Cogent Communications Holdings, Inc. Annual Report 2018

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FY2018 Annual Report · Cogent Communications Holdings, Inc.

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

(Mark One)

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

SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 2018

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

SECURITIES EXCHANGE ACT OF 1934.

For the transition period from

to
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)

Securities registered pursuant to Section 12(b) of the Act

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

Title of each class

Name of exchange on which registered:

Common Stock, par value $0.001 per share

NASDAQ Global Select Market

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 every Interactive Data File required to

be submitted 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 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 (§ 229.405 of this
chapter) 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:1)

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

filer, a 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)

Non-accelerated filer (cid:2)

Accelerated filer (cid:2)

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, 2019

was 46,346,978.

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, 2018 as reported by the NASDAQ Global Select Market was approximately $2.3 billion.

COGENT COMMUNICATIONS HOLDINGS, INC.
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2018

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 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, 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 2019

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, Asia, Sydney
(Australia) and Sao Paulo (Brazil). 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 terrestrially 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 1,735 large multi-
tenant office buildings in major North American cities and 889 carrier neutral data center buildings 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 directly connected to 889 carrier neutral colocation
and unique data center buildings where our net-centric customers directly interconnect with our
network. We also operate 52 data centers across the United States and in Europe which comprise over
587,000 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 our on-net services are provisioned in considerably less time 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 200 metropolitan markets in North America, Europe, Asia, Latin

America and Australia and encompasses:

(cid:127) 1,735 multi-tenant office buildings strategically located in commercial business districts;

(cid:127) 889 carrier-neutral Internet aggregation facilities, data center buildings and single-tenant

buildings;

(cid:127) 804 intra-city networks consisting of 32,946 fiber miles;

(cid:127) an inter-city network of 57,426 fiber route miles; and

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

Latin American and Australian 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,

Asia, Latin America and Australia. The North American, European, Asian, Latin American and
Australian 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 52 data centers across the United States and in Europe. These facilities comprise over
587,000 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 6,580 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. 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 maintaining 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, Asia, Latin America and Australia.

We offer on-net services in over 200 metropolitan markets. We serve 2,676 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. 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 6,650 off-net buildings.

Sales and Marketing

Direct Sales. We employ a direct sales and marketing approach. As of February 1, 2019, our sales

force included 625 full-time employees. Our quota bearing sales force includes 488 employees with
336 employees focused primarily on the corporate market and 152 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 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 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.

Employees

As of February 1, 2019, we had 978 employees. Unions represent 26 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 maintain an Internet website at

www.cogentco.com. 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 provided by 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.

We have customers who depend on the U.S. government’s E-rate program for funding. There can
be no assurance that the E-rate program will continue or that other governmental programs that fund
governments and organizations that are or might become customers will continue. A failure of such
programs to continue could result in a loss of customers and 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 grown our company rapidly through network expansion and by 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, especially in light of

the tight job market in the U.S.;

(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, Singapore, 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 by blocking a fixed set of Internet addresses when the website
operators engage in practices that make it difficult to block them. 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 14 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; and

(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
would 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. In addition, our senior
management team has been in place for many years and has deep experience with our operations and
abilities that would make them 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, the
lease for a large portion of our U.S. intercity network 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.

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 and file 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 U.S. Tax Cuts and Jobs Act will impact us.

The Tax Cuts and Jobs Act (the ‘‘Act’’) significantly changed U.S. tax law by reducing the U.S.
corporate tax rate, making certain changes to U.S. taxation of income earned abroad, the deduction of
capital expenditures, and the deduction of interest expense. Although we generally believe the impact
of the Act will be favorable to us it is complex and there may be aspects that will negatively affect us.

Tax audits could adversely affect us.

We are subject to audit of our tax compliance in numerous jurisdictions. These may result in the

assessment of amounts due that are material and therefore would have an adverse effect on us.

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 our 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, bankruptcy, 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 proprietary property 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 proprietary property 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 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 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 business is premised on the idea that customers want simple Internet access and private

networks rather than a combination of such services with other services such as VOIP and complex
enterprise services. Our competitors offer such services. Should the market come to favor such services
our ability to acquire and keep customers would be impaired. 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.

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 as are our U.S subsidiaries 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, fiber
cuts, 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.

Privacy requirements in the EU may impact our business.

The General Data Protection Regulation (‘‘GDPR’’) came into force in May 2018 in the European
Union. The GDPR creates significant new requirements regarding the protection of personal data and
significantly increases the financial penalties for noncompliance. We believe we are in compliance with
GDPR, and we do not believe that GDPR will have a significant impact on our provision of services to
our customers. However, in the absence of precedence and guidance from EU regulators, the
application of GDPR to the provision of internet services remains unsettled, and we may be required
to adopt additional measures in the future.

In addition to the new requirements imposed upon us by GDPR, the privacy requirements and
expectations created in the EU by GDPR are stricter than those 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 and other means of compliance created by GDPR, European companies
and individuals may be reluctant to use US companies, which could negatively impact our business.

Proposed privacy requirements in the United States and other countries may impact our business.

Many countries, including the United States, are considering adopting privacy regulations or laws
that would govern the way an Internet user’s data is used. These rules would, for the most part, affect
Internet businesses that collect personal information about users of their services. We do not provide
such services. We only transmit data across the Internet. However, some of these proposed privacy
rules could impose obligations on us that could negatively impact 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.

As with the privacy laws described earlier, 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) 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 or former 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 we

collect all required taxes, however, a jurisdiction may assert 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.

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.

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.

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, 2018 was $809.2 million and included $189.2 million of

our 5.625% senior unsecured notes and $445.0 million of our 5.375% senior secured notes. Our
$189.2 million of senior unsecured notes are due in 2021 and require interest payments totaling
$10.6 million per year. Our $445.0 million senior secured notes are due in March 2022 and require
annual interest payments of $23.9 million per year. 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, 2018 also includes $163.8 million of capital lease obligations for dark

fiber primarily under 15 - 20 year IRUs and $11.2 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.

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, 2019, there were 142 holders of record of shares of our common stock holding

45,224,302 shares of our common stock.

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, 2013 to December 31, 2018, 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, 2013 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

$180

$160

$140

$120

$100

$80

$60

$40

$20

12/13

12/14

12/15

12/16

12/17

12/18

Cogent Communications Holdings

S&P 500

14FEB201915531745
NASDAQ Telecommunications

$100 invested on 12/31/13 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.

12/13

12/14

12/15

12/16

12/17

12/18

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

100.00
100.00
100.00

90.47
113.69
102.75

92.75
115.26
100.20

115.11
129.05
106.61

131.57
157.22
130.48

137.11
150.33
130.76

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

performance.

Issuer Purchases of Equity Securities

Our Board of Directors 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, 2019. As of
December 31, 2018, $34.9 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.

Issuer Purchases of Equity Securities

Total
Number of
Shares
Purchased

Average
Price Paid
per Share

Total
Number of
Shares Purchased
as Part of
Publicly Announced
Plans or Programs

Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans
or Programs

Period

October 1 - 31, 2018 . . . . . . . . . . . . . . . . .
November 1 - 30, 2018 . . . . . . . . . . . . . . . .
December 1 - 31, 2018 . . . . . . . . . . . . . . . .

— $ —
— $ —
$44.36

147,995

—
—
147,995

$41,469,082
$41,469,082
$34,904,594

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 2019 Proxy Statement.

ITEM 6. SELECTED 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) . . . . . . . . . . . . . . .

2018

2017

2016

2015

2014

Years Ended December 31,

(dollars in thousands)

520,193 $

485,175 $

446,900 $

404,234 $

380,003

218,631

208,674

193,493

173,926

159,405

895
117,045

16,813
81,233

604
115,229

12,686
75,926

573
110,547

10,162
75,235

584
102,172

10,931
70,527

488
98,596

9,083
69,481

434,617

413,119

390,010

358,140

337,053

—

(587)

(10,144)

—

—
982

86,558
(51,056)
5,880

41,382
(12,715)

—
3,862

75,918
(48,467)
3,667

31,118
(25,242)

—
7,739

64,042
(40,803)
1,021

24,260
(9,331)

11,643
5,443

53,036
(41,280)
956

12,712
(7,816)

Net income . . . . . . . . . . . . . . . . . . . . . . $

28,667 $

5,876 $

14,929 $

4,896 $

Net income per common share—basic . . . $

Net income per common share—diluted . . $

Dividends declared per common share . . . $

0.63 $

2.12 $

0.13 $

1.80 $

0.33 $

1.51 $

0.11 $

1.46 $

Weighted-average common shares—basic .

45,280,161

44,855,263

44,641,805

44,888,723

45,960,720

Weighted-average common shares—

diluted . . . . . . . . . . . . . . . . . . . . . . . .

45,780,954

45,184,203

44,873,830

45,159,849

46,349,670

CONSOLIDATED BALANCE SHEET

DATA (AT PERIOD END):

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

and current portion) (net of
unamortized discount of $446, $385,
$257, $817, and $0, respectively,
including unamortized premium of
$1,405, $382, $462, $0, and $4,230,
respectively, and net of unamortized
debt costs of $4,171, $3,930, $4,832,
$4,557 and $6,861, respectively) . . . . . .

739,850 $

710,588 $

737,892 $

665,860 $

754,914

806,032

728,544

707,080

601,839

603,907

—
10,950

53,900
(49,945)
536

4,491
(3,694)

797

0.02

1.17

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 leading 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 routed data. We deliver our services primarily to small and medium-sized businesses,
communications service providers and other bandwidth-intensive organizations in North America,
Europe, Asia, Latin America and Australia.

Our on-net service consists of high-speed Internet access and private network services provided 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 carrier neutral 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, primarily include voice services (only provided in Toronto,

Canada). We do not actively market these non-core services, are actively discontinuing providing certain
of these 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 2,676 buildings in which we provide our on-net services,
including 1,735 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 52 Cogent
controlled data centers totaling over 587,000 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 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. Over the
past several years, our revenue from corporate customers has grown faster than our revenue from our
net-centric customers.

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, Asia, Latin American and Australia. 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, 2018 Compared to the Year Ended December 31, 2017

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,

2018

2017

(in thousands)

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

$520,193
374,555
145,004
219,526
133,858
81,233
982
51,056
12,715

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

Percent
Change

7.2%
8.1%
5.2%
4.9%
4.6%
7.0%
(74.6)%
5.3%
(49.6)%

(1)

(2)

Includes non-cash equity-based compensation expense of $895 and $604 for 2018 and 2017,
respectively.

Includes non-cash equity-based compensation expense of $16,813 and $12,686 for 2018 and
2017, respectively.

Year Ended
December 31,

2018

2017

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

$
480
$ 1,155
$ 0.82

$
506
$ 1,239
$ 1.11

(5.1)%
(6.8)%
(25.9)%

On-net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Off-net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

68,770
10,974

61,334
9,953

12.1%
10.3%

Service Revenue. Our service revenue increased 7.2% from 2017 to 2018. Exchange rates positively

impacted our increase in service revenue by approximately $4.0 million. All foreign currency
comparisons herein reflect results for 2018 translated at the average foreign currency exchange rates for
2017. We increased our total service revenue by increasing the number of sales representatives selling
our services, by expanding our network, by adding additional buildings to our network, by increasing
our penetration into the buildings connected to our network and by gaining market share by offering
our services at lower prices than our competitors.

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 to our revenues from 2017 to 2018
of approximately $1.6 million.

Our 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. Revenues from our corporate and
net-centric customers represented 64.9% and 35.1% of total service revenue, respectively, for 2018 and
represented 62.3% and 37.7% of total service revenue, respectively, for 2017. Revenues from corporate
customers increased 11.8% to $337.8 million for 2018 from $302.1 million for 2017 primarily due to an
increase in our number of our corporate customers. Revenues from our net-centric customers
decreased by 0.4% to $182.3 million for 2018 from $183.1 million for 2017 primarily due to an increase
in our number of net-centric customers being offset by a decline in our average price per megabit. Our
revenue from our net-centric customers has declined as a percentage of our total revenue and grew at
a slower rate than our corporate customer revenue because net-centric customers purchase our services
based upon a price per megabit basis and our average price per megabit declined by 25.9% from 2017
to 2018. Additionally, the net-centric market experiences a greater level of pricing pressure than the
corporate market and net-centric customers who renew their service with us expect their renewed
service to be at a lower price than their current price. We expect that our average price per megabit
will continue to decline at similar rates which would result in our corporate revenues continuing to
represent a greater portion of our total revenues and our net-centric revenues continuing to grow at a
lower rate than our corporate revenues. Additionally, the impact of foreign exchange rates has a more
significant impact on our net-centric revenues.

Our on-net revenues increased 8.1% from 2017 to 2018. We increased the number of our on-net

customer connections by 12.1% at December 31, 2018 from December 31, 2017. On-net customer
connections increased at a greater rate than on-net revenues primarily due to the 5.1% 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 25.9% decline in our average price per megabit for our installed
base of customers.

Our off-net revenues increased 5.2% from 2017 to 2018. Our off-net revenues increased as we

increased the number of our off-net customer connections by 10.3% at December 31, 2018 from
December 31, 2017. Our off-net customer connections increased at a greater rate than our off-net
revenue primarily due to the 6.8% decrease in our off-net ARPU.

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, access and facilities fees paid to building
owners and excise taxes billed to our customers and recorded on a gross basis. 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 4.9% from 2017 to 2018 as we were connected to 11.9%
more customer connections and we were connected to 170 more on-net buildings as of December 31,
2018 compared to December 31, 2017. The increase in network operations expense 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 4.6% from 2017 to 2018. 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 $16.8 million for 2018 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
$1.1 million decrease in our legal fees primarily associated with U.S. net neutrality and interconnection
regulatory matters and by the $1.3 million reduction in commission expense from the impact of the new
revenue accounting standard which requires us to capitalize certain commissions paid to our sales
agents and sales employees. Our sales force headcount increased by 7.8% from 574 at December 31,
2017 to 619 at December 31, 2018 and our total headcount increased by 4.8% from 929 at
December 31, 2017 to 974 at December 31, 2018.

Depreciation and Amortization Expenses. Our depreciation and amortization expenses increased

7.0% from 2017 to 2018. 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 $1.0 million for 2018 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. The
reduction in gains from 2017 to 2018 was due to purchasing more equipment under the exchange
program in 2017 than we purchased in 2018.

Interest Expense.

Interest expense results from interest incurred on our $445.0 million of senior

Income Tax Expense. Our income tax expense was $12.7 million for 2018 and $25.2 million for
2017. The decrease in our income tax expense was primarily related to an increase in deferred income
tax expense for 2017 primarily due to 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 was 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 also 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 2017.

Buildings On-net. As of December 31, 2018 and 2017 we had a total of 2,676 and 2,506 on-net

buildings connected to our network, respectively.

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

Year Ended
December 31,

2017

2016

(in thousands)

Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . .
On-net revenues . . . . . . . . . . . . . . . . . . . . . . . . . .
Off-net 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
209,278
127,915
75,926
3,862
48,467
25,242

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

Percent
Change

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

(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.

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 was 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.

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.

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

Net increase (decrease) in cash and cash

Year Ended December 31,

2018

2017

2016

$133,921
(49,937)
(52,545)
(2,357)

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

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

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

$ 29,082

$ (27,308) $ 70,728

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
2018, 2017 and 2016 includes interest payments on our note obligations of $32.7 million, $30.8 million
and $24.5 million, respectively.

Net Cash Used In Investing Activities. Our primary use of investing cash is for purchases of
property and equipment. These amounts were $49.9 million, $45.8 million and $45.2 million for 2018,
2017 and 2016, 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 2018, 2017 and 2016 we obtained $9.9 million, $9.0 million and
$5.5 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. Amounts paid under our stock buyback program were $6.6 million for 2018, $1.8 million
for 2017 and $4.5 million for 2016. During 2018, 2017 and 2016 we paid $97.9 million, $81.7 million
and $68.2 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 $10.3 million, $11.2 million and $12.5 million for
2018, 2017 and 2016, 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
August 2018 we received net proceeds of $69.9 million from the issuance of our $70.0 million of senior
secured notes. In December 2016 we received net proceeds of $124.3 million from the issuance of our
$125.0 million of 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 $9.4 million,
$3.8 million and $21.2 million for 2018, 2017 and 2016, respectively.

Indebtedness

Our total indebtedness, at par, at December 31, 2018 was $809.2 million. Our total indebtedness at

December 31, 2018 includes $163.8 million of capital lease obligations for dark fiber primarily
under 15-20 year IRUs. Our total cash and cash equivalents were $276.1 million at December 31, 2018.

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 (‘‘Merger Sub’’), 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’’).

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 and mature on April 15, 2021. Interest
accrues at 5.625% and is paid semi-annually in arrears on April 15 and October 15 of each year.
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.

Senior secured notes—$445.0 million

In February 2015, Group issued $250.0 million of 5.375% senior secured notes due 2022 (the
‘‘2022 Notes’’). In December 2016, we issued an additional $125.0 million of our 2022 Notes at a
premium of 100.365%. In August 2018, we issued an additional $70.0 million of our 2022 Notes at a
premium of 101.75%. 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, the net proceeds from the December 2016 offering were
$124.3 million and the net proceeds from the August 2018 offering were $69.9 million.

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, 2018, and we have a total of $131.3 million that is
unrestricted and 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, 2018 is detailed below (in thousands).

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

December 31, 2018

(Unaudited)
$ 131,172
164

$ 131,336

$ 286,249
46
(154,959)

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

$ 131,336

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

Year Ended
December 31, 2018

(Unaudited)
$ 19,431
1,618

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

$(17,813)

Common Stock Buyback Program

Our Board of Directors has approved through December 31, 2019, purchases of our common stock

under a buyback program (the ‘‘Buyback Program’’). We purchased 0.1 million shares of our common
stock for $6.6 million during the year ended December 31, 2018, 0.1 million shares of our common
stock for $1.8 million during the year ended December 31, 2017 and 0.1 million shares of our common
stock for $4.5 million during the year ended December 31, 2016. As of December 31, 2018 there was a
total of $34.9 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 20, 2019, our Board of Directors approved the payment of
our quarterly dividend of $0.58 per common share. The dividend for the first quarter of 2019 will be
paid to holders of record on March 8, 2019. This estimated $26.2 million dividend payment is expected
to be made on March 29, 2019.

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. The indentures governing our notes limit our ability to return cash to our
stockholders. See Note 4 to our consolidated financial statements for additional discussion of
limitations on distributions.

Contractual Obligations and Commitments

The following table summarizes our contractual cash obligations and other commercial

commitments as of December 31, 2018.

Payments due by period

Total

Less than
1 year

1 - 3 years

3 - 5 years

After
5 years

Debt(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations(2) . . . . . . . . . . . . .
Operating leases, colocation and data center

obligations(3) . . . . . . . . . . . . . . . . . . . . . .
Unconditional purchase obligations(4) . . . . . .

755,793
339,418

136,965
21,087

(in thousands)
255,592
47,631

43,242
24,053

456,959
43,523

—
224,211

37,984
10,879

46,511
714

24,234
647

28,236
8,847

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

$1,253,263

$116,158

$350,448

$525,363

$261,294

(1) These amounts include interest and principal payment obligations on our $445.0 million of 2022
Notes through the maturity date of March 1, 2022, interest and principal payments on our
$189.2 million of 2021 Notes through the maturity date of April 15, 2021 and $11.2 million due
under an installment payment agreement with a vendor.

(2) The amounts include principal and interest payments under our capital lease obligations. Our

capital lease obligations 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 $163.8 million at
December 31, 2018. These leases generally have initial terms of 15 to 20 years.

(3) These amounts include amounts due under our facilities and IRU operating leases, colocation

obligations and carrier neutral data center obligations.

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

IRU operating and capital lease agreements entered into but not delivered and accepted prior to
December 31, 2018.

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

Our service offerings consist of on-net and off-net telecommunications services. Fixed fees are
billed monthly in advance and usage fees are billed monthly in arrears. Amounts billed are due upon
receipt and contract lengths range from month to month to 60 months. We satisfy our performance
obligations to provide services to customers over time as the services are rendered. Revenue is
recognized when a customer obtains the promised service. The amount of revenue recognized reflects
the consideration to which we expect to be entitled to receive in exchange for these services.

To achieve this core principle, we follow the following five steps:

Identification of the contract, or contracts with a customer

Identification of the performance obligations in the contract

3) Determination of the transaction price

4) Allocation of the transaction price to the performance obligations in the contract

5) Recognition of revenue when, or as, we satisfy a performance obligation

Installation fees for contracts with terms longer than month-to-month are recognized over the

contract term. Installation fees associated with month-to-month contracts are recognized over the
estimated average customer life. To the extent a customer contract is terminated prior to its contractual
end the customer is subject to termination fees. We vigorously seek payment of these amounts. We
recognize revenue for these amounts as they are collected.

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.

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. In July 2018 the FASB approved an
Accounting Standards Update which, among other changes, allows a company to elect to adopt
ASU 2016-02 using a cumulative effect adjustment 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 continuing to evaluate 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 estimate that the effect of ASU 2016-02 would be to record a right to use asset and
lease liability totaling approximately $97 million. The estimated lease liability is not considered a
liability under the consolidated leverage ratio calculations in our indentures governing our senior
unsecured and senior secured note obligations. We did not early adopt ASU 2016-02 and we will adopt
the standard using the modified retrospective approach with a cumulative-effect adjustment on
January 1, 2019.

In June 2016, the FASB issued No. 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, 2018, our foreign activities
accounted for 23% 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 and materially 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, 2018 and 2017 . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for Each of the Three Years Ended

December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Years Ended December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for Each of the Three Years Ended December 31, 2018 .
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, 2018 and 2017, the related
consolidated statements of comprehensive income, changes in stockholders’ equity (deficit) and cash
flows for each of the three years in the period ended December 31, 2018, 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, 2018 and 2017,
and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2018, 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, 2018, 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 22, 2019 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 auditor since 2002
Tysons, VA
February 22, 2019

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2018 AND 2017

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts of $1,263 and

$1,499, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . .

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

2018

2017

$ 276,093

$ 247,011

41,709
32,535

39,096
20,011

350,337

306,118

1,300,503
(925,178)

1,233,756
(852,474)

Total property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

375,325
2,733
11,455

381,282
17,616
5,572

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

$ 739,850

$ 710,588

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment payment agreement, current portion, net of discount of $395 and

$337, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations, current maturities . . . . . . . . . . . . . . . . . . . . . . . . .

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior secured 2022 notes, net of unamortized debt costs of $2,695 and

$1,870, respectively and including premium of $1,405 and $382,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Senior unsecured 2021 notes, net of unamortized debt costs of $1,476 and

$2,060, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations, net of current maturities . . . . . . . . . . . . . . . . . . . .
Other long term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value; 75,000,000 shares authorized; 46,336,499

8,519
51,431

11,592
47,947

8,283
7,074

75,307

7,816
7,171

74,526

443,710

373,512

187,749
156,706
25,380

888,852

187,165
150,333
27,596

813,132

and 45,960,799 shares issued and outstanding, respectively . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

46
471,331
(10,928)
(609,451)

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

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

(149,002)

(102,544)

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

$ 739,850

$ 710,588

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

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 2018

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Network operations (including $895, $604 and $573 of

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

Selling, general, and administrative (including $16,813,
$12,686 and $10,162 of equity-based compensation
expense, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . .

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

Gains on equipment transactions . . . . . . . . . . . . . . . . . . . .
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:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . .

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

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

2018

2017

2016

520,193

485,175

446,900

219,526

209,278

194,066

133,858
81,233

434,617

982
—

86,558
5,880
(51,056)

41,382
(12,715)

28,667

28,667
(6,328)

22,339

0.63

2.12

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

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

45,280,161

44,855,263

44,641,805

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

45,780,954

45,184,203

44,873,030

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, 2018

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Common Stock

Amount

Additional
Paid-in
Capital

Accumulated
Other

Comprehensive Accumulated
Income (Loss)

Deficit

Total
Stockholder’s
Equity (Deficit)

Balance at December 31, 2015 . . . . 45,198,718

$45

$434,161

$(14,693)

$(431,784)

$ (12,271)

Cumulative-effect adjustment from

adoption of ASU 2018-09 . . . . . .

— —

—

6,160

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)
—
—

—
—
(2,500)
—
—

—
—
—
—
—

—
11,910
(2,500)
—
1,220

—
—
—

—
(68,210)
14,929

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

Balance at December 31, 2016 . . . . 45,478,787

$45

$442,799

$(17,193)

$(478,905)

$ (53,254)

Forfeitures of shares granted to

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

(10,181) —
— —
— —
1
499,654
39,289 —

(46,750) —
— —
— —

—
14,504
—
—
1,222

(1,829)
—
—

—
—
12,593
—
—

—
—
—
—
—

—
14,504
12,593
1
1,222

—
—
—

—
(81,657)
5,876

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

Balance at December 31, 2017 . . . . 45,960,799

$46

$456,696

$ (4,600)

$(554,686)

$(102,544)

Cumulative effect adjustment from
adoption of ASC 606 . . . . . . . . .

Forfeitures of shares granted to

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

— —

—

14,455

(24,973) —
— —
— —
496,228 —
52,440 —

(147,995) —
— —
— —

—
19,431
—
—
1,768

(6,564)
—
—

—
—
(6,328)
—
—

—
—
—
—
—

—
19,431
(6,328)
—
1,768

—
—
—

—
(97,887)
28,667

(6,564)
(97,887)
28,667

Balance at December 31, 2018 . . . . 46,336,499

$46

$471,331

$(10,928)

$(609,451)

$(149,002)

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 2018

(IN THOUSANDS)

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—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 .

2018

2017

2016

$ 28,667

5,876

$ 14,929

81,233
1,533
17,708
—
(1,109)
11,117

(3,204)
(438)
(1,490)
(96)

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

133,921

111,702

107,967

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

(49,937)

(45,801)

(45,234)

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

(49,937)

(45,801)

(45,234)

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

of $1,364 and $1,202, respectively . . . . . . . . . . . . . . . . . . . . . . . . .
Extinguishment of 2021 unsecured 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 . . . . . . . . . . . . . . .

69,861
—
(97,887)
(10,286)
(9,437)
(6,564)
1,768

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

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

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

(52,545)

(97,267)

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

(2,357)

4,058

8,341

(346)

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

29,082
247,011

(27,308)
274,319

70,728
203,591

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

$276,093

$247,011

$274,319

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

$ 48,918
2,444

$ 47,032
441

$ 37,125
143

20,050
9,925
—

22,595
9,027
—

18,439
5,521
2,110

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

968

3,861

7,739

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 services, private network services
and data center colocation space. The Company’s network is specifically designed and optimized to
transmit packet routed data. The Company delivers its services primarily to small and medium-sized
businesses, communications service providers and other bandwidth-intensive organizations in North
America, Europe, and Asia and recently in Australia and Brazil.

The Company offers on-net Internet access and private network services exclusively through its

own facilities, which run from its network to its customers’ premises. The Company is not dependent
on local telephone companies or cable TV companies to serve its customers for its on-net Internet
access services because of its integrated network architecture. The Company offers its on-net services to
customers located in buildings that are physically connected to its network. The Company’s on-net
service consists of high-speed Internet access and private network services offered at speeds ranging
from 100 Megabits per second to 100 Gigabits per second of bandwidth. The Company provides its
on-net Internet access services and private network services to its corporate and net-centric customers.
The Company’s corporate customers are located in multi-tenant office buildings and typically include
law firms, financial services firms, advertising and marketing firms and other professional services
businesses. The Company’s net-centric customers include bandwidth-intensive users such as other
Internet service providers, telephone companies, cable television companies, web hosting companies,
content delivery network companies and commercial content and application service providers. These
net-centric customers obtain the Company’s services in colocation facilities and in the Company’s data
centers. The Company operates data centers throughout North America and Europe that allow its
customers to collocate their equipment and access the Company’s network.

In addition to providing its on-net services, the Company provides Internet connectivity and private

network services to customers that are not located in buildings directly connected to its network. The
Company provides this off-net service primarily to corporate customers using other carriers’ facilities to
provide the ‘‘last mile’’ portion of the link from the customers’ premises to the Company’s network.
The Company also provides certain non-core services that resulted from acquisitions. The Company
continues to support but does not actively sell these non-core services. Beginning in the second quarter
of 2018 the Company began to offer and sell its software-defined wide area network (‘‘SDWAN’’)
service.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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-
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.

Allowance for doubtful accounts

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 $3.3 million, $3.7 million and
$2.8 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Recent Accounting Pronouncements—Adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers
(‘‘ASC 606’’), which requires an entity to recognize the amount of revenue to which it expects to be
entitled for the transfer of promised goods or services to customers, and also requires enhanced
disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from
contracts with customers. ASC 606 replaced most existing revenue recognition guidance in U.S. GAAP.
The new standard was effective for the Company on January 1, 2018. The standard permits the use of
either the full retrospective or modified retrospective transition method. The Company adopted
ASC 606 using the modified retrospective transition method on January 1, 2018 and applied the
standard to all of its customer contracts that were not considered completed as of the adoption date.
Under the modified retrospective method, the cumulative effect of applying the standard was
recognized at the date of initial application and resulted in a reduction to the Company’s accumulated
deficit of $14.5 million, recording customer contract costs (a new asset) of $17.3 million, a decrease to

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

deferred revenue of $0.9 million and a decrease to deferred income tax assets of $3.8 million. The
Company refers to contract liabilities as ‘‘deferred revenue’’ on the condensed consolidated balance
sheets and related disclosures. Results for reporting periods beginning January 1, 2018 are presented
under ASC 606, while prior period amounts were not adjusted and continue to be reported in
accordance with the Company’s historic accounting under Topic 605, Revenue Recognition.

The effect of adopting ASC 606, changed the period for which the Company recognizes revenue
for fees billed in connection with customer installations. Installation fees for contracts with terms longer
than month-to-month are now recognized over the contract term which may be a shorter period than
the average customer life which was previously used to recognize revenue. The Company believes the
installation fee does not give rise to a material right as defined by ASC 606 for contracts with terms
longer than month-to-month. Consistent with previous GAAP, the Company is recognizing revenues
over the estimated average customer life for installation fees associated with month-to-month contracts,
because the fee represents a material right as defined by ASC 606.

Additionally, the Company is required to capitalize certain contract acquisition costs that relate
directly to a customer contract, including commissions paid to its sales team and sales agents, and to
amortize these costs on straight-line basis over the period the services are transferred to the customer
for commissions paid to its sales team (estimated customer life) and over the contract term for agent
commissions. The Company previously expensed these contract acquisition costs as incurred in selling,
general and administrative expenses. Management assesses these costs for impairment at least quarterly
and as ‘‘triggering’’ events occur that indicate it is more likely than not that an impairment exists.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

The impact on the Company’s financial statement line items from adopting ASC 606 was as
follows (in thousands, except earnings per share). There was no net impact on net cash provided by
operating activities.

Financial Statement Line Items

Balance Sheet
Prepaid expenses and other current assets . . . . . . .
Deposits and other assets . . . . . . . . . . . . . . . . . . .
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . .
Accrued and other current liabilities . . . . . . . . . . .
Other long term liabilities . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . .
Statement of Comprehensive Income
Three months ended December 31, 2018
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . .
Statement of Comprehensive Income
Year ended December 31, 2018
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . .

As Reported
December 31, 2018

Balances Without
the Adoption of
ASC 606

$ 32,535
$ 11,455
$
2,733
$ 51,431
$ 25,380
$(609,451)

$ 132,049
$ 33,218
$ 22,311
7,100
$
0.16
$
0.16
$
4,844
$

$ 520,193
$ 133,858
$ 86,558
$ 28,667
0.63
$
$
0.63
$ 22,339

$ 19,600
5,917
$
$
6,535
$ 51,078
$ 26,738
$(625,235)

$ 132,021
$ 33,160
$ 22,340
7,129
$
0.16
$
0.16
$
4,873
$

$ 520,133
$ 135,125
$ 85,230
$ 27,339
0.60
$
$
0.60
$ 21,011

Customer contract costs—current portion (included in

prepaid and other current assets) . . . . . . . . . . . . . . .
Customer contract costs—non-current portion (included
in deposits and other assets) . . . . . . . . . . . . . . . . . . .
Deferred revenue—current portion (included in accrued
and other current liabilities) . . . . . . . . . . . . . . . . . . .

Deferred revenue—non-current portion (included in

December 31,
2018

At Adoption—
January 1, 2018

$12,935

$11,893

5,538

4,504

5,400

3,846

2,865

other long-term liabilities) . . . . . . . . . . . . . . . . . . . . .

1,536

Service revenue recognized from amounts in deferred revenue at the beginning of the period

during the three months ended December 31, 2018 was $1.7 million and during the year ended

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

December 31, 2018 was $5.0 million. Amortization expense for contract costs was $4.3 million for the
three months ended December 31, 2018 and $16.8 million for the year ended December 31, 2018.

Revenue recognition

The Company’s service offerings consist of on-net and off-net telecommunications services. Fixed

fees are billed monthly in advance and usage fees are billed monthly in arrears. Amounts billed are due
upon receipt and contract lengths range from month to month to 60 months. The Company satisfies its
performance obligations to provide services to customers over time as the services are rendered. In
accordance with ASC 606, revenue is recognized when a customer obtains the promised service. The
amount of revenue recognized reflects the consideration to which the Company expects to be entitled
to receive in exchange for these services. The Company has adopted the practical expedient related to
certain performance obligation disclosures since it has a right to consideration from its customer in an
amount that corresponds directly with the value to the customer of the Company’s performance
completed to date.

To achieve this core principle, the Company followed the following five steps:

Identification of the contract, or contracts with a customer

Identification of the performance obligations in the contract

3) Determination of the transaction price

4) Allocation of the transaction price to the performance obligations in the contract

5) Recognition of revenue when, or as, the Company satisfies a performance obligation

Fees billed in connection with customer installations are deferred (as deferred revenue) and
recognized as noted above. To the extent a customer contract is terminated prior to its contractual end
the customer is subject to termination fees. The Company vigorously seeks payment of these amounts.
The Company recognizes revenue for these amounts as they are collected.

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 $12.5 million, $10.9 million, and $9.1 million for the years ended
December 31, 2018, 2017 and 2016, 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

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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 in
stockholders’ equity. The Company’s only components of ‘‘other comprehensive income’’ 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.

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, 2018 and December 31, 2017, 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, 2018 the fair
value of the Company’s $189.2 million senior unsecured notes was $188.5 million and the fair value of
the Company’s $445.0 million senior secured notes was $438.3 million.

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, 2018 and 2017, 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 and recently in
Australia and Brazil. 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.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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.

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.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

The following details the determination of the diluted weighted average shares:

Year Ended
December 31,
2018

Year Ended
December 31,
2017

Year Ended
December 31,
2016

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

45,280,161
33,134
467,659

44,855,263
31,534
297,406

44,641,805
31,760
199,465

Weighted average common shares—diluted .

45,780,954

45,184,203

44,873,030

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,
2018

December 31,
2017

December 31,
2016

1,187,586
53,114

1,112,151
47,513

908,761
90,959

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

3,545

201

79,450

Recent Accounting Pronouncements—to be Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (‘‘ASU 2016-02’’). ASU 2016-02 will

replace most existing lease accounting guidance when it becomes effective. ASU 2016-02 is effective for
the Company beginning on January 1, 2019. Early application is permitted. In July 2018 the FASB
approved an Accounting Standards Update which, among other changes, allows a company to elect to
adopt ASU 2016-02 using a cumulative effect adjustment 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 continuing to evaluate 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 estimates that the effect of
ASU 2016-02 would be to record a right to use asset and lease liability totaling approximately
$97 million. The estimated lease liability is not considered a liability under the consolidated leverage
ratio calculations in the indentures governing the Company’s senior unsecured and senior secured note
obligations. The Company did not early adopt ASU 2016-02 and will adopt the standard using the
modified retrospective approach with a cumulative-effect adjustment on January 1, 2019.

In June 2016, the FASB issued ASU No. 2016-13, ‘‘Financial Instruments—Credit Losses:
Measurement of Credit Losses on Financial Instruments.’’ This guidance is intended to introduce a
revised approach to the recognition and measurement of credit losses, emphasizing an updated model
based on expected losses rather than incurred losses. This new standard is effective for annual and
interim reporting periods beginning after December 15, 2019 and early adoption is permitted. The
Company is currently evaluating the impact that this guidance may have on its financial statements and
related disclosures.

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,

2018

2017

$ 538,761
214,495
124,018
9,963
16,711
1,277
108

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

905,333
(736,356)

850,296
(680,114)

168,977

170,182

395,170
(188,822)

383,460
(172,360)

206,348

211,100

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

$ 375,325

$ 381,282

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

$81.2 million, $75.9 million and $75.2 million, for 2018, 2017 and 2016, respectively.

The Company capitalizes the compensation cost of employees directly involved with its
construction activities. In 2018, 2017 and 2016, the Company capitalized compensation costs of
$10.5 million, $9.7 million and $8.7 million respectively. These amounts are included in system
infrastructure costs.

Exchange agreement

In 2018, 2017 and 2016 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 $3.2 million, $9.1 million and $15.5 million resulting in gains of $1.0 million,
$3.9 million and $7.7 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

The Company has 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, 2018 and December 31, 2017, there was $11.2 million and $10.7 million, respectively, of

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Property and equipment: (Continued)

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 $0.4 million as of December 31, 2018 and December 31,
2017, 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,

2018

2017

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

$24,020
4,504
7,695
4,212
11,000

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

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

$51,431

$47,947

4. Long-term debt:

Debt extinguishment and new debt issuances—$445.0 million 2022 Notes

In February 2015, Group issued $250.0 million of 5.375% senior secured notes due 2022 (the
‘‘2022 Notes’’). The net proceeds from the offering were $248.6 million after deducting discounts and
commissions and offering expenses. 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 offering costs. In August 2018, the Company
issued an additional $70.0 million par value of its 2022 Notes at a premium of 101.75% of par value.
The Company received net proceeds of $69.9 million after deducting offering costs. The premium and
offering costs are amortized 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% 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 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

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Long-term debt: (Continued)

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 and will mature on
April 15, 2021. Interest is paid semi-annually on April 15 and October 15. 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. The net proceeds from the offering 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 on extinguishment 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 bear interest at a rate of 5.625% per year and will mature on April 15, 2021.

Interest is paid semi-annually on April 15 and October 15. The 2021 Notes are senior unsecured
obligations of Group and are guaranteed on a senior unsecured basis by Holdings. The 2021 Notes are

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Long-term debt: (Continued)

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 ability of
Group (the company owned by Holdings which owns the operating companies) 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 Group’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 Group’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 Group’s consolidated cash flow, as defined in the
indentures, as long as the Group’s consolidated leverage ratio is less than 4.25. Group’s consolidated
leverage ratio was above 4.25 as of December 31, 2018. As of December 31, 2018, a total of
$131.3 million ($131.2 million held by Holdings in cash) was permitted for investment payments
including dividends to Holdings.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Long-term debt: (Continued)

Long-term debt maturities

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

2018 (in thousands):

For the year ending December 31,

2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 8,678
2,561
189,225
445,000
—
—

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

$645,464

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 amended the Internal Revenue Code and reduced the corporate tax rate from
a maximum of 35% to a flat 21% rate. The rate reduction was 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 a 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 year ended December 31, 2017. As of December 31, 2018, the Company has
collected all of the necessary data to complete its analysis of the effect of the Act on its underlying
deferred income taxes and recorded a $0.1 million reduction in the value to its net deferred tax asset.
The Act subjects a U.S. shareholder to current tax on global intangible low-taxed income earned by
certain foreign subsidiaries. FASB Staff Q&A, Topic 740, No. 5, ‘‘Accounting for Global Intangible
Low-Taxed Income’’, states that the Company is permitted to make an accounting policy election to
either recognize deferred income taxes for temporary basis differences expected to reverse as global
intangible low-taxed income in future years or provide for the income tax expense related to such
income in the year the income tax is incurred. The Company has made an accounting policy to record
these income taxes as a period cost in the year the income tax in incurred.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Income taxes: (Continued)

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

Years Ended December 31,

2018

2017

2016

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

$ 63,878
(22,496)

$ 52,250
(21,132)

$ 41,759
(17,499)

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

$ 41,382

$ 31,118

$ 24,260

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

Years Ended December 31,

2018

2017

2016

Current:

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

Deferred:

(1,522)
(75)

(9,746)
(802)
(570)

— $

(353)
(209)

135
(188)
(202)

(24,150)
(430)
(100)

(8,175)
(1,047)
146

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

$(12,715) $(25,242) $(9,331)

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

thousands):

December 31,

2018

2017

Deferred Tax Assets:

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

$ 255,235
2,458
3,322

$ 271,219
2,771
2,327

Total gross deferred tax assets

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

261,015

276,317

Deferred Tax Liabilities:

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

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

29,769
101,934

131,703

22,777
106,251

129,028

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

129,312
(126,579)

147,289
(129,673)

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

2,733

$ 17,616

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

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Income taxes: (Continued)

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, 2018, 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
$131.4 million, net operating loss carry-forwards related to its European, Mexican, Asian and Canadian
operations of $851.0 million, $4.0 million, $1.7 million and $1.4 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 $131.4 million of net operating losses available at December 31,
2018 in the United States $44.8 million are limited for use under Section 382. Net operating loss
carryforwards outside of the United States totaling $858.0 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 2036. The net operating loss carry-forwards related to the Company’s Mexican, Asian
and Canadian operations will expire if unused, between 2020 and 2028. The net operating loss carry-
forwards related to the Company’s European operations include $707.3 million that do not expire and
$143.6 million that expire between 2019 and 2033.

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
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 have a liability for uncertain tax positions at December 31, 2018 and does not
expect that its liability for uncertain tax positions will increase during the twelve months ended
December 31, 2019, 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.

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 2018. The Company is subject to tax examinations in its foreign
jurisdictions generally for years 2005 to 2018.

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,

2018

2017

2016

$ (8,690) $(10,892) $(8,492)

(2,665)
(146)
(1,274)
—
—
(130)
(645)
835

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

(1,080)
138
(590)
175
—
—
98
420

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

$(12,715) $(25,242) $(9,331)

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,

2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

$ 24,053
24,049
23,582
22,305
21,218
224,211

339,418
(175,638)

163,780
(7,074)

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

$ 156,706

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Commitments and contingencies: (Continued)

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 $2.9 million in excess of the amount accrued at December 31, 2018.

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 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
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 and other facility leases

The Company leases office space, network equipment sites, and data center facilities under
operating leases and other agreements. 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,

$ 37,984
26,432
20,079
13,291
10,943
28,236

$136,965

Expenses related to these arrangements were $37.6 million in 2018, $38.2 million in 2017 and

$34.6 million in 2016.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Commitments and contingencies: (Continued)

Unconditional purchase obligations

Unconditional purchase obligations for equipment and services totaled $8.5 million at

December 31, 2018. As of December 31, 2018, the Company had also committed to additional dark
fiber IRU capital and operating lease agreements totaling $12.6 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 2019. Future minimum payments under these obligations are
$10.9 million, $0.4 million, $0.4 million, $0.3 million and $0.3 million for the years ending
December 31, 2019 to December 31, 2023, respectively, and $8.8 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 $0.8 million for 2018, $0.7 million for 2017 and
$0.6 million for 2016 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
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, 2018, there was
$34.9 million remaining for purchases under the Buyback Program. During 2018, 2017 and 2016, the
Company purchased approximately 0.1 million, 0.1 million and 0.1 million shares of its common stock
for $6.6 million, $1.8 million and $4.5 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

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Stockholders’ equity: (Continued)

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’’). 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 on a straight-line basis 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 that are subject to certain performance
conditions and cliff vesting based upon certain of the Company’s operating metrics. The vesting of
48,100 shares granted to the Company’s executives in 2017 and 2018 is subject to certain performance
conditions and the vesting of 210,000 shares granted to the Company’s CEO in 2017 and 2018 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 for stock options 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.

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Stock option and award plan: (Continued)

The weighted-average per share grant date fair value of options was $8.45 in 2018, $7.06 in 2017

and $6.23 in 2016. The following assumptions were used for determining the fair value of options
granted in the three years ended December 31, 2018:

Black-Scholes Assumptions

Years Ended
December 31,

2018

2017

2016

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

4.6% 4.1% 3.7%
28.7% 27.1% 30.8%
2.5% 2.0% 1.4%
4.5
4.4

4.6

Stock option activity under the Company’s Award Plan during the year ended December 31, 2018,

was as follows:

Outstanding at December 31, 2017 . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled and expired . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised—intrinsic value $0.9 million; cash received

Number of Weighted-Average

Options

Exercise Price

189,929
77,592
(46,534)

$36.37
$49.59
$44.59

$1.8 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(52,440)

$33.72

Outstanding at December 31, 2018—$1.1 million intrinsic

value and 7.4 years weighted-average remaining
contractual term . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Exercisable at December 31, 2018—$0.9 million intrinsic

value and 6.3 years weighted-average remaining
contractual term . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Expected to vest—$1.0 million intrinsic value and

168,547

$41.01

96,552

$36.50

7.2 years weighted-average remaining contractual term .

148,887

$40.04

A summary of the Company’s non-vested restricted stock awards as of December 31, 2018 and the

changes during the year ended December 31, 2018 are as follows:

Non-vested awards

Non-vested at December 31, 2017 . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,112,151
496,228
(395,820)
(24,973)

Non-vested at December 31, 2018 . . . . . . . . . . . . . . . . .

1,187,586

Weighted-Average
Grant Date
Fair Value

$38.11
$44.02
$36.19
$43.11

$41.12

The weighted average per share grant date fair value of restricted stock granted was $44.02 in 2018
(0.5 million shares) $40.52 in 2017 (0.5 million shares) and $38.87 in 2016 (0.4 million shares). The fair

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Stock option and award plan: (Continued)

value was determined using the quoted market price of the Company’s common stock on the date of
grant. Valuations were obtained to determine the fair value for the shares granted to the Company’s
CEO that 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 fair value of shares of restricted
stock vested in 2018, 2017 and 2016 was $19.1 million $12.6 million and $12.0 million, respectively.

Equity-based compensation expense related to stock options and restricted stock was $17.7 million,

$13.3 million, and $10.7 million for 2018, 2017, and 2016, respectively. The income tax benefit related
to stock options and restricted stock was $1.8 million, $2.5 million, and $2.8 million for 2018, 2017, and
2016, respectively. The Company capitalized compensation expense related to stock options and
restricted stock for 2018, 2017, and 2016 of $1.7 million, $1.2 million and $1.2 million, respectively. As
of December 31, 2018, there was $27.3 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.

9. Related party transactions:

Office lease

The Company’s headquarters is located in an office building owned by Sodium LLC whose owner

is the Company’s Chief Executive Officer. The fixed annual rent for the headquarters building is
$1.0 million per year plus an allocation of taxes and utilities. The lease began in May 2015 and the
lease term is for five years which 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
$1.7 million in 2018, $1.6 million in 2017 and $1.7 million in 2016 for rent and related costs (including
taxes and utilities) for this lease.

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):

Year Ended December 31, 2018 Revenues

On-net

Off-net

Non-core

Total

North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Latin America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$299,021
72,958
2,562
14

$128,510
15,918
576
—

Total

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

$374,555

$145,004

$572
62
—
—

$634

$428,103
88,938
3,138
14

$520,193

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Geographic information: (Continued)

Year Ended December 31, 2017 Revenues

On-net

Off-net

Non-core

Total

North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$278,714
66,588
1,143

$122,683
14,867
342

Total

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

$346,445

$137,892

$797
41
—

$838

$402,194
81,496
1,485

$485,175

Year Ended December 31, 2016 Revenues

On-net

Off-net

Non-core

Total

$263,903
59,065
634

$107,998
14,181
158

Total

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

$323,602

$122,337

$909
52
—

$961

$372,810
73,298
792

$446,900

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

$275,367
99,978

$282,112
99,194

Total

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

$375,345

$381,306

December 31,
2018

December 31,
2017

11. Quarterly financial information (unaudited):

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,
2018

June 30,
2018

September 30,
2018

December 31,
2018

(in thousands, except share and per share amounts)

128,706

129,296

130,139

132,049

54,875
117
20,637
6,784

54,379
357
21,354
6,552

54,615
416
22,255
8,231

55,660
92
22,311
7,100

0.15

0.18

0.16

44,923,973

45,016,767

45,105,830

45,284,481

45,294,697

45,536,473

45,699,635

45,803,418

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Quarterly financial information (unaudited): (Continued)

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
2,124
18,666
4,136

51,115
1,023
19,000
4,317

53,584
397
17,720
3,650

53,918
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.

12. Subsequent Events:

Dividend

On February 20, 2019, the Company’s Board of Directors approved the payment of its quarterly

dividend of $0.58 per common share. The dividend for the first quarter of 2019 will be paid to holders
of record on March 8, 2019. This estimated $26.2 million dividend payment is expected to be made on
March 29, 2019.

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, 2018, our system of internal control over financial reporting was effective.

The independent registered public accounting firm, Ernst & Young LLP, has audited our 2018
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 2018 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 22, 2019

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 Communications Holdings, Inc. and subsidiaries’ internal control over

financial reporting as of December 31, 2018, 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 Communications
Holdings, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2018, 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, 2018 and 2017, the related
consolidated statements of comprehensive income, changes in stockholders’ equity (deficit) and cash
flows for each of the three years in the period ended December 31, 2018, 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 22, 2019 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 22, 2019

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 2019 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,’’
‘‘Compensation Discussion and Analysis ‘‘Employment Agreements and Other Potential
Post-Employment Compensation Arrangements’’, ‘‘Compensation Committee Report on Executive
Compensation,’’ and ‘‘Compensation Committee Interlocks and Insider Participation’’ in our 2019 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 2019
Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND 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 2019 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 2019 Proxy Statement.

ITEM 15. EXHIBITS, 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 on September 10,

2018 (previously filed as Exhibit 3.2 to our Current Report on Form 8-K/A, filed on
September 10, 2018, 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).

4.7

Second Supplemental Indenture related to the 5.375% Senior Secured Notes due 2022, dated
as of August 20, 2018, 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 August 20, 2018).

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, 2018, 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.

Confidential treatment requested and obtained as to certain portions. Portions have been omitted
pursuant to this request where indicated by an asterisk.

Schedule II
COGENT COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

Description

Allowance for doubtful service accounts receivable

(deducted from accounts receivable)(a)

Year ended December 31, 2016 . . . . . . . . . . . . . . . . .
Year ended December 31, 2017 . . . . . . . . . . . . . . . . .
Year ended December 31, 2018 . . . . . . . . . . . . . . . . .
Deferred tax valuation allowance
Year ended December 31, 2016 . . . . . . . . . . . . . . . . .
Year ended December 31, 2017 . . . . . . . . . . . . . . . . .
Year ended December 31, 2018 . . . . . . . . . . . . . . . . .

Balance at
Beginning of
Period

Charged to
Costs and
Expenses

(Deductions)

Balance at
End of
Period

$
$
$

1,757
1,734
1,499

$113,392
$110,194
$129,673

$ 3,840
$ 4,835
$ 4,115

$ 3,102
$20,102
$ 2,138

$(3,863)
$(5,070)
$(4,351)

$(6,300)
$ (623)
$(5,232)

$
$
$

1,734
1,499
1,263

$110,194
$129,673
$126,579

(a) Bad debt expense, net of recoveries, was approximately $3.3 million for the year ended

December 31, 2018, $3.7 million for the year ended December 31, 2017 and $2.8 million for the
year ended December 31, 2016.

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 22, 2019

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 22, 2019

/s/ THADDEUS G. WEED

Thaddeus G. Weed

Chief Financial Officer (Principal
Financial and Accounting Officer)

February 22, 2019

/s/ TIMOTHY WEINGARTEN

Timothy Weingarten

/s/ STEVEN BROOKS

Steven Brooks

/s/ RICHARD T. LIEBHABER

Richard T. Liebhaber

/s/ DAVID BLAKE BATH

David Blake Bath

/s/ MARC MONTAGNER

Marc Montagner

/s/ LEWIS H. FERGUSON III

Lewis H. Ferguson III

Director

February 22, 2019