Item 1A. Risk Factors.
Investing in our securities carries a significant degree of risk. You should carefully consider the risks described below, together with all of the other information in this Form 10-K, including our consolidated financial statements and related notes included elsewhere in this Form 10-K, before deciding whether to invest in our securities. If any or a combination of the following risks were to materialize, our results of operations, financial condition and prospects could be materially adversely affected. If that were to be the case, the market price of our securities could decline, and investors could lose all or part of their investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.
Risks Relating to our Pending Acquisition by EQT and PSP
The Mergers may not be completed on the terms or timeline currently contemplated, or at all, for a variety of reasons, including the possibility that the Merger Agreement is terminated prior to the consummation of the Mergers, and the failure to complete the Mergers could adversely affect our business, results of operations, financial condition, and the market price of our Common Stock.
There can be no assurance that the Mergers will be completed in the currently contemplated timeframe, or at all. The consummation of the Mergers are subject to certain conditions, including, among others, (a) the approval and adoption of the Merger Agreement by our stockholders, (b) the absence of a law or order prohibiting the transactions contemplated by the Merger Agreement or imposing a Burdensome Condition (as defined in the Merger Agreement), (c) the termination or expiration of any waiting periods and receipt of approvals under applicable antitrust and foreign investment laws without the imposition of a Burdensome Condition (as defined in the Merger Agreement), (d) compliance by the Company, APW OpCo and the Parent Parties in all material respects with our and their respective obligations under the Merger Agreement, (e) subject to specified exceptions and qualifications for materiality, the accuracy of representations and warranties made by the Company, APW OpCo and the Parent Parties, respectively, as of the closing date, (f) no Debt Default (as defined in the Merger Agreement) having occurred and been continuing immediately prior and immediately after giving effect to the Mergers, (g) the Company having a minimum cash balance of $210 million and the Company or any of its subsidiaries having an additional amount of cash of not less than $30 million, in each case at the of the Mergers, (h) no effect, change, circumstance or occurrence that, individually or in the aggregate, has had or would reasonably be expected to have a Material Effect (as defined in the Merger Agreement) having occurred since the date of the Merger Agreement and (i) certain waivers of change of control provisions under our Specified Debt Agreements (as defined in the Merger Agreement) being in full and effect at the of the Mergers. The consummation of the Mergers is not subject to a financing condition.
While it is currently expected that the Mergers will close on or around the third quarter of 2023, there can be no assurance that all required approvals will be obtained or that all closing conditions will otherwise be satisfied (or waived, if applicable), and, if all required approvals are obtained and all closing conditions are satisfied (or waived, if applicable), we can provide no assurance as to the terms, conditions and timing of such approvals or that the Mergers will be completed in a timely manner or at all. Many of the conditions to completion of the Mergers are not within our or Parent’s control, and we cannot predict when or if these conditions will be satisfied (or waived, as applicable). Even if regulatory approval is obtained, it is possible conditions will be imposed that could result in a material delay in, or the abandonment of, the Mergers or otherwise have an adverse effect on us.
The Merger Agreement contains customary mutual termination rights for us and Parent, which could prevent the consummation of the Mergers, including if the Mergers are not completed by September 30, 2023 (subject to extension to November 30, 2023 under certain circumstances).
The Merger Agreement also contains customary termination rights for the benefit of each party, including if the other party breaches its representations, warranties, or covenants under the Merger Agreement in a way that would result in a failure of the other party’s condition to closing being satisfied (subject to certain procedures and cure periods). Additionally, the Merger Agreement provides termination rights, if certain conditions are met, including (a) for Parent, if our Board of Directors makes an Adverse Recommendation Change (as defined in the Merger Agreement), and (b) for us, if our Board of Directors authorizes entry into a definitive agreement with respect to a Superior Proposal (as
defined in the Merger Agreement) prior to us receiving stockholder approval of the Merger or if the Parent fails to close the Mergers by the later of (1) five business days after all closing conditions have been satisfied and (2) five business days following the Company’s delivery of a written notice to Parent that all of Parent’s closing conditions have been satisfied or waived and the Company is ready, willing and able to consummate the Mergers .
If the Mergers are not completed within the expected timeframe or at all, we may be subject to a number of material risks, including:
the trading price of our Common Stock may significantly decline to the extent that the market price of the Common Stock reflects positive market assumptions that the Mergers will be completed, and the related benefits will be realized;
if the Merger Agreement is terminated under certain specified circumstances, we or Parent will be required to pay a termination fee, including that we will be required to pay Parent a termination fee of $52 million under specified circumstances, and Parent will be required to pay us a reverse termination fee of $103 million under specified circumstances;
the obligation to pay significant transaction costs, such as legal, accounting and financial advisory costs that are not contingent on closing;
the diversion of management and resources towards the Mergers, for which we will have received little or no benefit if completion of the Mergers does not occur; and
reputational harm including relationships with customers and business partners due to the adverse perception of any failure to successfully complete the Mergers.
The Merger Agreement contains provisions that could discourage a potential competing acquirer of the Company or could result in a competing acquisition proposal being at a lower price than it might otherwise be.
The Merger Agreement contains provisions that, subject to certain exceptions, restrict our ability to solicit or negotiate any alternative acquisition proposal. Upon termination of the Merger Agreement under circumstances relating to an alternative acquisition proposal, we may be required to pay a termination fee of $52 million. These provisions could discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of the Company’s business from considering or making a competing acquisition proposal, even if the potential competing acquirer was prepared to pay consideration with a higher per share cash value than the market value proposed to be received or realized in the Mergers, or might cause a potential competing acquirer to propose to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee and other costs that may become payable in certain circumstances under the Merger Agreement.
While the Merger Agreement is in effect, we are subject to certain interim covenants.
The Merger Agreement generally requires us to operate our business in the ordinary course, subject to certain exceptions, including as required by applicable law, pending consummation of the Mergers, and subjects us to customary interim operating covenants that restrict us, without Parent’s approval (such approval not to be unreasonably withheld, delayed or conditioned), from taking certain specified actions until the Mergers are completed or the Merger Agreement is terminated in accordance with its terms. These restrictions could prevent us from pursuing certain business opportunities that may arise prior to the consummation of the Merger and may affect our ability to execute our business strategies and attain financial and other goals and may impact our financial condition, results of operations and cash flows.
The announcement and pendency of the Mergers may result in disruptions to our business, and the Mergers could divert management's attention, disrupt our relationships with third parties and employees, any of which could negatively impact our operating results and ongoing business.
Our current and prospective employees may experience uncertainty about their future roles with us following the Mergers, which may materially adversely affect our ability to attract and retain key personnel and other employees while the Mergers are pending.
The pending Mergers could cause disruptions to our business or business relationships with our existing and potential tenants, sellers and other business partners, and this could have an adverse impact on our results of operations. Parties with which we have business relationships may experience uncertainty as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties, or seek to negotiate changes or alter their present business relationships with us. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties.
The pursuit of the Mergers may place a significant burden on management and internal resources, which may have a negative impact on our ongoing business. It may also divert management’s time and attention from the day-to-day operation of our businesses and the execution of our other strategic initiatives. This could adversely affect our financial results. In addition, we have incurred and will continue to incur other significant costs, expenses, and fees for professional services and other transaction costs in connection with the Mergers, and many of these fees and costs are payable regardless of whether or not the pending Mergers are consummated.
Any of the foregoing, individually or in combination, could materially and adversely affect our business, our financial condition and our results of operations and prospects.
An adverse judgment in any litigation that may be filed to challenge the Mergers may prevent the transaction from becoming effective or from becoming effective within the expected timeframe.
The Company may be subject to stockholder lawsuits challenging the Mergers and such suits may seek, among other things, to enjoin us from proceeding with the stockholder vote on the Mergers. No assurance can be made as to the outcome of these and other similar lawsuits, including the amount of costs associated with defending such claims or any other liabilities that may be incurred in connection with the litigation of such claims. If plaintiffs are successful in obtaining an injunction prohibiting completion the Mergers on the agreed-upon terms, such an injunction may delay the completion of the transaction in the expected timeframe or may prevent the transaction from being completed altogether. Whether or not any plaintiff’s claim is successful, such may result in significant costs and management’s attention and resources, which could affect the operation of our business.
Risks Relating to our Industry
If the MNOs or tower companies consolidate their operations, exit the wireless communications business or share site infrastructure to a significant degree, our business and profitability could be materially and adversely affected.
The U.S. wireless carrier industry has experienced, and may continue to experience, significant consolidation, such as the 2020 merger between Sprint and T-Mobile. Historically, consolidation among MNO’s has resulted in the decommissioning of certain existing communications sites, including due to overlap of the networks or the consolidation of different technologies. Internationally, MNO’s are increasingly entering into active and passive network sharing agreements or roaming or resale arrangements. These agreements could also result in decommissioning of certain existing communications sites due to network overlap or redundancy.
The Tenant Leases from which we derive most of our revenue can typically be terminated upon a very short notice period, generally 30 to 180 days, regardless of the length of the lease term. To the extent that an MNO does not need a redundant communications site, it may terminate the site’s lease prior to the end of the lease term or simply refuse to renew the lease. As part of our business strategy, we purchase the revenue stream under a lease from the site owner, typically including any renewal periods, and assumes the risk that such lease is early terminated or not renewed. As we do not have recourse to the site owner in the case of such early termination (absent fraud or breach of contractual representations or covenants by such site owner), our ongoing in-place rents and future results may be negatively
impacted if a significant number of these leases are terminated or not renewed, materially impairing the value of our real property and contractual interests in such sites.
Consolidation can also potentially reduce the diversity of the tenants from which we derive revenue and give tenants greater leverage over us, as their effective landlord, by increasing co-location on nearby existing sites and aggressively negotiating master lease terms for multiple sites, all of which could materially and adversely affect our revenue.
New technologies may significantly reduce demand for wireless infrastructure and therefore negatively impact our revenue and future growth.
Improvements in the efficiency of wireless networks could reduce the demand for the MNO’s or tower companies’ wireless infrastructure. For example, signal combining technologies that permit one antenna to service multiple frequencies and, thereby, more customers, may reduce the need for wireless infrastructure. In addition, other technologies, such as Wi-Fi, femtocells, other small cells, or satellite (such as low earth orbiting) and mesh transmission systems may, in the future, serve as substitutes for, or alternatives to, leasing additional tower or antennae sites that might otherwise be anticipated as wireless infrastructure had such technologies not existed. Any significant reduction in wireless infrastructure leasing demand resulting from the previously mentioned technologies or other technologies could materially and adversely affect our revenue, financial condition and future growth.
Perceived health risks from radio frequency (“RF”) energy could reduce demand for wireless communications services.
The U.S. and other governments impose requirements and other guidelines relating to exposure to RF energy. Exposure to high levels of RF energy can cause negative health effects. The potential connection between exposure to low levels of RF energy and certain negative health effects, including some forms of cancer, has been the subject of substantial study by the scientific community. According to the U.S. Federal Communications Commission, the results of these studies to date have been inconclusive. However, public perception of possible health risks associated with cellular and other wireless communications media could slow the growth of MNOs, which could in turn slow our growth. In particular, negative public perception of, and regulations regarding, health risks could cause a decrease in the demand for wireless communications, which could materially and adversely affect the demand for our assets, the revenue that we are able to generate, and the rate of growth in our business. Moreover, if a connection between exposure to low levels of RF energy and possible negative health effects, including cancer, were demonstrated, we could be subject to numerous relating to exposure to RF energy and, even if such ultimately had no merit, our financial condition could be materially and affected by having to such .
Risks Relating to our Business
We may become involved in expensive litigation or other contentious legal proceedings relating to our real property interests and contractual rights, the outcome of which is unpredictable and could require us to change our business model in certain jurisdictions or exit certain markets altogether.
The tenants under our Tenant Leases are typically MNO’s and tower companies that may have competitive or other concerns regarding the assignment of the right to receive lease payments to us from the site owners, and as a result some of these tenants may challenge our real property interests and contractual rights. For example, MNO’s and tower companies have challenged certain of our real property interests in Brazil, Chile, Colombia and the Netherlands and alleged that the grant of the real property interest in the land underlying the wireless tower or antennae violated either a contractual non-assignment provision or a statutory pre-emptive right. In addition, under eminent domain laws (or equivalent laws in jurisdictions outside of the United States), governments can take real property without the owner’s consent, sometimes for less compensation than the owner believes the property is worth. If these or similar claims are successful, we may not be able to continue to operate in those jurisdictions using our current business model, or at all, which could have a material adverse effect on our ability to acquire new assets or grow our business as planned.
Any litigation or other proceeding, even if resolved favorably, could require us to incur substantial costs and be a distraction to management. Also, such litigation could be used as a nuisance to disrupt our business. Litigation results are highly unpredictable, particularly in some of the jurisdictions in which we operate. Even if we believe we have a strong legal basis to defend such claims, we may not prevail in any litigation or other proceeding in which we may become involved. If we are unsuccessful in defending claims by our tenants relating to our business model in a
particular jurisdiction, it may be difficult or impossible to continue operations in those jurisdictions, or we may incur significant additional expense to adjust our business model in response to any legal order or judgment, any of which could have a material adverse effect on our business and results of operations.
Competition for assets could adversely affect our ability to achieve our anticipated growth.
If we are unable to make accretive acquisitions of real property interests and contractual rights in the revenue streams of Tenant Leases, our growth could be limited. As none of the individual revenue streams that we acquire are material, our business model requires us to identify and negotiate a significant number of new interests each year in order to deliver material growth. We may experience increased competition for these assets from new entrants to the industry. Further, in some jurisdictions, including Europe, the number of wireless towers and antennae owned by tower companies, as compared to MNOs, is growing quickly. These tower companies may be more likely to seek to own or control the land underlying their tower as that is their asset or service as compared to the MNOs who have traditionally allocated their capital to network development rather than acquisition of the underlying real property. This could make the acquisition of high-quality assets significantly more costly or prohibitive. The wireless tower companies may be larger than us and may have greater financial resources than we do, while other competitors may apply less stringent investment criteria than we do. Higher prices for assets or the failure to add new assets to our portfolio could make it more difficult to our anticipated returns on investment or future growth, which could materially and affect our business, results of operations or financial condition.
If the Tenant Leases for the wireless communication tower or antennae located on our real property interests are not renewed with similar rates or at all, our future revenue may be materially affected.
A significant portion (approximately 16% of revenue for the year ended December 31, 2022 and 14% of annualized in-place rents as of December 31, 2022) of the Tenant Leases located on communications sites on which we hold a property interest are either hold-over leases or will be subject to renewal over the next 12 months. The MNOs and tower companies are under no obligation to renew their ground or rooftop leases. In addition, there is no assurance that such tenants will renew their current leases with similar terms or rental rates even if they do want to renew. The extension, renewal or replacement of existing leases depends on a number of factors, several of which are beyond our control, including the level of existing and new competition in markets in which we operate; the macroeconomic factors affecting lease economics for our current and potential customers; the balance of supply and demand on a short-term, seasonal and long-term basis in our markets; the extent to which customers are willing to contract on a long-term basis and the effects of international, federal, state or local regulations on the contracting practices of our customers. Unsuccessful negotiations could potentially reduce revenue generated from the assets. As a result, we may not fully recognize the anticipated benefits of the assets that we acquire, which could have a material adverse effect on our results of operations and cash flow. For a definition of annualized in-place rents and a comparison to the most directly comparable GAAP financial measure, revenue, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures”.
Most of the Tenant Leases associated with our assets may be terminated upon limited notice by the MNO or tower company, and unexpected lease cancellations could materially impact cash flow from operations.
Most of the Tenant Leases associated with our assets permit the MNO or tower company tenant to cancel the lease at any time with limited prior notice, typically requiring the tenant to provide only 30 to 180 days’ advance notification to terminate the lease. Cancellations are determined by the tenants themselves in their sole discretion. For instance, sites are independently assessed by tenants for their ability to provide coverage. This assessment is made prior to construction or installation of the asset and there is no guarantee such coverage will remain static in the future due to independent developments, technological developments, property and infrastructure developments ( e.g. , construction
of new buildings and roads), foliage growth or other physical changes in the landscape that are unforeseeable and out of our control. We have previously experienced terminations and cancellations of leases for the following reasons:
network consolidations and mergers that make a particular tower site redundant for an MNO;
primarily in the United Kingdom, where the MNO has a shared lease with the tower company or tower owner and we only receive a portion of the shared rent;
the MNO secures an alternative site to allow it to save operational expenses; and
the MNO identifies a location that provides better coverage and renders the existing site obsolete or unused.
Such results could lead to site removal or relocation, leading to a reduction in our revenue. Any significant number of cancellations will adversely affect our revenue and cash flow.
If we are unable to protect and enforce our real property interests in, or contractual rights to, the revenue streams generated by leases on our communications sites, our business and operating results could be materially adversely affected.
Pursuant to our business model, we purchase the stream of future rental payments generated by an existing lease, and that will be generated by future leases, between a site owner and an owner or operator of a wireless communications tower or wireless antennae. As a lease generating such revenue stream already exists, our business model effectively puts us in the position of landlord without the consent of the MNO or tower operator. Where possible, we seek to purchase an “in rem” real property interest in the land underlying the wireless tower or antennae, typically easements, usufructs, leasehold and sub-leasehold interests, and fee simple interests. If that is not feasible due to local legal requirements or commercial limitations, we will purchase a contractual assignment of rents. As we are one of the first companies to develop an asset portfolio of revenue streams from existing wireless communications sites in some of the jurisdictions in which we operate, the “in rem” right that we have purchased has not traditionally been used in a commercial context. Consequently, our real property rights may be subject to challenge by third parties, including the MNOs or tower companies that are counterparties to the underlying site leases, or become subject to new regulations. Further, where we have rooftop easements (or comparable property interests), we are subject to the risk that the underlying property owners may block access to the rooftop. If we cannot enforce our real property and contractual rights, particularly to the extent any claim or regulatory constraint impacts a large number of our assets, our business and results of operations could be materially affected.
Due to the long-term expectations of revenue from our assets, our results are sensitive to the creditworthiness and financial strength of our tenants and their sub-lessees.
We have purchased, for an upfront fee, the future revenue stream pursuant to the underlying Tenant Leases and subsequent leases and do not have recourse to the site owner if the tenant fails to make such future payments (absent fraud or breach of contractual representations or covenants by such site owner). Due to the long-term nature of most cell site leases, including the Tenant Leases and their sub-leases, our financial performance is dependent on the continued financial strength of the tenants, including the MNOs, tower companies and other owners of structures where we own the attached property rights, many of whom operate with substantial leverage. Many tenants and potential tenants rely on capital raising activities to fund their operations and capital expenditures, and downturns in the economy or disruptions in the financial and credit markets may make it more difficult and more expensive to raise capital. If, as a result of a prolonged economic downturn or otherwise, one or more of our tenants experienced financial or filed for , such an event could result in accounts receivable and an of our deferred rent asset. In addition, it could result in the of significant customers and all or a portion of our anticipated lease revenue from certain tenants, all of which could have a material effect on our business, results of operations and cash flows. In addition, if the Tenant Lease tenants or sub-lessees (or potential tenants or sub-lessees) are to raise adequate capital to fund their business plans, they may reduce their spending, file for
bankruptcy, or terminate operations, which could materially and adversely affect demand for the communications sites and the rental rates that we will be able to charge upon renewal.
Certain of our real property interests are subordinated to senior debt such as mortgages on the underlying properties.
The real property interests and contractual rights we purchase typically relate to a portion of a larger parcel of land that is owned by the site owner from whom we acquired the interests or rights. As a result, mortgages and other encumbrances, including any tax liens, which attach to the parcel as a whole, may also attach to or have enforcement priority over our interests or rights. We make an effort to target investment opportunities that are free from mortgages and other encumbrances. Where that option is not available, we make an effort to obtain non-disturbance agreements or locally comparable protections on the real property interests we acquire on mortgaged sites, but sometimes we are unable to do so. Under certain circumstances and in the absence of a non-disturbance agreement or locally comparable protections, if the underlying property owner fails to comply with or make payments under debt arrangements that grant creditors with claims on the property that are senior to ours, an event of default may result, which would allow the creditors to on any of our real property interests and contractual rights associated with that site. Any such or could have a material effect on our results of operations and cash flow.
The tenants on the Tenant Leases underlying our assets may be exposed to force majeure events and other unforeseen events for which their insurance may not provide adequate coverage.
The communications sites underlying our real property interests and contract rights are subject to risks associated with natural disasters, such as ice and windstorms, fires, tornadoes, floods, hurricanes and earthquakes, as well as cyber-attacks, terrorism and other unforeseen damage. During the past several years, we have seen an increase in severe weather events, and expect this trend to continue due to climate change. Substantially all of the leases in our portfolio allow the tenants either to terminate the lease or to withhold rent payments until the site is restored to its original condition should such a disaster cause damage to one of these communications sites or the equipment on such site. While tenants generally maintain insurance coverage for natural disasters, they may not have adequate insurance to cover the associated costs of repair or reconstruction for a future major event. Furthermore, while all of the Tenant Leases require that the tenants have access to the communications site, we often must rely on the site owners to take all the necessary steps to restore access to the site. In the event of any to the communications equipment, federal, state and local regulations may restrict the ability to repair or rebuild towers or antennae. If the tenants are or to repair or rebuild due to , we may experience in revenue due to leases and/or lease payments that are withheld pursuant to the terms of the Tenant Lease while the site is repaired.
A substantial portion of our revenue is derived from a small number of MNOs or tower companies in each of the jurisdictions in which we operate, and the loss, consolidation or financial instability of any of our limited number of customers may materially decrease revenue.
In each of the jurisdictions in which we operate, there are a small number of MNOs or tower companies. Consequently, the loss of any one of our large customers as a result of consolidation, merger, bankruptcy, insolvency, network sharing, roaming, joint development, resale agreements with other MNOs or otherwise may result in (i) a material decrease in our revenue, (ii) uncollectible account receivables, (iii) an impairment of our deferred site rental receivables, site rental contracts, customer relationships or intangible assets or (iv) other adverse effects on our business. Additionally, the rental payments due to us from foreign affiliates and subsidiaries of large, nationally recognized MNOs or tower companies may not provide for full recourse to the larger, more creditworthy parent entities affiliated with our lessees.
We may not be able to consummate or successfully integrate future acquisitions into our business, which could result in unanticipated expenses and losses.
Part of our strategy has been to seek to grow through acquisitions of portfolios of assets or entities that are engaged in similar or complementary businesses. Our ability successfully to implement our acquisition strategy will depend on our ability to identify, negotiate, complete and integrate acquisitions and, if necessary, to obtain satisfactory debt or equity financing to fund those acquisitions. Mergers and acquisitions are inherently risky, and any mergers and acquisitions that we complete may not be successful. The process of integrating a large portfolio of assets or an acquired company’s business into our operations is challenging and may result in expected or unexpected operating
or compliance challenges, which may require significant expenditures and a significant amount of management’s attention that would otherwise be focused on the ongoing operation of our business. The potential difficulties or risks of integrating an acquired company’s business that could materially and adversely affect our business and results of operations include the following, which risks can be magnified when one or more integrations are occurring simultaneously or within a small period of time:
the effect of the acquisition on our financial and strategic positions and our reputation;
risk that we may be unable to obtain the anticipated benefits of the acquisition, including synergies, economies of scale, revenues and cash flow;
challenges in retaining, assimilating and training new employees;
potential increased expenditure on human resources and related costs;
retention risk with respect to an acquired company’s key executives and personnel;
potential disruption to our ongoing business;
investments in immature businesses or assets with unproven track records that have an especially high degree of risk, with the possibility that we may lose the value of our entire investment or incur additional unexpected liabilities (including becoming subject to foreign laws and regulations not previously applicable to us);
potential diversion of cash for an acquisition or integration activities that would limit other potential uses for cash including marketing and other investments;
the assumption of known and unknown debt and other liabilities and obligations of the acquired company;
potential integration risks relating to acquisition targets that had not previously maintained internal controls and policies and procedures over financial reporting as would be required of a public company, which may amplify our risks and liabilities with respect to our ability to develop and maintain appropriate internal controls and procedures; and
challenges in reconciling accounting issues, especially if an acquired company utilizes accounting principles different from those used by us.
Although our real property and contractual interests generally do not make us contractually responsible for the payment of real property taxes, in our U.S. operations, if the responsible party fails to pay real property taxes, the resulting tax lien could put our real property interest in jeopardy.
A majority of our real property and contractual interests (60% of revenue for the year ended December 31, 2022 and 55% of annualized in-place rents as of December 31, 2022) are subject to triple net or effectively triple net lease arrangements under which we are not responsible for paying real property taxes. In the United States, if the property owner or tenant fails to pay real property taxes, any lien resulting from such unpaid taxes would be senior to our real property interest or contract rights in the applicable site. Failure of the property owner or tenant to pay such real property taxes could result in our real property interest or contract rights being impaired or extinguished, or we may be forced to incur costs and pay the real property tax liability to avoid impairment of our assets. Internationally, although our real property interests would typically be senior to any subsequent tax lien, those assets that are contractual rights (such as an assignment of rents) could be subject to liens and be deemed subordinate to such governmental claims. For a definition of annualized in-place rents and a comparison to the most directly comparable
GAAP financial measure, revenue, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures”.
The failure of the property owner or tenant to maintain the property or infrastructure assets could result in a diminution of our real property and contractual interest, which could materially and adversely affect our results of operations.
We are not responsible for maintenance expenditures related to the property or infrastructure for real property and contractual interests subject to triple net or effectively triple net lease arrangements. Failure of the property owner or tenant to maintain the property or infrastructure could result in a diminution of our real property and contractual interests, or we may be forced to incur costs to maintain the property to avoid diminution of our assets. For example, the placement and performance of wireless transmissions might be impaired in a situation where a structure is not adequately maintained by the property owner, which would result in a diminution of the property. A diminution of the property could materially and adversely affect our results of operations through losses in revenue due to terminated Tenant Leases and/or lease payments that are withheld, lower lease renewal rates, the to lease the property, costs to maintain the assets and costs related to related to the of the property. For a definition of annualized in-place rents and a comparison to the most directly comparable GAAP financial measure, revenue, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures”.
Security breaches and other disruptions could compromise our information, which would cause our business and reputation to suffer.
As part of our day-to-day operations, we rely on information technology and other computer resources and infrastructure to carry out important business activities and to maintain our business records. We utilize both cloud infrastructure as well as on-premise systems physically located in our offices. These systems are subject to interruption or damage from power outages, internet service provider failures, computer viruses, security breaches, errors, catastrophic events such as natural disasters and other events beyond our control that could halt or impede our business activities. Depending on the nature and scope of the incident, backups might have to be restored in order to resume business. In extreme events, backup systems could become compromised as well.
If such systems and backup systems are compromised, degraded, damaged or breached, or otherwise cease to function properly, we could suffer interruptions in our operations or unintentionally allow misappropriation of proprietary or confidential information including information about the MNOs or tower companies or the site owners. This could damage our reputation and disrupt operations, which could adversely affect our business and operating results.
If we were to lose the services of certain members of senior management, it could negatively affect our business.
Our senior management developed our business model, have been integral in implementing this model in the jurisdictions in which we operate, and have deep industry relationships and knowledge. Our success depends to a significant extent upon the performance and active participation of our senior management key personnel. We cannot guarantee that we will be successful in retaining the services of members of our senior management. Although we have employment agreements with certain members of our senior management, these agreements do not ensure that those officers will continue with us in their current capacity for any particular period of time. If any of our key personnel were to leave or retire, we may not be able to find an appropriate replacement on a timely basis and our results of operations could be negatively affected.
Increased scrutiny and changing expectations from investors, lenders, employees, and others regarding our ESG practices and reporting could cause us to incur additional costs, devote additional resources and expose us to additional risks, which could adversely impact our reputation, asset and employee acquisition and retention, and access to capital .
Companies across all industries are facing increasing scrutiny related to their ESG practices and reporting. Investors, lenders, employees, and other stakeholders have begun to focus increasingly on ESG practices and to place increasing importance on the implications and social cost of their investments and business decisions. For example, an increasing number of investment funds focus on positive ESG practices and sustainability scores when making an investment decision. In addition, investors, particularly institutional investors, use ESG practices and scores to benchmark
companies against their peers and if a company is perceived as lagging, such investors may engage with a company to improve ESG disclosure or performance and may also make voting decisions on this basis. Given this increased focus and demand, public reporting regarding ESG practices is becoming more broadly expected. If our ESG practices and reporting do not meet investor, lender, or employee expectations, which continue to evolve, our reputation and asset acquisition and employee retention may be negatively impacted. Any disclosure we make may include our policies and practices on a variety of ESG matters, including human capital management, corporate governance, environmental compliance, employee health and safety practices, and workforce inclusion and diversity. It is possible that stakeholders may not be satisfied with our ESG reporting, our ESG practices or our speed of adoption. We could also incur additional costs and devote additional resources to monitoring, reporting and implementing various ESG practices. Our failure, or perceived failure, to meet the goals and objectives we set in any sustainability disclosure or the expectations of our various stakeholders could negatively impact our reputation, asset and employee retention, and access to capital.
Risks Relating to our Financial Performance or General Economic Conditions
We have a history of net losses and negative net cash flow; if we continue to grow at an accelerated rate, we may be unable to achieve profitability or positive cash flow at a company level (as determined in accordance with GAAP) for the foreseeable future.
We had an accumulated deficit as of December 31, 2022 and 2021, net losses for the years ended December 31, 2022 and 2021 and for the Successor period from February 10, 2020 to December 31, 2020 of $64.0 million, $69.7 million and $191.9 million, respectively, and net income of $6.2 million for the Predecessor period from January 1, 2020 to February 9, 2020. For the years ended December 31, 2022 and 2021 and for the Successor period from February 10, 2020 to December 31, 2020, we had negative cash flows from operating activities of $13.1 million, $14.5 million and $42.5 million, respectively, and negative cash flows from investing activities of $572.6 million, $470.7 million and $436.3 million, respectively. For the Predecessor period from January 1, 2020 to February 9, 2020, we had negative operating cash flows of $3.5 million and negative cash flows from investing activities of $22.6 million, respectively. Our accumulated deficit and net losses have historically resulted primarily from expenses incurred in acquiring assets, recognizing depreciation and amortization in connection with the properties we own and interest expense. Our negative cash flows have historically resulted from the substantial investments required to grow our business, including the significant increase in recent periods in the number of assets we have acquired. We expect that these costs and investments will continue to increase as we continue to grow our business. These expenditures will make it more for us to and cash flow from operations and investing activities, and we cannot predict whether we will for the foreseeable future.
Our results may be negatively affected by foreign currency exchange rates.
We conduct our business and incur costs in the local currencies of the countries in which we operate and, as a result, are subject to foreign exchange exposure due to changes in exchange rates, both as a result of translation and transaction risks.
We are exposed to foreign currency risk to the extent that we enter into transactions denominated in currencies other than our functional currencies (non-functional currency risk), such as our indebtedness. For example, we generate revenue from our Brazilian operations, which are denominated in Brazilian reals, while the indebtedness that funded those operations is presently denominated in Euros and Pound Sterling. Although we generally seek to match the currency of our obligations with the functional currency of the operations supporting those obligations, we are not always able to match the currency of our costs and expenses with the currency of our revenues. Changes in exchange rates with respect to amounts recorded in our consolidated financial statements related to these items will result in unrealized (based upon period-end exchange rates) or realized foreign currency transaction gains and losses upon settlement of the transactions.
Although substantially all of our operations are conducted in the local currency of the countries in which we operate, we are also exposed to unfavorable and potentially volatile fluctuations of the U.S. Dollar (our reporting currency), against the currencies of our operating subsidiaries when their respective financial statements are translated into U.S. Dollars for inclusion in our consolidated financial statements. Increasing exchange rate risk has been brought on by external factors such as increasing interest rates in the United States, as well as internal factors as a consequence of high fiscal and external deficits in some of the jurisdictions in which we operate. Volatility in exchange rates can
affect our reported revenue, margins and stockholders’ equity both positively and negatively and can make our results difficult to predict. Cumulative translation adjustments are recorded in accumulated other comprehensive earnings or loss as a separate component of equity. Any increase (or decrease) in the value of the U.S. D ollar against any foreign currency that is the functional currency of one of our operating subsidiaries will cause us to experience unrealized foreign currency translation losses (gains) with respect to amounts already invested in such foreign currencies. Accordingly, we may experience a positive or negative impact on our comprehensive earnings or loss and equity solely as a result of foreign currency translation. AP Wireless ’s primary exposure to exchange rate risk during the year ended December 31, 2022 was to the Euro and British P ound S terling, representing 45 % and 19 % of our reported revenue during the period, respectively. In addition, our reported operating results are impacted by changes in the exchange rates for the Brazilian real, Chilean peso, Australian D ollar, Mexican peso, Canadian D ollar, Colombian peso, Hungarian forint , Uruguayan Peso and Romanian leu. We generally do not hedge the risk that we may incur non-cash upon the translation of financial statements of our subsidiaries and affiliates into U.S. D ollars; however, even if we were to enter into such hedges, they may not be to off-set any such non-cash .
We have incurred a significant amount of debt and may in the future incur additional indebtedness. Our payment obligations under such indebtedness may, in the longer term, limit the funds available to us.
As of December 31, 2022 and 2021, we had total outstanding indebtedness of $1,536.4 million and $1,295.5 million, respectively, the majority of which was secured through multiple liens, pledges and other security interests on our assets. Our ability to make scheduled payments or refinance our obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. Taking into consideration our current cash on hand and our available credit facilities, including the maturity of such facilities, we do not believe our ability to service our debt and sustain our operations will be materially affected for at least a 12-month period following the date of this Form 10-K. In addition, we believe that our cash on hand, available restricted cash and future cash from operations of AP Wireless, together with our access to and the credit and capital markets, will provide adequate resources to provide both short-term and long-term liquidity. However, in the longer term, we may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness and to pursue growth. If our cash flows and capital resources are insufficient in the longer term to fund our obligations, we could face substantial liquidity problems and could be to reduce or investments and capital expenditures or to of material assets or operations, seek additional debt or equity capital or or refinance our indebtedness and other obligations or our lenders could seek to on our assets or could also sell all or substantially all of our assets under such or other realization upon those without prior approval of our stockholders. In the longer term, we may not be to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if , those alternative actions may not allow us to meet our scheduled debt obligations. For more information about our debt obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources”.
The terms of our debt agreements may restrict our flexibility in operating our business.
Under certain of our existing debt instruments, we and certain of our subsidiaries are subject to limitations regarding our business and operations, including limitations on the amounts of certain types of assets that can be acquired or the jurisdictions in which assets can be acquired, limitations on incurring additional indebtedness and liens, limitations on certain consolidations, mergers and sales of assets, and restrictions on the payment of dividends or distributions. Any debt financing that we secure in the future could involve additional restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital to pursue business opportunities, including potential acquisitions.
These restrictions could limit our ability to plan for or react to market conditions, meet extraordinary capital needs or otherwise take actions that we believe are in our best interests. Further, a failure by us to comply with any of these covenants and restrictions could result in an event of default that, if not waived or cured, could result in the acceleration of all or a substantial portion of the outstanding indebtedness thereunder. For more information about our debt
obligations and the covenants and restrictions thereunder, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources”.
Our growth strategy requires access to new capital, which could be impaired by unfavorable capital markets.
Our growth strategy requires significant capital as we primarily purchase for an upfront fee the future stream of rental payments. Any limitations on access to new capital will impair our ability to execute our growth strategy. If the cost of capital becomes too expensive, our ability to grow will be limited. We may not be able to raise the necessary funds on satisfactory terms, if at all. To the extent that we raise capital through issuance of equity, our stockholders may suffer significant dilution. To the extent that we raise capital through additional debt, that debt (i) may adversely affect our profitability, (ii) may be secured and (iii) would rank senior to any of our equity. We have historically raised a significant portion of our capital through the issuance of secured debt, which has a lower coupon rate than unsecured debt, but our ability to obtain secured debt in the future to execute our growth strategy is subject to our having sufficient assets eligible for securitization that are not subject to prior securitization from our existing debt. Weak economic conditions and and in the financial markets, including as a result of events such as the COVID-19 pandemic, could increase the cost of raising money in the debt and equity capital markets substantially while the availability of funds from those markets, which could materially impact our ability to implement our growth strategy.
A continued increase in market interest rates could increase our interest costs on future debt, reduce the value of our assets and affect the growth of our business, all of which may materially and adversely affect our results of operations and financial condition.
Fluctuations in interest rates may negatively impact our business. Interest rates are highly sensitive to many factors beyond our control, including general economic conditions, both domestic and foreign, and the monetary and fiscal policies of various governmental and regulatory authorities. Interest rates in the countries in which we operate have recently increased significantly from historic lows and may continue to increase in the future. As we continue to raise debt to help fund our business operations, if interest rates continue to increase or stay at higher than recent levels, so could our interest expense for new debt, making the financing of new assets costlier, and so would our interest expense on any variable interest rate indebtedness, which could adversely affect our financial condition and results of operations Rising interest rates could limit our ability to refinance existing debt when it matures or cause us to pay higher interest rates upon refinancing and increased interest expense on refinanced indebtedness. From time to time, we may manage our exposure to interest rate risk with interest rate hedge contracts that effectively fix or cap a portion of our debt. There can be no assurance that any hedging activities we may use will have the desired beneficial impact on our results of operations or financial condition, and if interest rates decrease, the fair market value of any existing interest rate hedge contracts on outstanding fixed-rate debt would .
Changes in interest rates may also affect the value of our assets and affect our ability to acquire new assets as site owners may be more reluctant to sell their interests during times of higher interest rates or may demand a higher cost than we have historically paid for our assets. If we cannot acquire additional assets at appropriate prices and returns or determine to pay higher amounts for additional assets, we will not be able to grow revenue to the extent expected, which could have a material adverse effect on our financial results and condition.
Our efforts to manage these exposures may not be successful. Developing an effective interest rate risk strategy is complex and no strategy can completely insulate us from risks associated with interest rate fluctuations.
Our revenue is primarily derived from lease payments due from MNOs and tower operators; consequently, a slowdown in the demand for wireless communication services may adversely affect our business.
Our assets consist primarily of real property interests in wireless communications sites and contractual rights to the revenue stream generated from Tenant Leases. If consumers significantly reduce their minutes of use or data usage or fail to widely adopt and use wireless data applications or new technologies, MNOs could experience a decrease in demand for their services. In addition, delays or changes in the roll out of new spectrum or deployment of new technologies could reduce consumer demand and otherwise materially and adversely affect our future growth and revenues. To the extent that that the demand for wireless communications services decreases, the owners and operators of wireless communications towers and antennae may be less willing or able to invest additional capital in their networks and may even reduce the number of wireless communications sites in their networks, all of which could
materially and adversely affect the demand for our assets, the revenue that we are able to generate, and the rate of growth in our business.
We may enter into additional credit agreements or mortgage, pledge, hypothecate or grant a security interest in all or a portion of our assets without prior approval of our stockholders.
We expect to incur additional debt to finance our operations all or a portion of which will be secured by a lien on our assets. We anticipate that the leverage we employ will vary depending on our ability to sell additional Company debt, obtain credit facilities, the targeted leveraged return we expect from our portfolio and our ability to meet ongoing covenants related to our asset mix and financial performance. Our results of operations and cash flow may be materially adversely affected to the extent that changes in market conditions cause the cost of our future financings to increase. Any significant indebtedness incurred by us or our subsidiaries could have the following material consequences, among others:
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of cash flow to fund acquisitions, working capital, capital expenditures, dividends, research and development efforts and other general corporate purposes;
increase the amount of our interest expense because our borrowings could include instruments with variable rates of interest, which, if interest rates increase, would result in higher interest expense;
increase our vulnerability to general adverse economic and industry conditions;
limit our ability to make strategic acquisitions, introduce new technologies or exploit business opportunities;
place us at a competitive disadvantage compared to our competitors that have less indebtedness; and
limit, among other things, our ability to borrow additional funds.
Inflation may adversely affect our financial condition and results of operations.
A significant majority of our Tenant Leases contain contractual rent escalators that are either tied to a local CPI or subject to OMV. However, contractual rent escalators are not part of all of our Tenant Leases. Increased inflation could have a more pronounced negative impact on our selling, general and administrative expenses, as these costs could increase at a rate higher than the escalations of our rents. Inflation also may adversely affect expenses associated with Tenant Leases that are not triple net lease arrangements, which, under such leases, could result in the rate of increase in operating expenses to exceed the rate of increase resulting from the contractual rent escalators or the incurrence of incremental expenses that may precede the timing of the impact of rent escalations on our reported revenue.
We are a holding company whose principal source of operating cash is the income received from our subsidiaries, which may limit our ability to pay dividends or satisfy our other financial obligations.
We are a holding company with no material assets other than our limited liability company interests in APW OpCo, and therefore we have no independent means of generating revenue or cash flow. To the extent APW OpCo has available cash, we intend to cause APW OpCo to (i) make distributions to its unitholders, including us, in an amount sufficient to cover all applicable taxes at assumed tax rates and (ii) reimburse us for our expenses. Our ability to pay dividends will be dependent upon the financial results and cash flows of APW OpCo and distributions received from APW OpCo with respect to our limited liability company interests in APW OpCo. The amount of distributions and dividends, if any, that may be paid from APW OpCo to us will depend on many factors, including its results of operations and financial condition, limits on dividends under applicable law, our subsidiaries’ constitutional documents and documents governing any indebtedness of our subsidiaries, and other factors that may be outside our control. If our subsidiaries are unable to generate sufficient cash flow or APW OpCo does not make distributions to us with respect to our limited liability company interests in APW OpCo for any other reason, we may be unable to make distributions and dividends on the Class A Common Stock, pay our expenses or satisfy our other financial
obligations, including our obligations to service and repay our indebtedness and to pay any dividends that may be required to be paid in respect of the Series A Founder Preferred Stock.
Risks Relating to Laws and Regulation
Our operations outside the U.S. are subject to economic, political, cultural and other risks that could materially and adversely affect our revenues or financial position, including risks associated with fluctuations in foreign currency exchange rates.
For the year ended December 31, 2022, approximately 84% of AP Wireless’s revenue arose from business operations outside the U.S., and approximately 86% of AP Wireless’s annualized in-place rents as of December 31, 2022 arose from business operations outside the U.S. For a definition of annualized in-place rents and a comparison to the most directly comparable GAAP financial measure, revenue, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Non-GAAP Financial Measures”. We anticipate that the overall proportion of revenues from our international operations will continue to grow. Accordingly, our business is subject to risks associated with doing business internationally that could materially and adversely affect our business and results of operations, including:
laws and regulations that dictate how we conduct business, including zoning, maintenance and environmental matters, and laws related to ownership of real property interests;
uncertain, inconsistent or changing interpretations of laws and regulations, especially those that address our business model, as well as judicial systems that may move more slowly, or be more unpredictable, than U.S. judicial systems;
changes in a specific country’s or region’s political or economic conditions, including inflation or currency devaluation;
laws affecting communications infrastructure, including the sharing of such infrastructure;
laws and regulations that tax or otherwise restrict repatriation of earnings or other funds or otherwise limit distributions of capital;
changes to existing or enactment of new domestic or international tax laws;
expropriation and governmental regulation restricting foreign ownership or requiring reversion or divestiture;
laws and regulations governing employee relations, including occupational health and safety matters and employee compensation and benefits matters;
our ability to comply with, and the costs of compliance with, anti-bribery laws such as the U.S. Foreign Corrupt Practices Act of 1977, the United Kingdom Bribery Act 2010 and similar international anti-bribery laws;
changes to zoning regulations or construction laws, which could be applied retroactively to our existing communications sites;
reluctance or unwillingness of communications site property owners in an existing country of our operations, or in a new country that we determine to enter, generally to do business with a U.S.-
headquartered company or a company engaged in our business, especially where there is no history of such a business in the country; and
actions restricting or revoking the MNOs’ spectrum licenses or suspending or terminating business under prior licenses.
The Electronic Communications Code enacted in the United Kingdom may limit the amount of lease income we generate in the United Kingdom, which would have a material adverse effect on our results of operations and financial condition.
The Electronic Communications Code, which came into force on December 28, 2017 as part of the United Kingdom’s Digital Economy Act 2017, governs certain relationships between landowners and operators of electronic communications services, such as cellular towers. It gives operators certain rights to install, inspect and maintain electronic communications apparatus including masts, cables and other equipment on land, even where the operator cannot agree with the landowner as to the terms of the rights. Among other measures, the Electronic Communications Code restricts the ability of landowners to charge premium prices for the use of their land by basing the consideration paid on the underlying value of the land, not the value attributable to the high public demand for communications services and provides authority to the courts to determine the rent if the parties are unable to come to agreement. As a result, our future results may be negatively impacted if a significant number of our leases in the United Kingdom are renegotiated at lower rates. Our revenue for the year ended December 31, 2022 and annualized in-place rent as of December 31, 2022 generated by property located in the United Kingdom was approximately 19% and 15%, respectively. A material reduction in our revenue and annualized in-place rents in the United Kingdom would have a material adverse impact on our results of operations and financial condition.
We have devoted and continue to devote a significant amount of management attention and resources to mitigating the potential adverse impact of the Electronic Communications Code, including through dispute resolution, as new and existing tenants in the United Kingdom have attempted to materially reduce the amount of rents paid to us under leases as a result of this law. We cannot provide any assurances that we will be able to mitigate the potential adverse impact of this law on our business in the United Kingdom. The government of the United Kingdom has recently passed the Product Security and Telecommunications Infrastructure Act (the “PSTI”) which amends certain provisions of the Electronic Communications Code. Part of the PSTI extends the valuation provisions currently in the Electronic Communications Code to a wider number of agreements which we hold. This may have a material adverse effect on our results of operations and financial condition.
Unforeseen liabilities under environmental laws could have a material adverse effect on our results of operations and cash flow.
Laws and regulations governing the discharge of materials into the environment or otherwise relating to the protection of the environment are applicable to the communications sites in which we have a real property interest and to the businesses and operations of our lessees, property owners and other surface owners or operators. International, federal, state and local government agencies issue regulations that often require difficult and costly compliance measures that carry substantial administrative, civil and criminal penalties and that may result in injunctive obligations for non-compliance. These laws and regulations often require permits before operations commence, restrict the types, quantities and concentrations of various substances that can be released into the environment, require remediation of released substances, and limit or prohibit construction or operations on certain lands ( e.g. , wetlands). Although we do not conduct any operations on our properties, the MNOs or tower companies on our communications sites may maintain small quantities of materials that, if released, would be subject to certain environmental laws. Similarly, the site owners, lessees and other surface interest owners may have liability or responsibility under these laws that could have an indirect impact on our business. For those communications sites in which we hold real property interests that are not full fee simple ownership, our liability is typically limited to caused by our actions. However, in limited circumstances, certain jurisdictions may seek to impose liability if all other owners are not available. With respect to the communications sites that we own in fee simple, we are subject to environmental liability in accordance with local law. Although we do not acquire interests in connection with real property where we are aware that there are or may be any environmental issues, in connection with our core lease prepayment business we generally do not conduct any environmental due diligence such as Phase 1 Environmental Assessments in the United States or similar inquiries outside the United States. Our agreements with lessees, counterparties and other surface owners generally include environmental representations, warranties and indemnities to minimize the extent to which we may be
financially responsible for liabilities arising under these laws. However, these counterparties may not have the financial ability to comply with their assumed obligations, which may have a material adverse effect on our results of operations.
We are subject to laws, regulations and other legal obligations related to privacy, data protection, information and cybersecurity, and the costs of compliance with, and potential liability associated with, our actual or perceived failure to comply with such obligations could harm our business.
We collect, use, disclose, store and data of (i) site owners who have agreements with mobile network operators and telecommunication infrastructure providers, (ii) the MNOs and tower companies from whom we receive rental payments, (iii) our employees, and (iv) other service providers. As discussed in more detail in “Business—Privacy and Data Protection,” handling of data is subject to a variety of state, local, and foreign laws and regulations, as well as contractual obligations and industry standards. Regulatory focus on data privacy and security concerns continues to increase globally, and laws and regulations concerning the collection, use and disclosure of personal information are expanding and becoming more complex. We are continuing to assess the impact of new and proposed data privacy and protection laws and proposed amendments to existing laws on our business.
U.S. and global laws and regulations may require notification to individuals and government authorities in the event of a breach of certain personal data, which could result in increased costs stemming from the notification itself or a regulatory inquiry. In addition, our data handling is subject to contractual obligations and industry standards. Any changes in privacy and data protection laws or regulations could also adversely impact the way we use e-mail, text messages and other marketing techniques and could require changes to our marketing strategies. In addition, although we endeavor to comply with our published privacy and data protection policies, we may at times fail to do so or may be perceived to have failed to do so. Moreover, despite our efforts, we may not be successful in achieving compliance if our employees or vendors fail to comply with our published policies. Such failures can subject us to potential international, local, state and federal action if they are found to be , , or misrepresentative of our actual practices.
Our entities entered into data transfer agreements, which establish mechanisms for the transfer of information internationally (e.g., among our different entities from the EU or the United Kingdom to the United States or Latin America). We annually review the data transfer agreement terms to update them to newly implemented or modified privacy laws. However, there are certain unsettled legal issues regarding the adequacy of data transfers among different jurisdictions, the resolution of which may adversely impact our ability to process and transfer personal data.
Our efforts to comply with privacy, data protection and information security laws, regulations and other obligations, which include a long-term engagement with a cybersecurity firm to assess information technology security and implement leading practices, penetration testing by independent external parties on a recurring basis and investment in additional server hardware and licenses to monitor security events through the use of a Security Information and Event Management System, are costly, and we may encounter difficulties, delays or significant expenses in connection with our compliance, or because of our customers’ need to comply or our customers’ interpretation of their own legal requirements. Any failure or perceived failure by us, a company that we acquire, or one of our technology service providers to comply with laws, regulations, policies, legal or contractual obligations, industry standards or regulatory guidance relating to privacy or data security could result in governmental investigations and enforcement actions, litigation, fines and penalties, exposure to indemnification obligations or other liabilities, and publicity, all of which could have an effect on our reputation, as well as our business, financial condition, and results of operation.
The frequency, intensity, and sophistication of cyber-attacks, ransom-ware attacks, and other data security incidents has significantly increased in recent years. Such incidents or attacks may also include the use of data in our systems in a manner inconsistent with our policies, terms, and other documentation. As with many other businesses, our information systems are a target of attacks and we are continually at risk of being subject to attacks and incidents. Due to the increased risk of these types of attacks and incidents, we expend significant resources on information technology and data security tools, measures, and processes designed to protect our information technology systems, as well as the personal, confidential, or sensitive information stored on or transmitted through those systems, and to help ensure an effective response to any cyber-attack or data security incident. Given the evolving nature of security threats and evolving safeguards, there can be no assurance that any preventive, protective, or remedial measures are or will be adequate to address threats that arise. Even security measures that are appropriate, reasonable, and/or in accordance
with applicable legal requirements may not be able to fully protect our information technology systems and the data contained in those systems, or our data that is contained in third parties’ systems. Additionally, while we have implemented security measures that we believe are appropriate, a regulator could deem our security measures not to be appropriate given the lack of prescriptive measures in certain data protection laws. Whether or not these measures are ultimately successful, related expenditures could have an adverse impact on our financial condition and results of operations and divert management’s attention from pursuing our strategic objectives.
While we have purchased cybersecurity insurance, there are no assurances that the coverage would be adequate in relation to any incurred losses. Moreover, as cyber-attacks increase in frequency and magnitude, we may be unable to obtain cybersecurity insurance in amounts and on terms we view as adequate for our operations.
Risks Relating to our Securities
We have been, and may in the future, be required to issue additional Class A Common Stock pursuant to the terms of the Series A Founder Preferred Stock, and such additional issuances may dilute your interests in the Class A Common Stock.
The terms of the Series A Founder Preferred Stock provide that (i) the Series A Founder Preferred Stock will, in accordance with its terms, automatically convert into Class A Common Stock on a one-for-one basis (subject to adjustment in accordance with our restated certificate of incorporation (the “Charter”)) on December 31, 2027 and (ii) some or all of the Series A Founder Preferred Stock may be converted at the option of the holder, at any time, five trading days following our receipt of a written request from the holder.
In addition, as described more fully in “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities–Dividend Policy,” pursuant to the Charter, the holders of Series A Founder Preferred Stock are entitled to receive, when, as and if declared by the Board, out of assets legally available therefor, a cumulative annual dividend of the Annual Dividend Amount as defined in the Charter) under certain circumstances. Such Annual Dividend Amount will be payable in Class A Common Stock or cash, in the sole discretion of the Board. With respect to the 2021 Annual Dividend Amount, on May 13, 2022, the Board paid a stock dividend of 2,523,472 shares of Class A Common Stock to the holders of the Series A Founder Preferred Stock. Concurrently with the dividend payment, rollover distributions of Class B Common Units held in tandem with the shares of Class B Common Stock were made to the holders of the Series A Rollover Profits Units of APW OpCo, and we issued 138,005 shares of Class B Common Stock to the holders of the Series A Rollover Profits Units of APW OpCo.
The precise number of shares of Class A Common Stock that we may issue pursuant to the terms of the Series A Founder Preferred Stock cannot be ascertained at this time. The issuance of Class A Common Stock pursuant to the terms of the Series A Founder Preferred Stock will increase the number of shares of Class A Common Stock outstanding and dilute your interests in our Class A Common Stock and may have an adverse effect on the market price of the Class A Common Stock.
We may be required to issue additional Class A Common Stock pursuant to the terms of the APW OpCo LLC Agreement upon the redemption or exchange of certain APW OpCo units, which may dilute your interests in the Class A Common Stock.
A member of APW OpCo (other than the Company) holding Class B Common Units pursuant to the Second Amended and Restated Limited Liability Company Agreement of APW OpCo, dated as of July 31, 2020, by and between its members and the Company (the “APW OpCo LLC Agreement”) that are redeemable in accordance with the terms of the APW LLC Operating Agreement (“Redeemable Units”) may cause APW OpCo to redeem such Redeemable Units upon compliance with the procedures set forth in the APW OpCo LLC Agreement. Upon redemption of the Redeemable Units, the holders thereof will be entitled to receive either (i) a number of shares of Class A Common Stock equal to such Redeemable Units (the “Share Settlement”) or (ii) immediately available U.S. Dollars in an amount determined in accordance with the procedures set forth in the APW OpCo LLC Agreement (the “Cash Settlement”) by our independent Directors who are independent for the purposes of the governance standards set forth in section 5600 of the Nasdaq Listing Rules, as the context requires (the “Independent Directors”), who are disinterested. The Independent Directors who are disinterested may, in accordance with the procedures set forth in the APW OpCo LLC Agreement, also effect the direct exchange of such Redeemable Units for the Share Settlement or the Cash Settlement, as applicable, rather than through a redemption by APW OpCo. Simultaneous with such
redemption (or direct exchange), the member of APW OpCo whose Redeemable Units were redeemed or exchanged is required to surrender to us for no consideration, and we are required to cancel for no consideration, a number of shares of our Class B Common Stock or the shares of our Series B Founder Preferred Stock), as applicable, equal to the number of Redeemable Units so redeemed or exchanged. The issuance of additional Class A Common Stock pursuant to a redemption or exchange of Redeemable Units pursuant to the APW OpCo LLC Agreement will increase the number of shares of Class A Common Stock outstanding and may therefore dilute your interests in our Class A Common Stock and/or have an adverse effect on the market price of the Class A Common Stock.
We will be required to issue additional Class A Common Stock upon the exercise of our options, which may dilute your interests in the Class A Common Stock.
As of December 31, 2022, we had outstanding options to acquire 4,392,415 shares of Class A Common Stock (1,335,515 of which were vested). The exercise of such options will result in a dilution of the value of a stockholder’s interests in our Class A Common Stock. The potential for the issuance of additional Class A Common Stock pursuant to exercise of the Options could have an adverse effect on the market price of the Class A Common Stock.
Holders of our Common Stock will have the right to elect only five out of our nine Directors, which will limit the ability of such holders to influence the composition of the Board.
Pursuant to the Charter, so long as TOMS Acquisition II LLC, Imperial Landscape Sponsor LLC, Digital Landscape Partners Holding LLC (an entity controlled by TOMS Acquisition II LLC and Imperial Landscape Sponsor LLC) and William H. Berkman (collectively, the “Founder Entities”), their affiliates and their permitted transferees under the Shareholders Agreement in the aggregate hold 20% or more of the issued and outstanding Founder Preferred Stock, such holders will, acting together, have the right to appoint four of the nine directors on the Board (such Directors, the “Founder Directors”), two appointed by William Berkman and Berkman Family Investments, LLC and two appointed by Digital Landscape Partners Holding LLC. In addition, Berkman Family Investments, LLC, on behalf of William Berkman, Scott Bruce, Richard Goldstein and their permitted transferees, will have the right to designate a majority of the Nominating and Governance Committee of the Board, and at least four-ninths of any other committee of the Board will be comprised of Founder Directors or other Directors selected by them. As of December 31, 2022, the Founder Entities hold approximately 94% of the outstanding Series A Founder Preferred Stock. Further, so long as Founder Preferred Stock remain outstanding, we may not increase the size of the Board to more than nine Directors without the prior vote or consent of the holders of at least 80% in voting power of the outstanding Founder Preferred Stock.
In addition, for so long as Centerbridge Partners Real Estate Fund, LP., Centerbridge Partners Real Estate Fund SBS, LP. and Centerbridge Special Credit Partners III, LP., each of which are entities affiliated with Centerbridge Partners, LP (collectively, the “Centerbridge Entities”) hold at least 50% of the Class A Common Stock that they purchased under that certain Subscription Agreement, dated as of November 20, 2019, by and among the Company and the Centerbridge Entities, as amended and supplemented (or any of our shares issued in exchange therefor, including Class A Common Stock), they are entitled to nominate one Director to the Board, subject to reasonable approval by AP Wireless. As of the date of this Form 10-K, the Centerbridge Entities hold 100 % of such shares.
As a result, holders of our Common Stock other than the Founder Entities, their affiliates and their permitted transferees under the Shareholders Agreement, and the Centerbridge Entities will have the right to elect only four out of our nine Directors, which will limit such holders’ ability to influence the composition of the Board and, in turn, potentially influence and impact future actions taken by the Board.
Anti-takeover provisions in our organizational documents and under Delaware law could delay, discourage or prevent takeover attempts or changes in our management that stockholders may consider favorable.
Our Charter and bylaws (the “Bylaws”) contain provisions that could have the effect of delaying, discouraging or preventing takeover attempts or changes in our management without the consent of the Board. These provisions include:
that so long as the Founder Entities, their affiliates and their permitted transferees under the Shareholders Agreement in aggregate hold 20% or more of the issued and outstanding Founder
Preferred Stock, four of our nine Directors will be Founder Directors, appointed by such without any vote of the holders of our Common Stock;
no cumulative voting in the election of directors, which may limit the ability of minority stockholders to elect Director candidates;
the exclusive right of our Board to elect a director to fill a vacancy on the Board resulting from an increase in the authorized number of directors, or from death, resignation, disqualification, removal or other cause (subject to the rights of the holders of the Founder Preferred Stock), which prevents stockholders from being able to fill vacancies on our Board;
a prohibition on stockholder action by written consent (subject to exceptions for action by holders of the Founder Preferred Stock), which forces stockholder action to be taken at an annual or special meeting of our stockholders;
the ability of our Board to issue preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
the requirement that an annual meeting of stockholders may be called only (a) by (i) the chairman or a co-chairman of the Board, (ii) the chief executive officer, (iii) the Board or (iv) an officer authorized by the Board to do so or (b) upon the written request of holders of at least 30% of the voting power of our outstanding capital stock, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;
advance notice procedures that stockholders must comply with in order to nominate candidates to our Board or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us;
limitations on the liability of, and the provision of indemnification to, our directors and officers; and
absent our written consent to an alternative forum, the exclusive jurisdiction of the Court of Chancery of the State of Delaware or, in the case of actions arising under the Securities Act, the federal district courts of the United States, for certain actions against us.
In addition, we and our organizational documents will be governed by Delaware law. The application of Delaware law to us may have the effect of deterring hostile takeover attempts or a change in control. In particular, Section 203 of the General Corporation Law of the State of Delaware (the “DGCL”) imposes certain restrictions on “business combinations” (defined to include mergers, asset sales and other transactions) between us and “interested stockholders” (defined to include persons who hold 15% or more of our voting stock and their affiliates). Any provision of the Charter or Bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their securities and could also affect the price that some investors are willing to pay for our securities.
The Charter provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between us and our stockholders. The Charter also provides that the federal district courts of the United States are the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. These choices of forum provisions could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our Directors, officers or employees.
The Charter provides that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for: (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our Directors, officers or employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, the Charter or the Bylaws and (iv) any action asserting a claim that is governed by the internal affairs doctrine of the State of Delaware (in each case, unless the Court of Chancery of the State of Delaware lacks jurisdiction over any such action or
proceeding, in which case the sole and exclusive forum for such action or proceeding will be another state or federal court located within the State of Delaware).
The Charter also provides that, unless we consent in writing to an alternative forum, the federal district courts of the United States is the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. While the Delaware Supreme Court has recently upheld provisions of the certificates of incorporation of other Delaware corporations that are similar to this forum provision, a court of a state other than the State of Delaware could decide that such provisions are not enforceable under the laws of that state.
Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of and have consented to the forum provisions in the Charter. These choices of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our Directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provisions contained in the Charter to be inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.
Neither the Delaware nor the Securities Act forum provisions are intended by us to limit the forums available to our stockholders for actions or proceedings asserting claims arising under the Exchange Act.
General Risk Factors
Future sales of substantial amounts of our securities, or the perception that such sales could occur, may have an adverse effect on the price of our securities.
Sales of substantial amounts of the Class A Common Stock or our other securities in the public market, particularly sales by our directors, executive officers and significant stockholders, or the perception that these sales could occur, could adversely affect the market price of our Class A Common Stock and could impair our ability to raise capital through the sale of additional equity securities.
The market price of our securities may fluctuate significantly, and such volatility could adversely affect your investment in our securities.
Fluctuations in the market price of our securities could contribute to the loss of all or part of your investment in our securities. Even if an active market for our securities develops and is maintained, the market price of our securities could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in our securities and our securities may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of our securities may not recover and may experience a further decline. A decline in the market price of our securities
also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.
Factors that may cause the market price of our securities to fluctuate significantly include, among others:
quarterly variations in our operating results;
interest rate changes;
our operating results failing to meet the expectation of securities analysts or investors in a particular period;
operating and stock price performance of other companies that investors deem comparable to us;
additions or departures of our Directors or executive officers;
material announcements by us or our competitors;
sales of substantial amounts of our securities by our Directors, executive officers or significant stockholders, or the perception that such sales could occur;
announcement or expectation of additional equity or debt financing efforts by us;
general economic and political conditions such as recessions, acts of war or terrorism and global pandemics such as the COVID-19 pandemic; and
the risk factors set forth in this Form 10-K and other matters discussed herein.
Furthermore, broad market and industry factors could cause the market price of our securities to materially decline. The stock markets have experienced significant price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance of the particular companies affected. A loss of investor confidence in the market for retail stocks or the stocks of other companies that investors perceive to be similar to us, as well as fluctuations in general economic, political and market conditions, could depress the price of our securities regardless of our business, prospects, financial conditions or results of operations.
