Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial statements and footnotes thereto included elsewhere in this Annual Report. In addition to historical financial information, the following discussion contains forward-looking statements that are based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results and the timing of events may differ materially from those anticipated and discussed in the forward-looking statements as a result of various factors discussed in “Cautionary Note Regarding Forward-Looking Statements” and “Part I-Item 1A. Risk Factors” contained in this Annual Report and in our other reports that we file from time to time with the SEC.
Overview of Cyxtera’s Business
Cyxtera is a global data center leader in retail colocation and interconnection services. We provide an innovative suite of deeply connected and intelligently automated infrastructure and interconnection solutions to more than 2,300 leading enterprises, service providers and government agencies around the world enabling them to scale faster, meet rising consumer expectations and gain a competitive edge.
Factors Affecting Cyxtera’s Business
Impact of the Current Macroeconomic Environment
Uncertainty in the macroeconomic environment, including due to the effects of fluctuation in foreign exchange rates, the recent rise in global inflation and interest rates, supply chain disruptions, a rise in energy prices, geopolitical pressures, including the ongoing Russia-Ukraine conflict and associated global economic conditions have resulted in volatility in foreign currency, credit, equity and energy markets. If these uncertain macroeconomic conditions persist, they could have an adverse impact on our business.
Key Operational and Business Metrics
In addition to the Company’s financial results determined in accordance with US GAAP, our management uses the following key operational and business metrics to manage its data center business and to assess the results of operations:
•recurring and non-recurring revenues;
•bookings; and
•churn.
These metrics are important indicators of the overall direction of our business, including trends in sales and the effectiveness of our operations and growth initiatives. The following table presents our recurring and nonrecurring revenues from the Company’s consolidated financial statements and certain operating metrics for each of the periods indicated, which have been derived from the Company’s internal records. These metrics may differ from those used by other companies in our industry who may define these metrics differently.
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
| Revenues | | | | | |
Recurring revenue | $ | 710.6 | | | $ | 671.5 | | | $ | 657.4 | |
Non-recurring revenues | 35.4 | | | 32.2 | | | 33.1 |
| Total | $ | 746.0 | | | $ | 703.7 | | | $ | 690.5 | |
Bookings | $ | 8.7 | | | $ | 8.7 | | | $ | 6.9 | |
Churn | $ | 5.9 | | | $ | 5.4 | | | $ | 6.9 | |
We define these metrics as follows:
Revenues: We disaggregate revenue from contracts with customers into recurring revenues and non-recurring revenues. We derive the majority of our revenues from recurring revenue streams, consisting primarily of colocation service fees, which include fees for the licensing of space and power, and interconnection service fees. We consider our colocation service offerings recurring because customers are generally committed to such services under long term contracts, typically three years in length. Our interconnection services are typically on month-to-month contracts but are considered recurring because customers’ use of interconnection services generally remains stable over time. This is because interconnection services facilitate a customer’s full use of the colocation environment or support the business function housed within the customer’s colocation environment by establishing connections between colocation customers within our data center facilities and their preferred network service providers, low latency public cloud on-ramps and a wide range of technology and network service providers and business partners. Our colocation and interconnection service offerings are generally billed monthly and recognized ratably over the term of the contract. Our management reviews monthly recurring revenue by reference to the metric of “MRR,” which is calculated as of the last day of a given month and represents the sum of all service charges for recurring services provided during such month. Our MRR was $58.7 million, $53.5 million, and $52.9 million as of December 31, 2022, 2021 and 2020, respectively. Our non-recurring revenues are primarily composed of installation services related to a customer’s initial deployment and professional services we perform. These services are considered to be non-recurring because they are billed typically once, upon completion of the installation or the professional services work performed. The majority of these non-recurring revenues are typically billed on the first invoice distributed to the customer in connection with their initial installation. However, revenues from installation services are deferred and recognized ratably over the period of the contract term in accordance with Accounting Standard Codification (“ASC”) Topic 606 as discussed in Note 6 of our consolidated financial statements included elsewhere in this Annual Report.
Bookings: We define Bookings for a given period as the new monthly recurring service fees for colocation and interconnection services committed under service contracts during the relevant period. Bookings are measured for the respective reporting period and represent the monthly service fees - based on the service fees for one month of services - attributable to new service contracts entered into and additional services committed under existing service contracts during the relevant period. Bookings is a key performance measure that management uses to assess the productivity of our sales force and anticipate data center inventory requirements. In addition, our management considers Bookings together with Churn (described below) to anticipate future changes to MRR.
Bookings was calculated for each period presented (i.e., the years ended December 31, 2022, 2021 and 2020) and represents the new monthly recurring service fees - based on the service fees for one month of services - attributable to new service contracts and additional services committed under existing service contracts during the period presented.
During the years ended December 31, 2022, 2021 and 2020, the total amount of new monthly recurring service fees for colocation and interconnection services committed under service contracts (i.e., Bookings) during such periods totaled $8.7 million, $8.7 million, and $6.9 million respectively.
Churn: We define Churn for a given period as the decrease in MRR during the relevant period attributable to service terminations and reductions. Churn is calculated for the respective reporting period, and represents the sum of the total amount of MRR for which a service contract was terminated or reduced during the relevant period, based on the last month’s service charges. Churn is a key performance measure that management uses to assess our customer satisfaction and performance against competition. In addition, our management considers Churn together with Bookings to anticipate future changes to MRR.
As presented in the table above, Churn was calculated for each period presented (i.e., the years ended December 31, 2022, 2021 and 2020) and represents the sum of the total amount of MRR for which a service contract was terminated or reduced during the period presented.
During the years ended December 31, 2022, 2021 and 2020, the total amount of MRR for which a service contract was terminated or reduced (i.e., Churn) during such periods totaled $5.9 million, $5.4 million, and $6.9 million, respectively.
Key Components of Results of Operations
Revenues:
We derive the majority of our revenues from recurring revenue streams, consisting primarily of colocation service fees, which include fees for the licensing of space and power, as well as interconnection service fees. Our colocation and interconnection service offerings are generally billed monthly and recognized ratably over the term of the contract. Our recurring revenues have comprised more than 95% of total revenues for each of the past three years. In addition, during 2022, 2021 and 2020, 90%, 84%, and 77%, respectively, of our Bookings came from existing customers. For purposes of calculating Bookings attributable to existing customers, an existing customer is a customer with an active service contract that executes an order for additional services. Our largest customer accounted for approximately 9% of recurring revenue for the year ended December 31, 2022, 11% of recurring revenues for the year ended December 31, 2021 and 15% of recurring revenues for the year ended December 31, 2020. Our 50 largest customers accounted for approximately 56%, 55%, and 57%, respectively, of recurring revenues for the years ended December 31, 2022, 2021 and 2020. Our interconnection revenues represented approximately 12% of total revenues for year ended December 31, 2022, and approximately 11% of total revenues for the years ended December 31, 2021 and 2020.
Our non-recurring revenues are primarily composed of installation services related to a customer’s initial deployment and professional services we perform. Non-recurring installation fees, although generally invoiced in a lump sum upon installation, are deferred and recognized ratably over the contract term. Professional service fees are also generally invoiced in a lump sum upon service delivery and are recognized in the period when the services are provided. As a percentage of total revenues, we expect non-recurring revenues to represent less than 5% of total revenues for the foreseeable future.
Operating Costs and Expenses:
Cost of Revenues, excluding Depreciation and Amortization. The largest components of our cost of revenue are rental payments related to our leased data centers; utility costs, including electricity and bandwidth access; data center employees’ salaries and benefits, including stock-based compensation, repairs and maintenance; supplies and equipment; and security. A majority of our cost of revenues is fixed in nature and are not expected to vary significantly from period to period unless we expand our existing data centers or open or acquire 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. Recently, the cost of electricity has generally risen due to macroeconomic natural gas supply and demand constraints, initially beginning with inadequate natural gas reserves in Europe to meet European demand in light of sanctions on Russian natural gas supply as a result of the conflict in the Ukraine. In addition, we expect the cost of utilities, specifically electricity, will generally continue to increase in the future on a cost-per-unit or fixed basis and for growth in consumption of electricity by our customers. Furthermore, the cost of electricity is generally higher in the summer months, as compared to other times of the year. Our costs of electricity may also increase as a result of the physical effects of climate change, increased regulations driving alternative electricity generation due to environmental considerations or as a result of our election to use renewable energy sources. To the extent we incur increased utility costs, such increased costs could materially impact our financial condition, results of operations and cash flows.
Selling, General and Administrative Expenses. Our selling, general and administrative expenses consist primarily of personnel-related expenses, including salaries, benefits and stock-based compensation for our sales and marketing, executive, finance, human resources, legal and IT functions and administrative personnel, third-party professional services fees, insurance premiums and administrative-related rent expense. We also incur additional expenses as a result of operating as a public company, including expenses necessary to comply with the rules and regulations applicable to companies listed on a national securities exchange and related to compliance and reporting
obligations pursuant to the rules and regulations of the SEC, as well as expenses for general and director and officer insurance, investor relations and professional services.
Depreciation and Amortization. Depreciation and amortization expenses are primarily composed of depreciation and amortization on our property, plant and equipment and amortization related to intangible assets.
Restructuring, Impairment, Site Closures and Related Cost. Should we commit to a plan to dispose a long-lived asset before the end of its previously estimated useful life or change its use of assets, estimated cash flows are revised accordingly. Restructuring, impairment, site closures and related costs are primarily composed of costs incurred to dispose of a long-lived asset and include an impairment charge of the leased asset, related liabilities that may arise as a result of the underlying action (such as severance), contractual obligations and other accruals associated with the site closures.
Goodwill impairment. Goodwill impairment consists of non-cash impairment charges related to goodwill. We review goodwill for impairment annually on October 1 and more frequently if events or changes in circumstances indicate an impairment may exist. If the carrying value of the reporting unit continues to exceed its fair value, the fair value of the Company’s goodwill is calculated and an impairment charge equal to the excess is recorded.
Transaction-related costs. Transaction-related costs consisted of a one-time transaction bonus paid to current and former employees and directors of Legacy Cyxtera following the consummation of the Business Combination (the “Transaction Bonus”). The Transaction Bonus was funded in full by a capital contribution from SIS, the sole stockholder of Legacy Cyxtera prior to the consummation of the Business Combination.
Interest Expense, Net. Interest expense, net is primarily composed of interest incurred under our credit facilities and on capital leases.
Other Expenses, Net. Other expenses, net primarily includes the impact of foreign currency gains and losses.
Change in Fair Value of the Warrant Liabilities. Upon the consummation of the Business Combination, Cyxtera assumed certain warrants issued by SVAC. Such warrants consisted of public warrants issued in the IPO (the “Public Warrants”) and warrants issued by SVAC to the Sponsor and certain clients of Starboard Value LP (the “Forward Purchasers”) in private placement transactions (the “Private Placement Warrants” and, together with the Public Warrants, the “Public and Private Placement Warrants”). Warrants that were assumed in connection with the consummation of the Business Combination were initially measured at fair value at the Closing Date of the Business Combination and were subsequently remeasured at estimated fair value on a recurring basis at the end of each reporting period, with changes in estimated fair value of the respective warrant liability recognized as change of fair value of warrant liabilities in the consolidated statements of operations. In December 2021, the Company announced that it would redeem all Public Warrants and Private Placement Warrants that remained outstanding at 5:00 p.m., New York City time, on January 19, 2022. In January 2022, the remaining Public Warrants and Private Placement Warrants were either exercised by the holders, or were redeemed by the Company (see Note 13 to our audited consolidated financial statements included elsewhere in this Annual Report).
Results of Operations
The following tables set forth our consolidated results of operations for the periods presented. The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future. The results of operations data for the years ended December 31, 2022, 2021 and 2020, have been derived from our consolidated financial statements and related notes included elsewhere in this Annual Report.
Years ended December 31, 2022 and 2021. The following table sets forth our historical operating results for the periods indicated, and the changes between periods:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| Revenues | $ | 746.0 | | | $ | 703.7 | | | $ | 42.3 | | | 6 | % |
| Operating costs and expenses | | | | | | | |
| Cost of revenues, excluding depreciation and amortization | 402.0 | | | 390.5 | | | 11.5 | | | 3 | % |
| Selling, general and administrative expenses | 144.3 | | | 112.8 | | | 31.5 | | | 28 | % |
| Depreciation and amortization | 243.0 | | | 240.6 | | | 2.4 | | | 1 | % |
| Goodwill impairment | 153.6 | | | — | | | 153.6 | | | nm |
| Restructuring, impairment, site closures and related costs | 5.2 | | | 69.8 | | | (64.6) | | | (93) | % |
| Transaction-related costs | — | | | 5.2 | | | (5.2) | | | nm |
| Total operating costs and expenses | 948.1 | | | 818.9 | | | 129.2 | | | 16 | % |
| Loss from operations | (202.1) | | | (115.2) | | | (86.9) | | | 75 | % |
| Interest expense, net | (163.3) | | | (164.9) | | | 1.6 | | | (1) | % |
| Other expenses, net | (2.2) | | | (0.1) | | | (2.1) | | | 2100 | % |
| Change in fair value of the warrant liabilities | 11.8 | | | (25.5) | | | 37.3 | | | (146) | % |
| Loss from operations before income taxes | (355.8) | | | (305.7) | | | (50.1) | | | 16 | % |
| Income tax benefit | 0.7 | | | 47.8 | | | (47.1) | | | (99) | % |
| Net loss | $ | (355.1) | | | $ | (257.9) | | | $ | (97.2) | | | 38 | % |
nm = not meaningful
Revenues
Revenues increased by $42.3 million, or 6%, for the year ended December 31, 2022 compared to the prior year. The increase in revenue was attributable to an increase in recurring revenues due to a net increase of $22.6 million in customer activation of services and an increase of $9.6 million of variable recurring revenue compared to the prior year. Interconnection revenue increased by $6.3 million compared to the prior year, as a result of rate increases in the year.
Operating Costs and Expenses
Cost of Revenues, excluding Depreciation and Amortization
Cost of revenues, excluding depreciation and amortization, increased by $11.5 million, or 3% for the year ended December 31, 2022 compared to the prior year. This increase in cost of revenues was primarily attributable to the cost of power, as utilities expenses increased by $21.7 million during the year ended December 31, 2022 compared to the prior year. The increase of expenses was offset by our exit from the Moses Lake property, completed in the second quarter of 2021, which resulted in a reduction in rent expense of $3.2 million in 2022 compared to the prior year. Customer installation costs decreased by $7.8 million in the year ended December 31, 2022 driven by cost management efforts.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $31.5 million, or 28%, for the year ended December 31, 2022 compared to the prior year. Personnel and related expenses increased by $19.0 million due to an increase in employee headcount and increases in stock-based compensation driven by equity awards granted in the latter half of 2021, which represented $12.0 million of the increase of payroll and related expenses. Professional services and insurance expenses increased by $12.3 million as a result of the additional costs associated with being a
public company compared to the prior year.
Depreciation and Amortization
Depreciation and amortization increased by $2.4 million, or 1%, for the year ended December 31, 2022 compared to the prior year. The increase was primarily attributable to higher depreciation of leasehold improvements and higher finance lease asset amortization from new finance leases that commenced in the latter half of 2021 and early 2022.
Goodwill Impairment
We incurred $153.6 million of goodwill impairment of the Company in the fourth quarter of 2022. For additional details, see Note 9 - Goodwill and Intangible Assets in the notes to the consolidated financial statements, included elsewhere in this Annual Report.
Restructuring, Impairment, Site Closures and Related Costs
Restructuring, impairment, site closures and related costs decreased by $64.6 million, for the year ended December 31, 2022 compared to the prior year. In the year ended December 31, 2021, we exited the Addison office space and incurred $7.9 million in exit expenses. In June 2021, the Company ceased use of the Moses Lake property and wrote off the remaining lease obligation of $58.5 million. During the year ended December 31, 2022, the Company recognized $5.2 million of restructuring costs in connection with the Addison and Moses Lake exits.
Transaction-related costs
Transaction-related costs were $5.2 million for the year ended December 31, 2021 (and no such costs were incurred in the same period of the current year).
Interest Expense, Net
Interest expense, net, decreased by $1.6 million, or 1%, for the year ended December 31, 2022 compared to the prior year. We incurred less interest expense period over period as a result of the payoff of the 2017 Second Lien Term Facility and the pay down of the Revolving Facility and 2021 Revolving Facility in July and August 2021 following the consummation of the Business Combination.
Other Expenses, Net
Other expenses, net increased by $2.1 million, for the year ended December 31, 2022 compared to the prior year. The increase in other expenses was driven by higher unrealized losses due to foreign currency fluctuations for the year ended December 31, 2022.
Change in Fair Value of the Warrant Liabilities
For the year ended December 31, 2022, we recorded a gain of $11.8 million on our consolidated statements of operations in connection with the change of the fair value of the warrant liabilities. In December 2021, the Company announced that it would redeem all of the Public Warrants and Private Placement Warrants that remained outstanding as of the Redemption Time. Pursuant to the terms of the Warrant Agreement, prior to the Redemption Time, the warrant holders were permitted to exercise their warrants either (a) on a cash basis by paying the exercise price of $11.50 per warrant in cash or (b) on a “cashless basis,” in which case the holder would receive 0.265 shares of the Company’s Class A common stock per warrant. On January 26, 2022, the Company announced the completion of the redemption. Of the 11,620,383 Public Warrants that were outstanding as of the time of the Business Combination, 134,443 were exercised for cash at an exercise price of $11.50 per share of Class A common stock and 10,115,180 were exercised on a cashless basis in exchange for an aggregate of 2,680,285 shares of Class A common stock, in each case in accordance with the terms of the Warrant Agreement, representing approximately
88% of the Public Warrants. In addition, of the 8,576,940 Private Placement Warrants that were outstanding as of the date of the Business Combination, 8,576,940 were exercised on a cashless basis in exchange for an aggregate of 2,272,884 shares of Class A common stock, in accordance with the terms of the Warrant Agreement, representing 100% of the Private Placement Warrants. Total cash proceeds generated from exercises of the warrants were $1.5 million. As of January 25, 2022, the Company had no warrants outstanding. The Company recorded a decrease in the warrant liability of $64.7 million and increase to additional paid in capital of $54.2 million in connection with the warrants that were exercised.
Income Tax Benefit
The income tax benefit for the year ended December 31, 2022 and 2021, was $0.7 million and $47.8 million, respectively. The income tax benefit on the pre-tax loss for the year ended December 31, 2022 was different than the amount expected at the statutory federal income tax rate primarily as a result of additional state income tax benefits, an increase in the valuation allowance recorded on certain deferred tax assets, including net operating loss carryforwards and interest deduction limitation carryforwards, that management believes are not more-likely-than-not to be fully realized in future periods, nondeductible goodwill impairment loss, the effects of the change in fair value of the warrant liabilities, nondeductible equity-based compensation, and the effects of the Company’s foreign operations. The income benefit on the pre-tax loss for the year ended December 31, 2021 was different than the amount expected at the statutory federal income tax rate as a result of additional state income tax benefits, an increase in the valuation allowances recorded on certain deferred tax assets that management believes are not more-likely-than-not to be fully realized in future periods, the effects of the change in fair value of the warrant liabilities, nondeductible equity-based compensation, the remeasurement of the Company’s net deferred tax assets in the United Kingdom due to an enacted tax rate change, and the effects of the Company’s foreign operations.
Years ended December 31, 2021 and 2020. The following table sets forth our historical operating results for the periods indicated, and the changes between periods:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2021 | | 2020 | | $ Change | | % Change |
Revenues | $ | 703.7 | | | $ | 690.5 | | | $ | 13.2 | | | 2 | % |
Operating costs and expenses: | | | | | | | |
Cost of revenues, excluding depreciation and amortization | 390.5 | | | 390.5 | | | — | | | — | % |
Selling, general and administrative expenses | 112.8 | | | 115.5 | | | (2.7) | | | (2) | % |
Depreciation and amortization | 240.6 | | | 231.8 | | | 8.8 | | | 4 | % |
| Restructuring, impairment, site closures and related cost | 69.8 | | | — | | | 69.8 | | | 100 | % |
Transaction-related costs | 5.2 | | | — | | | 5.2 | | | 100 | % |
Recovery of notes receivable from affiliate | — | | | (97.7) | | | 97.7 | | | (100) | % |
Total operating costs and expenses | 818.9 | | | 640.1 | | | 178.8 | | | 28 | % |
(Loss) income from operations before income taxes | (115.2) | | | 50.4 | | | (165.6) | | | (329) | % |
Interest expense, net | (164.9) | | | (169.4) | | | 4.5 | | | (3) | % |
Other expenses, net | (0.1) | | | (0.3) | | | 0.2 | | | (67) | % |
| Change in fair value of the warrant liabilities | (25.5) | | | — | | | (25.5) | | | 100 | % |
Loss from operations before income taxes | (305.7) | | | (119.3) | | | (186.4) | | | 156 | % |
Income tax benefit (expense) | 47.8 | | | (3.5) | | | 51.3 | | | (1466) | % |
Net loss | $ | (257.9) | | | $ | (122.8) | | | $ | (135.1) | | | 110 | % |
Revenues
Revenues increased by $13.2 million, or 2%, for the year ended December 31, 2021 as compared to the prior year. The increase in revenue is attributable to an increase in recurring revenues as a result of increased bookings and lower churn.
Operating Costs and Expenses
Cost of Revenue, excluding Depreciation and Amortization
Cost of revenues, excluding depreciation and amortization were flat at $390.5 million for the years ended December 31, 2021 and 2020. During the year ended December 31, 2020, the Company lowered headcount and external contractors across its data centers resulting in a reduction of $7.4 million in payroll and services expenses. As part of the reduction, the Company incurred severance expenses of $1.5 million during the year ended December 31, 2020. During 2021, benefit expenses were lower by $1.2 million due to lower claims period-over-period. Our exit from Moses Lake, completed in the second quarter of 2021, resulted in a reduction in rent expense of $4.4 million compared to the prior year. Customer installation costs have decreased by $8.7 million driven by cost management efforts on implementations. Security costs have decreased by $0.7 million driven by the implementation of an automated security system, leading to a reduction in the use of outside security contractors. In addition, the Company recovered $4.3 million in relation to a settlement with a vendor. These savings have been offset by an increase in utilities expense of $23.2 million and increases to data center maintenance of $1.4 million period-over-period. The increase in utility expense during 2021 is mostly driven by $3.4 million in additional electric power expenses resulting from Winter Storm Uri, which affected the grid in several markets driving a significant increase in pricing for the affected time periods, approximately $13.5 million related to rate increases, and approximately $1.9 million growth in our existing and new customer base and the remaining change related to increases in consumption.
Sales, General and Administrative Expenses
Selling, general and administrative expenses decreased by $2.7 million, or 2%, for the year ended December 31, 2021, compared to the prior year. This decrease in selling, general and administrative expenses was primarily attributable to the reversal of a $2.0 million litigation contingency as a result of a favorable settlement and a decrease in legal fees of $2.1 million. Professional fees decreased by $3.3 million year over year, primarily as a result of a decrease in pre-transaction exploratory costs incurred in late 2020 as compared to 2021. Subscription expense decreased by $1.0 million driven by better rates obtained on subscription licenses. The costs were offset by an increase to payroll related expenses of $6.7 million due to an increase in employee headcount and increases in stock compensation driven by equity awards granted following the completion of the Business Combination.
Depreciation and Amortization
Depreciation and amortization increased by $8.8 million, or 4%, for the year ended December 31, 2021, compared to the prior year. The increase to depreciation was primarily attributable to leasehold improvement additions and $1.8 million of accelerated depreciation and amortization on Moses Lake assets in connection with the decision to cease use of the data center site as further described in Note 5 to our consolidated financial statements.
Amortization increased due to capital lease asset additions for capital leases entered in December 2020 and throughout 2021.
Restructuring, impairment, site closures and related costs
Restructuring, impairment, site closures and related costs were $69.8 million for the year ended December 31, 2021 (no such costs were incurred in the same period of the prior year). These charges are related to the Moses Lake data center facility and Addison office space closures.
Transaction-related costs
The Company paid a one-time $5.2 million Transaction Bonus related to the completion of the Business Combination for the year ended December 31, 2021 (no such costs incurred in the same period of the prior year).
Recovery of Notes Receivable from Affiliate
On March 31, 2019, Appgate, Inc., formerly known as Cyxtera Cybersecurity, Inc. (“Appgate”), issued promissory notes to each of Cyxtera and Cyxtera Management, Inc., a Delaware corporation (the “Management Company”), evidencing certain funds borrowed by Appgate from each of Cyxtera and the Management Company as well as potential future borrowings (together, the “Promissory Notes”). Appgate is an affiliate of the Company and a direct subsidiary of SIS, and through December 31, 2019, was a direct subsidiary of the Company. The Promissory Notes had a combined initial aggregate principal amount of $95.2 million and provided for additional borrowings during the term of the Promissory Notes for additional amounts not to exceed approximately $52.5 million in the aggregate (approximately $147.7 million including the initial aggregate principal amount). Interest accrued on the unpaid principal balance of the Promissory Notes at a rate per annum equal to 3%; provided, that, with respect to any day during the period from the date of the Promissory Notes through December 31, 2019, interest was calculated assuming that the unpaid principal balance of the Promissory Notes on such day is the unpaid principal amount of the notes on the last calendar day of the quarter in which such day occurs. Interest was payable upon the maturity date of the notes. Each of the Promissory Notes had an initial maturity date of March 30, 2020, and was extended through March 30, 2021, by amendments entered into effective as of March 30, 2020.
As of December 31, 2019, we had a receivable related to the Promissory Notes of $127.7 million. On December 31, 2019, Appgate spun off from Cyxtera. As of December 31, 2019, we assessed collectability of the Promissory Notes from Appgate and reserved the entire amount of $127.7 million as the balance was deemed unrecoverable. In making that determination, we considered factors such as Appgate’s operating and cash losses since the initial acquisition into the Cyxtera group in 2017 through December 31, 2019, and Appgate’s anticipated cash needs and potential access to liquidity and capital resources over the remaining term of the note based on the facts and circumstances at the time.
During the year ended December 31, 2020, we advanced $19.4 million under the Promissory Notes and recorded a provision for loan losses in the same amount based on the same factors discussed above. Accordingly, as of December 31, 2020, we had a receivable related to the Promissory Notes of $147.1 million with an allowance of $30.0 million. In addition, during the year ended December 31, 2020, we had other amounts receivable from Appgate of $3.9 million with a full reserve because of the same factors discussed above for the Promissory Notes. These other amounts include charges under the Transition Services Agreement by and between Appgate and the Management Company pursuant to which the Management Company provided certain transition services to Appgate and Appgate provided certain transition services to Cyxtera (the “Transition Services Agreement”). The Transition Services Agreement provided for a term that commenced on January 1, 2020 and was terminated on December 31, 2020.
On February 8, 2021, we received a payment of $118.2 million from Appgate against the then accumulated principal and interest under the Promissory Notes and issued a payoff letter to Appgate extinguishing the $36.1 million of principal and accrued interest balance remaining following such repayment. Of the $118.2 million payment, $1.1 million was attributed to 2020 accrued interest on the Promissory Notes and $117.1 million to the
recovery of a portion of the Promissory Notes’ principal and interest balance outstanding as of December 31, 2019. Accordingly, for the year ended December 31, 2020, the Company recorded a reversal of the previously established allowance of $117.1 million. During the three months ended March 31, 2021, we wrote off the ending balance of $30.0 million in the allowance for loan losses on the Promissory Notes. Accordingly, no additional changes or advances on the Promissory Notes or the allowance for loan losses occurred during the year ended December 31, 2021.
Interest Expense, Net
Interest expense, net decreased by $4.5 million, or 3%, for the year ended December 31, 2021 compared to the prior year. The decrease of interest expense of $4.5 million is due to the repayment in full of the 2017 Second Lien Term Facility, and the paying down of the Revolving Facility (as defined in “—Liquidity and Capital Resources”) and the 2021 Revolving Facility (as defined in “—Liquidity and Capital Resources”) in July and August 2021 following the consummation of the Business Combination.
Other Expenses, Net
Other expenses, net decreased by $0.2 million, or 67%, for the year ended December 31, 2021, compared to the prior year. In 2020, the Company incurred $3.4 million in realized losses related to foreign exchange rates and finance charges, offset by approximately $4.2 million in gains related to fees charged to Appgate under the Transition Services Agreement. In 2021, the Company realized $2.5 million in gains related to foreign exchange rates, offset by finance charges of $2.0 million incurred in connection with the factoring arrangement entered into 2021.
Change in Fair Value of the Warrant Liabilities
For the year ended December 31, 2021, we recorded a loss of $25.5 million on our consolidated statement of operations in connection with the change of the fair value of the warrant liabilities. In December 2021, the Company announced that it would redeem all of the Public Warrants and Private Placement Warrants that remained outstanding as of the Redemption Time. Pursuant to the terms of the warrant agreement governing the Warrants, prior to the Redemption Time, the warrant holders were permitted to exercise their warrants either (a) on a cash basis by paying the exercise price of $11.50 per warrant in cash or (b) on a “cashless basis,” in which case the holder would receive 0.265 shares of the Company’s Class A common stock per warrant. As of December 31, 2021, 840,456 Public Warrants were exercised in accordance with the terms of the Warrant Agreement, resulting in the issuance by us of 228,450 shares of Class A common stock. The Company recorded a decrease of the warrant liability of $2.6 million and increase to additional paid in capital of $2.8 million in connection with the warrants that were exercised.
Income Tax Benefit (Expense)
The income tax benefit for the year ended December 31, 2021 was $47.8 million compared to $3.5 million of income tax expense for the prior year. The income tax benefit on the pre-tax loss for the year ended December 31, 2021 was different than the amount expected at the statutory federal income tax rate as a result of additional state income tax benefits, an increase in the valuation allowances recorded on certain deferred tax assets that management believes are not more-likely-than-not to be fully realized in future periods, the effects of the change in fair value of the warrant liabilities, nondeductible equity-based compensation, the remeasurement of the Company’s net deferred tax assets in the United Kingdom due to an enacted tax rate change, and the effects of the Company’s foreign operations. The income tax expense on the pre-tax loss for the year ended December 31, 2020 was different than the amount expected at the statutory federal income tax rate as a result of additional state income tax benefits, an increase in the valuation allowances recorded on certain deferred tax assets that management believes are not more-likely-than-not to be fully realized in future periods, non-deductible equity compensation and the effects of the Company’s foreign operations.
Liquidity and Capital Resources
As of December 31, 2022 and 2021, we had cash of $65.1 million and $52.4 million, respectively, and had $73.1 million and $88.8 million of borrowing capacity under our $120.1 million 2021 Revolving Facility, respectively. The 2021 Revolving Facility, under which $42.0 million was drawn as of December 31, 2022, would have matured on November 1, 2023. We also have $869.0 million of term loan indebtedness under our 2017 First Lien Term Facility and our 2019 First Lien Term Facility, which mature on May 1, 2024. For additional information concerning these facilities, see below under “—Debt”. Historically, customer collections are our primary source of cash. On March 14, 2023, we entered into an amendment to our 2021 Revolving Facility (the “Revolving Facility Amendment”) which, among other things, provided for an extension of the maturity date from November 1, 2023 to April 2, 2024, an approximately $18 million reduction to the borrowing capacity under such facility, a transition of the benchmark rate for such facility from LIBOR to SOFR, increases to the applicable interest rates for borrowings under such facility and certain other covenant modifications, including additional limitations on our ability to make investments and incur indebtedness. Based on our current forecast, which considers quantitative factors that are known or reasonably knowable as of the date of these financial statements, including the Revolving Facility Amendment, we believe that the cash generated from operations will be sufficient to fund our operating activities for at least the next twelve months from the issuance of these financial statements.
The Company is actively attempting to extend the maturity on, or refinance or repay, its long-term debt to ensure it will have positive cash flow for the long-term foreseeable future. However, there can be no assurances that we will be able to raise additional capital to refinance or repay our existing debt or fund our future business activities and requirements. The inability to raise capital would adversely affect our ability to achieve our business objectives, including pursuing additional expansion opportunities. Given the current economic slowdown, some of our customers may have difficulty paying us and we may experience increased churn in our customer base, including reductions in their commitments to us, and we may be unable to secure additional financing, or any such additional financing may only be available to us on unfavorable terms, all of which could have a material adverse effect on our liquidity. If the Company cannot successfully extend, refinance or repay its revolving credit facility and long-term debt with proceeds from other sources, the Company will not be able to meet its financial obligations when due in April 2024 and May 2024, respectively. As a result, the Company could be forced to consider all strategic alternatives including restructuring its debt, seeking additional debt or equity capital, reducing or delaying its business activities and strategic initiatives or selling assets, other strategic transactions and/or other measures, including liquidation or filing for bankruptcy, which could lead to material or even total losses for its security holders as it relates to their investments in the Company. See “Risk Factors—Risks Related to Our Indebtedness—If we are unable to refinance our material indebtedness with near term maturities, we could be forced to liquidate and/or file for bankruptcy, and the holders of our Class A common stock could suffer a total loss on their investment” for additional information.
In addition, we may, at any time and from time to time, seek to purchase, repay, exchange or otherwise retire our outstanding debt in open market transactions, privately negotiated transactions, tender offers, exchange offers, pursuant to the terms of our outstanding debt or otherwise. We may incur additional financing to fund such transactions or otherwise, which could include substantial additional debt (including secured debt) or equity or equity-linked financing. Although the terms of the agreements governing existing debt restrict our ability to incur additional debt (including secured debt), such restrictions are subject to several exceptions and qualifications and such restrictions and qualifications may be waived or amended, and debt (including secured debt) incurred in compliance with such restrictions and qualifications (as they may be waived or amended) may be substantial. The number of shares of our Class A common stock or securities convertible into shares of our Class A common stock that may be issued in connection with such transactions may be material. Such transactions, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements and cash position, contractual restrictions, trading prices of debt from time to time, and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material. In addition, from time to time we engage in discussions with holders of our existing debt and other potential financing sources regarding such transactions, and we expect to continue to engage in such discussions in the future. We cannot provide any assurance as to if or when we will consummate any such transactions or the terms of any such transactions.
Debt
On May 1, 2017, a subsidiary of the Company (the “Borrower”) entered into credit agreements for up to $1,275.0 million of borrowings under first and second lien credit facilities (together with the 2019 First Lien Term Facility and the 2021 Revolving Facility described below, collectively, the “Senior Secured Credit Facilities”). The Senior Secured Credit Facilities initially consisted of (a) a first lien credit agreement providing for (i) a $150.0 million first lien multicurrency revolving credit facility (the “Revolving Facility”) and (ii) an $815.0 million first lien term loan borrowing (the “First Lien Term Facility”) and (b) a second lien credit agreement providing for a $310.0 million second lien term loan credit borrowing (the “2017 Second Lien Term Facility”). On May 13, 2019, the Borrower borrowed an additional $100.0 million under the incremental first lien loan under the first lien credit agreement (the “2019 First Lien Term Facility”). On May 7, 2021, certain of the lenders under the Revolving Facility entered into an amendment with the Borrower pursuant to which they agreed to extend the maturity date for certain revolving commitments from May 1, 2022 to November 1, 2023. Under the terms of the amendment, $141.3 million of commitments under the existing Revolving Facility were exchanged for $120.1 million of commitments under a new revolving facility (the “2021 Revolving Facility”). In connection with the amendment, the Borrower repaid $19.6 million of the outstanding balance under the Revolving Facility on May 10, 2021. In connection with the Business Combination, the Borrower repaid the entire balance of the 2017 Second Lien Term Facility of $310.0 million on July 29, 2021, and the remaining outstanding balance on the Revolving Facility and 2021 Revolving Facility of $123.1 million on August 13, 2021. In addition, during the year ended December 31, 2021, the Company paid down $9.2 million of principal of the First Lien Term Facility. Subsequent to the consummation of the Business Combination and the pay-down of the Revolving Facility and the 2021 Revolving Facility, the Borrower drew down an additional $40.0 million from the Revolving Facility and the 2021 Revolving Facility during the year ended December 31, 2021. Following receipt of $75.0 million in connection with the exercise of the optional shares purchase options, we repaid the entire balance owed under the Revolving Facility and the 2021 Revolving Facility of $40.0 million. The Revolving Facility matured in May 2022 and was not renewed. Subsequent to paying down of the Revolving Facility and the 2021 Revolving Facility, the Borrower drew down $42.0 million from the 2021 Revolving Facility. The 2021 Revolving Facility, the 2017 First Lien Term Facility and the 2019 First Lien Term Facility have a 18-month, seven- and five-year term, respectively, and are set to mature on November 1, 2023, May 1, 2024 and May 1, 2024, respectively. Subsequent to year-end, on March 14, 2023, we entered into the Revolving Facility Amendment which, among other things, provided for an extension of the maturity date from November 1, 2023 to April 2, 2024, an approximately $18 million reduction to the borrowing capacity under such facility, a transition of the benchmark rate for such facility from LIBOR to SOFR, increases to the applicable interest rates for borrowings under such facility and certain other covenant modifications, including additional limitations on our ability to make investments and incur indebtedness.
The Senior Secured Credit Facilities are secured by substantially all assets of the Borrower and contain customary covenants, including reporting and financial covenants, some of which require the Borrower to maintain certain financial coverage and leverage ratios, as well as customary events of default, and are guaranteed by a parent entity of the Borrower as well as certain of the Borrower’s wholly owned domestic subsidiaries. As of December 31, 2022, the Company believes the Borrower was in compliance with these covenants.
As of December 31, 2022, we had $1,121.8 million and $907.0 million in finance lease obligations and long-term debt outstanding under our Senior Secured Credit Facilities, respectively. As of December 31, 2021, we had $976.3 million and $908.3 million in capital lease obligations and long-term debt outstanding under our Senior Secured Credit Facilities, respectively.
Cash Flow
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Net cash provided by operating activities | $ | 97.4 | | | $ | 25.8 | | | $ | 116.6 | |
| Net cash (used in) provided by investing activities | (131.8) | | | 39.6 | | | (102.6) | |
| Net cash provided by (used in) financing activities | 52.2 | | | (137.0) | | | 91.0 | |
Operating Activities
Cash provided by our operations is generated by colocation service fees, which include fees for the licensing of space, power and interconnection services.
During the year ended December 31, 2022, operating activities provided $97.4 million of net cash as compared to $25.8 million during the prior year. On February 19, 2021, we repaid $22.7 million of fees related to the Structuring Fee, Service Provider Fee and other Sponsor related expenses that were owned under the Services Agreement as described in Note 21 in our consolidated financial statements included elsewhere in this Annual Report. There was no such payment that occurred during the year ended December 31, 2022. On August 31, 2022, we entered into an Accounts Receivable Sales Program, as described in Note 7 of our consolidated financial statements included elsewhere in this Annual Report, pursuant to which we sold $37.5 million of accounts receivable in exchange for cash. While we had a factoring arrangement in 2021, there was no Accounts Receivable Sales Program in place for the same period of the prior year. The remaining change was to other changes in working capital.
Investing Activities
Our investing activities are primarily focused on capital expenditures due to expansion activities and overall modernization of our data centers.
During the year ended December 31, 2022, investing activities used $131.8 million of net cash as compared to net cash provided by $39.6 million during the prior year. The decrease in net cash provided by investing activities during the year ended December 31, 2022, was primarily due to the one-time payment of $117.1 million received from Appgate in February 2021 in settlement of the Primary Notes offset by $54.3 million in additional cash used for the purchase of property and equipment during the year December 31, 2022.
Financing Activities
Our cash flow from financing activities is centered around the use of our Senior Secured Credit Facilities and lease financings.
During the year ended December 31, 2022, financing activities provided for use of $52.2 million of net cash as compared to net cash used of $137.0 million for the prior year. The increase in net cash used from financing activities during the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily due to the receipt of $75.0 million in proceeds during 2022 from the exercise of the purchase options under the Optional Share Purchase Agreements. The cash inflows were partially offset by the paydown of $40.0 million on the Revolving Facility and the 2021 Revolving Facility and a paydown of $6.9 million in principal of the First Lien Term Facility. Since the paydown of the revolving facilities, we re-borrowed $42.0 million from the 2021 Revolving Facility. Repayments on finance leases were lower in the year ended December 31, 2022, compared to the prior year by $12.9 million, which was a result of finance leases that were modified to extend the lease terms. In the year ended December 31, 2022, we received $30.0 million in proceeds from an equipment sale-leaseback transaction compared to $5.0 million in the prior year. For the year ended December 31, 2021, we paid a one-time capital redemption payment of $97.9 million when we redeemed, cancelled and retired 9,645,455 shares of the Class A common stock of Legacy Cyxtera held by SIS in exchange for such payment by Legacy Cyxtera to SIS. In 2021, the Company also obtained a capital contribution of $5.2 million from SIS to pay the Transaction Bonus to current and former employees.
Contractual Obligations and Commitments
Material Cash Commitments
As of December 31, 2022, our principal commitments were primarily composed of:
•approximately $907.0 million of principal from the 2017 and 2019 First Lien Term Facility and balance on the 2021 Revolving Facility (net of debt issuance cost and debt discount);
•approximately $1,429.1 million of total lease payments, net interest expense, which represents lease payments under finance and operating lease arrangements, including renewal options that are reasonably certain to be exercised; and
•approximately $4.4 million of other non-capital purchase commitments related to IT licenses, utilities and our colocation operations. These commitments to purchase IT contractually bind us for goods, services or arrangements to be delivered or provided during 2023 and beyond.
For further information on maturities of lease liabilities and long-term debt, see Notes 11 and 12, respectively, to our consolidated financial statements included elsewhere in this Annual Report.
Based on our current forecast, which considers quantitative factors that are known or reasonably knowable as of the date of these financial statements, including the Revolving Facility Amendment, we believe that our sources of liquidity, including our expected future operating cash flows, are adequate to fund our operating activities in the next twelve months from the issuance of these financial statements. The Company is actively attempting to extend, refinance or repay its revolving credit facility and existing long-term debt that will mature in April 2024 and May 2024, respectively, to ensure it will adequately meet long-term material cash commitments for the foreseeable future. However, if the Company cannot successfully extend its revolving credit facility and long-term debt, or refinance or repay its revolving credit facility and long-term debt with proceeds from other sources, the Company will not be able to meet its financial obligations when due in April 2024 and May 2024, respectively, and beyond twelve months from the date of issuance of these financial statements. As a result, the Company could be forced to consider all strategic alternatives including restructuring its debt, seeking additional debt or equity capital, reducing or delaying its business activities and strategic initiatives or selling assets, other strategic transactions and/or other measures, including liquidation or filing for bankruptcy, which could lead to material or even total losses for its security holders as it relates to their investments in the Company. See “Risk Factors—Risks Related to Our Indebtedness—If we are unable to refinance our material indebtedness with near term maturities, we could be forced to liquidate and/or file for bankruptcy, and the holders of our Class A common stock could suffer a total loss on their investment” for additional information.
Other Contractual Obligations
Additionally, we have entered into lease agreements with various landlords primarily for data center spaces which have not yet commenced as of December 31, 2022. For additional information, see “Maturities of Lease Liabilities” in Note 11 to our audited consolidated financial statements included elsewhere in this Annual Report.
We have also entered into an agreement for power redundancy supply at a facility in Massachusetts, which has not yet commenced as of December 31, 2022. For additional information, see “Lease Commitments” in Note 19 to our consolidated financial statements included elsewhere in this Annual Report.
Off-Balance-Sheet Arrangements
We did not have any off-balance-sheet arrangements as of December 31, 2022.
Critical Accounting Policies and Estimates
Discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with US GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements. Generally, we base our estimates on historical experience and on various other assumptions in accordance with US GAAP that we believe to be reasonable under the circumstances. Because of the uncertainty inherent in these matters, actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require Cyxtera’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Based on this definition, we have identified the following critical accounting policies and estimates: revenue from contracts with customers, accounting for income taxes, accounting for leases and accounting for warrant liabilities. These critical accounting policies are addressed below. In addition, we have other key accounting policies and estimates that are described in Note 2 to our consolidated financial statements.
Revenue recognition
We derive the majority of our revenues from recurring revenue streams, consisting primarily of colocation service fees. Colocation service fees include fees for the licensing of space, power and interconnection services. The remainder of our revenues are derived from non-recurring charges, such as installation fees and professional services, including remote support to troubleshoot technical issues and turnkey structured cabling solutions. Our revenue contracts are accounted for in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”), with the exception of certain contracts that contain lease components and are accounted for in accordance with ASC Topic 840, Leases. Under the revenue accounting guidance, revenues are recognized when control of these products and services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for the products and services. Revenues from recurring revenue streams are generally invoiced monthly in advance and recognized ratably over the term of the contract, which is generally three years. Non-recurring installation fees, although generally invoiced in a lump sum upon installation, are deferred and recognized ratably over the contract term. Professional service fees and equipment sales are also generally invoiced in a lump sum upon service delivery and are recognized in the period when the services are provided or the equipment is delivered. For contracts with customers that contain multiple performance obligations, we account for individual performance obligations separately if they are distinct or as a series of distinct obligations if the individual performance obligations meet the series criteria. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. The transaction price is allocated to the separate performance obligation on a relative standalone selling price basis. The standalone selling price is determined based on overall pricing objectives, taking into consideration market conditions, geographic locations and other factors. Other judgments include determining if any variable consideration should be included in the total contract value of the arrangement, such as price increases.
Revenue is generally recognized on a gross basis in accordance with the accounting standard related to reporting revenue on a gross basis as a principal versus on a net basis as an agent, as we are primarily responsible for fulfilling the contract, bear the inventory risk and have discretion in establishing the price when selling to customers. To the extent we do not meet the criteria for recognizing revenue on a gross basis, we record the revenue on a net basis.
Contract balances
The timing of revenue recognition, billings and cash collections result in accounts receivables, contract assets and deferred revenues. A receivable is recorded at the invoice amount, net of an allowance for doubtful accounts and is recognized in the period in which we have transferred products or provided services to our customers and when our right to consideration is unconditional. Payment terms and conditions vary by contract type,
although terms generally include a requirement of payment within 30 to 45 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined that our contracts generally do not include a significant financing component. We assess collectability based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We generally do not request collateral from our customers. We also maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments which we had expected to collect. If the financial condition of our customers deteriorates or if they became insolvent, resulting in an impairment of their ability to make payments, greater allowances for doubtful accounts may be required. Management specifically analyzes accounts receivable and current economic news and trends, historical bad debts, customer concentrations, customer credit-worthiness and changes in customer payment terms when evaluating revenue recognition and the adequacy of our reserves. Any amounts that were previously recognized as revenue and subsequently determined to be uncollectable are charged to bad debt expense, which is included in selling, general and administrative expenses in the consolidated statements of operations. Delinquent account balances are written off after management has determined that collection is not probable.
A contract asset exists when we have transferred products or provided services to our customers, but customer payment is contingent upon satisfaction of additional performance obligations. Certain contracts include terms related to price arrangements such as price increases and free months. We recognize revenues ratably over the contract term, which could potentially give rise to contract assets during certain periods of the contract term. Contract assets are recorded in prepaid and other current assets and other assets in the consolidated balance sheets.
Deferred revenue (a contract liability) is recognized when we have an unconditional right to a payment before we transfer products or services to customers. Deferred revenue is included in other current liabilities and other liabilities in the consolidated balance sheets.
Contract costs
Direct and indirect incremental costs solely related to obtaining revenue generating contracts are capitalized as costs of obtaining a contract when they are incremental and if they are expected to be recovered. Such costs consist primarily of commission fees and sales bonuses, contract fulfillment costs, as well as indirect related payroll costs. Contract costs are amortized over the estimated period of benefit, which is estimated as three years, on a straight-line basis.
For further information on revenue recognition, see Note 6 to our consolidated financial statements.
Income Taxes
We account for income taxes pursuant to the asset and liability method, which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying amounts and tax bases of assets and liabilities based on enacted statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Any effects of changes in income tax rates or laws are included in income tax expense in the period of enactment. We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the evidence available, it is more-likely-than-not that such assets will not be realized. In making the assessment under the more-likely-than-not standard, appropriate consideration must be given to all positive and negative evidence related to the realization of the deferred tax assets. The assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods by jurisdiction, our experience with loss carryforwards not expiring unutilized and all tax planning alternatives that may be available. A valuation allowance is recognized if, under applicable accounting standards, we determine it is more-likely-than-not that a deferred tax asset would not be realized.
Leases
A significant portion of our data center spaces, office spaces and equipment are leased. Each time we enter into a new lease or lease amendments, we analyze each lease or lease amendment for the proper accounting, including determining if the arrangement is or contains a lease at inception and making assessment of the leased properties to determine if they are operating or finance leases. Determination of accounting treatment, including the result of the lease classification test for each new lease or lease amendment, is dependent on a variety of judgements, such as identification of lease and non-lease components, determination of lease term, including assessing the likelihood of lease renewals, valuation of leased property and establishing the incremental borrowing rate to calculate the present value of the minimum lease payment for the lease term. As our lessee leases do not provide a readily determinable implicit rate, we use our incremental borrowing rate estimated based on information available at the commencement date in determining the present value of lease payments under each finance lease. When determining the incremental borrowing rate, we utilize a market-based approach, which requires significant judgment. Therefore, we utilize different data sets to estimate IBRs via an analysis of (i) yields on our outstanding public debt (ii) yields on comparable credit rating composite curves and (iii) yields on comparable market curves.
Warrant Liabilities
In January 2022, the Company completed the redemption of the Public Warrants and Private Placement Warrants. As a result, the Company derecognized the $64.7 million of the warrant liabilities and recognized a gain of $11.8 million. See Note 13 in our audited consolidated financial statements included elsewhere in this Annual Report for additional information regarding the warrants redeemed. As a result of the redemption, we do not believe warrant liabilities is a critical accounting estimate.
Recent Accounting Pronouncements
Recently issued accounting pronouncements are described in Note 2 of our audited consolidated financial statements included elsewhere in this Annual Report.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Item 8. Financial Statements and Supplementary Data
CYXTERA TECHNOLOGIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
To the shareholders and the Board of Directors of Cyxtera Technologies, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cyxtera Technologies, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, and the related consolidated statements of operations, comprehensive loss, changes in shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Miami, Florida
March 16, 2023
We have served as the Company's auditor since 2020.
CYXTERA TECHNOLOGIES, INC.
Consolidated Balance Sheets
As of December 31, 2022 and 2021
(in millions, except share information)
| | | | | | | | | | | |
| 2022 | | 2021 |
| Assets: | | | |
| Current assets: | | | |
| Cash | $ | 65.1 | | | $ | 52.4 | |
Accounts receivable, net of allowance of $0.1 and $0.3 | 28.3 | | | 18.3 | |
| Prepaid and other current assets | 38.1 | | | 37.5 | |
| Total current assets | 131.5 | | | 108.2 | |
| | | |
| Property and equipment, net | 1,638.6 | | | 1,530.8 | |
| Operating lease right-of-use assets | 248.0 | | | — | |
| Goodwill | 599.6 | | | 761.7 | |
| Intangible assets, net | 427.6 | | | 519.8 | |
| Other assets | 18.0 | | | 16.7 | |
| Total assets | $ | 3,063.3 | | | $ | 2,937.2 | |
| | | |
| Liabilities and shareholders' equity: | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 61.9 | | | $ | 57.9 | |
| Accrued expenses | 81.4 | | | 65.3 | |
| Current portion of operating lease liabilities | 35.3 | | | — | |
| Current portion of long-term debt, finance leases and other financing obligations | 96.7 | | | 50.3 | |
| Deferred revenue | 73.1 | | | 60.7 | |
| Other current liabilities | 25.3 | | | 10.0 | |
| Total current liabilities | 373.7 | | | 244.2 | |
| | | |
| Operating lease liabilities, net of current portion | 272.0 | | | — | |
| Long-term debt, net of current portion | 853.5 | | | 896.5 | |
| Finance leases and other financing obligations, net of current portion | 1,078.5 | | | 937.8 | |
| Deferred income taxes | 26.0 | | | 29.9 | |
| Warrant liabilities | — | | | 64.7 | |
| Other liabilities | 75.3 | | | 158.2 | |
| Total liabilities | 2,679.0 | | | 2,331.3 | |
| | | |
| Commitments and contingencies (Note 19) | | | |
| | | |
| Shareholders' equity: | | | |
Preferred Stock, $0.0001 par value; 10,000,000 shares authorized; none issued and outstanding | — | | | — | |
Class A common stock, $0.0001 par value; 500,000,000 shares authorized; 179,683,659 and 166,207,190 shares issued and outstanding as of December 31, 2022, and December 31, 2021, respectively | — | | | — | |
| Additional paid-in capital | 1,968.0 | | | 1,816.5 | |
| Accumulated other comprehensive (loss) income | (7.2) | | | 10.8 | |
| Accumulated deficit | (1,576.5) | | | (1,221.4) | |
| Total shareholders' equity | 384.3 | | | 605.9 | |
| Total liabilities and shareholders' equity | $ | 3,063.3 | | | $ | 2,937.2 | |
See accompanying notes to consolidated financial statements
60
CYXTERA TECHNOLOGIES, INC.
Consolidated Statements of Operations
For the Years Ended December 31, 2022, 2021 and 2020
(in millions, except share information)
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Revenues | $ | 746.0 | | | $ | 703.7 | | | $ | 690.5 | |
| Operating costs and expenses: | | | | | |
| Cost of revenues, excluding depreciation and amortization | 402.0 | | | 390.5 | | | 390.5 | |
| Selling, general and administrative expenses | 144.3 | | | 112.8 | | | 115.5 | |
| Depreciation and amortization | 243.0 | | | 240.6 | | | 231.8 | |
| Goodwill impairment (Note 9) | 153.6 | | | — | | | — | |
| Restructuring, impairment, site closures and related costs (Note 5) | 5.2 | | | 69.8 | | | — | |
| Transaction-related costs (Note 14) | — | | | 5.2 | | | — | |
| Recovery of notes receivable from affiliate (Note 21) | — | | | — | | | (97.7) | |
| Total operating costs and expenses | 948.1 | | | 818.9 | | | 640.1 | |
| | | | | |
| (Loss) income from operations | (202.1) | | | (115.2) | | | 50.4 | |
| Interest expense, net | (163.3) | | | (164.9) | | | (169.4) | |
| Other expenses, net | (2.2) | | | (0.1) | | | (0.3) | |
| Change in fair value of the warrant liabilities | 11.8 | | | (25.5) | | | — | |
| Loss from operations before income taxes | (355.8) | | | (305.7) | | | (119.3) | |
| Income tax benefit (expense) | 0.7 | | | 47.8 | | | (3.5) | |
| Net loss | $ | (355.1) | | | $ | (257.9) | | | $ | (122.8) | |
| | | | | |
| Loss per Share | | | | | |
| Basic and diluted | $ | (1.99) | | | $ | (1.94) | | | $ | (1.06) | |
| | | | | |
| Weighted average number of shares outstanding | | | | | |
| Basic and diluted | 178,144,676 | | | 133,126,171 | | | 115,745,455 | |
See accompanying notes to consolidated financial statements
61
CYXTERA TECHNOLOGIES, INC.
Consolidated Statements of Comprehensive Loss
For the Years Ended December 31, 2022, 2021 and 2020
(in millions)
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Net loss | $ | (355.1) | | | $ | (257.9) | | | $ | (122.8) | |
| | | | | |
| Other comprehensive (loss) income: | | | | | |
| Foreign currency translation adjustment | (18.0) | | | (5.9) | | | 8.7 | |
| Other comprehensive (loss) income | (18.0) | | | (5.9) | | | 8.7 | |
| | | | | |
| Comprehensive loss | $ | (373.1) | | | $ | (263.8) | | | $ | (114.1) | |
See accompanying notes to consolidated financial statements
62
CYXTERA TECHNOLOGIES, INC.
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended December 31, 2022, 2021 and 2020
(in millions, except share information)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A common stock | | Additional paid-in capital | | Accumulated other comprehensive income (loss) | | Accumulated deficit | | Total shareholders' equity |
| Share | | Amount | | | | |
| Balance as of December 31, 2019 | 0.96 | | $ | — | | | $ | 1,494.9 | | | $ | 8.0 | | | $ | (840.7) | | | $ | 662.2 | |
| Retroactive application of recapitalization | 115,745,454 | | — | | | — | | | — | | | — | | | — | |
| Adjusted balance, beginning of period | 115,745,455 | | — | | 1,494.9 | | 8.0 | | (840.7) | | 662.2 |
| Equity-based compensation | — | | | — | | | 8.2 | | | — | | | — | | | 8.2 | |
| Cybersecurity Spinoff (2019) | — | | | — | | | 1.5 | | | — | | | — | | | 1.5 | |
| Net loss | — | | | — | | | — | | | — | | | (122.8) | | | (122.8) | |
| Other comprehensive income | — | | | — | | | — | | | 8.7 | | | — | | | 8.7 | |
| Balance as of December 31, 2020 | 115,745,455 | | | — | | | 1,504.6 | | | 16.7 | | | (963.5) | | | 557.8 | |
| Equity-based compensation | — | | | — | | | 9.5 | | | — | | | — | | | 9.5 | |
| Capital redemption | (9,645,455) | | | — | | | (97.9) | | | — | | | — | | | (97.9) | |
| Reverse recapitalization, net of transaction costs | 59,878,740 | | | — | | | 392.3 | | | — | | | — | | | 392.3 | |
| Capital contribution | — | | | — | | | 5.2 | | | — | | | — | | | 5.2 | |
| Issuance of shares related to exercise of warrants | 228,450 | | | — | | | 2.8 | | | — | | | — | | | 2.8 | |
| Net loss | — | | | — | | | — | | | — | | | (257.9) | | | (257.9) | |
| Other comprehensive loss | — | | | — | | | — | | | (5.9) | | | — | | | (5.9) | |
| Balance as of December 31, 2021 | 166,207,190 | | | — | | | 1,816.5 | | | 10.8 | | | (1,221.4) | | | 605.9 | |
| Equity-based compensation | — | | | — | | | 22.3 | | | — | | | — | | | 22.3 | |
| Issuance of shares related to exercise of warrants | 4,859,162 | | | — | | | 54.2 | | | — | | | — | | | 54.2 | |
| Issuance of shares related to exercise of optional shares purchase options | 7,500,000 | | | — | | | 75.0 | | | — | | | — | | | 75.0 | |
| Net loss | — | | | — | | | — | | | — | | | (355.1) | | | (355.1) | |
| Other comprehensive loss | — | | | — | | | — | | | (18.0) | | | — | | | (18.0) | |
| Issuance of shares for Restrictive Stock Units vesting | 1,117,307 | | | — | | | — | | | — | | | — | | | — | |
| Balance as of December 31, 2022 | 179,683,659 | | | $ | — | | | $ | 1,968.0 | | | $ | (7.2) | | | $ | (1,576.5) | | | $ | 384.3 | |
| | | | | | | | | | | |
See accompanying notes to consolidated financial statements
63
CYXTERA TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2022, 2021 and 2020
(in millions)
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Net loss | $ | (355.1) | | | $ | (257.9) | | | $ | (122.8) | |
| Cash flows from operating activities: | | | | | |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | |
| Depreciation and amortization | 243.0 | | | 240.6 | | | 231.8 | |
| Gain on sale of fixed assets | (0.2) | | | — | | | — | |
| Restructuring, impairment, site closures and related costs | — | | | 2.0 | | | — | |
| Amortization of favorable/unfavorable leasehold interests, net | — | | | 3.7 | | | 3.1 | |
| Loss on extinguishment of debt and amortization of debt issuance costs and fees, net | 3.9 | | | 10.1 | | | 5.8 | |
| Goodwill impairment (Note 9) | 153.6 | | | — | | | — | |
| Recovery of notes receivable from affiliate (Note 21) | — | | | — | | | (97.7) | |
| Equity-based compensation | 22.3 | | | 9.5 | | | 8.2 | |
| Reversal of provision for doubtful accounts | (0.5) | | | (1.2) | | | (5.5) | |
| Change of fair value of warrant liabilities | (11.8) | | | 25.5 | | | — | |
| Deferred income taxes | (2.3) | | | (48.2) | | | 1.1 | |
| Non-cash interest expense, net | 10.2 | | | 9.7 | | | 12.0 | |
| Changes in operating assets and liabilities, excluding impact of acquisitions and dispositions: | | | | | |
| Accounts receivable | (10.9) | | | 16.4 | | | 37.4 | |
| Prepaid and other current assets | 2.2 | | | 3.6 | | | 15.0 | |
| Due from affiliates | — | | | — | | | 0.8 | |
| Other assets | (2.8) | | | 6.5 | | | 4.3 | |
| Operating lease right-of-use assets | 34.9 | | | — | | | — | |
| Operating lease liabilities | (33.9) | | | — | | | — | |
| Accounts payable | (0.8) | | | (10.1) | | | (7.1) | |
| Accrued expenses | 17.0 | | | (22.9) | | | 10.2 | |
| Due to affiliates | — | | | (22.7) | | | (2.1) | |
| Other liabilities | 28.6 | | | 61.2 | | | 22.1 | |
| Net cash provided by operating activities | 97.4 | | | 25.8 | | | 116.6 | |
| Cash flows from investing activities: | | | | | |
| Purchases for property and equipment | (131.8) | | | (77.5) | | | (83.2) | |
| Amounts received from (advanced to) affiliate (Note 21) | — | | | 117.1 | | | (19.4) | |
| Net cash (used in) provided by investing activities | (131.8) | | | 39.6 | | | (102.6) | |
| Cash flows from financing activities: | | | | | |
| Proceeds from issuance of long-term debt and other financing obligations | 42.0 | | | 40.0 | | | 91.7 | |
| Proceeds from recapitalization, net of issuance costs | — | | | 434.5 | | | — | |
| Capital contribution | — | | | 5.2 | | | — | |
| Proceeds from sale-leaseback financing | 30.0 | | | 5.0 | | | 46.0 | |
| Repayment of long-term debt | (46.9) | | | (461.7) | | | (10.3) | |
| Repayment of finance leases and other financing obligations | (49.2) | | | (62.1) | | | (36.4) | |
| Proceeds from the exercise of warrants, net of redemptions | 1.3 | | | — | | | — | |
| Proceeds from the exercise of the optional shares purchase options | 75.0 | | | — | | | — | |
| Capital redemption | — | | | (97.9) | | | — | |
| Net cash provided by (used in) financing activities | 52.2 | | | (137.0) | | | 91.0 | |
| Effect of foreign currency exchange rates on cash | (5.1) | | | 3.3 | | | 2.7 | |
| Net increase (decrease) in cash | 12.7 | | | (68.3) | | | 107.7 | |
| Cash at beginning of period | 52.4 | | | 120.7 | | | 13.0 | |
| Cash at end of period | $ | 65.1 | | | $ | 52.4 | | | $ | 120.7 | |
CYXTERA TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows (continued)
For the Years Ended December 31, 2022, 2021 and 2020
(in millions)
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Supplemental cash flow information: | | | | | |
| Cash (refund) paid for income taxes, net | $ | (0.4) | | | $ | 4.5 | | | $ | 3.6 | |
| Cash paid for interest | $ | 40.8 | | | $ | 58.6 | | | $ | 157.4 | |
| Non-cash purchases of property and equipment | $ | 38.5 | | | $ | 65.7 | | | $ | 55.3 | |
See accompanying notes to consolidated financial statements
64
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and description of the business
Cyxtera Technologies, Inc. (“Cyxtera” or the “Company”) is a global data center leader in retail colocation and interconnection services. Cyxtera’s data center platform consists of 65 data centers across 33 markets on three continents.
Cyxtera was incorporated in Delaware as Starboard Value Acquisition Corp. (“SVAC”) on November 14, 2019. On July 29, 2021 (the “Closing Date”), SVAC consummated the previously announced business combination pursuant to the Agreement and Plan of Merger, dated February 21, 2021 ( the “Merger Agreement”), by and among SVAC, Cyxtera Technologies, Inc. (now known as Cyxtera Technologies, LLC), a Delaware corporation (“Legacy Cyxtera”), Mundo Merger Sub 1, Inc., a Delaware Corporation and wholly owned subsidiary of SVAC (“Merger Sub 1”), Mundo Merger Sub 2, LLC (now known as Cyxtera Holdings, LLC), a Delaware limited liability company and wholly owned subsidiary of SVAC (“Merger Sub 2” and, together with Mundo Merger Sub 1, the “Merger Subs”), and Mundo Holdings, Inc. (“NewCo”), a Delaware corporation and wholly owned subsidiary of SIS Holdings LP, a Delaware limited partnership (“SIS”). Pursuant to the Merger Agreement, Legacy Cyxtera was contributed to NewCo and then converted into a limited liability company and, thereafter, Merger Sub 1 was merged with and into NewCo, with NewCo surviving such merger as a wholly owned subsidiary of SVAC and immediately following such merger and as part of the same overall transaction NewCo was merged with and into Merger Sub 2, with Merger Sub 2 surviving such merger as a wholly owned subsidiary of SVAC (the “Business Combination” and, collectively with the other transactions described in the Merger Agreement, the “Transactions”). On the Closing Date, and in connection with the closing of the Business Combination, SVAC changed its name to Cyxtera Technologies, Inc.
Unless otherwise indicated or the context otherwise requires, references in this Annual Report on Form 10-K to “we,” “us,” “our,” the “Company” and “Cyxtera” refer to the consolidated operations of Cyxtera Technologies, Inc. and its subsidiaries. References to “SVAC” refer to Starboard Value Acquisition Corp. prior to the consummation of the Business Combination and references to “Legacy Cyxtera” refer to the former Cyxtera Technologies, Inc. (now known as Cyxtera Technologies, LLC) prior to the consummation of the Business Combination.
Legacy Cyxtera was deemed the accounting acquirer in the Business Combination based on an analysis of the criteria outlined in Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. This determination was primarily based on Legacy Cyxtera’s stockholders prior to the Business Combination having a majority of the voting power in the combined company, Legacy Cyxtera having the ability to appoint a majority of the board of directors of the combined company, Legacy Cyxtera’s existing management comprising the senior management of the combined company, Legacy Cyxtera’s operations comprising the ongoing operations of the combined company, Legacy Cyxtera being the larger entity based on historical revenues and business operations and the combined company assuming Legacy Cyxtera’s name. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Legacy Cyxtera issuing stock for the net assets of SVAC, accompanied by a recapitalization. The net assets of SVAC are stated at historical cost, with no goodwill or other intangible assets recorded.
While SVAC was the legal acquirer in the Business Combination, because Legacy Cyxtera was deemed the accounting acquirer, the historical financial statements of Legacy Cyxtera became the historical financial statements of the combined company upon the consummation of the Business Combination. As a result, the financial statements included in this report reflect: (i) the historical operating results of Legacy Cyxtera prior to the Business Combination; (ii) the consolidated results of SVAC and Legacy Cyxtera following the close of the Business Combination; (iii) the assets and liabilities of Legacy Cyxtera at their historical cost; and (iv) the Company’s equity structure for all periods presented.
In accordance with guidance applicable to these circumstances, the equity structure has been restated in all comparative periods up to the Closing Date to reflect the number of shares of the Company’s Class A common stock, $0.0001 par value per share (“Class A common stock”), issued to Legacy Cyxtera’s shareholders in connection with the Business Combination. As such, the shares and corresponding capital amounts and earnings per
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
share related to Legacy Cyxtera common stock prior to the Business Combination have been retroactively restated as shares of Class A common stock reflecting the effective exchange ratio of 120,568,182 utilized in the Business Combination. Refer to Note 3 for further discussion of the Cyxtera and SVAC Business Combination.
The Company has a revolving facility of $120.1 million ($42.0 million drawn as of December 31, 2022) and long-term debt of $869.0 million, which would have matured in November 2023 and May 2024, respectively. Subsequent to year-end, the Company entered into an amendment to its revolving facility which, among other things, extended the maturity date under such facility to April 2, 2024. See Note 22—Subsequent Events for more information. Based on our current forecast, which considers quantitative factors that are known or reasonably knowable as of the date of these financial statements, including the amendment described above, we believe that the cash generated from operations will be sufficient to fund our operating activities for at least the next twelve months from the date of issuance of these financial statements. We are actively attempting to extend, refinance or repay our long-term debt and are taking actions to improve our operating cash flows. However, if the Company cannot successfully extend its revolving credit facility and long-term debt, or refinance or repay the revolving credit facility and the long-term debt (which mature on April 2, 2024 and May 1, 2024, respectively) with proceeds from other sources, such as new debt, equity capital, or sales of assets, the Company will not be able to meet its financial obligations due beyond twelve months from the date of issuance of these December 31, 2022 financial statements and specifically twelve months from April 2, 2023.
Note 2. Summary of significant accounting policies
a)Basis of presentation and use of estimates
The accompanying consolidated financial statements are presented in accordance with US generally accepted accounting principles (“US GAAP”), which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ from these estimates and assumptions. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to the allowance for doubtful accounts, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, assets acquired, and liabilities assumed from acquisitions, asset retirement obligations and income taxes.
b)Risks and uncertainties
Preparing financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Examples include, but are not limited to, asset and goodwill impairments, allowance for doubtful accounts, stock-based compensation forfeiture rates, the incremental borrowing rate for leases, future asset retirement obligations and the potential outcome of future tax consequences of events that have been recognized in the consolidated financial statements. Actual results and outcomes may differ from these estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment.
c)Principles of consolidation and foreign currency translation
The consolidated financial statements include Cyxtera accounts and the accounts of entities in which Cyxtera has a controlling financial interest, the usual condition of which is ownership of a majority voting interest. All material intercompany balances and transactions have been eliminated in consolidation.
The functional currency of each of the Company’s operating subsidiaries is generally the currency of the economic environment in which the subsidiary primarily does business. The Company’s foreign subsidiaries’ financial statements are translated into dollars using the foreign exchange rates applicable to the dates of the financial statements. Assets and liabilities are translated using the end-of-period foreign exchange spot rates. Income and expenses are translated at the average foreign exchange rates for each period. Equity accounts are translated at historical foreign exchange rates. The effects of these translation adjustments are reported as a component of accumulated other comprehensive income (loss) (“AOCI”) in the consolidated statements of shareholders’ equity.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For any transaction that is denominated in a currency different from the transacting entity’s functional currency, the Company records a gain or loss based on the difference between the foreign exchange rate at the transaction date and the foreign exchange rate at the transaction settlement date (or rate at period end, if unsettled) which is included within selling, general and administrative expenses in the consolidated statements of operations.
d)Financial instruments and concentrations of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of accounts receivable. The Company operates primarily in the United States; realization of its customer accounts receivable and its future operations and cash flows could be affected by adverse economic conditions in the United States. During the years ended December 31, 2022, 2021 and 2020, Lumen Technologies Inc, formerly known as CenturyLink Inc., (“Lumen”), the Company’s largest customer, accounted for approximately 10%, 11%, and 14%, respectively, of the Company’s consolidated revenue. Revenues from Lumen are recognized pursuant to a Master Services Agreement (the “MSA”), dated May 1, 2017, between the Company and Lumen. The MSA originally had an initial term of three years, subject to renewal, and contained provisions related to rental of space for an initial term of 10 years, subject to renewal – see Note 11—Leases, for the related disclosure on minimum lease receipts. On July 10, 2020, the Company entered into a new master agreement with Lumen (the “Master Agreement”). The Master Agreement replaced the MSA with retroactive effect to May 1, 2020, and provides for services with staggered terms through April 30, 2025. Provisions related to the rental of space were included on substantially the same terms as provided under the MSA. In connection with the execution and delivery of the Master Agreement, the Company also settled various other amounts due from and due to Lumen, which resulted in a net gain of approximately $11.0 million. This net gain will be recognized over the five-year term of the Master Agreement. During the years ended December 31, 2022, 2021 and 2020, no other customer accounted for more than 5% of the Company’s consolidated revenues.
e)Property and equipment
Property and equipment is recorded at the Company’s original cost or fair value for property, plant and equipment acquired through acquisition, net of accumulated depreciation and amortization. In general, depreciation is computed using the straight-line method over the estimated useful life of the asset being depreciated. Leasehold improvements are amortized over the shorter of the useful life of the asset or the length of the expected lease term. When property, plant and equipment is sold or otherwise disposed of, the costs and accumulated depreciation are generally removed from the accounts and any gain or loss is recognized in income.
The estimated useful lives used in computing depreciation and amortization are as follows:
| | | | | |
| Asset class | Estimated useful
lives (years) |
| Buildings | 10—40 |
| Leasehold improvements | 3—40 |
| Personal property | 2—15 |
The Company’s construction in progress is stated at original cost. Construction in progress consists of costs incurred under construction contracts, including services related to project management, engineering and schematic design, design development and construction and other construction-related fees and services. The Company has contracted out substantially all of its current construction and expansion projects to independent contractors. In addition, the Company generally capitalizes interest costs during the construction phase. During the years ended December 31, 2022 and 2021, the Company capitalized interest of $4.5 million and $1.7 million, respectively. At the time a construction or expansion project becomes operational, these capitalized costs are allocated to certain property and equipment assets and are depreciated over the estimated useful lives of the underlying assets.
Major improvements are capitalized, while maintenance and repairs are expensed when incurred.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
f)Long-lived assets
Long-lived assets, such as property, plant and equipment and intangible assets subject to amortization, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Some of the events and circumstances that would trigger an impairment review include, but are not limited to, a significant decrease in market price of a long-lived asset, a significant adverse change in legal factors or business climate that could affect the value of a long-lived asset, or a continuous deterioration of the Company’s financial condition. Recoverability of assets to be held and used is assessed by comparing the carrying amount of an asset to estimated undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized based on the amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company did not record any impairment charges on long-lived assets during the years ended December 31, 2022, 2021 and 2020.
g)Asset retirement obligations
The Company has asset retirement obligations (each an “ARO”) primarily associated with its obligations to retire long-lived assets from leased properties under long-term arrangements and, to a lesser extent, the removal and disposal of fuel tanks from both leased and owned properties. AROs are initially measured at fair value and recognized at the time the obligation is incurred. Upon initial recognition, a liability for the retirement obligation is recorded. The associated cost is capitalized as part of the cost basis of the related long-lived asset and depreciated over the useful life of that asset. We have several leases that require remediation of the leased premises and/or removal of all of the Company’s owned property and equipment from the leased premises at the expiration of the lease term. The Company’s ARO liability associated with these activities is recorded within other liabilities and was $7.2 million and $6.9 million as of December 31, 2022 and 2021, respectively, and the related cost is capitalized within property, plant and equipment on the consolidated balance sheets.
h)Goodwill
Goodwill is calculated as the excess of the purchase price over the fair value of assets acquired and liabilities assumed in connection with a business combination. Goodwill will not be amortized, but rather tested for impairment at least annually or more often if an event occurs or circumstances change which indicate impairment might exist. Goodwill is evaluated at the reporting unit level. The Company has identified a single reporting unit.
The Company conducts goodwill impairment testing as of October 1st of each year or whenever an indicator of impairment exists. The Company has the option to assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. If, after assessing the qualitative factors, the Company determines that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying value, then the Company will not be required to perform a quantitative test. However, if the Company concludes that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, then it is required to perform a quantitative impairment test. The quantitative test compares the fair value of a reporting unit with its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
i)Debt issuance costs and fees
Debt issuance costs and fees are capitalized and amortized over the term of the related loans based on the effective interest method. Such amortization is a component of interest expenses, net on the consolidated statements of operations. Debt issuance costs related to outstanding debt are presented as a reduction of the carrying amount of the debt liability and debt issuance fees related to the Revolving Facility (as defined in Note 12—Long-term debt) are presented within other assets on the Company’s consolidated balance sheets.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
j)Fair value measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market, or if none exists, the most advantageous market, for the specific asset or liability at the measurement date (the exit price). The fair value is based on assumptions that market participants would use when pricing the asset or liability. The fair values are assigned a level within the fair value hierarchy, depending on the source of the inputs to the calculation, as follows:
| | | | | |
| Input level | Description of input |
| Level 1 | Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets |
| Level 2 | Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly |
| Level 3 | Unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability |
k)Revenue
Revenue recognition
Cyxtera derives the majority of its revenues from recurring revenue streams, consisting primarily of colocation service fees. The Company derives revenue from colocation service fees, which include fees for the licensing of space, power and interconnection services. The Company derives the significant majority of its colocation revenue from sales to customers in the United States, based upon the service address of the customer. Revenue derived from customers outside the United States, based upon the service address of the customer, was not significant in any individual foreign country. The remainder of the Company’s revenues are derived from non-recurring charges, such as installation fees and professional services, including remote support to troubleshoot technical issues and turnkey structured cabling solutions. The Company’s revenue contracts are accounted for in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”), with the exception of certain contracts that contain lease components and are accounted for in accordance with ASC Topic 842, Leases (“Topic 842”).
Under the revenue accounting guidance, revenues are recognized when control of these products and services is transferred to the Company’s customers, in an amount that reflects the consideration it expects to be entitled to in exchange for the products and services. Revenues from recurring revenue streams are generally invoiced monthly in advance and recognized ratably over the term of the contract, which is generally three years. Non-recurring installation fees, although generally invoiced in a lump sum upon installation, are deferred and recognized ratably over the contract term. Professional service fees and equipment sales are also generally invoiced in a lump sum upon service delivery and are recognized in the period when the services are provided or the equipment is delivered. For contracts with customers that contain multiple performance obligations, the Company accounts for individual performance obligations separately if they are distinct or as a series of distinct obligations if the individual performance obligations meet the series criteria. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. The transaction price is allocated to the separate performance obligation on a relative standalone selling price basis. The standalone selling price is determined based on overall pricing objectives, taking into consideration market conditions, geographic locations and other factors. Other judgments include determining if any variable consideration should be included in the total contract value of the arrangement, such as price increases.
Revenue is generally recognized on a gross basis in accordance with the accounting standard related to reporting revenue on a gross basis as a principal versus on a net basis as an agent, as the Company is primarily responsible for fulfilling the contract, bears inventory risk and has discretion in establishing the price when selling to the customer. To the extent the Company does not meet the criteria for recognizing revenue on a gross basis, the Company records the revenue on a net basis.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company estimates credits on contractual billings using historical data and recognizes an allowance that reduces net sales. Historically, these credits have not been significant.
Occasionally, the Company enters into contracts with customers for data center, office and storage spaces, which contain lease components. The Company’s leases with customers are generally classified as operating leases and lease payments are recognized on a straight-line basis over the lease term. Lease revenues are included within revenues in the Company’s consolidated statements of operations.
Taxes collected from customers and remitted to governmental authorities are reported on a net basis and are excluded from revenue.
Contract balances
The timing of revenue recognition, billings and cash collections result in accounts receivables, contract assets and deferred revenues. A receivable is recorded at the invoice amount, net of an allowance for doubtful accounts and is recognized in the period in which the Company has transferred products or provided services to its customers and when its right to consideration is unconditional. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 45 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that the Company’s contracts generally do not include a significant financing component. The Company assesses collectability based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company generally does not request collateral from its customers. The Company also maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments that the Company had expected to collect. If the financial condition of the Company’s customers deteriorates or if they become insolvent, resulting in an impairment of their ability to make payments, greater allowances for doubtful accounts may be required. Management specifically analyzes accounts receivable and current economic news and trends, historical bad debts, customer concentrations, customer credit-worthiness and changes in customer payment terms when evaluating revenue recognition and the adequacy of the Company’s reserves. Any amounts that were previously recognized as revenue and subsequently determined to be uncollectable are charged to bad debt expense, which is included in selling, general and administrative expenses in the consolidated statements of operations. Delinquent account balances are written off after management has determined that collection is not probable.
A contract asset exists when the Company has transferred products or provided services to its customers, but customer payment is contingent upon satisfaction of additional performance obligations. Certain contracts include terms related to price arrangements such as price increases and free months. The Company recognizes revenues ratably over the contract term, which could potentially give rise to contract assets during certain periods of the contract term. Contract assets are recorded in prepaid and other current assets and other assets in the consolidated balance sheets.
Deferred revenue (a contract liability) is recognized when the Company has an unconditional right to a payment before we transfer products or services to customers. Deferred revenue is included in other current liabilities and other liabilities in the consolidated balance sheets.
Contract costs
Direct and indirect incremental costs solely related to obtaining revenue generating contracts are capitalized as costs of obtaining a contract when they are incremental and if they are expected to be recovered. Such costs consist primarily of commission fees and sales bonuses, contract fulfillment costs, as well as other related payroll costs. Contract costs are amortized over the estimated period of benefit, which is estimated as three years, on a straight-line basis.
For further information on revenue recognition, see Note 6—Revenue.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
l)Leases
The Company determines if an arrangement is or contains a lease at its inception. The Company enters into lease arrangements primarily for data center spaces, office spaces and equipment. The Company recognizes a right-of-use (“ROU”) asset and lease liability on the consolidated balance sheets for all leases with a term longer than 12 months, including renewals.
ROU assets represent the Company’s right to use an underlying asset for the lease term. Lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are classified and recognized at the commencement date. Lease liabilities are measured based on the present value of fixed lease payments over the lease term. ROU assets consist of (i) initial measurement of the lease liability; (ii) lease payments made to the lessor at or before the commencement date less any lease incentives received; and (iii) initial direct costs incurred by the Company. Lease payments may vary because of changes in facts or circumstances occurring after the commencement, including changes in inflation indices. Variable lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate) are included in the measurement of ROU assets and lease liabilities using the index or rate at the commencement date. Variable lease payments that do not depend on an index or a rate are excluded from the measurement of ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. Since most of the Company’s leases do not provide an implicit rate, the Company uses its own incremental borrowing rate (“IBR”) on a collateralized basis in determining the present value of lease payments. The Company utilizes a market-based approach to estimate the IBR. The approach requires significant judgment. Therefore, the Company utilizes different data sets to estimate IBRs via an analysis of (i) yields on our outstanding traded bank loans (ii) yields on comparable credit rating composite curves and (iii) yields on comparable market curves.
The majority of the Company’s lease arrangements include options to extend the lease. If the Company is reasonably certain to exercise such options, the periods covered by the options are included in the lease term. The Company recognizes rental expenses for operating leases that contain predetermined fixed escalation clauses on a straight-line basis over the expected term of the lease. The depreciable lives of certain fixed assets and leasehold improvements are limited by the expected lease term. The Company has certain leases that have an initial term of 12 months or less and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. For such leases, the Company elected not to recognize any ROU asset or lease liability on the consolidated balance sheets. The Company has lease agreements with lease and non-lease components. The Company elected to account for the lease and non-lease components as a single lease component for all classes of underlying assets for which the Company has identified lease arrangements with non-lease components.
Lease modifications
In the normal course of business, the Company may modify leases, which could result in a change from the original lease classification (i.e. finance or operating leases). The Company remeasures the lease liability based on the lease term of the modified leases by discounting revised lease payments using a revised IBR at the effective date of the modification. The Company accounts for the remeasurement of lease liabilities and lease incentives from lessor by making corresponding adjustments to the relevant right-of-use asset.
m)Restructuring charges
If the Company commits to a plan to dispose of a long-lived asset before the end of its previously estimated useful life or changes its use of assets and estimated cash flows are revised accordingly, the Company may be required to record an asset impairment charge. Additionally, related liabilities may arise such as severance, contractual obligations and other accruals associated with site closures from decisions to dispose of assets. The Company estimates these liabilities based on the facts and circumstances in existence for each restructuring decision. The amounts the Company will ultimately realize or disburse could differ from the amounts assumed in arriving at the asset impairment and restructuring charges recorded.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
n)Warrant Liabilities
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standard Codification Topic 480, Distinguishing Liabilities from Equity (“ASC Topic 480”), and FASB ASC Topic 815, Derivatives and Hedging (“ASC Topic 815”). The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
Upon the consummation of the Business Combination, Cyxtera assumed certain warrants issued by SVAC. Such warrants consisted of public warrants issued in SVAC’s initial public offering (“IPO”) (the “Public Warrants”) and warrants issued by SVAC to the SVAC Sponsor, LLC (the “Sponsor”) and certain clients of Starboard Value LP (the “Forward Purchasers”) in private placement transactions (the “Private Placement Warrants” and, together with the Public Warrants, the “Public and Private Placement Warrants”). The Public and Private Placement Warrants were reallocated upon the consummation of the Business Combination and recognized as derivative liabilities in accordance with ASC Topic 815. Accordingly, the Company recognizes the warrant instruments as liabilities at fair value and adjusts the carrying value of the instruments to fair value at each reporting period until they are exercised. The Public and Private Placement Warrants were initially recorded at fair value on the date of the Business Combination.
In December 2021, the Company announced that it would redeem all Public Warrants and Private Placement Warrants that remained outstanding at 5:00 p.m., New York City time, on January 19, 2022. In January 2022, the remaining Public Warrants and Private Placement Warrants were either exercised by the holders, or were redeemed by the Company. As a result, the Company derecognized the $64.7 million of the warrant liabilities and recognized a gain of $11.8 million (see Note 13).
o)Income taxes
The Company files a consolidated US federal, state, local and foreign income tax returns where applicable.
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more-likely-than-not to be realized in the future. A tax benefit from an uncertain income tax position may be recognized in the financial statements only if it is more-likely-than-not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and precedents.
p)Equity-based compensation
SIS Profit Interest Units
SIS has issued equity awards in the form of profit interest units (“PIUs”) to certain employees of Cyxtera and its affiliates. Compensation expense related to PIU awards is based on the fair value of the underlying units on the grant date. Fair value of PIUs is estimated using a Black-Scholes option pricing model (“OPM”), which requires assumptions as to expected volatility, dividends, term and risk-free rates. These PIUs vest based on a service condition. For additional information regarding equity-based compensation, see Note 15—Stock-based compensation.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock-based compensation
The Company maintains the 2021 Omnibus Incentive Plan (the “2021 Plan”), an equity incentive plan under which the Company may grant equity incentive awards, including non-qualified stock options, restrictive stock units (“RSUs”) and performance stock units (“PSUs”), to employees, officers, directors and consultants. The Company records stock-based compensation expense based on the fair value of stock awards at the grant date and recognizes the expense over the vesting period on a straight-line basis. The fair value of each stock option granted is estimated on the grant date using the Black-Scholes-Merton option valuation model. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and our historical experience. Our assumption used to calculate the volatility of the stock options is based on public peer companies. The fair value of each restricted stock unit is estimated on the grant date using the closing stock price of Class A common stock that is being traded on the Nasdaq Stock Market, LLC (“Nasdaq”). Forfeitures are recorded as they occur. Compensation expense is recognized over the requisite service period for each separately vesting portion of the award, and only for those awards expected to vest.
The Company has an employee stock purchase plan (“ESPP”) under which shares of the Company’s stock are available for purchase by eligible participants. The plan allows participants to purchase the Company’s Class A common stock at 85% of its fair market value at the lower of (i) the date of commencement of the offering period or (ii) the last day of the exercise period, as defined in the plan documents. The fair value of purchases under the Company’s employee stock purchase plans is estimated using the Black-Scholes option-pricing valuation model. The determination of fair value of stock-based awards using an option-pricing model is affected by the Company’s stock price as well as assumptions pertaining to several variables, including expected stock price volatility, the expected term of the award and the risk-free rate of interest. In the option-pricing model for the Company’s employee stock purchase plans, expected stock price volatility is based on historical volatility of the Company’s common stock.
p) Other comprehensive (loss) income
Other comprehensive (loss) income refers to revenues, expenses, gains and losses that are included in comprehensive (loss) income but are excluded from net loss as these amounts are recorded directly as an adjustment to shareholders’ equity. The Company’s other comprehensive (loss) income is composed of unrealized gains and losses on foreign currency translation adjustments.
q) Advertising expenses
Costs related to advertising are expensed as incurred and included in selling, general and administrative expenses in the consolidated statements of operations. Advertising expenses of $4.1 million, $3.2 million and $2.4 million were recorded during the years ended December 31, 2022, 2021 and 2020, respectively.
r) Recent accounting pronouncements
The Company is as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended (“JOBS Act”). The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards, such that an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to avail itself of the extended transition periods and, as a result, the Company will not be required to adopt new or revised accounting standards on the adoption dates required for other public companies so long as the Company remains an emerging growth company.
In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform, which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients and that are retained through the end of the hedging relationship. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in December 2022, the FASB issued ASU No. 2022-06, Deferral of the Sunset Date of Reference Rate Reform (Topic 848). Topic 848 provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate (e.g., LIBOR) reform if certain criteria are met, for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The ASU deferred the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. The ASU is effective as of December 21, 2022 through December 31, 2024. The Company is evaluating the impact that the adoption of these standards will have on its consolidated financial statements.
In December 2019, the Financial Accounting Standards Board issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. We adopted the amendments in Topic 740 as of January 1, 2022, without a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326)—Measurement of Credit Losses on Financial Instruments, which requires companies to measure and recognize lifetime expected credit losses for certain financial instruments, including trade accounts receivable. Expected credit losses are estimated using relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. This amendment is effective commencing in 2023 with early adoption permitted, and the Company expects to adopt the new standard on the effective date or the date it no longer qualifies as an emerging growth company, whichever is earlier. Entities are permitted to use a modified retrospective approach. The Company is evaluating the impact that the adoption of this standard will have on its consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt: Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)—Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. The guidance simplifies accounting for convertible instruments by removing major separation models required under current US GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for annual and interim periods beginning after December 15, 2021. The Company adopted this new guidance on January 1, 2022 without a material impact on its consolidated financial statements.
In February 2016, FASB issued Topic 842, which replaced the guidance in former ASC Topic 840, Leases. The new lease guidance increases transparency and comparability among organizations by requiring the recognition of the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s future obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) an operating lease ROU asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The accounting for the Company’s finance leases remains substantially unchanged. Topic 842 allows entities to adopt using one of two methods: the modified retrospective transition method or the alternative transition method.
During the year ended December 31, 2022, the Company adopted Topic 842, with an effective date of January 1, 2022, using the alternative transition method. Therefore, results for reporting periods beginning after January 1, 2022 are presented under Topic 842, while comparative information has not been restated and continues to be reported under accounting standards in effect for those periods. The Company recognized the cumulative effects of initially applying the standard as an adjustment to the operating lease right-of-use assets, intangible assets, operating lease liabilities and other liabilities in the period of adoption.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In adopting the new guidance, the Company elected to apply the package of practical expedients permitted under the transition guidance, which allows the Company not to reassess (1) whether any expired or existing contracts contain leases under the new definition of a lease; (2) lease classification for any expired or existing leases; and (3) whether previously capitalized initial direct costs would qualify for capitalization under Topic 842.
Adoption of the standard had a significant impact on the Company’s consolidated balance sheets, including the (1) recognition of new ROU assets and liabilities on its balance sheet for all operating leases; and (2) reclassification of previously recognized lease abandonment liabilities, deferred rent, and favorable and unfavorable lease interests, as a reduction of or addition to the ROU assets recognized at adoption. The adoption of the standard did not have a significant impact on the consolidated statements of operations and statements of cash flow. The cumulative effect of the changes made to our consolidated balance sheet as of January 1, 2022 due to the adoption of Topic 842 was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Balance Sheet | | Balances at December 31, 2021 | | Adjustments due to adoption of Topic 842 | | Balances at January 1, 2022 |
| Assets | | | | | | |
| Operating lease right-of-use assets | | $ | — | | | $ | 290.6 | | | $ | 290.6 | |
| Intangible assets, net | | 519.8 | | (32.7) | | | 487.1 |
| Liabilities | | | | | | |
| Current portion of operating lease liabilities | | — | | | 32.2 | | | 32.2 |
| Operating lease liabilities, less current portion | | — | | | 319.0 | | | 319.0 |
| Other liabilities | | 158.2 | | | (93.3) | | | 64.9 |
See Note 11—Leases for additional information.
Note 3. Business combination
July 29, 2021, Acquisition of Legacy Cyxtera
On July 29, 2021, Legacy Cyxtera consummated the Business Combination with SVAC, with Legacy Cyxtera deemed the accounting acquirer. The Business Combination was accounted for as a reverse recapitalization with no goodwill or other intangible assets recorded, in accordance with US GAAP. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Legacy Cyxtera issuing stock for net assets of SVAC, accompanied by a recapitalization. As stated in Note 1, in connection with the closing of the Business Combination, SVAC was renamed Cyxtera Technologies, Inc.
Of the 40,423,453 shares of SVAC’s Class A common stock issued in its IPO (“Public Shares”) in September 2020, holders of 26,176,891 shares of SVAC’s Class A common stock properly exercised their right to have such shares redeemed for a full pro rata portion of the trust account holding the proceeds from the IPO, calculated as of two business days prior to the consummation of the Business Combination, which was approximately $10.00 per share or $261.8 million in the aggregate. As a result, 14,246,562 shares of Class A common stock remained outstanding, leaving $142.5 million in the trust account.
As a result of the Business Combination, 106,100,000 shares of Class A common stock were issued to SIS, the sole stockholder of Legacy Cyxtera prior to the Business Combination, and 25,000,000 shares of Class A common stock were issued to certain qualified institutional buyers and accredited investors, at a price of $10.00 per share, for aggregate consideration of $250.0 million, for the purpose of raising additional capital for use by the combined company following the closing of the Business Combination and satisfying one of the conditions to the closing (the “PIPE Investment”). Additionally, as a result of the Business Combination, 10,526,315 shares of Class A common stock were issued to the Forward Purchasers for $100 million and 10,105,863 shares of SVAC Class B common stock held by the Sponsor, automatically converted to 10,105,863 shares of Class A common stock.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In connection with the IPO, the Forward Purchasers and SVAC entered into an Optional Share Purchase Agreement, dated September 9, 2020 (the “Optional Share Purchase Agreement”), pursuant to which the Forward Purchasers were granted the option, exercisable anytime or from time to time during the six-month period following the day that is the first business day following the closing of the Company’s initial business combination, to purchase common equity of the surviving entity in the initial business combination (the “Optional Shares”) at a price per Optional Share of $10.00, subject to adjustments. In connection with the Merger Agreement, Legacy Cyxtera and the Forward Purchasers entered into a letter agreement pursuant to which the Forward Purchasers agreed not to purchase Optional Shares for an aggregate amount exceeding $75.0 million. On July 29, 2021, immediately prior to the consummation of the Transactions, Legacy Cyxtera entered into a second letter agreement (the “Optional Purchase Letter Agreement”) with the Forward Purchasers pursuant to which the parties agreed to amend the Optional Share Purchase Agreement to limit the number of Optional Shares available for purchase by the Forward Purchasers in the six-month period following the Transactions from $75.0 million to $37.5 million. Additionally, pursuant to an assignment agreement entered into concurrently with the Optional Purchase Letter Agreement (the “Assignment Agreement”), the Forward Purchasers agreed to assign an option to purchase $37.5 million of Optional Shares under the Optional Share Purchase Agreement to SIS. As a result of the Optional Purchase Letter Agreement and the Assignment Agreement, each of SIS and the Forward Purchasers had the ability to purchase, at a price of $10.00 per share, up to 3.75 million shares of Class A common stock (for a combined maximum amount of $75.0 million or 7.5 million shares) during the six-month period following the day that is the first business day following the closing date of the Transactions. The exercise price of $10.00 per share was subject to adjustment in proportion to any stock dividends, stock splits, reverse stock splits or similar transactions. On January 31, 2022, SIS and the Forward Purchasers exercised the option, and Cyxtera issued 7.5 million shares of Class A common stock to SIS and the Forward Purchasers at a price of $10.00 per share, for aggregate consideration of $75.0 million. Since SIS and the Forward Purchasers exercised the option, the Company was obligated to issue shares of Class A common stock in exchange for cash (and the option settled on a gross basis). The accounting guidance in ASC Subtopic 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity (“ASC Subtopic 815-40”), states that contracts should be classified as equity instruments (and not as an asset or liability) if they are both (1) indexed to the issuer’s own stock and (2) classified in stockholders’ equity in the issuer’s statement of financial position. The optional share purchase options were indexed to the Company’s Class A common stock because the options were considered a fixed-for-fixed option on equity shares, pursuant to which the option holder would receive a fixed number of Class A common stock for a fixed conversion price of $10.00 per share. The Optional Share Purchase Agreement contained no contingent exercise or settlement provisions that would preclude equity classification.
After giving effect to the Transactions, the redemption of the Public Shares as described above, the issuance of shares as part of the forward purchase and the consummation of the PIPE Investment, there were 165,978,740 shares of Class A common stock issued and outstanding, immediately following the completion of the Business Combination. The Class A common stock and Public Warrants (as defined in Note 4) commenced trading on the Nasdaq on July 30, 2021. As noted above, an aggregate of $261.8 million was paid from SVAC’s trust account to holders that properly exercised their right to have Public Shares redeemed, and the remaining balance immediately prior to the closing remained in the trust account. After taking into account the funds of $142.5 million in the trust account and $1.4 million from SVAC’s cash operating accounts after redemptions, the $250.0 million in gross proceeds from the PIPE Investment and the $100.0 million in gross proceeds from the forward purchase, the Company received approximately $493.9 million in total cash from the Business Combination, before direct and incremental transaction costs of approximately $59.4 million and debt repayment of $433.0 million, plus accrued interest. The $433.0 million debt repayment includes the full repayment of Legacy Cyxtera’s 2017 Second Lien Term Facility (as defined in Note 12) of $310.0 million and pay down of Legacy Cyxtera’s Revolving Facility and 2021 Revolving Facility (each as defined in Note 12) of $123.0 million, plus accrued interest.
In December 2021, the Company announced that it would redeem all of the Public Warrants and Private Placement Warrants (as defined in Note 4) that remained outstanding as of 5:00 p.m., New York City time, on January 19, 2022. On January 26, 2022, the Company announced that it had completed the redemption of all of its outstanding warrants that were issued under the warrant agreement and that remained outstanding at 5:00 p.m., New York City time, on January 19, 2022. Upon completion of the redemption, the Public Warrants ceased trading on the Nasdaq and were deregistered.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Prior to the Business Combination, Legacy Cyxtera and SVAC filed separate standalone federal, state and local income tax returns. As a result of the Business Combination, which qualified as a reverse recapitalization, SVAC (now known as Cyxtera Technologies, Inc.) became the parent of the consolidated filing group, with Legacy Cyxtera (now known as Cyxtera Technologies, LLC) as a subsidiary.
The following table reconciles the elements of the Business Combination to the consolidated statements of cash flows and the consolidated statements of changes in shareholders’ equity for the year ended December 31, 2021:
| | | | | | | | |
| | Recapitalization
( in millions) |
| SVAC’s trust and cash, net of redemption | | $ | 143.9 | |
| Cash-PIPE Investment | | 250.0 | |
| Cash-Forward Purchase | | 100.0 |
| Less: transaction cost and advisory fees, net of tax benefit | | (59.4) | |
| Net proceeds from reverse recapitalization | | 434.5 |
Plus: non-cash net liabilities assumed(1) | | (41.8) | |
| Less: accrued transaction costs and advisory fees | | (0.4) | |
| Net contributions from reverse recapitalization | | $ | 392.3 | |
(1)Represents $41.8 million of non-cash Public Warrants and Private Placement Warrants liabilities assumed.
Note 4. Loss per common share
Basic loss per share is computed by dividing net loss (the numerator) by the weighted-average number of shares of Class A common stock outstanding (the denominator) for the period. Diluted loss per share assumes that any dilutive equity instruments were exercised with outstanding Class A common stock adjusted accordingly when the conversion of such instruments would be dilutive.
The Company’s potential dilutive shares, which include previously outstanding public warrants (“Public Warrants”) and private placement warrants (“Private Placement Warrants”), unvested employee stock options, unvested restricted stock units (“RSUs”), unvested performance stock units (“PSUs”), unissued employee stock purchase plan shares (“ESPP shares”) and options that were issued to the Forward Purchasers and SIS pursuant to the Optional Share Purchase Agreement and subsequently exercised in 2022, have been excluded from diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of common shares outstanding used to calculate both basic and diluted net loss per share is the same. The Company excluded the following potential common shares, presented based on amounts outstanding as of December 31, 2022 and 2021, from the computation of diluted net loss per share because including them would have an anti-dilutive effect:
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 |
Public and Private Warrants (2) | | — | | | 19,356,867 | |
| Unvested employee stock options | | 830,547 | | | 849,233 | |
| Unvested restrictive stock units | | 3,938,963 | | | 3,347,511 | |
Optional shares (1) | | — | | | 7,500,000 | |
| Unvested performance stock units | | 349,766 | | | — | |
| Unissued employee stock purchase plan shares | | 159,626 | | | — | |
| Total shares | | 5,278,902 | | | 31,053,611 | |
(1) Optional shares were excluded from the computation of diluted loss per share for the periods these instruments represented potential dilutive common stock equivalents during the year ended December 31, 2022.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) In addition, 19.4 million of Public Warrants and Private Placement Warrants were excluded from the computation of net loss per share for the period January 1, 2022 through January 24, 2022 because they would have had an anti-dilutive effect on the computation of diluted net loss.
For the year ended December 31, 2020, the Company did not have any potential dilutive shares.
Note 5. Restructuring, impairment, site closures and related costs
Addison site
In January 2021, the Company notified the landlord of the Addison office space in Texas of its intent to sublease the property for the remaining 10 years. The Company ceased use of and subleased the space during the three months ended March 31, 2021. In connection with this decision, the Company incurred $7.9 million of expenses, including $5.9 million of accrued lease termination costs and $2.0 million of asset disposals.
Moses Lake site
In February 2021, the Company notified the landlord of the Moses Lake data center facility in the State of Washington of its intent to cease the use of the space. Accordingly, the Company accelerated depreciation and amortization of all assets on the site, including favorable leasehold interest amortization, which resulted in $1.8 million additional depreciation and amortization during the year ended December 31, 2021, and $0.6 million additional favorable leasehold interest amortization, recorded in cost of revenues, during the year ended December 31, 2021, respectively. The Company ceased use of the property in June 2021 at which time it met the conditions for recording a charge related to the remaining lease obligation of $58.5 million. There is no sublease in place on this property. Furthermore, management believes the ability to sublease the property is remote and as such has not made any assumption for the future cash flows from a potential sublease in making this estimate.
On January 1, 2022, the Company adopted Topic 842, and reclassified $53.0 million of the restructuring liability reserve representing lease abandonment liabilities to the ROU asset. As of December 31, 2022, the restructuring liability reserve relates to the ASC 420, Exit or Disposal Cost Obligations, lease abandonment liability for Moses Lake, which was in excess of the ROU asset adjustment. The restructuring liability reserve is included in other liabilities in the consolidated balance sheets.
The activity in the restructuring liability reserve for the years ended December 31, 2022 and 2021, was as follows (in millions):
| | | | | | | | | | | |
| | | |
| 2022 | | 2021 |
| Beginning balance | $ | 62.3 | | | $ | — | |
| Lease termination costs | — | | | 64.4 | |
| Reclassification of deferred rent credits | — | | | 3.4 | |
| Reclassification of the restructuring liability to ROU Asset | (53.0) | | | — | |
| Accretion | 0.6 | | | 3.5 | |
| Payments | (1.2) | | | (9.0) | |
| Ending balance | $ | 8.7 | | | $ | 62.3 | |
During the years ended December 31, 2022 and 2021, the Company recorded accretion of $0.6 million, and $3.5 million, respectively, in connection with the exits, recorded in restructuring, impairment, site closures and related costs in the consolidated statements of operations. There was no accretion expense in 2020 in connection with restructuring liability reserve.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6. Revenue
Disaggregation of revenue
The Company disaggregates revenue from contracts with customers into recurring revenues and non-recurring revenues. Cyxtera derives the majority of its revenues from recurring revenue streams, consisting primarily of colocation service fees. These fees are generally billed monthly and recognized ratably over the term of the contract. The Company’s non-recurring revenues are primarily composed of installation services related to a customer’s initial deployment and professional services the Company performs. These services are considered to be non-recurring because they are billed typically once, upon completion of the installation or the professional services work performed. The majority of these non-recurring revenues are typically billed on the first invoice distributed to the customer in connection with their initial installation. However, revenues from installation services are deferred and recognized ratably over the period of the contract term in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”) as discussed in Note 2.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Recurring revenue | $ | 710.6 | | | $ | 671.5 | | | $ | 657.4 | |
| Non-recurring revenues | 35.4 | | | 32.2 | | | 33.1 | |
| Total | $ | 746.0 | | | $ | 703.7 | | | $ | 690.5 | |
Contract balances
The following table summarizes the opening and closing balances of the Company’s receivables; contract asset, current; contract asset, non-current; deferred revenue, current; and deferred revenue, non-current (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Receivables | | Contract asset, current | | Contract asset, non-current | | Deferred revenue, current | | Deferred revenue, non-current |
| Closing balances as of December 31, 2019 | $ | 65.2 | | | $ | 32.5 | | | $ | 23.8 | | | $ | 14.6 | | | $ | 9.6 | |
| Net (decrease) increase during the year ended December 31, 2020 | (31.7) | | | (8.7) | | | (7.0) | | | 1.0 | | | 8.5 | |
| Closing balances as of December 31, 2020 | 33.5 | | | 23.8 | | | 16.8 | | | 15.6 | | | 18.1 | |
| Net (decrease) increase during the year ended December 31, 2021 | (15.2) | | | (6.6) | | | (4.7) | | | (1.1) | | | (3.4) | |
| Closing balances as of December 31, 2021 | 18.3 | | | 17.2 | | | 12.1 | | | 14.5 | | | 14.7 | |
| Net (decrease) increase during the year ended December 31, 2022 | 10.0 | | | (1.5) | | | 1.7 | | | 7.9 | | | 1.0 | |
| Closing balances as of December 31, 2022 | $ | 28.3 | | | $ | 15.7 | | | $ | 13.8 | | | $ | 22.4 | | | $ | 15.7 | |
The difference between the opening and closing balances of the Company’s contract assets and deferred revenues primarily results from the timing difference between the Company’s performance obligation and the customer’s payment. The amounts of revenue recognized during the years ended December 31, 2022, 2021, and 2020, from the opening deferred revenue balance was $14.3 million, $15.6 million, and $8.2 million, respectively. During the years ended December 31, 2022, 2021 and 2020, no impairment loss related to contract balances was recognized in the consolidated statements of operations.
In addition to the contract liability amounts shown above, deferred revenue on the consolidated balance sheets includes $50.7 million, $46.1 million, and $44.6 million of advanced billings as of December 31, 2022, 2021 and 2020, respectively.
Contract costs
The ending balance of net capitalized contract costs as of December 31, 2022, 2021 and 2020 was $29.5 million, $29.3 million, and $40.6 million, respectively, $15.7 million, $17.2 million and $23.8 million of which were included in prepaid and other current assets in the consolidated balance sheets as of December 31, 2022, 2021 and 2020, respectively, and $13.8 million, $12.1 million, and $16.8 million of which were included in other assets in the consolidated balance sheets as of December 31, 2022, 2021 and 2020, respectively. For the years ended
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2022, 2021 and 2020, $19.5 million, $26.5 million, and $35.1 million, respectively, of contract costs was amortized, $6.6 million, $15.2 million, and $24.1 million of which were included in cost of revenues, excluding depreciation and amortization in the consolidated statements of operations for the years ended December 31, 2022, 2021 and 2020, respectively, and $12.9 million, $11.3 million, and $11.0 million, of which were included in selling, general and administrative expenses in the consolidated statements of operations for the years ended December 31, 2022, 2021 and 2020.
Remaining performance obligations
Under colocation contracts, Cyxtera’s performance obligations are to provide customers with space and power through fixed duration agreements, which are typically three years. Under these arrangements, the Company bills customers on a monthly basis. Under interconnection agreements, Cyxtera’s performance obligations are to provide customers the ability to establish connections to their network service providers and business partners. Interconnection services are typically offered on month-to-month contract terms and generate recurring revenue.
Cyxtera’s remaining performance obligations under its colocation agreements represent contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized in future periods. The remaining performance obligations do not include estimates of variable consideration related to unsatisfied performance obligations, such as the usage of metered power, or any contracts that could be terminated without significant penalties, such as the majority of interconnection revenues. The aggregate amount allocated to performance obligations that were unsatisfied or partially unsatisfied as of December 31, 2022, was $942.3 million, of which 43%, 27% and 31% is expected to be recognized over the next year, the next one to two years, and thereafter, respectively. The aggregate amount allocated to performance obligations that were unsatisfied or partially unsatisfied as of December 31, 2021 was $818.0 million, of which 45%, 27% and 28% is expected to be recognized over the next year, the next one to two years, and thereafter, respectively.
While initial contract terms vary in length, substantially all contracts automatically renew in one-year increments. Included in the performance obligations is either (1) remaining performance obligations under the initial contract terms or (2) remaining performance obligations related to contracts in the renewal period once the initial terms have lapsed.
Note 7. Balance sheet components
Allowance for doubtful accounts
The activity in the allowance for doubtful accounts during the year ended December 31, 2022 and 2021 was as follows (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Beginning balance | $ | 0.3 | | | $ | 1.4 | |
| Current period provisions | 0.1 | | | 0.1 | |
| Recoveries and reversal of allowance | (0.3) | | | (1.2) | |
| Ending balance | $ | 0.1 | | | $ | 0.3 | |
During the year ended December 31, 2022, the Company recorded recoveries and decreased our allowance by $0.3 million. During the year ended December 31, 2021, the Company recorded recoveries and decreased our allowance by $1.2 million. The allowance for doubtful accounts was impacted to a lesser extent from foreign currency translation during the same period.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Factored receivables
On February 9, 2021, a subsidiary of Cyxtera entered into a Master Receivables Purchase Agreement (the “Factoring Agreement”) with Nomura Corporate Funding America, LLC (the “Factor”) to factor up to $37.5 million in open trade receivables at any point during the term of the commitment, which could be extended for a period of 540 days provided that the Factor had the right to impose additional conditions to its obligations to complete any purchase after 360 days. The Factor did not impose any such additional conditions. Pursuant to the terms of the arrangement, a subsidiary of the Company would, from time to time, sell to the Factor certain of its accounts receivable balances on a non-recourse basis for credit approved accounts. The agreement allowed for up to 85% of the face amount of an invoice to be factored. The unused balance fee under the arrangement was 2%. During the year ended December 31, 2022, the Company’s subsidiary factored $10.9 million receivables and received $10.7 million, net of fees of $0.2 million. During the year ended December 31, 2021, the Company’s subsidiary factored $101.2 million receivables and received $99.5 million, net of fees of $1.7 million. Cash collected under this arrangement is reflected within the change in accounts receivables in the consolidated statement of cash flows. On August 31, 2022, the Company terminated the Factoring Agreement.
Accounts Receivable Sales Program
On August 31, 2022, the Company entered into an Accounts Receivable Sales Program with PNC Bank, National Association and the other parties thereto (the “A/R Program”) for an investment limit of $37.5 million, which terminates on August 31, 2025 unless extended. Under the A/R Program, certain of the Company’s wholly owned subsidiaries continuously sell (or contribute) receivables to a wholly owned special purpose entity at fair market value. The Company then designates certain of the receivables to be sold by the special purpose entity to an unaffiliated financial institution (the “Purchaser”) and the special purpose entity grants a security interest in the remaining receivables to the Purchaser such that the Purchaser has recourse to all receivables transferred to the special purpose entity to recover its investment. Although the special purpose entity is a wholly owned subsidiary of the Company, it is a separate legal entity with its own separate creditors who will be entitled, upon its liquidation, to be satisfied out of its assets prior to any assets or value in such special purpose entity becoming available to its equity holders and its assets are not available to pay other creditors of the Company. As of December 31, 2022, the Company had $17.3 million drawn on the investment limit. The investments sold by the Company bears a discount based on a variable rate which is based on the Secured Overnight Financing Rate (“SOFR”) plus a margin.
All transactions under the A/R Program and the Factoring Agreement were accounted for as a true sale in accordance with ASC 860, Transfers and Servicing (“Topic 860”). Following the sale and transfer of the receivables to the Purchaser, the receivables are legally isolated from the Company and its subsidiaries, and the Company sells, conveys, transfers and assigns to the Purchaser all its rights, title and interest in the receivables. Receivables sold are derecognized from the statement of financial position. The Company continues to service, administer and collect the receivables on behalf of the Purchaser. The Company recognizes a liability for amounts collected on behalf of the Purchaser in accordance with Topic 860. As of December 31, 2022, the Company reported a liability of $20.2 million due to the Purchaser in other current liabilities in the consolidated balance sheets.
Prepaid and other current assets
Prepaid and other current assets consist of the following as of December 31, 2022 and 2021 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Contract asset, current | $ | 15.7 | | | $ | 17.2 | |
| Prepaid expenses | 22.2 | | | 19.3 | |
| Other current assets | 0.2 | | | 1.0 | |
| Total prepaid and other current assets | $ | 38.1 | | | $ | 37.5 | |
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Property, plant and equipment, net
Property, plant and equipment, net consist of the following as of December 31, 2022 and 2021 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Land | $ | 10.6 | | | $ | 10.6 | |
| Buildings | 1,168.3 | | | 1,030.4 | |
| Leasehold improvements | 945.8 | | | 933.5 | |
| Personal property | 253.3 | | | 222.9 | |
| Construction in progress | 135.5 | | | 65.2 | |
| 2,513.5 | | | 2,262.6 | |
| Less: accumulated depreciation and amortization | (874.9) | | | (731.8) | |
| Property, plant and equipment, net | $ | 1,638.6 | | | $ | 1,530.8 | |
Assets under finance leases (formerly known as capital leases) and related accumulated amortization are $1,130.9 million and $235.2 million, respectively, as of December 31, 2022, and $943.8 million and $193.4 million, respectively, as of December 31, 2021.
Depreciation and amortization expense amounted to $182.7 million, $180.3 million, and $171.4 million, respectively, for the years ended December 31, 2022, 2021 and 2020.
Note 9. Goodwill and Intangible assets
Goodwill was $599.6 million and $761.7 million as of December 31, 2022 and 2021, respectively. The changes in the carrying amount of goodwill during the years ended December 31, 2022 and 2021 are as follows (in millions):
| | | | | | | | |
| Balance as of January 1, 2021 | | $ | 762.2 | |
| Impact of foreign currency translation | | (0.5) | |
| Balance as of December 31, 2021 | | 761.7 | |
| Goodwill Impairment | | (153.6) | |
| Impact of foreign currency translation | | (8.5) | |
| Balance as of December 31, 2022 | | $ | 599.6 | |
In addition, the Company has indefinite-lived intangible assets, which consist of internet protocol addresses of $1.3 million and $0.5 million as of December 31, 2022 and 2021, respectively.
Summarized below are the carrying values for the major classes of amortizing intangible assets as of December 31, 2022 and 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
| Customer relationships | $ | 768.0 | | | $ | (341.7) | | | $ | 426.3 | | | $ | 768.0 | | | $ | (281.4) | | | $ | 486.6 | |
| Favorable leasehold interests | — | | | — | | | — | | | 57.6 | | | (24.9) | | | 32.7 | |
| Developed technology | 0.3 | | | (0.3) | | | — | | | 0.3 | | | (0.3) | | | — | |
| Total intangibles | $ | 768.3 | | | $ | (342.0) | | | $ | 426.3 | | | $ | 825.9 | | | $ | (306.6) | | | $ | 519.3 | |
The main changes in the carrying amount of each major class of amortizing intangible assets during the years ended December 31, 2022 and 2021 was amortization and, to a lesser extent, the impact of foreign currency
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
translation. In addition, on January 1, 2022, the Company adopted Topic 842 and reclassified the favorable leasehold interests to ROU assets.
Amortization expense on intangible assets, excluding the impact of unfavorable leasehold interest amortization, amounted to $65.6 million and $66.2 million, respectively, for the years ended December 31, 2022 and 2021. Amortization expense for all intangible assets, except favorable leasehold interests, was recorded within depreciation and amortization expense in the consolidated statements of operations. As of December 31, 2021, the Company had $16.2 million of unfavorable leasehold interests included within other liabilities in the accompanying consolidated balance sheets. Favorable leasehold amortization of $5.9 million, and unfavorable leasehold amortization of $2.3 million was recorded within cost of revenues, excluding depreciation and amortization in the consolidated statements of operations for the years ended December 31, 2021.
The Company estimates annual amortization expense for existing intangible assets subject to amortization is as follows (in millions):
| | | | | |
| For the years ending: | |
| 2023 | $ | 60.3 | |
| 2024 | 60.3 | |
| 2025 | 60.3 | |
| 2026 | 60.3 | |
| 2027 | 60.3 | |
| Thereafter | 124.8 | |
| Total amortization expense | $ | 426.3 | |
Impairment tests
The Company performs annual impairment tests of goodwill on October 1st of each year or whenever an indicator of impairment exists. The Company performed the annual impairment test on October 1, 2022, and concluded there was no impairment. During the quarter ended December 31, 2022, management identified various qualitative factors collectively, indicated the Company had triggering events, including the substantial decrease in stock price, for which the Company performed a quantitative assessment as of November 30, 2022. For purposes of the Company’s 2022 quantitative annual impairment test of goodwill, fair value measurements were determined using the market capitalization based on total value of the Company as determined on a public exchange plus a control premium. As a result of the quantitative assessment performed, the implied fair value of the Company was less than carrying value as of November 30, 2022, and, as a result a pre-tax, non-cash goodwill impairment charge of $153.6 million was recorded for the difference.
During the year ended December 31, 2021, the Company performed a qualitative assessment, which consists of an assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount. No impairment charges were recorded during the years ended December 31, 2021 and 2020. As of December 31, 2021, the Company concluded goodwill was not impaired as the fair value of the reporting unit exceeded its carrying value, including goodwill.
Note 10. Fair value measurements
The fair value of cash, accounts receivable, accounts payable, accrued expenses, deferred revenue and other current liabilities approximate their carrying value because of the short-term nature of these instruments. Refer to Note 13 for the fair value measurement disclosures related to the warrant liabilities.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying values and fair values of other financial instruments are as follows as of December 31, 2022 and 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Carrying value | | Fair value | | Carrying value | | Fair value |
| 2017 First Lien Term Facility | $ | 772.2 | | | $ | 780.0 | | | $ | 778.3 | | | $ | 780.0 | |
| 2019 First Lien Term Facility | 96.8 | | | 98.0 | | | 97.5 | | | 98.0 | |
| Revolving Facility | — | | | — | | | 2.7 | | | 2.7 | |
| 2021 Revolving Facility | 42.0 | | | 42.0 | | | 37.3 | | | 37.3 | |
The fair value of our First Lien Term Facility (as defined in Note 12) as of December 31, 2022 and 2021 was based on the quoted market price for this instrument in an inactive market, which represents a Level 2 fair value measurement. The carrying value of the Revolving Facility (as defined in Note 12) and the 2021 Revolving Facility (as defined in Note 12) approximates estimated fair value as of December 31, 2022 and 2021 due to the variability of interest rates. Debt issuance costs of $4.0 million and $7.5 million, respectively, as of December 31, 2022 and 2021 are not included in the carrying value of these instruments as shown above.
Note 11. Leases
The Company determines if an arrangement is or contains a lease at inception. The Company enters into lease arrangements primarily for data center spaces, office spaces and equipment. The Company recognizes an ROU asset and lease liability on the consolidated balance sheets for all leases with a term longer than 12 months. The leases have remaining lease terms of 1 year to 32 years. As of December 31, 2022, the Company recorded finance lease assets of $1,130.9 million, net of accumulated amortization of $235.2 million, within property and equipment, net.
Lease Expenses
The components of lease expenses and income are as follows (in millions):
| | | | | | | | |
| | Year Ended December 31, 2022 |
| Finance lease cost | | |
Amortization of ROU assets (1) | | $ | 57.8 | |
Interest on lease liabilities (2) | | 114.2 | |
| Total finance lease cost | | 172.0 | |
| | |
Operating lease cost (3)(6) | | 59.8 |
Variable lease cost (4) | | 14.4 | |
Sublease income (5) | | (15.6) | |
| Total lease cost | | $ | 230.6 | |
| | |
(1) Amortization of assets under finance leases is included in depreciation and amortization expense in the Company’s consolidated statements of operations.
(2) Interest on lease liabilities is included in interest expense, net in the Company’s consolidated statements of operations.
(3) Operating lease costs for data centers is included in cost of revenue, excluding depreciation and amortization in the Company’s consolidated statements of operations. Operating lease costs for office leases is included in selling, general and administrative expenses in the Company’s consolidated statements of operations.
(4) Variable lease costs for operating leases is included in costs of revenue, excluding depreciation and amortization in the Company’s consolidated statements of operations.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) The Company has subleases for certain data centers with a couple of our customers. The Company also has a sublease of the Addison office space described in Note 5. Sublease and lease income of $13.8 million in connection with our customers is included in revenues in the Company’s consolidated statements of operations. Sublease income of $1.8 million in connection with the Addison office lease is included in restructuring, impairment, site closures and related costs in the Company’s consolidated statements of operations.
(6) During the year ended December 31, 2022, the Company recognized $5.2 million of restructuring expenses recorded in restructuring, impairment, site closures and related costs in the consolidated statements of operations. The restructuring costs were composed of $5.8 million of operating lease cost, $0.6 million of variable lease cost, and $0.6 million of accretion expense, net of $1.8 million of income recognized from the Addison sublease.
Lease costs for short-term leases were inconsequential for the year ended December 31, 2022.
Other Information
Other information related to leases is as follows (in millions):
| | | | | | | | |
| | Year Ended December 31, 2022 |
| Cash paid for amounts included in the measurement of lease liabilities: | | |
| Operating cash outflows from finance leases | | $ | 104.0 | |
| Operating cash outflows from operating leases | | 59.6 | |
| Financing cash outflows from finance lease | | 49.2 | |
| | |
| Right-of-use assets obtained in exchange for lease liabilities: | | |
| Finance leases | | 165.4 |
| Operating leases | | 272.5 |
| | |
| | As of December 31, 2022 |
Weighted-average remaining lease term (in years) - finance leases(1) | | 20.5 |
Weighted-average remaining lease term (in years) - operating leases(1) | | 9.8 |
| Weighted-average discount rate - finance leases | | 10.0 | % |
| Weighted-average discount rate - operating lease | | 8.9 | % |
(1) Includes renewal options that are reasonably certain to be exercised.
Maturities of Lease Liabilities
Maturities of lease liabilities under Topic 842 as of December 31, 2022 are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Operating Leases(1) | | Finance Leases | | Total |
| 2023 | $ | 60.0 | | | $ | 154.8 | | | $ | 214.8 | |
| 2024 | 59.6 | | | 145.3 | | | 204.9 | |
| 2025 | 51.2 | | | 147.6 | | | 198.8 | |
| 2026 | 46.7 | | | 142.0 | | | 188.7 | |
| 2027 | 44.4 | | | 120.3 | | | 164.7 | |
| Thereafter | 220.0 | | | 2,479.3 | | | 2,699.3 | |
| Total lease payments | $ | 481.9 | | | $ | 3,189.3 | | | $ | 3,671.2 | |
| Less: imputed interest | $ | (174.6) | | | $ | (2,067.5) | | | $ | (2,242.1) | |
| Total | $ | 307.3 | | | $ | 1,121.8 | | | $ | 1,429.1 | |
(1) Minimum lease payments have not been reduced by minimum sublease rentals of $147.4 million due in the future under non-cancelable subleases.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future minimum lease receipts under operating lease obligations under Topic 842 as of December 31, 2022 are as follows (in millions):
| | | | | |
| Lease receipts |
| 2023 | $ | 26.0 | |
| 2024 | 26.0 |
| 2025 | 26.1 |
| 2026 | 26.1 |
| 2027 | 19.3 |
| Thereafter | 32.0 |
| Total minimum lease receipts | $ | 155.5 | |
The future minimum lease receipts and payments under operating lease obligations under ASC Topic 840 as of December 31, 2021 are as follows (in millions):
| | | | | | | | | | | |
| For the years ending: | Lease receipts | | Lease commitments(1) |
| 2022 | $ | 12.2 | | | $ | 60.3 | |
| 2023 | 12.2 | | | 59.7 | |
| 2024 | 12.2 | | | 59.2 | |
| 2025 | 12.2 | | | 50.6 | |
| 2026 | 12.2 | | | 46.3 | |
| Thereafter | 4.1 | | | 273.8 | |
| Total minimum lease receipts/payments | $ | 65.1 | | | $ | 549.9 | |
(1) Minimum lease payments have not been reduced by minimum sublease rentals of $45.1 million due in the future under non-cancelable subleases.
Total rent expense, including the net impact from the amortization of ROU asset, was approximately $118.5 million for the year ended December 31, 2022 and is included within cost of revenues, excluding depreciation and amortization in the consolidated statements of operations.
The future minimum lease payments under capital lease arrangements and sale-leaseback financing obligations under ASC Topic 840 as of December 31, 2021 are as follows (in millions):
| | | | | |
| For the years ending: | |
| 2022 | $ | 135.1 | |
| 2023 | 128.3 | |
| 2024 | 118.5 | |
| 2025 | 120.6 | |
| 2026 | 119.3 | |
| Thereafter | 2,285.0 | |
| Total minimum lease payments | 2,906.8 | |
| Less: amount representing interest | (1,930.5) | |
| Present value of net minimum lease payments | 976.3 | |
| Less: current portion | (38.5) | |
| Capital leases, net of current portion | $ | 937.8 | |
Interest expense recorded in connection with finance leases (formerly known as capital leases) and sale-leaseback financings totaled $114.2 million and $101.5 million, respectively, for the years ended December 31, 2022 and 2021 and is included within interest expense, net in the accompanying consolidated statements of operations.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Sale-leaseback financings
The Company enters sale-leaseback financings, primarily relating to equipment. Amortization of assets under finance leases is included in depreciation and amortization expense in the Company’s consolidated statements of operations. Payments on sale-leaseback financings are included in repayments of sale-leaseback financings in the Company’s consolidated statements of cash flows.
During the years ended December 31, 2022 and 2021, the Company had additions to assets and liabilities recorded as sale-leaseback financings of $30.0 million and $5.0 million, respectively. During the years ended December 31, 2022 and 2021, there was no gain or loss recognized from the sale-leaseback financings.
Note 12. Long-term debt
Long-term debt consists of the following as of December 31, 2022 and 2021 (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| 2017 First Lien Term Facility due May 2024 | $ | 772.2 | | | $ | 778.3 | |
| 2019 First Lien Term Facility due May 2024 | 96.8 | | | 97.5 | |
| Revolving Facility due May 2022 | — | | | 2.7 | |
| 2021 Revolving Facility due November 2023 | 42.0 | | | 37.3 | |
| Less: unamortized debt issuance costs | (4.0) | | | (7.5) | |
| 907.0 | | | 908.3 | |
| Less: current maturities of long-term debt | (53.5) | | | (11.8) | |
| Long-term debt, net current portion | $ | 853.5 | | | $ | 896.5 | |
Senior Secured Credit Facilities
On May 1, 2017, a subsidiary of the Company (the “Borrower”) entered into credit agreements for up to $1,275.0 million of borrowings under first and second lien credit facilities (together with the 2019 First Lien Term Facility and the 2021 Revolving Facility described below, collectively, the “Senior Secured Credit Facilities”). The Senior Secured Credit Facilities consist of (a) a first lien credit agreement providing for (i) a $150.0 million first lien multi-currency revolving credit facility (the “Revolving Facility”) and (ii)(a) an $815.0 million first lien term loan borrowing (the “2017 First Lien Term Facility”) and (b) a second lien credit agreement providing for a $310.0 million second lien term loan credit borrowing (the “2017 Second Lien Term Facility”). On May 13, 2019, the Borrower borrowed an additional $100.0 million under the incremental first lien loan under the first lien credit agreement (the “2019 First Lien Term Facility”). On May 7, 2021, certain of the lenders under the Revolving Facility entered into an amendment with the Borrower pursuant to which they agreed to extend the maturity date for certain revolving commitments from May 1, 2022, to November 1, 2023. Under these terms of the amendment, $141.3 million of commitments under the existing Revolving Facility were exchanged for $120.1 million of commitments under a new revolving facility (the “2021 Revolving Facility”). The 2021 Revolving Facility has substantially the same terms as Revolving Facility, except that the maturity date of the 2021 Revolving Facility is November 1, 2023. In connection with the amendment, the Company repaid $19.6 million of the outstanding balance under the Revolving Facility on May 10, 2021. The amounts owed under the 2017 Second Lien Term Facility, the Revolving Facility and the 2021 Revolving Facility were repaid in July and August 2021 following the consummation of the Business Combination—see Note 3. The Company recognized a loss on extinguishment of debt of $5.2 million, which resulted from the write off of deferred financing costs attributed to the 2017 Second Lien Term Facility. The $5.2 million loss on extinguishment of debt is included within interest expense, net in the consolidated statements of operations for the year ended December 31, 2021. Subsequent to the consummation of the Business Combination and the pay-down of the Revolving Facility and the 2021 Revolving Facility, the Company drew down an additional $40.0 million from such revolving facilities during the year ended December 31, 2021. During the year ended December 31, 2022, the Company repaid $40.0 million of the outstanding balance under the revolving facilities. Subsequent to paying down the revolving facilities, the Company drew down $42.0 million from the 2021 Revolving Facility during the year ended December 31, 2022. As of December 31, 2022, a
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
total of $42.0 million was outstanding and approximately $73.1 million was available under the revolving facilities. As of December 31, 2021, a total of $40.0 million was outstanding and approximately $88.8 million was available under the revolving facilities.
The Senior Secured Credit Facilities, including the 2019 First Lien Term Facility, are secured by substantially all assets of Borrower and contain customary covenants, including reporting and financial covenants, some of which require the Borrower to maintain certain financial coverage and leverage ratios, as well as customary events of default, and are guaranteed by certain of the Borrower’s domestic subsidiaries. As of December 31, 2022, the Company believes the Borrower was in compliance with these covenants. The Revolving Facility matured in May 2022 and was not renewed. The 2021 Revolving Facility, the 2017 First Lien Term Facility and the 2019 First Lien Term Facility have an 18-month, seven-year and five-year term, respectively, and are set to expire on November 1, 2023, May 1, 2024 and May 1, 2024, respectively.
The Borrower is required to make amortization payments on each of the 2017 First Lien Term Facility and the 2019 First Lien Term Facility at a rate of 1.0% of the original principal amount per annum, payable on a quarterly basis, with the remaining balance to be repaid in full at maturity. The 2017 First Lien Term Facility bears interest at a rate based on LIBOR plus a margin that can vary from 2.0% to 3.0%. The 2019 First Lien Term Facility bears interest at a rate based on LIBOR plus a margin that can vary from 3.0% to 4.0%. The 2017 Second Lien Term Facility, which was repaid in August 2021, bore interest at a rate based on LIBOR plus a margin that varied from 6.25% to 7.25%. As of December 31, 2022, the rate for the 2017 First Lien Term Facility was 7.4%, and the rate for the 2019 First Lien Term Facility was 8.4%.
The 2021 Revolving Facility allows the Borrower to borrow, repay and reborrow over its stated term. The 2021 Revolving Facility provides a sublimit for the issuance of letters of credit of up to $30.0 million at any one time. Borrowings under the 2021 Revolving Facility bear interest at a rate based on LIBOR plus a margin that can vary from 2.5% to 3.0% or, at the Borrower’s option, the alternative base rate, which is defined as the higher of (a) the Federal Funds Rate plus 0.5%, (b) the JP Morgan prime rate or (c) one-month LIBOR plus 1%, in each case, plus a margin that can vary from 1.5% to 3.0%. As of December 31, 2022, the rate for the Revolving Facility and the 2021 Revolving Facility was 7.7%. The Borrower is required to pay a letter of credit fee on the face amount of each letter of credit, at a 0.125% rate per annum. The Revolving Facility matured in May 2022 and was not renewed. The balance of the 2021 Revolving Facility was $42.0 million as of December 31, 2022.
The aggregate maturities of our long-term debt, including the 2021 Revolving Facility, are as follows as of December 31, 2022 (in millions):
| | | | | |
| For the years ending: | Principal amount |
| 2023 | $ | 53.5 | |
| 2024 | 853.5 | |
| 2025 | — | |
| 2026 | — | |
| Total | $ | 907.0 | |
Interest expense, net
Interest expense, net for the years ended December 31, 2022, 2021 and 2020 consist of the following (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Interest expense on debt, net of capitalized interest | $ | 45.2 | | | $ | 53.3 | | | $ | 66.6 | |
| Interest expense on capital leases | 114.2 | | | 101.5 | | | 98.0 | |
| Amortization of deferred financing costs and fees | 3.9 | | | 10.1 | | | 5.8 | |
| Interest income on Promissory Notes (Note 21) | — | | | — | | | (1.0) | |
| Total | $ | 163.3 | | | $ | 164.9 | | | $ | 169.4 | |
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13. Warrant liabilities
In September 2020, in connection with the IPO, SVAC issued Public Warrants to purchase shares of the SVAC Class A common stock at $11.50 per share. Simultaneously with the consummation of the IPO, SVAC issued Private Placement Warrants to purchase shares of its Class A common stock at $11.50 per share to the Sponsor and to SVAC’s underwriters. In July 2021, in connection with the Business Combination transaction described in Note 3, additional Public Warrants and Private Placement Warrants were issued to SVAC common shareholders, including the Forward Purchasers.
In December 2021, the Company announced that it would redeem all of the Public Warrants and Private Placement Warrants that remained outstanding as of 5:00 p.m., New York time, on January 19, 2022 (the “Redemption Time”). Pursuant to the terms of the Warrant Agreement, prior to the Redemption Time, the warrant holders were permitted to exercise their warrants either (a) on a cash basis by paying the exercise price of $11.50 per warrant in cash or (b) on a “cashless basis,” in which case the holder would receive 0.265 shares of Class A common stock per warrant. As a result of the redemption notice for the Public Warrants and Private Placement Warrants, the valuation method for the Private Placement Warrants was changed from the Monte Carlo Simulation to utilizing a fair value based on the publicly traded closing price of the Public Warrants given that, in connection with the terms of the redemption notice, the exercise and settlement provision of the Public Warrants and Private Placement Warrants were substantially the same. Such fair value determination represents a Level 2 fair value input.
On January 26, 2022, the Company completed the redemption of all of its outstanding warrants that were issued under the Warrant Agreement and that remained outstanding at the Redemption Time, at a redemption price of $0.10 per warrant. Between December 20, 2021, and the Redemption Time, warrant holders elected to exercise 134,443 warrants on a cash basis for $1.5 million, and 10,115,180 Public Warrants and 8,576,940 Private Warrants on a “cashless basis,” resulting in the issuance by the Company of 5,087,612 shares of Class A common stock. On January 26, 2022, the Company redeemed 1,370,760 warrants for $0.1 million, which was recorded as an expense in the change of fair value of warrant liabilities in other income (expenses), net in the consolidated statements of operations. The warrant shares were issued in transactions not requiring registration under the Securities Act in reliance on the exemption contained in Section 3(a)(9) of the Securities Act. Upon completion of the redemption, the Public Warrants ceased trading on the Nasdaq and were deregistered, to the extent unsold.
For the Public Warrants and Private Placement Warrants exercised through the Redemption Time, the warrants were marked to market through the settlement date utilizing the publicly traded closing stock price of the Public Warrants on the settlement date, with changes in the fair value through the settlement date recorded as change of fair value of warrant liabilities in other income (expenses), net in the consolidated statements of operations. Upon settlement, the remaining warrant liabilities were derecognized and the liabilities and cash received from warrant holders was recorded as consideration for the common shares issued (an increase of $54.2 million was recorded to additional paid in capital).
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
There were no Level 3 warrant liabilities outstanding during the year ended December 31, 2022. There was a transfer between fair value measurement level (from Level 3 to Level 2) for Private Placement Warrants that were called for redemption in December 2021. The following table presents information about the Company’s movement in its Level 1 and Level 2 warrant liabilities measured at fair value during the year ended December 31, 2022 and 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Public Warrants (Level 1) | | Private Placement Warrants (Level 2) | | Private Placement Warrants (Level 3) | | Total |
| Balance at January 1, 2021 | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Warrants assumed on July 29, 2021 | | 23.2 | | | — | | | 18.6 | | | 41.8 | |
| Level 3 transfer-out and Level 2 transfer-in | | — | | | 18.6 | | | (18.6) | | | — | |
| Change in fair value of the warrant liabilities | | 15.5 | | 10.0 | | | — | | | 25.5 | |
| Warrants exercised for Class A common stock | | (2.6) | | | — | | | — | | | (2.6) | |
| Balance at December 31, 2021 | | $ | 36.1 | | | $ | 28.6 | | | $ | — | | | $ | 64.7 | |
| Warrants exercised for Class A common stock | | (28.9) | | | (24.0) | | | — | | | (52.9) | |
| Change in fair value of the warrant liabilities | | (7.2) | | | (4.6) | | | — | | | (11.8) | |
| Balance at December 31, 2022 | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Note 14. Shareholders’ equity
As mentioned in Note 1, the equity structure has been restated in all the comparative periods up to the Closing Date to reflect the number of shares of the Company’s Class A common stock, $0.0001 par value per share, issued to Legacy Cyxtera’s shareholder in connection with the Business Combination. Accordingly, the shares and corresponding capital amounts and earnings per share prior to the Business Combination have been retroactively restated as of January 1, 2020, to 115,745,455 shares, as shown in the consolidated statements of changes in shareholders’ equity. The Company’s authorized share capital consists of 510,000,000 shares of capital stock, of which 500,000,000 are designated as Class A common stock, and 10,000,000 are designated as preferred stock. As of December 31, 2020, Legacy Cyxtera had 115,745,455 shares of Class A common stock issued and outstanding, which shares were owned by SIS. On February 19, 2021, Cyxtera redeemed, cancelled and retired 9,645,455 shares of its common stock, par value $0.0001, prior to the Business Combination, held by SIS, in exchange for the payment of $97.9 million by the Company to SIS. From December 20, 2021 through the Redemption Time, 10,115,180 Public Warrants and 8,576,940 Private Placement Warrants, respectively, were exercised in accordance with the terms of the Warrant Agreement, resulting in the issuance of 5,087,612 shares of Class A common stock. In addition, on January 31, 2022, the Company issued a total of 7,500,000 Optional Shares for an aggregate purchase price of $75.0 million. As of December 31, 2022, the Company had 179,683,659 shares of Class A common stock issued and outstanding. Effective July 29, 2022, the SIS interest in the Company’s Class A common stock was distributed to BCEC-SIS Holdings L.P (the “BC Stockholder”), Medina Capital Fund II - SIS Holdco, L.P. (“Medina Stockholder”) and other owners of SIS, resulting in BC Stockholder. owning 38.0% of the Company’s Class A common stock, Medina Stockholder owning 12.8% of the Company’s Class A common stock, and the remaining portion of the SIS’s ownership was distributed to other shareholders. Prior to the SIS distribution, SIS owned 61.5% of the Company’s Class A common stock. As of December 31, 2022 and 2021, there were no shares of preferred stock issued or outstanding.
During the year ended December 31, 2021, SIS made a capital contribution of $5.2 million to fund a Business Combination transaction bonus that was paid to current and former employees and directors of Legacy Cyxtera. The transaction bonus of $5.2 million is included within transaction-related costs in the consolidated statements of operations for the year ended December 31, 2021.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15. Stock-based compensation
Stock-based compensation includes stock options, RSUs, PSUs and class B units in SIS Holdings LP, which are awarded to employees, and directors of the Company, and also includes shares purchased under the ESPP. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period of the award based on its grant date fair value. Stock-based compensation expense is included within cost of revenues, excluding depreciation and amortization, and selling, general and administrative expense in the consolidated statements of operations.
SIS Holdings LP Class B Profit Units
SIS adopted the SIS Holdings LP Class B Unit Plan (the “SIS Plan”) in May 2017. The purpose of the SIS Plan was to promote the interests of SIS and its controlled affiliates, including Cyxtera and Appgate, Inc. (the Company’s former cybersecurity business) (“Appgate”), by (a) attracting and retaining officers, directors, managers, employees and consultants of SIS and its controlled affiliates and (b) enabling such persons to acquire an equity interest in and participate in the long-term growth and financial success of SIS and its controlled affiliates. 1,000,000 Class B profit interest units were available for issuance pursuant to awards under the SIS Plan. Class B units issued under the SIS Plan are limited partnership units in SIS and are subject to the terms and conditions of the Amended and Restated Limited Partnership Agreement of SIS, dated May 1, 2017.
All awards were issued in 2017, 2018 and 2019 (none were issued in 2020, 2021 or 2022). Awards under the SIS Plan are subject to a vesting schedule measured by a service condition such that awards vest 25% after the first anniversary of issue date (or, with respect to certain employees, the earlier of their hire date and May 1, 2017) and the remainder vest in equal monthly installments over the 42 months following the initial vesting date. In addition, vesting of all unvested units will be accelerated upon the satisfaction of a performance condition, namely an “exit event.” An exit event is defined as a change of control through sale of all or substantially all of the assets of SIS and its subsidiaries (whether by merger, recapitalization, stock sale or other sale or business combination, including the sale of any subsidiary accounting for all or substantially all of the revenues of SIS and its subsidiaries on a consolidated basis) or any transaction resulting in a change of in excess of 50% of the beneficial ownership of the voting units of SIS. The holders of the Class B units were not required to make any capital contributions to SIS or the Company in exchange for their Class B units and are entitled to receive distributions on their vested units (including those accelerated upon an exit event).
A summary of PIU awards granted by SIS to the employees of the Company, for the years ended December 31, 2022, 2021 and 2020 is presented below:
| | | | | | | | | | | |
| Number of units | | Weighted-average grant date fair value |
| Outstanding at January 1, 2020 | 686,714 | | | $ | 82.65 | |
| Forfeited | (48,995) | | | $ | (81.95) | |
| Outstanding at December 31, 2020 | 637,719 | | | $ | 82.70 | |
| Forfeited | (4,407) | | | $ | (89.00) | |
| Outstanding at December 31, 2021 | 633,312 | | | $ | 82.63 | |
| Forfeited | — | | | $ | — | |
| Outstanding at December 31, 2022 | 633,312 | | | $ | 82.63 | |
Equity-based compensation costs totaled $0.8 million, $6.3 million, and $7.5 million, respectively, for the years ended December 31, 2022, 2021 and 2020, of which $0.8 million, $6.0 million, and $6.9 million, respectively, is included in selling, general and administrative expenses and an inconsequential amount, $0.3 million, and $0.6 million, respectively, is included in cost of revenues, excluding depreciation and amortization, in the accompanying consolidated statements of operations. No related income tax benefit was recognized as of December 31, 2022, 2021 or 2020.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2022, total equity-based compensation expense related to 14,982 unvested Class B Units not yet recognized totaled $1.5 million, which is expected to be recognized over a weighted-average period of 1.7 years.
Stock Options
Effective as of July 29, 2021, the Company adopted the 2021 Plan. The total number of shares of Class A common stock authorized for issuance under the 2021 Plan is 13,278,299. On August 5, 2021, the Company granted stock options under the 2021 Plan. Such options are a form of employee compensation for certain Cyxtera employees. The stock options granted will vest and become exercisable as to 25% of the number of shares granted on the one-year anniversary of the grant date, and the remainder of the options will vest ratably in twelve equal quarterly installments over the three-year period following the anniversary of the grant date. The options generally expire 10 years from the grant date in each case subject to continued employment on the applicable vesting date.
The fair value of stock options awards was estimated at the grant date at $2.42 per share using a Black Scholes valuation model, with the following weighted average assumptions for the year ended December 31, 2021:
| | | | | | | | |
| Stock Options Granted during the Year Ended |
| December 31, 2021 |
| Expected term (in years) | | 6.1 |
| Expected stock volatility | | 30.7 | % |
| Risk-free interest rate | | 0.87 | % |
| Stock price at grant date | | $ | 8.65 | |
| Exercise price | | $ | 9.55 | |
| Dividend yield | | — | % |
The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on the volatility of the stock of public company peers. The risk-free interest rate is based on the implied yield available on US Treasury zero-coupon issues with an equivalent remaining term. The dividend yield assumption is based on our anticipated cash dividend payouts.
Stock option transactions for the year ended December 31, 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares Subject to Options | | Weighted Average Exercise Price per Share | | Weighted Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value |
| Outstanding from January 1, 2022 | 849,233 | | | $ | 9.55 | | | — | | | $ | — | |
| Granted | 6,228 | | | $ | — | | | | | |
| Exercised | — | | | $ | — | | | | | |
| Expired/forfeited | (24,914) | | | $ | 9.55 | | | | | |
| Outstanding at December 31, 2022 | 830,547 | | | $ | 9.55 | | | 8.6 | | $ | — | |
| Exercisable, December 31, 2022 | 263,823 | | | $ | — | | | — | | | $ | — | |
| Ending vested and expected to vest, December 31, 2022 | 830,547 | | | $ | 9.55 | | | 8.6 | | $ | — | |
The aggregate intrinsic value in the table above is the amount by which the value of the underlying stock exceeded the exercise price of outstanding options, before applicable income taxes, and represents the amount optionees would have realized if all-in-the-money options had been exercised on the last business day of the period indicated.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2022, the total unrecognized stock-based compensation, related to unvested options was approximately $1.3 million, before income taxes, and is expected to be recognized over a weighted average period of approximately 2.6 years.
Total stock options compensation expense related to the stock options for the year ended December 31, 2022 and 2021, was approximately $0.5 million, and $0.2 million, respectively and is recorded in selling, general and administrative expenses in the consolidated statements of operations. The related income tax benefit for the year ended December 31, 2022 and 2021, was inconsequential.
Restricted Stock Units
On October 1, 2021, November 12, 2021, March 23, 2022, April 8, 2022 and June 8, 2022, the Company granted approximately 3.2 million, 0.2 million, 1.6 million, 0.1 million and 0.1 million of RSUs under the 2021 Plan. RSUs may be settled in shares or cash at the Company’s option with board of directors or compensation committee approval. The Company has the intent and ability to settle the RSU awards with shares. The fair value of RSUs granted is determined using the fair value of the Company’s Class A common stock on the date of the grant, which was $9.30, $9.54, $11.66, $12.66, and $14.50, respectively. RSUs were granted to members of the board of directors and employees of the Company. The RSUs granted to the members of the board vest over on the one year anniversary of the date of grant. The RSUs issued to employees vest in three equal annual installments.
RSUs transactions for the year ended December 31, 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares Subject to RSUs | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Life (Years) | | Weighted Average Grant Date
Fair Value | | Aggregate Intrinsic Value |
| Outstanding from January 1, 2022 | 3,335,811 | | | $ | — | | | — | | | $ | 9.34 | | | $ | — | |
| Granted | 1,881,191 | | | $ | — | | | | | $ | 11.81 | | | |
| Vested | (1,117,307) | | | $ | — | | | | | $ | 9.38 | | | |
| Expired/forfeited | (160,732) | | | $ | — | | | | | $ | 9.88 | | | |
| Outstanding at December 31, 2022 | 3,938,963 | | | $ | — | | | 1.1 | | $ | 10.47 | | | $ | 7,562,809 | |
| Exercisable, December 31, 2022 | — | | | $ | — | | | — | | | $ | — | | | $ | — | |
| Ending vested and expected to vest, December 31, 2022 | 3,938,963 | | | $ | — | | | 1.1 | | $ | 10.47 | | | $ | 7,562,809 | |
As of December 31, 2022, the total unrecognized stock-based compensation, net of actual forfeitures, related to unvested RSUs was approximately $30.5 million, before income taxes, and is expected to be recognized over a weighted period of approximately 1.8 years. The total fair value of RSUs vested was $12.8 million during the year ended December 31, 2022.
Total RSU compensation expense totaled $18.1 million and $3.0 million, respectively, for the year ended December 31, 2022 and 2021, of which approximately $16.8 million and $2.8 million, respectively, is recorded in selling, general and administrative expenses and $1.3 million and $0.2 million, respectively, is recorded in cost of revenues, excluding depreciation and amortization, in the consolidated statements of operations. The related income tax benefit for the year ended December 31, 2022 was $3.5 million (2021 was inconsequential).
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Performance Stock Units
The Company has granted PSUs under the Company’s 2021 Plan. The Company has the intent and ability to settle the PSU awards with shares. The PSU will vest based on both the passage of time and achievement of certain market and performance conditions that are measured during a three-year period beginning on January 1, 2022, subject to continued employment on the applicable vesting dates. The actual number of PSUs earned with respect to an award is based upon the target number of PSUs, multiplied by a “payout percentage” ranging from 0% to 200% of target level and determined by the level of performance against pre-established performance or market components for the applicable performance period. The PSUs are subject to two types of performance conditions: relative total shareholder return (“TSR”) based on achievement of certain market conditions, and adjusted earnings before interest, taxes, depreciation and amortization (“Adj. EBITDA”), each of which is weighted one-half of the PSU, as shown in more detail below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Payout Percentage |
Metric | Weight | Performance Period | Vesting Period | Index | Below Threshold | Threshold | Target | Maximum |
TSR | 50% | 3-year rolling | Annual (33.33% per year) | Russell 1000 | 0% | 50% (25th percentile) | 100% (50th percentile) | 200% (75th percentile) |
Adj. EBITDA | 50% | 3-year rolling | Annual (33.33% per year) | N/A | 0% | 50% | 100% | 200% |
The award of PSUs will vest in three equal installments on the 1st, 2nd and 3rd anniversary of the grant date. The PSUs will be earned based on the Company’s achievement of the applicable performance goals as follows:
•Year One of the performance period: Award will vest based on performance during the first year of the performance period;
•Year Two: Award will vest based on cumulative performance during the first two years of the performance period;
•Year Three: Award will vest based on cumulative performance during the three years of the performance period.
The payout percentage will be linearly interpolated if achievement falls between the threshold and target or target and maximum levels of performance.
With respect to the TSR measured component, the PSUs were valued using a Monte-Carlo simulation. The key assumptions used to determine the fair value of the TSR measured component of the PSUs at March 23, 2022 (grant date) using the Monte Carlo simulation model were as follows:
| | | | | | | | |
| Inputs | | As of March 23, 2022 |
| Risk-free interest rate | | 2.3 | % |
| Volatility for Least-Square Monte Carlo Model | | 39.0 | % |
| Expected Term in Years | | 2.8 |
| Dividend Yield | | — | % |
| Fair Value of Class A Common Stock | | $ | 11.66 | |
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
With respect to the Adj. EBITDA measured component, the PSUs for the first year were valued using the fair value of the Company’s Class A common stock on the date of the grant, which was $11.66 multiplied by the number of shares of Class A common stock expected to be earned based on the Company’s estimate of future Adj. EBITDA, to be realized in Year One. The Adj. EBITDA measured PSUs for Year Two and Year Three, are not deemed granted for accounting purposes because the adjusted EBITDA targets for 2023 and 2024 are not yet determinable as they have not been approved by the board of directors.
The following table summarizes PSU activity for the year ended December 31, 2022:
| | | | | | | | | | | | | | |
| | Number of Units | | Weighted-average grant date fair value |
| Non-vested as of January 1, 2022 | | — | | | $ | — | |
Granted (1) | | 349,766 | | | $ | 15.78 | |
| Vested | | — | | | $ | — | |
| Forfeited | | — | | | $ | — | |
| Unvested as of December 31, 2022 | | 349,766 | | | $ | 15.78 | |
(1) Year Two and Year Three Adj. EBITDA measured PSUs are excluded from the total amount of granted PSUs, since such units are not deemed granted for accounting purposes as of December 31, 2022. We excluded 174,883 of Year Two and Year Three Adj. EBITDA measured PSUs.
As of December 31, 2022, the total unrecognized stock-based compensation expense related to unvested PSUs was approximately $2.8 million, before income taxes, and is expected to be recognized over a weighted period of approximately 1.0 years. No PSUs vested during the year ended December 31, 2022.
Total PSU compensation expense was $2.7 million for the year ended December 31, 2022 and was recorded in selling, general and administrative expenses in the consolidated statements of operations. The related income tax benefit for the year ended December 31, 2022 was inconsequential.
Employee Stock Purchase Plan
Effective as of June 8, 2022, the Company adopted the 2022 Employee Stock Purchase Plan (the “ESPP”) under which shares of the Company’s common stock are available for purchase by eligible participants. The total number of shares of Class A common stock authorized for issuance under the ESPP is 1,785,664. The ESPP allows participants to purchase shares of Class A common stock at 85% of its fair market value at the lower of (i) the date of commencement of the offering period or (ii) the last day of the exercise period, as defined in the plan documents.
The fair value of purchases under the Company’s ESPP is estimated using the Black-Scholes option-pricing valuation model. The determination of fair value of stock-based awards using an option-pricing model is affected by the Company’s stock price as well as assumptions pertaining to several variables, including expected stock price volatility, the expected term of the award and the risk-free rate of interest. In the option-pricing model for the Company’s employee stock purchase plans, expected stock price volatility is based on historical volatility of the Company’s Class A common stock. The expected term of the award is based on the six-month requisite period. The Company has not paid dividends in the past, and has not announced any intention to pay dividends in the foreseeable future, and therefore uses an expected dividend yield of zero.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides details pertaining to the ESPP for the periods indicated:
| | | | | |
| For the Year Ended December 31, 2022 |
| Cash proceeds (in millions) | $ | 0.8 | |
| Common shares issued | 159,626 | |
| Fair value of ESPP at grant date | $ | 5.73 | |
| Stock price at grant date | $ | 5.83 | |
As of December 31, 2022, the total unrecognized stock-based compensation expense related to the ESPP was approximately $0.1 million, before income taxes, and is expected to be recognized over a weighted period of approximately 0.5 years.
Non-cash stock-based compensation expense under the ESPP was $0.2 million for the year ended December 31, 2022. The related income tax benefit for the year ended December 31, 2022 was inconsequential.
Note 16. Cyxtera Management, Inc. Long-Term Incentive Plan
On February 13, 2018, Cyxtera Management Inc. (the “Management Company”) adopted the Cyxtera Management, Inc. Long-Term Incentive Plan (the “LTI Plan”). The purpose of the LTI Plan is to retain key talent, attract new employees, align particular behavior with the common goals of profitability and revenue growth, provide incentive awards, the value of which are tied to the equity value of SIS, and to create an opportunity for certain key employees to participate in value creation.
The value of award units under the LTI Plan is tied to SIS’s equity value. Award units entitle the holder to share in the equity appreciation of SIS upon an exit event or an initial public offering. Except in the case of an initial public offering, any payments in respect of the awards are expected to be made in cash. In an initial public offering, payment may be made in the stock of the initial public offering vehicle. The payout is estimated to range between $0 and $70.0 million, depending on a multiple based on the results of the exit event or initial public offering. While awards under the LTI Plan vest, to the extent there is no exit event or an initial public offering, the awards expire after seven years from the grant date. The Company has determined that no expense or liability should be recognized under this LTI Plan until an exit event or initial public offering occurs.
As described in Note 1, on February 21, 2021, Cyxtera entered into the Merger Agreement, which closed on July 29, 2021. Pursuant to the Merger Agreement, the Company caused its subsidiaries to declare an “Early Settlement Event” under (resulting in the final settlement of) the LTI Plan and any award agreements thereunder, without liability to the Company or any of its subsidiaries.
Note 17. Employee benefits – 401(k)
Effective July 2, 2017, the Company’s employees are eligible to participate in the Cyxtera 401(k) Savings Plan (the “Plan”), a defined contribution benefit plan sponsored by the Management Company. Under the Plan, the Company may make a safe harbor matching contribution equal to 100% of an employee’s salary deferral that does not exceed 1% of the employee’s compensation plus 50% of the salary deferral between 1% and 6% of the employee’s compensation.
Matching contributions made to the Plan were $2.7 million, $2.8 million and $3.0 million for the years ended December 31, 2022, 2021 and 2020, respectively, of which $1.2 million, $1.2 million and $1.8 million, respectively, is included in cost of revenues, excluding depreciation and amortization, and $1.5 million, $1.6 million and $1.2 million, respectively, is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Through December 31, 2020, employees of Appgate were eligible to participate in the Plan. Under a transition service agreement with the Management Company (“Transition Services Agreement”), costs related to the participation of Appgate employees in the Plan were charged back to Appgate. See Note 21- Certain relationships and related party transactions for further reference.
Note 18. Income taxes
The components of loss before income taxes for the years ended December 31, 2022, 2021 and 2020 consists of the following (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Domestic and foreign loss | | | | | |
| US loss | $ | (321.9) | | | $ | (284.9) | | | $ | (97.9) | |
| Foreign loss | (33.9) | | | (20.8) | | | (21.4) | |
| Total loss before income taxes | $ | (355.8) | | | $ | (305.7) | | | $ | (119.3) | |
The income tax benefit (expense) from continuing operations for the years ended December 31, 2022, 2021 and 2020 consists of the following (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Current | | | | | |
| US Federal | $ | — | | | $ | — | | | $ | — | |
| US State and local | (0.2) | | | (0.2) | | | (0.2) | |
| Foreign | (1.4) | | | (0.2) | | | (2.2) | |
| Total current tax provision | (1.6) | | | (0.4) | | | (2.4) | |
| | | | | |
| Deferred | | | | | |
| US Federal | 2.4 | | | 42.5 | | | 5.7 | |
| US State and local | (1.0) | | | 4.9 | | | (1.7) | |
| Foreign | 0.9 | | | 0.8 | | | (5.1) | |
| Total deferred tax provision | 2.3 | | | 48.2 | | | (1.1) | |
| Total income tax benefit (expense) | $ | 0.7 | | | $ | 47.8 | | | $ | (3.5) | |
The effective tax rate for the years ended December 31, 2022, 2021 and 2020 is 0.2%, 15.6% and (2.9)%, respectively. An income tax reconciliation between the US statutory tax rate of 21% for each of the years ended December 31, 2022, 2021 and 2020 and the effective tax rate is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Income tax at US federal statutory income tax rate | $ | 74.7 | | | $ | 64.2 | | | $ | 25.1 | |
| State and local taxes, net of federal income tax benefit | 7.1 | | | 12.6 | | | 9.2 | |
| Valuation allowance | (44.5) | | | (21.9) | | | (31.6) | |
| Goodwill impairment loss | (32.3) | | | — | | | — | |
| Change in fair value of the warrant liabilities | 2.5 | | | (5.4) | | | — | |
| Nondeductible equity-based compensation | (0.2) | | | (1.3) | | | (1.6) | |
| Taxes of foreign operations at rates different than US Federal statutory rates | (2.0) | | | 1.1 | | | (1.9) | |
| Foreign adjustments | (1.3) | | | 0.6 | | | (1.8) | |
| Impact of foreign law changes | — | | | (1.0) | | | — | |
| Other | (3.3) | | | (1.1) | | | (0.9) | |
| Total income tax benefit (expense) | $ | 0.7 | | | $ | 47.8 | | | $ | (3.5) | |
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2022 and 2021consists of the following (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Deferred tax assets | | | |
| Net operating loss carryforward | $ | 94.4 | | | $ | 91.6 | |
| Interest expense limitation carryforward | 57.9 | | | 44.9 | |
| Finance lease | 263.4 | | | 55.1 | |
| Operating lease liabilities | 60.4 | | | — | |
| Other accruals | 16.1 | | | 14.1 | |
| Acquisition and other related costs | 4.6 | | | 4.9 | |
| Asset retirement obligations | 1.9 | | | 1.7 | |
| Allowance for doubtful accounts | 0.1 | | | 1.2 | |
| Deferred rent | — | | | 3.6 | |
| Other | 11.4 | | | 4.8 | |
| Gross deferred tax assets | 510.2 | | | 221.9 | |
| Valuation allowance | (98.2) | | | (53.7) | |
| Total deferred tax assets, net of valuation allowance | 412.0 | | | 168.2 | |
| | | |
| Deferred tax liabilities | | | |
| Finance lease | (216.0) | | | — | |
| Intangibles | (163.7) | | | (165.7) | |
| Operating lease right-of-use assets | (45.3) | | | — | |
| Property and equipment | (6.4) | | | (23.4) | |
| Contract asset | (3.1) | | | (2.4) | |
| Other | (3.4) | | | (5.6) | |
| Total deferred tax liabilities | (437.9) | | | (197.1) | |
| Deferred tax liabilities, net | $ | (25.9) | | | $ | (28.9) | |
As of December 31, 2022 and 2021, $0.1 million and $1.0 million, respectively, of deferred tax assets above is included in other assets and $26.0 million and $29.9 million, respectively, is included in deferred income tax liabilities in the accompanying consolidated balance sheets. There exists certain US federal, state, local and foreign deferred tax assets that are not expected to be realized before their expiration and as such are not more-likely-than-not realizable. The Company has recorded a valuation allowance against such deferred tax assets.
As of December 31, 2022, the Company has US federal NOL carryforwards of $300.8 million generated in tax years 2017 through 2022 of which $59.3 million will expire in 2037 and $241.5 million will carry forward indefinitely. The Company has state and local NOL carryforwards of $440.9 million generated in tax years beginning after 2007. The state NOL carryforwards of $376.0 million will expire from 2023 to 2042 and $64.9 million will carryforward indefinitely. Additionally, the Company has foreign NOL carryforwards of $20.4 million generated from tax years 2017 to 2022, of which $11.6 million will expire between 2031 and 2042 and $8.8 million will carryforward indefinitely.
In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will be realized. In making such a determination, we considered all available positive and negative evidence, including our past operating results, forecasted earnings, frequency and severity of current and cumulative losses, duration of statutory carryforward periods, future taxable income and prudent and feasible tax planning strategies. On the basis of this evaluation, we continue to maintain a valuation allowance against a portion of the Company’s deferred tax assets. As of December 31, 2022, the Company has recorded a valuation allowance of $98.2 million for the portion of the deferred tax asset that did not meet the more-likely-than-not realization criteria. The Company recorded an increase in its valuation allowance on its net deferred taxes of approximately $44.5 million during the year ended December 31, 2022. The changes in valuation allowance are primarily due to increased losses that have resulted in certain US federal, state, local and foreign
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
deferred tax assets that management believes are not more-likely-than-not to be fully realized in future periods. In addition, certain state NOL carryforward assets are subject to an annual limitation under Internal Revenue Code Section 382. If losses continue, we may not be able to benefit from such future losses and additional valuation allowances may also be required.
The Company is subject to taxation in the United States and various foreign jurisdictions. As of December 31, 2022, the Company is no longer subject to examination by the Internal Revenue Service (“IRS”) for tax years prior to 2019 and generally not subject to examination by state tax authorities for tax years prior to 2016. With few exceptions, the Company is no longer subject to foreign examinations by tax authorities for tax years prior to 2017. The Company is currently under examination in the United States by some state tax authorities. The Company is also currently under audit in Germany for its 2016 tax year; however, the outcome and any resulting liability related to Germany is not the responsibility of the Company.
The Company does not have any unrecorded uncertain tax positions (“UTPs”) as of December 31, 2022. While the Company currently does not have any UTPs, it is foreseeable that the calculation of the Company’s tax liabilities may involve dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across the Company’s global operations. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. Upon identification of a UTP, the Company would (1) record the UTP as a liability in accordance with ASC 740 and (2) adjust these liabilities if/when management’s judgment changes as a result of the evaluation of new information not previously available. Ultimate resolution of UTPs may produce a result that is materially different from an entity’s estimate of the potential liability. In accordance with ASC 740, the Company would reflect these differences as increases or decreases to income tax expense in the period in which new information is available. The Company recognized and includes interest and penalties accrued on uncertain tax positions as a component of income tax expense.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, for 2022, 2021 and 2020, is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Gross unrecognized tax benefits - beginning of period | $ | — | | | $ | 1.0 | | | $ | — | |
| Increases related to prior year tax positions | 1.2 | | | — | | | — | |
| Increases related to current year tax positions | — | | | — | | | 1.0 | |
| Decreases related to settlements | (1.2) | | | (1.0) | | | — | |
| Gross unrecognized tax benefits - end of period | $ | — | | | $ | — | | | $ | 1.0 | |
The increase and subsequent decrease to unrecognized tax benefits during the year ended December 31, 2022 was related to the effective settlement of the Company’s tax examination by the Internal Revenue Service for the 2017 tax year.
As of December 31, 2022 and 2021, the Company had undistributed foreign earnings of $115.6 million and $111.8 million, respectively, which the Company intends to reinvest indefinitely. As part of the Tax Act, the Company paid a one-time deemed repatriation tax on the ending balance as of December 31, 2017. With respect to the remaining total balance as of December 31, 2022, the Company does not expect to incur US federal, state, local or foreign withholding taxes on the balance of these unremitted earnings as management plans to indefinitely reinvest these earnings overseas. In the event the Company determines not to continue to assert that all or part of its undistributed foreign earnings are permanently reinvested, such a determination in the future could result in the accrual and payment of additional foreign withholding taxes and US taxes on currency transaction gains and losses, the determination of which is not practicable due to the complexities associated with the hypothetical calculation.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 19. Commitments and contingencies
Letters of credit
As of December 31, 2022 and 2021, the Company had $4.9 million and $5.7 million, respectively, in irrevocable stand-by letters of credit outstanding, which were issued primarily to guarantee data center lease obligations, to guarantee a subsidiary’s performance under a services agreement (in 2020 only), and to guarantee another subsidiary’s performance under a line of credit. As of December 31, 2022 and 2021, no amounts had been drawn on any of these irrevocable standby letters of credit.
Lease commitments
The Company entered into an agreement for power redundancy supply at a facility in Massachusetts. The service contract will contain a lease of power redundancy equipment, however, the lease has not yet commenced as of December 31, 2022. This lease is expected to commence in the latter half of 2023, with a total lease commitment of $22.4 million.
Purchase obligations
As of December 31, 2022 and 2021, the Company had approximately $4.4 million of purchase commitments related to information technology licenses, utilities and colocation operations. These amounts do not represent the Company’s entire anticipated purchases in the future but represent only those items for which the Company was contractually committed as of December 31, 2022 and 2021, respectively.
Litigation
From time to time the Company is involved in certain legal proceedings and claims that arise in the ordinary course of business. It is the Company’s policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and the amount is reasonably estimable. In the opinion of management, based on consultations with counsel, the results of any of these matters individually and in the aggregate are not expected to have a material effect on the Company’s results of operations, financial condition or cash flows.
Note 20. Segment reporting
Cyxtera’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 – the colocation segment.
The Company derives the significant majority of its colocation revenue from sales to customers in the United States, based upon the service address of the customer. Revenue derived from customers outside the United States, based upon the service address of the customer, was not significant in any individual foreign country.
Note 21. Certain relationships and related party transactions
Relationships
The Company is party to the following agreements and key relationships:
•Appgate. transition services agreement and other services
Appgate and the Management Company were parties to the Transition Service Agreement, pursuant to which the Management Company provided certain transition services to Appgate and Appgate provided certain transition services to Cyxtera. The Transition Services Agreement provided for a term that commenced on January 1, 2020, and substantially ended on December 31,
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2020. Appgate is an affiliate of the Company and a direct subsidiary of SIS, and through December 31, 2019, was a direct subsidiary of the Company.
During the year ended December 31, 2020, the Company charged $3.9 million to Appgate for services rendered under the Transition Services Agreement (net of service fees provided to Cyxtera and its subsidiaries by Appgate), with a full reserve of $3.9 million. The provision for doubtful accounts is presented as part of the recovery of notes receivable from affiliates in the consolidated statement of operations for the year ended December 31, 2020. Income from the Transition Services Agreement is included in other expenses, net in the consolidated statements of operations for the year ended December 31, 2020.
•Promissory Notes
On March 31, 2019, Appgate issued Promissory Notes to each of the Company and the Management Company evidencing certain funds borrowed by Appgate from each of the Company and the Management Company as well as potential future borrowings. The Promissory Notes had a combined initial aggregate principal amount of $95.2 million and provided for additional borrowings during the term of the Promissory Notes for additional amounts not to exceed approximately $52.5 million in the aggregate (approximately $147.7 million including the initial aggregate principal amount). Interest accrued on, the unpaid principal balance of the Promissory Notes at a rate per annum equal to 3%; provided, that with respect to any day during the period from the date of the Promissory Notes through December 31, 2019, interest was calculated assuming that the unpaid principal balance of the Promissory Notes on such day is the unpaid principal amount of the notes on the last calendar day of the quarter in which such day occurs. Interest was payable upon the maturity date of the notes. Each of the Promissory Notes had an initial maturity date of March 30, 2020, and was extended through March 30, 2021, by amendments entered into effective as of March 30, 2020.
During the year ended December 31, 2020, the Company advanced $19.4 million under the Promissory Notes to Appgate and recorded provision for loan losses in the same amount. Accordingly, as of December 31, 2020, the Company had a receivable related to the Promissory Notes of $147.1 million with a reserve of $30.0 million. The provision for loan losses is presented as recovery of notes receivable from affiliates in the consolidated statement of operations for the year ended December 31, 2020.
On February 8, 2021, the Company received $120.6 million from Appgate. Approximately $117.1 million and $1.1 million were designated as repayment of the full balance of the $154.3 million outstanding principal and accrued interest, respectively, on the Promissory Notes at that time. On the same date, the Company issued a payoff letter to Appgate extinguishing the remaining unpaid balance of the Promissory Notes. The remainder of the payment was designated as settlement of trade balances with Appgate and its subsidiaries and other amounts due to/from under the Transition Services Agreement described above. Accordingly, for the year ended December 31, 2020, the Company recorded a reversal of previously established allowance of $117.1 million. As a result, during the three months ended March 31, 2021, the Company wrote off the ending balance in the allowance for loan losses on the Promissory Notes. No other transactions related to the Promissory Notes were recorded during the year ended December 31, 2021.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
There was no activity in the allowance for loan losses on the Promissory Notes during the year ended December 31, 2022. The activity in the allowance for loan losses on the Promissory Notes during the years ended December 31, 2021 and 2020, was as follows (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
| Beginning balance | $ | 30.0 | | | $ | 127.7 | |
| Provision for loan losses | — | | | 19.4 | |
| Reversal of allowance | — | | | (117.1) | |
| Net reversal of allowance for loan losses | — | | | (97.7) | |
| Write offs | (30.0) | | | — | |
| Ending balance | $ | — | | | $ | 30.0 | |
•Service provider management consulting fee and structuring fee
In connection with the 2017 colocation acquisition from Lumen, certain equity owners of SIS (collectively, the “Service Providers”) entered into a Services Agreement (the “Services Agreement”) dated May 1, 2017, with SIS and its subsidiaries and controlled affiliates as of such date (collectively, the “Company Group”). Under the Services Agreement, the Service Providers agreed to provide certain management, consulting and advisory services to the business combination and affairs of the Company Group from time to time. Pursuant to the Services Agreement, the Company Group also agreed to pay the Service Providers an annual service fee in the aggregate amount of $1.0 million in equal quarterly installments (the “Service Provider Fee”).
Fees owed under the Services Agreement related to a structuring fee, Service Provider Fee and other related expenses totaled $22.7 million as of December 31, 2020, and were included within due to affiliates in the consolidated balance sheet. Such fees were primarily incurred prior to 2020. All outstanding fees under the Services Agreement were repaid in February 2021.
•Sponsor’s investment in the First Lien Term Facility
At December 31, 2020, until the date of the Business Combination, some of the controlled affiliates of BC Partners LLP (“BC Partners”), the largest equity owner of SIS, held investments in the Company’s First Lien Term Facility. The total investment represented less than 5% of the Company’s total outstanding debt at December 31, 2020. As of December 31, 2022 and 2021, the controlled affiliates of BC Partners no longer held investments in the Company’s First Lien Term Facility.
•Optional Share Purchase
On July 21, 2021, immediately prior to the consummation of the Business Combination, Legacy Cyxtera entered into the Optional Purchase Letter Agreement with the Forward Purchasers, pursuant to which the Forward Purchasers agreed to amend the Optional Share Purchase Agreement to limit the number of Optional Shares available for purchase by the Forward Purchasers in the six-month period following the Business Combination from 7.5 million shares to 3.75 million shares. In addition, on such date, the Forward Purchasers agreed to assign the rights to purchase up to 3.75 million shares under the Optional Share Purchase Agreement to SIS. In January 2022, SIS and the Forward Purchasers exercised their option to purchase 7.5 million Optional Shares at a price of $10.00 per share, for an aggregate purchase price of $75.0 million.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
•Relationships with certain members of the Company’s board of directors
The Company owed zero in board fees, which is included within accrued expenses in the consolidated balance sheets as of December 31, 2022 and 2021.
The chairman of the board of directors is one of the founders and the chairman of Emerge Americas, LLC, which operates a technology conference in Miami, Florida. As of December 31, 2022 and 2021, the Company did not owe any significant amounts to Emerge Americas, LLC.
Since 2019 until the date of the Business Combination, one of the directors of the Company was also a member of the board of directors of Pico Quantitative Trading, LLC (“Pico”). Pico offers a comprehensive range of network products to meet the full spectrum of electronic trading requirements. During the period from January 1, 2021 through the date of the Business Combination, the Company billed and collected from Pico $0.2 million. During the year ended December 31, 2020, the Company billed and collected from Pico $0.6 million. As of December 31, 2022 and 2021, Pico was no longer a related party of the Company.
One director of the Company is also a member of the board of directors of Presidio Holdings, Inc. (“Presidio”), a provider of digital transformation solutions built on agile secure infrastructure deployed in a multi-cloud world with business analytics. During the years ended December 31, 2022, 2021 and 2020, the Company paid $0.3 million to Presidio for services. As of December 31, 2022, 2021 and 2020, the Company did not owe any amounts to Presidio. Presidio is also a customer and referral partner of the Company. During each of the years ended December 31, 2022, 2021 and 2020, the Company billed and collected from Presidio $0.4 million, $0.3 million, and $0.2 million, respectively.
One of the former directors of the Company is also a member of the board of directors of Altice USA, Inc. (“Altice”), a vendor and a customer of the Company. The amount paid and due for the year ended December 31, 2022 and 2021 was inconsequential. The amount billed and collected for the year ended December 31, 2022 was $0.3 million and $0.4 million, respectively. The amount billed and collected for the year ended December 31, 2021 was $0.3 million and $0.4 million, respectively. During the year ended, December 31, 2020, Altice was not a related party of the Company.
One of the former directors of the Company is also a member of the board of directors of Navex Global, Inc. (“Navex”), a vendor and customer of the Company. The amount paid and due to Navex for the year ended December 31, 2022 and 2021, was inconsequential. The amounts billed and collected from Navex for the year ended December 31, 2022 were $0.1 million (amount billed and collected during the year ended December 31, 2021 was inconsequential). During the year ended December 31, 2020, Navex was not a related party of the Company.
CYXTERA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Related party transactions and balances
The following table summarizes the Company’s transactions with related parties for each of the years ended December 31, 2022, 2021 and 2020 (in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Revenues (1) | $ | 1.1 | | | $ | 1.5 | | | $ | 0.2 | |
Selling, general and administrative expenses (2) | 0.4 | | | 1.0 | | | 0.3 | |
Recovery of notes receivable from affiliate (3) | — | | | — | | | (97.7) | |
Interest income (4) | — | | | — | | | 1.0 | |
Other (expense) income, net (5) | — | | | (1.2) | | | 4.2 | |
(1)Revenues for the years ended December 31, 2022, 2021 and 2020 include amounts recognized from contracts with Appgate, Altice, Brainspace Corporation, Navex, and Presidio. Appgate is an affiliate of the Company and a direct subsidiary of SIS. Brainspace Corporation was an affiliate of the Company and an indirect subsidiary of SIS through January 20, 2021.
(2) Selling, general and administrative expenses include amounts incurred from contracts with Appgate and Presidio.
(3) Represents net recovery recognized in connection with amounts funded under the Promissory Notes.
(4)Represents interest income recognized under one of the Promissory Notes and under the Transaction Services Agreement for the years ended December 31, 2022, 2021 and 2020.
(5)Includes expenses incurred in connection with board fees and management fees paid for the years ended December 31, 2022, 2021 and 2020.
As of December 31, 2022 and 2021, the Company had the following balances arising from transactions with related parties (in millions):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Accounts receivable (1) | | $ | 0.1 | | | $ | 0.1 | |
Accounts payable (2) | | — | | | 0.6 | |
(1)Accounts receivable at December 31, 2022 and 2021, include trade receivables due from Appgate.
(2)Accounts payable at December 31, 2022 and 2021, include trade payables due to Appgate.
Note 22. Subsequent events
On February 19, 2023, the Company extended the first purchase period of the ESPP from February 28, 2023 to May 31, 2023. In addition, the Company amended the subsequent offering periods to commence on June 1 and December 1 of each year.
On March 14, 2023, the Company entered into an amendment to extend the maturity date of the 2021 Revolving Facility, from its original expiration of November 1, 2023 to April 2, 2024. Under the terms of the amendment, $120.1 million of commitments under the existing Revolving Facility were exchanged for $102.1 million of commitments under the amended revolving facility. With the amendment, the interest rate changed to SOFR plus 400 basis points.
We have evaluated all subsequent events through the date that the consolidated financial statements were issued and determined that, other than amendments of the ESPP and 2021 Revolving Facility, there have been no other events or transactions which would have a material effect on the consolidated financial statements and therefore would require recognition or disclosure.