Quarterly Report (10-q)

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 September 30, 2019



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

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)

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

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

As of November 1, 2019, the registrant had 86,796,336 shares of Class A common stock, 112,145,474 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)	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36

Part II.	Other Information
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	39
Item 6.	Exhibits	39
Signatures

Table of Contents


Part I.	Financial Information


Item 1.	Financial Statements (Unaudited).



Consolidated Balance Sheets	2
Consolidated Statements of Comprehensive Income	3
Consolidated Statements of Stockholders’ Equity	4
Consolidated Statements of Cash Flows	8
Condensed Notes to Consolidated Financial Statements	10

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Switch, Inc.

Consolidated Balance Sheets

(in thousands, except per share data)



	September 30, 2019			December 31, 2018
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	52,478		$	81,560
Accounts receivable, net of allowance of $296 and $426, respectively	18,741			17,654
Prepaid expenses	6,962			6,781
Other current assets	2,428			2,332
Total current assets	80,609			108,327
Property and equipment, net	1,444,993			1,302,770
Long-term deposit	5,047			3,333
Deferred income taxes	90,115			28,550
Other assets	18,349			17,050
TOTAL ASSETS	$	1,639,113		$	1,460,030

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Long-term debt, current portion	$	6,000		$	6,000
Accounts payable	17,476			20,501
Accrued salaries and benefits	12,626			5,258
Accrued expenses	13,875			9,778
Accrued construction payables	30,981			12,729
Deferred revenue, current portion	13,713			10,800
Customer deposits	10,442			9,962
Total current liabilities	105,113			75,028
Long-term debt, net	646,671			580,566
Capital lease obligations	19,466			19,466
Deferred revenue	36,847			22,260
Liabilities under tax receivable agreement	132,516			52,535
Other long-term liabilities	17,519			1,823
TOTAL LIABILITIES	958,132			751,678
Commitments and contingencies (Note 5)
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, 84,357 and 55,218 shares issued and outstanding, respectively	84			55
Class B common stock, $0.001 par value per share, 300,000 shares authorized, 117,782 and 148,481 shares issued and outstanding, respectively	118			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	210,349			140,191
(Accumulated deficit) retained earnings	(51		)	2,693
Accumulated other comprehensive income	79			79
Total Switch, Inc. stockholders’ equity	210,622			143,210
Noncontrolling interest	470,359			565,142
TOTAL STOCKHOLDERS’ EQUITY	680,981			708,352
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,639,113		$	1,460,030

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

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Switch, Inc.

Consolidated Statements of Comprehensive Income

(in thousands, except per share data)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue	$	117,558		$	102,768		$	336,177		$	302,646
Cost of revenue	62,112			59,150			177,301			169,200
Gross profit	55,446			43,618			158,876			133,446
Selling, general and administrative expense	37,314			31,086			104,612			95,676
Income from operations	18,132			12,532			54,264			37,770
Other income (expense):
Interest expense, including $409, $409, $1,227, and $1,227, respectively, in amortization of debt issuance costs	(6,743		)	(7,409		)	(21,212		)	(19,826		)
Equity in net losses of investments	—			—			—			(331		)
Loss on interest rate swaps	(3,926		)	—			(17,692		)	—
Other	245			752			1,264			2,603
Total other expense	(10,424		)	(6,657		)	(37,640		)	(17,554		)
Income before income taxes	7,708			5,875			16,624			20,216
Income tax expense	(610		)	(1,212		)	(1,249		)	(2,064		)
Net income	7,098			4,663			15,375			18,152
Less: net income attributable to noncontrolling interest	5,024			4,657			11,423			16,654
Net income attributable to Switch, Inc.	$	2,074		$	6		$	3,952		$	1,498

Net income per share (Note 9):
Basic	$	0.02		$	0.00		$	0.05		$	0.03
Diluted	$	0.02		$	0.00		$	0.05		$	0.03

Weighted average shares used in computing net income per share (Note 9):
Basic	84,135			50,669			72,566			43,063
Diluted	86,261			50,710			247,193			43,142

Other comprehensive income:
Foreign currency translation adjustment, net of tax of $0	—			—			—			331
Comprehensive income	7,098			4,663			15,375			18,483
Less: comprehensive income attributable to noncontrolling interest	5,024			4,657			11,423			16,937
Comprehensive income attributable to Switch, Inc.	$	2,074		$	6		$	3,952		$	1,546

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

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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			(Accumulated Deficit) 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
Net income	—	—		—		—			—	—		—			1,178			—		3,428			4,606
Equity-based compensation expense	—	—		—		—			—	—		3,800			—			—		3,643			7,443
Issuance of Class A common stock upon settlement of restricted stock unit awards, net of shares withheld for tax	1	—		—		—			—	—		(195		)	—			—		190			(5		)
Issuance of restricted stock awards	80	—		—		—			—	—		—			—			—		—			—
Dividends declared ($0.0294 per share)	—	—		—		—			—	—		—			(2,389		)	—		—			(2,389		)
Distributions to noncontrolling interest	—	—		—		—			—	—		—			—			—		(4,934		)	(4,934		)
Exchanges of noncontrolling interest for Class A common stock	22,323	22		(22,323	)	(22		)	—	—		67,362			—			—		(67,362		)	—
Repurchase of common units and cancellation of Class B common stock	—	—		(1,288	)	(2		)	—	—		(2,738		)	—			—		(10,857		)	(13,597		)
Recognition of tax receivable agreement liability resulting from exchanges of noncontrolling interest for Class A common stock	—	—		—		—			—	—		(59,476		)	—			—		—			(59,476		)
Net deferred tax asset resulting from changes in outside basis difference on investment in Switch, Ltd.	—	—		—		—			—	—		47,871			—			—		—			47,871
Balance—June 30, 2019	78,085	$	78	124,870		$	125		42,945	$	43	$	198,231		$	454		$	79	$	490,905		$	689,915

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Switch, Inc.

Consolidated Statements of Stockholders’ Equity (Continued)

(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				(Accumulated Deficit) Retained Earnings				Accumulated Other Comprehensive Income			Noncontrolling Interest				Total Stockholders’ Equity
Balance—June 30, 2019	78,085	$	78	124,870		$	125		42,945	$	43	$	198,231			$	454			$	79		$	490,905			$	689,915
Net income	—	—		—		—			—	—		—				2,074				—			5,024				7,098
Equity-based compensation expense	—	—		—		—			—	—		3,960				—				—			3,350				7,310
Issuance of Class A common stock upon settlement of restricted stock unit awards, net of shares withheld for tax	19	—		—		—			—	—		(708		)		—				—			612				(96		)
Dividends declared ($0.0294 per share)	—	—		—		—			—	—		—				(2,579		)		—			—				(2,579		)
Distributions to noncontrolling interest	—	—		—		—			—	—		—				—				—			(4,725		)		(4,725		)
Exchanges of noncontrolling interest for Class A common stock	6,254	6		(6,254	)	(6		)	—	—		18,550				—				—			(18,550		)		—
Repurchase of common units and cancellation of Class B common stock	—	—		(834	)	(1		)	—	—		(4,850		)		—				—			(6,257		)		(11,108		)
Recognition of tax receivable agreement liability resulting from exchanges of noncontrolling interest for Class A common stock	—	—		—		—			—	—		(20,505		)		—				—			—				(20,505		)
Net deferred tax asset resulting from changes in outside basis difference on investment in Switch, Ltd.	—	—		—		—			—	—		15,671			—				—			—				15,671
Balance—September 30, 2019	84,357	$	84	117,782		$	118		42,945	$	43	$	210,349			$	(51	)		$	79		$	470,359			$	680,981

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Switch, Inc.

Consolidated Statements of Stockholders’ Equity (Continued)

(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			(Accumulated Deficit) 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
Net income	—	—		—		—			—	—		—			821			—		8,718			9,539
Equity-based compensation expense	—	—		—		—			—	—		2,288			—			—		5,921			8,209
Issuance of Class A common stock upon settlement of restricted stock unit awards, net of shares withheld for tax	1	—		—		—			—	—		(7		)	—			—		—			(7		)
Issuance of restricted stock awards	61	—		—		—			—	—		—			—			—		—			—
Dividends declared ($0.0147)	—	—		—		—			—	—		—			(1,320		)	—		—			(1,320		)
Distributions to noncontrolling interest	—	—		—		—			—	—		—			—			—		(6,048		)	(6,048		)
Exchanges of noncontrolling interest for Class A common stock	13,424	14		(13,424	)	(14		)	—	—		37,676			—			—		(37,676		)	—
Recognition of tax receivable agreement liability resulting from exchanges of noncontrolling interest for Class A common stock	—	—		—		—			—	—		(39,534		)	—			—		—			(39,534		)
Net deferred tax asset resulting from changes in outside basis difference on investment in Switch, Ltd.	—	—		—		—			—	—		20,349			—			—		—			20,349
Balance—June 30, 2018	49,553	$	50	160,200		$	160		42,945	$	43	$	131,845		$	1,774		$	79	$	614,795		$	748,746

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Switch, Inc.

Consolidated Statements of Stockholders’ Equity (Continued)

(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			(Accumulated Deficit) Retained Earnings			Accumulated Other Comprehensive Income		Noncontrolling Interest			Total Stockholders’ Equity
Balance—June 30, 2018	49,553	$	50	160,200		$	160		42,945	$	43	$	131,845		$	1,774		$	79	$	614,795		$	748,746
Net income	—	—		—		—			—	—		—			6			—		4,657			4,663
Equity-based compensation expense	—	—		—		—			—	—		2,494			—			—		5,134			7,628
Issuance of Class A common stock upon settlement of restricted stock unit awards, net of shares withheld for tax	1	—		—		—			—	—		(7		)	—			—		—			(7		)
Dividends declared ($0.0147 per share)	—	—		—		—			—	—		—			(799		)	—		—			(799		)
Distributions to noncontrolling interest	—	—		—		—			—	—		—			—			—		(2,805		)	(2,805		)
Exchanges of noncontrolling interest for Class A common stock	2,529	2		(2,529	)	(2		)	—	—		7,466			—			—		(7,466		)	—
Repurchase of common units and cancellation of Class B common stock	—	—		(6,055	)	(6		)	—	—		(9,085		)	—			—		(51,553		)	(60,644		)
Recognition of tax receivable agreement liability resulting from exchanges of noncontrolling interest for Class A common stock	—	—		—		—			—	—		(5,896		)	—			—		—			(5,896		)
Net deferred tax asset resulting from changes in outside basis difference on investment in Switch, Ltd.	—	—		—		—			—	—		1,588			—			—		—			1,588
Settlement of option loans	—	—		—		—			—	—		63			—			—		251			314
Balance—September 30, 2018	52,083	$	52	151,616		$	152		42,945	$	43	$	128,468		$	981		$	79	$	563,013		$	692,788

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

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Switch, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



	Nine Months Ended September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	15,375		$	18,152
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment	88,597			79,310
Loss on disposal of property and equipment	148			809
Deferred income taxes	1,249			2,064
Amortization of debt issuance costs	1,227			1,227
(Benefit) provision for doubtful accounts	(107		)	83
Unrealized loss on interest rate swaps	17,449			—
Equity in net losses of investments	—			331
Equity-based compensation	22,898			28,194
Amortization of portfolio energy credits	1,236			1,999
Changes in operating assets and liabilities:
Accounts receivable	(2,007		)	1,501
Prepaid expenses	(181		)	1,105
Other current assets	(96		)	(190		)
Other assets	(2,062		)	(3,108		)
Accounts payable	2,691			938
Accrued salaries and benefits	7,368			4,760
Accrued expenses	790			2,871
Deferred revenue	17,500			(31		)
Customer deposits	480			1,070
Other long-term liabilities	641			(170		)
Net cash provided by operating activities	173,196			140,915
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment	(221,296		)	(221,144		)
Acquisition of intangible asset	—			(25		)
Proceeds from sale of property and equipment	33			25
Purchase of portfolio energy credits	(1,095		)	(1,999		)
Net cash used in investing activities	(222,358		)	(223,143		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings	70,000			—
Repayment of borrowings, including capital lease obligations	(4,500		)	(4,500		)
Change in long-term deposit	2,144			(996		)
Payment of tax withholdings upon settlement of restricted stock unit awards	(1,441		)	(1,227		)
Settlement of option loans	—			314
Repurchase of common units	(24,705		)	(60,644		)
Dividends paid to Class A common stockholders	(6,412		)	(2,023		)
Distributions paid to noncontrolling interest	(15,006		)	(8,851		)
Net cash provided by (used in) financing activities	20,080			(77,927		)
NET DECREASE IN CASH AND CASH EQUIVALENTS	(29,082		)	(160,155		)
CASH AND CASH EQUIVALENTS—Beginning of period	81,560			264,666
CASH AND CASH EQUIVALENTS—End of period	$	52,478		$	104,511

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Switch, Inc.

Consolidated Statements of Cash Flows (Continued)

(in thousands)

(unaudited)



	Nine Months Ended September 30,
	2019			2018
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized	$	20,042		$	18,523
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION:
Increase in liabilities incurred to acquire property and equipment	$	10,519		$	12,896
Increase in accrued construction payables incurred related to long-term deposit	$	814		$	—
Increase in accounts payable incurred related to long-term deposit	$	501		$	—
Increase in deferred tax asset resulting from changes in outside basis difference on investment in Switch, Ltd.	$	62,814		$	21,937
Decrease in noncontrolling interest as a result of exchanges for Class A common stock	$	(85,912	)	$	(45,142	)
Recognition of liabilities under tax receivable agreement	$	79,981		$	45,430
Increase in distributions payable on unvested common units	$	659		$	—
Increase in dividends payable on unvested restricted stock units	$	284		$	96
Dividends payable settled with shares of Class A common stock	$	30		$	—
Settlement of liability incurred upon acquisition of capital lease asset	$	—		$	(1,976	)
Distributions used for payment of option loans and related interest	$	—		$	2

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

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Switch, Inc.

Condensed Notes to Consolidated Financial Statements

(unaudited)



Note 1	Organization	11
Note 2	Summary of Significant Accounting Policies	11
Note 3	Property and Equipment, Net	15
Note 4	Equity Method Investments	15
Note 5	Commitments and Contingencies	16
Note 6	Income Taxes	17
Note 7	Equity-Based Compensation	18
Note 8	Noncontrolling Interest	18
Note 9	Net Income Per Share	19
Note 10	Segment Reporting	19
Note 11	Subsequent Events	20

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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, with customer occupancy expected to commence in the first half of 2020, 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 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 and nine months ended September 30, 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, 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.

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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.

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 September 30, 2019 and 2018, the Company’s largest customer and its affiliates comprised 13% and 11%, respectively, of the Company’s revenue. During the nine months ended September 30, 2019 and 2018, the Company’s largest customer and its affiliates comprised 12% and 10% of the Company’s revenue. One customer accounted for 10% or more of accounts receivable as of September 30, 2019 and the Company’s largest customer and its affiliates 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:



		September 30, 2019
	Balance Sheet Classification	Carrying Value		Level 1		Level 2		Level 3
		(in thousands)
Assets:
Cash equivalents	Cash and cash equivalents	$	23,244	$	23,244	$	—	$	—
Liabilities:
Interest rate swaps	Accrued expenses	$	3,307	$	—	$	3,307	$	—
Interest rate swaps	Other long-term liabilities	$	14,142	$	—	$	14,142	$	—



		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 September 30, 2019 was approximately $659.1 million, compared to its carrying value, excluding debt issuance costs, of $656.5 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.

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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 designated as hedging instruments, inclusive of periodic net settlement amounts, were recorded in loss on interest rate swaps on the consolidated statements of comprehensive income and totaled $3.9 million and $17.7 million for the three and nine months ended September 30, 2019, respectively.

Recent Accounting Pronouncements

The Company will cease to qualify as an emerging growth company on December 31, 2019. Accordingly, the Company will no longer be permitted to adopt new or revised standards on a private company timeline consistent with emerging growth companies that elect not to opt out of the available extended transition period. As a result, adoption dates for Accounting Standards Updates herein effective after December 31, 2019 are reflective of public business entity requirements.

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 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.

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 Company will adopt this guidance for the annual reporting period ending December 31, 2019 using the modified retrospective approach for adoption. The most significant impact to the Company from the adoption of this guidance relates to installation revenue. Under the new guidance, the Company expects to recognize installation revenue over the contract term rather than over the expected life of the installation under the prior revenue guidance. For contracts not yet completed as of January 1, 2019, the Company expects to recognize an increase to retained earnings of approximately $1.0 million to $1.5 million before any potential income tax impacts. The Company is still assessing the income tax impacts related to this adoption. The 2019 quarterly impacts of this adoption are not expected to be material.

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ASU 2016-02–Leases

In February 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 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. 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 will 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 2016-13–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, 2019, including interim periods within those fiscal years, and requires a modified retrospective approach to adoption. In April 2019, the FASB issued ASU 2019-04, which, among other amendments, allows for certain policy elections and practical expedients related to accrued interest on financial instruments. In May 2019, the FASB also issued ASU 2019-05, which granted targeted transition relief by allowing entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

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 Company will adopt this guidance for the annual reporting period ending December 31, 2019 retrospectively for all periods presented. Upon adoption of ASU 2016-15, for the year ended December 31, 2017, the Company expects its cash flows from operating activities to increase by $1.5 million and its cash flows provided by financing activities to decrease by $1.5 million. The Company does not expect the adoption of this guidance to impact the years ended December 31, 2019 and December 31, 2018.

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, and interim periods within those fiscal years, beginning after December 15, 2019. In addition, in November 2018, the FASB issued ASU 2018-19, which provides clarifications and improvements on sections of ASU 2018-13. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

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Prior Period Adjustments

During the three months ended September 30, 2018, the Company identified $15.0 million of property and equipment, which was included in construction in progress, that should have been placed in service during the three months ended June 30, 2017, at which time the Company should have begun depreciating the asset and ceased capitalizing interest. To correct for such errors in previously issued consolidated financial statements, during the three months ended September 30, 2018, the Company recognized $1.5 million of incremental depreciation expense in cost of revenue and $0.7 million of incremental interest expense as out of period adjustments. Considering both quantitative and qualitative factors, the Company determined the amounts were not material to any previously issued consolidated financial statements.

3. Property and Equipment, Net

Property and equipment, net consists of the following:



	September 30, 2019			December 31, 2018
	(in thousands)
Land and land improvements	$	223,822		$	194,711
Buildings, building improvements, and leasehold improvements	426,894			412,089
Substation equipment	19,770			4,247
Data center equipment	992,193			904,722
Vehicles	1,744			1,685
Core network equipment	38,338			34,901
Cloud computing equipment	5,192			5,192
Fiber facilities	10,597			9,912
Computer equipment, furniture, and fixtures	39,729			34,975
Capitalized leased assets	34,602			33,730
Construction in progress	197,765			124,431
Property and equipment, gross	1,990,646			1,760,595
Less: accumulated depreciation and amortization	(545,653		)	(457,825		)
Property and equipment, net	$	1,444,993		$	1,302,770

Accumulated amortization for capitalized leased assets totaled $11.0 million and $9.9 million as of September 30, 2019 and December 31, 2018, respectively.

During the nine months ended September 30, 2019 and 2018, capitalized interest was $3.9 million and $3.1 million, respectively.

The Company capitalized internal use software costs of $0.8 million and $0.3 million during the three months ended September 30, 2019 and 2018, respectively, and $1.7 million and $1.1 million during the nine months ended September 30, 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 September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(in thousands)
Cost of revenue	$	29,427	$	28,327	$	86,251	$	77,448
Selling, general and administrative expense	809		662		2,346		1,862
Total depreciation and amortization of property and equipment	$	30,236	$	28,989	$	88,597	$	79,310

4. Equity Method Investments

The Company currently holds two investments accounted for under the equity method of accounting, SUPERNAP International, S.A. (“SUPERNAP International”) and Planet3, Inc. (“Planet3”), in which the Company holds a 50% ownership interest and a 45% ownership interest, respectively. As of September 30, 2019 and December 31, 2018, the Company determined that it continued to have a variable interest in both SUPERNAP International and Planet3,

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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 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 nine months ended September 30, 2018 amounted to $0.3 million. As of September 30, 2019 and December 31, 2018, the Company recorded amounts consisting primarily of royalty fees and reimbursable expenses due from SUPERNAP International of $0.3 million and $0.4 million, respectively, within accounts receivable on the consolidated balance sheets.

5. Commitments and Contingencies

Purchase Commitments

In June 2019, a wholly-owned subsidiary of Switch, Ltd. entered into a power purchase and sale agreement with Tenaska Power Services Co. to purchase a commitment of 20 megawatts per energy hour for a term of 12 months, or a purchase commitment of $6.3 million during the term, which started July 1, 2019. Additionally, scheduling services for the purchased power from the agreement are provided by Morgan Stanley Capital Group Inc., resulting in an additional purchase commitment of $0.3 million, for a total purchase commitment of $6.6 million related to this agreement. The remaining total purchase commitment was $4.9 million as of September 30, 2019. Future power purchase commitments for the remainder of 2019 and 2020 are $1.6 million and $3.3 million, respectively, with no additional commitments upon termination of the agreement thereafter.

In July 2019, a wholly-owned subsidiary of Switch, Ltd. entered into two power purchase and sale agreements for electricity and a battery energy storage system agreement to purchase 10.1 million megawatt-hours over a term of 25 years and battery capacity of 50 megawatts at a monthly price per kilowatt-month of installed capacity for a term of 20 years. These agreements result in an aggregate purchase commitment of $468.6 million during the respective terms starting on the earlier of October 1, 2022 or upon delivery of the battery energy storage system.

Operating Leases

During the three months ended September 30, 2019 and 2018, rent expense related to operating leases was $2.6 million and $2.0 million, respectively. During the nine months ended September 30, 2019 and 2018, rent expense related to operating leases was $6.7 million and $5.9 million, respectively. Related party rent included in these amounts was $2.0 million and $1.2 million for the three months ended September 30, 2019 and 2018, respectively, and $4.7 million and $3.7 million for the nine months ended September 30, 2019 and 2018, respectively.

In June 2019, the Company received county approval of an operating lease it previously entered into with an entity in which a member of its Board of Directors has a beneficial ownership interest for the lease of land. The operating lease requires annual payments of $2.5 million over a non-cancellable term of 50 years, commencing July 1, 2019, for a total obligation of $126.9 million. The remaining lease commitment was $126.2 million as of September 30, 2019.

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. The parties are currently engaged in discovery. 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

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in the lawsuit from infringing Switch, Ltd.’s patents, as well as other remedies. The parties are currently engaged in discovery.

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 the defendants’ motion to stay the State Court Securities Action in favor of the Federal Court Securities Action, which stay was affirmed by the Nevada Supreme Court in September 2019. 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. In July 2019, the federal court granted Switch, Inc.’s motion to dismiss in part, which narrowed the scope of the plaintiff’s case. The parties are currently engaged in discovery in the Federal Court Securities Action. Switch, Inc. believes that these lawsuits are without merit and intends to continue to vigorously defend against them.

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 parties are currently negotiating a further stay of the Derivative Shareholder Action pending the resolution of the Federal Court Securities Action.

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.

6. Income Taxes

The Company recorded a net deferred tax asset resulting from changes in the outside basis difference on Switch, Inc.’s investment in Switch, Ltd. of $15.7 million and $62.8 million during the three and nine months ended September 30, 2019, respectively, and $1.6 million and $21.9 million during the three and nine months ended September 30, 2018, respectively, with a corresponding increase to additional paid in capital. The Company has determined it is more-likely-than-not that it will be able to realize this deferred tax asset in the future. Additionally, the Company recorded return to provision adjustments of $0.4 million and $0.6 million due to changes in estimated depreciation expense during the three and nine months ended September 30, 2019 and 2018, respectively.

Tax Receivable Agreement

The Company has recorded a liability under the tax receivable agreement of $132.5 million and $52.5 million as of September 30, 2019 and December 31, 2018, respectively, which provides for the payment of 85% of the amount of the tax benefits, if any, that Switch, Inc. is deemed to realize as a result of increases in the tax basis of its ownership in Switch, Ltd. related to exchanges of noncontrolling interest for Class A common stock.

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7. Equity-Based Compensation

Total equity-based compensation recognized on the consolidated statements of comprehensive income was as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(in thousands)
Cost of revenue	$	361	$	358	$	1,115	$	1,141
Selling, general and administrative expense	6,949		7,270		21,783		27,053
Total equity-based compensation	$	7,310	$	7,628	$	22,898	$	28,194

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. In April and July 2019, Switch, Inc. issued an aggregate of 28.6 million shares of Class A common stock to members of Switch, Ltd. in connection with such members’ redemptions of an equivalent number of Common Units and corresponding cancellation of an equivalent number of Switch, Inc.’s Class B common stock. The redemption occurred pursuant to the terms of the Switch operating agreement entered into in connection with the Company’s IPO.

In April and July 2019, Switch, Ltd. elected to repurchase an aggregate of 2.1 million of its outstanding Common Units for $24.7 million upon the exercise by certain members of their respective redemption right. Pursuant to these repurchases, Switch, Inc. canceled an equivalent amount of its shares of Class B common stock. The repurchases are part of a program previously approved by the Board of Directors of the Company and reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

The ownership of the Common Units is summarized as follows:



	September 30, 2019			December 31, 2018
	Units	Ownership %		Units	Ownership %
	(units in thousands)
Switch, Inc.’s ownership of Common Units⁽¹⁾	84,277	34.9	%	55,157	22.7	%
Noncontrolling interest holders’ ownership of Common Units⁽²⁾	157,339	65.1	%	187,440	77.3	%
Total Common Units	241,616	100.0	%	242,597	100.0	%

________________________________________


(1)	Common Units held by Switch, Inc. as of September 30, 2019 exclude 80,000 Common Units underlying unvested restricted stock awards. Common Units held by Switch, Inc. as of December 31, 2018 exclude 61,000 Common Units underlying unvested restricted stock awards.


(2)	Common Units held by noncontrolling interest holders as of September 30, 2019 exclude 3.4 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.

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9. Net Income Per Share

The following table sets forth the calculation of basic and diluted net income per share:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(in thousands, except per share data)
Net income per share:
Numerator—basic:
Net income attributable to Switch, Inc.—basic	$	2,074	$	6	$	3,952	$	1,498
Numerator—diluted:
Net income attributable to Switch, Inc.—basic	$	2,074	$	6	$	3,952	$	1,498
Effect of dilutive securities:
Shares of Class B and Class C common stock	—		—		8,818		—
Net income attributable to Switch, Inc.—diluted	$	2,074	$	6	$	12,770	$	1,498
Denominator—basic:
Weighted average shares outstanding—basic	84,135		50,669		72,566		43,063
Net income per share—basic	$	0.02	$	0.00	$	0.05	$	0.03
Denominator—diluted:
Weighted average shares outstanding—basic	84,135		50,669		72,566		43,063
Weighted average effect of dilutive securities:
Stock/unit options	1,050		25		572		67
Restricted stock units	1,027		—		652		—
Dividend equivalent units	24		9		21		5
Restricted stock awards	25		7		33		7
Shares of Class B and Class C common stock	—		—		173,349		—
Weighted average shares outstanding—diluted	86,261		50,710		247,193		43,142
Net income per share—diluted	$	0.02	$	0.00	$	0.05	$	0.03

Shares of Class B 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 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 September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
	(in thousands)
Stock options⁽¹⁾	5,040	5,316	5,040	5,316
Restricted stock units⁽¹⁾	13	2,252	13	2,242
Shares of Class B and Class C common stock⁽²⁾	160,727	194,561	—	194,561

________________________________________


(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.


(2)	Shares of Class B and Class C common stock at the end of the period are considered potentially dilutive shares of Class A common stock under application of the if-converted method.

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

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customer, was less than 2% of revenue for each of the three and nine months ended September 30, 2019 and 2018.

The Company’s revenue is comprised of the following:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(in thousands)
Colocation	$	95,089	$	82,445	$	271,977	$	241,314
Connectivity	20,861		18,482		59,212		55,566
Other	1,608		1,841		4,988		5,766
Total revenue	$	117,558	$	102,768	$	336,177	$	302,646

11. Subsequent Events

In October 2019, a wholly-owned subsidiary of Switch, Ltd. entered into a power purchase and sale agreement for electricity and a battery energy storage system agreement to purchase 6.6 million megawatt-hours over a term of 25 years and battery capacity of 60 megawatts at a monthly price per kilowatt-month of installed capacity for a term of 20 years. These agreements result in an aggregate purchase commitment of $379.4 million during the respective terms starting on the earlier of October 1, 2022 or upon delivery of the battery energy storage system.

In October 2019, a wholly-owned subsidiary of Switch, Ltd. entered into a power purchase and sale agreement for electricity to purchase a firm commitment of 10 megawatts per energy hour for a term of five months and 50 megawatts per energy hour for a term of one month, or a purchase commitment of $2.4 million, inclusive of scheduling services, for a total term of six months starting on January 1, 2020.

In October 2019, Switch, Inc. issued an aggregate of 2.4 million shares of Class A common stock to members of Switch, Ltd. in connection with such members’ redemptions of an equivalent number of Common Units and 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 October 2019, Switch, Ltd. also elected to repurchase 3.2 million of its outstanding Common Units for $49.2 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.

In October 2019, the Company borrowed $50.0 million under its revolving credit facility.

In November 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 $2.7 million, to be paid on November 29, 2019 to holders of record as of November 19, 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 $7.1 million.

In November 2019, at the request of Switch, Inc.’s Board of Directors, the holders of Class C common stock converted each share of Class C common stock held by them into one share of Class B common stock pursuant to Switch, Inc.’s amended and restated articles of incorporation.

In November 2019, Switch, Inc.’s Board of Directors increased the previously approved program by which Switch, Ltd. may repurchase its outstanding Common Units for cash by $5.0 million, with any unused amount from this increase expiring on December 31, 2019.

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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, or 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 words 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 capital expenditures and other 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 expectations regarding loss of our emerging growth company status;


•	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., or Common Units;


•	our expectations regarding future declarations of dividends and cash distributions; and

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•	our expectations regarding payments under the tax receivable agreement entered into with members of Switch, Ltd., or the Tax Receivable Agreement, contingent upon our taxable income and the applicable tax rate.

We qualify all of our forward-looking statements by the cautionary statements below. 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.

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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 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 hyperscale 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 are constructing a fourth Prime, The Keep Campus, in Atlanta, Georgia, with customer occupancy expected to commence in the first half of 2020. 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 950 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 over 90 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 nine months ended September 30, 2019 and 2018, our largest customer, eBay, Inc. and its affiliates, accounted for 12% and 10% 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.

We generated net income of $7.1 million and $4.7 million during the three months ended September 30, 2019 and 2018, respectively. During the three months ended September 30, 2019 and 2018, we generated Adjusted EBITDA of $56.7 million and $50.9 million, respectively, representing an Adjusted EBITDA margin of 48.2% and 49.5%, respectively.

We generated net income of $15.4 million and $18.2 million during the nine months ended September 30, 2019 and 2018, respectively. During the nine months ended September 30, 2019 and 2018, we generated Adjusted EBITDA of $168.9 million and $148.1 million, respectively, representing an Adjusted EBITDA margin of 50.2% and 48.9%, respectively.

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.

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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 megawatts, or MW, of power. As of September 30, 2019, the utilization rates at these Prime Campuses, based on currently available cabinets, were approximately 93%, 72%, and 92% at The Core Campus, The Citadel Campus, and The Pyramid Campus, respectively. Additionally, each of our existing Primes has room for further expansion. 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 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, as 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 reduces 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 $5.4 million and $5.2 million for the nine months ended September 30, 2019 and 2018, respectively.

Growth in Customers. Our results of operations could be significantly affected by the growth or reduction of our customer base. We have over 950 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, some of which 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 September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(dollars in thousands)
Recurring revenue	$	115,308		$	100,306		$	329,381		$	294,875
Capital expenditures	$	121,165		$	60,371		$	221,296		$	221,144
Adjusted EBITDA	$	56,714		$	50,892		$	168,870		$	148,069
Adjusted EBITDA margin	48.2		%	49.5		%	50.2		%	48.9		%

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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.

The following table sets forth a reconciliation of recurring revenue to total revenue:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(in thousands)
Recurring revenue	$	115,308	$	100,306	$	329,381	$	294,875
Non-recurring revenue	2,250		2,462		6,796		7,771
Revenue	$	117,558	$	102,768	$	336,177	$	302,646

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 certain 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.

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The following table sets forth a reconciliation of our net income to Adjusted EBITDA:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(in thousands)
Net income	$	7,098		$	4,663		$	15,375		$	18,152
Interest expense	6,743			7,409			21,212			19,826
Interest income⁽¹⁾	(94		)	(575		)	(659		)	(2,001		)
Income tax expense	610			1,212			1,249			2,064
Depreciation and amortization of property and equipment	30,236			28,989			88,597			79,310
Loss on disposal of property and equipment	41			182			148			809
Loss on interest rate swaps	3,926			—			17,692			—
Equity-based compensation	7,310			7,628			22,898			28,194
Shareholder-related litigation expense	844			1,384			2,358			1,384
Equity in net losses of investments	—			—			—			331
Adjusted EBITDA	$	56,714		$	50,892		$	168,870		$	148,069

________________________________________


(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 and nine months ended September 30, 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 are 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.

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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 expenses related to the loss of our emerging growth company status expected to occur on December 31, 2019, 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 other equity awards. 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.

Loss on Interest Rate Swaps

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, inclusive of periodic net settlement amounts.

Other

Other income (expense) primarily consists 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 our initial public offering, or 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.

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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 September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(in thousands)
Consolidated Statements of Income Data:
Revenue	$	117,558		$	102,768		$	336,177		$	302,646
Cost of revenue	62,112			59,150			177,301			169,200
Gross profit	55,446			43,618			158,876			133,446
Selling, general and administrative expense	37,314			31,086			104,612			95,676
Income from operations	18,132			12,532			54,264			37,770
Other income (expense):
Interest expense, including amortization of debt issuance costs	(6,743		)	(7,409		)	(21,212		)	(19,826		)
Equity in net losses of investments	—			—			—			(331		)
Loss on interest rate swaps	(3,926		)	—			(17,692		)	—
Other	245			752			1,264			2,603
Total other expense	(10,424		)	(6,657		)	(37,640		)	(17,554		)
Income before income taxes	7,708			5,875			16,624			20,216
Income tax expense	(610		)	(1,212		)	(1,249		)	(2,064		)
Net income	7,098			4,663			15,375			18,152
Less: net income attributable to noncontrolling interest	5,024			4,657			11,423			16,654
Net income attributable to Switch, Inc.	$	2,074		$	6		$	3,952		$	1,498

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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 September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Consolidated Statements of Income Data:
Revenue	100	%	100	%	100	%	100	%
Cost of revenue	53		58		53		56
Gross profit	47		42		47		44
Selling, general and administrative expense	32		30		31		32
Income from operations	15		12		16		12
Other income (expense):
Interest expense, including amortization of debt issuance costs	(6	)	(7	)	(6	)	(7	)
Equity in net losses of investments	—		—		—		—
Loss on interest rate swaps	(3	)	—		(5	)	—
Other	—		1		—		1
Total other expense	(9	)	(6	)	(11	)	(6	)
Income before income taxes	7		6		5		7
Income tax expense	(1	)	(1	)	—		(1	)
Net income	6		5		5		6
Less: net income attributable to noncontrolling interest	4		5		3		6
Net income attributable to Switch, Inc.	2	%	—	%	1	%	—	%

Comparison of the Three Months Ended September 30, 2019 and 2018

Revenue



	Three Months Ended September 30,				Change
	2019		2018		Amount			%
	(dollars in thousands)
Colocation	$	95,089	$	82,445	$	12,644		15	%
Connectivity	20,861		18,482		2,379			13	%
Other	1,608		1,841		(233		)	(13	)%
Revenue	$	117,558	$	102,768	$	14,790		14	%

Revenue increased by $14.8 million, or 14%, for the three months ended September 30, 2019, compared to the three months ended September 30, 2018. The increase was primarily attributable to an increase of $12.6 million in colocation revenue. Of the overall increase, 48% was attributable to new customers initiating service after September 30, 2018, and the remaining 52% 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% and 0.3% during the three months ended September 30, 2019 and 2018, respectively.

Cost of Revenue and Gross Margin



	Three Months Ended September 30,						Change
	2019			2018			Amount		%
	(dollars in thousands)
Cost of revenue	$	62,112		$	59,150		$	2,962	5	%
Gross margin	47.2		%	42.4		%

Cost of revenue increased by $3.0 million, or 5%, for the three months ended September 30, 2019, compared to the three months ended September 30, 2018. The increase was primarily attributable to increases of $2.6 million in

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depreciation and amortization expense due to additional property and equipment being placed into service, $1.1 million in salaries and related employee expenses largely due to an increase in headcount, and $1.1 million in connectivity costs associated with increased occupancy. These increases were partially offset by a correction made during the three months ended September 30, 2018 for an immaterial amount of $1.5 million in additional depreciation expense included in cost of revenue that should have been expensed during the periods from June 30, 2017 through June 30, 2018. For further information, see Note 2 “Summary of Significant Accounting Policies—Prior Period Adjustments” within our consolidated financial statements. Gross margin increased by 480 basis points for the three months ended September 30, 2019, compared to the three months ended September 30, 2018.

Selling, General and Administrative Expense



	Three Months Ended September 30,				Change
	2019		2018		Amount		%
	(dollars in thousands)
Selling, general and administrative expense	$	37,314	$	31,086	$	6,228	20	%

Selling, general and administrative expense increased by $6.2 million, or 20%, for the three months ended September 30, 2019, compared to the three months ended September 30, 2018. The increase was primarily attributable to increases of $3.4 million in professional fees for consulting, legal, and accounting services, and $3.2 million in salaries and related employee expenses largely due an increase in headcount.

Other Income (Expense)



	Three Months Ended September 30,						Change
	2019			2018			Amount			%
	(dollars in thousands)
Other income (expense):
Interest expense	$	(6,743	)	$	(7,409	)	$	666		(9	)%
Loss on interest rate swaps	(3,926		)	—			(3,926		)	NM
Other	245			752			(507		)	(67	)%
Total other expense	$	(10,424	)	$	(6,657	)	$	(3,767	)	57	%

________________________________________

NM - Not meaningful

Interest Expense

Interest expense decreased by $0.7 million, or 9%, for the three months ended September 30, 2019, compared to the three months ended September 30, 2018. The decrease was primarily driven by a correction made during the three months ended September 30, 2018 of $0.7 million in additional interest expense that should have been expensed during the periods from June 30, 2017 through June 30, 2018. For further information, see Note 2 “Summary of Significant Accounting Policies—Prior Period Adjustments” within our consolidated financial statements.

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 a loss on interest rate swaps that do not qualify for hedge accounting of $3.9 million from changes in the fair value for the three months ended September 30, 2019.

Other

Other income decreased by $0.5 million, or 67%, for the three months ended September 30, 2019, compared to the three months ended September 30, 2018. The decrease was primarily due to a decrease in interest income earned on our cash equivalents.

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Income Tax Expense



	Three Months Ended September 30,						Change
	2019			2018			Amount		%
	(dollars in thousands)
Income tax expense	$	(610	)	$	(1,212	)	$	602	(50	)%

Income tax expense decreased by $0.6 million, or 50%, for the three months ended September 30, 2019, compared to the three months ended September 30, 2018. Income tax expense is driven by our allocable share of Switch, Ltd.’s income and loss before income taxes.

Net Income Attributable to Noncontrolling Interest



	Three Months Ended September 30,				Change
	2019		2018		Amount		%
	(dollars in thousands)
Net income attributable to noncontrolling interest	$	5,024	$	4,657	$	367	8	%

Net income attributable to noncontrolling interest increased by $0.4 million, or 8%, for the three months ended September 30, 2019, compared to the three months ended September 30, 2018, primarily due to an increase in net income.

Comparison of the Nine Months Ended September 30, 2019 and 2018

Revenue



	Nine Months Ended September 30,				Change
	2019		2018		Amount			%
	(dollars in thousands)
Colocation	$	271,977	$	241,314	$	30,663		13	%
Connectivity	59,212		55,566		3,646			7	%
Other	4,988		5,766		(778		)	(13	)%
Revenue	$	336,177	$	302,646	$	33,531		11	%

Revenue increased by $33.5 million, or 11%, for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018. The increase was primarily attributable to an increase of $30.7 million in colocation revenue. Of the overall increase, 62% was attributable to new customers initiating service after September 30, 2018, and the remaining 38% was attributable to growth from existing customers. Our revenue churn rate was 0.5% and 0.4% during the nine months ended September 30, 2019 and 2018, respectively.

Cost of Revenue and Gross Margin



	Nine Months Ended September 30,						Change
	2019			2018			Amount		%
	(dollars in thousands)
Cost of revenue	$	177,301		$	169,200		$	8,101	5	%
Gross margin	47.3		%	44.1		%

Cost of revenue increased by $8.1 million, or 5%, for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018. The increase was primarily attributable to an increase of $9.6 million in depreciation and amortization expense due to additional property and equipment being placed into service, partially offset by a decrease of $0.9 million in facilities costs. In addition, we corrected an immaterial amount during the nine months ended September 30, 2018 of $0.8 million in additional depreciation expense included in cost of revenue that should have been expensed during the periods from June 30, 2017 through December 31, 2017. For further

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information, see Note 2 “Summary of Significant Accounting Policies—Prior Period Adjustments” within our consolidated financial statements. Gross margin increased by 320 basis points for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018.

Selling, General and Administrative Expense



	Nine Months Ended September 30,				Change
	2019		2018		Amount		%
	(dollars in thousands)
Selling, general and administrative expense	$	104,612	$	95,676	$	8,936	9	%

Selling, general and administrative expense increased by $8.9 million, or 9%, for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018. The increase was primarily attributable to increases of $5.9 million in professional fees for consulting, legal, and accounting services, $1.0 million in salaries and related employee expenses, largely due to an increase in headcount, $0.8 million in real estate and personal property taxes, and $0.6 million in insurance costs.

Other Income (Expense)



	Nine Months Ended September 30,						Change
	2019			2018			Amount			%
	(dollars in thousands)
Other income (expense):
Interest expense	$	(21,212	)	$	(19,826	)	$	(1,386	)	7	%
Equity in net losses of investments	—			(331		)	331			(100	)%
Loss on interest rate swaps	(17,692		)	—			(17,692		)	NM
Other	1,264			2,603			(1,339		)	(51	)%
Total other expense	$	(37,640	)	$	(17,554	)	$	(20,086	)	114	%

________________________________________

NM - Not meaningful

Interest Expense

Interest expense increased by $1.4 million, or 7%, for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018. The increase was driven by an increase in our weighted average interest rate from 4.12% for the nine months ended September 30, 2018 to 4.61% for the nine months ended September 30, 2019, related to our LIBOR-based borrowings. In addition, during the nine months ended September 30, 2018, we corrected an immaterial amount of $0.4 million in additional interest expense that should have been expensed during the periods from June 30, 2017 through December 31, 2017. For further information, see Note 2 “Summary of Significant Accounting Policies—Prior Period Adjustments” within our consolidated financial statements.

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 nine months ended September 30, 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.

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 a loss on interest rate swaps that do not qualify for hedge accounting of $17.7 million from changes in the fair value for the nine months ended September 30, 2019.

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Other

Other income decreased by $1.3 million, or 51%, for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018. The decrease was primarily due to a decrease in interest income earned on our cash equivalents.

Income Tax Expense



	Nine Months Ended September 30,						Change
	2019			2018			Amount		%
	(dollars in thousands)
Income tax expense	$	(1,249	)	$	(2,064	)	$	815	(39	)%

Income tax expense decreased by $0.8 million, or 39%, for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018. Income tax expense is driven by our allocable share of Switch, Ltd.’s income and loss before income taxes.

Net Income Attributable to Noncontrolling Interest



	Nine Months Ended September 30,				Change
	2019		2018		Amount			%
	(dollars in thousands)
Net income attributable to noncontrolling interest	$	11,423	$	16,654	$	(5,231	)	(31	)%

Net income attributable to noncontrolling interest decreased by $5.2 million, or 31%, for the nine months ended September 30, 2019, compared to the nine months ended September 30, 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 its 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 September 30, 2019, we had $52.5 million of cash and cash equivalents. As of September 30, 2019, our total indebtedness was $672.1 million consisting of (i) $582.7 million principal from our term loan facility (net of debt issuance costs), (ii) $70.0 million from our revolving credit facility, and (iii) $19.4 million from our capital lease obligations. As of September 30, 2019, we had access to $430.0 million in additional liquidity from our revolving credit facility. For the year ending December 31, 2019, we expect to incur $245 million to $265 million in capital expenditures (excluding acquisitions of land); however, the exact amount will depend on a number of factors. 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. In November 2019, our board of directors increased the repurchase authority by $5.0 million, with any unused amount from this increase expiring on December 31, 2019. The program was effective immediately

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upon authorization, but 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 September 30, 2019, we had $64.7 million remaining in repurchase authority, of which $49.2 million was used to repurchase Common Units in October 2019.

Cash Flows

The following table summarizes our cash flows:



	Nine Months Ended September 30,
	2019			2018
	(in thousands)
Net cash provided by operating activities	$	173,196		$	140,915
Net cash used in investing activities	(222,358		)	(223,143		)
Net cash provided by (used in) financing activities	20,080			(77,927		)
Net decrease in cash and cash equivalents	$	(29,082	)	$	(160,155	)

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 nine months ended September 30, 2019 was $173.2 million, compared to $140.9 million for the nine months ended September 30, 2018. The increase of $32.3 million was primarily due to increased operations in our expanded data center facilities and changes in our working capital accounts.

Cash Flows from Investing Activities

During the nine months ended September 30, 2019, net cash used in investing activities was $222.4 million, primarily consisting of capital expenditures of $221.3 million related to the expansion of our data center facilities.

During the nine months ended September 30, 2018, net cash used in investing activities was $223.1 million, primarily consisting of capital expenditures of $221.1 million related to the expansion of our data center facilities, and purchases of portfolio energy credits of $2.0 million.

Cash Flows from Financing Activities

During the nine months ended September 30, 2019, net cash provided by financing activities was $20.1 million, primarily consisting of $70.0 million in proceeds from borrowings on our revolving credit facility, partially offset by $24.7 million for the repurchase of Common Units, distributions paid to noncontrolling interest of $15.0 million, dividends paid of $6.4 million, and repayments of borrowings outstanding under our term loan of $4.5 million.

During the nine months ended September 30, 2018, net cash used in financing activities was $77.9 million, primarily consisting of $60.6 million for the repurchase of Common Units, distributions paid to noncontrolling interest of $8.9 million, repayments of borrowings outstanding under our term loan of $4.5 million, dividends paid of $2.0 million, and payments of tax withholdings upon settlement of restricted stock unit awards of $1.2 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 our request of up to $30.0 million. As of September 30, 2019, we had $70.0 million outstanding under the revolving credit facility accruing interest at an underlying variable rate of 3.54% and $430.0 million of availability. As of September 30, 2019, we had $582.7 million 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 4.29%. Upon satisfying certain conditions, the amended and restated credit agreement provides that we can increase the amount

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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 our 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 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 our 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 September 30, 2019, the maximum consolidated total leverage ratio was 4.75 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 September 30, 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 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.

In June 2019, we received county approval of an operating lease with an entity in which a member of our Board of Directors has a beneficial ownership interest for the lease of land. The operating lease requires annual payments of $2.5 million over a non-cancellable term of 50 years, commencing July 1, 2019, for a total obligation of $126.9 million.

In June 2019, we entered into a power purchase and sale agreement to purchase a commitment of 20 megawatts per energy hour for a term of 12 months, or a purchase commitment of $6.3 million during the term, which started July 1, 2019. Scheduling services for the purchased power from the agreement result in an additional purchase commitment of $0.3 million, for a total purchase commitment of $6.6 million related to this agreement. The remaining total purchase commitment was $4.9 million as of September 30, 2019. Future power purchase commitments for the remainder of 2019 and 2020 are $1.6 million and $3.3 million, respectively, with no additional commitments upon termination of the agreement thereafter.

In July and October 2019, we entered into three power purchase and sale agreements for electricity and two battery energy storage system agreements to purchase 16.7 million megawatt-hours over a term of 25 years and battery capacity of 110 megawatts at a monthly price per kilowatt-month of installed capacity for a term of 20 years. These agreements result in an aggregate purchase commitment of $848.0 million during the respective terms starting on the earlier of October 1, 2022 or upon delivery of the battery energy storage systems.

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In October 2019, we entered into a power purchase and sale agreement for electricity to purchase a firm commitment of 10 megawatts per energy hour for a term of five months and 50 megawatts per energy hour for a term of one month, or a purchase commitment of $2.4 million, inclusive of scheduling services, for a total term of six months starting on January 1, 2020.

In October 2019, we borrowed $50.0 million under our revolving credit facility.

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.

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 September 30, 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 September 30, 2019, we had $256.5 million outstanding under our credit facilities with an underlying variable interest rate of 4.21%. As of September 30, 2019, a hypothetical increase or decrease of 100 basis points in LIBOR would cause our annual interest cost to change by $2.6 million.

As of September 30, 2019, we had cash and cash equivalents of $52.5 million with cash equivalents of $23.2 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 September 30, 2019 would cause our annual interest income to change by $0.2 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 September 30, 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 September 30, 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

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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 September 30, 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 September 30, 2019.

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 during the quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Switch, Inc. | Q3 2019 Form 10-Q | 37

Table of Contents


Part II.	Other Information


Item 1.	Legal Proceedings.

Switch, Inc. | Q3 2019 Form 10-Q | 38

Table of Contents


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		Amended and Restated Articles of Incorporation of Switch, Inc.	8-K	3.1	10/11/2017
3.2		Amended and Restated Bylaws of Switch, Inc.	8-K	3.2	10/11/2017
31.1	*	Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	*	Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	#	Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	*	XBRL Instance Document.
101.SCH	*	XBRL Taxonomy Extension Schema Document.
101.CAL	*	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	*	XBRL Extension Definition Linkbase Document.
101.LAB	*	XBRL Taxonomy Label Linkbase Document.
101.PRE	*	XBRL Taxonomy Extension Presentation Linkbase Document.

___________________________________________________________________

* Filed herewith.

# Furnished herewith.

Switch, Inc. | Q3 2019 Form 10-Q | 39

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:	November 12, 2019	/s/ Gabe Nacht
		Gabe Nacht Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer)