| 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 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 and recently in Australia and Brazil. 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 and private network 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 access 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 carrier neutral data centers 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’ circuits 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. 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, 2018. 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, 2019, 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, 2019 the fair value of the Company’s $189.2 million senior unsecured notes was $191.4 million, the fair value of the Company’s $445.0 million senior secured notes was $461.7 million and the fair value of the Company’s €135 million senior unsecured notes was $149.8 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 $4.0 million and $3.0 million for the three months ended September 30, 2019 and September 30, 2018, respectively, and $10.6 million and $9.3 million for the nine months ended September 30, 2019 and September 30, 2018, 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, 2019 September 30, 2018 September 30, 2019 September 30, 2018 Weighted average common shares - basic 45,438,656 45,105,830 45,428,305 45,096,472 Dilutive effect of stock options 34,593 39,488 32,179 34,644 Dilutive effect of restricted stock 546,442 554,317 487,847 460,101 Weighted average common shares - diluted 46,019,691 45,699,635 45,948,331 45,591,217 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, 2019 September 30, 2018 September 30, 2019 September 30, 2018 Unvested shares of restricted common stock 1,379,446 1,350,320 1,379,446 1,350,320 Anti-dilutive options for common stock 37,606 30,836 50,928 47,422 Anti-dilutive shares of restricted common stock — — 50,292 1,348 Stockholder’s Deficit The following details the changes in stockholder’s deficit for the three and nine months ended September 30, 2019 and September 30, 2018 (in thousands except share amounts): Accumulated Additional Other Total Common Stock Paid-in Comprehensive Accumulated Stockholder’s 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 Stockholder’s Shares Amount Capital Income (Loss) Deficit Equity (Deficit) Balance at June 30, 2018 46,443,945 $ 46 $ 467,007 $ (8,187) $ (573,502) $ (114,636) Forfeitures of shares granted to employees (9,381) — — — — — Equity-based compensation — — 5,292 — — 5,292 Foreign currency translation — — — (485) — (485) Issuances of common stock 12,750 — — — — — Exercises of options 14,057 — 518 — — 518 Dividends paid — — — — (24,764) (24,764) Net income — — — — 8,231 8,231 Balance at September 30, 2018 46,461,371 $ 46 $ 472,817 $ (8,672) $ (590,035) $ (125,844) Accumulated Additional Other Total Common Stock Paid-in Comprehensive Accumulated Stockholder's 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) Accumulated Additional Other Total Common Stock Paid-in Comprehensive Accumulated Stockholder's Shares Amount Capital Income (Loss) Deficit Equity (Deficit) Balance at December 31, 2017 45,960,799 $ 46 $ 456,696 $ (4,600) $ (554,686) $ (102,544) Cumulative effect adjustment from adoption of ASC 606 — — — — 14,455 14,455 Forfeitures of shares granted to employees (20,909) — — — — — Equity-based compensation — — 14,601 — — 14,601 Foreign currency translation — — — (4,072) — (4,072) Issuances of common stock 476,728 — — — — — Exercises of options 44,753 — 1,520 — — 1,520 Dividends paid — — — — (71,371) (71,371) Net income — — — — 21,567 21,567 Balance at September 30, 2018 46,461,371 $ 46 $ 472,817 $ (8,672) $ (590,035) $ (125,844) 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, 2019 was $1.7 million and during the three months ended September 30, 2018 was $1.9 million. Service revenue recognized from amounts in deferred revenue (contract liabilities) at the beginning of the period during the nine months ended September 30, 2019 was $5.1 million and during the nine months ended September 30, 2018 was $5.8 million. Amortization expense for contract costs was $4.3 million for the three months ended September 30, 2019 and $4.2 million for the three months ended September 30, 2018. Amortization expense for contract costs was $13.0 million for the nine months ended September 30, 2019 and $12.5 million for the three months ended September 30, 2018. Recent Accounting Pronouncements— Adopted In February 2016, the FASB issued ASU No. 2016-02, Leases 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 ASU2016-02 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 Ended September 30, 2019 Finance lease cost Amortization of right-of-use assets $ 4,963 Interest expense on finance lease liabilities 4,414 Operating lease cost 1,662 Total lease costs 11,039 Nine Months Ended September 30, 2019 Finance lease cost Amortization of right-of-use assets $ 14,851 Interest expense on finance lease liabilities 13,230 Operating lease cost 8,443 Total lease costs 36,524 Other lease information Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from finance leases (12,957) Operating cash flows from operating leases (8,443) Financing cash flows from finance leases (7,035) Right-of-use assets obtained in exchange for new finance lease liabilities 11,342 Right-of-use assets obtained in exchange for new operating lease liabilities 6,912 Weighted-average remaining lease term — finance leases (in years) 14.5 Weighted-average remaining lease term — operating leases (in years) 21.7 Weighted average discount rate — finance leases 10.5 % Weighted average discount rate — operating leases 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, 2019, the Company had committed to additional dark fiber IRU lease agreements totaling The future minimum payments (principal and interest) under these finance leases are as follows (in thousands): For the Twelve Months Ending September 30, 2020 $ 25,012 2021 24,728 2022 23,574 2023 22,365 2024 22,319 Thereafter 221,608 Total minimum finance lease obligations 339,606 Less—amounts representing interest (171,544) Present value of minimum finance lease obligations 168,062 Current maturities (7,884) Finance lease obligations, net of current maturities $ 160,178 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, 2020 $ 15,268 2021 13,641 2022 12,249 2023 11,286 2024 9,830 Thereafter 96,432 Total minimum operating lease obligations 158,706 Less—amounts representing interest (63,076) Present value of minimum operating lease obligations 95,630 Current maturities (10,299) Lease obligations, net of current maturities $ 85,331 Recent Accounting Pronouncements— to be Adopted In June 2016, the FASB issued ASU No. 2016-13, “ Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments. |
