Description of the business and recent developments:

9 Months Ended

Sep. 30, 2020

Description of the business and recent developments:

Description of the business and recent developments:

1.  Description of the business and recent developments:

Reorganization and merger

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

Description of business

We are a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation space. Our network is specifically designed and optimized to transmit packet switched data. We deliver our services primarily to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations in 47 countries across North America, Europe, Asia, South America, Australia and Africa. We are a Delaware corporation and we are headquartered in Washington, DC.

We offer on-net Internet access services exclusively through our own facilities, which run from our network to our customers’ premises. We offer our on-net services to customers located in buildings that are physically connected to our network. As a result, we are not dependent on local telephone companies or cable TV companies to serve our customers for our on-net Internet access and private network service. Our on- net service consists of high-speed Internet access and private network services offered at speeds ranging from 100 Megabits per second to 100 Gigabits per second.

We provide our on-net Internet access and private network services to our corporate and net-centric customers. Our corporate customers are located in multi-tenant office buildings and typically include law firms, financial services firms, advertising and marketing firms as well as health care providers, educational institutions and other professional services businesses. Our net-centric customers include bandwidth-intensive users which leverage our network to either deliver content to end users or to provide access to residential or commercial internet users. Content delivery customers include over the top (“OTT”) media service providers, content delivery networks, web hosting companies, and commercial content and application software providers. Access customers include over 7,200 access networks comprised of other Internet access providers, telephone companies, and cable television companies that collectively provide internet access to a substantial number of broadband subscribers across the world. These net-centric customers generally receive our services in carrier neutral colocation facilities and in our data centers. We operate data centers throughout North America and Europe that allow our customers to collocate their equipment and access our network.

In addition to providing our on-net services, we provide Internet access and private network services to customers that are not located in buildings directly connected to our network. We provide these off-net services primarily to corporate customers using other carriers’ circuits to provide the “last mile” portion of the link from the customers’ premises to our network. We also provide certain non-core services that resulted from acquisitions. We continue to support but do 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 annual report on Form 10-K for the year ended December 31, 2019.

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

Use of estimates

The preparation of consolidated financial statements in conformity with 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.

Financial instruments

At September 30, 2020, 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 amortized cost, which approximates fair value based upon quoted market prices (Level 1). Based upon recent trading prices (Level 2— market approach) at September 30, 2020 the fair value of the Company’s $445.0 million senior secured notes was $455.0 million and the fair value of the Company’s €350.0 million Euro ($410.4 million USD) senior unsecured notes was $416.5 million.

Gross receipts taxes, universal service fund and other surcharges

Revenue recognition standards include guidance relating to taxes or surcharges assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer and may include, but are not limited to, gross receipts taxes, excise taxes, Universal Service Fund fees and certain state regulatory fees. Such charges may be presented gross or net based upon the Company’s accounting policy election. The Company records certain excise taxes and surcharges on a gross basis and includes them in its revenues and costs of network operations. Excise taxes and surcharges billed to customers and recorded on a gross basis (as service revenue and network operations expense) were $3.9 million and $4.0  million for the three months ended September 30, 2020 and September 30, 2019, respectively, and $10.9 million and $10.6 million for the nine months ended September 30, 2020 and September 30, 2019, respectively.

Basic and diluted net income per common share

Basic earnings per share (“EPS”) excludes dilution for common stock equivalents and is computed by dividing net income or (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares of common stock outstanding during each period, adjusted for the effect of dilutive common stock equivalents. Shares of restricted stock are included in the computation of basic EPS as they vest and are included in diluted EPS, to the extent they are dilutive, determined using the treasury stock method.

The following details the determination of diluted weighted average shares:

	Three Months Ended	Three Months Ended	Nine Months Ended	Nine Months Ended
	September 30, 2020	September 30, 2019	September 30, 2020	September 30, 2019
Weighted average common shares - basic	45,815,718	45,438,656	45,818,677	45,428,305
Dilutive effect of stock options	—	34,593	99,581	32,179
Dilutive effect of restricted stock	—	546,442	680,612	487,847
Weighted average common shares - diluted	45,815,718	46,019,691	46,598,870	45,948,331

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

	Three Months	Three Months	Nine Months	Nine Months
	Ended	Ended	Ended	Ended
	September 30, 2020	September 30, 2019	September 30, 2020	September 30, 2019
Unvested shares of restricted common stock	1,472,572	1,379,446	1,472,572	1,379,446
Anti-dilutive options for common stock	87,214	37,606	24,453	50,928
Anti-dilutive shares of restricted common stock	925,866	—	191	50,292

Stockholders’ Deficit

The following details the changes in stockholders’ deficit for the three and nine months ended September 30, 2020 and September 30, 2019 (in thousands except share amounts):

						Accumulated
				Additional		Other				Total
	Common Stock			Paid-in		Comprehensive		Accumulated		Stockholders’
	Shares	Amount		Capital		Income (Loss)		Deficit		Equity (Deficit)
Balance at June 30, 2020	47,279,201	$	47	$	506,391	$	(12,906)	$	(729,082)	$	(235,550)
Forfeitures of shares granted to employees	(4,932)		—		—		—		—		—
Equity-based compensation	—		—		7,147		—		—		7,147
Foreign currency translation	—		—		—		5,408		—		5,408
Issuances of common stock	10,500		—		—		—		—		—
Exercises of options	4,134		—		185		—		—		185
Common stock purchases and retirement	(4,567)		—		(269)		—		—		(269)
Dividends paid	—		—		—		—		(32,657)		(32,657)
Net loss	—		—		—		—		(4,955)		(4,955)
Balance at September 30, 2020	47,284,336	$	47	$	513,454	$	(7,498)	$	(766,694)	$	(260,691)

						Accumulated
				Additional		Other				Total
	Common Stock			Paid-in		Comprehensive		Accumulated		Stockholders’
	Shares	Amount		Capital		Income (Loss)		Deficit		Equity (Deficit)
Balance at June 30, 2019	46,806,370	$	47	$	481,734	$	(10,967)	$	(647,404)	$	(176,590)
Forfeitures of shares granted to employees	(4,508)		—		—		—		—		—
Equity-based compensation	—		—		5,311		—		—		5,311
Foreign currency translation	—		—		—		(4,709)		—		(4,709)
Issuances of common stock	10,572		—		—		—		—		—
Exercises of options	9,152		—		351		—		—		351
Dividends paid	—		—		—		—		(28,565)		(28,565)
Net income	—		—		—		—		13,701		13,701
Balance at September 30, 2019	46,821,586	$	47	$	487,396	$	(15,676)	$	(662,268)	$	(190,501)

						Accumulated
				Additional		Other				Total
	Common Stock			Paid-in		Comprehensive		Accumulated		Stockholders'
	Shares	Amount		Capital		Income (Loss)		Deficit		Equity (Deficit)
Balance at December 31, 2019	46,840,434	$	47	$	493,178	$	(12,326)	$	(684,578)	$	(203,679)
Forfeitures of shares granted to employees	(42,212)		—		—		—		—		—
Equity-based compensation	—		—		19,371		—		—		19,371
Foreign currency translation	—		—		—		4,828		—		4,828
Issuances of common stock	465,530		—		—		—		—		—
Exercises of options	25,151		—		1,174		—		—		1,174
Common stock purchases and retirement	(4,567)		—		(269)		—		—		(269)
Dividends paid	—		—		—		—		(94,952)		(94,952)
Net income	—		—		—		—		12,836		12,836
Balance at September 30, 2020	47,284,336	$	47	$	513,454	$	(7,498)	$	(766,694)	$	(260,691)

						Accumulated
				Additional		Other				Total
	Common Stock			Paid-in		Comprehensive		Accumulated		Stockholders'
	Shares	Amount		Capital		Income (Loss)		Deficit		Equity (Deficit)
Balance at December 31, 2018	46,336,499	$	46	$	471,331	$	(10,928)	$	(609,451)	$	(149,002)
Forfeitures of shares granted to employees	(8,394)		—		—		—		—		—
Equity-based compensation	—		—		14,796		—		—		14,796
Foreign currency translation	—		—		—		(4,748)		—		(4,748)
Issuances of common stock	459,550		1		—		—		—		1
Exercises of options	33,931		—		1,269		—		—		1,269
Dividends paid	—		—		—		—		(82,871)		(82,871)
Net income	—		—		—		—		30,054		30,054
Balance at September 30, 2019	46,821,586	$	47	$	487,396	$	(15,676)	$	(662,268)	$	(190,501)

Revenue recognition

The Company recognizes revenue under ASU No. 2014-09, Revenue from Contracts with Customers (“ASC 606”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Under ASC 606 installation fees for contracts with terms longer than month-to-month are recognized over the contract term. The Company believes that the installation fee does not give rise to a material right as defined by ASC 606 for contracts with terms longer than month-to-month. The Company recognizes revenue over the estimated average customer life for installation fees associated with month-to-month contracts, because the fee represents a material right as defined by ASC 606. The Company capitalizes certain contract acquisition costs that relate directly to a customer contract, including commissions paid to its sales team and sales agents and amortizes these costs on straight-line basis over the period the services are transferred to the customer for commissions paid to its sales team (estimated customer life) and over the remaining original contract term for agent commissions. Management assesses these costs for impairment at least quarterly and as "triggering" events occur that indicate it is more likely than not that an impairment exists.

The Company’s service offerings consist of on-net and off-net telecommunications services. Fixed fees are billed monthly in advance and usage fees are billed monthly in arrears. Amounts billed are due upon receipt and contract lengths range from month to month to 60 months. The Company satisfies its performance obligations to provide services to customers over time as the services are rendered. In accordance with ASC 606, revenue is recognized when a customer obtains the promised service. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. The Company has adopted the practical expedient related to certain performance obligation disclosures since it has a right to consideration from its customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date.

To achieve this core principle, the Company follows the following five steps:

1) Identification of the contract, or contracts with a customer

2) Identification of the performance obligations in the contract

3) Determination of the transaction price

4) Allocation of the transaction price to the performance obligations in the contract

5) Recognition of revenue when, or as, we satisfy a performance obligation

Fees billed in connection with customer installations are deferred (as deferred revenue) and recognized as noted above. To the extent a customer contract is terminated prior to its contractual end the customer is subject to termination fees. The Company vigorously seeks payment of these amounts. The Company recognizes revenue for these amounts as they are collected.

Service revenue recognized from amounts in deferred revenue (contract liabilities) at the beginning of the period during the three months ended September 30, 2020 was $1.6 million and during the three months ended September 30, 2019 was $1.7 million. Service revenue recognized from amounts in deferred revenue (contract liabilities) at the beginning of the period during the nine months ended September 30, 2020 was $3.9  million and during the nine months ended September 30, 2019 was $5.1 million. Amortization expense for contract costs was $4.2  million for the three months ended September 30, 2020 and $4.3 million for the three months ended September 30, 2019. Amortization expense for contract costs was $12.6  million for the nine months ended September 30, 2020 and $13.0  million for the nine months ended September 30, 2019.

Recent Accounting Pronouncements— Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 replaced most existing lease accounting guidance. In July 2018 the FASB approved an Accounting Standards Update which, among other changes, allowed a company to elect to adopt ASU 2016-02 using the modified retrospective method applying the transition provisions at the beginning of the period of adoption, rather than at the beginning of the earliest comparative period presented in these financial statements. ASU 2016-02 was effective for the Company beginning on January 1, 2019 and required the Company to record a right-of-use asset and a lease liability for most of its facilities leases. These leases were previously treated as operating leases. The effect of ASU 2016-02 was to record a cumulative-effect adjustment on January 1, 2019 as a right-of-use asset and an operating lease liability totaling $97.3 million. The operating lease liability is not considered a liability under the consolidated leverage ratio calculations in the indentures governing the Company’s senior unsecured and senior secured note obligations. The Company has made an accounting policy election to not apply the recognition requirements of ASU 2016-02 to its short-term leases - leases with a term of one year or less. The Company has also elected to apply certain practical expedients under ASU 2016-02 including not separating lease and nonlease components on its finance and operating leases, not reassessing whether any existing contracts contained leases, not reconsidering lease classification, not reassessing initial direct costs and using hindsight in determining the lease reasonably certain term of its leases.

	Three Months		Three Months
	Ended		Ended
	September 30, 2020		September 30, 2019
Finance lease cost
Amortization of right-of-use assets	$	6,382	$	4,963
Interest expense on finance lease liabilities		4,804		4,414
Operating lease cost		4,269		3,716
Total lease costs	$	15,455	$	13,093

	Nine Months			Nine Months
	Ended			Ended
	September 30, 2020			September 30, 2019
Finance lease cost
Amortization of right-of-use assets	$	16,117		$	14,851
Interest expense on finance lease liabilities		13,794			13,230
Operating lease cost		12,860			10,497
Total lease costs	$	42,771		$	38,578
Other lease information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	(14,150)		$	(12,957)
Operating cash flows from operating leases		(13,785)			(8,443)
Financing cash flows from finance leases		(19,392)			(7,035)
Right-of-use assets obtained in exchange for new finance lease liabilities		61,504			11,342
Right-of-use assets obtained in exchange for new operating lease liabilities		24,866			6,912
Weighted-average remaining lease term — finance leases (in years)		12.3			14.5
Weighted-average remaining lease term — operating leases (in years)		20.4			21.7
Weighted average discount rate — finance leases		10.5	%		10.5	%
Weighted average discount rate — operating leases		5.4	%		5.7	%

Finance leases—fiber lease agreements

The Company has entered into lease agreements with numerous providers of dark fiber under indefeasible-right-of use agreements (“IRUs). These IRUs typically have initial terms of 15- 20 years and include renewal options after the initial lease term. The Company establishes the number of renewal option periods used in determining the lease term based upon its assessment at the inception of the lease of the number of option periods for which failure to renew the lease imposes a penalty in such amount that renewal appears to be reasonably certain. The option to renew may be automatic, at the option of the Company or mutually agreed to between the dark fiber provider and the Company. Once the Company has accepted the related fiber route, leases that meet the criteria for treatment as finance leases are recorded as a finance lease obligation and an IRU asset. The interest rate used in determining the present value of the aggregate future minimum lease payments is the Company’s incremental borrowing rate for the reasonably certain lease term. Finance lease assets are included in property and equipment in the Company’s consolidated balance sheets. As of September 30, 2020, the Company had committed to additional dark fiber IRU lease agreements totaling $20.7 million in future payments to be paid over periods of up to 20 years. These obligations begin when the related fiber is accepted, which is generally expected to occur in the next 12 months.

The future minimum payments (principal and interest) under these finance leases are as follows (in thousands):

For the twelve months ending September 30,
2021	$	33,471
2022		32,638
2023		31,650
2024		31,753
2025		28,495
Thereafter		225,320
Total minimum finance lease obligations		383,327
Less—amounts representing interest		(170,387)
Present value of minimum finance lease obligations		212,940
Current maturities		(15,252)
Finance lease obligations, net of current maturities	$	197,688

Operating leases

The Company leases office space and certain data center facilities under operating leases. In certain cases the Company also enters into short term operating leases for dark fiber. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments under the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the reasonably certain lease term. The implicit rates within the Company’s operating leases are generally not determinable and the Company uses its incremental borrowing rate at the lease commencement date to determine the present value of its lease payments. The determination of the Company’s incremental borrowing rate requires judgment. The Company determines its incremental borrowing rate for each lease using its current borrowing rate, adjusted for various factors including level of collateralization and term to align with the term of the lease. Certain of the Company’s leases include options to extend or terminate the lease. The Company establishes the number of renewal option periods used in determining the operating lease term based upon its assessment at the inception of the operating lease of the number of option periods for which failure to renew the lease imposes a penalty in such amount that renewal appears to be reasonably certain. The option to renew may be automatic, at the option of the Company or mutually agreed to between the landlord or dark fiber provider and the Company. Once the Company has accepted the related fiber route or the facility lease term has begun, the present value of the aggregate future minimum operating lease payments are recorded as an operating lease liability and a right-of-use leased asset. Lease incentives and deferred rent liabilities for facilities operating leases are presented with the right-of-use leased asset. Lease expense for lease payments is recognized on a straight-line basis over the term of the lease.

The future minimum payments under these operating lease agreements are as follows (in thousands):

For the twelve months ending September 30,
2021	$	17,579
2022		16,535
2023		15,674
2024		14,198
2025		12,124
Thereafter		103,809
Total minimum operating lease obligations		179,919
Less—amounts representing interest		(66,466)
Present value of minimum operating lease obligations		113,453
Current maturities		(12,006)
Lease obligations, net of current maturities	$	101,447

Adopted accounting pronouncements

Effective January 1, 2020, the Company adopted Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") later codified as Accounting Standards Codification ("ASC") 326 ("ASC 326"), using the modified retrospective transition approach. This guidance introduces a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. As of January 1, 2020, the Company maintained an allowance for credit losses to cover its current expected credit losses ("CECL") on its trade receivables arising from the failure of customers to make contractual payments. The Company estimates credit losses expected over the life of its trade receivables based on historical information combined with current conditions that may affect a customer's ability to pay and reasonable and supportable forecasts. While the Company uses various credit quality metrics, it primarily monitors collectability by reviewing the duration of collection pursuits on its delinquent trade receivables. Based on the Company's experience, the customer's delinquency status is the strongest indicator of the credit quality of the underlying trade receivables, which is analyzed monthly. Adoption of ASU 2016-13 did not have a material impact on the Company's consolidated financial statements and related disclosures and no cumulative adjustment was recorded.

			Current-period
	Balance at		Provision for		Write offs		Balance at
	June 30,		Expected Credit		Charged Against		September 30,
Description	2020		Losses		Allowance		2020
Allowance for credit losses (deducted from accounts receivable)
Three months ending September 30, 2020	$	2,115	$	1,174	$	(1,085)	$	2,204

			Current-period
	Balance at		Provision for		Write offs		Balance at
	December 31,		Expected Credit		Charged Against		September 30,
Description	2019		Losses		Allowance		2020
Allowance for credit losses (deducted from accounts receivable)
Nine months ending September 30, 2020	$	1,771	$	3,942	$	(3,509)	$	2,204

Net bad debt expense for the three months ended September 30, 2020 was $0.8 million which is net of bad debt recoveries of $0.4 million. Net bad debt expense for the nine months ended September 30, 2020 was $3.2 million which is net of bad debt recoveries of $0.8 million.