the agreement without exchange of the underlying notional amount. The cash flow hedge had a notional amount starting at $150.0 million throughand expired December 31, 2016.

As of December 31, 2015 and 2014, the fair value of our interest rate swap, which was determined by the bank that holds the swap, was $0.7 million and is included in “Other current liabilities” in the accompanying consolidated balance sheets and $0.8 million and is included in “Other long-term liabilities” in the accompanying consolidated balance sheets, respectively.

During the yearsyear ended December 31, 2015 and 2014,2016, we recorded the effective portion of the change in fair value of our interest rate swap in “Accumulated items of other comprehensive loss” in the accompanying consolidated balance sheets. We did not recognize any hedge ineffectiveness during either of the yearsyear ended December 31, 2015 and 2014.

2016. We will reclassifyreclassified amounts reported in “Accumulated items of other comprehensive loss” related to our interest rate swaps to “Interest expense” in our accompanying consolidated statements of operations and comprehensive loss as we accrueaccrued interest payments on our variable-rate debt. Through

During the year ended December 31, 2016, we estimated that we will reclassify an additional $0.8 million as an increase to interest expense since the hedge interest rate currently exceeds the variable interest rate on our debt.

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

  Year Ended December 31, 
  2015  2014 
Gain (loss) recorded as the effective portion of the change in fair value  84   (36)
Interest payments reclassified as an increase to interest expense  798   806 

Gain recorded as the effective portion of the change in fair value  $728
Interest payments reclassified as an increase to interest expense  790



During the year ended December 31, 2017, there were no interest rate swap agreements or activity.
11.
10.COMMITMENTS, CONTINGENCIES AND LITIGATION


New Credit Agreement

During 2013,


On April 6, 2017, we entered into a $350.0 million credit agreementnew Credit Agreement (the “credit agreement”“2017 Credit Agreement”), which provides for a senior secured first lien$300 million term loan facility of an initial $300.0 million (“("2017 term loan”loan") and a second secured first lien$25 million revolving credit facility of $50.0 million (“(" 2017 revolving credit facility”facility"). Concurrently with the effective date and fundingThe proceeds of the term loan we acquired iWebwere used to refinance the Company’s existing credit facility and to pay costs and expenses associated with the 2017 Credit Agreement.

Certain potions of refinancing transaction were considered an extinguishment of debt and certain portions were considered a modification. A total of $5.7 million was paid off ourfor 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 term loan third party costs and will be amortized over the term of the loan and $0.4 million are prepaid debt issuance costs related to the revolving credit facility and will be amortized over the term of the revolving credit facility. In addition, $4.8 million of debt discount and debt issuance costs related to the previous credit facility which resulted in a loss onwere expensed due to the extinguishment of debtthat credit facility.

The maturity date of $0.9 million. In addition, we recorded a debt discountthe term loan is April 6, 2022 and the maturity date of $9.5 million related to costs incurred for the credit agreement.

F-16

The2017 revolving credit facility is due November 26, 2018. TheOctober 6, 2021. As of December 31, 2017, the balance of the term loan is due in installmentsand the revolver was $298.5 million and $5.0 million, respectively. As of $750,000December 31, 2017, the interest rate on the last day of each fiscal quarter, with2017 term loan and the remaining unpaid balance due November 26, 2019.

revolver was 8.4% and 10.3%, respectively.


Borrowings under the amended 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 revolving credit facility is 3.50% 4.5%for loans bearing interest calculated using the base rate (“Base Rate Loans”) and 4.50%5.50% for loans bearing interest calculated using the adjusted LIBOR rate (“Adjusted LIBOR Loans”). The applicable margin for loans under the term loan is 4.00%5.00% for Base Rate Loans and 5.00%6.00% 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 Loansterm loans issued on the Closing Date,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 revolving credit facility are subject to various conditions, as set forth in the credit agreement.

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 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.
Previous Credit Agreement

During 2013, we entered into a $350 million credit agreement (the “previous credit agreement”), which provides for a senior secured first lien term loan facility of an initial $300 million (“term loan”) and a second secured first lien revolving credit facility of $50 million (“revolving credit facility”). The revolving credit facility is due November 26, 2018. The term loan is due in installments of $750,000 on the last day of each fiscal quarter, with the remaining unpaid balance due November 26, 2019.

Second Amendment

During the three months ended June 30, 2016, we entered into an amendment to our credit agreement (the “Second Amendment”), which among other things, amended the interest coverage ratio and leverage ratio covenants to make them less restrictive and increased the applicable margin for revolving credit facility and term loan by 1.0%. We paid a one-time aggregate fee of $1.7 million to the lenders for the Second Amendment. Absent the Second Amendment we would not have been able to comply with our covenants in the credit agreement.



Third Amendment

During the three months ended March 31, 2017, we entered into an amendment to our previous credit agreement, which, among other things, amended the credit agreement (i) to make each of the interest coverage ratio and leverage ratio covenants less restrictive and (ii) to decrease the maximum level of permitted capital expenditures. We paid a one-time aggregate fee of $2.6 million to the lenders for the Third Amendment, which we recorded as a debt discount of $2.2 million related to the term loan and prepaid debt issuance costs of $0.4 million related to the revolving credit facility. In addition, we paid $0.3 million in third-party fees, which we recorded as expense of $0.3 million related to the term loan and as prepaid debt issuance costs of less than $0.1 million related to the previous revolving credit facility.
The Third Amendment was effective on February 28, 2017, upon the closing of the equity sale, which is described in note 15 "Equity" below. The effectiveness of the covenant amendments was conditioned on the Company completing one or more equity offerings on or before June 30, 2017 for gross cash proceeds of not less than $40 million, and net cash proceeds of not less than $37 million and the application of the net cash proceeds to the repayment of indebtedness under the previous agreement. The Company paid a fee of approximately $0.9 million to the lenders on January 26, 2017 and paid an additional fee of $1.6 million on February 28, 2017. Absent the Third Amendment, we may not have been able to comply with our covenants in the previous agreement.

A summary of our credit agreement as of December 31, 2017 and December 31, 2016 is as follows (dollars in thousands): 
  December 31,
  2017 2016
Outstanding principal balance on the term loan, less unamortized discount and prepaid costs of $9.8 million and $6.8 million, respectively $288,712
 $284,178
Outstanding balance on the revolving credit facility 5,000
 35,500
Letters of credit issued with proceeds from revolving credit facility 5,361
 4,209
Borrowing capacity 14,639
 10,291
Interest rate – term loan 8.4% 7.0%
Interest rate – revolving credit facility 10.3% 6.1%
     
Maturities of the term loan are as follows:  
  
   
 $3,000
2019  
 3,000
2020   3,000
2021   3,000
2022   286,500
   
 $298,500
The terms of our 2017 Credit Agreement specify certain events which would be considered an event of default. These events include if we do not comply with the financial covenants, a failure to make a payment under the credit agreement, a change of control of the Company or other proceedings related to insolvency. Upon the occurrence and continuation of an event of default, after completion of any applicable grace or cure period, lenders may demand immediate payment in full of all indebtedness outstanding under the credit facility, terminate their obligations to make any loans or advances or issue any letter of credit, set off and apply any and all deposits held by any lender for the credit or account of any borrower.

The credit agreement, as amended, includes customary representations, warranties, negative and affirmative covenants, including certain financial covenants relating to maximum total leverage ratio, minimum consolidated interest coverage ratio and limitation on capital expenditures. As of December 31, 2015, we were in compliance

The table below sets forth information with theserespect to the current financial covenants.

Our obligations are secured pursuant to a security agreement, under which we granted a security interest in substantially all of our assets, including the capital stock of our domestic subsidiaries and 65% of the capital stock of our foreign subsidiaries.

A summary of our credit agreementcovenants as of December 31, 2015 and December 31, 2014 is as follows (dollars in thousands):

  December 31, 
  2015  2014 
Outstanding principal balance on the term loan, less unamortized discount of $6.5 million and $8.0 million, respectively $287,457  $288,994 
Outstanding balance on the revolving credit facility  31,000   10,000 
Letters of credit issued with proceeds from revolving credit facility  4,144   6,329 
Borrowing capacity  14,856   33,671 
Interest rate – term loan  6.0%  6.0%
Interest rate – revolving credit facility  4.7%  4.7%
         
Maturities of the term loan are as follows:      
2016     $3,000 
2017      3,000 
2018      3,000 
2019      285,000 
      $294,000 

2017. 

Covenants
Requirements
Maximum total leverage ratio (the ratio of Consolidated Indebtedness to Consolidated EBITDA as defined in the 2017 Credit Agreement) should be equal to or less than:5.9
(1)
Minimum consolidated interest coverage ratio (the ratio of Consolidated EBITDA to Consolidated Interest Expense as defined in the 2017 Credit Agreement) should be equal to or greater than:2.0
(2)


2017 Annual LimitTwelve Months Ended
December 31, 2017
Limitation on capital expendituresNo limit$36 million

(1)
The maximum total leverage ratio decreases to 5.9 to 1 as of March 1, 2018, 5.9 to 1 as of June 30, 2018, 5.9 to 1 as of September 30, 2018, 5.9 to 1 as of December 31, 2018, 5.9 to 1 as of March 31, 2019, 5.9 to 1 as of June 30, 2019, 5.5 to 1 as of September 30, 2019, 5.5 to 1 as of December 31, 2019, 5.5 to 1 March 31, 2020, 5.25 to 1 as of June 30, 2020, 5.25 to 1 September 30, 2020, 4.75 to 1 as of December 31, 2020, 4.75 to 1 as of March 31, 2021, 4.75 to 1 as of June 30, 2021 and 4.5 to 1 as of September 30, 2021 and thereafter.
(2)
The minimum consolidated interest coverage ratio increases to 2.00 to 1 as of March 31, 2018, 2.00 to 1 as of June 30, 2018, 2.00 to 1 as of September 30, 2018, 2.00 to 1 as of December 31, 2018, 2.00 to 1 as of March 31, 2019, 2.00 to 1 as of June 30, 2019, 2.00 to 1 September 30, 2019, 2.00 to 1 as of December 31, 2019, 2.00 to 1 as of March 31, 2020, 2.00 to 1 as of June 30, 2020, 2.00 to 1 as of September 30, 2020, 2.25 to 1 December 31, 2020, 2.25 to 1 as of March 31, 2021, 2.25 to 1 as of June 30, 2021, 2.25 to 1 as of September 30, 2021 and thereafter.


Asset Retirement Obligations

In prior years, we recorded asset retirement obligations (“ARO”) related to future estimated removal costs of leasehold improvements for certain data center leased properties. We were able to reasonably estimate the liabilities on these properties in order to record the ARO and the corresponding asset retirement cost in our data center services segment at its fair value. We calculated the fair value by discounting the estimated amount to present value using the applicable Treasury bill rate adjusted for our credit non-performance risk. As of December 31, 20152017 and 2014,2016, the balance of the present value ARO was $1.9 million and $2.8 million. For the balance at December 31, 2017, $0.2 million and $0, which we$1.7 million were included in “Other"Other current liabilities,” respectively,liabilities" and $2.6 million and $2.5 million, which we included in “Other long-term liabilities,” respectively, in the consolidated balance sheets. At December 31, 2016, the entire balance was included in "Other long-term liabilities." We included all asset retirement costs in “Property and equipment, net” in the consolidated balance sheets as of December 31, 20152017 and 2014,2016, and depreciated those costs using the straight-line method over the remaining term of the related lease.

We have other capital lease agreements that require us to decommission physical space for which we have not yet recorded an ARO. Due to the uncertainty of specific decommissioning obligations, timing and related costs, we cannot reasonably estimate an ARO for these properties and we have not recorded a liability at this time for such properties.


Capital Leases

We record capital lease obligations and leased property and equipment at the lesser of the present value of future lease payments based upon the terms of the related lease or the fair value of the assets held under capital leases. As of December 31, 2015,2017, our capital leases had expiration dates ranging from 20162017 to 2039.

F-17

Future minimum capital lease payments and the present value of the minimum lease payments for all capital leases as of December 31, 2015,2017, are as follows (in thousands):

2016 $13,176 
2017  12,376 
2018  11,900 
2019  10,085 
2020  7,187 
Thereafter  27,682 
Remaining capital lease payments  82,406 
Less: amounts representing imputed interest  (25,293)
Present value of minimum lease payments  57,113 
Less: current portion  (8,421)
  $48,692 

2018$32,511
201931,021
202026,754
202126,350
202224,346
Thereafter434,947
Remaining capital lease payments575,929
Less: amounts representing imputed interest(340,469)
Present value of minimum lease payments235,460
Less: current portion(11,711)
 $223,749


Operating Leases

We have entered into leases for data center, private network access points (“P-NAPs”POPS”) and office space that are classified as operating leases. Initial lease terms range from three to 25 years and contain various periods of free rent and renewal options. However, we record rent expense on a straight-line basis over the initial lease term and any renewal periods that are reasonably assured. Certain leases require that we maintain letters of credit. Future minimum lease payments on non-cancelable operating leases having terms in excess of one year were as follows at December 31, 20152017 (in thousands):

2016 $26,727 
2017  24,439 
2018  18,170 
2019  10,031 
2020  4,103 
Thereafter  8,368 
  $91,838 

2018$11,700
20195,077
20202,538
20212,467
20222,523
Thereafter3,492
 $27,797
Rent expense was $21.6$15.6 million, $21.3$21.8 million and $23.8$21.6 million during the years ended December 31, 2017, 2016 and 2015, 2014 and 2013, respectively.

Other Commitments

We have entered into commitments primarily related to IP, telecommunications and data center services. Future minimum payments under these service commitments having terms in excess of one year were as follows at December 31, 20152017 (in thousands):

2016 $7,026 
2017  2,803 
2018  807 
2019  451 
2020  79 
Thereafter  — 
  $11,166 

2018$2,357
20191,221
2020131
2021—
2022—
Thereafter—
 $3,709

Litigation

On September 18, 2015, and Other Regulatory Inquiries

In August 2016, the Company received a purported stockholder filedrequest for information as part of a putative class action complaint inbroad-based inquiry regarding the Superior CourtCompany’s use of Fulton County ofnon-GAAP measures from the State of Georgia against us, the current members of our board of directorsSecurities and Jefferies Finance LLC (“Jefferies”Exchange Commission (the “SEC”). The complaint was captioned Grisolia v. Internap Corp., et al., Case No. 2015cv265926 (Ga. Sup. Ct.) and the complaint alleged, among other things, that the members of our board of directors breached their fiduciary duties, and that Jefferies aided and abetted such breaches, in connectionCompany is cooperating with the credit agreement described inSEC. At this filing. The complaint alleged thattime, the credit agreement contained a so-called “dead hand proxy put” provision that (a) definedCompany is unable to predict the election of a majority of directors whose initial nomination arose from an actual or threatened proxy contest to be an event of default that triggers the lenders’ right to accelerate payment of the debt outstanding under the credit agreement; and (b) thereby allegedly coerced stockholders and entrenched the members of our board of directors. The Plaintiff further claimed that Jefferies aided and abetted the alleged breach of fiduciary duties by including the provisions in the credit agreement and encouraging our board of directors to accept them. The complaint sought, among other things, declaratory and injunctive relief, as well as an award of costs and disbursements, including attorneys’ and experts’ fees.

F-18
likely outcome.

On October 30, 2015, we, along with our lenders, amended the credit agreement to remove the provision which was the subject of the litigation. The parties have agreed that the amendment moots the Plaintiff’s claims.  The parties filed a stipulation of dismissal and, on January 28, 2016, the court entered an order dismissing the case. We recorded $0.4 million as litigation expense in “General and administrative” in the accompanying statements of operations and comprehensive loss for the year ended December 31, 2015.

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.

12.
11.OPERATING SEGMENT AND GEOGRAPHIC INFORMATION


Operating Segment Information

We operate

Effective January 1, 2017, we changed our organizational structure in an effort to create more effective and efficient business operations and to improve customer and product focus. In that regard, we revised the information that our chief executive officer, who is also our chief operating decision maker, regularly reviews for purposes of allocating resources and assessing performance.  As a result, we now report our financial performance based on our two business segments: data centernew reportable segments, INAP COLO and INAP CLOUD, as follows:
INAP COLO
Our Colocation segment consists of colocation, managed services and IP services. The data center services segment includes colocation, hosting, and cloudnetwork services.
Colocation


Colocation involves providing physical space within data centers and associated services such as power, interconnection, environmental controls, monitoring and security while allowing our customers to deploy and manage their servers, storage and other equipment.equipment in our secure data centers.
Managed Services and Hosting
Managed Services and cloud services involveHosting consists of leasing dedicated servers as well as storage and network equipment along with other associated hardware to our customers.  We configure and administer the provisionhardware and maintenance of hardware, operating system, software,provide technical support, patch management, monitoring and monitoring software, data center infrastructureupdates.  We offer managed hosting around the globe, including North America, Europe and interconnection, while allowing our customers to own and manage their software applications and content. Our IPthe Asia-Pacific region.

Network Services
Network services segment includes our patented Performance IP™ service, content delivery network services, and IP routing and hardware and software platform.

Segment profit is calculated as segment revenues lessplatform and Managed Internet Route Optimizer™ Controller. By intelligently routing traffic with redundant, high-speed connections over multiple, major Internet backbones, our network services provides high-performance and highly-reliable delivery of content, applications and communications to end users globally.


INAP CLOUD

Cloud services involve providing compute and storage services via an integrated platform that includes servers, storage and network. We built our next generation cloud platform with our high-density colocation, Performance IP service and OpenStack, a leading open source technology for cloud services.

In conjunction with our change in segments we changed the measure for determining the results of our segments to business unit contribution which includes the direct costs of sales and services, customer support and sales and marketing, exclusive of depreciation and amortization foramortization. In addition, during the three months ended June 30, 2017, management changed its measure of profitability to exclude corporate facilities allocation cost which are now reflected in "Sales, general and administrative," in the accompanying consolidated income statements.



The following table provides segment and does not include direct costs of customer support, direct costs of amortization of acquired and developed technologies or any other depreciation or amortization associatedresults, with direct costs.

  Year Ended December 31, 
  2015  2014  2013 
Revenues:            
Data center services $236,155  $242,623  $185,147 
IP services  82,138   92,336   98,195 
Total revenues  318,293   334,959   283,342 
             
Direct costs of network, sales and services, exclusive of depreciation and amortization:            
Data center services  97,385   106,159   92,564 
IP services  34,055   38,787   39,448 
Total direct costs of network, sales and services, exclusive of depreciation and amortization  131,440   144,946   132,012 
             
Segment profit:            
Data center services  138,770   136,464   92,583 
IP services  48,083   53,549   58,747 
Total segment profit  186,853   190,013   151,330 
             
Exit activities, restructuring and impairments  2,278   4,520   1,414 
Other operating expenses, including direct costs of customer support, depreciation and amortization  210,470   199,832   157,403 
Loss from operations  (25,895)  (14,339)  (7,487)
Non-operating expenses  26,408   26,775   12,841 
Loss before income taxes and equity in (earnings) of equity-method investment $(52,303) $(41,114) $(20,328)

prior period amounts reclassified to conform to the current presentation (in thousands): 

  Year Ended December 31,
  2017 2016 2015
Revenues:  
  
  
INAP COLO $209,580
 $221,678
 $234,859
INAP CLOUD 71,138
 76,619
 83,434
Total revenues 280,718
 298,297
 318,293
       
Costs of sales and services, exclusive of depreciation and amortization:  
  
  
INAP COLO 89,240
 105,620
 111,765
INAP CLOUD 16,977
 18,635
 19,675
Total costs of sales and services, exclusive of depreciation and amortization 106,217
 124,255
 131,440
       
Segment profit:  
  
  
INAP COLO 120,340
 116,058
 123,094
INAP CLOUD 54,161
 57,984
 63,759
Total segment profit 174,501
 174,042
 186,853
       
Goodwill impairment —
 80,105
 —
Exit activities, restructuring and impairments 6,249
 7,236
 2,278
Other operating expenses, including direct costs of customer support, depreciation and amortization 163,478
 179,770
 210,470
Income (loss) from operations 4,774
 (93,070) (25,895)
Non-operating expenses 51,001
 31,312
 26,408
Loss before income taxes, non-controlling interest and equity in earnings of equity-method investment $(46,227) $(124,382) $(52,303)

Total assets by segment are as follows (in thousands):

  December 31, 
  2015  2014  2013 
Data center services $451,360  $474,460  $470,736 
IP services  104,195   117,324   143,505 
  $555,555  $591,784  $614,241 

F-19

  December 31,
  2017 2016
INAP COLO $398,231
 $224,540
INAP CLOUD 173,691
 192,684
Corporate 14,603
 13,391
  $586,525
 $430,615
We present goodwill by segment in note 7,Note 6, and as discussed in that note, we did not record an impairment charge during the yearsyear ended December 31, 2015 and 2014.

2017. However, we did record an impairment charge during the year ended December 31, 2016.



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):

  Year Ended December 31, 
  2015  2014  2013 
Revenues:            
United States $245,853  $258,770  $257,591 
Canada  47,021   47,479   4,303 
Other countries  25,419   28,710   21,448 
  $318,293  $334,959  $283,342 

  Year Ended December 31,
  2017 2016 2015
Revenues:  
  
  
United States $220,018
 $231,943
 $245,853
Canada 38,750
 44,206
 47,021
Other countries 21,950
 22,148
 25,419
  $280,718
 $298,297
 $318,293
Net property and equipment, by country with assets over 10% of total property and equipment, is as follows (in thousands):

  December 31, 
  2015  2014 
United States $272,178  $278,065 
Canada  54,286   60,320 
Other countries  2,236   3,760 
  $328,700  $342,145 

  December 31,
  2017 2016
United States $417,936
 $260,788
Canada 34,296
 36,495
Other countries 6,333
 5,397
  $458,565
 $302,680
13.
12.STOCK-BASED COMPENSATION PLANS


We have granted employees options to purchase shares of our common stock and issued shares of restricted common stock subject to vesting. We measure stock-based compensation cost at the grant date based on the calculated fair value of the option or award. We recognize the expense over the employees’ requisite service period, generally the vesting period of the option or award. We estimate the fair value of stock options at the grant date using the Black-Scholes option pricing model. Stock 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 following table summarizes the amount of stock-based compensation, net of estimated forfeitures, included in the consolidated statements of operations and comprehensive loss (in thousands):

  Year Ended December 31, 
  2015  2014  2013 
Direct costs of customer support $1,901  $1,448  $1,108 
Sales and marketing  2,101   1,147   1,110 
General and administrative  4,779   4,587   4,525 
  $8,781  $7,182  $6,743 

  Year Ended December 31,
  2017 2016 2015
Costs of customer support $167
 $1,159
 $1,901
Sales, general and administrative 2,873
 3,838
 6,880
  $3,040
 $4,997
 $8,781
We have not recognized any tax benefits associated with stock-based compensation due to our tax net operating losses. During the threeyear ended December 31, 2017, an immaterial amount of stock-based compensation was capitalized. During the years ended December 31, 2015, 20142016 and 2013,2015, we capitalized $0.3 million, $0.3$0.2 million and $0.4$0.3 million, respectively, of stock-based compensation.

During the year ended December 31, 2017, there was no option grants under our stock-based compensation plans. The significant weighted average assumptions used for estimating the fair value of the option grants under our stock-based compensation plans during the years ended December 31, 2015, 20142016 and 2013,2015, were expected terms of 4.5, 4.64.7 and 4.44.5 years, respectively; historical volatilities of 40%, 47%45% and 66%40%, respectively; risk free interest rates of 1.4%, 1.4%1.2% and 0.7%1.4%, respectively and no dividend yield. The weighted average estimated fair value per share of our stock options at grant date was $3.23, $3.13 and $4.46$12.93 during the years ended December 31, 2015, 20142016 and 2013,2015, respectively. The expected term represents the weighted average period of time that the stock options are expected to be outstanding, giving consideration to the vesting schedules and our historical exercise patterns. Because our stock options are not publicly traded, assumed volatility is 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 term of the options. We have also used historical data to estimate stock option exercises, employee terminations and forfeiture rates.



Under our 20142017 Stock Incentive Plan (the “2014“2017 Plan”), we may issue stock options, stock appreciation rights, restricted stock and restricted stock units to eligible employees and directors. Our historical practice has beendirectors to grant only stock options and restricted stock.

F-20
promote interest of the Company.


The compensation committee of our board of directors administers the 20142017 Plan. As of December 31, 2015, 2.22017, 0.8 million shares of stock were available for issuance.

For all stock-based compensation plans, the exercise price for each stock option may not be less than the fair market value of a share of our common stock on the grant date. Stock options generally have a maximum term of 10 years from the grant date. Stock options become exercisable as determined at the grant date by the compensation committee of our board of directors. Stock options generally vest 25% after one year and monthly or quarterly over the following three years. Conditions, if any, under which stock will be issued under stock grants or cash or stock will be paid under restricted stock units and the conditions under which the interest in any stock that has been issued will become non-forfeitable are determined at the grant date by the compensation committee. All awards under the 20142017 Plan are subject to minimum vesting requirements unless otherwise determined by the compensation committee: acommittee. The minimum one-year vesting period for time-basedover which stock option and stock appreciation rights and a minimum three-year vesting period for time-based stock grants, except as described below for non-employee directors.award shall vest is one year from the date the award is granted. If awards are performance-based, thenunless otherwise determined by the compensation committee, stock awards to covered employees will be designed to comply with the performance must be measured over a periodgoals. In such case, the level of at leastvesting of the award will depend on the attainment of one year. The 2014 Plan limits the number of shares that mayor more performance goals. No participant in any calendar year shall be granted asstock awards with respect to more than 350,000 shares of stock. Under the 2017 Plan only full value awards (that is, grants other thanshares in the form of restricted stock options orand restricted stock appreciation rights) to 50% of the total number of shares available for issuance. In general, when awards granted under the 2014 Plan expire or are canceled without having been fully exercised, the shares reserved for those awardsunits will be returned to the share reserve and be available for future awards. However, sharesgrant.  Shares of common stock that are delivered by the grantee or withheld by us as payment of the exercise price in connection with the exercise of an option or payment of the tax withholding obligation in connection with any award will not be returned to the share reserve and will not be available for future awards. WeShares subject to awards that have reserved sufficient common stockbeen canceled, forfeited or otherwise not issued under an award and shares subject to satisfy stock option exercises with newlyawards settled in cash would not count as shares issued stock. However, we may also use treasury stock to satisfy stock option exercises.

under the 2017 Plan.



During 2017, 2016 and 2015, 2014 and 2013, the total value of the equity grants received by all non-employee directors was $118,000, $96,000$1.1 million, $0.4 million and $94,000,$0.6 million, respectively, in the form of restricted stock that vests on the date of our annual meeting of stockholders in the year following grant.


Stock option activity during the year ended December 31, 20152017 under all of our stock-based compensation plans was as follows (shares in thousands):

  Shares  Weighted
Average
Exercise
Price		 
Balance, December 31, 2014  5,928  $7.07 
Granted  1,344   9.17 
Exercised  (856)  7.06 
Forfeitures and post-vesting cancellations  (911)  8.50 
Balance, December 31, 2015  5,505   7.35 
Exercisable, December 31, 2015  3,659   6.68 

  Shares 
Weighted
Average
Exercise
Price
Balance, December 31, 2016 795
 $27.80
Granted —
 —
Exercised (49) 8.80
Forfeitures and post-vesting cancellations (430) 31.72
Balance, December 31, 2017 316
 25.40
Exercisable, December 31, 2017 277
 26.25
Fully vested and exercisable stock options and stock options expected to vest as of December 31, 20152017 are further summarized as follows (shares in thousands):

  Fully
Vested and
Exercisable		  Expected
to Vest		 
Total shares  3,659   5,161 
Weighted-average exercise price $6.68   7.26 
Aggregate intrinsic value $3,387   3,387 
Weighted-average remaining contractual term (in years)  3.4   4.7 

  
Fully
Vested and
Exercisable
 
Expected
to Vest
Total shares 277
 316
Weighted-average exercise price $26.25
 $25.40
Aggregate intrinsic value $—
 $—
Weighted-average remaining contractual term (in years) 3.9
 4.4
The total intrinsic value of stock options exercised was $2.1$0.4 million, $0.6$0.1 million and $1.2$2.1 million during the years ended December 31, 2015, 20142017, 2016 and 2013,2015, respectively. None of our stock options or the underlying shares isare subject to any right to repurchase by us.



Restricted stock activity during the year ended December 31, 20152017 was as follows (shares in thousands):

  Shares  Weighted-
Average
Grant Date
Fair
Value		 
Unvested balance, December 31, 2014  769  $6.89 
Granted  1,122   9.27 
Vested  (540)  7.02 
Forfeited  (213)  8.36 
Unvested balance, December 31, 2015  1,138   8.90 

F-21

  Shares 
Weighted-
Average
Grant Date
Fair
Value
Unvested balance, December 31, 2016 555
 $4.52
Granted 483
 $6.20
Vested (172) $8.63
Forfeited (106) $9.00
Unvested balance, December 31, 2017 760
 $4.03
The total fair value of restricted stock vested during the years ended December 31, 2017, 2016 and 2015 2014 and 2013 was $4.6$2.6 million, $3.5$1.5 million and $4.7$4.6 million, respectively. At December 31, 2015,2017, the total intrinsic value of all unvested restricted stock was $7.3$11.9 million.

Total unrecognized compensation costs related to unvested stock-based compensation as of December 31, 20152017 is as follows (dollars in thousands):

  Stock
Options		  Restricted
Stock		  Total 
Unrecognized compensation $4,458  $5,513  $9,971 
Weighted-average remaining recognition period (in years)  2.7   1.9   2.2 

  
Stock
Options
 
Restricted
Stock
 Total
Unrecognized compensation $241
 $2,972
 $3,213
Weighted-average remaining recognition period (in years) 2.51
 1.87
 1.92

14.
13.EMPLOYEE RETIREMENT PLAN


We sponsor a defined contribution retirement savings plan that qualifies under Section 401(k) of the Internal Revenue Code. Plan participants may elect to have a portion of their pre-tax compensation contributed to the plan, subject to certain guidelines issued by the Internal Revenue Service. Employer contributions are discretionary and were $0.4 million for the year ended December 31, 2017 and $0.8 million for the years ended December 31, 2015, 20142016 and 2013, respectively.

2015.
15.
14.INCOME TAXES

The loss from continuing operations before income taxes, non-controlling interest and equity in (earnings) of equity-method investment is as follows (in thousands):

  Year Ended December 31, 
  2015  2014  2013 
United States $(31,572) $(32,684) $(17,066)
Foreign  (20,731)  (8,430)  (3,262)
Loss from continuing operations before income taxes and equity in (earnings) of equity-method investment $(52,303) $(41,114) $(20,328)

  Year Ended December 31,
  2017 2016 2015
United States $(46,648) $(120,553) $(31,572)
Foreign 421
 (3,829) (20,731)
Loss from continuing operations before income taxes, non-controlling interest and equity in (earnings) of equity-method investment $(46,227) $(124,382) $(52,303)


The current and deferred income tax benefit is as follows (in thousands):

  Year Ended December 31, 
  2015  2014  2013 
Current:            
Federal $—  $—  $(420)
State  152   127   122 
Foreign  158   121   12 
   310   248   (286)
Deferred:            
State  —   —   25 
Foreign  (3,970)  (1,609)  (24)
   (3,970)  (1,609)  1 
Net income tax benefit $(3,660) $(1,361) $(285)

  Year Ended December 31,
  2017 2016 2015
Current:  
  
  
Federal $(730) $(15)
$—
State 123
 155
 152
Foreign 507
 61
 158
  (100) 201
 310
Deferred:  
  
  
Federal —

—

—
State —

—

—
Foreign 353
 329
 (3,970)
  353
 329
 (3,970)
Provision (benefit) for income taxes $253
 $530
 $(3,660)
A reconciliation of the effect of applying the federal statutory rate and the effective income tax rate on our income tax benefit is as follows:

  Year Ended December 31, 
  2015  2014  2013 
Federal income tax at statutory rates  (34)%  (34)%  (34)%
Foreign income tax  4   —   — 
State income tax  (4)  (4)  (4)
Other permanent differences  —   2   3 
Statutory tax rate change  —   —   1 
Compensation  3   4   5 
Capital loss expiration  —   —   11 
Acquisition costs  —   —   6 
Change in valuation allowance  24   29   11 
Effective tax rate  (7)%  (3)%  (1)%

F-22

  Year Ended December 31,
  2017 2016 2015
Federal income tax at statutory rates (34.0)% (34.0)% (34.0)%
Foreign income tax 0.5
 0.7
 4.0
State income tax (5.0) (5.0) (4.0)
Other permanent differences 0.4
 0.2
 —
Statutory tax rate change - Deferred - Tax Reform Act (128.4) (3.2) —
Statutory tax rate change - Valuation Allowance - Tax Reform Act 128.4
 —
 —
Compensation —
 3.0
 3.0
Goodwill impairment —
 25.2
 —
Refundable AMT credit (1.5)
—



Change in valuation allowance 40.1
 13.5
 24.0
Effective tax rate 0.5 % 0.4 % (7.0)%


Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of deferred taxes related to the following (in thousands):

  December 31, 
  2015  2014 
Current deferred income tax assets:        
Provision for doubtful accounts $—  $2,998 
Accrued compensation  —   1,673 
Other accrued expenses  —   4 
Deferred revenue  —   844 
Restructuring liability  —   687 
Other  —   208 
Current deferred income tax assets  —   6,414 
Less: valuation allowance  —   (5,781)
Net current deferred income tax assets  —   633 
         
Long-term deferred income tax (liabilities) assets:        
Property and equipment  52,551   45,719 
Goodwill  3,338   3,388 
Intangible assets  (19,049)  (20,090)
Deferred revenue, less current portion  2,540   1,225 
Restructuring liability, less current portion  1,474   1,026 
Deferred rent  3,482   4,119 
Stock-based compensation  5,578   4,667 
Provision for doubtful accounts  2,299   — 
U.S. net operating loss carryforwards  78,570   69,457 
Foreign net operating loss carryforwards, less current portion  10,238   10,052 
Tax credit carryforwards  3,683   3,246 
Other  2,726   1,771 
Long-term deferred income tax assets  147,430   124,580 
Less: valuation allowance  (148,310)  (130,236)
Net long-term deferred income tax (liabilities) assets  (880)  (5,656)
         
Net deferred tax liabilities $(880) $(5,023)

In November 2015, the Financial Accounting Standards Board issued guidance to simplify the presentation of deferred income taxes, which require deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. We have elected early adoption as of December 31, 2015 and prospectively applied.

  December 31,
  2017 2016
Long-term deferred income tax (liabilities) assets:  
  
Property and equipment $43,554
 $57,161
Goodwill 1,392
 2,525
Intangible assets (22,021) (22,958)
Deferred revenue, less current portion 1,834
 2,809
Restructuring liability, less current portion 1,282
 1,839
Refinance (374) (3,054)
Deferred rent 639
 2,737
Stock-based compensation 911
 3,079
Provision for doubtful accounts 1,772
 1,449
U.S. net operating loss carryforwards 89,117
 102,408
Foreign net operating loss carryforwards, less current portion 8,053
 9,324
Tax credit carryforwards 2,812
 3,616
Other 2,090
 2,417
Long-term deferred income tax assets 131,061
 163,352
Less: valuation allowance (132,712) (164,865)
Net long-term deferred income tax (liabilities) assets (1,651) (1,513)
     
Net deferred tax liabilities $1,651
 $1,513
As of December 31, 2015,2017, we hadhave U.S. net operating loss carryforwards for federal tax purposes of $234.4$334.6 million that will expire in tax years 2018 through 2035.2037. Of the total U.S. net operating loss carryforwards, $27.7 million of net operating losses related to the deduction of stock-based compensation that will be tax-effected andcompensation. This amount was included in the benefit creditedfinancial statement balance of U.S net operating loss carryforwards upon the adoption of ASU 2016-09 related to additional paid-in capital when realized.employee share-based payments. In addition, we have alternative minimum tax, research and development tax, foreign tax and state &and local tax credits carryforwards of approximately $1.3$0.5 million. Alternative minimum tax credits have an indefinite carryforward period while our researchResearch and development credits will begin to expire in 2026.2027. Finally, we have foreign net operating loss carryforwards of $43.7approximately $37.8 million that will beginare currently subject to expire in tax year 2015.

annual expiration.

We determined that through December 31, 2015,2017, no further ownership changes have occurred since 2001 pursuant to Section 382 of the Internal Revenue Code (“Section 382”). Therefore, as of December 31, 2015,2017, no additional material limitations existed on the U.S. net operating losses related to Section 382. However, if we experience subsequent changes in stock ownership as defined by Section 382, we may have additional limitations on the future utilization of our U.S. net operating losses.

A


On December 22, 2017, the United States enacted tax reform legislation commonly known as the H.R.1 (the "Act”) resulting in significant modifications to existing law. The Company follows the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”), which provides additional clarification regarding the application of ASC Topic 740 in situations where the Company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act for the reporting period in which the Act was enacted. SAB 118 provides for a measurement period beginning in the reporting period that includes the Act’s enactment date and ending when the Company has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstances should the measurement period extend beyond one year from the enactment date.

The Company has substantially completed the accounting for the effects of the Act during the period ended December 31, 2017 except for the potential impact of the taxation of global intangible low-taxed income. The Company believes that an adjustment is not required related to the one-timed deemed repatriation transition tax on unrepatriated foreign earnings. The Company’s position is based on information currently available, including tax earnings and profits from foreign investments.



The FASB Staff also provided additional guidance to address the accounting for the taxation of global intangible low-taxed income (“GILTI”). FASB determined that companies should make an accounting policy election to recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to include the GILTI tax expense in the year it is incurred. We have not completed our analysis of the effects of the GILTI provisions and will finalize our accounting policy election within the measurement period provided under SAB 118.

Accounting for the remaining income tax effects of the Act which impact our tax provision has been completed as of the current year and included in the Company’s financial statements as of December 31, 2017. As a result of the Act, the Company has recorded the impact of the remeasurement of deferred tax asset is also created by accelerated depreciable livesassets and liabilities from 35% to 21%, along with the offsetting adjustment to our valuation allowance including a decrease to the valuation allowance of fixed assets for financial reporting purposes compared$.7 million related to income tax purposes. Network equipment and leasehold improvements comprise the majority of the income tax basis differences. These assetsAlternative Minimum Tax credit carryforwards that are deductible over a shorter life for financial reporting than for income tax purposes. As we retire assets in the future, the income tax basis differences will reverse and become deductible for income taxes.

F-23
expected to be refundable.


We periodically evaluate the recoverability of the deferred tax assets and the appropriateness of the valuation allowance. As of December 31, 2015,2017, we establishedcontinued to maintain a valuation allowance of $142.7$127.2 million against the U.S. deferred tax asset and $5.6$5.5 million against the foreign deferred tax asset that we do not believe are more likely than not to be realized. We will continue to assess the requirement for a valuation allowance on a quarterly basis and, at such time when we determine that it is more likely than not that the deferred tax assets will be realized, we will reduce the valuation allowance accordingly.

Changes in our deferred tax asset valuation allowance are summarized as follows (in thousands):

  Year Ended December 31, 
  2015  2014  2013 
Balance, January 1, $136,017  $126,568  $124,433 
Increase in deferred tax assets  12,293   9,449   2,135 
Balance, December 31, $148,310  $136,017  $126,568 

  Year Ended December 31,
  2017 2016 2015
Balance, January 1, $164,865
 $148,310
 $136,017
Increase in deferred tax assets 27,183
 16,555
 12,293
Remeasurement in deferred tax assets (59,336) —
 —
Balance, December 31, $132,712
 $164,865
 $148,310
We intend to reinvest future earnings indefinitely within each country. Accordingly, we have not recorded deferred taxes for the difference between our financial and tax basis investment in foreign entities. Based on negative cumulative earnings from foreign operations, we estimate that we will not incur incremental tax costs in the hypothetical instance of a repatriation and thus no deferred asset or liability would be recorded in our consolidated financial statements.

Our accounting for uncertainty in income taxes requires us to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, we must measure the tax position to determine the amount to recognize in the financial statements.

Changes in our unrecognized tax benefits are summarized as follows (in thousands):

  Year Ended December 31, 
  2015  2014  2013 
Unrecognized tax benefits balance, January 1, $408  $408  $341 
Addition for tax positions taken in a prior year  —   —   408 
Deduction for tax positions taken in a prior year  (408)  —   (341)
Unrecognized tax benefits balance, December 31, $—  $408  $408 

  Year Ended December 31,
  2017 2016 2015
Unrecognized tax benefits balance, January 1, $187
 $—
 $408
Addition for tax positions taken in a prior year 162
 187
 —
Deduction for tax positions taken in a prior year (187) —
 (408)
Unrecognized tax benefits balance, December 31, $162
 $187
 $—
During 2017, we recorded $0.2 million of additional unrecognized tax benefits related to foreign exchange losses. During 2013, we recorded $0.4 million of additional unrecognized tax benefits through purchase accounting from the iWeb acquisition related to participation interest deducted in a prior year. No uncertain tax positions were recorded during 2014. During 2015, the statute of limitation for the iWeb uncertain tax position expired. Accordingly, this amount was removed from the uncertain tax position balance.

During 2017, the statute of limitation for the 2016 tax benefit for Internap Network Services B.V. expired. Also during 2017, an uncertain tax position was recorded for Internap Network Services Canada for withholding tax required for annual intercompany royalty charges from Internap Corporation.

We classify interest and penalties arising from the underpayment of income taxes in the consolidated statements of operations and comprehensive loss as a component of “Benefit“Provision (benefit) for income taxes.” As of December 31, 2015, 20142017 and 2013,2016, we had an accrual of $0less than $0.1 million for interest and penalties related to uncertain tax positions.

positions and zero at December 31, 2015.



Our U.S. federal and state income tax returns remain open to examination for the tax years 20122015 through 2014;2016; however, tax authorities have the right to adjust the net operating loss carryovers for years prior to 2012.2016. Returns filed in other jurisdictions are generally subject to examination for years prior to 2012.

2016.
16.
15.UNAUDITED QUARTERLY RESULTSEQUITY


Securities Purchase Agreement
On February 22, 2017, we 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, as described in Note 10.
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 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 was 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 Company’s 2017 Stock Incentive Plan.

16.     RELATED PARTY TRANSACTION

Effective November 1, 2016, INAP leases office space in VA from Broad Valley Capital, LLC, a company 50% owned by Mr. Aquino and 50% by Mr. Diegnan.   The lease is at-cost from Broad Valley Capital to INAP and total payment for rent, plus furniture, copier, office supplies, broadband and other in 2017 was $138,371.


17.     SUBSEQUENT EVENTS

On February 28, 2018, we acquired SingleHop, LLC, a provider of high-performance data center services including colocation, managed hosting, cloud and network services for $132.0 million in cash. The transaction was funded with an incremental term loan and cash from the balance sheet. As part of the financing, INAP obtained an amendment to its credit agreement to allow for the incremental term loan and to provide further operational flexibility under the covenants. 

On February 6, 2018, the Company, the Lenders party thereto and Jefferies Finance LLC, as Administrative Agent , entered into a Second Amendment to 2017 Credit Agreement. The 2018 Second Amendment, among other things, amends the 2017 Credit Agreement (i) to


permit the Company to incur incremental term loans under the 2017 Credit Agreement of up to $135 million to finance the Company’s pending acquisition of SingleHop LLC and to pay related fees, costs and expenses and (ii) to 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 2018 Second Amendment became effective upon the execution and delivery of the Second Amendment.  

The Company paid a fee of approximately $0.8 million to the lenders who are parties to the 2018 Second Amendment. 

In 2018, INAP reorganized into a geographic-based structure and the necessary changes have taken place effective January 1, 2018.  Beginning with our first quarter, we report in two major segments (US and International) instead of the current segments (Colo and Cloud).  We made this change to better serve our customers with our product offerings and to enable a more efficient sales approach across our global footprint. 

18.     UNAUDITED QUARTERLY RESULTS

The following table sets forth selected unaudited quarterly data during the years ended December 31, 20152017 and 2014.2016. The quarterly operating results below are not necessarily indicative of those in future periods (in thousands, except for share data).

  2015 Quarter Ended 
  March 31  June 30  September 30  December 31 
Revenues $80,786  $80,432  $78,318  $78,756 
Direct costs of network, sales and services, exclusive of depreciation and amortization  33,346   32,978   33,681   31,434 
Direct costs of customer support  9,118   9,090   9,173   9,094 
Direct costs of amortization of acquired and developed technologies  1,150   592   816   892 
Exit activities, restructuring and impairments  265   59   920   1,033 
Net loss  (10,442)  (12,534)  (14,197)  (11,269)
Basic and diluted net loss per share  (0.20)  (0.24)  (0.27)  (0.22)

F-24

  2014 Quarter Ended 
  March 31  June 30  September 30  December 31 
Revenues $81,961  $84,068  $84,667  $84,263 
Direct costs of network, sales and services, exclusive of depreciation and amortization  35,760   36,562   37,148   35,475 
Direct costs of customer support  8,927   9,553   9,114   9,211 
Direct costs of amortization of acquired and developed technologies  1,461   1,551   1,524   1,383 
Exit activities, restructuring and impairments  1,384   1,561   56   1,518 
Net loss  (10,675)  (11,185)  (9,377)  (8,257)
Basic and diluted net loss per share  (0.21)  (0.22)  (0.18)  (0.16)

F-25

  2017 Quarter Ended
  March 31 June 30 September 30 December 31
Revenues $72,133
 $69,642
 $68,907
 $70,035
Costs of sales and services, exclusive of depreciation and amortization 29,045
 26,429
 24,945
 25,798
Costs of customer support 7,264
 6,133
 6,237
 6,122
Exit activities, restructuring and impairments 1,023
 4,628
 745
 (148)
Net loss attributable to INAP stockholders (8,230) (19,283) (10,895) (6,934)
Basic and diluted net loss per share $(0.51) $(0.97) $(0.55) $(0.35)
  2016 Quarter Ended
  March 31 June 30 September 30 December 31
Revenues $75,924
 $74,315
 $73,940
 $74,117
Costs of sales and services, exclusive of depreciation and amortization 31,077
 31,370
 31,562
 30,246
Costs of customer support 8,804
 7,919
 7,985
 7,475
Goodwill impairment —
 —
 78,169
 1,936
Exit activities, restructuring and impairments 201
 152
 1,670
 5,213
Net loss attributable to INAP stockholders (9,644) (10,693) (91,297) (13,110)
Basic and diluted net loss per share $(0.75) $(0.82) $(7.01) $(1.01)


INTERNAP CORPORATION
FINANCIAL STATEMENT SCHEDULE

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)

  Balance at
Beginning
of Fiscal
Period		  Charges to
Costs and
Expense		  Deductions  Balance at
End of
Fiscal
Period		 
Year ended December 31, 2013:                
Allowance for doubtful accounts $1,809  $1,861  $(1,675)(1) $1,995 
                 
Year ended December 31, 2014:                
Allowance for doubtful accounts  1,995   1,469   (1,343)(1)  2,121 
                 
Year ended December 31, 2015:                
Allowance for doubtful accounts  2,121   1,354   (1,724)(1)  1,751 

  
Balance at
Beginning
of Fiscal
Period
 
Charges to
Costs and
Expense
 Deductions 
Balance at
End of
Fiscal
Period
Year ended December 31, 2015  
  
  
  
         
Allowance for doubtful accounts $2,121
 $1,354
 $(1,724)
(1) 
$1,751
         
Year ended December 31, 2016  
  
  
  
         
Allowance for doubtful accounts 1,751
 1,093
 (1,598)
(1) 
1,246
         
Year ended December 31, 2017  
  
  
  
         
Allowance for doubtful accounts 1,246
 1,049
 (808)
(1) 
1,487
         
(1)Deductions in the allowance for doubtful accounts represent write-offs of uncollectible accounts net of recoveries.

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S-1