UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

x~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

For the Quarterly Period Ended June 30, ~~2018~~2019

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

Commission File No. 000-51829

COGENT COMMUNICATIONS HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		46-5706863
(State of Incorporation)		(I.R.S. Employer
		Identification Number)

2450 N Street N.W.

Washington, ~~D.C.~~D.C. 20037

(Address of Principal Executive Offices and Zip Code)

(202)295-4200

(Registrant’s Telephone Number, Including Area Code)

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


Title of Each Class	Trading Symbol	Name of Each Exchange on which Registered
Common Stock, par value $0.001 per share	CCOI	NASDAQ Global Select Market

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 x⌧ No o◻

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T ~~(232.405~~(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes x⌧ No o◻

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 filerx	☒	Accelerated filero	☐
Non-accelerated filer	☐	Smaller reporting company	☐
~~Non-accelerated filer~~ o		~~Smaller reporting company~~ o

~~(Do not check if a smaller reporting company)~~		Emerging growth companyo	☐

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. o◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.001 par value ~~46,452,695~~46,815,903 Shares Outstanding as of July 31, ~~2018~~2019

Table of Contents

INDEX


PART I ~~FINANCIAL INFORMATION~~
				FINANCIAL INFORMATION
~~Item 1.~~
Item 1.	Financial Statements	1
	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets of Cogent Communications Holdings, Inc., and Subsidiaries as of June 30, ~~2018~~2019 (Unaudited) and December 31, ~~2017~~2018	1
	Condensed Consolidated Statements of Comprehensive Income of Cogent Communications Holdings, Inc., and Subsidiaries for the Three Months Ended June 30, ~~2018~~2019 and June 30, ~~2017~~2018 (Unaudited)	2
	Condensed Consolidated Statements of Comprehensive Income of Cogent Communications Holdings, Inc., and Subsidiaries for the Six Months Ended June 30, ~~2018~~2019 and June 30, ~~2017~~2018 (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows of Cogent Communications Holdings, Inc., and Subsidiaries for the Six Months Ended June 30, ~~2018~~2019 and June 30, ~~2017~~2018 (Unaudited)	4
	Notes to Interim Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1217
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	1927
Item 4.	Controls and Procedures	1927

			PART II ~~OTHER INFORMATION~~
				OTHER INFORMATION
~~Item 1.~~	~~Legal Proceedings~~	20
Item 2.1.	Legal Proceedings	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2028
Item 6.	Exhibits	2028
SIGNATURES		2029
CERTIFICATIONS

Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, ~~2018~~2019 AND DECEMBER 31, ~~2017~~2018

(IN THOUSANDS, EXCEPT SHARE DATA)

June 30,
2018

December 31,
2017

(Unaudited)

Assets

Current assets:

Cash and cash equivalents

$
224,282

$
247,011

Accounts receivable, net of allowance for doubtful accounts of $1,131 and $1,499, respectively

39,482

39,096

Prepaid expenses and other current assets

32,972

20,011

Total current assets

296,736

306,118

Property and equipment, net

382,730

381,282

Deferred tax assets

9,038

17,616

Deposits and other assets

11,725

5,572

Total assets

$
700,229

$
710,588

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$
10,330

$
11,592

Accrued and other current liabilities

47,447

47,947

Installment payment agreement, current portion, net of discount of $413 and $337, respectively

8,746

7,816

Current maturities, capital lease obligations

8,428

7,171

Total current liabilities

74,951

74,526

Senior secured 2022 notes, net of unamortized debt costs of $1,668 and $1,870, respectively and including premium of $340 and $382, respectively

373,672

373,512

Senior unsecured 2021 notes, net of unamortized debt costs of $1,772 and $2,060, respectively

187,453

187,165

Capital lease obligations, net of current maturities

151,439

150,333

Other long term liabilities

27,350

27,596

Total liabilities

814,865

813,132

Commitments and contingencies:

Stockholders’ equity:

Common stock, $0.001 par value; 75,000,000 shares authorized; 46,443,945 and 45,960,799 shares issued and outstanding, respectively

46

46

Additional paid-in capital

467,007

456,696

Accumulated other comprehensive income — foreign currency translation

(8,187
)
(4,600
)
Accumulated deficit

(573,502
)
(554,686
)
Total stockholders’ deficit

(114,636
)
(102,544
)
Total liabilities and stockholders’ deficit

$
700,229

$
710,588


	June 30,		December 31,
	2019		2018
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	409,279	$	276,093
Accounts receivable, net of allowance for doubtful accounts of $1,782 and $1,263, respectively		40,684		41,709
Prepaid expenses and other current assets		36,030		32,535
Total current assets		485,993		350,337
Property and equipment, net		375,936		375,325
Right-of-use leased assets		72,255		—
Deferred tax assets		—		2,733
Deposits and other assets		14,881		11,455
Total assets	$	949,065	$	739,850

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	11,570	$	8,519
Accrued and other current liabilities		51,615		51,431
Installment payment agreement, current portion, net of discount of $396 and $395, respectively		8,693		8,283
Current maturities, operating lease liabilities		10,639		—
Current maturities, finance lease obligations		7,700		7,074
Total current liabilities		90,217		75,307
Senior secured 2022 notes, net of unamortized debt costs of $2,301 and $2,695, respectively and including premium of $1,197 and $1,405, respectively		443,896		443,710
Senior unsecured 2024 Euro notes, net of unamortized debt costs of $1,550		151,957		—
Senior unsecured 2021 notes, net of unamortized debt costs of $1,171 and $1,476, respectively		188,054		187,749
Operating lease liabilities, net of current maturities		83,456		—
Finance lease obligations, net of current maturities		160,487		156,706
Other long term liabilities		7,588		25,380
Total liabilities		1,125,655		888,852
Commitments and contingencies:
Stockholders’ equity:
Common stock, $0.001 par value; 75,000,000 shares authorized; 46,806,370 and 46,336,499 shares issued and outstanding, respectively		47		46
Additional paid-in capital		481,734		471,331
Accumulated other comprehensive income — foreign currency translation		(10,967)		(10,928)
Accumulated deficit		(647,404)		(609,451)
Total stockholders’ deficit		(176,590)		(149,002)
Total liabilities and stockholders’ deficit	$	949,065	$	739,850

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

Table of Contents

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED JUNE 30, ~~2018~~2019 AND JUNE 30, ~~2017~~2018

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Three Months
Ended
June 30, 2018

Three Months
Ended
June 30, 2017

(Unaudited)

(Unaudited)

Service revenue

$
129,296

$
119,777

Operating expenses:

Network operations (including $232 and $141 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)

54,379

51,115

Selling, general, and administrative (including $4,463 and $3,084 of equity-based compensation expense, respectively)

33,704

31,788

Depreciation and amortization

20,216

18,897

Total operating expenses

108,299

101,800

Gains on equipment transactions

357

1,023

Operating income

21,354

19,000

Interest income and other, net

189

1,015

Interest expense

(12,373
)
(12,090
)
Income before income taxes

9,170

7,925

Income tax provision

(2,618
)
(3,608
)
Net income

$
6,552

$
4,317

Comprehensive income:

Net income

$
6,552

$
4,317

Foreign currency translation adjustment

(6,198
)
6,163

Comprehensive income

$
354

$
10,480

Net income per common share:

Basic net income per common share

$
0.15

$
0.10

Diluted net income per common share

$
0.14

$
0.10

Dividends declared per common share

$
0.52

$
0.44

Weighted-average common shares - basic

45,016,767

44,717,372

Weighted-average common shares - diluted

45,536,473

44,988,655


	Three Months		Three Months
	Ended		Ended
	June 30, 2019		June 30, 2018
	(Unaudited)		(Unaudited)
Service revenue	$	134,789	$	129,296
Operating expenses:
Network operations (including $226 and $232 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)		54,407		54,379
Selling, general, and administrative (including $5,063 and $4,463 of equity-based compensation expense, respectively)		38,566		33,704
Depreciation and amortization		19,979		20,216
Total operating expenses		112,952		108,299
Gains on equipment transactions		185		357
Operating income		22,022		21,354
Interest income and other, net		1,753		189
Interest expense		(13,595)		(12,373)
Income before income taxes		10,180		9,170
Income tax provision		(3,044)		(2,618)
Net income	$	7,136	$	6,552

Comprehensive income:
Net income	$	7,136	$	6,552
Foreign currency translation adjustment		1,786		(6,198)
Comprehensive income	$	8,922	$	354

Net income per common share:
Basic net income per common share	$	0.16	$	0.15
Diluted net income per common share	$	0.16	$	0.14
Dividends declared per common share	$	0.60	$	0.52

Weighted-average common shares - basic		45,354,327		45,016,767

Weighted-average common shares - diluted		45,912,291		45,536,473

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

Table of Contents

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED JUNE 30, ~~2018~~2019 AND JUNE 30, ~~2017~~2018

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Six Months
Ended
June 30, 2018

Six Months
Ended
June 30, 2017

(Unaudited)

(Unaudited)

Service revenue

$
258,002

$
236,981

Operating expenses:

Network operations (including $421 and $252 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)

109,252

101,778

Selling, general, and administrative (including $8,058 and $5,620 of equity-based compensation expense, respectively)

67,227

63,252

Depreciation and amortization

40,004

37,435

Total operating expenses

216,483

202,465

Gains on equipment transactions

475

3,146

Operating income

41,994

37,662

Interest income and other, net

1,879

1,870

Interest expense

(24,780
)
(23,978
)
Income before income taxes

19,093

15,554

Income tax provision

(5,757
)
(7,101
)
Net income

$
13,336

$
8,453

Comprehensive income:

Net income

$
13,336

$
8,453

Foreign currency translation adjustment

(3,587
)
7,491

Comprehensive income

$
9,749

$
15,944

Net income per common share:

Basic net income per common share

$
0.30

$
0.19

Diluted net income per common share

$
0.29

$
0.19

Dividends declared per common share

$
1.02

$
0.86

Weighted-average common shares - basic

45,011,616

44,720,971

Weighted-average common shares - diluted

45,456,831

44,990,298


	Six Months		Six Months
	Ended		Ended
	June 30, 2019		June 30, 2018
	(Unaudited)		(Unaudited)
Service revenue	$	268,930	$	258,002
Operating expenses:
Network operations (including $406 and $421 of equity-based compensation expense, respectively, exclusive of depreciation and amortization shown separately below)		108,557		109,252
Selling, general, and administrative (including $8,318 and $8,058 of equity-based compensation expense, respectively)		74,427		67,227
Depreciation and amortization		40,240		40,004
Total operating expenses		223,224		216,483
Gains on equipment transactions		721		475
Operating income		46,427		41,994
Interest income and other, net		3,572		1,879
Interest expense		(27,051)		(24,780)
Income before income taxes		22,948		19,093
Income tax provision		(6,595)		(5,757)
Net income	$	16,353	$	13,336

Comprehensive income:
Net income	$	16,353	$	13,336
Foreign currency translation adjustment		(39)		(3,587)
Comprehensive income	$	16,314	$	9,749

Net income per common share:
Basic net income per common share	$	0.36	$	0.30
Diluted net income per common share	$	0.36	$	0.29

Dividends declared per common share	$	1.18	$	1.02

Weighted-average common shares - basic		45,349,397		45,011,616

Weighted-average common shares - diluted		45,838,918		45,456,831

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

Table of Contents

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, ~~2018~~2019 AND JUNE 30, ~~2017~~2018

(IN THOUSANDS)

Six months
Ended
June 30, 2018

Six months
Ended
June 30, 2017

(Unaudited)

(Unaudited)

Cash flows from operating activities:

Net income

$
13,336

$
8,453

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

40,004

37,435

Amortization of debt discount and premium

751

567

Equity-based compensation expense (net of amounts capitalized)

8,479

5,872

Gains — equipment transactions and other, net

(439
)
(3,628
)
Deferred income taxes

4,815

6,626

Changes in operating assets and liabilities:

Accounts receivable

(741
)
(341
)
Prepaid expenses and other current assets

(631
)
(1,200
)
Accounts payable, accrued liabilities and other long-term liabilities

(2,418
)
(2,084
)
Deposits and other assets

(1,706
)
(141
)
Net cash provided by operating activities

61,450

51,559

Cash flows from investing activities:

Purchases of property and equipment

(26,893
)
(24,256
)
Net cash used in investing activities

(26,893
)
(24,256
)
Cash flows from financing activities:

Dividends paid

(46,607
)
(38,945
)
Purchases of common stock

—

(1,829
)
Proceeds from exercises of stock options

1,002

486

Principal payments on installment payment agreement

(4,254
)
(951
)
Principal payments of capital lease obligations

(6,059
)
(6,048
)
Net cash used in financing activities

(55,918
)
(47,287
)
Effect of exchange rates changes on cash

(1,368
)
2,157

Net decrease in cash and cash equivalents

(22,729
)
(17,827
)
Cash and cash equivalents, beginning of period

247,011

274,319

Cash and cash equivalents, end of period

$
224,282

$
256,492

Supplemental disclosure of non-cash investing and financing activities:

Non-cash component of network equipment obtained in exchange transactions

$
460

$
3,120

PP&E obtained for installment payment agreement

$
5,943

$
4,874

Capital lease obligations incurred

$
10,735

$
11,580


	Six months		Six months
	Ended		Ended
	June 30, 2019		June 30, 2018
	(Unaudited)		(Unaudited)
Cash flows from operating activities:
Net income	$	16,353	$	13,336
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		40,240		40,004
Amortization of debt costs and premium		842		751
Equity-based compensation expense (net of amounts capitalized)		8,724		8,479
Gains - equipment transactions and other, net		(484)		(439)
Deferred income taxes		4,831		4,815
Changes in operating assets and liabilities:
Accounts receivable		1,005		(741)
Prepaid expenses and other current assets		(3,547)		(631)
Accounts payable, accrued liabilities and other long-term liabilities		5,088		(2,418)
Deposits and other assets		(3,783)		(1,706)
Net cash provided by operating activities		69,269		61,450
Cash flows from investing activities:
Purchases of property and equipment		(25,008)		(26,893)
Net cash used in investing activities		(25,008)		(26,893)
Cash flows from financing activities:
Dividends paid		(54,306)		(46,607)
Net proceeds from issuance of senior unsecured 2024 Euro Notes - net of debt costs of $1,556		152,128		—
Proceeds from exercises of stock options		919		1,002
Principal payments on installment payment agreement		(4,774)		(4,254)
Principal payments of finance lease obligations		(5,006)		(6,059)
Net cash provided by (used in) financing activities		88,961		(55,918)
Effect of exchange rates changes on cash		(36)		(1,368)
Net increase (decrease) in cash and cash equivalents		133,186		(22,729)
Cash and cash equivalents, beginning of period		276,093		247,011
Cash and cash equivalents, end of period	$	409,279	$	224,282
Supplemental disclosure of non-cash investing and financing activities:
Non-cash component of network equipment obtained in exchange transactions	$	684	$	460
PP&E obtained for installment payment agreement	$	5,483	$	5,943
Finance lease obligations incurred	$	8,562	$	10,735

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

Table of Contents

COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.Description of the business and recent developments:

Reorganization and merger

On May 15, 2014, pursuant to the Agreement and Plan of Reorganization ~~(the “Merger Agreement”)~~ by and among Cogent Communications Group, Inc. (“Group”), a Delaware corporation, Cogent Communications Holdings, Inc., a Delaware corporation (“Holdings”) and Cogent Communications Merger Sub, Inc., a Delaware corporation, Group adopted a new holding company organizational structure whereby Group is now a wholly owned subsidiary of Holdings. Holdings is a “successor issuer” to Group pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

References to the “Company” for events that occurred prior to May 15, 2014 refer to Cogent Communications Group, Inc. and its subsidiaries and on and after May 15, 2014 the “Company” refers to Cogent Communications Holdings, Inc. and its subsidiaries.

Description of business

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.~~Asia and recently in Australia and Brazil.

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

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

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments that the Company considers necessary for the fair presentation of its results of operations and cash flows for the interim periods covered, and of the financial position of the Company at the date of the interim condensed consolidated balance sheet. Certain

Table of Contents

information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. While the Company believes that the disclosures are adequate to not make the information misleading, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in its annual report on ~~Form��~~Form 10-K for the year ended December 31, ~~2017.~~2018.

The accompanying unaudited condensed consolidated financial statements include all wholly-owned subsidiaries. All inter-company accounts and activity have been eliminated.

Use of estimates

The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.

Financial instruments

At June 30, ~~2018,~~2019, the carrying amount of cash and cash equivalents, accounts receivable, prepaid and other current assets, accounts payable and accrued expenses approximated fair value because of the short-term nature of these instruments. The Company measures its cash equivalents at amortized cost, which approximates fair value based upon quoted market prices (Level 1). Based upon recent trading prices (Level 2 — market approach) at June 30, ~~2018~~2019 the fair value of the Company’s $189.2 million senior unsecured notes was ~~$190.6~~$191.8 million, the fair value of the Company’s $445.0 million senior secured notes was $461.7 million and the fair value of the Company’s ~~$375.0~~135.0 million Euro ($153.5 million USD) senior ~~secured~~unsecured notes was ~~$383.4~~$153.7 million.

Gross receipts taxes, universal service fund and other surcharges

Revenue recognition standards include guidance relating to taxes or surcharges assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer and may include, but are not limited to, gross receipts taxes, excise taxes, Universal Service Fund fees and certain state regulatory fees. Such charges may be presented gross or net based upon the Company’s accounting policy election. The Company records certain excise taxes and surcharges on a gross basis and includes them in its revenues and costs of network operations. Excise taxes and surcharges billed to customers and recorded on a gross basis (as service revenue and network operations expense) were ~~$3.1~~$3.2 million and ~~$2.7~~$3.1 million for the three months ended June 30, ~~2018~~2019 and June 30, ~~2017,~~2018, respectively, and ~~$6.3~~$6.6 million and ~~$5.3~~$6.3 million for the six months ended June 30, ~~2018~~2019 and June 30, ~~2017,~~2018, respectively.

Basic and diluted net income per common share

Basic earnings per share (“EPS”) excludes dilution for common stock equivalents and is computed by dividing net income or (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares of common stock outstanding during each period, adjusted for the effect of dilutive common stock equivalents. Shares of restricted stock are included in the computation of basic EPS as they vest and are included in diluted EPS, to the extent they are dilutive, determined using the treasury stock method. The Company’s employees exercised options for 19,576 and 5,995 common shares for the three months ended June 30, 2018 and 2017, and exercised options for 30,696 and 17,913 common shares for the six months ended June 30, 2018 and 2017, respectively.

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The following details the determination of diluted weighted average shares:

	Three Months Ended June 30, 2018	Three Months Ended June 30, 2017	Six Months Ended June 30, 2018	Six Months Ended June 30, 2017

					Three Months Ended	Three Months Ended	Six Months Ended	Six Months Ended
					June 30, 2019	June 30, 2018	June 30, 2019	June 30, 2018
Weighted average common shares - basic	45,016,767	44,717,372	45,011,616	44,720,971	45,354,327	45,016,767	45,349,397	45,011,616
Dilutive effect of stock options	36,320	26,395	32,222	27,393	35,895	36,320	30,972	32,222
Dilutive effect of restricted stock	483,386	244,888	412,993	241,934	522,069	483,386	458,549	412,993
Weighted average common shares - diluted	45,536,473	44,988,655	45,456,831	44,990,298	45,912,291	45,536,473	45,838,918	45,456,831

The following details unvested shares of restricted common stock as well as the anti-dilutive effects of stock options and restricted stock awards outstanding:

	Three Months Ended June 30, 2018	Three Months Ended June 30, 2017	Six Months Ended June 30, 2018	Six Months Ended June 30, 2017


					Three Months	Three Months	Six Months	Six Months
					Ended	Ended	Ended	Ended
					June 30, 2019	June 30, 2018	June 30, 2019	June 30, 2018
Unvested shares of restricted common stock	1,417,669	1,239,633	1,417,669	1,239,633	1,442,520	1,417,669	1,442,520	1,417,669
Anti-dilutive options for common stock	43,308	62,175	50,353	54,765	36,381	43,308	52,338	50,353
Anti-dilutive shares of restricted common stock	—	138,909	44,672	69,838	37,494	—	87,686	44,672

~~Recent Accounting Pronouncements— Adopted~~Stockholder’s Deficit

~~In May 2014,~~The following details the ~~FASB issued~~changes in stockholder’s deficit for the three and six months ended June 30, 2019 and June 30, 2018 (in thousands except share amounts):


						Accumulated
				Additional		Other				Total
	Common Stock			Paid-in		Comprehensive		Accumulated		Stockholder’s
	Shares	Amount		Capital		Income (Loss)		Deficit		Equity (Deficit)
Balance at March 31, 2019	46,350,434	$	46	$	475,275	$	(12,753)	$	(626,799)	$	(164,231)
Forfeitures of shares granted to employees	(1,702)		—		—		—		—		—
Equity-based compensation	—		—		5,714		—		—		5,714
Foreign currency translation	—		—		—		1,786		—		1,786
Issuances of common stock	438,478		1		—		—		—		1
Exercises of options	19,160		—		745		—		—		745
Dividends paid	—		—		—		—		(27,741)		(27,741)
Net income	—		—		—		—		7,136		7,136
Balance at June 30, 2019	46,806,370	$	47	$	481,734	$	(10,967)	$	(647,404)	$	(176,590)


						Accumulated
				Additional		Other				Total
	Common Stock			Paid-in		Comprehensive		Accumulated		Stockholder’s
	Shares	Amount		Capital		Income (Loss)		Deficit		Equity (Deficit)
Balance at March 31, 2018	46,283,140	$	46	$	461,154	$	(1,989)	$	(556,266)	$	(97,055)
Forfeitures of shares granted to employees	(4,749)		—		—		—		—		—
Equity-based compensation	—		—		5,149		—		—		5,149
Foreign currency translation	—		—		—		(6,198)		—		(6,198)
Issuances of common stock	145,978		—		—		—		—		—
Exercises of options	19,576		—		704		—		—		704
Dividends paid	—		—		—		—		(23,788)		(23,788)
Net income	—		—		—		—		6,552		6,552
Balance at June 30, 2018	46,443,945	$	46	$	467,007	$	(8,187)	$	(573,502)	$	(114,636)

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						Accumulated
				Additional		Other				Total
	Common Stock			Paid-in		Comprehensive		Accumulated		Stockholder's
	Shares	Amount		Capital		Income (Loss)		Deficit		Equity (Deficit)
Balance at December 31, 2018	46,336,499	$	46	$	471,331	$	(10,928)	$	(609,451)	$	(149,002)
Forfeitures of shares granted to employees	(3,886)		—		—		—		—		—
Equity-based compensation	—		—		9,484		—		—		9,484
Foreign currency translation	—		—		—		(39)		—		(39)
Issuances of common stock	448,978		1		—		—		—		1
Exercises of options	24,779		—		919		—		—		919
Dividends paid	—		—		—		—		(54,306)		(54,306)
Net income	—		—		—		—		16,353		16,353
Balance at June 30, 2019	46,806,370	$	47	$	481,734	$	(10,967)	$	(647,404)	$	(176,590)


						Accumulated
				Additional		Other				Total
	Common Stock			Paid-in		Comprehensive		Accumulated		Stockholder's
	Shares	Amount		Capital		Income (Loss)		Deficit		Equity (Deficit)
Balance at December 31, 2017	45,960,799	$	46	$	456,696	$	(4,600)	$	(554,686)	$	(102,544)
Cumulative effect adjustment from adoption of ASC 606	—		—		—		—		14,455		14,455
Forfeitures of shares granted to employees	(11,528)		—		—		—		—		—
Equity-based compensation	—		—		9,310		—		—		9,310
Foreign currency translation	—		—		—		(3,587)		—		(3,587)
Issuances of common stock	463,978		—		—		—		—		—
Exercises of options	30,696		—		1,001		—		—		1,001
Dividends paid	—		—		—		—		(46,607)		(46,607)
Net income	—		—		—		—		13,336		13,336
Balance at June 30, 2018	46,443,945	$	46	$	467,007	$	(8,187)	$	(573,502)	$	(114,636)

Revenue recognition

The Company recognizes revenue under ASU No. 2014-09, Revenue from Contracts with Customers (“ASC 606”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to ~~customers, and also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with~~ customers. Under 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 are 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 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~~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.~~term. The Company believes that the installation fee does not give rise to a material right as defined by ASC 606 for contracts with terms longer than month-to-month. ~~Consistent with previous GAAP, the~~The Company ~~is recognizing revenues~~recognizes revenue over the estimated average customer life for installation fees associated with month-to-month contracts, because the fee represents a material right as defined by ASC 606.

~~Additionally, the~~ The Company ~~is required to capitalize~~capitalizes certain contract acquisition costs that relate directly to a customer contract, including commissions paid to its sales team and sales agents and ~~to amortize~~amortizes these costs on straight-line basis over the period the services are transferred to the customer for commissions paid to its sales team (estimated customer life) and over the remaining original contract term for agent commissions. ~~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”~~"triggering" events occur that indicate it is more likely than not that an impairment exists.

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

As Reported
June 30, 2018

Balances Without
the Adoption of
ASC 606

Balance Sheet

Prepaid expenses and other current assets

$
32,972

$
20,383

Deposits and other assets

$
11,725

$
5,734

Deferred tax assets

$
9,038

$
12,835

Accrued and other current liabilities

$
47,447

$
48,764

Other long term liabilities

$
27,350

$
26,792

Accumulated deficit

$
(573,502
)
$
(588,193
)
Statement of Comprehensive Income

Three months ended June 30, 2018

Service revenue

$
129,296

$
129,400

Selling, general and administrative expenses

$
33,704

$
34,043

Operating income

$
21,354

$
21,119

Net income

$
6,552

$
6,317

Basic earnings per share

$
0.15

$
0.14

Diluted earnings per share

$
0.14

$
0.14

Comprehensive income

$
354

$
119

Statement of Comprehensive Income

Six months ended June 30, 2018

Service revenue

$
258,002

$
258,145

Selling, general and administrative expenses

$
67,227

$
68,630

Operating income

$
41,994

$
40,734

Net income

$
13,336

$
12,076

Basic earnings per share

$
0.30

$
0.27

Diluted earnings per share

$
0.29

$
0.27

Comprehensive income

$
9,749

$
8,385

June 30,
2018

At Adoption —
January 1, 2018

Customer contract costs — current portion (included in prepaid and other current assets)

$
12,589

$
11,893

Customer contract costs — non-current portion (included in deposits and other assets)

5,991

5,400

Deferred revenue — current portion (included in accrued and other current liabilities)

4,374

3,846

Deferred revenue — non-current portion (included in other long-term liabilities)

1,804

2,865

Service revenue recognized from amounts in deferred revenue at the beginning of the period during the three months ended June 30, 2018 was $1.9 million and during the six months ended June 30, 2018 was $3.9 million. Amortization expense for contract costs was $4.2 million for the three months ended June 30, 2018 and $8.3 million for the six months ended June 30, 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.~~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

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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~~follows the following five steps:

Identification of the contract, or contracts with a customer

Identification of the performance obligations in the contract

Determination of the transaction price

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

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

1) ~~Identification of the contract, or contracts with a customer~~

2) ~~Identification of the performance obligations in the contract~~

3) ~~Determination of the transaction price~~

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

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

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

Service revenue recognized from amounts in deferred revenue (contract liabilities) at the beginning of the period during the three months ended June 30, 2019 was $1.7 million and during the three months ended June 30, 2018 was $1.9 million. Service revenue recognized from amounts in deferred revenue (contract liabilities) at the beginning of the period during the six months ended June 30, 2019 was $3.4 million and during the six months ended June 30, 2018 was $3.9 million. Amortization expense for contract costs was $4.3 million for the three months ended June 30, 2019 and $4.2 million for the three months ended June 30, 2018. Amortization expense for contract costs was $8.7 million for the six months ended June 30, 2019 and $8.3 million for the three months ended June 30, 2018.

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~~replaced 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.~~guidance. In ~~January~~July 2018 the FASB ~~issued a Proposed~~approved an Accounting Standards Update which, among other changes, ~~would allow~~allowed a company to elect to adopt ASU 2016-02 using ~~a cumulative effect adjustment to~~ the ~~opening balance~~modified retrospective method applying the transition provisions at the beginning of ~~its retained earnings on~~ the period of adoption, ~~date.~~rather than at the beginning of the earliest comparative period presented in these financial statements. ASU 2016-02 ~~will require~~was effective for the Company beginning on January 1, 2019 and required the Company to record a ~~right to use~~right-of-use asset and a lease liability for most of its ~~leases, including its leases currently~~facilities leases. Leases that were previously treated as operating leases. The ~~Company is evaluating the~~ effect ~~that~~of ASU 2016-02 ~~will have~~was to record a cumulative-effect adjustment on January 1, 2019 as a right-of-use asset and an operating lease liability totaling $97.3 million. The operating lease liability is not considered a liability under the consolidated leverage ratio calculations in the indentures governing the Company’s senior unsecured and senior secured note obligations. The Company has made an accounting policy election to not apply the recognition requirements of ASU 2016-02 to its ~~consolidated financial statements and related disclosures and the~~short-term leases - leases with a term of one year or less. The Company ~~will elect~~has also elected to apply certain practical ~~expedients.~~ expedients under ASU2016-02 including not separating lease and nonlease components on its finance and operating leases, not reassessing whether any existing contracts contained leases, not reconsidering lease classification, not reassessing initial direct costs and using hindsight in determining the lease reasonably certain term of its leases.


	Three Months
	Ended
	June 30, 2019

Finance lease cost
Amortization of right-of-use assets	$	4,917
Interest expense on finance lease liabilities		4,415
Operating lease cost		3,486
Total lease costs		12,818

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	Six Months
	Ended
	June 30, 2019

Finance lease cost Amortization of right-of-use assets	$	9,888
Interest expense on finance lease liabilities		8,816
Operating lease cost		6,780
Total lease costs		25,484
Other lease information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases		(8,827)
Operating cash flows from operating leases		(6,780)
Financing cash flows from finance leases		(5,006)
Right-of-use assets obtained in exchange for new finance lease liabilities		8,562
Right-of-use assets obtained in exchange for new operating lease liabilities		1,457
Weighted-average remaining lease term — finance leases (in years)		14.6
Weighted-average remaining lease term — operating leases (in years)		22.3
Weighted average discount rate — finance leases		10.6	%
Weighted average discount rate — operating leases		5.7	%

Finance leases—fiber lease agreements

The Company has ~~not yet determined~~entered into lease agreements with numerous providers of dark fiber under indefeasible-right-of use agreements (“IRU’s). These IRU’s typically have initial terms of 15-20 years and include renewal options after the ~~effect~~initial lease term. The Company establishes the number of ~~ASU 2016-02 on~~renewal option periods used in determining the lease term based upon its ~~ongoing financial reporting~~assessment at the inception of the lease of the number of option periods for which failure to renew the lease imposes a penalty in such amount that renewal appears to be reasonably certain. The option to renew may be automatic, at the option of the Company or ~~quantified~~mutually agreed to between the ~~impact~~dark fiber provider and the Company. Once the Company has accepted the related fiber route, leases that meet the criteria for treatment as finance leases are recorded as a finance lease obligation and an IRU asset. The interest rate used in determining the present value of the aggregate future minimum lease payments is the Company’s incremental borrowing rate for the reasonably certain lease term. Finance lease assets are included in property and equipment in the Company’s consolidated balance sheets. As of June 30, 2019, the Company had committed to ~~its balance sheet, however it does expect~~additional dark fiber IRU lease agreements totaling $12.3 million in future payments to be paid over periods of up to 20 years. These obligations begin when the related fiber is accepted, which is generally expected to occur in the next 12 months.

The future minimum payments (principal and interest) under these finance leases are as follows (in thousands):


For the twelve months ending June 30,
2020	$	24,926
2021		24,753
2022		23,742
2023		22,567
2024		21,704
Thereafter		225,184

Total minimum finance lease obligations		342,876
Less—amounts representing interest		(174,689)

Present value of minimum finance lease obligations		168,187
Current maturities		(7,700)

Finance lease obligations, net of current maturities	$	160,487

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Operating leases

The Company leases office space and certain data center facilities under operating leases. In certain cases the Company also enters into short term operating leases for dark fiber. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease ~~liability recorded will be material.~~liabilities represent its obligation to make lease payments under the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the reasonably certain lease term. The implicit rates within the Company’s operating leases are generally not determinable and the Company uses its incremental borrowing rate at the lease commencement date to determine the present value of its lease payments. The determination of the Company’s incremental borrowing rate requires judgment. The Company ~~does not expect~~determines its incremental borrowing rate for each lease using its current borrowing rate, adjusted for various factors including level of collateralization and term to ~~early adopt ASU 2016-02~~align with the term of the lease. Certain of the Company’s leases include options to extend or terminate the lease. The Company establishes the number of renewal option periods used in determining the operating lease term based upon its assessment at the inception of the operating lease of the number of option periods for which failure to renew the lease imposes a penalty in such amount that renewal appears to be reasonably certain. The option to renew may be automatic, at the option of the Company or mutually agreed to between the landlord or dark fiber provider and ~~anticipates adopting ASU 2016-02 using~~ the ~~cumulative effect method, if approved.~~Company. Once the Company has accepted the related fiber route or the facility lease term has begun, the present value of the aggregate future minimum operating lease payments are recorded as an operating lease liability and a right-of-use leased asset. Lease incentives and deferred rent liabilities for facilities operating leases are presented with the right-of-use leased asset. Lease expense for lease payments is recognized on a straight-line basis over the term of the lease.

The future minimum payments under these operating lease agreements are as follows (in thousands):


For the twelve months ending June 30,
2020	$	15,592
2021		13,504
2022		12,248
2023		10,985
2024		9,871
Thereafter		96,148

Total minimum operating lease obligations		158,348
Less—amounts representing interest		(64,253)

Present value of minimum operating lease obligations		94,095
Current maturities		(10,639)

Lease obligations, net of current maturities	$	83,456

Recent Accounting Pronouncements— to be Adopted

In June 2016, the FASB issued ASU No. 2016-13, ““Financial ~~Financial Instruments —~~ 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.

2. Property and equipment:

Depreciation and amortization expense related to property and equipment and ~~capital~~finance leases was ~~$20.2~~$20.0 million and ~~$18.9~~$20.2 million for the three months ended June 30, ~~2018,~~2019, and ~~2017~~2018 respectively, and ~~$40.0~~$40.2 million and ~~$37.4~~$40.0 million for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The Company capitalized salaries and related benefits of employees working directly on the construction and build-out of its network of $2.7 million and ~~$2.4~~$2.7 million for the

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three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and $5.3 million and ~~$4.9~~$5.3 million for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

Exchange agreement

In the three and six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, the Company exchanged certain used network equipment and cash consideration for new network equipment. The fair value of the equipment received was estimated to be ~~$1.1~~$0.5 million and ~~$2.2~~$1.1 million for the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$1.5~~$2.2 million and ~~$7.0~~$1.5 million for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively and after considering the cash component the transactions resulted in gains of ~~$0.3~~$0.1 million and ~~$1.0~~$0.3 million for the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$0.5~~$0.7 million and ~~$3.1~~$0.5 million for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The estimated fair value of the equipment received was based upon the cash consideration price the Company pays for the new network equipment on a standalone basis (Level 3).

Installment payment agreement

In March 2015, the Company entered into an installment payment agreement (“IPA”) with a vendor. Under the IPA the Company may purchase network equipment in exchange for interest free note obligations each with a twenty-four month term. There are no payments under each note obligation for the first six months followed by eighteen equal installment payments for the remaining eighteen month term. As of June 30, ~~2018,~~2019, and December 31, ~~2017~~2018 there was ~~$12.4~~$11.9 million and ~~$10.7~~$11.2 million, respectively, of note obligations outstanding under the IPA, secured by the related equipment. The Company recorded the assets purchased and the net present value of the note obligation utilizing an

imputed interest rate. The resulting discount was ~~$0.5~~$0.4 million and $0.4 million as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, and is being amortized over the note term using the effective interest rate method.

3.Long-term debt:

Limitations under the indentures

The Company has $189.2 million of senior unsecured notes, ~~and $375.0~~$445.0 million of senior secured notes and 135.0 million Euros ($153.5 million USD) of senior unsecured notes outstanding. The $189.2 million of senior unsecured notes are due on April 15, 2021 (the “2021 Notes”) and bear interest at a rate of 5.625% per year. Interest is paid semi-annually on April 15 and October 15. The ~~$375.0~~$445.0 million of senior secured notes are due on March 1, 2022 (the “2022 Notes”) and bear interest at a rate of 5.375% per year. Interest is paid semi-annually on March 1 and September 1. The 135.0 million Euro ($153.5 million USD) of senior unsecured notes are due on June 30, 2024 (the “2024 Notes”) and bear interest at a rate of 4.375% per year. Interest is paid semi-annually on June 30 and December 30.

The indentures governing the 2024 Notes, 2022 Notes and 2021 Notes, among other things, limit the Company’s ability ~~of Cogent Group (the company owned by Holdings which owns Cogent’s 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~~the Company’s consolidated leverage ratio, as defined in the indentures, is greater than ~~5.0.~~6.0 for the 2024 Notes and greater than 5.0 for the 2022 Notes and 2021 Notes. Limitations on the ability to incur additional secured indebtedness include a restriction on incurring additional secured indebtedness if the Company’s consolidated secured leverage ratio, as defined in the indentures, is greater than 4.0 for the 2024 Notes and greater than 3.5 for the 2022 Notes and 2021 Notes. The indentures prohibit certain payments, such as dividends and stock purchases, when ~~Group’s~~the Company’s consolidated leverage ratio, as defined by the indentures, is greater than 4.25. A certain amount of such unrestricted payments is permitted notwithstanding this prohibition. The unrestricted payment amount may be increased by ~~Group’s~~the Company’s consolidated cash flow, as defined in the indentures, as long as the ~~Group’s~~Company’s consolidated leverage ratio is less than 4.25. ~~Group’s~~The Company’s consolidated leverage ratio was ~~below~~above 4.25 as of June 30, ~~2018.~~2019. As ~~a result, as~~ of June 30, ~~2018,~~2019, a total of ~~$186.8~~$166.9 million ~~($17.2 million held~~(held by Holdings in ~~cash)~~cash and cash equivalents) was permitted for investment payments including dividends ~~to Holdings.~~and stock purchases.

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Issuance of 2024 Notes

On June 25, 2019, Group completed an offering of €135.0 million ($153.7 million) aggregate principal amount of 4.375% senior unsecured notes due 2024. The net proceeds from the offering, after deducting offering expenses, were approximately $152.1 million. The Company ~~anticipates transferring~~expects to use the proceeds for general corporate purposes and/or to repurchase the Company’s common stock or for special or recurring dividends to the Company’s stockholders. The 2024 Notes are guaranteed (the “Guarantees”) on a ~~majority~~senior unsecured basis, jointly and severally, by the Company’s material domestic subsidiaries, subject to certain exceptions, and by the Company (collectively, the “Guarantors”). Under certain circumstances, the Guarantors may be released from these Guarantees without the consent of the ~~accumulated unrestricted cash balance from its operating companies~~holders of the 2024 Notes.

The 2024 Notes and the Guarantees are Group’s and the Guarantors’ senior unsecured obligations. The 2024 Notes and the Guarantees are effectively subordinated to ~~Holdings~~all of Groups’s and the Guarantors’ existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness, and are structurally subordinated to all indebtedness and other liabilities of subsidiaries that are not Guarantors. Without giving effect to collateral arrangements, the 2024 Notes and the Guarantees rank pari passu in right of payment with Group’s and the Guarantors’ existing and future senior indebtedness. The 2024 Notes and the Guarantees rank contractually senior in right of payment to all of Group’s and the Guarantors’ existing and future subordinated indebtedness.

The 2024 Notes were offered and sold only to persons reasonably believed to be qualified institutional buyers in an unregistered offering pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Act”), and to certain non-U.S. persons in transactions outside the United States in compliance with Regulation S under the Act. The 2024 Notes have not been registered under the Act, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Application will be made for the 2024 Notes to be listed on the Official List of The International Stock Exchange; however, there can be no assurance that the application will be successful or that any such listing will be granted or maintained.

The 2024 Notes bear interest at a rate of 4.375% per annum. Interest began to accrue on the 2024 Notes on June 25, 2019 and will be paid semi-annually in arrears on June 30 and December 30 of each year, commencing on December 30, 2019. Unless earlier redeemed, the 2024 Notes will mature on June 30, 2024. The 2024 Notes were issued at par for 135.0 million Euros ($153.7 million USD) on June 25, 2019. The 2024 Notes were issued in Euros and are reported in the Company’s reporting currency – US Dollars. As of June 30, 2019 the 2024 Notes were valued at $153.5 million resulting in an unrealized gain of $0.2 million recorded during the three and six months ended June 30, 2019.

Group may redeem some or all of the 2024 Notes at any time prior to June 30, 2021 at a price equal to 100% of the principal amount of the 2024 Notes, plus a “make-whole” premium as set forth in the indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption. Thereafter, Group may redeem the 2024 Notes, in whole or in part, at a redemption price ranging from 102.188% to par (depending on the year), as set forth in the indenture. Group may also redeem up to 35% of the principal amount of the 2024 Notes using proceeds of certain equity offerings completed prior to June 30, 2021 at a redemption price equal to 104.375%, plus accrued and unpaid interest, if any, to, but not including, the date of redemption, subject to certain exceptions. Group may also redeem the 2024 Notes, in whole but not in part, in the event of certain changes in the tax laws of the United States (or any taxing authority in the United States). This redemption would be at 100% of the principal amount of the 2024 Notes to be redeemed (plus any accrued interest and additional amounts then payable with respect to the 2024 Notes to, but not including, the redemption date).

If Group undergoes specific kinds of change in control accompanied by certain ratings events, it will be required to offer to repurchase the 2024 Notes from holders at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the date of repurchase. Additionally, if Group or any of its restricted subsidiaries sells assets and does not apply the proceeds from such sale in a certain manner or certain other events have not occurred, under certain circumstances, Group will be required to use the excess net proceeds to make an offer to purchase the 2024 Notes at an offer price in cash equal to 100% of the principal amount of the 2024 Notes, plus accrued and unpaid interest, if any, to, but not including, the repurchase date.

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In connection with any offer to purchase all or any of the 2024 Notes (including a change of control offer, asset sale offer or any tender offer), if holders of no less than 90% of the aggregate principal amount of the 2024 Notes validly tender their 2024 Notes, Group or a third ~~quarter~~party is entitled to redeem any remaining 2024 Notes at the price offered to each holder.

The 2024 notes indenture includes covenants that restrict Group and its restricted subsidiaries’ ability to, among other things: incur indebtedness; issue certain preferred stock or similar equity securities; pay dividends or make other distributions in respect of, ~~2018.~~or repurchase or redeem, capital stock; make certain investments and other restricted payments, such as prepayment, redemption or repurchase of certain indebtedness; create liens; consolidate, merge, sell or otherwise dispose of all or substantially all of the assets of Group and its restricted subsidiaries taken as a whole; incur restrictions on the ability of a subsidiary to pay dividends or make other payments; and enter into transactions with affiliates. However, the covenants provide for certain exceptions to these restrictions and the Company is not subject to the covenants under the 2024 Notes indenture. Certain covenants will cease to apply to the 2024 Notes if, and for so long as, the 2024 Notes have investment grade ratings from any two of Moody’s Investors Service, Inc., Fitch Ratings, Inc. and S&P Global Ratings and so long as no default or event of default under the Indenture has occurred and is continuing.

The principal amount of the 2024 Notes would become immediately due and payable upon the occurrence of certain bankruptcy or insolvency events involving Group or certain of its subsidiaries, and may be declared immediately due and payable by the trustee or the holders of at least 25% of the aggregate principal amount of the then-outstanding 2024 Notes upon the occurrence of certain events of default under the indenture.

4. Commitments and contingencies:

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 ~~$2.7~~$3.0 million in excess of the amount accrued at June 30, ~~2018.~~2019.

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

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

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5.Income taxes:

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

	Three Months Ended June 30, 2018			Three Months Ended June 30, 2017			Six Months Ended June 30, 2018			Six Months Ended June 30, 2017


													Three Months Ended		Three Months Ended			Six Months Ended	Six Months Ended
													June 30, 2019		June 30, 2018			June 30, 2019	June 30, 2018

Domestic	$	15,446		$	12,690		$	29,582		$	25,056		$	16,332	$	15,446	$	35,084	$	29,582
Foreign	(6,276		)	(4,765		)	(10,489		)	(9,502		)		(6,152)		(6,276)		(12,136)		(10,489)
Total	$	9,170		$	7,925		$	19,093		$	15,554		$	10,180	$	9,170	$	22,948	$	19,093

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. Although the tax rate reduction is known, the Company has not collected all of the necessary data to complete its analysis of the effect of the Tax Act on all of its underlying deferred taxes and as such, the amounts recorded are provisional. The actual impact on the Company’s net deferred tax asset may vary from this amount from certain changes in interpretations of the Act, additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, additional data collected and revisions to assumptions that the Company has made. Those adjustments may materially impact the Company’s provision for income taxes and effective tax rate in the period in which the adjustments are made. The accounting for the tax effects of the Tax Act will be completed in 2018.

6. Common stock buyback ~~program:~~program stock option and award plan:

The Company’s Board of Directors has approved purchases of the Company’s common stock under a buyback program (the “Buyback Program”) through December 31, ~~2018.~~2019. At June 30, ~~2018,~~2019, there was approximately ~~$41.5~~$34.9 million remaining for purchases under the Buyback Program. ~~During the three and six months ended June 30, 2017 the Company purchased 46,750 shares of its common stock for $1.8 million.~~ There were no purchases of common stock during the three and six months ended June 30, 2019 and June 30, 2018.

In the second quarter of 2019 the Company granted 0.4 million shares of common stock to its employees valued at $23.5 million. The vesting of 24,050 of these shares granted to the Company's executives are subject to certain performance conditions and the vesting of 105,000 shares granted to the Company's CEO are subject to the total shareholder return of the Company's common stock compared to the total shareholder return of the Nasdaq Telecommunications Index. The remaining shares vest over periods ending in December 2022.

7. 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. On August ~~1, 2018,~~7, 2019, the Company’s Board of Directors approved the payment of a quarterly dividend of ~~$0.54~~$0.62 per common share. This ~~dividend for the third quarter of 2018 will be paid to holders of record on August 17, 2018. This~~ estimated ~~$24.3~~$28.1 million dividend payment is expected to be made on ~~August 31, 2018.~~September 9, 2019.

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

8. Related party transactions:

Office leases

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 $0.5 million and ~~$0.4~~$0.5 million in the three months ended June 30, 2019 and 2018, respectively, and ~~2017 and $0.8~~$0.9 million ~~respectively,~~ and $0.8 million in the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, for rent and related costs (including taxes and utilities) to Sodium LLC for this lease.

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9. Segment information:

The Company operates as one operating segment. The Company’s service revenue by geographic region and product class and long lived assets by geographic region are as follows (in thousands):

Three months Ended June 30, 2018 Revenues	On net		Off-net		Non-core		Total

Three months Ended June 30, 2019
Revenues									On net		Off-net		Non-core		Total
North America	$	74,088	$	32,028	$	149	$	106,265	$	78,484	$	32,864	$	111	$	111,459
Europe	18,382		3,942		14		22,338			17,789		4,113		15		21,917
Latin America										71		3		—		74
Asia Pacific	556		137		—		693			1,128		211		—		1,339
Total	$	93,026	$	36,107	$	163	$	129,296	$	97,472	$	37,191	$	126	$	134,789

Three months Ended June 30, 2017 Revenues	On net		Off-net		Non-core		Total

Three months Ended June 30, 2018
Revenues									On net		Off-net		Non-core		Total
North America	$	69,165	$	30,275	$	200	$	99,640	$	74,088	$	32,028	$	149	$	106,265
Europe	16,156		3,614		11		19,781			18,382		3,942		14		22,338
Asia Pacific	265		91		—		356			556		137		—		693
Total	$	85,586	$	33,980	$	211	$	119,777	$	93,026	$	36,107	$	163	$	129,296

Six months Ended June 30, 2018 Revenues	On net		Off-net		Non-core		Total

Six months Ended June 30, 2019
Revenues									On net		Off-net		Non-core		Total
North America	$	147,144	$	64,020	$	313	$	211,477	$	156,462	$	65,499	$	197	$	222,158
Europe	37,259		7,968		26		45,253			35,969		8,139		41		44,149
Latin America										105		4		—		109
Asia Pacific	1,009		263		—		1,272			2,120		394		—		2,514
Total	$	185,412	$	72,251	$	339	$	258,002	$	194,656	$	74,036	$	238	$	268,930

Six months Ended June 30, 2017 Revenues	On net		Off-net		Non-core		Total

Six months Ended June 30, 2018
Revenues									On net		Off-net		Non-core		Total
North America	$	136,951	$	60,123	$	420	$	197,494	$	147,144	$	64,020	$	313	$	211,477
Europe	31,723		7,090		23		38,836			37,259		7,968		26		45,253
Asia Pacific	499		152		—		651			1,009		263		—		1,272
Total	$	169,173	$	67,365	$	443	$	236,981	$	185,412	$	72,251	$	339	$	258,002

June 30,
2018

December 31,
2017

Long lived assets, net

North America

$
280,884

$
282,112

Europe

101,516

99,194

Total

$
382,400

$
381,306


	June 30,		December 31,
	2019		2018
Long lived assets, net
North America	$	273,772	$	275,367
Europe and other		102,183		99,978
Total	$	375,955	$	375,345

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

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis together with our condensed 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. 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 US 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; our ability to make payments on our indebtedness as they become due 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, our annual report on Form 10-K for the year ended December 31, ~~2017.~~2018.

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 ~~in Asia.~~

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 we 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 ~~2,599~~2,737 buildings in which we provide our on-net services, including ~~1,710~~1,751 multi-tenant office buildings. We also provide on-net services in carrier-neutral data centers, Cogent controlled

data centers and single-tenant office buildings.

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We operate 5253 Cogent controlled data centers totaling ~~588,000~~over 592,000 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. ~~However, over the past several years our off-net revenue has grown faster than our on-net revenue.~~

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

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

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

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Three Months Ended June 30, ~~2018~~2019 Compared to the Three Months Ended June 30, ~~2017~~2018

The following summary table presents a comparison of our results of operations with respect to certain key financial measures. The comparisons illustrated in the table are discussed in greater detail below.

	Three months ended June 30,				Percent
	2018		2017		Change
	(in thousands)

							Three months ended
							June 30,				Percent
							2019		2018		Change
							(in thousands)
Service revenue	$	129,296	$	119,777	7.9	%	$	134,789	$	129,296	4.2	%
On-net revenue	93,026		85,586		8.7	%		97,472		93,026	4.8	%
Off-net revenue	36,107		33,980		6.3	%		37,191		36,107	3.0	%
Network operations expenses (1)	54,379		51,115		6.4	%		54,407		54,379	0.1	%
Selling, general, and administrative expenses (2)	33,704		31,788		6.0	%		38,566		33,704	14.4	%
Gains on equipment transactions	357		1,023		(65.1	)%		185		357	(48.2)	%
Depreciation and amortization expenses	20,216		18,897		7.0	%		19,979		20,216	(1.2)	%
Interest expense	12,373		12,090		2.3	%		13,595		12,373	9.9	%
Income tax provision	2,618		3,608		(27.4	)%		3,044		2,618	16.3	%

(1)	Includes equity-based compensation expenses of $226 and $232 in the three months ended June 30, 2019 and 2018, respectively.

(2)	Includes equity-based compensation expenses of $5,063 and $4,463 in the three months ended June 30, 2019 and 2018, respectively.


	Three months ended
	June 30,				Percent
	2019		2018		Change
	(in thousands)
Other Operating Data
Average Revenue Per Unit (ARPU)
ARPU—on net	$	453	$	482	(6.0)	%
ARPU—off-net	$	1,104	$	1,162	(5.0)	%
Average Price per Megabit — installed base	$	0.63	$	0.87	(27.1)	%
Customer Connections—end of period
On-net		72,415		65,407	10.7	%
Off-net		11,321		10,480	8.0	%

~~(1)~~ ~~Includes equity-based compensation expenses of $232 and $141 in the three months ended June 30, 2018 and 2017, respectively.~~

~~(2)~~ ~~Includes equity-based compensation expenses of $4,463 and $3,084 in the three months ended June 30, 2018 and 2017, respectively.~~

Three Months Ended
June 30,

Percent

2018

2017

Change

Other Operating Data

Average Revenue Per Unit (ARPU)

ARPU—on net

$
482

$
509

(5.4
)%
ARPU—off-net

$
1,162

$
1,232

(5.7
)%
Average Price per Megabit — installed base

$
0.87

$
1.17

(25.4
)%
Customer Connections—end of period

On-net

65,407

57,307

14.1
%
Off-net

10,480

9,335

12.3
%

Service Revenue. Our service revenue increased ~~7.9%~~4.2% for the three months ended June 30, ~~2018~~2019 from the three months ended June 30, ~~2017.~~2018. The impact of exchange rates resulted in ~~an increase~~a decrease in revenues for the three months ended June 30, ~~2018~~2019 of approximately ~~$1.9~~$1.5 million. All foreign currency comparisons herein reflect our second quarter ~~2018~~2019 results translated at the average foreign currency exchange rates for the second quarter of ~~2017.~~2018. 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. ~~For the three months ended June 30, 2018 and 2017, on-net, off-net and non-core revenues represented 72.0%, 27.9% and 0.1% and 71.4%, 28.4% 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 in our revenues for the three months ended June 30, ~~2018~~2019 from the three months ended June 30, ~~2017~~2018 of approximately ~~$0.4~~$0.1 million.

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per connection basis. Revenues from our corporate and net centric customers represented 68.5% and 31.5% of total service revenue, respectively, for the three months ended June 30, 2019 and represented 64.4% and 35.6% of total service revenue, respectively, for the three months ended June 30, ~~2018 and represented 62.2% and 37.8% of total service revenue, respectively, for the three months ended June 30, 2017.~~2018. Revenues from corporate customers increased ~~11.9%~~10.8% to ~~$83.3~~$92.3 million for the three months ended June 30, ~~2018~~2019 from ~~$74.4 million for~~ the three months ended June 30, ~~2017~~2018 primarily due to an increase in our number of our corporate customers. Revenues from our net-centric customers ~~increased~~decreased by ~~1.4%~~7.7% to ~~$46.0~~$42.5 million for the three months ended June 30, ~~2018~~2019 from ~~$45.3 million for~~ the three months ended June 30, ~~2017~~2018 primarily due to an increase in our number of net-centric customers ~~partially~~being offset by a decline in our average price per ~~megabit.~~megabit and the impact of foreign exchange rates. 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 ~~25.4%~~27.1% from the three months ended June 30, ~~2017~~2018 to the three months ended June 30, ~~2018.~~2019. 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 ~~8.7%~~4.8% for the three months ended June 30, ~~2018~~2019 from the three months ended June 30, ~~2017.~~2018. We increased the number of our on-net customer connections by ~~14.1%~~10.7% at June 30, ~~2018~~2019 from June 30, ~~2017.~~2018. On-net customer connections increased at a greater rate than on-net revenues primarily due to the ~~5.4%~~6.0% 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 ~~25.4%~~27.1% decline in our average price per megabit for our installed base of customers.

Our off-net revenues increased ~~6.3%~~3.0% for the three months ended June 30, ~~2018~~2019 from the three months ended June 30, ~~2017.~~2018. Our off-net revenues increased as we increased the number of our off-net customer connections by ~~12.3%~~8.0% at June 30, ~~2018~~2019 from June 30, ~~2017.~~2018. Our off-net customer connections increased at a greater rate than our off-net revenue primarily due to the ~~5.7%~~5.0% 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 ~~6.4%~~0.1% for the three months ended June 30, ~~2018~~2019 from the three months ended June 30, ~~2017~~2018 as we ~~are~~were connected to ~~13.8%~~10.3% more customer connections and we were connected to ~~161~~138 more on-net buildings as of June 30, ~~2018~~2019 compared to June 30, ~~2017.~~2018. 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~~revenues partly offset by price reductions obtained in certain of ~~the associated tail circuits.~~our circuit costs and fewer operating leases for fiber.

Selling, General, and Administrative (“SG&A”) Expenses. Our SG&A expenses, including non-cash equity-based compensation expense, increased by ~~6.0%~~14.4% for the three months ended June 30, ~~2018~~2019 from the three months ended June 30, ~~2017.~~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 $5.1 million for the three months ended June 30, 2019 and $4.5 million for the three months ended June 30, ~~2018 and $3.1 million for the three months ended June 30, 2017.~~2018. SG&A expenses increased primarily from an increase in salaries and related costs required to support our expansion and the increase in our sales efforts, partly offset by the impact of the new revenue accounting standard which requires us to capitalize certain commissions paid to our sales

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agents and sales employees. Our sales force headcount increased from ~~559 at June 30, 2017 to~~ 566 at June 30, 2018 to 656 at June 30, 2019 and our total headcount increased from ~~909 at June 30, 2017 to~~ 917 at June 30, ~~2018.~~

2018 to 1,026 at June 30, 2019.

Gains on Equipment Transactions. In the three months ended June 30, ~~2018~~2019 and June 30, ~~2017,~~2018, we exchanged certain used network equipment and cash consideration for new network equipment resulting in gains of ~~$0.3~~$0.2 million and ~~$1.0~~$0.4 million, respectively, based upon the estimated fair value of the new network equipment less the carrying amount of the returned used network equipment and the cash paid. The reduction in gains from the three months ended June 30, ~~2017~~2018 to the three months ended June 30, ~~2018~~2019 was due to purchasing more equipment under the exchange program in the three months ended June 30, ~~2017~~2018 than the three months ended June 30, ~~2018.~~

2019.

Depreciation and Amortization Expenses. Our depreciation and amortization expense ~~increased~~decreased by ~~7.0%~~1.2% for the three months ended June 30, ~~2018~~2019 from the three months ended June 30, ~~2017.~~2018. The ~~increase~~decrease is primarily due to ~~the depreciation expense associated with the increase in~~certain deployed fixed ~~assets.~~

assets becoming fully depreciated.

Interest Expense. Interest expense results from interest incurred on our ~~$375.0~~$445.0 million of senior secured notes, interest incurred on our $189.2 million of senior unsecured notes, interest on our installment payment agreement, interest on our finance lease obligations and interest on our ~~capital lease obligations.~~€135.0 million ($153.7 million) aggregate principal amount of 4.375% senior unsecured notes due 2024 (“2024 Notes’) that we issued on June 25, 2019. Our interest expense increased by ~~2.3%~~9.9% for the three months ended June 30, ~~2018~~2019 from the three months ended June 30, ~~2017~~2018 primarily due to an increase in our ~~capital~~finance lease ~~obligations.~~

obligations, the issuance of $70.0 million of senior secured notes in August 2018 and the issuance of our 2024 Notes in June 2019.

Income Tax Provision. Our income tax provision was $3.0 million for the three months ended June 30, 2019 and $2.6 million for the three months ended June 30, ~~2018 and $3.6 million for the three months ended June 30, 2017. The reduction is~~2018. Our income tax provision increased primarily due to ~~the impact of the reduction~~an increase in ~~the corporate income tax rate from a maximum of 35% to a flat 21% rate that was effective on January 1, 2018.~~

our taxable income.

Buildings On-net. As of June 30, ~~2018~~2019 and ~~2017,~~2018, we had a total of ~~2,599~~2,737 and ~~2,438~~2,599 on-net buildings connected to our network, respectively. The increase in on-net buildings was a result of our disciplined network expansion program. We anticipate adding a similar number of buildings to our network for the next several years.

Six Months Ended June 30, ~~2018~~2019 Compared to the Six Months Ended June 30, ~~2017~~2018

Six months ended
June 30,

Percent

2018

2017

Change

(in thousands)

Service revenue

$
258,002

$
236,981

8.9
%
On-net revenue

185,412

169,173

9.6
%
Off-net revenue

72,251

67,365

7.3
%
Network operations expenses (1)

109,252

101,778

7.3
%
Selling, general, and administrative expenses (2)

67,227

63,252

6.3
%
Gains on equipment transactions

475

3,146

(84.9
)%
Depreciation and amortization expenses

40,004

37,435

6.9
%
Interest expense

24,780

23,978

3.3
%
Income tax provision

5,757

7,101

(18.9
)%


	Six months ended
	June 30,				Percent
	2019		2018		Change
	(in thousands)
Service revenue	$	268,930	$	258,002	4.2	%
On-net revenue		194,656		185,412	5.0	%
Off-net revenue		74,036		72,251	2.5	%
Network operations expenses (1)		108,557		109,252	(0.6)	%
Selling, general, and administrative expenses (2)		74,427		67,227	10.7	%
Gains on equipment transactions		721		475	51.8	%
Depreciation and amortization expenses		40,240		40,004	0.6	%
Interest expense		27,051		24,780	9.2	%
Income tax provision		6,595		5,757	14.6	%

~~(1)~~

(1)	Includes equity-based compensation expenses of $406 and $421 in the six months ended June 30, 2019 and 2018, respectively.

(2)	Includes equity-based compensation expenses of $8,318 and $8,058 in the six months ended June 30, 2019 and 2018, respectively.

Table of ~~$421 and $252 in the six months ended June 30, 2018 and 2017, respectively.~~Contents


	Six Months Ended
	June 30,				Percent
	2019		2018		Change
Other Operating Data
Average Revenue Per Unit (ARPU)
ARPU—on net	$	460	$	488	(5.8)	%
ARPU—off-net	$	1,107	$	1,179	(6.1)	%
Average Price per Megabit — installed base	$	0.65	$	0.89	(26.1)	%
Customer Connections—end of period
On-net		72,415		65,407	10.7	%
Off-net		11,321		10,480	8.0	%

~~(2)~~ ~~Includes equity-based compensation expenses of $8,058 and $5,620 in the six months ended June 30, 2018 and 2017, respectively.~~

Six Months Ended
June 30,

Percent

2018

2017

Change

Other Operating Data

Average Revenue Per Unit (ARPU)

ARPU—on net

$
488

$
512

(4.7
)%
ARPU—off-net

$
1,179

$
1,252

(5.9
)%
Average Price per Megabit — installed base

$
0.89

$
1.18

(25.0
)%
Customer Connections—end of period

On-net

65,407

57,307

14.1
%
Off-net

10,480

9,335

12.3
%

Service Revenue. Our service revenue increased ~~8.9%~~4.2% for the six months ended June 30, ~~2018~~2019 from the six months ended June 30, ~~2017.~~2018. The impact of exchange rates resulted in ~~an increase~~a decrease in revenues for the six months ended June 30, ~~2018~~2019 of approximately ~~$5.2~~$3.6 million. All foreign currency comparisons herein reflect our results for the six months ended June 30, ~~2018~~2019 translated at the average foreign currency exchange rates for the six months ended June 30, ~~2017.~~2018. 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. ~~For the six months ended June 30, 2018 and 2017, on-net, off-net and non-core revenues represented 71.9%, 28.0% and 0.1% and 71.4%, 28.4% 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 in our revenues for the six months ended June 30, ~~2018~~2019 from the six months ended June 30, ~~2017~~2018 of approximately ~~$1.0~~$0.3 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 67.9% and 32.1% of total service revenue, respectively, for the six months ended June 30, 2019 and represented 63.7% and 36.3% of total service revenue, respectively, for the six months ended June 30, ~~2018 and represented 62.0% and 38.0% of total service revenue, respectively, for the six months ended June 30, 2017.~~2018. Revenues from corporate customers increased ~~12.0%~~11.0% to ~~$161.4~~$182.5 million for the six months ended June 30, ~~2018~~2019 from ~~$146.8 million for~~ the six months ended June 30, ~~2017~~2018 primarily due to an increase in our number of our corporate customers. Revenues from our net-centric customers ~~increased~~decreased by ~~3.8%~~7.6% to ~~$93.6~~$86.4 million for the six months ended June 30, ~~2018~~2019 from ~~$90.2 million for~~ the six months ended June 30, ~~2017~~2018 primarily due to an increase in our number of net-centric customers, ~~partially~~being offset by a decline in our average price per ~~megabit.~~megabit and the impact of foreign exchange rates. 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 ~~25.0%~~26.1% from the six months ended June 30, ~~2017~~2018 to the six months ended June 30, ~~2018.~~2019. 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 ~~9.6%~~5.0% for the six months ended June 30, ~~2018~~2019 from the six months ended June 30, ~~2017.~~2018. We increased the number of our on-net customer connections by ~~14.1%~~10.7% at June 30, ~~2018~~2019 from June 30, ~~2017.~~2018. On-net customer connections increased at a greater rate than on-net revenues primarily due to the ~~4.7%~~5.8% 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

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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 ~~25.0%~~26.1% decline in our average price per megabit for our installed base of customers.

Our off-net revenues increased ~~7.3%~~2.5% for the six months ended June 30, ~~2018~~2019 from the six months ended June 30, ~~2017.~~2018. Our off-net revenues increased as we increased the number of our off-net customer connections by ~~12.3%~~8.0% at June 30, ~~2018~~2019 from June 30, ~~2017.~~2018. Our off-net customer connections increased at a greater rate than our off-net revenue primarily due to the ~~5.9%~~6.1% 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 7.3%~~decreased 0.6% for the six months ended June 30, ~~2018~~2019 from the six months ended June 30, ~~2017 as we are~~2018. We incurred the cost of being connected to ~~13.8%~~10.3% more customer connections and ~~we were connected to 161~~138 more on-net buildings as of June 30, ~~2018~~2019 compared to June 30, ~~2017. The increase~~2018 that was offset by price reductions in ~~network operations expense is primarily attributable to an increase in~~certain circuit 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.~~

fewer operating leases for fiber.

Selling, General, and Administrative (“SG&A”) Expenses. Our SG&A expenses, including non-cash equity-based compensation expense, increased by ~~6.3%~~10.7% for the six months ended June 30, ~~2018~~2019 from the six months ended June 30, ~~2017.~~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 $8.3 million for the six months ended June 30, 2019 and $8.1 million for the six months ended June 30, ~~2018 and $5.6 million for the six months ended June 30, 2017.~~2018. SG&A expenses increased primarily from an increase in salaries and related costs required to support our expansion and the increase in our sales efforts, partly offset by 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 from ~~559 at June 30, 2017 to~~ 566 at June 30, 2018 to 656 at June 30, 2019 and our total headcount increased from ~~909 at June 30, 2017 to~~ 917 at June 30, ~~2018.~~

2018 to 1,026 at June 30, 2019.

Gains on Equipment Transactions. In the six months ended June 30, ~~2018~~2019 and June 30, ~~2017,~~2018, we exchanged certain used network equipment and cash consideration for new network equipment resulting in gains of ~~$0.5~~$0.7 million and ~~$3.1~~$0.5 million, respectively, based upon the estimated fair value of the new network equipment less the carrying amount of the returned used network equipment and the cash paid. The ~~reduction~~gain recorded in ~~gains from the six months ended June 30, 2017 to~~ the six months ended June 30, 2018 ~~was due to purchasing more equipment under the exchange program in~~and the six months ended June 30, ~~2017 than~~2019 is dependent upon the ~~six months ended June 30, 2018.~~

amount of equipment purchased under the exchange program.

Depreciation and Amortization Expenses. Our depreciation and amortization expense increased by ~~6.9%~~0.6% for the six months ended June 30, ~~2018~~2019 from the six months ended June 30, ~~2017.~~2018. The increase is primarily due to the depreciation expense associated with the increase in deployed fixed assets.

Interest Expense. Interest expense results from interest incurred on our ~~$375.0~~$445.0 million of senior secured notes, interest incurred on our $189.2 million of senior unsecured notes, interest on our installment payment agreement, interest on our finance lease obligations and interest on our ~~capital lease obligations.~~€135.0 million ($153.7 million) 2024 Notes that we issued on June 25, 2019. Our interest expense increased by ~~3.3%~~9.2% for the six months ended June 30, ~~2018~~2019 from the six months ended June 30, ~~2017~~2018 primarily due to the issuance of $70.0 million of senior secured notes in August 2018, the issuance of our 2024 Notes in June 2019 and from an increase in our ~~capital~~finance lease obligations.

Income Tax Provision. Our income tax provision was $6.6 million for the six months ended June 30, 2019 and $5.8 million for the six months ended June 30, ~~2018 and $7.1 million for the six months ended June 30, 2017. The reduction is~~2018. Our income tax provision increased primarily due to ~~the impact~~an increase in our taxable income.

Table of ~~the reduction in the corporate income tax rate from a maximum of 35% to a flat 21% rate that was effective on January 1, 2018.~~Contents

Liquidity and Capital Resources

In assessing our liquidity, management reviews and analyzes our current cash balances, accounts receivable, accounts payable, accrued liabilities, capital expenditure commitments, and required ~~capital~~finance lease and debt payments and other obligations.

Cash Flows

The following table sets forth our consolidated cash flows.

	Six months ended June 30,

							Six months ended June 30,
(in thousands)	2018			2017			2019		2018
Net cash provided by operating activities	$	61,450		$	51,559		$	69,269	$	61,450
Net cash used in investing activities	(26,893		)	(24,256		)		(25,008)		(26,893)
Net cash used in financing activities	(55,918		)	(47,287		)
Net cash provided by (used in) financing activities								88,961		(55,918)
Effect of exchange rates changes on cash	(1,368		)	2,157				(36)		(1,368)
Net decrease in cash and cash equivalents	$	(22,729	)	$	(17,827	)
Net increase (decrease) in cash and cash equivalents							$	133,186	$	(22,729)

Net Cash Provided by Operating Activities. Our primary sources of operating cash are 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~~finance lease vendors and our note holders. Our changes in cash provided by operating activities are primarily due to changes in our operating profit. Cash provided by operating activities for the six months ended June 30, ~~2018~~2019 and ~~2017~~2018 includes interest payments on our note obligations of ~~$15.4~~$17.3 million and $15.4 million, respectively.

Net Cash Used In Investing Activities. Our primary use of cash for investing activities is for purchases of property and equipment. Purchases of property and equipment were ~~$26.9~~$25.0 million and ~~$24.3~~$26.9 million for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The 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.

Net Cash ~~Used In~~Provided by (Used In) Financing Activities. Our primary uses of cash for financing activities are for principal payments under our ~~capital~~finance lease obligations and our installment payment agreement, purchases of our common stock and dividend payments. Principal payments under our ~~capital~~finance lease obligations were ~~$6.1~~$5.0 million and ~~$6.0~~$6.1 million for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Principal payments under our installment payment agreement were ~~$4.3~~$4.8 million and ~~$1.0~~$4.3 million for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. During the six months ended June 30, ~~2018~~2019 and ~~2017~~2018 we paid ~~$46.6~~$54.3 million and ~~$38.9~~$46.6 million, respectively, for our quarterly

dividend payments. ~~During the six months ended~~On June ~~30, 2017~~25, 2019, we ~~paid $1.8~~completed an offering of €135.0 million ~~for purchases~~($153.7 million) of our ~~common stock. There~~2024 Notes. The net proceeds from the offering, after deducting offering expenses, were ~~no purchases of our common stock in the six months ended June 30, 2018.~~

approximately $152.1 million.

Cash Position and Indebtedness

Our total indebtedness at June 30, ~~2018~~2019 was ~~$736.5~~$967.9 million and our total cash and cash equivalents were ~~$224.3~~$409.3 million. Our total indebtedness at June 30, ~~2018~~2019 includes ~~$159.9~~$168.2 million of ~~capital~~finance lease obligations for dark fiber under long term IRU agreements.

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Summarized Financial Information of Holdings

Holdings is not a restricted subsidiary as defined under the indentures governing our 2021 Notes, 2022 Notes and ~~our 2022~~2024 Notes. Holdings is a guarantor under these 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 six months ended June 30, ~~2018~~2019 is detailed below (in thousands).

	June 30, 2018
	(Unaudited)

				June 30, 2019
				(Unaudited)
Cash and cash equivalents	$	17,182		$	167,652
Accrued interest receivable					106
Total assets	$	17,182		$	167,758


Investment from subsidiaries	$	167,690		$	320,160
Common stock	46				47
Accumulated deficit	(150,554		)		(152,449)
Total equity	$	17,182		$	167,758

Six Months
Ended
June 30, 2018

(Unaudited)

Equity-based compensation expense

9,309

Interest income

224

Net loss

$
(9,085
)


	Six Months
	Ended
	June 30, 2019
	(Unaudited)
Equity-based compensation expense		9,486
Interest income		1,592
Net loss	$	(7,894)

Common Stock Buyback Program

Our Board of Directors has approved purchases of our common stock under a buyback program (the “Buyback Program”). ~~During the three and six months ended June 30, 2017 we purchased 46,750 shares of our common stock for $1.8 million.~~ There were no purchases of our common stock in the three and six months ended June 30, 2019 and June 30, 2018. As of June 30, ~~2018,~~2019, there was a total of ~~$41.5~~$34.9 million available under the Buyback Program which is authorized to continue through December 31, ~~2018.~~

2019.

Dividends on Common Stock and Return of Capital Program

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 August ~~1, 2018,~~7, 2019, our Board of Directors approved the payment of our quarterly dividend of ~~$0.54~~$0.62 per common share. This ~~dividend for the third quarter of 2018 will be paid to holders of record on August 17, 2018. This~~ estimated ~~$24.3~~$28.1 million dividend payment is expected to be made on ~~August 31, 2018.~~

September 9, 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 3 of our interim condensed consolidated financial statements for additional discussion of limitations on distributions.

Contractual Obligations and Commitments

There have been no material changes to our contractual obligations and commitments included in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the year ended December 31, ~~2017.~~2018 except as follows.

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On June 25, 2019, Group completed an offering of €135.0 million ($153.7 million) aggregate principal amount of our 2024 Notes. The net proceeds from the offering, after deducting offering expenses, were approximately $152.1 million. We expect to use the proceeds for general corporate purposes and/or to repurchase our common stock or for special or recurring dividends to our stockholders. The 2024 Notes bear interest at a rate of 4.375% per annum. Interest began to accrue on the 2024 Notes on June 25, 2019 and will be paid semi-annually in arrears on June 30 and December 30 of each year, commencing on December 30, 2019. Unless earlier redeemed, the 2024 Notes will mature on June 30, 2024. The 2024 Notes were issued at par for 135.0 million Euros ($153.7 million USD) on June 25, 2019.

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 risks that could arise if we had engaged in these relationships.

Critical Accounting Policies and Significant Estimates

Management believes that as of June 30, ~~2018,~~2019, there have been no material changes to our critical accounting policies and significant estimates from those listed in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the year ended December 31, ~~2017.~~

2018.

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 January 2018 the FASB issued a Proposed Accounting Standards Update which, among other changes would allow a company to elect to adopt ASU 2016-02 using a cumulative effect adjustment to the opening balance of its retained earnings on the adoption date. ASU 2016-02 will require us to record a right to use asset and a lease liability for most of our leases, including our leases currently treated as operating leases. We are evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures and we will elect to apply certain practical expedients. We have not yet determined the effect of ASU 2016-02 on our ongoing financial reporting or quantified the impact to our balance sheet, however we do expect the right to use asset and lease liability recorded will be material. We do not expect to early adopt ASU 2016-02 and we anticipate adopting ASU 2016-02 using the cumulative effect method, if approved.

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

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adoption is permitted. We are currently evaluating the impact that this guidance may have on our financial statements and related disclosures.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management believes that as of June 30, ~~2018,~~2019, there have been no material changes to our exposures to market risk from those disclosed in Item 7A “Quantitative and Qualitative Disclosures About Market Risk,” of our annual report on Form 10-K for the year ended December 31, ~~2017.~~2018.

ITEM 4.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 disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes 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 our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) 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 our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.

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.

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PART II OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

We are involved in legal proceedings in the ordinary course of our business that we do not expect to have a material impact on our operations or results of operations. Note 4 of our interim condensed consolidated financial statements includes information on these proceedings.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Our Board of Directors has authorized a plan to permit the repurchase of our common stock in negotiated and open market transactions through December 31, ~~2018.~~2019. We may purchase shares from time to time depending on market, economic, and other factors. There were no purchases of our common stock during the second quarter of ~~2018.~~2019.

ITEM 6.EXHIBITS.

(a)Exhibits


Exhibit Number		Description
4.1		Indenture, dated as of June 25, 2019, among Cogent Communications Group, Inc., the guarantors named therein, Wilmington Trust, National Association, as trustee, Deutsche Bank AG, London Branch, as paying agent, and Deutsche Bank Luxembourg S.A., as authentication agent and registrar, (previously filed as Exhibit 4.1 to our Current Report on Form 8-K, filed on June 25, 2019, and incorporated herein by reference).
4.2		Form of 4.375% Senior Notes due 2024 (previously filed as Exhibit A to the Exhibit 4.1 to our Current Report on Form 8-K, filed on June 25, 2019, and incorporated herein by reference).
10.1		First Amendment to Cogent Communications Holdings, Inc. 2017 Incentive Award Plan (incorporated by reference to Appendix B of the Company’s Definitive Proxy Statement on Schedule 14A filed March 15, 2019 (File No. 000-51829)).
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)
101.1		The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, ~~2018,~~2019, formatted in Inline Extensible Business Reporting Language ~~(XBRL)~~(iXBRL), include: (i) the Condensed Consolidated Statements of Comprehensive Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) related notes (filed herewith).

~~SIGNATURES~~

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SIGNATURES

Pursuant to the requirements 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.

Date: August ~~2, 2018~~8, 2019
COGENT COMMUNICATIONS HOLDINGS, INC.

By:
/s/ David Schaeffer

Name:
David Schaeffer

Title:
Chief Executive Officer

Date: August ~~2, 2018~~8, 2019
By:
/s/ Thaddeus G. Weed

Name:
Thaddeus G. Weed
~~Title:~~
~~Chief Financial Officer (Principal Accounting Officer)~~

20

29

	June 30, 2018			December 31, 2017
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	224,282		$	247,011
Accounts receivable, net of allowance for doubtful accounts of $1,131 and $1,499, respectively	39,482			39,096
Prepaid expenses and other current assets	32,972			20,011
Total current assets	296,736			306,118
Property and equipment, net	382,730			381,282
Deferred tax assets	9,038			17,616
Deposits and other assets	11,725			5,572
Total assets	$	700,229		$	710,588

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	10,330		$	11,592
Accrued and other current liabilities	47,447			47,947
Installment payment agreement, current portion, net of discount of $413 and $337, respectively	8,746			7,816
Current maturities, capital lease obligations	8,428			7,171
Total current liabilities	74,951			74,526
Senior secured 2022 notes, net of unamortized debt costs of $1,668 and $1,870, respectively and including premium of $340 and $382, respectively	373,672			373,512
Senior unsecured 2021 notes, net of unamortized debt costs of $1,772 and $2,060, respectively	187,453			187,165
Capital lease obligations, net of current maturities	151,439			150,333
Other long term liabilities	27,350			27,596
Total liabilities	814,865			813,132
Commitments and contingencies:
Stockholders’ equity:
Common stock, $0.001 par value; 75,000,000 shares authorized; 46,443,945 and 45,960,799 shares issued and outstanding, respectively	46			46
Additional paid-in capital	467,007			456,696
Accumulated other comprehensive income — foreign currency translation	(8,187		)	(4,600		)
Accumulated deficit	(573,502		)	(554,686		)
Total stockholders’ deficit	(114,636		)	(102,544		)
Total liabilities and stockholders’ deficit	$	700,229		$	710,588

Financial Statement Line Items	As Reported June 30, 2018			Balances Without the Adoption of ASC 606
Balance Sheet
Prepaid expenses and other current assets	$	32,972		$	20,383
Deposits and other assets	$	11,725		$	5,734
Deferred tax assets	$	9,038		$	12,835
Accrued and other current liabilities	$	47,447		$	48,764
Other long term liabilities	$	27,350		$	26,792
Accumulated deficit	$	(573,502	)	$	(588,193	)
Statement of Comprehensive Income
Three months ended June 30, 2018
Service revenue	$	129,296		$	129,400
Selling, general and administrative expenses	$	33,704		$	34,043
Operating income	$	21,354		$	21,119
Net income	$	6,552		$	6,317
Basic earnings per share	$	0.15		$	0.14
Diluted earnings per share	$	0.14		$	0.14
Comprehensive income	$	354		$	119
Statement of Comprehensive Income
Six months ended June 30, 2018
Service revenue	$	258,002		$	258,145
Selling, general and administrative expenses	$	67,227		$	68,630
Operating income	$	41,994		$	40,734
Net income	$	13,336		$	12,076
Basic earnings per share	$	0.30		$	0.27
Diluted earnings per share	$	0.29		$	0.27
Comprehensive income	$	9,749		$	8,385

	June 30, 2018		At Adoption — January 1, 2018

Customer contract costs — current portion (included in prepaid and other current assets)	$	12,589	$	11,893
Customer contract costs — non-current portion (included in deposits and other assets)	5,991		5,400
Deferred revenue — current portion (included in accrued and other current liabilities)	4,374		3,846
Deferred revenue — non-current portion (included in other long-term liabilities)	1,804		2,865

	Six months ended June 30,				Percent
	2018		2017		Change
	(in thousands)
Service revenue	$	258,002	$	236,981	8.9	%
On-net revenue	185,412		169,173		9.6	%
Off-net revenue	72,251		67,365		7.3	%
Network operations expenses (1)	109,252		101,778		7.3	%
Selling, general, and administrative expenses (2)	67,227		63,252		6.3	%
Gains on equipment transactions	475		3,146		(84.9	)%
Depreciation and amortization expenses	40,004		37,435		6.9	%
Interest expense	24,780		23,978		3.3	%
Income tax provision	5,757		7,101		(18.9	)%