What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-05-09 · 426 added, 223 removed, 391 unchanged (62% of the section changed)

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reduction of the attractiveness of our business due to certain employees desiring to work remotely;

our to successfully make or integrate acquisitions or enter into strategic alliances;

our ability to successfully make or integrate acquisitions or enter into strategic alliances;

risks related to data center expansions;

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the lack of a Legacy Registration Services Agreement with the American Registry for Internet Numbers or any other regional Internet registry with respect to a substantial portion of our IPv4 addresses;

our ability to obtain or maintain the agreements necessary to augment or maintain the Company’s network;

our ability to obtain or maintain the agreements necessary to augment or maintain our network;

delays and problems of our off-net business;

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risks related to maintaining and repairing our owned fiber network;

risks related to the our network infrastructure equipment being manufactured or provided by a limited number of network infrastructure vendors;

risks related to our network infrastructure equipment being manufactured or provided by a limited number of network infrastructure vendors;

risks related to international operations;

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difficulties in censoring content on the Internet;

our ability to make payments on our indebtedness as they become due, our ability to incur more debt, restrictions on our business contained in the agreements governing our debt obligations, our ability to service our indebtedness, and risks related to our cash and cash equivalents held at financial institutions in amounts in excess of insured limits, as well as other risks discussed from time to time in our filings with the Securities and Exchange Commission, including, without limitation, our Annual Report on Form 10-K for the year ended December 31, 2023, and our Quarterly Reports on Form 10-Q.

our ability to make payments on our indebtedness as they become due;

our ability to incur more debt, restrictions on our business contained in the agreements governing our debt obligations;

our ability to service our indebtedness;

and risks related to our cash and cash equivalents held at financial institutions in amounts in excess of insured limits, as well as other risks discussed from time to time in our filings with the Securities and Exchange Commission, including, without limitation, this report and our quarterly report on Form 10-Q for the quarterly period ended March 31, 2024 and our annual report on Form 10-K for the year ended December 31, 2023.

Acquisition of Sprint Communications

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extensions thereof) of Sprint Communications and its subsidiaries (the “Sprint Business”) in accordance with the terms and conditions of the Membership Interest Purchase Agreement (the “Purchase Agreement”), dated September 6, 2022, by and among us, 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”).

On the Closing Date, we 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”).

On the Closing Date, we 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, held Sprint Communications’ assets and liabilities relating to the Sprint Business (such transactions contemplated by the Purchase Agreement, collectively, the “Transaction”).

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On the Closing Date, we 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) was $66.1 million, of which $61.1 million was paid to the Seller 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.

In April 2024, the additional $5.0 million Working Capital Adjustment was paid to the Seller.

The Purchase Agreement also includes an estimated payment of $28.1 million ($19.8 million net of discount) from Seller to Buyer related to acquired short-term lease obligations (the “Short-term Lease Payment”).

The Short-term Lease Payment will be paid from the Seller to the Company in four equal payments in months 55 to 58 after the Closing Date.

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 us making a payment to the Seller of $61.1 million on the Closing Date.

In April 2024, an additional Working Capital Adjustment of $5.0 million was paid 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 the Seller to us related to acquired short-term lease obligations (the “Short-term Lease Payment”).

The Short-term Lease Payment will be paid from the Seller to us 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.

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The determination of the discount rate requires some judgment.

During the third quarter of 2023, the Short-term Lease Payment was reduced by $4.8 million and in the first quarter of 2024 the Short-term Lease Payment was reduced by an additional $17.0 million, net of discount of $7.2 million.

Including the cumulative impact of the first quarter 2024 adjustment, the amortization of the discount resulted in interest expense of $0.5 million for the three months ended March 31, 2024.

The Purchase Agreement also includes reimbursement from Seller to Buyer for qualifying severance expenses incurred, which were $4.3 million in the three months ended March 31, 2024 and $16.2 million in the year ended December 31, 2023.

The final determination of the Working Capital Adjustment and the Short-term Lease Payment was completed in April 2024 and the Company paid the Seller $5.0 million for the remaining Working Capital Adjustment.

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, net of discount, was reduced by an additional $17.0 million.

Severance reimbursements

The Purchase Agreement also includes reimbursement from Seller to us 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.

IP Transit Services Agreement

On the Closing Date, Cogent Communications, LLC (formerly Cogent Communications, Inc.) 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 us 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.

We concluded that the $700.0 million cash consideration was not separately identifiable from the business combination.

As a result, the IP Transit Services Agreement was recorded in connection with the Transaction.

During the three months ended March 31, 2024, TMUSA paid us $87.5 million under the IP Transit Agreement.

On the Closing Date, we entered into an agreement for IP transit services (“IP Transit Services Agreement”), pursuant to which TMUSA will pay us 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 us $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.

Transition Services Agreement

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Amounts billed under the TSA are due 30 days from receipt of the related invoice.

During the three months ended March 31, 2024, the Company was billed $16.7 million as due to the Seller under the TSA, respectively, primarily for reimbursement at cost of payments to vendors of the Sprint Business.

During the three months ended March 31, 2024, the Company paid $78.5 million to the Seller under the TSA that included payments for amounts billed in 2023.

As of March 31, 2024, the Company owed $5.8 million to the Seller and the Seller owed $3.2 million to the Company under the TSA agreement.

The amounts due to the Seller are primarily reimbursements for payments to Sprint Business vendors paid by the Seller for the Company until these vendors are fully transitioned to the Company.

The amounts due from the Seller are primarily reimbursements for severance costs related to Sprint Business employees and services provided by the Company for the Seller.

Amounts billed to us under the TSA are primarily for reimbursement at cost of payments to vendors of the Sprint Business until these vendors are fully transitioned to us.

During the three and six months ended June 30, 2024, we were billed $6.6 million and $23.3 million as due to the Seller under the TSA, respectively.

During the three and six months ended June 30, 2023, we were 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, we paid to the Seller $9.7 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, we owed $2.3 million to the Seller and the Seller owed $3.9 million to us under the TSA.

The amounts due to us from the Seller are reimbursements for severance costs related to Sprint Business employees and services provided by us for the Seller.

Other Services Provided to Seller

In addition, on the Closing Date, the Buyer and TMUSA entered into a commercial agreement (the “Commercial Agreement”) for colocation and connectivity services, pursuant to which the Company will provide such services to TMUSA for a per service monthly fee plus certain third-party costs incurred in providing the services.

During the three months ended March 31, 2024, the Company recorded $3.2 million from TMUSA as service revenue under the Commercial Agreement.

As of March 31, 2024, TMUSA owed $20.0 million to the Company under the Commercial Agreement.

These amounts are included in accounts receivable.

In addition, on the Closing Date, we entered into a commercial agreement (the “Commercial Agreement”) with TMUSA for colocation and connectivity services, pursuant to which we 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, we recorded as service 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, 2023, respectively.

Acquisition-Related Costs

In connection with the Transaction and negotiation of the Purchase Agreement, the Company has incurred a total of $9.2 million of professional fees and other acquisition related costs and $20.6 million of reimbursed severance costs.

For the three months ended March 31, 2024 such professional fees and other acquisition related costs and reimbursed severance costs were $4.7 million and $4.3 million, respectively.

In connection with the Transaction and negotiation of the Purchase Agreement, we incurred professional and other acquisition related costs of $4.4 million and $8.0 million of reimbursed severance in the three months ended June 30, 2024, respectively, and a total of $9.0 million of professional and other acquisition costs and $12.3 million of reimbursed severance costs.

We incurred professional and other acquisition costs of $0.7 million and $1.1 million in the three and six months ended June 30, 2023, respectively.

Competitive Advantages

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Selecting one operating protocol has also had positive effects in terms of our operating overhead and the simplicity of our organization.

We believe the vast majority of our competition currently operates their networks with multiple protocols and we believe that attempts to upgrade their networks to one protocol would be operationally challenging and costly.

We believe the vast majority of our competitors currently operate their networks with multiple protocols and we believe that attempts to upgrade their networks to one protocol would be operationally challenging and costly.

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● Our Network .

We have acquired a large portfolio of dark fiber leases from over 325 dark fiber vendors from around the world sourced from the excess inventory of existing networks.

We have acquired a large portfolio of dark fiber leases from 328 dark fiber vendors from around the world sourced from the excess inventory of existing networks.

The nature of this portfolio and the individual leases provide us long-term access to dark fiber at attractive rates and, in many cases, the opportunity to extend these leases for multiple terms.

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interconnect with our network.

We also operate 78 of our own data centers 24 of which converted from facilities acquired with the Sprint Business) across the United States and in Europe, which comprise over 1.7 million square feet of floor space, offer 159 MW of power and are directly connected to our network.

We also operate 86 of our own data centers 34 of which were converted from facilities acquired with the Sprint Business) across the United States and in Europe, which comprise over 1.8 million square feet of floor space, offer 164 MW of power and are directly connected to our network.

We believe that these network points of presence strategically position our network to attract high levels of Internet traffic and maximize our revenue opportunities and profitability.

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This control of traffic is an important differentiator as it increases our service reliability and speed of traffic delivery.

The increasing share of traffic delivered from content providers to access networks also enhances our margins as we are compensated by both the originating customer and terminating customer.

The increasing share of traffic delivered from content providers to access networks also enhances our margins as we are compensated by both the originating customer and the terminating customer.

The breadth of our network, extensive size of our customer base, and the volume of our traffic enables us to be one of a handful of Tier 1 networks that are interconnected on a settlement-free basis.

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Since the acquisition of the Sprint Business, we have formed dedicated sales teams who are tasked with preserving existing business with and seeking new sales from enterprise customers.

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Increase our Share of the Net-Centric Market .

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We expect that we will continue to grow our shares of these segments by offering our customers a series of attractive features including:

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● Geographic breadth – We have the broadest CNDC footprint in the industry and currently offer network services in 54 countries – as net-centric customers seek a more international audience this footprint is a significant advantage;

● Geographic breadth – We have one of the broadest CNDC footprints in the industry and currently offer network services in 54 countries – as net-centric customers seek a more international audience this footprint is a significant advantage;

● High capacity and reliability – We offer 100 Mbps to 100 Gbps ports in all of the CNDCs and 400 Gbps in selected locations on our network, which differentiates the capacity choices we provide our net-centric clients;

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A critical factor in our success has been our investment and focus on our sales and marketing efforts.

We seek to maintain a consistent level of sales productivity as measured by the number of connections sold per salesperson per month, taking into account adjustments to the changing mix of products sold and installed.

We seek to maintain a consistent level of sales productivity as measured by the number of connections sold per salesperson per month, considering adjustments to the changing mix of products sold and installed.

In order to gain market share in our targeted businesses, we expect to continue our sales efforts including introducing strategies and tools to optimize and improve our sales productivity.

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In connection with our acquisition of the Sprint Business, we expanded our offerings of optical wavelength and optical transport services over our fiber network.

We are selling these services to our existing customers, customers acquired with the Sprint Business and to new customers who require dedicated optical transport connectivity without the capital and ongoing expenses associated with owning and operating network infrastructure.

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infrastructure.

We currently offer wavelength services in 516 data centers and intend to offer this service in approximately 800 data centers in the United States and Mexico by the end of 2024.

We believe our wavelength service has the advantages of unique routes, ubiquitous service locations, faster provisioning times and lower prices.

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Expand our Data Center Footprint .

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Repurposing these facilities included removing unused, obsolete equipment and racks, and upgrading or installing new HVAC systems, uninterruptable power supplies (“UPS”), backup generators and fire suppression systems as well as other structural changes.

By March 31, 2024, we had converted 24 former Sprint facilities and are in the process of converting approximately 19 additional facilities.

If and when these facilities are all suitable for data center customers, we will have added 1.3 million square foot of floor space and approximately 113 MW of available power to our data center portfolio.

By June 30, 2024, we had converted 34 former Sprint facilities and are in the process of converting approximately 18 additional facilities.

If and when these facilities are all suitable for data center customers, we will have added 1.3 million square feet of floor space and approximately 113 MW of available power to our data center portfolio.

In connection with this conversion process we expect to decommission certain legacy Cogent data centers.

Increase our Leasing of IPv4 Address Space .

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We currently own approximately 38 million IPv4 addresses, of which 9.9 million were recently acquired at the closing of the Sprint Business acquisition.

We currently lease 12.2 million of our IPv4 addresses to our customers on contracts with service terms ranging from 1 month to 5 years.

We currently lease 12.8 million of our IPv4 addresses to our customers on contracts with service terms ranging from one month to five years.

We intend to continue to lease IPv4 addresses to our customers as well as explore alternatives for monetizing our IPv4 address inventory.

Results of Operations

Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023

Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023

Our management reviews and analyzes several key financial measures in order to manage our business and assess the quality and variability of our service revenue, operating results and cash flows.

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Service revenue

On-net revenue

Off-net revenue

Wavelength revenue

Non-core revenue

Network operations expenses (1)

Selling, general, and administrative (“SG&A) expenses (2)

Acquisition costs – Sprint Business

Sprint acquisition costs

Depreciation and amortization expenses

Change in valuation - interest rate swap agreement

Reduction to gain on bargain purchase – Sprint Business

Gain on lease termination

Gain on bargain purchase – Sprint Business

Interest income – IP Transit Services Agreement

Interest expense

Income tax benefit (expense)

(1) Includes non-cash equity-based compensation expenses of $385 and $149 in the three months ended March 31, 2024 and 2023, respectively.

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(2) Includes non-cash equity-based compensation expenses of $6,565 and $6,432 in the three months ended March 31, 2024 and 2023, respectively.

Interest expense, including change in valuation interest rate swap agreement

Income tax benefit

(1) Includes non-cash equity-based compensation expenses of $350 and $231 in the three months ended June 30, 2024 and 2023, respectively.

(2) Includes non-cash equity-based compensation expenses of $3,215 and $6,018 in the three months ended June 30, 2024 and 2023, respectively.

NM – not meaningful

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Service Revenue .

We continually work to grow our total service revenue by increasing the number of potential customers that we can reach on our network.

We do this by investing capital to expand the geographic footprint of our network, increasing the number of buildings that we are connected to, including CNDCs and MTOBs, and increasing our penetration rate into our existing buildings.

These efforts broaden the global reach of our network and increase the size of our potential addressable market.

We also seek to grow our service revenue by investing in our sales and marketing team.

We typically sell corporate connections at similar pricing to our competitors, but our clients benefit from our significantly faster speeds, greater aggregate throughput, enhanced service level agreements and rapid installation times.

In the net-centric market, we offer comparable services in terms of capacity but typically at significantly lower prices.

Our service revenue increased by 8.6% from the three months ended June 30, 2023 to the three months ended June 30, 2024.

Exchange rates negatively affected our increase in service revenue by $0.4 million.

All foreign currency comparisons herein reflect results for the three months ended June 30, 2024 translated at the average foreign currency exchange rates for the three months ended June 30, 2023.

We increased our total service revenue by the acquisition of Sprint Business customers, expanding our network, adding additional buildings to our network, increasing our penetration into the buildings connected to our network and gaining market share by offering our services at lower prices than our competitors.

Revenue recognition standards include guidance relating to any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, gross receipts taxes, Universal Service Fund fees and certain state regulatory fees.

We record these taxes billed to our customers on a gross basis (as service revenue and network operations expense) in our condensed consolidated statements of comprehensive income.

The impact of these taxes including the Universal Service Fund resulted in an increase to our revenues of $8.1 million from the three months ended June 30, 2023 to the three months ended June 30, 2024.

Other Operating Data

Revenue by Customer Type – (thousands)

Customer Connections by Customer Type - end of period

Revenue – by Network Connection Type – (thousands)

Customer Connections – by Network Connection Type - end of period

Average Revenue Per Unit (ARPU)

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ARPU - off-net

ARPU - wavelengths

ARPU - wavelength

Average Price per Megabit — installed base

Customer Connections—end of period

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Revenue and customer connections by customer type .

Our corporate customers generally purchase their services on a price per connection basis.

Our net-centric customers generally purchase their services on a price per megabit-metered basis.

We began to serve enterprise customers in connection with our acquisition of the Sprint Business.

We define “enterprise” customers as large corporations (typically, Fortune 500 companies with greater than $5 billion in annual revenue) running Wide Area Networks (“WAN”) with several dozen to several hundred sites.

Our enterprise customers generally purchase our services on a price per location basis.

On the Closing Date, we acquired 17,823 corporate customer connections, 5,711 net-centric customer connections and 23,209 enterprise customer connections with the Sprint Business.

We classified the $39.5 million of May 2023 Sprint Business revenue as $20.1 million of monthly recurring revenue as enterprise revenue, $12.9 million of monthly recurring revenue as corporate revenue and $6.5 million of monthly recurring revenue as net-centric revenue.

Revenues from our corporate, net-centric and enterprise customers represented 45.9%, 35.0% and 19.1% of total service revenue, respectively, for the three months ended June 30, 2024 and represented 46.3%, 36.5% and 17.2% of total service revenue, respectively, for the three months ended June 30, 2023.

Our revenue from our corporate customers increased primarily due to corporate customers acquired with the Sprint Business.

Our corporate customers take advantage of our superior speeds, greater aggregate throughput, service levels and installation times versus our competitors.

The growing trend of customers installing second lines for redundancy in order to construct virtual private networks (“VPNs”) has also led to our ability to increase our corporate revenues.

Beginning with and throughout the COVID-19 pandemic, we witnessed a deteriorating real estate market in and around the buildings we service in central business districts in North America.

Because of the rising vacancy levels and falling lease initiations or renewals, we experienced a slowdown in new sales to our corporate customers, which negatively affected our corporate revenue results.

During the three months ended June 30, 2024, we continued to see gradual declines in vacancy rates and rising office occupancy rates.

In addition, we continued to see positive trends in our corporate business.

As the option to fully or partially work from home becomes permanently established at many companies, our corporate customers are integrating some of the new applications that became part of the remote work environment, which benefits our corporate business as these customers upgrade their Internet access infrastructure to higher capacity connections.

Further, if and when companies eventually return to the buildings in which we operate, we believe it will present an opportunity for increased sales.

However, the exact timing and path of these positive trends remains uncertain, and as the after effects of the COVID-19 pandemic linger, we may continue to see increased corporate customer turnover, fewer upgrades of existing corporate customer configurations and fewer new tenant opportunities, which would negatively affect our corporate revenue growth.

Our revenue from our net-centric customers increased primarily due to growth in network traffic from these customers and from net-centric customers acquired with the Sprint Business.

Our net-centric customers purchase our services on a price per megabit basis.

The net-centric market exhibits significant pricing pressure due to the continued introduction of new technology, which lowers the marginal cost of transmission and routing, and the commodity nature of the service where price is typically the only differentiating factor for these customers.

Our average price per megabit of our installed base of customers decreased by 10.4% from the three months ended June 30, 2023 to the three months ended June 30, 2024.

The impact of foreign exchange rates has a more significant impact on our net-centric revenues.

Our revenue from our enterprise customers increased primarily due to enterprise customers acquired with the Sprint Business.

Revenue and customer connections by network connection type.

On the Closing Date, we classified the total $39.5 million of monthly Sprint Business revenue as $2.5 million of on-net revenue, $32.3 million of off-net revenue and $4.7 million of non-core revenue.

Additionally, on the Closing Date, we classified the total 46,743 Sprint Business customer connections as 1,560 on-net customer connections, 24,667 off-net customer connections and 20,516 non-core customer connections.

Revenues from our on-net, off-net, wavelength and non-core customers represented 54.0%, 42.8%, 1.4% and 1.8% of total service revenue, respectively, for the three months ended June 30, 2024 and represented 53.2%, 42.5%, 0.7% and 3.6% of total service revenue, respectively, for the three months ended June 30, 2023.

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Our on-net revenues increased from the three months ended June 30, 2023 to the three months ended June 30, 2024 primarily from customers acquired with the Sprint Business.

On-net revenue increased at a greater rate than on-net customer connections primarily due to an increase in our on-net ARPU from the three months ended June 30, 2023 to the three months ended June 30, 2024.

ARPU is determined by dividing on-net revenue for the period by the average on-net customer connections for that period.

Our off-net revenues increased from the three months ended June 30, 2023 to the three months ended June 30, 2024 primarily from customers acquired with the Sprint Business.

In connection with our acquisition of the Sprint Business, we expanded our offerings of optical wavelength and optical transport services over our fiber network.

Wavelength revenue was $3.6 million for the three months ended June 30, 2024 and $1.6 million for the three months ended June 30, 2023.

Our non-core revenues decreased from the three months ended June 30, 2023 to the three months ended June 30, 2024 from the cancellation of non-core revenues acquired in the Sprint Business.

Non-core services are services, which we acquired and continue to support but do not actively sell.

Network Operations Expenses.

Network operations expenses include the costs of personnel associated with service delivery, network management and customer support, network facilities costs, right-of-way fees, fiber and equipment maintenance fees, leased circuit costs, access and facilities fees paid to building owners and excise taxes billed to our customers and recorded on a gross basis.

Non-cash equity-based compensation expense is included in network operations expenses consistent with the classification of the employee’s salary and other compensation.

Our increase in network operations expense is primarily attributable to an increase in costs related to our network and facilities expansion activities, an increase in power costs and network operations expense from our acquisition of the Sprint Business.

Selling, General, and Administrative (“SG&A”) Expenses.

Our SG&A expenses, including non-cash equity-based compensation expense, decreased by 18.3% from the three months ended June 30, 2023 to the three months ended June 30, 2024.

Non-cash equity-based compensation expense is included in SG&A expenses consistent with the classification of the employee’s salary and other compensation.

SG&A expenses decreased primarily from a decrease in costs related to the Sprint Business acquisition including costs under the TSA agreement.

Acquisition-Related Costs.

In connection with the Transaction and negotiation of the Purchase Agreement, we incurred professional fees, other acquisition related costs and reimbursed severance costs.

Such fees and reimbursed severance costs totaled $12.4 million for the three months ended June 30, 2024 and $0.7 million for the three months ended June 30, 2023.

Total qualifying severance expenses since the Closing Date were $28.6 million of which $8.0 million were recorded in the three months ended June 30, 2024.

No reimbursement amounts were recorded in the three months ended June 30, 2023.

Depreciation and Amortization Expenses.

Our depreciation and amortization expense increased by 41.0% primarily due to the depreciation expense associated assets acquired with the Sprint Business and an increase in deployed fixed assets.

Gain on Lease Termination.

In June 2024, we elected to exercise a contractual option to prepay in full at a 12.0% discounted rate an IRU finance lease agreement between a us and a vendor we assumed with the Sprint Business for $114.6 million.

At the payment date, the present value of the IRU finance lease liability was $117.9 million and the remaining 31 $4.2 million monthly principal payments totaled $130.2 million.

The prepayment resulted in a gain on lease termination of $3.3 million related to the difference between the book value of $117.9 million and the cash payment of $114.6 million.

We are continuing to use the related IRU asset.

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Gain on Bargain Purchase.

We accounted for our acquisition of the Sprint Business as a business combination.

The identifiable assets acquired and liabilities assumed were recorded at their fair values as of the acquisition 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.

During the three months ended June 30, 2024, we made certain adjustments to our estimates of the fair market value of the assets acquired and liabilities assumed resulting in increase to the gain on bargain purchase of $27.7 million for the three months ended June 30, 2024.

The total bargain purchase gain was $1.4 billion.

Interest Income - IP Transit Services Agreement .

Under the IP Transit Services Agreement TMUSA will pay us an aggregate of $700.0 million, consisting of (i) $350.0 million in equal monthly installments during the first year after the Closing Date and (ii) $350.0 million in equal monthly installments over the subsequent 42 months.

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 amortization of the discount resulted in interest income of $5.9 million for the three months ended June 30, 2024 and $7.7 million for the three months ended June 30, 2023.

Interest Expense.

Our interest expense resulted from interest incurred on our $500.0 million aggregate principal amount of 3.50% Senior Secured Notes due 2026 that we issued in May 2021 (the “2026 Notes”), interest incurred on our $450.0 million aggregate principal amount of 7.00% Senior Unsecured Notes due 2027 that we issued in June 2022 (the “2027 Notes”), interest incurred on $206.0 million aggregate principal amount of 7.924% IPv4 secured notes that we issued in May 2024 (the “IPv4 Notes”), interest incurred on our $300.0 million aggregate principal amount of 7.00% Senior Unsecured Notes due 2027 that we issued in June 2024 (the “2027 Mirror Notes”), interest on our Swap Agreement and interest incurred on our finance lease obligations.

As of June 30, 2024, the fair value of our Swap Agreement was a net liability of $35.5 million Changes in the valuation of the Swap Agreement are related to semi-annual interest payments in May and November and changes in interest rates and are included in interest expense.

Under the Swap Agreement settlement payment made in May 2023, we paid $9.5 million to the counterparty for a net cash interest cost of $9.5 million for the period from November 1, 2022 to April 30, 2023.

Under the Swap Agreement settlement payment made in May 2024, we paid $12.1 million to the counterparty for a net cash interest cost of $12.1 million for the period from November 1, 2023 to April 30, 2024.

Our interest expense decreased primarily due to the change in the valuation of the swap agreement offsetting the increase from the issuance of our IPv4 Notes in May 2024 and the issuance of our 2027 Mirror Notes in June 2024.

Income Tax Benefit.

Our income tax benefit was $7.9 million for the three months ended June 30, 2024 and $24.3 million for the three months ended June 30, 2023.

The change in our income benefit is primarily related to projected operating results related to the Sprint Business acquisition and the reversal of deferred tax liabilities acquired with the Sprint Business.

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Buildings On-net.

As of June 30, 2024, and 2023, we had a total of 3,386 and 3,227 on-net buildings connected to our network, respectively.

The increase in our on-net buildings was a result of our disciplined network expansion program.

We anticipate adding a similar number of buildings to our network for the next several years.

Six Months Ended June 30, 2024 Compared to the Six Months Ended June 30, 2023

Our management reviews and analyzes several key financial measures in order to manage our business and assess the quality and variability of our service revenue, operating results and cash flows.

The following summary tables present a comparison of our results of operations with respect to certain key financial measures.

The comparisons illustrated in the tables are discussed in greater detail below.

Six Months Ended

(in thousands)

Service revenue

Network operations expenses (1)

Selling, general, and administrative (“SG&A) expenses (2)

Sprint acquisition costs

Depreciation and amortization expenses

Gain on bargain purchase – Sprint Business

Gain on lease termination

Interest income – IP Transit Services Agreement

Interest expense, including change in valuation of swap agreement

Income tax benefit

(1) Includes non-cash equity-based compensation expenses of $385 and $380 in the six months ended June 30, 2024 and 2023, respectively.

(2) Includes non-cash equity-based compensation expenses of $10,131 and $12,450 in the six months ended June 30, 2024 and 2023, respectively.

NM – not meaningful

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In the net-centric market, we offer comparable services in terms of capacity but typically at significantly lower prices.

Our service revenue increased by 73.3% from the three months ended March 31, 2023 to the three months ended March 31, 2024.

Exchange rates positively affected our increase in service revenue by $0.4 million.

All foreign currency comparisons herein reflect results for the three months ended March 31, 2024 translated at the average foreign currency exchange rates for the three months ended March 31, 2023.

Our service revenue increased by 33.9% from the six months ended June 30, 2023 to the six months ended June 30, 2024.

Exchange rates had a positive impact on our increase in service revenue by $0.1 million.

All foreign currency comparisons herein reflect results for the six months ended June 30, 2024 translated at the average foreign currency exchange rates for the six months ended June 30, 2023.

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We record these taxes billed to our customers on a gross basis (as service revenue and network operations expense) in our condensed consolidated statements of comprehensive income.

The impact of these taxes including the Universal Service Fund resulted in an increase to our revenues of $16.4 million from the three months ended March 31, 2023 to the three months ended March 31, 2024.

The impact of these taxes including the Universal Service Fund resulted in an increase to our revenues of $24.5 million from the six months ended June 30, 2023 to the six months ended June 30, 2024.

Other Operating Data

Revenue by Customer Type – (thousands)

Customer Connections by Customer Type - End of Period

Revenue – by Network Connection Type – (thousands)

Customer Connections – by Network Connection Type - End of Period

Average Revenue Per Unit (ARPU)

ARPU - on-net

ARPU - off-net

ARPU - wavelength

Average Price per Megabit — installed base

Revenue and customer connections by customer type .

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We began to serve enterprise customers in connection with our acquisition of the Sprint Business.

We define “enterprise” customers as large corporations (typically, Fortune 500 companies with greater than $5 billion in annual revenue) running WAN with several dozen to several hundred sites.

Our enterprise customers generally purchase our services on a price per location basis.

Revenues from our corporate, net-centric and enterprise customers represented 46.9%, 34.6% and 18.5% of total service revenue, respectively, for the three months ended March 31, 2024.

Revenues from our corporate and net-centric customers represented 55.8% and 44.2% of total service revenue, respectively, for the three months ended March 31, 2023.

Revenues from corporate customers increased by 45.8% to $124.9 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Revenues from our net-centric customers

On the Closing Date, we acquired 17,823 corporate customer connections, 5,711 net-centric customer connections and 23,209 enterprise customer connections with the Sprint Business.

Revenues from our corporate, net-centric and enterprise customers represented 46.4%, 34.8% and 18.8% of total service revenue, respectively, for the six months ended June 30, 2024 and represented 50.0%, 39.5% and 10.5% of total service revenue, respectively, for the six months ended June 30, 2023.

Our revenue from our corporate customers increased primarily due to corporate customers acquired with the Sprint Business.

Our corporate customers take advantage of our superior speeds, greater aggregate throughput, service levels and installation times

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increased by 35.3% to $92.0 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Revenues from our enterprise customers were $49.3 million for the three months ended March 31, 2024.

We acquired 17,823 corporate customer connections, 5,711 net-centric customer connections and 23,209 enterprise customer connections with the Sprint Business.

In connection with our acquisition of the Sprint Business and at the Closing Date, we classified the Sprint Business revenue as $20.1 million of monthly recurring revenue as enterprise revenue, $12.9 million of monthly recurring revenue as corporate revenue and $6.5 million of monthly recurring revenue as net-centric revenue.

Our revenue from our corporate customers increased primarily due to corporate customer connections acquired with the Sprint Business.

Our corporate customers take advantage of our superior speeds, greater aggregate throughput, service levels and installation times versus our competitors.

The growing trend of customers installing second lines for redundancy in order to construct virtual private networks (“VPNs”) has also led to our ability to increase our corporate revenues.

versus our competitors.

The growing trend of customers installing second lines for redundancy in order to construct VPNs has also led to our ability to increase our corporate revenues.

Beginning with and throughout the COVID-19 pandemic, we witnessed a deteriorating real estate market in and around the buildings we service in central business districts in North America.

During the three months ended March 31, 2024, we continued to see gradual declines in vacancy rates and rising office occupancy rates.

During the six months ended June 30, 2024, we continued to see gradual declines in vacancy rates and rising office occupancy rates.

In addition, we continued to see positive trends in our corporate business.

2 unchanged sentences

Our revenue from our net-centric customers increased primarily due to an increase in our number of net-centric customers, growth in network traffic from these customers and from net-centric customer connections acquired with the Sprint Business.

Our revenue from our net-centric customers increased primarily due to the net-centric customers acquired with the Sprint Business and growth in network traffic from our customers.

Our net-centric customers purchase our services on a price per megabit basis.

Our average price per megabit of our installed base of customers increased by 5.9% from the three months ended March 31, 2023 to the three months ended March 31, 2024 primarily from the impact of the price per megabit customers acquired in the Sprint Business.

Our average price per megabit of our installed base of customers decreased by 2.7% from the six months ended June 30, 2023 to the six months ended June 30, 2024.

The impact of foreign exchange rates has a more significant impact on our net-centric revenues.

Our revenue from our enterprise customers increased primarily due to enterprise customers acquired with the Sprint Business.

Revenue and customer connections by network connection type.

In connection with our acquisition of the Sprint Business, on the Closing Date, we classified $39.4 million of monthly Sprint Business revenue as $2.5 million of on-net revenue, $32.2 million of off-net revenue and $4.7 million of non-core revenue.

Additionally, in connection with our acquisition of the Sprint Business, on the Closing Date, we classified 46,743 of Sprint Business customer connections as 1,560 on-net customer connections, 24,667 off-net customer connections and 20,516 non-core customer connections.

Our on-net revenues increased by 19.4% from the three months ended March 31, 2023 to the three months ended March 31, 2024.

Our on-net revenues increased as we increased the number of our on-net customer connections by 5.2% at March 31, 2024 from March 31, 2023.

On-net revenue increased at a greater rate than on-net customer connections primarily due to an increase in our on-net ARPU from the three months ended March 31, 2023 to the three months ended March 31, 2024.

On the Closing Date, we classified the total $39.5 million of monthly Sprint Business revenue as $2.5 million of on-net revenue, $32.3 million of off-net revenue and $4.7 million of non-core revenue.

Revenues from our on-net, off-net, wavelength and non-core customers represented 53.1%, 43.6%, 1.3% and 2.0% of total service revenue, respectively, for the six months ended June 30, 2024 and represented 62.0%, 35.4%, 0.4% and 2.2% of total service revenue, respectively, for the six months ended June 30, 2023.

Our on-net revenues increased from the six months ended June 30, 2023 to the six months ended June 30, 2024 primarily from customers acquired with the Sprint Business.

On-net revenue increased at a greater rate than on-net customer connections primarily due to an increase in our on-net ARPU from the six months ended June 30, 2023 to the six months ended June 30, 2024.

ARPU is determined by dividing on-net revenue for the period by the average on-net customer connections for that period.

Our off-net revenues increased by 217.0% from the three months ended March 31, 2023 to the three months ended March 31, 2024.

Our off-net revenues increased primarily from the 150.8% increase in the number of our off-net customer connections from March 31, 2023 to March 31, 2024.

Off-net customer revenues increased at a greater rate than off-net customer connections primarily due to an increase in our off-net ARPU from the three months ended March 31, 2023 to the three months ended March 31, 2024.

Our off-net revenues increased from the six months ended June 30, 2023 to the six months ended June 30, 2024 from customers acquired with the Sprint Business.

Off-net customer revenues increased at a greater rate than off-net customer connections primarily due to an increase in our off-net ARPU from the six months ended June 30, 2023 to the six months ended June 30, 2024.

Off-net ARPU is determined by dividing off-net revenue for the period by the average off-net customer connections for that period.

In connection with our acquisition of the Sprint Business, we expanded our offerings of optical wavelength and optical transport services over our fiber network.

Wavelength revenue was $3.3 million for the three months ended March 31, 2024.

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Our non-core revenues increased from the three months ended March 31, 2023 to the three months ended March 31, 2024 from the acquisition of non-core revenues from customers acquired in the Sprint Business.

Wavelength revenue was $7.0 million for the six months ended June 30, 2024 and was $1.6 million for the six months ended June 30, 2023.

Our non-core revenues increased from the six months ended June 30, 2023 to the six months ended June 30, 2024 from the acquisition of non-core revenues from customers acquired in the Sprint Business.

Non-core services are services, which we acquired and continue to support but do not actively sell.

Network Operations Expenses.

Our network operations expenses, including non-cash equity-based compensation expense, increased by 188.1% from the three months ended March 31, 2023 to the three months ended March 31, 2024.

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Non-cash equity-based compensation expense is included in network operations expenses consistent with the classification of the employee’s salary and other compensation.

The increase in network operations expense is primarily attributable to an increase in costs related to our network and facilities expansion activities, an increase in power costs and network operations expense from our acquisition of the Sprint Business.

Selling, General, and Administrative (“SG&A”) Expenses.

Our SG&A expenses, including non-cash equity-based compensation expense, increased by 70.1% from the three months ended March 31, 2023 to the three months ended March 31, 2024.

Our SG&A expenses, including non-cash equity-based compensation expense, increased by 12.9% from the six months ended June 30, 2023 to the six months ended June 30, 2024.

Non-cash equity-based compensation expense is included in SG&A expenses consistent with the classification of the employee’s salary and other compensation.

SG&A expenses increased primarily from an increase in salaries and benefits from a 76.6% increase in our total headcount, including 942 employees added to our headcount from our acquisition of the Sprint Business on the Closing Date.

Our sales force headcount, inclusive of sales management, was 871 at March 31, 2024 and 714 at March 31, 2023, and our total headcount was 1,955 at March 31, 2024 and 1,107 at March 31, 2023.

The Sprint Business added 114 employees to our sales force headcount on the Close Date.

SG&A expenses increased primarily from an increase in salaries and benefits from 942 employees added to our headcount from our acquisition of the Sprint Business on the Closing Date and costs associated with the Sprint acquisition including TSA costs.

Our total headcount was 1,901 at June 30, 2024 and 2,020 at June 30, 2023.

Acquisition-Related Costs.

In connection with the Transaction and negotiation of the Purchase Agreement, we incurred professional fees, other acquisition related costs and reimbursed severance costs.

Such fees and reimbursed severance costs totaled $9.0 million for the three months ended March 31, 2024 and $0.4 million for the three months ended March 31, 2023.

Such fees and reimbursed severance costs totaled $21.4 million for the six months ended June 30, 2024 and $0.7 million for the six months ended June 30, 2023.

Total qualifying severance expenses since the Closing Date were $28.6 million of which $12.3 million were recorded in the six months ended June 30, 2024.

No reimbursement amounts were recorded in the six months ended June 30, 2023.

Depreciation and Amortization Expenses.

Our depreciation and amortization expense increased by 181.8% from the three months ended March 31, 2023 to the three months ended March 31, 2024.

The increase was primarily due to the depreciation expense associated with the increase in deployed fixed assets and assets acquired with the Sprint Business.

Reduction to Gain on Bargain Purchase .

Our depreciation and amortization expense increased primarily due to the depreciation expense associated with the increase in assets acquired with the Sprint Business and an increase in deployed fixed assets.

Gain on Lease Termination.

At the payment date, the present value of the IRU finance lease liability was $117.9 million and the remaining thirty-one $4.2 million monthly principal payments totaled $130.2 million.

The prepayment resulted in a gain on lease termination of $3.3 million related to the difference between the book value of $117.9 million and the cash payment of $114.6 million.

We are continuing to use the related IRU asset.

Gain on Bargain Purchase.

We accounted for our acquisition of the Sprint Business as a business combination.

1 unchanged sentence

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.

The fair value of the identifiable assets acquired was $1.9 billion (including amounts due under the IP Transit Services Agreement) and was in excess of the $1.1 billion liabilities assumed and the $0.6 billion net consideration to be received from the Seller resulting in a gain on bargain purchase of $1.4 billion.

During the three months ended March 31, 2024, we made certain adjustments to our estimates of the fair market value of the assets acquired and liabilities assumed resulting in reduction to the gain on bargain purchase of $5.5 million for the three months ended March 31, 2024.

As of June 30, 2023, the fair value of the identifiable assets acquired was $1.5 billion (including amounts due under the IP Transit Services Agreement) and was in excess of the $1.0 billion liabilities assumed and the $0.6 billion net consideration to be received from the Seller resulting in a gain on bargain purchase of $1.2 billion.

During the six months ended June 30, 2024, we made certain adjustments to our estimates of the fair market value of the assets acquired and liabilities assumed resulting in increase to the gain on bargain purchase of $22.2 million for the three months ended June 30, 2024.

The total bargain purchase gain was $1.4 billion.

Interest Income - IP Transit Services Agreement .

On the Closing Date, we entered into the IP Transit Services Agreement with TMUSA, pursuant to which TMUSA will pay us an aggregate of $700.0 million, consisting of (i) $350.0 million in equal monthly installments during the first year after the Closing Date and (ii) $350.0 million in equal monthly installments over the subsequent 42 months.

We accounted for the Transaction as a business combination under ASC Topic 805 Business Combinations (“ASC 805”).

Under ASC 805, we concluded that the $700.0 million of payments to be made represent consideration received to complete the acquisition of a distressed business.

We also evaluated whether the IP Transit Services Agreement was in the scope of ASU No.

2014-09 Revenue from Contracts with Customers (“ASC 606”).

We concluded that TMUSA 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, 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 amortization of the discount resulted in interest income of $7.3 million for the three months ended March 31, 2024.

Under the IP Transit Services Agreement, TMUSA will pay us an aggregate of $700.0 million, consisting of (i) $350.0 million in equal monthly installments during the first year after the Closing Date and (ii) $350.0 million in equal monthly installments over the subsequent 42 months.

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 amortization of the discount resulted in interest income of $13.3 million for the six months ended June 30, 2024 and $7.7 million for the six months ended June 30, 2023.

Interest Expense.

Our interest expense resulted from interest incurred on our 2026 Notes, interest incurred on our 2027 Notes, interest incurred on our 2027 Mirror Notes, interest incurred on our IPv4 Notes, interest on our Swap Agreement and interest incurred on our finance lease obligations.

Our interest expense increased primarily due to the issuance of our IPv4 Notes in May 2024 and the issuance of our 2027 Mirror Notes in June 2024.

As of June 30, 2024, the fair value of our Swap Agreement was a net liability of $35.5 million.

We recorded a gain for the change in the valuation of the Swap Agreement of $3.1 million in the six months ended June 30, 2024 and a gain of $0.5 million in the six months ended June 30, 2023.

Changes in the valuation of the Swap Agreement are related to semi-annual interest payments in May and November and changes in interest rates, and included in interest expense.

Under the Swap Agreement settlement payment made in May 2023, we paid $9.5 million to the counterparty for a net cash interest cost of $9.5 million for the period from November 1, 2022

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incurred on our finance lease obligations.

Our finance leases include a lease totaling $160.9 million being amortized over 44 months, acquired with the Sprint Business.

Our interest expense increased by 21.1% from the three months ended March 31, 2023 to the three months ended March 31, 2024.

The increase was primarily due to the impact of the finance lease acquired with the Sprint Business.

Change in Valuation - Interest Rate Swap Agreement.

As of March 31, 2024, the fair value of our Swap Agreement was a net liability of $44.8 million.

We recorded an unrealized loss for the non-cash change in the valuation of the Swap Agreement of $6.2 million in the three months ended March 31, 2024 and an unrealized gain of $1.8 million in the three months ended March 31, 2023 from changes in interest rates.

Under the Swap Agreement settlement payment made in November 2023, we paid $12.0 million to the counterparty for a net cash interest cost of $12.0 million for the period from May 1, 2023 to October 31, 2023.

to April 30, 2023.

Income Tax Benefit (Expense).

Our income tax benefit was $19.1 million for the three months ended March 31, 2024 and our income tax expense was $4.5 million for the three months ended March 31, 2023.

Our interest expense increased primarily due to the issuance of our IPv4 Notes in May 2024 and the issuance of our 2027 Mirror Notes in June 2024.

Income Tax Benefit.

Our income tax benefit was $27.0 million for the six months ended June 30, 2024 and $19.8 million for the six months ended June 30, 2023.

The change in our income tax expense is primarily related to projected operating results related to the Sprint Business acquisition and the reversal of deferred tax liabilities acquired with the Sprint Business.

Buildings On-net.

As of March 31, 2024 and 2023, we had a total of 3,321 and 3,190 on-net buildings connected to our network, respectively.

As of June 30, 2024, and 2023, we had a total of 3,386 and 3,227 on-net buildings connected to our network, respectively.

The increase in our on-net buildings was a result of our disciplined network expansion program.

We anticipate adding a similar number of buildings to our network for the next several years.

Liquidity and Capital Resources

IPv4 Address Securitization

On May 2, 2024, Cogent IPv4 LLC, a special-purpose, bankruptcy remote, indirect wholly owned subsidiary of the Company (the “Securitization Issuer”), completed a financing transaction pursuant to which it issued $206.0 million aggregate principal amount of secured Internet Protocol version 4 (“IPv4”) address revenue notes (the “Securitization”), consisting of 7.924% Series 2024-1, Class A-2 term notes with a term ending in May 2029, in an offering exempt from registration under the Securities Act of 1933, as amended.

In connection with the consummation of the Securitization, the Company:

(i) transferred or assigned to Group, the co-issuer of the Company’s existing senior notes, or its subsidiaries (a) certain IPv4 addresses (which IPv4 addresses are not included as collateral for the Securitization) held by the Company’s direct subsidiary, Cogent Infrastructure, LLC (formerly Cogent Infrastructure, Inc.) (“Cogent Infrastructure”), or its subsidiaries, (b) certain customer contracts that are unrelated to the Securitization and (c) the equity interests of Cogent Infrastructure’s indirect subsidiary, Sprint Solutions Wireline LLC, including all liabilities and obligations associated therewith;

(ii) entered into (a) leases on behalf of Cogent Infrastructure or its subsidiaries, as lessor, and Group or its subsidiaries, as lessee, for the use of certain premises held by Cogent Infrastructure of its subsidiaries, and (b) a dark fiber indefeasible right of use agreement in favor of Cogent Group or its subsidiaries for the use of certain fiber optic routes owned by Cogent Infrastructure or its subsidiaries;

(iii) prior to the transfer of the equity of the Securitization Issuer from Group or its subsidiaries, transferred or assigned to the Securitization Issuer (a) certain IPv4 addresses held by Cogent Group or its subsidiaries and (b) any related customer contracts;

(iv) transferred the equity of the Securitization Issuer from Group or one of its subsidiaries to Cogent Infrastructure or one of its subsidiaries;

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(v) following the transfer of the equity of the Securitization Issuer to Cogent Infrastructure or one of its subsidiaries, transferred or assigned to the Securitization Issuer (a) certain IPv4 addresses held by Cogent Infrastructure or its subsidiaries and (b) any related customer contracts;

in each case, in amounts of substantially equivalent value and delivered by the Company to Group or Cogent Infrastructure, as applicable, as a contribution to capital.

For the avoidance of doubt, following the consummation of the foregoing, the Securitization Issuer became an indirect subsidiary of Cogent Infrastructure and holds the IPv4 addresses contributed to it by Group, Cogent Infrastructure and/or their respective subsidiaries in connection with the foregoing.

Acquisition of Sprint Communications

The Sprint Business’s cash flow was negative at the time of negotiations and during its recent history.

Due to the dire financial condition of the Sprint Business, it was understood that a payment from T-Mobile to any potential buyer would be required to execute a transaction to give a buyer sufficient cash inflows to offset losses that would be expected until a buyer could optimize the business.

Due to the dire financial condition of the Sprint Business, it was understood that a payment from T-Mobile to any potential buyer would be required to execute a transaction to give a buyer sufficient cash inflow to offset losses that would be expected until a buyer could optimize the business.

Based on management’s internal modeling at the culmination of the due diligence process, management determined this cash payment to be $700.0 million.

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Under the IP Transit Services Agreement, TMUSA will pay us 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.

Through March 31, 2024, we received ten monthly payments totaling $291.7 million under the IP Transit Services Agreement, reflected as cash from investing activities in our consolidated statements of cash flows.

Through June 30, 2024, we received thirteen monthly payments totaling $358.3 million under the IP Transit Services Agreement, reflected as cash from investing activities in our consolidated statements of cash flows.

As our business has grown as a result of an increasing customer base, the Transaction, broader geographic coverage and increased traffic on our network, we have historically produced a growing level of cash provided by operating activities.

2 unchanged sentences

Increasing our cash provided by operating activities is, in part, dependent upon our ability to reduce the operating costs of the Sprint Business while retaining its revenue, expanding our geographic footprint and increasing our network capacity.

During 2024, we expect to receive a total of $204.2 million under the monthly payments under the IP Transit Services Agreement.

This includes an additional five monthly payments of $29.2 million each, totaling $145.8 million, and seven monthly payments of $8.3 million each, totaling $58.3 million.

During the first six months of 2024, we have received a total of $154.2 million under the IP Transit Services Agreement.

During the remainder of 2024 we expect to receive a total of $49.8 million under the monthly payments under the IP Transit Services Agreement.

This includes six monthly payments of $8.3 million each.

Increasing our combined cash provided by operating activities and cash provided by the IP Transit Service Agreement is, in part, dependent upon our ability to reduce the operating costs of the Sprint Business while retaining its revenue.

Issuance of $300.0 Million Principal Amount of 2027 Mirror Notes

On June 11, 2024, Cogent Communications Group, LLC (“Group”) and Cogent Finance, Inc.

(the “Co-Issuer” and, together with Group, the “Issuers”), two of our wholly owned subsidiaries, completed the offering of our 2027 Mirror Notes for issuance in a private placement not registered under the U.S.

Securities Act of 1933, as amended (the “Securities Act”).

The 2027 Mirror Notes were offered and sold only to persons reasonably believed to be qualified institutional buyers in an unregistered offering pursuant to Rule 144A under the Securities Act and to certain non-U.S.

persons in transactions outside the United States in compliance with Regulation S under the Securities Act.

The 2027 Mirror Notes have the same maturity date and call protection, bear interest at the

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same rate and otherwise have substantially the same terms as our 2027 Notes;

however, the 2027 Mirror Notes are not fungible (from a trading or tax perspective) with the 2027 Notes and are a separate series of notes from the 2027 Notes.

The 2027 Mirror Notes were issued at a price equal to 98.50% of their face value.

The net proceeds from the offering were approximately $291.9 million after deducting the discount and offering expenses.

We used $114.6 million of the net proceeds from the offering to exercise a contractual option to prepay in full in June 2024 an existing indefeasible right-of-use agreement consisting of 31 remaining monthly recurring payments of $4.2 million, at a 12.0% discounted rate.

We expect to use the remainder of the net proceeds for general corporate purposes and/or to make special or recurring dividends to our parent company, Cogent Holdings, Inc.

(the “Company”).

The 2027 Mirror Notes were issued pursuant to, and are governed by, an indenture, dated June 11, 2024 (the “2027 Mirror Notes Indenture”), among the Issuers, the other guarantors named therein and Wilmington Trust, National Association, as trustee (the “2027 Notes Trustee”).

The 2027 Mirror Notes are jointly and severally guaranteed (the “Guarantees”) on a senior unsecured basis by each of Group’s, existing and future material domestic subsidiaries (other than the Co-Issuer), subject to certain exceptions (collectively, the “Subsidiary Guarantors”), and by the Company (together with the Subsidiary Guarantors, the “Guarantors”).

However, the Company is not subject to the covenants under the 2027 Mirror Notes Indenture.

Under certain circumstances, the Guarantors may be released from these Guarantees without the consent of the holders of the 2027 Mirror Notes.

The 2027 Mirror Notes and the Guarantees are the Issuers’ and the Guarantors’ senior unsecured obligations.

The 2027 Mirror Notes and the Guarantees are effectively subordinated to all of the Issuers’ and the Guarantors’ existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness, and are structurally subordinated to all indebtedness and other liabilities of subsidiaries that are not Subsidiary Guarantors.

Without giving effect to collateral arrangements, the 2027 Mirror Notes and the Guarantees rank pari passu in right of payment with the Issuers’ and the Guarantors’ existing and future senior indebtedness, including the 2026 Notes and the 2027 Notes.

The 2027 Mirror Notes and the Guarantees rank contractually senior in right of payment to all of the Issuers’ and the Guarantors’ subordinated indebtedness and are structurally subordinated to any existing and future indebtedness and other liabilities of the Issuers’ non-guarantor subsidiaries.

The 2027 Mirror Notes bear interest at a rate of 7.00% per annum.

Interest began to accrue on the 2027 Mirror Notes on June 11, 2024 and will be paid semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2024.

Unless earlier redeemed or repurchased, the 2027 Mirror Notes will mature on June 15, 2027.

After June 15, 2024, the Issuers may redeem the 2027 Mirror Notes, in whole or in part, at a redemption price ranging from 103.5% of the aggregate principal amount of the 2027 Mirror Notes redeemed to par (depending on the year), in each case, as set forth in the Indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption.

If Group undergoes specific kinds of change in control accompanied by certain ratings events, the Issuers will be required to offer to repurchase the 2027 Mirror Notes from holders at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the date of repurchase.

Additionally, if Group or any of its restricted subsidiaries sells assets and does not apply the proceeds from such sale in a certain manner or certain other events have not occurred, under certain circumstances, we will be required to use the net proceeds to make an offer to purchase the 2027 Mirror Notes at an offer price in cash equal to 100% of the principal amount of the 2027 Mirror Notes, plus accrued and unpaid interest, if any, to, but not including, the repurchase date.

In connection with any offer to purchase all or any of the 2027 Mirror Notes (including a change of control offer, asset sale offer or any tender offer), if holders of no less than 90% of the aggregate principal amount of the outstanding 2027 Mirror Notes validly tender their 2027 Mirror Notes, the Issuers, or a third party, are entitled to redeem any remaining 2027 Mirror Notes at the price paid to each holder.

The 2027 Indenture includes covenants that restrict Group and its restricted subsidiaries’ (including the Co-Issuer’s) ability to, among other things;

incur indebtedness;

issue certain preferred stock or similar equity securities;

pay dividends or make other distributions in respect of, or repurchase or redeem, capital stock;

make certain investments and other restricted payments, such as prepayment, redemption or repurchase of certain indebtedness;

create liens;

consolidate, merge, sell or otherwise dispose of all or substantially all of the properties and assets of Group and its restricted subsidiaries taken as a whole;

incur restrictions on the ability of a subsidiary to pay dividends or make other payments;

or to enter into transactions with affiliates.

The covenants provide for certain exceptions to these restrictions, and the Company is not subject to the covenants under the Indenture.

Certain covenants will cease to apply to the 2027 Mirror Notes if, and for so long as, the 2027 Mirror Notes have investment grade ratings from any two of Moody’s Investors Service, Inc., Fitch Ratings, Inc.

and S&P Global Ratings and so long as no default or event of default under the Indenture

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has occurred and is continuing.

Upon suspension of the covenants, the Guarantees will be released until such time as the covenants are no longer suspended.

The principal amount of the 2027 Mirror Notes would become immediately due and payable upon the occurrence of certain bankruptcy or insolvency events and may be declared immediately due and payable by the 2027 Notes Trustee or the holders of at least 25% of the aggregate principal amount of the then-outstanding 2027 Mirror Notes upon the occurrence of certain events of default under the Indenture.

Events of default include the following with respect to the Issuers and Group’s significant subsidiaries:

(i) failure to pay principal, premium or interest at required times;

(ii) failure to comply with any other agreements in the Indenture;

(iii) default on certain material indebtedness that is caused by a failure to make a payment within any applicable grace period when due at maturity or results in the acceleration of such indebtedness prior to its express maturity;

(iv) failure to pay certain material judgments;

(v) a Guarantee being held unenforceable or invalid or ceasing for any reason to be in full force and effect or a Guarantor denying or disaffirming its obligations under its Guarantee;

and (vi) certain events of bankruptcy or insolvency.

Issuance of $206.0 Million Principal Amount of IPv4 Notes

On May 2, 2024, Cogent IPv4 LLC (the “IPv4 Issuer”), our special-purpose, bankruptcy remote, indirect wholly owned subsidiary, issued $206.0 million aggregate principal amount of IPv4 Notes, with an anticipated term ending in May 2029 (such anticipated repayment date, the “ARD”), in an offering exempt from registration under the Securities Act.

The net proceeds from the offering, after debt offering costs, were $198.4 million and are expected to be used for general corporate purposes.

The IPv4 Notes were issued pursuant to an indenture, dated as of May 2, 2024 (the “IPv4 Base Indenture”), as supplemented by the Series 2024-1 Supplement thereto, dated as of May 2, 2024 (the “Series 2024-1 Supplement”), in each case entered into by and between the IPv4 Issuer and Wilmington Trust, National Association, as the trustee for the IPv4 Notes (the “IPv4 Trustee”).

The IPv4 Base Indenture allows the IPv4 Issuer to issue additional series of notes subject to certain conditions set forth therein, and the IPv4 Base Indenture, together with the Series 2024-1 Supplement, and any other series supplements to the IPv4 Base Indenture, is referred to herein as the “IPv4 Indenture.”

The IPv4 Notes were issued as part of a securitization transaction, pursuant to which certain Internet Protocol version 4 (“IPv4”) addresses, customer IPv4 address leases, customer accounts receivables and other IPv4 address assets (collectively, “IPv4 Address Assets”) were contributed or sold to the IPv4 Issuer and are included as collateral for the IPv4 Notes.

While the IPv4 Notes are outstanding, scheduled payments of interest are required to be made on a monthly basis.

From and after the ARD, principal payments will also be required to be made on the IPv4 Notes on a monthly basis.

No principal payments will be due on the IPv4 Notes prior to the ARD, unless certain rapid amortization or acceleration triggers are activated.

Cogent Communications LLC (in such capacity, the “Manager”) performs monthly services related to the IPv4 Address Assets and IPv4 Notes including billing customers, collecting amounts paid by customers, forwarding payments to the IPv4 Trustee related to the IPv4 Assets and other administrative services.

Amounts paid by the Manager to the IPv4 Trustee are reconciled on a monthly basis and the IPv4 Trustee pays the monthly interest on the IPv4 Notes and other expenses from the customer accumulated payments on the IPv4 Assets.

Amounts held by the IPv4 Trustee before the monthly reconciliation is completed are considered restricted cash.

After the IPv4 Trustee pays the monthly interest and other IPv4 Asset related costs, including monthly fees paid to the Manager for its services, the residual cash is paid to us and is unrestricted.

The legal final maturity date of the IPv4 Notes is in May of 2054.

If the IPv4 Issuer has not repaid or refinanced the IPV4 Notes prior to the monthly payment date in May of 2029, additional interest will accrue thereon in an amount equal to the greater of (i) 5.0% per annum and (ii) the excess amount, if any, by which the sum of the following exceeds the interest rate for such IPv4 Note:

(A) the yield to maturity (adjusted to a “mortgage-equivalent basis” pursuant to the standards and practices of the Securities Industry and Financial Markets Association) on the ARD for such Note of the United States Treasury Security having a remaining term closest to 10 years;

plus (B) 5.0%;

plus (C) the post-ARD note spread of 3.400% applicable to such Note.

The IPv4 Notes are obligations only of the IPv4 Issuer pursuant to the IPv4 Indenture, and are secured by a security interest in substantially all of the IPv4 Address Assets pursuant to the IPv4 Indenture.

The IPv4 Notes are guaranteed by Cogent IPv4 Holdco LLC, a special-purpose entity and our indirect wholly owned subsidiary, as the guarantor (the “IPv4 Guarantor”), pursuant to a guaranty dated as of May 2, 2024 (the “Guaranty”) by the IPv4 Guarantor in favor of the IPv4 Trustee, pursuant to which the IPv4 Guarantor has granted a security interest in the equity interests of the IPv4 Issuer as collateral security for its obligations under the

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Except as described below, neither we nor any of our subsidiaries, other than the IPv4 Issuer and the IPv4 Guarantor, will guarantee or in any way be liable for the obligations of the IPv4 Issuer under the IPv4 Indenture or the IPv4 Notes.

The IPv4 Notes are subject to a series of covenants and restrictions customary for transactions of this type.

These covenants and restrictions include (i) that the IPv4 Issuer maintains a liquidity reserve account to be used to make required payments in respect of the IPv4 Notes, (ii) provisions relating to optional and mandatory prepayments, including specified make-whole payments in the case of certain optional prepayments of the IPv4 Notes prior to the monthly payment date in May of 2028, (iii) certain indemnification payments in the event, among other things, that the transfers of the assets pledged as collateral for the IPv4 Notes are in stated ways defective or ineffective and (iv) covenants relating to recordkeeping, access to information and similar matters.

As provided in the IPv4 Base Indenture, the IPv4 Notes are also subject to rapid amortization in the event of a failure to maintain a stated debt service coverage ratio.

A rapid amortization may be cured if the debt service coverage ratio exceeds a certain threshold for a certain period of time, upon which cure, regular amortization, if any, will resume.

In addition, if certain utilization thresholds are not met (i.e., the proportion of IP addresses that are leased to the total number of IP addresses owned by the IPv4 Issuer falls below certain thresholds), the IPv4 Issuer will be required to apply collections to the repayment of the IPv4 Notes and in certain circumstances, the noteholders will have the ability to direct a sale of the IP Address Assets, in whole or in part, pursuant to the terms set forth in the IPv4 Indenture.

The IPv4 Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal or other amounts due on or with respect to the IPv4 Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective and certain judgments.

Liquidity and Capital Resources

In assessing our liquidity, management reviews and analyzes our current cash balances, payments under the IP Transit Services Agreement, accounts receivable, accounts payable, accrued liabilities, capital expenditure commitments, and required finance lease and debt payments and other obligations.

Because of the operating leverage of our network, our annual capital expenditures measured as a percentage of revenues has fallen over the last decade.

We have also had increasing success in raising capital by issuing notes and arranging financing and leases that have had a lower cost and more flexible terms.

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We will continue to assess our capital and liquidity needs and, where appropriate, return capital to stockholders.

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Over the next several years, we have significant contractual and anticipated cash outlays including our indicative dividend payments on our common stock, our maturing debt obligations, interest payments on our debt obligations and Swap Agreement and our projected capital expenditure requirements in order to help execute our business plan including the integration of Sprint Business.

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Our $450.0 million of 2027 Notes mature in June 2027 and include annual interest payments of $31.5 million until maturity.

Our $300.0 million of 2027 Mirror Notes mature in June 2027 and include annual interest payments of $21.0 million until maturity.

Our $206.0 million of IPv4 Notes effectively mature in May 2029 and include annual interest payments of $16.3 million until maturity (which amount increases if the IPv4 Notes are not repaid prior to May 2029).

Under our Swap Agreement, we pay the counterparty a semi-annual payment based upon overnight SOFR plus a contractual interest rate spread, and the counterparty pays us a semi-annual fixed 3.50% interest payment.

These settlement payments are made in November and May of each year until the Swap Agreement expires in February 2026.

As of March 31, 2024, $44.8 million of our cash and cash equivalents are restricted for use under our Swap Agreement.

As of June 30, 2024, $35.5 million of our cash and cash equivalents are restricted for use under our Swap Agreement.

We have made a $37.3 million deposit with the counterparty to the Swap Agreement.

If the fair value of the Swap Agreement exceeds a net liability of $37.3 million, we will be required to deposit additional funds with the counterparty equal to the net liability fair value.

As of March 31, 2024, $44.9 million of the deposit was restricted and $1.0 million was unrestricted.

As of June 30, 2024, $35.5 million of the deposit was restricted and $1.8 million was unrestricted.

At the payment date, the present value of the IRU finance lease liability was $117.9 million and the remaining thirty-one $4.2 million monthly principal payments totaled

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$130.2 million.

The prepayment resulted in a gain on lease termination of $3.3 million related to the difference between the book value of $117.9 million and the cash payment of $114.6 million.

We are continuing to use the related IRU asset.

We may need to, or elect to, refinance all or a portion of our indebtedness at or before maturity and we cannot provide assurances that we will be able to refinance any such indebtedness on commercially reasonable terms or at all.

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Given uncertainties regarding the lingering business impact of the pandemic, the cash flow requirements of the Sprint Business and the timing for economic recovery, we will continue to monitor our capital spending.

As we do each year, we will continue to monitor our future sources and uses of cash, and anticipate that we will make adjustments to our capital allocation strategies when, as and if determined by our Board of Directors.

As we do each year, we will continue to monitor our future sources and uses of cash, and anticipate that we will adjust our capital allocation strategies when, as and if determined by our Board of Directors.

Impact of COVID-19 on Our Liquidity and Operating Performance

As of March 31, 2024, we had cash, cash equivalents and restricted cash of $163.3 million.

As of June 30, 2024, we had cash, cash equivalents and restricted cash of $426.2 million.

The COVID-19 pandemic has not impacted our credit rating to date, nor do we believe that it has materially changed our cost of capital.

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We have experienced certain corporate customers taking a more cautious approach to new configurations and upgrades as well as a reduction in demand for connecting smaller satellite offices as a result of the challenges and uncertainties of the remote work environment that resulted from the COVID-19 pandemic.

We also have witnessed a deteriorating real estate market in and around the buildings we service with rising vacancy levels and falling lease initiations or renewals which resulted in fewer sales opportunities for our salesforce and a reduction in VPN opportunities.

We also witnessed a deteriorating real estate market in and around the buildings we service with rising vacancy levels and falling lease initiations or renewals which resulted in fewer sales opportunities for our salesforce and a reduction in VPN opportunities.

As a result, we experienced a slowdown in new sales to our corporate customers which negatively impacted our corporate revenue growth.

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Following the end of the pandemic, during the three months ended March 31, 2024, we continued to see declining vacancy rates and rising office occupancy rates in certain markets in which we operate.

Following the end of the pandemic, during the three months ended June 30, 2024, we continued to see declining vacancy rates and rising office occupancy rates in certain markets in which we operate.

Other markets, particularly those in California and the Pacific Northwest, continue to see markedly higher vacancy rates.

In addition, we began to see positive trends in our corporate business.

Despite these factors, we began to see positive trends in our corporate business.

This was due partially to the increase in office occupancy rates and leasing activity in some markets but also to new demands for services from corporate customers.

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As a result, we may continue to experience increased customer turnover, fewer upgrades of existing customer configurations and fewer new tenant opportunities.

A potential resurgence of COVID-19 due to new immunity-resistant variants could cause companies to continue to delay the return of their employees to the office, to cause companies to shift workers in the office back to remote work and to delay further opening new offices.

A potential resurgence of COVID-19 due to new immunity-resistant variants could cause companies to continue to delay the return of their employees to the

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office, to cause companies to shift workers in the office back to remote work and to delay further opening new offices.

These trends may negatively impact our revenue growth, cash flows and profitability.

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The following table sets forth our consolidated cash flows.

Three months Ended March 31,

Six Months Ended June 30,

(in thousands)

Net cash provided by operating activities

Net cash (used in) provided by operating activities

Net cash provided by (used in) investing activities

Net cash used in financing activities

Net cash provided by (used in) financing activities

Effect of exchange rates changes on cash

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

Net Cash Provided by Operating Activities.

Net Cash (Used in) Provided by Operating Activities.

Our primary source of operating cash is receipts from our customers who are billed on a monthly basis for our services.

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Amounts billed under the TSA are due 30 days from receipt of the related invoice.

During the three months ended March 31, 2024, we were billed $16.7 million under the TSA primarily for reimbursement at cost of payment to vendors of the Sprint Business.

During the three months ended March 31, 2024 we paid $78.5 million to the Seller under the TSA.

As of March 31, 20234 we owed $5.8 million to the Seller and the Seller owed $3.2 million to us under the TSA agreement.

During the six months ended June 30, 2024, and 2023 we were billed $23.3 million and $116.8 million under the TSA, respectively, primarily for reimbursement at cost of payments to vendors of the Sprint Business.

During the six months ended June 30, 2024 we paid $88.2 million to the Seller under the TSA.

There were no payments made under the TSA for the six months ended June 30, 2023 since the first payment under the TSA was due in July 2023.

As of June 30, 2024, we owed $2.3 million to the Seller and the Seller owed $3.9 million to us under the TSA.

Amounts due and paid to the Seller under the TSA resulted in $64.6 million of net cash used in operating activities for the six months ended June 30, 2024.

As of June 30, 2023, we owed $116.8 million to the Seller and the Seller owed us $7.0 million under the TSA.

Amounts due to the Seller under the TSA contributed $118.8 million to net cash provided by operating activities for the six months ended June 30, 2023.

Net Cash Provided by (Used in) Investing Activities.

Our primary use of cash for investing activities is for purchases of property and equipment.

Purchases of property and equipment were $40.9 million and $23.2 million for the three months ended March 31, 2024 and 2023, respectively.

Purchases of property and equipment were $90.0 million and $60.6 million for the six months ended June 30, 2024 and 2023, respectively.

The changes in purchases of property and equipment were primarily due to the timing and scope of our network expansion activities including geographic expansion, purchases related to our acquisition of the Sprint Business and adding buildings to our network.

On the Closing Date, we entered into the IP Transit Services Agreement pursuant to which TMUSA will pay us an aggregate of $700.0 million, consisting of (i) $350.0 million in equal monthly installments during the first year after the Closing Date and (ii) $350.0 million in equal monthly installments over the subsequent 42 months.

During the three months ended March 31, 2024 we were paid $87.5 million under the IP Transit Services Agreement.

During the six months ended June 30, 2024 we were paid $154.2 million under the IP Transit Services Agreement.

During the six months ended June 30, 2023, we were paid $29.2 million under the IP Transit Services Agreement.

In the six months ended June 30, 2023, we paid $61.1 million, net of $47.1 million of cash acquired, and received $16.2 million for our acquisition of the Sprint Business.

In the six months ended June 30, 2024, we received $12.3 million in reimbursed severance payments related to our acquisition of the Sprint Business.

Net Cash Provided By (Used In) Financing Activities.

Our primary uses of cash for financing activities are for dividend payments, purchases of our common stock and principal payments under our finance lease obligations.

Our primary sources of cash for financing activities are issuances of note obligations.

During the six months ended June 30, 2024 and 2023 we paid $93.8 million and $90.2 million for our quarterly dividend payments, respectively.

Our quarterly dividend payments have increased due to increases

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Net Cash Used in Financing Activities.

Our primary uses of cash for financing activities are for payments to redeem and extinguish our debt, dividend payments and principal payments under our finance lease obligations.

During the three months ended March 31, 2023 we paid $45.3 million for our first quarter dividend payment.

Our first quarter 2024 dividend payment totaling $45.8 million was paid in April 2024 and accrued at March 31, 2024.

Our quarterly dividend payments have increased due to increases in our quarterly dividend per share amounts.

Principal payments under our finance lease obligations were $23.2 million and $9.5 million for the three months ended March 31, 2024 and 2023, respectively.

The changes in our principal payments under our finance lease obligations were primarily due to the timing and extent of our network expansion activities including geographic expansion, purchases related to our acquisition of the Sprint Business and adding buildings to our network.

in our quarterly dividend per share amounts.

Principal payments under our finance lease obligations were $42.1 million and $17.2 million for the six months ended June 30, 2024 and 2023, respectively.

At the payment date, the present value of the IRU finance lease liability was $117.9 million and the remaining thirty-one $4.2 million monthly principal payments totaled $130.2 million.

The prepayment resulted in a gain on lease termination of $3.3 million related to the difference between the book value and the cash payment.

The other changes in our principal payments under our finance lease obligations were primarily due to the timing and extent of our network expansion activities including geographic expansion, purchases related to our acquisition of the Sprint Business and adding buildings to our network.

During the six months ended June 30, 2024 we purchased 153,322 shares of our common stock for $8.0 million.

There were no purchases of our common stock in the six months ended June 30, 2023.

We completed a series of debt issuances in the six months ended June 30, 2024.

On May 2, 2024, we issued $206.0 million aggregate principal amount of our IPv4 Notes, with an anticipated term ending in May 2029.

The net proceeds from the offering, after debt offering costs, were $198.4 million and are expected to be used for general corporate purposes.

Interest on the IPv4 Notes is paid on a monthly basis.

From and after the ARD, principal payments will also be required to be made on the IPv4 Notes on a monthly basis.

No principal payments will be due on the IPv4 Notes prior to the ARD, unless certain rapid amortization or acceleration triggers are activated.

On June 11, 2024, we completed our offering of $300.0 million aggregate principal amount of our 2027 Mirror Notes.

The 2027 Mirror Notes were issued at a price equal to 98.50% of their face value.

The net proceeds from the offering were approximately $291.9 million after deducting the discount and offering expenses.

The 2027 Mirror Notes bear interest at a rate of 7.00% per annum.

Interest began to accrue on the 2027 Mirror Notes on June 11, 2024 and will be paid semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2024.

Unless earlier redeemed or repurchased, the 2027 Mirror Notes will mature on June 15, 2027.

Cash Position and Indebtedness

At March 31, 2024, our total indebtedness, at par, was $1.5 billion and our total cash, cash equivalents and restricted cash ($44.8 million) was $163.3 million.

Our total indebtedness at March 31, 2024 included $517.5 million of finance lease obligations for dark fiber under long-term IRU agreements.

At June 30, 2024, our total indebtedness, at par, was $1.9 billion and our total cash, cash equivalents and restricted cash ($41.8 million) was $426.2 million.

Our total indebtedness at June 30, 2024 includes $426.4 million of finance lease obligations for dark fiber under long-term IRU agreements.

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Summarized Financial Information of Holdings

Neither Holdings nor any of its subsidiaries that is not also a subsidiary of Group is a “Restricted Subsidiary” as defined under the indentures governing our 2026 Notes and our 2027 Notes (the “Indentures”).

Neither Holdings nor any of its subsidiaries that is not also a subsidiary of Group is a “Restricted Subsidiary” as defined under the indentures governing our 2026 Notes, our 2027 Notes or our 2027 Mirror Notes (the “Indentures”).

Holdings is a guarantor under these notes, but none of its subsidiaries that is not also a subsidiary of Group is a guarantor under these notes.

Under the Indentures, we are required to disclose certain reasonably related information of Holdings and its subsidiaries that is not attributable to Group and its subsidiaries, relating to Holdings’ assets, liabilities and operating results (“Holdings Financial Information”).

The Holdings Financial Information as of and for the three months ended March 31, 2024 is detailed below (in thousands):

As of March 31, 2024

The Holdings Financial Information as of and for the three and six months ended June 30, 2024 is detailed below (in thousands):

As of June 30, 2024

Cash and cash equivalents

Accounts receivable

Restricted cash

Accounts receivable, net

Other current assets

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Accounts payable

Due to T-Mobile – TSA

Due to T-Mobile – Purchase Agreement

Accrued and other liabilities

Due to T-Mobile – TSA

Operating lease liabilities, current maturities

Finance lease liabilities, current maturities

Total current liabilities

Due to Cogent Communications LLC

Operating lease liabilities

Finance lease liabilities

Unfavorable lease liabilities

Due to Cogent Communications LLC

Senior secured IPv4 Notes

Deferred income tax liabilities

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Total liabilities

Stockholders’ equity

Total liabilities and stockholders’ equity

Total stockholders’ deficit

Total liabilities and stockholders’ deficit

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For the Three Months

March 31, 2024

Three Months Ended

June 30, 2024

Service revenue

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Interest expense

Reduction to bargain purchase gain

Interest income and other

The Holdings Financial Information as of and for the year ended December 31, 2023 is detailed below (in thousands):

As of December 31, 2023

Cash and cash equivalents (1)

Accounts receivable

Other current assets

Total current assets

Property and equipment, net

Right-of-use leased assets

Intangible assets, net

Deposits and other assets

Due from T-Mobile – Working Capital

Accounts payable

Due to T-Mobile – TSA

Due to T-Mobile Working Capital

Accrued and other liabilities

Operating lease liabilities, current maturities

Finance lease liabilities, current maturities

Total current liabilities

Due to Cogent Communications LLC

Operating lease liabilities

Finance lease liabilities

Deferred income tax liabilities

Other long-term liabilities

Total liabilities (1)

Stockholders’ equity

Total liabilities and stockholders’ equity

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December 31, 2023

Gain on lease termination

Adjustment to gain on bargain purchase – Sprint Business

Interest income and other, net

Six Months Ended

June 30, 2024

Service revenue

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Interest expense

Bargain purchase gain

Interest income and other

Income before taxes

Income tax benefit

(1) On May 2, 2024, the Securitization Issuer, which is not a “Restricted Subsidiary” under the Indentures, completed the Securitization.

The Securitization is not reflected in the Holdings Financial Information.

Net proceeds, after offering expenses, of $200.5 million are expected to be used for general corporate purposes.

Gain on lease termination

Gain on bargain purchase – Sprint Business

Interest income and other, net

Common Stock Buyback Program

Our Board of Directors has approved purchases of shares of our common stock under a buyback program (the “Buyback Program”).

There were no purchases of shares of our common stock in the three months ended March 31, 2024 and 2023.

As of March 31, 2024, there was a total of $30.4 million available under the Buyback Program that is authorized to continue through December 31, 2024.

During the three months ended June 30, 2024, we purchased 153,322 shares of our common stock for $8.0 million.

There were no purchases of our common stock in the three and six months ended June 30, 2023.

As of June 30, 2024, there was a total of $22.4 million available under the Buyback Program that is authorized to continue through December 31, 2024.

Dividends on Common Stock and Return of Capital Program

On February 28, 2024, our Board of Directors approved the payment of our first quarter 2024 dividend of $0.965 per share of common stock to holders of record as of March 15, 2024.

This $45.8 million dividend payment was paid on April 9, 2024 and is accrued on our consolidated balance sheet as of March 31, 2024.

On May 8, 2024, our Board of Directors approved the payment of a quarterly dividend of $0.975 per share of common stock.

This estimated $46.3 million dividend payment is expected to be paid on June 7, 2024.

On August 7, 2024, our Board of Directors approved the payment of our quarterly dividend of $0.985 per common share.

This estimated $46.8 million dividend payment is expected to be made on September 6, 2024.

The payment of any future dividends and any other returns of capital, including stock buybacks, will be at the discretion of our Board of Directors and may be reduced, eliminated or increased and will be dependent upon our financial position, results of operations, available cash, cash flow, capital requirements, limitations under our debt indentures and other factors deemed relevant by our Board of Directors.

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See Note 3 of our interim condensed consolidated financial statements for additional discussion of limitations on distributions.

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Future Capital Requirements

We believe that our cash on hand and cash generated from our operating activities and cash from the IP Transit Services Agreement will be adequate to meet our working capital, capital expenditure, debt service, dividend payments and other cash requirements for the next 12 months and beyond the next 12 months if we execute our business plan.

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Any future acquisitions or other significant unplanned costs or cash requirements in excess of amounts we currently hold may require that we raise additional funds through the issuance of debt or equity.

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Critical Accounting Estimates

Management believes that as of March 31, 2024, there have been no material changes to our critical accounting policies and significant estimates from those listed in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the year ended December 31, 2023.

Management believes that as of June 30, 2024, there have been no material changes to our critical accounting policies and significant estimates from those listed in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the year ended December 31, 2023.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management believes that as of March 31, 2024, there have been no material changes to our exposures to market risk from those disclosed in Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our annual report on Form 10-K for the year ended December 31, 2023.

Management believes that as of June 30, 2024, there have been no material changes to our exposures to market risk from those disclosed in Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our annual report on Form 10-K for the year ended December 31, 2023.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis