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Section 1: 10-Q (10-Q)

swch-20200331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to     
Commission File Number: 001-38231
403941431_swch-20200331_g1.gif
Switch, Inc.
(Exact name of registrant as specified in its charter)

Nevada
82-1883953
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
7135 S. Decatur Boulevard
Las Vegas,
NV
89118
(Address of principal executive offices)
(Zip Code)

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

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Class A common stock, par value $0.001SWCHNew York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No      
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes      No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No 
As of April 30, 2020, the registrant had 103,149,364 shares of Class A common stock, 138,467,056 shares of Class B common stock, and no shares of Class C common stock outstanding.



Switch, Inc.
Table of Contents

Part I.
Financial Information
Item 1.
Item 2.
Item 3.
Item 4.
Part II.
Other Information
Item 1.
Item 1A.
Item 6.




Table of Contents 
Part I.Financial Information
Item 1.Financial Statements (Unaudited).

Switch, Inc. | Q1 2020 Form 10-Q | 3


Table of Contents 
Switch, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
March 31,December 31,
20202019
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents$64,711  $24,721  
Accounts receivable, net of allowance for credit losses of $384 and $309, respectively
15,371  23,365  
Prepaid expenses6,683  7,137  
Other current assets, net of allowance for credit losses of $6 and $0, respectively
4,436  3,817  
Total current assets91,201  59,040  
Property and equipment, net1,583,491  1,551,117  
Long-term deposit3,163  3,429  
Deferred income taxes131,255  114,372  
Other assets, net of allowance for credit losses of $73 and $0, respectively
45,429  45,785  
TOTAL ASSETS$1,854,539  $1,773,743  
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Long-term debt, current portion$6,000  $6,000  
Accounts payable16,400  19,477  
Accrued salaries and benefits6,853  5,828  
Accrued expenses11,371  11,254  
Accrued construction payables28,476  37,269  
Deferred revenue, current portion15,826  14,991  
Customer deposits11,128  10,830  
Interest rate swap liability, current portion8,297  3,464  
Operating lease liability, current portion4,549  4,805  
Finance lease liability, current portion12  12  
Total current liabilities108,912  113,930  
Long-term debt, net814,074  745,372  
Operating lease liability25,117  26,142  
Finance lease liability57,588  57,614  
Deferred revenue24,756  27,852  
Liabilities under tax receivable agreement181,274  162,076  
Other long-term liabilities24,981  13,112  
TOTAL LIABILITIES1,236,702  1,146,098  
Commitments and contingencies (Note 4)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value per share, 10,000 shares authorized, none issued and outstanding
    
Class A common stock, $0.001 par value per share, 750,000 shares authorized, 95,035 and 89,768 shares issued and outstanding, respectively
95  90  
Class B common stock, $0.001 par value per share, 300,000 shares authorized, 146,410 and 151,047 shares issued and outstanding, respectively
146  151  
Class C common stock, $0.001 par value per share, 75,000 shares authorized, none issued and outstanding
    
Additional paid in capital217,124  204,711  
(Accumulated deficit) retained earnings(1,754) 2,420  
Accumulated other comprehensive income79  79  
Total Switch, Inc. stockholders’ equity215,690  207,451  
Noncontrolling interest402,147  420,194  
TOTAL STOCKHOLDERS’ EQUITY617,837  627,645  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$1,854,539  $1,773,743  

The accompanying condensed notes are an integral part of these consolidated financial statements.
Switch, Inc. | Q1 2020 Form 10-Q | 4


Table of Contents 
Switch, Inc.
Consolidated Statements of Comprehensive (Loss) Income
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
20202019
Revenue$128,096  $107,442  
Cost of revenue67,029  57,525  
Gross profit61,067  49,917  
Selling, general and administrative expense40,116  34,251  
Income from operations20,951  15,666  
Other income (expense):
Interest expense, including $409 and $409, respectively, in amortization of debt issuance costs
(7,435) (7,131) 
Loss on interest rate swaps(17,555) (4,985) 
Other277  502  
Total other expense(24,713) (11,614) 
(Loss) income before income taxes(3,762) 4,052  
Income tax benefit (expense)273  (206) 
Net (loss) income(3,489) 3,846  
Less: net (loss) income attributable to noncontrolling interest(2,273) 3,113  
Net (loss) income attributable to Switch, Inc.$(1,216) $733  
Net (loss) income per share (Note 8):
Basic$(0.01) $0.01  
Diluted$(0.01) $0.01  
Weighted average shares used in computing net (loss) income per share (Note 8):
Basic94,366  55,536  
Diluted 94,366  247,364  
Other comprehensive (loss) income:
Foreign currency translation adjustment, net of tax of $0
    
Comprehensive (loss) income(3,489) 3,846  
Less: comprehensive (loss) income attributable to noncontrolling interest(2,273) 3,113  
Comprehensive (loss) income attributable to Switch, Inc.$(1,216) $733  

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

Switch, Inc. | Q1 2020 Form 10-Q | 5


Table of Contents 
Switch, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
(unaudited)
Switch, Inc. Stockholders’ Equity
Class A Common StockClass B Common Stock
SharesAmountSharesAmountAdditional Paid in Capital(Accumulated Deficit) Retained EarningsAccumulated Other Comprehensive IncomeNoncontrolling InterestTotal Stockholders’ Equity
Balance—December 31, 201989,768  $90  151,047  $151  $204,711  $2,420  $79  $420,194  $627,645  
Cumulative adjustment due to adoption of new credit loss standard—  —  —  —  —  (67) —  (82) (149) 
Net loss—  —  —  —  —  (1,216) —  (2,273) (3,489) 
Equity-based compensation expense—  —  —  —  4,973  —  —  2,551  7,524  
Issuance of Class A common stock upon settlement of restricted stock units, net of shares withheld for tax630  —  —  —  (3,375) —  —  (536) (3,911) 
Dividends declared ($0.0294 per share)
—  —  —  —  —  (2,891) —  —  (2,891) 
Distributions to noncontrolling interest—  —  —  —  —  —  —  (4,304) (4,304) 
Exchanges of noncontrolling interest for Class A common stock4,637  5  (4,637) (5) 13,403  —  —  (13,403) —  
Recognition of tax receivable agreement liability resulting from exchanges of noncontrolling interest for Class A common stock—  —  —  —  (19,198) —  —  —  (19,198) 
Net deferred tax asset resulting from changes in outside basis difference on investment in Switch, Ltd.—  —  —  —  16,610  —  —  —  16,610  
Balance—March 31, 202095,035  $95  146,410  $146  $217,124  $(1,754) $79  $402,147  $617,837  

Switch, Inc. | Q1 2020 Form 10-Q | 6


Table of Contents 
Switch, Inc.
Consolidated Statements of Stockholders’ Equity (Continued)
(in thousands)
(unaudited)
Switch, Inc. Stockholders’ Equity
Class A Common StockClass B Common StockClass C Common Stock
SharesAmountSharesAmountSharesAmountAdditional Paid in Capital(Accumulated Deficit) Retained EarningsAccumulated Other Comprehensive IncomeNoncontrolling InterestTotal Stockholders’ Equity
Balance—December 31, 201855,218  $55  148,481  $149  42,945  $43  $140,191  $2,693  $79  $565,142  $708,352  
Cumulative adjustment due to adoption of new revenue recognition standard—  —  —  —  —  —  —  224  —  940  1,164  
Net income—  —  —  —  —  —  —  733  —  3,113  3,846  
Equity-based compensation expense—  —  —  —  —  —  4,160  —  —  3,985  8,145  
Issuance of Class A common stock upon settlement of restricted stock units, net of shares withheld for tax463  1  —  —  —  —  (2,016) —  —  705  (1,310) 
Dividends declared ($0.0294 per share)
—  —  —  —  —  —  —  (1,728) —  —  (1,728) 
Distributions to noncontrolling interest—  —  —  —  —  —  —  —  —  (6,006) (6,006) 
Net deferred tax asset resulting from changes in outside basis difference on investment in Switch, Ltd.—  —  —  —  —  —  (728) —  —  —  (728) 
Balance—March 31, 201955,681  $56  148,481  $149  42,945  $43  $141,607  $1,922  $79  $567,879  $711,735  

The accompanying condensed notes are an integral part of these consolidated financial statements.
Switch, Inc. | Q1 2020 Form 10-Q | 7


Table of Contents 
Switch, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended
March 31,
20202019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income$(3,489) $3,846  
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization of property and equipment32,518  28,558  
Loss on disposal of property and equipment60  43  
Deferred income taxes(273) 206  
Amortization of debt issuance costs409  409  
Credit loss expense (benefit)18  (23) 
Unrealized loss on interest rate swaps16,745  4,985  
Equity-based compensation7,524  8,145  
Amortization of portfolio energy credits267  359  
Cost of revenue for sales-type leases2,803    
Changes in operating assets and liabilities:
Accounts receivable5,944  5,164  
Prepaid expenses454  58  
Other current assets(626) (62) 
Other assets411  893  
Accounts payable1,987  (2,201) 
Accrued salaries and benefits1,025  249  
Accrued expenses117  1,650  
Deferred revenue(2,261) 673  
Customer deposits298  229  
Operating lease liabilities(1,281) (1,198) 
Other long-term liabilities(92) (61) 
Net cash provided by operating activities62,558  51,922  
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment(80,898) (45,946) 
Proceeds from sale of property and equipment  16  
Purchase of portfolio energy credits(601) (299) 
Net cash used in investing activities(81,499) (46,229) 
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings70,000    
Repayment of borrowings, including finance lease liabilities(1,671) (1,500) 
Change in long-term deposit1,659  2,543  
Payment of tax withholdings upon settlement of restricted stock unit awards(4,040) (1,338) 
Dividends paid to Class A common stockholders(2,795)   
Distributions paid to noncontrolling interest(4,222)   
Net cash provided by (used in) financing activities58,931  (295) 
NET INCREASE IN CASH AND CASH EQUIVALENTS39,990  5,398  
CASH AND CASH EQUIVALENTSBeginning of period
24,721  81,560  
CASH AND CASH EQUIVALENTSEnd of period
$64,711  $86,958  

Switch, Inc. | Q1 2020 Form 10-Q | 8


Table of Contents 
Switch, Inc.
Consolidated Statements of Cash Flows (Continued)
(in thousands)
(unaudited)
Three Months Ended
March 31,
20202019
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized$7,106  $6,588  
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION:
Decrease in liabilities incurred to acquire property and equipment$(13,532) $(10,585) 
Decrease in accrued construction payables incurred related to long-term deposit$(882) $  
Increase in property and equipment related to transfer of long-term deposit$244  $  
Increase in dividends payable on unvested restricted stock units$96  $90  
Decrease in noncontrolling interest as a result of exchanges for Class A common stock$(13,403) $  
Recognition of liabilities under tax receivable agreement$19,198  $  
Increase (decrease) in deferred tax asset resulting from changes in outside basis difference on investment in Switch, Ltd.$16,610  $(728) 
Property and equipment obtained in exchange for new finance leases$145  $—  
Increase in distributions payable on unvested common units$82  $490  
Dividends payable settled with shares of Class A common stock$129  $28  
Dividends and distributions declared but not paid$  $7,154  

The accompanying condensed notes are an integral part of these consolidated financial statements.
Switch, Inc. | Q1 2020 Form 10-Q | 9


Table of Contents 
Switch, Inc.
Condensed Notes to Consolidated Financial Statements
(unaudited)
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10

Switch, Inc. | Q1 2020 Form 10-Q | 10


Table of Contents 
1. Organization
Switch, Inc. was formed as a Nevada corporation in June 2017 for the purpose of completing an initial public offering (“IPO”) and related organizational transactions in order to carry on the business of Switch, Ltd. and its subsidiaries (collectively, “Switch,” and together with Switch, Inc., the “Company”). Switch is comprised of limited liability companies that provide colocation space and related services to global enterprises, financial companies, government agencies, and others that conduct critical business on the internet. Switch develops and operates data centers in Nevada, which are Tier IV Gold certified, Michigan, and Georgia (which opened in the first quarter of 2020), delivering redundant services with low latency and super capacity transport environments. As the manager of Switch, Ltd., Switch, Inc. operates and controls all of the business and affairs of Switch.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for quarterly reports on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Management believes that the accompanying consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of these consolidated financial statements. The consolidated results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020, or for any other future annual or interim period.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and all significant intercompany transactions and balances have been eliminated.
As the sole manager of Switch, Ltd., Switch, Inc. operates and controls all of the business and affairs of Switch, has the sole voting interest in, and controls the management of, Switch, and has the obligation to absorb the losses of, and receive benefits from, Switch. Accordingly, Switch, Inc. identifies itself as the primary beneficiary of Switch and began consolidating Switch in its consolidated financial statements as of October 11, 2017, the closing date of the IPO, resulting in a noncontrolling interest related to the common units of Switch, Ltd. (“Common Units”) held by members, including Rob Roy, the Founder, Chief Executive Officer and Chairman of Switch, Ltd., and an affiliated entity of Mr. Roy (collectively, the “Founder Members”), other than Switch, Inc. on its consolidated financial statements.
The Company periodically evaluates entities for consolidation either through ownership of a majority voting interest, or through means other than voting interest, in accordance with the Variable Interest Entity (“VIE”) accounting model. A VIE is an entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to the allowance for credit losses, useful lives of property and equipment, deferred income taxes, liabilities under the tax receivable agreement, equity-based compensation, deferred revenue, incremental borrowing rate, fair value of performance obligations, and probability assessments of exercising renewal options on leases. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable. Actual results could differ from these estimates.

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Significant Accounting Policies
A description of the Company’s significant accounting policies is included in the audited financial statements within its Annual Report on Form 10-K for the year ended December 31, 2019. No other changes to significant accounting policies have occurred since the year ended December 31, 2019, with the exception of those detailed below.
Concentration of Credit and Other Risks
Although the Company operates primarily in Nevada, realization of its receivables and its future operations and cash flows could be affected by adverse economic conditions, both regionally and elsewhere in the United States. During the three months ended March 31, 2020 and 2019, the Company’s largest customer and its affiliates comprised 14% and 11%, respectively, of the Company’s revenue. Two customers accounted for 10% or more of total receivables, including net investments in sales-type leases, as of March 31, 2020 and two customers, one of which was the Company’s largest customer and its affiliate, accounted for 10% or more of total receivables as of December 31, 2019.
Revenue Recognition
Contract Balances
The opening and closing balances of the Company’s contract assets, net of allowance for credit losses, and deferred revenue are as follows:
Contract Assets, Current Portion(1)
Contract Assets(2)
Deferred Revenue, Current Portion(3)
Deferred Revenue(4)
(in thousands)
December 31, 2019496  3,216  14,991  27,852  
March 31, 2020362  3,393  15,826  24,756  
Change$(134) $177  $835  $(3,096) 
________________________________________
(1)  Amounts are included within other current assets on the Company’s consolidated balance sheets.
(2)  Amounts are included within other assets on the Company’s consolidated balance sheets.
(3)  Amounts include $3.8 million and $3.6 million of deferred revenue related to leases as of December 31, 2019 and March 31, 2020, respectively.
(4)  Amounts include $7.9 million and $3.7 million of deferred revenue related to leases as of December 31, 2019 and March 31, 2020, respectively.
The differences between the opening and closing balances of the Company’s deferred revenue primarily result from timing differences between the Company’s satisfaction of performance obligations and the associated customer payments. Revenue recognized during the three months ended March 31, 2020 from the balance of deferred revenue as of December 31, 2019 was $6.6 million. For the three months ended March 31, 2020 and 2019, no impairment losses related to contract assets were recognized on the consolidated statements of comprehensive (loss) income.
Remaining Performance Obligations
Remaining performance obligations represent contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized in future periods. These amounts as of March 31, 2020 were $790.1 million, 34%, 41%, and 13% of which is expected to be recognized over the next year, one to three years, and three to five years, respectively, with the remainder recognized thereafter. 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.

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Fair Value Measurements
Information about the Company’s financial assets and liabilities measured at fair value on a recurring basis is presented below:
March 31, 2020
Balance Sheet ClassificationCarrying ValueLevel 1Level 2Level 3
(in thousands)
Assets:
Cash equivalentsCash and cash equivalents$27,229  $27,229  $—  $—  
Liabilities:
Interest rate swapsInterest rate swap liability, current portion  $8,297  $—  $8,297  $—  
Interest rate swapsOther long-term liabilities  $22,462  $—  $22,462  $—  

December 31, 2019
Balance Sheet ClassificationCarrying ValueLevel 1Level 2Level 3
(in thousands)
Liabilities:
Interest rate swapsInterest rate swap liability, current portion  $3,464  $—  $3,464  $—  
Interest rate swapsOther long-term liabilities  $10,550  $—  $10,550  $—  
Transfers between levels of fair value hierarchy are recorded at the end of the reporting period during which the events or changes in circumstances that caused the transfers occur. There were no transfers between levels of fair value hierarchy during the periods presented.
The fair value of interest rate swaps was measured using a present value of cash flow valuation technique based on forward yield curves for the same or similar financial instruments.
The estimated fair value of the Company’s long-term debt as of March 31, 2020 and December 31, 2019 was approximately $788.5 million and $755.0 million, respectively, compared to its carrying value, excluding debt issuance costs, of $823.5 million and $755.0 million, respectively. The estimated fair value of the Company’s long-term debt was based on Level 2 inputs using quoted market prices on or about March 31, 2020 and December 31, 2019, respectively.
Recent Accounting Pronouncements
ASU 2014-09–Revenue from Contracts with Customers and ASU 2016-02–Leases
In the fourth quarter of 2019, the Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) and ASU 2016-02, Leases (Topic 842) effective January 1, 2019, each using the modified retrospective approach. Results for the three months ended March 31, 2019 have been modified to reflect the adoption of this guidance each on January 1, 2019.
ASU 2016-13–Financial Instruments–Credit Losses
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). Under this guidance, a company will be required to use a new forward-looking “expected loss” model for trade and other receivables that generally will result in the earlier recognition of allowances for losses. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and requires a modified retrospective approach to adoption. In April 2019, the FASB issued ASU 2019-04, which, among other amendments, allows for certain policy elections and practical expedients related to accrued interest on financial instruments. In May 2019, the FASB issued ASU 2019-05, which granted targeted transition relief by allowing entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost. In November 2019, the FASB issued ASU 2019-10 and ASU 2019-11, which addressed certain aspects of the guidance related to effective dates, expected recoveries, troubled debt restructurings, accrued interest receivables, and financial assets secured by collateral. In February and March 2020, the FASB also issued ASU 2020-02 and ASU 2020-03, respectively, which provide certain amendments and improvements to sections of ASU 2016-13.
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The Company adopted this guidance effective January 1, 2020 using the modified retrospective method. As a result of this adoption, the Company measured an allowance for current expected credit losses for its accounts receivable and contract assets through a loss rate method; whereby, based on past events, such as prior write-offs, it determined expected losses as of the adoption date, while adjusting for current and forward-looking conditions, such as economic news and trends, customer concentrations, changes in customer payment terms, and customer credit-worthiness. Customer credit-worthiness is determined through indicators such as third-party credit ratings, collection experience, and other internal metrics. If a customer‘s credit-worthiness resulted in an impairment of their ability to make payments, greater allowances for credit losses may be required. The Company pooled its assets based on these conditions such that each asset pool reflected a homogenous set of asset risks, including characteristics such as credit ratings, customer industry, contract term, and historical credit loss patterns. For any period beyond a reasonable and supportable forecast for current and forward-looking conditions, the Company reverted to a loss rate based only on historical information. The adoption of this guidance did not materially impact the Company’s consolidated financial statements.
ASU 2018-13–Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The amendments in ASU 2018-13 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. In addition, in November 2018, the FASB issued ASU 2018-19, which provides clarifications and improvements on sections of ASU 2018-13. The Company has adopted this guidance as of March 31, 2020. The adoption of this guidance did not materially impact the Company’s consolidated financial statements.
ASU 2019-12–Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740)–Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The amendments in ASU 2019-12 provide certain clarifications and simplify accounting for income taxes by removing certain exceptions to the general principles in the current guidance. The amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted in periods for which financial statements have not yet been issued. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial statements. The Company has not decided if early adoption will be considered.
ASU 2020-04–Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848)–Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The amendments in ASU 2020-04 provide optional expedients and exceptions to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in this update are elective and are effective upon issuance for all entities. The Company has adopted this guidance as of March 31, 2020. The adoption of this guidance did not materially impact the Company’s consolidated financial statements.
Reclassification
The Company reclassified the current portion of its interest rate swap liability to present it separately from accrued expenses on the consolidated balance sheet as of December 31, 2019 to be consistent with the current period presentation. The reclassification had no impact on the Company’s financial condition, results of operations, or net cash flows.
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3. Property and Equipment, Net
Property and equipment, net consists of the following:
March 31,December 31,
20202019
(in thousands)
Land and land improvements$275,322  $223,877  
Buildings, building improvements, and leasehold improvements505,294  435,214  
Substation equipment19,780  19,780  
Data center equipment1,130,743  1,021,056  
Vehicles1,825  1,732  
Core network equipment38,943  36,572  
Fiber facilities13,644  13,180  
Computer equipment, furniture and fixtures42,748  39,057  
Finance lease right-of-use assets72,957  72,569  
Construction in progress81,353  254,750  
Property and equipment, gross2,182,609  2,117,787  
Less: accumulated depreciation and amortization(599,118) (566,670) 
Property and equipment, net$1,583,491  $1,551,117  
Accumulated amortization for finance lease right-of-use assets totaled $12.3 million and $11.7 million as of March 31, 2020 and December 31, 2019, respectively.
During the three months ended March 31, 2020 and 2019, capitalized interest was $1.8 million and $1.3 million, respectively.
The Company capitalized internal use software costs of $0.1 million and $0.5 million during the three months ended March 31, 2020 and 2019, respectively.
Total depreciation and amortization of property and equipment recognized on the consolidated statements of comprehensive (loss) income was as follows:
Three Months Ended
March 31,
20202019
(in thousands)
Cost of revenue$31,228  $27,810  
Selling, general and administrative expense1,290  748  
Total depreciation and amortization of property and equipment$32,518  $28,558  

4. Commitments and Contingencies
Operating Leases
During the three months ended March 31, 2020 and 2019, lease costs related to operating leases were $1.8 million and $1.9 million, respectively. Related party lease costs included in these amounts were $1.2 million for each of the three months ended March 31, 2020 and 2019.
Legal Proceedings
On September 7, 2017, Switch, Ltd. and Switch, Inc. were named in a lawsuit filed in the U.S. District Court for the District of Nevada by V5 Technologies formerly d/b/a Cobalt Data Centers. The lawsuit alleges, among other things, that Switch, Ltd. and Switch, Inc. monopolized the Las Vegas Metropolitan area of Southern Nevada’s data center colocation market and engaged in unfair business practices leading to the failure of Cobalt Data Centers in 2015 and seeks monetary damages in an amount yet to be disclosed. Discovery closed in February 2020. In March 2020, both parties filed motions for summary judgment and are waiting for the court to rule on the motions. Switch, Ltd. and Switch, Inc. are vigorously defending the case.
On September 12, 2017, Switch, Ltd. filed a complaint in the Eighth Judicial District of Nevada against the consultant, Stephen Fairfax, and his business, MTechnology Inc. Among other claims, Switch raised allegations of
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breach of contract and misappropriation of trade secrets. The complaint also alleged that Aligned Data Centers LLC (“Aligned”) hired Mr. Fairfax and MTechnology Inc. to design their data centers; that this consultant had toured Switch under a non-disclosure agreement; and that this consultant breached his confidentiality agreements with Switch by using Switch’s designs to design the Aligned data centers. Switch, Ltd. is seeking an injunction to prevent the defendants in the lawsuit from infringing Switch, Ltd.’s patents, as well as other remedies. The parties are currently engaged in discovery.
Four substantially similar putative class action complaints, captioned Martz v. Switch, Inc. et al. (filed April 20, 2018); Palkon v. Switch, Inc. et al. (filed April 30, 2018); Chun v. Switch, Inc. et al. (filed May 11, 2018); and Silverberg v. Switch, Inc. et al. (filed June 6, 2018), were filed in the Eighth Judicial District of Nevada, and subsequently consolidated into a single case (the “State Court Securities Action”). Additionally, on June 11, 2018, one putative class action complaint captioned Cai v. Switch, Inc. et al. was filed in the United States District Court for the District of New Jersey (the “Federal Court Securities Action,” and collectively with the State Court Securities Action, the “Securities Actions”) and subsequently transferred to the Eighth Judicial District of Nevada in August 2018 and the federal court appointed Oscar Farach lead plaintiff. These lawsuits were filed against Switch, Inc., certain current and former officers and directors and certain underwriters of Switch, Inc.’s IPO alleging federal securities law violations in connection with the IPO. These lawsuits were brought by purported stockholders of Switch, Inc. seeking to represent a class of stockholders who purchased Class A common stock in or traceable to the IPO, and seek unspecified damages and other relief. In October 2018, the state court granted the defendants’ motion to stay the State Court Securities Action in favor of the Federal Court Securities Action, which stay was affirmed by the Nevada Supreme Court in September 2019. With respect to the Federal Court Securities Action, in July 2019, the federal court granted Switch, Inc.’s motion to dismiss in part, which narrowed the scope of the plaintiff’s case. In December 2019, Switch, Inc. filed a motion for judgment on the pleadings and the parties are waiting for the federal court to rule on the motion. The parties are currently engaged in discovery in the Federal Court Securities Action. Switch, Inc. believes that these lawsuits are without merit and intends to continue to vigorously defend against them.
On September 10, 2018, two purported stockholders of Switch, Inc. filed substantially similar shareholder derivative complaints, respectively captioned Liu v. Roy et al., and Zhao v. Roy et al., in the Eighth Judicial District of Nevada, which were subsequently consolidated into a single case (the “Derivative Shareholder Action”). These lawsuits allege breaches of fiduciary duty, unjust enrichment, waste of corporate assets, abuse of control, and gross mismanagement against certain current and former officers and directors of Switch, Inc. The plaintiffs also named Switch, Inc. as a nominal defendant. The complaints arise generally from the same allegations described in the State Court Securities Action and Federal Court Securities Action. The plaintiffs seek unspecified damages on Switch, Inc.’s behalf from the officer and director defendants, certain corporate governance actions, compensatory awards, and other relief. In December 2019, the court granted the parties’ stipulation to stay the Derivative Shareholder Action until the earlier of any of the following events: the Securities Actions are resolved with prejudice as to each defendant or a motion for summary judgment is resolved in the Federal Court Securities Action.
The outcomes of the legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to the Company’s financial condition, results of operations, and cash flows for a particular period. Where the Company is a defendant, it will vigorously defend against the claims pleaded against it. These actions are each in preliminary stages and management has determined that based on proceedings to date, it is currently unable to determine the probability of the outcome of these actions or the range of reasonably possible loss, if any.
5. Income Taxes
The Company recorded a net increase in deferred tax assets of $16.6 million during the three months ended March 31, 2020, with a corresponding increase to additional paid in capital, and a net decrease in deferred tax assets of $0.7 million during the three months ended March 31, 2019, with a corresponding decrease to additional paid in capital, resulting from changes in the outside basis difference on Switch, Inc.’s investment in Switch, Ltd. The Company has determined it is more-likely-than-not that it will be able to realize this deferred tax asset in the future.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in March 2020. The Company does not expect the provisions of the CARES Act to have a significant impact on the effective tax rate or the deferred income tax positions of the Company.
Tax Receivable Agreement
The Company has recorded a liability under the tax receivable agreement of $181.3 million and $162.1 million as of March 31, 2020 and December 31, 2019, respectively, which provides for the payment of 85% of the amount of the tax benefits, if any, that Switch, Inc. is deemed to realize as a result of increases in the tax basis of its ownership in Switch, Ltd. related to exchanges of noncontrolling interest for Class A common stock.
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6. Equity-Based Compensation
Total equity-based compensation recognized on the consolidated statements of comprehensive (loss) income was as follows:
Three Months Ended
March 31,
20202019
(in thousands)
Cost of revenue$470  $373  
Selling, general and administrative expense7,054  7,772  
Total equity-based compensation$7,524  $8,145  

7. Noncontrolling Interest
Ownership
Switch, Inc. owns a minority economic interest in Switch, Ltd., where “economic interests” means the right to receive any distributions, whether cash, property or securities of Switch, Ltd., in connection with Common Units. Switch, Inc. presents interest held by noncontrolling interest holders within noncontrolling interest in the consolidated financial statements. During the three months ended March 31, 2020, Switch, Inc. issued an aggregate of 4.6 million shares of Class A common stock to members of Switch, Ltd. in connection with such members’ redemptions of an equivalent number of Common Units and corresponding cancellation and retirement of an equivalent number of Switch, Inc.’s Class B common stock. Such retired shares of Class B common stock may not be reissued. The redemptions occurred pursuant to the terms of the Switch operating agreement entered into in connection with the Company’s IPO.
In February 2020, Switch, Inc.’s Board of Directors authorized the repurchase by Switch, Ltd. of up to $20.0 million of its outstanding Common Units, which authorization expired unused on March 17, 2020.
The ownership of the Common Units is summarized as follows:
March 31, 2020December 31, 2019
UnitsOwnership %UnitsOwnership %
(units in thousands)
Switch, Inc.’s ownership of Common Units(1)
94,955  39.8 %89,688  37.8 %
Noncontrolling interest holders’ ownership of Common Units(2)
143,620  60.2 %147,859  62.2 %