Description of the business, basis of presentation and recent developments:

9 Months Ended

Sep. 30, 2011

Description of the business, basis of presentation and recent developments:

Description of the business, basis of presentation and recent developments:

1.             Description of the business, basis of presentation and recent developments:

Description of business

Cogent Communications Group, Inc. (the “Company”) is a Delaware corporation and is headquartered in Washington, DC. The Company is a facilities-based provider of low-cost, high-speed Internet access and Internet Protocol (“IP”) communications services. The Company’s network is specifically designed and optimized to transmit data using IP. The Company delivers its services to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations in North America and Europe.

The Company offers on-net Internet access services exclusively through its own facilities, which run all the way to its customers’ premises. Because of its integrated network architecture, the Company is not dependent on local telephone companies to serve its on-net customers. The Company provides on-net Internet access to its net centric customers which include certain bandwidth-intensive users such as universities, other Internet service providers, telephone companies, cable television companies and commercial content providers at speeds up to 10 Gigabits per second. These customers generally receive service in colocation facilities and the Company’s data centers. The Company also offers Internet access services to its corporate customers in multi-tenant office buildings typically serving law firms, financial services firms, advertising and marketing firms and other professional services businesses. The Company operates data centers throughout North America and Europe that allow customers to colocate their equipment and access the Company’s network.

In addition to providing on-net services, the Company also provides Internet connectivity to customers that are not located in buildings directly connected to its network. The Company serves these off-net customers using other carriers’ facilities to provide the “last mile” portion of the link from its customers’ premises to the Company’s network. The Company also provides certain non-core services that resulted from acquisitions. The Company continues to support but does not actively sell these non-core services.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments that the Company considers necessary for the fair presentation of its results of operations and cash flows for the interim periods covered, and of the financial position of the Company at the date of the interim condensed consolidated balance sheet. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. While the Company believes that the disclosures are adequate to not make the information misleading, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in its 2010 annual report on Form 10-K.

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

Use of estimates

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

Recent accounting pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued amendments to the presentation of comprehensive income which become effective for interim and annual periods beginning after December 15, 2011. The amendments eliminate the current reporting option of displaying components of other comprehensive income within the statement of changes in stockholders’ equity. Under the new guidance, the Company will be required to present either a single continuous statement of comprehensive income or an income statement immediately followed by a statement of comprehensive income. The Company is currently evaluating which of the two presentation methods it will adopt.

Foreign currency translation adjustment and comprehensive (loss) income

The Company’s only component of “other comprehensive income” is the currency translation adjustment for all periods presented.

	Three months ended September 30, 2010			Three months ended September 30, 2011			Nine months ended September 30, 2010			Nine months ended September 30, 2011
Net (loss) income	$	(462	)	$	281		$	(1,915	)	$	2,118
Currency translation	3,781			(3,318		)	(275		)	512
Comprehensive income (loss)	$	3,319		$	(3,037	)	$	(2,190	)	$	2,630

Financial instruments

At December 31, 2010 and September 30, 2011, the carrying amount of cash and cash equivalents, accounts receivable, prepaid and other current assets, accounts payable, and accrued expenses approximated fair value because of the short-term nature of these instruments. The Company measures its cash equivalents at fair value based upon quoted (Level 1) market prices and at amortized cost, which approximates fair value. Based upon the quoted (Level 1) market price at September 30, 2011, the fair values of the Company’s $92.0 million convertible senior notes and the Company’s $175.0 million senior secured notes were approximately $81.3 million and $179.6 million, respectively.

The Company was party to letters of credit totaling approximately $0.5 million as of December 31, 2010 and September 30, 2011. These letters of credit are secured by investments totaling approximately $0.5 million at December 31, 2010 and September 30, 2011, that are restricted and included in other assets.

Basic and diluted net (loss) income per common share

Basic earnings per share (“EPS”) excludes dilution for common stock equivalents and is computed by dividing net income or (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares of common stock outstanding during each period, adjusted for the effect of common stock equivalents, if dilutive.

Shares of restricted stock are included in the computation of basic EPS as they vest and are included in diluted EPS, to the extent they are dilutive, determined using the treasury stock method. For the three months ended September 30, 2010 and 2011, 1.2 million and 10,800 unvested shares of restricted common stock, respectively, are not included in the computation of diluted (loss) income per share, as the effect would be anti-dilutive. For the nine months ended September 30, 2010 and 2011, 1.2 million and 4,196 unvested shares of restricted common stock, respectively, are not included in the computation of diluted (loss) income per share, as the effect would be anti-dilutive.

Using the “if-converted” method, the shares issuable upon conversion of the Company’s 1.00% Convertible Senior Notes (the “Convertible Notes”) were anti-dilutive for the three and nine months ended September 30, 2010 and 2011. Accordingly, the impact has been excluded from the computation of diluted (loss) income per share. The Convertible Notes are convertible into shares of the Company’s common stock at an initial conversion price of $49.18 per share, yielding 1.9 million shares at December 31, 2010 and September 30, 2011, subject to certain adjustments set forth in the indenture.

The Company computes the dilutive effect of outstanding options using the treasury stock method. For the three and nine months ended September 30, 2010, options to purchase approximately 0.4 million shares of common stock at a weighted-average exercise price of $12.81 per share are not included in the computation of diluted (loss) per share as the effect would be anti-dilutive.   For the three and nine months ended September 30, 2011, options to purchase approximately 0.2 million shares of common stock at weighted-average exercise prices of $17.28 and $17.24 per share, respectively, are not included in the computation of diluted income per share as the effect would be anti-dilutive.  For the three and nine months ended September 30, 2010 and 2011, the Company’s employees exercised options for 10,593, 23,207, 35,644 and 53,924 common shares, respectively.

For the three and nine months ended September 30, 2011, the Company purchased approximately 0.2 million shares of common stock for approximately $2.9 million.

The following details the determination of the diluted weighted average shares for the three and nine months ended September 30, 2011.

	Three Months Ended September 30,2011	Nine Months Ended September 30,2011
Weighted average common shares outstanding - basic	45,080,859	45,100,004
Dilutive effect of shares of restricted stock	406,480	483,231
Dilutive effect of stock options	72,633	86,516
Weighted average shares - diluted	45,559,972	45,669,751