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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 Transition Period Ended September 30, 2023

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 48,623,846 Shares Outstanding as of October 31, 2023

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 September 30, 2023 (Unaudited) and December 31, 2022

3

Condensed Consolidated Statements of Comprehensive Loss of Cogent Communications Holdings, Inc. and Subsidiaries for the Three Months Ended September 30, 2023 and September 30, 2022(Unaudited)

4

Condensed Consolidated Statements of Comprehensive Income (Loss) of Cogent Communications Holdings, Inc. and Subsidiaries for the Nine Months Ended September 30, 2023 and September 30, 2022(Unaudited)

5

Condensed Consolidated Statements of Cash Flows of Cogent Communications Holdings, Inc. and Subsidiaries for the Nine Months Ended September 30, 2023 and September 30, 2022(Unaudited)

6

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

7

Item 2.

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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

Item 4.

Controls and Procedures

44

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

45

Item 1A.

Risk Factors

45

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 5.

Other Information

46

Item 6.

Exhibits

47

SIGNATURES

48

CERTIFICATIONS

Page 2 of 48

PART I FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2023 AND DECEMBER 31, 2022

(IN THOUSANDS, EXCEPT SHARE DATA)

    

September 30, 

    

December 31, 

2023

2022

(Unaudited)

Assets

Current assets:

Cash and cash equivalents

$

109,661

$

223,783

Restricted cash

56,411

52,129

Accounts receivable, net of allowance for credit losses of $4,158 and $2,303, respectively

 

87,170

44,123

Due from T-Mobile, IP Transit Services Agreement, current portion, net of discount of $29,029

237,637

Due from T-Mobile, Transition Services Agreement

16,831

Prepaid expenses and other current assets

 

73,541

45,878

Total current assets

 

581,251

365,913

Property and equipment:

Property and equipment

2,946,723

1,714,906

Accumulated depreciation and amortization

(1,329,114)

(1,170,476)

Total property and equipment, net

1,617,609

544,430

Right-of-use leased assets

 

364,397

81,601

Intangible assets, net

54,362

Deposits and other assets

 

22,143

18,238

Due from T-Mobile, IP Transit Services Agreement, net of discount of $32,613

284,054

Due from T-Mobile, Purchase Agreement, net of discount of $14,444

37,865

Total assets

$

2,961,681

$

1,010,182

Liabilities and stockholders’ (deficit) equity

Current liabilities:

Accounts payable

$

29,367

$

27,208

Accrued and other current liabilities

 

120,031

63,889

Due to T-Mobile – Transition Services Agreement

69,629

Due to T-Mobile – Purchase Agreement

4,981

Current maturities, operating lease liabilities

68,418

12,005

Finance lease obligations, current maturities

63,236

17,182

Total current liabilities

 

355,662

120,284

Senior secured 2026 notes, net of unamortized debt costs of $710 and $905, respectively, and discounts of $945 and $1,203, respectively

 

498,345

497,892

Senior unsecured 2027 notes, net of unamortized debt costs of $1,001 and $1,173, respectively, and discounts of $2,095 and $2,456, respectively

446,904

446,371

Operating lease liabilities, net of current maturities

330,993

94,587

Finance lease obligations, net of current maturities

 

419,941

287,044

Deferred income tax liabilities

388,273

47,646

Other long-term liabilities

 

79,435

34,990

Total liabilities

 

2,519,553

1,528,814

Commitments and contingencies:

Stockholders’ equity (deficit):

Common stock, $0.001 par value; 75,000,000 shares authorized; 48,612,382 and 48,013,330 shares issued and outstanding, respectively

 

49

48

Additional paid-in capital

 

598,494

575,064

Accumulated other comprehensive loss

 

(19,761)

(19,156)

Accumulated deficit

 

(136,654)

(1,074,588)

Total stockholders’ equity (deficit)

 

442,128

(518,632)

Total liabilities and stockholders’ equity (deficit)

$

2,961,681

$

1,010,182

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

Page 3 of 48

COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND SEPTEMBER 30, 2022

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

    

Three Months Ended

    

Three Months Ended

September 30, 2023

September 30, 2022

    

(Unaudited)

    

(Unaudited)

Service revenue

$

275,429

$

150,000

Operating expenses:

Network operations (including $370 and $176 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)

 

173,594

57,220

Selling, general, and administrative (including $7,041 and $6,035 of equity-based compensation expense, respectively)

 

65,308

39,114

Acquisition costs – Sprint Business

351

2,004

Depreciation and amortization

 

86,734

22,897

Total operating expenses

 

325,987

121,235

Loss on lease transactions

(670)

Operating (loss) income

(50,558)

28,095

Interest expense

 

(24,198)

(17,948)

Loss on bargain purchase – Sprint Business

(3,332)

Change in valuation – interest rate swap agreement

(4,825)

(16,923)

Interest income – IP Transit Services Agreement

10,299

Interest income – Purchase Agreement

664

Interest income and other, net

 

1,604

(262)

Income before income taxes

 

(70,346)

(7,038)

Income tax benefit (expense)

13,623

(969)

Net loss

$

(56,723)

$

(8,007)

Comprehensive loss:

Net loss

$

(56,723)

$

(8,007)

Foreign currency translation adjustment

 

(4,134)

(7,752)

Comprehensive loss

$

(60,857)

$

(15,759)

Net loss per common share:

Basic net loss per common share

$

(1.20)

$

(0.17)

Diluted net loss per common share

$

(1.20)

$

(0.17)

Dividends declared per common share

$

0.945

$

0.905

Weighted-average common shares - basic

47,227,338

46,736,742

Weighted-average common shares - diluted

 

47,227,338

46,736,742

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

Page 4 of 48

COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND SEPTEMBER 30, 2022

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Nine Months Ended

Nine Months Ended

    

September 30, 2023

    

September 30, 2022

(Unaudited)

(Unaudited)

Service revenue

$

668,822

$

447,625

Operating expenses:

 

 

Network operations (including $750 and $465 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)

 

369,734

 

171,183

Selling, general, and administrative (including $19,491 and $17,709 of equity-based compensation expense, respectively)

 

194,046

 

119,129

Acquisition costs – Sprint Business

1,490

2,004

Depreciation and amortization

 

164,403

 

68,659

Total operating expenses

 

729,673

 

360,975

Gains on lease terminations

(210)

Operating (loss) income

 

(60,851)

 

86,440

Interest expense

 

(71,855)

 

(45,594)

Gain on bargain purchase – Sprint Business

1,152,386

Change in valuation – interest rate swap agreement

(4,283)

(45,703)

Foreign exchange gain on 2024 Euro Notes

31,561

Loss on debt extinguishment and redemption- 2024 Euro Notes

 

 

(11,885)

Interest income – IP Transit Services Agreement

 

17,968

 

Interest income – Purchase Agreement

 

1,170

 

Interest income and other, net

 

5,154

 

(462)

Income before income taxes

1,039,689

14,357

Income tax benefit (expense)

33,599

(10,063)

Net income

$

1,073,288

$

4,294

 

 

  

Comprehensive income (loss):

Net income

$

1,073,288

$

4,294

Foreign currency translation adjustment

 

(605)

 

(17,410)

Comprehensive income (loss)

$

1,072,683

$

(13,116)

 

 

  

Net income per common share:

Basic net income per common share

$

22.72

$

0.09

Diluted net income per common share

$

22.54

$

0.09

Dividends declared per common share

$

2.805

$

2.640

 

 

Weighted-average common shares - basic

47,234,025

46,759,632

 

 

Weighted-average common shares - diluted

47,624,709

47,097,580

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

Page 5 of 48

COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND SEPTEMBER 30, 2022

(IN THOUSANDS)

    

Nine Months Ended

    

Nine Months Ended

    

September 30, 2023

    

September 30, 2022

(Unaudited)

(Unaudited)

Cash flows from operating activities:

Net income

$

1,073,288

$

4,294

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

 

164,403

68,659

Amortization of debt discount and premium

 

986

1,144

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

(19,138)

Equity-based compensation expense (net of amounts capitalized)

 

20,241

18,174

Gain on bargain purchase – Sprint Business

(1,152,386)

Gains - equipment transactions and other, net

(277)

3,531

Loss on debt extinguishment and redemption – 2024 Euro Notes

11,885

Foreign currency exchange gain on 2024 Euro Notes

(31,561)

Deferred income taxes

(63,509)

4,682

Changes in operating assets and liabilities:

Accounts receivable

(3,247)

(3,103)

Prepaid expenses and other current assets

(4,763)

(9,404)

Change in valuation – interest rate swap agreement

4,283

45,703

Due to T-Mobile – Transition Services Agreement

69,629

Due from T-Mobile – Transition Services Agreement

(16,831)

Unfavorable lease liabilities

(16,174)

Accounts payable, accrued liabilities and other long-term liabilities

9,715

23,144

Deposits and other assets

 

(177)

236

Net cash provided by operating activities

 

66,043

137,384

Cash flows from investing activities:

Cash receipts - IP Transit Agreement – T-Mobile

116,667

Acquisition of Sprint Business, net of $47.1 million of cash acquired

(14,037)

Purchases of property and equipment

 

(86,023)

(59,380)

Net cash provided by (used in) investing activities

 

16,607

(59,380)

Cash flows from financing activities:

Dividends paid

 

(135,354)

(125,882)

Redemption and extinguishment – 2024 Euro Notes

(375,354)

Net proceeds from issuance of senior unsecured 2027 Notes - net of debt costs of $1,290

446,010

Proceeds from exercises of stock options

787

426

Principal payments on installment payment agreement

(790)

Principal payments of finance lease obligations

(58,549)

(20,958)

Net cash used in financing activities

 

(193,116)

(76,548)

Effect of exchange rates changes on cash

 

626

(6,416)

Net decrease in cash, cash equivalents and restricted cash

 

(109,840)

 

(4,960)

Cash, cash equivalents and restricted cash, beginning of period

 

275,912

328,624

Cash, cash equivalents and restricted cash, end of period

$

166,072

$

323,664

Supplemental disclosure of non-cash financing activities:

Fair value of equipment acquired in leases

$

$

1,969

Finance lease obligations incurred

$

217,782

$

74,633

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

Page 6 of 48

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, 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, Inc. and its subsidiaries and on and after May 15, 2014 the “Company” refers to Cogent Communications Holdings, Inc. and its subsidiaries. Cogent Communications, Inc. is wholly owned by Group and the vast majority of the Company’s assets, contractual arrangements, and operations are executed by Sprint Communications Company LP and Cogent Communications, Inc.

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 switched data. The Company delivers its services primarily to small and medium-sized businesses, 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. Access 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.

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 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.

Page 7 of 48

Recently Adopted Accounting Standards

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"). ASU 2021-08 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities in accordance with Revenue from Contracts with Customers (Topic 606), as if the acquirer had originated the contracts at the date of the business combination. ASU 2021-08 is effective for annual reporting periods beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted.

The Company adopted ASU 2021-08 in connection with its acquisition of Sprint Communications (as discussed below), at which time it became applicable to the Company and was applied in the accounting for the acquisition. The adoption did not have a material impact on the provisional opening balance sheet recorded and there was no retrospective impact to our consolidated financial statements as a result of the adoption.

Acquisition of Sprint Communications

On September 6, 2022, 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 loss for the three-month period ended September 30, 2023 were $113.0 million and $82.1 million, respectively. Revenue and pre-tax loss for the Sprint Business included in the Company's condensed consolidated statements of comprehensive income for the nine-month period ended September 30, 2023 were $191.0 million and $141.6 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.

The Purchase Agreement also includes an estimated payment of $52.3 million 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 $15.6 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 $0.7 million and $1.2 million for the three and nine months ended September 30, 2023, respectively. The Seller is disputing approximately $24.2 million of the Short-term Lease

Page 8 of 48

Payment amount that was accounted for by the Seller as a service agreement and not as a finance lease. As of September 30, 2023, the Company reclassified $160.9 million of a lease liability at the Closing Date previously recorded as an operating lease to a finance lease. A final determination of the Working Capital Adjustment and the Short-term Lease Payment is expected by the end of 2023.

IP Transit Services Agreement

On the Closing Date, 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 and nine months ended TMUSA paid the Company $87.5 million and $116.7 million, respectively, under the IP Transit Agreement. On October 3, 2023 an additional $29.2 million payment was received. On November 2, 2023, an additional $29.2 million payment was received.

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 $10.3 million and $18.0 million for the three and nine months ended September 30, 2023, respectively.

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, 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 and at cost plus 20 percent, if the TSA is extended. 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 and nine months ended September 30, 2023 the Company was billed $101.2 million and $218.0 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 and nine months ended September 30, 2023 the Company paid $153.1 million to the Seller under the TSA. As of September 30, 2023, the Company owed $69.6 million to the Seller and the Seller owed $16.8 million to the Buyer under the TSA agreement. The amounts due to the Seller are primarily reimbursements for payments to Sprint Business vendors paid by the

Page 9 of 48

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.

Other Services Provided to Seller

In addition, on the Closing Date, the Buyer and TMUSA entered into a commercial agreement (“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 and nine months ended September 30, 2023 the Company recorded $8.0 million and $15.3 million, respectively from TMUSA as service revenue under the Commercial Agreement. As of September 30, 2023, TMUSA owed $3.2 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 $3.7 million in professional fees, including $0.4 million and $1.5 million incurred in the three and nine months ended September 30, 2023, respectively.

Consideration

During the three months ended September 30, 2023, the Company updated its Working Capital Adjustment resulting in an additional $1.5 million due to the Seller and updated its Short-term Lease Payment resulting in a decrease of $5.0 million due from the Seller. The revised acquisition-date fair value of consideration to be received from the Transaction totaled $591.0 million and comprised of the following:

(In thousands)

    

May 1, 2023

Estimated working capital payments made to the Seller (a)

$

66,093

Estimated Purchase Agreement payment to be received from the Seller, net of discount of $15,614 (b)

 

36,696

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

 

657,086

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

 

590,993

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 $1.2 billion.

During the third quarter, the Company recorded a measurement period adjustment to reclassify $24.9 million from right-of-use leased assets (net of related unfavorable lease liability amount) to finance lease assets (presented within property and equipment) and a measurement period adjustment to reclassify $160.9 million from operating lease liabilities to finance lease liability. The corresponding adjustment to the condensed consolidated statement of comprehensive loss for the three-month and nine-month periods ended September 30, 2023 was not material.

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.

Page 10 of 48

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.

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

 

1,055,101

Right-of-use leased assets

 

314,632

Intangible assets

 

57,000

Deposits and other assets

 

7,191

Total assets

$

1,543,723

Liabilities

 

Current liabilities:

 

Accounts payable

$

13,313

Accrued and other current liabilities

 

36,629

Current maturities, operating lease liabilities

 

74,562

Current maturities, finance lease liabilities

39,559

Total current liabilities

 

164,063

Operating lease liabilities, net of current maturities

 

251,573

Finance lease liabilities, net of current maturities

121,342

Deferred income tax liabilities

 

407,000

Other long-term liabilities

 

38,352

Total liabilities

 

982,330

Fair value of net assets acquired

$

561,393

Gain on bargain purchase

Fair value of net assets acquired

$

561,393

Total net consideration to be received from the Seller, net of discounts (b) (c) (d)

590,993

Gain on bargain purchase

$

1,152,386

(a) Includes $61.1 million paid to the Seller on the Closing Date and an accrual of $5.0 million due to the Seller. During the third quarter of 2023, the Working Capital Adjustment was increased by $1.5 million. A final determination of the Working Capital Adjustment is expected by the end of 2023.

IP Transit Services Agreement

(b) Under the Purchase Agreement, 50% of the assumed short-term operating lease liabilities totaling $52.3 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 $15.6 million. During the third quarter of 2023, the Short-term Lease Payment was reduced by $4.8 million. A final determination of the Short-term Lease Payment is expected by the end of 2023.

(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

Page 11 of 48

Intangible Assets

Intangible assets include $57.0 million of acquired customer relationships with an estimated useful life of nine years and were determined using the income approach. This fair value measurement is based on significant inputs not observable in the market and, therefore, represents a Level 3 measurement as defined in ASC 820: Fair Value Measurement. The key assumptions in applying the income approach include the discount rate, projected revenue from existing customers, customer attrition rate and projected capital and operating expenditures. Amortization expense for the three and nine months ended September 30, 2023 was $1.6 million and $2.6 million, respectively. Future amortization expense of the customer relationships is $6.3 million per year for nine years.

Asset Retirement Obligations

In connection with the Transaction, the Company assumed $35.0 million of asset retirement obligations related to restoration obligations for acquired leases. 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 September 30, 2023 were $0.7 million and $2.1 million, respectively. Accretion of the asset retirement obligations and amortization of the asset retirement assets for the nine months ended September 30, 2023 were $1.1 million and $3.5 million, respectively.

Pro Forma Information

The following unaudited pro forma financial information gives effect to the Transaction as if it had been completed on January 1, 2022. 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 nine months ended September 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 five months ended September 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 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, 2022, nor do they purport to project the future consolidated results of operations.

    

Nine Months

    

Nine Months

Ended

Ended

(In thousands)

September 30, 2023

September 30, 2022

Service revenue

$

849,580

$

881,546

Operating loss from continuing operations

 

(227,065)

 

(623,519)

Net income

 

915,730

 

452,150

The pro forma results for the nine months ended September 30, 2022 include estimates for the gain on bargain purchase related to the Transaction of $1.2 billion, interest income from the amortization of the discount recorded under the IP Transit Services Agreement of $29.4 million, a net increase to historical depreciation expense based on the fair value of property and equipment and the impact of the finance lease adjustment discussed above, of $35.4 million, amortization expense related to the customer relationship intangible assets of $4.8 million, the elimination of amounts charged from the parent company to the Sprint Business as autonomous entity expense adjustments of $24.9 million, amortization of unfavorable lease liabilities of $29.1 million, a reduction to network operations expense of $37.8 million and an increase to interest expense of $8.4 million from the impact of the finance lease adjustment discussed above, and the impact to income tax expense from the pro-forma and autonomous entity adjustments of $19.0 million. The historical results of the Sprint Business for the nine months ended September 30, 2022 include a loss on impairment of $477.3 million and a gain on the sale of IP addresses of $120.8 million.

The pro forma results for the nine months ended September 30, 2023 include the gain on bargain purchase related to the Transaction of $1.2 billion, interest income from the amortization of the discount recorded under the IP Transit Services Agreement of $14.7 million, a net increase to historical depreciation expense based on the fair value of property and equipment and the impact of the finance lease adjustment discussed above of $29.5 million, amortization expense related to the customer relationship intangible assets of $2.1 million, amortization of unfavorable lease liabilities of $12.9 million, a reduction to network operations expense of $16.8

Page 12 of 48

million and an increase to interest expense of $3.9 million from the impact of the finance lease adjustment discussed above, and the impact to income tax expense from the pro-forma adjustments of $2.3 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, 2022.

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 September 30, 2023 and December 31, 2022, 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 September 30, 2023, 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 $427.5 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 $460.0 million and the estimated liability fair value of the Company’s interest rate swap agreement was $56.4 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 $57.6 million as of September 30, 2023. 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 costs of network operations) were $14.6 million and $4.1 million for the three months ended September 30, 2023 and September 30, 2022, respectively, and $29.8 million and $11.3 million for the nine months ended September 30, 2023 and September 30, 2022, respectively.

Page 13 of 48

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

    

Nine Months

    

Nine Months

Ended

Ended

Ended

Ended

September 30, 2023

September 30, 2022

September 30, 2023

September 30, 2022

Weighted-average common shares - basic

47,227,338

46,736,742

47,234,025

46,759,632

Dilutive effect of stock options

15,713

17,668

Dilutive effect of restricted stock

374,971

320,280

Weighted-average common shares - diluted

47,227,338

46,736,742

47,624,709

47,097,580

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

Nine Months

Nine Months

Ended

Ended

Ended

Ended

    

September 30, 2023

    

September 30, 2022

    

September 30, 2023

    

September 30, 2022

Unvested shares of restricted common stock

1,395,258

1,271,441

1,395,258

1,271,441

Anti-dilutive options for common stock

125,643

113,376

112,048

43,648

Anti-dilutive shares of restricted common stock

106,125

637,028

90,768

827

Page 14 of 48

Stockholders’ (Deficit) Equity

The following details the changes in stockholders’ (deficit) equity for the three and nine months ended September 30, 2023 and September 30, 2022, respectively (in thousands except share data):

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity (Deficit)

Balance at June 30, 2022

48,003,724

$

48

$

561,161

$

(20,661)

$

(980,729)

$

(440,181)

Forfeitures of shares granted to employees

 

(14,492)

 

 

 

 

 

Equity-based compensation

 

 

 

6,812

 

 

 

6,812

Foreign currency translation

 

 

 

 

(7,752)

 

 

(7,752)

Issuances of common stock

 

10,748

 

 

 

 

 

Exercises of options

 

2,155

 

 

92

 

 

 

92

Dividends paid

 

 

 

 

 

(42,729)

 

(42,729)

Net (loss)

 

 

 

 

 

(8,007)

 

(8,007)

Balance at September 30, 2022

 

48,002,135

$

48

$

568,065

$

(28,413)

$

(1,031,465)

$

(491,765)

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity (Deficit)

Balance at June 30, 2023

48,617,162

$

49

$

589,573

$

(15,627)

$

(34,795)

$

539,200

Forfeitures of shares granted to employees

 

(27,061)

Equity-based compensation

 

8,519

8,519

Foreign currency translation

 

(4,134)

(4,134)

Issuances of common stock

 

14,400

Exercises of options

 

7,881

402

402

Dividends paid

 

(45,136)

(45,136)

Net (loss)

 

(56,723)

(56,723)

Balance at September 30, 2023

 

48,612,382

$

49

$

598,494

$

(19,761)

$

(136,654)

$

442,128

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity (Deficit)

Balance at December 31, 2021

 

47,674,189

$

48

$

547,734

$

(11,003)

$

(909,877)

$

(373,098)

Forfeitures of shares granted to employees

 

(66,857)

 

 

 

 

 

Equity-based compensation

 

 

 

19,905

 

 

 

19,905

Foreign currency translation

 

 

 

 

(17,410)

 

 

(17,410)

Issuances of common stock

 

384,028

 

 

 

 

 

Exercises of options

 

10,775

 

 

426

 

 

 

426

Dividends paid

 

 

 

 

 

(125,882)