10-Q 1 ccoi-20240331x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2024

OR

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

Commission File No. 000-51829

COGENT COMMUNICATIONS HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

46-5706863

(State or other jurisdiction of Incorporation or organization)

(I.R.S. Employer

Identification Number)

2450 N Street N.W.

Washington, D.C. 20037

(Address of Principal Executive Offices and Zip Code)

(202295-4200

(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

Common Stock, par value $0.001 per share

CCOI

NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes  No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No 

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

Large accelerated filer

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   No 

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 49,024,447 Shares Outstanding as of April 30, 2024

INDEX

PART I

FINANCIAL INFORMATION

    

Item 1.

Financial Statements

3

Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets of Cogent Communications Holdings, Inc. and Subsidiaries as of March 31, 2024 (Unaudited) and December 31, 2023

3

Condensed Consolidated Statements of Comprehensive (Loss) Income of Cogent Communications Holdings, Inc. and Subsidiaries for the Three Months Ended March 31, 2024 and March 31, 2023 (Unaudited)

4

Condensed Consolidated Statements of Cash Flows of Cogent Communications Holdings, Inc. and Subsidiaries for the Three Months Ended March 31, 2024 and March 31, 2023 (Unaudited)

5

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

Item 4.

Controls and Procedures

41

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

42

Item 1A.

Risk Factors

42

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 5.

Other Information

43

Item 6.

Exhibits

44

SIGNATURES

45

CERTIFICATIONS

Page 2 of 45

PART I FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2024 AND DECEMBER 31, 2023

(IN THOUSANDS, EXCEPT SHARE DATA)

    

March 31,

    

December 31, 

2024

2023

(Unaudited)

Assets

Current assets:

Cash and cash equivalents

$

118,433

$

75,092

Restricted cash

44,841

38,689

Accounts receivable, net of allowance for credit losses of $5,588 and $3,677, respectively

 

107,169

135,475

Due from T-Mobile, IP Transit Services Agreement, current portion, net of discount of $21,878 and $24,898, respectively

119,788

179,269

Due from T-Mobile, Transition Services Agreement

3,232

4,514

Prepaid expenses and other current assets

 

79,698

80,588

Total current assets

 

473,161

513,627

Property and equipment:

Property and equipment

3,046,160

2,947,376

Accumulated depreciation and amortization

(1,484,792)

(1,409,559)

Total property and equipment, net

1,561,368

1,537,817

Right-of-use leased assets

 

347,993

361,587

IPV4 intangible assets

458,000

458,000

Other intangible assets, net

14,370

14,815

Deposits and other assets

 

26,327

23,438

Due from T-Mobile, IP Transit Services Agreement, net of discount of $23,606 and $27,916, respectively

243,061

263,750

Due from T-Mobile, Purchase Agreement, net of discount of $6,982 and $13,725, respectively

21,132

38,585

Total assets

$

3,145,412

$

3,211,619

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$

45,932

$

48,356

Accrued and other current liabilities

187,495

120,523

Accrued dividend payable

 

45,789

Due to T-Mobile – Transition Services Agreement

5,816

66,908

Due to T-Mobile – Purchase Agreement

4,981

4,981

Current maturities, operating lease liabilities

66,553

67,962

Finance lease obligations, current maturities

64,043

64,594

Total current liabilities

 

420,609

373,324

Senior secured 2026 notes, net of unamortized debt costs of $578 and $645, respectively, and discounts of $769 and $857, respectively

 

498,653

498,498

Senior unsecured 2027 notes, net of unamortized debt costs of $880 and $941, respectively, and discounts of $1,844 and $1,970, respectively

447,276

447,088

Operating lease liabilities, net of current maturities

320,898

330,095

Finance lease obligations, net of current maturities

 

453,473

419,921

Deferred income tax liabilities

436,504

471,498

Other long-term liabilities

 

67,355

61,639

Total liabilities

 

2,644,768

2,602,063

Commitments and contingencies:

Stockholders’ equity:

Common stock, $0.001 par value; 75,000,000 shares authorized; 49,013,487 and 48,608,569 shares issued and outstanding, respectively

 

49

49

Additional paid-in capital

 

614,535

606,755

Accumulated other comprehensive loss

 

(19,419)

(14,385)

Accumulated (deficit) earnings

 

(94,521)

17,137

Total stockholders’ equity

 

500,644

609,556

Total liabilities and stockholders’ equity

$

3,145,412

$

3,211,619

The accompanying notes are an integral part of these condensed consolidated balance sheets.

Page 3 of 45

COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND MARCH 31, 2023

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

    

Three Months Ended

    

Three Months Ended

March 31, 2024

March 31, 2023

    

(Unaudited)

    

(Unaudited)

Service revenue

$

266,168

$

153,588

Operating expenses:

Network operations (including $385 and $149 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)

 

168,933

58,638

Selling, general, and administrative (including $6,565 and $6,432 of equity-based compensation expense, respectively)

 

76,696

45,078

Acquisition costs – Sprint Business

9,037

400

Depreciation and amortization

 

70,891

25,160

Total operating expenses

 

325,557

129,276

Operating (loss) income

(59,389)

24,312

Interest expense

(23,010)

(19,005)

Reduction to gain on bargain purchase – Sprint Business

(5,470)

Change in valuation – interest rate swap agreement

 

(6,152)

 

1,847

Interest income – IP Transit Services Agreement

7,330

Interest income – Purchase Agreement

(480)

Interest income and other, net

2,737

3,498

Income before income taxes

(84,434)

10,652

Income tax benefit (expense)

 

19,127

(4,504)

Net (loss) income

$

(65,307)

$

6,148

  

Comprehensive (loss) income:

Net (loss) income

$

(65,307)

$

6,148

Foreign currency translation adjustment

 

(5,034)

1,788

Comprehensive (loss) income

$

(70,341)

$

7,936

  

Net (loss) income per common share:

Basic net (loss) income per common share

$

(1.38)

$

0.13

Diluted net (loss) income per common share

$

(1.38)

$

0.13

Dividends declared per common share

$

0.965

$

0.925

 

Weighted-average common shares - basic

47,416,268

47,037,091

Weighted-average common shares - diluted

47,416,268

47,381,226

The accompanying notes are an integral part of these condensed consolidated statements.

Page 4 of 45

COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND MARCH 31, 2023

(IN THOUSANDS)

    

Three Months Ended

    

Three Months Ended

    

March 31, 2024

    

March 31, 2023

(Unaudited)

(Unaudited)

Cash flows from operating activities:

Net (loss) income

$

(65,307)

$

6,148

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Depreciation and amortization

 

70,891

25,160

Amortization of debt discounts

 

342

324

Amortization of discounts, due from T-Mobile, IP Transit Services & Purchase Agreements

(6,850)

Equity-based compensation expense (net of amounts capitalized)

 

6,950

6,581

Reduction to gain on bargain purchase – Sprint Business

5,470

Gains – lease transactions

(615)

Deferred income taxes

(33,069)

890

Changes in operating assets and liabilities:

Accounts receivable

28,306

(860)

Prepaid expenses and other current assets

890

(2,919)

Change in valuation – interest rate swap agreement

6,152

(1,847)

Due to T-Mobile – Transition Services Agreement

(61,092)

Due from T-Mobile – Transition Services Agreement

(3,052)

Unfavorable lease liabilities

(2,451)

Accounts payable, accrued liabilities and other long-term liabilities

75,397

2,923

Deposits and other assets

 

(3,358)

36

Net cash provided by operating activities

 

19,219

35,821

Cash flows from investing activities:

Cash receipts - IP Transit Services Agreement – T-Mobile

87,500

Acquisition of Sprint Business – severance reimbursement

4,334

Purchases of property and equipment

 

(40,883)

(23,204)

Net cash provided by (used in) investing activities

 

50,951

(23,204)

Cash flows from financing activities:

Dividends paid

 

(478)

(45,311)

Proceeds from exercises of stock options

164

145

Principal payments of finance lease obligations

(23,235)

(9,450)

Net cash used in financing activities

 

(23,549)

(54,616)

Effect of exchange rates changes on cash

 

2,872

510

Net increase (decrease) in cash, cash equivalents and restricted cash

 

49,493

 

(41,489)

Cash, cash equivalents and restricted cash, beginning of period

 

113,781

275,912

Cash, cash equivalents and restricted cash, end of period

$

163,274

$

234,423

Supplemental disclosure of non-cash financing activities:

Fair value of equipment acquired in leases

$

$

171

Finance lease obligations incurred

$

54,423

$

25,871

The accompanying notes are an integral part of these condensed consolidated statements.

Page 5 of 45

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 54 countries across North America, Europe, South America, Oceania and Africa. The Company is a Delaware corporation and is headquartered in Washington, DC.

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 100 megabits per second to 400 gigabits per second.

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 6 of 45

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 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”). The Purchase Agreement provides that, upon the terms and conditions set forth therein, 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 as to the receipt of certain required regulatory approvals and consents, all of which have been received. The Company has agreed to guarantee the obligations of the Buyer under the Purchase Agreement pursuant to the terms of a Guaranty, dated as of September 6, 2022, by and between the Company and the Seller (the “Parent Guaranty”). The Parent Guaranty contains customary representations, warranties and covenants of the Company and the Seller.

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 the year ended December 31, 2023 were $283.3 million and $234.5 million, respectively.

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 $1 payable to the Seller for the Purchased Interests, subject to customary adjustments, including working capital (the “Working Capital Adjustment”), as set forth in the Purchase Agreement. As consideration for the Purchased Interests, the Working Capital Adjustment (primarily related to acquired cash and cash equivalents of an estimated $43.4 million at the Closing Date in order to fund the international operations of the Sprint Business) resulted in the Buyer making a payment to the Seller of $61.1 million on the Closing Date. During the third quarter of 2023, an additional Working Capital Adjustment of $5.0 million was accrued due to the Seller.

The Purchase Agreement also includes an estimated payment of $28.1 million ($19.8 million net of discount) from Seller to Buyer related to acquired short-term lease obligations (the “Short-term Lease Payment”). The Short-term Lease Payment will be paid from the Seller to the Company in four equal payments in months 55 to 58 after the Closing Date. The Short-term Lease Payment was recorded at its present value resulting in a discount of $8.4 million. The interest rate used in determining the present value was derived considering rates on similar issued debt instruments with comparable durations, amongst other market factors. The determination of the discount rate requires some judgment. During the third quarter of 2023, the Short - term Lease Payment was reduced by $4.8 million and in the first quarter of 2024 the Short - term Lease Payment was reduced by an additional $17.0 million, net of discount of $7.2 million. Including the cumulative impact of the first quarter 2024 adjustment, the amortization of the discount resulted in interest expense of $0.5 million for the three months ended March 31, 2024.

Page 7 of 45

The Purchase Agreement also includes reimbursement from Seller to Buyer for qualifying severance expenses incurred, which were $4.3 million in the three months ended March 31, 2024 and $16.2 million in the year ended December 31, 2023. The final determination of the Working Capital Adjustment and the Short-term Lease Payment was completed in April 2024 and the Company paid the Seller $5.0 million for the remaining Working Capital Adjustment.

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 $700.0 million, consisting of (i) $350.0 million in equal monthly installments of $29.2 million per month during the first year after the Closing Date and (ii) $350.0 million in equal monthly installments of $8.3 million per month over the subsequent 42 months. During the three months ended March 31, 2024, TMUSA paid the Company $87.5 million under the IP Transit Services Agreement.

The Company accounted for the Transaction as a business combination under ASC Topic 805 Business Combinations (“ASC 805”). The Company evaluated what elements are part of the business combination and the consideration exchanged to complete the acquisition. Under ASC 805, the Company has concluded that the $700.0 million of payments to be made represent consideration received from T-Mobile to complete the acquisition of a distressed business. The Company also evaluated whether the IP Transit Services Agreement was in the scope of ASU No. 2014-09 Revenue from Contracts with Customers (“ASC 606”). The Company has concluded that T-Mobile did not represent a “customer” as defined by ASC 606, the stated contract price did not represent consideration for services to be delivered, and the transaction did not satisfy the definition of revenue, which excluded this arrangement from the scope of ASC 606. As a result, and considering statements made by T-Mobile, the IP Transit Services Agreement was recorded in connection with the Transaction at its discounted present value resulting in a discount of $79.6 million. The interest rate used in determining the present value was derived considering rates on similar issued debt instruments with comparable durations, amongst other market factors. The determination of the discount rate requires some judgment. The amortization of the discount resulted in interest income of $7.3 million for the three months ended March 31, 2024.

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. 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 two years following the Closing Date, although such period may be extended for an additional one-year term by either party upon 30 days’ prior written notice. The fees for the Transition Services are calculated using either a per service monthly fee or an hourly rate for the employees allocated to provide such services. Any third-party costs incurred in providing the Transition Services are passed on to the party receiving such services at cost for the two-year period. Amounts paid for the Sprint Business by T-Mobile are reimbursed at cost.

Either party to the TSA may terminate the agreement (i) with respect to any individual service in full for convenience upon 30 days’ prior written notice for certain services and reduced for other services after a 90-day period. The TSA may be terminated in its entirety if the other party has failed to perform any of its material obligations and such failure is not cured within 30 days. The TSA provides for customary indemnification and limits on liability. Amounts billed under the TSA are due 30 days from receipt of the related invoice. During the three months ended March 31, 2024, the Company was billed $16.7 million as due to the Seller under the TSA, respectively, primarily for reimbursement at cost of payments to vendors of the Sprint Business. During the three months ended March 31, 2024, the Company paid $78.5 million to the Seller under the TSA that included payments for amounts billed in 2023. As of March 31, 2024, the Company owed $5.8 million to the Seller and the Seller owed $3.2 million to the Company under the TSA. The amounts due to the Seller are primarily reimbursements for payments to Sprint Business vendors paid by the Seller for the Company until these vendors are fully transitioned to the Company. The amounts due from the Seller are primarily reimbursements for severance costs related to Sprint Business employees and services provided by the Company for the Seller.

Page 8 of 45

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. During the three months ended March 31, 2024, the Company recorded $3.2 million from TMUSA as service revenue under the Commercial Agreement. As of March 31, 2024, TMUSA owed $20.0 million to the Company under the Commercial Agreement. These amounts are included in accounts receivable.

Acquisition-Related Costs

In connection with the Transaction and negotiation of the Purchase Agreement, the Company has incurred a total of $9.2 million of professional fees and other acquisition related costs and $20.6 million of reimbursed severance costs. For the three months ended March 31, 2024, such professional fees and other acquisition related costs and reimbursed severance costs were $4.7 million and $4.3 million, respectively. For the three months ended March 31, 2023 such professional fees were $0.4 million.

Consideration

The acquisition-date fair value of consideration to be received from the Transaction totaled $594.6 million and comprised of the following:

(In thousands)

    

May 1, 2023

Estimated working capital payments made to the Seller, net of severance reimbursements (a)

$

45,531

Estimated Purchase Agreement payment to be received from the Seller, net of discount of $8,392 (b)

 

19,723

Amounts due from the Seller – IP Transit Services Agreement, net of discount of $79,610 (c)

 

620,390

Total to be received from the Seller

 

640,113

Total net consideration to be received from the Seller (d)

 

594,582

(a)Includes $61.1 million paid to the Seller on the Closing Date and an accrual of $5.0 million due to the Seller that was paid in April 2024. Additionally, includes an offsetting $20.6 million in total severance reimbursement payments received from the Seller recorded as measurement period adjustments during the fourth quarter of 2023 ($16.2 million) and $4.3 million recorded as a measurement period adjustment during the first quarter of 2024.
(b)Under the Purchase Agreement, 50% of the assumed short-term operating lease liabilities totaling $28.1 million is to be paid to the Company from the Seller in four equal installments in months 55-58 from the Closing Date and is recorded at its present value resulting in a discount of $8.4 million. During the first quarter of 2024, the Working Capital Adjustment was adjusted by $17.0 million, net of discount of $7.2 million to reflect the conclusion of the determination of amounts due from the Seller from the Short - term Lease Payment.
(c)The IP Transit Services Agreement payments totaling $700.0 million are recorded at their present value resulting in a discount of $79.6 million. The $700.0 million is to be paid to the Company from the Seller in equal monthly payments of $29.2 million in months 1-12 and $8.3 million in months 13-54.
(d)Cash consideration was $1

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 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 $1.4 billion.

Page 9 of 45

During the first quarter of 2024, the Company recorded a measurement period adjustment resulting in a reduction to the gain on bargain purchase of $5.5 million which includes;

A reduction to the Short-term Lease Receivable of $24.2 million ($17.0 million net of discount).
Additional reimbursed severance costs of $4.3 million
An increase to unfavorable lease liabilities of $6.0 million
A reduction to accrued liabilities of $11.3 million; and
A reduction to deferred income tax liabilities resulting from the adjustments noted above of $1.9 million

The Transaction is considered an asset purchase for income tax purposes. The tax basis of the acquired business is the consideration paid ($1) plus the tax basis of certain liabilities assumed, with adjustments for cash acquired in excess of the purchase price. Deferred income taxes are recorded based upon the difference between the book and tax basis of the acquired assets and assumed liabilities at the Company’s marginal effective income tax rate on the Closing Date.

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. The amounts presented are provisional and are subject to change as the Company refines the estimates and inputs used in the calculations of the assets acquired and liabilities assumed. The Company believes that estimates that are potentially subject to change include additional reimbursable severance costs and modification to the effective income tax rate.

May 1, 2023

Assets

    

  

Current assets:

 

  

Cash and cash equivalents

$

47,074

Accounts receivable

 

39,948

Prepaid expenses and other current assets

 

22,777

Total current assets

 

109,799

Total property and equipment

 

965,715

Right-of-use leased assets

 

304,982

IPV4 intangible assets

 

458,000

Other intangible assets

16,000

Deposits and other assets

 

7,521

Total assets

$

1,862,017

Liabilities

 

Current liabilities:

 

Accounts payable

$

13,313

Accrued and other current liabilities

 

25,344

Current maturities, operating lease liabilities

 

74,562

Current maturities, finance lease liabilities

39,559

Total current liabilities

 

152,778

Operating lease liabilities, net of current maturities

 

251,573

Finance lease liabilities, net of current maturities

121,342

Deferred income tax liabilities

 

494,575

Other long-term liabilities

 

35,366

Total liabilities

 

1,055,634

Fair value of net assets acquired

$

806,383

Gain on bargain purchase

Fair value of net assets acquired

$

806,383

Total net consideration to be received from the Seller, net of discounts - see table above

594,582

Gain on bargain purchase

1,400,965

Page 10 of 45

Acquired Property & Equipment

The Company acquired property and equipment of $965.7 million. This is primarily comprised of the legacy Sprint network and consists of optical fiber, related equipment, and owned real estate which were valued using a combination of the cost and market approaches. Management intends to operate the acquired business; however, management valued these assets using factors that represent an orderly liquidation value, to approximate the highest and best use of assets acquired in a distressed business.

The estimated fair value of the optical fiber on the Transaction date was $369.2 million. The valuation requires the estimation of the total replacement cost per mile of fiber and a factor to reflect the orderly liquidation value. There is not active market data for these assumptions and these assumptions are inherently subjective. Market participants could have differing views on these assumptions, which could result in a materially different fair value of the optical fiber.

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 $157.2 million that was valued using the income approach. Unfavorable lease liabilities are presented net of the corresponding right of use assets.

Acquired Intangible Assets

Intangible assets acquired include $458.0 million of IPv4 address intangible assets and $16.0 million of acquired customer relationships. The fair value measurement of the IPv4 addresses was based on recent auction prices and a factor to incorporate the uncertainty for how the market for IPv4 addresses will function in the future. The Company believes that these IPv4 addresses have an indefinite useful live and are not being amortized. The Company evaluates these assets for impairment on the first day of the fourth quarter. There was no impairment recorded during the period from May 1, 2023 through March 31, 2024.

The acquired customer relationships have an estimated useful life of nine years and the estimated fair value was determined using a market based income approach. Amortization expense for the three months ended March 31, 2024 was $0.4 million. Future amortization expense of the customer relationships is $1.8 million per year for eight years.

Acquired Asset Retirement Obligations

In connection with the Transaction, the Company assumed $32.0 million of asset retirement obligations primarily related to restoration obligations for acquired leases that was valued using the income approach. The obligations and corresponding asset retirement assets are being accreted and amortized over approximately four years. Accretion of the asset retirement obligations (recorded as an increase to network operations expenses) and amortization of the asset retirement assets (recorded as depreciation and amortization expenses) for the three months ended March 31, 2024 were $0.6 million and $1.9 million, respectively. In accordance with ASC 410, the Company has not recorded an asset retirement obligation related to the removal of the acquired optical fiber because a settlement date for which to remove the fiber is indeterminable and therefore a reasonable estimation of fair value cannot be made.

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.

Page 11 of 45

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 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 purchase adjustments are preliminary and subject to change as additional analyses are performed and finalized. The selected unaudited pro forma condensed combined financial information is provided for illustrative purposes only and does not purport to represent what 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.

    

Three Months

Ended

(In thousands) (unaudited)

March 31, 2023

Service revenue

$

286,288

Operating loss from continuing operations

 

(119,922)

Net income

 

1,271,413

The pro forma results for the three months ended March 31, 2023 include:

The gain on bargain purchase related to the Transaction of $1.4 billion,
Interest income from the amortization of the discount recorded under the IP Transit Services Agreement of $11.3 million,
A net increase to historical depreciation expense based on the fair value of property and equipment and the impact of a finance lease of $20.5 million,
Amortization expense related to the customer relationship intangible assets of $0.4 million,
Amortization of unfavorable lease liabilities of $1.4 million,
An increase to interest expense of $3.0 million and a reduction to network operations expense of $12.6 million from the impact of a finance lease adjustment; and,
The impact to income tax expense from the pro-forma adjustments of $0.3 million.

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.

Page 12 of 45

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 March 31, 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 March 31, 2024, the fair value of the Company’s $450.0 million aggregate principal amount of 7.00% Senior Unsecured Notes due 2027 (the “2027 Notes”) was $446.6 million, the fair value of the Company’s $500.0 million aggregate principal amount of 3.50% Senior Secured Notes due 2026 (the “2026 Notes”) was $475.0 million and the estimated liability fair value of the Company’s interest rate swap agreement was $44.8 million.

Restricted cash and interest rate swap agreement

Restricted cash represents 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 $44.8 million as of March 31, 2024. Additional cash may be further restricted to maintain our Swap Agreement as interest rates fluctuate and margin requirements change. The Company does not use derivative financial instruments for trading purposes.

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 $20.5 million and $4.2 million for the three months ended March 31, 2024 and March 31, 2023, respectively.

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

Ended

Ended

    

March 31, 2024

    

March 31, 2023

Weighted-average common shares - basic

47,416,268

47,037,091

Dilutive effect of stock options

16,299

Dilutive effect of restricted stock

327,836

Weighted-average common shares - diluted

47,416,268

47,381,226

Page 13 of 45

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

Ended

Ended

    

March 31, 2024

    

March 31, 2023

Unvested shares of restricted common stock

1,602,845

1,261,342

Anti-dilutive options for common stock

194,990

100,777

Anti-dilutive shares of restricted common stock

115,341

137,892

Stockholders’ (Deficit) Equity

The following details the changes in stockholders’ (deficit) equity for the three and three months ended March 31, 2024 and March 31, 2023, respectively (in thousands except share data):

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Deficit

Balance at December 31, 2022

48,013,330

$

48

$

575,064

$

(19,156)

$

(1,074,588)

$

(518,632)

Forfeitures of shares granted to employees

 

(6,509)

 

 

 

 

 

Equity-based compensation

 

 

 

7,315

 

 

 

7,315

Foreign currency translation

 

 

 

 

1,788

 

 

1,788

Issuances of common stock

 

286,762

 

 

 

 

 

Exercises of options

 

3,299

 

 

145

 

 

 

145

Dividends paid

 

 

 

 

 

(45,311)

 

(45,311)

Net income

 

 

 

 

 

6,148

 

6,148

Balance at March 31, 2023

 

48,296,882

$

48

$

582,524

$

(17,368)

$

(1,113,751)

$

(548,547)

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Equity (Deficit)

    

Equity

Balance at December 31, 2023

48,608,569

$

49

$

606,755

$

(14,385)

$

17,137

$

609,556

Forfeitures of shares granted to employees

 

(37,379)

Equity-based compensation

 

7,616

7,616

Foreign currency translation

 

(5,034)

(5,034)

Issuances of common stock

 

439,090

Exercises of options

 

3,207

164

164

Dividends paid

 

(46,351)

(46,351)

Net loss

 

(65,307)

(65,307)

Balance at March 31, 2024

 

49,013,487

$

49

$

614,535

$

(19,419)

$

(94,521)

$

500,644

Revenue recognition

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

Page 14 of 45

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

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

1)Identification of the contract, or contracts with a customer
2)Identification of the performance obligations in the contract
3)Determination of the transaction price
4)Allocation of the transaction price to the performance obligations in the contract; and
5)Recognition of revenue when, or as, the Company satisfies its performance obligations

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

    

Three Months

    

Three Months

Ended

Ended

(in thousands)

March 31, 2024

March 31, 2023

Service revenue recognized from balance at beginning of period

$

3,085

$

1,805

Amortization expense for contract costs

 

4,733

 

4,823

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 replaced most existing lease accounting guidance. The operating lease liability under ASU 2016-02 is not considered a liability under the consolidated leverage ratio calculations in the indentures governing the Company’s senior unsecured and senior secured note obligations. The Company has made an accounting policy election to not apply the recognition requirements of ASU 2016-02 to its short-term leases - leases with a term of one year or less. The Company has also elected to apply certain practical expedients under ASU 2016-02 including not separating lease and non-lease components on its finance and operating leases.

    

Three Months

 

Three Months

Ended

 

Ended

(Amounts in thousands)

    

March 31, 2024

    

March 31, 2023

Finance lease cost

 

  

Amortization of right-of-use assets

$

11,564

$

8,968

Interest expense on finance lease liabilities

 

10,411

6,430

Operating lease cost

 

24,251

4,582

Total lease costs

$

46,226

$

19,980

Page 15 of 45

    

Three months

    

Three months

Ended

Ended

March 31, 2024

March 31, 2023

Other lease information (amounts in thousands)

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from finance leases

$

(10,419)

$

(5,136)

Operating cash flows from operating leases

(24,729)

(4,957)

Financing cash flows from finance leases

(23,235)

(9,450)

Right-of-use assets obtained in exchange for new finance lease liabilities

54,423

25,871

Right-of-use assets obtained in exchange for new operating lease liabilities

5,151

363

Weighted-average remaining lease term — finance leases (in years)

14.2

13.4

Weighted-average remaining lease term — operating leases (in years)

12.3

16.1

Weighted-average discount rate — finance leases

7.7

%

8.8

%

Weighted-average discount rate — operating leases

8.1

%

5.4

%

Finance leases—fiber lease agreements

The Company has entered into lease agreements with numerous providers of dark fiber under indefeasible-right-of use agreements (“IRUs”). These IRUs typically have initial terms of 15- 20 years and include renewal options after the initial lease term. The Company establishes the number of renewal option periods used in determining the lease term based upon its assessment at the inception of the lease of the number of option periods for which failure to renew the lease imposes a penalty in such amount that renewal appears to be reasonably certain. The option to renew may be automatic, at the option of the Company or mutually agreed to between the dark fiber provider and the Company. Once the Company has accepted the related fiber route, leases that meet the criteria for treatment as finance leases are recorded as a finance lease obligation and an IRU asset. The interest rate used in determining the present value of the aggregate future minimum lease payments is the Company’s incremental borrowing rate for the reasonably certain lease term. The determination of the Company’s incremental borrowing rate requires some judgment. Finance lease assets are included in property and equipment in the Company’s condensed consolidated balance sheets. As of March 31, 2024, the Company had committed to additional dark fiber IRU lease agreements totaling $267.9 million in future payments to be paid over periods of up to 20 years. These obligations begin when the related fiber is accepted, which is generally expected to occur in the next 12 months.

Operating leases

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

Page 16 of 45

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

    

Operating

    

Finance

For the Twelve Months Ending March 31,

Leases

Leases

2025

 

$

76,442

$

102,776

2026

60,457

95,730

2027

56,365

81,476

2028

50,945

43,628

2029

47,567

41,953

Thereafter

318,997

503,234

Total minimum lease obligations

610,773

868,797

Less—amounts representing interest

(223,322)

(351,281)

Present value of minimum lease obligations

387,451

517,516

Current maturities

(66,553)

(64,043)

Lease obligations, net of current maturities

$

320,898

$

453,473

Unfavorable lease liabilities

In connection with the Transaction, the Company recorded $157.2 million of unfavorable lease liabilities for leases with terms greater than current market rates. The liability is classified with the corresponding right-of-use lease assets and is being amortized into the condensed consolidated statement of comprehensive (loss) income in the same line items as the activity for the corresponding right-of-use lease assets. For the three months ended March 31, 2024 the Company amortized $2.4 million as a reduction to network operations expenses and $8.9 million as a reduction to depreciation expense.

Allowance for credit losses

As of January 1, 2020, the Company maintained an allowance for credit losses to cover its current expected credit losses on its trade receivables arising from the failure of customers to make contractual payments. The Company estimates credit losses expected over the life of its trade receivables based on historical information combined with current conditions that may affect a customer’s ability to pay and reasonable and supportable forecasts. While the Company uses various credit quality metrics, it primarily monitors collectability by reviewing the duration of collection pursuits on its delinquent trade receivables. Based on the Company’s experience, the customer’s delinquency status is the strongest indicator of the credit quality of the underlying trade receivables, which is analyzed monthly.

    

    

Current-period

    

    

Provision for

Write-offs

Beginning

Expected Credit

Charged Against

Ending

Description

    

Balance

    

Losses

    

Allowance

    

Balance

Allowance for credit losses (deducted from accounts receivable) (in thousands)

  

  

  

  

Three months ended March 31, 2024

$

3,677

$

2,595

$

(684)

$

5,588

Three months ended March 31, 2023

2,303

$

1,548

$

(1,176)

$

2,675

    

Three Months

    

Three Months

Ended

Ended

(in thousands)

March 31, 2024

March 31, 2023

Net bad debt expense

$

2,595

$

1,215

Bad debt recoveries

 

296

334

Page 17 of 45

2.  Property and equipment:

Depreciation and amortization expense related to property and equipment and finance leases and capitalized compensation costs of employees directly involved with construction activities were as follows:

    

Three Months

    

Three Months

Ended

Ended

(in thousands)

March 31, 2024

March 31, 2023

Depreciation and amortization expense

$

70,842

$

25,153

Capitalized compensation cost

 

11,697

3,678

3.  Long-term debt:

As of March 31, 2024, the Company had outstanding $450.0 million aggregate principal amount of 2027 Notes and $500.0 million aggregate principal amount of 2026 Notes. The 2027 Notes were issued in June 2022, are due on June 15, 2027 and bear interest at a rate of 7.00% per year. Interest on the 2027 Notes is paid semi-annually on June 15 and December 15 of each year. The 2026 Notes were issued in May 2021, are due on May 1, 2026 and bear interest at a rate of 3.50% per year. Interest on the 2026 Notes is paid semi-annually on May 1 and November 1 of each year.

Limitations under the indentures

The indentures governing the 2027 Notes and the 2026 Notes (the “Indentures”), among other things, limit the Company’s ability to incur indebtedness; to pay dividends or make other distributions; to make certain investments and other restricted payments; to create liens; to consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; to incur restrictions on the ability of a subsidiary to pay dividends or make other payments; and to enter into certain transactions with its affiliates. There are certain exceptions to the limitations on the Company’s ability to incur indebtedness under the Indentures, including IRU agreements incurred in the normal course of business and any additional indebtedness if the Company’s consolidated leverage ratio, as defined in the Indentures, is less than 6.0 to 1.0 or the Company’s fixed charge coverage ratio, as defined in the Indentures, is 2.0 to 1.0 or greater. The Company can also incur unlimited liens (which can be used, together with capacity under the debt covenant, to incur additional secured indebtedness) if the Company’s consolidated secured leverage ratio, as defined in the Indentures, is less than 4.0 to 1.0. Under the Indentures, the Company can pay dividends, make other distributions, make certain investments and make other restricted payments under certain circumstances, including if, after giving pro forma effect to such restricted payment, the Company could still incur $1 of indebtedness, as defined (i.e., either its consolidated leverage ratio is less than 6.0 to 1.0 or its fixed charge coverage ratio is 2.0 to 1.0 or greater). As of March 31, 2024, the Company’s consolidated leverage ratio was below 6.0, the Company’s consolidated secured leverage ratio was below 4.0 and the Company’s fixed charge coverage ratio was above 2.0. As of March 31, 2024, a total of $460.1 million (inclusive of a $250.0 million general basket) was unrestricted and permitted for restricted payments, including dividends and stock purchases.

Interest rate swap agreement

As of March 31, 2024, the Company was party to an interest rate swap agreement (the “Swap Agreement”) that has the economic effect of modifying the fixed interest rate obligation associated with its 2026 Notes to a variable interest rate obligation based on the Secured Overnight Financing Rate (“SOFR”) so that the interest payable on the 2026 Notes effectively became variable based on overnight SOFR. The critical terms of the Swap Agreement match the terms of the 2026 Notes, including the notional amount and the optional redemption date on February 1, 2026. The Company did not elect hedge accounting for the Swap Agreement. The Swap Agreement is recorded at its fair value at each reporting period, and the Company incurs gains and losses due to changes in market interest rates. By entering into the Swap Agreement, the Company has assumed the risk associated with variable interest rates. Changes in interest rates affect the valuation of the Swap Agreement that the Company recognizes in its consolidated statements of comprehensive (loss) income. The values that the Company reports for the Swap Agreement as of each reporting date are recognized as “change in valuation – interest rate swap” with the corresponding amounts included in assets or liabilities in the Company’s condensed consolidated balance sheets. As of March 31, 2024, the fair value of the Swap Agreement was a net liability of $44.8 million, of which $23.2 million is presented with accrued and other current liabilities and $21.6 million is presented with other long-term liabilities. As of December 31, 2023 the fair value of the Swap Agreement was a net liability of $38.7 million of which $21.6 million is presented with accrued and other current liabilities and $17.1 million is presented with other long-term liabilities. In the three months ended March 31, 2024 and three months ended March 31, 2023, the Company recorded an unrealized (loss) gain related

Page 18 of 45

to the Swap Agreement of ($6.2) million and $1.8 million, respectively. The Company has made a $45.8 million deposit with the counterparty to the Swap Agreement. If the fair value of the Swap Agreement exceeds a net liability of $45.8 million, the Company will be required to deposit additional funds with the counterparty equal to the net liability fair value. As of March 31, 2024, $44.8 million of the deposit was restricted and $1.0 million was unrestricted.

Under the Swap Agreement, the Company pays the counterparty a semi-annual payment based upon overnight SOFR plus a contractual interest rate spread, and the counterparty pays the Company a semi-annual fixed 3.50% interest payment. The settlement payment is made each November and May until the Swap Agreement expires in February 2026. Under the settlement payment made in May 2023, the Company made a payment of $9.5 million to the counterparty for a net cash interest cost of $9.5 million for the period from November 1, 2022 to April 30, 2023. Under the settlement payment made in November 2023, the Company made a payment of $12.0 million to the counterparty for a net cash interest cost of $12.0 million for the period from May 1, 2023 to October 31, 2023. Under the settlement payment made in May 2024, the Company made a payment of $12.1 million to the counterparty for a net cash interest cost of $12.1 million for the period from November 1, 2023 to April 30, 2024.

4.  Commitments and contingencies:

Current and potential litigation

In accordance with the accounting guidance for contingencies, the Company accrues its estimate of a contingent liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Where it is probable that a liability has been incurred and there is a range of expected loss for which no amount in the range is more likely than any other amount, the Company accrues at the low end of the range. The Company reviews its accruals at least quarterly and adjusts them to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter. The Company has taken certain positions related to its obligations for leased circuits for which it is reasonably possible to result in a loss of up to $4.1 million in excess of the amount accrued at March 31, 2024.

In the ordinary course of business, the Company is involved in other legal activities and claims. Because such matters are subject to many uncertainties and the outcomes are not predictable with assurance, the liability related to these legal actions and claims cannot be determined with certainty. Management does not believe that such claims and actions will have a material impact on the Company’s financial condition or results of operations. Judgment is required in estimating the ultimate outcome of any dispute resolution process, as well as any other amounts that may be incurred to conclude the negotiations or settle any litigation. Actual results may differ from these estimates under different assumptions or conditions and such differences could be material.

5.  Income taxes:

The components of income (loss) before income taxes consist of the following (in thousands):

Three Months Ended

    

Three Months Ended

    

March 31, 2024

March 31, 2023

Domestic

$

(79,003)

$

2,978

Foreign

(5,431)

7,674

Total

$

(84,434)

$

10,652

6.  Common stock buyback program and stock options and award plan:

The Company’s Board of Directors has approved purchases of shares of the Company’s common stock under a buyback program (the “Buyback Program”) through December 31, 2024. As of March 31, 2024, there was $30.4 million remaining for purchases under the Buyback Program. There were no purchases of common stock in the three months ended March 31, 2024 or 2023.

Page 19 of 45

7.  Dividends on common stock:

On February 28, 2024, our Board of Directors approved the payment of our first quarter 2024 dividend of $0.965 per share of common stock to holders of record as of March 15, 2024. This $45.8 million dividend payment was paid on April 9, 2024 and is accrued on our condensed consolidated balance sheet as of March 31, 2024. On May 8, 2024, the Company’s Board of Directors approved the payment of a quarterly dividend of $0.975 per share of common stock. This estimated $46.3 million dividend payment is expected to be paid on June 7, 2024.

The payment of any future dividends and any other returns of capital, including stock buybacks will be at the discretion of the Company’s Board of Directors and may be reduced, eliminated or increased and will be dependent upon the Company’s financial position, results of operations, available cash, cash flow, capital requirements, limitations under the Company’s debt indentures and other factors deemed relevant by the Company’s Board of Directors. The Company is a Delaware corporation and under the General Corporation Law of the State of Delaware, distributions may be restricted including a restriction that distributions, including stock purchases and dividends, do not result in an impairment of a corporation’s capital, as defined under Delaware law. The Indentures limit the Company’s ability to return cash to its stockholders.

8.  Related party transactions:

Office leases

The Audit Committee of the Company’s Board of Directors (the “Audit Committee”) reviews and approves all transactions with related parties.

The Company’s headquarters is located in an office building owned by Sodium LLC whose owner is the Company’s Chief Executive Officer, David Schaeffer. The fixed annual rent for the headquarters building is $1.0 million per year plus an allocation of taxes and utilities. The lease began in May 2015, and the lease term was for five years. In February 2020, the lease term was extended to May 2025.The lease is cancellable at no cost by the Company upon 60 days’ notice.

On January 6, 2023, the Company entered into two lease agreements (the “New Leases”), one with Thorium LLC (“Thorium”) and one with Germanium LLC (“Germanium”), entities owned by the Company’s Chief Executive Officer, David Schaeffer. The first of the New Leases is with Thorium for 54,803 square feet of office space, which serves as office space for the Company replacing a portion of its office space in the Northern Virginia area (“Office Lease”). The second of the New Leases is with Germanium LLC for 1,587 square feet of technical space which serves as network operations space for the Company (“Network Operations Lease”). The term for each of the New Leases is five years beginning on April 1, 2023. Both of the New Leases are cancellable by the Company without penalty upon 60 days written notice. The Company took occupancy of the office space and network operations space in April 2023. The amount of fixed annual rent during the term of the Office Lease is $1.2 million, and the Company is responsible for paying its proportionate share of the building’s operating expenses that exceed a 2023 base year. The amount of fixed annual rent for the Network Operations Lease is $