UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No.
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer | |
Identification Number) |
(Address of Principal Executive Offices and Zip Code)
(
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
| Trading Symbol |
| Name of Each Exchange on which Registered |
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $.001 par value
INDEX
| |||
3 | |||
Condensed Consolidated Financial Statements (Unaudited) | |||
3 | |||
4 | |||
5 | |||
6 | |||
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) | 7 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27 | ||
51 | |||
52 | |||
53 | |||
53 | |||
54 | |||
54 | |||
55 | |||
56 | |||
CERTIFICATIONS |
Page 2 of 56
PART I FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2024 AND DECEMBER 31, 2023
(IN THOUSANDS, EXCEPT SHARE DATA)
| June 30, |
| December 31, | |||
2024 | 2023 | |||||
(Unaudited) | ||||||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash | | | ||||
Accounts receivable, net of allowance for credit losses of $ |
| |
| | ||
Due from T-Mobile, IP Transit Services Agreement, current portion, net of discount of $ | | | ||||
Due from T-Mobile, Transition Services Agreement | | | ||||
Prepaid expenses and other current assets |
| |
| | ||
Total current assets |
| |
| | ||
Property and equipment: | ||||||
Property and equipment | | | ||||
Accumulated depreciation and amortization | ( | ( | ||||
Total property and equipment, net | | | ||||
Right-of-use leased assets |
| |
| | ||
IPv4 intangible assets | | | ||||
Other intangible assets, net | | | ||||
Deposits and other assets |
| |
| | ||
Due from T-Mobile, IP Transit Services Agreement, net of discount of $ | | | ||||
Due from T-Mobile, Purchase Agreement, net of discount of $ | | | ||||
Total assets | $ | | $ | | ||
Liabilities and stockholders’ equity | ||||||
Current liabilities: | ||||||
Accounts payable | $ | | $ | | ||
Accrued and other current liabilities | | | ||||
Due to T-Mobile – Transition Services Agreement | | | ||||
Due to T-Mobile – Purchase Agreement | — | | ||||
Current maturities, operating lease liabilities | | | ||||
Finance lease obligations, current maturities | | | ||||
Total current liabilities |
| |
| | ||
Senior secured 2026 notes, net of unamortized debt costs of $ |
| |
| | ||
Senior unsecured 2027 notes, net of unamortized debt costs of $ | | | ||||
Secured IPv4 notes, net of debt costs of $ | | — | ||||
Operating lease liabilities, net of current maturities | | | ||||
Finance lease obligations, net of current maturities |
| |
| | ||
Deferred income tax liabilities | | | ||||
Other long-term liabilities |
| |
| | ||
Total liabilities |
| |
| | ||
Commitments and contingencies: | ||||||
Stockholders’ equity: | ||||||
Common stock, $ |
| |
| | ||
Additional paid-in capital |
| |
| | ||
Accumulated other comprehensive loss |
| ( |
| ( | ||
Accumulated (deficit) earnings |
| ( |
| | ||
Total stockholders’ equity |
| |
| | ||
Total liabilities and stockholders’ equity | $ | | $ | |
The accompanying notes are an integral part of these condensed consolidated balance sheets.
Page 3 of 56
COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2024 AND JUNE 30, 2023
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months Ended |
| Three Months Ended | ||||
| June 30, 2024 | June 30, 2023 | ||||
(Unaudited) |
| (Unaudited) | ||||
Service revenue | $ | | $ | | ||
Operating expenses: |
|
| ||||
Network operations (including $ |
| |
| | ||
Selling, general, and administrative (including $ |
| |
| | ||
Acquisition costs – Sprint Business |
| |
| | ||
Depreciation and amortization |
| |
| | ||
Total operating expenses |
| |
| | ||
Gain on lease termination |
| |
| — | ||
Operating loss |
| ( |
| ( | ||
Interest expense, including change in valuation interest rate swap agreement |
| ( |
| ( | ||
Gain on bargain purchase – Sprint Business |
| |
| | ||
Interest income – IP Transit Services Agreement |
| |
| | ||
Interest income – Purchase Agreement |
| |
| | ||
Interest income and other, net |
| |
| | ||
(Loss) income before income taxes |
| ( |
| | ||
Income tax benefit |
| |
| | ||
Net (loss) income | $ | ( | $ | | ||
|
|
| ||||
Comprehensive (loss) income: |
|
|
|
| ||
Net (loss) income | $ | ( | $ | | ||
Foreign currency translation adjustment |
| ( |
| | ||
Comprehensive (loss) income | $ | ( | $ | | ||
Net (loss) income per common share: |
|
|
|
| ||
Basic net (loss) income per common share | $ | ( | $ | | ||
Diluted net (loss) income per common share | $ | ( | $ | | ||
Dividends declared per common share | $ | | $ | | ||
Weighted-average common shares - basic |
| |
| | ||
Weighted-average common shares - diluted |
| |
| |
The accompanying notes are an integral part of these condensed consolidated statements.
Page 4 of 56
COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2024 AND JUNE 30, 2023
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
| Six Months Ended |
| Six Months Ended | |||
June 30, 2024 | June 30, 2023 | |||||
| (Unaudited) |
| (Unaudited) | |||
Service revenue | $ | | $ | | ||
Operating expenses: | ||||||
Network operations (including $ |
| |
| | ||
Selling, general, and administrative (including $ |
| |
| | ||
Acquisition costs – Sprint Business | | | ||||
Depreciation and amortization |
| |
| | ||
Total operating expenses |
| |
| | ||
Gain on lease termination | — | |||||
Operating loss | ( | ( | ||||
Interest expense, including change in valuation interest rate swap agreement | ( | ( | ||||
Gain on bargain purchase – Sprint Business | |
| | |||
Interest income – IP Transit Services Agreement | | | ||||
Interest income – Purchase Agreement | ( | | ||||
Interest income and other, net | | | ||||
(Loss) income before income taxes | ( | | ||||
Income tax benefit |
| |
| | ||
Net (loss) income | $ | ( | $ | | ||
| ||||||
Comprehensive (loss) income: | ||||||
Net (loss) income | $ | ( | $ | | ||
Foreign currency translation adjustment |
| ( |
| | ||
Comprehensive (loss) income | $ | ( | $ | | ||
| ||||||
Net (loss) income per common share: | ||||||
Basic net (loss) income per common share | $ | ( | $ | | ||
Diluted net (loss) income per common share | $ | ( | $ | | ||
Dividends declared per common share | $ | | $ | | ||
|
| |||||
Weighted-average common shares - basic | | | ||||
Weighted-average common shares - diluted | | |
The accompanying notes are an integral part of these condensed consolidated statements.
Page 5 of 56
COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2024 AND JUNE 30, 2023
(IN THOUSANDS)
| Six Months Ended |
| Six Months Ended | |||
| June 30, 2024 |
| June 30, 2023 | |||
(Unaudited) | (Unaudited) | |||||
Cash flows from operating activities: | ||||||
Net (loss) income | $ | ( | $ | | ||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||
Depreciation and amortization |
| |
| | ||
Amortization of debt costs and discounts |
| |
| | ||
Amortization of discounts, due from T-Mobile, IP Transit Services & Purchase Agreements | ( | ( | ||||
Equity-based compensation expense (net of amounts capitalized) |
| |
| | ||
Gain on bargain purchase – Sprint Business | ( | ( | ||||
Gains – lease terminations and other, net | ( | ( | ||||
Deferred income taxes | ( | ( | ||||
Changes in operating assets and liabilities: | ||||||
Accounts receivable | | ( | ||||
Prepaid expenses and other current assets | | ( | ||||
Due to T-Mobile – Transition Services Agreement | ( | | ||||
Due from T-Mobile – Transition Services Agreement | ( | ( | ||||
Unfavorable lease liabilities | ( | ( | ||||
Accounts payable, accrued liabilities and other long-term liabilities | | | ||||
Deposits and other assets |
| ( |
| | ||
Net cash (used in) provided by operating activities |
| ( |
| | ||
Cash flows from investing activities: | ||||||
Cash payments - IP Transit Services Agreement – T-Mobile | | | ||||
Acquisition of Sprint Business, net of $ | | ( | ||||
Purchases of property and equipment | ( | ( | ||||
Net cash provided by (used in) investing activities |
| |
| ( | ||
Cash flows from financing activities: | ||||||
Dividends paid |
| ( | ( | |||
Purchases of common stock | ( | — | ||||
Net proceeds from issuance of senior unsecured 2027 Notes - net of discount of $ | | — | ||||
Net proceeds from issuance of secured IPv4 notes – net of debt costs of $ |
| | — | |||
Proceeds from exercises of stock options | | | ||||
Principal payments of finance lease obligations | (42,131) | ( | ||||
Settlement of finance lease – at a discount |
| ( | — | |||
Net cash provided by (used in) financing activities |
| | ( | |||
Effect of exchange rates changes on cash |
| |
| | ||
Net increase (decrease) in cash, cash equivalents and restricted cash | | ( | ||||
Cash, cash equivalents and restricted cash, beginning of period | | | ||||
Cash, cash equivalents and restricted cash, end of period | $ | $ | ||||
Supplemental disclosure of non-cash financing activities: | ||||||
Fair value of equipment acquired in leases | $ | — | $ | | ||
Finance lease obligations incurred | $ | | $ | |
The accompanying notes are an integral part of these condensed consolidated statements.
Page 6 of 56
COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the business:
Reorganization and merger
On May 15, 2014, pursuant to the Agreement and Plan of Reorganization (the “Merger Agreement”) by and among Cogent Communications Group, LLC (formerly Cogent Communications Group, Inc.) (“Group”), a Delaware corporation, Cogent Communications Holdings, Inc., a Delaware corporation (“Holdings”) and Cogent Communications Merger Sub, Inc., a Delaware corporation, Group adopted a new holding company organizational structure whereby Group is now a wholly owned subsidiary of Holdings. Holdings is a “successor issuer” to Group pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). References to the “Company” for events that occurred prior to May 15, 2014 refer to Cogent Communications Group, LLC (formerly Cogent Communications Group, Inc.) and its subsidiaries and on and after May 15, 2014 the “Company” refers to Cogent Communications Holdings, Inc. and its subsidiaries. Cogent Communications, LLC (formerly Cogent Communications, Inc.) is wholly owned by Group, Sprint Communications Company LP is indirectly wholly owned by Holdings, and the vast majority of the Company’s assets, contractual arrangements, and operations are executed by Sprint Communications Company LP and Cogent Communications, LLC.
Description of business
The Company is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation space and power. The Company’s network is specifically designed and optimized to transmit packet routed data. The Company delivers its services primarily to businesses, large and small, communications service providers and other bandwidth-intensive organizations in
The Company offers on-net Internet access services exclusively through its own facilities, which run from its network to its customers’ premises. The Company offers its on-net services to customers located in buildings that are physically connected to its network. As a result, the Company is not dependent on local telephone companies or cable TV companies to serve its customers for its on-net Internet access and private network services. The Company’s on-net service consists of high-speed Internet access and private network services offered at speeds ranging from
The Company provides its on-net Internet access and private network services to its corporate, net-centric and enterprise customers. The Company’s corporate customers are located in multi-tenant office buildings that typically include law firms, financial services firms, advertising and marketing firms, as well as health care providers, educational institutions and other professional services businesses. The Company’s net-centric customers include bandwidth-intensive users that leverage its network either to deliver content to end users or to provide access to residential or commercial Internet users. Content delivery customers include over the top media service providers, content delivery networks, web hosting companies, and commercial content and application software providers. The Company’s net-centric customers include access networks comprised of other Internet Service Providers, telephone companies, mobile phone operators and cable television companies that collectively provide internet access to a substantial number of broadband subscribers and mobile phone subscribers across the world. These net-centric customers generally receive the Company’s services in carrier neutral colocation facilities and in the Company’s own data centers. The Company operates data centers throughout North America and Europe that allow its customers to collocate their equipment and access the Company’s network.
In addition to providing on-net services, the Company provides Internet access and private network services to customers that are not located in buildings directly connected to its network. The Company provides these off-net services primarily to corporate customers using other carriers’ circuits to provide the “last mile” portion of the link from the customers’ premises to the Company’s network. The Company also provides certain non-core services that resulted from acquisitions, including the acquisition of Sprint Communications (as discussed below). The Company continues to support but does not actively sell these non-core services.
Page 7 of 56
In connection with the Company’s acquisition of Sprint Communications (as discussed below), the Company began to provide optical wavelength services and optical transport services over its fiber network. The Company is selling these wavelength services to its existing customers, customers of Sprint Communications and to new customers who require dedicated optical transport connectivity without the capital and ongoing expenses associated with owning and operating network infrastructure. Additionally, the Sprint Business (as defined below) customers include a number of companies larger than the Company’s historical customer base. In connection with the acquisition of Sprint Communications, the Company expanded selling services to these larger “Enterprise” customers.
Acquisition of Sprint Communications
On September 6, 2022, Cogent Infrastructure, LLC (formerly Cogent Infrastructure, Inc.), a Delaware corporation (the “Buyer” and “Cogent Infrastructure”) and a direct wholly owned subsidiary of the Company, entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Sprint Communications LLC, a Kansas limited liability company (“Sprint Communications”) and an indirect wholly owned subsidiary of T-Mobile US, Inc., a Delaware corporation (“T-Mobile”), and Sprint LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of T-Mobile (the “Seller”), pursuant to which the Company acquired the U.S. long-haul fiber network (including the non-U.S. extensions thereof) of Sprint Communications and its subsidiaries (the “Sprint Business”). Pursuant to the Purchase Agreement, the Company purchased from the Seller all of the issued and outstanding membership interests (the “Purchased Interests”) of Wireline Network Holdings LLC, a Delaware limited liability company that, following an internal restructuring and divisive merger, holds Sprint Communications’ assets and liabilities relating to the Sprint Business (such transactions contemplated by the Purchase Agreement, collectively, the “Transaction”). The Purchase Agreement includes customary representations, warranties, indemnities and covenants, including regarding the conduct of the Sprint Business prior to the closing of the Transaction (the “Closing”). In addition, the Closing was subject to customary closing conditions, including the receipt of certain required regulatory approvals and consents.
The Company believes it is in a unique position to monetize the Sprint Business and its network and management expects to achieve significant cost reduction synergies and revenue synergies from the Transaction. Revenue and pre-tax loss for the Sprint Business included in the Company’s condensed consolidated statements of comprehensive income for both the three- and six-month periods ended June 30, 2023 were $
Purchase Price
The Transaction closed on May 1, 2023 (the “Closing Date”). On the Closing Date, the Buyer consummated the Transaction pursuant to the terms of the Purchase Agreement, providing a purchase price of $
Short-term leases
The Purchase Agreement also provides for an estimated payment of $
Page 8 of 56
Severance reimbursement
The Purchase Agreement also provides for reimbursement from the Seller to the Buyer for qualifying severance expenses incurred. Total qualifying severance expenses were $
IP Transit Services Agreement
On the Closing Date, Cogent Communications, LLC (formerly Cogent Communications, Inc.), and T-Mobile USA, Inc., a Delaware corporation and direct subsidiary of T-Mobile (“TMUSA”), entered into an agreement for IP transit services (“IP Transit Services Agreement”), pursuant to which TMUSA will pay an affiliate of the Company an aggregate of $
The IP Transit Services Agreement was recorded in connection with the Transaction at its discounted present value resulting in a discount of $
Transition Services Agreement
On the Closing Date, the Buyer entered into a transition services agreement (the “TSA”) with the Seller, pursuant to which the Seller will provide to the Buyer, and the Buyer will provide to the Seller on an interim basis following the Closing Date, certain specified services (the “Transition Services”) to ensure an orderly transition following the separation of the Sprint Business from Sprint Communications. The services to be provided by the Seller to the Buyer include, among others, information technology support, back office and finance, real estate and facilities, vendor and supply chain management, including the payment and processing of vendor invoices for the Company and human resources services. The services to be provided by the Buyer to the Seller include, among others, information technology and network support, finance and back office and other wireless business support.
The Transition Services are generally intended to be provided for a period of up to
Either party to the TSA may terminate the agreement (i) with respect to any individual service in full for convenience upon
Page 9 of 56
Other Services Provided to Seller
In addition, on the Closing Date, the Buyer and TMUSA entered into a commercial agreement (the “Commercial Agreement”) for colocation and connectivity services, pursuant to which the Company will provide such services to TMUSA for a per service monthly fee plus certain third-party costs incurred in providing the services. Under the Commercial Agreement, the Company recorded revenue of $
Acquisition-Related Costs
In connection with the Transaction and negotiation of the Purchase Agreement, the Company incurred professional fees and other acquisition related costs, including $
Consideration
The acquisition-date fair value of consideration to be received from the Transaction comprised of the following:
(In thousands) |
| May 1, 2023 | |
Working capital payments made to the Seller, net of severance reimbursements (a) | $ | | |
Purchase Agreement payment to be received from the Seller, net of discount of $ |
| | |
Amounts due from the Seller – IP Transit Services Agreement, net of discount of $ |
| | |
Total to be received from the Seller |
| | |
Total net consideration to be received from the Seller (d) |
| |
a. | $ |
b. | $ |
c. | $ |
Page 10 of 56
Fair Value of Assets Acquired and Liabilities Assumed and Gain on Bargain Purchase
The Company accounted for the Transaction as a business combination under ASC Topic 805 Business Combination (“ASC 805”). Under ASC 805, the identifiable assets acquired and liabilities assumed were recorded at their fair values as of the Closing Date. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires the use of significant judgment regarding estimates and assumptions. For the fair values of the assets acquired and liabilities assumed, the Company used the cost, income and market approaches, including market participant assumptions. The fair value of the identifiable assets acquired (including amounts due under the IP Transit Services Agreement) were in excess of the liabilities assumed and the net consideration to be paid resulting in a gain on bargain purchase of $
The Transaction is considered an asset purchase for income tax purposes. The tax basis of the acquired business is the consideration paid ($
During the first quarter of 2024, the Company recorded a measurement period adjustment resulting in a reduction to the gain on bargain purchase of $
● | A reduction to the Short-term Lease Receivable of $ |
● | Additional reimbursed severance costs of $ |
● | An increase to unfavorable lease liabilities of $ |
● | A reduction to accrued liabilities of $ |
● | A reduction to deferred income tax liabilities resulting from the adjustments noted above of $ |
During the second quarter of 2024, the Company recorded measurement period adjustments resulting in an increase to the gain on bargain purchase of $
● | Additional reimbursed severance costs of $ |
● | An adjustment to net deferred income tax liabilities of $ |
Page 11 of 56
The following table summarizes the fair values for each major class of assets acquired and liabilities assumed at the Closing Date. The Company retained the services of certified valuation specialists to assist with assigning values to certain acquired assets and assumed liabilities.
May 1, 2023 | |||
Assets |
|
| |
Current assets: |
|
| |
Cash and cash equivalents | $ | | |
Accounts receivable |
| | |
Prepaid expenses and other current assets |
| | |
Total current assets |
| | |
Total property and equipment |
| | |
Right-of-use leased assets |
| | |
IPv4 intangible assets |
| | |
Other intangible assets | | ||
Deposits and other assets |
| | |
Total assets | $ | | |
Liabilities |
|
| |
Current liabilities: |
|
| |
Accounts payable | $ | | |
Accrued and other current liabilities |
| | |
Current maturities, operating lease liabilities |
| | |
Current maturities, finance lease liabilities | | ||
Total current liabilities |
| | |
Operating lease liabilities, net of current maturities |
| | |
Finance lease liabilities, net of current maturities | | ||
Deferred income tax liabilities |
| | |
Other long-term liabilities |
| | |
Total liabilities |
| | |
Fair value of net assets acquired | $ | | |
Gain on bargain purchase |
| ||
Fair value of net assets acquired | $ | | |
Total net consideration to be received from the Seller, net of discounts - see table above | | ||
Gain on bargain purchase | $ | |
Acquired Property & Equipment
The Company acquired property and equipment of $
The estimated fair value of the optical fiber on the Closing Date was $
Acquired Leases
The Company acquired a portfolio of lease arrangements for the lease of dark fiber, rights-of-way and facilities. In accordance with ASC 805 and ASC 842, the acquired leases are accounted for as if the leases are new at the acquisition date however, the Company will retain the lease classification from the Seller. The Company followed its historical policies with respect to evaluating the renewal periods of the acquired leases and estimating the incremental borrowing rate. The Company also evaluated the leases for unfavorable terms and recorded an adjustment for unfavorable market terms of $
Page 12 of 56
Acquired Intangible Assets
Intangible assets acquired include $
The acquired customer relationships have an estimated useful life of
Acquired Asset Retirement Obligations
In connection with the Transaction, the Company assumed $
Three Months | Three Months | Six Months | Six Months | |||||||||
Ended | Ended | Ended | Ended | |||||||||
(in thousands) |
| June 30, 2024 |
| June 30, 2023 |
| June 30, 2024 |
| June 30, 2023 | ||||
Depreciation and amortization expense | $ | | $ | | $ | | $ | | ||||
Network operations expense |
| |
| |
| |
| |
Reassessment of Bargain Purchase Gain
Because the fair value of the identifiable assets acquired and liabilities assumed exceeded the fair value of the consideration transferred, the Company recorded a material bargain purchase gain. Consequently, the Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed in accordance with ASC 805-30-25-4 and concluded that all acquired assets and assumed liabilities were recognized and that the valuation procedures and resulting measures were appropriate.
Pro Forma Information
The following unaudited pro forma financial information gives effect to the Transaction as if it had been completed on January 1, 2023. The pro forma adjustments are based on historically reported transactions by the respective companies. The pro forma results do not include anticipated synergies or other expected benefits of the acquisition. The pro forma results for the six months ended June 30, 2023 include the historical results of the Sprint Business through April 30, 2023 and the combined results of the Company and the Sprint Business for the two months ended June 30, 2023. The unaudited pro forma information is based upon available information and certain assumptions that the Company believes are reasonable under the circumstances. Actual results may differ materially from the assumptions within the accompanying unaudited pro forma financial information. The selected unaudited pro forma condensed combined financial information is provided for illustrative purposes only and does not purport to represent what
Page 13 of 56
the actual consolidated results of operations would have been had the Transaction actually occurred on January 1, 2023, nor do they purport to project the future consolidated results of operations.
| Six Months | ||
Ended | |||
(In thousands) | June 30, 2023 | ||
Service revenue | $ | | |
Operating loss from continuing operations |
| ( | |
Net income |
| |
The pro forma results for the six months ended June 30, 2023 include the gain on bargain purchase related to the Transaction of $
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments that the Company considers necessary for the fair presentation of its results of operations and cash flows for the interim periods covered, and of the financial position of the Company at the date of the interim condensed consolidated balance sheet. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles, (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. While the Company believes that the disclosures are adequate to not make the information misleading, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in its annual report on Form 10-K for the year ended December 31, 2023. Certain prior year amounts have been reclassified to conform to current year presentation.
The accompanying unaudited condensed consolidated financial statements include all wholly owned subsidiaries. All inter-company accounts and activity have been eliminated.
Use of estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.
Financial instruments
At June 30, 2024 and December 31, 2023, the carrying amount of cash and cash equivalents, restricted cash, accounts receivable, prepaid and other current assets, accounts payable, and accrued expenses approximated fair value because of the short-term nature of these instruments. The Company measures its cash equivalents and restricted cash at amortized cost, which approximates fair value based upon quoted market prices (Level 1).
Based upon recent trading prices (Level 2—market approach) at June 30, 2024,
● | the fair value of the Company’s $ |
● | the fair value of the Company’s $ |
Page 14 of 56
● | the fair value of the Company’s $ |
● | the fair value of the Company’s $ |
● | the fair value of the Company’s interest rate swap agreement was $ |
Restricted cash and interest rate swap agreement
Restricted cash includes amounts held in segregated bank accounts by our clearing broker as margin in support of our Swap Agreement as discussed in Note 3 and was $
Gross receipts taxes, universal service fund and other surcharges
Revenue recognition standards include guidance relating to taxes or surcharges assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer and may include, but are not limited to, gross receipts taxes, excise taxes, Universal Service Fund fees and certain state regulatory fees. Such charges may be presented gross or net based upon the Company’s accounting policy election. The Company records certain excise taxes and surcharges on a gross basis and includes them in its revenue and network operations expense. Excise taxes and surcharges billed to customers and recorded on a gross basis (as service revenue and network operations expense) were $
Basic and diluted net income per common share
Basic earnings per share (“EPS”) excludes dilution for common stock equivalents and is computed by dividing net income or (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares of common stock outstanding during each period, adjusted for the effect of dilutive common stock equivalents. Shares of restricted stock are included in the computation of basic EPS as they vest and are included in diluted EPS, to the extent they are dilutive, determined using the treasury stock method.
The following details the determination of diluted weighted-average shares:
| Three Months |
| Three Months |
| Six Months |
| Six Months | |
Ended | Ended | Ended | Ended | |||||
| June 30, 2024 |
| June 30, 2023 | June 30, 2024 | June 30, 2023 | |||
Weighted average common shares - basic | | | | | ||||
Dilutive effect of stock options | — | | — | | ||||
Dilutive effect of restricted stock | — | | — | | ||||
Weighted average common shares - diluted | | | | |
The following details unvested shares of restricted common stock as well as the anti-dilutive effects of stock options and restricted stock awards outstanding:
Three Months | Three Months | Six Months | Six Months | |||||
Ended | Ended | Ended | Ended | |||||
| June 30, 2024 |
| June 30, 2023 |
| June 30, 2024 |
| June 30, 2023 | |
Unvested shares of restricted common stock | | | | | ||||
Anti-dilutive options for common stock | | | | | ||||
Anti-dilutive shares of restricted common stock | | | | |
Page 15 of 56
Stockholders’ (Deficit) Equity
The following details the changes in stockholders’ (deficit) equity for the three and six months ended June 30, 2023 and June 30, 2024, respectively (in thousands except share data):
Accumulated | |||||||||||||||||
Additional | Other | Total | |||||||||||||||
Common Stock | Paid-in | Comprehensive | Accumulated | Stockholders’ | |||||||||||||
| Shares |
| Amount |
| Capital |
| Loss |
| Deficit |
| (Deficit) Equity | ||||||
Balance at March 31, 2023 | | $ | | $ | | $ | ( | $ | ( | $ | ( | ||||||
Forfeitures of shares granted to employees |
| ( | — | — | — | — | — | ||||||||||
Equity-based compensation |
| — | — | | — | — | | ||||||||||
Foreign currency translation |
| — | — | — | | — | | ||||||||||
Issuances of common stock |
| | | — | — | — | | ||||||||||
Exercises of options |
| | — | | — | — | | ||||||||||
Dividends paid |
| — | — | — | — | ( | ( | ||||||||||
Net income |
| — | — | — | — | | | ||||||||||
Balance at June 30, 2023 |
| | $ | | $ | | $ | ( | $ | ( | $ | |
| Accumulated | ||||||||||||||||
Additional | Other | Total | |||||||||||||||
Common Stock | Paid-in | Comprehensive | Accumulated | Stockholders’ | |||||||||||||
|
| Shares |
| Amount |
| Capital |
| Loss |
| Deficit |
| Equity | |||||
Balance at March 31, 2024 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Forfeitures of shares granted to employees |
| ( | — | — | — | — | — | ||||||||||
Equity-based compensation |
| — | — | | — | — | | ||||||||||
Foreign currency translation |
| — | — | — | ( | — | ( | ||||||||||
Issuances of common stock |
| | — | — | — | — | — | ||||||||||
Exercises of options |
| | — | | — | — | | ||||||||||
Common stock purchases & retirement | ( | — | ( | — | — | ( | |||||||||||
Dividends paid |
| — | — | — | — | ( | ( | ||||||||||
Net loss |
| — | — | — | — | ( | ( | ||||||||||
Balance at June 30, 2024 |
| |