What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-08 · 223 added, 228 removed, 589 unchanged (43% of the section changed)

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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.

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 reports on Form 10-Q for the quarterly periods ended March 31, 2024 and June 30.

2024, and our annual report on Form 10-K for the year ended December 31, 2023.

Acquisition of Sprint Communications

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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”).

Short-term Lease Payment

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 operating 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.

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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, 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.

Under the IP Transit Services Agreement., TMUSA paid us $25.0 million and $87.5 million, during the three months ended September 30, 2024 and 2023, respectively, and $179.2 million and $116.7 million during the nine months ended September 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.

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Either party to the TSA may terminate the agreement (i) with respect to any individual service in full for convenience upon 30 days’ prior written notice for certain services and reduced for other services after a 90-day period.

Either party to the TSA may terminate the agreement with respect to any individual service in full for convenience upon 30 days’ prior written notice for certain services and reduced for other services after a 90-day period.

The TSA may be terminated in its entirety if the other party has failed to perform any of its material obligations and such failure is not cured within 30 days.

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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, 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.

During the three and nine months ended September 30, 2024, we were billed $3.0 million and $26.3 million, respectively, as due to the Seller under the TSA.

During the three and nine months ended September 30, 2023, we were billed $101.2 million and $218.0 million, respectively as due to the Seller under the TSA.

During the three and nine months ended September 30, 2024, we paid to the Seller $3.7 and $91.9 million, respectively, under the TSA.

During the three and nine months ended September 30, 2023 we paid $153.1 million to the Seller under the TSA.

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

As of September 30, 2024, we owed $1.6 million to the Seller under the TSA.

Severance reimbursement

The Purchase Agreement also provides for reimbursement from the Seller to the Buyer for qualifying severance expenses incurred.

Total qualifying severance expenses were $28.6 million of which $12.3 million were recorded in the nine months ended September 30, 2024.

No reimbursement amounts were recorded in the three and nine months ended September 30, 2023 or three months ended September 30, 2024.

Acquisition-Related Costs

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.

In connection with the Transaction and negotiation of the Purchase Agreement, we incurred a total of $13.6 million of professional fees and other acquisition related costs (not including severance costs).

Acquisition related costs were $0.4 million for the three months ended September 30, 2023 and $21.4 million and $1.5 million for the nine months ended September 30, 2024 and 2023, respectively.

There were no acquisition related costs in the three months ended September 30, 2024.

Other Services Provided to the Seller

In addition, on the Closing Date, we entered into a commercial agreement (the “CSA”) 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 CSA, we recorded service revenue of $4.1 million and $8.0 million during the three months ended September 30, 2024 and 2023, respectively, and $13.2 million and $15.3 million during the nine months ended September 30, 2023, respectively.

Competitive Advantages

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We believe that our organization has the following competitive advantages:

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Low Cost of Operation:

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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 .

● Our IP Network .

We have acquired a large portfolio of dark fiber leases from 360 dark fiber vendors from around the world sourced from the excess inventory of existing networks.

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This strategic combination of owned and leased dark fiber will help to ensure a robust and reliable network and enables us to connect via dark fiber to virtually any geographic route or facility we require on a long-term, cost-effective basis.

● Optical Wave Network - Acquiring the Sprint Network also has allowed us to construct a wavelength network using the predominantly owned fiber.

This enables us to expand our product offerings to include optical wavelength and optical transport services.

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.

We intend to offer this service in approximately 800 data centers in the United States, Mexico and Canada 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.

Narrow and Focused Product Set .

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We believe that the relative size of our salesforce training, support and overhead is lower than comparable telecom providers that tend to offer a broader, one-stop shop product set to their client base.

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● Scalable Network Equipment and Hub Configurations .

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These buildings include 1,870 large MTOBs (totaling over 1.0 billion square feet of office space) in major North American cities where we offer our services to a diverse set of high-quality corporate customers within close physical proximity of each other.

These buildings also include 1,602 CNDCs located in 1,436 buildings in North America, Europe, South America, Oceania and Africa where our net-centric customers directly

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interconnect with our network.

These buildings also include 1,627 CNDCs located in 1,459 buildings in North America, Europe, South America, Oceania and Africa where our net-centric customers directly interconnect with our network.

We also operate 95 of our own data centers 43 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 169 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.

Balanced, High-Traffic Network.

Balanced, High-Traffic IP Network.

Since its inception, our network has grown significantly in terms of its geographic reach, customer connections, and traffic.

We currently serve 8,212 access networks as well as numerous large and small content providers and 47,613 corporate customer connections and 16,447 enterprise customer connections.

Because of these growing bases of customers who distribute (content providers) and receive (access networks) content on our network, we believe that the majority of all the traffic remains “on-net” by both originating and terminating on our network.

Because of these bases of customers who distribute (content providers) and receive (access networks) content on our network, we believe that the majority of all the traffic remains “on-net” by both originating and terminating on our network.

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

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This Tier 1 network peering status broadens our geographic delivery capability and materially reduces our network costs.

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Proven and Experienced Management Team .

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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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● Wave and optical transport services – We began offering wave and optical transport services to our net-centric customers who require these high bandwidth services.

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Pursue On-net Customer Growth.

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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.

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infrastructure.

We currently offer wavelength services in 657 data centers and intend to offer this service in approximately 800 data centers in the United States and Mexico by the end of 2024.

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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 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.

By September 30, 2024, we had converted 43 former Sprint facilities.

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

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

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Results of Operations

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

Three Months Ended September 30, 2024 Compared to the Three Months Ended September 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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Three Months Ended

September 30,

(in thousands)

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Depreciation and amortization expenses

Gain on lease termination

Gain on bargain purchase – Sprint Business

Reduction to gain on bargain purchase – Sprint Business

Interest income – IP Transit Services Agreement

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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.

(1) Includes non-cash equity-based compensation expenses of $469 and $370 in the three months ended September 30, 2024 and 2023, respectively.

(2) Includes non-cash equity-based compensation expenses of $7,406 and $7,041 in the three months ended September 30, 2024 and 2023, respectively.

NM – not meaningful

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Service Revenue .

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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.

We typically sell corporate connections at similar pricing to our competitors, but our customers 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.

Our service revenue decreased by 6.7% from the three months ended September 30, 2023 to the three months ended September 30, 2024.

Exchange rates positively impacted our service revenue by $0.2 million.

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

Our total service revenue decreased from the cancellation of low margin and non-core customers we acquired with the Sprint Business, and a reduction in revenue under the CSA agreement with TMUSA, more than offsetting the growth in customers from 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.

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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.

The impact of these taxes including the Universal Service Fund resulted in an increase to our revenues of $5.2 million from the three months ended September 30, 2023 to the three months ended September 30, 2024.

Three Months Ended

September 30,

Other Operating Data

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Average Revenue Per Unit (ARPU)

ARPU - on-net

ARPU - off-net

ARPU wavelength

Average Price per Megabit installed base

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Revenue and customer connections by customer type .

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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.

Revenues from our corporate, net-centric and enterprise customers represented 45.2%, 35.7% and 19.1% of total service revenue, respectively, for the three months ended September 30, 2024 and represented 43.7%, 34.5% and 21.8% of total service revenue, respectively, for the three months ended September 30, 2023.

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Our revenue from our corporate customers decreased primarily due to cancellations of low margin and non-core 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.

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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.

During the three months ended September 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.

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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.

However, the exact timing and path of these positive trends remains uncertain.

Our revenue from our net-centric customers decreased primarily due to a reduction in the CSA with TMUSA offsetting growth in network traffic from our legacy net-centric 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.

Our average price per megabit of our installed base of customers decreased by 23.9% from the three months ended September 30, 2023 to the three months ended September 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.

Our revenue from our enterprise customers decreased primarily due to a reduction from low-margin and non-core enterprise customers acquired with the Sprint Business.

Service revenue classified as on-net revenue and enterprise revenue from a low margin resale customer acquired in connection with the Sprint Business was $1.7 million for the three months ended September 30, 2024 and $3.4 million for the three months ended September 30, 2023.

The resale customer cancelled its service on July 31, 2024.

Revenue and customer connections by network connection type.

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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.

Revenues from our on - net, off - net, wavelength and non - core customers represented 53.0%, 43.3%, 2.1% and 1.6% of total service revenue, respectively, for the three months ended September 30, 2024 and represented 46.9%, 47.4%, 1.1% and 4.7% of total service revenue, respectively, for the three months ended September 30, 2023.

Our on-net revenues increased from the three months ended September 30, 2023 to the three months ended September 30, 2024 primarily from customers acquired with the Sprint Business and an increase in revenues from our legacy Cogent customers.

The resale customer cancelled its service on July 31, 2024.

Our off-net revenues decreased from the three months ended September 30, 2023 to the three months ended September 30, 2024 primarily from cancellations of low-margin off-net 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.

Wavelength revenue was $5.3 million for the three months ended September 30, 2024 and $3.0 million for the three months ended September 30, 2023.

Our non-core revenues decreased from the three months ended September 30, 2023 to the three months ended September 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.

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Network Operations Expenses.

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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.

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.

Our decrease in network operations expense is primarily attributable to our efforts to reduce the network operations costs related to our acquisition of the Sprint Business, including leased circuit costs and facilities costs.

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.

Our SG&A expenses, including non - cash equity - based compensation expense, increased by 3.6% from the three months ended September 30, 2023 to the three months ended September 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.

SG&A expenses increased primarily from an increase in bad debt expense associated with the Sprint Business.

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.

In connection with the Transaction and negotiation of the Purchase Agreement, we incurred cumulative professional fees, other acquisition related costs totaling $42.1 million, including $28.6 million of reimbursed severance costs.

Such fees totaled $0.4 million for the three months ended September 30, 2023.

There were no acquisition related costs recorded in the three months ended September 30, 2024.

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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Our depreciation and amortization expense decreased by 1.1% primarily due to the depreciation expense associated assets acquired with the Sprint Business and an increase in deployed fixed assets offset by a change in estimated useful life for owned fiber acquired in the Sprint Business.

Effective July 1, 2024, we changed our estimate of the useful life of our owned fiber to better reflect the estimated periods during which these assets will remain in service.

The estimated useful life of the owned fiber that previously averaged 14 years was increased to an average of 40 years.

The effect of this change in estimate on the three months ended September 30, 2024 was to reduce depreciation expense by $4.4 million.

Gain on Bargain Purchase.

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

We accounted for the Transaction 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.

In the three months ended September 30, 2023 we reduced the gain on bargain purchase by $3.3 million.

The total bargain purchase gain from the Transaction was $1.4 billion.

Interest Income - IP Transit Services Agreement .

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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.

The amortization of the discount resulted in interest income of $5.4 million for the three months ended September 30, 2024 and $10.3 million for the three months ended September 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 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”) and interest on our Swap Agreement and interest incurred on our finance lease obligations.

As of September 30, 2024, the fair value of our Swap Agreement was a net liability of $29.9 million Changes in the valuation of the Swap Agreement are related changes in interest rates and are included in interest expense.

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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Income Tax Benefit.

Our income tax benefit was $16.9 million for the three months ended September 30, 2024 and $13.6 million for the three months ended September 30, 2023.

The change in our income tax 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.

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.

As of September 30, 2024 and 2023, we had a total of 3,424 and 3,257 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

Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 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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The comparisons illustrated in the tables are discussed in greater detail below.

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

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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.

(1) Includes non-cash equity-based compensation expenses of $1,204 and $750 in the nine months ended September 30, 2024 and 2023, respectively.

(2) Includes non-cash equity-based compensation expenses of $17,186 and $19,491 in the nine months ended September 30, 2024 and 2023, respectively.

NM – not meaningful

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

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

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

Our service revenue increased by 17.2% from the nine months ended September 30, 2023 to the nine months ended September 30, 2024.

Exchange rates had a positive impact on our increase in service revenue by $0.2 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.

All foreign currency comparisons herein reflect results for the nine months ended September 30, 2024 translated at the average foreign currency exchange rates for the nine months ended September 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 $24.5 million from the six months ended June 30, 2023 to the six months ended June 30, 2024.

The impact of these taxes including the Universal Service Fund resulted in an increase to our revenues of $29.7 million from the nine months ended September 30, 2023 to the nine months ended September 30, 2024.

Nine Months Ended

September 30,

Other Operating Data

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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

Revenues from our corporate, net - centric and enterprise customers represented 46.0%, 35.1% and 18.9% of total service revenue, respectively, for the nine months ended September 30, 2024 and represented 47.4%, 37.5% and 15.1% of total service revenue, respectively, for the nine months ended September 30, 2023.

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versus our competitors.

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 VPNs has also led to our ability to increase our corporate revenues.

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

During the nine months ended September 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.

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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.

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.

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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.

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

Service revenue classified as on-net revenue and enterprise revenue from a low margin resale customer acquired in connection with the Sprint Business was $11.9 million for the nine months ended September 30, 2024 and $8.5 million for the nine months ended September 30, 2023.

The resale customer cancelled its service on July 31, 2024.

Revenue and customer connections by network connection type.

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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.

Revenues from our on-net, off-net, wavelength and non-core customers represented 53.0%, 43.5%, 1.6% and 1.9% of total service revenue, respectively, for the nine months ended September 30, 2024 and represented 55.7%, 40.3%, 0.7% and 3.2% of total service revenue, respectively, for the nine months ended September 30, 2023.

Our on-net revenues increased from the nine months ended September 30, 2023 to the nine months ended September 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 nine months ended September 30, 2023 to the nine months ended September 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 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.

The resale customer cancelled its service on July 31, 2024.

Our off-net revenues increased from the nine months ended September 30, 2023 to the nine months ended September 30, 2024 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 $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.

Wavelength revenue was $12.2 million for the nine months ended September 30, 2024 and was $4.6 million for the nine months ended September 30, 2023.

Our non-core revenues decreased from the nine months ended September 30, 2023 to the nine months ended September 30, 2024 primarily from reductions in 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.

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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.

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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.

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 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 12.9% from the six months ended June 30, 2023 to the six months ended June 30, 2024.

Our SG&A expenses, including non-cash equity-based compensation expense, increased by 9.6% from the nine months ended September 30, 2023 to the nine months ended September 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 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.

Our total headcount was 1,908 at September 30, 2024 and 1,990 at September 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 $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.

In connection with the Transaction and negotiation of the Purchase Agreement, we incurred professional fees, other acquisition related costs totaling $42.1 million, including $28.6 million of reimbursed severance costs.

Such fees totaled $1.5 million for the nine months ended September 30, 2023 and $21.4 million for the nine months ended September 30, 2024.

Depreciation and Amortization Expenses.

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.

Our depreciation and amortization expense increased by 40.4% primarily due to the depreciation expense associated assets acquired with the Sprint Business and an increase in deployed fixed assets, partly offset by the impact of an increase in the estimated useful life for our owned fiber acquired with the Sprint Business.

Effective July 1, 2024, we changed our estimate of the useful life of our owned fiber to better reflect the estimated periods during which these assets will remain in service.

The estimated useful life of the owned fiber that previously averaged 14 years was increased to an average of 40 years.

The effect of this change in estimate on the nine months ended September 30, 2024 was to reduce depreciation expense by $4.4 million.

Gain on Lease Termination.

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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.

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.

As of September 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 nine months ended September 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 nine months ended September 30, 2024.

The total bargain purchase gain was from the Transaction was $1.4 billion.

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Interest Income - IP Transit Services Agreement.

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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.

The amortization of the discount resulted in interest income of $18.7 million for the nine months ended September 30, 2024 and $18.0 million for the nine months ended September 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.

As of September 30, 2024, the fair value of our Swap Agreement was a net liability of $29.9 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 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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to April 30, 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.

Our income tax benefit was $43.9 million for the nine months ended September 30, 2024 and $33.6 million for the nine months ended September 30, 2023.

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.

As of September 30, 2024, and 2023, we had a total of 3,424 and 3,257 on-net buildings connected to our network, respectively.

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

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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 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.

Through September 30, 2024, we received monthly payments totaling $383.3 million under the IP Transit Services Agreement, reflected as cash flows 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.

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

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During the first nine months of 2024, we have received a total of $179.2 million under the IP Transit Services Agreement.

During the remainder of 2024 we expect to receive a total of $25.0 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.

This includes three monthly payments of $8.3 million each.

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.

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.

(the “Co – Issuer” and, together with Group, the “Issuers”), two wholly owned subsidiaries of Cogent Communications Holdings, Inc.

(“Holdings”), 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”).

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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;

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

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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.

We expect to use the remainder of the net proceeds for general corporate purposes and/or to make special or recurring dividends to Holdings.

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, Holdings, 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 Holdings (together with the Subsidiary Guarantors, the “Guarantors”).

However, the Holdings 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.

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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.

Without giving effect to collateral arrangements, the 2027 Mirror Notes and the Guarantees rank pari passu in right of payment with all of 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.

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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.

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 2027 Mirror Notes Indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption.

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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.

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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;

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

incur indebtedness;

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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.

or enter into transactions with affiliates.

The covenants provide for certain exceptions to these restrictions, and Holdings is not subject to the covenants under the 2027 Mirror Notes 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.

and S&P Global Ratings, and so long as no default or event of default under the 2027 Mirror Notes Indenture 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;

(ii) failure to comply with any other agreements in the 2027 Mirror Notes 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;

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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.

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Cogent Communications LLC (in such capacity, the “Manager”) performs certain 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 accumulated customer payments on the IPv4 Assets.

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

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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;

(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 IPv4 Note of the United States Treasury Security having a remaining term closest to 10 years;

plus (B) 5.0%;

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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.

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 such amount considered restricted cash, (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 as defined in the IPv4 Indenture.

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.

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

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

As of September 30, 2024, $29.9 million of our cash and cash equivalents are restricted for use under our Swap Agreement.

We have made a $31.8 million deposit with the counterparty to the Swap Agreement.

If the fair value of the Swap Agreement exceeds a net liability of $31.8 million, we will be required to deposit additional funds with the counterparty equal to the net liability fair value.

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.

As of September 30, 2024, $29.9 million of the deposit was restricted and $1.9 million was unrestricted.

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 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 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.

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

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As of September 30, 2024, we had cash, cash equivalents and restricted cash of $316.1 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 believe we will have access to additional capital from a variety of sources and the public capital markets for debt and equity.

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.

Continued Impact of Changing Office Occupancy Rates

Since the onset of the COVID-19 pandemic in 2020, 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 initially from the pandemic.

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.

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.

During the three months ended September 30, 2024, we continued to see declining vacancy rates and rising office occupancy rates in certain markets in which we operate continuing a trend that began following the end of the pandemic.

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

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

These higher vacancy rates may represent a long-term change in office attendance and occupancy rates.

Despite this overall environment, we are seeing some 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.

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, and mitigates the overall impact of remote work policies on our corporate business.

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

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

While we believe that demand for office space in the buildings in which we operate will remain among the strongest in the markets in which they are located, and that most employers will eventually require their employees to return to their offices on at least a hybrid basis, the timing and scope of a return to office, particularly in a number of key markets we serve, remains uncertain.

In some markets, office occupancy rates may never return to pre-pandemic levels.

In some markets, office occupancy rates may never return to pre-2020 levels.

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

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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.

We cannot predict whether new COVID-19 variants will arise and spread widely, the impact of the spread of new COVID-19 variants on the global economy, how national and local governments may react to the spread of new variants nor predict the impact the variants and any measures taken in response may have on our operations, employee retention, revenue growth, cash flows and our profitability.

The following table sets forth our consolidated cash flows.

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands)

Net cash (used in) provided by operating activities

Net cash provided by (used in) investing activities

Net cash provided by investing activities

Net cash provided by (used in) financing activities

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

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.

During the nine months ended September 30, 2024, and 2023 we were billed $26.3 million and $218.0 million, respectively, under the TSA, primarily for reimbursement at cost of payments to vendors of the Sprint Business.

During the nine months ended

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September 30, 2024 we paid $91.9 million to the Seller under the TSA.

During the nine months ended September 30, 2023 we paid $153.1 million to the seller under the TSA.

As of September 30, 2024, we owed $1.6 million to the Seller under the TSA.

Amounts due and paid to the Seller under the TSA resulted in $65.3 million of net cash used in operating activities for the nine months ended September 30, 2024.

As of September 30, 2023, we owed $69.6 million to the Seller and the Seller owed us $16.8 million under the TSA.

Amounts due to the Seller under the TSA contributed $69.6 million to net cash provided by operating activities for the nine months ended September 30, 2023.

Net Cash Provided by Investing Activities.

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

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.

Purchases of property and equipment were $148.9 million and $86.0 million for the nine months ended September 30, 2024 and 2023, respectively.

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 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.

During the nine months ended September 30, 2024 we were paid $179.2 million under the IP Transit Services Agreement.

During the nine months ended September 30, 2023, we were paid $116.7 million under the IP Transit Services Agreement.

In the nine months ended September 30, 2023, we paid $61.1 million, net of $47.1 million of cash acquired, for a net total of $14.0 million paid for our acquisition of the Sprint Business.

Net Cash Provided By (Used In) Financing Activities.

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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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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.

During the nine months ended September 30, 2024 and 2023 we paid $141.0 million and $135.4 million for our quarterly dividend payments, respectively.

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

Principal payments under our finance lease obligations were $161.2 million and $58.5 million for the nine months ended September 30, 2024 and 2023, respectively.

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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.

During the nine months ended September 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 nine months ended September 30, 2023.

We completed a series of debt issuances in the nine months ended September 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.

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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.

From and after May 2029, 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 May 2029, unless certain rapid amortization or acceleration triggers are activated.

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

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Cash Position and Indebtedness

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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At September 30, 2024, our total indebtedness, at par, was $1.9 billion and our total cash, cash equivalents and restricted cash ($36.9 million) was $316.1 million.

Our total indebtedness at September 30, 2024 includes $482.6 million of finance lease obligations for dark fiber under long-term IRU agreements.

Summarized Financial Information of Holdings

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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 and six months ended June 30, 2024 is detailed below (in thousands):

As of June 30, 2024

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

As of September 30, 2024

Cash and cash equivalents

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Intangible assets, net

Deposits and other assets

Due from T-Mobile - Purchase Agreement

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Three Months Ended

June 30, 2024

September 30, 2024

Service revenue

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Interest expense

Gain on lease termination

Adjustment to gain on bargain purchase – Sprint Business

Interest income - Purchase Agreement

Interest income and other, net

Six Months Ended

June 30, 2024

Nine Months Ended

September 30, 2024

Service revenue

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Gain on bargain purchase – Sprint Business

Interest income – Purchase Agreement

Interest income and other, net

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

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.

During the nine months ended September 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 nine months ended September 30, 2023.

As of September 30, 2024, there was a total of $22.4 million available under the Buyback Program that is authorized to continue through December 31, 2025.

Dividends on Common Stock and Return of Capital Program

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.

On November 6, 2024, our Board of Directors approved the payment of our quarterly dividend of $0.995 per common share.

This estimated $47.2 million dividend payment is expected to be made on December 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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Critical Accounting Estimates

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 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.

Management believes that as of September 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.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management believes that as of September 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.

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