CYXTERA TECHNOLOGIES, INC. 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 theSEC .
Overview of
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 ongoingRussia -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
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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 ofDecember 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 endedDecember 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 endedDecember 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 endedDecember 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. 40 -------------------------------------------------------------------------------- During the years endedDecember 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 endedDecember 31, 2022 , 11% of recurring revenues for the year endedDecember 31, 2021 and 15% of recurring revenues for the year endedDecember 31, 2020 . Our 50 largest customers accounted for approximately 56%, 55%, and 57%, respectively, of recurring revenues for the years endedDecember 31, 2022 , 2021 and 2020. Our interconnection revenues represented approximately 12% of total revenues for year endedDecember 31, 2022 , and approximately 11% of total revenues for the years endedDecember 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 inEurope to meet European demand in light of sanctions on Russian natural gas supply as a result of the conflict in theUkraine . 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
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obligations pursuant to the rules and regulations of the
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 onOctober 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 LegacyCyxtera 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 ofStarboard 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. InDecember 2021 , the Company announced that it would redeem all Public Warrants and Private Placement Warrants that remained outstanding at5:00 p.m. ,New York City time, onJanuary 19, 2022 . InJanuary 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 endedDecember 31, 2022 , 2021 and 2020, have been derived from our consolidated financial statements and related notes included elsewhere in this Annual Report. 42 -------------------------------------------------------------------------------- Years endedDecember 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 endedDecember 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 endedDecember 31, 2022 compared to the prior year. The increase of expenses was offset by our exit from theMoses 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 endedDecember 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 endedDecember 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 43 --------------------------------------------------------------------------------
public company compared to the prior year.
Depreciation and Amortization
Depreciation and amortization increased by$2.4 million , or 1%, for the year endedDecember 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 endedDecember 31, 2022 compared to the prior year. In the year endedDecember 31, 2021 , we exited the Addison office space and incurred$7.9 million in exit expenses. InJune 2021 , the Company ceased use of theMoses Lake property and wrote off the remaining lease obligation of$58.5 million . During the year endedDecember 31, 2022 , the Company recognized$5.2 million of restructuring costs in connection with the Addison andMoses Lake exits. Transaction-related costs
Transaction-related costs were
Interest Expense, Net
Interest expense, net, decreased by$1.6 million , or 1%, for the year endedDecember 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 andAugust 2021 following the consummation of the Business Combination.
Other Expenses, Net
Other expenses, net increased by$2.1 million , for the year endedDecember 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 endedDecember 31, 2022 .
Change in Fair Value of the Warrant Liabilities
For the year endedDecember 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. InDecember 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. OnJanuary 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 44 -------------------------------------------------------------------------------- 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 ofJanuary 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 endedDecember 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 endedDecember 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 endedDecember 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 theUnited Kingdom due to an enacted tax rate change, and the effects of the Company's foreign operations. Years endedDecember 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 %
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Revenues
Revenues increased by$13.2 million , or 2%, for the year endedDecember 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 endedDecember 31, 2021 and 2020. During the year endedDecember 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 endedDecember 31, 2020 . During 2021, benefit expenses were lower by$1.2 million due to lower claims period-over-period. Our exit fromMoses 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 endedDecember 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 endedDecember 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 onMoses 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. 46 --------------------------------------------------------------------------------
Amortization increased due to capital lease asset additions for capital leases
entered in
Restructuring, impairment, site closures and related costs
Restructuring, impairment, site closures and related costs were$69.8 million for the year endedDecember 31, 2021 (no such costs were incurred in the same period of the prior year). These charges are related to theMoses Lake data center facility and Addison office space closures.
Transaction-related costs
The Company paid a one-time
Recovery of Notes Receivable from Affiliate
OnMarch 31, 2019 , Appgate, Inc., formerly known asCyxtera Cybersecurity, Inc. ("Appgate"), issued promissory notes to each ofCyxtera andCyxtera Management, Inc. , aDelaware corporation (the "Management Company "), evidencing certain funds borrowed by Appgate from each ofCyxtera and theManagement 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 throughDecember 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 throughDecember 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 ofMarch 30, 2020 , and was extended throughMarch 30, 2021 , by amendments entered into effective as ofMarch 30, 2020 . As ofDecember 31, 2019 , we had a receivable related to the Promissory Notes of$127.7 million . OnDecember 31, 2019 , Appgate spun off fromCyxtera . As ofDecember 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 theCyxtera group in 2017 throughDecember 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 endedDecember 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 ofDecember 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 endedDecember 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 theManagement Company pursuant to which theManagement Company provided certain transition services to Appgate and Appgate provided certain transition services toCyxtera (the "Transition Services Agreement"). The Transition Services Agreement provided for a term that commenced onJanuary 1, 2020 and was terminated onDecember 31, 2020 . OnFebruary 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 47 -------------------------------------------------------------------------------- recovery of a portion of the Promissory Notes' principal and interest balance outstanding as ofDecember 31, 2019 . Accordingly, for the year endedDecember 31, 2020 , the Company recorded a reversal of the previously established allowance of$117.1 million . During the three months endedMarch 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 endedDecember 31, 2021 . Interest Expense, Net Interest expense, net decreased by$4.5 million , or 3%, for the year endedDecember 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 andAugust 2021 following the consummation of the Business Combination.
Other Expenses, Net
Other expenses, net decreased by$0.2 million , or 67%, for the year endedDecember 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 endedDecember 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. InDecember 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 ofDecember 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 endedDecember 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 endedDecember 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 theUnited 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 endedDecember 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. 48 --------------------------------------------------------------------------------
Liquidity and Capital Resources
As ofDecember 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 ofDecember 31, 2022 , would have matured onNovember 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 onMay 1, 2024 . For additional information concerning these facilities, see below under "-Debt". Historically, customer collections are our primary source of cash. OnMarch 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 fromNovember 1, 2023 toApril 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 inApril 2024 andMay 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. 49 --------------------------------------------------------------------------------
Debt
OnMay 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"). OnMay 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"). OnMay 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 fromMay 1, 2022 toNovember 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 onMay 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 onJuly 29, 2021 , and the remaining outstanding balance on the Revolving Facility and 2021 Revolving Facility of$123.1 million onAugust 13, 2021 . In addition, during the year endedDecember 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 endedDecember 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 inMay 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 onNovember 1, 2023 ,May 1, 2024 andMay 1, 2024 , respectively. Subsequent to year-end, onMarch 14, 2023 , we entered into the Revolving Facility Amendment which, among other things, provided for an extension of the maturity date fromNovember 1, 2023 toApril 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 ofDecember 31, 2022 , the Company believes the Borrower was in compliance with these covenants. As ofDecember 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 ofDecember 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
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
50
--------------------------------------------------------------------------------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 endedDecember 31, 2022 , operating activities provided$97.4 million of net cash as compared to$25.8 million during the prior year. OnFebruary 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 endedDecember 31, 2022 . OnAugust 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 endedDecember 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 endedDecember 31, 2022 , was primarily due to the one-time payment of$117.1 million received from Appgate inFebruary 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 yearDecember 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 endedDecember 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 endedDecember 31, 2022 , compared to the year endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 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. 51 --------------------------------------------------------------------------------
Contractual Obligations and Commitments
Material Cash Commitments
As 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 inApril 2024 andMay 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 inApril 2024 andMay 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 ofDecember 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 inMassachusetts , which has not yet commenced as ofDecember 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
52
--------------------------------------------------------------------------------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 requireCyxtera'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,
53
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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.
54
--------------------------------------------------------------------------------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
InJanuary 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.
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