| 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 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 46 countries across North America, Europe, Asia, Latin 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 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 June 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 June 30, 2020 the fair value of the Company’s $445.0 million senior secured notes was $456.1 million and the fair value of the Company’s €350.0 million Euro ($393.0 million USD) senior unsecured notes was $393.5 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 $3.3 million and $3.2 million for the three months ended June 30, 2020 and June 30, 2019, respectively, and $7.0 million and $6.6 million for the six months ended June 30, 2020 and June 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 Six Months Ended Six Months Ended June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Weighted average common shares - basic 45,754,880 45,354,327 45,760,302 45,349,397 Dilutive effect of stock options 205,823 35,895 128,477 30,972 Dilutive effect of restricted stock 725,962 522,069 703,666 458,549 Weighted average common shares - diluted 46,686,665 45,912,291 46,592,445 45,838,918 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 Six Months Six Months Ended Ended Ended Ended June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Unvested shares of restricted common stock 1,521,942 1,442,520 1,521,942 1,442,520 Anti-dilutive options for common stock 18,496 36,381 13,172 52,338 Anti-dilutive shares of restricted common stock — 37,494 — 87,686 Stockholder’s Deficit The following details the changes in stockholder’s deficit for the three and six months ended June 30, 2020 and June 30, 2019 (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 March 31, 2020 47,139,369 $ 47 $ 499,455 $ (15,819) $ (705,908) $ (222,225) Forfeitures of shares granted to employees (972) — — — — — Equity-based compensation — — 6,666 — — 6,666 Foreign currency translation — — — 2,913 — 2,913 Issuances of common stock 135,280 — — — — — Exercises of options 5,524 — 270 — — 270 Dividends paid — — — — (31,738) (31,738) Net income — — — — 8,564 8,564 Balance at June 30, 2020 47,279,201 $ 47 $ 506,391 $ (12,906) $ (729,082) $ (235,550) Accumulated Additional Other Total Common Stock Paid-in Comprehensive Accumulated Stockholder’s Shares Amount Capital Income (Loss) Deficit Equity (Deficit) Balance at March 31, 2019 46,350,434 $ 46 $ 475,275 $ (12,753) $ (626,799) $ (164,231) Forfeitures of shares granted to employees (1,702) — — — — — Equity-based compensation — — 5,714 — — 5,714 Foreign currency translation — — — 1,786 — 1,786 Issuances of common stock 438,478 1 — — — 1 Exercises of options 19,160 — 745 — — 745 Dividends paid — — — — (27,741) (27,741) Net income — — — — 7,136 7,136 Balance at June 30, 2019 46,806,370 $ 47 $ 481,734 $ (10,967) $ (647,404) $ (176,590) Accumulated Additional Other Total Common Stock Paid-in Comprehensive Accumulated Stockholder's 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 (37,280) — — — — — Equity-based compensation — — 12,224 — — 12,224 Foreign currency translation — — — (580) — (580) Issuances of common stock 455,030 - — — — - Exercises of options 21,017 — 989 — — 989 Dividends paid — — — — (62,295) (62,295) Net income — — — — 17,791 17,791 Balance at June 30, 2020 47,279,201 $ 47 $ 506,391 $ (12,906) $ (729,082) $ (235,550) 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 (3,886) — — — — — Equity-based compensation — — 9,484 — — 9,484 Foreign currency translation — — — (39) — (39) Issuances of common stock 448,978 1 — — — 1 Exercises of options 24,779 — 919 — — 919 Dividends paid — — — — (54,306) (54,306) Net income — — — — 16,353 16,353 Balance at June 30, 2019 46,806,370 $ 47 $ 481,734 $ (10,967) $ (647,404) $ (176,590) 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 June 30, 2020 was $1.8 million and during the three months ended June 30, 2019 was $1.7 million. Service revenue recognized from amounts in deferred revenue (contract liabilities) at the beginning of the period during the six months ended June 30, 2020 was $3.0 million and during the six months ended June 30, 2019 was $3.4 million. Amortization expense for contract costs was $4.2 million for the three months ended June 30, 2020 and $4.3 million for the three months ended June 30, 2019. Amortization expense for contract costs was 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 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 June 30, 2020 June 30, 2019 Finance lease cost Amortization of right-of-use assets $ 4,973 $ 4,917 Interest expense on finance lease liabilities 4,517 4,415 Operating lease cost 4,405 3,486 Total lease costs $ 13,895 $ 12,818 Six Months Six Months Ended Ended June 30, 2020 June 30, 2019 Finance lease cost Amortization of right-of-use assets $ 9,735 $ 9,888 Interest expense on finance lease liabilities 8,990 8,816 Operating lease cost 8,592 6,780 Total lease costs $ 27,317 $ 25,484 Other lease information Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from finance leases $ (8,985) $ (8,827) Operating cash flows from operating leases (9,149) (6,780) Financing cash flows from finance leases (9,883) (5,006) Right-of-use assets obtained in exchange for new finance lease liabilities 42,359 8,562 Right-of-use assets obtained in exchange for new operating lease liabilities 20,694 1,457 Weighted-average remaining lease term — finance leases (in years) 12.1 14.6 Weighted-average remaining lease term — operating leases (in years) 20.4 22.3 Weighted average discount rate — finance leases 10.8 % 10.6 % 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 (“IRU’s). These IRU’s 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 June 30, 2020, 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 June 30, 2021 $ 32,568 2022 31,800 2023 30,772 2024 30,051 2025 29,710 Thereafter 214,604 Total minimum finance lease obligations 369,505 Less—amounts representing interest (165,727) Present value of minimum finance lease obligations 203,778 Current maturities (14,734) Finance lease obligations, net of current maturities $ 189,044 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 June 30, 2021 $ 16,725 2022 16,108 2023 14,918 2024 13,833 2025 12,097 Thereafter 101,672 Total minimum operating lease obligations 175,353 Less—amounts representing interest (64,910) Present value of minimum operating lease obligations 110,443 Current maturities (11,292) Lease obligations, net of current maturities $ 99,151 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 Current-period Balance at Provision for Write offs Balance at March 31, Expected Credit Charged Against June 30, Description 2020 Losses Allowance 2020 Allowance for credit losses (deducted from accounts receivable) Three months ending June 30, 2020 $ 1,976 $ 1,432 $ (1,293) $ 2,115 Current-period Balance at Provision for Write offs Balance at December 31, Expected Credit Charged Against June 30, Description 2019 Losses Allowance 2020 Allowance for credit losses (deducted from accounts receivable) Six months ending June 30, 2020 $ 1,771 $ 2,768 $ (2,424) $ 2,115 Net bad debt expense for the three months ended June 30, 2020 was $1.3 million which is net of bad debt recoveries of $0.2 million. Net bad debt expense for the six months ended June 30, 2020 was $2.3 million which is net of bad debt recoveries of $0.4 million. |
