0001710583-19-000019.txt : 20190510 0001710583-19-000019.hdr.sgml : 20190510 20190510073034 ACCESSION NUMBER: 0001710583-19-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 58 CONFORMED PERIOD OF REPORT: 20190331 FILED AS OF DATE: 20190510 DATE AS OF CHANGE: 20190510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Switch, Inc. CENTRAL INDEX KEY: 0001710583 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 821883953 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38231 FILM NUMBER: 19812844 BUSINESS ADDRESS: STREET 1: 7135 SOUTH DECATUR BOULEVARD CITY: LAS VEGAS STATE: NV ZIP: 89118 BUSINESS PHONE: (702) 444-4111 MAIL ADDRESS: STREET 1: 7135 SOUTH DECATUR BOULEVARD CITY: LAS VEGAS STATE: NV ZIP: 89118 10-Q 1 swch3311910-q.htm FORM 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
   
For the quarterly period ended March 31, 2019
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to     
Commission File Number: 001-38231
switchlogoblacka10.gif
Switch, Inc.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
82-1883953
(I.R.S. Employer Identification No.)
7135 S. Decatur Boulevard
Las Vegas, NV
(Address of principal executive offices)
89118
(Zip Code)

(702) 444-4111
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

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  þ No  o     
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  þ    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.
Large accelerated filer o
Accelerated filer þ
 
 
Non-accelerated filer o
Smaller reporting company o
 
 
 
Emerging growth company þ
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 þ
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Class A common stock, par value $0.001
SWCH
New York Stock Exchange
As of May 1, 2019, the registrant had 78,005,110 shares of Class A common stock, 124,870,003 shares of Class B common stock, and 42,944,647 shares of Class C common stock outstanding.



Switch, Inc.
Table of Contents





Part I.
Financial Information

Item 1.
Financial Statements (Unaudited).



Switch, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
 
March 31,
2019
 
December 31,
2018
 
(unaudited)
 
 
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
86,958

 
$
81,560

Accounts receivable, net of allowance of $403 and $426, respectively
9,994

 
17,654

Prepaid expenses
6,731

 
6,781

Other current assets
2,339

 
2,332

Total current assets
106,022

 
108,327

Property and equipment, net
1,309,514

 
1,302,770

Long-term deposit
3,333

 
3,333

Deferred income taxes
27,625

 
28,550

Other assets
17,363

 
17,050

TOTAL ASSETS
$
1,463,857

 
$
1,460,030

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Long-term debt, current portion
$
6,000

 
$
6,000

Accounts payable
15,810

 
20,501

Accrued salaries and benefits
5,507

 
5,258

Accrued expenses
11,832

 
9,778

Accrued construction payables
4,658

 
12,729

Dividends and distributions payable
7,154

 

Deferred revenue, current portion
10,987

 
10,800

Customer deposits
10,191

 
9,962

Total current liabilities
72,139

 
75,028

Long-term debt, net
579,268

 
580,566

Capital lease obligations
19,466

 
19,466

Deferred revenue
23,155

 
22,260

Liabilities under tax receivable agreement
52,535

 
52,535

Other long-term liabilities
6,898

 
1,823

TOTAL LIABILITIES
753,461

 
751,678

Commitments and contingencies (Note 6)


 


STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock, $0.001 par value per share, 10,000 shares authorized, none issued and outstanding

 

Class A common stock, $0.001 par value per share, 750,000 shares authorized, 55,681 and 55,218 shares issued and outstanding, respectively
56

 
55

Class B common stock, $0.001 par value per share, 300,000 shares authorized, 148,481 shares issued and outstanding
149

 
149

Class C common stock, $0.001 par value per share, 75,000 shares authorized, 42,945 shares issued and outstanding
43

 
43

Additional paid in capital
141,607

 
140,191

Retained earnings
1,665

 
2,693

Accumulated other comprehensive income
79

 
79

Total Switch, Inc. stockholders’ equity
143,599

 
143,210

Noncontrolling interest
566,797

 
565,142

TOTAL STOCKHOLDERS’ EQUITY
710,396

 
708,352

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
1,463,857

 
$
1,460,030


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

Switch, Inc. | Q1 2019 Form 10-Q | 1


Switch, Inc.
Consolidated Statements of Comprehensive Income
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
Revenue
$
107,032

 
$
97,717

Cost of revenue
57,300

 
54,856

Gross profit
49,732

 
42,861

Selling, general and administrative expense
34,251

 
33,451

Income from operations
15,481

 
9,410

Other income (expense):
 
 
 
Interest expense, including $409 in amortization of debt issuance costs
(7,131
)
 
(6,273
)
Equity in net losses of investments

 
(331
)
Unrealized loss on interest rate swaps
(4,985
)
 

Other
503

 
1,029

Total other expense
(11,613
)
 
(5,575
)
Income before income taxes
3,868

 
3,835

Income tax (expense) benefit
(197
)
 
115

Net income
3,671

 
3,950

Less: net income attributable to noncontrolling interest
2,971

 
3,279

Net income attributable to Switch, Inc.
$
700

 
$
671

 
 
 
 
Net income per share (Note 9):
 
 
 
Basic
$
0.01

 
$
0.02

Diluted
$
0.01

 
$
0.02

 
 
 
 
Weighted average shares used in computing net income per share (Note 9):
 
 
 
Basic
55,536

 
36,003

Diluted
247,364

 
252,552

 
 
 
 
Other comprehensive income:
 
 
 
Foreign currency translation adjustment, before and after tax

 
331

Comprehensive income
3,671

 
4,281

Less: comprehensive income attributable to noncontrolling interest
2,971

 
3,562

Comprehensive income attributable to Switch, Inc.
$
700

 
$
719


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


Switch, Inc. | Q1 2019 Form 10-Q | 2


Switch, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
(unaudited)
 
Switch, Inc. Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Class A Common Stock
 
Class B Common Stock
 
Class C Common Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Additional Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Noncontrolling Interest
 
Total Stockholders’ Equity
Balance—December 31, 2018
55,218

 
$
55

 
148,481

 
$
149

 
42,945

 
$
43

 
$
140,191

 
$
2,693

 
$
79

 
$
565,142

 
$
708,352

Net income

 

 

 

 

 

 

 
700

 

 
2,971

 
3,671

Equity-based compensation expense

 

 

 

 

 

 
4,160

 

 

 
3,985

 
8,145

Issuance of Class A common stock upon settlement of restricted stock unit awards, net of shares withheld for tax
463

 
1

 

 

 

 

 
(2,016
)
 

 

 
705

 
(1,310
)
Dividends declared ($0.0294 per share)

 

 

 

 

 

 

 
(1,728
)
 

 

 
(1,728
)
Distributions to noncontrolling interest

 

 

 

 

 

 

 

 

 
(6,006
)
 
(6,006
)
Net deferred tax asset resulting from changes in outside basis difference on investment in Switch, Ltd.

 

 

 

 

 

 
(728
)
 

 

 

 
(728
)
Balance—March 31, 2019
55,681

 
$
56

 
148,481

 
$
149

 
42,945

 
$
43

 
$
141,607

 
$
1,665

 
$
79

 
$
566,797

 
$
710,396


 
Switch, Inc. Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Class A Common Stock
 
Class B Common Stock
 
Class C Common Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Additional Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Noncontrolling Interest
 
Total Stockholders’ Equity
Balance—December 31, 2017
35,938

 
$
36

 
173,624

 
$
174

 
42,945

 
$
43

 
$
107,008

 
$
1,602

 
$
31

 
$
633,239

 
$
742,133

Net income

 

 

 

 

 

 

 
671

 

 
3,279

 
3,950

Equity-based compensation expense

 

 

 

 

 

 
5,278

 

 

 
7,079

 
12,357

Issuance of Class A common stock upon settlement of restricted stock unit awards, net of shares withheld for tax
129

 

 

 

 

 

 
(1,213
)
 

 

 

 
(1,213
)
Foreign currency translation adjustment

 

 

 

 

 

 

 

 
48

 
283

 
331

Balance—March 31, 2018
36,067

 
$
36

 
173,624

 
$
174

 
42,945

 
$
43

 
$
111,073

 
$
2,273

 
$
79

 
$
643,880

 
$
757,558


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



Switch, Inc. | Q1 2019 Form 10-Q | 3


Switch, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
3,671

 
$
3,950

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property and equipment
28,558

 
24,603

Loss on disposal of property and equipment
43

 
214

Deferred income taxes
197

 
(115
)
Amortization of debt issuance costs
409

 
409

(Benefit) provision for doubtful accounts
(23
)
 
83

Unrealized loss on interest rate swaps
4,985

 

Equity in net losses of investments

 
331

Equity-based compensation
8,145

 
12,357

Amortization of portfolio energy credits
359

 
32

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
5,164

 
(3,077
)
Prepaid expenses
50

 
(125
)
Other current assets
(7
)
 
(530
)
Other assets
(580
)
 
(129
)
Accounts payable
(2,201
)
 
230

Accrued salaries and benefits
249

 
(532
)
Accrued expenses
1,653

 
1,314

Deferred revenue
1,082

 
100

Customer deposits
229

 
370

Other long-term liabilities
(61
)
 
(56
)
Net cash provided by operating activities
51,922

 
39,429

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Acquisition of property and equipment
(45,946
)
 
(61,387
)
Escrow deposit

 
(1,047
)
Proceeds from sale of property and equipment
16

 

Purchase of portfolio energy credits
(299
)
 
(32
)
Net cash used in investing activities
(46,229
)
 
(62,466
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Repayment of borrowings, including capital lease obligations
(1,500
)
 
(1,500
)
Change in long-term deposit
2,543

 
(355
)
Payment of tax withholdings upon settlement of restricted stock unit awards
(1,338
)
 
(1,213
)
Net cash used in financing activities
(295
)
 
(3,068
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
5,398

 
(26,105
)
CASH AND CASH EQUIVALENTSBeginning of period
81,560

 
264,666

CASH AND CASH EQUIVALENTSEnd of period
$
86,958

 
$
238,561


Switch, Inc. | Q1 2019 Form 10-Q | 4


Switch, Inc.
Consolidated Statements of Cash Flows (Continued)
(in thousands)
(unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for interest, net of amounts capitalized
$
6,588

 
$
5,266

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION:
 
 
 
(Decrease) increase in liabilities incurred to acquire property and equipment
$
(10,585
)
 
$
13,023

Decrease in deferred tax asset resulting from changes in outside basis difference on investment in Switch, Ltd.
$
(728
)
 
$

Dividends and distributions declared but not paid
$
7,154

 
$

Increase in distributions payable on unvested common units
$
490

 
$

Increase in dividends payable on unvested restricted stock units
$
90

 
$

Dividends payable settled with shares of Class A common stock
$
28

 
$


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

Switch, Inc. | Q1 2019 Form 10-Q | 5


Switch, Inc.
Condensed Notes to Consolidated Financial Statements
(unaudited)


Switch, Inc. | Q1 2019 Form 10-Q | 6


1. Organization
Switch, Inc. was formed as a Nevada corporation in June 2017 for the purpose of completing an initial public offering (“IPO”) and related organizational transactions in order to carry on the business of Switch, Ltd. and its subsidiaries (collectively, “Switch,” and together with Switch, Inc., the “Company”). Switch is comprised of limited liability companies that provide colocation space and related services to global enterprises, financial companies, government agencies, and others that conduct critical business on the internet. Switch develops and operates data centers in Nevada, which are Tier IV Gold certified, and Michigan, and is developing data centers in Georgia, delivering redundant services with low latency and super capacity transport environments. As the manager of Switch, Ltd., Switch, Inc. operates and controls all of the business and affairs of Switch.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for quarterly reports on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. These consolidated financial statements should be read in conjunction with the Company’s 2018 Annual Report on Form 10-K for the year ended December 31, 2018.
Management believes that the accompanying consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of these consolidated financial statements. The consolidated results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019, or for any other future annual or interim period.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and all significant intercompany transactions and balances have been eliminated.
As the sole manager of Switch, Ltd., Switch, Inc. operates and controls all of the business and affairs of Switch, and has the sole voting interest in, and controls the management of, Switch, and has the obligation to absorb the losses of, and receive benefits from, Switch. Accordingly, Switch, Inc. identifies itself as the primary beneficiary of Switch and began consolidating Switch in its consolidated financial statements as of October 11, 2017, the closing date of the IPO, resulting in a noncontrolling interest related to the common units of Switch, Ltd. (“Common Units”) held by members other than Switch, Inc. on its consolidated financial statements.
The Company periodically evaluates entities for consolidation either through ownership of a majority voting interest, or through means other than voting interest, in accordance with the Variable Interest Entity (“VIE”) accounting model. A VIE is an entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to the allowance for doubtful accounts, useful lives of property and equipment, deferred income taxes, liabilities under the tax receivable agreement, equity-based compensation, deferred revenue, fair value of leased property at inception of lease term, fair value of deliverables under multiple element arrangements, and probability assessments of exercising renewal options on leases. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable. Actual results could differ from these estimates.
Significant Accounting Policies
A description of the Company’s significant accounting policies is included in the audited financial statements within its Annual Report on Form 10-K for the year ended December 31, 2018. No other changes to significant accounting policies have occurred since the year ended December 31, 2018, with the exception of those detailed below.

Switch, Inc. | Q1 2019 Form 10-Q | 7


Concentration of Credit and Other Risks
Although the Company operates primarily in Nevada, realization of its customer accounts receivable and its future operations and cash flows could be affected by adverse economic conditions, both regionally and elsewhere in the United States. During the three months ended March 31, 2019 and 2018, the Company’s largest customer and its affiliates comprised 11% and 9%, respectively, of the Company’s revenue. No single customer accounted for 10% or more of accounts receivable as of March 31, 2019 and only one customer accounted for 10% or more of accounts receivable as of December 31, 2018.
Fair Value Measurements
Information about the Company’s financial assets and liabilities measured at fair value on a recurring basis is presented below:
 
 
 
March 31, 2019
 
Balance Sheet Classification
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
 
Cash equivalents
Cash and cash equivalents
 
$
61,931

 
$
61,931

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
 
 
Interest rate swaps
Accrued expenses
 
$
401

 
$

 
$
401

 
$

Interest rate swaps
Other long-term liabilities
 
$
4,584

 
$

 
$
4,584

 
$

 
 
 
December 31, 2018
 
Balance Sheet Classification
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
 
Cash equivalents
Cash and cash equivalents
 
$
53,293

 
$
53,293

 
$

 
$

The estimated fair value of the Company’s long-term debt as of March 31, 2019 was approximately $584.3 million, compared to its carrying value, excluding debt issuance costs, of $589.5 million. The estimated fair value of the Company’s long-term debt was based on Level 2 inputs.
Derivative Financial Instruments
A derivative is a financial instrument whose value changes in response to an underlying variable, requires little or no initial net investment, and is settled at a future date. Derivatives are initially recognized on the consolidated balance sheets at fair value on the date on which the derivatives are entered into and subsequently re-measured at fair value. Derivatives are separated into their current and long-term components based on the timing of the cash flows as of the end of each reporting period.
Embedded derivatives included in hybrid instruments are treated and disclosed as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract, the terms of the embedded derivative are the same as those of a stand-alone derivative and the combined contract is not measured at fair value through earnings. The financial host contracts are accounted for and measured using the applicable GAAP of the relevant financial instrument category.
The method of recognizing fair value gains and losses depends on whether the derivatives are designated as hedging instruments, and if so, the nature of the hedge relationship. All gains and losses from changes in the fair values of derivatives that do not qualify for hedge accounting are recognized immediately in earnings. Cash flows from derivatives not designated as hedging instruments are classified in accordance with the nature of the derivative instrument and how it is used in the context of the Company’s business.
The Company enters into interest rate swap agreements to manage its interest rate risk associated with variable-rate borrowings. In January and February 2019, Switch, Ltd. entered into four interest rate swap agreements; whereby, Switch, Ltd. will pay a weighted average fixed interest rate (excluding the applicable interest margin) of 2.48% on notional amounts corresponding to borrowings of $400.0 million in exchange for receipts on the same notional amount at a variable interest rate based on the applicable LIBOR at the time of payment. The interest rate swap agreements mature in June 2024 and are not designated as hedging instruments. Losses from derivatives not

Switch, Inc. | Q1 2019 Form 10-Q | 8


designated as hedging instruments were recorded in unrealized loss on interest rate swaps on the consolidated statements of comprehensive income and totaled $5.0 million for the three months ended March 31, 2019.
Recent Accounting Pronouncements
As the Company is an emerging growth company, it has elected not to opt out of the available extended transition period. Therefore, when a standard is issued or revised with different application dates for public or private companies, the Company, as an emerging growth company, is permitted to adopt the new or revised standard at the time private companies adopt the new or revised standard. As a result, adoption dates of Accounting Standards Updates herein are based on a private company timeline.
ASU 2014-09–Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The standard supersedes much of the current guidance regarding revenue recognition including most industry-specific guidance. The core principle of the standard is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity will be required to identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligation in the contract, and recognize revenue when (or as) the entity satisfies a performance obligation. In addition to the new revenue recognition requirements, entities will be required to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The standard also provides guidance on the recognition of costs related to obtaining customer contracts. The standard allows for either full retrospective adoption, meaning the guidance is applied for all periods presented, or modified retrospective adoption, meaning the guidance is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the guidance recognized at the date of initial application. In August 2015, the FASB deferred the effective date by one year (ASU 2015-14) to December 15, 2018 for annual reporting periods beginning after that date, and interim periods within annual periods beginning after December 15, 2019, and permitted early adoption of the standard, but not before the original effective date of December 15, 2017.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). The core principle of the guidance in ASU 2014-09 is not changed by the amendments in ASU 2016-08. The amendments clarify the implementation guidance on principal versus agent considerations. Per ASU 2016-08, when another party is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise is to provide the specified good or service itself (principal) or to arrange for that good or service to be provided by the other party (agent). When an entity that is a principal satisfies a performance obligation, the entity recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer. When an entity that is an agent satisfies a performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled. The effective date and transition requirements for ASU 2016-08 are the same as the effective date and transition requirements for ASU 2014-09.
In April 2016 and May 2016, the FASB issued guidance which amends certain other aspects of ASU 2014-09. The amendments include the identification of performance obligations and the licensing implementation guidance (ASU 2016-10) and the collectability of revenue, presentation of sales tax and other similar taxes collected from customers, contracts containing noncash considerations, and contract modifications and completed contracts at transition (ASU 2016-12). In December 2016, the FASB amended ASU 2014-09 to make minor corrections and minor improvements to the guidance that are not expected to have a significant effect on current accounting practice or create a significant administrative cost (ASU 2016-20). The effective date and transition provisions in these amendments are aligned with the requirements of ASU 2014-09.
The Company expects to adopt this guidance for the annual reporting period ending December 31, 2019 using the modified retrospective approach for adoption. The Company has assigned internal resources and engaged consulting service providers to assist in evaluating the impact the adoption of this guidance will have on its consolidated financial statements.
ASU 2016-02–Leases
On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). The principle of ASU 2016-02 is that a lessee should recognize the assets and liabilities that arise from leases. Lessees will need to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the

Switch, Inc. | Q1 2019 Form 10-Q | 9


definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability. For income statement purposes, ASU 2016-02 requires leases to be classified as either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. Lessor accounting will remain largely unchanged, other than certain targeted improvements intended to align lessor accounting with the lessee accounting model and with the updated revenue recognition guidance. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020, with early adoption permitted. In addition, in January 2018, the FASB issued ASU 2018-01, which permits an entity to elect an optional transition practical expedient to not evaluate land easements that exist or expired before the entity’s adoption of ASU 2016-02 and were not previously accounted for as leases. In July 2018, the FASB issued ASU 2018-10, which provides clarifications and improvements on sections of ASU 2016-02, and ASU 2018-11, which provides lessees the option to apply the new guidance to all open leases as of the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption and lessors with a practical expedient to account for qualifying non-lease components with associated lease components. In December 2018 and March 2019, the FASB also issued ASU 2018-20 and ASU 2019-01, respectively, which provide additional clarifications on sections of ASU 2016-02.
The Company expects to adopt this guidance for the annual reporting period ending December 31, 2020. The Company has assigned internal resources and engaged consulting service providers to assist in evaluating the impact the adoption of this guidance will have on its consolidated financial statements.
ASU 2016-13–Financial Instruments–Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). Under this guidance, a company will be required to use a new forward-looking “expected loss” model for trade and other receivables that generally will result in the earlier recognition of allowances for losses. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021, and requires a modified-retrospective approach to adoption. Early adoption is permitted in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In March 2019, the FASB also issued ASU 2019-04, which, among other amendments, allows for certain policy elections and practical expedients related to accrued interest on financial instruments. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial statements. The Company has not decided if early adoption will be considered.
ASU 2016-15–Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The areas affected by ASU 2016-15 are debt prepayment and debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies), distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. Specifically, under this guidance, cash payments for debt prepayment or debt extinguishment costs will be classified as cash outflows for financing activities. The amendments in ASU 2016-15 are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The adoption of ASU 2016-15 is not expected to materially impact the Company’s consolidated financial statements.
ASU 2018-13–Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The amendments in ASU 2018-13 are effective for fiscal years beginning after December 15, 2019. Early adoption of this ASU is permitted, including adoption in any interim period. In addition, in November 2018, the FASB issued ASU 2018-19, which provides clarifications and improvements on sections of ASU 2018-13. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial statements. The Company has not decided if early adoption will be considered.
Reclassification
The Company has reclassified the amortization of portfolio energy credits to present it separately from changes in accounts payable on the consolidated statements of cash flows for the three months ended March 31, 2018 to be

Switch, Inc. | Q1 2019 Form 10-Q | 10


consistent with the current period presentation. The reclassification had no impact on the Company’s financial condition, results of operations, or net cash flows.
3. Property and Equipment, Net
Property and equipment, net consists of the following:
 
March 31,
2019
 
December 31,
2018
 
(in thousands)
Land and land improvements
$
194,854

 
$
194,711

Buildings, building improvements, and leasehold improvements
413,678

 
412,089

Substation equipment
19,443

 
4,247

Data center equipment
928,549

 
904,722

Vehicles
1,825

 
1,685

Core network equipment
35,843

 
34,901

Cloud computing equipment
5,192

 
5,192

Fiber facilities
9,977

 
9,912

Computer equipment, furniture, and fixtures
36,245

 
34,975

Capitalized leased assets
34,341

 
33,730

Construction in progress
115,585

 
124,431

Property and equipment, gross
1,795,532

 
1,760,595

Less: accumulated depreciation and amortization
(486,018
)
 
(457,825
)
Property and equipment, net
$
1,309,514

 
$
1,302,770

Accumulated amortization for capitalized leased assets totaled $10.2 million and $9.9 million as of March 31, 2019 and December 31, 2018, respectively.
During the three months ended March 31, 2019 and 2018, capitalized interest was $1.3 million and $1.0 million, respectively.
The Company capitalized internal use software costs of $0.5 million and $0.7 million during the three months ended March 31, 2019 and 2018, respectively.
Total depreciation and amortization of property and equipment recognized on the consolidated statements of comprehensive income was as follows:
 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands)
Cost of revenue
$
27,810

 
$
24,067

Selling, general and administrative expense
748

 
536

Total depreciation and amortization of property and equipment
$
28,558

 
$
24,603

4. Equity Method Investments
The Company currently holds two investments accounted for under the equity method of accounting, SUPERNAP International and Planet3, Inc. (“Planet3”), in which the Company holds a 50% ownership interest and a 45% ownership interest, respectively. As of March 31, 2019 and December 31, 2018, the Company determined that it continued to have a variable interest in both SUPERNAP International and Planet3, as the entities do not have sufficient equity at risk. However, the Company concluded that it is not the primary beneficiary of SUPERNAP International or of Planet3 as it does not have deemed control of either entity. As a result, it does not consolidate either entity into its consolidated financial statements.
As of March 31, 2018, the Company’s carrying value of its investment in SUPERNAP International was reduced to zero as a result of recording its share of the investee’s losses. Accordingly, as the Company does not have any guaranteed obligations and is not otherwise committed to provide further financial support to SUPERNAP International, the Company discontinued the equity method of accounting for its investment in SUPERNAP International as of March 31, 2018 and will not provide for additional losses until its share of future net income or

Switch, Inc. | Q1 2019 Form 10-Q | 11


comprehensive income, if any, equals the share of net losses or comprehensive losses not recognized during the period the equity method was suspended. The Company’s share of net loss recorded during the three months ended March 31, 2018 amounted to $0.3 million. As of March 31, 2019 and December 31, 2018, the Company recorded amounts consisting primarily of reimbursable expenses due from SUPERNAP International of $0.3 million and $0.4 million, respectively, within accounts receivable on the consolidated balance sheets.
The summarized income statement information of the Company’s equity method investment in SUPERNAP International is as follows:
 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands)
Revenue
$
104

 
$
195

Gross loss
$
(176
)
 
$
(371
)
Net loss
$
(1,095
)
 
$
(1,321
)
5. Leases
Rent expense related to operating leases was $1.9 million, of which $1.2 million was related party rent, during each of the three months ended March 31, 2019 and 2018.
6. Commitments and Contingencies
Legal Proceedings
On September 7, 2017, Switch, Ltd. and Switch, Inc. were named in a lawsuit filed in the U.S. District Court for the District of Nevada by V5 Technologies formerly d/b/a Cobalt Data Centers. The lawsuit alleges, among other things, that Switch, Ltd. and Switch, Inc. monopolized the Las Vegas Metropolitan area of Southern Nevada’s data center colocation market and engaged in unfair business practices leading to the failure of Cobalt Data Centers in 2015 and seeks monetary damages in an amount yet to be disclosed. Switch, Ltd. and Switch, Inc. are vigorously defending the case.
On September 12, 2017, Switch, Ltd. filed a complaint in the Eighth Judicial District of Nevada against the consultant, Stephen Fairfax, and his business, MTechnology Inc. Among other claims, Switch raised allegations of breach of contract and misappropriation of trade secrets. The complaint also alleged that Aligned Data Centers LLC hired Mr. Fairfax and MTechnology to design their data centers; that this consultant had toured Switch under a non-disclosure agreement; and that this consultant breached his confidentiality agreements with Switch by using Switch’s designs to design the Aligned data centers. Switch, Ltd. is seeking an injunction to prevent the defendants in the lawsuit from infringing Switch, Ltd.’s patents, as well as other remedies.
Four substantially similar putative class action complaints, captioned Martz v. Switch, Inc. et al. (filed April 20, 2018); Palkon v. Switch, Inc. et al. (filed April 30, 2018); Chun v. Switch, Inc. et al. (filed May 11, 2018); and Silverberg v. Switch, Inc. et al. (filed June 6, 2018), were filed in the Eighth Judicial District of Nevada, and subsequently consolidated into a single case (the “State Court Securities Action”). Additionally, on June 11, 2018, one putative class action complaint captioned Cai v. Switch, Inc. et al. was filed in the United States District Court for the District of New Jersey (the “Federal Court Securities Action,” and collectively with the State Court Securities Action, the “Securities Actions”) and subsequently transferred to the Eighth Judicial District of Nevada in August 2018 and the federal court appointed Oscar Farach lead plaintiff. These lawsuits were filed against Switch, Inc., certain current and former officers and directors and certain underwriters of Switch, Inc.’s IPO alleging federal securities law violations in connection with the IPO. These lawsuits were brought by purported stockholders of Switch, Inc. seeking to represent a class of stockholders who purchased Class A common stock in or traceable to the IPO, and seek unspecified damages and other relief. In October 2018, the state court granted defendants motion to stay the State Court Securities Action in favor of the Federal Court Securities Action. In November 2018, the plaintiffs in the State Court Securities Action filed a petition for writ of mandamus challenging the stay order. In February 2019, Switch, Inc. filed an answer to this petition and plaintiffs in the State Court Securities Action filed their reply in March 2019. The Supreme Court of Nevada has not yet issued its ruling on this petition. In October 2018, the lead plaintiff of the Federal Court Securities Action filed an amended complaint. In November 2018, Switch, Inc. and other defendants filed a motion to dismiss for failure to state a claim and a motion to strike. Switch, Inc. believes that these lawsuits are without merit and intends to continue to vigorously defend against them.

Switch, Inc. | Q1 2019 Form 10-Q | 12


On September 10, 2018, two purported stockholders of Switch, Inc. filed substantially similar shareholder derivative complaints, respectively captioned Liu v. Roy et al., and Zhao v. Roy et al., in the Eighth Judicial District of Nevada, which were subsequently consolidated into a single case the “Derivative Shareholder Action”). These lawsuits allege breaches of fiduciary duty, unjust enrichment, waste of corporate assets, abuse of control, and gross mismanagement against certain current and former officers and directors of Switch, Inc. The plaintiffs also named Switch, Inc. as a nominal defendant. The complaints arise generally from the same allegations described in the State Court Securities Action and Federal Court Securities Action. The plaintiffs seek unspecified damages on Switch, Inc.’s behalf from the officer and director defendants, certain corporate governance actions, compensatory awards, and other relief. In December 2018, the court granted the parties’ stipulation to stay the Derivative Shareholder Action until the Securities Actions are dismissed with prejudice or until the defendants file an answer in any of the Securities Actions.
The outcomes of the legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to the Company’s financial condition, results of operations, and cash flows for a particular period. Where the Company is a defendant, it will vigorously defend against the claims pleaded against it. These actions are each in preliminary stages and management has determined that based on proceedings to date, it is currently unable to determine the probability of the outcome of these actions or the range of reasonably possible loss, if any.
7. Equity-Based Compensation
Total equity-based compensation recognized on the consolidated statements of comprehensive income was as follows:
 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands)
Cost of revenue
$
373

 
$
416

Selling, general and administrative expense
7,772

 
11,941

Total equity-based compensation
$
8,145

 
$
12,357

8. Noncontrolling Interest
Ownership
Switch, Inc. owns an indirect minority economic interest in Switch, Ltd., where “economic interests” means the right to receive any distributions, whether cash, property or securities of Switch, Ltd., in connection with Common Units. Switch, Inc. presents interest held by noncontrolling interest holders within noncontrolling interest in the consolidated financial statements. The ownership of the Common Units is summarized as follows:
 
 
March 31, 2019
 
December 31, 2018
 
 
Units
 
Ownership %
 
Units
 
Ownership %
 
 
(units in thousands)
Switch, Inc.’s ownership of Common Units(1)
 
55,620

 
22.9
%
 
55,157

 
22.7
%
Noncontrolling interest holders’ ownership of Common Units(2)
 
187,640

 
77.1
%
 
187,440

 
77.3
%
Total Common Units
 
243,260

 
100.0
%
 
242,597

 
100.0
%
________________________________________
(1)
Common Units held by Switch, Inc. as of March 31, 2019 and December 31, 2018 exclude 61,000 Common Units underlying unvested restricted stock awards.
(2)
Common Units held by noncontrolling interest holders as of March 31, 2019 exclude 3.8 million unvested Common Unit awards. Common Units held by noncontrolling interest holders as of December 31, 2018 exclude 4.0 million unvested Common Unit awards.
The Company uses the weighted average ownership percentages during the period to calculate the income before income taxes attributable to Switch, Inc. and the noncontrolling interest holders of Switch, Ltd.

Switch, Inc. | Q1 2019 Form 10-Q | 13


9. Net Income Per Share
The following table sets forth the calculation of basic and diluted net income per share:
 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands, except per share data)
Net income per share:
 
 
 
Numerator—basic:
 
 
 
Net income attributable to Switch, Inc.—basic
$
700

 
$
671

Numerator—diluted:
 
 
 
Net income attributable to Switch, Inc.—basic
$
700

 
$
671

Effect of dilutive securities:
 
 
 
Shares of Class B common stock and Class C common stock
2,339

 
3,279

Net income attributable to Switch, Inc.—diluted
$
3,039

 
$
3,950

Denominator—basic:
 
 
 
Weighted average shares outstanding—basic
55,536

 
36,003

Net income per share—basic
$
0.01

 
$
0.02

Denominator—diluted:
 
 
 
Weighted average shares outstanding—basic
55,536

 
36,003

Weighted average effect of dilutive securities:
 
 
 
Stock/unit options
40

 
90

Restricted stock units
311

 

Dividend equivalent units
18

 

Restricted stock awards
33

 

Shares of Class B common stock and Class C common stock
191,426

 
216,459

Weighted average shares outstanding—diluted
247,364

 
252,552

Net income per share—diluted
$
0.01

 
$
0.02

Shares of Class B common stock and Class C common stock do not share in the earnings or losses of Switch, Inc. and are therefore not participating securities. As such, separate calculations of basic and diluted net income per share for each of Class B common stock and Class C common stock under the two-class method have not been presented.
The following table presents potentially dilutive securities excluded from the computation of diluted net income per share for the periods presented because their effect would have been anti-dilutive.
 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands)
Stock options(1)
6,377

 
5,640

Restricted stock units(1)
1,979

 
2,187

________________________________________
(1)
Represents the number of instruments outstanding at the end of the period. Application of the treasury stock method would reduce this amount if they had a dilutive effect and were included in the computation of diluted net income per share.
10. Segment Reporting
The Company’s chief operating decision maker is its Chief Executive Officer. The Company manages its operations as a single operating segment for the purposes of assessing performance and making operating decisions. All of the Company’s assets are maintained in the United States, although the Company holds an equity method investment in SUPERNAP International, which has deployed facilities in Italy and Thailand. The Company derives almost all of its revenue from sales to customers in the United States, based upon the billing address of the customer. Revenue derived from customers outside the United States, based upon the billing address of the customer, was less than 1% and 3% of revenue for the three months ended March 31, 2019 and 2018, respectively.

Switch, Inc. | Q1 2019 Form 10-Q | 14


The Company’s revenue is comprised of the following:
 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands)
Colocation
$
86,177

 
$
77,719

Connectivity
18,893

 
18,218

Other
1,962

 
1,780

Total revenue
$
107,032

 
$
97,717

11. Subsequent Events
In April 2019, Switch, Inc. issued an aggregate of 22.3 million shares of the Company’s Class A common stock in connection with the redemptions of an equivalent number of Common Units of members of Switch, Ltd. and the corresponding cancellation of an equivalent number of shares of Class B common stock. The redemptions occurred pursuant to the terms of the Switch operating agreement entered into in connection with the Company’s IPO.
In April 2019, Switch, Ltd. also elected to repurchase 1.3 million of its outstanding Common Units for $13.6 million upon the exercise by certain members of their respective redemption right. Pursuant to this repurchase, Switch, Inc. canceled an equivalent number of shares of Class B common stock.
On April 8, 2019, Switch, Ltd. filed a complaint in the Eighth Judicial District of Nevada against the Public Utilities Commission of Nevada (the “PUCN”), its regulatory operation staff (the “Staff”), and its staff counsel, Tamara Cordova, in response to a regulatory petition filed by the Staff requesting the PUCN rule whether Switch is (i) a public utility, as defined by the Nevada statute, (ii) provides its services to the public at large, and (iii) charges its customers for electricity at a rate that is higher than the rate Switch pays for electricity at its facilities. Among other claims, Switch alleges it is not a public utility providing a monopoly utility service to customers subject to the regulatory control of the PUCN. Switch, Ltd. is seeking declaratory relief as well as other remedies. On April 15, 2019, Switch filed a writ of mandamus requesting the court prevent the PUCN from ruling under the regulatory petition.
In May 2019, Switch, Inc.’s Board of Directors declared a dividend of $0.0294 per share of Class A common stock, for a total estimated to be $2.3 million, to be paid on June 4, 2019 to holders of record as of May 22, 2019. Prior to the payment of this dividend, Switch, Ltd. will make a cash distribution to all holders of record of Common Units, including Switch, Inc., of $0.0294 per Common Unit, for a total estimated to be $7.2 million.

Switch, Inc. | Q1 2019 Form 10-Q | 15


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related condensed notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Form 10-Q”), and with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018. Unless the context otherwise requires, references to “we,” “us,” “our,” the “Company,” “Switch” and similar references refer to Switch, Inc., and, unless otherwise stated, all of its subsidiaries, including Switch, Ltd., and, unless otherwise stated, all of its subsidiaries.
Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain word such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Form 10-Q include, but are not limited to, statements about:

our goals and strategies;
our expansion plans, including timing for such plans;
our future business development, financial condition and results of operations, including factors that may influence such future results of operations;
the expected growth of the data center market;
our beliefs regarding our design technology and its advantages to our business and financial results;
our beliefs regarding opportunities that exist in the data center market due to current industry limitations;
our expectations regarding opportunities to grow penetration of existing customers and attract new customers;
our beliefs regarding our competitive strengths and the value of our brand;
our expectations regarding our revenue streams and drivers of future revenue;
our expectations regarding our future expenses, including anticipated increases;
our expectations regarding demand for, and market acceptance of, our services;
our expectations regarding our customer growth rate;
our beliefs regarding the sufficiency of our cash and access to liquidity, and cash generated from operating activities, to satisfy our working capital and capital expenditures for at least the next 12 months;
our intentions regarding sources of financing for our operations and capital expenditures;
the network effects associated with our business;
our plans to further invest in and grow our business, and our ability to effectively manage our growth and associated investments;
our ability to timely and effectively scale and adapt our existing technology;
our ability to successfully enter new markets;
our expectations to enter into joint ventures, strategic collaborations and other similar arrangements;
our beliefs regarding our ability to achieve reduced variability of power costs as an unbundled purchaser of energy;
our beliefs that we have the necessary permits and approvals to operate our business and that our properties are in substantial compliance with applicable laws;
our ability to maintain, protect and enhance our intellectual property and not infringe upon others’ intellectual property;
our beliefs regarding the adequacy of our insurance coverage;
our beliefs regarding the effectiveness of efforts to improve our internal control over financial reporting;
our plans regarding our repurchase program of common membership interests in Switch, Ltd. (“Common Units”);
our expectations regarding future declarations of dividends and cash distributions; and
our expectations regarding payments under the tax receivable agreement entered into with members of Switch, Ltd. (the “Tax Receivable Agreement”), contingent upon our taxable income and the applicable tax rate.

Switch, Inc. | Q1 2019 Form 10-Q | 16



We qualify all of our forward-looking statements by these cautionary statements. The forward-looking statements in this Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. The most important factors that could prevent us from achieving our goals and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by the forward-looking statements include, but are not limited to, the following:

our ability to successfully implement our business strategies;
our ability to effectively manage our growth and expansion plans;
delays or unexpected costs in development and opening of data center facilities;
any slowdown in demand for our existing data center resources;
our ability to attract new customers and achieve sufficient customer demand to realize future expected returns on our investments;
our ability to license space in our existing data centers;
the geographic concentration of our data centers in certain markets;
local economic, credit and market conditions that impact our customers in these markets;
the impact of delays or disruptions in third-party network connectivity;
developments in the technology and data center industries in general that negatively impact us, including development of new technologies, adoption of new industry standards, declines in the technology industry or slowdown in the growth of the Internet;
our ability to adapt to evolving technologies and customer demands in a timely and cost-effective manner;
financial market fluctuations;
our ability to obtain necessary capital to fund our capital requirements and our ability to continue to comply with covenants and terms in our credit instruments;
our ability to generate sufficient cash flow to meet our debt service and working capital requirements;
our ability to collect revenues on a timely basis;
fluctuations in interest rates and increased operating costs, including power costs;
significant disruptions, security breaches, including cyber security breaches, or system failures at any of our data center facilities;
our ability to effectively compete in the data center market;
our ability to protect our intellectual property rights and not infringe upon others’ intellectual property rights;
loss of significant customers or key personnel;
losses in excess of our insurance coverage, including due to natural disasters and other unforeseen damage;
impact of the outcome of pending or future litigation;
the impact of future changes in legislation and regulations, including changes in real estate and zoning laws, the Americans with Disabilities Act of 1990, environmental and other laws that impact our business and industry;
future increases in real estate taxes;
early termination of data center leases or inability to renew on commercially acceptable terms;
our ability to successfully identity and consummate future joint ventures, acquisitions or other strategic transactions;
our realization of any benefit from the Tax Receivable Agreement, our Common Unit repurchase plan and our organizational structure;
our ability to sufficiently remediate the material weaknesses identified in our internal control over financial reporting;
volatility of our stock price, including due to future issuances of our Class A common stock upon redemption or exchange of Common Units; and
our ability to successfully estimate the impact of certain accounting and tax matters, including the effect on our company of adopting certain accounting pronouncements.

The foregoing list of important factors does not include all such factors, nor necessarily present them in order of importance. In addition, you should consult other disclosures made by us (such as in our company press releases or other filings with the Securities and Exchange Commission, or the SEC) for other factors that may cause actual results to differ materially from those projected by us. You should read this Form 10-Q, and the

Switch, Inc. | Q1 2019 Form 10-Q | 17


documents that we reference in this Form 10-Q and have filed with the SEC, and our Annual Report on Form 10-K for the year ended December 31, 2018, with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.

Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
Overview
We are a technology infrastructure company powering the sustainable growth of the connected world and the Internet of Everything. Using our technology platform, we provide solutions to help enable that growth. Our advanced data centers are the center of our platform and provide power densities that exceed industry averages with efficient cooling, while being powered by 100% renewable energy. These hyper scale data centers address the growing challenges facing the data center industry. Our critical infrastructure components in our data centers are purpose-built to satisfy customers’ needs, drive efficiency and enable the deployment of highly advanced computing technologies.
We presently own and operate three primary campus locations, called Primes, which encompass 11 colocation facilities with an aggregate of up to 4.4 million gross square feet, or GSF, of space. Our Primes consist of The Core Campus in Las Vegas, Nevada; The Citadel Campus near Reno, Nevada; and The Pyramid Campus in Grand Rapids, Michigan. In addition, we have begun construction on a fourth Prime, The Keep Campus, in Atlanta, Georgia. In addition to our Primes, we hold a 50% ownership interest in SUPERNAP International, S.A., or SUPERNAP International, which has deployed facilities in Italy and Thailand. Until March 31, 2018, we accounted for this ownership interest under the equity method of accounting.
We currently have more than 900 customers, including some of the world’s largest technology and digital media companies, cloud, IT and software providers, financial institutions and network and telecommunications providers. Our ecosystem connects over 250 cloud, IT and software providers and 80 network and telecommunications providers. Our business is based on a recurring revenue model comprised of (1) colocation, which includes the licensing and leasing of cabinet space and power; and (2) connectivity services, which include cross-connects, broadband services and external connectivity. We consider these services recurring because our customers are generally billed on a fixed and recurring basis each month for the duration of their contract. We derive more than 95% of our revenue from recurring revenue and we expect to continue to do so for the foreseeable future. For the three months ended March 31, 2019 and 2018, our largest customer, eBay, Inc. and its affiliates, accounted for 11% and 9% of our revenue, respectively.
Our non-recurring revenue is primarily comprised of installation services related to a customer’s initial deployment. These services are non-recurring because they are typically billed once, upon completion of the installation.
Factors that May Influence Future Results of Operations
Market and Economic Conditions. We are affected by general business and economic conditions in the United States and globally. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets and broad trends in industry and finance, all of which are beyond our control. Macroeconomic conditions that affect the economy and the economic outlook of the United States and the rest of the world could adversely affect our customers and vendors, which could adversely affect our results of operations and financial condition.
Growth and Expansion Activities. Our future revenue growth will depend on our ability to maintain our existing revenue base while expanding and increasing utilization at our existing and developing Prime Campus locations. Our existing Prime Campus locations currently encompass 11 colocation facilities with an aggregate of up to 4.4 million GSF of space and up to 455 MW of power. As of March 31, 2019, the utilization rates at these Prime Campuses, based on currently available cabinets, were approximately 92%, 70%, and 91% at The Core Campus, The Citadel Campus, and The Pyramid Campus, respectively. Additionally, each of our existing Primes has room for further expansion, and we have designs to add up to 5.9 million GSF of additional space to The Citadel Campus and 940,000 GSF of additional space to The Pyramid Campus. We may be unable to attract customers to our data centers or retain them for a number of reasons, including if we fail to provide competitive pricing terms, provide space that is deemed to be inferior to that of our competitors or are unable to provide services that our existing and potential customers desire.
Cost of Power. We are a large consumer of power, and the cost of energy accounts for a significant portion of our cost of revenue. We require power supply to provide many services we offer, such as powering and cooling our

Switch, Inc. | Q1 2019 Form 10-Q | 18


customers’ IT equipment and operating critical data center plant and equipment infrastructure. Pursuant to our service agreements, we provide our customers with a committed level of power supply availability and we have committed to operating our data centers with 100% clean and renewable energy. Most of our customer agreements provide the ability to increase our cost of service in response to an increase in the cost of energy; however, our gross profit can be adversely affected by increases in our cost of energy if we choose not to pass along the increases to our customers. For instance, the seasonal increase in energy costs during the summer months has not historically resulted in an adjustment to our customer pricing, and therefore has resulted in a decrease in our gross profit in those periods. Nonetheless, since becoming an unbundled purchaser of energy in Nevada, we are able to purchase power in the open market through long-term power contracts, which we believe can subsequently reduce variability of energy costs. Additionally, our existing customers may not renew their contracts with us or may reduce the services purchased from us, or we may be unable to attract new customers, if we experience increased energy costs or limited availability of power resources, including clean and renewable energy. Our brand or reputation could be adversely affected if we are unable to operate our data centers with 100% clean and renewable energy.
Capital Expenditures. Our growth and expansion initiatives require significant capital. The costs of constructing, developing, operating and maintaining data centers and growing our operations are substantial. While we strive to match the growth of our facilities to the demand for services, we still must spend significant amounts before we receive any revenue. If we are unable to generate sufficient capital to meet our anticipated capital requirements, our growth could slow and operations could be adversely affected. Our maintenance capital expenditures were $2.0 million for the three months ended March 31, 2019.
Growth in Customers. Our results of operations could be significantly affected by the growth or reduction of our customer base. We have over 900 customers, including some of the world’s largest technology and digital media companies, cloud, IT and software providers, financial institutions and network and telecommunications providers. We believe we have significant opportunities to both grow penetration of our existing customers as well as attract new customers. Our ability to attract new customers depends on a number of factors, including our ability to offer high quality services at competitive prices and the capability of our marketing and sales team to attract new customers. Additionally, a significant portion of our revenue is highly dependent on our top 10 customers and the loss of these customers or any significant decrease in their business could adversely affect our results of operations.
Key Metrics and Non-GAAP Financial Measures
We monitor the following unaudited key metrics and financial measures that are not calculated in accordance with accounting principles generally accepted in the United States of America, or GAAP, to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions.
 
Three Months Ended
March 31,
 
2019
 
2018
 
(dollars in thousands)
Recurring revenue
$
104,491

 
$
95,269

Capital expenditures
$
45,946

 
$
61,387

Adjusted EBITDA
$
53,654

 
$
46,893

Adjusted EBITDA margin
50.1
%
 
48.0
%
Recurring Revenue
We calculate recurring revenue as contractual revenue under signed contracts calculated in accordance with GAAP for the applicable period. Recurring revenue does not include any installation or other one-time revenue, which would be classified as non-recurring revenue. Management uses recurring revenue as a supplemental performance measure because it provides a useful measure of increases or decreases in contractual revenue from our customers and provides a baseline revenue measure on which to plan expenses.

Switch, Inc. | Q1 2019 Form 10-Q | 19



The following table sets forth a reconciliation of recurring revenue to total revenue:
 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands)
Recurring revenue
$
104,491

 
$
95,269

Non-recurring revenue
2,541

 
2,448

Revenue
$
107,032

 
$
97,717

Capital Expenditures
We define capital expenditures as cash purchases of property and equipment during a particular period. We believe that capital expenditures is a useful metric because it provides information regarding the growth of our technology infrastructure platform and the potential to expand our services and add new customers.
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA as net income adjusted for interest expense, interest income, income taxes, depreciation and amortization of property and equipment and for specific and defined supplemental adjustments to exclude (i) non-cash equity-based compensation expense; (ii) equity in net losses of investments; and (iii) certain other items that we believe are not indicative of our core operating performance. We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue.
Our Adjusted EBITDA and Adjusted EBITDA margin are not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to measures prepared in accordance with GAAP. We present Adjusted EBITDA and Adjusted EBITDA margin because we believe certain investors use them as measures of a company’s historical operating performance and its ability to service and incur debt and make capital expenditures. We believe that the inclusion of certain adjustments in presenting Adjusted EBITDA and Adjusted EBITDA margin is appropriate to provide additional information to investors because Adjusted EBITDA and Adjusted EBITDA margin exclude certain items that we believe are not indicative of our core operating performance and that are not excluded in the calculation of EBITDA. Adjusted EBITDA is also similar to the measures used under the debt covenants included in our credit facilities, except that the definition used in our credit facilities does not exclude cash gains or shareholder-related litigation expense. Accordingly, we believe that Adjusted EBITDA and Adjusted EBITDA margin provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision-making.
Our non-GAAP financial measures have limitations as analytical tools and you should not consider them in isolation or as a substitute for an analysis of our results under GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their nearest GAAP equivalents. Non-GAAP financial measures may not provide information directly comparable to measures provided by other companies in our industry, as those other companies may calculate their non-GAAP financial measures differently. In addition, the non-GAAP financial measures exclude certain recurring expenses that have been and will continue to be significant expenses of our business.

Switch, Inc. | Q1 2019 Form 10-Q | 20


The following table sets forth a reconciliation of our net income to Adjusted EBITDA:
 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands)
Net income
$
3,671

 
$
3,950

Interest expense
7,131

 
6,273

Interest income(1)
(308
)
 
(720
)
Income tax expense (benefit)
197

 
(115
)
Depreciation and amortization of property and equipment
28,558

 
24,603

Loss on disposal of property and equipment
43

 
214

Unrealized loss on interest rate swaps
4,985

 

Equity-based compensation
8,145

 
12,357

Equity in net losses of investments

 
331

Shareholder-related litigation expense
1,232

 

Adjusted EBITDA
$
53,654

 
$
46,893

________________________________________
(1)
Interest income is included in the “Other” line of other income (expense) in our consolidated statements of comprehensive income.
Components of Results of Operations
Revenue
During the three months ended March 31, 2019 and 2018, we derived more than 95% of our revenue from recurring revenue streams, consisting primarily of (1) colocation, which includes the licensing and leasing of cabinet space and power; and (2) connectivity services, which include cross-connects, broadband services and external connectivity. The remainder of our revenue is from non-recurring revenue, which primarily includes installation services related to a customer’s initial deployment and contract settlements. Based on the current growth stage of our business, we expect increases in revenue to be driven primarily by increases in volume, rather than changes in the prices we charge to our customers.
Revenue from recurring revenue streams is generally billed monthly and recognized ratably over the period to which the service relates. Contracts with our customers generally have terms of three to five years. Non-recurring installation fees, although generally paid in a lump sum upon installation, are deferred and recognized ratably over the expected life of the installation. Revenue from connectivity services is generally recognized on a gross basis, primarily because we generally act as the principal in the transactions, take title to services and bear credit risk. Revenue from contract settlements, which result when a customer wishes to terminate their contract early, is recognized when no remaining performance obligations exist, to the extent that the revenue has not previously been recognized.
Cost of Revenue
Cost of revenue consists primarily of depreciation and amortization expense, expenses associated with the operations of our facilities, including electricity and other utility costs and repairs and maintenance, data center employees’ salaries and benefits, including equity-based compensation, connectivity costs, and rental payments related to our leased buildings and land used in data center operations. A substantial portion of our cost of revenue is fixed in nature and may not vary significantly from period to period, unless we expand our existing data centers or open new data centers. However, there are certain costs that are considered more variable in nature, including utilities and supplies that are directly related to growth in our existing and new customer base. We have seen the cost of our utilities, specifically electricity, decrease as we have become an unbundled purchaser of energy in Nevada, and are able to purchase energy from the open market. The largest portion of our utility costs is fixed and a smaller portion is variable with market conditions.
Gross Profit and Gross Margin
Gross profit, or revenue less cost of revenue, and gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by various factors, including customer growth, the expansion of our existing data centers or opening of new data centers, and the cost of our utilities, specifically electricity. Our gross margin may fluctuate from period to period depending on the interplay of these factors.

Switch, Inc. | Q1 2019 Form 10-Q | 21


Operating Expenses
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of salaries and related expenses, including equity-based compensation, accounting, legal and other professional service fees, real estate and personal property taxes, rental payments related to our corporate office lease, marketing and selling expenses, including sponsorships, commissions paid to partners, travel, depreciation and amortization expense, insurance, and other facility and employee related costs. This expense classification may not be comparable to those of other companies. We expect to incur additional selling, general and administrative expenses as we continue to scale our operations to invest in sales and marketing initiatives to further increase our revenue and support our growth. We also expect to continue to incur general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and those of the New York Stock Exchange, additional insurance expenses, investor relations activities and other administrative and professional services. Further, we expect to continue to incur general and administrative expenses in the form of equity-based compensation as a result of the continued vesting of Common Unit awards granted to certain of our executives in 2017 and equity awards granted subsequent to our initial public offering (“IPO”). As a result, we expect that our selling, general and administrative expense will continue to increase in absolute dollars, but may fluctuate as a percentage of our revenue from period to period.
Other Income (Expense)
Interest Expense
Interest expense consists primarily of interest on our credit facilities and amortization of debt issuance costs, net of amounts capitalized.
Equity in Net Losses of Investments
Equity in net losses of investments primarily consists of our share of results of operations from our equity method investments, including foreign currency translation adjustments. We currently hold two investments, SUPERNAP International and Planet3, Inc., or Planet3. Our investments in SUPERNAP International and Planet3 were accounted for under the equity method of accounting through March 31, 2018 and December 31, 2016, respectively, and our share of their results of operations are included within equity in net losses of investments for each applicable period presented. As of March 31, 2018, the carrying value of our investment in SUPERNAP International was reduced to zero as a result of recording our share of its losses. Our losses will continue to include the foreign currency translation adjustments in our investment. As of December 31, 2016, we determined an other than temporary loss in the value of our investment in Planet3 had occurred, and we therefore fully impaired its carrying value. Accordingly, we discontinued the equity method of accounting for our investments in SUPERNAP International and Planet3 as of March 31, 2018 and December 31, 2016, respectively, and will not provide for additional losses until our share of future net income, if any, equals the share of net losses not recognized during the period the equity method was suspended.
Unrealized Loss on Interest Rate Swaps
Unrealized loss on interest rate swaps consists of changes in the fair value of interest rate swaps used to mitigate our exposure to interest rate risk.
Other
Other income (expense) primarily consist of other items that have impacted our results of operations such as interest income and gains and losses resulting from other transactions.
Income Taxes
As a result of the IPO and certain organizational transactions completed in connection with our IPO, we became the sole manager of Switch, Ltd., which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Switch, Ltd. is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Switch, Ltd. is passed through to, and included in the taxable income or loss of, its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss generated by Switch, Ltd.

Switch, Inc. | Q1 2019 Form 10-Q | 22


Noncontrolling Interest
As the sole manager of Switch, Ltd., we operate and control all of the business and affairs of Switch, Ltd. and its subsidiaries. Although we have a minority economic interest in Switch, Ltd., we have the sole voting interest in, and control the management of, Switch, Ltd. Accordingly, we consolidate the financial results of Switch, Ltd. and report a noncontrolling interest on our consolidated statements comprehensive income, representing the portion of net income or loss and comprehensive income or loss attributable to the noncontrolling interest. The weighted average ownership percentages during the period are used to calculate the net income or loss and other comprehensive income or loss attributable to Switch, Inc. and the noncontrolling interest.
Results of Operations
The following table sets forth our results of operations:
 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands)
Consolidated Statements of Income Data:
 
 
 
Revenue
$
107,032

 
$
97,717

Cost of revenue
57,300

 
54,856

Gross profit
49,732

 
42,861

Selling, general and administrative expense
34,251

 
33,451

Income from operations
15,481

 
9,410

Other income (expense):
 
 
 
Interest expense, including amortization of debt issuance costs
(7,131
)
 
(6,273
)
Equity in net losses of investments

 
(331
)
Unrealized loss on interest rate swaps
(4,985
)
 

Other
503

 
1,029

Total other expense
(11,613
)
 
(5,575
)
Income before income taxes
3,868

 
3,835

Income tax (expense) benefit
(197
)
 
115

Net income
3,671

 
3,950

Less: net income attributable to noncontrolling interest
2,971

 
3,279

Net income attributable to Switch, Inc.
$
700

 
$
671


Switch, Inc. | Q1 2019 Form 10-Q | 23


The following table sets forth the consolidated statements of income data presented as a percentage of revenue. Amounts may not sum due to rounding.
 
Three Months Ended
March 31,
 
2019
 
2018
Consolidated Statements of Income Data:
 
 
 
Revenue
100
 %
 
100
 %
Cost of revenue
54

 
56

Gross profit
46

 
44

Selling, general and administrative expense
32

 
34

Income from operations
14

 
10

Other income (expense):
 
 
 
Interest expense, including amortization of debt issuance costs
(7
)
 
(6
)
Equity in net losses of investments

 

Unrealized loss on interest rate swaps
(5
)
 

Other

 
1

Total other expense
(11
)
 
(6
)
Income before income taxes
4

 
4

Income tax (expense) benefit

 

Net income
3

 
4

Less: net income attributable to noncontrolling interest
3

 
3

Net income attributable to Switch, Inc.
1
 %
 
1
 %
Comparison of the Three Months Ended March 31, 2019 and 2018
Revenue
 
Three Months Ended
March 31,
 
Change
 
2019
 
2018
 
Amount
 
%
 
(dollars in thousands)
Colocation
$
86,177

 
$
77,719

 
$
8,458

 
11
%
Connectivity
18,893

 
18,218

 
675

 
4
%
Other
1,962

 
1,780

 
182

 
10
%
Revenue
$
107,032

 
$
97,717

 
$
9,315

 
10
%
Revenue increased by $9.3 million, or 10%, for the three months ended March 31, 2019, compared to the three months ended March 31, 2018. The increase was primarily attributable to increases of $8.5 million in colocation revenue and $0.7 million in connectivity revenue, both of which resulted from an increased volume of sales to existing and new customers. Of the overall increase, 47% was attributable to new customers initiating service after March 31, 2018, and the remaining 53% was attributable to growth from existing customers. Our revenue churn rate, which we define as the reduction in recurring revenue attributable to customer terminations or non-renewal of expired contracts, divided by revenue at the beginning of the period, was 0.1% during each of the three months ended March 31, 2019 and 2018.
Cost of Revenue and Gross Margin
 
Three Months Ended
March 31,
 
Change
 
2019
 
2018
 
Amount
 
%
 
(dollars in thousands)
Cost of revenue
$
57,300

 
$
54,856

 
$
2,444

 
4
%
Gross margin
46.5
%
 
43.9
%
 
 
 
 

Switch, Inc. | Q1 2019 Form 10-Q | 24


Cost of revenue increased by $2.4 million, or 4%, for the three months ended March 31, 2019, compared to the three months ended March 31, 2018. The increase was primarily attributable to an increase of $3.7 million in depreciation and amortization expense due to additional property and equipment being placed into service, partially offset by a decrease of $0.8 million in salaries and related employee expenses due to an increase in capitalized labor resulting from the continued buildout of the LAS VEGAS 11 facility. Accordingly, gross margin increased by 260 basis points for the three months ended March 31, 2019, compared to the three months ended March 31, 2018.
Selling, General and Administrative Expense
 
Three Months Ended
March 31,
 
Change
 
2019
 
2018
 
Amount
 
%
 
(dollars in thousands)
Selling, general and administrative expense
$
34,251

 
$
33,451

 
$
800

 
2
%
Selling, general and administrative expense increased by $0.8 million, or 2%, for the three months ended March 31, 2019, compared to the three months ended March 31, 2018. The increase was primarily attributable to increases of $2.9 million in professional fees for consulting, legal, and accounting services and $1.9 million in salaries and related employee expenses due to an increase in headcount, partially offset by a decrease of $4.2 million in non-cash compensation expense primarily related to the Common Unit awards granted in 2017 and certain fully-vested restricted stock unit awards granted in 2018 to certain of our executives.
Other Income (Expense)
 
Three Months Ended
March 31,
 
Change
 
2019
 
2018
 
Amount
 
%
 
(dollars in thousands)
Other income (expense):
 
 
 
 
 
 
 
Interest expense
$
(7,131
)
 
$
(6,273
)
 
$
(858
)
 
14
 %
Equity in net losses of investments

 
(331
)
 
331

 
(100
)%
Unrealized loss on interest rate swaps
(4,985
)
 

 
(4,985
)
 
NM

Other
503

 
1,029

 
(526
)
 
(51
)%
Total other expense
$
(11,613
)
 
$
(5,575
)
 
$
(6,038
)
 
108
 %
________________________________________
NM - Not meaningful
Interest Expense
Interest expense increased by $0.9 million, or 14%, for the three months ended March 31, 2019, compared to the three months ended March 31, 2018. The increase was driven by an increase in our weighted average interest rate from 4.13% for the three months ended March 31, 2018 to 4.75% for the three months ended March 31, 2019, related to our LIBOR-based and fixed-rate borrowings.
Equity in Net Losses of Investments
Equity in net losses of investments of $0.3 million related to the financial performance of our equity method investment in SUPERNAP International for the three months ended March 31, 2018. As the carrying value of our investment in SUPERNAP International was reduced to zero as a result of recording our share of its losses as of March 31, 2018, we discontinued the equity method of accounting and will not provide for additional losses until our share of future net income, if any, equals the share of net losses not recognized during the period the equity method was suspended.
Unrealized Loss on Interest Rate Swaps
In January and February 2019, we entered into four interest rate swap agreements to mitigate our exposure to interest rate risk. We recorded an unrealized loss on interest rate swaps that do not qualify for hedge accounting of $5.0 million from changes in the fair value for the three months ended March 31, 2019.

Switch, Inc. | Q1 2019 Form 10-Q | 25


Other
Other income decreased by $0.5 million, or 51%, for the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily due to a decrease in interest income earned on our cash equivalents.
Income Tax (Expense) Benefit
 
Three Months Ended
March 31,
 
Change
 
2019
 
2018
 
Amount
 
%
 
(dollars in thousands)
Income tax (expense) benefit
$
(197
)
 
$
115

 
$
(312
)
 
NM
________________________________________
NM - Not meaningful

During the three months ended March 31, 2019, we incurred $0.2 million of income tax expense, compared to $0.1 million of income tax benefit during the three months ended March 31, 2018. Income tax expense and benefit are driven by our allocable share of Switch, Ltd.’s income and loss before income taxes.
Net Income Attributable to Noncontrolling Interest
 
Three Months Ended
March 31,
 
Change
 
2019
 
2018
 
Amount
 
%
 
(dollars in thousands)
Net income attributable to noncontrolling interest
$
2,971

 
$
3,279

 
$
(308
)
 
(9
)%

Net income attributable to noncontrolling interest decreased by $0.3 million, or 9%, for the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily due to a decrease in net income.
Liquidity and Capital Resources
Switch, Inc. is a holding company and has no material assets other than our ownership of Common Units. As such, we have no independent means of generating revenue or cash flow, and our ability to pay our taxes and operating expenses or declare and pay dividends in the future, if any, will be dependent upon the financial results and cash flows of Switch, Ltd. and its subsidiaries and any distributions we receive from Switch, Ltd. The terms of the amended and restated credit agreement limit the ability of Switch, Ltd., among other things, to incur additional debt, incur additional liens, encumbrances or contingent liabilities, and pay distributions or make certain other restricted payments.
As of March 31, 2019, we had $87.0 million of cash and cash equivalents. As of March 31, 2019, our total indebtedness was comprised of debt and financing obligations totaling $604.7 million consisting of (i) $585.3 million principal from our term loan facility (net of debt issuance costs) and (ii) $19.4 million from our capital lease obligations. As of March 31, 2019, we had access to $500.0 million in additional liquidity from our revolving credit facility. We believe we have sufficient cash and access to liquidity, coupled with anticipated cash generated from operating activities, to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months, including repayment of the current portion of our debt as it becomes due and completion of our development projects.
In addition, we are obligated to make payments under the Tax Receivable Agreement. Although the actual timing and amount of any payments we make under the Tax Receivable Agreement will vary, we expect those payments will be significant. Any payments we make under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us or to Switch, Ltd. and, to the extent we are unable to make payments under the Tax Receivable Agreement for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by us.
In August 2018, our board of directors authorized a program by which Switch, Ltd. may repurchase up to $150.0 million of its outstanding Common Units for cash and Switch, Inc. will cancel a corresponding amount of Class B common shares. The program was effective immediately upon authorization. The authorization may be suspended or discontinued at any time without notice. Repurchases under the Common Unit repurchase program will be funded from our existing cash and cash equivalents. As of March 31, 2019, we had $89.4 million remaining in repurchase authority, of which $13.6 million was used to repurchase Common Units in April 2019.
Cash Flows
The following table summarizes our cash flows:

Switch, Inc. | Q1 2019 Form 10-Q | 26


 
Three Months Ended
March 31,
 
2019
 
2018
 
(in thousands)
Net cash provided by operating activities
$
51,922

 
$
39,429

Net cash used in investing activities
(46,229
)
 
(62,466
)
Net cash used in financing activities
(295
)
 
(3,068
)
Net increase (decrease) in cash and cash equivalents
$
5,398

 
$
(26,105
)
Cash Flows from Operating Activities
Cash from operating activities is primarily generated from operating income from our colocation and connectivity services.
Net cash provided by operating activities for the three months ended March 31, 2019 was $51.9 million, compared to $39.4 million for the three months ended March 31, 2018. The increase of $12.5 million was primarily due to the changes in our working capital accounts.
Cash Flows from Investing Activities
During the three months ended March 31, 2019, net cash used in investing activities was $46.2 million, primarily consisting of capital expenditures of $45.9 million related to the expansion of our data center facilities.
During the three months ended March 31, 2018, net cash used in investing activities was $62.5 million, primarily consisting of capital expenditures of $61.4 million related to the expansion of our data center facilities.
Cash Flows from Financing Activities
During the three months ended March 31, 2019, net cash used in financing activities was $0.3 million, consisting of repayments of borrowings outstanding under our term loan of $1.5 million and payments of tax withholdings upon settlement of restricted stock unit awards of $1.3 million, partially offset by a $2.5 million refund on deposits related to our substation capital lease.
During the three months ended March 31, 2018, net cash used in financing activities was $3.1 million, consisting of repayments of borrowings outstanding under our term loan of $1.5 million, payments of tax withholdings upon settlement of restricted stock unit awards of $1.2 million, and a deposit payment related to our substation capital lease of $0.4 million.
Outstanding Indebtedness
On June 27, 2017, we entered into an amended and restated credit agreement with Wells Fargo Bank, National Association, as administrative agent, and certain other lenders, consisting of a $600.0 million term loan facility, maturing on June 27, 2024, and a $500.0 million revolving credit facility, maturing on June 27, 2022, which replaced our prior credit facility. We refer to the term loan facility and the revolving credit facility as the credit facilities. We are required to repay the aggregate outstanding principal amount of the initial term loan in consecutive quarterly installments of $1.5 million, beginning on September 30, 2017, until the final payment of $559.5 million is made on the maturity date.
The amended and restated credit agreement permits the issuance of letters of credit upon Switch, Ltd.’s request of up to $30.0 million. As of March 31, 2019, we had no borrowings outstanding under the revolving credit facility and $500.0 million of availability. As of March 31, 2019, we had $585.3 million of borrowings outstanding under the term loan (net of deferred debt issuance costs) with $400.0 million effectively fixed at 4.73% pursuant to interest rate swap agreements entered into in January and February 2019 and the remaining borrowings outstanding accruing interest at an underlying variable rate of 4.75%. Upon satisfying certain conditions, the amended and restated credit agreement provides that Switch, Ltd. can increase the amount available for borrowing under the credit facilities no more than five times (up to an additional $75.0 million in total, plus an additional amount subject to certain leverage restrictions) during the term of the amended and restated credit agreement.
The credit facilities are secured by a first priority security interest in substantially all of Switch, Ltd.’s tangible and intangible personal property and guaranteed by certain of its wholly-owned subsidiaries. Interest on the credit facilities is calculated based on the base rate plus the applicable margin or a LIBOR rate plus the applicable margin (each as defined in the amended and restated credit agreement), at Switch, Ltd.’s election. Interest calculations are based on 365/366 days for a base rate loan and 360 days for a LIBOR loan. Base rate interest payments are due and payable in arrears on the last day of each calendar quarter. LIBOR rate interest payments are due and payable on the last day of each selected interest period (not to extend beyond three-month intervals). In addition, under the

Switch, Inc. | Q1 2019 Form 10-Q | 27


revolving credit facility we incur a fee on unused lender commitments based on the applicable margin and payment is due and payable in arrears on the last day of each calendar quarter.
The credit agreement contains affirmative and negative covenants customary for such financings, including, but not limited to, limitations, subject to specified exceptions and baskets, on incurring additional debt, incurring additional liens, encumbrances or contingent liabilities, making investments in other persons or property, selling or disposing of its assets, merging with or acquiring other companies, liquidating or dissolving ourselves or any of the subsidiary guarantors, engaging in any business that is not otherwise a related line of business, engage in certain transactions with affiliates, paying dividends or making certain other restricted payments, and making loans, advances or guarantees. The terms of the credit agreement also require compliance with the consolidated total leverage ratio (as defined in the amended and restated credit agreement) starting with the fiscal quarter ended June 30, 2017. As of March 31, 2019, the maximum consolidated total leverage ratio was 5.00 to 1.00. The maximum consolidated total leverage ratio decreases over time to, and remains at, 4.00 to 1.00 for the quarters ending September 30, 2020 and thereafter through maturity. We were in compliance with this and our other covenants under the credit agreement as of March 31, 2019.
Events of default under the credit facilities, subject to specified thresholds, include but are not limited to: nonpayment of principal, interest, fees or any other payment obligations thereunder; failure to perform or observe covenants, conditions or agreements; material violation of any representation, warranty or certification; cross-defaults to certain material indebtedness; bankruptcy or insolvency of Switch Ltd.’s subsidiary guarantors; certain monetary judgments against the subsidiary guarantors; and any change of control occurrence.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements for any of the periods presented.
Contractual Obligations
In January and February 2019, we entered into four interest rate swap agreements; whereby, we will pay a weighted average fixed interest rate (excluding the applicable interest margin) of 2.48% on notional amounts corresponding to borrowings of $400.0 million in exchange for receipts on the same notional amount at a variable interest rate based on the applicable LIBOR at the time of payment. The interest rate swap agreements mature in June 2024.
Outside of the aforementioned, and any routine transactions made in the ordinary course of business, there have been no material changes to the contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances. There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

Switch, Inc. | Q1 2019 Form 10-Q | 28


Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to financial market risks, primarily in interest rates related to our debt obligations.
Interest Rate Risk
Our primary exposure to market risk is interest rate risk associated with our long-term debt. We evaluate our exposure to market risk by monitoring interest rates in the marketplace. As of March 31, 2019, borrowings under our amended and restated credit agreement bear interest at a margin above LIBOR or base rate (each as defined in the amended and restated credit agreement) as selected by us. In January and February 2019, we entered into four interest rate swap agreements; whereby, we will pay a weighted average fixed interest rate (excluding the applicable interest margin) of 2.48% on notional amounts corresponding to borrowings of $400.0 million in exchange for receipts on the same notional amount at a variable interest rate based on the applicable LIBOR at the time of payment. The interest rate swap agreements mature in June 2024. As of March 31, 2019, we had $189.5 million of outstanding borrowings under our credit facilities with an underlying variable interest rate of 4.75%. As of March 31, 2019, a hypothetical increase or decrease of 100 basis points in LIBOR would cause our annual interest cost to change by $1.9 million.
As of March 31, 2019, we had cash and cash equivalents of $87.0 million with cash equivalents of $61.9 million held in money market funds. A hypothetical increase or decrease of 100 basis points in the interest rate on our cash equivalents held in money market funds as of March 31, 2019 would cause our annual interest income to change by $0.6 million.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of March 31, 2019, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as amended, or the Exchange Act). Based on their evaluation, as of March 31, 2019, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective because of the material weaknesses in our internal control over financial reporting described below.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our 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. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Material Weaknesses
As of December 31, 2018, we had two material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
The first material weakness was identified in connection with the audit of our 2016 consolidated financial statements. This material weakness was due to a failure of the information and communication component of internal control to provide complete and accurate output because of deficiencies in the communication process. Contracts executed by various departments were not communicated, on a timely basis, to the accounting department, resulting in recording of out-of-period adjustments that impacted the recognition and disclosure of amounts in the consolidated financial statements during the year ended December 31, 2016. We concluded this material weakness continued to exist as of March 31, 2019.
The second material weakness, which was identified in connection with the audit of our 2017 consolidated financial statements, related to an insufficient complement of resources with an appropriate level of accounting expertise, knowledge, and training commensurate with the complexity of our financial reporting matters. This material weakness led to pervasive immaterial adjustments to our annual and interim consolidated financial statements, inadequate review over account reconciliations and the inability to maintain segregation of duties over journal entries resulting in the lack of an effective control environment. We concluded this material weakness continued to exist as of March 31, 2019.

Switch, Inc. | Q1 2019 Form 10-Q | 29


Additionally, these material weaknesses could result in a misstatement of substantially all account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Remediation Efforts
We have implemented and continue to implement measures designed to improve our internal control over financial reporting to remediate these material weaknesses, including hiring additional personnel with appropriate education, experience and certifications for key positions in the financial reporting and accounting function, implementing policies and procedures to improve our ability to communicate and share information in a timely manner, as well as designing and implementing improved processes and internal controls. In addition, we are formalizing our internal control documentation and strengthening supervisory reviews by our management.
While we believe that these efforts will improve our internal control over financial reporting, the implementation of these measures is ongoing and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles. Due to this ongoing testing, we cannot provide assurance that the measures we have taken to date, and are continuing to implement, will be sufficient to remediate the material weaknesses we have identified or avoid potential future material weaknesses. If the steps we take do not correct the material weaknesses in a timely manner, we will be unable to conclude that we maintain effective internal control over financial reporting. Accordingly, there could continue to be a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis.
Changes in Internal Control over Financial Reporting
Other than as described above, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control performed during the quarter ended March 31, 2019, to which this report relates, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Switch, Inc. | Q1 2019 Form 10-Q | 30


Part II.
Other Information
Item 1A.
Risk Factors.
There have been no material changes with respect to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.
Item 6. Exhibits.
 
 
 
Incorporated by Reference
Exhibit No.
 
Exhibit Description
Form
Exhibit
Filing Date
3.1
 
8-K
3.1
10/11/2017
3.2
 
8-K
3.2
10/11/2017
10.1
8-K
10.1
4/16/2019
10.2
8-K
10.2
4/16/2019
10.3
8-K
10.3
4/16/2019
31.1
*
 
 
 
31.2
*
 
 
 
32.1
#
 
 
 
101.INS
*
XBRL Instance Document (submitted electronically herewith).
 
 
 
101.SCH
*
XBRL Taxonomy Extension Schema Document (submitted electronically herewith).
 
 
 
101.CAL
*
XBRL Taxonomy Extension Calculation Linkbase Document (submitted electronically herewith).
 
 
 
101.DEF
*
XBRL Extension Definition Linkbase Document (submitted electronically herewith).
 
 
 
101.LAB
*
XBRL Taxonomy Label Linkbase Document (submitted electronically herewith).
 
 
 
101.PRE
*
XBRL Taxonomy Extension Presentation Linkbase Document (submitted electronically herewith).
 
 
 

___________________________________________________________________
*    Filed herewith.
#    Furnished herewith.
†    Indicates a management contract or compensatory plan or arrangement.

Switch, Inc. | Q1 2019 Form 10-Q | 31


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.
 
 
Switch, Inc.
(Registrant)
 
 
 
Date:
May 10, 2019
/s/ Gabe Nacht
 
 
Gabe Nacht
Chief Financial Officer
(Principal Financial and Accounting Officer and Duly Authorized Officer)

EX-31.1 2 exhibit311302ceocertificat.htm EXHIBIT 31.1 Exhibit
Exhibit 31.1
CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, Rob Roy, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Switch, Inc.
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and



b.
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 10, 2019
 
By:
/s/ Rob Roy
 
 
Rob Roy
Chief Executive Officer
Principal Executive Officer 

EX-31.2 3 exhibit312302cfocertificat.htm EXHIBIT 31.2 Exhibit
Exhibit 31.2
CERTIFICATION BY THE CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, Gabe Nacht, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Switch, Inc.
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and



b.
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 10, 2019
 
By:
/s/ Gabe Nacht
 
 
Gabe Nacht
Chief Financial Officer
Principal Financial Officer 

EX-32.1 4 exhibit321906certification.htm EXHIBIT 32.1 Exhibit
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Switch, Inc. (the “Company”) for the period ended March 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Rob Roy, Chief Executive Officer, and Gabe Nacht, Chief Financial Officer, of the Company, do each certify, pursuant to Section 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
1.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.
the information contained in the Report fairly presents, in all materials respects, the financial condition and results of operations of the Company.
Date: May 10, 2019
 
By:
/s/ Rob Roy
 
 
Rob Roy
Chief Executive Officer
Principal Executive Officer 
 
 
 
 
By:
/s/ Gabe Nacht
 
 
Gabe Nacht
Chief Financial Officer
Principal Financial Officer 
 
 
 


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