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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 June 30, 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 49,004,160 shares outstanding as of July 31, 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 June 30, 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 June 30, 2024 and June 30, 2023 (Unaudited)

4

Condensed Consolidated Statements of Comprehensive (Loss) Income of Cogent Communications Holdings, Inc. and Subsidiaries for the Six Months Ended June 30, 2024 and June 30, 2023 (Unaudited)

5

Condensed Consolidated Statements of Cash Flows of Cogent Communications Holdings, Inc. and Subsidiaries for the Six Months Ended June 30, 2024 and June 30, 2023 (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

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

51

Item 4.

Controls and Procedures

52

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

53

Item 1A.

Risk Factors

53

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

54

Item 5.

Other Information

54

Item 6.

Exhibits

55

SIGNATURES

56

CERTIFICATIONS

Page 2 of 56

PART I FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2024 AND DECEMBER 31, 2023

(IN THOUSANDS, EXCEPT SHARE DATA)

    

June 30,

    

December 31, 

2024

2023

(Unaudited)

Assets

Current assets:

Cash and cash equivalents

$

384,419

$

75,092

Restricted cash

41,822

38,689

Accounts receivable, net of allowance for credit losses of $6,382 and $3,677, respectively

 

111,676

135,475

Due from T-Mobile, IP Transit Services Agreement, current portion, net of discount of $19,992 and $24,898, respectively

80,008

179,269

Due from T-Mobile, Transition Services Agreement

3,862

4,514

Prepaid expenses and other current assets

 

67,688

80,588

Total current assets

 

689,475

513,627

Property and equipment:

Property and equipment

3,103,518

2,947,376

Accumulated depreciation and amortization

(1,522,908)

(1,409,559)

Total property and equipment, net

1,580,610

1,537,817

Right-of-use leased assets

 

332,065

361,587

IPv4 intangible assets

458,000

458,000

Other intangible assets, net

13,926

14,815

Deposits and other assets

 

26,455

23,438

Due from T-Mobile, IP Transit Services Agreement, net of discount of $19,558 and $27,916, respectively

222,108

263,750

Due from T-Mobile, Purchase Agreement, net of discount of $6,581 and $13,725, respectively

21,534

38,585

Total assets

$

3,344,173

$

3,211,619

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$

38,510

$

48,356

Accrued and other current liabilities

189,131

120,523

Due to T-Mobile – Transition Services Agreement

2,286

66,908

Due to T-Mobile – Purchase Agreement

4,981

Current maturities, operating lease liabilities

61,780

67,962

Finance lease obligations, current maturities

21,253

64,594

Total current liabilities

 

312,960

373,324

Senior secured 2026 notes, net of unamortized debt costs of $511 and $645, respectively, and discounts of $680 and $857, respectively

 

498,809

498,498

Senior unsecured 2027 notes, net of unamortized debt costs of $2,163 and $941, respectively, and discounts of $8,332 and $1,970, respectively

739,505

447,088

Secured IPv4 notes, net of debt costs of $7,323

198,677

Operating lease liabilities, net of current maturities

309,055

330,095

Finance lease obligations, net of current maturities

 

405,176

419,921

Deferred income tax liabilities

406,335

471,498

Other long-term liabilities

 

58,133

61,639

Total liabilities

 

2,928,650

2,602,063

Commitments and contingencies:

Stockholders’ equity:

Common stock, $0.001 par value; 75,000,000 shares authorized; 48,990,760 and 48,608,569 shares issued and outstanding, respectively

 

49

49

Additional paid-in capital

 

610,905

606,755

Accumulated other comprehensive loss

 

(21,141)

(14,385)

Accumulated (deficit) earnings

 

(174,290)

17,137

Total stockholders’ equity

 

415,523

609,556

Total liabilities and stockholders’ equity

$

3,344,173

$

3,211,619

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

Page 3 of 56

COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2024 AND JUNE 30, 2023

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Three Months Ended

    

Three Months Ended

    

June 30, 2024

June 30, 2023

(Unaudited)

 

(Unaudited)

Service revenue

$

260,443

$

239,806

Operating expenses:

 

 

Network operations (including $350 and $231 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)

 

156,167

 

137,502

Selling, general, and administrative (including $3,215 and $6,018 of equity-based compensation expense, respectively)

 

68,345

 

83,658

Acquisition costs – Sprint Business

 

12,370

 

739

Depreciation and amortization

 

74,036

 

52,511

Total operating expenses

 

310,918

 

274,410

Gain on lease termination

 

3,332

 

Operating loss

 

(47,143)

 

(34,604)

Interest expense, including change in valuation interest rate swap agreement

 

(29,541)

 

(29,958)

Gain on bargain purchase – Sprint Business

 

27,673

 

1,155,719

Interest income – IP Transit Services Agreement

 

5,934

 

7,669

Interest income – Purchase Agreement

 

402

 

506

Interest income and other, net

 

2,484

 

200

(Loss) income before income taxes

 

(40,191)

 

1,099,532

Income tax benefit

 

7,853

 

24,331

Net (loss) income

$

(32,338)

$

1,123,863

 

 

  

Comprehensive (loss) income:

 

  

 

  

Net (loss) income

$

(32,338)

$

1,123,863

Foreign currency translation adjustment

 

(1,722)

 

1,741

Comprehensive (loss) income

$

(34,060)

$

1,125,604

Net (loss) income per common share:

 

  

 

  

Basic net (loss) income per common share

$

(0.68)

$

23.84

Diluted net (loss) income per common share

$

(0.68)

$

23.65

Dividends declared per common share

$

0.975

$

0.935

Weighted-average common shares - basic

 

47,511,613

 

47,137,822

Weighted-average common shares - diluted

 

47,511,613

 

47,526,207

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

Page 4 of 56

COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2024 AND JUNE 30, 2023

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

    

Six Months Ended

    

Six Months Ended

June 30, 2024

June 30, 2023

    

(Unaudited)

    

(Unaudited)

Service revenue

$

526,613

$

393,395

Operating expenses:

Network operations (including $385 and $380 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)

 

324,752

196,140

Selling, general, and administrative (including $10,131 and $12,450 of equity-based compensation expense, respectively)

 

145,392

128,736

Acquisition costs – Sprint Business

21,407

1,139

Depreciation and amortization

 

144,930

77,669

Total operating expenses

 

636,481

403,684

Gain on lease termination

3,332

Operating loss

(106,536)

(10,289)

Interest expense, including change in valuation interest rate swap agreement

(58,703)

(47,116)

Gain on bargain purchase – Sprint Business

22,202

1,155,719

Interest income – IP Transit Services Agreement

13,264

7,669

Interest income – Purchase Agreement

(78)

506

Interest income and other, net

5,226

3,695

(Loss) income before income taxes

(124,625)

1,110,184

Income tax benefit

 

26,980

19,827

Net (loss) income

$

(97,645)

$

1,130,011

  

Comprehensive (loss) income:

Net (loss) income

$

(97,645)

$

1,130,011

Foreign currency translation adjustment

 

(6,756)

3,529

Comprehensive (loss) income

$

(104,401)

$

1,133,540

  

Net (loss) income per common share:

Basic net (loss) income per common share

$

(2.06)

$

23.97

Diluted net (loss) income per common share

$

(2.06)

$

23.79

Dividends declared per common share

$

1.940

$

1.860

 

Weighted-average common shares - basic

47,408,786

47,142,074

Weighted-average common shares - diluted

47,408,786

47,508,334

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

Page 5 of 56

COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2024 AND JUNE 30, 2023

(IN THOUSANDS)

    

Six Months Ended

    

Six Months Ended

    

June 30, 2024

    

June 30, 2023

(Unaudited)

(Unaudited)

Cash flows from operating activities:

Net (loss) income

$

(97,645)

$

1,130,011

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

Depreciation and amortization

 

144,930

77,669

Amortization of debt costs and discounts

 

1,106

652

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

(13,186)

(8,175)

Equity-based compensation expense (net of amounts capitalized)

 

10,516

12,830

Gain on bargain purchase – Sprint Business

(22,202)

(1,155,719)

Gains – lease terminations and other, net

(3,332)

(608)

Deferred income taxes

(43,554)

(27,190)

Changes in operating assets and liabilities:

Accounts receivable

23,799

(4,918)

Prepaid expenses and other current assets

12,900

(14,140)

Due to T-Mobile – Transition Services Agreement

(64,622)

118,777

Due from T-Mobile – Transition Services Agreement

(11,671)

(7,015)

Unfavorable lease liabilities

(3,843)

(6,469)

Accounts payable, accrued liabilities and other long-term liabilities

66,541

2,637

Deposits and other assets

 

(2,688)

133

Net cash (used in) provided by operating activities

 

(2,951)

118,475

Cash flows from investing activities:

Cash payments - IP Transit Services Agreement – T-Mobile

154,167

29,167

Acquisition of Sprint Business, net of $47.1 million of cash acquired in 2023

12,323

(14,034)

Purchases of property and equipment

(89,650)

(60,653)

Net cash provided by (used in) investing activities

 

76,840

(45,520)

Cash flows from financing activities:

Dividends paid

 

(93,782)

(90,218)

Purchases of common stock

(7,968)

Net proceeds from issuance of senior unsecured 2027 Notes - net of discount of $6.8 million and debt costs of $1.4 million

291,879

Net proceeds from issuance of secured IPv4 notes – net of debt costs of $7.6 million

 

198,420

Proceeds from exercises of stock options

204

385

Principal payments of finance lease obligations

(42,131)

(17,247)

Settlement of finance lease – at a discount

 

(114,576)

Net cash provided by (used in) financing activities

 

232,046

(107,080)

Effect of exchange rates changes on cash

 

6,525

2,166

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

312,460

(31,959)

Cash, cash equivalents and restricted cash, beginning of period

113,781

275,912

Cash, cash equivalents and restricted cash, end of period

$

426,241

$

243,953

Supplemental disclosure of non-cash financing activities:

Fair value of equipment acquired in leases

$

$

171

Finance lease obligations incurred

$

96,606

$

42,639

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

Page 6 of 56

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  Description of the business:

Reorganization and merger

On May 15, 2014, pursuant to the Agreement and Plan of Reorganization (the “Merger Agreement”) by and among Cogent Communications Group, LLC (formerly Cogent Communications Group, Inc.) (“Group”), a Delaware corporation, Cogent Communications Holdings, Inc., a Delaware corporation (“Holdings”) and Cogent Communications Merger Sub, Inc., a Delaware corporation, Group adopted a new holding company organizational structure whereby Group is now a wholly owned subsidiary of Holdings. Holdings is a “successor issuer” to Group pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). References to the “Company” for events that occurred prior to May 15, 2014 refer to Cogent Communications Group, LLC (formerly Cogent Communications Group, Inc.) and its subsidiaries and on and after May 15, 2014 the “Company” refers to Cogent Communications Holdings, Inc. and its subsidiaries. Cogent Communications, LLC (formerly Cogent Communications, Inc.) is wholly owned by Group, Sprint Communications Company LP is indirectly wholly owned by Holdings, and the vast majority of the Company’s assets, contractual arrangements, and operations are executed by Sprint Communications Company LP and Cogent Communications, LLC.

Description of business

The Company is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation space and power. The Company’s network is specifically designed and optimized to transmit packet routed data. The Company delivers its services primarily to businesses, large and small, communications service providers and other bandwidth-intensive organizations in 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 7 of 56

In connection with the Company’s acquisition of Sprint Communications (as discussed below), the Company began to provide optical wavelength services and optical transport services over its fiber network. The Company is selling these wavelength services to its existing customers, customers of Sprint Communications and to new customers who require dedicated optical transport connectivity without the capital and ongoing expenses associated with owning and operating network infrastructure. Additionally, the Sprint Business (as defined below) customers include a number of companies larger than the Company’s historical customer base. In connection with the acquisition of Sprint Communications, the Company expanded selling services to these larger “Enterprise” customers.

Acquisition of Sprint Communications

On September 6, 2022, Cogent Infrastructure, LLC (formerly Cogent Infrastructure, Inc.), a Delaware corporation (the “Buyer” and “Cogent Infrastructure”) and a direct wholly owned subsidiary of the Company, entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Sprint Communications LLC, a Kansas limited liability company (“Sprint Communications”) and an indirect wholly owned subsidiary of T-Mobile US, Inc., a Delaware corporation (“T-Mobile”), and Sprint LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of T-Mobile (the “Seller”), pursuant to which the Company acquired the U.S. long-haul fiber network (including the non-U.S. extensions thereof) of Sprint Communications and its subsidiaries (the “Sprint Business”). Pursuant to the Purchase Agreement, the Company purchased from the Seller all of the issued and outstanding membership interests (the “Purchased Interests”) of Wireline Network Holdings LLC, a Delaware limited liability company that, following an internal restructuring and divisive merger, holds Sprint Communications’ assets and liabilities relating to the Sprint Business (such transactions contemplated by the Purchase Agreement, collectively, the “Transaction”). The Purchase Agreement includes customary representations, warranties, indemnities and covenants, including regarding the conduct of the Sprint Business prior to the closing of the Transaction (the “Closing”). In addition, the Closing was subject to customary closing conditions, including the receipt of certain required regulatory approvals and consents.

The Company believes it is in a unique position to monetize the Sprint Business and its network and management expects to achieve significant cost reduction synergies and revenue synergies from the Transaction. Revenue and pre-tax loss for the Sprint Business included in the Company’s condensed consolidated statements of comprehensive income for both the three- and six-month periods ended June 30, 2023 were $78.0 million and $65.6 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. During the third quarter of 2023, an additional Working Capital Adjustment of $5.0 million was accrued due to the Seller.

Short-term leases

The Purchase Agreement also provides for an estimated payment of $28.1 million ($19.8 million net of discount) from Seller to the 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 income (expense) of $0.4 and $0.5 million for the three months ended June 30, 2024 and 2023, respectively and ($0.1) and $0.5 million for the six months ended June 30, 2024 and 2023, respectively.

Page 8 of 56

Severance reimbursement

The Purchase Agreement also provides for reimbursement from the Seller to the Buyer for qualifying severance expenses incurred. Total qualifying severance expenses were $28.6 million of which $8.0 million and $12.3 million were recorded in the three and six months ended June 30, 2024, respectively. No reimbursement amounts were recorded in the three and six months ended June 30, 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. Under the IP Transit Services Agreement., TMUSA paid the Company $66.7 million and $29.2 million, during the three months ended June 30, 2024 and 2023, respectively, and $154.2 million and $29.2 million during six months ended June 30, 2024 and 2023, respectively.

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 $5.9 million and $7.7 million for the three months ended June 30, 2024 and 2023, respectively, and $13.3 million and $7.7 million for the six months ended June 30, 2024 and 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, including the payment and processing of vendor invoices for the Company and human resources services. The services to be provided by the Buyer to the Seller include, among others, information technology and network support, finance and back office and other wireless business support.

The Transition Services are generally intended to be provided for a period of up to 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. Amounts billed to the Company under the TSA are primarily for reimbursement at cost of payments to vendors of the Sprint Business 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. During the three and six months ended June 30, 2024, the Company was billed $6.7 million and $23.3 million as due to the Seller under the TSA, respectively. During the three and six months ended June 30, 2023, the Company was billed $116.8 million and $116.8 million as due to the Seller under the TSA, respectively. During the three and six months ended June 30, 2024, the Company paid the Seller $9.8 million and $88.2 million, respectively, under the TSA. There were no amounts paid under the TSA for the three and six months ended June 30, 2023 since no payments were due until July 2023. As of June 30, 2024, the Company owed $2.3 million to the Seller and the Seller owed $3.9 million to the Company under the TSA. As of December 31, 2023, the Company owed $66.9 million to the Seller and the Seller owed $4.5 million to the Company under the TSA.

Page 9 of 56

Other Services Provided to Seller

In addition, on the Closing Date, the Buyer and TMUSA entered into a commercial agreement (the “Commercial Agreement”) for colocation and connectivity services, pursuant to which the Company will provide such services to TMUSA for a per service monthly fee plus certain third-party costs incurred in providing the services. Under the Commercial Agreement, the Company recorded revenue of $5.9 million and $7.3 million during the three months ended June 30, 2024 and 2023, respectively, and $9.1 million and $7.3 million during the six months ended June 30, 2024 and 2023, respectively. As of June 30, 2024, and December 31, 2023, TMUSA owed $7.3 million and $1.6 million, respectively, 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 incurred professional fees and other acquisition related costs, including $12.4 million and $0.7 million incurred in the three months ended June 30, 2024 and 2023, respectively, and $21.4 million and $1.1 million incurred in the six months ended June 30, 2024 and 2023, respectively.

Consideration

The acquisition-date fair value of consideration to be received from the Transaction comprised of the following:

(In thousands)

    

May 1, 2023

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

$

37,532

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)

 

602,581

(a)Includes $61.1 million paid to the Seller on the Closing Date and $5.0 million that was paid in April 2024. Additionally, includes an offsetting $28.6 million in total severance reimbursement payments received from the Seller recorded as measurement period adjustments of
a.$16.2 million during the fourth quarter of 2023,
b.$4.3 million during the three months ended March 31, 2024, and
c.$8.0 million during the three months ended June 30, 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 net of discount, was adjusted by $17.0 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

Page 10 of 56

Fair Value of Assets Acquired and Liabilities Assumed and Gain on Bargain Purchase

The Company accounted for the Transaction as a business combination under ASC Topic 805 Business Combination (“ASC 805”). Under ASC 805, the identifiable assets acquired and liabilities assumed were recorded at their fair values as of the Closing Date. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires the use of significant judgment regarding estimates and assumptions. For the fair values of the assets acquired and liabilities assumed, the Company used the cost, income and market approaches, including market participant assumptions. The fair value of the identifiable assets acquired (including amounts due under the IP Transit Services Agreement) were in excess of the liabilities assumed and the net consideration to be paid resulting in a gain on bargain purchase of $1.4 billion.

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.

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 included;

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

During the second quarter of 2024, the Company recorded measurement period adjustments resulting in an increase to the gain on bargain purchase of $27.7 million including

Additional reimbursed severance costs of $8.0 million, and
An adjustment to net deferred income tax liabilities of $19.7 million

Page 11 of 56

The following table summarizes the fair values for each major class of assets acquired and liabilities assumed at the Closing Date. The Company retained the services of certified valuation specialists to assist with assigning values to certain acquired assets and assumed liabilities.

May 1, 2023

Assets

    

  

Current assets:

 

  

Cash and cash equivalents

$

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

 

474,891

Other long-term liabilities

 

35,366

Total liabilities

 

1,035,950

Fair value of net assets acquired

$

826,067

Gain on bargain purchase

Fair value of net assets acquired

$

826,067

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

602,581

Gain on bargain purchase

$

1,428,648

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 that 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 Closing 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.

Page 12 of 56

Acquired Intangible Assets

Intangible assets acquired include $458.0 million of IPv4 addresses 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 June 30, 2024. During the fourth quarter of 2023, the Company recorded a reduction to acquired customer relationships, totaling $41.0 million from revisions to certain assumptions.

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 was $0.4 and $1.1 million for the three months ended June 30, 2024 and 2023, respectively, and $0.9 million and $1.1 million for the six months ended June 30, 2024 and 2023, respectively. 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 is recorded as an increase to network operations expenses and amortization of the asset retirement assets is recorded as depreciation and amortization expenses, as shown in the table below. 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.

Three Months

Three Months

Six Months

Six Months

Ended

Ended

Ended

Ended

(in thousands)

    

June 30, 2024

    

June 30, 2023

    

June 30, 2024

    

June 30, 2023

Depreciation and amortization expense

$

1,908

$

1,272

$

3,817

$

1,272

Network operations expense

 

654

 

405

 

1,296

 

405

Reassessment of Bargain Purchase Gain

Because the fair value of the identifiable assets acquired and liabilities assumed exceeded the fair value of the consideration transferred, the Company recorded a material bargain purchase gain. Consequently, the Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed in accordance with ASC 805-30-25-4 and concluded that all acquired assets and assumed liabilities were recognized and that the valuation procedures and resulting measures were appropriate.

Pro Forma Information

The following unaudited pro forma financial information gives effect to the Transaction as if it had been completed on January 1, 2023. The pro forma adjustments are based on historically reported transactions by the respective companies. The pro forma results do not include anticipated synergies or other expected benefits of the acquisition. The pro forma results for the six months ended June 30, 2023 include the historical results of the Sprint Business through April 30, 2023 and the combined results of the Company and the Sprint Business for the two months ended June 30, 2023. The unaudited pro forma information is based upon available information and certain assumptions that the Company believes are reasonable under the circumstances. Actual results may differ materially from the assumptions within the accompanying unaudited pro forma financial information. The selected unaudited pro forma condensed combined financial information is provided for illustrative purposes only and does not purport to represent what

Page 13 of 56

the actual consolidated results of operations would have been had the Transaction actually occurred on January 1, 2023, nor do they purport to project the future consolidated results of operations.

    

Six Months

Ended

(In thousands)

June 30, 2023

Service revenue

$

574,153

Operating loss from continuing operations

 

(196,525)

Net income

 

1,229,943

The pro forma results for the six months ended June 30, 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 $14.7 million, a net increase to historical depreciation expense based on the fair value of property and equipment and the impact of a finance lease adjustment of $28.3 million, amortization expense related to the customer relationship intangible assets of $0.6 million, amortization of unfavorable lease liabilities of $1.0 million, a reduction to network operations expense of $16.8 million and an increase to interest expense of $3.9 million from the impact of a finance lease adjustment 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, 2023. Certain prior year amounts have been reclassified to conform to current year presentation.

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

Use of estimates

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

Financial instruments

At June 30, 2024 and December 31, 2023, the carrying amount of cash and cash equivalents, restricted cash, accounts receivable, prepaid and other current assets, accounts payable, and accrued expenses approximated fair value because of the short-term nature of these instruments. The Company measures its cash equivalents and restricted cash at amortized cost, which approximates fair value based upon quoted market prices (Level 1).

Based upon recent trading prices (Level 2—market approach) at June 30, 2024,

the fair value of the Company’s $450.0 million aggregate principal amount of 7.00% Senior Unsecured Notes due 2027 (the “2027 Notes”) was $443.3 million,
the fair value of the Company’s $300.0 million aggregate principal amount of 7.00% Senior Unsecured Mirror Notes due 2027 (the “2027 Mirror Notes”) was $295.5 million,

Page 14 of 56

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,
the fair value of the Company’s $206.0 million aggregate principal amount of secured IPv4 notes (the “IPv4 Notes”) was $210.1 million and
the fair value of the Company’s interest rate swap agreement was $35.5 million.

Restricted cash and interest rate swap agreement

Restricted cash includes amounts held in segregated bank accounts by our clearing broker as margin in support of our Swap Agreement as discussed in Note 3 and was $35.5 million as of June 30, 2024. Additional restricted cash related to the IPv4 Notes, as discussed in Note 3, was $6.3 million as of June 30, 2024. Additional cash may be further restricted to maintain our Swap Agreement as interest rates fluctuate and margin requirements change and under the provisions of our IPv4 Note indenture. 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 $19.2 million and $11.0 million for the three months ended June 30, 2024 and 2023, respectively, and $39.7 million and $15.2 million for the six months ended June 30, 2024 and 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

    

Six Months

    

Six Months

Ended

Ended

Ended

Ended

    

June 30, 2024

    

June 30, 2023

June 30, 2024

June 30, 2023

Weighted average common shares - basic

47,511,613

47,137,822

47,408,786

47,142,074

Dilutive effect of stock options

16,147

16,223

Dilutive effect of restricted stock

372,238

350,037

Weighted average common shares - diluted

47,511,613

47,526,207

47,408,786

47,508,334

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

Three Months

Three Months

Six Months

Six Months

Ended

Ended

Ended

Ended

    

June 30, 2024

    

June 30, 2023

    

June 30, 2024

    

June 30, 2023

Unvested shares of restricted common stock

1,624,434

1,476,049

1,624,434

1,476,049

Anti-dilutive options for common stock

185,211

107,898

152,867

104,468

Anti-dilutive shares of restricted common stock

384,098

104,086

373,452

153,978

Page 15 of 56

Stockholders’ (Deficit) Equity

The following details the changes in stockholders’ (deficit) equity for the three and six months ended June 30, 2023 and June 30, 2024, respectively (in thousands except share data):

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Loss

    

Deficit

    

(Deficit) Equity

Balance at March 31, 2023

48,296,882

$

48

$

582,524

$

(17,368)

$

(1,113,751)

$

(548,547)

Forfeitures of shares granted to employees

(5,321)

Equity-based compensation

6,809

6,809

Foreign currency translation

1,741

1,741

Issuances of common stock

320,430

1

1

Exercises of options

5,171

240

240

Dividends paid

(44,907)

(44,907)

Net income

1,123,863

1,123,863

Balance at June 30, 2023

48,617,162

$

49

$

589,573

$

(15,627)

$

(34,795)

$

539,200

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Loss

    

Deficit

    

Equity

Balance at March 31, 2024

49,013,487

$

49

$

614,535

$

(19,419)

$

(94,521)

$

500,644

Forfeitures of shares granted to employees

 

(73,166)

Equity-based compensation

 

4,298

4,298

Foreign currency translation

 

(1,722)

(1,722)

Issuances of common stock

 

202,692

Exercises of options

 

1,069

40

40

Common stock purchases & retirement

(153,322)

(7,968)

(7,968)

Dividends paid

 

(47,431)

(47,431)

Net loss

 

(32,338)

(32,338)

Balance at June 30, 2024

 

48,990,760