| 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.
Description of business
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 services, private network services and data center colocation space. The Company’s network is specifically designed and optimized to transmit packet routed data. The Company delivers its services primarily to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations in North America, Europe and Asia.
The Company offers on-net Internet access and private network services exclusively through its own facilities, which run from its network to its customers’ premises. The Company is not dependent on local telephone companies or cable TV companies to serve its customers for its on-net Internet access services because of its integrated network architecture. The Company offers its on-net services to customers located in buildings that are physically connected to its network. The Company’s on-net service consists of high-speed Internet access and private network services offered at speeds ranging from 100 Megabits per second to 100 Gigabits per second of bandwidth. The Company provides its on-net Internet access services and private network services to its corporate and net-centric customers. The Company’s corporate customers are located in multi-tenant office buildings and typically include law firms, financial services firms, advertising and marketing firms and other professional services businesses. The Company’s net-centric customers include bandwidth-intensive users such as other Internet service providers, telephone companies, cable television companies, web hosting companies, content delivery network companies and commercial content and application service providers. These net-centric customers obtain the Company’s services in colocation facilities and in the Company’s data centers. The Company operates data centers throughout North America and Europe that allow its customers to collocate their equipment and access the Company’s network.
In addition to providing its on-net services, the Company provides Internet connectivity and private network services to customers that are not located in buildings directly connected to its network. The Company provides this off-net service primarily to corporate customers using other carriers’ facilities to provide the “last mile” portion of the link from the customers’ premises to the Company’s network. The Company also provides certain non-core services that resulted from acquisitions. The Company continues to support but does not actively sell these non-core services. Beginning in the second quarter of 2018 the Company will begin to offer and sell its software-defined wide area network (“SDWAN”) service.
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, 2017.
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 March 31, 2018, 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 March 31, 2018 the fair value of the Company’s $189.2 million senior unsecured notes was $191.6 million and the fair value of the Company’s $375.0 million senior secured notes was $383.4 million.
The Company was party to letters of credit totaling $0.7 million as of March 31, 2018. These letters of credit are secured by investments that are restricted and included in other assets.
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 $3.2 million and $2.6 million for the three months ended March 31, 2018 and March 31, 2017, 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. For the three months ended March 31, 2018 and 2017, the Company’s employees exercised options for 11,120 and 11,918 common shares, respectively.
The following details the determination of diluted weighted average shares:
Three Months Ended
Three Months Ended
Weighted average common shares - basic
Dilutive effect of stock options
Dilutive effect of restricted stock
Weighted average common shares - diluted
The following details unvested shares of restricted common stock as well as the anti-dilutive effects of stock options and restricted stock awards outstanding:
March 31, 2018
March 31, 2017
Unvested shares of restricted common stock
Anti-dilutive options for common stock
Anti-dilutive shares of restricted common stock
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Recent Accounting Pronouncements— Adopted
In May 2014, the FASB issued 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, and also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. ASC 606 replaced most existing revenue recognition guidance in U.S. GAAP. The new standard was effective for the Company on January 1, 2018. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company adopted ASC 606 using the modified retrospective transition method on January 1, 2018 and applied the standard to all of its customer contracts that are not considered completed as of the adoption date. Under the modified retrospective method, the cumulative effect of applying the standard was recognized at the date of initial application and resulted in a reduction to the Company’s accumulated deficit of $14.5 million, recording customer contract costs (a new asset) of $17.3 million, a decrease to deferred revenue of $0.9 million and a decrease to deferred income tax assets of $3.8 million. The Company refers to contract liabilities as “deferred revenue” on the condensed consolidated balance sheets and related disclosures. Results for reporting periods beginning January 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605, Revenue Recognition .
The effect of adopting ASC 606, changed the period for which the Company recognizes revenue for fees billed in connection with customer installations. Installation fees for contracts with terms longer than month-to-month are now recognized over the contract term which may be a shorter period than the average customer life which was previously used to recognize revenue. The Company believes 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. Consistent with previous GAAP, the Company is recognizing revenues 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.
Additionally, the Company is required to capitalize certain contract acquisition costs that relate directly to a customer contract, including commissions paid to its sales team and sales agents, and to amortize 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 contract term for agent commissions. The Company previously expensed these contract acquisition costs as incurred in selling, general and administrative expenses. 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 impact on the Company’s financial statement line items as of March 31, 2018 from adopting ASC 606 was as follows (in thousands, except earnings per share). There was no net impact on net cash provided by operating activities.
Financial Statement Line Items
As Reported
Balances Without
Balance Sheet
Prepaid expenses and other current assets
$
$
Deposits and other assets
$
$
Deferred tax assets
$
$
Accrued and other current liabilities
$
$
Other long term liabilities
$
$
Accumulated deficit
$
)
$
)
Statement of Comprehensive Income
Service revenue
$
$
Selling, general and administrative expenses
$
$
Operating income
$
$
Net income
$
$
Basic and diluted earnings per share
$
$
Comprehensive income
$
$
March 31,
At Adoption –
Customer contract costs — current portion (included in prepaid and other current assets)
$
$
Customer contract costs — non-current portion (included in deposits and other assets)
Deferred revenue — current portion (included in accrued and other current liabilities)
Deferred revenue — non-current portion (included in other long-term liabilities)
Service revenue recognized from amounts in deferred revenue at the beginning of the period during the three months ended March 31, 2018 was $2.0 million. Amortization expense for contract costs was $4.2 million for the three months ended March 31, 2018.
Revenue recognition
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 followed 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.
Recent Accounting Pronouncements—to be Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 will replace most existing lease accounting guidance when it becomes effective. ASU 2016-02 is effective for the Company beginning on January 1, 2019. Early application is permitted. In January 2018 the FASB issued a Proposed Accounting Standards Update which, among other changes would allow a company to elect to adopt ASU 2016-02 using a cumulative effect adjustment to the opening balance of its retained earnings on the adoption date. The Proposed Accounting Standards Update was subsequently approved. ASU 2016-02 will require the Company to record a right to use asset and a lease liability for most of its leases, including its leases currently treated as operating leases. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures and the Company will elect to apply certain practical expedients. The Company has not yet determined the effect of ASU 2016-02 on its ongoing financial reporting or quantified the impact to its balance sheet, however it does expect the right to use asset and lease liability recorded will be material. The Company does not expect to early adopt ASU 2016-02 and anticipates adopting ASU 2016-02 using the cumulative effect method.
In June 2016, the FASB issued ASU No. 2016-13, “ Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments. ” This guidance is intended to introduce a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. This new standard is effective for annual and interim reporting periods beginning after December 15, 2019 and early adoption is permitted. The Company is currently evaluating the impact that this guidance may have on its financial statements and related disclosures. |
