| Description of the business: | 1. Description of the business: 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. Cogent Communications, Inc. is wholly owned by Group and the vast majority of Cogent’s assets, contractual arrangements, and operations are executed by Cogent Communications, Inc. Description of business The Company is a facilities-based provider of low-cost, high-speed Internet access, private network services, and data center colocation space and power. The Company’s network is specifically designed and optimized to transmit packet switched data. The Company delivers its services primarily to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations in 51 countries across North America, Europe, Oceania, South America, Oceania and Africa. The Company is a Delaware corporation and is headquartered in Washington, DC. The Company offers on-net Internet access services exclusively through its own facilities, which run from its network to its customers’ premises. The Company offers its on-net services to customers located in buildings that are physically connected to its network. As a result, 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. 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 400 gigabits per second. The Company provides its on-net Internet access and private network services to its corporate and net-centric customers. The Company’s corporate customers are located in multi-tenant office buildings that typically include law firms, financial services firms, advertising and marketing firms, as well as health care providers, educational institutions and other professional services businesses. The Company’s net-centric customers include bandwidth-intensive users that leverage its 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 media service providers, content delivery networks, web hosting companies, and commercial content and application software providers. Access customers include access networks comprised of other Internet Service Providers, telephone companies, mobile phone operators and cable television companies that collectively provide internet access to a substantial number of broadband subscribers and mobile phone subscribers across the world. These net-centric customers generally receive the Company’s services in carrier neutral colocation facilities and in the Company’s own 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 on-net services, the Company provides Internet access and private network services to customers that are not located in buildings directly connected to its network. The Company provides 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 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. In connection with the Company’s acquisition of the Wireline Business of Sprint Communications (as discussed below), the Company will begin to provide optical wavelength services and optical transport services over its fiber network. The Company will sell these wavelength services to its existing customers, customers of Sprint Communications and to new customers who require dedicated optical transport connectivity without the capital and ongoing expenses associated with owning and operating network infrastructure. Acquisition of Sprint Communications On September 6, 2022, Cogent Infrastructure, Inc., a Delaware corporation (the “Buyer”) and a direct wholly owned subsidiary of the Company, entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Sprint Communications LLC, a Kansas limited liability company (“Sprint Communications”) and an indirect wholly owned subsidiary of T-Mobile US, Inc., a Delaware corporation (“T-Mobile”), and Sprint LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of T-Mobile (the “Seller”), pursuant to which the Company acquired the U.S. long-haul fiber network (including the non-U.S. extensions thereof) of Sprint Communications and its subsidiaries (the “Wireline Business”). The Purchase Agreement provides that, upon the terms and conditions set forth therein, the Company purchased from the Seller all of the issued and outstanding membership interests (the “Purchased Interests”) of Wireline Network Holdings LLC, a Delaware limited liability company that, following an internal restructuring and divisive merger, holds Sprint Communications’ assets and liabilities relating to the Wireline Business (such transactions contemplated by the Purchase Agreement, collectively, the “Transaction”). The Purchase Agreement includes customary representations, warranties, indemnities and covenants, including regarding the conduct of the Wireline Business prior to the Closing. In addition, the Closing was subject to customary closing conditions, including as to the receipt of certain required regulatory approvals and consents, which have been received. As discussed in Note 10, the acquisition closed on May 1, 2023 (the “Closing Date”). On the Closing Date, the Buyer consummated the Transaction pursuant to the terms of the Purchase Agreement, providing a purchase price of $1 payable to the Seller for the Purchased Interests, subject to adjustments for cash, working capital and other customary items, which resulted in the Buyer paying to the Seller approximately $61.1 million. The Company has agreed to guarantee the obligations of the Buyer under the Purchase Agreement pursuant to the terms of a Guaranty, dated as of September 6, 2022, by and between the Company and the Seller (the “Parent Guaranty”). The Parent Guaranty contains customary representations, warranties and covenants of the Company and the Seller. Acquisition-Related Costs In connection with the Transaction and negotiation of the Purchase Agreement, the Company incurred a total of $2.6 million in professional fees, including $0.4 million incurred in the three months ended March 31, 2023. 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 (“GAAP”) 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, 2022. 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 US GAAP 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, 2023 and December 31, 2022, the carrying amount of cash and cash equivalents, restricted cash, 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 and restricted cash 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, 2023 the fair value of the Company’s $500.0 million aggregate principal amount Senior Secured Notes due 2027 (the “2027 Notes”) was $460.0 million, the fair value of the Company’s $450.0 million aggregate principal amount Senior Notes due 2026 (the “2026 Notes”) was $441.0 million and the estimated liability fair value of the Company’s interest rate swap agreement was $50.3 million. Restricted cash and interest rate swap agreement Restricted cash represents amounts held in segregated bank accounts by our clearing broker as margin in support of our Swap Agreement as discussed in Note 3 and was $50.3 million as of March 31, 2023. Additional cash may be further restricted to maintain our swap agreement as interest rates fluctuate and margin requirements change. The Company does not use derivative financial instruments for trading purposes. 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 revenue and network operations expense. Excise taxes and surcharges billed to customers and recorded on a gross basis (as service revenue and costs of network operations) were $4.2 million and $3.7 million for the three months ended March 31, 2023 and March 31, 2022, 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 Three Months Ended Ended March 31, 2023 March 31, 2022 Weighted average common shares - basic 47,037,091 46,575,848 Dilutive effect of stock options 16,299 21,310 Dilutive effect of restricted stock 327,836 332,033 Weighted average common shares - diluted 47,381,226 46,929,191 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, 2023 March 31, 2022 Unvested shares of restricted common stock 1,261,342 1,352,439 Anti-dilutive options for common stock 100,777 85,921 Anti-dilutive shares of restricted common stock 137,892 479,655 Stockholders’ Deficit The following details the changes in stockholders’ deficit for the three months ended March 31, 2023 and March 31, 2022, respectively (in thousands except share data): Accumulated Additional Other Total Common Stock Paid-in Comprehensive Accumulated Stockholders’ Shares Amount Capital Income (Loss) Deficit Equity (Deficit) Balance at December 31, 2021 47,674,189 $ 48 $ 547,734 $ (11,003) $ (909,877) $ (373,098) Forfeitures of shares granted to employees (9,582) — — — — — Equity-based compensation — — 6,614 — — 6,614 Foreign currency translation — — — (2,165) — (2,165) Issuances of common stock 256,800 — — — — — Exercises of options 5,173 — 204 — — 204 Dividends paid — — — — (41,298) (41,298) Net income — — — — 1,137 1,137 Balance at March 31, 2022 47,926,580 $ 48 $ 554,552 $ (13,168) $ (950,038) $ (408,606) Accumulated Additional Other Total Common Stock Paid-in Comprehensive Accumulated Stockholders’ Shares Amount Capital Income (Loss) Deficit Equity (Deficit) Balance at December 31, 2022 48,013,330 $ 48 $ 575,064 $ (19,156) $ (1,074,588) $ (518,632) Forfeitures of shares granted to employees (6,509) — — — — — Equity-based compensation — — 7,315 — — 7,315 Foreign currency translation — — — 1,788 — 1,788 Issuances of common stock 286,762 — — — — — Exercises of options 3,299 — 145 — — 145 Dividends paid — — — — (45,311) (45,311) Net income — — — — 6,148 6,148 Balance at March 31, 2023 48,296,882 $ 48 $ 582,524 $ (17,368) $ (1,113,751) $ (548,547) Revenue recognition The Company recognizes revenue under ASU No. 2014-09, Revenue from Contracts with Customers 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, the Company satisfies its performance obligations 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 termination fees. The Company recognizes revenue for termination fees 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 March 31, 2023 was $1.8 million and during the three months ended March 31, 2022 was $1.9 million. Amortization expense for contract costs was $4.8 million for the three months ended March 31, 2023 and $4.7 million for the three months ended March 31, 2022. Leases In February 2016, the FASB issued ASU No. 2016-02, Leases Three Months Three Months Ended Ended March 31, 2023 March 31, 2022 Finance lease costs Amortization of right-of-use assets $ 8,968 $ 6,998 Interest expense on finance lease liabilities 6,430 5,081 Operating lease cost 4,582 4,773 Total lease costs 19,980 16,852 Other lease information Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from finance leases (5,136) (6,621) Operating cash flows from operating leases (4,957) (4,811) Financing cash flows from finance leases (9,450) (5,863) Right-of-use assets obtained in exchange for new finance lease liabilities 25,871 6,982 Right-of-use assets obtained in exchange for new operating lease liabilities 363 4,841 Weighted-average remaining lease term — finance leases (in years) 13.4 12.6 Weighted-average remaining lease term — operating leases (in years) 16.1 18.5 Weighted average discount rate — finance leases 8.8 % 8.9 % Weighted average discount rate — operating leases 5.4 % 5.4 % 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. The implicit rates within the Company’s operating leases are generally not determinable and 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. The determination of the Company’s incremental borrowing rate requires judgment. Finance lease assets are included in property and equipment in the Company’s consolidated balance sheets. As of March 31, 2023, the Company had committed to additional dark fiber IRU lease agreements totaling $100.0 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. 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 some 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 is 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, and netted against, 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 and finance lease agreements are as follows (in thousands): Operating Finance For the Twelve Months Ending March 31, Leases Leases 2024 17,434 44,301 2025 16,785 44,765 2026 13,692 37,553 2027 11,962 36,918 2028 10,772 43,054 Thereafter 84,003 346,896 Total minimum lease obligations 154,648 553,487 Less—amounts representing interest (50,357) (233,105) Present value of minimum lease obligations 104,291 320,382 Current maturities (12,369) (19,782) Lease obligations, net of current maturities $ 91,922 $ 300,600 Allowance for credit losses As of January 1, 2020, the Company maintained an allowance for credit losses to cover its current expected credit losses 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. Current-period Provision for Write offs Beginning Expected Credit Charged Against Ending Description Balance Losses Allowance Balance Allowance for credit losses (deducted from accounts receivable) Three months ended March 31, 2023 $ 2,303 $ 1,548 $ (1,176) $ 2,675 Three months ended March 31, 2022 $ 1,510 $ 946 $ (980) $ 1,476 Net bad debt expense for the three months ended March 31, 2023 was $1.2 million which is net of bad debt recoveries of $0.3 million. Net bad debt expense for the three months ended March 31, 2022 was $0.3 million which is net of bad debt recoveries of $0.6 million. |
