Cogent Communications Holdings, Inc. Annual Report 2017

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FY2017 Annual Report · Cogent Communications Holdings, Inc.

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark One)

(cid:1) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934.

FORM 10-K

For the fiscal year ended December 31, 2017

(cid:2) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934.

For the transition period from

Commission file number 000-51829

COGENT COMMUNICATIONS HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)

2450 N Street N.W.
Washington, D.C.
(Address of Principal Executive Offices)

46-5706863
(I.R.S. Employer
Identification No.)

20037
(Zip Code)

(202) 295-4200
Registrant’s Telephone Number, Including Area Code

Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $0.001 per share

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act. Yes (cid:1) No (cid:2)

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the

Exchange Act. Yes (cid:2) No (cid:1)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the

Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:1) No (cid:2)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,

every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes (cid:1) No (cid:2)

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained

herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:2)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,

smaller reporting company or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated
filer,’’, ‘‘smaller reporting company’’ and ‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:1)

Accelerated filer (cid:2)

Non-accelerated filer (cid:2)
(Do not check if a
smaller reporting company)

Smaller reporting company (cid:2)
Emerging growth company (cid:2)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition

period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. (cid:2)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act). Yes (cid:2) No (cid:1)

The number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of January 31, 2018 was

45,968,237.

The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on the closing price of

$40.10 per share on June 30, 2017 as reported by the NASDAQ Global Select Market was approximately $1.7 billion.

COGENT COMMUNICATIONS HOLDINGS, INC.

FORM 10-K ANNUAL REPORT

FOR THE YEAR ENDED DECEMBER 31, 2017

TABLE OF CONTENTS

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Part I—Financial Information
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Part II—Other Information
Item 5

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer

Item 6
Item 7

Item 7A
Item 8
Item 9

Item 9A
Part III
Item 10
Item 11
Item 12

Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of

Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial

Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related

Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions and Director Independence . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 13
Item 14
Part IV
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15
Item 16
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement on Schedule 14A for the registrant’s 2018

annual shareholders meeting are incorporated by reference in Part III of this Form 10-K.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report may contain forward-looking statements within the meaning of Section 21E of the

Securities Exchange Act of 1934, as amended. Forward-looking statements are not statements of
historical facts, but rather reflect our current expectations concerning future results and events. You can
identify these forward-looking statements by our use of words such as ‘‘anticipates,’’ ‘‘believes,’’
‘‘continues,’’ ‘‘expects,’’ ‘‘intends,’’ ‘‘likely,’’ ‘‘may,’’ ‘‘opportunity,’’ ‘‘plans,’’ ‘‘potential,’’ ‘‘project,’’
‘‘will,’’ and similar expressions to identify forward-looking statements, whether in the negative or the
affirmative. We cannot guarantee that we actually will achieve these plans, intentions or expectations.
These forward-looking statements are subject to risks and uncertainties including those discussed in
Item 1A ‘‘Risk Factors’’ and other factors, some of which are beyond our control, which could cause
actual results to differ materially from those forecasts or anticipated in such forward-looking
statements.

You should not place undue reliance on these forward-looking statements, which reflect our view
only as of the date of this report. We undertake no obligation to update these statements or publicly
release the result of any revisions to these statements to reflect events or circumstances after the date
of this report or to reflect the occurrence of unanticipated events.

ITEM 1. BUSINESS

PART I

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 North America, Europe and Asia. 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 are not dependent on local telephone companies or cable TV
companies to serve our customers for our on-net Internet access and private network services because
of our integrated network architecture. We offer our on-net services to customers located in buildings
that are physically connected to our network. 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 and other professional
services businesses. Our 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 our services in carrier neutral data centers 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
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 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.

Competitive Advantages

We believe we address many of the data communications needs of small and medium-sized
businesses, communications service providers and other bandwidth-intensive organizations by offering
them high-quality, high-speed Internet access and private network services at attractive prices.

Low Cost of Operation. We offer a streamlined set of products on an integrated network. Our
network design allows us to avoid many of the costs that our competitors incur associated with circuit-
switched, TDM and hybrid fiber coaxial networks related to provisioning, monitoring and maintaining
multiple transport protocols. We believe that our low cost of operation also gives us greater pricing
flexibility and a significant advantage in a competitive environment characterized by falling Internet
access prices. We believe our value proposition is equal or superior to our competitors’ in all of the
on-net multi-tenant office buildings and carrier neutral data centers in which we operate.

Network. Our on-net service does not rely on circuits that must be provisioned by a third party

carrier. In on-net multi-tenant office buildings we provide our customers the entire network, including
the ‘‘last mile’’ and the in-building wiring connecting to our customer’s suite. In carrier neutral data
centers we are collocated with our customers so only a connection, known as a cross connect, within
the data center is required to provide our services. This gives us more control over our service, quality
and pricing. It also allows us to provision services more quickly and efficiently than provisioning

services on a third-party carrier network. We are typically able to activate service to our customers in
one of our on-net buildings in approximately thirteen business days.

High Quality, Reliable Service. We are able to offer high-quality Internet service due to our metro

and intercity network. Its design increases the speed and throughput of our network and reduces the
number of data packets dropped during transmission compared to traditional circuit-switched networks.
We believe that we deliver a high level of technical performance because our network is optimized for
packet switched traffic. We believe that our network is more reliable and carries traffic at lower cost
than networks built as overlays to traditional circuit-switched, or TDM networks.

High Traffic Network Footprint. We have strategically chosen locations, such as over 1,650 large

multi-tenant office buildings in major North American cities and carrier neutral data centers in North
America and Europe with high levels of Internet traffic, to maximize our revenue opportunities and
expand our margins. Our network is connected to our on-net multi-tenant office buildings where we
offer our services to a diverse set of high-quality, low churn corporate customers within close physical
proximity of each other. Our network is also directly connected to 800 carrier neutral colocation and
unique data center buildings where our net-centric customers directly interconnect with our network.
We also operate 53 data centers across the United States and in Europe which comprise over
603,000 square feet of floor space and are directly connected to our network.

Low Capital Cost to Grow Our Business. We have a history of efficient network expansion and

integration execution. We believe that we have incurred relatively lower costs in growing our business
than our competitors because we use Internet routers without additional legacy equipment, we offer a
streamlined set of products, and we have acquired optical fiber from the excess inventory in existing
networks.

Proven and Experienced Management Team. Our senior management team is composed of

seasoned executives with extensive expertise in the telecommunications industry as well as knowledge of
the markets in which we operate. The members of our senior management team have an average of
over 20 years of experience in the telecommunications industry and many have been working together
at Cogent for several years. Several members of the senior management team have been working
together at Cogent since 2000. Our senior management team has designed and built our network and
led the integration of our network assets we acquired through 13 significant acquisitions and managed
the expansion and growth of our business.

Our Strategy

We intend to become the leading provider of high-quality, high-speed Internet access and private
network services and to continue to improve our profitability and cash flow. The principal elements of
our strategy include:

Focus on Providing Low-Cost, High-Speed Internet Access and Private Network Services. We intend

to further load our high-capacity network to respond to the growing demand for high-speed Internet
access generated by bandwidth-intensive applications such as streaming media, online gaming, video,
voice over IP (VOIP), remote data storage, distributed computing, cloud services and virtual private
networks. We intend to do so by continuing to offer our high-speed and high-capacity services at
competitive prices.

Pursuing On-Net Customer Growth. We intend to increase usage of our network and operational
infrastructure by adding customers in our existing on-net buildings, as well as connecting more multi-
tenant office buildings and carrier neutral data centers to our network. We emphasize our on-net
service because our on-net services generate greater profit margins and we have more control over
service levels, quality, pricing and faster provisioning of our on-net services than our off-net services.

Our fiber network connects directly to our on-net customers’ premises and we pay no local access (‘‘last
mile’’) charges to other carriers to provide our on-net services. We are responding to this on-net
revenue opportunity by increasing our sales and marketing efforts including increasing our number of
sales representatives, implementing strategies to optimize sales productivity and expanding our on-net
addressable market by adding service locations to our network.

Selectively Pursuing Acquisition Opportunities.

In addition to adding customers through our sales

and marketing efforts, we will continue to seek out acquisition opportunities that increase our customer
base, allowing us to take advantage of the unused capacity on our network and to add revenues with
minimal incremental costs. We may pursue acquisition opportunities that we believe expand our
footprint, generate positive cash flow and may include off-net as well as on-net customers including
complementary businesses and those offering over the top applications such as VOIP. We may also
make opportunistic acquisitions of network assets. Given our record of successful asset integration, we
believe we can continue to successfully integrate new businesses as they are acquired. We are very
selective in reviewing acquisition opportunities and have not completed an acquisition in over a decade.

Our Network

Our network is comprised of in-building riser facilities, metropolitan optical networks, metropolitan

traffic aggregation points and inter-city transport facilities. We believe that we deliver a high level of
technical performance because our network is optimized for packet switched traffic. We believe that
our network is more reliable and carries packet switched traffic at lower cost than networks built as
overlays to traditional circuit-switched telephone networks.

Our network serves over 190 metropolitan markets in North America, Europe and Asia and

encompasses:

(cid:127) over 1,650 multi-tenant office buildings strategically located in commercial business districts;

(cid:127) over 800 carrier-neutral Internet aggregation facilities, data center buildings and single-tenant

buildings;

(cid:127) over 720 intra-city networks consisting of over 31,250 fiber miles;

(cid:127) an inter-city network of more than 57,400 fiber route miles; and

(cid:127) multiple high-capacity transoceanic circuits that connect the North American, European and

Asian portions of our network.

We have created our network by acquiring optical fiber from carriers with large amounts of unused

fiber and directly connecting Internet routers to our existing optical fiber national backbone. We have
expanded our network through key acquisitions of financially distressed companies or their assets at a
significant discount to their original cost. Due to our network design and acquisition strategy, we
believe we are positioned to grow our revenue and increase our profitability with limited incremental
capital expenditures.

Inter-city Networks

Our inter-city network consists of optical fiber connecting major cities in North America, Europe

and Asia. The North American, European and Asian portions of our network are connected by
transoceanic circuits. Our network was built by acquiring from various owners of fiber optic networks
the right to use typically two strands of optical fiber out of the multiple fibers owned by the cable
operator. We install the optical and electronic equipment necessary to amplify, regenerate, and route
the optical signals along these networks. We have the right to use the optical fiber under long term
agreements. We pay these providers our pro rata fees for the maintenance of the optical fiber and
provide our own equipment maintenance.

Intra-city Networks

In each metropolitan area in which we provide our high-speed on-net Internet access services, our

backbone network is connected to one or more routers that are connected to one or more of our
metropolitan optical networks. We created our intra-city networks by obtaining the right to use optical
fiber from carriers with optical fiber networks in those cities. These metropolitan networks consist of
optical fiber that runs from the central router in a market into routers located in our on-net buildings.
In most cases the metropolitan fiber runs in a ring architecture, which provides redundancy so that if
the fiber is cut, data can still be transmitted to the central router by directing traffic in the opposite
direction around the ring. The router in the building provides the connection to each of our on-net
customers.

Within the cities where we offer our off-net Internet access services, we lease circuits from

telecommunications carriers, primarily local telephone companies and cable TV companies, to provide
the last mile connection to our customer’s premises. Typically, these circuits are aggregated at various
locations in those cities onto higher-capacity leased circuits that ultimately connect the local
aggregation router to our network.

In-building Networks

In office buildings where we provide service to multiple tenants we connect our routers to a cable
typically containing 12 to 288 optical fiber strands that run from our equipment in the basement of the
building through the building riser to the customer location. Our service is initiated by connecting a
fiber optic cable from our customer’s local area network to the infrastructure in the building riser
giving our customer dedicated and secure access to our network using an Ethernet connection. We
believe that Ethernet is the lowest cost network connection technology and is almost universally used
for the local area networks that businesses operate.

Data Centers

We operate 53 data centers across the United States and in Europe. These facilities comprise over
603,000 square feet of floor space and are directly connected to our network. Each location is equipped
with secure access, uninterruptable power supplies (UPS), and backup generators. Our customers
typically purchase bandwidth, rack space, and power within these facilities.

Internetworking

The Internet is an aggregation of interconnected networks. We interconnect with the networks of

our customers, which represent the majority of our interconnections, and with other Internet service
providers, or ISPs. The majority of our traffic travels between our customers. We have settlement-free
interconnections between our network and most major ISPs who are not our customers. We
interconnect our network to other ISP networks predominantly through private peering arrangements
facilitated with direct connections with networks who are not customers of the ISP. Larger ISPs
exchange traffic and interconnect their networks by means of direct private connections referred to as
private peering.

Peering agreements between ISPs are necessary in order for them to exchange traffic. Without
peering agreements, each ISP would have to buy Internet access from every other ISP in order for its
customer’s traffic, such as email, to reach and be received from customers of other ISPs. We are
considered a Tier 1 ISP with a large customer base and, as a result, we have settlement-free peering
arrangements with other providers. We do not purchase transit services or paid peering to reach any
portion of the Internet. This allows us to exchange traffic with those ISPs without payment by either
party. In such arrangements, each party exchanging traffic bears its own cost of delivering traffic to the
point at which it is handed off to the other party. We do not treat our settlement-free peering

arrangements as generating revenue or expense related to the traffic exchanged. We do not sell or
purchase paid peering. We directly connect with over 6,150 total networks (in approximately
700 locations globally) of which approximately 30 networks are settlement-free peers, the remaining
networks are customers, whom we charge for Internet access.

Network Management and Customer Care

Our primary network operations centers are located in Washington, D.C. and Madrid, Spain. These

facilities provide continuous operational support for our network in both North America and Europe.
Our network operations centers are designed to immediately respond to any problems in our network.
Our customer care call centers are located in Washington D.C., Herndon Virginia, Madrid Spain,
Paris France, and Frankfurt Germany. To ensure the quick replacement of faulty equipment in the
intra-city and long-haul networks, we have deployed field engineers across North America and Europe.
In addition, we have maintenance contracts with third-party vendors that specialize in optical and
routed networks.

Our Services

We offer our high-speed Internet access and IP connectivity services primarily to small and
medium-sized businesses, communications providers and other bandwidth-intensive organizations
located in North America, Europe and Asia.

We offer on-net services in over 190 metropolitan markets. We serve over 2,500 on-net buildings.
Our most popular on-net service in North America is Internet access at 100 megabits per second. We
typically offer this service to small and medium-sized business customers. We also offer Internet access
at higher speeds of up to 100 Gigabits per second. These services are generally used by customers that
have businesses, such as web hosting, Internet access, and video delivery. These services are generally
delivered at our data centers and carrier neutral data centers. We believe that, on a per-Megabit basis,
this service offering is one of the lowest priced in the marketplace. We also offer colocation services in
our data centers located in North America and Europe. This service offers Internet access combined
with rack space and power in our facility, allowing the customer to locate a server or other equipment
at that location and connect to our Internet access service. Our final on-net service offering is our
private network service. This service provides point-to-point and point to multi-point connectivity. This
service allows customers to connect geographically dispersed local area networks in a seamless manner.
We offer lower prices for longer term and volume commitments. We emphasize the sale of our on-net
services because we believe that we have a competitive advantage in providing these services and these
services generate gross profit margins that are greater than our off-net services.

We offer our off-net services to customers that are not located in our on-net buildings. These
services are primarily provided in the metropolitan markets in North America and Europe in which we
offer on-net services. These services are generally provided to small and medium-sized corporate
customers in over 6,300 off-net buildings.

Sales and Marketing

Direct Sales. We employ a direct sales and marketing approach. As of February 1, 2018, our sales

force included 574 full-time employees. Our quota bearing sales force includes 451 employees with
308 employees focused primarily on the corporate market and 143 employees focused primarily on the
net-centric market. Our sales personnel work through direct contact with potential customers in, or
intending to locate in, our on-net buildings. Through agreements with building owners, we are able to
initiate and maintain personal contact with our customers by staging various promotional and social
events in our multi-tenant office buildings and carrier neutral data centers. Sales personnel are

compensated with a base salary plus quota-based commissions and incentives. We use a customer
relationship management system to efficiently track sales activity levels and sales productivity.

Indirect Sales. We also have an indirect sales program. Our indirect sales program includes
several master agents with whom we have a direct relationship. Through our agreements with our
master agents we are able to sell through to thousands of sub agents. All agents have access to selling
to potential corporate customers and may sell all of our products. We have hired an indirect channel
team who manages these indirect relationships. The indirect channel team is compensated with a base
salary plus quota-based commissions and incentives. We use our customer relationship management
system to efficiently track indirect sales activity levels and the sales productivity of our agents under our
indirect sales program.

Marketing. Because of our historical focus on a direct sales force that utilizes direct contact, we

have not spent funds on television, radio or print advertising. We do use a limited amount of web
based advertising. Our marketing efforts are designed to drive awareness of our products and services,
to identify qualified leads through various direct marketing campaigns and to provide our sales force
with product brochures, collateral materials, in building marketing events and relevant sales tools to
improve the overall effectiveness of our sales organization. In addition, we conduct building events and
public relations efforts focused on cultivating industry analyst and media relationships with the goal of
securing media coverage and public recognition of our Internet access and private network services.

Competition

We face competition from incumbent telephone and cable companies, and facilities-based network
operators, many of whom are much larger than us, have significantly greater financial resources, better-
established brand names and large, existing installed customer bases in the markets in which we
compete. We also face competition from new entrants to the communications services market. Many of
these companies offer products and services that are similar to our products and services.

Unlike some of our competitors, we generally do not have title to most of the dark fiber that
makes up our network. Our interests in that dark fiber are in the form of long-term leases under
indefeasible rights of use, or IRUs, with providers, some of which also compete with us. We rely on the
owner of the fiber to maintain the fiber. We are also dependent on third party providers, some of
which compete with us, for the local loop facilities for the provision of connections to our off-net
customers.

We believe that competition is based on many factors, including price, transmission speed, ease of
access and use, length of time to provision service, breadth of service availability, reliability of service,
customer support and brand recognition. Because our fiber optic networks have been recently installed
compared to those of the incumbent carriers, our state-of-the-art technology may provide us with cost,
capacity, and service quality advantages over some existing incumbent carrier networks; however, our
network may not support some of the services supported by these legacy networks, such as circuit-
switched voice, ATM, frame relay, wireless and shared hybrid fiber coax networks. While the Internet
access speeds offered by traditional ISPs serving multi-tenant office buildings using DSL or cable
modems typically do not match our on-net offerings in terms of throughput or quality, these slower
services are usually priced lower than our offerings and thus provide competitive pressure on pricing,
particularly for more price-sensitive customers. These and other downward pricing pressures particularly
in carrier neutral data centers have diminished, and may further diminish, the competitive advantages
that we have enjoyed as the result of the pricing of our services. Increasingly, traditional ISPs are
upgrading their services using optical fiber and cable technology so that they can match our
transmission speed and quality.

Regulation

Our services are subject to the regulatory authority of various agencies in the jurisdictions in which

we operate. As a provider of only Internet access and private networks to businesses the regulation is
generally light. This benefits us in that we have flexibility in offering our services and ease of entry into
new markets. However, this light regulation generally extends to our competitors, some of whom are
incumbent telephone and cable companies with whom we need to interconnect and from whom we
acquire circuits for our off-net services. The extent of regulation can change. For example, the U.S.
Federal Communications Commission recently rescinded regulations applicable to mass market Internet
access providers. In all jurisdictions regulations continue to evolve. The regulations with which we need
to comply include licenses to provide our services, data privacy, interception of communications by law
enforcement, blocking of web sites, and others. We believe that we comply with all regulations in the
jurisdictions in which we operate.

The laws related to Internet telecommunications are unsettled and there may be new legislation

and court decisions that may affect our services and expose us to burdensome requirements and
liabilities.

Reportable Segments and Geographic Information

We conduct our business through one reportable segment. For information regarding our service

revenues and long lived assets by geographic region see Note 10 to our consolidated financial
statements.

Employees

As of February 1, 2018, we had 928 employees. Unions represent 27 of our employees in France.

We believe that we have a satisfactory relationship with our employees.

Available Information

We were incorporated in Delaware in 1999. We make available free of charge through our Internet

website our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on
Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Exchange Act. The reports are made available through a link to the SEC’s Internet website at
www.sec.gov. You can find these reports and request a copy of our Code of Conduct on our website at
www.cogentco.com under the ‘‘About Cogent’’ tab at the ‘‘Investor Relations’’ link.

ITEM 1A. RISK FACTORS

Our connections to the Internet require us to establish and maintain relationships with other providers, which
we may not be able to maintain.

The Internet is composed of various network providers who operate their own networks that
interconnect at public and private interconnection points. Our network is one such network. In order to
obtain Internet connectivity for our network, we must establish and maintain relationships with other
Internet access providers and certain of our larger customers. These providers may be customers (who
connect their network to ours by buying Internet access from us) or may be other large Internet access
providers to whom we connect on a settlement-free peering basis as described below. Both customers
and settlement-free peers may be competitors of ours.

By entering into what are known as settlement-free peering arrangements, providers agree to
exchange traffic between their respective networks without charging each other. Our ability to avoid the
higher costs of acquiring paid dedicated network capacity (transit or paid peering) and to maintain high
network performance is dependent upon our ability to establish and maintain settlement-free peering

relationships and to increase the capacity of the interconnections underlying these relationships. The
terms and conditions of our settlement-free peering relationships may also be subject to adverse
changes, which we may not be able to control. For example, several network operators with large
numbers of individual users are arguing that they should be able to charge or charge more to network
operators and businesses that deliver the large volumes of traffic requested by their users. If we are not
able to maintain or increase our settlement-free peering relationships in all of our markets on favorable
terms or to upgrade the capacity of our existing settlement-free peering relationships, we may not be
able to provide our customers with high performance or affordable or reliable services, which could
cause us to lose existing and potential customers, damage our reputation and have a material adverse
effect on our business. We have in the past had peering disputes with other network providers that
resulted in a temporary disruption of the exchange of traffic between our network and the network of
the other carrier. We have resolved the majority of such disputes through negotiations. In 2013 the
major incumbent telephone and cable companies in the United States began to refuse to upgrade our
peering connections. This refusal caused congestion at our existing peering connections with these
networks as our connections were unable to handle the large volume of traffic requested by the
customers of these incumbent telephone and cable companies. This congestion impacted our network
and our services to our other customers. Following issuance by the U.S. Federal Communications
Commission (FCC) of its Open Internet Order we were able to enter into agreements with most of
these carriers that have alleviated the congestion we were experiencing. We cannot assure you that the
upgrade commitments in those agreements will be sufficient to accommodate the growth of Internet
traffic on our network. Also, in December 2017 the FCC rescinded the protections of the Open
Internet Order. This may impact the willingness of telephone and cable companies to enter into
agreements to augment interconnections as traffic grows and to continue current agreements.

We have experienced the same congestion problem in Europe with incumbent telephone
companies. As the use of streaming video increases this problem is exacerbated. Recently, several
European incumbent telephone companies have increased the capacity of our interconnections. We do
not know if they will continue to do so. The major carrier in Germany, Deutsche Telekom, continues to
limit our interconnection capacity.

We cannot assure you that we will be able to continue to establish and maintain relationships with
other Internet access providers, favorably resolve disputes with such providers, or increase the capacity
of our interconnections with such providers.

We need to retain existing customers and continue to add new customers in order to become consistently
profitable and cash flow positive.

In order to become consistently profitable and consistently cash flow positive, we need to both
retain existing customers and continue to add a large number of new customers. The precise number of
additional customers required is dependent on a number of factors, including the turnover of existing
customers, the pricing of our product offerings and the revenue mix among our customers. We may not
succeed in adding customers if our sales and marketing efforts are unsuccessful. In addition, many of
our targeted customers are businesses that are already purchasing Internet access services from one or
more providers, often under a contractual commitment. It has been our experience that such targeted
customers are often reluctant to switch providers due to costs and effort associated with switching
providers. Further, as some of our customers grow larger they may decide to build their own Internet
backbone networks or enter into direct connection agreements with telephone and cable companies
that provide Internet service to consumers. A migration of a few very large Internet users to their own
networks, or to special networks that may be offered by major telephone and cable providers of last
mile broadband connections to consumers, or the loss or reduced purchases from several significant
customers could impair our growth, cash flow and profitability.

Our growth and financial health are subject to a number of economic risks.

A downturn in the world economy, especially the economies of North America and Europe would

negatively impact our growth. We would be particularly impacted by a decline in the development of
new applications and businesses that make use of the Internet. Our revenue growth is predicated on
growing use of the Internet that makes up for the declining prices of Internet service. An economic
downturn could impact the Internet business more significantly than other businesses that are less
dependent on new applications and growth in the use of those applications because of the
retrenchment by consumers and businesses that typically occurs in an economic downturn.

Our business and operations are growing rapidly and we may not be able to efficiently manage our growth.

We have rapidly grown our company through network expansion and obtaining new customers
through our sales efforts. Our expansion places significant strains on our management, operational and
financial infrastructure. Our ability to manage our growth will be particularly dependent upon our
ability to:

(cid:127) expand, develop and retain an effective sales force and qualified personnel;

(cid:127) maintain the quality of our operations and our service offerings;

(cid:127) maintain and enhance our system of internal controls to ensure timely and accurate compliance

with our financial and regulatory reporting requirements; and

(cid:127) expand our accounting and operational information systems in order to support our growth.

If we fail to implement these measures successfully, our ability to manage our growth will be impaired.

We may experience difficulties operating in countries outside of the United States, Canada and Western
Europe.

We have expanded our network into Eastern Europe, Mexico and on a limited basis to Tokyo,
Hong Kong and Singapore. We are in the process of extending our network to Sydney (Australia) and
Sao Paulo (Brazil). We have experienced difficulties, ranging from lack of dark fiber to regulatory
issues to slower revenue growth rates in operating in these markets. If we are not successful in
developing our market presence in these regions our operating results and revenue growth could be
adversely impacted.

We may experience delays and additional costs in expanding our on-net buildings.

We plan on continuing to increase the number of carrier-neutral data centers and multi-tenant
office buildings that are connected to our network. We may be unsuccessful at identifying appropriate
buildings or negotiating favorable terms for acquiring access to such buildings, and consequently, we
may experience difficulty in adding customers to our network and fully using our network’s available
capacity.

We may be required to censor content on the Internet, which we may find difficult to do and which may
impact our ability to provide our services in some countries as well as impact the growth of Internet usage,
upon which we depend.

Some governments attempt to limit access to certain content on the Internet. It is impossible for

us (and other providers as far as we know) to filter all content that flows across the Internet
connections we provide. For example, some content is encrypted when a secure web site is accessed. It
is difficult to limit access to web sites that engage in practices that make it difficult to block them by
blocking a fixed set of Internet addresses. Should any government require us to perform these types of
blocking procedures we could experience difficulties ranging from incurring additional expenses to

ceasing to provide service in that country. We could also be subject to penalties if we fail to implement
the censorship.

We may not successfully make or integrate acquisitions or enter into strategic alliances.

As part of our growth strategy, we may pursue selected acquisitions and strategic alliances. To
date, we have completed 13 significant acquisitions. However, we are very selective with respect to such
acquisitions and alliances and we have not undertaken either for more than ten years. We compete with
other companies for acquisition opportunities and we cannot assure you that we will be able to execute
future acquisitions or strategic alliances on commercially reasonable terms, or at all. Even if we enter
into these transactions, we may experience:

(cid:127) delays in realizing or a failure to realize the benefits we anticipate;

(cid:127) difficulties or higher-than-anticipated costs associated with integrating any acquired companies,

products or services into our existing business;

(cid:127) attrition of key personnel from acquired businesses;

(cid:127) unexpected costs or charges; or

(cid:127) unforeseen operating difficulties that require significant financial and managerial resources that

would otherwise be available for the ongoing development or expansion of our existing
operations.

In the past, our acquisitions have often included assets, service offerings and financial obligations
that are not compatible with our core business strategy. We have expended management attention and
other resources to the divestiture of assets, modification of products and systems as well as
restructuring financial obligations of acquired operations. In most acquisitions, we have been successful
in renegotiating the agreements that we have acquired. If we are unable to satisfactorily renegotiate
such agreements in the future or with respect to future acquisitions, we may be exposed to large claims
for payment for services and facilities we do not need.

Consummating these transactions could also result in the incurrence of additional debt and related
interest expense, as well as unforeseen contingent liabilities, all of which could have a material adverse
effect on our business, financial condition and results of operations. Because we have purchased
financially distressed companies or their assets, and may continue to do so in the future, we have not
had, and may not have, the opportunity to perform extensive due diligence or obtain contractual
protections and indemnifications that are customarily provided in acquisitions. As a result, we may face
unexpected contingent liabilities arising from these acquisitions. We may also issue additional equity in
connection with these transactions, which would dilute our existing shareholders.

Following an acquisition, we have experienced a decline in revenue attributable to acquired

customers as these customers’ contracts have expired and they have entered into our standard customer
contracts at generally lower rates or have chosen not to renew service with us. We anticipate that we
will experience similar revenue declines with respect to customers we may acquire in the future.

We depend upon our key employees and may be unable to attract or retain sufficient qualified personnel.

Our future performance depends upon the continued contribution of our executive management

team and other key employees, in particular, our Chairman and Chief Executive Officer, Dave
Schaeffer. As founder of our company, Mr. Schaeffer’s knowledge of our business and our industry
combined with his deep involvement in every aspect of our operations and planning make him
particularly well-suited to lead our company and difficult to replace.

We will need to renew the long-term leases of the optical fiber that composes our network.

Our network is composed of optical fiber that we have leased from many carriers. Most of the

leases are long-term, i.e. 15 years with renewal rights. These leases are generally referred to as
indefeasible rights of use (IRU). In coming years we will need to renew certain of these leases either
pursuant to the renewal terms of the lease or by negotiating an extension of the term. In particular, our
U.S. backbone network lease will need to be renewed in 2020. We have exercised our renewal right as
provided in the lease. However, the owner of the fiber has the right to abandon the fiber rather than
renew the lease. We do not expect the owner to abandon the fiber but if the owner did so we would
experience substantial disruption and expense in replacing our U.S. backbone network with fiber from
other providers. We face similar risks with respect to the other portions of our network.

Substantially all of our network infrastructure equipment is manufactured or provided by a single network
infrastructure vendor.

We purchase from Cisco Systems, Inc. (Cisco) the routers and transmission equipment used in our

network. If Cisco fails to provide equipment on a timely basis or fails to meet our performance
expectations, including in the event that Cisco fails to enhance, maintain, upgrade or improve its
products, hardware or software we purchase from them when and how we need them, we may be
delayed or unable to provide services as and when requested by our customers. We also may be unable
to upgrade our network and face greater difficulty maintaining and expanding our network.

Transitioning from Cisco to another vendor would be disruptive because of the time and expense
required to learn to install, maintain and operate the new vendor’s equipment and to operate a multi-
vendor network. Any such disruption could increase our costs, decrease our operating efficiencies and
have an adverse effect on our business, results of operations and financial condition.

Cisco may also be subject to litigation with respect to the technology on which we depend,
including litigation involving claims of patent infringement. Such claims have been growing rapidly in
the communications industry. Regardless of the merit of these claims, they can result in the diversion of
technical and management personnel, or require us to obtain non-infringing technology or enter into
license agreements for the technology on which we depend. There can be no assurance that such
non-infringing technology or licenses will be available on acceptable terms and conditions, if at all.

Our business could suffer because telephone companies and cable companies may provide better delivery of
certain Internet content, including content originating on their own networks, than content on the public
Internet.

Broadband connections provided by cable TV and telephone companies have become the
predominant means by which consumers connect to the Internet. The providers of these broadband
connections may treat Internet content or other broadband content delivered from different sources
differently. The possibility of this has been characterized as an issue of ‘‘net neutrality.’’ As many of
our customers operate websites and services that deliver content to consumers our ability to sell our
services would be negatively impacted if Internet content delivered by us was less easily received by
consumers than Internet content delivered by others. The U.S. Federal Communications Commission
had promulgated rules that would have banned practices such as blocking and throttling of Internet
traffic but those rules were rescinded by the U.S. Federal Communications Commission in
December 2017. The European Union has issued similar net neutrality rules but they remain untested.
We also do not know the extent to which the providers of broadband Internet access to consumers may
favor certain content or providers in ways that may disadvantage us.

Our operations outside of the United States expose us to economic, regulatory and other risks.

The nature of our operations outside of the United States involve a number of risks, including:

(cid:127) fluctuations in currency exchange rates;

(cid:127) exposure to additional regulatory and legal requirements, including import restrictions and
controls, exchange controls, tariffs and other trade barriers and privacy and data protection
regulations;

(cid:127) difficulties in staffing and managing our foreign operations;

(cid:127) changes in political and economic conditions; and

(cid:127) exposure to additional and potentially adverse tax regimes.

As we continue to expand into other countries, our success will depend, in part, on our ability to
anticipate and effectively manage these and other risks. Our failure to manage these risks and grow our
operations outside the United States may have a material adverse effect on our business and results of
operations.

Fluctuations in foreign exchange rates may adversely affect our financial position and results of operations.

Our operations outside the United States expose us to currency fluctuations and exchange rate
risk. For example, while we record revenues and the financial results of our European operations in
Euros, these results are reflected in our consolidated financial statements in US dollars. Therefore, our
reported results are exposed to fluctuations in the exchange rates between the US dollar and the Euro.
We may fund certain of our cash flow requirements of our operations outside of the United States in
US dollars. Accordingly, in the event that the foreign currency strengthens against the US dollar to a
greater extent than we anticipate, the cash flow requirements associated with these operations may be
significantly greater in US dollar terms than planned.

The exit of the United Kingdom from the European Union may adversely affect us.

We operate in the EU, including the United Kingdom. The exit of the United Kingdom from the

EU could adversely affect our operations and sales in unknown ways.

Our business could suffer delays and problems due to the actions of ‘‘last mile’’ providers on whom we are
partially dependent.

Our off-net customers are connected to our network by means of communications lines that are

provided as services by local telephone and cable companies and others. We may experience problems
with the installation, maintenance and pricing of these lines which could adversely affect our results of
operations and our plans to add additional customers to our network using such services. We have
historically experienced installation and maintenance delays when the network provider is devoting
resources to other services, such as traditional telephony, cable TV services and private network
services. We have also experienced pricing problems when a lack of alternatives allows a provider to
charge high prices for services in a particular area. We attempt to reduce this problem by using many
different providers so that we have alternatives for linking a customer to our network. Competition
among the providers tends to improve installation intervals, maintenance and pricing.

Our network may be the target of potential cyber-attacks and other security breaches that could have
significant negative consequences.

Our business depends on our ability to limit and mitigate interruptions or degradation to our

network availability. Our network, including our routers, may be vulnerable to unauthorized access,

computer viruses, cyber-attacks, distributed denial of service (DDOS), and other security breaches. An
attack on or security breach of our network could result in interruption or cessation of services, our
inability to meet our service level commitments, and potentially compromise customer data transmitted
over our network. We cannot guarantee that our security measures will not be circumvented, thereby
resulting in network failures or interruptions that could impact our network availability and have a
material adverse effect on our business, financial condition and operational results. We may be required
to expend significant resources to protect against such threats, and may experience a reduction in
revenues, litigation, and a diminution in goodwill, caused by a breach. Although our customer contracts
limit our liability, affected customers and third parties may seek to recover damages from us under
various legal theories.

Our network could suffer serious disruption if certain locations experience serious damage.

There are certain locations through which a large amount of our Internet traffic passes. Examples

are facilities in which we exchange traffic with other carriers, the facilities through which our
transoceanic traffic passes, and certain of our network hub sites. If any of these facilities were
destroyed or seriously damaged a significant amount of our network traffic could be disrupted. Because
of the large volume of traffic passing through these facilities our ability (and the ability of carriers with
whom we exchange traffic) to quickly restore service would be challenged. There could be parts of our
network or the networks of other carriers that could not be quickly restored or that would experience
substantially reduced service for a significant time. If such a disruption occurs, our reputation could be
negatively impacted which may cause us to lose customers and adversely affect our ability to attract
new customers, resulting in an adverse effect on our business and operating results.

We may have difficulty and experience disruptions as we add features and upgrade our network

When we upgrade our network this process involves reconfiguring our network and making
changes to software including our operating systems. In doing so we may experience disruptions that
affect our customers, our revenue, and our ability to grow. We may require additional resources to
accomplish this work in a timely manner. That could cause us to incur unexpected expenses or delay
portions of this effort to the detriment of our ability to provide service to our customers.

If the information systems that we depend on to support our customers, network operations, sales, billing and
financial reporting do not perform as expected, our operations and our financial results may be adversely
affected.

We rely on complex information systems to operate our network and support our other business

functions. Our ability to track sales leads, close sales opportunities, provision services, bill our
customers for our services and prepare our financial statements depends upon the effective integration
of our various information systems. If our information systems, individually or collectively, fail or do
not perform as expected, our ability to process and provision orders, to make timely payments to
vendors, to ensure that we collect amounts owed to us and prepare our financial statements would be
adversely affected. Such failures or delays could result in increased capital expenditures, customer and
vendor dissatisfaction, loss of business or the inability to add new customers or additional services, and
the inability to prepare accurate and timely financial statements all of which would adversely affect our
business and results of operations.

The utilization of certain of our net operating loss carryforwards is limited and depending upon the amount of
our taxable income we may be subject to paying income taxes earlier than planned.

Section 382 of the Internal Revenue Code in the United States limits the utilization of net
operating losses when ownership changes, as defined by that section, occur. We have performed an
analysis of our Section 382 ownership changes and have determined that the utilization of certain of

our net operating loss carryforwards in the United States is limited. Further, recent changes to the tax
law in the United States may impact our utilization of these net operating losses.

Our business could suffer from an interruption of service from our fiber providers.

The optical fiber cable owners from whom we have obtained our inter-city and intra-city dark fiber

maintain that dark fiber. We are contractually obligated under the agreements with these carriers to
pay maintenance fees, and if we are unable to continue to pay such fees we would be in default under
these agreements. If these carriers fail to maintain the fiber or disrupt our fiber connections due to our
default or for other reasons, such as business disputes with us and governmental takings, our ability to
provide service in the affected markets or parts of markets would be impaired unless we have or can
obtain alternative fiber routes. Some of the companies that maintain our inter-city dark fiber and some
of the companies that maintain our intra-city dark fiber are also competitors of ours. Consequently,
they may have incentives to act in ways unfavorable to us. While we have successfully mitigated the
effects of prior service interruptions and business disputes in the past, we may incur significant delays
and costs in restoring service to our customers in connection with future service interruptions, and as a
result we may lose customers.

Our business depends on agreements with carrier neutral data center operators, which we could fail to obtain
or maintain.

Our business depends upon access to customers in carrier neutral data centers, which are facilities
in which many users of the Internet house the computer servers that deliver content and applications to
users by means of the Internet and provide access to multiple Internet access networks. Most carrier
neutral data centers allow any carrier to operate within the facility (for a standard fee). We expect to
enter into additional agreements with carrier neutral data center operators as part of our growth plan.
Current government regulations do not require carrier neutral data center operators to allow all
carriers access on terms that are reasonable or nondiscriminatory. We have been successful in obtaining
agreements with these operators in the past and have generally found that the operators want to have
us located in their facilities because we offer low-cost, high-capacity Internet service to their customers.
Any deterioration in our existing relationships with these operators could harm our sales and marketing
efforts and could substantially reduce our potential customer base. Increasing concentration in this
industry could negatively impact us if any such combined entities decide to discontinue operation of
their facilities in a carrier neutral fashion.

Our ability to serve customers in multi-tenant office buildings depends on access agreements with building
owners and managers, which we could fail to obtain or maintain.

Our on-net business depends upon our in-building networks. Our in-building networks depend on

access agreements with building owners or managers allowing us to install our in-building networks and
provide our services in these buildings. These agreements typically have terms of five to ten years, with
one or more renewal options. Any deterioration in our existing relationships with building owners or
managers could harm our sales and marketing efforts and could substantially reduce our potential
customer base. We expect to enter into additional access agreements as part of our growth plan.
Current federal and state regulations do not require building owners to make space available to us or
to do so on terms that are reasonable or nondiscriminatory. While the FCC has adopted regulations
that prohibit common carriers (subject to regulation under Title II of the Communications Act) from
entering into exclusive arrangements with owners of multi-tenant commercial office buildings, these
regulations do not require building owners to offer us access to their buildings. Building owners or
managers may decide not to permit us to install our networks in their buildings or they may elect not
to renew or amend our access agreements. Most of these agreements have one or more automatic
renewal periods and others may be renewed at the option of the landlord. Some of these access

agreements have or will have exhausted all automatic renewal periods and, as such, will be coming up
for renewal in the near future. While we have historically been successful in renewing these agreements
and no single building access agreement is material to our success, the failure to obtain or maintain a
number of these agreements would reduce our revenue, and we might not recover our costs of
procuring building access and installing our in-building networks in those locations.

We may not be able to obtain or construct additional building laterals to connect new buildings to our
network.

In order to connect a new building to our network we need to obtain or construct a lateral from
our metropolitan network to the building. We may not be able to obtain fiber in an existing lateral at
an attractive price from a provider and may not be able to construct our own lateral due to the cost of
construction or municipal regulatory restrictions. Failure to obtain fiber in an existing lateral or to
construct a new lateral could keep us from adding new buildings to our network and negatively impact
our growth opportunities.

Impairment of our intellectual property rights and our alleged infringement on other companies’ intellectual
property rights could harm our business.

We cannot assure you that the steps taken by us to protect our intellectual property rights will be

adequate to deter misappropriation of proprietary information or that we will be able to detect
unauthorized use and take appropriate steps to enforce our intellectual property rights. We also are
subject to the risk of litigation alleging infringement of third party intellectual property rights. Any such
claims could require us to spend significant sums in litigation, pay damages, develop non-infringing
intellectual property or acquire licenses to the intellectual property that is the subject of the alleged
infringement.

We are aware of several other companies in our and other industries that use the word ‘‘Cogent’’

in their corporate names. Consequently, we do not have rights to the name ‘‘Cogent’’. This may weaken
our ability to market our services.

The sector in which we operate is highly competitive, and we may not be able to compete effectively.

We face significant competition from incumbent carriers, Internet service providers and facilities-

based network operators. Relative to us, many of these providers have significantly greater financial
resources, more well-established brand names, larger customer bases, and more diverse strategic plans
and service offerings.

Intense competition from these traditional and new communications companies has led to

declining prices and margins for many communications services, and we expect this trend to continue as
competition intensifies in the future. Decreasing prices for high-speed Internet services have somewhat
diminished the competitive advantage that we have enjoyed as a result of our service pricing.

Our competitors may also introduce new technologies or services that could make our services less

attractive to potential customers.

We issue projected results and estimates for future periods from time to time, and such projections and
estimates are subject to inherent uncertainties and may prove to be inaccurate.

Financial information, results of operations and other projections that we may issue from time to

time are based upon our assumptions and estimates. While we believe these assumptions and estimates
to be reasonable when they are developed, they are inherently subject to significant business, economic
and competitive uncertainties and contingencies, many of which are beyond our control. You should
understand that certain unpredictable factors could cause our actual results to differ from our

expectations and those differences may be material. No independent expert participates in the
preparation of these estimates. These estimates should not be regarded as a representation by us as to
our results of operations during such periods as there can be no assurance that any of these estimates
will be realized. In light of the foregoing, we caution you not to place undue reliance on these
estimates. These estimates constitute forward-looking statements.

We have negative shareholders equity and may not be able to pay dividends in the future.

We have negative shareholders equity. Our Board of Directors has declared dividends based upon

an independent expert valuation of our assets that determined sufficient funds existed to pay a dividend
under Delaware Law. We cannot assure you that a future valuation of our assets will reach the same
conclusion. In the future if we do not receive a similar valuation of our assets and we continue to have
negative shareholders equity, we will not be able to pay dividends.

The indentures governing our debt agreements, among other things, limits our ability to incur
indebtedness; to pay dividends or make other distributions; to make certain investments and other
restricted payments; to create liens; consolidate, merge, sell or otherwise dispose of all or substantially
all of our assets; to incur restrictions on the ability of a subsidiary to pay dividends or make other
payments; and to enter into certain transactions with our affiliates. Permitted investments and payments
that are not restricted total $64.3 million as of December 31, 2017. This amount may be increased by
our consolidated cash flow, as defined in the indentures as long as our consolidated leverage ratio is
less than 4.25. Our consolidated leverage ratio is currently above 4.25 so no amounts other than those
described above are available for permitted investments including dividends and stock purchases.

The payment of any future dividends and any other returns of capital, including stock buybacks,
will be at the discretion of our Board of Directors and may be reduced, eliminated or increased and
will be dependent upon our financial position, results of operations, available cash, cash flow, capital
requirements, limitations under our debt indentures and other factors deemed relevant by the our
Board of Directors. We are a Delaware Corporation and under the General Corporate Law of the
State of Delaware distributions may be restricted including a restriction that distributions, including
stock purchases and dividends, do not result in an impairment of a corporation’s capital, as defined
under Delaware Law.

Network failure or delays and errors in transmissions expose us to potential liability.

Our network is part of the Internet which is a network of networks. Our network uses a collection

of communications equipment, software, operating protocols and proprietary applications for the
high-speed transportation of large quantities of data among multiple locations. Given the complexity of
our network, it is possible that data will be lost or distorted. Delays in data delivery may cause
significant losses to one or more customers using our network. Our network may also contain
undetected design faults and software bugs that, despite our testing, may not be discovered in time to
prevent harm to our network or to the data transmitted over it. The failure of any equipment or facility
on our network could result in the interruption of customer service until we affect the necessary repairs
or install replacement equipment. Network failures, delays and errors could also result from natural
disasters, power losses, security breaches, computer viruses, distributed denial of service attacks and
other natural or man-made events. Our off-net services are dependent on the network facilities of other
providers or on local telephone companies or cable companies. Network failures, faults or errors could
cause delays or service interruptions, expose us to customer liability or require expensive modifications
that could have a material adverse effect on our business.

As an Internet access provider, we may incur liabilities for information disseminated through our network.

The law relating to the liabilities of Internet access providers and on-line services companies for

information carried on or disseminated through their networks is unsettled. As the law in this area
develops and as we expand our international operations, the potential imposition of liabilities upon us
for the behavior of our customers or the information carried on and disseminated through our network
could require us to implement measures to reduce our exposure to such liabilities, which may require
the expenditure of substantial resources or the discontinuation of certain products or service offerings.
Any costs that are incurred as a result of such measures or the imposition of liabilities could have a
material adverse effect on our business.

Changes in laws, rules, and enforcement could adversely affect us.

We are not subject to substantial regulation by the Federal Communications Commission or the

state public utilities commissions in the United States. Internet service is also subject to minimal
regulation in Western Europe and in Canada. Elsewhere the regulation is greater, though not as
extensive as the regulation for providers of voice services. If we decide to offer traditional voice
services or otherwise expand our service offerings to include services that would cause us to be deemed
a common carrier, we will become subject to additional regulation. Additionally, if we offer voice
service using IP (VOIP) or offer certain other types of data services, we may become subject to
additional regulation. This regulation could impact our business because of the costs and time required
to obtain necessary authorizations, the additional taxes that we may become subject to or may have to
collect from our customers, and the additional administrative costs of providing these services, and
other costs. Even if we do not decide to offer additional services, governmental authorities may decide
to impose additional regulation and taxes upon providers of Internet access and private network
services. All of these matters could inhibit our ability to remain a low-cost carrier and could have a
material adverse effect on our business, financial condition and our results of operations.

Much of the law related to the liability of Internet service providers for content on the network
and the behavior of our customers and their end users remains unsettled. Some jurisdictions have laws,
regulations, or court decisions that impose obligations upon Internet access providers to restrict access
to certain content. Other legal issues, such as the sharing of copyrighted information, data protection,
trans-border data flow, unsolicited commercial email (‘‘spam’’), universal service, and liability for
software viruses could become subjects of additional legislation and legal development and changes in
enforcement policies. Laws that could subject us to claims or otherwise impact our business include,
among others:

(cid:127) The Canadian Anti Spam Legislation (‘‘CASL’’) implemented in 2015. The full implementation
of CASL was delayed in 2017, and changes may be made to the legislation in the future. We
believe we are currently in compliance with CASL.

(cid:127) The General Data Protection Regulation (‘‘GDPR’’) comes into force in May 2018 in the

European Union. The GDPR creates significant new requirements and significantly increases the
financial penalties for noncompliance. We do not believe that GDPR will have a significant
impact on our provision of services to our customers. However, we will still need to take
appropriate steps to ensure compliance with the GDPR in our back office operations.

(cid:127) Statutory safe harbors, such as the Digital Millennium Copyright Act in the United States, upon
which we rely with respect to copyright liability for transitory communications. Any changes to
these safe harbors may adversely impact us.

(cid:127) The United States Communications Assistance for Law Enforcement Act and similar laws of

other countries require that we be able to intercept communications when required to do so by
law enforcement agencies. We may experience difficulties and incur significant costs in

complying with these laws. If we are unable to comply with the laws we could be subject to fines
in the United States of up to $1.0 million per event and equal or greater fines in other
countries.

We cannot predict the impact of these changes on us. They could have a material adverse effect on

our business, financial condition and our results of operations.

Governments may assert that we are liable for taxes which we have not collected from our customers and we
may have to begin collecting a multitude of taxes if Internet services become subject to taxation similar to the
taxation of telephone service.

In the United States Internet services are generally not subject to taxes. Consequently, in the
United States we collect few taxes from our customers even though most telecommunications services
are subject to numerous taxes. Various local jurisdictions have asserted that some of our services should
be subject to local taxes. If such jurisdictions assess taxes on prior years we may be subject to a liability
for unpaid taxes that we may be unable to collect from our customers. If the taxation of Internet
service is expanded we will need to collect those taxes from our customers. The process of
implementing a system to properly bill and collect such taxes may require significant resources. In
addition, the FCC is considering changes to its Universal Services Fund that could result in its
application to Internet services. This too would require that we expend resources to collect this tax.
Finally, the cumulative effect of these taxes levied on Internet services could discourage potential
customers from using Internet services to replace traditional telecommunication services and negatively
impact our ability to grow our business.

Our private network services are subject to taxes and fees in various jurisdictions. We believe that

we collect all required taxes. However, the taxation of telecommunications services is complex and
there are numerous taxes. A jurisdiction may assert that we have failed to collect certain taxes. The
expense of paying any unpaid taxes could be substantial and we might not be able to collect such back
taxes from our customers.

Terrorist activity throughout the world, military action to counter terrorism and natural disasters could
adversely impact our business.

The continued threat of terrorist activity and other acts of war or hostility have had, and may

continue to have, an adverse effect on business, financial and general economic conditions
internationally. Effects from these events and any future terrorist activity, including cyber terrorism,
may, in turn, increase our costs due to the need to provide enhanced security, which would adversely
affect our business and results of operations. These circumstances may also damage or destroy the
Internet infrastructure and may adversely affect our ability to attract and retain customers, our ability
to raise capital and the operation and maintenance of our network access points. We are particularly
vulnerable to acts of terrorism because our largest customer concentration is located in New York, our
headquarters is located in Washington, D.C., and we have significant operations in Paris, Madrid and
London, cities that have historically been targets for terrorist attacks. We are also susceptible to other
catastrophic events such as major natural disasters, extreme weather, fire or similar events that could
affect our headquarters, other offices, our network, infrastructure or equipment, which could adversely
affect our business.

If we do not comply with laws regarding corruption and bribery, we may become subject to monetary or
criminal penalties.

The United States Foreign Corrupt Practices Act generally prohibits companies and their
intermediaries from bribing foreign officials for the purpose of obtaining or keeping business. Other
countries have similar laws to which we are subject. We take precautions to comply with these laws.

However, these precautions may not protect us against liability, particularly as a result of actions that
may be taken in the future by agents and other intermediaries through whom we have exposure under
these laws even though we may have limited or no ability to control such persons. Our competitors
include foreign entities that are not subject to the United States Foreign Corrupt Practices Act or laws
of similar stringency, and hence we may be at a competitive disadvantage.

Allegations that the United States Government has intercepted Internet traffic may discourage use of the
Internet and the use of United States based Internet service providers.

Allegations have been made that the United States Government (through its National Security
Agency) and other governments have allegedly intercepted Internet traffic on a massive scale. It has
also been alleged that user information has been collected from various Internet-based services with
and without the cooperation of the companies providing those services. Such allegations may
discourage individuals and organizations from making use of Internet-based services due to privacy
concerns and concerns that proprietary data can be compromised, This could impact our ability to grow
our business, especially because we and other companies headquartered in the United States may be
less favored by customers that perceive a connection between the activities of the United States
Government and United States companies.

Privacy requirements in the EU may impact our business.

Privacy requirements in the EU are stricter than in the US. These requirements include rules

restricting the flow of data across borders. These restrictions may cause companies to localize data,
decline to make use of services provided by our customers in the US, and otherwise impact the use of
our services. Notwithstanding the existence of programs such as the Privacy Shield program in place
between the US and EU, European companies and individuals may be reluctant to use US companies,
which could negatively impact our business.

Risk Factors Related to Our Indebtedness

We have substantial debt which we may not be able to repay when due.

Our total indebtedness at December 31, 2017 was $732.5 million. In April 2014 we issued
$200.0 million in 5.625% senior unsecured notes. In the second quarter of 2016, we purchased
$10.8 million of par value of these 5.625% senior unsecured notes reducing the principal amount to
$189.2 million. The $189.2 million of senior unsecured notes are due in 2021 and require interest
payments totaling $10.6 million per year. In December 2016 and February 2015, we issued
$125.0 million and $250.0 million of 5.375% senior secured notes, respectively. The $375.0 million
senior secured notes are due in March 2022 and require annual interest payments of $20.2 million. All
of our noteholders have the right to be paid the principal upon default and upon certain designated
events, such as certain changes of control. Our total indebtedness at December 31, 2017 also includes
$157.5 million of capital lease obligations for dark fiber primarily under 15 - 20 year IRUs and
$10.7 million due under an installment payment agreement with a vendor. The amount of our
IRU capital lease obligations may be impacted due to our expansion activities, the timing of payments
and fluctuations in foreign currency rates. We may not have sufficient funds to pay the interest and
principal related to these obligations at the time we are obligated to do so, which could result in
bankruptcy, or we may only be able to raise the necessary funds on unfavorable terms. Additionally,
contemplated changes to current income tax law in the US may impact the deductibility of our interest
expense.

Our substantial level of indebtedness could adversely affect our financial condition and prevent us from
fulfilling our obligations under our notes and our other indebtedness.

We have substantial indebtedness. Our substantial debt may have important consequences. For

instance, it could:

(cid:127) make it more difficult for us to satisfy our financial obligations, including those relating to our

debt;

(cid:127) require us to dedicate a substantial portion of any cash flow from operations to the payment of
interest and principal due under our debt, which will reduce funds available for other business
purposes, including the growth of our operations, capital expenditures and acquisitions;

(cid:127) place us at a competitive disadvantage compared with some of our competitors that may have

less debt and better access to capital resources; and

(cid:127) limit our ability to obtain additional financing required to fund working capital and capital

expenditures, for strategic acquisitions and for other general corporate purposes.

Our ability to satisfy our obligations including our debt depends on our future operating

performance and on economic, financial, competitive and other factors, many of which are beyond our
control. Our business may not generate sufficient cash flow, and future financings may not be available
to provide sufficient net proceeds, to meet these obligations or to successfully execute our business
strategy.

Despite our leverage we may still be able to incur more debt. This could further exacerbate the risks that we
and our subsidiaries face.

We and our subsidiaries may incur additional indebtedness, including additional secured

indebtedness, in the future. The terms of our debt indentures restrict, but do not completely prohibit,
us from doing so. In addition, the indentures allow us to issue additional notes and other indebtedness
secured by the collateral under certain circumstances. Moreover, we are not prevented from incurring
other liabilities that do not constitute indebtedness as defined in the indentures, including additional
capital lease obligations in the form of IRUs. These liabilities may represent claims that are effectively
prior to the claims of our note holders. If new debt or other liabilities are added to our debt levels the
related risks that we and our subsidiaries now face could intensify.

The agreements governing our various debt obligations impose restrictions on our business and could
adversely affect our ability to undertake certain corporate actions.

The agreements governing our various debt obligations include covenants imposing significant
restrictions on our business. These restrictions may affect our ability to operate our business and may
limit our ability to take advantage of potential business opportunities as they arise. These covenants
place restrictions on our ability to, among other things:

(cid:127) incur additional debt;

(cid:127) create liens;

(cid:127) make certain investments;

(cid:127) enter into certain transactions with affiliates;

(cid:127) declare or pay dividends, redeem stock or make other distributions to stockholders; and

(cid:127) consolidate, merge or transfer or sell all or substantially all of our assets.

Our ability to comply with these agreements may be affected by events beyond our control,

including prevailing economic, financial and industry conditions. These covenants could have an adverse
effect on our business by limiting our ability to take advantage of financing, merger and acquisition or
other corporate opportunities. The breach of any of these covenants or restrictions could result in a
default under the agreements governing our debt obligations.

To service our indebtedness, we will require a significant amount of cash. However, our ability to generate
cash depends on many factors many of which are beyond our control.

Our ability to make payments on and to refinance our indebtedness and to fund planned capital

expenditures will depend on our ability to generate cash in the future, which, in turn, is subject to
general economic, financial, competitive, regulatory and other factors, many of which are beyond our
control.

Our business may not generate sufficient cash flow from operations and we may not have available

to us future borrowings in an amount sufficient to enable us to pay our indebtedness or to fund our
other liquidity needs. In these circumstances, we may need to refinance all or a portion of our
indebtedness on or before maturity. We may not be able to refinance any of our indebtedness on
commercially reasonable terms or at all. Without this financing, we could be forced to sell assets or
secure additional financing to make up for any shortfall in our payment obligations under unfavorable
circumstances. However, we may not be able to secure additional financing on terms favorable to us or
at all and, in addition, the terms of the indentures governing our notes limit our ability to sell assets
and also restrict the use of proceeds from such a sale. We may not be able to sell assets quickly enough
or for sufficient amounts to enable us to meet our obligations, including our obligations under our
notes.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We lease space for offices, data centers, colocation facilities, and points-of-presence.

Our headquarters facility consists of 43,117 square feet located in Washington, D.C. The lease for

our headquarters is with an entity controlled by our Chief Executive Officer. The lease expires in
May 2020 and may be cancelled by us upon 60 days’ notice.

We lease a total of approximately 740,000 square feet of space for our data centers, offices and
operations centers. We believe that these facilities are generally in good condition and suitable for our
operations.

ITEM 3. LEGAL PROCEEDINGS

We are involved in legal proceedings in the ordinary course of our business that we do not expect

to have a material adverse effect on our business, financial condition or results of operations. For a
discussion of the significant proceedings in which we are involved, see Note 6 to our consolidated
financial statements.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our sole class of common equity is our common stock, par value $0.001, which is currently traded

on the NASDAQ Global Select Market under the symbol ‘‘CCOI.’’ Prior to March 6, 2006, our
common stock traded on the American Stock Exchange under the symbol ‘‘COI.’’ Prior to February 5,
2002, no established public trading market for our common stock existed.

As of February 1, 2018, there were 152 holders of record of shares of our common stock holding

44,933,474 shares of our common stock.

The table below shows, for the quarters indicated, the reported high and low trading prices of our

common stock.

Calendar Year 2017
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Calendar Year 2016
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

High

Low

$44.40
45.25
50.25
54.85

$39.18
41.93
43.61
42.35

$38.50
37.85
38.10
42.40

$29.65
36.73
35.07
34.23

Dividends on common stock

Dividend payments are recorded in and increase our accumulated deficit. Dividends on unvested
restricted shares of common stock are paid as the awards vest. Our initial quarterly dividend payment
was made in the third quarter of 2012. The payment of any future dividends and any other returns of
capital, including stock buybacks, will be at the discretion of our Board of Directors and may be
reduced, eliminated or increased and will be dependent upon our financial position, results of
operations, available cash, cash flow, capital requirements, limitations under the Company’s debt
indentures as described in Note 4 to our consolidated financial statements and other factors deemed
relevant by our Board of Directors. We are a Delaware Corporation and under the General Corporate
Law of the State of Delaware distributions may be restricted including a restriction that distributions,
including stock purchases and dividends, do not result in an impairment of a corporation’s capital, as
defined under Delaware Law.

Performance Graph

Our common stock currently trades on the NASDAQ Global Select Market. The chart below
compares the relative changes in the cumulative total return of our common stock for the period from
December 31, 2012 to December 31, 2017, against the cumulative total return for the same period of
the (1) The Standard & Poor’s 500 (S&P 500) Index and (2) the NASDAQ Telecommunications Index.
The comparison below assumes $100 was invested on December 31, 2012 in our common stock, the
S&P 500 Index and the NASDAQ Telecommunications Index, with dividends, if any, reinvested.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Cogent Communications Holdings, the S&P 500 Index
and the NASDAQ Telecommunications Index

$300

$250

$200

$150

$100

$50

12/12

12/13

12/14

12/15

12/16

12/17

Cogent Communications Holdings

S&P 500

16FEB201815520238
NASDAQ Telecommunications

$100 invested on 12/31/12 in stock or index, including reinvestment of dividends.Fiscal year ending
December 31.
Copyright(cid:3) 2018 Standard & Poor’s, a division of S&P Global. All rights reserved.

Cogent Communications Holdings Inc. . . .
S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . .
NASDAQ Telecommunications Index . . . . .

$100.00
100.00
100.00

$182.81
132.39
141.28

$165.38
150.51
145.43

$169.56
152.59
140.97

$210.43
170.84
150.94

$240.53
208.14
184.81

The stock price performance included in this graph is not necessarily indicative of future stock price

12/12

12/13

12/14

12/15

12/16

12/17

performance.

Issuer Purchases of Equity Securities

Our Board of Directors had authorized a plan to permit the repurchase of up to $50.0 million of

our common stock in negotiated and open market transactions through December 31, 2018. As of
December 31, 2017, $41.5 million remained available for such negotiated and open market transactions
concerning our common stock. We may purchase shares from time to time depending on market,
economic, and other factors.

Equity Compensation Plan Information

The information required by this Item 5 regarding Securities Authorized for Issuance Under

Equity Compensation Plans is incorporated in this report by reference to the information set forth
under the caption ‘‘Equity Plan Information’’ in our 2018 Proxy Statement.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The annual financial information set forth below has been derived from our audited consolidated
financial statements. The information should be read in connection with, and is qualified in its entirety
by reference to, Item 7. ‘‘Management’s Discussion and Analysis of Financial Condition and Results of
Operations’’, the consolidated financial statements and notes included elsewhere in this report and in
our SEC filings.

CONSOLIDATED STATEMENT OF

OPERATIONS DATA:

Service revenue . . . . . . . . . . . . . . . . . . .
Operating expenses:
Network operations . . . . . . . . . . . . . . . .
Equity-based compensation expense—

network operations . . . . . . . . . . . . . . .
Selling, general, and administrative . . . . . .
Equity-based compensation expense—

SG&A . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . .

Total operating expenses . . . . . . . . . . . . .
Losses on debt redemption and

extinguishment . . . . . . . . . . . . . . . . . .

Gains—lease obligation restructurings and

releases . . . . . . . . . . . . . . . . . . . . . . .
Gains on equipment exchanges . . . . . . . .

Operating income . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . .
Interest income and other, net . . . . . . . . .

Income before income taxes . . . . . . . . . .
Income tax (expense) benefit . . . . . . . . . .

Net income . . . . . . . . . . . . . . . . . . . . . .

Net income per common share—basic . . .

Net income per common share—diluted . .

Dividends declared per common share . . .

2017

2016

2015

2014

2013

Years Ended December 31,

(dollars in thousands)

485,175

446,900

404,234

380,003

347,979

208,674

193,493

173,926

159,405

149,718

604
115,229

12,686
75,926

413,119

—

—
3,862

75,918
(48,467)
3,667

31,118
(25,242)

5,876

0.13

1.80

573
110,547

10,162
75,235

390,010

584
102,172

10,931
70,527

358,140

488
98,596

9,083
69,481

337,053

(587)

(10,144)

—

—
7,739

64,042
(40,803)
1,021

24,260
(9,331)

14,929

0.33

1.51

11,643
5,443

53,036
(41,280)
956

12,712
(7,816)

4,896

0.11

1.46

—
10,950

53,900
(49,945)
536

4,491
(3,694)

797

0.02

1.17

507
79,030

8,212
64,358

301,825

—

—
—

46,154
(41,797)
2,630

6,987
49,702

56,689

1.22

1.21

0.76

Weighted-average common shares—basic .

44,855,263

44,641,805

44,888,723

45,960,720

46,286,735

Weighted-average common shares—diluted

45,184,203

44,873,830

45,159,849

46,349,670

46,996,904

CONSOLIDATED BALANCE SHEET

DATA (AT PERIOD END):

Total assets . . . . . . . . . . . . . . . . . . . . . .
Long-term debt (including capital leases

and current portion) (net of
unamortized discount of $385, $257,
$817, $0, and $3,099, respectively,
including unamortized premium of $382,
$462, $0, $4,230 and $5,423, and net of
unamortized debt costs of $3,930,
$4,832, $4,557, $6,861 and $3,832,
respectively) . . . . . . . . . . . . . . . . . . . .

710,588

737,892

662,816

754,914

751,269

728,544

707,080

601,839

603,907

492,249

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

You should read the following discussion and analysis together with ‘‘Item 6. Selected Consolidated
Financial Data’’ and our consolidated financial statements and related notes included in this report. The
discussion in this report contains forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. The cautionary statements made in this
report should be read as applying to all related forward-looking statements wherever they appear in this
report. Factors that could cause or contribute to these differences include those discussed in ‘‘Item 1A. Risk
Factors,’’ as well as those discussed elsewhere. You should read ‘‘Item 1A. Risk Factors’’ and ‘‘Special Note
Regarding Forward-Looking Statements.’’ Our actual results could differ materially from those discussed
here. Factors that could cause or contribute to these differences include, but are not limited to:

Future economic instability in the global economy, which could affect spending on Internet services; the
impact of changing foreign exchange rates (in particular the Euro to US dollar and Canadian dollar to US
dollar exchange rates) on the translation of our non-US dollar denominated revenues, expenses, assets and
liabilities; legal and operational difficulties in new markets; the imposition of a requirement that we
contribute to the United States Universal Service Fund on the basis of our Internet revenue; changes in
government policy and/or regulation, including rules regarding data protection, cyber security and net
neutrality; increasing competition leading to lower prices for our services; our ability to attract new customers
and to increase and maintain the volume of traffic on our network; the ability to maintain our Internet
peering arrangements on favorable terms; our ability to renew our long-term leases of optical fiber that
comprise our network; our reliance on an equipment vendor, Cisco Systems Inc., and the potential for
hardware or software problems associated with such equipment; the dependence of our network on the
quality and dependability of third-party fiber providers; our ability to retain certain customers that comprise
a significant portion of our revenue base; the management of network failures and/or disruptions; and
outcomes in litigation as well as other risks discussed from time to time in our filings with the Securities and
Exchange Commission, including, without limitation, this annual report on Form 10-K.

General Overview

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 using IP. We deliver our services primarily to small and medium-sized businesses,
communications service providers and other bandwidth-intensive organizations in North America,
Europe and in Asia.

Our on-net service consists of high-speed Internet access and private network services at speeds

ranging from 100 Megabits per second to 100 Gigabits per second. We offer our on-net services to
customers located in buildings that are physically connected to our network. We provide on-net
Internet access and private network services to corporate customers and net-centric customers. Our
corporate customers are located in multi-tenant office buildings and in our data centers and typically
include law firms, financial services firms, advertising and marketing firms and other professional
services businesses. Our net-centric customers include bandwidth-intensive users such as other Internet
access providers, telephone companies, cable television companies, web hosting companies, content
delivery networks and commercial content and application service providers. These net-centric
customers generally receive our services in colocation facilities and in our data centers.

Our off-net services are sold to businesses that are connected to our network primarily by means
of ‘‘last mile’’ access service lines obtained from other carriers, primarily in the form of metropolitan
Ethernet circuits. Our non-core services, which consist primarily of legacy services of companies whose
assets or businesses we have acquired. We do not actively market these non-core services and expect
the service revenue associated with them to continue to decline.

Our network is comprised of in-building riser facilities, metropolitan optical fiber networks,

metropolitan traffic aggregation points and inter-city transport facilities. Our network is physically
connected entirely through our facilities to 2,506 buildings in which we provide our on-net services,
including 1,653 multi-tenant office buildings. We also provide on-net services in carrier-neutral data
centers, Cogent controlled data centers and single-tenant office buildings. We operate 53 Cogent
controlled data centers totaling 603,000 square feet. Because of our integrated network architecture, we
are not dependent on local telephone companies or cable companies to serve our on-net customers. We
emphasize the sale of our on-net services because we believe we have a competitive advantage in
providing these services and these services generate gross profit margins that are greater than the gross
profit margins of our off-net services.

We believe our key growth opportunity is provided by our high-capacity network, which provides us

with the ability to add a significant number of customers to our network with minimal direct
incremental costs. Our focus is to add customers to our network in a way that maximizes its use and at
the same time provides us with a profitable customer mix. We are responding to this opportunity by
increasing our sales and marketing efforts including increasing our number of sales representatives and
expanding our network to locations that we believe can be economically integrated and represent
significant concentrations of Internet traffic. One of our keys to developing a profitable business will be
to carefully match the cost of extending our network to reach new customers with the revenue expected
to be generated by those customers. In addition, we may add customers to our network through
strategic acquisitions.

We believe some of the most important trends in our industry are the continued long-term growth
in Internet traffic and a decline in Internet access prices on a per megabit basis. The effective price per
megabit for our corporate customers is declining as the bandwidth utilization and connection size of
our corporate customer connections increases. As Internet traffic continues to grow and prices per unit
of traffic continue to decline, we believe we can continue to load our network and gain market share
from less efficient network operators. However, continued erosion in Internet access prices will likely
have a negative impact on the rate at which we can increase our revenues and our profitability. Our
revenue may also be negatively affected if we are unable to grow our Internet traffic or if the rate of
growth of Internet traffic does not offset an expected decline in our per unit pricing. We do not know
if Internet traffic will increase or decrease, or the rate at which it will increase or decrease. Changes in
Internet traffic will be a function of the number of Internet users, the amount of time users spend on
the Internet, the applications for which the Internet is used, the bandwidth intensity of these
applications and the pricing of Internet services, and other factors.

The growth in Internet traffic has a more significant impact on our net-centric customers who
represent the vast majority of the traffic on our network and who tend to consume the majority of their
allocated bandwidth on their connections. Net-centric customers tend to purchase their service on a
price per megabit basis. Our corporate customers tend to utilize a small portion of their allocated
bandwidth on their connections and tend to purchase their service on a per connection basis.

We are a facilities-based provider of Internet access and communications services. Facilities-based

providers require significant physical assets, or network facilities, to provide their services. Typically
when a facilities-based network services provider begins providing its services in a new jurisdiction
losses are incurred for several years until economies of scale have been achieved. Our foreign
operations are in Europe, Canada, Mexico and Asia. Europe accounts for roughly 75% of our foreign
operations. Our European operations have incurred losses and will continue to do so until our
European customer base and revenues have grown enough to achieve sufficient economies of scale.

Due to our strategic acquisitions of network assets and equipment, we believe we are well

positioned to grow our revenue base. We continue to purchase and deploy network equipment to parts
of our network to maximize the utilization of our assets and to expand and increase the capacity of our

network. Our future capital expenditures will be based primarily on the expansion of our network and
the addition of on-net buildings. We plan to continue to expand our network and to increase the
number of on-net buildings we serve including multi-tenant office buildings, carrier neutral data centers
and Cogent controlled data centers. Many factors can affect our ability to add buildings to our network.
These factors include the willingness of building owners to grant us access rights, the availability of
optical fiber networks to serve those buildings, the cost to connect buildings to our network and
equipment availability.

Results of Operations

Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016

Our management reviews and analyzes several key financial measures in order to manage our
business and assess the quality of and variability of our service revenue, operating results and cash
flows. The following summary tables present a comparison of our results of operations with respect to
certain key financial measures. The comparisons illustrated in the tables are discussed in greater detail
below.

Year Ended
December 31,

2017

2016

(in thousands)

Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . .
On-net revenues . . . . . . . . . . . . . . . . . . . . . . . . . .
Off-net revenues . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-core revenues . . . . . . . . . . . . . . . . . . . . . . . .
Network operations expenses(1) . . . . . . . . . . . . . . . .
Selling, general, and administrative expenses(2) . . . . .
Depreciation and amortization expenses . . . . . . . . . .
Gains on equipment transactions . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . .

$485,175
346,445
137,892
838
209,278
127,915
75,926
3,862
48,467
25,242

$446,900
323,602
122,337
961
194,066
120,709
75,235
7,739
40,803
9,331

Percent
Change

8.6%
7.1%
12.7%
(12.8)%
7.8%
6.0%
0.9%
(50.1)%
18.8%
170.5%

NM—Not meaningful

(1) Includes non-cash equity-based compensation expense of $604 and $573 for 2017 and

2016, respectively.

(2) Includes non-cash equity-based compensation expense of $12,686 and $10,162 for 2017

and 2016, respectively.

Year Ended
December 31,

2017

2016

Percent
Change

Other Operating Data
Average Revenue Per Unit (ARPU)

ARPU—on net
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
ARPU—off-net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average price per megabit . . . . . . . . . . . . . . . . . . . . . .
Customer Connections—end of period

$
506
$ 1,239
1.11
$

$
548
$ 1,284
1.34
$

(7.8)%
(3.5)%
(17.4)%

On-net
Off-net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

61,334
9,953

52,874
8,598

16.0%
15.8%

Service Revenue. Our service revenue increased 8.6% from 2016 to 2017. Exchange rates positively

impacted our increase in service revenue by approximately $1.9 million. All foreign currency
comparisons herein reflect results for 2017 translated at the average foreign currency exchange rates for
2016. For 2017 and 2016, on-net, off-net and non-core revenues represented 71.4%, 28.4% and 0.2%
and 72.4%, 27.4% and 0.2% of our service revenue, respectively. Revenue recognition standards include
guidance relating to any tax assessed by a governmental authority that is directly imposed on a revenue-
producing transaction between a seller and a customer and may include, but is not limited to, gross
receipts taxes, Universal Service Fund fees and certain state regulatory fees. We record these taxes
billed to our customers on a gross basis (as service revenue and network operations expense) in our
consolidated statements of operations. The impact of these taxes including the Universal Service Fund
resulted in an increase of our revenues for 2017 of approximately $1.8 million.

Revenue from our corporate and net-centric customers represented 62.3% and 37.7% of our
service revenue, respectively, for 2017, and represented 60.4% and 39.6% of our service revenue,
respectively, for 2016. Revenue from corporate customers increased 11.8% from $270.1 million for 2016
to $302.1 million for 2017 due to an increase in our number of corporate customers. Revenue from our
net-centric customers increased by 3.6% from $176.8 million for 2016 to $183.1 million for 2017
primarily due to an increase in our number of net-centric customers, partially offset by a decline in our
average price per megabit.

Our on-net revenue increased 7.1% from 2016 to 2017. We increased the number of our on-net

customer connections by 16.0% from December 31, 2016 to December 31, 2017. On-net customer
connections increased at a greater rate than on-net revenues primarily due to the 7.8% decline in our
on-net ARPU, primarily from a decline in ARPU for our net centric customers. ARPU is determined
by dividing revenue for the period by the average customer connections for that period. Our average
price per megabit for our installed base of customers is determined by dividing the aggregate monthly
recurring fixed charges for those customers by the aggregate committed data rate for the same
customers. The decline in on-net ARPU is partly attributed to volume and term based pricing
discounts. Additionally, on-net customers who cancel their service from our installed base of customers,
in general, have an ARPU that is greater than the ARPU for our new customers due to declining
prices primarily for our on-net services sold to our net-centric customers. These trends resulted in the
reduction to our on-net ARPU and a 17.4% decline in our average price per megabit for our installed
base of customers.

Our off-net revenue increased 12.7% from 2016 to 2017. Our off-net customer connections
increased 15.8% from December 31, 2016 to December 31, 2017. Our off-net customer connections
increased at a greater rate than our off-net revenue due to the 3.5% decrease in our off-net ARPU.

Our non-core revenue decreased 12.8% from 2016 to 2017. We do not actively market these
acquired non-core services and expect that the service revenue associated with them will continue to
decline.

Network Operations Expenses. Network operations expenses include the costs of personnel
associated with service delivery, network management, and customer support, network facilities costs,
fiber and equipment maintenance fees, leased circuit costs, and access and facilities fees paid to
building owners. Non-cash equity-based compensation expense is included in network operations
expenses consistent with the classification of the employee’s salary and other compensation. Our
network operations expenses, including non-cash equity-based compensation expense, increased 7.8%
from 2016 to 2017. The increase is primarily attributable to an increase in costs related to our network
and facilities expansion activities and the increase in our off-net revenues. When we provide off-net
services we also assume the cost of the associated tail-circuits.

Selling, General, and Administrative Expenses (‘‘SG&A’’). Our SG&A expenses, including non-cash

equity-based compensation expense, increased 6.0% from 2016 to 2017. Non cash equity-based
compensation expense is included in SG&A expenses consistent with the classification of the
employee’s salary and other compensation and was $10.2 million for 2016 and $12.7 million for 2017.
SG&A expenses increased primarily from an increase in salaries and related costs required to support
our expansion and increases in our sales efforts and an increase in our headcount partly offset by a
$2.0 million decrease in our legal fees primarily associated with U.S. net neutrality and interconnection
regulatory matters and a $3.1 million charge related to a proposed settlement of a class action wage
and hour claim for certain of our current and past sales reps that we incurred in 2016. Our sales force
headcount increased by 5.9% from 542 at December 31, 2016 to 574 at December 31, 2017 and our
total headcount increased by 4.7% from 887 at December 31, 2016 to 929 at December 31, 2017.

Depreciation and Amortization Expenses. Our depreciation and amortization expenses increased

0.9% from 2016 to 2017. The increase is primarily due to the depreciation expense associated with the
increase related to newly deployed fixed assets more than offsetting the decline in depreciation expense
from fully depreciated fixed assets.

Gains on Equipment Transactions. We exchanged certain used network equipment and cash
consideration for new network equipment resulting in gains of $7.7 million for 2016 and $3.9 million
for 2017. The gains are based upon the excess of the estimated fair value of the new network
equipment over the carrying amount of the returned used network equipment and the cash paid.

Interest Expense.

Interest expense results from interest incurred on our $375.0 million of senior

secured notes, interest incurred on our $189.2 million of senior unsecured notes, interest on our
installment payment agreement and interest on our capital lease obligations. Our interest expense
increased by 18.8% from 2016 to 2017 primarily due to our issuance of $125.0 million of senior secured
notes in December 2016. In the second quarter of 2016, we paid $10.9 million for the purchase of
$10.8 million of par value and accrued interest of our $200.0 million senior unsecured notes reducing
the principal to $189.2 million and resulting in a loss of $0.2 million. The loss resulted from the write
off of the remaining unamortized debt issuance costs related to the purchased notes. In June 2016, we
elected to repay the outstanding $17.1 million principal balance of the installment payment agreement
before its maturity date resulting in a loss of $0.4 million from the remaining unamortized discount.

Income Tax Expense. Our income tax expense was $25.2 million for 2017 and $9.3 million for
2016. The increase in our income tax expense was primarily related to an increase in deferred income
tax expense due to an increase in income before taxes in the United States and the impact of the Tax
Cuts and Jobs Act (the ‘‘Act’’). On December 22, 2017, the President of the United States signed into
law the Act. The Act amended the Internal Revenue Code and reduced the corporate tax rate from a
maximum rate of 35% to a flat 21% rate. The rate reduction is effective on January 1, 2018 and may
reduce our future income taxes payable once we become a cash taxpayer in the United States. As a
result of the reduction in the corporate income tax rate and other provisions under the Act, we were
required to revalue our net deferred tax asset at December 31, 2017 resulting in a reduction in our net
deferred tax asset of $9.0 million and we recorded a transition tax of $2.3 million related to our foreign
operations for a total income tax expense of approximately $11.3 million, which was recorded as
additional noncash income tax expense in the three months and year ended December 31, 2017. The
actual impact on our net deferred tax asset may vary from this amount from certain changes in
interpretations and assumptions we have made and as further guidance related to the Act may be
issued.

Buildings On-net. As of December 31, 2017 and 2016 we had a total of 2,506 and 2,373 on-net

buildings connected to our network, respectively.

Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015

Year Ended
December 31,

2016

2015

(in thousands)

Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . .
On-net revenues . . . . . . . . . . . . . . . . . . . . . . . . . .
Off-net revenues . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-core revenues . . . . . . . . . . . . . . . . . . . . . . . .
Network operations expenses(1) . . . . . . . . . . . . . . . .
Selling, general, and administrative expenses(2) . . . . .
Depreciation and amortization expenses . . . . . . . . . .
Gains on capital lease terminations . . . . . . . . . . . . . .
Gains on equipment transactions . . . . . . . . . . . . . . . .
Losses on debt extinguishment and redemption . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . .

$446,900
323,602
122,337
961
194,066
120,709
75,235
—
7,739
587
40,803
9,331

$404,234
294,845
108,360
1,029
174,510
113,103
70,527
11,643
5,443
10,144
41,280
7,816

Percent
Change

10.6%
9.8%
12.9%
(6.6)%
11.2%
6.7%
6.7%
NM
42.2%
NM
(1.2)%
19.4%

NM—Not meaningful

(1) Includes non-cash equity-based compensation expense of $573 and $584 for 2016 and

2015, respectively.

(2) Includes non-cash equity-based compensation expense of $10,162 and $10,931 for 2016

and 2015, respectively.

Year Ended
December 31,

2016

2015

Percent
Change

Other Operating Data
Average Revenue Per Unit (ARPU)

$
548
$ 1,284
1.34
$

$
576
$ 1,353
1.61
$

(4.9)%
(5.0)%
(16.8)%

On-net
Off-net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

52,874
8,598

45,473
7,279

16.3%
18.1%

Service Revenue. Our service revenue increased 10.6% from 2015 to 2016. Exchange rates

negatively impacted our increase in service revenue by approximately $0.9 million. All foreign currency
comparisons herein reflect results for 2016 translated at the average foreign currency exchange rates for
2015. For 2016 and 2015, on-net, off-net and non-core revenues represented 72.4%, 27.4% and 0.2%
and 72.9%, 26.8% and 0.3% of our service revenue, respectively. Revenue recognition standards include
guidance relating to any tax assessed by a governmental authority that is directly imposed on a revenue-
producing transaction between a seller and a customer and may include, but is not limited to, gross
receipts taxes, Universal Service Fund fees and certain state regulatory fees. We record these taxes

billed to our customers on a gross basis (as service revenue and network operations expense) in our
consolidated statements of operations. The impact of these taxes including the Universal Service Fund
resulted in an increase of our revenues for 2016 of approximately $5.5 million.

Revenue from our corporate and net-centric customers represented 60.4% and 39.6% of our
service revenue, respectively, for 2016, and represented 58.3% and 41.7% of our service revenue,
respectively, for 2015. Revenue from corporate customers increased 14.7% from $235.5 million for 2015
to $270.1 million for 2016 due to an increase in our number of corporate customers. Revenue from our
net-centric customers increased by 4.8% from $168.7 million for 2015 to $176.8 million for 2016
primarily due to an increase in our number of net-centric customers, partially offset by the negative
impact of foreign exchange and a decline in our average price per megabit.

Our on-net revenue increased 9.8% from 2015 to 2016. We increased the number of our on-net

customer connections by 16.3% from December 31, 2015 to December 31, 2016. On-net customer
connections increased at a greater rate than on-net revenues primarily due to the 4.9% decline in our
on-net ARPU, primarily from a decline in ARPU for our net centric customers. ARPU is determined
by dividing revenue for the period by the average customer connections for that period. Our average
price per megabit for our installed base of customers is determined by dividing the aggregate monthly
recurring fixed charges for those customers by the aggregate committed data rate for the same
customers. The decline in on-net ARPU is partly attributed to volume and term based pricing
discounts. Additionally, on-net customers who cancel their service from our installed base of customers,
in general, have an ARPU that is greater than the ARPU for our new customers due to declining
prices primarily for our on-net services sold to our net-centric customers. These trends resulted in the
reduction to our on-net ARPU and a 16.8% decline in our average price per megabit for our installed
base of customers.

Our off-net revenue increased 12.9% from 2015 to 2016. Our off-net customer connections
increased 18.1% from December 31, 2015 to December 31, 2016. Our off-net customer connections
increased at a greater rate than our off-net revenue due to the 5.0% decrease in our off-net ARPU.

Our non-core revenue decreased 6.6% from 2015 to 2016. We do not actively market these
acquired non-core services and expect that the service revenue associated with them will continue to
decline.

Network Operations Expenses. Network operations expenses include the costs of personnel
associated with service delivery, network management, and customer support, network facilities costs,
fiber and equipment maintenance fees, leased circuit costs, and access and facilities fees paid to
building owners. Non-cash equity-based compensation expense is included in network operations
expenses consistent with the classification of the employee’s salary and other compensation. Our
network operations expenses, including non-cash equity-based compensation expense, increased 11.2%
from 2015 to 2016. The increase is primarily attributable to an increase in costs related to our network
and facilities expansion activities, a $5.5 million increase in excise taxes billed to our customers
recorded on a gross basis (in service revenue and cost of network operations expense) and the increase
in our off-net revenues. When we provide off-net services we also assume the cost of the associated
tail-circuits.

Selling, General, and Administrative Expenses (‘‘SG&A’’). Our SG&A expenses, including non-cash

equity-based compensation expense, increased 6.7% from 2015 to 2016. Non cash equity-based
compensation expense is included in SG&A expenses consistent with the classification of the
employee’s salary and other compensation and was $10.9 million for 2015 and $10.2 million for 2016.
SG&A expenses increased primarily from an increase in salaries and related costs required to support
our expansion and increases in our sales efforts, an increase in our headcount and a $3.1 million charge
related to a proposed settlement of a class action wage and hour claim for certain of our current and
past sales reps, partly offset by a $0.5 million decrease in our legal fees primarily associated with U.S.

net neutrality and interconnection regulatory matters. Our sales force headcount increased by 9.5%
from 495 at December 31, 2015 to 542 at December 31, 2016 and our total headcount increased by
7.1% from 828 at December 31, 2015 to 887 at December 31, 2016.

Depreciation and Amortization Expenses. Our depreciation and amortization expenses increased

6.7% from 2015 to 2016. The increase is primarily due to the depreciation expense associated with the
increase related to newly deployed fixed assets more than offsetting the decline in depreciation expense
from fully depreciated fixed assets.

Gains on Equipment Transactions. We exchanged certain used network equipment and cash
consideration for new network equipment resulting in gains of $5.4 million for 2015 and $7.7 million
for 2016. The gains are based upon the excess of the estimated fair value of the new network
equipment over the carrying amount of the returned used network equipment and the cash paid.

Gains on capital lease terminations.

In March 2015 we elected to terminate certain IRU capital

lease obligations with a vendor. Under our estimate of the termination provisions of the related
contract we recorded an estimated termination liability of $8.1 million in March 2015. The difference
between the remaining net present value of the related IRU capital leases, the remaining net book
value of the IRU assets and the termination liability and amounts due through the termination date
was recorded as a gain on capital lease termination of $10.1 million in 2015.

In July 2015, we settled a dispute for the payment of the remaining balances for certain IRU
capital lease obligations with a vendor. The IRU assets were fully depreciated in 2012 when the related
fiber was replaced and was no longer used by us. The difference between the remaining net present
value of the related IRU capital lease obligation and the settlement liability was recorded as a gain on
lease obligations of $1.5 million.

Debt extinguishment, redemption and new debt issuance—$250.0 million.

In March 2015, we

redeemed our $240.0 million 8.375% senior notes due in 2018 at a redemption price of 104.188% of
the $240.0 million principal amount thereof plus accrued and unpaid interest with the proceeds from
our February 2015 issuance of $250.0 million of 5.375% senior secured notes and existing cash on hand.
As a result of this transaction we incurred a loss on debt extinguishment and redemption of
$10.1 million in 2015.

Interest Expense.

Interest expense results from interest incurred on our $125.0 million of senior

secured notes that we issued on December 2, 2016, $250.0 million of senior secured notes that we
issued on February 20, 2015, $200.0 million of senior unsecured notes that we issued on April 9, 2014,
$240.0 million of senior secured notes that we issued in August 2013 and January 2011 and redeemed
in March 2015, interest on our installment payment agreement and interest on our capital lease
obligations. Our interest expense decreased by 1.2% primarily due to the March 2015 redemption of
our $240 million of 8.375% senior secured notes that carried a higher interest rate than our
$250.0 million of 5.375% senior secured notes that we issued in February 2015. Additionally, in March
2015 we elected to terminate $29.9 million of capital lease obligations in Spain with a vendor reducing
our interest expense on our capital leases.

In the second quarter of 2016, we paid $10.9 million for the purchase of $10.8 million of par value

and accrued interest of our $200.0 million senior unsecured notes reducing the principal to
$189.2 million and resulting in a loss of $0.2 million. The loss resulted from the write off of the
remaining unamortized debt issuance costs related to the purchased notes. In June 2016, we elected to
repay the outstanding $17.1 million principal balance of our installment payment agreement before its
maturity date resulting in a loss of $0.4 million from the remaining unamortized discount.

Income Tax Expense. Our income tax expense was $9.3 million for 2016 and $7.8 million for 2015.

The increase in our income tax expense was primarily related to an increase in deferred income tax
expense due to an increase in income before taxes in the United States.

Buildings On-net. As of December 31, 2016 and 2015 we had a total of 2,373 and 2,251 on-net

buildings connected to our network, respectively.

Liquidity and Capital Resources

In assessing our short term and long term liquidity, management reviews and analyzes our current
cash balances, short-term investments, accounts receivable, accounts payable, accrued liabilities, capital
expenditure and operating expense commitments, and required capital lease, interest and debt
payments and other obligations.

The following table sets forth our consolidated cash flows.

Year Ended December 31,

2017

2016

2015

Net cash provided by operating activities . . . . . . .
Net cash used in investing activities . . . . . . . . . . .
Net cash (used in) provided by financing activities .
Effect of exchange rates on cash . . . . . . . . . . . . .

$111,702
(45,801)
(97,267)
4,058

Net (decrease) increase in cash and cash

(in thousands)
$107,967
(45,234)
8,341
(346)

$ 83,809
(35,471)
(128,847)
(3,690)

equivalents during the year . . . . . . . . . . . . . . . .

$ (27,308) $ 70,728

$ (84,199)

Net Cash Provided By Operating Activities. Our primary source of operating cash is receipts from
our customers who are billed on a monthly basis for our services. Our primary uses of operating cash
are payments made to our vendors, employees and interest payments made to our capital lease vendors
and our note holders. Our changes in cash provided by operating activities are primarily due to changes
in our operating profit and changes in our interest payments. Cash provided by operating activities for
2017, 2016 and 2015 includes interest payments on our note obligations of $30.8 million, $24.5 million
and $29.3 million, respectively.

Net Cash Used In Investing Activities. Our primary use of investing cash is for purchases of
property and equipment. These amounts were $45.8 million, $45.2 million and $35.6 million for 2017,
2016 and 2015, respectively. The annual changes in purchases of property and equipment are primarily
due to the timing and scope of our network expansion activities including geographic expansion and
adding buildings to our network. In 2017, 2016 and 2015 we obtained $9.0 million, $5.5 million and
$21.9 million, respectively, of network equipment and software in non-cash exchanges for notes payable
under an installment payment agreement.

Net Cash (Used In) Provided By Financing Activities. Our primary uses of cash for financing
activities are for dividend payments, stock purchases and principal payments under our capital lease
obligations. In 2015 we redeemed our $240.0 million senior secured notes for a payment of
$251.3 million. Amounts paid under our stock buyback program were $1.8 million for 2017, $4.5 million
for 2016 and $39.4 million for 2015. During 2017, 2016 and 2015 we paid $81.7 million, $68.2 million
and $66.3 million, respectively, for our quarterly dividend payments. Our quarterly dividend payments
have increased due to regular quarterly increases in our quarterly dividend per share amounts. Principal
payments under our capital lease obligations were $11.2 million, $12.5 million and $20.2 million for
2017, 2016 and 2015, respectively, and are impacted by the timing and extent of our network expansion
activities. Our financing activities also include proceeds from and repayments of our debt offerings. In
December 2016 we received net proceeds of $124.3 million from the issuance of our $125.0 million of

senior secured notes. In 2015 we received net proceeds of $248.6 million from the issuance of our
$250.0 million senior secured notes. During 2016 we paid $10.9 million for the purchase of
$10.8 million of par value and accrued interest of our $200.0 million senior unsecured notes and we
elected to repay the outstanding $17.1 million principal balance of our installment payment agreement
prior to its maturity date. Total installment payment agreement principal payments were $3.8 million,
$21.2 million and $0.7 million for 2017, 2016 and 2015, respectively.

Indebtedness

Our total indebtedness, at par, at December 31, 2017 was $732.5 million. Our total indebtedness at

December 31, 2017 includes $157.5 million of capital lease obligations for dark fiber primarily under
15-20 year IRUs. Our total cash and cash equivalents were $247.0 million at December 31, 2017.

On May 15, 2014, pursuant to the Agreement and Plan of Reorganization (the ‘‘Merger

Senior unsecured notes—$189.2 million

Group is obligor on our $189.2 million (originally $200.0 million) of 5.625% senior unsecured

notes due 2021 (the ‘‘2021 Notes’’). The 2021 Notes were sold in private offerings for resale to
qualified institutional buyers pursuant to SEC Rule 144A. Holdings provided a guarantee of the 2021
Notes but Holdings is not subject to the covenants under the indenture. In the second quarter of 2016,
we paid $10.9 million for the purchase of $10.8 million of par value and accrued interest on our 2021
Notes reducing the principal amount to $189.2 million.

Debt extinguishment, redemption and new debt issuances—$375.0 million senior secured notes

In March 2015, Group redeemed its $240.0 million 8.375% senior notes due in 2018 (the ‘‘2018

Notes’’) with the proceeds from its February 2015 issuance of $250.0 million of 5.375% senior secured
notes (the ‘‘2022 Notes’’) and existing cash on hand. In February 2015 we deposited $251.6 million with
the trustee for the benefit of the holders of the 2018 Notes in order to redeem on March 12, 2015 the
entire outstanding amount of 2018 Notes at a redemption price of 104.188% of the $240.0 million
principal amount thereof plus accrued and unpaid interest. As a result of this transaction we incurred a
loss on debt extinguishment and redemption of $10.1 million. In December 2016, we issued an
additional $125.0 million of our 2022 Notes at a premium of 100.365%.

The 2022 Notes were sold in private offerings for resale to qualified institutional buyers pursuant

to SEC Rule 144A and mature on March 1, 2022. Interest accrues at 5.375% and is paid semi-annually
in arrears on March 1 and September 1 of each year. The net proceeds from the February 2015
offering were $248.6 million and the net proceeds were $124.3 million from the December 2016
offering after deducting discounts and commissions and offering expenses.

Senior secured notes—$240.0 million

In January 2011 and in August 2013, we issued our 2018 Notes for aggregate principal amounts of

$175.0 million and $65.0 million, respectively, in private offerings for resale to qualified institutional
buyers pursuant to SEC Rule 144A. The 2018 Notes were secured and bore interest at 8.375% per
annum. Interest was payable in cash semiannually in arrears on February 15 and August 15, of each
year. In January 2011, we received net proceeds of $170.5 million after deducting $4.5 million of

issuance costs from issuing $175.0 million of our 2018 Notes. In August 2013, we received net proceeds
of approximately $69.9 million after deducting $1.0 million of issuance costs from issuing $65.0 million
of 2018 Notes. The 2018 Notes sold in August 2013 were sold at 109.00% of par value. The resulting
$5.9 million premium was being amortized as a reduction to interest expense to the maturity date using
the effective interest rate method. In March 2015, the 2018 Notes were extinguished and redeemed
with the proceeds of our issuance of our $250.0 million of 2022 Notes and cash on hand.

Limitations under the indentures

The indentures governing our 2022 and 2021 Notes, among other things, limit our ability to incur

indebtedness; to pay dividends or make other distributions; to make certain investments and other
restricted payments; to create liens; consolidate, merge, sell or otherwise dispose of all or substantially
all of our assets; to incur restrictions on the ability of a subsidiary to pay dividends or make other
payments; and to enter into certain transactions with our affiliates. Limitations on the ability to incur
additional indebtedness (excluding IRU agreements incurred in the normal course of business) include
a restriction on incurring additional indebtedness if our consolidated leverage ratio, as defined in the
indentures, is greater than 5.0. The indentures prohibit certain payments, such as dividends and stock
purchases, when our consolidated leverage ratio, as defined by the indentures, is greater than 4.25. The
unrestricted payment amount may be increased by our consolidated cash flow, as defined in the
indentures, as long as our consolidated leverage ratio is less than 4.25. Our consolidated leverage ratio
is currently above 4.25 as of December 31, 2017, and we have a total of $64.3 million that is permitted
for investment payments including dividends and stock purchases.

Summarized Financial Information of Holdings

Holdings is a guarantor under the 2021 and 2022 Notes. Under the indentures we are required to

disclose financial information of Holdings including its assets, liabilities and its operating results
(‘‘Holdings Financial Information’’). The Holdings Financial Information as of and for the year ended
December 31, 2017 is detailed below (in thousands).

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31, 2017

(Unaudited)
$ 62,857

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 62,857

Investment from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 214,591
46
(151,780)

Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 62,857

Equity-based compensation expense . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended
December 31, 2017

(Unaudited)
$ 14,504
809

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(13,695)

Common Stock Buyback Program

Our Board of Directors has approved through December 31, 2018, purchases of our common stock

under a buyback program (the ‘‘Buyback Program’’). We purchased 0.1 million shares of our common
stock for $1.8 million during the year ended December 31, 2017, 0.1 million shares of our common
stock for $4.5 million during the year ended December 31, 2016 and 1.2 million shares of our common
stock for $39.4 million during the year ended December 31, 2015. As of December 31, 2017 there was
a total of $41.5 million available under the Buyback Program.

Dividends on Common Stock

Dividends are recorded as a reduction to retained earnings. Dividends on unvested restricted
shares of common stock are paid as the awards vest. Our initial quarterly dividend payment was made
in the third quarter of 2012. On February 21, 2018, our Board of Directors approved the payment of
our quarterly dividend of $0.50 per common share. The dividend for the first quarter of 2018 will be
paid to holders of record on March 9, 2018. This estimated $22.4 million dividend payment is expected
to be made on March 26, 2018.

Contractual Obligations and Commitments

The following table summarizes our contractual cash obligations and other commercial

commitments as of December 31, 2017.

Payments due by period

Total

Less than
1 year

1 - 3 years

3 - 5 years

Debt(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations(2) . . . . . . . . . . . . .
Operating leases(3) . . . . . . . . . . . . . . . . . . .
Unconditional purchase obligations(4) . . . . . .

702,933
335,675
151,923
19,823

(in thousands)
64,197
45,907
49,517
727

38,954
23,969
37,276
8,404

599,782
43,719
29,592
748

After
5 years

—
222,080
35,538
9,944

Total contractual cash obligations . . . . . . . . .

$1,210,354

$108,603

$160,348

$673,841

$267,562

(1) These amounts include interest and principal payment obligations on our $375.0 million of 2022

Notes through the maturity date of March 1, 2022 and interest and principal payments on our
$189.2 million of 2021 Notes through the maturity date of April 15, 2021 and $10.7 million due
under an installment payment agreement with a vendor.

(2) The capital lease obligations above were incurred in connection with IRUs for inter-city and
intra-city dark fiber underlying substantial portions of our network. These capital leases are
presented on our balance sheet at the net present value of the future minimum lease payments, or
$157.5 million at December 31, 2017. These leases generally have initial terms of 15 to 20 years

(3) These amounts include amounts due under our operating leases.

(4) These amounts include amounts due under unconditional purchase obligations including dark fiber

IRU operating and capital lease agreements entered into prior to December 31, 2017.

Future Capital Requirements

We believe that our cash on hand and cash generated from our operating activities will be
adequate to meet our working capital, capital expenditure, debt service, dividend payments and other
cash requirements for the next twelve months if we execute our business plan.

Any future acquisitions or other significant unplanned costs or cash requirements in excess of
amounts we currently hold may require that we raise additional funds through the issuance of debt or
equity. We cannot assure you that such financing will be available on terms acceptable to us or our
stockholders, or at all. Insufficient funds may require us to delay or scale back the number of buildings
and markets that we add to our network, reduce our planned increase in our sales and marketing
efforts, or require us to otherwise alter our business plan or take other actions that could have a
material adverse effect on our business, results of operations and financial condition. If issuing equity
securities raises additional funds, substantial dilution to existing stockholders may result.

We may need to or elect to refinance all or a portion of our indebtedness at or before maturity

and we cannot provide assurances that we will be able to refinance any such indebtedness on
commercially reasonable terms or at all. In addition, we may elect to secure additional capital in the
future, at acceptable terms, to improve our liquidity or fund acquisitions or for general corporate
purposes. In addition, in an effort to reduce future cash interest payments as well as future amounts
due at maturity or to extend debt maturities, we may, from time to time, issue new debt, enter into
debt for debt, or cash transactions to purchase our outstanding debt securities in the open market or
through privately negotiated transactions. We will evaluate any such transactions in light of the existing
market conditions. The amounts involved in any such transaction, individually or in the aggregate, may
be material.

Off-Balance Sheet Arrangements

We do not have relationships with unconsolidated entities or financial partnerships, such as entities

often referred to as structured finance or special purpose entities, which would have been established
for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.
As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise
if we had engaged in these relationships.

Income Taxes

Critical Accounting Policies and Significant Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our

consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

The accounting policies we believe to be most critical to understanding our financial results and

condition or that require complex, significant and subjective management judgments are discussed
below.

Revenue Recognition

We recognize service revenue when the services are performed, evidence of an arrangement exists,
the fee is fixed and determinable and collection is probable. Service discounts and incentives offered to
certain customers are recorded as a reduction of revenue when granted. Fees billed in connection with
customer installations are deferred and recognized ratably over the longer of estimated customer life or
contract term. We determine the estimated customer life using a historical analysis of customer
retention and contract terms. If our estimated customer life and contract terms increase, we will
recognize installation revenue over a longer period. We expense the direct costs associated with sales as
incurred.

Valuation Allowances for Doubtful Accounts Receivable and Deferred Tax Assets

We have established allowances associated with uncollectible accounts receivable and certain of our

deferred tax assets.

(cid:127) Our valuation allowance for uncollectible accounts receivable is designed to account for the

expense associated with accounts receivable that we estimate will not be collected. We assess the
adequacy of this allowance by evaluating general factors, such as the length of time individual
receivables are past due, historical collection experience, and changes in the credit-worthiness of
our customers. We also assess the ability of specific customers to meet their financial obligations
to us and establish specific allowances based on the amount we expect to collect from these
customers. If circumstances relating to specific customers change or economic conditions change
such that our past collections experience and assessment of the economic environment are no
longer appropriate, our estimate of the recoverability of our trade receivables could be impacted.

(cid:127) Our valuation allowance for our net deferred tax asset reflects the uncertainty surrounding the
realization of our net operating loss carry-forwards and our other deferred tax assets. Valuation
allowances are established when management determines it is ‘‘more likely than not’’ that some
portion or the entire deferred tax asset will not be realized. At each balance sheet date, we
assess the likelihood that we will be able to realize our deferred tax assets. We consider all
available positive and negative evidence, on a jurisdictional basis, in assessing the need for a
valuation allowance including our operating results, ongoing tax planning, and our forecast of
future taxable income. We base our estimates of deferred tax assets and liabilities on current tax
laws, rates and interpretations, and, in certain cases, business plans and other expectations about
future outcomes. We develop our estimates of future profitability based on our historical data
and experience and our judgment and expectations. Changes in existing tax laws and rates, their
related interpretations, and the uncertainty generated by the current economic environment may
affect the amounts of our deferred tax liabilities or the valuations of our deferred tax assets
overtime. Significant judgment is required with respect to the determination of whether a
valuation allowance is required for certain of our deferred tax assets. Our accounting for

deferred tax consequences represents management’s best estimate of future events that can be
appropriately reflected in accounting estimates.

Capital Lease Obligations

We record assets and liabilities under capital leases at the lesser of the present value of the
aggregate future minimum lease payments or the fair value of the assets under lease. We establish the
number of renewal option periods used in determining the lease term, if any, based upon our
assessment at the inception of the lease of the number of option periods for which failure to renew the
lease imposes a penalty on us in such amount that renewal appears to be reasonably assured. Useful
lives are determined based on historical usage with consideration given to technological changes and
trends in the industry that could impact the asset utilization. We estimate the fair value of leased assets
primarily using estimated replacement cost data for similar assets.

Accruals for Contingencies

We estimate our litigation accruals based upon our estimate of the expected outcome after
consultation with legal counsel. In the normal course of business we are involved in other legal
activities and claims. Because such matters are subject to many uncertainties and the outcomes are not
predictable with assurance, the liability related to these legal actions and claims cannot be determined
with certainty. In accordance with the accounting guidance for contingencies, we accrue our estimate of
a contingent liability when it is both probable that a liability has been incurred and the amount of the
loss can be reasonably estimated. Where it is probable that a liability has been incurred and there is a
range of expected loss for which no amount in the range is more likely than any other amount, we
accrue at the low end of the range. We review our accruals at least quarterly and adjust them to reflect
the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and
events pertaining to a particular matter. Judgment is required in estimating the ultimate outcome of
any dispute resolution process, as well as any other amounts that may be incurred to conclude the
negotiations or settle any litigation. Actual results may differ from these estimates under different
assumptions or conditions and such differences could be material.

We estimate our accruals for disputed leased circuit obligations based upon the nature and age of

the dispute. Our network costs are impacted by the timing and amounts of disputed circuit costs. We
generally record these disputed amounts when billed by the vendor and reverse these amounts when
the vendor credit has been received or the dispute has otherwise been resolved.

Recent Accounting Pronouncements

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
us beginning on January 1, 2019. Early application is permitted. ASU 2016-02 currently must be
adopted using the modified retrospective approach for all leases that exist at or commence after the
beginning of the earliest comparative period presented (with the option to apply certain practical
expedients), which for us will be the period beginning January 1, 2017. However, in January 2018 the
FASB issued a Proposed Accounting Standards Update which, among other changes, if approved 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. ASU 2016-02 will require us to record a right to
use asset and a lease liability for most of our leases, including our leases currently treated as operating
leases. We are evaluating the effect that ASU 2016-02 will have on our consolidated financial
statements and related disclosures and we will elect to apply certain practical expedients. We have not
yet determined the effect of ASU 2016-02 on our ongoing financial reporting or quantified the impact

to our balance sheet, however we do expect the right to use asset and lease liability recorded will be
material. We do not expect to early adopt ASU 2016-02 and we anticipate adopting ASU 2016-02 using
the cumulative effect method should this method be approved.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers,

(‘‘ASU 2014-09’’) 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. ASU 2014-09 will replace most existing revenue recognition guidance in
U.S. GAAP when it becomes effective. ASU 2014-09 is effective for us on January 1, 2018. Early
application is permitted for annual periods beginning after December 15, 2016. ASU 2014-09 permits
the use of either the full retrospective or modified retrospective transition method. We will adopt
ASU 2014-09 using the modified retrospective transition method on January 1, 2018 for those contracts
that are not completed as of the date of the initial application. Under the modified retrospective
method, the cumulative effect of applying the standard would be recognized at the date of initial
application. We will not early adopt ASU 2014-09.

We have not fully quantified the effect of adopting ASU 2014-09, however we anticipate the period
for which we recognize revenue for fees billed in connection with customer installations will change and
we be required to capitalize certain contract acquisition costs. Revenues will be recognized over the
contract term for installation fees associated with customer contracts with terms that are longer than
month-to-month, which may be a shorter period than the average customer life currently used, because
the fee does not give rise to a material right as defined by ASU 2014-09. Revenues will be recognized
over the estimated average customer life for installation fees associated with month-to-month contracts,
because the fee represents a material right. The impact of adopting ASU 2014-09 on our total service
revenue is not expected to be material. Additionally, we will be required to capitalize certain contract
acquisition costs, including commissions paid to our sales team and agents, and to amortize these costs
over the period the services are transferred to the customer for commission paid to our sales team and
over the remaining contract term for agent commissions. We currently expense these contract
acquisition costs as incurred in Selling, General and Administrative Expenses (‘‘SG&A). As a result our
SG&A expense for 2018 under ASU 2014-09 will be less than our SG&A expense under our current
accounting policy.

In June 2016, the FASB issued ASU 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. We are currently
evaluating the impact that this guidance may have on our financial statements and related disclosures.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks. These risks, which include interest rate risk and foreign

currency exchange risk, arise in the normal course of business rather than from trading activities.

Interest Rate Risk

Our cash flow exposure due to changes in interest rates related to our debt is limited as our note

obligations have fixed interest rates. The fair value of our note obligations may increase or decrease for
various reasons, including fluctuations in the market price of our common stock, fluctuations in market
interest rates and fluctuations in general economic conditions. A decline in interest rates in the future
will not generally benefit us with respect to our fixed rate debt due to the terms and conditions of the
indentures relating to that debt that would require us to repurchase the debt at specified premiums if

redeemed early. Our interest income is sensitive to changes in the general level of interest rates.
However, based upon the nature and current level of our investments, which consist of cash and cash
equivalents, we believe that there is no material interest rate exposure related to our investments.

Foreign Currency Exchange Risk

Our operations outside of the United States expose us to potentially unfavorable adverse
movements in foreign currency rate changes. We have not entered into forward exchange contracts
related to our foreign currency exposure. While we record financial results and assets and liabilities
from our international operations in the functional currency, which is generally the local currency, these
results are reflected in our consolidated financial statements in US dollars. Therefore, our reported
results are exposed to fluctuations in the exchange rates between the US dollar and the local
currencies, in particular the Euro and the Canadian dollar. In addition, we may fund certain cash flow
requirements of our international operations in US dollars. Accordingly, in the event that the local
currencies strengthen versus the US dollar to a greater extent than planned, the revenues, expenses and
cash flow requirements associated with our international operations may be significantly higher in
US-dollar terms than planned. During the year ended December 31, 2017, our foreign activities
accounted for 22% of our consolidated revenue. A 1% change in foreign exchange rates would impact
our consolidated annual revenue by approximately $1.0 million. Changes in foreign currency rates could
adversely affect our operating results.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income (Loss) for Each of the Three Years Ended

December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for Each of the Three

Years Ended December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for Each of the Three Years Ended December 31, 2017 .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

44
45

47
48
49

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Cogent Communications Holdings, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Cogent Communications
Holdings, Inc. and subsidiaries (the ‘‘Company’’) as of December 31, 2017 and 2016, the related
consolidated statements of comprehensive income (loss), changes in stockholders’ equity (deficit) and
cash flows for each of the three years in the period ended December 31, 2017, and the related notes
and financial statement schedule listed in the Index at Item 15(a)2 (collectively referred to as the
‘‘consolidated financial statements’’). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016,
and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States) (‘‘PCAOB’’), the Company’s internal control over financial reporting
as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)
and our report dated February 23, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility

is to express an opinion on the Company’s financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require

that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditors since 2002
Tysons, VA
February 23, 2018

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2017 AND 2016

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts of $1,499 and

2017

2016

$ 247,011

$ 274,319

$1,734, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . .

39,096
20,011

33,598
19,706

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment:
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . .

306,118

327,623

1,233,756
(852,474)

1,136,470
(774,829)

Total property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits and other assets ($736 and $128 restricted, respectively) . . . . . . . . .

381,282
17,616
5,572

361,641
42,241
6,387

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 710,588

$ 737,892

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment payment agreement, current portion, net of discount of $337 and

$204, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations, current maturities . . . . . . . . . . . . . . . . . . . . . . . . .

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior secured 2022 notes, net of unamortized debt costs of $1,870 and

11,592
47,947

11,551
47,149

7,816
7,171

74,526

2,587
6,626

67,913

$2,257, respectively and including premium of $382 and $462, respectively .

373,512

373,205

Senior unsecured 2021 notes, net of unamortized debt costs of $2,060 and

$2,575, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations, net of current maturities . . . . . . . . . . . . . . . . . . . .
Other long term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

187,165
150,333
27,596

813,132

186,650
135,335
28,043

791,146

Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value; 75,000,000 shares authorized; 45,960,799

and 45,478,787 shares issued and outstanding, respectively . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

46
456,696
(4,600)
(554,686)

45
442,799
(17,193)
(478,905)

Total stockholders’ deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(102,544)

(53,254)

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 710,588

$ 737,892

The accompanying notes are an integral part of these consolidated balance sheets.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 2017

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2017

2016

2015

485,175

446,900

404,234

Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Network operations (including $604, $573 and $584 of

equity-based compensation expense, respectively), exclusive
of amounts shown separately . . . . . . . . . . . . . . . . . . . . . .

Selling, general, and administrative (including $12,686,
$10,162 and $10,931 of equity-based compensation
expense, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . .

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gains on equipment transactions . . . . . . . . . . . . . . . . . . . .
Gains on capital lease terminations . . . . . . . . . . . . . . . . . . .
Losses on debt extinguishment and redemption . . . . . . . . . .

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income and other . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Comprehensive income (loss):
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . .

Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . .

Basic net income per common share . . . . . . . . . . . . . . . . . .

Diluted net income per common share . . . . . . . . . . . . . . . . .

Dividends declared per common share . . . . . . . . . . . . . . . . .

209,278

194,066

174,510

127,915
75,926

413,119

3,862
—
—

75,918
3,667
(48,467)

31,118
(25,242)

5,876

5,876
12,593

18,469

0.13

1.80

120,709
75,235

390,010

7,739
—
(587)

64,042
1,021
(40,803)

24,260
(9,331)

14,929

14,929
(2,500)

12,429

0.33

1.51

113,103
70,527

358,140

5,443
11,643
(10,144)

53,036
956
(41,280)

12,712
(7,816)

4,896

4,896
(8,231)

(3,335)

0.11

1.46

Weighted-average common shares—basic . . . . . . . . . . . . . . .

44,855,263

44,641,805

44,888,723

Weighted-average common shares—diluted . . . . . . . . . . . . .

45,184,203

44,873,030

45,159,489

The accompanying notes are an integral part of these consolidated statements.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 2017

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Common Stock

Amount

Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Income (Loss)

Accumulated
Deficit

Total
Stockholder’s
Equity (Deficit)

Balance at December 31, 2014 .

46,398,729

$46

$460,576

$ (6,462)

$(370,366)

$ 83,794

Forfeitures of shares granted to
employees . . . . . . . . . . . . .
Equity-based compensation . . .
Foreign currency translation . . .
Issuances of common stock . . .
Exercises of options . . . . . . . .
Common stock purchases and

retirement . . . . . . . . . . . . .
Excess income tax benefit . . . .
Dividends paid . . . . . . . . . . . .
Net income . . . . . . . . . . . . . .

(47,705)
—
—
62,900
27,676

(1,242,882)
—
—
—

—
—
—
—
—

(1)
—
—
—

—
12,554
—
—
423

(39,394)
2
—
—

—
—
(8,231)
—
—

—
—
—
—

—
—
—
—
—

—
—
(66,314)
4,896

—
12,554
(8,231)
—
423

(39,395)
2
(66,314)
4,896

Balance at December 31, 2015 .

45,198,718

$45

$434,161

$(14,693)

$(431,784)

$ (12,271)

Cumulative-effect adjustment

from adoption of
ASU 2017-09 . . . . . . . . . . .
Forfeitures of shares granted to
employees . . . . . . . . . . . . .
Equity-based compensation . . .
Foreign currency translation . . .
Issuances of common stock . . .
Exercises of options . . . . . . . .
Common stock purchases and

retirement . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . .
Net income . . . . . . . . . . . . . .

—

(3,824)
—
—
358,130
53,245

(127,482)
—
—

—

—
—
—
—
—

—
—
—

—

—
11,910
—
—
1,220

(4,492)
—
—

—

6,160

—
—
(2,500)
—
—

—
—
—

—
—
—
—
—

—
(68,210)
14,929

—
11,910
(2,500)
—
1,220

(4,492)
(68,210)
14,929

Balance at December 31, 2016 .

45,478,787

$45

$442,799

$(17,193)

$(478,905)

$ (53,254)

retirement . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . .
Net income . . . . . . . . . . . . . .

(10,181)
—
—
499,654
39,289

(46,750)
—
—

—
—
—
1
—

—
—
—

—
14,504
—
—
1,222

(1,829)
—
—

—
—
12,593
—
—

—
—
—

—
—
—
—
—

—
(81,657)
5,876

—
14,504
12,593
1
1,222

(1,829)
(81,657)
5,876

Balance at December 31, 2017 .

45,960,799

$46

$456,696

$ (4,600)

$(554,686)

$(102,544)

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 2017

(IN THOUSANDS)

70,527
171
11,515
10,144
(11,643)
(4,866)
7,709

1,119
(2,898)
(221)
(2,644)

83,809

(35,582)
111

(35,471)

2017

2016

2015

$ 5,876

$ 14,929

4,896

Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating

activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt discount and premium . . . . . . . . . . . . . . . . . . . . .
Equity-based compensation expense (net of amounts capitalized) . . . . . . .
Losses on debt extinguishment and redemption . . . . . . . . . . . . . . . . . . .
Gains on capital lease terminations
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains—equipment transactions and other, net . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Changes in operating assets and liabilities:

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . .
Deposits and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable, accrued liabilities and other long-term liabilities . . . . . .

75,926
1,239
13,290
—
—
(4,833)
24,679

(4,161)
1,146
1,111
(2,571)

75,235
1,105
10,735
587
—
(7,674)
9,224

(3,183)
(2,923)
(336)
10,268

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . .

111,702

107,967

Cash flows from investing activities:
Purchases of property and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from asset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(45,801)
—

(45,234)
—

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(45,801)

(45,234)

Cash flows from financing activities:
Net proceeds from issuance of 2022 secured notes—net of debt costs of

$1,202 and $1,397, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Extinguishment of 2021 unsecured notes
Redemption of 2018 secured notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments of capital lease obligations . . . . . . . . . . . . . . . . . . . . . .
Principal payments of installment payment agreement
. . . . . . . . . . . . . . . .
Purchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercises of common stock options . . . . . . . . . . . . . . . . . . .

Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . .

—
—
—
(81,657)
(11,201)
(3,802)
(1,829)
1,222

(97,267)

124,267
(10,775)
—
(68,210)
(12,466)
(21,203)
(4,492)
1,220

248,603
—
(251,280)
(66,314)
(20,215)
(670)
(39,394)
423

8,341

(128,847)

Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . .

4,058

(346)

Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . .

(27,308)
274,319

70,728
203,591

(3,690)

(84,199)
287,790

Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . .

$247,011

$274,319

$ 203,591

Supplemental disclosures of cash flow information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for income taxes
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash investing and financing activities:

Capital lease obligations incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
PP&E obtained for installment payment agreement
Fair value of equipment acquired in leases
. . . . . . . . . . . . . . . . . . . . . .
Non-cash component of network equipment obtained in exchange

$ 47,032
441

$ 37,125
143

$ 44,383
577

22,595
9,027
—

18,439
5,521
2,110

25,794
21,873
595

transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,861

7,739

8,156

The accompanying notes are an integral part of these consolidated statements.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of the business and summary of significant accounting policies:

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 and Internet Protocol (‘‘IP’’)
communications services. The Company’s network is specifically designed and optimized to transmit
data using IP. 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 services exclusively through its own facilities, which run

from its network to its customers’ premises. The Company is not dependent on local telephone
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 IP connectivity ranging from 100 Megabits per second to 100 Gigabits per second of
bandwidth. The Company provides its on-net Internet access 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 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.

Principles of consolidation

The consolidated financial statements have been prepared in accordance with United States

generally accepted accounting principles and include the accounts of the Company and all of its wholly-

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Description of the business and summary of significant accounting policies: (Continued)

owned and majority-owned subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.

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.

Revenue recognition and allowance for doubtful accounts

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. Revenues from
telecommunication services are recognized when the services are performed, evidence of an
arrangement exists, the fee is fixed and determinable and collection is probable. The probability of
collection is determined by an analysis of credit history for certain new customers and historical
payment patterns for existing customers. Service discounts and incentives related to telecommunication
services are recorded as a reduction of revenue when granted. Fees billed in connection with customer
installations are deferred and recognized ratably over the longer of the contract term or the estimated
customer life. The Company expenses the direct costs associated with sales as incurred.

The Company invoices certain customers for amounts contractually due for unfulfilled minimum
contractual obligations and recognizes a corresponding sales allowance equal to the amount invoiced
resulting in the recognition of no net revenue at the time the customer is billed. The Company
vigorously seeks payment of these amounts. The Company recognizes revenue for these amounts as
they are collected.

The Company establishes an allowance for doubtful accounts and other sales credit adjustments
related to its trade receivables. Trade receivables are recorded at the invoiced amount and can bear
interest. Allowances for sales credits are established through a reduction of revenue, while allowances
for doubtful accounts are established through a charge to selling, general, and administrative expenses
as bad debt expense. The Company assesses the adequacy of these reserves by evaluating factors, such
as the length of time individual receivables are past due, historical collection experience, and changes
in the credit worthiness of its customers. The Company also assesses the ability of specific customers to
meet their financial obligations and establishes specific allowances related to these customers. If
circumstances relating to specific customers change or economic conditions change such that the
Company’s past collection experience and assessment of the economic environment are no longer
appropriate, the Company’s estimate of the recoverability of its trade receivables could be impacted.
Accounts receivable balances are written-off against the allowance for doubtful accounts after all means
of internal collection activities have been exhausted and the potential for recovery is considered
remote. The Company recognized bad debt expense, net of recoveries, of $3.7 million, $2.8 million and
$3.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Description of the business and summary of significant accounting policies: (Continued)

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 $10.9 million, $9.1 million, and $3.6 million for the years ended
December 31, 2017, 2016 and 2015, respectively.

Network operations

Network operations expenses include the costs of personnel and related operating expenses
associated with service delivery, network management, and customer support, network facilities costs,
fiber and equipment maintenance fees, leased circuit costs, access fees paid to building owners and
certain excise taxes and surcharges recorded on a gross basis. The Company estimates its accruals for
any disputed leased circuit obligations based upon the nature and age of the dispute. Network
operations costs are impacted by the timing and amounts of disputed circuit costs. The Company
generally records these disputed amounts when billed by the vendor and reverses these amounts when
the vendor credit has been received or the dispute has otherwise been resolved. The Company does not
allocate depreciation and amortization expense to its network operations expense.

Foreign currency translation adjustment and comprehensive income (loss)

The consolidated financial statements of the Company’s non-US operations are translated into US

dollars using the period-end foreign currency exchange rates for assets and liabilities and the average
foreign currency exchange rates for revenues and expenses. Gains and losses on translation of the
accounts are accumulated and reported as a component of other comprehensive income (loss) in
stockholders’ equity. The Company’s only components of ‘‘other comprehensive income (loss)’’ are
currency translation adjustments for all periods presented. The Company considers the majority of its
investments in its foreign subsidiaries to be long-term in nature. The Company’s foreign exchange
transaction gains (losses) are included within interest income and other on the consolidated statements
of comprehensive income (loss).

Financial instruments

The Company considers all highly liquid investments with an original maturity of three months or

less at purchase to be cash equivalents. The Company determines the appropriate classification of its
investments at the time of purchase and evaluates such designation at each balance sheet date.

At December 31, 2017 and December 31, 2016, 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 December 31, 2017 the fair

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Description of the business and summary of significant accounting policies: (Continued)

value of the Company’s $189.2 million senior unsecured notes was $193.0 million and the fair value of
the Company’s $375.0 million senior secured notes was $392.8 million.

The Company was party to letters of credit totaling $0.7 million as of December 31, 2017 and

$0.1 million as of December 31, 2016. These letters of credit are secured by investments that are
restricted and included in deposits and other assets.

Concentrations of credit risk

The Company’s assets that are exposed to credit risk consist of its cash and cash equivalents, other

assets and accounts receivable. As of December 31, 2017 and 2016, the Company’s cash equivalents
were invested in demand deposit accounts, overnight investments and money market funds. The
Company places its cash equivalents in instruments that meet high-quality credit standards as specified
in the Company’s investment policy guidelines. Accounts receivable are due from customers located in
major metropolitan areas in the United States, Europe, Canada, Mexico and Asia. Receivables from
the Company’s net-centric (wholesale) customers are generally subject to a higher degree of credit risk
than the Company’s corporate customers.

The Company relies upon an equipment vendor for the majority of its network equipment and is

also dependent upon many third-party fiber providers for providing its services to its customers.

Property and equipment

Property and equipment are recorded at cost and depreciated once deployed using the straight-line

method over the estimated useful lives of the assets. Useful lives are determined based on historical
usage with consideration given to technological changes and trends in the industry that could impact
the asset utilization. System infrastructure costs include the capitalized compensation costs of
employees directly involved with construction activities and costs incurred by third party contractors.

Assets and liabilities under capital leases are recorded at the lesser of the present value of the

aggregate future minimum lease payments or the fair value of the assets under lease. Leasehold
improvements include costs associated with building improvements. The Company determines the
number of renewal option periods, if any, included in the lease term for purposes of amortizing
leasehold improvements and the lease term of its capital leases based upon its assessment at the
inception of the lease for which the failure to renew the lease imposes a penalty on the Company in
such amount that a renewal appears to be reasonably assured. Expenditures for maintenance and
repairs are expensed as incurred.

Depreciation and amortization periods are as follows:

Type of asset

Depreciation or amortization period

Indefeasible rights of use (IRUs) . . . . . . . . . . . . .

Network equipment
. . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . .

Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owned buildings . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Office and other equipment
System infrastructure . . . . . . . . . . . . . . . . . . . . .

Shorter of useful life or the IRU lease agreement;
generally 15 to 20 years
3 to 8 years
Shorter of lease term, including reasonably
assured renewal periods, or useful life
5 years
40 years
3 to 7 years
5 to 10 years

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Description of the business and summary of significant accounting policies: (Continued)

Long-lived assets

The Company’s long-lived assets include property and equipment. These long-lived assets are

reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. Impairment is determined by comparing the carrying value of these
long-lived assets to management’s probability weighted estimate of the future undiscounted cash flows
expected to result from the use of the assets. In the event an impairment exists, a loss is recognized
based on the amount by which the carrying value exceeds the fair value of the asset, which would be
determined by using quoted market prices or valuation techniques such as the discounted present value
of expected future cash flows, appraisals, or other pricing models. In the event there are changes in the
planned use of the Company’s long-term assets or the Company’s expected future undiscounted cash
flows are reduced significantly, the Company’s assessment of its ability to recover the carrying value of
these assets could change.

Equity-based compensation

The Company recognizes compensation expense for its share-based payments granted to its
employees based on their grant date fair values with the expense being recognized on a straight-line
basis over the requisite service period. The Company begins recording equity-based compensation
expense related to performance awards when it is considered probable that the performance conditions
will be met and for market based awards compensation cost is recognized if the service condition is
satisfied even if the market condition is not satisfied. Equity-based compensation expense is recognized
in the statement of operations in a manner consistent with the classification of the employee’s salary
and other compensation.

Income taxes

The Company’s deferred tax assets or liabilities are computed based upon the differences between

financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate.
Deferred income tax expenses or benefits are based upon the changes in the assets or liability from
period to period. At each balance sheet date, the Company assesses the likelihood that it will be able
to realize its deferred tax assets. Valuation allowances are established when management determines
that it is ‘‘more likely than not’’ that some portion or all of the deferred tax asset may not be realized.
The Company considers all available positive and negative evidence in assessing the need for a
valuation allowance including its historical operating results, ongoing tax planning, and forecasts of
future taxable income, on a jurisdiction by jurisdiction basis. The Company reduces its valuation
allowance if the Company concludes that it is ‘‘more likely than not’’ that it would be able to realize its
deferred tax assets.

Management determines whether a tax position is more likely than not to be sustained upon
examination based on the technical merits of the position. Once it is determined that a position meets
this recognition threshold, the position is measured to determine the amount of benefit to be
recognized in the financial statements. The Company adjusts its estimated liabilities for uncertain tax
positions periodically because of ongoing examinations by, and settlements with, the various taxing
authorities, as well as changes in tax laws, regulations and interpretations. The Company’s policy is to
recognize interest and penalties accrued on any unrecognized tax benefits as a component of its income
tax expense.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Description of the business and summary of significant accounting policies: (Continued)

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 the diluted weighted average shares:

Year Ended
December 31,
2017

Year Ended
December 31,
2016

Year Ended
December 31,
2015

Weighted average common shares—basic . . .
Dilutive effect of stock options . . . . . . . . . .
Dilutive effect of restricted stock . . . . . . . . .

44,855,263
31,534
297,406

44,641,805
31,760
199,465

44,888,723
40,196
230,570

Weighted average common shares—diluted .

45,184,203

44,873,030

45,159,489

The following details unvested shares of restricted common stock as well as the anti-dilutive effects

of stock options and restricted stock awards outstanding:

Unvested shares of restricted common stock .
Anti-dilutive options for common stock . . . .
Anti-dilutive shares of restricted common

December 31,
2017

December 31,
2016

December 31,
2015

1,112,151
47,513

908,761
90,959

870,751
119,872

stock . . . . . . . . . . . . . . . . . . . . . . . . . . .

201

79,450

362,241

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. ASU 2016-02 currently must
be adopted using the modified retrospective approach for all leases that exist at or commence after the
beginning of the earliest comparative period presented (with the option to apply certain practical
expedients), which for the Company will be the period beginning January 1, 2017. However, in January
2018 the FASB issued a Proposed Accounting Standards Update which, among other changes, and if
approved 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. 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

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Description of the business and summary of significant accounting policies: (Continued)

adopt ASU 2016-02 and anticipates adopting ASU 2016-02 using the cumulative effect method should
this method be approved.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers,

(‘‘ASU 2014-09’’) 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. ASU 2014-09 will replace most existing revenue recognition guidance in
U.S. GAAP when it becomes effective. ASU 2014-09 is effective for the Company on January 1, 2018.
Early application is permitted for annual periods beginning after December 15, 2016. ASU 2014-09
permits the use of either the full retrospective or modified retrospective transition method. The
Company will adopt ASU 2014-09 using the modified retrospective transition method on January 1,
2018 for those contracts that are not completed as of the date of the initial application. Under the
modified retrospective method, the cumulative effect of applying the standard will be recognized at the
date of initial application. The Company will not early adopt ASU 2014-09.

The Company has not fully quantified the effect of adopting ASU 2014-09, however anticipates

that the period for which it recognizes revenue for fees billed in connection with its customer
installations will change and the Company will be required to capitalize certain contract acquisition
costs. Revenues will be recognized over the contract term for installation fees associated with customer
contracts with terms that are longer than month-to-month, which may be a shorter period than the
average customer life currently used, because the fee does not give rise to a material right as defined
by ASU 2014-09. Revenues will be recognized over the estimated average customer life for installation
fees associated with month-to-month contracts, because the fee represents a material right. The impact
of adopting ASU 2014-09 on the Company’s total service revenue is not expected to be material.
Additionally, the Company will be required to capitalize certain contract acquisition costs, including
commissions paid to its sales team and agents, and to amortize these costs over the period the services
are transferred to the customer for commission paid to its sales team and over the remaining contract
term for agent commissions. The Company currently expenses these contract acquisition costs as
incurred in Selling, General and Administrative Expenses.

In June 2016, the FASB issued ASU 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.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Property and equipment:

Property and equipment consisted of the following (in thousands):

Owned assets:
Network equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . .
System infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office and other equipment
. . . . . . . . . . . . . . . . . . . . . . . .
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less—Accumulated depreciation and amortization . . . . . . . .

Assets under capital leases:
IRUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less—Accumulated depreciation and amortization . . . . . . . .

December 31,

2017

2016

$ 510,327
200,184
114,046
9,701
14,591
1,334
113

$ 476,786
182,734
102,502
9,523
13,735
1,171
99

850,296
(680,114)

786,550
(621,162)

170,182

165,388

383,460
(172,360)

349,920
(153,667)

211,100

196,253

Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . .

$ 381,282

$ 361,641

Depreciation and amortization expense related to property and equipment and capital leases was

$75.9 million, $75.2 million and $70.5 million, for 2017, 2016 and 2015, respectively.

The Company capitalizes the compensation cost of employees directly involved with its
construction activities. In 2017, 2016 and 2015, the Company capitalized compensation costs of
$9.7 million, $8.7 million and $8.3 million respectively. These amounts are included in system
infrastructure costs.

Exchange agreement

In 2017, 2016 and 2015 the Company exchanged certain used network equipment and cash
consideration for new network equipment. The fair value of the new network equipment received was
estimated to be $9.1 million, $15.5 million and $17.9 million resulting in gains of $3.9 million,
$7.7 million and $5.3 million respectively. The estimated fair value of the equipment received was
based upon the cash consideration price the Company pays for the new network equipment on a
standalone basis (Level 3).

Installment payment agreement

In March 2015, the Company entered into an installment payment agreement (‘‘IPA’’) with a
vendor. Under the IPA the Company may purchase network equipment in exchange for interest free
note obligations each with a twenty-four month term. There are no payments under each note
obligation for the first six months followed by eighteen equal installment payments for the remaining
eighteen month term. As of December 31, 2017 and December 31, 2016, there was $10.7 million and

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Property and equipment: (Continued)

$5.5 million, respectively, of note obligations outstanding under the IPA, secured by the related
equipment. The Company recorded the assets purchased and the present value of the note obligation
utilizing an imputed interest rate. The resulting discounts totaling $0.4 million and $0.3 million as of
December 31, 2017 and December 31, 2016, respectively, under the note obligations are being
amortized over the note term using the effective interest rate method.

3. Accrued and other liabilities:

Accrued and other current liabilities consist of the following (in thousands):

December 31,

2017

2016

Operating accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue—current portion . . . . . . . . . . . . . . . . . . . . . .
Payroll and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes—non-income based . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$25,278
4,758
5,139
2,360
10,412

$24,356
4,334
4,170
4,037
10,252

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$47,947

$47,149

4. Long-term debt:

Debt extinguishment, redemption and new debt issuances—$375 million 2022 Notes

In March 2015, Group redeemed its $240.0 million 8.375% senior notes due in 2018 (the ‘‘2018

Notes’’) with the proceeds from its February 2015 issuance of $250.0 million of 5.375% senior secured
notes (the ‘‘2022 Notes’’) and existing cash on hand. The net proceeds from the offering were
$248.6 million after deducting discounts and commissions and offering expenses. In February 2015 the
Company deposited $251.6 million with the trustee for the benefit of the holders of the 2018 Notes in
order to redeem on March 12, 2015 the entire outstanding amount of 2018 Notes at a redemption price
of 104.188% of the $240.0 million principal amount thereof plus accrued interest. As a result of this
transaction the Company incurred a loss on debt extinguishment and redemption of $10.1 million. In
December 2016, the Company issued an additional $125.0 million par value of its 2022 Notes at a
premium of 100.375% of par value. The Company received net proceeds of $124.3 million after
deducting $1.2 million of offering costs. The $0.5 million premium is amortized as a reduction to
interest expense to the maturity date using the effective interest rate method. The net proceeds from
these offerings are intended to be used for general corporate purposes.

The 2022 Notes were sold in private offerings for resale to qualified institutional buyers pursuant

to SEC Rule 144A and mature on March 1, 2022. Interest accrues at 5.375% beginning on February 20,
2015 and is paid semi-annually in arrears on March 1 and September 1 of each year. The indenture
governing the 2022 Notes provides that the Company and each of the Company’s existing domestic
subsidiaries and future material domestic subsidiaries guarantee the 2022 Notes, subject to certain
exceptions and permitted liens. The 2022 Notes are also secured by a pledge of all of the equity
interests in Group’s domestic subsidiaries and 65% of the equity interests in Group’s first-tier foreign
subsidiaries. The 2022 Notes and the subsidiary guarantees will be the Company’s and the subsidiary
guarantors’ senior indebtedness and will rank pari passu in right of payment with all of the Company’s

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Long-term debt: (Continued)

and the subsidiary guarantors’ existing and future senior indebtedness, effectively senior to Group’s
senior unsecured indebtedness to the extent of the value of the collateral securing the 2022 Notes and
the subsidiary guarantees, including Group’s 2021 Notes that were issued on April 9, 2014, described
below, and senior to any of the Company’s and the subsidiary guarantors’ future subordinated
indebtedness. The 2022 Notes are structurally subordinated to the liabilities of the non-guarantor
subsidiaries and are effectively subordinated to the Company’s and the subsidiary guarantors’ secured
indebtedness to the extent of the value of the collateral securing such indebtedness on a basis senior to
the 2022 Notes and the subsidiary guarantees. Holdings is also a guarantor of the 2022 Notes; however
Holdings’ guarantee is unsecured and thus its guarantee is not secured by any of Holdings assets.
Holdings is also not subject to the covenants under the indenture governing the 2022 Notes.

The 2022 Notes may be redeemed prior to December 1, 2021 (three months prior to the maturity

date of the Notes) in whole or from time to time in part, at a redemption price equal to the sum of
(1) 100% of the principal amount plus accrued and unpaid interest, if any, to, but not including, the
redemption date, and (2) a make-whole premium, if any. The make-whole premium is the excess of
(1) the net present value, on the redemption date, of the principal being redeemed or paid and the
amount of interest (exclusive of interest accrued to the date of redemption) that would have been
payable if such redemption had not been made, over (2) the aggregate principal amount of the notes
being redeemed or paid. Net present value shall be determined by discounting, on a semi-annual basis,
such principal and interest at the reinvestment rate (as determined in the indenture governing the 2022
Notes) from the respective dates on which such principal and interest would have been payable if such
redemption had not been made. In addition, at any time on or after December 1, 2021 (three months
prior to the maturity date of the 2022 Notes), the Issuer may redeem the 2022 Notes, in whole and or
in part, at a redemption price equal to 100% of the principal amount of the 2022 Notes to be
redeemed, plus accrued and unpaid interest, if any, to, but not including, the redemption date.

Senior unsecured notes—$189.2 million 2021 Notes

On April 9, 2014, Cogent Communications Finance, Inc. (‘‘Cogent Finance’’), a newly formed

financing subsidiary of Group, completed an offering at par of $200.0 million in aggregate principal
amount of 5.625% Senior Notes due 2021 (the ‘‘2021 Notes’’). The 2021 Notes were sold in private
offerings for resale to qualified institutional buyers pursuant to SEC Rule 144A. The offering closed
into escrow pursuant to an escrow agreement, dated as of April 9, 2014 (the ‘‘Escrow Agreement’’).
The term ‘‘Issuer’’ refers to Cogent Finance prior to the release of the funds from the escrow account
(such date of release, the ‘‘Escrow Release Date’’) and to Group after the Escrow Release Date. As a
condition to releasing the funds from escrow Group redeemed its remaining outstanding convertible
notes on June 20, 2014 (the ‘‘Redemption Transaction’’). After consummation of the Redemption
Transaction, Cogent Finance merged with Group, with Group continuing as the surviving corporation
(the ‘‘Finance Merger’’). At the time of consummation of the Finance Merger, Group assumed the
obligations of Cogent Finance under the 2021 Notes and the indenture governing the 2021 Notes (the
‘‘Indenture’’) and Group and each of Group’s domestic subsidiaries became party to the Indenture
pursuant to a supplemental indenture to the Indenture and the obligations under the Indenture became
obligations solely of Group and each of Group’s domestic subsidiaries. Holdings also provided a
guarantee of the 2021 Notes but Holdings is not subject to the covenants under the Indenture. After
the conditions to the release of the escrow proceeds were satisfied, on June 25, 2014 (the ‘‘Escrow
Release Date’’) the proceeds from the 2021 Notes were released. The net proceeds from the offering

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Long-term debt: (Continued)

were $195.8 million after deducting commissions and offering expenses. The net proceeds from the
offering are intended to be used for general corporate purposes.

In the second quarter of 2016, the Company paid $10.9 million for the purchase of $10.8 million of

par value and accrued interest on its 2021 Notes reducing the principal amount to $189.2 million and
resulting in a loss of $0.2 million. The loss resulted from the write off of the remaining unamortized
debt issuance costs related to the purchased notes.

The 2021 Notes were issued pursuant to, and are governed by the Indenture between Cogent
Finance and the trustee. The 2021 Notes bear interest at a rate of 5.625% per year and will mature on
April 15, 2021. Interest began to accrue on the 2021 Notes on April 9, 2014 and will be paid
semi-annually on April 15 and October 15, commencing on October 15, 2014. Following the Escrow
Release Date, the 2021 Notes became Group’s senior unsecured obligations and are guaranteed on a
senior unsecured basis by Holdings. The 2021 Notes are effectively subordinated in right of payment to
all of Group’s and each guarantor’s secured indebtedness and future secured indebtedness, if any, to
the extent of the value of the assets securing such indebtedness. The 2021 Notes are equal in right of
payment with Group’s and each guarantor’s unsecured indebtedness that is not subordinated in right of
payment to the 2021 Notes. The 2021 Notes rank senior in right of payment to Group’s and each
guarantor’s future subordinated debt, if any; and are structurally subordinated in right of payment to all
indebtedness and other liabilities of any of the Group’s subsidiaries that are not guarantors, which only
consist of immaterial subsidiaries and foreign subsidiaries that do not guarantee other indebtedness of
Group.

Group may also redeem the 2021 Notes, in whole or in part, at any time on or after April 15, 2017

at the applicable redemption prices specified under the indenture governing the 2021 Notes plus
accrued and unpaid interest, if any, to the date of redemption. The redemption prices (expressed as a
percentage of the principal amount) are 104.219% during the 12-month period beginning on April 15,
2017, 102.813% during the 12-month period beginning on April 15, 2018, 101.406% during the
12-month period beginning on April 15, 2019 and 100.0% during the 12-month period beginning on
April 15, 2020 and thereafter. If Group experiences specific kinds of changes of control, Group must
offer to repurchase all of the 2021 Notes at a purchase price of 101.0% of their principal amount, plus
accrued and unpaid interest, if any, to the repurchase date.

Limitations under the indentures

The indentures governing the 2022 Notes and 2021 Notes, among other things, limit the

Company’s ability to incur indebtedness; to pay dividends or make other distributions; to make certain
investments and other restricted payments; to create liens; consolidate, merge, sell or otherwise dispose
of all or substantially all of its assets; to incur restrictions on the ability of a subsidiary to pay dividends
or make other payments; and to enter into certain transactions with its affiliates. Limitations on the
ability to incur additional indebtedness (excluding IRU agreements incurred in the normal course of
business) include a restriction on incurring additional indebtedness if the Company’s consolidated
leverage ratio, as defined in the indentures, is greater than 5.0. The indentures prohibit certain
payments, such as dividends and stock purchases, when the Company’s consolidated leverage ratio, as
defined by the indentures, is greater than 4.25. A certain amount of such unrestricted payments is
permitted notwithstanding this prohibition. The unrestricted payment amount may be increased by the
Company’s consolidated cash flow, as defined in the indentures, as long as the Company’s consolidated
leverage ratio is less than 4.25. The Company’s consolidated leverage ratio is currently above 4.25 as of
December 31, 2017. As of December 31, 2017, a total of $64.3 million is permitted for investment
payments including dividends and stock purchases.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Long-term debt: (Continued)

Senior secured notes—2018 Notes

The Company redeemed its 8.375% Senior Secured Notes (the ‘‘2018 Notes’’) in March 2015 at a

redemption price of 104.188% of the $240.0 million principal amount thereof plus accrued interest.

On January 26, 2011 and on August 19, 2013, the Company issued its 2018 Notes due February 15,

2018, for aggregate principal amounts of $175.0 million and $65.0 million, respectively, in private
offerings for resale to qualified institutional buyers pursuant to SEC Rule 144A. The 2018 Notes were
secured and bore interest at 8.375% per annum. Interest was payable in cash semiannually in arrears
on February 15 and August 15, of each year. The 2018 Notes sold in August 2013 were sold at 109.00%
of par value. The $5.9 million premium was being amortized as a reduction to interest expense to the
maturity date using the effective interest rate method.

Long-term debt maturities

The aggregate future contractual maturities of long-term debt were as follows as of December 31,

2017 (in thousands):

For the year ending December 31,

2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 8,153
2,595
—
189,225
375,000
—

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$574,973

5. Income taxes:

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs

Act (the ‘‘Act’’). The Act amends the Internal Revenue Code and reduces the corporate tax rate from a
maximum of 35% to a flat 21% rate. The rate reduction is effective on January 1, 2018. The
Company’s net deferred tax assets represent a decrease in corporate taxes expected to be paid in the
future. Under generally accepted accounting principles deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The Company’s net deferred tax asset
was determined based on the current enacted federal tax rate of 35% prior to the passage of the Act.
As a result of the reduction in the corporate income tax rate from 35% to 21% and other provisions
under the Act, the Company has made reasonable estimates of the effects of the Act and revalued its
net deferred tax asset on a provisional basis at December 31, 2017 resulting in a reduction in the value
of its net deferred tax asset of approximately $9.0 million and recorded at transition tax of $2.3 million
related to its foreign operations for a total of $11.3 million, which was recorded as additional noncash
income tax expense in the three months and year ended December 31, 2017. Although the tax rate
reduction is known, the Company has not collected all of the necessary data to complete its analysis of

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Income taxes: (Continued)

the effect of the Tax Act on the underlying deferred taxes and as such, the amounts recorded as of
December 31, 2017 are provisional. The actual impact on the Company’s net deferred tax asset may
vary from this amount from certain changes in interpretations of the Act, additional guidance issued by
the U.S. Treasury Department, the IRS, and other standard-setting bodies, additional data collected
and assumptions that the Company has made. Those adjustments may materially impact our provision
for income taxes and effective tax rate in the period in which the adjustments are made. The
accounting for the tax effects of the Tax Act will be completed in 2018.

The components of income (loss) before income taxes consist of the following (in thousands):

Years Ended December 31,

2017

2016

2015

Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 52,250
(21,132)

$ 41,759
(17,499)

$21,972
(9,260)

Total income before income taxes . . . . . . . . . . . . . .

$ 31,118

$ 24,260

$12,712

The income tax expense is comprised of the following (in thousands):

Years Ended December 31,

2017

2016

2015

Current:

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

— $

(353)
(209)

135
(188)
(202)

(9)
4
(96)

Deferred:

(24,150)
(430)
(100)

(8,175)
(1,047)
146

(5,867)
(1,959)
111

Total income tax expense . . . . . . . . . . . . . . . . . . . . . .

$(25,242) $(9,331) $(7,816)

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Income taxes: (Continued)

Our consolidated temporary differences comprising our net deferred tax assets are as follows (in

thousands):

December 31,

2017

2016

Deferred Tax Assets:

Net operating loss carry-forwards . . . . . . . . . . . . . . . . . . .
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity-based compensation . . . . . . . . . . . . . . . . . . . . . . .

$ 271,219
2,771
2,327

$ 273,509
2,237
2,279

Total gross deferred tax assets

. . . . . . . . . . . . . . . . . . .

276,317

278,025

Deferred Tax Liabilities:

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities and other . . . . . . . . . . . . . . . . . . . . . .

Total gross deferred tax liabilities . . . . . . . . . . . . . . . . .

22,777
106,251

129,028

29,984
95,606

125,590

Net deferred tax assets before valuation allowance . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

147,289
(129,673)

152,435
(110,194)

Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 17,616

$ 42,241

At each balance sheet date, the Company assesses the likelihood that it will be able to realize its

deferred tax assets. The Company considers all available positive and negative evidence in assessing the
need for a valuation allowance. The Company maintains a full valuation allowance against certain of its
deferred tax assets consisting primarily of net operating loss carryforwards related to its foreign
operations in Canada, Europe and Asia and net operating losses in the United States that are limited
for use under Section 382 of the Internal Revenue Code.

As of December 31, 2017, the Company has combined net operating loss carry-forwards of
$1.0 billion. This amount includes federal net operating loss carry-forwards in the United States of
$150.9 million, net operating loss carry-forwards related to its European, Mexican, Asian and Canadian
operations of $868.6 million, $5.3 million, $2.1 million and $1.0 million, respectively. Section 382 of the
Internal Revenue Code in the United States limits the utilization of net operating losses when
ownership changes, as defined by that section, occur. The Company has performed an analysis of its
Section 382 ownership changes and has determined that the utilization of certain of its net operating
loss carryforwards in the United States is limited based on the annual Section 382 limitation and
remaining carryforward period. Of the $150.9 million of net operating losses available at December 31,
2017 in the United States $60.1 million are limited for use under Section 382. Net operating loss
carryforwards outside of the United States totaling $877.0 million are not subject to limitations similar
to Section 382. The net operating loss carryforwards in the United States will expire, if unused,
between 2025 and 2037. The net operating loss carry-forwards related to the Company’s Mexican, Asian
and Canadian operations will expire if unused, between 2019 and 2027. The net operating loss carry-
forwards related to the Company’s European operations include $722.9 million that do not expire and
$145.7 million that expire between 2018 and 2032.

Other than the $2.3 million transition tax recorded in the year ended December 31, 2017 as a
result of its foreign earnings the Company has not provided for United States deferred income taxes or

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Income taxes: (Continued)

foreign withholding taxes on its undistributed earnings for certain non-US subsidiaries earnings or
cumulative translation adjustments because these earnings and adjustments are intended to be
permanently reinvested in operations outside the United States. It is not practical to determine the
amount of the unrecognized deferred tax liability on such undistributed earnings or cumulative
translation adjustments.

In the normal course of business the Company takes positions on its tax returns that may be
challenged by taxing authorities. The Company evaluates all uncertain tax positions to assess whether
the position will more likely than not be sustained upon examination. If the Company determines that
the tax position is not more likely than not to be sustained, the Company records a liability for the
amount of the benefit that is not more likely than not to be realized when the tax position is settled.
The Company does not expect that its liability for uncertain tax positions will increase during the
twelve months ended December 31, 2018, however, actual changes in the liability for uncertain tax
positions could be different than currently expected. If recognized, changes in the Company’s total
unrecognized tax benefits would impact the Company’s effective income tax rate. The roll-forward of
the liability for uncertain tax positions is below and excludes interest and penalties.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in

thousands):

Years Ended
December 31,

2017

2016

2015

Beginning balance of unrecognized tax benefits . . . . . . . . . . . .
$866
Decrease attributable to settlements with taxing authorities . . . — (776) —
— (90)
Decrease attributable to lapses of statutes of limitation . . . . . . —

$— $ 776

Ending balance of unrecognized tax benefits . . . . . . . . . . . . . .

$— $ — $776

The Company or one of its subsidiaries files income tax returns in the US federal jurisdiction and

various state and foreign jurisdictions. The Company is subject to US federal tax and state tax
examinations for years 2004 to 2017. The Company is subject to tax examinations in its foreign
jurisdictions generally for years 2005 to 2017.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Income taxes: (Continued)

The following is a reconciliation of the Federal statutory income taxes to the amounts reported in

the financial statements (in thousands).

Federal income tax expense at statutory rates . . . . . . .
Effect of:

State income taxes, net of federal benefit . . . . . . . .
Impact of foreign operations . . . . . . . . . . . . . . . . .
Non-deductible expenses . . . . . . . . . . . . . . . . . . . .
Changes in tax reserves . . . . . . . . . . . . . . . . . . . . .
Federal tax rate change . . . . . . . . . . . . . . . . . . . . .
Transition tax on foreign earnings . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in valuation allowance . . . . . . . . . . . . . . .

Years Ended December 31,

2017

2016

2015

$(10,892) $(8,492) $(4,450)

(2,244)
74
(1,350)
—
(9,046)
(2,296)
239
273

(1,080)
138
(590)
175
—
—
98
420

(1,710)
(179)
(1,253)
128
—
—
(16)
(336)

Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . .

$(25,242) $(9,331) $(7,816)

6. Commitments and contingencies:

Capital leases—fiber lease agreements

The Company has entered into lease agreements with numerous providers of dark fiber primarily

under 15-20 year IRUs typically with additional renewal terms. Once the Company has accepted the
related fiber route, leases that meet the criteria for treatment as capital leases are recorded as a capital
lease obligation and an IRU asset. The interest rate used in determining the present value of the
aggregate future minimum lease payments is the lessee’s incremental borrowing rate for the lease term.
The future minimum payments (principal and interest) under these agreements are as follows (in
thousands):

For the year ending December 31,

2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total minimum lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less—amounts representing interest . . . . . . . . . . . . . . . . . . . . . . . . . . .

Present value of minimum lease obligations . . . . . . . . . . . . . . . . . . . . . .
Current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 23,969
22,953
22,954
22,491
21,228
222,080

335,675
(178,171)

157,504
(7,171)

Capital lease obligations, net of current maturities . . . . . . . . . . . . . . . . .

$ 150,333

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Commitments and contingencies: (Continued)

Gains on capital lease terminations

In March 2015 the Company elected to terminate certain IRU capital lease obligations in Spain.

The Company obtained alternative fiber to serve its customers in Spain. Under its estimate of the
termination provisions of the related contracts the Company has recorded an estimated termination
liability of $9.0 million included in accrued and other current liabilities. The difference between the
remaining carrying amount of the related IRU capital lease liabilities ($29.9 million), the remaining net
book value of the IRU assets ($10.0 million) and the termination liability and amounts due through the
termination date was recorded as a gain on capital lease terminations of $10.1 million in 2015.

In July 2015, the Company settled a dispute for the payment of the remaining balances for certain

IRU capital lease obligations in Europe. The IRU assets were fully depreciated in 2012 when the
related fiber was replaced and was no longer used by the Company. The difference between the
remaining net present value of the related IRU capital lease obligations ($1.8 million) and the
settlement liability ($0.4 million) was recorded as a $1.4 million gain on capital lease terminations in
2015.

Current and potential litigation

In accordance with the accounting guidance for contingencies, the Company accrues its estimate of

a contingent liability when it is both probable that a liability has been incurred and the amount of the
loss can be reasonably estimated. Where it is probable that a liability has been incurred and there is a
range of expected loss for which no amount in the range is more likely than any other amount, the
Company accrues at the low end of the range. The Company reviews its accruals at least quarterly and
adjusts them to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and
other information and events pertaining to a particular matter. The Company has taken certain
positions related to its obligations for leased circuits for which it is reasonably possible could result in a
loss of up to $2.6 million in excess of the amount accrued at December 31, 2017.

In December 2011, certain former sales employees of the Company filed a collective action against
the Company in the United States District Court, Southern District of Texas, Houston Division alleging
misclassification of the Company’s sales employees throughout the United States in violation of the Fair
Labor Standards Act. The lawsuit sought to recover pay for allegedly unpaid overtime and other
damages, including attorney’s fees. In March 2014, the judge de-certified the collective action. Each of
the former employees that opted-in to the collective action retained the right to file an individual
action. Approximately 70 former employees did so. The Company has settled a number of the cases
that were filed and made the required settlement payments the final of which was settled for
$3.1 million and paid in October 2017.

The Company is engaged in an arbitration proceeding in Spain in which a former provider of
optical fiber to the Company is seeking approximately $9 million for the Company’s early termination
of the optical fiber leases, which amount the Company has accrued in 2015. The Company has
counterclaimed for damages and is contesting its obligation to pay the termination liability in an
arbitration proceeding in Spain. The arbitration is being conducted by the Civil and Commercial
Arbitration Court (CIMA) in Madrid, Spain.

In the ordinary course of business the Company is involved in other legal activities and claims.
Because such matters are subject to many uncertainties and the outcomes are not predictable with

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Commitments and contingencies: (Continued)

assurance, the liability related to these legal actions and claims cannot be determined with certainty.
Management does not believe that such claims and actions will have a material impact on the
Company’s financial condition or results of operations. Judgment is required in estimating the ultimate
outcome of any dispute resolution process, as well as any other amounts that may be incurred to
conclude the negotiations or settle any litigation. Actual results may differ from these estimates under
different assumptions or conditions and such differences could be material.

Operating leases

The Company leases office space, network equipment sites, and data center facilities under

operating leases. In certain cases the Company enters into operating lease commitments for fiber.
Future minimum annual payments under these arrangements are as follows (in thousands):

For the year ending December 31,

$ 37,276
27,347
22,170
17,717
11,875
35,538

$151,923

Expenses related to these arrangements were $38.2 million in 2017, $34.6 million in 2016 and

$38.2 million in 2015.

Unconditional purchase obligations

Unconditional purchase obligations for equipment and services totaled $5.0 million at

December 31, 2017. As of December 31, 2017, the Company had also committed to additional dark
fiber IRU capital and operating lease agreements totaling $14.8 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 2018. Future minimum payments under these obligations are
$8.4 million, $0.3 million, $0.4 million, $0.4 million and $0.4 million for the years ending December 31,
2018 to December 31, 2022, respectively, and $9.9 million, thereafter.

Defined contribution plan

The Company sponsors a 401(k) defined contribution plan that provides for a Company matching

payment. The Company matching payments were $0.7 million for 2017, $0.6 million for 2016 and
$0.6 million for 2015 and were paid in cash.

7. Stockholders’ equity:

Authorized shares

The Company has 75.0 million shares of authorized $0.001 par value common stock and 10,000

authorized but unissued shares of $0.001 par value preferred stock. The holders of common stock are

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Stockholders’ equity: (Continued)

entitled to one vote per common share and, subject to any rights of any series of preferred stock,
dividends may be declared and paid on the common stock when determined by the Company’s Board
of Directors.

Common stock buybacks

The Company’s Board of Directors has approved $50.0 million for purchases of the Company’s

common stock under a buyback program (the ‘‘Buyback Program’’). At December 31, 2017, there was
$41.5 million remaining for purchases under the Buyback Program. During 2017, 2016 and 2015, the
Company purchased approximately 0.1 million, 0.1 million and 1.2 million shares of its common stock
for $1.8 million, $4.5 million and $39.4 million, respectively. These common shares were subsequently
retired.

Dividends on common stock

Dividends are recorded as a reduction to retained earnings. Dividends on unvested restricted
shares of common stock are paid as the awards vest. The Company’s initial quarterly dividend payment
was made in the third quarter of 2012.

The payment of any future dividends and any other returns of capital, including stock buybacks,

will be at the discretion of the Company’s Board of Directors and may be reduced, eliminated or
increased and will be dependent upon the Company’s financial position, results of operations, available
cash, cash flow, capital requirements, limitations under the Company’s debt indentures and other
factors deemed relevant by the Company’s Board of Directors. The Company is a Delaware
Corporation and under the General Corporate Law of the State of Delaware distributions may be
restricted including a restriction that distributions, including stock purchases and dividends, do not
result in an impairment of a corporation’s capital, as defined under Delaware Law. The indentures
governing the Company’s notes limit the Company’s ability to return cash to its stockholders.

8. Stock option and award plan:

Incentive award plan

The Company grants restricted stock and options for common stock under its award plan, as
amended (the ‘‘Award Plan’’). In May 2017, the Company’s shareholders approved a 1.2 million share
increase to the authorized shares under the Award Plan. Stock options granted under the Award Plan
generally vest over a four-year period and have a term of ten years. Grants of shares of restricted stock
granted under the Award Plan generally vest over periods ranging from three to four years.
Compensation expense for all awards is recognized over the service period. Awards with graded vesting
terms that are subject only to service conditions are recognized on a straight-line basis. Certain option
and share grants provide for accelerated vesting if there is a change in control, as defined. For grants
of restricted stock, when an employee terminates prior to full vesting the employee retains their vested
shares and the employees’ unvested shares are returned to the plan. For grants of options for common
stock, when an employee terminates prior to full vesting, the employee may elect to exercise their
vested options for a period of ninety days and any unvested options are returned to the plan. Shares
issued to satisfy awards are provided from the Company’s authorized shares. In May 2016 the Company
granted 73,450 restricted shares under the Award Plan with a grant date fair value of $2.9 million that
are subject to certain performance conditions and cliff vesting based upon certain of the Company’s

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Stock option and award plan: (Continued)

operating metrics and will be recognized as equity-based compensation expense on a straight line basis
over the service period. In the second quarter of 2017 the Company granted a total of 470,404 shares
under the Award Plan to certain of its employees and directors with a grant date fair value of
$19.0 million. The grant date fair value will be recognized as equity-based compensation expense on a
straight line basis over the respective service periods. The vesting of certain of these shares (24,050)
granted to the Company’s executives is subject to performance conditions and the vesting of 105,000
shares granted to the Company’s CEO are subject to the total shareholder return of the Company’s
common stock compared to the total shareholder return of the Nasdaq Telecommunications Index.

The accounting for equity-based compensation expense requires the Company to make estimates

and judgments that affect its financial statements. These estimates include the following.

Expected Dividend Yield—The Company uses an expected dividend yield based upon expected

annual dividends and the Company’s stock price.

Expected Volatility—The Company uses its historical volatility for a period commensurate with the

expected term of the option.

Risk-Free Interest Rate—The Company uses the zero coupon US Treasury rate during the quarter

having a term that most closely resembles the expected term of the option.

Expected Term of the Option—The Company estimates the expected life of the option term by

analyzing historical stock option exercises.

Forfeiture Rates—The Company estimates its forfeiture rate based on historical data with further

consideration given to the class of employees to whom the options or shares were granted.

The weighted-average per share grant date fair value of options was $7.06 in 2017, $6.23 in 2016

and $6.29 in 2015. The following assumptions were used for determining the fair value of options
granted in the three years ended December 31, 2017:

Black-Scholes Assumptions

Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life of the option term (in years) . . . . . . . . . . . . . .

Years Ended
December 31,

2017

2016

2015

4.1% 3.7% 3.8%
27.1% 30.8% 32.5%
2.0% 1.4% 1.5%
4.6
4.5

4.6

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Stock option and award plan: (Continued)

Stock option activity under the Company’s Award Plan during the year ended December 31, 2017,

was as follows:

Outstanding at December 31, 2016 . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled and expired . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised—intrinsic value $0.5 million; cash received

Number of Weighted-Average

Options

Exercise Price

183,322
81,236
(35,340)

$32.35
$43.93
$38.72

$1.2 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(39,289)

$31.12

Outstanding at December 31, 2017—$1.8 million intrinsic

value and 7.5 years weighted-average remaining
contractual term . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Exercisable at December 31, 2017—$1.4 million intrinsic

value and 6.4 years weighted-average remaining
contractual term . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Expected to vest—$1.7 million intrinsic value and

189,929

$36.37

109,084

$32.85

7.3 years weighted-average remaining contractual term .

168,762

$35.63

A summary of the Company’s non-vested restricted stock awards as of December 31, 2017 and the

changes during the year ended December 31, 2017 are as follows:

Non-vested awards

Non-vested at December 31, 2016 . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

908,761
499,654
(286,083)
(10,181)

Non-vested at December 31, 2017 . . . . . . . . . . . . . . . . .

1,112,151

Weighted-Average
Grant Date
Fair Value

$35.94
$40.52
$35.35
$39.88

$38.11

The weighted average per share grant date fair value of restricted stock granted was $40.52 in 2017
(0.5 million shares) $38.87 in 2016 (0.4 million shares) and $33.19 in 2015 (0.1 million shares). The fair
value was determined using the quoted market price of the Company’s common stock on the date of
grant. The fair value of shares of restricted stock vested in 2017, 2016 and 2015 was $12.6 million
$12.0 million and $14.3 million, respectively.

Equity-based compensation expense related to stock options and restricted stock was $13.3 million,

$10.7 million, and $11.5 million for 2017, 2016, and 2015, respectively. The income tax benefit related
to stock options and restricted stock was $2.5 million, $2.8 million, and $1.8 million for 2017, 2016, and
2015, respectively. The Company capitalized compensation expense related to stock options and
restricted stock for 2017, 2016, and 2015 of $1.2 million, $1.2 million and $1.0 million, respectively. As
of December 31, 2017, there was $26.4 million of total unrecognized compensation cost related to
non-vested equity-based compensation awards. That cost is expected to be recognized over a weighted
average period of 2.1 years.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Related party transactions:

Office lease

The Company’s headquarters was located in an office building owned by Niobium LLC (a

successor to 6715 Kenilworth Avenue Partnership). The two owners of Niobium LLC are the
Company’s Chief Executive Officer, David Schaeffer, who has a 51% interest in Niobium LLC and his
wife who has a 49% interest. The lease was scheduled to end on August 31, 2016 and was cancellable
by the Company upon 60 days’ notice. The Company terminated the lease effective as of May 10, 2015.
In April 2015, the Company entered into a new lease agreement for its headquarters building with
Sodium LLC whose two owners are the Company’s Chief Executive Officer, who has a 51% interest in
Sodium LLC and his wife who has a 49% interest. The Company moved into the new headquarters
building in May 2015. The fixed annual rent for the new headquarters building is $1.0 million per year
plus an allocation of taxes and utilities. The lease term is for five years and is cancellable by the
Company upon 60 days’ notice. The Company’s audit committee reviews and approves all transactions
with related parties. The Company paid $1.6 million in 2017, $1.7 million in 2016 and $1.2 million in
2015, respectively for rent and related costs (including taxes and utilities) to these lessors for these
leases, respectively.

10. Geographic information:

Operating segments are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing the Company’s performance. The Company has one
operating segment. Revenues are attributed to regions based on where the services are provided. Below
are the Company’s service revenues and long lived assets by geographic region (in thousands):

Years Ended December 31,

2017

2016

2015

Service Revenue
North America . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$402,194
82,981

$372,810
74,090

$332,814
71,420

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$485,175

$446,900

$404,234

December 31,
2017

December 31,
2016

December 31,
2015

Long lived assets, net
North America . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . .

$282,112
99,194

$285,651
76,014

$285,187
$ 74,976

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$381,306

$361,665

$360,163

The majority of North American revenue consists of services delivered within the United States.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Quarterly financial information (unaudited):

Service revenue . . . . . . . . . .
Network operations,

including equity-based
compensation expense . . .

Gains on equipment

transactions . . . . . . . . . . .
Operating income . . . . . . . .
Net income (loss) . . . . . . . .
Net income (loss) per

common share—basic and
diluted . . . . . . . . . . . . . .
Weighted-average number of
common shares—basic . . .
Weighted-average number of
common shares—diluted . .

Three months ended

March 31,
2017

June 30,
2017

September 30,
2017

December 31,
2017(a)

(in thousands, except share and per share amounts)

117,203

119,777

122,969

125,226

50,662

51,115

53,584

53,918

2,124
18,666
4,136

1,023
19,000
4,317

397
17,720
3,650

319
20,534
(6,227)

0.09

0.10

0.08

(0.14)

44,649,645

44,717,372

44,767,163

44,844,469

44,917,014

44,988,655

45,118,607

44,844,469

(a) See Note 5 for the impact of the increase in income tax expense during the three months

ended December 31, 2017.

Service revenue . . . . . . . . . .
Network operations,

including equity-based
compensation expense . . .

Gains on equipment

transactions . . . . . . . . . . .
Operating income . . . . . . . .
Net income . . . . . . . . . . . . .
Net income per common

share—basic and diluted . .
Weighted-average number of
common shares—basic . . .
Weighted-average number of
common shares—diluted . .

Three months ended

March 31,
2016

June 30,
2016

September 30,
2016

December 31,
2016

(in thousands, except share and per share amounts)

108,291

109,955

113,057

115,596

47,277

47,872

48,827

50,089

1,946
15,675
3,354

4,439
17,511
4,224

687
16,063
3,459

667
14,795
3,892

0.08

0.09

0.08

0.09

44,402,640

44,491,899

44,574,583

44,577,826

44,571,937

44,757,494

44,816,860

44,803,782

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. Subsequent Events:

Dividend

On February 21, 2018, the Company’s Board of Directors approved the payment of its quarterly

dividend of $0.50 per common share. The dividend for the first quarter of 2018 will be paid to holders
of record on March 9, 2018. This estimated $22.4 million dividend payment is expected to be made on
March 26, 2018.

Share Grant

In February 2018 the Company granted approximately 0.3 million shares under the Award Plan to
certain of its employees and directors with a grant date fair value of approximately $14.1 million. The
grant date fair value will be recognized as equity-based compensation expense on a straight line basis
over the respective service periods. The vesting of certain of these shares (24,050) granted to the
Company’s executives is subject to performance conditions and the vesting of 105,000 shares granted to
the Company’s CEO are subject to the total shareholder return of the Company’s common stock
compared to the total shareholder return of the Nasdaq Telecommunications Index.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), an evaluation was performed under the supervision and with

the participation of our management, including our principal executive officer and our principal
financial officer, of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as
of the end of the period covered by this report. Based upon that evaluation, our management,
including our principal executive officer and our principal financial officer, concluded that the design
and operation of these disclosure controls and procedures were effective at the reasonable assurance
level.

There has been no change in our internal control over financial reporting during our most recent

fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING

We are responsible for the preparation and integrity of our published financial statements. The
financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America and, accordingly, include amounts based on judgments and estimates
made by our management. We also prepared the other information included in the annual report and
are responsible for its accuracy and consistency with the financial statements.

We are responsible for establishing and maintaining a system of internal control over financial

reporting, which is intended to provide reasonable assurance to our management and Board of
Directors regarding the reliability of our financial statements. The system includes but is not limited to:

(cid:127) a documented organizational structure and division of responsibility;

(cid:127) established policies and procedures, including a code of conduct to foster a strong ethical

climate which is communicated throughout the company;

(cid:127) regular reviews of our financial statements by qualified individuals; and

(cid:127) the careful selection, training and development of our people.

There are inherent limitations in the effectiveness of any system of internal control, including the

possibility of human error and the circumvention or overriding of controls. Also, the effectiveness of an
internal control system may change over time. We have implemented a system of internal control that
was designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements in accordance with generally accepted accounting principles.

As required by Rule 13a-15(d) of the Exchange Act, we have assessed our internal control system

in relation to criteria for effective internal control over financial reporting described in ‘‘Internal
Control—Integrated Framework’’ issued by the Committee of Sponsoring Organizations (COSO) of the
Treadway Commission (2013 Framework). Based upon these criteria, we believe that, as of
December 31, 2017, our system of internal control over financial reporting was effective.

The independent registered public accounting firm, Ernst & Young LLP, has audited our 2017
financial statements. Ernst & Young LLP was given unrestricted access to all financial records and
related data, including minutes of all meetings of stockholders, the Board of Directors and committees
of the Board. Ernst & Young LLP has issued an unqualified report on our 2017 financial statements as
a result of the audit and also has issued an unqualified report on our internal control over financial
reporting which is attached hereto.

Cogent Communications Holdings, Inc.

February 23, 2018

By:

/s/ DAVID SCHAEFFER

David Schaeffer
Chief Executive Officer

By:

/s/ THADDEUS WEED

Thaddeus Weed
Chief Financial Officer

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Cogent Communications Holdings, Inc.

Opinion on Internal Control over Financial Reporting

We have audited Cogent Communication Holdings, Inc. and subsidiaries’ internal control over

financial reporting as of December 31, 2017, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, Cogent Communication
Holdings, Inc. and subsidiaries (the ‘‘Company’’) maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2017, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting

Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Cogent
Communications Holdings, Inc. and subsidiaries as of December 31, 2017 and 2016, the related
consolidated statements of comprehensive income (loss), changes in stockholders’ equity (deficit) and
cash flows for each of the three years in the period ended December 31, 2017, and the related notes
and financial statement schedule listed in the Index at Item 15(a)2 (collectively referred to as the
‘‘consolidated financial statements’’) and our report dated February 23, 2018 expressed an unqualified
opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting included
in the accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based
on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require

that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting,

assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as
we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable

assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide

reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or

detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Tysons, VA
February 23, 2018

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item 10 is incorporated in this report by reference to the

information set forth under the captions entitled ‘‘Election of Directors,’’ ‘‘The Board of Directors and
Committees,’’ and ‘‘Section 16(a) Beneficial Ownership Reporting Compliance’’ in our 2018 Proxy
Statement for the 2018 Annual Meeting of Stockholders, which is expected to be filed with the
Commission within 120 days after the close of our fiscal year.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 is incorporated in this report by reference to the

information set forth under the captions entitled ‘‘The Board of Directors and Committees,’’
‘‘Executive Compensation’’, ‘‘Employment Agreements and Other Potential Post-Employment
Payments’’, ‘‘Compensation Committee Report on Executive Compensation,’’ and ‘‘Compensation
Committee Interlocks and Insider Participation’’ in our 2018 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

The information required by this Item 12 is incorporated in this report by reference to the
information set forth under the caption ‘‘Security Ownership of Certain Beneficial Owners and
Management’’ and ‘‘Securities Authorized for Issuance Under Equity Compensation Plans’’ in our 2018
Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR

INDEPENDENCE

The information required by this Item 13 is incorporated in this report by reference to the
information set forth under the caption ‘‘Certain Relationships and Related Transactions’’ and ‘‘The
Board of Directors and Committees’’ in our 2018 Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item 14 is incorporated in this report by reference to the

information set forth under the caption ‘‘Relationship With Independent Registered Public
Accountants’’ in our 2018 Proxy Statement.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

PART IV

(a)

1. Financial Statements. A list of financial statements included herein is set forth in the Index

to Financial Statements appearing in ‘‘ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA.’’

2. Financial Statement Schedules. The Financial Statement Schedule described below is filed

as part of the report.

Description

Schedule II—Valuation and Qualifying Accounts.

All other financial statement schedules are not required under the relevant instructions or are

inapplicable and therefore have been omitted.

(b) Exhibits

2.1 Agreement and Plan of Reorganization, dated as of May 15, 2014, by and among Cogent

Communications Group, Inc., Cogent Communications Holdings, Inc. and Merger Sub
(previously filed as Exhibit 2.1 to our Current Report on Form 8-K, filed on May 15, 2014, and
incorporated herein by reference).

3.1 Certificate of Incorporation of Cogent Communications Holdings, Inc. (previously filed as
Exhibit 3.1 to our Current Report on Form 8-K, filed on May 15, 2014, and incorporated
herein by reference).

3.2 Bylaws of Cogent Communications Holdings, Inc., as amended and restated by the Board of

Directors on March 30, 2015 (previously filed Exhibit 3.2 to our Current Report on
Form 8-K/A, filed on March 30, 2015, and incorporated herein by reference).

4.1

Indenture to the 5.625% Senior Notes due 2021, dated as of April 9, 2014, between Cogent
Communications Finance, Inc. (to which Cogent Communications Group, Inc. is successor by
merger) and Wilmington Trust, National Association, as trustee (filed as Exhibit 4.1 to our
Current Report on Form 8-K, filed on April 10, 2014, and incorporated herein by reference).

4.2 Form of 5.625% Senior Notes due 2021 (previously filed as Exhibit A to the Exhibit 4.1 to our

Current Report on Form 8-K, filed on April 10, 2014, and incorporated herein by reference)

4.3 First Supplemental Indenture related to the 5.625% Senior Notes due 2021, dated as of

June 23, 2014, among Cogent Communications Group, Inc., Cogent Communications
Holdings, Inc., the subsidiary guarantors named therein and Wilmington Trust, National
Association, as trustee (previously filed as Exhibit 4.1 to our Current Report on Form 8-K, filed
on June 26, 2014, and incorporated herein by reference).

4.4

Indenture related to the 5.375% Senior Secured Notes due 2022, dated as of February 20, 2015,
among Cogent Communications Group, Inc., the guarantors named therein and Wilmington
Trust, National Association, as trustee and collateral agent (previously filed as Exhibit 4.1 to
our Current Report on Form 8-K, filed on February 20, 2015).

4.5 Form of 5.375% Senior Secured Notes due 2022 (previously filed as Exhibit A to the

Exhibit 4.1 to our Current Report on Form 8-K, filed on February 20, 2015).

4.6 First Supplemental Indenture related to the 5.375% Senior Secured Notes due 2022, dated as
of December 2, 2016, among Cogent Communications Group, Inc., the guarantors named
therein and Wilmington Trust, National Association, as trustee and collateral agent (previously
filed as Exhibit 4.1 to our Current Report on Form 8-K, filed on December 2, 2016).

10.1 Dark Fiber IRU Agreement, dated April 14, 2000, between WilTel Communications, Inc. and

Cogent Communications, Inc., as amended June 27, 2000, December 11, 2000, January 26,
2001, and February 21, 2001 (incorporated by reference to Exhibit 10.2 to our Registration
Statement on Form S-4, Commission File No. 333-71684, filed on October 16, 2001)*

10.2 David Schaeffer Employment Agreement with Cogent Communications Group, Inc., dated

February 7, 2000 (incorporated by reference to Exhibit 10.6 to our Registration Statement on
Form S-4, Commission File No. 333-71684, filed on October 16, 2001)

10.3 Robert N. Beury, Jr. Employment Agreement with Cogent Communications Group, Inc., dated
June 15, 2000 (incorporated by reference to Exhibit 10.20 to our Annual Report on Form 10-K,
filed on March 31, 2003).

10.4 Timothy G. O’Neill Employment Agreement with Cogent Communications Group, Inc., dated

as of September 25, 2003 (previously filed as Exhibit 10.29 to our Annual Report on
Form 10-K, filed on February 27, 2012, and incorporated herein by reference).

10.5 Brad Kummer Employment Agreement with Cogent Communications Group, Inc., dated

January 11, 2000, (incorporated by reference to Exhibit 10.23 to our Registration Statement on
Form S-1, Commission File No. 333-122821, filed on February 14, 2005).

10.6 David Schaeffer Amendment No. 2 to Employment Agreement with Cogent Communications
Group, Inc., dated as of March 12, 2007 (previously filed as Exhibit 10.26 to our Annual
Report on Form 10-K, filed on March 14, 2007, and incorporated herein by reference).

10.7 Robert N. Beury, Jr. Employment Agreement with Cogent Communications Group, Inc., dated

as of March 12, 2007 (previously filed as Exhibit 10.27 to our Annual Report on Form 10-K,
filed on March 14, 2007, and incorporated herein by reference).

10.8 Thaddeus G. Weed Employment Agreements, dated September 25, 2003 through October 26,

2006 (previously filed as Exhibit 10.28 to our Annual Report on Form 10-K, filed on March 14,
2007, and incorporated herein by reference).

10.9 Amendment No. 3 to Employment Agreement of Dave Schaeffer, dated as of August 7, 2007

(previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q, filed on August 8,
2007, and incorporated herein by reference).

10.10 Amendment No. 4 to Employment Agreement of Dave Schaeffer, dated as of February 26,

2010 (previously filed as Exhibit 10.25 to our Annual Report on Form 10-K, filed on March 1,
2010, and incorporated herein by reference).

10.11 Amendment No. 5 to Employment Agreement of Dave Schaeffer, dated April 7, 2010

(previously filed as Exhibit 10.1 to our Current Report on Form 8-K, filed on April 7, 2010,
and incorporated herein by reference).

10.12 Cogent Communications Holdings, Inc. 2004 Incentive Award Plan (as amended through
April 17, 2014) (previously filed as Exhibit 10.1 to our Current Report on Form 8-K, filed
April 18, 2014, and incorporated herein by reference).

10.13 Assignment and Assumption Agreement, dated as of May 15, 2014, by and between Cogent

Communications Group, Inc. and Cogent Communications Holdings, Inc. assuming the
obligations of the 2004 Incentive Award Plan (previously filed as Exhibit 10.1 to our Current
Report on Form 8-K, filed on May 15, 2014, and incorporated herein by reference).

10.14 Amendment No. 6 to Employment Agreement of Dave Schaeffer, dated August 6, 2014

(previously filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q, filed on August 7,
2014, and incorporated herein by reference).

10.15 Restricted Stock Award to Mr. Schaeffer dated August 6, 2014—monthly vest (previously filed
as Exhibit 10.5 to our Quarterly Report on Form 10-Q, filed on August 7, 2014, and
incorporated herein by reference).

10.16 Restricted Stock Award to Mr. Schaeffer dated August 6, 2014—cliff vest (previously filed as

Exhibit 10.6 to our Quarterly Report on Form 10-Q, filed on August 7, 2014, and incorporated
herein by reference).

10.17 Restricted Stock Award, dated as of November 3, 2014, between the Company and Thaddeus

(‘‘Tad’’) Weed (previously filed Exhibit 10.1 to our Current Report on Form 8-K, filed on
November 5, 2014, and incorporated herein by reference).

10.18 Restricted Stock Award, dated as of November 3, 2014, between the Company and Robert

Beury (previously filed Exhibit 10.3 to our Current Report on Form 8-K, filed on November 5,
2014, and incorporated herein by reference).

10.19 Restricted Stock Award, dated as of November 3, 2014, between the Company and Timothy

O’Neill (previously filed Exhibit 10.4 to our Current Report on Form 8-K, filed on November 5,
2014, and incorporated herein by reference).

10.20 Restricted Stock Award to James Bubeck dated September 28, 2015 (previously filed

Exhibit 10.1 to our Current Report on Form 8-K, filed on October 1, 2015, and incorporated
herein by reference).

10.21 Restricted Stock Award to James Bubeck dated December 1, 2014 (previously filed Exhibit 10.2

to our Current Report on Form 8-K, filed on October 1, 2015, and incorporated herein by
reference).

10.22 Restricted Stock Award, dated as of May 4, 2016, between the Company and David Schaeffer
(previously filed Exhibit 10.1 to our Current Report on Form 8-K, filed on May 5, 2016, and
incorporated herein by reference).

10.23 Form of Restricted Stock Award, dated as of May 4, 2016, between the Company and the Vice

President named executive officers (previously filed Exhibit 10.2 to our Current Report on
Form 8-K, filed on May 5, 2016, and incorporated herein by reference).

10.24 Lease Agreement, dated April 16, 2015, between Sodium LLC and Cogent

Communications, Inc. (previously filed Exhibit 10.1 to our Current Report on Form 8-K, filed
on April 17, 2015, and incorporated herein by reference).

10.25 Restricted Stock Award, dated as of May 3, 2017, between the Company and David Schaeffer
(previously filed Exhibit 10.1 to our Current Report on Form 8-K, filed on May 3, 2017, and
incorporated herein by reference).

10.26 Form of Restricted Stock Award, dated as of May 3, 2017, between the Company and the Vice

President named executive officers (previously filed Exhibit 10.2 to our Current Report on
Form 8-K, filed on May 3, 2017, and incorporated herein by reference).

10.27 Amendment No. 7 to Employment Agreement of David Schaeffer, dated November 17, 2017

(previously filed Exhibit 10.1 to our Current Report on Form 8-K, filed on November 20, 2017,
and incorporated herein by reference).

10.28 Cogent Communications Holdings, Inc. 2017 Incentive Award Plan (incorporated by reference
to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed March 17,
2017).

21.1

Subsidiaries (filed herewith)

23.1 Consent of Ernst & Young LLP (filed herewith)

31.1 Certification of Chief Executive Officer (filed herewith)

31.2 Certification of Chief Financial Officer (filed herewith)

32.1 Certification of Chief Executive Officer (furnished herewith)

32.2 Certification of Chief Financial Officer (furnished herewith)

99.1 Policy Against Excise Tax Gross-ups on ‘‘Golden Parachute’’ Payments, with effect from April 7,
2010 (previously filed as Exhibit 99.1 to our Current Report on Form 8-K, filed on April 7,
2010, and incorporated herein by reference).

101 The following materials from the Annual Report on Form 10-K of Cogent Communications

Group, Inc. for the year ended December 31, 2016, formatted in XBRL (eXtensible Business
Reporting Language); (i) Consolidated Balance Sheets, (ii) Consolidated Statements of
Comprehensive Income (Loss), (iii) Consolidated Statements of Changes in Stockholders’
Equity (Deficit), (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated
Financial Statements.

(cid:127) Confidential treatment requested and obtained as to certain portions. Portions have been omitted

pursuant to this request where indicated by an asterisk.

COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES

Schedule II

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

Description

Allowance for doubtful service accounts receivable

(deducted from accounts receivable)(a)

Year ended December 31, 2015 . . . . . . . . . . . . . . . . .
Year ended December 31, 2016 . . . . . . . . . . . . . . . . .
Year ended December 31, 2017 . . . . . . . . . . . . . . . . .
Deferred tax valuation allowance
Year ended December 31, 2015 . . . . . . . . . . . . . . . . .
Year ended December 31, 2016 . . . . . . . . . . . . . . . . .
Year ended December 31, 2017 . . . . . . . . . . . . . . . . .

Balance at
Beginning of
Period

Charged to
Costs and
Expenses

(Deductions)

Balance at
End of
Period

$
$
$

1,707
1,757
1,734

$245,104
$113,392
$110,194

$ 4,746
$ 3,840
$ 4,835

$ 1,058
$ 3,102
$20,102

$
$
$

(4,696)
(3,863)
(5,070)

$
$
$

1,757
1,734
1,499

$(132,770)
(6,300)
$
(623)
$

$113,392
$110,194
$129,673

(a) Bad debt expense, net of recoveries, was approximately $3.7 million for the year ended

December 31, 2017, $2.8 million for the year ended December 31, 2016 and $3.3 million for the
year ended December 31, 2015.

ITEM 16. FORM 10-K SUMMARY

None

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the

registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

SIGNATURES

COGENT COMMUNICATIONS HOLDINGS, INC.

Dated: February 23, 2018

By: /s/ DAVID SCHAEFFER

Name: David Schaeffer
Title: Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed

below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.

Signature

Title

Date

/s/ DAVID SCHAEFFER

David Schaeffer

Chairman and Chief Executive
Officer (Principal Executive
Officer)

February 23, 2018

/s/ THADDEUS G. WEED

Thaddeus G. Weed

Chief Financial Officer
(Principal Financial and
Accounting Officer)

/s/ TIMOTHY WEINGARTEN

Timothy Weingarten

Director

February 23, 2018

/s/ STEVEN BROOKS

Steven Brooks

Director

February 23, 2018

/s/ RICHARD T. LIEBHABER

Richard T. Liebhaber

Director

February 23, 2018

/s/ DAVID BLAKE BATH

David Blake Bath

/s/ MARC MONTAGNER

Marc Montagner

Director

February 23, 2018

Director

February 23, 2018