UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934
For the fiscal year ended December 31, 20172022
OR | | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to
Commission File Number: 001-38285
Bandwidth Inc.BANDWIDTH INC.
(Exact name of registrant as specified in its charter)
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| Delaware | | 56-2242657 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
900 Main Campus Drive
Raleigh, NC 27606
(Address of principal executive offices) (Zip Code)
(800) 808-5150
(Registrant’s telephone number, including area code)
Securities registered pursuantRegistered Pursuant to Section 12(b) of the Act:
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| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Class A Common Stock, par value $0.001 per share | | BAND | | NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:Act. Yesox Nox☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act:Act. Yeso☐ Nox
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx Noo☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ☐ | Accelerated filer | ☐☒ |
| Non-accelerated filer | ☒ (Do not check if a smaller reporting company)☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☒☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of November 10, 2017,June 30, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, was $203.4$448.3 million based upon $21.19 per share,
the closing price reported for such date on the NASDAQ Global Select Market.
As of January 31, 2018, 4,197,831February 17, 2023, 23,477,180 shares of the registrant’s Class A common stock and 13,441,9761,965,170 shares of registrant’s Class B common stock were outstanding, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitiveregistrant’s Definitive Proxy Statement for the 20182023 Annual Meeting of Stockholders are incorporated herein by
reference in Part II and Part III of this Annual Report on Form 10-K to the extent stated herein. Such Definitive Proxy Statement will be filed
with the Securities and Exchange Commission within 120 days of the registrant'sregistrant’s fiscal year ended December 31, 2017.2022.
Bandwidth Inc.BANDWIDTH INC.
Annual Report on Form 10-K
For the Year Ended December 31, 20172022
TABLE OF CONTENTS
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Item 9B. | | |
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Item 15. | | |
Item 16. | | |
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”). All statements contained in this Annual Report on Form 10-K, other than statements of historical fact, are forward-looking statements. Forward-looking statements generally can be identified by the words “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” "would," "project," "plan,"“would,” “project,” “plan,” “estimate,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations strategy, plans or intentions. Forward lookingForward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about:
•our beliefs regarding the impact of macroeconomic conditions, including inflationary and/or recessionary pressures, on our business and financial condition;
•our ability to attract and retain customers, including large enterprises;
•our approach to identifying, attracting and keeping new and existing customers, as well as our expectations regarding customer turnover;
•our beliefs regarding network traffic growth and other trends related to the usage of our products and services;
•the impact of our customers’ violation of applicable laws, our policies or other misuse of our platform;
•our ability to successfully defend our network, systems and data against ever-evolving cybersecurity threats, including denial-of-service and ransomware attacks;
•our expectations regarding revenue, costs, expenses, gross margin, dollar based net retention rate, Adjustedadjusted EBITDA, non-generally accepted accounting principles in the United States of America (“GAAP”) net income and capital expenditures;
•our beliefs regarding the growth of our business and how that impacts our liquidity and capital resources requirements;
•our expectations about the impact of public health epidemics, such as COVID-19 (as defined herein), or natural disasters on the global economy and our business, results of operations and financial condition;
•the sufficiency of our cash and cash equivalents to meet our liquidity needs;
•our ability to attract, train, and retain qualified employees and key personnel;
•our beliefs regarding the expense and productivity of and competition for our sales force;
•our expectations regarding headcount;
•our ability to maintain and benefit from our corporate culture;
•our plans to further invest in and grow our business, including international offerings, and our ability to effectively manage our growth and associated investments;
•our ability to introduce new products and services and enhance existing products and services;
•our ability to successfully integrate and benefit from any strategic acquisitions, including our acquisition of Voxbone (as defined herein), or future strategic acquisitions or investments;
•our ability to effectively manage our international operations and expansion;
•our ability to compete successfully against current and future competitors;
•the evolution of technology affecting our products, services and markets;
•the impact of certain new accounting standards and guidance, as well as the time and cost of continued compliance with existing rules and standards;
•our beliefs regarding the use of non-GAAPNon-GAAP financial measures;
•our ability to comply with modified or new industry standards, laws and regulations applicable to our products, services and business, including the General Data Protection Regulation (“GDPR”), the California Consumer Privacy Act of 2018 and other privacy regulations that may be implemented in the future, and Secure Telephone Identity Revisited and Signature-based Handling of Asserted Information Using toKENs (“STIR/SHAKEN”), and other robocalling prevention and anti-spam standards and increased costs associated with such compliance;
•our ability to manage fees that have been or may be instituted by network providers that increase our costs;
•our ability to maintain, protect and enhance our intellectual property;
•our expectations regarding litigation and other pending or potential disputes;
•our ability to comply with modified or new lawsservice the interest on our Convertible Notes (as defined herein) and regulations;repay such Convertible Notes, to the extent required; and
the increased expenses associated with being a public company.
•other risks related to our indebtedness.
We caution you that the foregoing list may not contain all the forward-looking statements made in this Annual Report on Form 10-K.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled "Risk Factors"
“Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
Risk Factors Summary
The following is a summary of the principal risks that could adversely affect our business, results of operations and financial condition.
Risks Related to Our Business
•Our future growth and the success of our expansion plans depend on a number of factors that are beyond our control.
•Our growth and financial health are subject to a number of economic risks.
•The market in which we participate is highly competitive, and we may not compete effectively.
•We may not be able to attract new customers in a cost-effective manner.
•The market for some of our services is new and unproven, and may decline or experience limited growth.
•Our ability to meet our goals for revenue growth, cash flow and operating performance depends on customers increasing their use of our services.
•We may not be able to increase the revenue that we derive from enterprises.
•We may not be able to develop service enhancements or new services that achieve market acceptance.
•As we continue to expand geographically and otherwise, we may experience difficulty maintaining our corporate culture and operational infrastructure.
•We have grown rapidly, and may not be able to manage the growth effectively.
•Our pricing and billing systems are complex, and errors could adversely affect our results of operations.
•We must continue to develop effective systems to support our business.
•We may not be able to maintain and enhance our brand and increase market awareness.
•Failure to deliver high-quality support may adversely affect our customer relationships.
•We operate internationally, which exposes us to significant risks.
•The military conflict between Russia and Ukraine, including an expansion of that conflict to other areas, may adversely affect our business.
•If the COVID-19 infection rate returns to pandemic levels, it may harm our business and results of operations.
•Some of our revenue is concentrated in a limited number of enterprise customers.
•Attacks on or breaches of our networks or systems, or on those of third parties on which we rely, including denial-of-service and other cyberattacks, may result in disruption to our services, which could harm our business.
•We are currently subject to litigation, including litigation related to taxes and charges associated with our provision of 911 services.
•Customer misuse of our services and software could result in litigation and harm our business.
•We are subject to litigation in the ordinary course of business, which may harm our business.
•The communications industry faces significant regulatory uncertainties.
•The effects of increased regulation of IP-based service providers are unknown.
•We must obtain and maintain numerous licenses and permits, in the United States and internationally, to operate our network.
•If we violate regulatory requirements that apply to our operations, we may not be able to conduct our business.
•The FCC’s repeal of its Network Neutrality Rules could harm our business.
•Our business is subject to complex and evolving laws, commercial standards, contractual obligations and other requirements regarding privacy and data protection.
•Our business may be harmed if we cannot obtain, retain and distribute local or toll-free numbers.
•We may be exposed to liabilities under anti-corruption, export control and economic sanction regulations.
•Third party intellectual property rights could prevent us from using technologies needed to provide our services.
•Our use of open source software could negatively affect our ability to sell our services and subject us to litigation.
•Indemnity provisions in various agreements potentially expose us to substantial liability.
•We may fail to protect our internally developed systems, technology and software and our intellectual property.
•We may be liable for the information that content owners or distributors distribute over our network.
•Third parties may use our services to commit fraud or steal our services.
•Our customers may choose to discontinue use of VoIP-based services and revert to traditional network service providers.
•We may lose customers if our platform or network fails or is disrupted.
•Defects or errors in our services could harm our business.
•If our emergency services do not function properly, we may be exposed to significant liability.
•Termination of relationships with key suppliers could cause delay and additional costs.
•Our customer churn rate may increase.
•The prices for some of our services have decreased in the past and may do so again in the future.
•The need to obtain additional IP circuits or interconnect with other networks could increases our costs.
•The loss of any member of our senior management team or key employees could harm our business.
•If we are unable to hire, retain and motivate qualified personnel, our business will suffer.
•We could be subject to additional tax liabilities for historic and future sales, use and similar taxes.
•Our global operations and legal entity structure subject us to potentially adverse income tax consequences.
•Our ability to use our net operating loss and tax credit carryforwards to offset future taxable income may be limited.
•We may be subject to significant tax-related liabilities and indemnity obligations if the Spin-Off (as defined below) is taxable.
•Our estimates or judgments relating to our critical accounting policies may prove to be incorrect.
•We may be unable to maintain an effective system of disclosure controls and internal control over financial reporting.
•If our goodwill or intangible assets become impaired, we may be required to record a significant charge.
•Foreign currency exchange rate fluctuations may harm our business.
•Natural disasters, pandemics, power outages, terrorist attacks, acts of war, civilian unrest and similar events could harm our business.
•We may acquire other businesses, which may divert our management’s attention and impact our stock price.
Risks Related to the Convertible Notes
•Servicing our future indebtedness may require a significant amount of cash, which we may not have.
•We may not have the ability to raise the funds necessary for cash settlement of the Convertible Notes.
•The conditional conversion feature of the Convertible Notes may adversely affect our financial condition and operating results.
•The capped call transactions may affect the value of the Convertible Notes and our Class A common stock.
•We are subject to counterparty risk with respect to the Capped Calls.
Risks Related to Ownership of Our Class A Common Stock
•The trading price of our Class A common stock may be volatile and you could lose all or part of your investment.
•Substantial future sales of shares of our Class A common stock could cause the price of our Class A to decline.
•Our dual class capital structure concentrates voting control.
•We cannot predict the impact our capital structure may have on our stock price.
•We are effectively controlled by David A. Morken, our Co-Founder and Chief Executive Officer, whose interests may differ from other stockholders.
•Our stock price and trading volume could decline if securities or industry analysts stop covering our Class A Common Stock.
•Anti-takeover provisions in our organizational documents and Delaware law, could impair a takeover attempt.
•Our certificate of incorporation and bylaws include super-majority voting provisions.
•Our bylaws provide that Delaware will be the sole and exclusive forum for certain stockholder litigation.
•We may need additional capital in the future and such capital may be limited or unavailable.
•We do not intend to pay dividends for the foreseeable future.
PART I - FINANCIAL INFORMATION
Item 1. Business
Overview
OverviewA global communications transformation is underway, and we believe Bandwidth is at the center. Our mission is to develop and deliver the power to communicate. We enable innovative organizations—from startup app developers to the world’s largest enterprises—to engage their end-users and deliver exceptional experiences everywhere people live, learn, work and play. Backed by the Bandwidth Communications Cloud, a global owned-and-operated network spanning more than 60 countries reaching over 90 percent of global gross domestic product (“GDP”), innovative enterprises use Bandwidth’s Application Programming Interfaces (“APIs”) to easily embed voice, messaging and emergency services capabilities into software and applications. Bandwidth was the first CPaaS provider to offer a robust selection of APIs built on our own cloud platform. Our award-winning support teams help businesses around the world solve complex communications challenges every day.
Bandwidth’s business benefits from multiple global megatrends, including the enterprise migration to the cloud, the adoption of Contact Center as a Service platforms, the need to be able to work from anywhere, the reinvention of customer experience and the growth in messaging applications to engage directly with consumers. We believe these megatrends, which have created sizable total addressable markets, are secular, long-lasting and still early in the adoption curve.
With the combination of our software APIs, our global Communications Cloud and our broad range of experience with global regulatory frameworks, we believe Bandwidth is one of the best-positioned providers in our space to deliver business-critical communications for global enterprises. In fact, Bandwidth already powers all the 2022 GartnerⓇ Magic Quadrant Leaders in the key cloud communications categories of Unified Communications as a Service (“UCaaS”) and Contact Center as a Service (“CCaaS”).
Our long-term vision is to continue strengthening this position as the key enabling platform for communications transformation. We will seek to do this in three ways: (1) by cross-selling and up-selling within our existing customers as they benefit from our global footprint and powerful APIs to automate and scale cloud communications; (2) by focusing on direct-to-enterprise growth to serve Global 2000 enterprises that come directly to Bandwidth to leverage our services to accelerate their digital transformations, and (3) by aiming to be the preferred provider for Software as a Service (“SaaS”) platforms that use conversational messaging to create digital engagements that enhance the customer experience. These three strategies are the foundation of the durable business we seek to build.
Operating Segments
As a result of certain changes in our business during the quarter ended March 31, 2022, we re-evaluated our segment reporting and determined that one segment was appropriate, rather than the previously reported segments comprising “CPaaS” and “Other”. The primary drivers for this change were the strategic alignment of our operating departments and the sale of certain immaterial legacy businesses. We currently operate in one operating segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, who is our Chief Executive Officer, in deciding how to allocate resources and assessing performance. Our chief operating decision maker allocates resources and assesses performance based upon consolidated financial information.
Go-to-Market Strategy
Bandwidth’s go-to-market strategy is designed around the global shift from on-premises based technology to cloud-based communications. We believe we are the only global CPaaS provider that also owns and operates our own Communications Cloud network. This competitive differentiator has enabled Bandwidth to power each successive wave of the cloud communications revolution–from the unified communications hyperscalers, to the messaging platform leaders, and now directly to global enterprises. As each of these customer categories uses
services on the Bandwidth Communications Cloud in its own unique way, we have designed three key market offerings to power digital communications transformation:
•Market Offering 1: Global Communications Plans. This serves the leading power platforms at the forefront of the communications transformation in UCaaS and CCaaS, through a business-to-business-to-business (“B2B2B”) delivery model. We enable these customers to rapidly automate voice, global number management and many other services on a scalable, global basis.
•Market Offering 2: Programmable Services. This comprises our text messaging solutions, through which we support innovative SaaS platforms with use cases like retail and eCommerce promotions, financial services identity authentication, and healthcare patient engagement, through a business-to-business-to-consumer (“B2B2C”) delivery model. Programmable Services customers come to our Bandwidth Communications Cloud because we offer high capacity, volume and deliverability. We believe this category represents a significant opportunity for future growth due to our ability to scale with customer demand.
•Market Offering 3: Global Enterprises. This category is a business-to-business channel, where Global 2000 enterprises can now engage directly with us to leverage our services in their digital transformation. Bandwidth provides solutions to facilitate these customers’ efficient transition from their current on-premises equipment to a fully cloud-based solution. To capitalize on this growing opportunity, we now have a dedicated focus on enterprises.
Market Offering 1: Global Communications Plans
Through our Global Communications Plans market offering, we power all the leaders in UCaaS and CCaaS, as recognized by the research firm Gartner, including Microsoft, Google, Zoom, RingCentral, Genesys, and Five9. We have been co-creating with many of these customers for more than a decade.
These leaders rely on Bandwidth to deliver the voice, messaging, and emergency services that are central to their own user experiences. Our APIs also expedite customer onboarding with real-time global programmable number management (ordering, porting, provisioning) to allow providers to customize their customer journeys, embed our global communications capability into their platforms, and reduce friction to accelerate onboarding. These platforms are global in nature, and they expect a communications partner who can provide direct global coverage and regulatory insight. We believe our leadership in this space continues to expand with our global footprint.
We believe Bandwidth’s toll-free voice solution is a major reason contact center platforms build with Bandwidth for their North American business. Offering 5X redundancy with available hands-free alternative routing, our own toll-free voice network is directly peered with four additional network partners, offering customers greater peace of mind. Whenever possible, Bandwidth keeps calls on its own network to enable excellent quality and better return on investment. Our four additional peered networks further enable best-in-class coverage as well as resilience—so if one network experiences quality-impacting issues, calls can be routed to a different network seamlessly, before impacts are even felt. Bandwidth’s Call Assure solution, announced in October 2022, provides hands-free alternative routing that is fully insulated from the core network to protect against an extraordinary disruption, such as a fire, natural disaster or cyberattack.
Market Offering 2: Programmable Services
Our Programmable Services market offering is aimed at B2B2C platforms that use Bandwidth to deliver digital engagement experiences, primarily through our text messaging solutions.
With a 98 percent open rate by users, text messaging has become a business-critical communication channel to reach consumers. Our easy-to-use APIs and proven track record for deliverability have made Bandwidth a choice for many leading platforms in text messaging.
Our messaging customers are powering digital engagements across many of the major brands of products people wear, eat, drive, and use every day. Use cases include retail and eCommerce promotions, financial services identity authentication, healthcare patient engagement, and many more. Bandwidth offers a full suite of messaging products, including Application to Person (“A2P”) messaging solutions supporting both SMS and MMS on Local Numbers (“10DLC”), Toll Free Numbers, and Short Codes. All our solutions support bi-directional unicode, including emojis.
Bandwidth’s capacity, high deliverability, and regulatory know-how have positioned us as a leading provider for messaging platforms. We believe we will continue to win high-volume contracts from enterprises that have run out of capacity with our competitors
Market Offering 3: Global Enterprises
Much as the leading platforms in cloud communications have done for years, followed by the messaging leaders in SaaS, now Global 2000 enterprises need to accelerate their digital transformations. Bandwidth can help these large enterprises transition from their current on-premises equipment to a fully or hybrid cloud-based communications platform forsolution. We now have a dedicated go-to-market focus on enterprises in the United States. Our solutions include Global 2000.
By partnering with Bandwidth, global enterprises can reduce complexity, gain greater control, centralize communication resources and operational workloads, and better prepare for future scale. We believe Bandwidth’s history as an enabler to the platform leaders creates additional competitive benefits, such as deep automation of communications services, enterprise-grade quality and support, as well as deep operational relationships with the largest UCaaS and CCaaS platforms.
With these three market offerings, we aim for Bandwidth to be a “one stop shop” and critical enabler for global enterprises, SaaS platforms, and cloud communications platforms. We believe the combined power of our software platform and global Communications Cloud helps our customers to future-proof their strategy for the integrations of today, and new services to come.
The Bandwidth Communications Cloud
We believe one of our key competitive differentiators is the Bandwidth Communications Cloud. It provides a communications developer platform on top of an all-IP, owned-and-operated network with global reach. We believe we provide reliability, scalability, and usage-based control for global business-critical communications.
Automation and Workflow
The Bandwidth Communication Cloud’s command over our own numbering resources enables real-time porting, provisioning and number ordering en masse, and includes:
•coverage in more than 60 countries, serving 90 percent of global GDP;
•network platform paired with peering relationships with major global networks ensure our customers are never more than one hop away from the public switched telephone network (“PSTN”);
•5x resilient U.S. toll-free network, with interconnections to four toll-free networks in addition to our own, designed for best-in-class resiliency from a single provider;
•public safety connectivity purpose-built for today’s dynamic, increasingly remote workforce, interconnected with emergency calling networks worldwide;
•A2P messaging designed to support best-in-class deliverability and insight; and
•a broad range of software Application Programming Interfaces ("APIs") for voiceexperience with global regulatory frameworks earned through offering communications services in more than 60 countries and text functionality and our owned and managed, purpose-built Internet Protocol ("IP") voice network, one of the largest in the nation. Our sophisticated and easy-to-use software APIs allow enterprises to enhance their products and services by incorporating advanced voice and text capabilities. Companies use our platform to more frequently and seamlessly connect with their end users, add voice calling capabilities to residential Internet of Things ("IoT") devices, offer end users new mobile application experiences and improve employee productivity, among other use cases. By owning and operating a capital-efficient, purpose-built IP voice network, we are able to offer advanced monitoring, reporting and analytics, superior customer service, dedicated operating teams, personalized support, and flexible cost structures. Over the last ten years, we have pioneered the Communications Platform-as-a-Service ("CPaaS") space through our innovation-rich culture and focus on empowering enterprises with end-to-end communications solutions.
As technologies evolve and new mobile applications and connected devices proliferate, enterprises must adapt and innovate their communications solutions to create a “connected” experience anywhere, anytime, on any device. Enterprises looking to capitalize on trends such as voice as an interface and Application-to-Person ("A2P") messaging need solutions that are reliable, secure, scalable and cost-efficient. Most software-powered communications providers rely heavily on leased networks and cannot provide enterprise-grade service and support. We believe traditional large-scale network providers lack the capabilities to build robust software platforms for agile development of communications solutions. Enterprises focus on their core businesses, but lack the technical know-how or strategic flexibility to build the customized solutions they require in-house. As a result, enterprises need a third-party, end-to-end, cloud-based software solution that eliminates the complexity and expense of building and maintaining their own communications platform.
Our solutions address enterprises’ communications needs, which we believe are shaping the future of how enterprises connect through embedded voice and text for applications and devices. At the core of our solutions are our communications software APIs, which allow companies to build products and services on top of our cloud-based, out-of-the-box software. Our software APIs include pre-defined functions that are easily customizable for specific use cases without the challenge and expense of building and deploying complex code. Moreover, our platform collects and analyzes terabytes of call and messaging data records in real-time and provide a seamless integration to CRM and Business Intelligence analytics tools to provide meaningful data driven actionable insights for critical business decisions. Customers can then launch and scale applications and solutions with reliability using our own nationwide IP voice network. Our voice software APIs allow enterprises to make and receive phone calls and create advanced voice experiences. Integration with our purpose-built IP voice network ensures enterprise-grade functionality and secure, high-quality connections. Our messaging software APIs provide enterprises with advanced tools to connect with end users via messaging. Our customers also use our solutions to enable 911 response capabilities, real-time provisioning and activation of phone numbers, and toll-free number messaging.
We are the only CPaaS provider in the industry with our own nationwide IP voice network, which we have purpose-built for our platform. Our network is capital-efficient and custom-built to support the applications and experiences that make a difference in the way enterprises communicate. Since a communications platform is only as strong as the network that backs it, we believe our network provides a
territories.
Core Product Domains
significant competitive advantageBandwidth is continually investing in new domains in our Communications Cloud. Below are some of the control, quality, pricing powermajor product offerings and scalability of our offering.use cases supported:
Voice. We are ableoffer customers the ability to control the quality and provide the support our customers expect, as well as efficiently meet scalability and cost requirements.
Our customers currently include only enterprises, which includes large enterprises, small and medium-sized businesses, emerging technology companies and any other business. Our customers operate in a diverse set of industries, including technology, communications, hospitality and services, that need to launch and scale robust communications experiences. Our customers choose Bandwidth because we empower them to embed seamless communications within their products and services in a reliable, flexible, scalable and cost-efficient manner. Our customers include Google Voice, Microsoft Office 365 Skype for Business, Cisco-Webex, Dialpad, RingCentral, GoDaddy, Kipsu, Rover and ZipRecruiter, among many others. We do not currently have any consumer or residential customers, although our enterprise customers may utilize our solutions to serve their own consumer or residential customers or end users.
Our usage-based revenue model allows us to growinteract with our customers and increase our revenue base as our customers deepen their usage of our solutions.voice services through SIP or programmable voice API. Our dollar-based net retention rate, which measures our customers’ increased utilization of our platform, was 115%, 111% and 107% for the years ended December 31, 2015, 2016 and 2017, respectively.
We have continued growing our business in recent periods. For the years ended December 31, 2015, 2016 and 2017, our revenue was $137.8 million, $152.1 million and $163.0 million, respectively, and our net (loss) income was $(6.7) million, $22.4 million and $6.0 million, respectively.
Segments
We have two reportable segments, CPaaS and Other. Segments are evaluated based on revenue and gross profit. We do not allocate operating expenses, interest expense or income tax expense to our segments. Accordingly, we do not report such information. We generate a majority of our revenue from our CPaaS segment. CPaaS revenue is derived from voice usage, phone number services 911-enabled phone number services, messaging services and other services. We generate a portion of our CPaaS revenue from usage-based fees which include voice calling and messaging services. The remainder of our revenue is generated by our Other segment. Other revenue is composed of revenue earned from our legacy services and indirect revenue. See Note 9, "Segment and Geographic Information," in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for additional information about our segments.
Our Platform
Our Bandwidth Communications Platform empowers enterprises to create and scale voice or text communications services across any application and device. Our software platform and IP voice network enable our enterprise customers to rapidly develop and deploy real-time and mission-critical, software-powered communications solutions. Our sophisticated and easy-to-use software APIs allow enterprises to enhance their products and services by incorporating advanced voice and text capabilities. By owning and operating a capital-efficient, purpose-built IP voice network, we are able to offer advanced monitoring, reporting and analytics, superior customer service, dedicated operating teams, personalized support and flexible cost structures.
Our cloud-based platform is a proprietary CPaaS offering consisting of voice and messaging solutions:
Voice Software API. We provide flexible software APIs that are used to build voice calling withinin applications innovativeand platforms, orchestrate call flows between users or machines, call recording,record and bridge calls, initiate text-to-speech for interactive
voice response call detail records, conference calling or bridging and more. We provide the ability to have customizedEnterprises can customize high-quality call routing for business voice use cases and global reach. Some of the common use cases are:
•Powering calling plans within cloud communications platforms (UCaaS, CCaaS, Meetings Solutions):Our platform empowers cloud communications leaders to connect their enterprise end-users with local and toll-free connectivity at global scale.
•Embedding ‘click-to-call’ feature: We enhance our enterprise customers’ ability to connect with consumers instantly. Our programmable voice quality monitoring service provides toolsAPI enables many use cases including call notifications and processessurveys, advertising campaigns, etc.
•Transitioning from traditional premise focused communications to cloud based services: As enterprises migrate from on-premises equipment to the cloud, Bandwidth can fuel their digital transformation with our software-driven SIP trunking services designed to integrate in hybrid or full cloud deployments.
Messaging API. Our software APIs for network quality testsmessaging deliver a full suite of A2P messaging capabilities, designed to help brands engage with their customers. Bandwidth’s North American messaging services are enabled for local and proactive tuning.toll-free phone numbers as well as short codes. While we provide a wide range of functionalities, some of the common use cases are:
Enabling local and toll-free numbers via software API: Our platform empowers enterprises with a capability to activate and manage phone numbers instantly and at scale. Using our easy to use software APIs, our enterprise customers can easily add additional lines to their business as well as for their end users.
Automating voice communication while preserving privacy: Our software APIs enable voice communication capabilities from a mobile application to an individual or a group with or without disclosing personal identity.
Embedding ‘click-to-call’ communication feature: We enhance our enterprise customers mobile and web marketing capabilities by embedding click-to-call functionality in their customer outreach, including advertising campaigns that enables them to connect with consumers instantly.
Real-time call analytics: We provide our enterprise customers with real-time call analytics through our dashboard that correlates the raw data from calls with CRM records, including the call duration, customer sentiment and other attributes, in order to provide meaningful contextual sales and other business insights.
Messaging API. Our software APIs for messaging deliver a complete wireless experience, including: delivery receipts, SMS, MMS, long text support, emoji support and bi-directional unicode (international characters) and short codes interoperability. While we provide a wide range of functionalities, some of the common use cases are:
•Automated real-time notification and alerts: Our software APIs empower ourproduct leaders and enterprise customersdevelopers with predefined functionalities to send and receive textA2P messages, to and from an application to an individualuniquely integrated with their own business processes or a group. Our customers often build more customized use cases on top of our predefined use cases. For instance, ZipRecruiter uses this functionality to update job seekers of available jobs in real time via automated text alerts.
tech stacks.•Two-factor authentication: We enable enterprises to verify the identity and maintain security of end users through our software-based, SMSmulti-channel verification service that sends unique codes to end users in order to log in to mobile and web applications.
•Group messaging: EnterprisesProduct owners utilize our platform to collaborate withbuild messaging applications that enable their end users on a real-time basis by enabling group messaging within their user communityend-users to share SMS and MMS messages, videos, carry out polls and surveys amongst other uses without leaving the application.
911 Software API.Emergency Services. We are the only software platform that providesprovide complete communications solutions (full PSTN replacement) with integrated 911 services.local emergency services in 38 countries around the globe. We can instantly connect numbers, devices or applications to emergency services with reliable and accurate emergency routing. Our
•Dynamic GeospatialLocation Routing uses geocoding to enable: Enables real-time, geocoded routing based on X,Y coordinates of the caller and defined Public Safety AccessAnswering Point boundaries. This helps enterprises meet compliance requirements and enable increasingly remote workforces.
•Emergency Calling API: Connects apps to the public safety infrastructure without the need for on-premise technology or telephony expertise.
•Emergency Notification API: Enables a multi-channel notification sent to on-site security personnel when an emergency call takes place within a large enterprise.
Video API. Our Advanced “Next Generation 911” “i3”-ready NENA i2 “Enhanced” service network covers approximately 98% of the U.S.
Key Benefits of Our Software Platform
API for video easily combines with our programmable voice API to create an integrated collaboration experience, and enables users to join calls by video or by voice calling. Easily deployed with mobile,
browser, and server SDKs, our Video API provides such features as multi-party conferencing, support for VP8, H.264 video codecs, screen sharing, connection to the PSTN, and detailed call records.
•PSTN, SIP and browser-based endpoints: We allow customers to connect to PSTN, SIP, and browser-based voice and video endpoints to create a multi-party communication experience, and enable users to make and receive calls around the globe.
•Improve the impact of direct in-application communications: Our API allows applications that depend on making a real connection, such as telehealth, the ability to do so without leaving the context of the application, allowing them to connect face-to-face with consumers with a trackable video.
Phone Numbers. The Bandwidth Dashboard is Bandwidth’s user-friendly interface for a comprehensive number management solution. Every function within The Bandwidth Dashboard has an accompanying API, allowing our customers’ product leaders and developers to integrate Bandwidth’s functionality within their own user interfaces or web applications.
•Global Number Management: Order, provision, and activate local and toll-free phone numbers around the world, in real-time, allowing customers to search and sort by availability, geographic region, city/state, country/area code and many other options.
•Programmatically port up to 20,000 numbers simultaneously: Gain control over the confusing carrier landscape and automate number porting across all major carriers. This allows for a more reliable end-user experience with controlled scheduling and triggered porting activation.
Insights. Bandwidth Insights gives customers a detailed view of their voice and messaging performance to make data-driven decisions and ensure quality of service.
•Understand and solve for deliverability issues: Real-time error codes and alerting allows enterprises to understand and solve for SMS deliverability challenges in an ever-changing text messaging environment.
•Real-time call quality analytics: We provide our customers with real-time call analytics including data such as call duration, customer sentiment and other attributes to better understand call performance and customer experience.
•Track trends, benchmarks and usage: Our Insights API shows trends, delivery rates and usage patterns by product and carrier.
CCaaS and UCaaS Platform Integrations. Bandwidth’s global Communications Cloud integrates with several leading UCaaS and CCaaS platforms under the DuetTM solutions portfolio, to provide a holistic solution that's seamlessly aligned with the organization, and allows enterprises to move communications to the cloud at their own pace. Once numbers are in the Bandwidth Communications Platform providesCloud, they can be moved from platform to platform without leaving Bandwidth, decreasing cloud migration risk and complexity.
•DuetTM for Microsoft Teams: As mentioned earlier, we have a Duet partnership with the following benefitsleading CCaaS platform. We also have Duets in the UCaaS space, including Duet for Microsoft Teams. This includes:
•Direct routing & dynamic E911: Consolidate SIP globally with meaningful direct access to the enterprises we serve:telephony, and solve for an increasingly dynamic workforce from a single provider.
Easy to Build•Hosted session border controllers (SBCs): Connect telephony without another piece of on-premise equipment. A hosted SBC eliminates complexity and Deploy. Our easy-to-use, intuitive software APIs are ready to launch and scale from day one. We enable enterprises to rapidly and easily scale communications functionalities to a vast range of applications and devices. Our technology requires minimal lines of code to build customized applications, which allows for rapid composition of customized solutions and seamless embedding within other applications.
a truly cloud deployment.Easy to Scale. We enable•Send-to SMS web application: Allows enterprises to easily scale nationwide at launch, without sacrificing quality, while meeting the most stringent requirements. We can deliver full end-to-end automation for even the largest of enterprises using our IP voice network, which is the largest of any CPaaS provider based on the number of rate centers, a measure for the footprint covered by our IP voice network. We are able to support high user volumes without impacting deliverability. Our software, built on our own IP voice network, removes complexity, eliminates performance degradation and increases cost efficiencies at scale.
Flexibility. Our software APIs are easy to deploy and use and allow for the creation of solutions to address a broad array of use cases. Our software can be implemented directly into product workflow for a variety of custom solutions such as creation of virtual call centers, group messaging and dynamic call location routing. We enable developers to easily and rapidly innovate with our platform.
Key Benefits of Our Network
Our owned and managed IP voice network provides the following benefits to the enterprises we serve:
Enhanced Quality and Reliability. We offer greater levels of quality and delivery assurance than providers offering services across the public Internet or through partnerships. As a result, the enterprises we serve have enjoyed 99.9% network uptime in 2017 and we have not experienced any material system failures in the past three years.
Total Accountability. The ability to vertically integrate our software platform with our own IP voice network provides ussend text messages in and outside of the organization from within the Teams environment, built to work seamlessly with a differentiated ability to continuously monitor, report and resolve any software-direct routing or network-related issues on a real-time basis. For our enterprise customers, having a single platform solution for their entire communications requirements, including software and network, provides tremendous value with respect to time and financial resources. Our service-level agreements with our enterprise customers assures that we provide high quality service and gives them peace of mind and confidence in our service.
BYOC strategy.Lower Total Cost to Our Customers. The differentiated pairing of our software combined with owning the delivery capability through our IP voice network leads to significant savings for the enterprises we serve as compared to our competitors. Our IP voice network lowers total cost to our customers as compared to our competitors because of our reduced capital expenditure requirements and lower marginal costs at scale, which we are able to pass on to our customers.10
Our Competitive Strengths
In our 19 years of business, we have prided ourselves on maintaining a start-up culture and our focus on continuous innovation. We have innovated on our CPaaS offerings to empower our enterprise customers with the most comprehensive software-powered communications platform that integrates seamlessly with one of the largest IP voice networks in the U.S. that we have built and operate. Our innovation-rich culture,
Competitive Strengths
We believe three things give Bandwidth a competitive advantage. First, we have an all-IP platform with global reach. The Bandwidth Communications Cloud provides the connectivity, APIs, security, privacy, workflows, and tools to give enterprises of all sizes a simple, scalable way to consume our services. Second, our API-first approach facilitates the embedding of automation, enterprise-grade tooling, and simple UX/UI throughout the Bandwidth Communications Cloud. Third, we have a broad range of experience with global regulatory frameworks informed by our communications services offerings. We believe customers view Bandwidth as a trusted resource, helping them navigate constant change in the global regulatory landscape. In addition, our innovation-rich culture, customer-centric solutions and track record of successful execution provide us with the following competitive strengths:
Highly Scalable Platform Built for the Enterprise.A full-stack, open Communications Cloud: We built ourthe Bandwidth Communications Platform from the ground up as an enterprise-grade cloud application.Cloud to be enterprise grade. As a result, we believe our deployment is fast, our software APIs are flexible and easy-to-use, and we enable enterprises to launch and scale on day one. Our software APIs allow the enterprise customers we serve to grow with flexibilityquickly. The scale and seamlessly embed communications in their applications or devices. Our scalable platformquality of our Communications Cloud allows us to serve large-scale Internet companies and cloud service providers.
Broadest, Most Complete Solutions in the Industry. We It also allows us to provide enterprises with one of the broadest, most complete communications services solutions in the industry through our integrated softwareindustry--solutions that are ready to integrate with leading UC and IP voice network.contact center platforms to create customized, best-of-breed solutions. Our large library of APIs (including voice, messaging, numbers, emergency services, insights and text APIs enables ourintegrations) allows customers to incorporate a broad range of capabilities into their products and services that would be otherwise unattainable.
Global reach from a broad rangesingle source: Our Communications Cloud provides coverage in more than 60 countries covering more than 90 percent of capabilities not otherwise attainable.
Purpose-Built IP Voice Network. Ourglobal GDP. This means our customers can consolidate their communications vendor relationships with Bandwidth, Communications Platform’s IP voice network, which we ownwhile gaining global reach, resiliency and operate nationwide, supports our ability to scale at a reliableefficiency for their communications stack. We offer greater levels of quality and consistent quality fordelivery assurance than providers offering aggregated services across the enterprises we serve. Thepublic Internet or through resold partnerships. We believe that the control and scale we have over our own IP voice network integrated with our Bandwidth Communications Platform providesCloud gives us distinct competitive advantages that includeinclude: enabling our customers to deploy cloud-native services, consistent high quality, in-depth enterprise support, real-time networktraffic visibility and economies of scale.
CPaaS based emergency calling capabilities: We believe we are one of the only CPaaS providers with full stack emergency service capabilities. In many countries, it is a legal obligation to ensure on-premise access to local emergency services. Our customers can meet compliance commitments using a single provider in multiple markets where they do business—across North America, Europe and Asia-Pacific. Moreover, our dynamic geospatial routing capability routes emergency calls based on a real-time location of the caller to produce industry-leading results.
Deep Experience and& Expertise in Voice and Messaging. The combination of our versatile software API platform and our IP voice network control allows us to offer not just best efforts, but best-in-class voice and messaging solutions for enterprises.: Our senior leadership team has a combined 135 yearsconsists of industryboth new and long-tenured leaders – each an expert with deep and proven experience in the telecommunications and SaaS space. We regularly interact with local regulators in more than 30 countries, and we currently power all the 2022 Gartner Magic Quadrant Leaders in UCaaS and CCaaS. We seek to bring this body of experience and an average tenure with Bandwidth of 10 years.
knowledge to all our customer engagements.Growing Long-Term Relationships with Low Customer Churn.Churn: We deliver comprehensive solutions that address the unique and complex needs of the enterprisescustomers we serve. Asserve, and as a result, these enterprises have continued to innovate and grow with our platform over extended timeframes.many years. A number of our largest enterprise customers have been on our platform for more than ten years. Our relationship with each of the enterprises we serve often expands across differentspans product suites, divisions and use cases over time. Our customers include large enterprises and small and medium-sized businesses across various industries, and we rarely lose customers that have been on our platform for more than three months. For example, our largest enterprise customer has been on our platform for more than ten years. Based on surveys conducted after customer interactions in 2017,2022, our customers have expressed a 97% satisfaction rate.
CPaaS-Based 911 Network Capabilities. We believeA unique culture focused on people: At Bandwidth, we are mission first. To accomplish that mission, we’ve created a unique, service-oriented culture, centered on meaningful work, lifting each other up, and investing in the only CPaaS software provider with 911 capabilities. We believebodies, minds, and spirits of our 911 capabilities provideBandmates. For our customers, this means there’s always a significant advantage as compared to software platform providers that are enabling residential voice services through new connected device experiences. Moreover, our dynamic geospatial routing capability routes 911 calls basedsmiling, world-class Bandmate on a real-time locationthe other end of the callerline who will go the extra mile for them. We often hear from our customers that Bandwidth just cares more. For our employees, this means we make a “whole person promise” to produce industry-leading results.
Our Growth Strategyoffer
Expand Existing Enterprise Relationships. We will continue to expand our relationships with our existing enterprise customers. For example, enterprises often initially purchase only our voice solution and later expand to also purchase our messaging and 911 services. Additionally, we are able to help enterprises scale efficiently and offer their solutions to more of their customers as they grow.11
Growmeaningful work and programs that ensure Bandmates can find the work/life balance necessary to enjoy a healthy and fulfilling life. Our Enterprise Customer Base.culture is focused on helping each other succeed in our mission and makes work-life balance possible isn’t just something to feel good about. It drives real results. Our Bandmate engagement and satisfaction scores are consistently ranked higher than our peers. While we are exceptionally proud of the team we have assembled, we also acknowledge that there is important work for us to do to continue developing a more diverse and inclusive team. We believe there isdiverse and inclusive teams are more innovative and make better business decisions.
At Bandwidth, we say, “Your music matters to the BAND.” We celebrate differences and encourage our team members to be their authentic selves. No matter what music a substantial opportunity to increaseteam member makes, we support each team members’ unique gifts and needs with our enterprise customer base across a broad range of industries and companies. We plan to continue to grow and invest in our direct sales force and marketing to increase our enterprise customer base.
Continue to Innovate Our Platform. We are committed to buildingprograms that deliver on our track recordWhole Person Promise. The real masterpiece is in the music we make together with the strength and ingenuity to lift up all those we serve.
Our Your Music Matters program builds outreach programs and initiatives to fill our recruiting funnel with diverse candidates who possess the “Bandwidth Edge”—smart, common sense, hardworking, honest, competitive energy and emotional intelligence. We build external and internal campaigns to fill the recruiting funnel using our talented team members, creative local and non-local outreach partnerships, and virtual platforms to connect with talent who come from different backgrounds, skills, abilities and experiences.
We believe the benefits that we offer each of leveraging our innovative product capabilitiesteam members are an important component of our Whole Person Promise. These benefits, which vary based on country location and applicable laws, include: robust medical benefits in which we pay 100% of the premiums for medical, dental and vision insurance; 401(k); industry leading parental leave; and access to meetmental health resources.
Bandwidth’s compensation philosophy embraces transparency and educates all Bandmates on our customers’ needs, just as we have done throughout our history, through dramatic waves of change in communications technology. We were earlybenchmarking process, pay structure design and logical approach to deploy software-based networks and to offer hosted cloud-based voice services, while building outcompensation strategy. Research has shown that rigorously-designed compensation strategies like ours are one of the fastest growing IP voice networks over the last ten years. Ourbest ways to combat pay disparity and ensure fairness for every team has continued to adapt to a dynamic environment to grow our business, and we intend to invest in continued development of our platform and product features to support new use cases such as virtual personal assistants ("VPAs") and help our enterprise customers succeed as communications technologies evolve.member.
Continue Our Focus on Enterprise Customer Satisfaction. We intend to continue focusing on delivering world-class services and support to the enterprises we serve to ensure a high level of satisfaction. We believe that satisfied customers provide vital product feedback, purchase additional services, renew contracts at a high rate and provide broad advocacy and new customer referrals for our business.
Explore the Development and Growth of Our International Offerings. Today, our international services are limited to outbound international calling and outbound international messaging. Some of our enterprise customers operate globally or have plans to so. While we do not have specific expansion plans, we are actively exploring opportunities, including those where we might have a cost or quality advantage in serving our customers.
Pursue Acquisitions and Strategic Investments Selectively. We may selectively pursue acquisitions and strategic investments in businesses and technologies that strengthen our platform.
Our Customers
We have a broad and diversified customer base. We benefit from longstandinglong-standing relationships with some of the largest tech companies, well-recognized enterprise customers, as well as small and medium-sized businesses.innovative SaaS platforms. Many of our customers have multi-year contracts, with no single customer representing more than 8%10% of CPaaStotal revenue for the year ended December 31, 2017.2022.
Our management is highly focused on creating and maintaining strategic partnerships beyond standard transactional customer relationships. We seek to empower enterprises to create, scale and operate voice or text communicationsbusiness-critical services across any mobile application or connected device, and this capability reinforces our customer relationships.
The majority of our customers sign master service agreements (“MSAs”) that contain standard terms and conditions, including billing and payment, default, termination, limitations of liability, confidentiality, assignment and notification, and other key terms and conditions. Customers order specific services in separate service order forms that incorporate the applicable MSA. Each service order form details the minimum contract duration, any applicable monthly recurring charge and applicable non-recurring charges. The terms and conditions for each order are also specified in the applicable service order form.
Sales and Marketing
Our sales and marketing teams workare part of a single revenue organization that works closely together to identify and establish relationships with prospects,
acquire new enterprise customers, expand relationships with existing enterprises, and integrate them with ourthe Bandwidth Communications Platform.Cloud. Our marketing staffteam generates marketing qualified leads and pipeline for sales through a number of demand-generating channels, including our website, online marketing campaigns, webinars, sponsored virtual and live events, white papers and blogs, public relations, social media, analyst relations, paid
search and othersearch engine optimization and outbound lead development efforts. Our marketing staff also targets companies with products that could use our services for the first time or to displace our competitors. OurThese marketing initiatives enhance awareness, preference and adoption of our services.services, and help us cross-sell opportunities with existing customers.
We engage potential customers and existing customers through an enterpriseenterprise-focused sales approach. Our sales and marketing executives often directly engage C-level executives and other senior business, product and technical decision makers responsible for the end userend-user experience and financial results at their enterprises. Our sales and marketing executives work to educate these decision makers and their teams about the benefits of using ourthe Bandwidth Communications PlatformCloud to launchengage their end-users and scale robust communications experiences.deliver exceptional experiences everywhere people live, learn, work and play. Our sales team includes a full stack of sales development, inside sales, field sales, revenue enablement and sales engineering personnel.
As of December 31, 2017, we had 63 employees in our sales and marketing organization.functions.
Research and Development
Our ability to compete depends in large part on our continuous commitment to research and development ("(“R&D"&D”). We also seek to continuously enhance our existing servicesofferings and develop new products and services. Our product and network teams are responsible for the ongoing design, development, testing and release of our platform. These teams closely coordinate with ournew features and functions in the Bandwidth Communications Cloud. Our executive management which is responsible for creating a vision for our platform,product roadmap and withnew innovation, and our sales and marketing teams which relay customer insights, enterprise demandsneeds and possible new use cases or enhancements.
Our development efforts focus onvision for the availability and resiliency of our Bandwidth Communications PlatformCloud is to be viewed as a singular resource for global enterprise communications. Our near-term roadmap includes a range of solutions to help enterprises create a better total experience for consumers and our IP voice network, including infrastructure, ease-of-use and flexibility, end-user experience and ability to integrate with other enterprise systems.
As of December 31, 2017, we had 66 employees in our research and development organization.whether through the contact center, hybrid work, text messaging engagement, intelligent emergency services, or a combination thereof.
Competition
The CPaaS market is rapidly evolving and increasingly competitive. We believe that the principal competitive factors in our market are:
•platform scalability, reliability, deliverability, security and performance;
•network control and quality;
•global reach;
•completeness of offering;
•ease of integration and programmability;
•product features;
•customer support;
•ability to deliver measurable value and savings;
•the cost of deploying and using our service offerings;
•the strength of sales and marketing efforts;
•brand awareness and reputation; and
•credibility with product executives and developers.
We believe that we compete favorably based on the factors listed above and believe that none of our competitors currently competes directly with us across allthe combination of our product offerings.global scale, all-IP Communications Cloud, enterprise-grade APIs, and broad regulatory experience gained through our service offerings..
Our competitors fall into two primary categories:
•CPaaS companies that offer a narrower set of software APIs, more limited global reach, less robust customer support and fewer other features while relying on third-party networks and physical infrastructure; and
•Incumbent network service providersoperators that offer limited geographical reach and limited developer functionality on top of their own networks and physical infrastructure, such as AT&T, Level 3Colt, Lumen and Verizon.
Some of our competitors have greater financial and technical and other resources, greater geographic reach, greater name recognition larger sales and marketing budgets and largeror intellectual property portfolios. As a result, certain of our competitors may be able to respond more quickly and effectivelyportfolios than we can to new or changing opportunities, technologies, standards or enterprise requirements.do. In addition, some competitors may offer a greater number and variety of products and services than we do, or may offer services that address one or a limited number of functions at lower prices, with greater depth than our services orin geographies wherein which we do not operate. With the introduction of new products and services and new market entrants, weWe expect competition to intensify in the future. Moreover, asSee “Risk Factors–Risks Related to Our Business” elsewhere in this Annual Report on Form 10-K, for additional information on the competitive environment in which we expand the scope of our platform, we may face additional competition.operate, and risks related thereto.
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret laws in the United States and other jurisdictions, as well as license agreements and other contractual protections, to protect our proprietary technology. We also rely on registered and unregistered trademarks to protect our brand.
As of December 31, 2017,2022, we had eighttwenty-nine U.S. patents and fivethree U.S. patent applications pending. In addition, as of December 31, 2017,2022, we had fifteennineteen registered trademarks and onetwo trademark applications pending trademark application in the United States.States and elsewhere.
We seek to protect our intellectual property rights by implementing a policy that requiresrequiring our employees and independent contractors involved in development of intellectual property on our behalf to enter into agreements acknowledging that all works or other intellectual property generated or conceived by them on our behalf are our property, and assigning to us any rights, including intellectual property rights, that they may claim or otherwise have in those works or property, to the extent allowable under applicable law.
Despite our efforts See “Risk Factors–Risks Related to protect our technology and proprietary rights through intellectual property rights, licenses and other contractual protections, unauthorized parties may still copy or otherwise obtain and use our software and other technology. Any significant impairment ofOur Business” elsewhere in this Annual Report on Form 10-K for additional information on our intellectual property rights could harm our business or our ability to compete. Further, companies in the communications and technology industries may own large numbers of patents, copyrights and trademarks and may frequently threaten litigation, or file suit against us based on allegations of infringement or other violations of intellectual property rights. In the future, we may face allegations that we have infringed the intellectual property rights of third parties, including our competitors and non-practicing entities.
risks related thereto.
Employees
As of December 31, 2017,2022, we had a total of 378approximately 1,100 employees, all of whomwho are primarily located in the United States.States, Europe and Asia Pacific. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We have not experienced any work stoppages, and we consider our relations with our employees to be good.
Information about Geographic Revenue
Information about geographic revenue is set forth in Note 9, "Segment and Geographic Information," in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Regulatory
General
We and the communications services that we provide through our Communications Cloud and software APIs are subject to many U.S. federal and state and foreign laws and regulations. These laws and regulations may involveconcern telecommunications, as well as privacy, data protection, intellectual property, competition, consumer protection, taxation or other subjects. Many of the laws and regulations that apply to which weus and the communications services that we provide through our Communications Cloud and software APIs are subject are still evolving and being tested in courts and could be interpreted or applied in ways that could harm our business. In addition,We describe below certain material components of the application and interpretation of these laws and regulations often are uncertain, particularly in the new and rapidly evolving industryregulatory framework in which we operate. Because lawsSee “Risk Factors–Risks Related to Our Business” elsewhere in this Annual Report on Form 10-K for additional information on the regulatory framework in which we operate and regulations have continued to develop and evolve rapidly, it is possible that we may not be, or may not have been, compliant with each such applicable law or regulation.risks related thereto.
Federal Telecommunications RegulationRisks Related to Our Business
•Our future growth and the success of our expansion plans depend on a number of factors that are beyond our control.
•Our growth and financial health are subject to a number of economic risks.
•The Federal Communications Commission ("FCC") has jurisdiction over interstatemarket in which we participate is highly competitive, and international telecommunicationswe may not compete effectively.
•We may not be able to attract new customers in a cost-effective manner.
•The market for some of our services is new and unproven, and may decline or experience limited growth.
•Our ability to meet our goals for revenue growth, cash flow and operating performance depends on customers increasing their use of our services.
•We may not be able to increase the revenue that we derive from enterprises.
•We may not be able to develop service enhancements or new services that achieve market acceptance.
•As we continue to expand geographically and otherwise, we may experience difficulty maintaining our corporate culture and operational infrastructure.
•We have obtained FCC authorizationgrown rapidly, and may not be able to manage the growth effectively.
•Our pricing and billing systems are complex, and errors could adversely affect our results of operations.
•We must continue to develop effective systems to support our business.
•We may not be able to maintain and enhance our brand and increase market awareness.
•Failure to deliver high-quality support may adversely affect our customer relationships.
•We operate internationally, which exposes us to significant risks.
•The military conflict between Russia and Ukraine, including an expansion of that conflict to other areas, may adversely affect our business.
•If the COVID-19 infection rate returns to pandemic levels, it may harm our business and results of operations.
•Some of our revenue is concentrated in a limited number of enterprise customers.
•Attacks on or breaches of our networks or systems, or on those of third parties on which we rely, including denial-of-service and other cyberattacks, may result in disruption to our services, which could harm our business.
•We are currently subject to litigation, including litigation related to taxes and charges associated with our provision of 911 services.
•Customer misuse of our services and software could result in litigation and harm our business.
•We are subject to litigation in the ordinary course of business, which may harm our business.
•The communications industry faces significant regulatory uncertainties.
•The effects of increased regulation of IP-based service providers are unknown.
•We must obtain and maintain numerous licenses and permits, in the United States and internationally, to operate our network.
•If we violate regulatory requirements that apply to our operations, we may not be able to conduct our business.
•The FCC’s repeal of its Network Neutrality Rules could harm our business.
•Our business is subject to complex and evolving laws, commercial standards, contractual obligations and other requirements regarding privacy and data protection.
•Our business may be harmed if we cannot obtain, retain and distribute local or toll-free numbers.
•We may be exposed to liabilities under anti-corruption, export control and economic sanction regulations.
•Third party intellectual property rights could prevent us from using technologies needed to provide our services.
•Our use of open source software could negatively affect our ability to sell our services and subject us to litigation.
•Indemnity provisions in various agreements potentially expose us to substantial liability.
•We may fail to protect our internally developed systems, technology and software and our intellectual property.
•We may be liable for the information that content owners or distributors distribute over our network.
•Third parties may use our services to commit fraud or steal our services.
•Our customers may choose to discontinue use of VoIP-based services and revert to traditional network service providers.
•We may lose customers if our platform or network fails or is disrupted.
•Defects or errors in our services could harm our business.
•If our emergency services do not function properly, we may be exposed to significant liability.
•Termination of relationships with key suppliers could cause delay and additional costs.
•Our customer churn rate may increase.
•The prices for some of our services have decreased in the past and may do so again in the future.
•The need to obtain additional IP circuits or interconnect with other networks could increases our costs.
•The loss of any member of our senior management team or key employees could harm our business.
•If we are unable to hire, retain and motivate qualified personnel, our business will suffer.
•We could be subject to additional tax liabilities for historic and future sales, use and similar taxes.
•Our global operations and legal entity structure subject us to potentially adverse income tax consequences.
•Our ability to use our net operating loss and tax credit carryforwards to offset future taxable income may be limited.
•We may be subject to significant tax-related liabilities and indemnity obligations if the Spin-Off (as defined below) is taxable.
•Our estimates or judgments relating to our critical accounting policies may prove to be incorrect.
•We may be unable to maintain an effective system of disclosure controls and internal control over financial reporting.
•If our goodwill or intangible assets become impaired, we may be required to record a significant charge.
•Foreign currency exchange rate fluctuations may harm our business.
•Natural disasters, pandemics, power outages, terrorist attacks, acts of war, civilian unrest and similar events could harm our business.
•We may acquire other businesses, which may divert our management’s attention and impact our stock price.
Risks Related to the Convertible Notes
•Servicing our future indebtedness may require a significant amount of cash, which we may not have.
•We may not have the ability to raise the funds necessary for cash settlement of the Convertible Notes.
•The conditional conversion feature of the Convertible Notes may adversely affect our financial condition and operating results.
•The capped call transactions may affect the value of the Convertible Notes and our Class A common stock.
•We are subject to counterparty risk with respect to the Capped Calls.
Risks Related to Ownership of Our Class A Common Stock
•The trading price of our Class A common stock may be volatile and you could lose all or part of your investment.
•Substantial future sales of shares of our Class A common stock could cause the price of our Class A to decline.
•Our dual class capital structure concentrates voting control.
•We cannot predict the impact our capital structure may have on our stock price.
•We are effectively controlled by David A. Morken, our Co-Founder and Chief Executive Officer, whose interests may differ from other stockholders.
•Our stock price and trading volume could decline if securities or industry analysts stop covering our Class A Common Stock.
•Anti-takeover provisions in our organizational documents and Delaware law, could impair a takeover attempt.
•Our certificate of incorporation and bylaws include super-majority voting provisions.
•Our bylaws provide that Delaware will be the sole and exclusive forum for certain stockholder litigation.
•We may need additional capital in the future and such capital may be limited or unavailable.
•We do not intend to pay dividends for the foreseeable future.
PART I - FINANCIAL INFORMATION
Item 1. Business
Overview
A global communications transformation is underway, and we believe Bandwidth is at the center. Our mission is to develop and deliver the power to communicate. We enable innovative organizations—from startup app developers to the world’s largest enterprises—to engage their end-users and deliver exceptional experiences everywhere people live, learn, work and play. Backed by the Bandwidth Communications Cloud, a global owned-and-operated network spanning more than 60 countries reaching over 90 percent of global gross domestic product (“GDP”), innovative enterprises use Bandwidth’s Application Programming Interfaces (“APIs”) to easily embed voice, messaging and emergency services capabilities into software and applications. Bandwidth was the first CPaaS provider to offer a robust selection of APIs built on our own cloud platform. Our award-winning support teams help businesses around the world solve complex communications challenges every day.
Bandwidth’s business benefits from multiple global megatrends, including the enterprise migration to the cloud, the adoption of Contact Center as a Service platforms, the need to be able to work from anywhere, the reinvention of customer experience and the growth in messaging applications to engage directly with consumers. We believe these megatrends, which have created sizable total addressable markets, are secular, long-lasting and still early in the adoption curve.
With the combination of our software APIs, our global Communications Cloud and our broad range of experience with global regulatory frameworks, we believe Bandwidth is one of the best-positioned providers in our space to deliver business-critical communications for global enterprises. In fact, Bandwidth already powers all the 2022 GartnerⓇ Magic Quadrant Leaders in the key cloud communications categories of Unified Communications as a Service (“UCaaS”) and Contact Center as a Service (“CCaaS”).
Our long-term vision is to continue strengthening this position as the key enabling platform for communications transformation. We will seek to do this in three ways: (1) by cross-selling and up-selling within our existing customers as they benefit from our global footprint and powerful APIs to automate and scale cloud communications; (2) by focusing on direct-to-enterprise growth to serve Global 2000 enterprises that come directly to Bandwidth to leverage our services to accelerate their digital transformations, and (3) by aiming to be the preferred provider for Software as a Service (“SaaS”) platforms that use conversational messaging to create digital engagements that enhance the customer experience. These three strategies are the foundation of the durable business we seek to build.
Operating Segments
As a result of certain changes in our business during the quarter ended March 31, 2022, we re-evaluated our segment reporting and determined that one segment was appropriate, rather than the previously reported segments comprising “CPaaS” and “Other”. The primary drivers for this change were the strategic alignment of our operating departments and the sale of certain immaterial legacy businesses. We currently operate in one operating segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, who is our Chief Executive Officer, in deciding how to allocate resources and assessing performance. Our chief operating decision maker allocates resources and assesses performance based upon consolidated financial information.
Go-to-Market Strategy
Bandwidth’s go-to-market strategy is designed around the global shift from on-premises based technology to cloud-based communications. We believe we are the only global CPaaS provider that also owns and operates our own Communications Cloud network. This competitive differentiator has enabled Bandwidth to power each successive wave of the cloud communications revolution–from the unified communications hyperscalers, to the messaging platform leaders, and now directly to global enterprises. As each of these customer categories uses
services on the Bandwidth Communications Cloud in its own unique way, we have designed three key market offerings to power digital communications transformation:
•Market Offering 1: Global Communications Plans. This serves the leading power platforms at the forefront of the communications transformation in UCaaS and CCaaS, through a business-to-business-to-business (“B2B2B”) delivery model. We enable these customers to rapidly automate voice, global number management and many other services on a facilitiesscalable, global basis.
•Market Offering 2: Programmable Services. This comprises our text messaging solutions, through which we support innovative SaaS platforms with use cases like retail and resale basis,eCommerce promotions, financial services identity authentication, and healthcare patient engagement, through a business-to-business-to-consumer (“B2B2C”) delivery model. Programmable Services customers come to our Bandwidth Communications Cloud because we offer high capacity, volume and deliverability. We believe this category represents a significant opportunity for future growth due to our ability to scale with customer demand.
•Market Offering 3: Global Enterprises. This category is a business-to-business channel, where Global 2000 enterprises can now engage directly with us to leverage our services in their digital transformation. Bandwidth provides solutions to facilitate these customers’ efficient transition from their current on-premises equipment to a fully cloud-based solution. To capitalize on this growing opportunity, we now have a dedicated focus on enterprises.
Market Offering 1: Global Communications Plans
Through our Global Communications Plans market offering, we power all the leaders in UCaaS and CCaaS, as recognized by the research firm Gartner, including Microsoft, Google, Zoom, RingCentral, Genesys, and Five9. We have been co-creating with many of these customers for more than a decade.
These leaders rely on Bandwidth to deliver the voice, messaging, and emergency services that are central to their own user experiences. Our APIs also expedite customer onboarding with real-time global programmable number management (ordering, porting, provisioning) to allow providers to customize their customer journeys, embed our global communications capability into their platforms, and reduce friction to accelerate onboarding. These platforms are global in nature, and they expect a communications partner who can provide direct global coverage and regulatory insight. We believe our leadership in this space continues to expand with our global footprint.
We believe Bandwidth’s toll-free voice solution is a major reason contact center platforms build with Bandwidth for their North American business. Offering 5X redundancy with available hands-free alternative routing, our own toll-free voice network is directly peered with four additional network partners, offering customers greater peace of mind. Whenever possible, Bandwidth keeps calls on its own network to enable excellent quality and better return on investment. Our four additional peered networks further enable best-in-class coverage as well as viaresilience—so if one network experiences quality-impacting issues, calls can be routed to a wireless telecommunications license.different network seamlessly, before impacts are even felt. Bandwidth’s Call Assure solution, announced in October 2022, provides hands-free alternative routing that is fully insulated from the core network to protect against an extraordinary disruption, such as a fire, natural disaster or cyberattack.
UnderMarket Offering 2: Programmable Services
Our Programmable Services market offering is aimed at B2B2C platforms that use Bandwidth to deliver digital engagement experiences, primarily through our text messaging solutions.
With a 98 percent open rate by users, text messaging has become a business-critical communication channel to reach consumers. Our easy-to-use APIs and proven track record for deliverability have made Bandwidth a choice for many leading platforms in text messaging.
Our messaging customers are powering digital engagements across many of the Communications Actmajor brands of 1934,products people wear, eat, drive, and use every day. Use cases include retail and eCommerce promotions, financial services identity authentication, healthcare patient engagement, and many more. Bandwidth offers a full suite of messaging products, including Application to Person (“A2P”) messaging solutions supporting both SMS and MMS on Local Numbers (“10DLC”), Toll Free Numbers, and Short Codes. All our solutions support bi-directional unicode, including emojis.
Bandwidth’s capacity, high deliverability, and regulatory know-how have positioned us as amendeda leading provider for messaging platforms. We believe we will continue to win high-volume contracts from enterprises that have run out of capacity with our competitors
Market Offering 3: Global Enterprises
Much as the leading platforms in cloud communications have done for years, followed by the Telecommunications Actmessaging leaders in SaaS, now Global 2000 enterprises need to accelerate their digital transformations. Bandwidth can help these large enterprises transition from their current on-premises equipment to a fully or hybrid cloud-based solution. We now have a dedicated go-to-market focus on enterprises in the Global 2000.
By partnering with Bandwidth, global enterprises can reduce complexity, gain greater control, centralize communication resources and operational workloads, and better prepare for future scale. We believe Bandwidth’s history as an enabler to the platform leaders creates additional competitive benefits, such as deep automation of 1996 (the “1996 Act”), any entity, including cable television companies and electric and gas utilities, may enter any telecommunications market, subject to reasonable state regulation of safety,communications services, enterprise-grade quality and consumer protection. The industry continues to evolve toward new services built upon IP technologies. support, as well as deep operational relationships with the largest UCaaS and CCaaS platforms.
With these technological advances, there have been challengesthree market offerings, we aim for Bandwidth to be a “one stop shop” and critical enabler for global enterprises, SaaS platforms, and cloud communications platforms. We believe the traditional regulatory structure under the 1996 Act. Onecombined power of the challenges that has arisen is fraudour software platform and abuse in the form of illegal robocalling and unwanted text messaging. The FCC has initiated several proceedings to understand and address fraud and abuse, illegal robocalling and unwanted text messaging. Much of the FCC’s efforts to thwart illegal robocalling involve or relate to the Telephone Consumer Protection Act of 1991 (the "TCPA"), which restricts telemarketing calls and the use of automatic text messages without the recipient’s proper consent. The scope and interpretation of these laws and regulations continue to evolve and develop. If we do not comply with these laws or regulations or if we become liable under these laws or regulations due to the failure ofglobal Communications Cloud helps our customers to comply with these laws by obtainingfuture-proof their strategy for the recipient’s proper consent, we could face direct liability.integrations of today, and new services to come.
VoIP Regulation. SomeThe Bandwidth Communications Cloud
We believe one of our key competitive differentiators is the Bandwidth Communications Cloud. It provides a communications developer platform on top of an all-IP, owned-and-operated network with global reach. We believe we provide reliability, scalability, and usage-based control for global business-critical communications.
Automation and Workflow
The Bandwidth Communication Cloud’s command over our own numbering resources enables real-time porting, provisioning and number ordering en masse, and includes:
•coverage in more than 60 countries, serving 90 percent of global GDP;
•network platform paired with peering relationships with major global networks ensure our customers are never more than one hop away from the public switched telephone network (“PSTN”);
•5x resilient U.S. toll-free network, with interconnections to four toll-free networks in addition to our own, designed for best-in-class resiliency from a single provider;
•public safety connectivity purpose-built for today’s dynamic, increasingly remote workforce, interconnected with emergency calling networks worldwide;
•A2P messaging designed to support best-in-class deliverability and insight; and
•a broad range of experience with global regulatory frameworks earned through offering communications services provided through our software APIs may qualify as Voice-over Internet Protocol ("VoIP"). The FCC has imposed various regulatory requirements on VoIP providers that previously applied only to traditional telecommunications providers, such as obligations to provide 911 functionality, to contribute to the federal universal service fund, to comply with regulations
in more than 60 countries and territories.
Core Product Domains
relating to local number portability, to abide by the FCC’s service discontinuance rules, to contribute to the Telecommunications Relay Services fund and to abide by the regulations concerning Customer Proprietary Network Information, outage reporting, access for persons with disabilities and theBandwidth is continually investing in new domains in our Communications Assistance for Law Enforcement Act. InCloud. Below are some instances, these regulations indirectly affect us because they directly apply to our customers. Several state public utility commissions are conducting regulatory proceedings that could affect our rights and obligations, or the rights and obligations of our customers, with respect to IP-based voice applications. Specifically, some states have taken the position that the “local” component of VoIP service is subject to traditional regulations applicable to local telecommunications services, such as the obligation to pay intrastate universal service fees. We cannot predict whether the FCC or state public utility commissions will impose additional requirements, regulations or charges upon our provision of services related to IP communications.
Universal Service. Some of our services are subject to federal and state regulations that implement universal service support for access to communications services in rural and high-cost areas and to low-income consumers at reasonable rates; and access to advanced communications services by schools, libraries and rural health care providers. In some instances, these regulations indirectly affect us because they directly apply to our customers. The FCC assesses us a percentage of interstate and international revenue we receive from retail customers as our contribution to the Federal Universal Service Fund, which assessments we generally pass on to our customers. Additionally, the FCC has ruled that states may assess contributions to their state Universal Service Funds on VoIP providers’ intrastate revenue. Any change in the assessment methodology may affect our revenue and expenses, but at this time it is not possible to predict the extent we would be affected, if at all.
Intercarrier Compensation. Telecommunications carriers compensate one another for traffic carried on each other’s networks. Interexchange carriers pay access charges to local telephone companies for long distance calls that originate and terminate on local networks. Local telephone companies historically have charged one another for local and Internet-bound traffic terminating on each other’s networks. The methodology by which carriers have compensated one another for exchanged traffic, whether it be for local, intrastate or interstate traffic, has been under review by the FCC for over a decade and continues to be subject to on-going reform efforts.
In November 2011, the FCC released its Universal Service Fund/Intercarrier Compensation Transformation Order (the “USF/ICC Transformation Order”). Along with addressing other matters, the USF/ICC Transformation Order established a prospective intercarrier compensation framework for terminating switched access and VoIP traffic. Under the USF/ICC Transformation Order and subsequent related FCC orders, most terminating switched access charges and all reciprocal compensation charges were capped at then-current levels, and will be reduced to zero over, as relevant to us, generally a six-year transition period that began July 1, 2012.
Pursuant to the USF/ICC Transformation Order, VoIP, while remaining unclassified as either an information or a telecommunications service, was prospectively categorized as either local or non-local traffic. If “local”, then VoIP traffic is subject to reciprocal compensation; if “non-local”, then it is subject to interstate rates, thus eliminating any intrastate access rate applicable to VoIP. The USF/ICC Transformation Order did not address the treatment of VoIP retroactively. During 2015, the FCC issued clarifications concerning the rating of VoIP traffic that were favorable to us. Those clarifications were appealed, and in November 2016 the appellate court vacated the FCC’s 2015 clarification and ruled that additional action by the FCC is required. At this time, we cannot predict the outcome of the FCC actions.major product offerings and use cases supported:
State Telecommunications Regulation
The 1996 Act intendedVoice. We offer customers the ability to increase competition in the telecommunications industry, especially in the local market. With respect to localinteract with our voice services incumbent local exchange carriers (or “ILECs”) such as AT&T are required to allow interconnection to their incumbent networks and to provide access to network facilities, as well as several other pro-competitive measures.
State regulatory agencies have jurisdiction when our facilities andthrough SIP or programmable voice API. Our voice services are used to build voice calling in applications and platforms, orchestrate call flows between users or machines, record and bridge calls, initiate text-to-speech for interactive voice response and more. Enterprises can customize high-quality call routing for business voice use cases and global reach. Some of the common use cases are:
•Powering calling plans within cloud communications platforms (UCaaS, CCaaS, Meetings Solutions): Our platform empowers cloud communications leaders to connect their enterprise end-users with local and toll-free connectivity at global scale.
•Embedding ‘click-to-call’ feature: We enhance our enterprise customers’ ability to connect with consumers instantly. Our programmable voice API enables many use cases including call notifications and surveys, advertising campaigns, etc.
•Transitioning from traditional premise focused communications to cloud based services: As enterprises migrate from on-premises equipment to the cloud, Bandwidth can fuel their digital transformation with our software-driven SIP trunking services designed to integrate in hybrid or full cloud deployments.
Messaging API. Our software APIs for messaging deliver a full suite of A2P messaging capabilities, designed to help brands engage with their customers. Bandwidth’s North American messaging services are enabled for local and toll-free phone numbers as well as short codes. While we provide intrastate telecommunicationsa wide range of functionalities, some of the common use cases are:
•Automated real-time notification and alerts: Our APIs empower product leaders and enterprise developers with predefined functionalities to send and receive A2P messages, uniquely integrated with their own business processes or tech stacks.
•Two-factor authentication: We enable enterprises to verify the identity and maintain security of end users through our software-based, multi-channel verification service that sends unique codes to end users to log in to mobile and web applications.
•Group messaging: Product owners utilize our platform to build messaging applications that enable their end-users to share SMS and MMS messages, videos, carry out polls and surveys amongst other uses without leaving the application.
Emergency Services. We provide complete communications solutions (full PSTN replacement) with integrated local emergency services in 38 countries around the globe. We can instantly connect numbers, devices or applications to emergency services with reliable and accurate emergency routing.
•Dynamic Location Routing: Enables real-time, geocoded routing based on X,Y coordinates of the caller and defined Public Safety Answering Point boundaries. This helps enterprises meet compliance requirements and enable increasingly remote workforces.
•Emergency Calling API: Connects apps to the public safety infrastructure without the need for on-premise technology or telephony expertise.
•Emergency Notification API: Enables a multi-channel notification sent to on-site security personnel when an emergency call takes place within a large enterprise.
Video API. Our API for video easily combines with our programmable voice API to create an integrated collaboration experience, and enables users to join calls by video or by voice calling. Easily deployed with mobile,
browser, and server SDKs, our Video API provides such features as multi-party conferencing, support for VP8, H.264 video codecs, screen sharing, connection to the PSTN, and detailed call records.
•PSTN, SIP and browser-based endpoints: We allow customers to connect to PSTN, SIP, and browser-based voice and video endpoints to create a multi-party communication experience, and enable users to make and receive calls around the globe.
•Improve the impact of direct in-application communications: Our API allows applications that depend on making a real connection, such as telehealth, the ability to do so without leaving the context of the application, allowing them to connect face-to-face with consumers with a trackable video.
Phone Numbers. The Bandwidth Dashboard is Bandwidth’s user-friendly interface for a comprehensive number management solution. Every function within The Bandwidth Dashboard has an accompanying API, allowing our customers’ product leaders and developers to integrate Bandwidth’s functionality within their own user interfaces or web applications.
•Global Number Management: Order, provision, and activate local and toll-free phone numbers around the world, in real-time, allowing customers to search and sort by availability, geographic region, city/state, country/area code and many other options.
•Programmatically port up to 20,000 numbers simultaneously: Gain control over the confusing carrier landscape and automate number porting across all major carriers. This allows for a more reliable end-user experience with controlled scheduling and triggered porting activation.
Insights. Bandwidth Insights gives customers a detailed view of their voice and messaging performance to make data-driven decisions and ensure quality of service.
•Understand and solve for deliverability issues: Real-time error codes and alerting allows enterprises to understand and solve for SMS deliverability challenges in an ever-changing text messaging environment.
•Real-time call quality analytics: We provide our customers with real-time call analytics including data such as call duration, customer sentiment and other attributes to better understand call performance and customer experience.
•Track trends, benchmarks and usage: Our Insights API shows trends, delivery rates and usage patterns by product and carrier.
CCaaS and UCaaS Platform Integrations. Bandwidth’s global Communications Cloud integrates with several leading UCaaS and CCaaS platforms under the DuetTM solutions portfolio, to provide a holistic solution that's seamlessly aligned with the organization, and allows enterprises to move communications to the cloud at their own pace. Once numbers are in the Bandwidth Communications Cloud, they can be moved from platform to platform without leaving Bandwidth, decreasing cloud migration risk and complexity.
•DuetTM for Microsoft Teams: As mentioned earlier, we have a Duet partnership with the leading CCaaS platform. We also have Duets in the UCaaS space, including Duet for Microsoft Teams. This includes:
•Direct routing & dynamic E911: Consolidate SIP globally with meaningful direct access to the telephony, and solve for an increasingly dynamic workforce from a single provider.
•Hosted session border controllers (SBCs): Connect telephony without another piece of on-premise equipment. A hosted SBC eliminates complexity and allows for a truly cloud deployment.
•Send-to SMS web application: Allows enterprises the ability to send text messages in and outside of the organization from within the Teams environment, built to work seamlessly with a direct routing or BYOC strategy.
Competitive Strengths
We believe three things give Bandwidth a competitive advantage. First, we have an all-IP platform with global reach. The Bandwidth Communications Cloud provides the connectivity, APIs, security, privacy, workflows, and tools to give enterprises of all sizes a simple, scalable way to consume our services. Second, our API-first approach facilitates the embedding of automation, enterprise-grade tooling, and simple UX/UI throughout the Bandwidth Communications Cloud. Third, we have a broad range of experience with global regulatory frameworks informed by our communications services offerings. We believe customers view Bandwidth as a trusted resource, helping them navigate constant change in the global regulatory landscape. In addition, our innovation-rich culture, customer-centric solutions and track record of successful execution provide us with the following competitive strengths:
A portionfull-stack, open Communications Cloud: We built the Bandwidth Communications Cloud to be enterprise grade. As a result, we believe our deployment is fast, our software APIs are flexible and we enable enterprises to launch and scale quickly. The scale and quality of our Communications Cloud allows us to serve large-scale Internet companies and cloud service providers. It also allows us to provide enterprises with one of the broadest, most complete communications services solutions in the industry--solutions that are ready to integrate with leading UC and contact center platforms to create customized, best-of-breed solutions. Our large library of APIs (including voice, messaging, numbers, emergency services, insights and integrations) allows customers to incorporate a broad range of capabilities into their products and services that would be otherwise unattainable.
Global reach from a single source: Our Communications Cloud provides coverage in more than 60 countries covering more than 90 percent of global GDP. This means our customers can consolidate their communications vendor relationships with Bandwidth, while gaining global reach, resiliency and efficiency for their communications stack. We offer greater levels of quality and delivery assurance than providers offering aggregated services across the public Internet or through resold partnerships. We believe that the control we have over our Communications Cloud gives us distinct competitive advantages that include: enabling our customers to deploy cloud-native services, consistent high quality, in-depth enterprise support, real-time traffic may be classified as intrastatevisibility and economies of scale.
CPaaS based emergency calling capabilities: We believe we are one of the only CPaaS providers with full stack emergency service capabilities. In many countries, it is a legal obligation to ensure on-premise access to local emergency services. Our customers can meet compliance commitments using a single provider in multiple markets where they do business—across North America, Europe and Asia-Pacific. Moreover, our dynamic geospatial routing capability routes emergency calls based on a real-time location of the caller to produce industry-leading results.
Experience & Expertise: Our senior leadership team consists of both new and long-tenured leaders – each an expert with deep and proven experience in the telecommunications and therefore subjectSaaS space. We regularly interact with local regulators in more than 30 countries, and we currently power all the 2022 Gartner Magic Quadrant Leaders in UCaaS and CCaaS. We seek to state regulation.bring this body of experience and knowledge to all our customer engagements.
Growing Relationships with Low Customer Churn: We address the complex needs of the customers we serve, and as a result, these enterprises have continued to innovate and grow with our platform over many years. A number of our largest enterprise customers have been on our platform for more than ten years. Our relationship with each of the enterprises we serve often spans product suites, divisions and use cases over time. Based on surveys conducted after customer interactions in 2022, our customers have expressed a 97% satisfaction rate.
A unique culture focused on people: At Bandwidth, we are authorized to provide competitive local exchange telecommunications services in 49 statesmission first. To accomplish that mission, we’ve created a unique, service-oriented culture, centered on meaningful work, lifting each other up, and the District of Columbia, and thus are subject to these additional regulatory regimes. Changes in applicable state regulations could affect our business.
In addition, we need to maintain interconnection agreements with ILECs where we wish to provide service, which are subject to approval by individual states and subject to state arbitrationinvesting in the eventbodies, minds, and spirits of disputes.our Bandmates. For our customers, this means there’s always a smiling, world-class Bandmate on the other end of the line who will go the extra mile for them. We expectoften hear from our customers that Bandwidth just cares more. For our employees, this means we make a “whole person promise” to offer
meaningful work and programs that ensure Bandmates can find the work/life balance necessary to enjoy a healthy and fulfilling life. Our culture is focused on helping each other succeed in our mission and makes work-life balance possible isn’t just something to feel good about. It drives real results. Our Bandmate engagement and satisfaction scores are consistently ranked higher than our peers. While we are exceptionally proud of the team we have assembled, we also acknowledge that there is important work for us to do to continue developing a more diverse and inclusive team. We believe diverse and inclusive teams are more innovative and make better business decisions.
At Bandwidth, we say, “Your music matters to the BAND.” We celebrate differences and encourage our team members to be their authentic selves. No matter what music a team member makes, we support each team members’ unique gifts and needs with our programs that deliver on our Whole Person Promise. The real masterpiece is in the music we make together with the strength and ingenuity to lift up all those we serve.
Our Your Music Matters program builds outreach programs and initiatives to fill our recruiting funnel with diverse candidates who possess the “Bandwidth Edge”—smart, common sense, hardworking, honest, competitive energy and emotional intelligence. We build external and internal campaigns to fill the recruiting funnel using our talented team members, creative local and non-local outreach partnerships, and virtual platforms to connect with talent who come from different backgrounds, skills, abilities and experiences.
We believe the benefits that we should be ableoffer each of our team members are an important component of our Whole Person Promise. These benefits, which vary based on country location and applicable laws, include: robust medical benefits in which we pay 100% of the premiums for medical, dental and vision insurance; 401(k); industry leading parental leave; and access to negotiatemental health resources.
Bandwidth’s compensation philosophy embraces transparency and educates all Bandmates on our benchmarking process, pay structure design and logical approach to compensation strategy. Research has shown that rigorously-designed compensation strategies like ours are one of the best ways to combat pay disparity and ensure fairness for every team member.
Our Customers
We have a broad and diversified customer base. We benefit from long-standing relationships with some of the largest tech companies, well-recognized enterprise customers, as well as innovative SaaS platforms. Many of our customers have multi-year contracts, with no single customer representing 10% of total revenue for the year ended December 31, 2022.
Our management is highly focused on creating and maintaining strategic partnerships beyond standard transactional customer relationships. We seek to empower enterprises to create, scale and operate business-critical services across any mobile application or otherwise obtain renewals or successorconnected device, and this capability reinforces our customer relationships.
The majority of our customers sign master service agreements through adoption of others’ contracts or through arbitration proceedings, although the rates,(“MSAs”) that contain standard terms and conditions, including billing and payment, default, termination, limitations of liability, confidentiality, assignment and notification, and other key terms and conditions. Customers order specific services in separate service order forms that incorporate the applicable MSA. Each service order form details the minimum contract duration, any applicable monthly recurring charge and applicable non-recurring charges. The terms and conditions for each order are also specified in the applicable service order form.
Sales and Marketing
Our sales and marketing teams are part of a single revenue organization that works closely together to interconnectionidentify and acquire new customers, expand relationships with existing enterprises, and integrate them with the exchangeBandwidth Communications Cloud. Our marketing team generates marketing qualified leads and pipeline for sales through a number of traffic with certain ILECs could change significantly in certain cases.
Corporate Information
Bandwidth Inc. was founded in July 2000 and incorporated in Delaware on March 29, 2001. Our principal executive offices are located at 900 Main Campus Drive Raleigh, NC 27606, and our telephone number is (800) 808-5150. Our website address is www.bandwidth.com. Information contained on, or that can be accessed through,demand-generating channels, including our website, does not constitute part of this Annual Report on Form 10-K.
Available Information
The following information can be found, free of charge, on our corporate website at https://www.bandwidth.com/:
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,marketing campaigns, webinars, sponsored virtual and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securitieslive events, white papers and Exchange Commission;
our policies related to corporate governance, including our Code of Business Conduct and Ethics applying to our directors, officers and employees (including our principal executive officer and principal financial and accounting officer) that we have adopted to meet applicable rules and regulations;
the charters of the Audit and Compensation Committees of our Board of Directors.
In addition, copies of our annual report will be made available, free of charge, upon written request.
We intend to satisfy the applicable disclosure requirements regarding amendments to, or waivers from, provisions of our Code of Business Conduct and Ethics by posting such information on our website. The information contained on our website or accessible through our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report.
blogs, public relations, social media, analyst relations, paid
search and search engine optimization and outbound lead development efforts. These marketing initiatives enhance awareness, preference and adoption of our services, and help us cross-sell opportunities with existing customers.
Item 1A. Risk FactorsWe engage potential customers and existing customers through an enterprise-focused sales approach. Our sales and marketing executives often directly engage C-level executives and other senior business, product and technical decision makers responsible for the end-user experience and financial results at their enterprises. Our sales and marketing executives work to educate these decision makers and their teams about the benefits of using the Bandwidth Communications Cloud to engage their end-users and deliver exceptional experiences everywhere people live, learn, work and play. Our sales team includes a full stack of sales development, inside sales, field sales, revenue enablement and sales engineering functions.
A descriptionResearch and Development
Our ability to compete depends in large part on our continuous commitment to research and development (“R&D”). We seek to continuously enhance our existing offerings and develop new products and services. Our product and network teams are responsible for the ongoing design, development, testing and release of new features and functions in the risksBandwidth Communications Cloud. Our executive management is responsible for creating a vision for our product roadmap and uncertainties associatednew innovation, and our sales and marketing teams relay customer insights, enterprise needs and possible new use cases or enhancements.
Our vision for the Bandwidth Communications Cloud is to be viewed as a singular resource for global enterprise communications. Our near-term roadmap includes a range of solutions to help enterprises create a better total experience for consumers and employees whether through the contact center, hybrid work, text messaging engagement, intelligent emergency services, or a combination thereof.
Competition
The CPaaS market is rapidly evolving and increasingly competitive. We believe that the principal competitive factors in our market are:
•platform scalability, reliability, deliverability, security and performance;
•network control and quality;
•global reach;
•completeness of offering;
•ease of integration and programmability;
•product features;
•customer support;
•ability to deliver measurable value and savings;
•the cost of deploying and using our service offerings;
•the strength of sales and marketing efforts;
•brand awareness and reputation; and
•credibility with product executives and developers.
We believe that we compete favorably based on the factors listed above and believe that none of our business iscompetitors currently competes directly with us across the combination of our global scale, all-IP Communications Cloud, enterprise-grade APIs, and broad regulatory experience gained through our service offerings..
Our competitors fall into two primary categories:
•CPaaS companies that offer a narrower set forth below. You should carefully considerof software APIs, more limited global reach, less robust customer support and fewer other features while relying on third-party networks and physical infrastructure; and
•Incumbent network operators that offer limited geographical reach and limited developer functionality on top of their networks and physical infrastructure, such as AT&T, Colt, Lumen and Verizon.
Some of our competitors have greater financial and technical resources, geographic reach, name recognition or intellectual property portfolios than we do. In addition, some competitors may offer a greater number and variety of products and services than we do, or may offer services in geographies in which we do not operate. We expect competition to intensify in the risks and uncertainties described below, together with all of the other informationfuture. See “Risk Factors–Risks Related to Our Business” elsewhere in this Annual Report on Form 10-K, for additional information on the competitive environment in which we operate, and risks related thereto.
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret laws in the United States and other jurisdictions, as well as license agreements and other contractual protections, to protect our proprietary technology. We also rely on registered and unregistered trademarks to protect our brand.
As of December 31, 2022, we had twenty-nine U.S. patents and three U.S. patent applications pending. In addition, as of December 31, 2022, we had nineteen registered trademarks and two trademark applications pending in the United States and elsewhere.
We seek to protect our intellectual property rights by requiring our employees and independent contractors involved in development of intellectual property on our behalf to enter into agreements acknowledging that all works or other intellectual property generated or conceived by them on our behalf are our property, and assigning to us any rights, including intellectual property rights, that they may claim or otherwise have in those works or property, to the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our condensed consolidated financial statements and related notes appearingextent allowable under applicable law. See “Risk Factors–Risks Related to Our Business” elsewhere in this Annual Report on Form 10-K. The10-K for additional information on our intellectual property rights and risks related thereto.
Employees
As of December 31, 2022, we had approximately 1,100 employees, who are primarily located in the United States, Europe and uncertainties described belowAsia Pacific. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We have not experienced any work stoppages, and we consider our relations with our employees to be good.
Regulatory
General
We and the communications services that we provide through our Communications Cloud and software APIs are subject to many U.S. federal and state and foreign laws and regulations. These laws and regulations may not be the only ones we face. If anyconcern telecommunications, as well as privacy, data protection, intellectual property, competition, consumer protection, taxation or other subjects. Many of the risks actually occur,laws and regulations that apply to us and the communications services that we provide through our business, financial condition, results of operationsCommunications Cloud and prospectssoftware APIs are still evolving and being tested in courts and could be materiallyinterpreted or applied in ways that could harm our business. We describe below certain material components of the regulatory framework in which we operate. See “Risk Factors–Risks Related to Our Business” elsewhere in this Annual Report on Form 10-K for additional information on the regulatory framework in which we operate and adversely affected. In that event, the market pricerisks related thereto.
Risks Related to Our Business
The•Our future growth and the success of our growth and expansion plans dependsdepend on a number of factors that are beyond our control.
•Our growth and financial health are subject to a number of economic risks.
•The market in which we participate is highly competitive, and we may not compete effectively.
•We may not be able to attract new customers in a cost-effective manner.
•The market for some of our services is new and unproven, and may decline or experience limited growth.
•Our ability to meet our goals for revenue growth, cash flow and operating performance depends on customers increasing their use of our services.
•We may not be able to increase the revenue that we derive from enterprises.
•We may not be able to develop service enhancements or new services that achieve market acceptance.
•As we continue to expand geographically and otherwise, we may experience difficulty maintaining our corporate culture and operational infrastructure.
•We have grown rapidly, and may not be able to manage the growth effectively.
•Our pricing and billing systems are complex, and errors could adversely affect our results of operations.
•We must continue to develop effective systems to support our business.
•We may not be able to maintain and enhance our brand and increase market awareness.
•Failure to deliver high-quality support may adversely affect our customer relationships.
•We operate internationally, which exposes us to significant risks.
•The military conflict between Russia and Ukraine, including an expansion of that conflict to other areas, may adversely affect our business.
•If the COVID-19 infection rate returns to pandemic levels, it may harm our business and results of operations.
•Some of our revenue is concentrated in a limited number of enterprise customers.
•Attacks on or breaches of our networks or systems, or on those of third parties on which we rely, including denial-of-service and other cyberattacks, may result in disruption to our services, which could harm our business.
•We are currently subject to litigation, including litigation related to taxes and charges associated with our provision of 911 services.
•Customer misuse of our services and software could result in litigation and harm our business.
•We are subject to litigation in the ordinary course of business, which may harm our business.
•The communications industry faces significant regulatory uncertainties.
•The effects of increased regulation of IP-based service providers are unknown.
•We must obtain and maintain numerous licenses and permits, in the United States and internationally, to operate our network.
•If we violate regulatory requirements that apply to our operations, we may not be able to conduct our business.
•The FCC’s repeal of its Network Neutrality Rules could harm our business.
•Our business is subject to complex and evolving laws, commercial standards, contractual obligations and other requirements regarding privacy and data protection.
•Our business may be harmed if we cannot obtain, retain and distribute local or toll-free numbers.
•We may be exposed to liabilities under anti-corruption, export control and economic sanction regulations.
•Third party intellectual property rights could prevent us from using technologies needed to provide our services.
•Our use of open source software could negatively affect our ability to sell our services and subject us to litigation.
•Indemnity provisions in various agreements potentially expose us to substantial liability.
•We may fail to protect our internally developed systems, technology and software and our intellectual property.
•We may be liable for the information that content owners or distributors distribute over our network.
•Third parties may use our services to commit fraud or steal our services.
•Our customers may choose to discontinue use of VoIP-based services and revert to traditional network service providers.
•We may lose customers if our platform or network fails or is disrupted.
•Defects or errors in our services could harm our business.
•If our emergency services do not function properly, we may be exposed to significant liability.
•Termination of relationships with key suppliers could cause delay and additional costs.
•Our customer churn rate may increase.
•The prices for some of our services have decreased in the past and may do so again in the future.
•The need to obtain additional IP circuits or interconnect with other networks could increases our costs.
•The loss of any member of our senior management team or key employees could harm our business.
•If we are unable to hire, retain and motivate qualified personnel, our business will suffer.
•We could be subject to additional tax liabilities for historic and future sales, use and similar taxes.
•Our global operations and legal entity structure subject us to potentially adverse income tax consequences.
•Our ability to use our net operating loss and tax credit carryforwards to offset future taxable income may be limited.
•We may be subject to significant tax-related liabilities and indemnity obligations if the Spin-Off (as defined below) is taxable.
•Our estimates or judgments relating to our critical accounting policies may prove to be incorrect.
•We may be unable to maintain an effective system of disclosure controls and internal control over financial reporting.
•If our goodwill or intangible assets become impaired, we may be required to record a significant charge.
•Foreign currency exchange rate fluctuations may harm our business.
•Natural disasters, pandemics, power outages, terrorist attacks, acts of war, civilian unrest and similar events could harm our business.
•We may acquire other businesses, which may divert our management’s attention and impact our stock price.
Risks Related to the Convertible Notes
•Servicing our future indebtedness may require a significant amount of cash, which we may not have.
•We may not have the ability to raise the funds necessary for cash settlement of the Convertible Notes.
•The conditional conversion feature of the Convertible Notes may adversely affect our financial condition and operating results.
•The capped call transactions may affect the value of the Convertible Notes and our Class A common stock.
•We are subject to counterparty risk with respect to the Capped Calls.
Risks Related to Ownership of Our Class A Common Stock
•The trading price of our Class A common stock may be volatile and you could lose all or part of your investment.
•Substantial future sales of shares of our Class A common stock could cause the price of our Class A to decline.
•Our dual class capital structure concentrates voting control.
•We cannot predict the impact our capital structure may have on our stock price.
•We are effectively controlled by David A. Morken, our Co-Founder and Chief Executive Officer, whose interests may differ from other stockholders.
•Our stock price and trading volume could decline if securities or industry analysts stop covering our Class A Common Stock.
•Anti-takeover provisions in our organizational documents and Delaware law, could impair a takeover attempt.
•Our certificate of incorporation and bylaws include super-majority voting provisions.
•Our bylaws provide that Delaware will be the sole and exclusive forum for certain stockholder litigation.
•We may need additional capital in the future and such capital may be limited or unavailable.
•We do not intend to pay dividends for the foreseeable future.
PART I - FINANCIAL INFORMATION
Item 1. Business
Overview
A global communications transformation is underway, and we believe Bandwidth is at the center. Our mission is to develop and deliver the power to communicate. We enable innovative organizations—from startup app developers to the world’s largest enterprises—to engage their end-users and deliver exceptional experiences everywhere people live, learn, work and play. Backed by the Bandwidth Communications Cloud, a global owned-and-operated network spanning more than 60 countries reaching over 90 percent of global gross domestic product (“GDP”), innovative enterprises use Bandwidth’s Application Programming Interfaces (“APIs”) to easily embed voice, messaging and emergency services capabilities into software and applications. Bandwidth was the first CPaaS provider to offer a robust selection of APIs built on our own cloud platform. Our award-winning support teams help businesses around the world solve complex communications challenges every day.
Bandwidth’s business benefits from multiple global megatrends, including the enterprise migration to the cloud, the adoption of Contact Center as a Service platforms, the need to be able to work from anywhere, the reinvention of customer experience and the growth in messaging applications to engage directly with consumers. We believe these megatrends, which have created sizable total addressable markets, are secular, long-lasting and still early in the adoption curve.
With the combination of our software APIs, our global Communications Cloud and our broad range of experience with global regulatory frameworks, we believe Bandwidth is one of the best-positioned providers in our space to deliver business-critical communications for global enterprises. In fact, Bandwidth already powers all the 2022 GartnerⓇ Magic Quadrant Leaders in the key cloud communications categories of Unified Communications as a Service (“UCaaS”) and Contact Center as a Service (“CCaaS”).
Our long-term vision is to continue strengthening this position as the key enabling platform for communications transformation. We will seek to do this in three ways: (1) by cross-selling and up-selling within our existing customers as they benefit from our global footprint and powerful APIs to automate and scale cloud communications; (2) by focusing on direct-to-enterprise growth to serve Global 2000 enterprises that come directly to Bandwidth to leverage our services to accelerate their digital transformations, and (3) by aiming to be the preferred provider for Software as a Service (“SaaS”) platforms that use conversational messaging to create digital engagements that enhance the customer experience. These three strategies are the foundation of the durable business we seek to build.
Operating Segments
As a result of certain changes in our business during the quarter ended March 31, 2022, we re-evaluated our segment reporting and determined that one segment was appropriate, rather than the previously reported segments comprising “CPaaS” and “Other”. The primary drivers for this change were the strategic alignment of our operating departments and the sale of certain immaterial legacy businesses. We currently operate in one operating segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, who is our Chief Executive Officer, in deciding how to allocate resources and assessing performance. Our chief operating decision maker allocates resources and assesses performance based upon consolidated financial information.
Go-to-Market Strategy
Bandwidth’s go-to-market strategy is designed around the global shift from on-premises based technology to cloud-based communications. We believe we are the only global CPaaS provider that also owns and operates our own Communications Cloud network. This competitive differentiator has enabled Bandwidth to power each successive wave of the cloud communications revolution–from the unified communications hyperscalers, to the messaging platform leaders, and now directly to global enterprises. As each of these customer categories uses
services on the Bandwidth Communications Cloud in its own unique way, we have designed three key market offerings to power digital communications transformation:
•Market Offering 1: Global Communications Plans. This serves the leading power platforms at the forefront of the communications transformation in UCaaS and CCaaS, through a business-to-business-to-business (“B2B2B”) delivery model. We enable these customers to rapidly automate voice, global number management and many other services on a scalable, global basis.
•Market Offering 2: Programmable Services. This comprises our text messaging solutions, through which we support innovative SaaS platforms with use cases like retail and eCommerce promotions, financial services identity authentication, and healthcare patient engagement, through a business-to-business-to-consumer (“B2B2C”) delivery model. Programmable Services customers come to our Bandwidth Communications Cloud because we offer high capacity, volume and deliverability. We believe this category represents a significant opportunity for future growth due to our ability to scale with customer demand.
•Market Offering 3: Global Enterprises. This category is a business-to-business channel, where Global 2000 enterprises can now engage directly with us to leverage our services in their digital transformation. Bandwidth provides solutions to facilitate these customers’ efficient transition from their current on-premises equipment to a fully cloud-based solution. To capitalize on this growing opportunity, we now have a dedicated focus on enterprises.
Market Offering 1: Global Communications Plans
Through our Global Communications Plans market offering, we power all the leaders in UCaaS and CCaaS, as recognized by the research firm Gartner, including Microsoft, Google, Zoom, RingCentral, Genesys, and Five9. We have been co-creating with many of these customers for more than a decade.
These leaders rely on Bandwidth to deliver the voice, messaging, and emergency services that are central to their own user experiences. Our APIs also expedite customer onboarding with real-time global programmable number management (ordering, porting, provisioning) to allow providers to customize their customer journeys, embed our global communications capability into their platforms, and reduce friction to accelerate onboarding. These platforms are global in nature, and they expect a communications partner who can provide direct global coverage and regulatory insight. We believe our leadership in this space continues to expand with our global footprint.
We believe Bandwidth’s toll-free voice solution is a major reason contact center platforms build with Bandwidth for their North American business. Offering 5X redundancy with available hands-free alternative routing, our own toll-free voice network is directly peered with four additional network partners, offering customers greater peace of mind. Whenever possible, Bandwidth keeps calls on its own network to enable excellent quality and better return on investment. Our four additional peered networks further enable best-in-class coverage as well as resilience—so if one network experiences quality-impacting issues, calls can be routed to a different network seamlessly, before impacts are even felt. Bandwidth’s Call Assure solution, announced in October 2022, provides hands-free alternative routing that is fully insulated from the core network to protect against an extraordinary disruption, such as a fire, natural disaster or cyberattack.
Market Offering 2: Programmable Services
Our Programmable Services market offering is aimed at B2B2C platforms that use Bandwidth to deliver digital engagement experiences, primarily through our text messaging solutions.
With a 98 percent open rate by users, text messaging has become a business-critical communication channel to reach consumers. Our easy-to-use APIs and proven track record for deliverability have made Bandwidth a choice for many leading platforms in text messaging.
Our messaging customers are powering digital engagements across many of the major brands of products people wear, eat, drive, and use every day. Use cases include retail and eCommerce promotions, financial services identity authentication, healthcare patient engagement, and many more. Bandwidth offers a full suite of messaging products, including Application to Person (“A2P”) messaging solutions supporting both SMS and MMS on Local Numbers (“10DLC”), Toll Free Numbers, and Short Codes. All our solutions support bi-directional unicode, including emojis.
Bandwidth’s capacity, high deliverability, and regulatory know-how have positioned us as a leading provider for messaging platforms. We believe we will continue to win high-volume contracts from enterprises that have run out of capacity with our competitors
Market Offering 3: Global Enterprises
Much as the leading platforms in cloud communications have done for years, followed by the messaging leaders in SaaS, now Global 2000 enterprises need to accelerate their digital transformations. Bandwidth can help these large enterprises transition from their current on-premises equipment to a fully or hybrid cloud-based solution. We now have a dedicated go-to-market focus on enterprises in the Global 2000.
By partnering with Bandwidth, global enterprises can reduce complexity, gain greater control, centralize communication resources and operational workloads, and better prepare for future scale. We believe Bandwidth’s history as an enabler to the platform leaders creates additional competitive benefits, such as deep automation of communications services, enterprise-grade quality and support, as well as deep operational relationships with the largest UCaaS and CCaaS platforms.
With these three market offerings, we aim for Bandwidth to be a “one stop shop” and critical enabler for global enterprises, SaaS platforms, and cloud communications platforms. We believe the combined power of our software platform and global Communications Cloud helps our customers to future-proof their strategy for the integrations of today, and new services to come.
The Bandwidth Communications Cloud
We believe one of our key competitive differentiators is the Bandwidth Communications Cloud. It provides a communications developer platform on top of an all-IP, owned-and-operated network with global reach. We believe we provide reliability, scalability, and usage-based control for global business-critical communications.
Automation and Workflow
The Bandwidth Communication Cloud’s command over our own numbering resources enables real-time porting, provisioning and number ordering en masse, and includes:
•coverage in more than 60 countries, serving 90 percent of global GDP;
•network platform paired with peering relationships with major global networks ensure our customers are never more than one hop away from the public switched telephone network (“PSTN”);
•5x resilient U.S. toll-free network, with interconnections to four toll-free networks in addition to our own, designed for best-in-class resiliency from a single provider;
•public safety connectivity purpose-built for today’s dynamic, increasingly remote workforce, interconnected with emergency calling networks worldwide;
•A2P messaging designed to support best-in-class deliverability and insight; and
•a broad range of experience with global regulatory frameworks earned through offering communications services in more than 60 countries and territories.
Core Product Domains
Bandwidth is continually investing in new domains in our Communications Cloud. Below are some of the major product offerings and use cases supported:
Voice. We offer customers the ability to interact with our voice services through SIP or programmable voice API. Our voice services are used to build voice calling in applications and platforms, orchestrate call flows between users or machines, record and bridge calls, initiate text-to-speech for interactive voice response and more. Enterprises can customize high-quality call routing for business voice use cases and global reach. Some of the common use cases are:
•Powering calling plans within cloud communications platforms (UCaaS, CCaaS, Meetings Solutions): Our platform empowers cloud communications leaders to connect their enterprise end-users with local and toll-free connectivity at global scale.
•Embedding ‘click-to-call’ feature: We enhance our enterprise customers’ ability to connect with consumers instantly. Our programmable voice API enables many use cases including call notifications and surveys, advertising campaigns, etc.
•Transitioning from traditional premise focused communications to cloud based services: As enterprises migrate from on-premises equipment to the cloud, Bandwidth can fuel their digital transformation with our software-driven SIP trunking services designed to integrate in hybrid or full cloud deployments.
Messaging API. Our software APIs for messaging deliver a full suite of A2P messaging capabilities, designed to help brands engage with their customers. Bandwidth’s North American messaging services are enabled for local and toll-free phone numbers as well as short codes. While we provide a wide range of functionalities, some of the common use cases are:
•Automated real-time notification and alerts: Our APIs empower product leaders and enterprise developers with predefined functionalities to send and receive A2P messages, uniquely integrated with their own business processes or tech stacks.
•Two-factor authentication: We enable enterprises to verify the identity and maintain security of end users through our software-based, multi-channel verification service that sends unique codes to end users to log in to mobile and web applications.
•Group messaging: Product owners utilize our platform to build messaging applications that enable their end-users to share SMS and MMS messages, videos, carry out polls and surveys amongst other uses without leaving the application.
Emergency Services. We provide complete communications solutions (full PSTN replacement) with integrated local emergency services in 38 countries around the globe. We can instantly connect numbers, devices or applications to emergency services with reliable and accurate emergency routing.
•Dynamic Location Routing: Enables real-time, geocoded routing based on X,Y coordinates of the caller and defined Public Safety Answering Point boundaries. This helps enterprises meet compliance requirements and enable increasingly remote workforces.
•Emergency Calling API: Connects apps to the public safety infrastructure without the need for on-premise technology or telephony expertise.
•Emergency Notification API: Enables a multi-channel notification sent to on-site security personnel when an emergency call takes place within a large enterprise.
Video API. Our API for video easily combines with our programmable voice API to create an integrated collaboration experience, and enables users to join calls by video or by voice calling. Easily deployed with mobile,
browser, and server SDKs, our Video API provides such features as multi-party conferencing, support for VP8, H.264 video codecs, screen sharing, connection to the PSTN, and detailed call records.
•PSTN, SIP and browser-based endpoints: We allow customers to connect to PSTN, SIP, and browser-based voice and video endpoints to create a multi-party communication experience, and enable users to make and receive calls around the globe.
•Improve the impact of direct in-application communications: Our API allows applications that depend on making a real connection, such as telehealth, the ability to do so without leaving the context of the application, allowing them to connect face-to-face with consumers with a trackable video.
Phone Numbers. The Bandwidth Dashboard is Bandwidth’s user-friendly interface for a comprehensive number management solution. Every function within The Bandwidth Dashboard has an accompanying API, allowing our customers’ product leaders and developers to integrate Bandwidth’s functionality within their own user interfaces or web applications.
•Global Number Management: Order, provision, and activate local and toll-free phone numbers around the world, in real-time, allowing customers to search and sort by availability, geographic region, city/state, country/area code and many other options.
•Programmatically port up to 20,000 numbers simultaneously: Gain control over the confusing carrier landscape and automate number porting across all major carriers. This allows for a more reliable end-user experience with controlled scheduling and triggered porting activation.
Insights. Bandwidth Insights gives customers a detailed view of their voice and messaging performance to make data-driven decisions and ensure quality of service.
•Understand and solve for deliverability issues: Real-time error codes and alerting allows enterprises to understand and solve for SMS deliverability challenges in an ever-changing text messaging environment.
•Real-time call quality analytics: We provide our customers with real-time call analytics including data such as call duration, customer sentiment and other attributes to better understand call performance and customer experience.
•Track trends, benchmarks and usage: Our Insights API shows trends, delivery rates and usage patterns by product and carrier.
CCaaS and UCaaS Platform Integrations. Bandwidth’s global Communications Cloud integrates with several leading UCaaS and CCaaS platforms under the DuetTM solutions portfolio, to provide a holistic solution that's seamlessly aligned with the organization, and allows enterprises to move communications to the cloud at their own pace. Once numbers are in the Bandwidth Communications Cloud, they can be moved from platform to platform without leaving Bandwidth, decreasing cloud migration risk and complexity.
•DuetTM for Microsoft Teams: As mentioned earlier, we have a Duet partnership with the leading CCaaS platform. We also have Duets in the UCaaS space, including Duet for Microsoft Teams. This includes:
•Direct routing & dynamic E911: Consolidate SIP globally with meaningful direct access to the telephony, and solve for an increasingly dynamic workforce from a single provider.
•Hosted session border controllers (SBCs): Connect telephony without another piece of on-premise equipment. A hosted SBC eliminates complexity and allows for a truly cloud deployment.
•Send-to SMS web application: Allows enterprises the ability to send text messages in and outside of the organization from within the Teams environment, built to work seamlessly with a direct routing or BYOC strategy.
Competitive Strengths
We believe three things give Bandwidth a competitive advantage. First, we have an all-IP platform with global reach. The Bandwidth Communications Cloud provides the connectivity, APIs, security, privacy, workflows, and tools to give enterprises of all sizes a simple, scalable way to consume our services. Second, our API-first approach facilitates the embedding of automation, enterprise-grade tooling, and simple UX/UI throughout the Bandwidth Communications Cloud. Third, we have a broad range of experience with global regulatory frameworks informed by our communications services offerings. We believe customers view Bandwidth as a trusted resource, helping them navigate constant change in the global regulatory landscape. In addition, our innovation-rich culture, customer-centric solutions and track record of successful execution provide us with the following competitive strengths:
A full-stack, open Communications Cloud: We built the Bandwidth Communications Cloud to be enterprise grade. As a result, we believe our deployment is fast, our software APIs are flexible and we enable enterprises to launch and scale quickly. The scale and quality of our Communications Cloud allows us to serve large-scale Internet companies and cloud service providers. It also allows us to provide enterprises with one of the broadest, most complete communications services solutions in the industry--solutions that are ready to integrate with leading UC and contact center platforms to create customized, best-of-breed solutions. Our large library of APIs (including voice, messaging, numbers, emergency services, insights and integrations) allows customers to incorporate a broad range of capabilities into their products and services that would be otherwise unattainable.
Global reach from a single source: Our Communications Cloud provides coverage in more than 60 countries covering more than 90 percent of global GDP. This means our customers can consolidate their communications vendor relationships with Bandwidth, while gaining global reach, resiliency and efficiency for their communications stack. We offer greater levels of quality and delivery assurance than providers offering aggregated services across the public Internet or through resold partnerships. We believe that the control we have over our Communications Cloud gives us distinct competitive advantages that include: enabling our customers to deploy cloud-native services, consistent high quality, in-depth enterprise support, real-time traffic visibility and economies of scale.
CPaaS based emergency calling capabilities: We believe we are one of the only CPaaS providers with full stack emergency service capabilities. In many countries, it is a legal obligation to ensure on-premise access to local emergency services. Our customers can meet compliance commitments using a single provider in multiple markets where they do business—across North America, Europe and Asia-Pacific. Moreover, our dynamic geospatial routing capability routes emergency calls based on a real-time location of the caller to produce industry-leading results.
Experience & Expertise: Our senior leadership team consists of both new and long-tenured leaders – each an expert with deep and proven experience in the telecommunications and SaaS space. We regularly interact with local regulators in more than 30 countries, and we currently power all the 2022 Gartner Magic Quadrant Leaders in UCaaS and CCaaS. We seek to bring this body of experience and knowledge to all our customer engagements.
Growing Relationships with Low Customer Churn: We address the complex needs of the customers we serve, and as a result, these enterprises have continued to innovate and grow with our platform over many years. A number of our largest enterprise customers have been on our platform for more than ten years. Our relationship with each of the enterprises we serve often spans product suites, divisions and use cases over time. Based on surveys conducted after customer interactions in 2022, our customers have expressed a 97% satisfaction rate.
A unique culture focused on people: At Bandwidth, we are mission first. To accomplish that mission, we’ve created a unique, service-oriented culture, centered on meaningful work, lifting each other up, and investing in the bodies, minds, and spirits of our Bandmates. For our customers, this means there’s always a smiling, world-class Bandmate on the other end of the line who will go the extra mile for them. We often hear from our customers that Bandwidth just cares more. For our employees, this means we make a “whole person promise” to offer
meaningful work and programs that ensure Bandmates can find the work/life balance necessary to enjoy a healthy and fulfilling life. Our culture is focused on helping each other succeed in our mission and makes work-life balance possible isn’t just something to feel good about. It drives real results. Our Bandmate engagement and satisfaction scores are consistently ranked higher than our peers. While we are exceptionally proud of the team we have assembled, we also acknowledge that there is important work for us to do to continue developing a more diverse and inclusive team. We believe diverse and inclusive teams are more innovative and make better business decisions.
At Bandwidth, we say, “Your music matters to the BAND.” We celebrate differences and encourage our team members to be their authentic selves. No matter what music a team member makes, we support each team members’ unique gifts and needs with our programs that deliver on our Whole Person Promise. The real masterpiece is in the music we make together with the strength and ingenuity to lift up all those we serve.
Our Your Music Matters program builds outreach programs and initiatives to fill our recruiting funnel with diverse candidates who possess the “Bandwidth Edge”—smart, common sense, hardworking, honest, competitive energy and emotional intelligence. We build external and internal campaigns to fill the recruiting funnel using our talented team members, creative local and non-local outreach partnerships, and virtual platforms to connect with talent who come from different backgrounds, skills, abilities and experiences.
We believe the benefits that we offer each of our team members are an important component of our Whole Person Promise. These benefits, which vary based on country location and applicable laws, include: robust medical benefits in which we pay 100% of the premiums for medical, dental and vision insurance; 401(k); industry leading parental leave; and access to mental health resources.
Bandwidth’s compensation philosophy embraces transparency and educates all Bandmates on our benchmarking process, pay structure design and logical approach to compensation strategy. Research has shown that rigorously-designed compensation strategies like ours are one of the best ways to combat pay disparity and ensure fairness for every team member.
Our Customers
We have a broad and diversified customer base. We benefit from long-standing relationships with some of the largest tech companies, well-recognized enterprise customers, as well as innovative SaaS platforms. Many of our customers have multi-year contracts, with no single customer representing 10% of total revenue for the year ended December 31, 2022.
Our management is highly focused on creating and maintaining strategic partnerships beyond standard transactional customer relationships. We seek to empower enterprises to create, scale and operate business-critical services across any mobile application or connected device, and this capability reinforces our customer relationships.
The majority of our customers sign master service agreements (“MSAs”) that contain standard terms and conditions, including billing and payment, default, termination, limitations of liability, confidentiality, assignment and notification, and other key terms and conditions. Customers order specific services in separate service order forms that incorporate the applicable MSA. Each service order form details the minimum contract duration, any applicable monthly recurring charge and applicable non-recurring charges. The terms and conditions for each order are also specified in the applicable service order form.
Sales and Marketing
Our sales and marketing teams are part of a single revenue organization that works closely together to identify and acquire new customers, expand relationships with existing enterprises, and integrate them with the Bandwidth Communications Cloud. Our marketing team generates marketing qualified leads and pipeline for sales through a number of demand-generating channels, including our website, marketing campaigns, webinars, sponsored virtual and live events, white papers and blogs, public relations, social media, analyst relations, paid
search and search engine optimization and outbound lead development efforts. These marketing initiatives enhance awareness, preference and adoption of our services, and help us cross-sell opportunities with existing customers.
We engage potential customers and existing customers through an enterprise-focused sales approach. Our sales and marketing executives often directly engage C-level executives and other senior business, product and technical decision makers responsible for the end-user experience and financial results at their enterprises. Our sales and marketing executives work to educate these decision makers and their teams about the benefits of using the Bandwidth Communications Cloud to engage their end-users and deliver exceptional experiences everywhere people live, learn, work and play. Our sales team includes a full stack of sales development, inside sales, field sales, revenue enablement and sales engineering functions.
Research and Development
Our ability to compete depends in large part on our continuous commitment to research and development (“R&D”). We seek to continuously enhance our existing offerings and develop new products and services. Our product and network teams are responsible for the ongoing design, development, testing and release of new features and functions in the Bandwidth Communications Cloud. Our executive management is responsible for creating a vision for our product roadmap and new innovation, and our sales and marketing teams relay customer insights, enterprise needs and possible new use cases or enhancements.
Our vision for the Bandwidth Communications Cloud is to be viewed as a singular resource for global enterprise communications. Our near-term roadmap includes a range of solutions to help enterprises create a better total experience for consumers and employees whether through the contact center, hybrid work, text messaging engagement, intelligent emergency services, or a combination thereof.
Competition
The CPaaS market is rapidly evolving and increasingly competitive. We believe that the principal competitive factors in our market are:
•platform scalability, reliability, deliverability, security and performance;
•network control and quality;
•global reach;
•completeness of offering;
•ease of integration and programmability;
•product features;
•customer support;
•ability to deliver measurable value and savings;
•the cost of deploying and using our service offerings;
•the strength of sales and marketing efforts;
•brand awareness and reputation; and
•credibility with product executives and developers.
We believe that we compete favorably based on the factors listed above and believe that none of our competitors currently competes directly with us across the combination of our global scale, all-IP Communications Cloud, enterprise-grade APIs, and broad regulatory experience gained through our service offerings..
Our competitors fall into two primary categories:
•CPaaS companies that offer a narrower set of software APIs, more limited global reach, less robust customer support and fewer other features while relying on third-party networks and physical infrastructure; and
•Incumbent network operators that offer limited geographical reach and limited developer functionality on top of their networks and physical infrastructure, such as AT&T, Colt, Lumen and Verizon.
Some of our competitors have greater financial and technical resources, geographic reach, name recognition or intellectual property portfolios than we do. In addition, some competitors may offer a greater number and variety of products and services than we do, or may offer services in geographies in which we do not operate. We expect competition to intensify in the future. See “Risk Factors–Risks Related to Our Business” elsewhere in this Annual Report on Form 10-K, for additional information on the competitive environment in which we operate, and risks related thereto.
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret laws in the United States and other jurisdictions, as well as license agreements and other contractual protections, to protect our proprietary technology. We also rely on registered and unregistered trademarks to protect our brand.
As of December 31, 2022, we had twenty-nine U.S. patents and three U.S. patent applications pending. In addition, as of December 31, 2022, we had nineteen registered trademarks and two trademark applications pending in the United States and elsewhere.
We seek to protect our intellectual property rights by requiring our employees and independent contractors involved in development of intellectual property on our behalf to enter into agreements acknowledging that all works or other intellectual property generated or conceived by them on our behalf are our property, and assigning to us any rights, including intellectual property rights, that they may claim or otherwise have in those works or property, to the extent allowable under applicable law. See “Risk Factors–Risks Related to Our Business” elsewhere in this Annual Report on Form 10-K for additional information on our intellectual property rights and risks related thereto.
Employees
As of December 31, 2022, we had approximately 1,100 employees, who are primarily located in the United States, Europe and Asia Pacific. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We have not experienced any work stoppages, and we consider our relations with our employees to be good.
Regulatory
General
We and the communications services that we provide through our Communications Cloud and software APIs are subject to many U.S. federal and state and foreign laws and regulations. These laws and regulations may concern telecommunications, as well as privacy, data protection, intellectual property, competition, consumer protection, taxation or other subjects. Many of the laws and regulations that apply to us and the communications services that we provide through our Communications Cloud and software APIs are still evolving and being tested in courts and could be interpreted or applied in ways that could harm our business. We describe below certain material components of the regulatory framework in which we operate. See “Risk Factors–Risks Related to Our Business” elsewhere in this Annual Report on Form 10-K for additional information on the regulatory framework in which we operate and risks related thereto.
Federal Telecommunications Regulation
The Federal Communications Commission (“FCC”) has jurisdiction over interstate and international telecommunications services in the U.S. We have obtained FCC authorization to provide services on a facilities and resale basis.
Under the Communications Act of 1934, as amended by the Telecommunications Act of 1996 (the “1996 Act”), any entity, including cable television companies and electric and gas utilities, may enter any telecommunications market, subject to reasonable state regulation of safety, quality and consumer protection. The industry continues to evolve toward new services built upon IP technologies. With these technological advances, there have been challenges to the traditional regulatory structure under the 1996 Act. Among the challenges are fraud and abuse in the form of illegal robocalling and unwanted text messaging. In December 2019, Congress adopted the Telephone Robocall Abuse Criminal Enforcement and Deterrence (“TRACED”) Act. Among other things, the TRACED Act directs the FCC to conduct a number of different rulemaking proceedings and increases the FCC’s enforcement authority. As a result, the FCC is conducting several proceedings to understand and address fraud and abuse in the form of illegal robocalling. Separately, the FCC and other governmental agencies work to thwart illegal robocalling through the Telephone Consumer Protection Act of 1991 (the “TCPA”), which restricts telemarketing calls and the use of automatic text messages without the recipient’s proper consent. The Federal Trade Commission and state attorneys general also have the authority to enforce compliance with the TCPA. Moreover, the TCPA also allows aggrieved private parties to directly seek civil remedies and seek statutory-defined damages for calls or text messages received without recipients’ proper consent.
VoIP Regulation. Some communications services provided through our software APIs may qualify as Voice-over Internet Protocol (“VoIP”). The FCC has imposed regulatory requirements on VoIP providers that previously applied only to traditional telecommunications providers, such as obligations to provide 911 functionality, to contribute to the federal universal service fund, to comply with regulations relating to local number portability, to abide by the FCC’s service discontinuance rules, to contribute to the Telecommunications Relay Services fund and to abide by the regulations concerning Customer Proprietary Network Information (“CPNI”), outage reporting, access for persons with disabilities, the Communications Assistance for Law Enforcement Act and expanded obligations with respect to the transmission of emergency calls. In some instances, these regulations indirectly affect us because they directly apply to our customers. Additionally, several state public utility commissions are conducting regulatory proceedings that could affect our rights and obligations, or the rights and obligations of our customers, with respect to IP-based voice applications. Some states have taken the position that the “local” component of VoIP service is subject to traditional regulations applicable to local telecommunications services, such as the obligation to pay intrastate universal service fees and other state-related telecommunications taxes, fees and surcharges. We cannot predict whether the FCC or state public utility commissions will impose additional requirements, regulations or charges upon our provision of services related to IP communications.
Universal Service. Some services are subject to federal and state regulations that implement universal service support for access to communications services in rural and high-cost areas and to low-income consumers at reasonable rates; and access to advanced communications services by schools, libraries and rural health care providers. In some instances, these regulations indirectly affect us because they directly apply to our customers. The FCC assesses a contribution amount based on a percentage of interstate and international revenue we receive from certain customers as our contribution to the Federal Universal Service Fund. These assessments are generally passed on to our customers. Additionally, the FCC has ruled that states may assess contributions to their state Universal Service Funds on VoIP providers’ intrastate revenue. Any change in the assessment methodology may affect our revenue and expenses, but at this time it is not possible to predict the extent we would be affected.
Intercarrier Compensation. Telecommunications carriers compensate one another for traffic carried on each other’s networks. Interexchange carriers pay access charges to local telephone companies for long distance calls that originate and terminate on local networks. Local telephone companies historically have charged one another for local and Internet-bound traffic terminating on each other’s networks. The methodology by which carriers have
compensated one another for exchanged traffic, whether it be for local, intrastate or interstate traffic, has been subject to ongoing reform efforts at the FCC.
In its November 2011 Universal Service Fund/Intercarrier Compensation Transformation Order (the “USF/ICC Transformation Order”) and subsequent related FCC orders, most terminating switched access charges and all reciprocal compensation charges were capped at then-current levels, and were reduced to zero over, as relevant to us, generally a six-year transition period that began July 1, 2012.
Pursuant to the USF/ICC Transformation Order, VoIP, while remaining unclassified as either an information or a telecommunications service, was prospectively categorized as either local or non-local traffic. On December 17, 2019, the FCC issued an order that concludes that local exchange carriers (“LECs”) may assess end office switched access charges only if the LEC or its VoIP partner provides a physical connection to the last-mile facilities used to serve an end user. If neither the LEC nor its VoIP partner provides such a physical connection, the LEC may not assess end office switched access charges because it is not providing the functional equivalent of end office switched access. The FCC also decided to give its order retroactive effect. We cannot predict the impact on our business, including whether other carriers will agree with our legal interpretations and treatments, at this time.
In a Report and Order released on October 9, 2020, the FCC adopted new rules governing various aspects of the intercarrier compensation structure applicable to toll free (8YY) calls (“8YY Originating Access Reform Order”). The new 8YY originating access rules took effect on December 28, 2020. The new rules are generally intended to shift most switched access charges for 8YY calls to a bill-and-keep framework over a three-year period.
Emergency Services. Pursuant to Federal legislation called Ray Baum’s Act and Kari’s Law, the FCC adopted new emergency calling regulations that began to take effect in early 2020 continuing through January 2022. These new regulations address the obligations of communication service providers and software providers, like us, as well as equipment installers, managers and operators of a variety of different types of communications systems, and generally require uniformity in dialing patterns for contacting emergency operators, implementing central notification functionalities. The rules also require the transmission of more precise location information in enterprise or campus environments. The granularity of the location information depends on the type of service. There is some ambiguity in the rules as to the specific obligations of each party involved in the service delivery chain and the rules have not yet been interpreted by the FCC or a court. More recently, in November 2022, the FCC released new 911 outage reporting requirements that expanded the scope of previous 911 outage reporting obligations to now broadly include originating service providers.
State Telecommunications Regulation
The 1996 Act was intended to increase competition in the telecommunications industry, especially in the local market. With respect to local services, incumbent local exchange carriers (“ILECs”) such as AT&T are required to allow interconnection to their incumbent networks and to provide access to network facilities, as well as several other pro-competitive measures.
State regulatory agencies have jurisdiction when our facilities and services are used to provide intrastate telecommunications services. A portion of our traffic may be classified as intrastate telecommunications and therefore subject to state regulation. We are authorized to provide competitive local exchange telecommunications services in 49 states and the District of Columbia, and thus are subject to these additional regulatory regimes. Changes in applicable state regulations could affect our business.
In addition, we need to maintain interconnection agreements with ILECs where we wish to provide service, which are subject to approval by individual states and subject to state arbitration in the event of disputes. We expect that we should be able to negotiate or otherwise obtain renewals or successor agreements through adoption of others’ contracts or through arbitration proceedings, although the rates, terms and conditions applicable to interconnection and the exchange of traffic with certain ILECs could change significantly in certain cases.
International
As an international company, we are subject to telecommunications laws and regulations in the non-US jurisdictions in which we offer our services. These laws and regulations may concern telecommunications, as well as privacy, data protection, intellectual property, competition, consumer protection, taxation or other subjects. In European markets, we are subject to the European Electronic Communications Code (the “Code”) and its transposition into the laws of the European Union (“EU”) and European Economic Area (“EEA”) countries in which we operate. The Code sets forth the European regulatory framework and harmonized rules across the EU and EEA, which govern the provision of electronic communications networks and services. While the Code provides a harmonized framework, laws of each jurisdiction of the EU and the EEA, and related regulations, will differ from country to country. For example, rules around suballocation of numbering resources differ from country to country.
The E-Privacy Directive seeks to ensure privacy and confidentiality in the processing of personal data in electronic communications. The E-Privacy Directive requires providers of publicly available electronic communications services to take appropriate technical and organizational measures to safeguard the security of services. These measures must: ensure that personal data can be accessed only by authorized personnel for legally authorized purposes; protect personal data stored or transmitted against accidental or unlawful destruction, accidental loss or alteration, and unauthorized or unlawful storage, processing, access or disclosure; and ensure the implementation of a security policy with respect to the processing of personal data. The E-Privacy Directive also requires notification of any breach or loss of personal data to the applicable NRA.
The United Kingdom’s (“U.K.”) departure from the EU was finalized in December 2020. While the Code is therefore no longer directly applicable in the U.K., we do not currently anticipate that considerable changes will be made to the U.K. regulatory framework.
Corporate Information
Bandwidth Inc. was founded in July 2000 and incorporated in Delaware on March 29, 2001. Our principal executive offices are located at 900 Main Campus Drive, Raleigh, NC 27606, and our telephone number is (800) 808-5150. Our website address is www.bandwidth.com. Information contained on, or that can be accessed through, our website does not constitute part of this Annual Report on Form 10-K.
Available Information
The following information can be found, free of charge, on our corporate website at https://www.bandwidth.com/:
•our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”);
•our policies related to corporate governance, including our Code of Business Conduct and Ethics applicable to our directors, officers and employees (including our principal executive officer and principal financial and accounting officer), that we have adopted to meet applicable rules and regulations; and
•the charters of the Audit and Compensation Committees of our Board of Directors.
In addition, copies of our annual report will be made available, free of charge, upon written request.
We intend to satisfy the applicable disclosure requirements regarding amendments to, or waivers from, provisions of our Code of Business Conduct and Ethics by posting such information on our website. The information contained on, or that can be accessed through, our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report.
Item 1A. Risk Factors
A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The risks and uncertainties described below may not be the only ones we face. If any of the risks actually occur, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the market price of our Class A common stock could decline.
Risks Related to Our Business
Our future growth and the success of our expansion plans depend on a number of factors that are beyond our control.
We have grown our business considerably over the last several years. We cannot guarantee that we will be able to maintain our growth or that we will choose to target the same pace of growth in the future. Our success in achieving continued growth depends upon several factors including:
the availability•our ability to hire and retention ofretain qualified and effective personnel, including, but not limited to, those with the expertise required to develop and maintain our service offerings, to sell those offerings and to operate effectively or successfully;our business effectively;
•the overall economic health of new and existing markets;
•the number and effectiveness of competitors;
•the pricing structure under which we will be able to purchase services required to serve our customers;
•our ability to introduce new service offerings and maintain or enhance existing offerings;
•the availability to us of technologies needed to remain competitive; and
•federal, and state and international regulatory conditions, including the maintenance of state regulation that protects us from unfair business practices by traditional network service providers or others with greater market power who have relationships with us as both competitors and suppliers.suppliers; and
•changes in industry standards, laws, regulations, or regulatory enforcement in the United States and internationally.
Our growth and financial health are impacted by a number of risks, including uncertain capital markets, recessionary fears, high rates of inflation and higher interest rates.
In recent years, the financial markets in the United States have experienced substantial volatility in securities prices, reduced liquidity and credit availability, rating downgrades of certain investments and declining values with respect to others. If capital and credit markets continue to experience uncertainty, we may not be able to obtain debt or equity financing or to refinance our existing indebtedness on favorable terms or at all, which could impair our ability to execute on our strategy, and harm our financial performance. These conditions currently have not precluded us from accessing credit markets or financing our operations, but there can be no assurance that financial markets and confidence in major economies will not deteriorate.
In addition, we are vulnerable to changes in market preferences or other market changes, such as general economic conditions, recession and fears of recession, interest rates, tax rates and policies, and inflation. The U.S. is currently experiencing higher rates of inflation than in previous years, and we may experience a compression in our gross margins as a result. These inflationary pressures could affect wages, the cost of and our ability to obtain
components, the price of our products and services, our ability to meet customer demand, and our gross margins and operating profit. Inflation may further exacerbate other risks discussed in this “Risk Factors” section, such as risks related to our sales and marketing efforts and our ability to attract, motivate and retain sales, engineering and other key personnel. If we are unable to successfully manage the effects of inflation, our business, operating results, cash flows and financial condition may be adversely affected.
In an attempt to temper these higher rates of inflation, beginning in March 2022, the U.S. Federal Reserve steadily raised its benchmark federal funds interest rate, resulting in a commensurate rise in interest rates across numerous borrowing categories. This rise in interest rates may impact our ability to access debt capital on terms acceptable to us, or at all.
The U.S. and global economies have in the past, and will in the future, experience recessionary periods and periods of economic instability. During such periods, our existing and potential customers may choose not to expend the amounts that we anticipate based on our expectations with respect to the addressable market for the services we offer. There could also be a number of other effects from adverse general business and economic conditions on our business, including insolvency of any of our third-party suppliers or contractors, decreased market confidence, decreased interest in communications solutions, decreased discretionary spending and reduced customer demand for the services we offer, any of which could have a material adverse effect on our business, financial condition and results of operations and exacerbate some of the other risk factors contained in this Annual Report on Form 10-K.
Key vendors upon which we rely also could be unwilling or unable to provide us with the materials or services that we need to operate our communications platform or otherwise on a timely basis or on terms that we find acceptable. Our financial counterparties, insurance providers or others also may default on their contractual obligations to us. If any of our key vendors fail, we may not be able to replace them without disruptions to, or deterioration of, our services and we also may incur higher costs associated with new vendors. Transitioning to new vendors also may result in the loss of the value of assets associated with our integration of third-party services into our network or service offerings.
The market in which we participate is highly competitive, and if we do not compete effectively, our business, results of operations and financial condition could be harmed.adversely affected.
The market for cloud communications is rapidly evolving, significantly fragmented and highly competitive, with relatively low barriers to entry in some segments. The principal competitive factors in our market include completeness of offering,our suite of service offerings, credibility with enterprises and developers, global reach, ease of integration and programmability, product features, platform scalability, reliability, deliverability, security and performance, brand awareness and reputation, the strength of sales and marketing efforts and customer support, as well as the cost of deploying and using our services. Our competitors fall into two primary categories:
•CPaaS companies that offer a narrower set of software APIs, less robust customer support and fewer other features, while relying on third-party networks and physical infrastructure; and
•network service providers that offer limited developer functionality on top of their own networks and physical infrastructure, such as AT&T, Level 3 and Verizon.infrastructure.
Some of our competitors and potential competitors are larger and have greater name recognition, longer operating histories, more established customer relationships, a larger global reach, larger budgets and
significantly greater resources than we do. In addition, they have the operating flexibility to bundle competing products and services at little or no incremental cost, including offering them at a lower price as part of a larger sales transaction. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. In addition, some competitors may offer services that address one or a limited number of functions at lower prices, with greater depth than our services or in different geographies. Our current and potential competitors may develop and market new services with comparable functionality to our services, and this could lead to us having to decrease prices in order to remain competitive. In
addition, some of our competitors have lower list prices than us, which may be attractive to certain customers even if those services have different or lesser functionality. If we are unable to maintain our current pricing due to the competitive pressures, our revenue and margins will be reduced and our business, results of operations and financial condition would be adversely affected. Customers utilize our services in many ways and use varying levels of functionality that our services offer or are capable of supporting or enabling within their applications. Customers that use many of the features of our services or use our services to support or enable core functionality for their applications may have difficulty or find it impractical to replace our services with a competitor’s services, while customers that use only limited functionality may be able to more easily replace our services with competitive offerings.
With the introduction of new services and new market entrants, we expect competition to intensify in the future. In addition, some of our customers choose to use our services and our competitors’ services at the same time.time in order to provide redundancy in their ability to deliver their own product offerings. Moreover, as we expand the scope of our services, we may face additional competition. Further, customers and consumers may choose to adopt other forms of electronic communications or alternative communication platforms, including developing necessary networks and platforms in-house.
Furthermore, if our competitors were to merge such that the combined entity would be able to compete fully with our service offering, then our business, results of operations and financial condition may be adversely effected. If one or more of our competitors were to merge or partner with another of our competitors, thethis change in the competitive landscape could alsofurther adversely affect our ability to compete effectively. In addition, pricing pressures and increased competition generally could result in reduced revenue, reduced margins, increased losses or the failure of our services to achieve or maintain widespread market acceptance, any of which could harm our business, results of operations and financial condition.
We presently operate in the United States and provide certain limited services in Canada. Our IP voice network, which is at the core of our product offerings, is located in the United States. Our current and potential competitors have developed and may develop in the future product solutionsservice offerings that are available internationally, as well as domestically. To the extent that customers seek product solutionsservice offerings that include support and scaling internationally, they may choose to use other service providers to fill their communication service needs. Furthermore, whileneeds before we believe the U.S. market is sufficiently largecan fully develop and expanding to allow us to continue to growintegrate our business, we may face slower growth due to our relative lack of exposure to international markets.offerings. Each of these factors could lead to reduced revenue, slower growth and lower brand name recognition amongst our industry competitors, any or all of which could harm our business, results of operations and financial condition.
If we are unable to attract new customers in a cost-effective manner, then our business, results of operations and financial condition would be adversely affected.
In order to grow our business, we must continue to attract new customers in a cost-effective manner. We use a variety of marketing channels to promote our services and our Bandwidth Communications Platform,communications platform, and we periodically adjust the mix of our marketing programs. If the costs of the marketing channels we use increase dramatically, then we may choose to use alternative and less expensive channels, which may not be
as effective as the channels we currently use. As we add to or change the mix of our marketing strategies, we may need to expand into more expensive channels than those we are currently in, which could adversely affect our business, results of operations and financial condition. We will incur marketing expenses before we are able to recognize any revenue that the marketing initiatives may generate, and these expenses may not result in increased revenue or brand awareness. We have made in the past, and may make in the future, significant expenditures and investments in new marketing campaigns. We cannot assure you that any new investments in sales and marketing, including any increased focus on enterprise sales efforts, will lead to the cost-effective acquisition of additional customers or increased sales or that our sales and marketing efficiency will be consistent with prior periods. If we are unable to maintain effective marketing programs, then our ability to attract new customers could be materially and adversely affected, our advertising and marketing expenses could increase substantially and our results of operations may suffer.
The market for some of our services and platform is new and unproven, may decline or experience limited growth and is dependent in part on enterprises and developers continuing to adopt our platform and use our services.
We have been developing and providing a cloud-based platform that enables developers and organizations to integrate voice and messaging communications capabilities into their software applications. This market is relatively new and unproven and is subject to a number of risks and uncertainties. We believe that our future success will depend in large part on the growth, if any, of this market. For example, the utilization of software APIs by
developers and organizations to build communications functionality into their applications is still relatively new, and developers and organizations may not recognize the need for, or benefits of, our services and platform. Moreover, ifIf they do not recognize the need for and benefits of our services and platform, they may decide to adopt alternative services and/or develop the necessary services in-house to satisfy their business needs. In order to grow our business and expand our market position, we intend to focus on educating enterprise customers about the benefits of our services and platform, expanding the functionality of our services and bringing new technologies to market to increase market acceptance and use of our platform. Our ability to expand the market that our services and platform address depends upon a number of factors, including the cost, performance and perceived value associated with such services and platform. The market for our services and platform could fail to grow significantly or there could be a reduction in demand for our services and platform as a result of a lack of customer acceptance, technological changes or challenges, our inability to successfully introduce new product offerings, competing services platforms and services,platforms, decreases in spending by current and prospective customers, weakening economic conditions, andgeopolitical developments, global pandemics, adverse regulatory developments or other causes. If our market does not experience significant growth or demand for our services and platform decreases, then our business, results of operations and financial condition could be adversely affected.
We must increase the network traffic and resulting revenue from the services that we offerOur ability to realize our targetsgoals for anticipated revenue growth, cash flow and operating performance.
We must increase the network traffic and resulting revenue from our inbound and outbound voice calling, text messaging, emergency voice functions, telephone numbers and related services at acceptable margins to realize our targets for anticipated revenue growth, cash flow and operating performance. If:
we do not maintain or improve our current relationships with existing key customers;
we are not able to expand the available capacity on our network to meet our customers’ demands in a timely manner;
we do not develop new large wholesale and enterprise customers; or
our customers determine to obtain these services from either their own network or from one of our competitors,
then we may be unable to increase or maintain our revenue at acceptable margins.
Our businessperformance depends on customers increasing their use of our services, and any loss of customers or decline in their use of our services could materially and adversely affect our business, results of operations and financial condition.
Our ability to grow and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with existing customers and to have them increase their usage of our Bandwidth Communications Platform. If our customers do not increase their use of our services, then our revenue may decline and our results of operations may be harmed.
Customers generally are charged based on the usage of our services. Most of our customers do not have long-term contractual financial commitments to us and, therefore, most of our customers may reduce or cease their use of our services at any time without penalty or termination charges. We cannot accurately predict customers’ usage levels, and the loss of customers or reductions in their usage levels of our services may each have a negative impact on our business, results of operations and financial condition.condition and may cause our dollar-based net retention rate to decline in the future if our customers are not satisfied with our services. If a significant number of customers cease using, or reduce their usage of, our services, then we may be required to spend significantly more on sales and marketing than we currently plan to spend in order to maintain or increase revenue from customers. Such additional sales and marketing expenditures could adversely affect our business, results of operations and financial condition. More specifically, if:
•we do not maintain or improve our current relationships with existing key customers;
•we are not able to expand the available capacity on our network to meet our customers’ demands in a timely manner;
•we do not develop and maintain relationships with new large enterprise customers; or
•our customers choose to obtain these services from either their own network or from one of our competitors,
then we may be unable to increase or maintain our revenue at acceptable margins.
If we are unable to increase the revenue that we derive from enterprises, our business, results of operations and financial condition may be adversely affected.
We currently generate all of our revenue from enterprise customers. Our ability to expand our sales to enterprise customers will depend, in part, on our ability to effectively organize, focus and train our sales and marketing personnel and to attract and retain sales personnel with experience selling to enterprises. We believe that there is significant competition for experienced sales professionals with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth in the future will depend, in part, on our ability to recruit, train and retain a sufficient number of experienced sales professionals, particularly those with experience selling to enterprises. In addition, even if we are successful in hiring qualified sales personnel, new hires require significant training and experience before they achieve full productivity, particularly for sales efforts targeted at enterprises and new territories. Our recent hires and planned hires may not
become as productive as quickly as we expect and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business.
With respect to enterprise customers, the decision to adopt our services may require the approval of multiple technical and business decision makers, including security, compliance, procurement, operations and IT. In addition, while enterprise customers may quickly deploy our services on a limited basis, before they will commit to deploying our services at scale, they often require extensive education about our services and significant customer support time, engage in protracted pricing negotiations and seek to secure readily available development resources. In addition, sales cycles for enterprises are inherently complex and lengthy, and some enterprise customers may not generate revenue that justifies the cost to obtain such customers. In addition, these complex and resource-intensive sales efforts could place additional strain on our limited product and engineering resources. Further, enterprises, including some of our customers, may choose to develop their own solutions that do not include our services. They also may demand reductions in pricing as their usage of our services increases, which could have an adverse impact on our gross margin. Our efforts to sell to these potential customers may not be successful. If we are unable to increase the revenue that we derive from enterprises, then our business, results of operations and financial condition may be adversely affected.
If we do not develop enhancements to our services and introduce new services that achieve market acceptance, our business, results of operations and financial condition could be adversely affected.
Our ability to attract new customers and increase revenue from existing customers depends in part on our ability to enhance and improve our existing services, increase adoption and usage of our services and introduce new services. The success of any enhancements or new services depends on several factors, including timely completion, adequate quality testing, actual performance quality, market-accepted pricing levels and overall market acceptance. Enhancements and new services that we develop may not be introduced in a timely or cost-effective manner, may contain errors or defects, may have interoperability difficulties with our Bandwidth Communications Platformcommunications platform, network or other services or may not achieve the broad market acceptance necessary to generate significant revenue. We also must integrate with a variety of network, hardware, mobile and software platforms and technologies, which requires us to enhance and modify our products and our communications platform to adapt to changes and innovation in these technologies. Wireline and wireless telephone providers or cell-phone operating system providers such as Apple and Google have developed and may in the future develop new applications, functions or technologies intended to filter illegal robocalls or other unwanted phone calls or messages. Such applications, functions or technologies may inadvertently filter legal and desired calls or messages to or from our customers. In certain instances, we may need to update our services and technology to work with these applications, functions or technologies. Any failure to operate effectively with evolving or new technologies could reduce the introductiondemand for our services. If we cannot respond to these changes in a cost-effective manner, our services may become less competitive or obsolete, and our business, results of new services requires the successful development of new technology.operations and financial condition could be adversely affected. To the extent that upgrades of existing products, services and technology are required for the introduction of new services, the success of these upgrades also may be dependent on reaching mutually acceptable terms with vendors and on vendors meeting their obligations in a timely manner.
Furthermore, our ability to increase the usage of our services depends, in part, on the development of new use cases for our services, which may be outside of our control. Our ability to generate usage of additional services by our customers may also require increasingly sophisticated and more costly sales efforts and result in a longer sales cycle. If we are unable to successfully enhance our existing services to meet evolving customer requirements, increase adoption and usage of our services or develop new services, or if our efforts to increase the usage of our services are more expensive than we expect, then our business, results of operations and financial condition would be adversely affected.
We have experienced rapid growthAs we continue to expand geographically and expectotherwise, we may experience difficulties in maintaining our growth to continue,corporate culture, operational infrastructure and if we fail to effectively manage our growth, thenmanagement, and our business, results of operations and financial condition could be adversely affected.
We have experienced substantial growthexpansion in our business, since inception, which has placed and may continue to place significant demands onincluding internationally through our corporate culture, operational infrastructure and management.acquisition of Voxbone in late 2020. We believe that our corporate culture has been a critical component of our success. We have invested substantial time and resources in building our team and nurturing our culture. As we further expand our business and mature as a public company,continue to grow internationally, we may find it difficult to maintain our corporate culture while managing this growth.culture. Any failure to manage our anticipated growth and organizational changes in a manner that preserves the key aspects of our culture could hurt our chance for future success, including our ability to recruit and retain personnel, and effectively focus on and pursue our corporate objectives. This, in turn, could adversely affect our business, results of operations and financial condition.
In addition, in order to successfully manage our rapid growth, our organizational structure has become more complex. In order to manage these increasing complexities, we will need to continue to scale and adapt the way in which we are organized, our operational, financial and management controls, as well asand our reporting systems and procedures. The expansion of our systems and infrastructure will require us to commit substantial financial, operational and management resources before our revenue increases and without any assurances that our revenue will increase.
Finally, continued growthThis expansion could strain our ability to maintain reliable service levels for our customers. If we fail to achieve the necessary level of efficiency in our organization as we grow, then our business, results of operations and financial condition could be adversely affected.
Our pricing and billing systems are complex, and errors could adversely affect our revenue and profits.results of operations.
Our pricing and billing effortssystems are complex to develop and challenging to implement. To be profitable, we must have accurate and complete information about the costs associated with voice and text
communications,messaging, and properly incorporate such information into our pricing model. Our pricing model must also reflect accurate and current information about the market for our services, including the pricing of competitive alternatives for our services, as well as reliable forecasts of traffic volume. We may determine pricing for our services based on data that is outdated or otherwise flawed. Even if we have complete and accurate market information, we may not set prices tothat optimize both revenue and profitability. If we price our services too high, the amount of traffic that our customers may route to our network may decrease and accordingly our revenue may decline. If we price our services too low, our margins may be adversely affected, which will reduce our ability to achieve and maintain profitability.
Additionally, we rely heavily on third parties to provide us with key software and services for our billing. If these third parties cease to provide those services to us for any reason, or fail to perform billing services accurately and completely, we may not be able to deliver accurate invoices promptly. Delays in invoicing can lead to delays in revenue recognition, and inaccuracies in our billing could result in lost revenue. If we fail to adapt quickly and effectively to changes affecting our costs, pricing and billing, our profitability and cash flow will be adversely affected.
We must continue to develop effective business support systems to implement customer orders and to provide and bill our customers for services.
We depend on our ability to continue to develop effective business support systems. This complicated undertaking requires significant resources and expertise and support from third-party vendors. Following the development of the business support systems, the data migration must be completed for the full benefit of the systems to be realized. Business support systems are needed for:
•quoting, accepting and inputting customer orders for services;
•provisioning, installing and delivering services;
•providing customers with direct access to the information systems included in our Bandwidth Communications Platformcommunications platform so that they can manage the services they purchase from us, generally through web-based customer portals; and
•billing for services.
Because our business provides for continued rapid growth in the number
If we are not able to maintain and enhance our brand and increase market awareness of our company and services, then our business, results of operations and financial condition may be adversely affected.
We believe that maintaining and enhancing our brand identity and increasing market awareness of our company and services are critical to achieving widespread acceptance of our company and our Bandwidth Communications Platform,communications platform, as well as to strengthen our relationships with our existing customers and to our ability to attract new customers. The successful promotion of our brand will depend largely on our continued marketing efforts, our ability to continue to offer high quality services that meet the evolving needs of our existing and prospective customers and our ability to successfully differentiate our services from competing products and services. Our brand promotion activities may not be successful or yield increased revenue. In addition, independent industry analysts often provide reviews of
our services and competing products and services, which may significantly influence the perception of our services in the marketplace. If these reviews are negative or not as strong as reviews of our competitors’ services, then our brand may be harmed.
From time to time, our customers have complained about our services, such as complaints about our pricing and customer support. Additionally, we sometimes experience customer complaints relating to disruption to, or outage of, our services. If we do not handle customer complaints effectively, then our brand and reputation may suffer, our customers may lose confidence in us and they may reduce or cease their use of our services. In addition, many of our customers post and discuss on social media about products and services, including our services and our Bandwidth Communications Platform.communications platform. Our success depends, in part, on our ability to generate positive customer feedback and minimize negative feedback on social media channels where existing and potential customers seek and share information. If actions we take or changes we make to our services or our Bandwidth Communications Platformcommunications platform upset these customers, then their online commentary could negatively affect our brand and reputation. Complaints or negative publicity about us, our services or our Bandwidth Communications Platformcommunications platform could materially and adversely affect our ability to attract and retain customers, our business, results of operations and financial condition.
The promotion of our brand also requires us to make substantial expenditures, and we anticipate that these expenditures will increase as our market becomes more competitive and as we expand into new markets. To the extent that these activities increase revenue, this revenue still may not be enough to offset the increased expenses we incur. In addition, due to restrictions on travel and in-person meetings resulting from COVID-19, we have attended planned customer and industry events as virtual-only experiences and cancelled others. We may alter, postpone or cancel other events in the future. Virtual meetings, events and interactions may not be as successful and may constrain our marketing, promotional and sales activity. If we do not successfully maintain and enhance our brand, then our business may not grow, we may see our pricing power reduced relative to competitors and we may lose customers, all of which would adversely affect our business, results of operations and financial condition.
Any failure to deliver and maintain high-quality customer support may adversely affect our relationships with our customers and prospective customers and could adversely affect our reputation, business, results of operations and financial condition.
Many of our customers depend on our customer support team to assist them in deploying or using our services effectively, to help them resolve post-deployment issues quickly and to provide ongoing support. If we do not devote sufficient resources or are otherwise unsuccessful in assisting our customers effectively, it could adversely affect our ability to retain existing customers and could prevent prospective customers from adopting our services. We may be unable to respond quickly enough to accommodate short-term increases in demand for customer support. We also may be unable to modify the nature, scope and delivery of our customer support to compete with changes in the support services provided by our competitors. Increased demand for customer support, without corresponding revenue, could increase costs and adversely affect our business, results of operations and financial condition. Our sales are highly dependent on our business reputation and on positive recommendations from existing customers. Any failure to deliver and maintain high-quality customer support, or a market perception that we do not maintain high-quality customer support, could adversely affect our reputation, business, results of operations and financial condition.
We operate internationally, which exposes us to significant risks.
We have expanded our international operations, including through the deployment of data centers in certain European locations and our acquisition of Voxbone in late 2020. As part of our growth strategy, we will continue to evaluate potential opportunities for further international expansion.
Operating in international markets requires significant resources and management attention, and subjects us to legal, regulatory, economic and political risks in addition to those we face in the United States. We have limited experience with international operations, and further international expansion efforts may not be successful.
In addition, we face risks in doing business internationally that could adversely affect our business, including:
•exposure to political developments in the United Kingdom (“U.K.”) as a result of the January 2020 departure of the U.K. from the European Union (“EU”), which has created an uncertain political and economic environment, instability for businesses and volatility in global financial markets and the value of foreign currencies, all of which could disrupt trade, the sale of our services and the mobility of our employees and contractors between the U.K., EU and other jurisdictions;
•difficulties in managing and staffing international operations, including difficulties related to the increased operations, travel, infrastructure, employee attrition and legal compliance costs associated with numerous international locations;
•our ability to effectively price our products in competitive international markets;
•new and different sources of competition;
•costs associated with network service providers outside of the United States;
•the need to adapt and localize our products for specific countries;
•challenges in understanding and complying with local laws, regulations and customs in foreign jurisdictions, particularly in the areas of telecommunications, data privacy and security;
•complexities related to differing technical standards, data privacy and telecommunications regulations and certification requirements outside the United States, which could prevent customers from deploying our products or limit their usage;
•export controls and economic sanctions administered by the Bureau of Industry and Security of the U.S. Department of Commerce and the Office of Foreign Assets Control of the U.S. Department of the Treasury;
•compliance with various anti-bribery and anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and U.K. Bribery Act 2010;
•international trade policies, tariffs and other non-tariff barriers, such as quotas;
•more limited protection for intellectual property rights in some countries;
•adverse consequences relating to the complexity of operating in multiple international jurisdictions with differing tax frameworks;
•fluctuations in currency exchange rates, which could increase the price of our products outside of the United States, increase the expenses of our international operations and expose us to foreign currency exchange rate risk;
•currency control regulations, which might restrict or prohibit our conversion of other currencies into U.S. dollars;
•restrictions on the transfer of funds;
•deterioration of political relations between the United States and other countries;
•public health epidemics, such as COVID-19, or natural disasters, which could have an adverse impact on our employees, contractors, customers, partners, travel and the global economy; and
•political or social unrest, acts of war or economic instability in a specific country or region in which we operate, which could have an adverse impact on our operations in that location.
In addition, due to potential costs from our international expansion efforts and network service provider fees outside of the United States, our gross margin for international customers may be lower than our gross margin for domestic customers. As a result, our overall gross margin may fluctuate as we further expand our operations and customer base internationally.
Our failure to manage any of these risks successfully could harm our international operations, and adversely affect our business, results of operations and financial condition.
The military conflict between Russia and Ukraine, and the global response to this conflict, may adversely affect our business and results of operations.
In response to the military conflict between Russia and Ukraine, the U.S., U.K., EU and others have imposed significant new sanctions and export controls against Russia and certain Russian individuals and entities. This conflict has also resulted in significant volatility and disruptions to the global markets. It is not possible to predict the short- or long-term implications of this conflict, which could include but are not limited to further sanctions, uncertainty about economic and political stability, increases in inflation rates and energy prices, supply chain challenges and adverse effects on currency exchange rates and financial markets. In addition, the U.S government has reported that U.S. sanctions against Russia in response to the conflict could lead to an increased threat of cyberattacks against U.S. companies. These increased threats could pose risks to the security of our information technology systems, our network and our service offerings, as well as the confidentiality, availability and integrity of our data.
We have operations, as well as current and potential new customers, in several locations in Europe, including an office in Romania. If the conflict extends beyond Ukraine or further intensifies, it could have an adverse impact on our operations in Romania or other affected areas. Due to the complexity and operational burden required to provide services in compliance with imposed sanctions related to the conflict, we terminated our service offerings in Russia and Belarus. Although neither Russia nor Belarus constituted a material portion of our business, a significant escalation or further expansion of the conflict’s current scope or related disruptions to the global markets could have a material adverse effect on our results of operations. And while we do not offer any services in Ukraine, we continue to monitor the situation in that country and globally, and assess the military conflict’s potential impact on our business.
If the COVID-19 infection rate returns to pandemic levels, it may harm our business and results of operations.
The global spread of novel coronavirus disease (“COVID-19”) and efforts to manage its impact created significant volatility, uncertainty and economic disruption in locations where we, our customers, suppliers and third-party business partners conduct business. COVID-19 is generally believed to have reduced to endemic levels globally, and its persistent nature has diminished in the present period. However, a return of COVID-19 infection rates to pandemic levels could result in decreased business spending by our customers and prospective customers, lower renewal rates by our customers, longer or delayed sales cycles, or reduced budgets or minimum commitments for the services that we offer, any of which could have an adverse impact on our financial condition and results of operations. Specifically, we may experience impact from enterprises reducing usage of our services or delaying decisions to implement our services. We cannot predict whether and to what extent COVID-19 infection rates may
increase in the future, or what the short- or long-term impact of any such increase might be on our business, financial condition or results of operations.
Some of our revenue is concentrated in a limited number of enterprise customers.
A significant portion of our revenue is concentrated among a limited number of enterprise customers. If we lost one or more of our top ten customers, or, if one or more of these major customers significantly decreased orders for our services, our business would be materially and adversely affected.
BreachesAttacks on or breaches of our networks or systems, or those of third parties upon which we rely, could degrade our ability to conduct our business, compromise the integrity of our services and our Bandwidth Communications Platform,communications platform, result in service degradation or outages, significant data losses, and the theft of our intellectual property,
investigations by government agencies and damage to our reputation, and could expose us to liability to third parties and require us to incur significant additional costs to maintain the security of our networks and data.
We depend upon our IT systems to conduct virtually all of our business operations, ranging from our internal operations and R&D activities to our marketing and sales efforts and communications with our customers and business partners. Cyber attacks,Cyber-attacks, including through the use of malware, computer viruses, dedicateddistributed denial of services (“DDoS”) attacks, credential harvesting and other means for obtaining unauthorized access to or disrupting the operation of our networks and systems and those of our suppliers, vendors and other service providers, could cause harm to our business, including by misappropriating our proprietary information or that of our customers, employees and business partners or to cause interruptions of our services and our Bandwidth Communications Platform. Cyber attackscommunications platform. Cyber-attacks may cause service degradation or outages, equipment failures, loss of information, including sensitive personal information of customers or employees or valuable technical and marketing information, as well as disruptions to our or our customers’ operations. Cyber attacksCyber-attacks against companies have increased in frequency, scope and potential harm in recent years. Further, the perpetrators of cyber attackscyber-attacks are not restricted to particular groups or persons. These attacks may be committed by company employees or external actors operating in any geography, including jurisdictions where law enforcement measures to address such attacks are unavailable or ineffective, and may even be launched by or at the behest of nation states. While, to date, we have not been subject to cyber attacks which, individually or in the aggregate, have been material to
Despite our operations or financial condition, the preventive actions we takeefforts to reduce the risks associated with cyber attacks,cyber-attacks, including protectionthe implementation of a number of defensive measures and protocols designed to protect our systems and networks, such efforts may be insufficient to repel or mitigate the effects of a major cybercyber-attack. Cybersecurity events, like the DDoS attack we experienced in late 2021 (discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—DDoS Attack” in this Annual Report on Form 10-K), may have cascading effects that unfold over time and result in additional costs, including costs associated with defensive measures, investigations, contractual claims, performance penalties, litigation, the future. Because theloss of future business and other losses and liabilities that may be difficult to foresee. Any perception by existing and prospective customers that our network and systems are not secure could result in a material loss of business and revenue and damage our reputation. We will continue to deploy security enhancements in an effort to further secure our network.
The techniques used by such individuals or entities to access, disrupt or sabotage devices, systems and networks change frequently and may not be recognized until launched against a target, wetarget. We may be unable to anticipate these techniques, and we may not become aware in a timely manner of such a security breach, which could exacerbate any damage we experience.the negative impact of such an event on our business or that of our customers. Additionally, we depend upon our employees and contractors to appropriately handle confidential and sensitive data, including customer data and customer proprietary network information pursuant to applicable federal law, and to deploy our IT resources in a safe and secure manner that does not expose our network systems to security breaches or the loss of data. Any data security incidents, including inadvertent disclosure or internal malfeasance by our employees, unauthorized access or usage, virus or similar breach or disruption of us or our services providers, could result in a loss of confidential information, theft of our intellectual property, damage to our reputation, loss of customers, litigation, regulatory investigations, fines, penalties and other liabilities.
Our existing general liability and cyber liability insurance policies may not cover, or may cover only a portion of, any potential claims related to cyber incidents or security breaches to whichthat we are exposedexperience or may not be adequate to indemnify us for all or any portion of liabilities that may be imposed. We also cannot be certain that our existing insurance coverage will continue to be available on acceptable terms or in amounts sufficient to cover the potentially significant losses that may result from a security incident or breach or that the insurer will not deny coverage of any future claim. At least one prominent global insurance carrier has announced that, beginning in 2023, it will exclude from its cyber insurance policies coverage for attacks carried out by nation-states. Accordingly, if our cybersecurity measures and those of our service providers fail to protect against unauthorized access, attacks (which may include sophisticated cyber attacks)cyber-attacks) and the mishandling of data by our employees and contractors, then our reputation, business, results of operations and financial condition could be adversely affected.
We are currently subject to litigation related to taxes and charges associated with our provision of 911 services, which could divert management’s attention and adversely affect our results of operations.
We, along with many other telecommunications companies and similar service providers, currently are subject to litigation and a civil investigation regarding our billing, collection and remittance of non-income-based taxes and other similar charges regarding 911 services alleged to apply in certain states, counties, and municipalities located in Alabama, Georgia,California, Illinois Minnesota, North Carolina, Pennsylvania, Rhode Island, South Carolina and the District of Columbia.New York. See the section titled “Item“Part II, Item 3. Legal Proceedings.Proceedings,” in this Annual Report on Form 10-K. We may face similar litigation in other jurisdictions in the future. While we are vigorously defending these lawsuits, litigation is inherently uncertain. Tax assessments, penalties and interest or future requirements
arising from these lawsuits, the settlement of any such lawsuit or any other lawsuits that may arise in other jurisdictions, may adversely affect our business, results of operations and financial condition.
We face a risk of litigation resulting from customer misuse of our services and software to make or send unauthorized and/or unsolicited calls and/or text messages, including those in violation of the Telephone Consumer Protection Act. Customer misuse of our services and software also could damage our reputation.
Calls and/or text messages originated or passed to us by our customers may subject us to potential risks.risks, including litigation, regulatory enforcement, fines, and reputational damage. For example, the TCPATelephone Consumer Protection Act of 1991 (the “TCPA”) restricts telemarketing and the use of technologies that enable automatic calling and/or SMS text messagesmessaging without proper customer consent. This may result in civil claims against us, including those arising due to our customers’ use of our platform, and requests for information through third-party subpoenas or regulatory investigations. Internationally, we also may become subject to similar laws imposing limitations on marketing calls to wireline and wireless numbers. The scope and interpretation of the laws that are or may be applicable to the making and/or delivery of calls and/or text messages are continuously evolving and developing. If we do not comply with these laws or regulations or if we become liable under these laws or regulations due to the failure of our customers to comply with these laws by taking mandatory actions such as obtaining proper customer consent, we could become subject to lawsuits, fines, civil penalties, potentially significant statutory damages, consent decrees, injunctions, adverse publicity, loss of user confidence in our services, loss of users and other adverse consequences, which could materially harm our business.
Some of our customers may use our platform to transmit illegal, offensive, unsolicited and/or unauthorized calls and messages, including spam, phishing scams, and links to harmful applications. Some of our customers also may reproduce and distribute copyrighted material or the trademarks of others without permission. Such actions violate our practices and policies, including our Acceptable Use Policy, which applies to all customers. We generally complete considerable “know-your-customer” reviews before a customer, and in certain jurisdictions, an end user, can use our platform, although we cannot always conduct proactive audits of our customers thereafter to confirm compliance with our practices and policies, including our Acceptable Use Policy. We generally rely on our customers’ contractual representations to us that their use of our platform will comply with applicable law and our practices and policies. In cases where our customers are reselling our services, we are relying on a contractual pass-through by our customers of similar contractual representations from their end users. We also generally evaluate complaints that we receive regarding our customers’ use of our platform. Our substantial efforts will not prevent all illegal robocalls and other fraudulent activity. The unlawful or fraudulent use of our platform could subject us to
claims for damages, copyright or trademark infringement, regulatory enforcement, fraud, or negligence or damage our reputation. Even if claims asserted against us do not result in liability, we may incur substantial costs to investigate and defend such claims. If we are found to be liable for our customers’ activities, we could be required to pay fines or penalties, redesign our business methods, limit our provision of certain services or otherwise expend resources to remedy any damages caused by such actions and avoid future liability.
We are also subject to litigation in the ordinary course of business, and uninsured judgments or a rise in insurance premiums may adversely affect our results of operations.
In the ordinary course of business, we are subject to various claims and litigation. Any such claims, regardless of merit, could be time-consuming and expensive to defend and could divert management’s attention and resources. In accordance with customary practice, we maintain insurance against some, but not all, of these potential claims. We may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the risks presented. The levels of insurance we maintain may not be adequate to fully cover any and all losses or liabilities. Further, we may not be able to maintain insurance at commercially acceptable premium levels or at all. If any significant judgment, claim (or a series of claims), a settlement or other event is not fully insured or indemnified against, it could have a material adverse impact on our business, financial condition and results of operations. There can be no assurance as to the actual amount of these liabilities or the timing thereof. We cannot be certain that the outcome of current or future litigation will not have a material adverse impact on our business and results of operations.
The communications industry faces significant regulatory uncertainties and the resolution of these uncertainties could harm our business, results of operations and financial condition.
If current or future regulations change, the FCCFederal Communications Commission (the “FCC”), state regulators or state regulators in other jurisdictions may not grant us any required regulatory authorizationauthorizations or may take action against us if we are found to have provided services without obtaining the necessary authorizations, or to have violated other requirements of their rules and orders. Delays in receiving required regulatory approvals or the enactment of new adverse regulation or regulatory requirements may slow our growth and have a material adverse effect on our business, results of operations and financial condition.
Proceedings before the FCC or regulators from international jurisdictions could limit our access to various network services or further increase the rates we must pay for such services. Likewise, proceedings before the FCC could impact the availability and price of special access facilities. OtherFor example, proceedings before the FCC could result in an increase in the amount we pay to other carriers or a reduction in the revenue we derive from other carriers in, or retroactive liability for, access charges and reciprocal compensation. Additionally,On December 17, 2019, the FCC issued an order that revised its interpretation of the Voice-over Internet Protocol (“VoIP”) symmetry rule. The FCC now concludes that LECs may assess end office switched access charges only if the LEC or its VoIP partner provides a physical connection to the last-mile facilities used to serve an end user. If neither the LEC nor its VoIP partner provides such a physical connection, the LEC may not assess end office switched access charges. The FCC also decided to give its order retroactive effect. We cannot predict the impact this FCC order may have on our business, including whether other carriers will agree with our legal interpretations and treatments, at this time. Other proceedings before the FCC could also result in increases in the cost of regulatory compliance. For example, the FCC has opened a proceedingcontinues to examine how to improve the delivery of emergency 911 services and whether to expand requirements to include communications services not currently subject to emergency calling obligations. A number of states also have proceedings pending that could impact our access to and the rates we pay for network services. Other state proceedings could limit our pricing and billing flexibility. Our business would be substantially impaired if the FCC, the courts or state commissions eliminated our access to the facilities and services we use to serve our customers, substantially increased the rates we pay for facilities and services, increased the costs or complexity associated with providing emergency 911 services or adversely affected the revenue we receive from other carriers or our customers. In addition, congressional legislative efforts to rewrite the Telecommunications Act of 1996 or enact other telecommunications legislation, as well as various state legislative initiatives, may cause major industry and regulatory changes. We cannot predict the outcome of these proceedings or legislative initiatives or the effects, if any, that these proceedings or legislative initiatives may have on our business and operations.
While we believe we are currentlycomply in complianceall material respects with all material federal, state, local and localinternational rules and regulations, these regulations are subject to interpretation and the relevant regulators may determine that our application of these rules and regulations is not consistent with their interpretation. Additionally, in certain instances,
third parties or government agencies may bring action with federal, state, local or localinternational regulators if they believe a provider has breached applicable rules and regulations.
The effects of increased regulation of IP-based service providers are unknown.
While the FCC has to date generally subjected IP-based service providers in the United States to less stringent regulatory oversight than traditional common carriers, the FCC has more recently imposed certain regulatory obligations on providers of interconnected and non-interconnected VoIP services, including the obligations to contribute to the Universal Service Fund, to provide 911 services, and/orand to comply with the Communications Assistance for Law Enforcement Act. Some states have imposed taxes, fees and/or surchargesThe TRACED Act aims to mitigate illegal robocalls by directing the FCC to conduct certain rulemaking proceedings that include adopting rules that require participation in the technical standard known as STIR/SHAKEN, among other requirements. For large carriers operating in the United States, IP-based network equipment and the IP services that operate on VoIP telephony services. The impositionsuch equipment were required to support the STIR/SHAKEN framework as of additional regulations could haveJune 30, 2021. We previously reported that we had a material adverse effectsmall subset of services and customer accounts that operated on our business.
We must obtainlegacy IP equipment that was not STIR/SHAKEN capable prior to the prescribed deadline; however, that equipment was retired in 2022 and maintain permits and licenses to operate our network.
If we are unable, on acceptable termscurrently in compliance with STIR/SHAKEN requirements. While additional countries have adopted or are expected to adopt the STIR/SHAKEN framework, other countries may seek to impose alternative regulatory obligations in an effort to mitigate illegal robocalling.
Noncompliance with applicable FCC or other regulations or requirements could subject us to investigations, sanctions, enforcement actions, fines, consent decrees or other collateral consequences. If any governmental sanctions or fines are imposed, our business, results of operations, and on a timely basis, to obtain and maintain the permits and licenses needed to expand and operate our network, our businessfinancial condition could be materially adversely affected. In addition, the cancellation or non-renewal of the permits or licenses that are obtained could materially adversely affect our business. In particular, although we have received approval from the FCC, we are currently awaiting approval from the state public utility commissions of California and Hawaii in connection with our expected change of control (the “Necessary Approvals”). Holders of our Class B common stock are prohibited from converting their shares of Class B common stockresponding to Class A common stock prior to the earlier of: (i) the receipt of the Necessary Approvals and (ii) the 181st day following our initial public offering (the “Conversion Commencement Date”). If we have not received the Necessary Approvals by the Conversion Commencement Date, weany governmental action will not be able to restrict holders of our Class B common stock from converting their shares of Class B common stock to Class A common stock, which maylikely result in a changediversion of control. If a change of control occurs prior to receipt of regulatory approvalmanagement’s attention and resources and an increase in a jurisdiction, we may be subject to fines, penalties, enforcement actions or loss of our authorization in such jurisdiction. In the event we are the target of an acquisition, the regulatory agencies responsible for granting, renewing or transferring permits and licenses may delay or reject applications to transfer such permits or licenses and as a result these uncertainties, we may not be as attractive an acquisition target.professional fees.
Our operations are subject to significant regulation and require us to obtain and maintain severalnumerous governmental licenses and permits.permits in the United States and internationally. If we violate those regulatory requirements or fail to obtain and maintain those licenses and permits, including payment of related fees, if any, we may not be able to conduct our business. Moreover, thosechanges in regulatory requirements could change in a manner that significantly increasesincrease our costs or otherwise adversely affectsaffect our operations.
In the ordinary course of operating our network and providing our services, we must obtain and maintain a variety of telecommunications and other licenses, permits and authorizations. We also must comply with a variety of ongoing regulatory obligations. There canIf we are unable to obtain and maintain the licenses and permits needed to operate and expand our network on acceptable terms and on a timely basis, our business could be no assurance we can maintain ourmaterially adversely affected. In addition, the cancellation or non-renewal of the licenses or that they will be renewed upon their expiration.permits we hold could materially adversely affect our business. Our failure to obtain or maintain necessary licenses, authorizations or to comply with the obligations imposed upon license and permit holders, including the payment of fees, may cause sanctions or additional costs, including the revocation of authority to provide services.
Our operations are subject to regulation at the national level and, often, at thecountry, state and local levels. Changes to existing regulations or rules, or the failure of regulatory agencies to regulate going forward in areas historically regulated on matters such as network neutrality, licensing fees, environmental, health and safety, privacy, intercarrier compensation, emergency 911 services, interconnection, illegal robocalling, extraterritorial use of telephone numbers, and other areas, in general or particular to our industry, may increase uncertainty, increase costs, restrict operations or decrease revenue.
Our inability or failure to comply with telecommunications and other laws and regulations could cause the temporary or permanent suspension of
our operations, andoperations. In addition, if we cannot provide emergency calling functionality through our Bandwidth Communications Platformcommunications platform to meet any newapplicable federal, state or state international
requirements, the competitive advantages that we currently have may not persist, adversely affecting our ability to obtain and to retain enterprise customers which could have an adverse impact on our business.
TheWe are subject to telecommunications laws and regulations in the non-U.S. countries where we offer our services. Numerous country-specific laws and governmental regulations apply to our business and may increase our costs, impact our products and communications platform or prevent us from offering or providing our products in certain countries. Many existing non-U.S. laws and regulations may not fully contemplate CPaaS solutions and the interpretation and enforcement of non-U.S. laws and regulations may involve significant uncertainties. For example, several European countries have adopted “know your customer” requirements regarding end users and have mandated the real-time provisioning of data to national law enforcement authorities’ systems.
In January 2018, the FCC recently repealed its Network Neutrality Rules. Our business could suffer with respect to the quality of the services we offer, our ability to maintain our internet-based services and our services offered through our Bandwidth Communications Platform, decreasecommunications platform, a reduction in our profitability or an increase in the price of our services making our offerings less competitive in the marketplace.
In January 2018, the FCC adopted an order largely repealing its network neutrality rules.rules (the “Order”). Among other things, the pre-existing network neutrality rules prevented providers of broadband internet access services - services—like cable and telephone companies - companies—from blocking, impairing and degrading service offerings from non-affiliated third parties like us. The repealIn 2019, the U.S. Court of Appeals for the District of Columbia Circuit largely affirmed the Order, but vacated the portion of the pre-existing rules is not yet effective and several state attorneys’ general and associations have appealedOrder that would bar states from imposing any rule or requirement inconsistent with the FCC’s repealorder. In April 2022, after losing an appeal before the U.S. Circuit Court of Appeals for the pre-existing network9th Circuit, California’s state law establishing net neutrality rules. There are also efforts in Congress to repeal the FCC’s January 2018 order. We cannot predict whether either the appeals or Congress will be successful and resultwent into effect. Since then, a number of states have adopted legislation that results in restoring the pre-existing network neutrality rules that prevent broadband internet access service providers from blocking, impairing and degrading offerings from third parties like us.rules. If broadband providers were to block, impair or degrade our internet-based services or services we offer through our Bandwidth Communications Platform,communications platform, or if broadband internet access providers were to charge us or our customers to access and use our internet-based services or services offered through our Bandwidth Communications Platform,communications platform, we could lose customers and our profitabilitybusiness could decrease, or we may have to raise prices making our service less competitive in the marketplace.be materially adversely affected. Most of the major broadband internet access providers have publicly stated that they will not block, impair or degrade third party offerings. We cannot predict the potential impact of any future efforts to restore Net Neutrality at the January, 2018, FCC network neutrality order on our offerings at this time.federal level.
Our business is subject to complex and evolving laws and regulations, commercial standards, contractual obligations and other requirements related to information collection.
We are subject to privacyvarious federal, state, local and foreign laws and regulations, contractual commitments and industry standards that create obligations and impose restrictions with respect to the collection, storage, retention, use, processing, transmission, sharing, disclosure and protection of personal data securityand other customer data, including “customer proprietary network information” under applicable U.S. laws. We must comply with these obligations and restrictions and may be subject to significant consequences, including penalties and fines, if we fail to comply. These obligations and restrictions continue to develop and evolve rapidly, and it is possible that we may not be, or may not have been, compliant with each such obligation and restriction.
The complexity and evolving nature of these obligations and restrictions subject us to the risk of differing interpretations, inconsistency or conflicts among countries or rules, and creates uncertainty regarding their application to our business. Uncertainty and changes in the U.S. The FCC, other Federal agenciesrequirements of multiple jurisdictions may increase the cost of compliance, delay or state attorneys’ general could finereduce demand for our services, restrict our ability to offer services in certain locations, impact our customers’ ability to utilize our services in certain jurisdictions, or subject us to sanctions by national data protection regulators, all of which could harm our business, financial condition and results of operations.
These obligations and restrictions may limit our ability to collect, store, process, use, transmit and share data with our customers, employees, consultants and third-party providers, which may result in our inability in certain cases to provide services to our customers or to offer a global customer experience. These obligations may also limit the ability of our customers to collect, store, retain, protect, use, process, transmit, share and disclose data
with others through our services. Compliance with, and other adverse actions that may negativelyburdens imposed by, such obligations and restrictions could increase the cost of our operations and adversely impact our business reputation. If we arebusiness.
Any failure to comply with these obligations and restrictions or our own posted privacy policies and notices, or any security incident that results in a personal data breach or the unauthorized access to, or the acquisition, release or transfer of, other customer data, could subject us to an investigationinvestigations, proceedings or sufferactions against us by governmental entities or others, lawsuits, fines, criminal penalties, statutory damages, consent decrees, injunctions, adverse publicity, contractual liability, civil liabilities, loss of customer confidence, damage to our brand and reputation or a breach, we may incur costs or be subject to forfeitures and penalties thatloss of customers, any of which could reducematerially harm our profitability.business.
For certain of our internet-based and Bandwidth Communications Platform offerings, we are subject to individual or joint jurisdiction of the FCC, the Federal Trade Commission, and state attorneys’ general with respect to privacy and data security obligations. If we were to suffer or if one of our customers or vendors were to suffer a personal data breach or other security incident, we may be subject to the jurisdiction of a variety of federal agencies’ jurisdictions as well as state attorneys’ general.governmental agencies. We may have to comply with a variety of data breach lawsrequirements at the federalnational and state levels in the United States and in other countries, comply with any resulting investigations, as well as offer mitigation to customers and potential end users of certain wholesale customers to which we provide services. We could also be subject to fines, forfeitures and other penalties that may adversely impact our business.
We areFrom time to time, various federal, state and foreign legislative or regulatory bodies may be subjectenact new or additional laws and regulations concerning data-protection issues. For example, certain laws or regulations may mandate disclosure of customer information to data privacy, securitydomestic or international law enforcement bodies, which could adversely impact our business, our brand or our reputation with customers and transfer rules in the European Union. The current law governingmay not always provide a level of protection for such information that is required by other laws or regulations. In other cases, some countries may limit the transfer of personal data from the European Union to the United States is ambiguous. We may be subject to enforcement actions or we may have to restructure our service offerings in order to comply with relevant law. Our business reputation could suffer, we could be subject to fines, penalties or forfeitures, and we could be subject to increased costs that could negatively impact our profitability or require us to increase the prices for our offerings making our services less competitive.
Like many other companies operating in the European Union (EU) and the U.S., we rely on certain methods to transferthat that personal data fromregarding customers in their country be maintained solely in their country. Having to maintain local data centers and redesign product, service and business operations to limit the EU to the U.S. There has been considerable litigation and legal
uncertainty associated with all established methods for transferring personal data from the EU to the U.S. As a result, there is substantial uncertainty as to the state of law governing the transferprocessing of personal data between the EU and the U.S. for all companies engaged in such transfers including us. We cannot predict when or how this issue will be resolved nor can we predict its impact on us at this time. We may be subject to fines or penalties if the existing data transfer methods are invalidated or wewithin individual countries could increase our operating costs significantly.
Additionally, some of our third-party vendors may have access to restructurecustomer, end user or employee data. If these third-party vendors violate obligations and restrictions related to applicable data protection laws or our business operations. Dependingpolicies or contractual commitments, such violations may also put us, or data relating to our customers, end users or employees, at risk and could in turn have a material and adverse effect on what we may have to do to comply with the law when and if it is ultimately resolved, we could incur increased operating costs which may decrease our profitability or we may increase the price of our services that may result in our services being less competitive in the marketplace.
The European Union’s General Data Protection Regulation (GDPR) becomes effective on May 25, 2018. If we are found to be in non-compliance with the GDPR, we could be subject to substantial monetary forfeitures and other penalties. Our business reputation could also suffer.
The EU adopted the General Data Protection Regulation (GDPR), which will become effective on May 25, 2018, replacing the Data Protection Directive 95/46/EC. The GDPR provides for far more significant forfeitures and penalties than the regulation it replaces for noncompliance. Much remains unknown with respect to how to interpret and implement the GDPR. Moreover, for our internet-based service offerings as well as those services we offer through the Bandwidth Communications Platform, there is substantial complexity associated with interpreting and implementing the GDPR. Should we be found to be not in compliance with the GDPR, we could be subject to substantial monetary forfeitures and other penalties that could negatively impact our operating results. Our business reputation could also suffer. We cannot evaluate our potential liability at this time.business.
Our business could suffer if we cannot obtain or retain local or toll-free numbers, are prohibited from obtaining local or toll-free numbers, or are limited to distributing local or toll-free numbers to only certain customers.
Our future success depends on our ability to procure large quantities of local and toll-free numbers in the United States in desirable locationsto meet customer demands at a reasonable cost and without restriction.undue restrictions. Our ability to procure and distribute numbers depends on factors outside of our control, such as applicable regulations, the practices of the communications carriers that provide numbers to us in certain jurisdictions, the cost of theseobtaining and managing numbers and the level of demand for new numbers. Due to their limited availability, there are certain popular area code prefixes and specialized “vanity” toll-free numbers that we may not be able to obtain in desired quantities or at all.quantities. Our inability to acquire or retain numbers for our operations would make our services, including our Bandwidth Communications Platform,communications platform, less attractive to potential customers that desire assignments of particular numbering resources. In addition, future growth of our customer base, together with growth of customer bases of other providers of communications services, has increased, which increases our dependence on needing large quantities of local and toll-free numbers associated with desirable area codes or specific toll-free numbering resources at a reasonable cost and without undue restriction. If we are not able to obtain or retain adequate local and toll-free numbers, or attractive subsets of such resources, our business, results of operations and financial condition could be materially adversely affected.
In addition, in order to procure, distribute and retain telephone numbers in certain foreign jurisdictions, we will be required to register with the local telecommunications regulatory authorities, some of which have been increasingly monitoring and regulating the categories of phone numbers that are eligible for provisioning to our customers, including geographical, regional, local and toll-free phone numbers. We have obtained licenses or are
obtaining licenses in various countries in which we do business, but in some countries, the regulatory regime around provisioning of phone numbers is unclear, subject to change, and may conflict from jurisdiction to jurisdiction. Furthermore, these regulations and governments’ approach to their enforcement, as well as our products and services, are evolving and we may be unable to maintain compliance with applicable regulations, or enforce compliance by our customers, on a timely basis or without significant cost. Also, compliance with these regulations may require changes in products or business practices that result in reduced revenue. If we or our customers use or assign phone numbers in these countries in a manner that violates applicable rules and regulations, we may also be subject to significant penalties or governmental action, including government-initiated audits and, in extreme cases, may be precluded from doing business in that particular country. In the event of non-compliance, we may be forced to reclaim phone numbers from our customers, which could result in loss of customers, breach of contract claims, loss of revenue and reputational harm, all of which could have a material adverse effect on our business, results of operations and financial condition.
We may be exposed to liabilities under anti-corruption, export control and economic sanction regulations, and similar laws and regulations, and any determination that we violated any of these laws or regulations could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act and other laws that prohibit improper payments or offers of payments to foreign governments and their officials, political parties, and/or private parties by persons and entities for the purpose of obtaining or retaining business. Our international activities create the risk of unauthorized payments or offers of payments by one of our employees or consultants, even though these parties are not always subject to our control. Our policies prohibit these practices by our employees and consultants, although our existing safeguards and any future improvements may prove to be less than effective, and our employees or consultants may engage in conduct for which we might be held responsible. Violations of the FCPA, the U.K. Bribery Act or other laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results, and financial condition.
Our products and services may be subject to export control and economic sanctions regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Control. Our products and services must be offered and sold in compliance with these laws and regulations. If we do not comply with these laws or regulations or if we become liable under these laws or regulations due to the failure of our customers to comply with these laws by obtaining proper consent, we could face liability. In addition, changes in our products or services, changes in applicable regulations, or change in the target of such regulations, could also result in decreased use of our products and services, or in our decreased ability to sell our products or provide our services to existing or prospective customers with international operations. Any decreased use of our products and services or limitation on our ability to export our products and provide our services could adversely affect our business, results of operations and financial condition.
Intellectual property and proprietary rights of others could prevent us from using necessary technology to provide our services or subject us to expensive intellectual property litigation.
If technology that we require to provide our services, including our Bandwidth Communications Platform,communications platform, was determined by a court to infringe a patent held by another entity that will not grant us a license on terms acceptable to us, we could be precluded by a court order from using that technology and we would likely be required to pay significant monetary damages to the patent holder. The successful enforcement of these patents, or our inability to negotiate a license for these patents on acceptable terms, could force us to
cease (i) using the relevant technology and (ii) offering services incorporating the technology. If a claim of infringement was brought against us based on the use of our technology or against our customers based on their use of our services for which we are obligated to indemnify, we could be subject to litigation to determine whether such use or sale is, in fact, infringing. This litigation could be expensive and distracting, regardless of the outcome.
While our own limited patent portfolio may deter other operating companies from bringing such actions, patent infringement claims are increasingly beingmay also be asserted by patent holding companies, which do not use technology and whose sole business is to enforce patents against operators, such as us, for monetary gain. Because such patent holding companies, commonly referred to as patent “trolls,” do not provide services or use technology, the assertion of our own patents by way of counter-claim would be largely ineffective.
Our use of open source software could negatively affect our ability to sell our services and subject us to possible litigation.
Our services, including our Bandwidth Communications Platform,communications platform, incorporate open source software, and we expect to continue to incorporate open source software in our services in the future. Few of the licenses applicable to open source software have been interpreted by courts, and there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our services, including our Bandwidth Communications Platform.communications platform. Moreover, although we have implemented policies to regulate the use and incorporation of open source software into our services, we cannot be certain that we have not incorporated open source software in our services in a manner that is inconsistent with such policies. If we fail to comply with open source licenses, we may be subject to certain requirements, including requirements that we offer our services that incorporate the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and that we license such modifications or derivative works under the terms of applicable open source licenses. If an author or other third-party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from generating revenue from customers using services that contained the open source software and required to comply with onerous conditions or restrictions on these services. In any of these events, we and our customers could be required to seek licenses from third parties in order to continue offering our services and to re-engineer our services or discontinue offering our services to customers in the event re-engineering cannot be accomplished on a timely basis. Any of the foregoing could require us to devote additional R&D resources to re-engineer our services, could result in customer dissatisfaction and may adversely affect our business, results of operations and financial condition.
Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.
Our agreements with customers and other third parties typically include indemnification or other provisions under which we agree to indemnify or are otherwise be liable to them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons or other liabilities relating to or arising from our services or platform or other acts or omissions. The term of these contractual provisions often survives termination or expiration of the applicable agreement. Large indemnity payments or damage claims from contractual breach could harm our business, results of operations and financial condition. Although we normally contractually limit our liability with respect to such obligations, we may still incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other current and prospective
customers, reduce demand for our services and adversely affect our business, results of operations and financial condition.
The storage, processing and use of personal information and related data subjects us to evolving governmental laws and regulation, commercial standards, contractual obligations and other legal obligations related to consumer and data privacy, which may have a material impact on our costs, use of our services, or expose us to increased liability.
Federal, state, local and foreign laws and regulations, commercial obligations and industry standards, each provide for obligations and restrictions with respect to data privacy and security, as well as the collection, storage, retention, protection, use, processing, transmission, sharing, disclosure and protection of personal information and other customer data, including customer proprietary network information under applicable federal law. The evolving nature of these obligations and restrictions subjects us to the risk of differing interpretations, inconsistency or conflicts among countries or rules, and creates uncertainty regarding their application to our business.
These obligations and restrictions may limit our ability to collect, store, process, use, transmit and share data with our customers, employees and third-party providers and to allow our customers to collect, store, retain, protect, use, process, transmit, share and disclose data with others through our services. Compliance with, and other burdens imposed by, such obligations and restrictions could increase the cost of our operations and impact our ability to market our services through effective segmentation.
Failure to comply with obligations and restrictions related to applicable data protection laws, regulations, standards, and codes of conduct, as well as our own posted privacy policies and contractual commitments could subject us to lawsuits, fines, criminal penalties, statutory damages, consent decrees, injunctions, adverse publicity, loss of user confidence in our services, and loss of users, which could materially harm our business. Because these obligations and restrictions have continued to develop and evolve rapidly, it is possible that we may not be, or may not have been, compliant with each such obligation and restriction. Additionally, third-party contractors may have access to customer or employee data. If these or other third-party vendors violate obligations and restrictions related to applicable data protection laws or our policies, such violations may also put our customers’ or employees’ information at risk and could in turn have a material and adverse effect on our business.
If we fail to protect our internally developed systems, technology and software and our patents and trademarks, we may become involved in costly litigation or our business or brand may be harmed.
Our ability to compete effectively is dependent in large part upon the maintenance and protection of systems and software that we have developed internally, including some systems and software-basedsoftware based on open standards. While we have eight U.S. patents and five pending U.S. patent applications, weWe cannot patent much of the technology that is important to our business. In addition, ourany pending patent applications may not be granted, and any issued patent that we own may be challenged, narrowed, invalidated or circumvented. To date, we have relied on patent, copyright and trade secret laws, as well as confidentiality procedures and licensing arrangements, to establish and protect our rights to our technology. While we typically
enter into confidentiality agreements with our employees, consultants, customers, and vendors in an effort to control access to and distribution of technology, software, documentation and other information, these agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Despite these precautions, it may be possible for a third-partythird party to copy or otherwise obtain and use our technology without authorization. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any rights against such party. Policing unauthorized use of our technology is difficult. The steps we
take may not prevent misappropriation of the technology we rely on. In addition, effective protection may be unavailable or limited in some jurisdictions outside the United States. Litigation may be necessary in the future to enforce or protect our rights or to determine the validity and scope of the rights of others. That litigation could cause us to incur substantial costs and divert resources away from our daily business, which in turn could adversely affect our business, results of operations and financial condition.
The unlicensed use of our brands by third parties could harm our reputation, cause confusion among our customers or impair our ability to market our services. Accordingly, we have registered numerous trademarks and service marks and have applied for registration of our trademarks and service marks in the United States and certain jurisdictions outside the United States to establish and protect our brand names as part of our intellectual property strategy. The laws of some countries do not protect intellectual property and other proprietary rights to the same extent as the laws of the United States. Our exposure to unauthorized copying, transfer and use of our proprietary technology or information may increase as we expand our international operations. We cannot assure you that our pending or future trademark applications will be approved. Although we anticipate that we would be given an opportunity to respond to any such rejections, we may be unable to overcome any such rejections. In addition, in proceedings before the United StatesU.S. Patent and Trademark Office third parties are given an opportunity to oppose pending trademark applications and seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. In the event that our trademarks are successfully challenged, we could be forced to rebrand our services, which could result in loss of brand name recognition. Moreover, successful opposition to our applications might encourage third parties to make additional oppositions or commence trademark infringement proceedings against us, which could be costly and time consuming to defend against. If we decide to take limited or no action to protect our trademarks, our trademark rights may be diluted and subject to challenge or invalidation, which could materially and adversely affect our brand in the marketplace. Certain of the trademarks we may use may become so well known by the public that their use becomes generic and they lose trademark protection. Over the long term, if we are unable to establish name recognition based on our trademark and tradenames, then we may not be able to compete effectively and our business may be adversely affected. Further, we cannot assure you that competitors will not infringe our trademarks or that we will have adequate resources to enforce our trademarks.
We are subject to litigation in the ordinary course of business, and uninsured judgments or a rise in insurance premiums may adversely affect our results of operations.
In the ordinary course of business, we are subject to various claims and litigation. Any such claims, regardless of merit, could be time-consuming and expensive to defend and could divert management’s attention and resources. In accordance with customary practice, we maintain insurance against some, but not all, of these potential claims. We may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the risks presented. The levels of insurance we maintain may not be adequate to fully cover any and all losses or liabilities. Further, we may not be able to maintain insurance at commercially acceptable premium levels or at all. If any significant judgment, claim (or a series of claims) or other event is not fully insured or indemnified against, it could have a material adverse impact on our business, financial condition and results of operations. There can be no assurance as to the actual amount of these liabilities or the timing thereof. We cannot be certain that the outcome of current or future litigation will not have a material adverse impact on our business and results of operations.
We may be liable for the information that content owners or distributors distribute over our network.
The law relating to the liability of private network operators for information carried on or disseminated through their networks remains unsettled. While we disclaim any liability for third-party content in our services agreements, we may become subject to legal claims relating to the content disseminated on our network, even though such content is owned or distributed by our customers or a customer of our customers. For example, lawsuits may be brought against us claiming that material distributed using our network was
inaccurate, offensive or violated the law or the rights of others. Claims could also involve matters such as defamation, invasion of privacy and copyright infringement. In addition, the law remains unclear over whether content may be distributed from one jurisdiction, where the content is legal, into another jurisdiction, where it is not. Companies operating private networks have been sued in the past, sometimes successfully, based on the nature of material distributed, even if the content is not owned by the network operator and the network operator has no knowledge of the content or its legality. It is not practical for us to monitor all of the content distributed using our network. We may need to take costly measures to reduce our exposure to these risks or to defend ourselves against such claims, which could adversely affect our results of operations and financial condition.
Third parties may fraudulently use our name to obtain access to customer accounts and other personal information, use our services to commit fraud or steal our services, which could damage our reputation, limit our growth or cause us to incur additional expenses.
Our customers may have been subject to “phishing,” which occurs when a third-partythird party calls or sends an email or pop-up message to a customer that claims to be from a business or organization that provides services to the customer. The purpose of the inquiry is typically to encourage the customer to visit a bogus website designed to look like a website operated by the legitimate business or organization or provide information to the operator. At the bogus website, the operator attempts to trick the customer into divulging customer account or other personal information such as credit card information or to introduce viruses through “Trojan horse” programs to the customers’ computers. This could result in identity theft from our customers and the unauthorized use of our services. Third parties also have used our communications services to commit fraud. If we are unable to detect and prevent “phishing” and other similar methods, use of our services for fraud and similar activities, our brand reputation and growth may suffer and we may incur additional costs, including costs to increase security, or be required to credit significant amounts to customers.
Third parties also have used our communications services without paying, including by submitting fraudulent credit information and fraudulent credit card information. This has resulted in our incurring the cost of providing the services, including incurring call termination fees, without any corresponding revenue. We have implemented anti-fraud procedures in order to limit the expenses resulting from theft of service. If our procedures are not effective, theft of service could significantly increase our expenses and adversely affect our business, results of operations and financial condition.
If our customers or their end users do not accept the differences between our service and traditional telephone service, they may choose to remain with their current telephone service provider or may choose to return to service provided by traditional network service providers.
Aspects of our services based on VoIP, including our Bandwidth Communications Platform,communications platform, are not the same as traditional network service providers. Our continued growth is dependent on the adoption of our services by mainstream customers and their end users, so these differences are important. For example:
•Our 911 calling and other emergency calling services are different, in significant respects, from the 911 serviceand other emergency calling services associated with traditional wireline and wireless telephone providers and, in certain cases, with other VoIP providers.
•In the event of a power loss or Internet access interruption experienced by a customer, our service may be interrupted.
•Our customers’ end users may experience lower call quality than they are used to from traditional wireline or wireless telephone companies, including static, echoes and delays in transmissions.
•Our customers’ end users may not be able to call premium-rate telephone numbers such as 1-900 numbers and 976 numbers.
We may lose customers if we experience failures of our system or Bandwidth Communications Platformcommunications platform that significantly disrupt the availability and quality of the services that we provide. Such failures may also cause interruptions to service delivery and the completion of other corporate functions.
Our operations depend on our ability to limit and mitigate interruptions or degradation in service for customers. Interruptions in service or performance problems, for whatever reason, could undermine our customers’ confidence in our services and cause us to lose customers or make it more difficult to attract new ones. Because many of our services are critical to the businesses or daily lives of many of our customers or our customers’ end users, any significant interruption or degradation in service also could result in lost profits or other losses to customers. Although our service agreements generally limit our liability for service failures and generally exclude
any liability for “consequential” damages such as lost profits, a court might not enforce these limitations on liability, which could expose us to financial loss. We also sometimes provide our customers with committed service levels. If we fail to meet these committed service levels, we could be required to provide service credits or other compensation to our customers, which could adversely affect our results of operations.
The failure of any equipment or facility on our network, including our network operations control centers and network data storage locations, could interrupt customer service and other corporate functions until we complete necessary repairs or install replacement equipment. Our business continuity plans also may be inadequate to address a particular failure that we experience. Delays, errors or network equipment or facility failures could result from natural disasters, pandemics such as COVID-19, disease, accidents, terrorist acts, acts of war, power losses, security breaches, vandalism or other illegal acts, computer viruses or other causes. These delays, errors or failures could significantly impair our business due to:
•service interruptions;
misfunction•malfunction of our Bandwidth Communications Platformcommunications platform on which our enterprise users rely for voice, messaging or 911emergency service functionality;
•exposure to customer liability;
•the inability to install new service;
•the unavailability of employees necessary to provide services;
•the delay in the completion of other corporate functions such as issuing bills and the preparation of financial statements; or
•the need for expensive modifications to our systems and infrastructure.
Defects or errors in our services could diminish demand for our services, harm our business and results of operations and subject us to liability.
Our customers use our services for important aspects of their businesses, and any errors, defects or disruptions to our services and any other performance problems with our services could damage our customers’ businesses and, in turn, hurt our brand and reputation. We provide regular updates to our services, which have in the past contained, and may in the future contain, undetected errors, failures, vulnerabilities and bugs when first introduced or released. Real or perceived errors, failures or bugs in our services could result in negative publicity, loss of or delay in market acceptance of our platform, loss of competitive position, lower
customer retention or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem. In addition, we may not carry insurance sufficient to compensate us for any losses that may result from claims arising from defects or disruptions in our services. As a result, our brand and reputation could be harmed, and our business, results of operations and financial condition may be adversely affected.
If our 911emergency services do not function properly, we may be exposed to significant liability from our users.
Certain of our IP telephony offerings, as well as the 911 and other emergency services solutions that we offer are subject to FCC and other rules governing the delivery of emergency calling services. SimilarThe rules and laws that govern emergency calling services are subject to otherchange as communications technologies and consumer use cases evolve. Similar providers of IP telephony services, our 911 serviceand other emergency services are different from those associated with traditional local telecommunications services. These differences may lead to an inability to make and complete calls that would not occur for users of traditional telephony services. For example, to provide the emergency calling services required by the FCC’s rules to our IP telephony consumers, we may use components of both the wireline and wireless infrastructure in unique ways that can result in failed connections and calls routed to incorrect emergency call centers. Routing emergency calls overthrough the Internet may be adversely affected by
power outages and network congestion that may not occur for users of traditional telephony services. Emergency call centers may not be equipped with appropriate hardware or software to accurately process and respond to emergency calls initiated by consumers of our IP telephony services, and calls routed to the incorrect emergency call center can significantly delay response times for first responders. Users of our IPinterconnected VoIP telephony services from a fixed address in the United States are required to manually update their location information for use when calling 911, and failure to do so may result in dispatching of assistance to the wrong location. Even manual updates made appropriately require a certain amount of time before the updated address appears in the relevant databases which could result in misrouting emergency calls to the wrong emergency calling center, dispatching first responders to the wrong address, or both. Similar requirements and delays applicable to relevant databases also apply to local emergency services provided outside the United States. Moreover, the relevant rules with respect to what address information should be provided to emergency call centers when the call originates from a mobile application are unsettled.unsettled and evolving. As a result, we could be subject to enforcement action by the FCC or other entities-possiblyentities — possibly exposing us to significant monetary penalties, cease and desist orders, civil liability, loss of user confidence in our services, loss of users, and other adverse consequences, which could materially harm our business. The FCC’s rules, and some states, also impose other obligations, on us, such as properly recording our customers’ registered locations, obtaining affirmative acknowledgement from customers that they are aware of the differences between emergency calling services associated with IP telephony as compared with traditional telecommunications services, and distribution of appropriate warning labels to place on or near hardware used to place IP telephony calls. Similar obligations apply to local emergency services provided outside the United States. Failure to comply with these requirements, or failure of our Bandwidth Communications Platformcommunications platform such that 911 and other emergency calls did not complete or were misrouted, may result in FCC, foreign regulatory or other enforcement action, state attorneys’ general investigations, potential exposure to significant monetary penalties, cease and desist orders, civil liability to our users and their customers, loss of user confidence in our services, loss of users, and other adverse consequences, which could materially harm our business.
TheNational regulations, including the FCC’s rules, also require that we timely report certain 911 and other emergency service outages. The FCC or other applicable regulatory authorities may make further inquiries regarding matters related to any reported 911 or other emergency service outage. Any inquiry could result in FCCregulatory enforcement action, potential monetary penalties and other adverse consequences.
TerminationAny disruption to or termination of relationshipsarrangements with key suppliers could cause delay and additional costs.costs and could harm our relationships with current and prospective customers.
Our business is dependent on third-party suppliers for fiber, computers, software, transmission electronics and related network components, as well as providers of network colocation facilities that are integrated into our network, some of which are critical to the operation of our business. If any of these critical relationships is terminated, a supplier either exits or curtails its business as a result of economic conditions,
a supplier fails to provide critical services or equipment, or the supplier is forced to stop providing equipment or services due to supply chain issues or legal constraints, such as patent infringement, and we are unable to reach suitable alternative arrangements quickly, we may experience significant additional costs or we may not be able to provide certain services to customers. If that happens, our business, results of operations and financial condition could be materially adversely affected. There can be no assurance that alternative components or equipment will be available when required or on terms that are commercially reasonable, which could extend our lead times, increase the cost of maintaining our network, result in service outages and otherwise harm our business, operating results and financial condition. We may not be able to continue to procure components at reasonable prices, which may require us to enter into longer-term contracts with component suppliers to obtain components at competitive prices. Any of the foregoing disruptions could exacerbate other risk factors and increase our costs and decrease our gross margins, harming our business, operating results and financial condition.
Many of our third-party suppliers do not have long-term committed contracts with us and may interrupt services or terminate their agreements with us without notice or by providing 30 days prior written notice. Although we expect that we could receive similar services from other third-party suppliers, if any of our arrangements with
our third-party suppliers are terminated or interrupted, we could experience interruptions in our ability to make our services available to customers, as well as delays and additional expenses in arranging alternative providers. If a significant portion of our third-party suppliers fail to provide these services to us on a cost-effective basis or otherwise terminate or interrupt these services, the delay caused by qualifying and switching to other providers could be time consuming and costly and could adversely affect our business, results of operations and financial condition.
One of our third-party suppliers, Level 3, provides us with certain 911 call routing and termination services. Pursuant to the agreement with Level 3, Level 3 is our preferred provider for these services until December 31, 2020, after which the agreement automatically renews for consecutive one-year periods, unless terminated by either Level 3 or us. After December 31, 2020, Level 3 may cancel the agreement upon two years’ notice and we may cancel the agreement upon one year’s notice. If our agreement with Level 3 terminates for any reason other than our default, Level 3 must continue to provide these services to us for at least two years to allow us to transition to another provider. We are obligated to pay Level 3 a minimum of $100,000 per month for as long as the agreement continues. Additionally, Level 3 has a right of first refusal to provide these 911 call routing and termination services to us in additional geographic areas.
Our growth and financial health are subject to a number of economic risks.
The financial markets in the United States have experienced substantial uncertainty during recent years. This uncertainty has included, among other things, extreme volatility in securities prices, drastically reduced liquidity and credit availability, rating downgrades of certain investments and declining values with respect to others. If capital and credit markets continue to experience uncertainty and available funds remain limited, we may not be able to obtain debt or equity financing or to refinance our existing indebtedness on favorable terms or at all, which could affect our strategic operations and our financial performance and force modifications to our operations. These conditions currently have not precluded us from accessing credit markets or financing our operations, but there can be no assurance that financial markets and confidence in major economies will not deteriorate. An extended period of economic deterioration could materially adversely affect our results of operations and financial condition and exacerbate some of the other risk factors contained in this Annual Report on Form 10-K. For example, our customers might defer or entirely decline purchases of our services due to tighter credit or negative financial news or reduce demand for our services. Our customers also may not be able to obtain adequate credit, which could adversely affect the timeliness of their payments to us or ultimately result in a filing by the customer for protection from creditors under applicable insolvency or bankruptcy laws. If our customers cannot make timely payments to us, our accounts receivable could increase. The demand for, and the prices of, our services also may decline due to the actions of our competitors or otherwise.
Key vendors upon which we rely also could be unwilling or unable to provide us with the materials or services that we need to operate our Bandwidth Communications Platform or otherwise on a timely basis or on terms that we find acceptable. Our financial counterparties, insurance providers or others also may
default on their contractual obligations to us. If any of our key vendors fail, we may not be able to replace them without disruptions to, or deterioration of, our services and we also may incur higher costs associated with new vendors. Transitioning to new vendors also may result in the loss of the value of assets associated with our integration of third-party services into our network or service offerings.
Our customer churn rate may increase.
Customer churn occurs when a customer reduces usage or discontinues service with us, whether voluntarily or involuntarily, such as a customer switching some or all of its usage to a competitor or going out of business. Changes in the economy, increased competition from other providers, cyber incidents such as the 2021 DDoS attack or issues with the quality of service we deliver can impact our customer churn rate. We cannot predict future pricing by our competitors, but we anticipate that price competition will continue. Lower prices offered by our competitors could contribute to an increase in customer churn. We cannot predict the timing, duration or magnitude of any deteriorated economic conditions or its impact on our target of customers. Higher customer churn rates could adversely affect our revenue growth. Higher customer churn rates could cause our dollar-based net retention rate to decline. A sustained and significant growth in the churn rate could have a material adverse effect on our business.
The market prices for certain of our services have decreased in the past and may decrease in the future, resulting in lower revenue than we anticipate.
Market prices for certain of our services have decreased over recent years. These decreases resulted from downward market pressure and other factors including:
•technological changes and network expansions, which have resulted in increased transmission capacity available for sale by us and by our competitors; and
•some of our competitors have been willing to accept smaller operating margins in the short term in an attempt to increase long-term revenue.
To retain customers and revenue, we must sometimes reduce prices in response to market conditions and trends. We cannot predict to what extent we may need to reduce our prices to remain competitive or whether we will be able to sustain future pricing levels as our competitors introduce competing services or similar services at lower prices. Our ability to meet price competition may depend on our ability to operate at costs equal to or lower than our competitors or potential competitors. As our prices for some of our services decrease, our operating results may suffer unless we are able to either reduce our operating expenses or increase traffic volume from which we can derive additional revenue.
The need to obtain additional IP circuits from other providers increases our costs. In addition, the need to interconnect our network to networks that are controlled by others could increase our costs.costs and adversely impact our business.
We lease over 150,000all of our IP circuits from third parties nationwide.parties. We could incur material expenses if we were required to locate alternative IP circuits. We may not be able to obtain reasonable alternative IP circuits if needed. Failure to obtain usage of alternative IP circuits, if necessary, could have a material adverse effect on our ability to carry on business operations. In addition, some of our agreements with other providers require the payment of amounts for services whether or not those services are used. Our reliance on third-party providers may reduce our operating flexibility, ability to make timely service changes and ability to control quality of service.
In the normal course of business, we need to enter into interconnection agreements with many local telephone companies, as well as the owners of networks that our customers desire to access to deliver their services. We are not always able to secure these interconnection agreements on favorable terms. Costs of
In some jurisdictions, we rely on third party access and networks for local connectivity. We are not always able to secure this access and local
connectivity on favorable terms. Costs of obtaining service from other communications carriers comprise a significant proportion of the operating expenses of long distance carriers. Changes in regulation, particularly the regulation of telecommunication carriers and local access network owners, could indirectly, but significantly, affect our competitive position. These changes could increase or decrease the costs of providing our services. Further, if problems occur with our third-party providers or local telephone companies, it may cause errors or poor quality communications, and we could encounter difficulties identifying the source of the problem. The occurrence of errors or poor quality communications on our services, whether caused by our platform or a third-party provider, may result in the loss of our existing customers or the delay of adoption of our services by potential customers and may adversely affect our business, results of operations and financial condition.
Network providers also may institute additional fees due to regulatory, competitive or other industry-related changes that increase our costs. For example, the major U.S. cellular carriers and their intermediaries have added a variety of fees that are applied to Application to Person (“A2P”) messages delivered to their subscribers. While we may be able to negotiate with network providers, absorb the increased costs, or charge these costs to our customers, we cannot assure you that we will be able to do so. In the case of new A2P fees, we currently pass, and expect to continue to pass, these fees on to our customers who send A2P messages to the carrier's subscribers. This is expected to increase our revenue and cost of goods sold, but is not expected to impact the gross profit received for sending these messages. However, these changes may still have a negative impact on our gross margins mathematically. We also may not be able to effectively respond to any new fees if all network providers in a particular market impose equivalent fee structures, if the magnitude of the fees is disproportionately large when compared to the underlying prices paid by our customers, or if market conditions limit our ability to increase the prices we charge our customers.
In connection with the delivery of text messages to customers of mobile carriers in the U.S., and in certain other instances, our customers’ traffic must be routed through intermediaries who have direct access to network service providers. Although we are seeking direct connections with network service providers in a number of countries, we expect that we will continue to rely on intermediaries for these services for some period of time. These intermediaries sometimes have offerings that directly compete with our products and may stop providing services to us on a cost-effective basis. If a significant portion of these intermediaries stop providing services or stop providing services on a cost-effective basis, our business could be adversely affected.
We depend largely on the continued services of our senior management and other key employees, the loss of any of whom could adversely affect our business, results of operations and financial condition.
Our future performance depends on the continued services and contributions of our senior management and other key employees to execute on our business plan, to develop our platform, to deliver our services to customers, to attract and retain customers and to identify and pursue opportunities. The loss of services of senior management or other key employees, such as those who develop and maintain our service offerings, could significantly delay or prevent the achievement of our development and strategic objectives. In particular, we depend to a considerable degree on the vision, skills, experience and effort of our Cofounder, Chief Executive Officer, and Chairman, David A. Morken. The replacement of any of our senior management personnel would likelyor other key employees can involve significant time and costs, and such loss could significantly delay or prevent the achievement of our business objectives. The loss of the services of our senior management or other key employees for any reason could adversely affect our business, results of operations and financial condition.
If we are unable to hire, retain and motivate qualified personnel, our business will suffer.
Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. Wepersonnel, and our inability to do so could adversely affect our business, results of operations and financial condition. Competition for talent in the technology industry has become increasingly intense, and the market to recruit, retain and motivate talent has become even more competitive. Many key individual contributors, particularly in software development, sales and cloud computing and telecommunications infrastructure, are critical to our success and can attract very significant compensation packages. In addition, we believe that there is, and will continue to be, intense
competition for highly skilled management, technical, sales and other personnel with experience in our industry in the Raleigh, North Carolina area, where our headquarters are located, and in other geographic locations where we maintain offices.
We musthave experienced and may continue to experience difficulties attracting, hiring and retaining highly-skilled personnel with appropriate qualifications, and may not be able to fill positions in desired geographic areas or at all. These difficulties may be exacerbated by the reactions of employees and prospective employees to our policies related to remote working flexibility. As a result, we have also experienced and may continue to experience increased compensation and training costs that may not be offset by either improved productivity or higher sales, which could reduce our profitability.
We seek to provide competitive compensation packages and a high-quality work environment to hire, retain and motivate employees. If we are unable to retain and motivate our existing employees and attract qualified personnel to fill key positions, we may be unable to manage our business effectively, including the development, marketing and sale of our services, which could adversely affect our business, results of operations and financial condition. To the extent we hire personnel from competitors, we also may be subject to allegations that they have been improperly solicited or hired, or that they divulged proprietary or other confidential information.
Volatility in, or lack of performance of,declines in our stock price may also affect our ability to attract and retain key personnel. Many of our key personnel are, or will soon be, vested in a substantial amount of shares of Class A common stock, Class B common stock or stock options. Employees may be more likely to terminate their employment with us if the shares they own or the shares underlying their vested optionsany restricted stock units have not significantly appreciated in value, relative toor if the original purchase pricesvalue of the shares or the exercise prices of the options, or, conversely, if the exercise prices of the options thatunderlying restricted stock units they hold are significantly above the trading price of our Class A common stock.has depreciated significantly. If we are unable to retain our employees, our business, results of operations and financial condition could be adversely affected.
Our management teamIn addition, we believe our corporate culture has limited experience managingbeen a public company.
Most memberskey contributor to our success to date. We, along with many companies in the technology industry, experienced higher than average attrition in the “great resignation,” in which the technology industry saw a dramatic increase in workers leaving their positions in 2020 and 2021 during the COVID-19 pandemic. As we continue to grow and expand globally and navigate shifting workforce priorities, including the desire of many of our management team have limited, if any, experience managingemployees and prospective employees for a publicly-traded company, interacting with public company investors and complyinghybrid work model with the increasingly complex laws
pertainingthe week, and the increasing demand of employees and prospective employees for fully remote work, we may find it difficult to public companies. Our management teammaintain important aspects of our corporate culture. This could negatively affect our ability to retain and recruit personnel who are essential to our future success, and could ultimately have a negative impact on our ability to innovate our technology and our business. Since 2020, we have experienced and may not successfullycontinue to face higher than usual employee turnover rates, and as of December 31, 2022, approximately 24.8% of our employees have been employed by us for a year or efficiently manage us as a public company.less. As a result, we must be able to effectively integrate, develop and motivate a large number of being a public company, we are subject to significant regulatory oversight and reporting obligations undernew employees, while maintaining the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents require significant attention from our senior management and could divert their attention away from the day-to-day managementeffectiveness of our business which could adversely affectexecution and the beneficial aspects of our business, results of operations and financial condition.corporate culture.
We could be subject to liabilityadditional tax liabilities for historic and future sales, use and similar taxes, which could adversely affect our results of operations.
We conduct operations in many tax jurisdictions throughout the United States.States and internationally. In many of these jurisdictions, non-income-based taxes such as sales, use and telecommunications taxes, including those associated with (or potentially associated with) VoIP telephony services or 911 services, are or may be assessed on our operations. We also face exposure to other non-income-based international taxes such as value added taxes that are or may be assessed on our operations. The systems and procedures necessary to comply in these jurisdictions are complex to develop and challenging to implement. Additionally, we rely heavily on third parties to provide us with key software and services for compliance. If these third parties cease to provide those services to us for any reason, or fail to perform services accurately and completely, we may not be able to accurately bill, collect or remit applicable non-income-based taxes. Historically, we have not billed or collected certain of these taxes and, in accordance with generally accepted accounting principles ("GAAP"),GAAP, we have recorded a provision for our tax exposure in these jurisdictions when it is both probable that a liability has been incurred and the amount of the exposure can be reasonably estimated. These estimates include several key assumptions including, but not limited to, the taxability of our services, the
jurisdictions in which we believe we have nexus, and the sourcing of revenue to those jurisdictions. In the event these jurisdictions challenge our assumptions and analysis, our actual exposure could differ materially from our current estimates.
Taxing authorities also may periodically perform audits to verify compliance and include all periods that remain open under applicable statutes,law, which customarily range from three to four years. At any point in time, we may undergo audits that could result in significant assessments of past taxes, fines and interest if we were found to be non-compliant. During the course of an audit, a taxing authority may, as a matter of policy, question our interpretation and/or application of their rules in a manner that, if we were not successful in substantiating our position, could potentially result in a significant financial impact to us.
Furthermore, certain jurisdictions in which we do not collect sales, use and similar taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties and interest or future requirements may adversely affect our business, results of operations and financial condition.
Our global operations and legal entity structure subject us to potentially adverse income tax consequences.
We conduct our international operations through subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. Also, our tax expense could be affected depending on the applicability of withholding and other taxes under the tax laws of certain jurisdictions in which we have business operations. The relevant revenue and taxing authorities may disagree with positions we have taken generally, or our determinations as to income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position were not sustained, we could be required to pay additional taxes, interest and penalties, which could result in additional tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations.
We are unable to predict what global or U.S. tax reforms may be proposed or enacted in the future or what effects such future changes would have on our business. Any such changes in tax legislation, regulations, policies or practices in the jurisdictions in which we operate could increase the estimated tax liability that we have expensed to date and paid or accrued on our balance sheet; affect our financial position, future results of operations, cash flows, and effective tax rates where we have operations; reduce post-tax returns to our stockholders; and increase the complexity, burden, and cost of tax compliance. We are subject to potential changes in relevant tax, accounting, and other laws, regulations, and interpretations, including changes to tax laws applicable to corporate multinationals.
Certain government agencies in jurisdictions where we and our affiliates do business have had an extended focus on issues related to the taxation of multinational companies. For example, the Organisation for Economic Co-operation and Development (the “OECD”) is conducting a project focused on base erosion and profit shifting in international structures, which seeks to establish certain international standards for taxing the worldwide income of multinational companies. In addition, the OECD is working on a “BEPS 2.0” initiative, which is aimed at (i) shifting taxing rights to the jurisdiction of the consumer and (ii) ensuring all companies pay a global minimum tax. On October 8, 2021, the OECD announced an agreement by members of the Inclusive Framework delineating an implementation plan, and on December 20, 2021, the OECD released model rules for the domestic implementation of a 15% global minimum tax. Further, several countries have proposed or enacted taxes applicable to digital services, which could apply to our business. As a result of these developments, the tax laws of certain countries in which we and our affiliates do business could change on a prospective or retroactive basis, and any such changes could increase our liabilities for taxes, interest and penalties, and therefore could harm our business, cash flows, results of operations and financial position.
The governments of countries in which we operate and other governmental bodies could make unprecedented assertions about how taxation is determined in their jurisdictions that are contrary to the way in which we have interpreted and historically applied the rules and regulations in our tax returns filed in such
jurisdictions. New laws could significantly increase our tax obligations in the countries in which we do business or require us to change the way we operate our business. As a result of the large and expanding scale of our international business activities, many of these changes to the taxation of our activities could adversely impact our worldwide effective tax rate and harm our financial position, results of operations, and cash flows.
Our ability to use our net operating loss and tax credit carryforwards to offset future taxable income may be subject to certain limitations.
The future utilization of our net operating loss and tax credit carryforwards (collectively, “Tax Attributes”) may be limited due to changes in ownership as defined under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, if we experience a greater than 50% aggregate change in ownership of certain significant stockholders or groups over a three-year period, utilization of our pre-change Tax Attributes is subject to an annual limitation under Section 382 of the Code (and similar state laws). The annual limitation generally is determined by multiplying the value of our stock at the time of such ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Such limitations may result in expiration of a portion of the pre-change Tax Attributes before utilization and may be substantial. In the past we may have experienced, and in the future may experience, ownership changes as a result of subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change Tax Attributes to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.
We may be subject to significant U.S. federal income tax-related liabilities and indemnity obligations if certain ownership changes were to occur, including asthere is a result of subsequent issuances or acquisitions of our stock, and we may determine to forego certain transactions in light of such liabilities as well asdetermination that the restrictions and obligations imposed by and under the Tax Sharing Agreement.Spin-Off is taxable for U.S. federal income tax purposes.
We may be subject to significant U.S. federal income tax-related liabilities with respect to our prior distribution of all of the issued and outstanding shares of the common stock of Relay, Inc. (f/k/a Republic Wireless, Inc.) (“Republic Wireless”Relay”), our former subsidiary, to our stockholders as of and on November 30, 2016 (the “Spin-Off”), if certain ownership changes were to occur.there is a determination that the Spin-Off is taxable for U.S. federal income tax purposes. In particular,that regard, even if the Spin-Off otherwise qualifiesqualified as a tax-free transaction to us and our stockholders under Section 355, Section 368(a)(1)(D) and related provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), it may result in at the time of the Spin-Off, we would be subject to corporate-level taxable gain to us under Section 355(e) of the Code (“Section 355(e)”) if there iswas a 50% or greater change in ownership, by vote or value, of shares of our stock or Republic Wireless’sRelay’s stock occurringthat occurred after the Spin-Off as part
of a plan or series of related transactions that includesincluded the Spin-Off. In addition, pursuant to the Tax Sharing Agreement, dated November 30, 2016, between us and Republic Wireless (the “Tax Sharing Agreement”), we and Republic Wireless are each prohibited from taking or failing to take any action that prevents the Spin-Off from qualifying for tax-free treatment under Section 355, Section 368(a)(1)(D) and related provisions of the Code, and we and Republic Wireless must generally indemnify one another for any taxes or losses incurred by the other (or its respective subsidiaries), as applicable, resulting from the application of Section 355(e) to the Spin-Off as a result of subsequent actions we or Republic Wireless take or fail to take.
To preserve the tax-free nature of the Spin-Off to us as well as Republic Wireless (and its subsidiaries), we might forego certain transactions that might otherwise have been advantageous. In particular, we might continue to operate certain of our business operations for the foreseeable future even if a sale or discontinuance of such business might have otherwise been advantageous.
In addition, forFor purposes of Section 355(e), any acquisitions or issuances of our stock, including pursuant to our initial public offering and pursuant to the reorganizations undertaken and arrangements entered into in connection with our initial public offering, or Republic Wireless’sRelay’s stock, in each case, that occuroccurred within two years after the Spin-Off willare generally be presumed to be part of a plan or series of related transactions with respect to the Spin-Off. Although
In connection with the Spin-Off, we or Republic Wireless may be ablereceived an opinion from Skadden, Arps, Slate, Meagher & Flom LLP substantially to rebutthe effect that, presumption, determining whether an acquisition or issuance is part ofamong other things, the Spin-Off should qualify as a plan or series of related transactionstax-free transaction for U.S. federal income tax purposes under these rules is generally complex, inherently factualSection 355 and subject to interpretationSection 368(a)(1)(D) of the facts and circumstances of a particular case. For this purpose, whether any increaseCode. In addition, in voting power by holders of our Class B common stock by reason of the conversion by other holders of our Class B common stock to our Class A common stock should be considered an acquisition of voting power as part of a plan or series of related transactions is unclear.
In light of the implications that would arise for us if Section 355(e) were to applyapplied to the Spin-Off, we received an opinion from Kilpatrick Townsend & Stockton LLP our special tax counsel, in conjunctionconnection with our initial public offering substantially to the effect that (i) as of November 9, 2017,the date of the initial public offering, we arewould not be required to recognize gain with respect to the Spin-Off pursuant to Section 355(e) as a result of one or more persons directly or indirectly acquiring our stock,, and (ii) any increases in voting power attributable to conversions of our Class B common stock to Class A common stock by those who holdheld our Class B common stock as of ourthe date of the initial public offering willwould not cause us to recognize gain with respect to the Spin-Off pursuant to Section 355(e) (the(together with the opinion from Skadden, Arps, Slate, Meagher & Flom LLP with respect to the Spin-Off, the “Tax Opinion”Opinions”). TheNeither of the Tax OpinionOpinions is not binding on the Internal Revenue Service (the “IRS”) or the courts, however, and the IRS or the courts may not agree with the conclusions reached in the Tax Opinion.Opinions. Moreover, the Tax Opinion wasOpinions were based upon, among other things, then-current lawthe laws in effect at the time of each of the Tax Opinions and certain assumptions and representations as to factual matters made by us. Any change in currently applicable law, which may be retroactive, or the failure of any such assumptions or representations to be true, could adversely affect the validity of the conclusions reached in the Tax Opinion. Opinions.
If the conclusions inof the Tax Opinion wereOpinions are not correct, and Section 355(e) wereor if the Spin-Off is otherwise ultimately determined to apply to the Spin-Off,be a taxable transaction, we would be liable for significant U.S. federal income tax related liabilitiesliabilities. In addition, pursuant to the Tax Sharing Agreement, dated November 30, 2016, between us and Relay (the “Tax Sharing Agreement”), we must generally indemnify Relay for any taxes or losses incurred by it (or its respective subsidiaries) resulting from the Spin-Off failing to qualify as a tax-free transaction for U.S. federal income tax purposes (including due to the application of Section 355(e)) as a result of subsequent actions we take or fail to take. The amount of any indemnity obligations we may have under the Tax Sharing Agreement.Agreement in such case may be material.
Even if Section 355(e) does not apply to the Spin-Off as of the date of our initial public offering or as a result of an increase in voting power attributable to conversions of our Class B common stock by those who holdheld such stock as of our initial public offering, subsequent acquisitions or issuances of our stock could be treated as part of a plan or series of related transactions with respect to the Spin-Off. Accordingly, in light of the requirements of Section 355(e), we might forego share repurchases, stock issuances and other strategic transactions for some period of time following our initial public offering.transactions. Notwithstanding the foregoing, it is possible that we, Republic WirelessRelay or the holders of our respective stock might inadvertently cause, permit or otherwise not prevent a change in the ownership of our stock or Republic Wireless’sRelay’s stock to occur, which would cause Section 355(e) to apply to the Spin-Off, thereby triggering significant U.S. federal income tax-related liabilities and indemnity obligations under the Tax Sharing Agreement of approximately $50 million.
This approximation is based on our current expectations and the tax laws in effect as of our initial public offering. However, we cannot provide any assurance that this estimate will prove to be accurate in the event that Section 355(e) were to apply.
If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, capitalized internal-use software costs, other non-income taxes, business combination and valuation of goodwill and purchased intangible assets and share-based compensation. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our Class A common stock.
If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
As a public company, weWe are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), and the rules and regulations of the applicable listing standards of the NASDAQ Global Select Market. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and place significant strain on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Our disclosure controls and other procedures are designed to ensure that information required to be disclosed by us in the reports that we will file with the Securities and Exchange Commission ("SEC")SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal
executive and financial officers, and we continue to evaluate how to improve controls. We are also continuing to improve our internal control over financial reporting. In order to develop, maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight.
Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our consolidated financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting could also adversely affect the results of periodic management evaluations and annual independent
registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC.reporting. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NASDAQ Global Select Market. We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we are required to provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second Annual Report on Form 10-K.
Our independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the Jumpstartreporting. Our Business Startups Act of 2012 (the "JOBS Act"). At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material and adverse effect on our business, results of operations and financial condition and could cause a decline in the trading price of our Class A common stock.
If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.
We review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. An adverse change in market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates, could result in a change to the estimation of fair value that could result in an impairment charge to our goodwill or intangible assets. Any such charges may adversely affect our results of operations.
We are an “emerging growth company”face exposure to foreign currency exchange rate fluctuations, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will makesuch fluctuations could adversely affect our Class A common stock less attractive to investors.business, results of operations and financial condition.
We face exposure to the effects of fluctuations in currency exchange rates. While historically we have primarily transacted in U.S. dollars, we generally have transacted with customers and partners in Europe in British Pounds and Euros. We expect to expand the number of transactions with customers and partners that are an “emerging growth company,” as defineddenominated in foreign currencies in the JOBS Act, and take advantagefuture as we continue to expand our business internationally. We also incur expenses for some of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404our network service provider costs outside of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executiveUnited States in local currencies and for employee compensation and other operating expenses in local currency. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in an increase to the U.S. dollar equivalent of such expenses.
In addition, our international subsidiaries maintain net assets denominated in currencies other than the functional operating currencies of these entities. As we expand our international operations, we will become more exposed to the effects of fluctuations in currency exchange rates. Accordingly, changes in the value of foreign currencies relative to the U.S. dollar may affect our results of operations due to transactional and translational re-measurements. Such foreign currency exchange rate fluctuations could make it more difficult to detect underlying trends in our periodic reportsbusiness and proxy statements, and exemptions from the requirementsresults of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these exemptions for so long as we are an “emerging growth company.” We cannot predict if investors will find our Class A common stock less attractive because we will rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and theoperations. The trading price of our Class A common stock also could be
adversely affected if fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors and securities analysts who follow our stock.
We do not currently maintain a program to hedge transactional exposures in foreign currencies. However, in the future, we may beuse derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more volatile.than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments.
Earthquakes, hurricanes, fires, floods, pandemics, power outages, terrorist attacks, acts of war, civilian unrest and other significant events could disrupt our business and ability to serve our clients.
A significant event, such as an earthquake, hurricane, a fire, a flood, ora pandemic, a power outage, terrorist attack, act of war or civilian unrest could have a material adverse effect on our business, results of operations or financial condition. For example, the rapid and global spread of COVID-19 disrupted businesses and increased travel restrictions globally. Health concerns or governmental, legal, political or regulatory developments in the United States or other countries in which we or our customers, partners and service providers operate could cause economic, labor or social instability and could materially adversely affect our business and our results of operations and financial condition. Future developments, which are very uncertain, include evolving responses by governments and businesses. These future developments could materially adversely affect our business and our results of operations and financial condition. Our IP network is designed to be redundant and to offer seamless backup support in an emergency. While our network is designed to withstand the loss of any one data center at any point in time, the simultaneous failure of multiple data centers could disrupt our ability to serve our clients. Additionally, certain of our capabilities cannot be made redundant feasibly or cost-effectively. Acts of physical or cyber terrorism or other geopolitical unrest, including acts of war, also could cause disruptions in our business. The adverse impacts of these risks may increase if our disaster recovery plans prove to be inadequate.
As we have electedWe may acquire or invest in companies, which may divert our management’s attention and result in debt or dilution to avail ourselves of the JOBS Act extended accounting transition period, our financial statements may not be easily comparable to other companies.
Pursuant to the JOBS Act, as an “emerging growth company,” we can elect to avail ourselves of the extended transition period for any new or revised accounting standards that may be issued by the Public Company Accounting Oversight Board or the SEC. We have elected to avail ourselves of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an “emerging growth company,” expect to adopt the standard on the timeline for private companies. This may make comparison of our financial statements with other public companies that are not emerging growth companies or emerging growth companies that have opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Our financial condition and growth may depend upon the successful integration of acquired businesses.stockholders. We may not be able to efficiently and effectively integrate acquired operations, and thus may not fully realize the anticipated benefits from such acquisitions.
We may evaluate and consider potential strategic transactions, including acquisitions of, or investments in, businesses, technologies, services, products and other assets in the future. We may also enter into relationships with other businesses to expand our products and platform, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies.
Achieving the anticipated benefits of any acquisitions depends in part upon whether we can integrate new businesses in an efficient and effective manner. The integration of any acquired businesses involves a number of risks, including, but not limited to:
•demands on management related to any significant increase in size after the acquisition;
•the disruption of ongoing business and the diversion of management’s attention from the management of daily operations to management of integration activities;
•failure to fully achieve expected synergies and costs savings;
•unanticipated impediments in the integration of departments, systems, including accounting systems, technologies, books and records and procedures, as well as in maintaining uniform standards, controls, including internal control over financial reporting required by the Sarbanes-Oxley Act, procedures and policies;
•difficulty establishing and maintaining appropriate governance, reporting relationships, policies, controls, and procedures for the acquired business, particularly if it is based in a country or region where we did not previously operate;
•new or more stringent regulatory compliance obligations and costs by virtue of the acquisition, including risks related to international acquisitions that may operate in new jurisdictions or geographic areas where we may have no or limited experience;
•loss of customers or the failure of customers to order incremental services that we expect them to order;
•difficulty and delays in integrating the products, technology platforms, operations, systems, and personnel of the acquired business with our own, particularly if the acquired business is outside of our core competencies and current geographic markets;
•failure to provision services that are ordered by customers during the integration period;
•higher integration costs than anticipated; and
•difficulties in the assimilation and retention of highly qualified, experienced employees, many of whom may be geographically dispersed.dispersed;
•litigation, investigations, proceedings, fines, or penalties arising from or relating to the transaction or the acquired business, and any resulting liabilities may exceed our forecasts;
Table•acquisition of Contentsbusinesses with different revenue models, different contractual relationships, and increased customer concentration risks;
•assumption of long-term contractual obligations, commitments, or liabilities (for example, the costs associated with leased facilities), which could adversely impact our efforts to achieve and maintain profitability and impair our cash flow;
•failure to successfully evaluate or utilize the acquired business’ technology and accurately forecast the financial impact of an acquisition, including accounting charges; and
•drag on our overall revenue growth rate or an increase of our net loss, which could cause analysts and investors to reduce their valuation of our company.
Successful integration of any acquired businesses or operations will depend on our ability to manage these operations, realize opportunities for revenue growth presented by strengthened service offerings and expanded geographic market coverage, obtain better terms from our vendors due to increased buying power, and eliminate redundant and excess costs to fully realize the expected synergies. Because of difficulties in combining geographically distant operations and systems which may not be fully compatible, we may not be able to achieve the financial strength and growth we anticipate from the acquisitions.
We may not realize our anticipated benefits from our acquisitions, if any, or may be unable to efficiently and effectively integrate acquired operations as planned. If we fail to integrate acquired businesses and operations efficiently and effectively or fail to realize the benefits we anticipate, we would be likely to experience material adverse effects on our business, financial condition, results of operations and future prospects.
Our credit facility contains restrictiveAcquisitions or investments may also require us to issue debt or equity securities, use our cash resources, incur debt or contingent liabilities, amortize intangibles, or write-off acquisition-related expenses. In addition, we cannot predict market reactions to any acquisitions we may make or to any failure to announce any future acquisitions.
While we would conduct due diligence in connection with any acquisition opportunities, there may be risks or liabilities that such due diligence efforts fail to discover, that are not disclosed to us or that we inadequately
assess. The failure to timely identify any material liabilities associated with any acquisitions could adversely affect our business, results of operations, and financial covenantscondition.
We have incurred, and may continue to incur, significant, non-recurring costs in connection with the acquisition and integrating our operations with those of Voxbone, including costs to consolidate business support systems and service offerings. We cannot ensure that the elimination of duplicative costs or the realization of other efficiencies will offset the transaction and integration costs in the near term or at all.
Risks Related to the Convertible Notes
Servicing our debt requires a significant amount of cash, and our business may not generate sufficient cash flow to repay our indebtedness.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance the Convertible Notes depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional debt financing or equity capital on terms that may limit our operating flexibility.
be onerous or highly dilutive. Our credit facility contains certain restrictive covenants that either limit our ability to or require a mandatory prepayment inrefinance our indebtedness will depend on the event we, among other things, incur additional indebtedness, issue guarantees, create liens on assets, make certain investments, merge with or acquire other companies, change business locations, pay dividends or make certain other restricted payments, transfer or dispose of assets, enter into transactions with affiliatescapital markets and enter into various specified transactions.our financial condition at such time. We therefore, may not be able to engage in any of the foregoing transactions unless we obtain the consentthese activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, any of our lendersfuture debt agreements may contain restrictive covenants that may prohibit us from adopting any of these alternatives. Our failure to comply with these covenants could result in an event of default which, if not cured or prepaywaived, could result in the outstanding amount under our credit facility. Our credit facility also contains certain financial covenants and financial reporting requirements. Our obligations under our credit facility are secured by allacceleration of our property, with certain exceptions. indebtedness.
We may incur substantially more debt or take other actions which would intensify the risks discussed above.
We and our subsidiaries may be able to incur substantial additional debt in the future, some of which may be secured debt. We will not be restricted under the terms of the indentures governing the Convertible Notes from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of the indentures governing the Convertible Notes that could have the effect of diminishing our ability to make payments on the Convertible Notes when due.
We may not be ablehave the ability to generate sufficientraise the funds necessary for cash flowsettlement upon conversion of the Convertible Notes or sales to meetrepurchase the financial covenantsConvertible Notes for cash following a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion of the Convertible Notes or payto repurchase the Convertible Notes.
Subject to limited exceptions, holders of the Convertible Notes have the right to require us to repurchase their Convertible Notes upon the occurrence of a fundamental change at a cash repurchase price generally equal to 100% of the principal and interest under our credit facility. Furthermore, future working capital, borrowings or equity financing could be unavailable to repay or refinanceamount of the amounts outstanding under our credit facility. In the event of a liquidation, all outstanding principal and interest would haveConvertible Notes to be repaid priorrepurchased, plus accrued and unpaid interest, if any, to, distributionbut excluding, the fundamental change repurchase date. In addition, upon conversion of assetsthe Convertible Notes, unless we elect to unsecured creditors, and the holdersdeliver solely shares of our Class A and Class B common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Convertible Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Convertible Notes surrendered therefor or pay the cash amounts due upon conversion. In addition, our ability to repurchase the Convertible Notes or to pay cash upon conversions of the Convertible Notes may be limited by applicable law, by regulatory authorities or by agreements governing our future indebtedness. Our failure to repurchase the Convertible Notes at a time when such repurchase is required by the indentures governing the Convertible Notes or to pay the cash amounts due upon future conversions of the Convertible Notes as required by such indentures would receiveconstitute a default under such indentures. A default under the indentures governing the Convertible Notes or the fundamental change itself may also lead to a default under agreements governing our existing or future indebtedness, which may result in such existing or future indebtedness becoming immediately payable in full. We may not have sufficient funds to satisfy all amounts due under such
existing or future indebtedness and repurchase the Convertible Notes or make cash payments upon conversions thereof.
The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Convertible Notes is triggered, holders of Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option as described in the indentures governing the Convertible Notes. If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our Class A common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The Capped Calls may affect the value of the Convertible Notes and our Class A common stock.
In connection with the pricing of the Company’s 0.25% Convertible Notes due March 1, 2026 (the “2026 Convertible Notes”) and 0.50% Convertible Notes due April 1, 2028 (the “2028 Convertible Notes” and, together with the 2026 Convertible Notes, the “Convertible Notes”), we entered into privately negotiated capped call transactions (the “2026 Capped Calls” and the “2028 Capped Calls,” respectively and, collectively, the “Capped Calls”) with certain financial institutions (the “option counterparties”). The Capped Calls are expected generally to reduce the potential dilution upon any liquidation proceeds only ifconversion of the Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Convertible Notes, as the case may be, with such reduction and/or offset subject to a cap.
We have been advised that, in connection with establishing their initial hedges of the Capped Calls, the option counterparties or their respective affiliates entered into various derivative transactions with respect to our Class A common stock concurrently with or shortly after the pricing of the Convertible Notes.
In addition, the option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our Class A common stock and/or purchasing or selling our Class A common stock or other securities of ours in secondary market transactions from time to time prior to the maturity of the Convertible Notes (and are likely to do so during any observation period related to a conversion of Convertible Notes). This activity could also cause or avoid an increase or a decrease in the market price of our Class A common stock or the Convertible Notes, which could affect your ability to convert the Convertible Notes and, to the extent the activity occurs during any observation period related to a conversion of Convertible Notes, it could affect the number of shares and value of the consideration that you will receive upon conversion of such Convertible Notes.
We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of the Convertible Notes or our Class A common stock. In addition, we do not make any representation that the option counterparties will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
We are subject to counterparty risk with respect to the Capped Calls.
The option counterparties are financial institutions, and we will be subject to the risk that any or all of our creditors, including our lenders, were first repaid in full.
If we are unable to comply with the restrictive and financial covenants in our credit facility, there would be athem might default under the termsCapped Calls. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. Past global economic conditions have resulted in the actual or perceived failure or financial difficulties of many financial institutions. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that agreement, and this could result intime under the capped call transactions with such option counterparty. Our exposure will depend on many factors
but, generally, an acceleration of payment of funds that have been borrowed.
If we were unable to comply with the restrictive and financial covenantsincrease in our credit facility, there wouldexposure will be correlated to an increase in the market price and in the volatility of our Class A common stock. In addition, upon a default under the terms of that agreement. As a result, any borrowings under other instruments that contain cross-acceleration or cross default provisionsby an option counterparty, we may also be accelerated and become due and payable. If any of these events occur, theresuffer more dilution than we currently anticipate with respect to our Class A common stock. We can beprovide no assurance that we would be able to make necessary paymentsassurances as to the lendersfinancial stability or that we would be able to find alternative financing. Even if we were able to obtain alternative financing, there can be no assurance that it would be on terms that are acceptable.viability of the option counterparties.
Risks Related to Ownership of Our Class A Common Stock
The trading price of our Class A common stock may be volatile, and you could lose all or part of your investment.
Prior to our initial public offering, there was no public market for shares of our Class A common stock. On November 10, 2017, we sold shares of our Class A common stock to the public at $20.00 per share. From November 10, 2017, the date that our Class A common stock began trading on the NASDAQ Global
Select Market, through JanuaryDecember 31, 2018,2022, the trading price of our Class A common stock has ranged from $18.05 per share to $24.99$198.61 per share. The trading price of our Class A common stock may continue to be volatile and could fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
•general market volatility caused by epidemics, endemics and pandemics such as COVID-19, acts of war, or other significant domestic or international events;
•price and volume fluctuations in the overall stock market from time to time;
•volatility in the trading prices and trading volumes of technology stocks;
•volatility in the trading volumes of our Class A common stock;
•changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;
•sales of shares of our Class A common stock by us or our stockholders;
•failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
•the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;
•announcements by us or our competitors of new products or services;
•the public’s reaction to our press releases, other public announcements and filings with the SEC;
•rumors and market speculation involving us or other companies in our industry;
•actual or anticipated changes in our results of operations or fluctuations in our results of operations;
•actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally;
•litigation involving us, our industry or both;
•regulatory actions or developments affecting our operations, those of our competitors or our industry more broadly;
•developments or disputes concerning our intellectual property or other proprietary rights;
•announced or completed acquisitions of businesses, products, services or technologies by us or our competitors;
•new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
•changes in accounting standards, policies, guidelines, interpretations or principles;
•new rules adopted by certain index providers, such as S&P Dow Jones, that limit or preclude inclusion of companies with multi-class capital structures in certain of their indices;
•any significant change in our management; and
•general economic conditions and slow or negative growth of our markets.
In addition, in the past, securities class action litigation has often been instituted following periods of volatility in the overall market and the market price of a particular company’s securities. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Substantial future sales of shares of our Class A common stock could cause the market price of our Class A common stock to decline.
The market price of our Class A common stock could decline as a result of substantial sales of our Class A common stock, particularly sales by our directors, executive officers and significant stockholders, or the perception in the market that holders of a large number of shares intend to sell their shares.
Additionally, the shares of Class A common stock subject to outstanding options and restricted stock unit awards under our equity incentive plans and the shares reserved for future issuance under our equity incentive plans will become eligible for sale in the public market upon issuance. Certain holders of our Class A common stock have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for our stockholders or ourselves.
The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of our initial public offering, including our directors, executive officers and significant stockholders and their respective affiliates who held in the aggregate 89.6% of the voting power of our capital as of December 31, 2017.offering. This limitsmay limit or precludes yourpreclude stockholders’ ability to influence corporate matters, including the election of directors, amendments to our organizational documents and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval.
Our Class A common stock has one vote per share, and our Class B common stock has ten votes per share. As of December 31, 2017, our directors, executive officers and holders of more than 5%Substantially all of our Class B common stock continues to be held by our current Chairman and their respective affiliates, hold in the aggregate 89.6% of the voting power ofCEO, David Morken, and our capital stock.co-Founder Henry Kaestner. Because of the ten-to-one voting ratio between our Class B and Class A common stock, thethese holders of our Class B common stock collectively will continue to control a majorityapproximately 46% of the combined voting power of our common stock and therefore would be able to controlexert significant influence over all matters submitted to our stockholders for approval. This concentrated voting control limits or precludes yourstockholders’ ability to influence corporate matters for the foreseeable future, including the election of directors, amendments to our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that youstockholders may feel are in yourtheir best interest as one of our stockholders.
Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term.
We may become controlled by David A. Morken, our Cofounder and Chief Executive Officer, whose interests may differ from other stockholders.
If all or substantially all of the holders of our Class B common stock convert their shares into Class A common stock voluntarily or otherwise, David A. Morken, our Cofounder and Chief Executive Officer
may control approximately 53% of the combined voting power of our outstanding capital stock. As a result, Mr. Morken may have the ability to control the appointment of our management, the entering into of mergers, sales of substantially all or all of our assets and other extraordinary transactions and influence amendments to our certificate of incorporation and bylaws. If Mr. Morken controls a majority of the voting power of our outstanding capital stock, he would have the ability to control the vote in any election of directors and would have the ability to prevent any transaction that requires shareholder approval regardless of whether other shareholders believe the transaction is in our best interests. In any of these matters, the interests of Mr. Morken may differ from or conflict with your interests. Moreover, this concentration of ownership may also adversely affect the trading price for our Class A common stock to the extent investors perceive disadvantages in owning stock of a company with a controlling shareholder.
To the extent we become a “controlled company,” we plan to take advantage of the applicable exemption to the corporate governance rules for NASDAQ-listed companies, which could make our Class A common stock less attractive to some investors or otherwise harm our stock price.
If all or substantially all of the holders of our Class B common stock convert their shares into Class A common stock voluntarily or otherwise, we may qualify as a “controlled company” under the corporate governance rules for NASDAQ-listed companies and expect to take advantage of related exemptions to the corporate governance rules. As a result, we will not be required to have a majority of our board of directors be independent, nor will we be required to have a compensation committee or an independent nominating function. Accordingly, should the interests of our controlling stockholder differ from those of other stockholders, the other stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance rules for NASDAQ-listed companies. Our status as a controlled company could make our Class A common stock less attractive to some investors or otherwise harm our stock price. If fewer shares of Class B common stock are converted into shares of Class A common stock than we expect, Mr. Morken may not control sufficient voting power of our outstanding capital stock for us to qualify as a “controlled company” under the corporate governance rules for NASDAQ-listed companies. If we are not a “controlled company” by the first anniversary of our listing on NASDAQ, we will have to comply with the corporate governance standards applicable to non-controlled companies, including with respect to independent directors, and we may not have a long-lead time to satisfy those standards.
We cannot predict the impact our capital structure may have on our stock price.
In July 2017, S&P Dow Jones, a provider of widely followed stock indices, announced that companies with multiple share classes, such as ours, will not be eligible for inclusion in certain of their indices. As a result, our Class A common stock will likely not be eligible for these stock indices. Additionally, FTSE Russell, another provider of widely followed stock indices, recently stated that it plans to require new constituents of its indices to have at least five percent of their voting rights in the hands of public stockholders. Many investment funds are precluded from investing in companies that are not included in such indices, and these funds would be unable to purchase our Class
A common stock if we were not included in such indices. We cannot assure you that other stock indices will not take a similar approach to S&P Dow Jones or FTSE Russell in the future. Exclusion from indices could make our Class A common stock less attractive to investors and, as a result, the market price of our Class A common stock could be adversely affected.
In addition, several stockholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our common stock may cause stockholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any actions or publications by stockholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our Class A common stock.
We are effectively controlled by David A. Morken, our Co-Founder and Chief Executive Officer, whose interests may differ from other stockholders.
Mr. Morken has the ability to effectively control the appointment of our management, the entering into of mergers, sales of substantially all or all of our assets and other extraordinary transactions and influence amendments to our certificate of incorporation and bylaws. In any of these matters, the interests of Mr. Morken may differ from or conflict with your interests. Moreover, this concentration of ownership may also adversely affect the trading price for our Class A common stock to the extent investors perceive disadvantages in owning stock of a company with a controlling stockholder.
If securities or industry analysts cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our Class A common stock adversely, the trading price of our Class A common stock and trading volume could decline.
The trading market for our Class A common stock is influenced by the research and reports that securities or industry analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our Class A common stock in an adverse manner, or provide more favorable recommendations about our competitors relative to us, the trading price of our Class A common stock would likely decline. If any analyst who covers us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the trading price of our Class A common stock or trading volume to decline.
Anti-takeover provisions contained in our second amended and restated certificate of incorporation and second amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our second amended and restated certificate of incorporation, second amended and restated bylaws and Delaware law contain provisions which could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our board of directors. Among other things, our second amended and restated certificate of incorporation and second amended and restated bylaws include provisions:
•authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our Class A and Class B common stock;
•limiting the liability of, and providing indemnification to, our directors and officers;
•limiting the ability of our stockholders to call and bring business before special meetings;
•providing for a dual class common stock structure in which holders of our Class B common stock have the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the outstanding shares of our Class A and Class B common stock, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets;
•providing that our board of directors is classified into three classes of directors with staggered three-year terms;
•prohibiting stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
•requiring super-majority voting to amend some provisions in our second amended and restated certificate of incorporation and second amended and restated bylaws;
•requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors; and
•controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings.
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law,Law, which prevents certain stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of at least two-thirds of our outstanding common stock not held by such 15% or greater stockholder.
Any provision of our second amended and restated certificate of incorporation, second amended and restated bylaws or Delaware law that has the effect of delaying, preventing or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our Class A common stock and could also affect the price that some investors are willing to pay for our Class A common stock.
Our second amended and restated certificate of incorporation and our second amended and restated bylaws include super-majority voting provisions that will limit your ability to influence corporate matters.
Our second amended and restated certificate of incorporation and our second amended and restated bylaws include provisions that require the affirmative vote of two-thirds of all of the outstanding shares of our capital stock entitled to vote to effect certain changes. These changes include amending or repealing our second amended and restated bylaws or second amended and restated certificate of incorporation or removing a director from office for cause. If all or substantially all of the holders of our Class B common stock convert their shares into Class A common stock voluntarily or otherwise, Mr. Morken may control the majority of the voting power of our outstanding capital stock, and therefore he may have the ability to prevent any such changes, which will limit youra stockholder’s ability to influence corporate matters.
Our second amended and restated bylaws provide, subject to certain exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.
Our second amended and restated bylaws provide, subject to limited exceptions, that the Court of Chancery of the State of Delaware will, to the fullest extent permitted by law, be 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 stockholder to us or our stockholders; (iii) any action asserting a claim against us that is governed by the internal affairs doctrine; or (iv) any action arising pursuant to any provision of the Delaware General Corporation Law, our second amended and restated certificate of incorporation or our second amended and restated bylaws. IfThis exclusive forum provision does not apply to suits brought to enforce a stockholder files an action withinduty or liability created by the scopeExchange Act, which provides for exclusive jurisdiction of the preceding sentencefederal courts. It could apply, however, to a suit that asserts claims under the Securities Act and falls within one or more of the categories enumerated in our choice of forum provision, inasmuch as Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any other court thanduty or liability created by the
Securities Act or the rules and regulations thereunder. There is uncertainty as to whether a court located in Delaware,would enforce such provision with respect to claims under the stockholder shallSecurities Act, and our stockholders will not be deemed to have consented towaived our compliance with the provisions of our amendedfederal securities laws and restated bylaws described above. Thisthe rules and regulations thereunder.
Our choice of forum provision 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. While Delaware courts have determined that choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than that designated in our exclusive forum provision. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provision of our second amended and restated bylaws. Alternatively, if a court were to find the choice of forum provision contained in our second amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially and adversely affect our business, financial condition and results of operations.
We may need additional capital in the future and such capital may be limited or unavailable. Failure to raise capital when needed could prevent us from growing in accordance with our plans.
We may require more capital in the future from equity or debt financings to fund our operations, finance investments in equipment and infrastructure, acquire complementary businesses and technologies, and respond to competitive pressures and potential strategic opportunities. If we are required to raise additional funds through further issuances of equity or other securities convertible into equity, our existing stockholders could suffer significant dilution, and any new shares we issue could have rights, preferences or privileges senior to those of the holders of our Class A common stock. The additional capital we may seek may not be available on favorable terms or at all. In addition, our credit facility limits our ability to incur additional indebtedness under certain circumstances. If we are unable to obtain capital on favorable terms or at all, we
may have to reduce our operations or forego opportunities, and this may have a material adverse effect on our business, financial condition and results of operations.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid any cash dividends on our Class A common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. In addition, the terms of our credit facility contain restrictions on our ability to declare and pay cash dividends on our capital stock. Accordingly, investors must rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
If a large number of shares of our Class A common stock is sold in the public market, the sales could reduce the trading price of our Class A common stock and impede our ability to raise future capital.
We cannot predict what effect, if any, future issuances by us of our Class A common stock will have on the market price of our Class A common stock. In addition, shares of our Class A common stock that we issue in connection with an acquisition may not be subject to resale restrictions. The market price of our Class A common stock could drop significantly if certain large holders of our Class A common stock, or recipients of our Class A common stock in connection with an acquisition, sell all or a significant portion of their shares of Class A common stock or are perceived by the market as intending to sell these shares other than in an orderly manner. In addition, these sales could impair our ability to raise capital through the sale of additional Class A common stock in the capital markets.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters is located in Raleigh, North Carolina, where we lease approximately 83,218120,041 square feet of office space at 900 Main Campus Drive. We also lease approximately 40,657 square feet of space subject to a facilities sharing agreement with Republic Wireless. This operating space is leased under leases expiring in 2022. Additionally, on January 12, 2018, we entered into a seven-year office building lease with Keystone-Centennial II, LLC for approximately 40,000Drive and 40,802 square feet of additional office space on the Centennial Campus of North Carolina State University in Raleigh, North Carolina.
We maintain offices in locations in the United States and internationally. In addition to our headquarters, we lease space in Denver, COCO; Rochester, NY; Austin, TX; Simi Valley, CA; Brussels, Belgium; London, U.K.; Dublin, Ireland; Iasi, Romania; Singapore; Frankfurt, Germany; Madrid, Spain; and Rochester, NY, each of which are used for both our CPaaS and Other segments. Istanbul, Turkey.
We also maintain data centers located in Raleigh, NC (including our network operations center); Los Angeles, CA; Dallas, TX; Atlanta, GA; and New York, NY.NY; Frankfurt, Germany; and London, U.K.
We currently lease all our facilitiesfacilities. On June 4, 2021, we purchased approximately 40 acres of undeveloped land from the state of North Carolina to construct a new headquarters in Raleigh, NC. We subsequently sold approximately 24 acres of such property to a third party who is constructing our new headquarters facility, and do not own any realretained approximately 17 acres of such property. We may procureintend to relocate our corporate headquarters in mid-2023. We believe this new facility will provide the additional space in the future as we continue to add employees or expand geographically. We believe our facilities are adequate and suitable for our current needs, and to the extent we require it, we believe additional or alternative space will be readily available in the futureneeded to accommodate our operations.growing work force.
Item 3. Legal Proceedings
In April 2014, Phone Recovery Services, LLC (“and Phone Recovery Services”)Administrative Services, Inc. acting or purporting to act on behalf of applicable jurisdictions, or the applicable county or city itself, have filed a complaintmultiple lawsuits against us in the Superior Courtand/or one of the District of Columbia. The complaint allegesour subsidiaries alleging that we failed to bill, collect and remit certain taxes and surcharges associated with the provision of 911 services pursuant to applicable laws of the District of Columbia. In November 2015, the Superior Court of the District of Columbia dismissed Phone Recovery Services’ complaint with prejudice. Phone Recovery Services subsequently appealed, and we are currently awaiting a decision regarding Phone Recovery Services’ appeal.services.
Phone Recovery Services, acting or purporting to act on behalf of applicable jurisdictions, or the applicable county or city itself, has filed similar lawsuits against us and/or one of our subsidiaries in the Superior Court of the State of Rhode Island, the Court of Common Pleas of Allegheny County, Pennsylvania and the District Court of Ramsey County, Minnesota that are currently in various stages of litigation. The case in Ramsey County, Minnesota was dismissed in November 2016; in August 2017, the Minnesota Court of Appeals affirmed that dismissal. On September 5, 2017, Phone Recovery Services filed a notice of appeal to the Minnesota Supreme Court. To date, we have not received any material adverse decision in connection with those matters.
We face similar lawsuits brought directly by various state and local governments alleging underpayment of 911 taxes and surcharges, although we understand that Phone Recovery Services is working in conjunction with each state or local government as a consultant on a contingency basis. The following county or municipal governments have named us in lawsuits that remain unresolved and are associated with the collection and remittance of 911 taxes and surcharges: Birmingham Emergency Communications District, Alabama (the "Alabama Case"); Clayton(a) the City and County Cobb County, DeKalb County, Fulton County, Gwinnett County, Macon-Bibb County, Georgia and Columbus Consolidated Government, Georgia (collectively,of San Francisco, California; (b) the “Georgia Cases”);following Illinois jurisdictions, collectively: Cook County and Kane County Illinois;Counties, Illinois, the City of Chicago, Illinois;Illinois, and the State of Illinois (collectively,Illinois; and (c) the “Illinois Case”); Beaver County, Berks County, Bucks County, Butler County, Chester Co., Clarion County, Cumberland County, Dauphin County, Delaware County, Lancaster County, Lebanon County, Mercer County, Somerset County, Washington County, Westmoreland County, and York County, Pennsylvania (collectively, the “Pennsylvania Cases”); and Charleston County, South Carolina.State of New York. The complaints allege that we failed to bill, collect and remit certain taxes and surcharges associated with 911 service pursuant to applicable laws. A claim
On January 27, 2023, we were named as a defendant in the Alabama Case was partially dismissed in December 2017; that partial dismissal is the subject of subsequent motions that have not yet been resolved. The Georgia Cases have been closed administratively during the appeal ofan action brought by a non-practicing entity related case in the Georgia courts; the Georgia Cases may be reopened. We understand that Augusta-Richmond County, Bartow County, Chatham County, Cherokee County, City of Atlanta, City of Savannah, Forsyth County, Houston County and Spalding County, Georgia each intends to initiate legal proceedings against us with allegations substantially similar to those in the Georgia Cases. The Pennsylvania Case in Butler County, Pennsylvania was dismissed in August 2016 and that dismissal is currently pending appeal; the remaining Pennsylvania Cases have been stayed until the appeal of the dismissal of the Butler County, Pennsylvania Case is resolved. The Illinois Case was dismissed in December 2016; Phone Recovery Services timely filed a notice of appeal and the appeal is underway.alleged patent infringement.
We intend to vigorously defend these lawsuits and believe we have meritorious defenses to each. However, litigation is inherently uncertain, and any judgment or injunctive relief entered against us or any adverse settlement could negatively affect our business, results of operations and financial condition.
In August 2016, we received a Civil Investigative Demand from the Consumer Protection Division of the North Carolina Department of Justice, though no formal complaint has been filed in connection with that investigation. The North Carolina Department of Justice is investigating the billing, collection and
remission of certain taxes and surcharges associated with 911 service pursuant to applicable laws of the State of North Carolina.
At December 31, 2017, we had ongoing litigations against MCI Communications Services, Inc. d/b/a Verizon Business and Verizon Select Services, Inc. (collectively, “Verizon”) in the United States District Court for the Northern District of Texas. In April 2016, we filed counterclaims against Verizon. At December 31, 2017, we were pursuing collection of unpaid intercarrier compensation charges for providing switched access services related to the exchange of telecommunications traffic with Verizon entities across the United States. At December 31, 2017, Verizon had asserted counterclaims against us. See Note 17, "Subsequent Events," in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for current developments.
In addition to the litigation discussed above, from time to time, we may be subject to legal actions and claims in the ordinary course of business. We have received, and may in the future continue to receive, claims from third parties relating to number management, and claims asserting, among other things, infringement of their intellectual property rights. Future litigation may be necessary to defend ourselves, our partners and our customers by determining the scope, enforceability and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
Item 4. Mine Safety Disclosures
Not applicable.
PART II - OTHER INFORMATION
Item 5. Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Class A Common Stock
Our Class A common stock has been listed on the NASDAQ Global Select Market under the symbol "BAND"“BAND” since November 10, 2017. Prior to that date, there was no public trading market for our Class A common stock. The following table sets forth for the periods indicated the high and low intraday sales prices per share of our Class A common stock as reported on the NASDAQ Global Select Market:
|
| | | |
| | Price |
| Year ended December 31, 2017 | High | | Low |
| Fourth Quarter (from November 10, 2017) | $24.99 | | $18.05 |
Stockholders
As of December 31, 2017,February 17, 2023, we had 11022 holders of record of our Class A and Class B common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.
Dividend Policy
We have never declared or paid any cash dividend on our common stock. We currently intend to retain all of our future earnings, if any, generated by our operations for the development and growth of our business for the foreseeable future. The decision to pay dividends is at the discretion of our board of directors and depends upon our financial condition, results of operations, capital requirements, and other factors that our board of directors deems relevant.
Stock Performance Graph
This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Bandwidth Inc. under the Securities Act or the Exchange Act.
The graph below compares the cumulative total return to our stockholders between November 10, 2017 (the date our Class A common stock commenced trading on the NASDAQ Global Select Market) through December 31, 20172022 in comparison to the NASDAQ Composite Index and the S&P 500 Information Technology Index. The graph assumes $100 was invested in the Class A common stock of Bandwidth Inc., the NASDAQ Composite Index and the S&P 500 Information Technology Index, in each case on November 10, 2017, and assumes reinvestment of any dividends.
The comparisons in the graph below are based on historical data and are not indicative of, nor intended to forecast, the future performance of our Class A common stock.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this item is incorporated by reference to our Proxy Statement relating to our 20182023 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange CommissionSEC within 120 days of the fiscal year ended December 31, 2017.
2022.
Recent Sales of Unregistered Securities
From January 1, 2022 through December 31, 2022, we did not sell any securities on an unregistered basis.
Item 6. [Reserved]
Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FromThe following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in this Annual Report on Form 10-K. Our fiscal year ends on December 31.
Overview
A global communications transformation is underway, and we believe Bandwidth is at the center. Our mission is to develop and deliver the power to communicate. We enable innovative organizations—from startup app developers to the world’s largest enterprises—to engage their end-users and deliver exceptional experiences everywhere people live, learn, work and play. Backed by the Bandwidth Communications Cloud, a global owned-and-operated network spanning more than 60 countries reaching over 90 percent of GDP, innovative enterprises use Bandwidth’s APIs to easily embed voice, messaging and emergency services capabilities into software and applications. Bandwidth was the first CPaaS provider to offer a robust selection of APIs built on our own cloud platform. Our award-winning support teams help businesses around the world solve complex communications challenges every day.
Bandwidth’s business benefits from multiple global megatrends, including the enterprise migration to the cloud, the adoption of Contact Center as a Service platforms, the need to be able to work from anywhere, the reinvention of customer experience and the growth in messaging applications to engage directly with consumers. We believe these megatrends, which have created sizable total addressable markets, are secular, long-lasting and still early in the adoption curve.
With the combination of our software APIs, our global Communications Cloud and our broad range of experience with global regulatory frameworks, we believe Bandwidth is one of the best-positioned providers in our space to deliver business-critical communications for global enterprises. In fact, Bandwidth already powers all the 2022 GartnerⓇ Magic Quadrant Leaders in the key cloud communications categories of UCaaS and CCaaS.
Our long-term vision is to continue strengthening this position as the key enabling platform for communications transformation. We will seek to do this in three ways: (1) by cross-selling and up-selling within our existing customers as they benefit from our global footprint and powerful APIs to automate and scale cloud communications; (2) by focusing on direct-to-enterprise growth to serve Global 2000 enterprises that come directly to Bandwidth to leverage our services to accelerate their digital transformations, and (3) by aiming to be the preferred provider for SaaS platforms that use conversational messaging to create digital engagements that enhance the customer experience. These three strategies are the foundation of the durable business we seek to build.
For the years ended December 31, 2022, 2021 and 2020, total revenue was $573 million, $491 million and $343 million, respectively, representing an increase of 17% in 2022 and 43% in 2021. Net income in 2022 was $20 million, and net loss in 2021 and 2020 was $27 million and $44 million, respectively. As of December 31, 2022, 2021 and 2020, the number of active customer accounts was 3,405, 3,300, and 2,879, respectively, representing a year-over-year increase of 3% in 2022 and 15% in 2021.
Segment Reporting Update and Cost Alignment
As a result of certain changes in our business during the quarter ended March 31, 2022, we re-evaluated our segment reporting and determined that one segment was appropriate, rather than the previously reported segments comprising “CPaaS” and “Other”. The primary drivers for this change were the strategic alignment of our operating departments and the sale of certain immaterial legacy businesses.
Management’s Discussion and Analysis
Additionally, during the quarter ended March 31, 2022, we changed our presentation of certain costs to align with benchmarked definitions of cost of revenue, research and development, sales and marketing and general and administrative expenses. See Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. For both matters, prior period information has been conformed to the current period presentation.
The following is a comparison of the change in costs to the prior period:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, 2021 | | Year ended December 31, 2020 |
| | | | | As reported | | As previously reported | | As reported | | As previously reported |
| | | | | | | | | | | |
| | | | | (In thousands) |
| Statement of Operations | | | | | | | | | | | |
| Cost of revenue | | | | | $ | 277,094 | | | $ | 272,384 | | | $ | 189,203 | | | $ | 185,252 | |
| Research and development | | | | | 69,505 | | | 55,173 | | | 54,555 | | | 42,059 | |
| Sales and marketing | | | | | 82,333 | | | 51,817 | | | 61,216 | | | 40,552 | |
| General and administrative | | | | | 64,212 | | | 113,770 | | | 51,644 | | | 88,755 | |
Adoption of Accounting Standards Update 2020-06
We adopted Accounting Standards Update 2020-06 (“ASU 2020-06”) on January 1, 2017 through2022 using the modified retrospective approach resulting in decreases in accumulated deficit of $9 million, additional paid in capital of $156 million, and deferred tax liability of $1 million. We also recorded an increase in the Convertible Notes balance of $148 million as a result of the reversal of the separation of the convertible debt between debt and equity. The adoption of this standard decreased the amount of non-cash interest expense to be recognized in current and future periods as a result of eliminating the discount associated with the equity component. For the year ended December 31, 2017, we sold2022, the following securities on an
unregistered basis: (a) 47,760 sharescombined interest expense of common stockthe 2026 Convertible Notes and 2028 Convertible Notes was $27 million lower upon the exerciseadoption of options under our 2001 and 2010 Plans, at exercise prices rangingASU 2020-06. The number of diluted shares increased as a result of transitioning from $4.70the treasury stock method to $6.74the as-if converted method, which impacted the earnings per share for anthe year ended December 31, 2022. The transition did not impact the years ended December 31, 2021 and 2020, as we incurred a net loss in both reporting periods. See Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.
Repurchase of 2026 Convertible Notes
During November 2022, we entered into separate, privately negotiated repurchase agreements with a limited number of holders of the 2026 Convertible Notes to repurchase (the “Repurchases”) approximately $160 million aggregate exercise priceprincipal amount of $0.2 million; and (b) 17,260 shares of common stock upon the exercise of warrants, at exercise prices ranging from $5.80 to $6.57 per share,2026 Convertible Notes for an aggregate exercisecash price of $0.1approximately $117 million.
Use of Proceeds from Public Offering of Common Stock
In The Repurchases closed on November 2017, we sold 4,000,000 shares of our Class A common stock at a public offering price of $20.00 per share, including shares sold in connection with28, 2022. Following the exerciseRepurchases, approximately $240 million aggregate principal amount of the underwriters' option2026 Convertible Notes remains outstanding. The difference between the consideration used to purchase additional shares. The offerrepurchase the 2026 Convertible Notes and salethe carrying value of all the shares2026 Convertible Notes resulted in the initial public offering were registered under the Securities Act pursuant to a registration statementgain of $40 million recorded within other income (expense), net on Form S-1 (File No. 333-220945), which was declared effective by the SEC on November 9, 2017. We received proceeds of $74.4 million, after deducting underwriting discounts and commissions of $5.6 million. In addition, we incurred expenses of approximately $5.4 million; thus, the net offering proceeds, after deducting underwriting discounts and offering expenses, were approximately $69.0 million. Upon the initial public offering and in accordance with David Morken's employment agreement, the Chief Executive Officer received a cash bonus of $750,000. No other payments were made to our directors or officers or their associates, holders of 10% or more of any class of our equity securities or any affiliates. The underwriters of our initial public offering were Morgan Stanley, KeyBank Capital Markets, Baird, Canaccord Genuity and JMP Securities.
There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC on November 13, 2017 pursuant to Rule 424(b) under the Securities Act.
Item 6. Selected Financial Data
The consolidated statements of operations dataincluded elsewhere in this Annual Report on Form 10-K.
COVID-19 Update
We believe COVID-19 has reduced to endemic levels globally however, while its persistent nature has diminished in the present period, it is possible it could potentially impact areas of the United States or the rest of the world to varying degrees in the future. During the COVID-19 pandemic, its adverse effects were prevalent in the locations where we, our customers, suppliers and third-party business partners conduct business. We acknowledge there may be additional impacts to the economy and our business going forward as a result of COVID-19 and that
Management’s Discussion and Analysis
there is uncertainty regarding potentially broad or unknown implications of COVID-19 on our results of operations and overall financial performance remain uncertain. If the COVID-19 infection rate were to return to pandemic levels in the United States or in other global territories where we operate, we may experience curtailed customer demand that could materially adversely impact our business, results of operations and overall financial performance in future periods. Specifically, this could result in enterprises reducing usage of our services or delaying decisions to implement our services. See “Item 1A. Risk Factors” for further discussion of the possible impact of COVID-19 on our business.
DDoS Attack
Beginning on September 25, 2021, our communications network was subjected to a distributed denial of service attack (the “DDoS Attack”) initially causing intermittent communications services disruptions affecting certain of our markets and customers. A DDoS attack is a malicious attempt to disrupt the normal traffic of a targeted server, service or network by overwhelming the target or its surrounding infrastructure with a flood of unwanted internet traffic from multiple sources, resulting in the slowdown or blockage of legitimate traffic. Our mitigation efforts, in conjunction with our partners from leading cybersecurity firms, have proven successful. Our network has been largely stable and operating at normal service levels since the evening of September 29, 2021, although there have been some continued intermittent disruptions.
Key Performance Indicators
We monitor the following key performance indicators (“KPIs”) to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions. We believe the following KPIs are useful in evaluating our business:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | |
Number of active customers (as of period end) (1) | | | | | | 3,405 | | | 3,300 | | | 2,879 | |
| | | | | | | | | | |
Dollar-based net retention rate (1) | | | | | | 112 | % | | 117 | % | | 131 | % |
| | | | | | | | | | |
| | | | | | | | | | |
________________________(1) As a result of the change in revenue segment reporting, our KPIs of number of active customers and dollar-based net retention rates disclosed in previous SEC filings, press releases and presentations prior to reporting periods ending March 31, 2022, will not be directly comparable to our KPIs reported going forward. To facilitate comparison between the periods presented in the table above, number of active customers and dollar-based net retention rate have been conformed to the current period methodology.
Number of Active Customer Accounts
We define an active customer account at the end of any period as an individual account, as identified by a unique account identifier, for which we have recognized at least $100 of revenue in the last month of the period. We believe usage of our platform by an active customer at or above the $100 per month threshold is a stronger indicator of potential future engagement than trial usage at levels below $100 per month. A single organization may constitute multiple unique active customer accounts if it has multiple unique account identifiers, each of which is treated as a separate active customer account. Customers who pay after using our platform and customers that have credit balances are included in the number of active customer accounts. For comparative purposes, the number of active customers presented in the table above has been updated to reflect the change in our reporting segments.
Management’s Discussion and Analysis
Dollar-Based Net Retention Rate
Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with our existing customers that generate revenue and seek to increase their use of our platform. We track our performance in this area by measuring the dollar-based net retention rate for our customers who generate revenue. To calculate the dollar-based net retention rate, we first identify the cohort of customers that generate revenue and that were customers in the same quarter of the prior year. The dollar-based net retention rate is obtained by dividing the revenue generated from that cohort in a quarter, by the revenue generated from that same cohort in the corresponding quarter in the prior year. The dollar-based net retention rate reported in a quarter is then obtained by averaging the result from that quarter, by the corresponding results from each of the prior three quarters. Customers of acquired businesses are included in the subsequent year’s calendar quarter of acquisition. Our dollar-based net retention rate increases when such customers increase usage of a product, extend usage of a product to new applications or adopt a new product. Our dollar-based net retention rate decreases when such customers cease or reduce usage of a product or when we lower prices on our solutions.
As our customers grow their businesses and increase usage of our platform, they sometimes create multiple customer accounts with us for operational or other reasons. As such, when we identify a significant customer organization (defined as a single customer organization generating more than 1% of revenue in a quarterly reporting period) that has created a new customer, this new customer is tied to, and revenue from this new customer is included with, the original customer for the purposes of calculating this metric. For comparative purposes, the dollar-based net retention rate presented in the table above has been updated to reflect the change in our reporting segments.
Key Components of Statements of Operations
Revenue
Revenue is derived from (i) reoccurring sources such as per minute voice usage and voice calling, per text message usage and other usage services and fees, (ii) monthly recurring charges arising from phone number services, 911-enabled phone number services, messaging services and other services, and (iii) other various communications services and products, indirect revenue and messaging surcharge revenue.
For the years ended December 31, 2022, 2021 and 2020, we generated 78%, 75%, and 74%, respectively, of our revenue from reoccurring sources. The large bulk of our remaining revenue is generated from recurring monthly charges.
We recognize accounts receivable at the time the customer is invoiced. Additionally, we record a receivable for unbilled revenue if services have been delivered and are billable in subsequent periods. Unbilled revenue made up 45%, 52%, and 50% of outstanding accounts receivable, net of allowance for doubtful accounts, as of December 31, 2022, 2021 and 2020, respectively.
Cost of Revenue and Gross Margin
Cost of revenue consists of fees paid to other network service providers, network operations costs, personnel costs, allocated costs of facilities and information technology, amortization of acquired technology intangibles and depreciation.
Fees paid to other network service providers arise when we purchase services such as minutes of use, phone numbers, messages, porting of customer numbers and network circuits.
Network operations costs are incurred for web services and cloud infrastructure, capacity planning and management, software licenses, hardware and software maintenance fees, customer support and network-related facility rents.
Management’s Discussion and Analysis
Personnel costs (including non-cash stock-based compensation expenses) arise for employees who are responsible for the delivery of services and the operations and maintenance of the communications network.
Gross margin is calculated by subtracting cost of revenue from revenue, divided by revenue, expressed as a percentage. Our cost of revenue and gross margin have been, and will continue to be, affected by several factors, including the timing and extent of our investments in our network, our ability to manage off-network minutes of use and messaging costs, changes to the mix or amount of personnel-related costs included in our cost of revenue, the product mix of revenue, the timing of amortization of capitalized software development costs and fluctuations in the price we charge our customers for services.
Operating Expenses
The most significant components of operating expenses are personnel costs, which consist of salaries, benefits, bonuses, and stock-based compensation expenses. We also incur other non-personnel costs related to our general overhead expenses, including facility expenses, software licenses, web services, depreciation and amortization of assets unrelated to delivery of our services. We expect that our operating expenses will increase in absolute dollars driven by the growth in our business.
Research and Development
Research and development expenses consist of salaries and related personnel costs for the design, development, testing and enhancement of our cloud network and software products. Research and development expenses include depreciation and allocated costs of facilities and information technology utilized by our research and development staff.
Sales and Marketing
Sales and marketing expenses consist of salaries and related personnel costs, commissions, and costs related to advertising, marketing, brand awareness activities, sales support and professional services fees, and customer billing and collections functions. Sales and marketing expenses include depreciation, amortization of acquired customer relationship intangible assets, and allocated costs of facilities and information technology utilized by our sales and marketing staff.
General and Administrative
General and administrative expenses consist of salaries and related personnel costs for accounting, legal, human resources, corporate, and other administrative and compliance functions. General and administrative expenses include depreciation, expenditures for third party professional services, and allocated costs of facilities and information technology utilized by our corporate and administrative staff.
Income Taxes
For the years ended December 31, 2022, 2021 and 2020 our effective tax rate was (13.1)%, 12.3% and (51.8)%, respectively. The decrease in our effective tax rate is primarily due to the split of earnings and losses between jurisdictions. In 2022 we were in a pre-tax loss position in jurisdictions without valuation allowances and as such, recognized income tax benefit. However, as a result of income recognized in connection with our debt buy-back, we recognized pre-tax income in the U.S. The income resulted in nominal tax expense in the U.S. due to the utilization of tax attributes and the valuation allowance position.
Judgment is required in determining whether deferred tax assets will be realized in full or in part. Management assesses the available positive and negative evidence on a jurisdictional basis to estimate if deferred tax assets will be recognized and when it is more likely than not that all or some deferred tax assets will not be realized, and a valuation allowance must be established. As of December 31, 2022, we continue to maintain a valuation allowance for our U.S. federal and state net deferred tax assets.
Management’s Discussion and Analysis
Results of Operations
Consolidated Results of Operations
The following table sets forth the consolidated statements of operations for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | |
| | | | | | (In thousands) |
| Revenue | | | | | $ | 573,152 | | | $ | 490,907 | | | $ | 343,113 | |
| Cost of revenue | | | | | 334,799 | | | 277,094 | | | 189,203 | |
| Gross profit | | | | | 238,353 | | | 213,813 | | | 153,910 | |
| Operating expenses: | | | | | | | | | |
| Research and development | | | | | 97,990 | | | 69,505 | | | 54,555 | |
| Sales and marketing | | | | | 96,658 | | | 82,333 | | | 61,216 | |
| General and administrative | | | | | 68,029 | | | 64,212 | | | 51,644 | |
| Total operating expenses | | | | | 262,677 | | | 216,050 | | | 167,415 | |
| Operating loss | | | | | (24,324) | | | (2,237) | | | (13,505) | |
| Other income (expense), net: | | | | | | | | | |
| Net gain on extinguishment of debt | | | | | 40,205 | | | — | | | — | |
| Interest expense, net | | | | | (3,048) | | | (28,784) | | | (13,672) | |
| Other income (expense), net | | | | | 4,473 | | | (174) | | | (1,795) | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total other income (expense), net | | | | | 41,630 | | | (28,958) | | | (15,467) | |
| Income (loss) before income taxes | | | | | 17,306 | | | (31,195) | | | (28,972) | |
| Income tax benefit (provision) | | | | | 2,264 | | | 3,833 | | | (15,005) | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income (loss) | | | | | $ | 19,570 | | | $ | (27,362) | | | $ | (43,977) | |
The following table sets forth our results of operations as a percentage of our total revenue for the periods presented. *
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
| Revenue | | | | | 100 | % | | 100 | % | | 100 | % |
| Cost of revenue | | | | | 58 | % | | 56 | % | | 55 | % |
| Gross profit | | | | | 42 | % | | 44 | % | | 45 | % |
| Operating expenses: | | | | | | | | | |
| Research and development | | | | | 17 | % | | 14 | % | | 16 | % |
| Sales and marketing | | | | | 17 | % | | 17 | % | | 18 | % |
| General and administrative | | | | | 12 | % | | 13 | % | | 15 | % |
| Total operating expenses | | | | | 46 | % | | 44 | % | | 49 | % |
| Operating loss | | | | | (4) | % | | — | % | | (4) | % |
| Other income (expense), net: | | | | | | | | | |
| Net gain on extinguishment of debt | | | | | 7 | % | | — | % | | — | % |
| Interest expense, net | | | | | (1) | % | | (6) | % | | (4) | % |
| Other income (expense), net | | | | | 1 | % | | — | % | | (1) | % |
| | | | | | | | | | |
| | | | | | | | | | |
| Total other income (expense), net | | | | | 7 | % | | (6) | % | | (5) | % |
| Income (loss) before income taxes | | | | | 3 | % | | (6) | % | | (8) | % |
| Income tax benefit (provision) | | | | | — | % | | 1 | % | | (4) | % |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income (loss) | | | | | 3 | % | | (5) | % | | (13) | % |
(*) Columns may not foot due to rounding.
Management’s Discussion and Analysis
Comparison of the Years Ended December 31, 2022 and 2021
Revenue | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| | | | | | |
| 2022 | | 2021 | | Change |
| | | | | | | |
| (Dollars in thousands) |
| Revenue | $ | 573,152 | | | $ | 490,907 | | | $ | 82,245 | | | 17 | % |
In 2022, our total revenue increased by $82 million, or 17%, compared with the same period in 2021. This growth was the result of higher usage of our core messaging offering and additional A2P pass-through messaging surcharges imposed by certain carriers. Growth in our revenue other than from pass-through messaging surcharges, compared with the same period in 2021, was led by our core messaging offerings, which grew 46%, and phone number and 911-enabled phone number services, mostly offset by lower revenue from voice offerings. The growth in our core messaging offering was aided by higher messaging volumes from certain customers leading up to the U.S. midterm elections in November 2022. Compared with the same period last year, our voice offerings revenue in 2022 remained affected by lower usage arising from the 2021 DDoS incident as well as the absence of revenue from businesses divested earlier in 2022.
Active customer accounts increased 3% to 3,405 as of December 31, 2022, as compared with 3,300 active accounts as of December 31, 2021. Our dollar-based net retention rate as of December 31, 2022 was 112%.
Cost of Revenue and Gross Margin
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| | | | | | |
| 2022 | | 2021 | | Change |
| | | | | | | |
| (Dollars in thousands) |
| Cost of revenue | $ | 334,799 | | | $ | 277,094 | | | $ | 57,705 | | | 21 | % |
| Gross profit | $ | 238,353 | | | $ | 213,813 | | | $ | 24,540 | | | 11 | % |
| Total gross margin | 42 | % | | 44 | % | | | | |
In 2022, total cost of revenue increased $58 million, compared with the same period in 2021, driven by higher pass-through messaging surcharges of $56 million. In 2022, the combination of changes in total revenue and total cost of revenue yielded an increase in total gross profit of$25 million, or 11%, compared with the same period in 2021, driven by profit improvements from the combination of our revenue and cost of revenue derived other than from pass-through messaging surcharges.
Our total gross margin percentage of 42% in 2022 declined two percentage points, compared with the same period in 2021, as operating and product mix improvements were more than offset by the inclusion of higher pass-through messaging surcharges within total revenue.
Management’s Discussion and Analysis
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| | | | | | |
| 2022 | | 2021 | | Change |
| | | | | | | |
| (Dollars in thousands) |
| Research and development | $ | 97,990 | | | $ | 69,505 | | | $ | 28,485 | | | 41 | % |
| Sales and marketing | 96,658 | | | 82,333 | | | 14,325 | | | 17 | % |
| General and administrative | 68,029 | | | 64,212 | | | 3,817 | | | 6 | % |
| Total operating expenses | $ | 262,677 | | | $ | 216,050 | | | $ | 46,627 | | | 22 | % |
As a percentage of revenue, total operating expenses for the years ended December 31, 2015, 20162022 and 20172021 were 46% and 44%, respectively.
In 2022, research and development expenses increased by approximately $28 million, or 41%, compared with the same period in 2021. This increase was primarily due to increased personnel costs from greater numbers of employed staff of $22 million. The increase in headcount also contributed to higher allocated facilities and IT expenses of $7 million.
In 2022, sales and marketing expenses increased by $14 million, or 17%, compared with the same period in 2021, primarily due to an increase in sales personnel costs from a greater number of employed staff of $13 million.
In 2022, general and administrative expenses increased $4 million, or 6%, compared with the same period in 2021, primarily due to an increase in personnel costs of $5 million.
Interest Expense, Net
In 2022, interest expense, net of interest income, decreased by $26 million compared with the same period in 2021, due to a $24 million decrease in interest expense primarily related to the impact of the adoption of ASU 2020-06 on the Convertible Notes. See Note 8, “Debt,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details.
Management’s Discussion and Analysis
Income Tax Benefit
For the year ended December 31, 2022, we recognized an income tax benefit of $2 million, a decrease of $2 million compared with the same period in 2021. The resulting effective tax rate for the year ended December 31, 2022 was (13.1)% compared with 12.3% in 2021. For the year ended December 31, 2022, the favorable change to the effective tax rate was primarily due to the split of earnings and losses between jurisdictions. In 2022, we were in a pre-tax loss position in jurisdictions without valuation allowances and as such, recognized income tax benefit. However, as a result of income recognized in connection with our debt buy-back, we recognized pre-tax income in the U.S. This income resulted in nominal income tax expense in the U.S. due to the utilization of tax attributes and the valuation allowance position. For the years ended December 31, 2022 and 2021, the effective tax rates of (13.1)% and 12.3%, respectively, differed from the federal statutory rate of 21% in the U.S. primarily due to the valuation allowance recognized against federal and state deferred tax assets in the U.S.
Most of the permanent tax adjustments within our effective tax rate are offset by a valuation allowance. These adjustments include state taxes, federal research tax credits under Internal Revenue Code Section 41, equity compensation in the U.S. and other non-deductible expenditures in the U.S. Excluding the impact of the valuation allowance, we realize an estimated state effective tax rate of 4.3%. In addition, exclusive of the valuation allowance, we continue to generate income tax benefits in the current period related to income tax credits recognized for qualified research activities in the U.S. The applicable federal tax law and regulations define qualified research activities as research and development activities conducted in the U.S. that involve a process of experimentation designed to discover new information intended to develop a new or improved business component. Absent the valuation allowance, equity compensation also impacts the effective tax rate to the extent the income tax deduction exceeds or is below the related book expense, as required under ASC 718-740-35-2. Other U.S. non-deductible expenses that are offset by the valuation allowance consist primarily of non-deductible executive compensation under Internal Revenue Code 162(m).
Permanent tax adjustments within our effective tax rate that are not offset by the valuation allowance included minimum state taxes, foreign tax benefits and foreign rate differentials. As we continue to scale our international business, any changes to foreign business activity may impact our effective tax rate in the future.
We continue to expect recurring changes to the valuation allowance as deferred tax assets within the U.S. increase or decrease in subsequent periods. We will maintain a valuation allowance against all U.S. federal and state deferred tax assets until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized.
Comparison of the Years Ended December 31, 2021 and 2020
Revenue | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| | | | | | |
| 2021 | | 2020 | | Change |
| | | | | | | |
| (Dollars in thousands) |
| Revenue | $ | 490,907 | | | $ | 343,113 | | | $ | 147,794 | | | 43 | % |
In 2021, our total revenue increased by $148 million, or 43%, compared with the same period in 2020. This growth was led by increases in our core voice, messaging and related surcharges, and phone number services of $71 million, $41 million, and $26 million, respectively. This growth was aided by a full year of revenue contribution from the acquisition of Voxbone in November 2020. We believe our revenue results were lowered by approximately $10.0 million in 2021 from lost transaction volume and customer credits due to the previously disclosed 2021 DDoS Attack.
Management’s Discussion and Analysis
Cost of Revenue and Gross Margin
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| | | | | | |
| 2021 | | 2020 | | Change |
| | | | | | | |
| (Dollars in thousands) |
| Cost of revenue | $ | 277,094 | | | $ | 189,203 | | | $ | 87,891 | | | 46 | % |
| Gross profit | $ | 213,813 | | | $ | 153,910 | | | $ | 59,903 | | | 39 | % |
| Total gross margin | 44 | % | | 45 | % | | | | |
In 2021, total cost of revenue increased $88 million, compared with the same period in 2020. This growth was driven by higher cost of revenue in our messaging business and related surcharges, network related costs, and core voice of $33 million, $24 million, and $23 million, respectively. This growth was aided by a full year of cost of revenue contribution from the acquisition of Voxbone in November 2020.
In 2021, the combination of changes in total revenue and total cost of revenue yielded an increase in total gross profit of $60 million, or 39%, compared with the same period in 2020, driven by higher revenue and improved operating leverage. For the year ended December 31, 2021, total gross margin was 44.0% compared with 45.0% for the year ended December 31, 2020 and was impacted by higher pass-through messaging surcharges within total revenue.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| | | | | | |
| 2021 | | 2020 | | Change |
| | | | | | | |
| (Dollars in thousands) |
| Research and development | $ | 69,505 | | | $ | 54,555 | | | $ | 14,950 | | | 27 | % |
| Sales and marketing | 82,333 | | | 61,216 | | | 21,117 | | | 34 | % |
| General and administrative | 64,212 | | | 51,644 | | | 12,568 | | | 24 | % |
| Total operating expenses | $ | 216,050 | | | $ | 167,415 | | | $ | 48,635 | | | 29 | % |
As a percentage of revenue, total operating expenses for the years ended December 31, 2021 and 2020, were 44% and 49%, respectively.
In 2021, research and development expenses increased by approximately $15 million, or 27%, compared with the same period in 2020. This increase was primarily due to increased personnel costs from greater numbers of employed staff of $10 million, which was driven by the acquisition of Voxbone in November 2020.
In 2021, sales and marketing expenses increased by $21 million, or 34%, compared with the same period in 2020, driven by the increase in sales personnel costs from a greater number of employed staff of $8 million from the acquisition of Voxbone in November 2020.
In 2021, general and administrative expenses increased by approximately $13 million, or 24%, compared with the same period in 2020, mainly from higher headcount costs of $14 million, driven by the acquisition of Voxbone in November 2020.
Interest Expense, Net
In 2021, interest expense, net of interest income increased by $15 million compared with the same period in 2020, due to a $12 million increase in interest expense related to the Convertible Notes and a $2 million decrease in interest income from the investment of follow-on equity offering proceeds. See Note 8, “Debt,” to the consolidated balance sheetsfinancial statements, for additional details.
Income Tax Benefit (Provision)
Management’s Discussion and Analysis
In 2021, income tax expense decreased by $19 million compared with the same period in 2020. The effective tax rate for the year ended December 31, 2021, was 12.3% compared with (51.8)% in the same period in 2020. The increase in our effective tax rate is primarily due to a change in the valuation allowance related to certain deferred tax assets.
Liquidity and Capital Resources
Our liquidity is provided by our cash flow from operations less expenditures for capital equipment, and supplemented by financing activities from time to time. Our cash flow from operations is driven by monthly payments from customers for communication services consumed during the period. Our primary uses of cash include operating costs, such as fees paid to other network service providers, network operations costs, personnel costs and facility expenses, as well as the purchase of property plant and equipment to support growth on our communications platform and the purchase of land for our new corporate headquarters.
On June 6, 2022, we entered into a credit agreement (the “Credit Agreement”) among us, as borrower, the lenders from time to time party thereto, and Silicon Valley Bank as administrative agent, issuing lender and swingline lender. The Credit Agreement provides for a $50 million revolving credit facility (the “Credit Facility”), including a $20 million sublimit for the issuance of letters of credit and a swingline subfacility of up to $5 million. The Credit Facility matures on June 6, 2025. As of December 31, 2016 and 2017, are derived2022, there were no borrowings under the Credit Facility.
Additionally, in the last three years we have supplemented our liquidity with proceeds from our auditedissuance of the 2026 Convertible Notes and the 2028 Convertible Notes in February 2020 and March 2021, respectively. We used a majority of the proceeds from the issuance of our 2026 Convertible Notes to consummate the acquisition of Voxbone. On November 2, 2022, we repurchased $160 million of our 2026 Convertible Notes as further described in Note 8, “Debt,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results thatWe may, at any time and from time to time, seek to retire or purchase our 2026 Notes or 2028 Notes through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be expectedmaterial.
We believe that our cash and cash equivalents balances and the cash flows generated by our operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, our belief may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the future. The following selected consolidatedsection titled “Risk Factors.” We may be required to seek additional equity or debt financing in order to meet these future capital requirements. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial data shouldcondition would be readadversely affected.
Our principal future commitments consist of (i) an aggregate of $490 million in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" andConvertible Notes (see Note 8, “Debt” to the consolidated financial statements and related notes included elsewhere in Item 8, "Financial Statements and Supplementary Data," within this Annual Report on Form 10-K to fully understand factors that may affect the comparability, for a discussion of the information presented below.
2026 Convertible Notes and the 2028 Convertible Notes), (ii) a $496 million non-cancelable lease for our future office headquarters, which is anticipated to commence in mid-2023 and continue for an initial twenty (20) year term (the “Headquarters Lease”) (see Note 5, “Right-of-Use Asset and Lease Liabilities” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of our Headquarters Lease), (iii) $12 million in non-cancelable purchase obligations and future minimum payments under contracts to various service providers, and (iv) $17 million in future minimum rent payments for our current office space. See Note 12, “Commitments and Contingencies,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for future lease commitments.
Management’s Discussion and Analysis
Statement of Cash Flows
The following table summarizes our cash flows for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, | |
| | | | | | 2022 | | 2021 | | 2020 | |
| | | | | | | | | | | |
| | | | | | (In thousands) | | | |
| Net cash provided by operating activities | | | | | | $ | 34,906 | | | $ | 40,803 | | | $ | 4,518 | | |
| Net cash (used in) provided by investing activities | | | | | | (133,449) | | | 2,833 | | | (455,085) | | |
| Net cash (used in) provided by financing activities | | | | | | (120,005) | | | 207,027 | | | 346,891 | | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | | | | 881 | | | 189 | | | 109 | | |
| Net (decrease) increase in cash, cash equivalents, and restricted cash | | | | | | $ | (217,667) | | | $ | 250,852 | | | $ | (103,567) | | |
Cash Flows from Operating Activities
In 2022, net cash provided by operating activities was $35 million and was generated by our aggregate results of $40 million during the period, net of non-cash items comprising depreciation and amortization, non-cash reduction to the right-of-use asset, amortization of debt discount and issuance costs, stock-based compensation, deferred tax expense and other and net gain on extinguishment of debt and a $14 million cash inflow from increased operating liabilities, partially offset by a net cash outflow from operating assets aggregating $19 million. The net gain on extinguishment of debt was a result of the repurchase of $160 million aggregate principal amount of the 2026 Convertible Notes. Within operating liabilities, the net cash provided as a result of higher accounts payable of $17 million during 2022 was primarily related to the timing and amounts of purchases of both services and tangible goods and their related payment arrangements. The cash provided as a result of higher accrued expenses and other liabilities of $3 million during 2022 primarily related to higher accruals for lease incentives and higher advanced billings.This was partially offset by a cash outflow related to the operating right-of-use liability of $8 million. Within operating assets, cash used as a result of higher accounts receivable of $13 million during 2022 was driven by higher unbilled receivables balances of $2 million arising from higher usage amounts in the last month of 2022 and $11 million from timing of collection of invoiced amounts. The cash used as a result of higher prepaid expenses and other assets of $6 million during 2022 was driven byhigher VAT receivables and the timing of advance payments for software and other services.
In 2021, net cash provided by operating activities was $41 million consisting of net loss of $27 million adjusted for non-cash items of $76 million and offset by cash used by changes in operating assets and liabilities of $8 million. Cash used in operating assets and liabilities included an increase in accounts receivable of $7 million, a decrease in operating right-of-use liability of $6 million, and an increase in prepaid expenses and other assets of $7 million. Offsetting these cash use items in assets and liabilities was an increase in accrued expenses and other liabilities of $10 million, and an increase in accounts payable of $2 million. The non-cash items included depreciation and amortization expense of $37 million, amortization of debt discount and issuance costs of $27 million, stock-based compensation expense of $15 million, right-of-use asset amortization of $6 million, and loss on disposal of property, plant and equipment of $1 million, offset by a deferred tax benefit of $8 million.
In 2020, net cash provided by operating activities was $5 million consisting of net loss of $44 million adjusted for non-cash items of $62 million and offset by cash used changes in operating assets and liabilities of $13 million. Cash generated in operating assets and liabilities included an increase in accrued expenses and other liabilities of $14 million. Offsetting these cash generating items in assets and liabilities were an increase in accounts receivable of $19 million, a decrease in operating right-of-use liability of $5 million, and an increase in prepaid expenses and other assets of $4 million. The non-cash items included depreciation and amortization expense of $17
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| Consolidated Statements of Operations Data: | 2015 | | 2016 | | 2017 |
| | (In thousands) |
| Revenue: | | | | | |
| CPaaS revenue | $ | 101,502 |
| | $ | 117,078 |
| | $ | 131,572 |
|
| Other revenue | 36,299 |
| | 35,057 |
| | 31,383 |
|
| Total revenue | 137,801 |
| | 152,135 |
| | 162,955 |
|
| | | | | | |
| Cost of revenue: | | | | | |
| CPaaS cost of revenue | 64,760 |
| | 71,218 |
| | 75,859 |
|
| Other cost of revenue | 14,482 |
| | 14,000 |
| | 13,403 |
|
| Total cost of revenue | 79,242 |
| | 85,218 |
| | 89,262 |
|
| | | | | | |
| Gross profit | 58,559 |
| | 66,917 |
| | 73,693 |
|
| Operating expenses: | | | | | |
| Research and development | 7,375 |
| | 8,520 |
| | 10,789 |
|
| Sales and marketing | 8,620 |
| | 9,294 |
| | 11,218 |
|
| General and administrative | 34,602 |
| | 33,859 |
| | 37,069 |
|
| Total operating expenses | 50,597 |
| | 51,673 |
| | 59,076 |
|
| Operating income | 7,962 |
| | 15,244 |
| | 14,617 |
|
| Other expense: | | | | | |
| Interest expense, net | (589 | ) | | (908 | ) | | (1,728 | ) |
| Total other expense | (589 | ) | | (908 | ) | | (1,728 | ) |
| Income from continuing operations before income taxes | 7,373 |
| | 14,336 |
| | 12,889 |
|
| Income tax (provision) benefit | (408 | ) | | 11,094 |
| | (6,918 | ) |
| Income from continuing operations | 6,965 |
| | 25,430 |
| | 5,971 |
|
| Loss from discontinued operations, net of income taxes | (13,665 | ) | | (3,072 | ) | | — |
|
| Net (loss) income | $ | (6,700 | ) | | $ | 22,358 |
| | $ | 5,971 |
|
| Earnings from continuing operations per share: | | | | | |
| Income from continuing operations | $ | 6,965 |
| | $ | 25,430 |
| | $ | 5,971 |
|
| Less: income from continuing operations allocated to participating securities | 931 |
| | 3,355 |
| | 644 |
|
| Income from continuing operations attributable to common stockholders | $ | 6,034 |
| | $ | 22,075 |
| | $ | 5,327 |
|
| Income from continuing operations per share: | | | | | |
| Basic | $ | 0.52 |
| | $ | 1.89 |
| | $ | 0.42 |
|
| Diluted | $ | 0.48 |
| | $ | 1.72 |
| | $ | 0.37 |
|
| Weighted average number of common shares outstanding: | | | | | |
| Basic | 11,497,727 |
| | 11,678,568 |
| | 12,590,221 |
|
| Diluted | 12,456,540 |
| | 12,870,632 |
| | 14,543,170 |
|
|
| | | | | | | |
| | As of December 31, |
| Consolidated Balance Sheet Data: | 2016 | | 2017 |
| | (In thousands) |
| Cash and cash equivalents | $ | 6,788 |
| | $ | 37,627 |
|
| Working capital | (2,427 | ) | | 40,734 |
|
| Total assets | 69,973 |
| | 104,494 |
|
| Long-term debt and capital lease obligations, net of current portion | 37,738 |
| | — |
|
| Series A redeemable convertible preferred stock | 21,818 |
| | — |
|
| Total stockholders’ (deficit) equity | (22,374 | ) | | 76,711 |
|
Management’s Discussion and Analysis
million, amortization of debt discount and issuance costs of $16 million, deferred tax expense of $14 million, stock-based compensation expenses of $10 million, and right-of-use amortization of $5 million.
Cash Flows from Investing Activities
In 2022, net cash used in investing activities was $133 million. Cash used in investing activities included the purchase of marketable securities of $180 million partially offset by proceeds from the sales and maturities of marketable securities of $109 million. Cash used for deposits for construction in progress and the purchase of property, plant and equipment, primarily for our Raleigh, NC headquarters, was $60 million.
In 2021, net cash provided by investing activities was $3 million. Cash provided by investing activities included proceeds from sales and maturities of other investments of $40 million, proceeds from the sale of land of $17 million, offset by the purchase of land of $30 million, purchase of property, plant and equipment of $21 million and capitalized internally developed software costs of $4 million.
In 2020, net cash used in investing activities was $455 million, mainly from the costs related to the Voxbone acquisition of $400 million, net of cash. In addition, cash used in investing activities was the purchase of other investments of $231 million, the purchase of property, plant and equipment of $12 million and capitalized internally developed software costs of $2 million, offset by the proceeds from sales and maturities of other investments of $191 million.
Cash Flows from Financing Activities
In 2022, net cash used in financing activities was $120 million, consisting primarily of $117 million net cash paid to repurchase $160 million aggregate principal amount of the 2026 Convertible Notes.
In 2021, net cash provided by financing activities was $207 million consisting primarily of $250 million in proceeds from the issuance of the 2028 Convertible Notes and $1 million in proceeds from the exercise of stock options, partially offset by $26 million in the purchase of the 2028 Capped Calls, $8 million in payments of debt issuance cost, $7 million in payment of holdback proceeds to former Voxbone shareholders, and $4 million in value of equity awards withheld for tax liabilities.
In 2020, net cash provided by financing activities was $347 million consisting primarily of $400 million in proceeds from the issuance of the 2026 Convertible Notes and $4 million in proceeds from the exercise of stock options, partially offset by $43 million in the purchase of the 2026 Capped Calls, $12 million in payments of debt issuances cost, and $2 million in value of equity awards withheld for tax liabilities.
Off-Balance Sheet Arrangements
With the acquisition of Voxbone, we have off-balance sheet agreements for short-term office leases in the amount of less than $1 million ending prior to December 31, 2023.
Management’s Discussion and Analysis
Non-GAAP Financial Measures
We use Non-GAAP gross profit, Non-GAAP gross margin, Adjusted EBITDA, Non-GAAP net income, Adjusted EBITDA and free cash flow for financial and operational decision making and to evaluate period-to-period differences in our performance. Non-GAAP gross profit, Non-GAAP gross margin, Adjusted EBITDA, Non-GAAP net income, Adjusted EBITDA and free cash flow are non-GAAP financial measures, which we believe are useful for investors in evaluating our overall financial performance. We believe these measures provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key performance indicators used by management in its financial and operational decision making. ForSee below for a reconciliation of each of the non-GAAP financial measures described below, see “Reconciliation of Non-GAAP Financial Measures.”below.
Non-GAAP Gross Profit and Non-GAAP Gross Margin
GAAP defines gross profit as revenue less cost of revenue. Cost of revenue includes all expenses associated with our various service offerings as more fully described under the caption “Key Components of StatementStatements of Operations-Cost of Revenue and Gross Margin.” We define Non-GAAP gross profit as gross profit after adding back the following items:
•depreciation and amortization;
•amortization of acquired intangible assets related to acquisitions; and
•stock-based compensation.
compensation
We add back depreciationcalculate Non-GAAP gross margin by dividing Non-GAAP gross profit by revenue less pass-through messaging surcharges, expressed as a percentage of revenue.
In our calculation of Non-GAAP gross profit and amortization and stock-based compensation because they are non-cash items. WeNon-GAAP gross margin, we eliminate the impact of thesedepreciation and amortization, amortization of acquired intangible assets related to acquisitions, stock-based compensation, pass-through messaging surcharges, and all non-cash items, because we do not consider them indicative of our core operating performance. TheirThe exclusion of these items facilitates comparisons of our operating performance on a period-to-period basis. Therefore, we believe that showing gross margin, as Non-GAAP to remove the impact of these non-cash expenses, such as depreciation, amortization and stock-based compensation, is helpful to investors in assessing our gross profit and gross margin performance in a way that is similar to how management assesses our performance.
We calculate Non-GAAP gross margin by dividing Non-GAAP gross profit by revenue, expressed as a percentage of revenue.
Management uses Non-GAAP gross profit and Non-GAAP gross margin to evaluate operating performance and to determine resource allocation among our various service offerings. We believe that Non-GAAP gross profit and Non-GAAP gross margin provide useful information to investors and others to understand and evaluate our operating results in the same manner as our management and board of directors and allows for better comparison of financial results among our competitors. Non-GAAP gross profit and Non-GAAP gross margin may not be comparable to similarly titled measures of other companies because other companies may not calculate Non-GAAP gross profit and Non-GAAP gross margin or similarly titled measures in the same manner as we do.
Management’s Discussion and Analysis
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | (In thousands) |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Gross Profit | | | | | $ | 238,353 | | | $ | 213,813 | | | $ | 153,910 | |
| Gross Profit Margin % | | | | | 42 | % | | 44 | % | | 45 | % |
| Depreciation | | | | | 13,602 | | | 12,606 | | | 9,997 | |
| Amortization of acquired intangible assets | | | | | 7,657 | | | 8,543 | | | 1,445 | |
| Stock-based compensation | | | | | 404 | | | 364 | | | 306 | |
| Non-GAAP Gross Profit | | | | | $ | 260,016 | | | $ | 235,326 | | | $ | 165,658 | |
Non-GAAP Gross Margin % (1) | | | | | 55 | % | | 52 | % | | 50 | % |
Consolidated________________________
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| | (In thousands) |
| Consolidated Gross Profit | $ | 58,559 |
| | $ | 66,917 |
| | $ | 73,693 |
|
| Depreciation | 5,258 |
| | 4,574 |
| | 4,315 |
|
| Stock-based compensation | 45 |
| | 61 |
| | 80 |
|
| Non-GAAP Gross Profit | $ | 63,862 |
| | $ | 71,552 |
| | $ | 78,088 |
|
| Non-GAAP Gross Margin % | 46 | % | | 47 | % | | 48 | % |
By Segment
CPaaS
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| | (In thousands) |
| CPaaS Gross Profit | $ | 36,742 |
| | $ | 45,860 |
| | $ | 55,713 |
|
| Depreciation | 5,258 |
| | 4,574 |
| | 4,315 |
|
| Stock-based compensation | 45 |
| | 61 |
| | 80 |
|
| Non-GAAP Gross Profit | $ | 42,045 |
| | $ | 50,495 |
| | $ | 60,108 |
|
| Non-GAAP Gross CPaaS Margin % | 41 | % | | 43 | % | | 46 | % |
Other
There are no non-GAAP adjustments to(1) Calculated by dividing Non-GAAP gross profit by revenue less pass-through messaging surcharges of$99 million, $41 million, and $11 million in the years ended December 31, 2022, 2021 and 2020, respectively.
Non-GAAP Net Income
We define Non-GAAP net income as net income or loss adjusted for certain items affecting period-to-period comparability. Non-GAAP net income excludes:
•stock-based compensation;
•amortization of acquired intangible assets related to acquisitions;
•amortization of debt discount and issuance costs for convertible debt;
•acquisition related expenses;
•impairment charges of intangibles assets, if any;
•net cost associated with early lease terminations and leases without economic benefit;
•(gain) loss on sale of business;
•net (gain) loss on extinguishment of debt;
•non-recurring items not indicative of ongoing operations and other; and
•estimated tax impact of above adjustments, net of valuation allowances
We calculate Non-GAAP basic and diluted shares by adding the weighted average of outstanding Series A redeemable convertible preferred stock, if any, to the weighted average number of outstanding basic and diluted shares, respectively. The tax-effect of Non-GAAP adjustments is determined by recalculating the tax provision on a Non-GAAP basis. When we have a valuation allowance recorded and no tax benefits will be recognized, the rate is considered to be zero.
We believe Non-GAAP net income is a meaningful measure because by removing certain non-cash and other expenses, we are able to evaluate our operating results in a manner we believe is more indicative of the current period’s performance. We believe the use of Non-GAAP net income may be helpful to investors because it provides consistency and comparability with past financial performance, facilitates period-to-period comparisons of results of operations and assists in comparisons with other companies, many of which may use similar Non-GAAP financial information to supplement their GAAP results. As a result of the adoption of ASU No. 2020-06 on January 1, 2022, we add back cash interest expense on the Convertible Notes, as if converted at the beginning of the period, if the impact is dilutive for the Other segment.purposes of calculating diluted Non-GAAP net income or loss per Non-GAAP share.
Management’s Discussion and Analysis
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | (In thousands, except share and per share amounts) |
| Net income (loss) | | | | | $ | 19,570 | | | $ | (27,362) | | | $ | (43,977) | |
| Stock-based compensation | | | | | 20,655 | | | 14,537 | | | 9,881 | |
| | | | | | | | | |
| Amortization of acquired intangibles | | | | | 17,180 | | | 19,119 | | | 3,666 | |
| Amortization of debt discount and issuance costs for convertible debt | | | | | 2,977 | | | 26,672 | | | 15,565 | |
| | | | | | | | | |
| Acquisition-related expenses | | | | | — | | | — | | | 14,458 | |
| Gain on sale of business | | | | | (3,777) | | | — | | | — | |
| Net gain on extinguishment of debt | | | | | (40,205) | | | — | | | — | |
Non-recurring items not indicative of ongoing operations and other (1) | | | | | 1,992 | | | 832 | | | 334 | |
Estimated tax effects of adjustments (2) | | | | | (3,396) | | | (8,087) | | | 14,266 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Non-GAAP net income | | | | | $ | 14,996 | | | $ | 25,711 | | | $ | 14,193 | |
Interest expense on Convertible Notes (3) | | | | | 1,666 | | | — | | | — | |
| Numerator used to compute Non-GAAP diluted net income per share | | | | | $ | 16,662 | | | $ | 25,711 | | | $ | 14,193 | |
| | | | | | | | | |
| Net income (loss) per share | | | | | | | | | |
| Basic | | | | | $ | 0.77 | | | $ | (1.09) | | | $ | (1.83) | |
| Diluted | | | | | $ | (0.48) | | | $ | (1.09) | | | $ | (1.83) | |
| | | | | | | | | |
| Non-GAAP net income per Non-GAAP share | | | | | | | | | |
| Basic | | | | | $ | 0.59 | | | $ | 1.02 | | | $ | 0.59 | |
| Diluted | | | | | $ | 0.54 | | | $ | 0.97 | | | $ | 0.55 | |
| | | | | | | | | |
| Weighted average number of shares outstanding | | | | | | | | | |
| Basic | | | | | 25,282,796 | | | 25,090,916 | | | 24,092,574 | |
| Diluted | | | | | 30,907,869 | | | 25,090,916 | | | 24,092,574 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Non-GAAP basic shares | | | | | 25,282,796 | | | 25,090,916 | | | 24,092,574 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Convertible debt conversion | | | | | 5,625,073 | | | 987,149 | | | 1,022,941 | |
| Stock options issued and outstanding | | | | | 100,088 | | | 180,318 | | | 443,738 | |
| Nonvested RSUs outstanding | | | | | — | | | 197,538 | | | 352,854 | |
| Non-GAAP diluted shares | | | | | 31,007,957 | | | 26,455,921 | | | 25,912,107 | |
________________________(1) Non-recurring items not indicative of ongoing operations and other include $0.9 million of foreign currency losses on the settlement of intercompany borrowings, which were repatriated in conjunction with the repurchase of a portion of the 2026 Convertible Notes and $0.6 million of nonrecurring litigation expense for the year ended December 31, 2022, and $0.5 million, $0.8 million, and $0.3 million of losses on disposals of property, plant and equipment during the years ended December 31, 2022, 2021 and 2020, respectively.
Management’s Discussion and Analysis
(2) The estimated tax-effect of adjustments is determined by recalculating the tax provision on a Non-GAAP basis. The Non-GAAP effective income tax rate was 7.0%, 14.2%, and 5.0% for the years ended December 31, 2022, 2021 and 2020, respectively. For the year ended December 31, 2022, the Non-GAAP effective income tax rate differed from the federal statutory tax rate of 21% in the U.S. primarily due to research and development tax credits generated in 2022. For the years ended December 31, 2021 and 2020, these effective income tax rates differ from the federal statutory tax rate of 21% in the U.S. primarily due to the valuation allowance recognized against federal and state deferred tax assets in the U.S. We analyze the Non-GAAP valuation allowance position on a quarterly basis. In the fourth quarter of 2022, we removed the valuation allowance against all U.S. deferred tax assets for Non-GAAP purposes as a result of cumulative Non-GAAP U.S. income over the past three years and a significant depletion of net operating loss and tax credit carryforwards on a Non-GAAP basis. As of December 31, 2022, we have no valuation allowance against our remaining deferred tax assets for Non-GAAP purposes.
(3) Upon the adoption of ASU 2020-06, net income is increased for interest expense as part of the calculation for diluted Non-GAAP earnings per share. See Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details on the adoption of ASU 2020-06.
Adjusted EBITDA
We define Adjusted EBITDA as net income or losses from continuing operations, adjusted to reflect the addition or elimination of certain income statement items including, but not limited to:
•income tax provision (benefit); provision;
•interest (income) expense, net;
•depreciation and amortization expense;
•acquisition related expenses;
•stock-based compensation expense;
•impairment of intangible assets, if any;
•(gain) loss on sale of business;
•net cost associated with early lease terminations and leases without economic benefit;
•net (gain) loss (gain) on disposalextinguishment of propertydebt; and equipment.
•non-recurring items not indicative of ongoing operations and other
Management’s Discussion and Analysis
Adjusted EBITDA is a key measure used by management to understand and evaluate our core operating performance and trends, to generate future operating plans and to make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis.
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | (In thousands) |
| Net income (loss) | | | | | $ | 19,570 | | | $ | (27,362) | | | $ | (43,977) | |
| Income tax (benefit) provision | | | | | (2,264) | | | (3,833) | | | 15,005 | |
| Interest expense, net | | | | | 3,048 | | | 28,784 | | | 13,672 | |
| Depreciation | | | | | 18,419 | | | 17,523 | | | 13,137 | |
| Amortization | | | | | 17,180 | | | 19,119 | | | 3,666 | |
| Acquisition-related expenses | | | | | — | | | — | | | 14,458 | |
| Stock-based compensation | | | | | 20,655 | | | 14,537 | | | 9,881 | |
| | | | | | | | | |
| Gain on sale of business | | | | | (3,777) | | | — | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| Net gain on extinguishment of debt | | | | | (40,205) | | | — | | | — | |
Non-recurring items not indicative of ongoing operations and other (1) | | | | | 1,992 | | | 832 | | | 334 | |
| Adjusted EBITDA | | | | | $ | 34,618 | | | $ | 49,600 | | | $ | 26,176 | |
________________________
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| | (In thousands) |
| Income from continuing operations | $ | 6,965 |
| | $ | 25,430 |
| | $ | 5,971 |
|
| Income tax provision (benefit) | 408 |
| | (11,094 | ) | | 6,918 |
|
| Interest expense, net | 589 |
| | 908 |
| | 1,728 |
|
| Depreciation | 6,167 |
| | 5,251 |
| | 4,873 |
|
| Amortization | 908 |
| | 891 |
| | 839 |
|
| Stock-based compensation | 3,493 |
| | 1,370 |
| | 1,803 |
|
| Impairment of intangible asset | — |
| | 695 |
| | — |
|
| Loss on disposal of property and equipment | 382 |
| | 19 |
| | 91 |
|
| Adjusted EBITDA | $ | 18,912 |
| | $ | 23,470 |
| | $ | 22,223 |
|
Non-GAAP Net Income
We define Non-GAAP net income as net income adjusted for certain items affecting period-to-period comparability. Non-GAAP net income excludes:
stock-based compensation;
amortizationongoing operations and other include $0.9 million of acquired intangible assets related toforeign currency losses on the Dash acquisition;
impairment chargessettlement of intangibles assets, if any;
loss (gain) on disposalintercompany borrowings, which were repatriated in conjunction with the repurchase of property and equipment;
estimated tax impact of above adjustments;
benefit resulting from the releasea portion of the valuation allowance on our deferred tax assets (DTA);2026 Convertible Notes and
impact $0.6 million of remeasurement of DTA as a result of 2017 tax reform act
We calculate Non-GAAP basic and diluted shares by adding the weighted average of outstanding Series A redeemable convertible preferred stock to the weighted average number of outstanding basic and diluted shares, respectively.
We believe Non-GAAP net income is a meaningful measure because by removing certain non-cash and other expenses we are able to evaluate our operating results in a manner we believe is more indicative of the current period's performance. We believe the use of Non-GAAP net income may be helpful to investors because it provides consistency and comparability with past financial performance, facilitates period-to-period comparisons of results of operations and assists in comparisons with other companies, many of which may use similar non-GAAP financial information to supplement their GAAP results.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| | (In thousands) |
| Net (loss) income | $ | (6,700 | ) | | $ | 22,358 |
| | $ | 5,971 |
|
| Stock-based compensation | 3,493 |
| | 1,370 |
| | 1,803 |
|
| Amortization related to acquisitions | 520 |
| | 520 |
| | 520 |
|
| Impairment of intangible asset | — |
| | 695 |
| | — |
|
| Loss on disposal of property and equipment | 382 |
| | 19 |
| | 91 |
|
| Estimated tax effects of adjustments (1) | — |
| | (994 | ) | | (921 | ) |
| Release of valuation allowance (2) | — |
| | (14,138 | ) | | — |
|
| Remeasurement of DTA associated with tax rate change (3) | — |
| | — |
| | 2,073 |
|
| Non-GAAP net (loss) income | $ | (2,305 | ) | | $ | 9,830 |
| | $ | 9,537 |
|
| Non-GAAP net (loss) income per non-GAAP share | | | | | |
| Basic | $ | (0.17 | ) | | $ | 0.73 |
| | $ | 0.68 |
|
| Diluted | $ | (0.16 | ) | | $ | 0.67 |
| | $ | 0.59 |
|
| | | | | | |
| Non-GAAP Weighted Average Number of Shares outstanding | | | | | |
| Basic | 11,497,727 |
| | 11,678,568 |
| | 12,590,221 |
|
| Series A redeemable convertible preferred stock outstanding | 1,775,000 |
| | 1,775,000 |
| | 1,522,123 |
|
| Non-GAAP Basic Shares | 13,272,727 |
| | 13,453,568 |
| | 14,112,344 |
|
| | | | | | |
| Diluted | 12,456,540 |
| | 12,870,632 |
| | 14,543,170 |
|
| Series A redeemable convertible preferred stock outstanding | 1,775,000 |
| | 1,775,000 |
| | 1,522,123 |
|
| Non-GAAP Diluted Shares | 14,231,540 |
| | 14,645,632 |
| | 16,065,293 |
|
________________________
(1) The Company had a full valuation allowance against its deferred tax assetsnonrecurring litigation expense for the year ended December 31, 2015.2022, and $0.5 million, $0.8 million, and $0.3 million of losses on disposals of property, plant and equipment during the years ended December 31, 2022, 2021 and 2020, respectively.
(2) The Company recognized a tax benefit of $14,138 due to the release of the deferred tax asset valuation allowance subsequent to the spin-off of Republic Wireless.
(3) On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law. As a result of this change in tax law, the Company recorded a remeasurement of its deferred tax assets, which resulted in additional income tax expense of $2,073.
Free Cash FlowDollar-Based Net Retention Rate
Free cash flow representsOur ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with our existing customers that generate revenue and seek to increase their use of our platform. We track our performance in this area by measuring the dollar-based net cash providedretention rate for our customers who generate revenue. To calculate the dollar-based net retention rate, we first identify the cohort of customers that generate revenue and that were customers in the same quarter of the prior year. The dollar-based net retention rate is obtained by operating activities from continuing operations less net cash used in investing activities from continuing operations. We believe free cash flow is a useful indicator of liquidity and provides information to management and investors aboutdividing the amount of cashrevenue generated from that cohort in a quarter, by the revenue generated from that same cohort in the corresponding quarter in the prior year. The dollar-based net retention rate reported in a quarter is then obtained by averaging the result from that quarter, by the corresponding results from each of the prior three quarters. Customers of acquired businesses are included in the subsequent year’s calendar quarter of acquisition. Our dollar-based net retention rate increases when such customers increase usage of a product, extend usage of a product to new applications or adopt a new product. Our dollar-based net retention rate decreases when such customers cease or reduce usage of a product or when we lower prices on our core operationssolutions.
As our customers grow their businesses and increase usage of our platform, they sometimes create multiple customer accounts with us for operational or other reasons. As such, when we identify a significant customer organization (defined as a single customer organization generating more than 1% of revenue in a quarterly reporting period) that can be usedhas created a new customer, this new customer is tied to, and revenue from this new customer is included with, the original customer for investingthe purposes of calculating this metric. For comparative purposes, the dollar-based net retention rate presented in the table above has been updated to reflect the change in our business. Free cash flow has certain limitationsreporting segments.
Key Components of Statements of Operations
Revenue
Revenue is derived from (i) reoccurring sources such as per minute voice usage and voice calling, per text message usage and other usage services and fees, (ii) monthly recurring charges arising from phone number services, 911-enabled phone number services, messaging services and other services, and (iii) other various communications services and products, indirect revenue and messaging surcharge revenue.
For the years ended December 31, 2022, 2021 and 2020, we generated 78%, 75%, and 74%, respectively, of our revenue from reoccurring sources. The large bulk of our remaining revenue is generated from recurring monthly charges.
We recognize accounts receivable at the time the customer is invoiced. Additionally, we record a receivable for unbilled revenue if services have been delivered and are billable in that it does not represent the total increase or decrease in the cash balancesubsequent periods. Unbilled revenue made up 45%, 52%, and 50% of outstanding accounts receivable, net of allowance for the period, nor does it represent the residual cash flows availabledoubtful accounts, as of December 31, 2022, 2021 and 2020, respectively.
Cost of Revenue and Gross Margin
Cost of revenue consists of fees paid to other network service providers, network operations costs, personnel costs, allocated costs of facilities and information technology, amortization of acquired technology intangibles and depreciation.
Fees paid to other network service providers arise when we purchase services such as minutes of use, phone numbers, messages, porting of customer numbers and network circuits.
Network operations costs are incurred for discretionary expenditures. Therefore, it is important to evaluate free cash flow along with our consolidated statements of cash flows.web services and cloud infrastructure, capacity planning and management, software licenses, hardware and software maintenance fees, customer support and network-related facility rents.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| | (In thousands) |
| Net cash provided by operating activities from continuing operations | $ | 18,651 |
| | $ | 16,942 |
| | $ | 14,623 |
|
| Net cash used in investing activities from continuing operations(1) | (5,102 | ) | | (6,061 | ) | | (7,963 | ) |
| Free cash flow | $ | 13,549 |
| | $ | 10,881 |
| | $ | 6,660 |
|
________________________
(1) Represents the acquisition cost of property, equipment and capitalized development costs for software for internal use.
Management’s Discussion and Analysis
Personnel costs (including non-cash stock-based compensation expenses) arise for employees who are responsible for the delivery of services and the operations and maintenance of the communications network.
Gross margin is calculated by subtracting cost of revenue from revenue, divided by revenue, expressed as a percentage. Our cost of revenue and gross margin have been, and will continue to be, affected by several factors, including the timing and extent of our investments in our network, our ability to manage off-network minutes of use and messaging costs, changes to the mix or amount of personnel-related costs included in our cost of revenue, the product mix of revenue, the timing of amortization of capitalized software development costs and fluctuations in the price we charge our customers for services.
Operating Expenses
The most significant components of operating expenses are personnel costs, which consist of salaries, benefits, bonuses, and stock-based compensation expenses. We also incur other non-personnel costs related to our general overhead expenses, including facility expenses, software licenses, web services, depreciation and amortization of assets unrelated to delivery of our services. We expect that our operating expenses will increase in absolute dollars driven by the growth in our business.
Research and Development
Research and development expenses consist of salaries and related personnel costs for the design, development, testing and enhancement of our cloud network and software products. Research and development expenses include depreciation and allocated costs of facilities and information technology utilized by our research and development staff.
Sales and Marketing
Sales and marketing expenses consist of salaries and related personnel costs, commissions, and costs related to advertising, marketing, brand awareness activities, sales support and professional services fees, and customer billing and collections functions. Sales and marketing expenses include depreciation, amortization of acquired customer relationship intangible assets, and allocated costs of facilities and information technology utilized by our sales and marketing staff.
General and Administrative
General and administrative expenses consist of salaries and related personnel costs for accounting, legal, human resources, corporate, and other administrative and compliance functions. General and administrative expenses include depreciation, expenditures for third party professional services, and allocated costs of facilities and information technology utilized by our corporate and administrative staff.
Income Taxes
For the years ended December 31, 2022, 2021 and 2020 our effective tax rate was (13.1)%, 12.3% and (51.8)%, respectively. The decrease in our effective tax rate is primarily due to the split of earnings and losses between jurisdictions. In 2022 we were in a pre-tax loss position in jurisdictions without valuation allowances and as such, recognized income tax benefit. However, as a result of income recognized in connection with our debt buy-back, we recognized pre-tax income in the U.S. The income resulted in nominal tax expense in the U.S. due to the utilization of tax attributes and the valuation allowance position.
Judgment is required in determining whether deferred tax assets will be realized in full or in part. Management assesses the available positive and negative evidence on a jurisdictional basis to estimate if deferred tax assets will be recognized and when it is more likely than not that all or some deferred tax assets will not be realized, and a valuation allowance must be established. As of December 31, 2022, we continue to maintain a valuation allowance for our U.S. federal and state net deferred tax assets.
| |
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Management’s Discussion and Analysis
Results of Operations
Consolidated Results of Operations
The following table sets forth the consolidated statements of operations for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | |
| | | | | | (In thousands) |
| Revenue | | | | | $ | 573,152 | | | $ | 490,907 | | | $ | 343,113 | |
| Cost of revenue | | | | | 334,799 | | | 277,094 | | | 189,203 | |
| Gross profit | | | | | 238,353 | | | 213,813 | | | 153,910 | |
| Operating expenses: | | | | | | | | | |
| Research and development | | | | | 97,990 | | | 69,505 | | | 54,555 | |
| Sales and marketing | | | | | 96,658 | | | 82,333 | | | 61,216 | |
| General and administrative | | | | | 68,029 | | | 64,212 | | | 51,644 | |
| Total operating expenses | | | | | 262,677 | | | 216,050 | | | 167,415 | |
| Operating loss | | | | | (24,324) | | | (2,237) | | | (13,505) | |
| Other income (expense), net: | | | | | | | | | |
| Net gain on extinguishment of debt | | | | | 40,205 | | | — | | | — | |
| Interest expense, net | | | | | (3,048) | | | (28,784) | | | (13,672) | |
| Other income (expense), net | | | | | 4,473 | | | (174) | | | (1,795) | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total other income (expense), net | | | | | 41,630 | | | (28,958) | | | (15,467) | |
| Income (loss) before income taxes | | | | | 17,306 | | | (31,195) | | | (28,972) | |
| Income tax benefit (provision) | | | | | 2,264 | | | 3,833 | | | (15,005) | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income (loss) | | | | | $ | 19,570 | | | $ | (27,362) | | | $ | (43,977) | |
The following discussion and analysis oftable sets forth our financial condition and results of operations should be readas a percentage of our total revenue for the periods presented. *
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
| Revenue | | | | | 100 | % | | 100 | % | | 100 | % |
| Cost of revenue | | | | | 58 | % | | 56 | % | | 55 | % |
| Gross profit | | | | | 42 | % | | 44 | % | | 45 | % |
| Operating expenses: | | | | | | | | | |
| Research and development | | | | | 17 | % | | 14 | % | | 16 | % |
| Sales and marketing | | | | | 17 | % | | 17 | % | | 18 | % |
| General and administrative | | | | | 12 | % | | 13 | % | | 15 | % |
| Total operating expenses | | | | | 46 | % | | 44 | % | | 49 | % |
| Operating loss | | | | | (4) | % | | — | % | | (4) | % |
| Other income (expense), net: | | | | | | | | | |
| Net gain on extinguishment of debt | | | | | 7 | % | | — | % | | — | % |
| Interest expense, net | | | | | (1) | % | | (6) | % | | (4) | % |
| Other income (expense), net | | | | | 1 | % | | — | % | | (1) | % |
| | | | | | | | | | |
| | | | | | | | | | |
| Total other income (expense), net | | | | | 7 | % | | (6) | % | | (5) | % |
| Income (loss) before income taxes | | | | | 3 | % | | (6) | % | | (8) | % |
| Income tax benefit (provision) | | | | | — | % | | 1 | % | | (4) | % |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income (loss) | | | | | 3 | % | | (5) | % | | (13) | % |
(*) Columns may not foot due to rounding.
Management’s Discussion and Analysis
Comparison of the Years Ended December 31, 2022 and 2021
Revenue | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| | | | | | |
| 2022 | | 2021 | | Change |
| | | | | | | |
| (Dollars in thousands) |
| Revenue | $ | 573,152 | | | $ | 490,907 | | | $ | 82,245 | | | 17 | % |
In 2022, our total revenue increased by $82 million, or 17%, compared with the same period in conjunction2021. This growth was the result of higher usage of our core messaging offering and additional A2P pass-through messaging surcharges imposed by certain carriers. Growth in our revenue other than from pass-through messaging surcharges, compared with the same period in 2021, was led by our core messaging offerings, which grew 46%, and phone number and 911-enabled phone number services, mostly offset by lower revenue from voice offerings. The growth in our core messaging offering was aided by higher messaging volumes from certain customers leading up to the U.S. midterm elections in November 2022. Compared with the same period last year, our voice offerings revenue in 2022 remained affected by lower usage arising from the 2021 DDoS incident as well as the absence of revenue from businesses divested earlier in 2022.
Active customer accounts increased 3% to 3,405 as of December 31, 2022, as compared with 3,300 active accounts as of December 31, 2021. Our dollar-based net retention rate as of December 31, 2022 was 112%.
Cost of Revenue and Gross Margin
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| | | | | | |
| 2022 | | 2021 | | Change |
| | | | | | | |
| (Dollars in thousands) |
| Cost of revenue | $ | 334,799 | | | $ | 277,094 | | | $ | 57,705 | | | 21 | % |
| Gross profit | $ | 238,353 | | | $ | 213,813 | | | $ | 24,540 | | | 11 | % |
| Total gross margin | 42 | % | | 44 | % | | | | |
In 2022, total cost of revenue increased $58 million, compared with the same period in 2021, driven by higher pass-through messaging surcharges of $56 million. In 2022, the combination of changes in total revenue and total cost of revenue yielded an increase in total gross profit of$25 million, or 11%, compared with the same period in 2021, driven by profit improvements from the combination of our revenue and cost of revenue derived other than from pass-through messaging surcharges.
Our total gross margin percentage of 42% in 2022 declined two percentage points, compared with the same period in 2021, as operating and product mix improvements were more than offset by the inclusion of higher pass-through messaging surcharges within total revenue.
Management’s Discussion and Analysis
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| | | | | | |
| 2022 | | 2021 | | Change |
| | | | | | | |
| (Dollars in thousands) |
| Research and development | $ | 97,990 | | | $ | 69,505 | | | $ | 28,485 | | | 41 | % |
| Sales and marketing | 96,658 | | | 82,333 | | | 14,325 | | | 17 | % |
| General and administrative | 68,029 | | | 64,212 | | | 3,817 | | | 6 | % |
| Total operating expenses | $ | 262,677 | | | $ | 216,050 | | | $ | 46,627 | | | 22 | % |
As a percentage of revenue, total operating expenses for the years ended December 31, 2022 and 2021 were 46% and 44%, respectively.
In 2022, research and development expenses increased by approximately $28 million, or 41%, compared with the same period in 2021. This increase was primarily due to increased personnel costs from greater numbers of employed staff of $22 million. The increase in headcount also contributed to higher allocated facilities and IT expenses of $7 million.
In 2022, sales and marketing expenses increased by $14 million, or 17%, compared with the same period in 2021, primarily due to an increase in sales personnel costs from a greater number of employed staff of $13 million.
In 2022, general and administrative expenses increased $4 million, or 6%, compared with the same period in 2021, primarily due to an increase in personnel costs of $5 million.
Interest Expense, Net
In 2022, interest expense, net of interest income, decreased by $26 million compared with the same period in 2021, due to a $24 million decrease in interest expense primarily related to the impact of the adoption of ASU 2020-06 on the Convertible Notes. See Note 8, “Debt,” to the consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations10-K for additional details.
Management’s Discussion and beliefs that involve risksAnalysis
Income Tax Benefit
For the year ended December 31, 2022, we recognized an income tax benefit of $2 million, a decrease of $2 million compared with the same period in 2021. The resulting effective tax rate for the year ended December 31, 2022 was (13.1)% compared with 12.3% in 2021. For the year ended December 31, 2022, the favorable change to the effective tax rate was primarily due to the split of earnings and uncertainties. Our actual results may differ materially from those anticipatedlosses between jurisdictions. In 2022, we were in these forward-looking statementsa pre-tax loss position in jurisdictions without valuation allowances and as such, recognized income tax benefit. However, as a result of various factors, including those set forth under “Risk Factors”income recognized in this Annual Report Form 10-K. Our fiscal year ends on December 31.
Overview
We are a leading cloud-based communications platform for enterprisesconnection with our debt buy-back, we recognized pre-tax income in the United States. Our solutions include a broad range of software APIs for voice and text functionality and our owned and managed, purpose- built IP voice network, one of the largestU.S. This income resulted in nominal income tax expense in the nation. Our sophisticatedU.S. due to the utilization of tax attributes and easy-to-use software APIs allow enterprises to enhance their products and services by incorporating advanced voice and text capabilities. Companies use our platform to more frequently and seamlessly connect with their end users, add voice calling capabilities to residential IoT devices, offer end users new mobile application experiences and improve employee productivity, among other use cases. By owning and operating a capital-efficient, purpose-built IP voice network, we are able to offer advanced monitoring, reporting and analytics, superior customer service, dedicated operating teams, personalized support, and flexible cost structures. Over the last ten years, we have pioneered the CPaaS space through our innovation-rich culture and focus on empowering enterprises with end-to-end communications solutions.
Our voice software APIs allow enterprises to make and receive phone calls and create advanced voice experiences. Integration with our purpose-built IP voice network ensures enterprise-grade functionality and secure, high-quality connections. Our messaging software APIs provide enterprises with advanced tools to connect with end users via messaging. Our customers also use our solutions to enable 911 response capabilities, real-time provisioning and activation of phone numbers and toll-free number messaging.
We are the only CPaaS provider in the industry with our own nationwide IP voice network, which we have purpose-built for our platform. Our network is capital-efficient and custom-built to support the applications and experiences that make a difference in the way enterprises communicate. Since a communications platform is only as strong as the network that backs it, we believe our network provides a significant competitive advantage in the control, quality, pricing power and scalability of our offering. We are able to control the quality and provide the support our customers expect, as well as efficiently meet scalability and cost requirements.
valuation allowance position. For the years ended December 31, 2015, 20162022 and 2017,2021, the effective tax rates of (13.1)% and 12.3%, respectively, differed from the federal statutory rate of 21% in the U.S. primarily due to the valuation allowance recognized against federal and state deferred tax assets in the U.S.
Most of the permanent tax adjustments within our effective tax rate are offset by a valuation allowance. These adjustments include state taxes, federal research tax credits under Internal Revenue Code Section 41, equity compensation in the U.S. and other non-deductible expenditures in the U.S. Excluding the impact of the valuation allowance, we realize an estimated state effective tax rate of 4.3%. In addition, exclusive of the valuation allowance, we continue to generate income tax benefits in the current period related to income tax credits recognized for qualified research activities in the U.S. The applicable federal tax law and regulations define qualified research activities as research and development activities conducted in the U.S. that involve a process of experimentation designed to discover new information intended to develop a new or improved business component. Absent the valuation allowance, equity compensation also impacts the effective tax rate to the extent the income tax deduction exceeds or is below the related book expense, as required under ASC 718-740-35-2. Other U.S. non-deductible expenses that are offset by the valuation allowance consist primarily of non-deductible executive compensation under Internal Revenue Code 162(m).
Permanent tax adjustments within our effective tax rate that are not offset by the valuation allowance included minimum state taxes, foreign tax benefits and foreign rate differentials. As we continue to scale our international business, any changes to foreign business activity may impact our effective tax rate in the future.
We continue to expect recurring changes to the valuation allowance as deferred tax assets within the U.S. increase or decrease in subsequent periods. We will maintain a valuation allowance against all U.S. federal and state deferred tax assets until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized.
Comparison of the Years Ended December 31, 2021 and 2020
Revenue | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| | | | | | |
| 2021 | | 2020 | | Change |
| | | | | | | |
| (Dollars in thousands) |
| Revenue | $ | 490,907 | | | $ | 343,113 | | | $ | 147,794 | | | 43 | % |
In 2021, our total revenue increased by $148 million, or 43%, compared with the same period in 2020. This growth was $137.8led by increases in our core voice, messaging and related surcharges, and phone number services of $71 million, $152.1$41 million, and $163.0$26 million, respectively. This growth was aided by a full year of revenue contribution from the acquisition of Voxbone in November 2020. We believe our revenue results were lowered by approximately $10.0 million in 2021 from lost transaction volume and customer credits due to the previously disclosed 2021 DDoS Attack.
Management’s Discussion and Analysis
Cost of Revenue and Gross Margin
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| | | | | | |
| 2021 | | 2020 | | Change |
| | | | | | | |
| (Dollars in thousands) |
| Cost of revenue | $ | 277,094 | | | $ | 189,203 | | | $ | 87,891 | | | 46 | % |
| Gross profit | $ | 213,813 | | | $ | 153,910 | | | $ | 59,903 | | | 39 | % |
| Total gross margin | 44 | % | | 45 | % | | | | |
In 2021, total cost of revenue increased $88 million, compared with the same period in 2020. This growth was driven by higher cost of revenue in our messaging business and related surcharges, network related costs, and core voice of $33 million, $24 million, and $23 million, respectively. CPaaSThis growth was aided by a full year of cost of revenue contribution from the acquisition of Voxbone in November 2020.
In 2021, the combination of changes in total revenue and total cost of revenue yielded an increase in total gross profit of $60 million, or 39%, compared with the same period in 2020, driven by higher revenue and improved operating leverage. For the year ended December 31, 2021, total gross margin was 44.0% compared with 45.0% for the year ended December 31, 2020 and was impacted by higher pass-through messaging surcharges within total revenue.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| | | | | | |
| 2021 | | 2020 | | Change |
| | | | | | | |
| (Dollars in thousands) |
| Research and development | $ | 69,505 | | | $ | 54,555 | | | $ | 14,950 | | | 27 | % |
| Sales and marketing | 82,333 | | | 61,216 | | | 21,117 | | | 34 | % |
| General and administrative | 64,212 | | | 51,644 | | | 12,568 | | | 24 | % |
| Total operating expenses | $ | 216,050 | | | $ | 167,415 | | | $ | 48,635 | | | 29 | % |
As a percentage of revenue, total operating expenses for the years ended December 31, 2015, 20162021 and 20172020, were 44% and 49%, respectively.
In 2021, research and development expenses increased by approximately $15 million, or 27%, compared with the same period in 2020. This increase was $101.5primarily due to increased personnel costs from greater numbers of employed staff of $10 million, which was driven by the acquisition of Voxbone in November 2020.
In 2021, sales and marketing expenses increased by $117.121 million, or 34%, compared with the same period in 2020, driven by the increase in sales personnel costs from a greater number of employed staff of $8 million from the acquisition of Voxbone in November 2020.
In 2021, general and $131.6administrative expenses increased by approximately $13 million respectively, representing an, or 24%, compared with the same period in 2020, mainly from higher headcount costs of $14 million, driven by the acquisition of Voxbone in November 2020.
Interest Expense, Net
In 2021, interest expense, net of interest income increased rateby $15 million compared with the same period in 2020, due to a $12 million increase in interest expense related to the Convertible Notes and a $2 million decrease in interest income from the investment of 15%follow-on equity offering proceeds. See Note 8, “Debt,” to the consolidated financial statements, for additional details.
Income Tax Benefit (Provision)
Management’s Discussion and Analysis
In 2021, income tax expense decreased by $19 million compared with the same period in 2016 and an increase of 12% in 2017. Net (loss) income2020. The effective tax rate for the yearsyear ended December 31, 2015, 20162021, was 12.3% compared with (51.8)% in the same period in 2020. The increase in our effective tax rate is primarily due to a change in the valuation allowance related to certain deferred tax assets.
Liquidity and 2017 was $(6.7)Capital Resources
Our liquidity is provided by our cash flow from operations less expenditures for capital equipment, and supplemented by financing activities from time to time. Our cash flow from operations is driven by monthly payments from customers for communication services consumed during the period. Our primary uses of cash include operating costs, such as fees paid to other network service providers, network operations costs, personnel costs and facility expenses, as well as the purchase of property plant and equipment to support growth on our communications platform and the purchase of land for our new corporate headquarters.
On June 6, 2022, we entered into a credit agreement (the “Credit Agreement”) among us, as borrower, the lenders from time to time party thereto, and Silicon Valley Bank as administrative agent, issuing lender and swingline lender. The Credit Agreement provides for a $50 million $22.4revolving credit facility (the “Credit Facility”), including a $20 million sublimit for the issuance of letters of credit and $6.0 million, respectively.a swingline subfacility of up to $5 million. The number of active CPaaS customer accounts increased from 704 asCredit Facility matures on June 6, 2025. As of December 31, 2015,2022, there were no borrowings under the Credit Facility.
Additionally, in the last three years we have supplemented our liquidity with proceeds from our issuance of the 2026 Convertible Notes and the 2028 Convertible Notes in February 2020 and March 2021, respectively. We used a majority of the proceeds from the issuance of our 2026 Convertible Notes to 798 asconsummate the acquisition of December 31, 2016, or 13%. The number of active CPaaS customer accounts further increased to 965 as of December 31, 2017, up 21%from December 31, 2016.
Management's Discussion and Analysis
Initial Public Offering
Voxbone. On November 10, 2017,2, 2022, we sold 4,000,000 sharesrepurchased $160 million of our Class A common stock at a public offering price of $20.00 per share. We received proceeds of $74,400, after deducting underwriting discounts and commissions of $5,600. Immediately prior to the pricing of the initial public offering on November 9, 2017, all shares of our then-outstanding Series A redeemable convertible preferred stock ("Series A preferred stock") converted into an aggregate of 1,775,000 shares of Class A voting common stock ("Old Class A common stock") and an aggregate of 13,586,485 shares of Old Class A common stock converted into Class B common stock. In addition, an aggregate of 34,840 shares of Class B non-voting common stock ("Old Class B common stock") converted into Class A common stock and warrants exercisable into shares of Old Class A common stock became exercisable into shares of Class B common stock. See2026 Convertible Notes as further described in Note 10, "Redeemable Convertible Preferred Stock and Stockholders' (Deficit) Equity,"8, “Debt,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K,10-K. We may, at any time and from time to time, seek to retire or purchase our 2026 Notes or 2028 Notes through cash purchases and/or exchanges for further discussion of Class Aequity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and B common stock.at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Key Performance Indicators
We monitor the following key performance indicators ("KPIs") to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions. We believe the following KPIs are useful in evaluating our business:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| | (Dollars in thousands) |
| Number of active CPaaS customers (as of period end) | 704 |
| | 798 |
| | 965 |
|
| Dollar-based net retention rate | 115 | % | | 111 | % | | 107 | % |
| Adjusted EBITDA | $ | 18,912 |
| | $ | 23,470 |
| | $ | 22,223 |
|
| Free cash flow | $ | 13,549 |
| | $ | 10,881 |
| | $ | 6,660 |
|
Number of Active CPaaS Customer Accounts
We believe that our cash and cash equivalents balances and the numbercash flows generated by our operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, our belief may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. Our future capital requirements and the adequacy of active CPaaS customer accountsavailable funds will depend on many factors, including those set forth in the section titled “Risk Factors.” We may be required to seek additional equity or debt financing in order to meet these future capital requirements. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected.
Our principal future commitments consist of (i) an important indicatoraggregate of $490 million in Convertible Notes (see Note 8, “Debt” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for a discussion of the growth2026 Convertible Notes and the 2028 Convertible Notes), (ii) a $496 million non-cancelable lease for our future office headquarters, which is anticipated to commence in mid-2023 and continue for an initial twenty (20) year term (the “Headquarters Lease”) (see Note 5, “Right-of-Use Asset and Lease Liabilities” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of our business,Headquarters Lease), (iii) $12 million in non-cancelable purchase obligations and future minimum payments under contracts to various service providers, and (iv) $17 million in future minimum rent payments for our current office space. See Note 12, “Commitments and Contingencies,” to the market acceptanceconsolidated financial statements included elsewhere in this Annual Report on Form 10-K for future lease commitments.
Management’s Discussion and Analysis
Statement of Cash Flows
The following table summarizes our platformcash flows for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, | |
| | | | | | 2022 | | 2021 | | 2020 | |
| | | | | | | | | | | |
| | | | | | (In thousands) | | | |
| Net cash provided by operating activities | | | | | | $ | 34,906 | | | $ | 40,803 | | | $ | 4,518 | | |
| Net cash (used in) provided by investing activities | | | | | | (133,449) | | | 2,833 | | | (455,085) | | |
| Net cash (used in) provided by financing activities | | | | | | (120,005) | | | 207,027 | | | 346,891 | | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | | | | 881 | | | 189 | | | 109 | | |
| Net (decrease) increase in cash, cash equivalents, and restricted cash | | | | | | $ | (217,667) | | | $ | 250,852 | | | $ | (103,567) | | |
Cash Flows from Operating Activities
In 2022, net cash provided by operating activities was $35 million and was generated by our future revenue trends. We define an active CPaaS customer account ataggregate results of $40 million during the endperiod, net of any period as an individual account, as identifiednon-cash items comprising depreciation and amortization, non-cash reduction to the right-of-use asset, amortization of debt discount and issuance costs, stock-based compensation, deferred tax expense and other and net gain on extinguishment of debt and a $14 million cash inflow from increased operating liabilities, partially offset by a unique account identifier,net cash outflow from operating assets aggregating $19 million. The net gain on extinguishment of debt was a result of the repurchase of $160 million aggregate principal amount of the 2026 Convertible Notes. Within operating liabilities, the net cash provided as a result of higher accounts payable of $17 million during 2022 was primarily related to the timing and amounts of purchases of both services and tangible goods and their related payment arrangements. The cash provided as a result of higher accrued expenses and other liabilities of $3 million during 2022 primarily related to higher accruals for which we have recognized at least $100lease incentives and higher advanced billings.This was partially offset by a cash outflow related to the operating right-of-use liability of revenue$8 million. Within operating assets, cash used as a result of higher accounts receivable of $13 million during 2022 was driven by higher unbilled receivables balances of $2 million arising from higher usage amounts in the last month of 2022 and $11 million from timing of collection of invoiced amounts. The cash used as a result of higher prepaid expenses and other assets of $6 million during 2022 was driven byhigher VAT receivables and the period.timing of advance payments for software and other services.
In 2021, net cash provided by operating activities was $41 million consisting of net loss of $27 million adjusted for non-cash items of $76 million and offset by cash used by changes in operating assets and liabilities of $8 million. Cash used in operating assets and liabilities included an increase in accounts receivable of $7 million, a decrease in operating right-of-use liability of $6 million, and an increase in prepaid expenses and other assets of $7 million. Offsetting these cash use items in assets and liabilities was an increase in accrued expenses and other liabilities of $10 million, and an increase in accounts payable of $2 million. The non-cash items included depreciation and amortization expense of $37 million, amortization of debt discount and issuance costs of $27 million, stock-based compensation expense of $15 million, right-of-use asset amortization of $6 million, and loss on disposal of property, plant and equipment of $1 million, offset by a deferred tax benefit of $8 million.
In 2020, net cash provided by operating activities was $5 million consisting of net loss of $44 million adjusted for non-cash items of $62 million and offset by cash used changes in operating assets and liabilities of $13 million. Cash generated in operating assets and liabilities included an increase in accrued expenses and other liabilities of $14 million. Offsetting these cash generating items in assets and liabilities were an increase in accounts receivable of $19 million, a decrease in operating right-of-use liability of $5 million, and an increase in prepaid expenses and other assets of $4 million. The non-cash items included depreciation and amortization expense of $17
Management’s Discussion and Analysis
million, amortization of debt discount and issuance costs of $16 million, deferred tax expense of $14 million, stock-based compensation expenses of $10 million, and right-of-use amortization of $5 million.
Cash Flows from Investing Activities
In 2022, net cash used in investing activities was $133 million. Cash used in investing activities included the purchase of marketable securities of $180 million partially offset by proceeds from the sales and maturities of marketable securities of $109 million. Cash used for deposits for construction in progress and the purchase of property, plant and equipment, primarily for our Raleigh, NC headquarters, was $60 million.
In 2021, net cash provided by investing activities was $3 million. Cash provided by investing activities included proceeds from sales and maturities of other investments of $40 million, proceeds from the sale of land of $17 million, offset by the purchase of land of $30 million, purchase of property, plant and equipment of $21 million and capitalized internally developed software costs of $4 million.
In 2020, net cash used in investing activities was $455 million, mainly from the costs related to the Voxbone acquisition of $400 million, net of cash. In addition, cash used in investing activities was the purchase of other investments of $231 million, the purchase of property, plant and equipment of $12 million and capitalized internally developed software costs of $2 million, offset by the proceeds from sales and maturities of other investments of $191 million.
Cash Flows from Financing Activities
In 2022, net cash used in financing activities was $120 million, consisting primarily of $117 million net cash paid to repurchase $160 million aggregate principal amount of the 2026 Convertible Notes.
In 2021, net cash provided by financing activities was $207 million consisting primarily of $250 million in proceeds from the issuance of the 2028 Convertible Notes and $1 million in proceeds from the exercise of stock options, partially offset by $26 million in the purchase of the 2028 Capped Calls, $8 million in payments of debt issuance cost, $7 million in payment of holdback proceeds to former Voxbone shareholders, and $4 million in value of equity awards withheld for tax liabilities.
In 2020, net cash provided by financing activities was $347 million consisting primarily of $400 million in proceeds from the issuance of the 2026 Convertible Notes and $4 million in proceeds from the exercise of stock options, partially offset by $43 million in the purchase of the 2026 Capped Calls, $12 million in payments of debt issuances cost, and $2 million in value of equity awards withheld for tax liabilities.
Off-Balance Sheet Arrangements
With the acquisition of Voxbone, we have off-balance sheet agreements for short-term office leases in the amount of less than $1 million ending prior to December 31, 2023.
Management’s Discussion and Analysis
Non-GAAP Financial Measures
We use Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP net income, Adjusted EBITDA and free cash flow for financial and operational decision making and to evaluate period-to-period differences in our performance. Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP net income, Adjusted EBITDA and free cash flow are non-GAAP financial measures, which we believe are useful for investors in evaluating our overall financial performance. We believe thatthese measures provide useful information about operating results, enhance the useoverall understanding of past financial performance and future prospects and allow for greater transparency with respect to key performance indicators used by management in its financial and operational decision making. See below for a reconciliation of each of the non-GAAP financial measures described below.
Non-GAAP Gross Profit and Non-GAAP Gross Margin
GAAP defines gross profit as revenue less cost of revenue. Cost of revenue includes all expenses associated with our various service offerings as more fully described under the caption “Key Components of Statements of Operations-Cost of Revenue and Gross Margin.” We define Non-GAAP gross profit as gross profit after adding back the following items:
•depreciation and amortization;
•amortization of acquired intangible assets related to acquisitions; and
•stock-based compensation
We calculate Non-GAAP gross margin by dividing Non-GAAP gross profit by revenue less pass-through messaging surcharges, expressed as a percentage of revenue.
In our calculation of Non-GAAP gross profit and Non-GAAP gross margin, we eliminate the impact of depreciation and amortization, amortization of acquired intangible assets related to acquisitions, stock-based compensation, pass-through messaging surcharges, and all non-cash items, because we do not consider them indicative of our platform by active CPaaS customer accounts at or above the $100 per month threshold is a stronger indicatorcore operating performance. The exclusion of potential future engagement than trial usagethese items facilitates comparisons of our platform at levels below $100 per month. A single organization may constitute multiple unique active CPaaS customer accounts if it has multiple unique account identifiers, each of which is treated asoperating performance on a separate active CPaaS customer account. Customers who pay after usingperiod-to-period basis. Management uses Non-GAAP gross profit and Non-GAAP gross margin to evaluate operating performance and to determine resource allocation among our platformvarious service offerings. We believe Non-GAAP gross profit and customers that have credit balances are includedNon-GAAP gross margin provide useful information to investors and others to understand and evaluate our operating results in the numbersame manner as our management and board of active CPaaS customer accounts. Customers fromdirectors and allows for better comparison of financial results among our Other segment are excludedcompetitors. Non-GAAP gross profit and Non-GAAP gross margin may not be comparable to similarly titled measures of other companies because other companies may not calculate Non-GAAP gross profit and Non-GAAP gross margin or similarly titled measures in the numbersame manner we do.
InManagement’s Discussion and Analysis
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | (In thousands) |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Gross Profit | | | | | $ | 238,353 | | | $ | 213,813 | | | $ | 153,910 | |
| Gross Profit Margin % | | | | | 42 | % | | 44 | % | | 45 | % |
| Depreciation | | | | | 13,602 | | | 12,606 | | | 9,997 | |
| Amortization of acquired intangible assets | | | | | 7,657 | | | 8,543 | | | 1,445 | |
| Stock-based compensation | | | | | 404 | | | 364 | | | 306 | |
| Non-GAAP Gross Profit | | | | | $ | 260,016 | | | $ | 235,326 | | | $ | 165,658 | |
Non-GAAP Gross Margin % (1) | | | | | 55 | % | | 52 | % | | 50 | % |
________________________
(1) Calculated by dividing Non-GAAP gross profit by revenue less pass-through messaging surcharges of$99 million, $41 million, and $11 million in the years ended December 31, 2015, 20162022, 2021 and 20172020, respectively.
Non-GAAP Net Income
We define Non-GAAP net income as net income or loss adjusted for certain items affecting period-to-period comparability. Non-GAAP net income excludes:
•stock-based compensation;
•amortization of acquired intangible assets related to acquisitions;
•amortization of debt discount and issuance costs for convertible debt;
•acquisition related expenses;
•impairment charges of intangibles assets, revenue from active CPaaS customer accounts represented approximately 99%if any;
•net cost associated with early lease terminations and leases without economic benefit;
•(gain) loss on sale of total CPaaS revenue.business;
•net (gain) loss on extinguishment of debt;
•non-recurring items not indicative of ongoing operations and other; and
•estimated tax impact of above adjustments, net of valuation allowances
We calculate Non-GAAP basic and diluted shares by adding the weighted average of outstanding Series A redeemable convertible preferred stock, if any, to the weighted average number of outstanding basic and diluted shares, respectively. The tax-effect of Non-GAAP adjustments is determined by recalculating the tax provision on a Non-GAAP basis. When we have a valuation allowance recorded and no tax benefits will be recognized, the rate is considered to be zero.
We believe Non-GAAP net income is a meaningful measure because by removing certain non-cash and other expenses, we are able to evaluate our operating results in a manner we believe is more indicative of the current period’s performance. We believe the use of Non-GAAP net income may be helpful to investors because it provides consistency and comparability with past financial performance, facilitates period-to-period comparisons of results of operations and assists in comparisons with other companies, many of which may use similar Non-GAAP financial information to supplement their GAAP results. As a result of the adoption of ASU No. 2020-06 on January 1, 2022, we add back cash interest expense on the Convertible Notes, as if converted at the beginning of the period, if the impact is dilutive for the purposes of calculating diluted Non-GAAP net income or loss per Non-GAAP share.
Management'sManagement’s Discussion and Analysis
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | (In thousands, except share and per share amounts) |
| Net income (loss) | | | | | $ | 19,570 | | | $ | (27,362) | | | $ | (43,977) | |
| Stock-based compensation | | | | | 20,655 | | | 14,537 | | | 9,881 | |
| | | | | | | | | |
| Amortization of acquired intangibles | | | | | 17,180 | | | 19,119 | | | 3,666 | |
| Amortization of debt discount and issuance costs for convertible debt | | | | | 2,977 | | | 26,672 | | | 15,565 | |
| | | | | | | | | |
| Acquisition-related expenses | | | | | — | | | — | | | 14,458 | |
| Gain on sale of business | | | | | (3,777) | | | — | | | — | |
| Net gain on extinguishment of debt | | | | | (40,205) | | | — | | | — | |
Non-recurring items not indicative of ongoing operations and other (1) | | | | | 1,992 | | | 832 | | | 334 | |
Estimated tax effects of adjustments (2) | | | | | (3,396) | | | (8,087) | | | 14,266 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Non-GAAP net income | | | | | $ | 14,996 | | | $ | 25,711 | | | $ | 14,193 | |
Interest expense on Convertible Notes (3) | | | | | 1,666 | | | — | | | — | |
| Numerator used to compute Non-GAAP diluted net income per share | | | | | $ | 16,662 | | | $ | 25,711 | | | $ | 14,193 | |
| | | | | | | | | |
| Net income (loss) per share | | | | | | | | | |
| Basic | | | | | $ | 0.77 | | | $ | (1.09) | | | $ | (1.83) | |
| Diluted | | | | | $ | (0.48) | | | $ | (1.09) | | | $ | (1.83) | |
| | | | | | | | | |
| Non-GAAP net income per Non-GAAP share | | | | | | | | | |
| Basic | | | | | $ | 0.59 | | | $ | 1.02 | | | $ | 0.59 | |
| Diluted | | | | | $ | 0.54 | | | $ | 0.97 | | | $ | 0.55 | |
| | | | | | | | | |
| Weighted average number of shares outstanding | | | | | | | | | |
| Basic | | | | | 25,282,796 | | | 25,090,916 | | | 24,092,574 | |
| Diluted | | | | | 30,907,869 | | | 25,090,916 | | | 24,092,574 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Non-GAAP basic shares | | | | | 25,282,796 | | | 25,090,916 | | | 24,092,574 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Convertible debt conversion | | | | | 5,625,073 | | | 987,149 | | | 1,022,941 | |
| Stock options issued and outstanding | | | | | 100,088 | | | 180,318 | | | 443,738 | |
| Nonvested RSUs outstanding | | | | | — | | | 197,538 | | | 352,854 | |
| Non-GAAP diluted shares | | | | | 31,007,957 | | | 26,455,921 | | | 25,912,107 | |
________________________(1) Non-recurring items not indicative of ongoing operations and other include $0.9 million of foreign currency losses on the settlement of intercompany borrowings, which were repatriated in conjunction with the repurchase of a portion of the 2026 Convertible Notes and $0.6 million of nonrecurring litigation expense for the year ended December 31, 2022, and $0.5 million, $0.8 million, and $0.3 million of losses on disposals of property, plant and equipment during the years ended December 31, 2022, 2021 and 2020, respectively.
Management’s Discussion and Analysis
(2) The estimated tax-effect of adjustments is determined by recalculating the tax provision on a Non-GAAP basis. The Non-GAAP effective income tax rate was 7.0%, 14.2%, and 5.0% for the years ended December 31, 2022, 2021 and 2020, respectively. For the year ended December 31, 2022, the Non-GAAP effective income tax rate differed from the federal statutory tax rate of 21% in the U.S. primarily due to research and development tax credits generated in 2022. For the years ended December 31, 2021 and 2020, these effective income tax rates differ from the federal statutory tax rate of 21% in the U.S. primarily due to the valuation allowance recognized against federal and state deferred tax assets in the U.S. We analyze the Non-GAAP valuation allowance position on a quarterly basis. In the fourth quarter of 2022, we removed the valuation allowance against all U.S. deferred tax assets for Non-GAAP purposes as a result of cumulative Non-GAAP U.S. income over the past three years and a significant depletion of net operating loss and tax credit carryforwards on a Non-GAAP basis. As of December 31, 2022, we have no valuation allowance against our remaining deferred tax assets for Non-GAAP purposes.
(3) Upon the adoption of ASU 2020-06, net income is increased for interest expense as part of the calculation for diluted Non-GAAP earnings per share. See Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details on the adoption of ASU 2020-06.
Adjusted EBITDA
We define Adjusted EBITDA as net income or losses from continuing operations, adjusted to reflect the addition or elimination of certain income statement items including, but not limited to:
•income tax (benefit) provision;
•interest (income) expense, net;
•depreciation and amortization expense;
•acquisition related expenses;
•stock-based compensation expense;
•impairment of intangible assets, if any;
•(gain) loss on sale of business;
•net cost associated with early lease terminations and leases without economic benefit;
•net (gain) loss on extinguishment of debt; and
•non-recurring items not indicative of ongoing operations and other
Management’s Discussion and Analysis
Adjusted EBITDA is a key measure used by management to understand and evaluate our core operating performance and trends, to generate future operating plans and to make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis.
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | (In thousands) |
| Net income (loss) | | | | | $ | 19,570 | | | $ | (27,362) | | | $ | (43,977) | |
| Income tax (benefit) provision | | | | | (2,264) | | | (3,833) | | | 15,005 | |
| Interest expense, net | | | | | 3,048 | | | 28,784 | | | 13,672 | |
| Depreciation | | | | | 18,419 | | | 17,523 | | | 13,137 | |
| Amortization | | | | | 17,180 | | | 19,119 | | | 3,666 | |
| Acquisition-related expenses | | | | | — | | | — | | | 14,458 | |
| Stock-based compensation | | | | | 20,655 | | | 14,537 | | | 9,881 | |
| | | | | | | | | |
| Gain on sale of business | | | | | (3,777) | | | — | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| Net gain on extinguishment of debt | | | | | (40,205) | | | — | | | — | |
Non-recurring items not indicative of ongoing operations and other (1) | | | | | 1,992 | | | 832 | | | 334 | |
| Adjusted EBITDA | | | | | $ | 34,618 | | | $ | 49,600 | | | $ | 26,176 | |
________________________(1) Non-recurring items not indicative of ongoing operations and other include $0.9 million of foreign currency losses on the settlement of intercompany borrowings, which were repatriated in conjunction with the repurchase of a portion of the 2026 Convertible Notes and $0.6 million of nonrecurring litigation expense for the year ended December 31, 2022, and $0.5 million, $0.8 million, and $0.3 million of losses on disposals of property, plant and equipment during the years ended December 31, 2022, 2021 and 2020, respectively.
Dollar-Based Net Retention Rate
Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with our existing customers that generate CPaaS revenue and seek to increase their use of our platform. We track our performance in this area by measuring the dollar-based net retention rate for our customers who generate CPaaS revenue. Our dollar-based net retention rate compares the CPaaS revenue from customers in a quarter to the same quarter in the prior year. To calculate the dollar-based net retention rate, we first identify the cohort of customers that generate CPaaS revenue and that were customers in the same quarter of the prior year. The dollar-based net retention rate is obtained by dividing the CPaaS revenue generated from that cohort in a quarter, by the CPaaS revenue generated from that same cohort in the corresponding quarter in the prior year. When we calculateThe dollar-based net retention rate for periods longer than onereported in a quarter we useis then obtained by averaging the averageresult from that quarter, by the corresponding results from each of the quarterly dollar-based net retention rates forprior three quarters. Customers of acquired businesses are included in the quarters in such period.
subsequent year’s calendar quarter of acquisition. Our dollar-based net retention rate increases when such customers increase usage of a product, extend usage of a product to new applications or adopt a new product. Our dollar-based net retention rate decreases when such customers cease or reduce usage of a product or when we lower prices on our solutions.
As our customers grow their businessbusinesses and extend the useincrease usage of our platform, they sometimes create multiple customer accounts with us for operational or other reasons. As such, when we identify a significant customer organization (defined as a single customer organization generating more than 1% of CPaaS revenue in a quarterly reporting period) that has created a new CPaaS customer, this new customer is tied to, and CPaaS revenue from this new customer is included with, the original CPaaS customer for the purposes of calculating this metric. For comparative purposes, the dollar-based net retention rate presented in the table above has been updated to reflect the change in our reporting segments.
Key Components of Statements of Operations
Revenue
We generate a majority of our revenue from our CPaaS segment. CPaaS revenueRevenue is derived from (i) reoccurring sources such as per minute voice usage and voice calling, per text message usage and other usage services and fees, (ii) monthly recurring charges arising from phone number services, 911-enabled phone number services, messaging services and other services. We generate a portion of our CPaaSservices, and (iii) other various communications services and products, indirect revenue from usage-based fees which include voice calling and messaging services. surcharge revenue.
For the years ended December 31, 2015, 20162022, 2021 and 2017,2020, we generated 55%78%, 56%75%, and 58% of our CPaaS revenue,74%, respectively, from usage-based fees. We also earn monthly fees from services such as phone number services and 911 access service. For the years ended December 31, 2015, 2016 and 2017, we generated 42%, 41% and 40% of our CPaaS revenue in each period from monthly per unit fees.
The remainder of our revenue from reoccurring sources. The large bulk of our remaining revenue is generated by our Other segment. Other revenue is composed of revenue earned from our legacy services and indirect revenue. Other revenue as a percentage of total revenue is expected to continue to decline over time.recurring monthly charges.
We recognize accounts receivable at the time the customer is invoiced. Additionally, we record a receivable and revenue for unbilled revenue if the services have been delivered and are billable in subsequent periods. Unbilled revenue made up 47%45%, 44%52%, and 41%50% of outstanding accounts receivable, net of allowance for doubtful accounts, as of December 31, 2015, 20162022, 2021 and 2017,2020, respectively.
Management's Discussion and Analysis
Cost of Revenue and Gross Margin
CPaaS costCost of revenue consists primarily of fees paid to other network service providers, from whomnetwork operations costs, personnel costs, allocated costs of facilities and information technology, amortization of acquired technology intangibles and depreciation.
Fees paid to other network service providers arise when we buypurchase services such as minutes of use, phone numbers, messages, porting of customer numbers and network circuits. Cost of revenue also contains
Network operations costs related to support of our IP voice network,are incurred for web services and cloud infrastructure, capacity planning and management, rent for network facilities, software licenses, hardware and software maintenance fees, customer support and network engineering services. network-related facility rents.
Management’s Discussion and Analysis
Personnel costs (including non-cash stock-based compensation expenses) associated with personnelarise for employees who are responsible for the delivery of services operationand the operations and maintenance of ourthe communications network, and customer support as well as, third-party support agreements and depreciation of network equipment, amortization of internally developed software and gain (loss) on disposal of property and equipment are also included in cost of revenue.
Other cost of revenue consists of costs supporting non-CPaaS services including leased circuit costs paid to third party providers, internet connectivity expenses, minutes of use, direct operations, contractors, regulatory fees, surcharges and other pass-through costs and software and hardware maintenance fees.network.
Gross margin is calculated by subtracting cost of revenue from revenue, divided by total revenue, expressed as a percentage. Our cost of revenue and gross margin have been, and will continue to be, affected by several factors, including the timing and extent of our investments in our network, our ability to manage off-network minutes of use and messaging costs, changes to the mix or amount of personnel-related costs included in our cost of revenue, the product mix of revenue, the timing of amortization of capitalized software development costs and fluctuations in the extent to whichprice we periodically choose to pass on any cost savings tocharge our customers in the form of lower usage prices.for services.
Operating Expenses
The most significant components of operating expenses are personnel costs, which consist of salaries, benefits, bonuses, and stock-based compensation expenses. We also incur other non-personnel costs related to our general overhead expenses, including facility expenses, software licenses, web services, depreciation and amortization of assets unrelated to delivery of our services. We expect that our operating expenses will increase in absolute dollars.dollars driven by the growth in our business.
Research and Development
R&Desearch and development expenses consist primarily of salaries and related personnel costs (including non-cash stock-based compensation expenses), outsourcedfor the design, development, testing and enhancement of our cloud network and software development and engineering service and cloud infrastructure fees for stagingproducts. Research and development expenses include depreciation and allocated costs of outsourced engineering services. We capitalize the portion offacilities and information technology utilized by our softwareresearch and development costs in instances where we invest resources to develop software for internal use. We plan to continue to invest in R&D to enhance current product offerings and develop new services.staff.
Sales and Marketing
SalesSales and marketing expenses consist primarily of salaries and related personnel costs, including commissions, for our sales employees and non-cash stock-based compensation expenses. Sales and marketing expenses also include expenditurescosts related to advertising, marketing, our brand awareness activities, sales support and professional services fees.
Management's Discussionacquired customer relationship intangible assets, and Analysis
We focusallocated costs of facilities and information technology utilized by our sales and marketing efforts on creating sales leads and establishing and promoting our brand. We plan to continue to invest in sales and marketing in order to expand our CPaaS customer base by growing headcount, driving our go-to-market strategies, building brand awareness, advertising and sponsoring additional marketing events.staff.
General and Administrative
General and administrative expenses consist primarily of salaries and related personnel costs including stock-based compensation, for our accounting, finance, legal, human resources, corporate, and other administrative support personnel and executives.compliance functions. General and administrative expenses also include costs related to product management and reporting, customer billing and collection functions, information services,depreciation, expenditures for third party professional services, fees, credit card processing fees, rent associated withand allocated costs of facilities and information technology utilized by our headquarters in Raleigh, North Carolinacorporate and our other offices, and depreciation and amortization. We expect that we will incur increased costs associated with supporting the growth of our business and to meet the increased compliance requirements associated with our transition to, and operation as, a public company.administrative staff.
Income Taxes
For the years ended December 31, 2015, 20162022, 2021 and 2017,2020 our effective tax rate was 5.5%(13.1)%, (77.4)%12.3% and 53.7%(51.8)%, respectively. The increasedecrease in our effective tax rate is primarily due to the releasesplit of earnings and losses between jurisdictions. In 2022 we were in a pre-tax loss position in jurisdictions without valuation allowances and as such, recognized income tax benefit. However, as a result of income recognized in connection with our debt buy-back, we recognized pre-tax income in the U.S. The income resulted in nominal tax expense in the U.S. due to the utilization of tax attributes and the valuation allowance againstposition.
Judgment is required in determining whether deferred tax assets will be realized in full or in part. Management assesses the fourth quarteravailable positive and negative evidence on a jurisdictional basis to estimate if deferred tax assets will be recognized and when it is more likely than not that all or some deferred tax assets will not be realized, and a valuation allowance must be established. As of 2016December 31, 2022, we continue to maintain a valuation allowance for our U.S. federal and the enactment of the Tax Cuts and Jobs Act (the “Act”) in the fourth quarter of 2017.
state net deferred tax assets.
Management'sManagement’s Discussion and Analysis
Results of Operations
Consolidated Results of Operations
The following table sets forth the consolidated statements of operations for the periods indicated.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| | (In thousands) |
| Revenue: | | | | | |
| CPaaS revenue | $ | 101,502 |
| | $ | 117,078 |
| | $ | 131,572 |
|
| Other revenue | 36,299 |
| | 35,057 |
| | 31,383 |
|
| Total revenue | 137,801 |
| | 152,135 |
| | 162,955 |
|
| Cost of revenue: | | | | | |
| CPaaS cost of revenue | 64,760 |
| | 71,218 |
| | 75,859 |
|
| Other cost of revenue | 14,482 |
| | 14,000 |
| | 13,403 |
|
| Total cost of revenue | 79,242 |
| | 85,218 |
| | 89,262 |
|
| Gross profit: | | | | | |
| CPaaS | 36,742 |
| | 45,860 |
| | 55,713 |
|
| Other | 21,817 |
| | 21,057 |
| | 17,980 |
|
| Total gross profit | 58,559 |
| | 66,917 |
| | 73,693 |
|
| Operating expenses: | | | | | |
| Research and development | 7,375 |
| | 8,520 |
| | 10,789 |
|
| Sales and marketing | 8,620 |
| | 9,294 |
| | 11,218 |
|
| General and administrative | 34,602 |
| | 33,859 |
| | 37,069 |
|
| Total operating expenses | 50,597 |
| | 51,673 |
| | 59,076 |
|
| Operating income | 7,962 |
| | 15,244 |
| | 14,617 |
|
| Other expense: | | | | | |
| Interest expense, net | (589 | ) | | (908 | ) | | (1,728 | ) |
| Income from continuing operations before income taxes | 7,373 |
| | 14,336 |
| | 12,889 |
|
| Income tax (provision) benefit | (408 | ) | | 11,094 |
| | (6,918 | ) |
| Income from continuing operations | 6,965 |
| | 25,430 |
| | 5,971 |
|
| Loss from discontinued operations, net of income taxes | (13,665 | ) | | (3,072 | ) | | — |
|
| Net (loss) income | $ | (6,700 | ) | | $ | 22,358 |
| | $ | 5,971 |
|
Management's Discussion and Analysis
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | |
| | | | | | (In thousands) |
| Revenue | | | | | $ | 573,152 | | | $ | 490,907 | | | $ | 343,113 | |
| Cost of revenue | | | | | 334,799 | | | 277,094 | | | 189,203 | |
| Gross profit | | | | | 238,353 | | | 213,813 | | | 153,910 | |
| Operating expenses: | | | | | | | | | |
| Research and development | | | | | 97,990 | | | 69,505 | | | 54,555 | |
| Sales and marketing | | | | | 96,658 | | | 82,333 | | | 61,216 | |
| General and administrative | | | | | 68,029 | | | 64,212 | | | 51,644 | |
| Total operating expenses | | | | | 262,677 | | | 216,050 | | | 167,415 | |
| Operating loss | | | | | (24,324) | | | (2,237) | | | (13,505) | |
| Other income (expense), net: | | | | | | | | | |
| Net gain on extinguishment of debt | | | | | 40,205 | | | — | | | — | |
| Interest expense, net | | | | | (3,048) | | | (28,784) | | | (13,672) | |
| Other income (expense), net | | | | | 4,473 | | | (174) | | | (1,795) | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total other income (expense), net | | | | | 41,630 | | | (28,958) | | | (15,467) | |
| Income (loss) before income taxes | | | | | 17,306 | | | (31,195) | | | (28,972) | |
| Income tax benefit (provision) | | | | | 2,264 | | | 3,833 | | | (15,005) | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income (loss) | | | | | $ | 19,570 | | | $ | (27,362) | | | $ | (43,977) | |
The following table sets forth our results of operations as a percentage of our total revenue for the periods presented. *
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Revenue: | | | | | |
| CPaaS revenue | 74 | % | | 77 | % | | 81 | % |
| Other revenue | 26 | % | | 23 | % | | 19 | % |
| Total revenue | 100 | % | | 100 | % | | 100 | % |
| Cost of revenue: | | | | | |
| CPaaS cost of revenue | 47 | % | | 47 | % | | 47 | % |
| Other cost of revenue | 11 | % | | 9 | % | | 8 | % |
| Total cost of revenue | 58 | % | | 56 | % | | 55 | % |
| Gross profit: | | | | | |
| CPaaS | 27 | % | | 30 | % | | 34 | % |
| Other | 16 | % | | 14 | % | | 11 | % |
| Total gross profit | 42 | % | | 44 | % | | 45 | % |
| Operating expenses: | | | | | |
| Research and development | 5 | % | | 6 | % | | 7 | % |
| Sales and marketing | 6 | % | | 6 | % | | 7 | % |
| General and administrative | 25 | % | | 22 | % | | 23 | % |
| Total operating expenses | 36 | % | | 34 | % | | 37 | % |
| Operating income | 6 | % | | 10 | % | | 9 | % |
| Other expense: | | | | | |
| Interest expense, net | — | % | | (1 | )% | | (1 | )% |
| Income from continuing operations before income taxes | 5 | % | | 9 | % | | 8 | % |
| Income tax (provision) benefit | — | % | | 7 | % | | (4 | )% |
| Income from continuing operations | 5 | % | | 17 | % | | 4 | % |
| Loss from discontinued operations, net of income taxes | (10 | )% | | (2 | )% | | — | % |
| Net (loss) income | (5 | )% | | 15 | % | | 4 | % |
____________________ | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
| Revenue | | | | | 100 | % | | 100 | % | | 100 | % |
| Cost of revenue | | | | | 58 | % | | 56 | % | | 55 | % |
| Gross profit | | | | | 42 | % | | 44 | % | | 45 | % |
| Operating expenses: | | | | | | | | | |
| Research and development | | | | | 17 | % | | 14 | % | | 16 | % |
| Sales and marketing | | | | | 17 | % | | 17 | % | | 18 | % |
| General and administrative | | | | | 12 | % | | 13 | % | | 15 | % |
| Total operating expenses | | | | | 46 | % | | 44 | % | | 49 | % |
| Operating loss | | | | | (4) | % | | — | % | | (4) | % |
| Other income (expense), net: | | | | | | | | | |
| Net gain on extinguishment of debt | | | | | 7 | % | | — | % | | — | % |
| Interest expense, net | | | | | (1) | % | | (6) | % | | (4) | % |
| Other income (expense), net | | | | | 1 | % | | — | % | | (1) | % |
| | | | | | | | | | |
| | | | | | | | | | |
| Total other income (expense), net | | | | | 7 | % | | (6) | % | | (5) | % |
| Income (loss) before income taxes | | | | | 3 | % | | (6) | % | | (8) | % |
| Income tax benefit (provision) | | | | | — | % | | 1 | % | | (4) | % |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income (loss) | | | | | 3 | % | | (5) | % | | (13) | % |
(*) Columns may not foot due to rounding.
Management'sManagement’s Discussion and Analysis
Comparison of the Years Ended December 31, 20162022 and 20172021
Revenue | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| | | | | | |
| 2022 | | 2021 | | Change |
| | | | | | | |
| (Dollars in thousands) |
| Revenue | $ | 573,152 | | | $ | 490,907 | | | $ | 82,245 | | | 17 | % |
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2016 | | 2017 | | Change |
| | (In thousands) | | | | |
| CPaaS revenue | $ | 117,078 |
| | $ | 131,572 |
| | $ | 14,494 |
| | 12 | % |
| Other revenue | 35,057 |
| | 31,383 |
| | (3,674 | ) | | (10 | )% |
| Total revenue | $ | 152,135 |
| | $ | 162,955 |
| | $ | 10,820 |
| | 7 | % |
In 2017,2022, our total revenue increased by $10.8$82 million, or 7%17%, compared to 2016, and CPaaS revenue increased by $14.5 million, or 12%. As a percentagewith the same period in 2021. This growth was the result of total revenue, CPaaS revenue increased from 77% to 81% from 2016 to 2017. The increase in CPaaS revenue was primarily attributable to an increase in thehigher usage of all our servicecore messaging offering and additional A2P pass-through messaging surcharges imposed by certain carriers. Growth in our revenue other than from pass-through messaging surcharges, compared with the same period in 2021, was led by our core messaging offerings, particularly our voicewhich grew 46%, and messaging usage, which accounted for $21.4 million of the increase in CPaaS revenue, and our phone number services and 911-enabled phone number services, which accounted for $4.1 million of the increase in CPaaS revenue. This overall increase in CPaaS revenue was partiallymostly offset by $11.1 million relatedlower revenue from voice offerings. The growth in our core messaging offering was aided by higher messaging volumes from certain customers leading up to pricing decreases that we have implemented over timethe U.S. midterm elections in November 2022. Compared with the same period last year, our customersvoice offerings revenue in the form of2022 remained affected by lower usage pricesarising from the 2021 DDoS incident as well as the absence of revenue from businesses divested earlier in 2022.
Active customer accounts increased 3% to increase the reach and scale3,405 as of our platform. The changes in usage and price in 2017 were reflected in ourDecember 31, 2022, as compared with 3,300 active accounts as of December 31, 2021. Our dollar-based net retention rate of 107%. The increase in usage was also attributable to a 21% increase in the number of active CPaaS customer accounts, from 798 as of December 31, 2016 to 965 as of December 31, 20172022 was 112%. In addition, revenue from new CPaaS customers contributed $5.7 million, or 5%, to CPaaS revenue for 2017 compared to $4.2 million, or 4% to CPaaS revenue in 2016. Other revenue decreased by $3.7 million, or 10%, due to expected declines in our legacy services of $3.1 million and a decrease in indirect revenue of $0.6 million.
Cost of Revenue and Gross Margin
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| | | | | | |
| 2022 | | 2021 | | Change |
| | | | | | | |
| (Dollars in thousands) |
| Cost of revenue | $ | 334,799 | | | $ | 277,094 | | | $ | 57,705 | | | 21 | % |
| Gross profit | $ | 238,353 | | | $ | 213,813 | | | $ | 24,540 | | | 11 | % |
| Total gross margin | 42 | % | | 44 | % | | | | |
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2016 | | 2017 | | Change |
| | (In thousands) | | | | |
| Cost of revenue: | | | | | | | |
| CPaaS cost of revenue | $ | 71,218 |
| | $ | 75,859 |
| | $ | 4,641 |
| | 7 | % |
| Other cost of revenue | 14,000 |
| | 13,403 |
| | (597 | ) | | (4 | )% |
| Total cost of revenue | 85,218 |
| | 89,262 |
| | 4,044 |
| | 5 | % |
| Gross profit | $ | 66,917 |
| | $ | 73,693 |
| | $ | 6,776 |
| | 10 | % |
| Gross margin: | | | | | | | |
| CPaaS | 39 | % | | 42 | % | | | | |
| Other | 60 | % | | 57 | % | | | | |
| Total gross margin | 44 | % | | 45 | % | | | | |
Management's Discussion and Analysis
In 2017, 2022, total gross profit increased by $6.8 million, or 10%, compared to 2016. Total gross margin increased from 44% to 45% during the same period. In 2017, CPaaS cost of revenue increased $58 million, compared with the same period in 2021, driven by $4.6 million, or 7% compared 2016. CPaaShigher pass-through messaging surcharges of $56 million. In 2022, the combination of changes in total revenue and total cost of revenue increased primarily due toyielded an increase in voice usage coststotal gross profit of $1.9$25 million, due to growth in minutes used by customers, partially offset by a decrease in the cost per minute from vendors. Cost of phone numbers increased by $0.8 million due to an increase in phone numbers used by customers. Cost of messaging increased by $0.6 million due to an increase in number of messages used by customers and a slight increase in the cost per message. Additional increases were due to network costs and 911 services which increased $1.0 million and $0.2 million respectively. In 2017, CPaaS gross margin increased from 39% to 42%or 11%, compared to 2016. Excluding depreciation and stock-based compensation of $4.6 million and $4.4 million for 2016 and 2017, respectively, CPaaS Non-GAAP gross margin would have been 43% and 46% for 2016 and 2017, respectively, and total Non-GAAP gross margin would have been 47% and 48% forwith the same periods.
Otherperiod in 2021, driven by profit improvements from the combination of our revenue and cost of revenue decreased by $0.6 million, which was due to a $1.3 million decreasederived other than from pass-through messaging surcharges.
Our total gross margin percentage of 42% in 2022 declined two percentage points, compared with the same period in 2021, as a result of churn in legacy services, partiallyoperating and product mix improvements were more than offset by a $0.7 million increase in costthe inclusion of indirect revenue related to an increase in costhigher pass-through messaging surcharges within total revenue.
Management’s Discussion and toll-free number registration fees.Analysis
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| | | | | | |
| 2022 | | 2021 | | Change |
| | | | | | | |
| (Dollars in thousands) |
| Research and development | $ | 97,990 | | | $ | 69,505 | | | $ | 28,485 | | | 41 | % |
| Sales and marketing | 96,658 | | | 82,333 | | | 14,325 | | | 17 | % |
| General and administrative | 68,029 | | | 64,212 | | | 3,817 | | | 6 | % |
| Total operating expenses | $ | 262,677 | | | $ | 216,050 | | | $ | 46,627 | | | 22 | % |
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2016 | | 2017 | | Change |
| | (In thousands) | | | | |
| Research and development | $ | 8,520 |
| | $ | 10,789 |
| | $ | 2,269 |
| | 27 | % |
| Sales and marketing | 9,294 |
| | 11,218 |
| | 1,924 |
| | 21 | % |
| General and administrative | 33,859 |
| | 37,069 |
| | 3,210 |
| | 9 | % |
| Total operating expenses | $ | 51,673 |
| | $ | 59,076 |
| | $ | 7,403 |
| | 14 | % |
In 2017, Research2022, research and development expenses increased by $2.3approximately $28 million, or 27%41%, compared to 2016.with the same period in 2021. This increase was primarily due to increased personnel costs from greater numbers of $2.2 millionemployed staff of $22 million. The increase in headcount also contributed to higher allocated facilities and professional feesIT expenses of $0.1$7 million.
In 2017,2022, sales and marketing expenses increased by $1.9$14 million, or 21%17%, compared to 2016with the same period in 2021, primarily due to an overall increase in sales personnel costs from a greater number of $1.9employed staff of $13 million.
GeneralIn 2022, general and administrative expenses increased by $3.2$4 million, or 6%, compared with the same period in 2017, or 9%, compared to 2016. This increase was2021, primarily due to increases of $1.2 million in facilities expenses, $1.0 million for hosted software costs, $0.4 million for professional expenses, partially offset by a $0.9 million decrease in depreciation and amortization expenses. Anan increase in personnel costcosts of $1.5$5 million also contributed the the overall general and administrative expenses..
Interest Expense, Net
In 2017,2022, interest expense, increasednet of interest income, decreased by $0.8$26 million compared to 2016,with the same period in 2021, due to an increased balance outstanding of our credit facility that we entered into a $24 million decrease in November 2016. The balanceinterest expense primarily related to the impact of the credit facility was paid offadoption of ASU 2020-06 on the Convertible Notes. See Note 8, “Debt,” to the consolidated financial statements included elsewhere in full in November 2017 with proceeds from the initial public offering.this Annual Report on Form 10-K for additional details.
Management'sManagement’s Discussion and Analysis
Income Tax ExpenseBenefit
In 2017,For the year ended December 31, 2022, we recognized an income tax expense increased by $18.0benefit of $2 million, a decrease of $2 million compared to 2016with the same period in 2021. The resulting effective tax rate for 2017the year ended December 31, 2022 was 53.7%(13.1)% compared with 12.3% in 2021. For the year ended December 31, 2022, the favorable change to (77.4)% in 2016. During 2016the effective tax rate was primarily due to the split of earnings and losses between jurisdictions. In 2022, we hadwere in a fullpre-tax loss position in jurisdictions without valuation allowances and as such, recognized income tax benefit. However, as a result of income recognized in connection with our debt buy-back, we recognized pre-tax income in the U.S. This income resulted in nominal income tax expense in the U.S. due to the utilization of tax attributes and the valuation allowance position. For the years ended December 31, 2022 and 2021, the effective tax rates of (13.1)% and 12.3%, respectively, differed from the federal statutory rate of 21% in the U.S. primarily due to the valuation allowance recognized against ourfederal and state deferred tax assets. Theassets in the U.S.
Most of the permanent tax adjustments within our effective tax rate are offset by a valuation allowance. These adjustments include state taxes, federal research tax credits under Internal Revenue Code Section 41, equity compensation in the U.S. and other non-deductible expenditures in the U.S. Excluding the impact of the valuation allowance, was releasedwe realize an estimated state effective tax rate of 4.3%. In addition, exclusive of the valuation allowance, we continue to generate income tax benefits in December 2016 subsequentthe current period related to income tax credits recognized for qualified research activities in the U.S. The applicable federal tax law and regulations define qualified research activities as research and development activities conducted in the U.S. that involve a process of experimentation designed to discover new information intended to develop a new or improved business component. Absent the valuation allowance, equity compensation also impacts the effective tax rate to the Spin-Off.
On December 22, 2017,extent the Tax Cuts and Jobs Act (the “Act”) was enacted into law. The income tax effectsdeduction exceeds or is below the related book expense, as required under ASC 718-740-35-2. Other U.S. non-deductible expenses that are offset by the valuation allowance consist primarily of non-deductible executive compensation under Internal Revenue Code 162(m).
Permanent tax adjustments within our effective tax rate that are not offset by the valuation allowance included minimum state taxes, foreign tax benefits and foreign rate differentials. As we continue to scale our international business, any changes into foreign business activity may impact our effective tax laws are recognizedrate in the period when enacted. Among its numerousfuture.
We continue to expect recurring changes to the Internal Revenue Code, the Act reduces U.S. corporate rates from 35% to 21% for periods beginning on or after January 1, 2018. We have incurred additional income tax expense of $2,073 due to the re-measurement of ourvaluation allowance as deferred tax assets atwithin the lower corporate tax rate. AdditionalU.S. increase or decrease in subsequent periods. We will maintain a valuation allowance against all U.S. federal and state interpretive guidance is still forthcoming that could potentially affect the measurement of these balances or give rise to new deferred tax amounts. As such,assets until it becomes more likely than not that the re-measurementbenefit of our federal and state deferred tax balance is provisional pending future guidance.
As a result of changes made by the Act, starting with compensation paid in 2018, Section 162(m)assets will limit us from deducting compensation, including performance-based compensation, in excess of $1 million paid to anyone who serves as the Chief Executive Officer, Chief Financial Officer, or who is among the three highest compensated executive officers. The only exception to this rule is for compensation that is paid pursuant to a binding contract in effect as of November 2, 2017 that would have otherwise been deductible under the prior Section 162(m) rules. Accordingly, any compensation paid in the future pursuant to new compensation arrangements entered into after November 2, 2017, even if performance-based, will count towards the $1 million fiscal year deduction limit if paid to a covered executive. Because many different factors influence a well-rounded, comprehensive executive compensation program, some of the compensation we provide to our executive officers may not be deductible under Code Section 162(m) if our Compensation Committee believes it will contribute to the achievement of our business objectives.
Loss from Discontinued Operations, Net of Income Tax
In 2017, loss from discontinued operations decreased by $3.1 million compared to 2016. The Spin-Off of Republic took place on November 30, 2016.realized.
Comparison of the Years Ended December 31, 20152021 and 20162020
Revenue | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| | | | | | |
| 2021 | | 2020 | | Change |
| | | | | | | |
| (Dollars in thousands) |
| Revenue | $ | 490,907 | | | $ | 343,113 | | | $ | 147,794 | | | 43 | % |
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | |
| | 2015 | | 2016 | | Change |
| | (In thousands) | | | | |
| CPaaS revenue | $ | 101,502 |
| | $ | 117,078 |
| | $ | 15,576 |
| | 15 | % |
| Other revenue | 36,299 |
| | 35,057 |
| | (1,242 | ) | | (3 | )% |
| Total revenue | $ | 137,801 |
| | $ | 152,135 |
| | $ | 14,334 |
| | 10 | % |
In 2016,2021, our total revenue increased by $14.3$148 million, or 10%43%, compared to 2015. CPaaSwith the same period in 2020. This growth was led by increases in our core voice, messaging and related surcharges, and phone number services of $71 million, $41 million, and $26 million, respectively. This growth was aided by a full year of revenue increasedcontribution from the acquisition of Voxbone in November 2020. We believe our revenue results were lowered by $15.6approximately $10.0 million or 15% comparedin 2021 from lost transaction volume and customer credits due to the prior year. As a percentage of total revenue, CPaaS revenue increased from 74% to 77% year over year. The increase in CPaaS revenue was primarily attributable to an increase in the usage of all our products, particularly our voice and messaging services, and the adoption of additional services by our existing CPaaS customers. This increase was partially offset by pricing decreases that we have implemented over time with our customers in the form of lower usage prices to increase the reach and scale of our platform, as well as in exchange for contract renewals for certain key customers. The changes in usage and price for the year ended December 31, 2016 were reflected in our dollar-based netpreviously disclosed 2021 DDoS Attack.
Management'sManagement’s Discussion and Analysis
retention rate of 111%. The increase in usage was also attributable to a 13% increase in the number of active CPaaS customer accounts, from 704 as of December 31, 2015 to 798 as of December 31, 2016. Other revenue decreased by $1.2 million, or 3%, due to declines in our legacy services of $4.2 million, partially offset by a $3.0 million increase in indirect revenue related to new messaging and toll-free number registration fees.
Cost of Revenue and Gross Margin
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| | | | | | |
| 2021 | | 2020 | | Change |
| | | | | | | |
| (Dollars in thousands) |
| Cost of revenue | $ | 277,094 | | | $ | 189,203 | | | $ | 87,891 | | | 46 | % |
| Gross profit | $ | 213,813 | | | $ | 153,910 | | | $ | 59,903 | | | 39 | % |
| Total gross margin | 44 | % | | 45 | % | | | | |
|
| | | | | | | | | | | | | | |
| | Years ended December 31, | | | | |
| | 2015 | | 2016 | | Change |
| | (In thousands) | | | | |
| Cost of revenue: | | | | | | | |
| CPaaS cost of revenue | $ | 64,760 |
| | $ | 71,218 |
| | $ | 6,458 |
| | 10 | % |
| Other cost of revenue | 14,482 |
| | 14,000 |
| | (482 | ) | | (3 | )% |
| Total cost of revenue | $ | 79,242 |
| | $ | 85,218 |
| | $ | 5,976 |
| | 8 | % |
| Gross profit | $ | 58,559 |
| | $ | 66,917 |
| | $ | 8,358 |
| | 14 | % |
| Gross margin: | | | | | | | |
| CPaaS | 36% | | 39% | | | | |
| Other | 60% | | 60% | | | | |
| Total gross margin % | 42% | | 44% | | | | |
Total gross profit increased by $8.4 million in 2016 as compared to 2015 andIn 2021, total gross margin increased from 42% to 44% from 2015 to 2016. CPaaS cost of revenue increased $88 million, compared with the same period in 2020. This growth was driven by $6.5higher cost of revenue in our messaging business and related surcharges, network related costs, and core voice of $33 million, or 10%,$24 million, and $23 million, respectively. This growth was aided by a full year of cost of revenue contribution from the acquisition of Voxbone in 2016. All CPaaS services sawNovember 2020.
In 2021, the combination of changes in total revenue and total cost of revenue yielded an increase in costtotal gross profit of $60 million, or 39%, compared with the same period in 2020, driven by higher revenue and improved operating leverage. For the year ended December 31, 2021, total gross margin was 44.0% compared with 45.0% for the year ended December 31, 2020 and was impacted by higher pass-through messaging surcharges within total revenue.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | |
| | | | | | |
| 2021 | | 2020 | | Change |
| | | | | | | |
| (Dollars in thousands) |
| Research and development | $ | 69,505 | | | $ | 54,555 | | | $ | 14,950 | | | 27 | % |
| Sales and marketing | 82,333 | | | 61,216 | | | 21,117 | | | 34 | % |
| General and administrative | 64,212 | | | 51,644 | | | 12,568 | | | 24 | % |
| Total operating expenses | $ | 216,050 | | | $ | 167,415 | | | $ | 48,635 | | | 29 | % |
As a percentage of revenue, buttotal operating expenses for the overallyears ended December 31, 2021 and 2020, were 44% and 49%, respectively.
In 2021, research and development expenses increased by approximately $15 million, or 27%, compared with the same period in 2020. This increase was largelyprimarily due to increased personnel costs from greater numbers of employed staff of $10 million, which was driven by the cost for minutesacquisition of use, which increased by $3.4 million due to growthVoxbone in minutes used by customers, partially offset by a slight decrease in the cost per minute. Network costs increased by $2.0 million and cost of messaging increased by $0.5 million. Cost of phone numbers increased by $0.4 million due to an increase in phone numbers used by customers, partially offset by decreased cost per phone number. 911 costs remained constant due to an increase in 911-enabled phone numbers used by customers, partially offset by decreased cost per record. CPaaS gross margin increased from 36% in 2015 to 39% in 2016. Excluding depreciation and stock-based compensation of $5.3 million and $4.6 million for 2015 and2016, respectively, CPaaS Non-GAAP gross margin would have been 41% and 43% for 2015 and 2016, respectively, and total Non-GAAP gross margin would have been 46% and 47% for the same periods.November 2020.
Cost of Other revenue decreased by $0.5 million, or 3%, which was due to a $2.1 million decrease as a result of churn in legacy services, partially offset by a $1.6 million increase in cost of indirect revenue from 2015 to 2016 related to new required messaging and toll-free number registration fees. Total gross margin was affected by churn and a reduction in indirect margins.
Operating Expenses
|
| | | | | | | | | | | | | | |
| | Years ended December 31, | | | | |
| | 2015 | | 2016 | | Change |
| | (In thousands) | | | | |
| Research and development | $ | 7,375 |
| | $ | 8,520 |
| | $ | 1,145 |
| | 16 | % |
| Sales and marketing | 8,620 |
| | 9,294 |
| | 674 |
| | 8 | % |
| General and administrative | 34,602 |
| | 33,859 |
| | (743 | ) | | (2 | )% |
| Total operating expenses | $ | 50,597 |
| | $ | 51,673 |
| | $ | 1,076 |
| | 2 | % |
Management's Discussion and Analysis
In 2016, R&D expenses increased by $1.1 million, or 16%2021, compared to 2015. This increase was due primarily to increases in hosting software costs and increased headcount.
In 2016, sales and marketing expenses increased by $0.7$21 million, or 8%34%, compared to 2015 due to an overallwith the same period in 2020, driven by the increase in sales headcount.personnel costs from a greater number of employed staff of $8 million from the acquisition of Voxbone in November 2020.
GeneralIn 2021, general and administrative expenses decreasedincreased by $0.7approximately $13 million, or 24%, compared with the same period in 2016, or 2%2020, compared to 2015 mostly due to a decreasemainly from higher headcount costs of $14 million, driven by the acquisition of Voxbone in stock-based compensation expenses. This decrease was partially offset by increases in headcount, increases from gains on fixed asset disposals, increases in consulting fees and increased rent.November 2020.
Interest Expense, Net
In 2016,2021, interest expense, net of interest income increased by $0.3$15 million compared to 2015with the same period in 2020, due to increased borrowings on our credit facility that we entered intoa $12 million increase in November 2016.interest expense related to the Convertible Notes and a $2 million decrease in interest income from the investment of follow-on equity offering proceeds. See Note 8, “Debt,” to the consolidated financial statements, for additional details.
Income Tax ExpenseBenefit (Provision)
Management’s Discussion and Analysis
In 2016,2021, income tax expense decreased by $11.5$19 million compared to 2015 primarily due towith the $14.1 million release of the valuation allowancesame period in 2016 subsequent to the Republic Wireless Spin-Off.2020. The effective tax rate for 2016 was (77.4)% compared to 5.5% for 2015.
Loss from Discontinued Operations, Net of Income Tax
In 2016, loss from discontinued operations decreased by $10.6 million compared to 2015 due to the Republic Wireless Spin-Off in December 2016.
Quarterly Results of Operations
The following tables set forth our unaudited quarterly statements of operations data for each of the eight quartersyear ended December 31, 2017.2021, was 12.3% compared with (51.8)% in the same period in 2020. The informationincrease in our effective tax rate is primarily due to a change in the valuation allowance related to certain deferred tax assets.
Liquidity and Capital Resources
Our liquidity is provided by our cash flow from operations less expenditures for each quarter has been preparedcapital equipment, and supplemented by financing activities from time to time. Our cash flow from operations is driven by monthly payments from customers for communication services consumed during the period. Our primary uses of cash include operating costs, such as fees paid to other network service providers, network operations costs, personnel costs and facility expenses, as well as the purchase of property plant and equipment to support growth on our communications platform and the purchase of land for our new corporate headquarters.
On June 6, 2022, we entered into a basis consistentcredit agreement (the “Credit Agreement”) among us, as borrower, the lenders from time to time party thereto, and Silicon Valley Bank as administrative agent, issuing lender and swingline lender. The Credit Agreement provides for a $50 million revolving credit facility (the “Credit Facility”), including a $20 million sublimit for the issuance of letters of credit and a swingline subfacility of up to $5 million. The Credit Facility matures on June 6, 2025. As of December 31, 2022, there were no borrowings under the Credit Facility.
Additionally, in the last three years we have supplemented our liquidity with proceeds from our auditedissuance of the 2026 Convertible Notes and the 2028 Convertible Notes in February 2020 and March 2021, respectively. We used a majority of the proceeds from the issuance of our 2026 Convertible Notes to consummate the acquisition of Voxbone. On November 2, 2022, we repurchased $160 million of our 2026 Convertible Notes as further described in Note 8, “Debt,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K,10-K. We may, at any time and reflect,from time to time, seek to retire or purchase our 2026 Notes or 2028 Notes through cash purchases and/or exchanges for equity or debt, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair presentation of the financial information contained in those statements. Our historical results are not necessarily indicative of the results thatopen-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be expected in the future. The following quarterly financial data should be read in conjunction with our audited consolidated financial statements included in this Annual Report on Form 10-K.material.
Management's Discussion and Analysis
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, 2016 | | June 30, 2016 | | September 30, 2016 | | December 31, 2016 | | March 31, 2017 | | June 30, 2017 | | September 30, 2017 | | December 31, 2017 |
| Revenue: | | | | | | | | | | | | | | | |
| CPaaS revenue | $ | 27,735 |
| | $ | 28,916 |
| | $ | 30,249 |
| | $ | 30,178 |
| | $ | 31,647 |
| | $ | 31,547 |
| | $ | 33,397 |
| | $ | 34,981 |
|
| Other revenue | 9,204 |
| | 8,914 |
| | 8,354 |
| | 8,585 |
| | 7,978 |
| | 7,979 |
| | 7,941 |
| | 7,485 |
|
| Total revenue | 36,939 |
| | 37,830 |
| | 38,603 |
| | 38,763 |
| | 39,625 |
| | 39,526 |
| | 41,338 |
| | 42,466 |
|
| | | | | | | | | | | | | | | | |
| Cost of revenue: | | | | | | | | | | | | | | | |
| CPaaS cost of revenue | 17,220 |
| | 18,159 |
| | 18,197 |
| | 17,642 |
| | 18,228 |
| | 18,919 |
| | 19,247 |
| | 19,465 |
|
| Other cost of revenue | 3,792 |
| | 3,491 |
| | 3,317 |
| | 3,400 |
| | 3,338 |
| | 3,375 |
| | 3,324 |
| | 3,366 |
|
| Total cost of revenue | 21,012 |
| | 21,650 |
| | 21,514 |
| | 21,042 |
| | 21,566 |
| | 22,294 |
| | 22,571 |
| | 22,831 |
|
| | | | | | | | | | | | | | | | |
| Gross profit | 15,927 |
| | 16,180 |
| | 17,089 |
| | 17,721 |
| | 18,059 |
| | 17,232 |
| | 18,767 |
| | 19,635 |
|
| | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | |
| Research and development | 1,854 |
| | 1,913 |
| | 2,390 |
| | 2,363 |
| | 2,682 |
| | 2,409 |
| | 2,771 |
| | 2,927 |
|
| Sales and marketing | 2,189 |
| | 2,269 |
| | 2,418 |
| | 2,418 |
| | 2,558 |
| | 2,413 |
| | 3,128 |
| | 3,119 |
|
| General and administrative | 7,455 |
| | 8,217 |
| | 7,898 |
| | 10,289 |
| | 7,637 |
| | 8,257 |
| | 9,797 |
| | 11,378 |
|
| Total operating expenses | 11,498 |
| | 12,399 |
| | 12,706 |
| | 15,070 |
| | 12,877 |
| | 13,079 |
| | 15,696 |
| | 17,424 |
|
| | | | | | | | | | | | | | | | |
| Operating income | 4,429 |
| | 3,781 |
| | 4,383 |
| | 2,651 |
| | 5,182 |
| | 4,153 |
| | 3,071 |
| | 2,211 |
|
| | | | | | | | | | | | | | | | |
| Other (expense) income: | | | | | | | | | | | | | | | |
| Interest expense, net | (184 | ) | | (185 | ) | | (229 | ) | | (310 | ) | | (421 | ) | | (438 | ) | | (402 | ) | | (467 | ) |
| Change in fair value of stockholders’ anti-dilutive arrangement | — |
| | — |
| | — |
| | — |
| | — |
| | (553 | ) | | (136 | ) | | 689 |
|
| Total other (expense) income | (184 | ) | | (185 | ) | | (229 | ) | | (310 | ) | | (421 | ) | | (991 | ) | | (538 | ) | | 222 |
|
| | | | | | | | | | | | | | | | |
| Income from continuing operations before income taxes | 4,245 |
| | 3,596 |
| | 4,154 |
| | 2,341 |
| | 4,761 |
| | 3,162 |
| | 2,533 |
| | 2,433 |
|
| Income tax (provision) benefit | (182 | ) | | (87 | ) | | (137 | ) | | 11,500 |
| | (1,772 | ) | | (1,215 | ) | | (899 | ) | | (3,032 | ) |
| Income (loss) from continuing operations | 4,063 |
| | 3,509 |
| | 4,017 |
| | 13,841 |
| | 2,989 |
| | 1,947 |
| | 1,634 |
| | (599 | ) |
| (Loss) income from discontinued operations, net of income taxes | (1,028 | ) | | (1,983 | ) | | (728 | ) | | 667 |
| | — |
| | — |
| | — |
| | — |
|
| Net income (loss) | $ | 3,035 |
| | $ | 1,526 |
| | $ | 3,289 |
| | $ | 14,508 |
| | $ | 2,989 |
| | $ | 1,947 |
| | $ | 1,634 |
| | $ | (599 | ) |
| Total comprehensive income (loss), net of income tax | $ | 3,035 |
| | $ | 1,526 |
| | $ | 3,289 |
| | $ | 14,508 |
| | $ | 2,989 |
| | $ | 1,947 |
| | $ | 1,634 |
| | $ | (599 | ) |
| | | | | | | | | | | | | | | | |
| Net income (loss) per share: | | | | | | | | | | | | | | | |
| Basic | $ | 0.23 |
| | $ | 0.11 |
| | $ | 0.25 |
| | $ | 1.07 |
| | $ | 0.22 |
| | $ | 0.14 |
| | $ | 0.12 |
| | $ | (0.04 | ) |
| Diluted | $ | 0.21 |
| | $ | 0.10 |
| | $ | 0.22 |
| | $ | 0.97 |
| | $ | 0.20 |
| | $ | 0.13 |
| | $ | 0.11 |
| | $ | (0.04 | ) |
Management's Discussion and Analysis
Liquidity and Capital Resources
To date, our principal sources of liquidity have been the proceeds of $74.4 million, net of underwriting discounts and commissions, from our initial public offering in November 2017, in addition to free cash flow driven by payments received from customers using our services, as well as borrowings under our senior secured credit facility. We believe that our cash and cash equivalents balances our credit facility and the cash flows generated by our operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, our belief may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section titled “Risk Factors.” We may be required to seek additional equity or debt financing in order to meet these future capital requirements. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected.
Our principal future commitments consist of (i) an aggregate of $490 million in Convertible Notes (see Note 8, “Debt” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for a discussion of the 2026 Convertible Notes and the 2028 Convertible Notes), (ii) a $496 million non-cancelable lease for our future office headquarters, which is anticipated to commence in mid-2023 and continue for an initial twenty (20) year term (the “Headquarters Lease”) (see Note 5, “Right-of-Use Asset and Lease Liabilities” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of our Headquarters Lease), (iii) $12 million in non-cancelable purchase obligations and future minimum payments under contracts to various service providers, and (iv) $17 million in future minimum rent payments for our current office space. See Note 12, “Commitments and Contingencies,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for future lease commitments.
Management’s Discussion and Analysis
Statement of Cash Flows
The following table summarizes our cash flows from continuing operations for the periods indicated:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| | (In thousands) |
| Net cash provided by operating activities from continuing operations | $ | 18,651 |
| | $ | 16,942 |
| | $ | 14,623 |
|
| Net cash used in investing activities from continuing operations | (5,102 | ) | | (6,061 | ) | | (7,963 | ) |
| Net cash provided by (used in) financing activities from continuing operations | 11,038 |
| | (1,053 | ) | | 24,179 |
|
| Net increase in cash and cash equivalents from continuing operations | $ | 24,587 |
| | $ | 9,828 |
| | $ | 30,839 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, | |
| | | | | | 2022 | | 2021 | | 2020 | |
| | | | | | | | | | | |
| | | | | | (In thousands) | | | |
| Net cash provided by operating activities | | | | | | $ | 34,906 | | | $ | 40,803 | | | $ | 4,518 | | |
| Net cash (used in) provided by investing activities | | | | | | (133,449) | | | 2,833 | | | (455,085) | | |
| Net cash (used in) provided by financing activities | | | | | | (120,005) | | | 207,027 | | | 346,891 | | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | | | | 881 | | | 189 | | | 109 | | |
| Net (decrease) increase in cash, cash equivalents, and restricted cash | | | | | | $ | (217,667) | | | $ | 250,852 | | | $ | (103,567) | | |
Cash Flows from Operating Activities
In 2017,2022, net cash provided by operating activities from continuing operations was $14.6$35 million which primarily consistedand was generated by our aggregate results of $40 million during the period, net income of $6.0 million,non-cash items comprising depreciation and amortization, non-cash reduction to the right-of-use asset, amortization of $5.7debt discount and issuance costs, stock-based compensation, deferred tax expense and other and net gain on extinguishment of debt and a $14 million cash inflow from increased operating liabilities, partially offset by a net cash outflow from operating assets aggregating $19 million. The net gain on extinguishment of debt was a result of the repurchase of $160 million aggregate principal amount of the 2026 Convertible Notes. Within operating liabilities, the net cash provided as a result of higher accounts payable of $17 million during 2022 was primarily related to the timing and amounts of purchases of both services and tangible goods and their related payment arrangements. The cash provided as a result of higher accrued expenses and other liabilities of $3 million during 2022 primarily related to higher accruals for lease incentives and higher advanced billings.This was partially offset by a cash outflow related to the operating right-of-use liability of $8 million. Within operating assets, cash used as a result of higher accounts receivable of $13 million during 2022 was driven by higher unbilled receivables balances of $2 million arising from higher usage amounts in the last month of 2022 and $11 million from timing of collection of invoiced amounts. The cash used as a result of higher prepaid expenses and other assets of $6 million during 2022 was driven byhigher VAT receivables and the timing of advance payments for software and other services.
In 2021, net cash provided by operating activities was $41 million consisting of net loss of $27 million adjusted for non-cash items of $76 million and offset by cash used by changes in operating assets and liabilities of $8 million. Cash used in operating assets and liabilities included an increase in accounts receivable of $7 million, a decrease in operating right-of-use liability of $6 million, and an increase in prepaid expenses and other assets of $7 million. Offsetting these cash use items in assets and liabilities was an increase in accrued expenses and other liabilities of $10 million, and an increase in accounts payable of $2 million. The non-cash items included depreciation and amortization expense of $37 million, amortization of debt discount and issuance costs of $0.4$27 million, stock-based compensation expensesexpense of $1.8$15 million, deferred taxesright-of-use asset amortization of $6.2$6 million, and loss on disposal of property, plant and equipment of $0.1$1 million, partially offset by a decrease in working capitaldeferred tax benefit of $5.5 million. Working capital consisted primarily of increases in accounts receivable of $4.4$8 million prepaid expenses of $1.6 million, deferred costs of $0.9 million and $2.4 million in accounts payable offset by decreases in accrued expenses of $1.3 million and deferred revenue of $2.6 million..
In 2016,2020, net cash provided by operating activities from continuing operations was $16.9$5 million which primarily consistedconsisting of net income from continuing operations of $22.4 million that includes $3.1 million net loss by discontinued operations, depreciation and amortization of $6.1 million, amortization of debt issuance costs of $0.1 million, $1.4 million of stock-based compensation expenses and impairment of intangible assets of $0.7 million partially offset by a decrease in deferred taxes of $11.1 million and working capital of $5.7 million. Working capital consisted primarily of increases in accounts receivable of $4.0 million, prepaid expenses of $0.8 million, deferred costs of $1.0 million and accrued expenses of $0.6 million, offset by increases in accounts payable of $0.2 million and deferred revenue of $0.5 million.
In 2015, cash provided by operating activities from continuing operations was $18.7 million due to net loss of $6.7$44 million that includes $13.7 adjusted for non-cash items of $62 million net loss and offset by discontinued operations, depreciationcash used changes in operating assets and amortizationliabilities of $7.1$13 million $3.5 million of stock-based compensation expenses, loss on disposal of property. Cash generated in operating assets and equipment of $0.4 million, deferred taxes of $0.3 million andliabilities included an increase in working capital of $0.4 million. Working capital consisted of a decrease in deferred costs of $2.9 million, an increase in accounts payable of $1.0 million and a decrease in accrued expenses and other liabilities of $14 million. Offsetting these cash generating items in assets and liabilities were an increase in accounts receivable of $2.5$19 million, a decrease in operating right-of-use liability of $5 million, and increasesan increase in prepaid expenses and other assets of $0.6$4 million. The non-cash items included depreciation and accounts receivableamortization expense of $0.5 million.
$17
Management'sManagement’s Discussion and Analysis
Asmillion, amortization of December 31, 2017, we had an ongoing disputedebt discount and litigation with MCI Communications Services, Inc. d/b/a Verizon Business and Verizon Select Services, Inc. (collectively, “Verizon”), which is a carrier access billing (“CABS”) customer. Billings to Verizon were approximately $10.3issuance costs of $16 million, deferred tax expense of $14 million, stock-based compensation expenses of $10 million, and $9.6 million for the years ended December 31, 2016 and 2017, respectively. We recognize revenue for this customer only to the extent to which payments have been made. These outstanding amounts represent disputed and unpaid billings and were fully reserved within our allowance for doubtful accounts. We had not recognized revenue related to the outstanding and disputed balances. Only if and when we reached an agreement with Verizon to settle the outstanding and disputed billings which resulted in a payment for any or all amounts outstanding, would we recognize any revenue. Recognitionright-of-use amortization of revenue as a result of a settlement of disputed balances would result in an increase in cash flows from operating activities for the relevant period. On January 29, 2018, we entered into a settlement with Verizon (for further information see Note 17, "Subsequent Events," to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K).$5 million.
Cash Flows from Investing Activities
In 2017,2022, net cash used in investing activities was $133 million. Cash used in investing activities included the purchase of marketable securities of $180 million partially offset by proceeds from continuing operations was $8.0 million fromthe sales and maturities of marketable securities of $109 million. Cash used for deposits for construction in progress and the purchase of property, plant and equipment, primarily for our Raleigh, NC headquarters, was $60 million.
In 2021, net cash provided by investing activities was $3 million. Cash provided by investing activities included proceeds from sales and maturities of other investments of $40 million, proceeds from the sale of land of $17 million, offset by the purchase of land of $30 million, purchase of property, plant and equipment of $21 millionand capitalized internally developed software costs.costs of $4 million.
In 2016,2020, net cash used in investing activities was $455 million, mainly from continuing operationsthe costs related to the Voxbone acquisition of $400 million, net of cash. In addition, cash used in investing activities was $6.1the purchase of other investments of $231 million used to, the purchase of property, plant and equipment of $12 million and capitalized internally developed software costs.
In 2015, cash used in investing activitiescosts of $2 million, offset by the proceeds from continuing operations was $5.1 million used to purchase property, plantsales and equipment and capitalized internally developed software costs.maturities of other investments of $191 million.
Cash Flows from Financing Activities
In 2017,2022, net cash used in financing activities was $120 million, consisting primarily of $117 million net cash paid to repurchase $160 million aggregate principal amount of the 2026 Convertible Notes.
In 2021, net cash provided by financing activities from continuing operations was $24.2$207 million consisting primarily of $69.0 million from the net proceeds from the initial public offering, $0.2$250 million in proceeds from the issuancesissuance of common stock as a result of options exercised,the 2028 Convertible Notes and $0.1$1 million in proceeds from the exercise of warrants,stock options, partially offset by net repayments$26 million in the purchase of $5.0the 2028 Capped Calls, $8 million on our line of credit, $0.1 million in payments on capital leases, $40.0 million in payments on our term loan.
In 2016, cash used in financing activities from continuing operations was $1.1 million consisting primarily of $30.0 million in cash distributions to Republic Wireless, $0.6 million in payments of debt issuance costs,cost, $7 million in payment of holdback proceeds to former Voxbone shareholders, and $4 million in value of equity awards withheld for tax liabilities.
In 2020, net repaymentscash provided by financing activities was $347 million consisting primarily of $12.0 million on our line of credit, $0.1 million in payments on capital leases, offset by $40.0 million of borrowing on our term loan, $1.0$400 million in proceeds from the issuancesissuance of common stock as a result of options exercised,the 2026 Convertible Notes and $0.2$4 million in proceeds from the exercise of warrants.
In 2015, cash providedstock options, partially offset by financing activities from continuing operations was $11.0$43 million due to in the net $11.0 million in borrowings under our line of credit.
Debt
On November 4, 2016, we entered into a Credit and Security Agreement with a syndicate of four banks. The agreement includes a $40.0 million term loan and a $25.0 million revolving loan, which includes a swing line of up to $1.0 million and limits letters of credit commitments to a maximum of $2.5 million. Substantially all of our assets are pledged as security to the Credit and Security Agreement. The termpurchase of the Credit2026 Capped Calls, $12 million in payments of debt issuances cost, and Security Agreement is five years and matures on November 3, 2021. The interest rate used$2 million in value of equity awards withheld for the debt is based on our election to either apply the Federal Funds Effective Rate or LIBOR plus a stated margin, as defined in the Credit and Security Agreement. This agreement requires us to meet a certain leverage ratio and minimum debt service coverage ratio each quarter on a trailing 12-month basis.tax liabilities.
Management's Discussion and Analysis
On November 14, 2017, we paid in full the term loan with proceeds from our initial public offering. The revolving loan was paid in full on August 31, 2017. There is no loan balance outstanding as of December 31, 2017. We were in compliance with all financial covenants as of December 31, 2017. The availability under the Credit and Security Agreement was $25.0 million as of December 31, 2017.
Contractual Obligations and Other Commitments
The following table summarizes our noncancellable contractual obligations as of December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | |
| | Total | | Less Than 1 Year | | 1 to 2 Years | | 3 to 5 Years | | More than 5 years |
| As of December 31, 2017: | | | | | | | | | |
Operating leases(1) | $ | 17,060 |
| | $ | 3,631 |
| | $ | 7,538 |
| | $ | 5,890 |
| | $ | — |
|
| Capital leases | 92 |
| | 92 |
| | — |
| | — |
| | — |
|
Purchase obligations(2) | 5,249 |
| | 4,144 |
| | 1,083 |
| | 23 |
| | — |
|
| Total | $ | 22,401 |
| | $ | 7,867 |
| | $ | 8,621 |
| | $ | 5,913 |
| | $ | — |
|
________________________
(1) Operating leases represent total future minimum rent payments under non-cancellable operating lease agreements.
(2) Purchase obligations represent total future minimum payments under contracts to various service providers. Purchase obligations exclude agreements that are cancellable without penalty.
Off-Balance Sheet Arrangements
WeWith the acquisition of Voxbone, we have not entered into any off-balance sheet arrangementsagreements for short-term office leases in the amount of less than $1 million ending prior to December 31, 2023.
Management’s Discussion and Analysis
Non-GAAP Financial Measures
We use Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP net income, Adjusted EBITDA and free cash flow for financial and operational decision making and to evaluate period-to-period differences in our performance. Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP net income, Adjusted EBITDA and free cash flow are non-GAAP financial measures, which we believe are useful for investors in evaluating our overall financial performance. We believe these measures provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key performance indicators used by management in its financial and operational decision making. See below for a reconciliation of each of the non-GAAP financial measures described below.
Non-GAAP Gross Profit and Non-GAAP Gross Margin
GAAP defines gross profit as revenue less cost of revenue. Cost of revenue includes all expenses associated with our various service offerings as more fully described under the caption “Key Components of Statements of Operations-Cost of Revenue and Gross Margin.” We define Non-GAAP gross profit as gross profit after adding back the following items:
•depreciation and amortization;
•amortization of acquired intangible assets related to acquisitions; and
•stock-based compensation
We calculate Non-GAAP gross margin by dividing Non-GAAP gross profit by revenue less pass-through messaging surcharges, expressed as a percentage of revenue.
In our calculation of Non-GAAP gross profit and Non-GAAP gross margin, we eliminate the impact of depreciation and amortization, amortization of acquired intangible assets related to acquisitions, stock-based compensation, pass-through messaging surcharges, and all non-cash items, because we do not consider them indicative of our core operating performance. The exclusion of these items facilitates comparisons of our operating performance on a period-to-period basis. Management uses Non-GAAP gross profit and Non-GAAP gross margin to evaluate operating performance and to determine resource allocation among our various service offerings. We believe Non-GAAP gross profit and Non-GAAP gross margin provide useful information to investors and others to understand and evaluate our operating results in the same manner as our management and board of directors and allows for better comparison of financial results among our competitors. Non-GAAP gross profit and Non-GAAP gross margin may not be comparable to similarly titled measures of other companies because other companies may not calculate Non-GAAP gross profit and Non-GAAP gross margin or similarly titled measures in the same manner we do.
Management’s Discussion and Analysis
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | (In thousands) |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Gross Profit | | | | | $ | 238,353 | | | $ | 213,813 | | | $ | 153,910 | |
| Gross Profit Margin % | | | | | 42 | % | | 44 | % | | 45 | % |
| Depreciation | | | | | 13,602 | | | 12,606 | | | 9,997 | |
| Amortization of acquired intangible assets | | | | | 7,657 | | | 8,543 | | | 1,445 | |
| Stock-based compensation | | | | | 404 | | | 364 | | | 306 | |
| Non-GAAP Gross Profit | | | | | $ | 260,016 | | | $ | 235,326 | | | $ | 165,658 | |
Non-GAAP Gross Margin % (1) | | | | | 55 | % | | 52 | % | | 50 | % |
________________________
(1) Calculated by dividing Non-GAAP gross profit by revenue less pass-through messaging surcharges of$99 million, $41 million, and $11 million in the years ended December 31, 2022, 2021 and 2020, respectively.
Non-GAAP Net Income
We define Non-GAAP net income as net income or loss adjusted for certain items affecting period-to-period comparability. Non-GAAP net income excludes:
•stock-based compensation;
•amortization of acquired intangible assets related to acquisitions;
•amortization of debt discount and issuance costs for convertible debt;
•acquisition related expenses;
•impairment charges of intangibles assets, if any;
•net cost associated with early lease terminations and leases without economic benefit;
•(gain) loss on sale of business;
•net (gain) loss on extinguishment of debt;
•non-recurring items not indicative of ongoing operations and other; and
•estimated tax impact of above adjustments, net of valuation allowances
We calculate Non-GAAP basic and diluted shares by adding the weighted average of outstanding Series A redeemable convertible preferred stock, if any, to the weighted average number of outstanding basic and diluted shares, respectively. The tax-effect of Non-GAAP adjustments is determined by recalculating the tax provision on a Non-GAAP basis. When we have any holdingsa valuation allowance recorded and no tax benefits will be recognized, the rate is considered to be zero.
We believe Non-GAAP net income is a meaningful measure because by removing certain non-cash and other expenses, we are able to evaluate our operating results in variablea manner we believe is more indicative of the current period’s performance. We believe the use of Non-GAAP net income may be helpful to investors because it provides consistency and comparability with past financial performance, facilitates period-to-period comparisons of results of operations and assists in comparisons with other companies, many of which may use similar Non-GAAP financial information to supplement their GAAP results. As a result of the adoption of ASU No. 2020-06 on January 1, 2022, we add back cash interest entities.expense on the Convertible Notes, as if converted at the beginning of the period, if the impact is dilutive for the purposes of calculating diluted Non-GAAP net income or loss per Non-GAAP share.
Management’s Discussion and Analysis
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | (In thousands, except share and per share amounts) |
| Net income (loss) | | | | | $ | 19,570 | | | $ | (27,362) | | | $ | (43,977) | |
| Stock-based compensation | | | | | 20,655 | | | 14,537 | | | 9,881 | |
| | | | | | | | | |
| Amortization of acquired intangibles | | | | | 17,180 | | | 19,119 | | | 3,666 | |
| Amortization of debt discount and issuance costs for convertible debt | | | | | 2,977 | | | 26,672 | | | 15,565 | |
| | | | | | | | | |
| Acquisition-related expenses | | | | | — | | | — | | | 14,458 | |
| Gain on sale of business | | | | | (3,777) | | | — | | | — | |
| Net gain on extinguishment of debt | | | | | (40,205) | | | — | | | — | |
Non-recurring items not indicative of ongoing operations and other (1) | | | | | 1,992 | | | 832 | | | 334 | |
Estimated tax effects of adjustments (2) | | | | | (3,396) | | | (8,087) | | | 14,266 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Non-GAAP net income | | | | | $ | 14,996 | | | $ | 25,711 | | | $ | 14,193 | |
Interest expense on Convertible Notes (3) | | | | | 1,666 | | | — | | | — | |
| Numerator used to compute Non-GAAP diluted net income per share | | | | | $ | 16,662 | | | $ | 25,711 | | | $ | 14,193 | |
| | | | | | | | | |
| Net income (loss) per share | | | | | | | | | |
| Basic | | | | | $ | 0.77 | | | $ | (1.09) | | | $ | (1.83) | |
| Diluted | | | | | $ | (0.48) | | | $ | (1.09) | | | $ | (1.83) | |
| | | | | | | | | |
| Non-GAAP net income per Non-GAAP share | | | | | | | | | |
| Basic | | | | | $ | 0.59 | | | $ | 1.02 | | | $ | 0.59 | |
| Diluted | | | | | $ | 0.54 | | | $ | 0.97 | | | $ | 0.55 | |
| | | | | | | | | |
| Weighted average number of shares outstanding | | | | | | | | | |
| Basic | | | | | 25,282,796 | | | 25,090,916 | | | 24,092,574 | |
| Diluted | | | | | 30,907,869 | | | 25,090,916 | | | 24,092,574 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Non-GAAP basic shares | | | | | 25,282,796 | | | 25,090,916 | | | 24,092,574 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Convertible debt conversion | | | | | 5,625,073 | | | 987,149 | | | 1,022,941 | |
| Stock options issued and outstanding | | | | | 100,088 | | | 180,318 | | | 443,738 | |
| Nonvested RSUs outstanding | | | | | — | | | 197,538 | | | 352,854 | |
| Non-GAAP diluted shares | | | | | 31,007,957 | | | 26,455,921 | | | 25,912,107 | |
________________________(1) Non-recurring items not indicative of ongoing operations and other include $0.9 million of foreign currency losses on the settlement of intercompany borrowings, which were repatriated in conjunction with the repurchase of a portion of the 2026 Convertible Notes and $0.6 million of nonrecurring litigation expense for the year ended December 31, 2022, and $0.5 million, $0.8 million, and $0.3 million of losses on disposals of property, plant and equipment during the years ended December 31, 2022, 2021 and 2020, respectively.
Management’s Discussion and Analysis
(2) The estimated tax-effect of adjustments is determined by recalculating the tax provision on a Non-GAAP basis. The Non-GAAP effective income tax rate was 7.0%, 14.2%, and 5.0% for the years ended December 31, 2022, 2021 and 2020, respectively. For the year ended December 31, 2022, the Non-GAAP effective income tax rate differed from the federal statutory tax rate of 21% in the U.S. primarily due to research and development tax credits generated in 2022. For the years ended December 31, 2021 and 2020, these effective income tax rates differ from the federal statutory tax rate of 21% in the U.S. primarily due to the valuation allowance recognized against federal and state deferred tax assets in the U.S. We analyze the Non-GAAP valuation allowance position on a quarterly basis. In the fourth quarter of 2022, we removed the valuation allowance against all U.S. deferred tax assets for Non-GAAP purposes as a result of cumulative Non-GAAP U.S. income over the past three years and a significant depletion of net operating loss and tax credit carryforwards on a Non-GAAP basis. As of December 31, 2022, we have no valuation allowance against our remaining deferred tax assets for Non-GAAP purposes.
(3) Upon the adoption of ASU 2020-06, net income is increased for interest expense as part of the calculation for diluted Non-GAAP earnings per share. See Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details on the adoption of ASU 2020-06.
Adjusted EBITDA
We define Adjusted EBITDA as net income or losses from continuing operations, adjusted to reflect the addition or elimination of certain income statement items including, but not limited to:
•income tax (benefit) provision;
•interest (income) expense, net;
•depreciation and amortization expense;
•acquisition related expenses;
•stock-based compensation expense;
•impairment of intangible assets, if any;
•(gain) loss on sale of business;
•net cost associated with early lease terminations and leases without economic benefit;
•net (gain) loss on extinguishment of debt; and
•non-recurring items not indicative of ongoing operations and other
Management’s Discussion and Analysis
Adjusted EBITDA is a key measure used by management to understand and evaluate our core operating performance and trends, to generate future operating plans and to make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis.
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| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | (In thousands) |
| Net income (loss) | | | | | $ | 19,570 | | | $ | (27,362) | | | $ | (43,977) | |
| Income tax (benefit) provision | | | | | (2,264) | | | (3,833) | | | 15,005 | |
| Interest expense, net | | | | | 3,048 | | | 28,784 | | | 13,672 | |
| Depreciation | | | | | 18,419 | | | 17,523 | | | 13,137 | |
| Amortization | | | | | 17,180 | | | 19,119 | | | 3,666 | |
| Acquisition-related expenses | | | | | — | | | — | | | 14,458 | |
| Stock-based compensation | | | | | 20,655 | | | 14,537 | | | 9,881 | |
| | | | | | | | | |
| Gain on sale of business | | | | | (3,777) | | | — | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| Net gain on extinguishment of debt | | | | | (40,205) | | | — | | | — | |
Non-recurring items not indicative of ongoing operations and other (1) | | | | | 1,992 | | | 832 | | | 334 | |
| Adjusted EBITDA | | | | | $ | 34,618 | | | $ | 49,600 | | | $ | 26,176 | |
________________________(1) Non-recurring items not indicative of ongoing operations and other include $0.9 million of foreign currency losses on the settlement of intercompany borrowings, which were repatriated in conjunction with the repurchase of a portion of the 2026 Convertible Notes and $0.6 million of nonrecurring litigation expense for the year ended December 31, 2022, and $0.5 million, $0.8 million, and $0.3 million of losses on disposals of property, plant and equipment during the years ended December 31, 2022, 2021 and 2020, respectively.
Free Cash Flow
Free cash flow represents net cash provided by or used in operating activities less net cash used in the acquisition of property, plant and equipment and capitalized development costs of software for internal use. We believe free cash flow is a useful indicator of liquidity and provides information to management and investors about the amount of cash generated from our core operations that can be used to invest in our business. Free cash flow has certain limitations because it is subject to working capital timing, it does not represent the total increase or decrease in the cash balance for the period, it does not take into consideration investment in long-term securities, nor does it represent residual cash flows available for discretionary expenditures. Therefore, it is important to evaluate free cash flow along with our consolidated statements of cash flows.
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | (In thousands) |
| Net cash provided by operating activities | | | | | $ | 34,906 | | | $ | 40,803 | | | $ | 4,518 | |
Net cash used in investing in capital assets (1) (2) | | | | | (45,416) | | | (37,167) | | | (14,592) | |
| Free cash flow | | | | | $ | (10,510) | | | $ | 3,636 | | | $ | (10,074) | |
________________________(1) Represents the acquisition cost of property, plant and equipment and capitalized development costs for software for internal use.
(2) Includes the net cash used from the purchase of land of $(30.0) million offset by the proceeds from the sale of land of $17.5 million from investing activities of the statement of cash flows for the year ended December 31, 2021.
Management’s Discussion and Analysis
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, and expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions, and any such differences may be material.
We believe the accounting policies discussed below are critical to the process of making significant judgments and estimates in the preparation of our financial statements, and to understanding our historical and future performance.
Revenue Recognition and Deferred Revenue
We generate revenue primarily from the sale of communicationcommunications services to enterprise customers. We recognizeRevenue recognition commences upon transfer of control of promised goods or services to customers in an amount that we expect to receive in exchange for those goods or services.
The majority of our revenue when allis generated from usage-based fees earned from customers accessing our communications platform. Access to the communications platform is considered a series of distinct services, with continuous transfer of control to the following criteriacustomer, comprising one performance obligation. Usage-based fees are met (i) persuasive evidencerecognized in revenue in the period the traffic traverses our network.
Revenue from service-based fees, such as the provision and management of an arrangement exists; (ii) delivery has occurred; (iii)phone numbers and emergency services access, is recognized on a ratable basis as the feeservice is fixed or determinable; and (iv) collectionprovided, which is reasonably assured. If collection is not reasonably assured, we defer revenue recognition until collectability becomes reasonably assured. Our arrangements do not contain general rights of return. typically one month.
We generally enter into arrangements with customers that are typically 2 to 3 years in length. Incremental direct costs incurredlength with an auto-renewal feature. When required as part of providing service, revenues and associated expenses related to nonrefundable, upfront service activation and setup fees are deferred and recognized over the longer of the associated service contract period or estimated period of benefit.
Our arrangements do not contain general rights of return or provide customers with the right to take possession of the software supporting the applications. Amounts that have been invoiced are recorded in accounts receivable and in revenue or deferred revenue depending on whether the revenue recognition criteria have been met.
We maintain a reserve for sales credits. Credits are accounted for as variable consideration and are estimated based on several inputs including historical experience, contractual obligations and current trends of credit issuances. Adjustments to the reserve are recorded against revenue.
Business Combinations
We use the acquisition method of a customer contract are expensedaccounting for business combinations which requires the tangible and intangible assets acquired and liabilities assumed to be recorded at their respective fair market value as incurred.
Management's Discussion and Analysis
Stock-Based Compensation
Stock options awarded to employees, directors and non-employee third parties are measured at fair value on each grantthe acquisition date. Options subject to service-based vesting generally vest annuallyGoodwill represents the excess of the consideration transferred over a four-year period. The determination of the fair value of stock-based compensation arrangementsthe net assets acquired. The fair values of the assets acquired and liabilities assumed are determined based upon management's valuation and involves making significant estimates and assumptions based on facts and circumstances that existed as of the grantacquisition date. We use a measurement period following the acquisition date requires judgment. We recognize stock-based compensation expense usingto gather information that existed as of the Black-Scholes option-pricing model, net of estimated forfeitures, in orderacquisition date that is needed to determine the fair value of stock options, the output of whichassets acquired and liabilities assumed. The measurement period ends once all information is affected by a number of variables. These variables includeobtained, but no later than one year from the fair value of our common stock, expected term of the options, expected stock price volatility, risk-free interest rate and expected dividends, which are estimated as follows:
acquisition date.
Fair value of our common stock. The fair value of the shares of our common stock underlying stock options had historically been established by our board of directors with the assistance of an independent third-party valuation firm. Because there had been no public market for our common stock, our board of directors had relied on this independent valuation and other factors to establish the fair value of our common stock at the time of grant of the option. The determination of the fair value of our common stock is discussed further below.76
Expected term. The expected term was estimated using the simplified method allowed under SEC guidance as we do not have sufficient historical data to use any other method to estimate the expected term.
Expected volatility. The expected volatility is derived from an average of the historical volatilities of the common stock of several entities with characteristics similar to ours, such as the size, and operational and economic similarities to our principle business operations. We use this method because we have limited information on the volatility of our common stock.
Risk-free interest rate. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.
Expected dividends. The expected dividend is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock.
In addition to the assumptions used in the Black-Scholes option-pricing model, we must also determine a forfeiture rate to calculate the stock-based compensation for awards. Through December 31, 2017, we recognized compensation for only the portion of options expected to vest using an estimated forfeiture rate that was derived from historical employee termination behavior.
Determination of the Fair Value of Common Stock
Prior to our initial public offering, we had periodically determined for financial reporting purposes the estimated per share fair value of our common stock at various dates using contemporaneous valuations performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants Practice Aid, “Valuation of Privately-Held Company Equity Securities Issued as Compensation.” In conducting the contemporaneous valuations, we considered all objective and subjective factors that we believed to be relevant for each valuation conducted, including the following:
contemporaneous unrelated third-party valuations of our common stock;
the rights, preferences and privileges of our redeemable convertible preferred stock relative to those of our common stock;
our results of operations, financial position and capital resources;
current business conditions and projections;
Management'sManagement’s Discussion and Analysis
the lack of marketability of our common stock;
the hiring of key personnel and the experience of our management;
the introduction of new products;
the risk inherent in the development and expansion of our products;
the fact that the option grants involve illiquid securities in a private company;
the likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company, given the prevailing market conditions;
industry trends and competitive environment; and
overall economic indicators, including gross domestic product, employment, inflation and interest rates.
In valuing our common stock, we had historically determined the equity value of our Company using both the income and the market approach valuation methods:
The income approach estimates value based on the expectation of future cash flows that a company will generate. These future cash flows are discounted to their present values using a discount rate derived from an analysis of the cost of capital of comparable publicly traded companies in our industry as of each valuation date and is adjusted to reflect the risks inherent in our cash flows.
The market approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business. From the comparable companies, a representative market value multiple is determined and then applied to the subject. The estimated value for our common stock is then discounted by a non-marketability factor (discount for lack of marketability) due to the fact that stockholders of private companies do not have access to trading markets similar to those enjoyed by stockholders of public companies, which affects liquidity.
As a result of the determination to pursue strategic financing through an initial public offering, in June 2017, we began using the Probability-Weighted Expected Return Method (“PWERM”) in order to estimate the value of our common stock based on various outcomes. Using the PWERM, the value of our common stock was estimated based upon a probability-weighted analysis of varying values for our common stock assuming possible future events for the company, including an initial public offering and a stay private company scenario in which operations continued as a privately held company. Application of this approach involved the use of estimates, judgment and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses and future cash flows, discount rates, market multiples, the selection of comparable companies and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.
The dates of our contemporaneous valuations have not always coincided with the dates of our stock-based compensation grants. In such instances, management’s estimates have been based on the most recent contemporaneous valuation of our shares of common stock and our assessment of additional objective and subjective factors we believed were relevant as of the grant date. The additional factors considered when determining any changes in fair value between the most recent contemporaneous valuation and the grant dates included our stage of development, our operating and financial performance, current business conditions and the market performance of comparable publicly traded companies.
Management's Discussion and Analysis
Following our initial public offering, it was no longer necessary to determine the fair value of our Class A common stock using these valuation techniques as shares of our Class A common stock are traded on the the NASDAQ Global Select Market.
Goodwill and Intangible Assets
Goodwill
Goodwill represents the excess of the aggregate fair value of consideration transferred in a business combination, over the fair value of assets acquired, net of liabilities assumed. Goodwill is not amortized, but is subject to an annual impairment test. We test goodwill for impairment annually on December 31 of each calendar year or more frequently if events or changes in business circumstances indicate the asset might be impaired. Goodwill is tested for impairment at the reporting unit level. In evaluating the recoverability of goodwill, we perform a qualitative analysis to determine whether events and circumstances exist that indicate that it is more likely than not that goodwill is impaired. The qualitative factors we consider include but are not limited to, macroeconomic conditions, industry and market conditions, company-specific events and changes in circumstances. We completed our annual goodwill impairment analysis in each of the years ended December 31, 2015, 20162022, 2021 and 20172020 and no impairment charges were recorded. As of December 31, 20172022 goodwill was $6.9$326 million.
Long-Lived Assets
Long-lived assets, including intangible assets with definite lives, are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise.
We evaluate the recoverability of our long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of long-lived assets are measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. As of December 31, 2017,2022, intangible assets, net of accumulated amortization, were $7.6$177 million, which consists primarily of client relationships, client contracts and client contracts. As part of our annual evaluation of intangibles, we re-evaluated our marketing and trade name assets and concluded that there was no further benefit to a trade name acquired in the Dash acquisition. As a result, we impaired the intangible asset and recognized a loss of $0.7 million in 2016.developed technology. No indicators of impairment were identified for the years ended December 31, 20152022, 2021 and 2017.2020.
Internal-Use Software Development Costs
Internal-use software includes software that has been acquired, internally developed, or modified exclusively to meet the Company's needs. We capitalize qualifying internal-use software development costs that are incurred during the application development stage. Capitalization of costs begins when two criteria are met: (i) the preliminary project stage is completed and (ii) it is probable that the software will be completed and used for its intended function. Capitalization ceases when the software is substantially complete and ready for its intended use, including the completion of all significant testing. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality and expense costs incurred for maintenance and minor upgrades and enhancements. Costs related to preliminary project activities and post-implementation operating activities are expensed as incurred. As of December 31, 2022, software development costs, net of accumulated amortization, were $8 million.
Capitalized costs of platform and other software applications are included in property, plant and equipment. These costs are amortized over the estimated useful life of the software on a straight-line basis over three years, which is recorded in cost of revenue in the statement of operations. We evaluate the useful life of these
Management's Discussion and Analysis
assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that are included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which
Management’s Discussion and Analysis
the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We reduce the measurement of a deferred tax asset, if necessary, by a valuation allowance if it is more likely than not that we will not realize some or all the deferred tax asset. Quarterly, we review the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences, the implementation of prudent and feasible tax planning strategies, and results of recent operations. The evaluation of the recoverability of deferred tax assets requires judgment in assessing future profitability. Should there be a change in the ability to recover deferred tax assets, our income tax provision would increase or decrease in the period in which the assessment is changed.
We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon technical merits, it is more likely than not that the position will be sustained upon examination. The tax benefit recognized is measured as the largest amount of benefit determined on a cumulative probability basis that we believe is more likely than not to be realized upon ultimate settlement of the position. We recognize potential accrued interest and penalties associated with unrecognized tax positions in income tax expense.
Other Contingencies
We are subject to legal proceedings and litigation arising in the ordinary course of business. Periodically, we evaluate the status of each legal matter and assess our potential financial exposure. If the potential loss from any legal proceeding or litigation is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required to determineinvolved in the determination of the probability of a loss and whether the amount of the loss is reasonably estimable. The outcome of any proceeding is not determinable in advance. As a result, the assessment of a potential liability and the amount of any accruals recorded are based only on the information available to us at the time. As additional information becomes available, we reassess the potential liability related to the legal proceeding or litigation, and may revise our estimates. Any revisions could have a material effect on our results of operations.
We conduct operations in many tax jurisdictions throughout the United States.States and globally. In many of these jurisdictions, non-income-based taxes and fees, such as sales and use taxes, Value Added Taxes (“VAT”), telecommunications taxes, and regulatory fees including those associated with (or potentially associated with) VoIP telephony services or 911 services, are assessed or may be assessed on our operations. We are subject to indirect taxes, and may be subject to certain other taxes and surcharges in some of these jurisdictions. We generally bill and collect from our customers these taxes and surcharges. We record a liability for tax collected from customers but not yet paid to the appropriate jurisdiction. In addition, we record a provision for non-income based taxes and fees in jurisdictions where it is both probable that liability has been incurred and the amount of the exposure can be reasonably estimated. As a result, we have recorded a liability of $4.6 million, $2.8$8 million and $3.0$11 million as of December 31, 2015, 20162022 and 2017, respectively.2021, respectively, included in accrued expenses and other current liabilities. These estimates are based on several key assumptions, including the taxability of our services, the jurisdictions in which we believe we have nexus
Management's Discussion and Analysis
and the sourcing of revenue to those jurisdictions. In the event these jurisdictions challenge our assumptions and analysis, our actual exposure could differ materially from our current estimates.
Management's Discussion and Analysis
Recently Issued Accounting Guidance
See Note 2, "Summary“Summary of Significant Accounting Policies,"” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a summary of recently adopted accounting standards and recent accounting pronouncements not yet adopted.
JOBS Act Accounting Election
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).
Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
We also intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these exemptions for so long as we are an “emerging growth company.”
We will remain an emerging growth company until the earlier of (1) December 31, 2022 (the last day of the fiscal year following the fifth anniversary of our initial public offering), (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (3) the last day of the fiscal year in which we are deemed to be a “large accelerated filer,” as defined in the Exchange Act, and (4) the date on which we have issued more than $1.0 billion in nonconvertible debt during the prior three-year period. Any reference herein to “emerging growth company” has the meaning ascribed to it in the JOBS Act.
Management's Discussion and Analysis
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
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Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
We are exposed to certain market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and to a lesser extent, inflation.foreign currency exchange rates.
Interest Rate Risk
Our primary exposure to market risk relates to interest rate changes. We had cash and cash equivalents totaling $37.6of $114 million and marketable securities of $71 million as of December 31, 2017,2022, which were held for working capital purposes. Our cash and cash equivalents are comprised primarily of interest bearing checking and direct deposit accounts, and money market accounts. Marketable securities consist of corporate debt securities, U.S. treasury securities, and commercial paper not otherwise classified as cash equivalents.
Such interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in interest income have not been significant. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. Due to the short-termshort‑term nature of our investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. A hypothetical 10% change in interest rates would not have had a material impact on our financial results included elsewhere in this Annual Report on Form 10-K.
Our debt is comprised ofOn June 6, 2022, we entered into the Credit Agreement, which provides for a revolving line of credit account, which had no amount outstanding$50 million Credit Facility. Interest on borrowings accrues at an annual rate tied to a base rate or the Secured Overnight Financing Rate (“SOFR”), at our election. Loans based on SOFR bear interest at a rate equal to SOFR plus an applicable margin between 1.50% and 2.00% depending upon our consolidated adjusted quick ratio for the immediately preceding quarter and loans based on the base rate bear interest at a rate equal to the base rate plus an applicable margin between 0.50% and 1.00% depending upon our consolidated adjusted quick ratio for the immediately preceding quarter. As a result, we are exposed to interest rate risk as we make draws on the Credit Facility. As of December 31, 2017. The revolving line2022, there were no outstanding borrowings.
In February 2020 and March 2021, we issued $400 million and $250 million aggregate principal amount of credit has anthe 2026 Convertible Notes and the 2028 Convertible Notes, respectively. On November 2, 2022, we repurchased $160 million of our 2026 Convertible Notes as further described in Note 8, “Debt,” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. As the Convertible Notes have a fixed annual interest rate, basedwe have no financial or economic interest exposure associated with changes in interest rates. However, the fair value of fixed rate debt instruments fluctuates when interest rates change. Additionally, the fair value can be affected when the market price of our common stock fluctuates. We carry the Convertible Notes at face value less unamortized discount on our balance sheet, and we present the 1-month LIBOR rate plus 225 basis points asfair value for required disclosure purposes only.
Foreign Currency Risk
Our customers consumeThe functional currencies of our servicesforeign subsidiaries are the respective local currencies of the jurisdictions in which they operate, which are primarily inthe Euro and the British Pound. Approximately 10% of our total revenue was generated outside the United States. Our revenueStates for the year ended December 31, 2022. The majority of our revenues and operating expenses are denominated in U.S. dollars, and as a result we have notherefore are not currently subject to significant foreign currency risk.
Inflation
Our subsidiaries remeasure monetary assets and liabilities at period-end exchange rates, while non-monetary items are remeasured at historical rates. Revenue and expense accounts are remeasured at the average exchange rate in effect during the year. Foreign currency translation adjustments are accounted for as a component of accumulated other comprehensive loss within stockholders’ equity. Gains or losses due to transactions in foreign currencies are included in other income (expense), net in our consolidated statements of operations. We do not believe inflation has had a material effect oncurrently engage in any hedging activity to reduce our business, financial condition or results of operations. We continuepotential exposure to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. If our costs were to become subject to significant inflationary pressures,currency fluctuations, although we may not be able to fully offset such higher costs through price increases. Our inability or failurechoose to do so could harmin the future. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currencies result in increased revenue and operating expenses for our business, financial conditionnon-U.S. operations. Similarly, our revenue and results of operations.
operating expenses for our non-U.S. operations decrease if the U.S. dollar strengthens against foreign currencies. A hypothetical 10% adverse change in foreign currency exchange rates would have adversely impacted our net income for the year ended December 31, 2022 by approximately $2.4 million.
Item 8. Financial Statements and Supplementary Data
BANDWIDTH INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTSIndex to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Bandwidth Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Bandwidth Inc. (the Company) as of December 31, 20172022 and 2016,2021, the related consolidated statements of operations, and comprehensive (loss) income,loss, changes in redeemable convertible preferred stock and stockholders' (deficit)stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017,2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172022 and 2016,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
/s/ Ernst & Young LLPThe critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
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| Revenue Recognition |
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Description of the
Matter | As discussed in Note 2, the Company recognizes revenue from the sale of communications services offered through software solutions, which are generally derived from usage and monthly service fees. Usage revenue includes voice communication (primarily driven by inbound minutes, outbound minutes and toll-free minutes) and messaging communication (driven by the number of messages) that traverse the platform and network. Revenue for these services is recognized in the period the usage occurs. Monthly service fees include the provisioning and management of phone numbers and emergency services access, which is recognized on a ratable basis as the service is provided, which is typically one month. The processing and recording of revenue from voice and messaging data usage is highly automated and involves capturing and pricing significant volumes of data across multiple systems. Similarly, the provisioning and management of phone numbers and emergency services access is also highly automated and involves capturing and pricing the quantity of phone numbers in service and the quantity of phone numbers with emergency services access during the month. Given the complex automated systems utilized to capture, process, and ultimately record revenue, performing procedures to audit revenue required a high degree of auditor judgment and extensive audit effort. |
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How We Addressed
the Matter in Our
Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls that address the risks of material misstatement relating to the measurement and occurrence of revenue. This included involvement of audit professionals with significant experience in the use of information technology (IT) to support business operations and related controls. With the involvement of our IT professionals, we identified the significant systems used to capture and process voice usage, phone number services, emergency services access, and messaging volume, and tested the IT general controls over those systems, including testing of user access and change management controls. In addition, our audit procedures included testing of other manual reconciliation and analytical review controls designed to determine the accuracy and completeness of data processed and transferred across multiple platforms in connection with the recognition of revenue for voice and messaging usage, the quantity of phone numbers in service, and the quantity of phone numbers with emergency services access during the period. To test the Company’s revenue, our audit procedures included, among other procedures, performing data analytics by extracting data from the Company’s systems to evaluate the completeness and accuracy of recorded revenues, testing a sample of revenue transactions, which included evaluating the transaction price based on inspection of customer contracts and approved rate tables, as well as testing the mathematical accuracy of the recorded revenue based on the voice and messaging usage, as well as the quantity of phone numbers in service and quantity of phone numbers with emergency services access during the period. |
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We have served as the Company’s auditor since 2012.
/s/ Ernst & Young LLP
Raleigh, North Carolina
February 26, 2018
23, 2023
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Bandwidth Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Bandwidth Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Bandwidth Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notesand our report dated February 23, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Raleigh, North Carolina
February 23, 2023
BANDWIDTH INC.
CONSOLIDATED BALANCE SHEETSConsolidated Balance Sheets
(In Thousands, Except Sharethousands, except share and per Share Amounts)share amounts)
|
| | | | | | | |
| | As of December 31, |
| | 2016 | | 2017 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 6,788 |
| | $ | 37,627 |
|
| Accounts receivable, net of allowance for doubtful accounts | 16,838 |
| | 21,225 |
|
| Prepaid expenses and other current assets | 2,318 |
| | 3,767 |
|
| Deferred costs | 2,099 |
| | 2,633 |
|
| Total current assets | 28,043 |
| | 65,252 |
|
| | | | |
| Property and equipment, net | 11,180 |
| | 14,946 |
|
| Intangible assets, net | 8,482 |
| | 7,643 |
|
| Deferred costs, non-current | 1,696 |
| | 2,068 |
|
| Other long-term assets | 1,011 |
| | 1,192 |
|
| Goodwill | 6,867 |
| | 6,867 |
|
| Deferred tax asset | 12,694 |
| | 6,526 |
|
| Total assets | $ | 69,973 |
| | $ | 104,494 |
|
| Liabilities, redeemable convertible preferred stock and stockholders’ (deficit) equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 4,688 |
| | $ | 3,025 |
|
| Accrued expenses and other current liabilities | 14,649 |
| | 15,633 |
|
| Current portion of deferred revenue and advanced billings | 4,032 |
| | 5,768 |
|
| Line of credit, current portion | 5,000 |
| | — |
|
| Current portion of long-term debt and capital lease obligations | 2,101 |
| | 92 |
|
| Total current liabilities | 30,470 |
| | 24,518 |
|
| | | | |
| Other liabilities | 609 |
| | 716 |
|
| Deferred revenue, net of current portion | 1,712 |
| | 2,549 |
|
| Long-term debt and capital lease obligations, net of current portion | 37,738 |
| | — |
|
| Total liabilities | 70,529 |
| | 27,783 |
|
BANDWIDTH INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and per Share Amounts)
|
| | | | | | | |
| | As of December 31, |
| | 2016 | | 2017 |
| Redeemable convertible preferred stock: | | | |
| Series A redeemable convertible preferred stock; $0.001 par value; 1,200,000 shares authorized; 710,000 and 0 shares issued and outstanding at December 31, 2016 and 2017, respectively | 21,818 |
| | — |
|
| Commitments and contingencies |
| |
|
| Stockholders’ (deficit) equity: | | | |
| Class A voting common stock; $0.001 par value; 0 and 100,000,000 shares authorized as of December 31, 2016 and 2017, respectively; 0 and 4,197,831 shares issued and outstanding as of December 31, 2016 and 2017, respectively | — |
| | 4 |
|
| Class B voting common stock, $0.001 par value; 0 and 20,000,000 shares authorized as of December 31, 2016 and 2017, respectively; 0 and 13,440,725 shares issued and outstanding as of December 31, 2016 and 2017, respectively | — |
| | 13 |
|
| Old Class A voting common stock; $0.001 par value; 20,000,000 and 0 shares authorized as of December 31, 2016 and 2017, respectively; 11,779,975 and 0 shares issued and outstanding as of December 31, 2016 and 2017, respectively | 12 |
| | — |
|
| Old Class B non-voting common stock, $0.001 par value; 3,341,275 and 0 shares authorized as of December 31, 2016 and 2017, respectively; 18,590 and 0 shares issued and outstanding as of December 31, 2016 and 2017, respectively | — |
| | — |
|
| Preferred stock; $0.001 par value; 0 and 10,000,000 shares authorized as of December 31, 2016 and 2017, respectively; 0 shares issued and outstanding as of December 31, 2016 and 2017 | — |
| | — |
|
| Additional paid-in capital | 9,356 |
| | 102,465 |
|
| Accumulated deficit | (31,742 | ) | | (25,771 | ) |
| Total stockholders’ (deficit) equity | (22,374 | ) | | 76,711 |
|
| Total liabilities, redeemable convertible preferred stock and stockholders’ (deficit) equity | $ | 69,973 |
| | $ | 104,494 |
|
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 113,641 | | | $ | 331,453 | |
| Restricted cash | 981 | | | 836 | |
| Marketable securities | 71,231 | | | — | |
| | | |
| Accounts receivable, net of allowance for doubtful accounts | 74,465 | | | 61,572 | |
| Deferred costs | 3,566 | | | 3,204 | |
| Prepaid expenses and other current assets | 15,724 | | | 15,820 | |
| | | |
| | | |
| Total current assets | 279,608 | | | 412,885 | |
| Property, plant and equipment, net | 99,753 | | | 69,604 | |
| Operating right-of-use asset, net | 9,993 | | | 14,061 | |
| Intangible assets, net | 177,370 | | | 211,217 | |
| Deferred costs, non-current | 4,938 | | | 4,676 | |
| Other long-term assets | 31,251 | | | 8,673 | |
| Goodwill | 326,405 | | | 344,423 | |
| | | |
| | | |
| Total assets | $ | 929,318 | | | $ | 1,065,539 | |
| Liabilities and stockholders’ equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 26,750 | | | $ | 9,142 | |
| Accrued expenses and other current liabilities | 62,577 | | | 65,921 | |
| Current portion of deferred revenue | 7,181 | | | 6,248 | |
| Advanced billings | 10,049 | | | 6,380 | |
| Operating lease liability, current | 7,450 | | | 5,807 | |
| | | |
| | | |
| | | |
| | | |
| Total current liabilities | 114,007 | | | 93,498 | |
| Other liabilities | 11,176 | | | 6,018 | |
| Operating lease liability, net of current portion | 4,640 | | | 10,958 | |
| | | |
| Deferred revenue, net of current portion | 8,306 | | | 7,634 | |
| | | |
| Deferred tax liability | 38,466 | | | 48,396 | |
| Convertible senior notes | 480,546 | | | 486,440 | |
| Total liabilities | 657,141 | | | 652,944 | |
| | | |
| Commitments and contingencies | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Stockholders’ equity: | | | |
| Preferred stock; $0.001 par value; 10,000,000 shares authorized; 0 shares issued | — | | | — | |
| Class A voting common stock; $0.001 par value; 100,000,000 shares authorized as of December 31, 2022 and 2021; 23,379,000 and 23,177,988 shares issued and outstanding as of December 31, 2022 and 2021, respectively | 23 | | | 23 | |
| Class B voting common stock, $0.001 par value; 20,000,000 shares authorized as of December 31, 2022 and 2021; 1,965,170 shares issued and outstanding as of December 31, 2022 and 2021 | 2 | | | 2 | |
| | | |
| | | |
| | | |
| Additional paid-in capital | 364,913 | | | 502,477 | |
| Accumulated deficit | (48,547) | | | (76,867) | |
| Accumulated other comprehensive loss | (44,214) | | | (13,040) | |
| Total stockholders’ equity | 272,177 | | | 412,595 | |
| Total liabilities and stockholders’ equity | $ | 929,318 | | | $ | 1,065,539 | |
See accompanying notes.
BANDWIDTH INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(In Thousands, Except Share and per Share Amounts)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Revenue: | | | | | |
| CPaaS revenue | $ | 101,502 |
| | $ | 117,078 |
| | $ | 131,572 |
|
| Other revenue | 36,299 |
| | 35,057 |
| | 31,383 |
|
| Total revenue | 137,801 |
| | 152,135 |
| | 162,955 |
|
| | | | | | |
| Cost of revenue: | | | | | |
| CPaaS cost of revenue | 64,760 |
| | 71,218 |
| | 75,859 |
|
| Other cost of revenue | 14,482 |
| | 14,000 |
| | 13,403 |
|
| Total cost of revenue | 79,242 |
| | 85,218 |
| | 89,262 |
|
| | | | | | |
| Gross profit | 58,559 |
| | 66,917 |
| | 73,693 |
|
| | | | | | |
| Operating expenses: | | | | | |
| Research and development | 7,375 |
| | 8,520 |
| | 10,789 |
|
| Sales and marketing | 8,620 |
| | 9,294 |
| | 11,218 |
|
| General and administrative | 34,602 |
| | 33,859 |
| | 37,069 |
|
| Total operating expenses | 50,597 |
| | 51,673 |
| | 59,076 |
|
| | | | | | |
| Operating income | 7,962 |
| | 15,244 |
| | 14,617 |
|
| Other expense: | | | | | |
| Interest expense, net | (589 | ) | | (908 | ) | | (1,728 | ) |
| Total other expense | (589 | ) | | (908 | ) | | (1,728 | ) |
| | | | | | |
| Income from continuing operations before income taxes | 7,373 |
| | 14,336 |
| | 12,889 |
|
| Income tax (provision) benefit | (408 | ) | | 11,094 |
| | (6,918 | ) |
| Income from continuing operations | 6,965 |
| | 25,430 |
| | 5,971 |
|
| | | | | | |
| Loss from discontinued operations, net of income taxes | (13,665 | ) | | (3,072 | ) | | — |
|
| Net (loss) income | $ | (6,700 | ) | | $ | 22,358 |
| | $ | 5,971 |
|
| Total comprehensive (loss) income | $ | (6,700 | ) | | $ | 22,358 |
| | $ | 5,971 |
|
| | | | | | |
| Earnings (loss) per share: | | | | | |
| Income from continuing operations | $ | 6,965 |
| | $ | 25,430 |
| | $ | 5,971 |
|
| Less: income allocated to participating securities | 931 |
| | 3,355 |
| | 644 |
|
| Income from continuing operations attributable to common stockholders | $ | 6,034 |
| | $ | 22,075 |
| | $ | 5,327 |
|
| | | | | | |
| Income (loss) from continuing operations per share: | | | | | |
| Basic | $ | 0.52 |
| | $ | 1.89 |
| | $ | 0.42 |
|
| Diluted | $ | 0.48 |
| | $ | 1.72 |
| | $ | 0.37 |
|
| | | | | | |
| Net (loss) income | $ | (6,700 | ) | | $ | 22,358 |
| | $ | 5,971 |
|
| Less: (loss) income allocated to participating securities | (896 | ) | | 2,950 |
| | 644 |
|
| Net (loss) income attributable to common stockholders | $ | (5,804 | ) | | $ | 19,408 |
| | $ | 5,327 |
|
| | | | | | |
| Net (loss) income per share: | | | | | |
| Basic | $ | (0.50 | ) | | $ | 1.66 |
| | $ | 0.42 |
|
| Diluted | $ | (0.47 | ) | | $ | 1.51 |
| | $ | 0.37 |
|
| | | | | | |
| Weighted average number of common shares outstanding: | | | | | |
| Basic | 11,497,727 |
| | 11,678,568 |
| | 12,590,221 |
|
| Diluted | 12,456,540 |
| | 12,870,632 |
| | 14,543,170 |
|
See accompanying notes.
BANDWIDTH INC.
Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ (Deficit) EquityOperations
(In Thousands Except Share Amounts)thousands, except share and per share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Series A redeemable convertible preferred stock | | Class A voting
common Stock | | Class B voting
common Stock | | Old Class A voting common Stock | | Old Class B non-voting common Stock | | Additional paid-in capital | | Accumulated deficit | | Total stockholders’ (deficit) equity |
| | Shares | Amount | | Shares | Amount | | Shares | Amount | | Shares | Amount | | Shares | Amount | |
| Balance at December 31, 2014 | 710,000 |
| $ | 21,818 |
| | — |
| $ | — |
| | — |
| $ | — |
| | 11,455,615 |
| $ | 12 |
| | 14,060 |
| $ | — |
| | $ | 31,060 |
| | $ | (47,820 | ) | | $ | (16,748 | ) |
| Issuance of Old Class A voting common stock | — |
| — |
| | — |
| — |
| | — |
| — |
| | 69,405 |
| — |
| | 4,530 |
| — |
| | 113 |
| | — |
| | 113 |
|
| Issuance of Old Class B non-voting common stock | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | 48 |
| | — |
| | 48 |
|
| Exercise of warrants to purchase common stock | — |
| — |
| | — |
| — |
| | — |
| — |
| | 17,138 |
| — |
| | — |
| — |
| | — |
| | — |
| | — |
|
| Stock-based compensation | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | 4,213 |
| | — |
| | 4,213 |
|
| Net loss | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| | (6,700 | ) | | (6,700 | ) |
| Balance at December 31, 2015 | 710,000 |
| 21,818 |
| | — |
| — |
| | — |
| — |
| | 11,542,158 |
| 12 |
| | 18,590 |
| — |
| | 35,434 |
| | (54,520 | ) | | (19,074 | ) |
| Issuance of Old Class A voting common stock | — |
| — |
| | — |
| — |
| | — |
| — |
| | 218,345 |
| — |
| | — |
| — |
| | 1,111 |
| | — |
| | 1,111 |
|
| Exercise of warrants to purchase common stock | — |
| — |
| | — |
| — |
| | — |
| — |
| | 19,472 |
| — |
| | — |
| — |
| | 150 |
| | — |
| | 150 |
|
| Distribution of Republic | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | (28,899 | ) | | — |
| | (28,899 | ) |
| Shareholders’ anti-dilutive arrangement | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | (324 | ) | | — |
| | (324 | ) |
| Cumulative effect of change in accounting principle | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| | 420 |
| | 420 |
|
| Stock-based compensation | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | 1,884 |
| | — |
| | 1,884 |
|
| Net income | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| | 22,358 |
| | 22,358 |
|
| Balance at December 31, 2016 | 710,000 |
| 21,818 |
| | — |
| — |
| | — |
| — |
| | 11,779,975 |
| 12 |
| | 18,590 |
| — |
| | 9,356 |
| | (31,742 | ) | | (22,374 | ) |
| Issuance of Old Class A voting common stock | — |
| — |
| | — |
| — |
| | — |
| — |
| | 31,510 |
| — |
| | — |
| | | 94 |
| | — |
| | 94 |
|
| Issuance of Old Class B non-voting common stock | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | 16,250 |
| — |
| | 109 |
| | — |
| | 109 |
|
| Exercise of warrants to purchase common stock | — |
| — |
| | — |
| — |
| | 17,260 |
| — |
| | — |
| — |
| | — |
| — |
| | 91 |
| | — |
| | 91 |
|
| Stock-based compensation | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | 1,803 |
| | — |
| | 1,803 |
|
| Purchase of common stock | — |
| — |
| | — |
| — |
| | (29 | ) | — |
| | — |
| — |
| | — |
| — |
| | — |
| | — |
| | — |
|
| Conversion of Series A preferred stock to Old Class A voting common stock | (710,000 | ) | (21,818 | ) | | — |
| — |
| | — |
| — |
| | 1,775,000 |
| 1 |
| | — |
| — |
| | 21,817 |
| | — |
| | 21,818 |
|
| Conversion of Old Class A voting common stock to Class B voting common stock | — |
| — |
| | — |
| — |
| | 13,586,485 |
| 13 |
| | (13,586,485 | ) | (13 | ) | | — |
| — |
| | — |
| | — |
| | — |
|
| Conversion of Old Class B non-voting common stock to Class A voting common stock | — |
| — |
| | 34,840 |
| — |
| | — |
| — |
| | — |
| — |
| | (34,840 | ) | — |
| | — |
| | — |
| | — |
|
| Issuance of common stock in connection with initial public offering, net of underwriting discounts | — |
| — |
| | 4,000,000 |
| 4 |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | 74,396 |
| | — |
| | 74,400 |
|
| Costs in connection with initial public offering | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | (5,385 | ) | | — |
| | (5,385 | ) |
| Conversion of Class B voting common stock to Class A voting common stock | — |
| — |
| | 162,991 |
| — |
| | (162,991 | ) | — |
| | — |
| — |
| | — |
| — |
| | — |
| | — |
| | — |
|
Termination of Shareholders’ anti-dilutive arrangement
| — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | 184 |
| | — |
| | 184 |
|
| Net income | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| | 5,971 |
| | 5,971 |
|
| Balance at December 31, 2017 | — |
| $ | — |
| | 4,197,831 |
| $ | 4 |
| | 13,440,725 |
| $ | 13 |
| | — |
| $ | — |
| | — |
| $ | — |
| | $ | 102,465 |
| | $ | (25,771 | ) | | $ | 76,711 |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Revenue | | | | | $ | 573,152 | | | $ | 490,907 | | | $ | 343,113 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Cost of revenue | | | | | 334,799 | | | 277,094 | | | 189,203 | |
| | | | | | | | | | |
| Gross profit | | | | | 238,353 | | | 213,813 | | | 153,910 | |
| Operating expenses: | | | | | | | | | |
| Research and development | | | | | 97,990 | | | 69,505 | | | 54,555 | |
| Sales and marketing | | | | | 96,658 | | | 82,333 | | | 61,216 | |
| General and administrative | | | | | 68,029 | | | 64,212 | | | 51,644 | |
| Total operating expenses | | | | | 262,677 | | | 216,050 | | | 167,415 | |
| | | | | | | | | | |
| Operating loss | | | | | (24,324) | | | (2,237) | | | (13,505) | |
| Other income (expense), net: | | | | | | | | | |
| Net gain on extinguishment of debt | | | | | 40,205 | | | — | | | — | |
| Interest expense, net | | | | | (3,048) | | | (28,784) | | | (13,672) | |
| Other income (expense), net | | | | | 4,473 | | | (174) | | | (1,795) | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total other income (expense), net | | | | | 41,630 | | | (28,958) | | | (15,467) | |
| | | | | | | | | | |
| Income (loss) before income taxes | | | | | 17,306 | | | (31,195) | | | (28,972) | |
| Income tax benefit (provision) | | | | | 2,264 | | | 3,833 | | | (15,005) | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income (loss) | | | | | $ | 19,570 | | | $ | (27,362) | | | $ | (43,977) | |
| Earnings per share: | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income (loss) per share: | | | | | | | | | |
| Basic | | | | | $ | 0.77 | | | $ | (1.09) | | | $ | (1.83) | |
| Diluted | | | | | $ | (0.48) | | | $ | (1.09) | | | $ | (1.83) | |
| | | | | | | | | | |
| Numerator used to compute net income (loss) per share: | | | | | | | | | |
| Basic | | | | | $ | 19,570 | | | $ | (27,362) | | | $ | (43,977) | |
| Diluted | | | | | $ | (14,897) | | | $ | (27,362) | | | $ | (43,977) | |
| | | | | | | | | | |
| Weighted average number of common shares outstanding: | | | | | | | | | |
| Basic | | | | | 25,282,796 | | | 25,090,916 | | | 24,092,574 | |
| Diluted | | | | | 30,907,869 | | | 25,090,916 | | | 24,092,574 | |
See accompanying notes.
BANDWIDTH INC.
CONSOLIDATED STATEMENTS OF CASH FLOWSConsolidated Statements of Comprehensive Loss
(In Thousands)
thousands)
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | | | 2022 | | 2021 | | 2020 |
| Net income (loss) | | | | | $ | 19,570 | | | $ | (27,362) | | | $ | (43,977) | |
| Other comprehensive (loss) income | | | | | | | | | |
| Unrealized gain on marketable securities, net | | | | | 314 | | | — | | | — | |
| Foreign currency translation | | | | | (31,855) | | | (41,150) | | | 27,900 | |
| Unrealized gain on employee benefit plan, net | | | | | 367 | | | 169 | | | — | |
| Total other comprehensive (loss) income | | | | | (31,174) | | | (40,981) | | | 27,900 | |
| Total comprehensive loss | | | | | $ | (11,604) | | | $ | (68,343) | | | $ | (16,077) | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Operating activities | | | | | |
| Net (loss) income | $ | (6,700 | ) | | $ | 22,358 |
| | $ | 5,971 |
|
| Loss from discontinued operations, net of income taxes | 13,665 |
| | 3,072 |
| | — |
|
| Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: | | | | | |
| Depreciation and amortization | 7,075 |
| | 6,142 |
| | 5,712 |
|
| Amortization of debt issuance costs | 49 |
| | 52 |
| | 376 |
|
| Stock-based compensation | 3,493 |
| | 1,370 |
| | 1,803 |
|
| Deferred taxes | 304 |
| | (11,086 | ) | | 6,168 |
|
| Loss on disposal of property and equipment | 382 |
| | 19 |
| | 91 |
|
| Impairment of intangible asset | — |
| | 695 |
| | — |
|
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | (533 | ) | | (4,043 | ) | | (4,387 | ) |
| Prepaid expenses and other assets | (570 | ) | | (848 | ) | | (1,622 | ) |
| Deferred costs | 2,877 |
| | (975 | ) | | (906 | ) |
| Accounts payable | 1,041 |
| | 243 |
| | (2,429 | ) |
| Accrued expenses and other liabilities | (2,540 | ) | | (567 | ) | | 1,273 |
|
| Deferred revenue and advanced billings | 108 |
| | 510 |
| | 2,573 |
|
| Net cash provided by operating activities from continuing operations | 18,651 |
| | 16,942 |
| | 14,623 |
|
| Net cash used in operating activities from discontinued operations | (22,460 | ) | | (11,788 | ) | | — |
|
| Net cash (used in) provided by operating activities | (3,809 | ) | | 5,154 |
| | 14,623 |
|
| Investing activities | | | | | |
| Purchase of property and equipment | (2,091 | ) | | (3,831 | ) | | (5,021 | ) |
| Capitalized software development costs | (3,011 | ) | | (2,230 | ) | | (2,942 | ) |
| Net cash used in investing activities from continuing operations | (5,102 | ) | | (6,061 | ) | | (7,963 | ) |
| Net cash used in investing activities from discontinued operations | (860 | ) | | (1,311 | ) | | — |
|
| Net cash used in investing activities | (5,962 | ) | | (7,372 | ) | | (7,963 | ) |
| Financing activities | | | | | |
| Borrowings on line of credit | 43,500 |
| | 56,950 |
| | 4,000 |
|
| Repayments on line of credit | (32,500 | ) | | (68,950 | ) | | (9,000 | ) |
| Payments on capital leases | (155 | ) | | (102 | ) | | (73 | ) |
| Borrowings on term loan | — |
| | 40,000 |
| | — |
|
| Repayments on term loan | — |
| | — |
| | (40,000 | ) |
| Payment of debt issuance costs | (52 | ) | | (554 | ) | | (25 | ) |
| Payment of costs related to the initial public offering | — |
| | — |
| | (5,385 | ) |
| Proceeds from the initial public offering, net of underwriting discounts | — |
| | — |
| | 74,400 |
|
| Proceeds from issuances of common stock | 129 |
| | 974 |
| | 174 |
|
| Proceeds from exercises of warrants | — |
| | 150 |
| | 91 |
|
| Cash distribution to Republic | — |
| | (30,000 | ) | | — |
|
| Decrease (increase) in restricted cash | 116 |
| | 479 |
| | (3 | ) |
| Net cash provided by (used in) financing activities from continuing operations | 11,038 |
| | (1,053 | ) | | 24,179 |
|
| Net increase (decrease) in cash and cash equivalents | 1,267 |
| | (3,271 | ) | | 30,839 |
|
| Cash and cash equivalents, beginning of period | 8,792 |
| | 10,059 |
| | 6,788 |
|
| Cash and cash equivalents, end of period | $ | 10,059 |
| | $ | 6,788 |
| | $ | 37,627 |
|
| Supplemental disclosure of cash flow information | | | | | |
| Cash paid during the year for interest | $ | 1,103 |
| | $ | 1,314 |
| | $ | 1,535 |
|
| Cash paid for taxes | $ | 73 |
| | $ | 6 |
| | $ | 855 |
|
| Supplemental disclosure of noncash financing activities | | | | | |
| Non-cash distribution of net liabilities to Spin-Off | $ | — |
| | $ | 1,101 |
| | $ | — |
|
| Acquisition of equipment through capital leases | $ | 32 |
| | $ | 132 |
| | $ | — |
|
See accompanying notes.
BANDWIDTH INC.
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Class A voting
common stock | | Class B voting
common stock | | | | | | Additional paid-in capital | | Accumulated other comprehensive income (loss) | | Accumulated deficit | | Total stockholders’ equity | | |
| | | | | Shares | Amount | | Shares | Amount | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2019 | | | | | 18,584,478 | | $ | 19 | | | 4,927,401 | | $ | 5 | | | | | | | | | $ | 275,553 | | | $ | 41 | | | $ | (5,528) | | | $ | 270,090 | | | |
| Issuance of debt conversion option | | | | | — | | — | | | — | | — | | | | | | | | | 104,553 | | | — | | | — | | | 104,553 | | | |
| Debt conversion option issuance costs, net of tax | | | | | — | | — | | | — | | — | | | | | | | | | (3,742) | | | — | | | — | | | (3,742) | | | |
| Capped call option purchase price | | | | | — | | — | | | — | | — | | | | | | | | | (43,320) | | | — | | | — | | | (43,320) | | | |
| Exercises of vested stock options | | | | | 593,084 | | 1 | | | — | | — | | | | | | | | | 4,075 | | | — | | | — | | | 4,076 | | | |
| Vesting of restricted stock units | | | | | 161,067 | | — | | | — | | — | | | | | | | | | — | | | — | | | — | | | — | | | |
| Equity awards withheld for tax liability | | | | | (20,295) | | — | | | — | | — | | | | | | | | | (1,916) | | | — | | | — | | | (1,916) | | | |
| Conversion of Class B voting common stock to Class A voting common stock | | | | | 2,431,276 | | 1 | | | (2,431,276) | | (3) | | | | | | | | | — | | | — | | | — | | | (2) | | | |
| Equity consideration for Voxbone acquisition | | | | | 663,394 | | 1 | | | — | | — | | | | | | | | | 106,379 | | | — | | | — | | | 106,380 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation | | | | | — | | — | | | — | | — | | | | | | | | | — | | | 27,900 | | | — | | | 27,900 | | | |
| Stock based compensation | | | | | — | | — | | | — | | — | | | | | | | | | 9,881 | | | — | | | — | | | 9,881 | | | |
| Net loss | | | | | — | | — | | | — | | — | | | | | | | | | — | | | — | | | (43,977) | | | (43,977) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2020 | | | | | 22,413,004 | | 22 | | | 2,496,125 | | 2 | | | | | | | | | 451,463 | | | 27,941 | | | (49,505) | | | 429,923 | | | |
| Issuance of debt conversion option | | | | | — | | — | | | — | | — | | | | | | | | | 66,908 | | | — | | | — | | | 66,908 | | | |
| Debt conversion option issuance costs, net of tax | | | | | — | | — | | | — | | — | | | | | | | | | (2,019) | | | — | | | — | | | (2,019) | | | |
| Capped call option purchase price | | | | | — | | — | | | — | | — | | | | | | | | | (25,500) | | | — | | | — | | | (25,500) | | | |
| Exercises of vested stock options | | | | | 73,985 | | — | | | — | | — | | | | | | | | | 923 | | | — | | | — | | | 923 | | | |
| Vesting of restricted stock units | | | | | 186,502 | | — | | | — | | — | | | | | | | | | — | | | — | | | — | | | — | | | |
| Equity awards withheld for tax liability | | | | | (26,458) | | — | | | — | | — | | | | | | | | | (3,835) | | | — | | | — | | | (3,835) | | | |
| Conversion of Class B voting common stock to Class A voting common stock | | | | | 530,955 | | 1 | | | (530,955) | | — | | | | | | | | | — | | | — | | | — | | | 1 | | | |
| Foreign currency translation | | | | | — | | — | | | — | | — | | | | | | | | | — | | | (41,150) | | | — | | | (41,150) | | | |
| Unrealized gain on employee benefit pension plan | | | | | — | | — | | | — | | — | | | | | | | | | — | | | 169 | | | — | | | 169 | | | |
| Stock-based compensation | | | | | — | | — | | | — | | — | | | | | | | | | 14,537 | | | — | | | — | | | 14,537 | | | |
| Net loss | | | | | — | | — | | | — | | — | | | | | | | | | — | | | — | | | (27,362) | | | (27,362) | | | |
| Balance at December 31, 2021 | | | | | 23,177,988 | | 23 | | | 1,965,170 | | 2 | | | | | | | | | 502,477 | | | (13,040) | | | (76,867) | | | 412,595 | | | |
| Exercises of vested stock options | | | | | 20,468 | | — | | | — | | — | | | | | | | | | 163 | | | — | | | — | | | 163 | | | |
| Vesting of restricted stock units | | | | | 231,234 | | — | | | — | | — | | | | | | | | | — | | | — | | | — | | | — | | | |
| Equity awards withheld for tax liability | | | | | (50,690) | | — | | | — | | — | | | | | | | | | (2,134) | | | — | | | — | | | (2,134) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjustment to opening retained earnings due to adoption of ASU 2020-06 | | | | | — | | — | | | — | | — | | | | | | | | | (156,248) | | | — | | | 8,750 | | | (147,498) | | | |
| Unrealized gain on marketable securities | | | | | — | | — | | | — | | — | | | | | | | | | — | | | 314 | | | — | | | 314 | | | |
| Foreign currency translation | | | | | — | | — | | | — | | — | | | | | | | | | — | | | (31,855) | | | — | | | (31,855) | | | |
| Unrealized gain on employee benefit pension plan | | | | | — | | — | | | — | | — | | | | | | | | | — | | | 367 | | | — | | | 367 | | | |
Bandwidth Inc.BANDWIDTH INC.
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Class A voting
common stock | | Class B voting
common stock | | | | | | Additional paid-in capital | | Accumulated other comprehensive income (loss) | | Accumulated deficit | | Total stockholders’ equity | | |
| | | | | Shares | Amount | | Shares | Amount | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock-based compensation | | | | | — | | — | | | — | | — | | | | | | | | | 20,655 | | | — | | | — | | | 20,655 | | | |
| Net income | | | | | — | | — | | | — | | — | | | | | | | | | — | | | — | | | 19,570 | | | 19,570 | | | |
| Balance at December 31, 2022 | | | | | 23,379,000 | | $ | 23 | | | 1,965,170 | | $ | 2 | | | | | | | | | $ | 364,913 | | | $ | (44,214) | | | $ | (48,547) | | | $ | 272,177 | | | |
See accompanying notes.
BANDWIDTH INC.
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Cash flows from operating activities | | | | | |
| Net income (loss) | $ | 19,570 | | | $ | (27,362) | | | $ | (43,977) | |
| | | | | | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | | | | | |
| Depreciation and amortization | 35,599 | | | 36,642 | | | 16,803 | |
| Non-cash reduction to the right-of-use asset | 6,977 | | | 5,722 | | | 4,812 | |
| | | | | | |
| | | | | | |
| | | | | | |
| Amortization of debt discount and issuance costs | 3,082 | | | 26,754 | | | 15,647 | |
| Stock-based compensation | 20,655 | | | 14,537 | | | 9,881 | |
| | | | | | |
| Deferred taxes and other | (5,557) | | | (7,486) | | | 14,600 | |
| | | | | | |
| | | | | | |
| Net gain on extinguishment of debt | (40,205) | | | — | | | — | |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | (13,341) | | | (6,711) | | | (18,832) | |
| | | | | | |
| | | | | | |
| | | | | | |
| Prepaid expenses and other assets | (5,795) | | | (6,751) | | | (3,823) | |
| Accounts payable | 17,210 | | | 1,992 | | | 315 | |
| Accrued expenses and other liabilities | 4,291 | | | 9,693 | | | 14,393 | |
| | | | | | |
| Operating right-of-use liability | (7,580) | | | (6,227) | | | (5,301) | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net cash provided by operating activities | 34,906 | | | 40,803 | | | 4,518 | |
| Cash flows from investing activities | | | | | |
| Purchase of property, plant and equipment | (41,661) | | | (17,686) | | | (12,273) | |
| Deposits for construction in progress | (18,674) | | | (3,000) | | | — | |
| Capitalized software development costs | (3,755) | | | (3,926) | | | (2,319) | |
| | | | | | |
| Purchase of land | — | | | (30,017) | | | — | |
| Proceeds from sale of land | — | | | 17,462 | | | — | |
| Purchase of marketable securities | (179,598) | | | — | | | — | |
| Proceeds from sales and maturities of marketable securities | 108,681 | | | — | | | — | |
| Purchase of other investments | — | | | — | | | (230,780) | |
| Proceeds from sales and maturities of other investments | — | | | 40,000 | | | 190,780 | |
| Proceeds from sale of business | 1,558 | | | — | | | — | |
| Acquisition, net of cash acquired | — | | | — | | | (400,493) | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net cash (used in) provided by investing activities | (133,449) | | | 2,833 | | | (455,085) | |
| Cash flows from financing activities | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Payments on finance leases | (190) | | | (212) | | | (28) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Proceeds from issuance of convertible senior notes | — | | | 250,000 | | | 400,000 | |
| Net cash paid for debt extinguishment | (117,286) | | | — | | | — | |
| Purchase of Capped Call | — | | | (25,500) | | | (43,320) | |
| Payment of Acquisition holdback | — | | | (6,689) | | | — | |
| Payment of debt issuance costs | (553) | | | (7,544) | | | (11,990) | |
| Proceeds from exercises of stock options | 163 | | | 926 | | | 4,073 | |
| | | | | | |
| Value of equity awards withheld for tax liabilities | (2,139) | | | (3,954) | | | (1,844) | |
| | | | | | |
| Net cash (used in) provided by financing activities | (120,005) | | | 207,027 | | | 346,891 | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 881 | | | 189 | | | 109 | |
| Net (decrease) increase in cash, cash equivalents, and restricted cash | (217,667) | | | 250,852 | | | (103,567) | |
| Cash, cash equivalents, and restricted cash, beginning of period | 332,289 | | | 81,437 | | | 185,004 | |
| Cash, cash equivalents, and restricted cash, end of period | $ | 114,622 | | | $ | 332,289 | | | $ | 81,437 | |
BANDWIDTH INC.
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| Supplemental disclosure of cash flow information | | | | | |
| Cash paid for interest | $ | 18 | | | $ | 1,476 | | | $ | 579 | |
| Cash paid for taxes | $ | 3,932 | | | $ | 1,999 | | | $ | 454 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 3,421 | | | $ | 526 | | | $ | 3,105 | |
| Property, plant and equipment obtained in exchange for new finance lease liabilities | $ | — | | | $ | — | | | $ | 462 | |
| | | | | | |
| Supplemental disclosure of noncash investing and financing activities | | | | | |
| Purchase of property, plant and equipment, accrued but not paid | $ | 1,741 | | | $ | 3,760 | | | $ | 6,043 | |
| | | | | | |
| Lease incentive | $ | 5,791 | | | $ | 4,677 | | | $ | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| Value of common stock issued in acquisition | $ | — | | | $ | — | | | $ | 106,379 | |
| | | | | | |
| | | | | | |
| | | | | | |
| Acquisition holdback | $ | — | | | $ | — | | | $ | 8,595 | |
| Equity awards withheld for tax liabilities, accrued but not paid | $ | 121 | | | $ | 127 | | | $ | 247 | |
| Unrealized gain on marketable securities, accrued but not realized | $ | 314 | | | $ | — | | | $ | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| Acquisition of equipment through finance leases | $ | 147 | | | $ | 160 | | | $ | 113 | |
| | | | | | |
See accompanying notes.
BANDWIDTH INC.
Notes to Consolidated Financial Statements
(In Thousands Except Share and per Share Amounts)
1. Organization and Description of Business
Bandwidth Inc. (together with its subsidiaries, “Bandwidth” or the “Company”) was founded in July 2000 and incorporated in Delaware on March 29, 2001. The Company’s headquarters are located in Raleigh, North Carolina. The Company is aan international cloud-based, software-powered communications platform-as-a-service (“CPaaS”) provider that enables enterprises to create, scale and operate voice or textmessaging communications services across any mobile application or connected device.
The Company has two operating and reportable segments, CPaaS and Other. CPaaS revenue is derived from usage and monthly services fees charged for usageAs a result of Voice, Messaging, 911 and Phone Numbers solutions throughcertain changes in the Company’s proprietary CPaaS software application programming interfaces. Other revenue consists of fees charged for services provided such as: SIP trunking, data resale,business during the quarter ended March 31, 2022, the Company re-evaluated its segment reporting and a hosted Voice-over Internet Protocol (“VoIP”)determined that one segment was appropriate, rather than the previously reported segments comprising “CPaaS” and “Other”. The Other segment also includes revenue from traffic generated by other carriers, SMS registration fees and other miscellaneous product lines.
Initial Public Offering
On November 9, 2017,primary drivers for this change were the Company's Registration Statement on Form S-1 relating to the initial public offering (“IPO”)Company’s strategic alignment of its Class A common stock was declared effective byoperating departments and the SEC. Immediately priorsale of legacy assets. All previously reported segment information has been recast to the closing of the IPO, the Company’s certificate of incorporation was amended such that (i) each share of the Company’s then-outstanding Class A voting common stock (“Old Class A common stock”) was reclassified as one share of Class B voting common stock (“Class B common stock”), which has ten votes per share, (ii) each share of the Company’s then-outstanding Class B non-voting common stock (“Old Class B common stock”) was reclassified as one share of Class A voting common stock ("Class A common stock"), which has one vote per share and (iii) options and warrants exercisable into the Company’s Old Class A common stock and Old Class B common stock became exercisable into Class B common stock and Class A common stock, respectively. In addition, immediately prior to pricing of the IPO, all shares of the Company’s then-outstanding Series A redeemable convertible preferred stock were converted into Old Class A common stock, which then converted into Class B common stock. In connectionconform with the Company’s IPO, 4,000,000 shares of the Company's Class A common stock were sold at an initial public offering price of $20.00 per share for proceeds of approximately $74,400, net of underwriting discounts and commissions of $5,600. On November 14, 2017, the outstanding term loan of $38,500 was paid in full with proceeds from the IPO.one segment structure.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Share and per Share Amounts)
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements and accompanying notes were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The
Cost Alignment
During the quarter ended March 31, 2022, the Company had no componentschanged its presentation of other comprehensive income (loss) during anycertain costs to align with benchmarked definitions of cost of revenue, research and development, sales and marketing, and general and administrative expenses. As part of the benchmarked definitions, the Company has included allocations of facilities and shared IT costs based on employee headcount within the cost of revenue, research and development, sales and marketing, and general and administrative expense categories. Additionally, the product management function is now included in research and development rather than general and administrative as previously reported and the customer billing and collections function and the amortization of acquired customer relationship intangible assets are now included in sales and marketing rather than general and administrative as previously reported. Management believes use of the benchmarked definitions will increase comparability to peers and therefore usability of its financial statements.
All periods presented as such,have been conformed to the current definitions of cost of revenue, research and development, sales and marketing, and general and administrative expenses. There was no impact to revenue or net income for any periods presented due to the change in presentation. The consolidated balance sheets, consolidated statements of changes in stockholders’ equity and consolidated statements of cash flows are not affected by these changes.
Notes to Consolidated Financial Statements (continued)
The following is a consolidated statementcomparison of comprehensive income (loss) is not presented.the change in costs to the prior period:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, 2021 | | Year ended December 31, 2020 |
| | | | | As reported | | As previously reported | | As reported | | As previously reported |
| | | | | | | | | | | |
| | | | | (In thousands) |
| Statement of Operations | | | | | | | | | | | |
| Cost of revenue | | | | | $ | 277,094 | | | $ | 272,384 | | | $ | 189,203 | | | $ | 185,252 | |
| Research and development | | | | | 69,505 | | | 55,173 | | | 54,555 | | | 42,059 | |
| Sales and marketing | | | | | 82,333 | | | 51,817 | | | 61,216 | | | 40,552 | |
| General and administrative | | | | | 64,212 | | | 113,770 | | | 51,644 | | | 88,755 | |
Reclassification
The Company reclassified certain prior year amounts to conform to the current year presentation. These reclassifications had no impact on the previously reported total assets, liabilities, stockholder'sstockholder’s deficit or net income.
Principles of Consolidation
The consolidated financial statements include the accounts of Bandwidth Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the amounts reported in these financial statements and accompanying notes. These estimates in the consolidated financial statements include, but are not limited to, allowance for doubtful accounts, reserve for expected credit losses, reserve for sales credits, recoverability of long lived and intangible assets, fair value of acquired intangible assets and goodwill, discount rates used in the valuation of right-of-use assets and lease liabilities, the fair value of the liability and equity components of the Company’s Convertible Notes (as defined herein), estimated period of benefit, valuation allowances on deferred tax assets, certain accrued expenses and contingencies, economic and demographic actuarial assumptions related to pension and other postretirement benefit costs and liabilities. Although the Company believes that the estimates it uses are reasonable, due to the inherent uncertainty involved in making these estimates, actual results reported in future periods could differ from those estimates. These estimates
Revenue Recognition
Revenue recognition commences upon transfer of control of promised goods or services to customers in an amount that the Company expects to receive in exchange for those products or services.
The Company determines revenue recognition through the following steps:
•identification of the contract, or contracts, with a customer;
•identification of the performance obligations in the consolidated financial statements include, but are not limitedcontract;
•determination of the transaction price;
•allocation of the transaction price to allowance for doubtful accounts, recoverabilitythe performance obligations in the contract; and
•recognition of long livedrevenue, when, or as, the Company satisfies a performance obligation.
Notes to Consolidated Financial Statements (continued)
Nature of Products and intangible assets, customer relationship period, valuation allowances on tax assets, certain accrued expenses, and contingencies.
Revenue RecognitionServices
Revenue consists primarily of the sale of communications services offered through APIApplication Programming Interface (“API”) software solutions to large enterprise, as well as small and medium-sized business, customers and areis generally derived from usage and monthly service fees for both the CPaaS and Other segments.fees. Usage revenue includes voice communication (primarily driven by inbound minutes, outbound minutes and toll-free minutes) and messaging communication (driven by the number of messages) that traverse the platform and network. Revenue for these services is recognized in the period the usage occurs. Monthly serviceService fees include the provision and management of phone numbers and emergency services access, whichaccess.
The majority of the Company’s revenue is generated from reoccurring fees earned from customers accessing and using the Company’s communications platform. Access to the Company’s communication platform is considered a series of distinct services with continuous transfer of control to the customer, comprising one performance obligation. Reoccurring fees are recognized in revenue in the period the traffic traverses the Company’s network. For the years ended December 31, 2022, 2021 and 2020, the revenue from reoccurring fees represented $445.7 million, $392.5 million, and $260.6 million of total revenue, respectively.
Revenue from recurring fees is recognized on a ratable basis as the service is provided. In addition,provided, which is typically one month. For the Company earns Carrier Access Billings ("CABS")years ended December 31, 2022, 2021 and 2020, the revenue by allowing interconnected telecommunication carriersfrom recurring fees represented $116.9 million, $91.1 million and $76.5 million of total revenue, respectively.
The remaining $10.6 million, $7.3 million, and $6.0 million of revenue for the years ended December 31, 2022, 2021 and 2020, respectively, are generated from other miscellaneous services.
Infrequently, Bandwidth’s contracts with customers may include multiple performance obligations. For such arrangements, revenues are allocated to pass traffic througheach performance obligation based on its network and, as suchrelative standalone selling price. Generally, standalone selling prices are determined based on the Company is the principal in delivering communication servicesprices charged to such carriers. Due to the lack of timeliness of payments and the frequency of carrier disputes, the Company recognizes revenue related to this service only when collectability is probable.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Share and per Share Amounts)
similar customers for similar services.
When required as part of providing service, revenues and associated expenses related to nonrefundable, upfront service activation and setup fees are deferred and recognized over the longer of the associated service contract period or estimated customer life.
Revenue recognition commences when allThe Company’s contracts do not contain general rights of return. However, occasionally credits may be issued. The Company’s contracts do not provide customers with the right to take possession of the software supporting the applications. Amounts that have been invoiced are recorded in accounts receivable and in revenue or deferred revenue depending on whether the revenue recognition criteria have been met.
The Company maintains a reserve for sales credits. Credits are accounted for as variable consideration and are estimated based on several inputs including historical experience and current trends of credit issuances. Adjustments to the reserve are recorded against revenue.
The Company has various sales commission plans for which eligible employees can earn commissions from the sale of products and services to customers. Eligible employees must be employed at the time of payment in order to receive a commission. The Company pays commissions over time and a corresponding requisite substantive service condition exists for the employee to receive the commission. The Company determined that the timing of the commission payments and the underlying service performed by the employee were commensurate. Accordingly, sales commissions are generally expensed as incurred. These costs are recorded within sales and marketing expenses.
Notes to Consolidated Financial Statements (continued)
Contract Assets and Liabilities
The following criteriatable provides information about receivables and contract liabilities from contracts with customers:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | | |
| (In thousands) |
Receivables (1) | $ | 74,465 | | | $ | 61,572 | |
Contract liabilities (2) | 15,487 | | | 13,882 | |
________________________(1) Included in accounts receivable, net of allowance for doubtful accounts on the consolidated balance sheets.
(2) Included in current portion of deferred revenue and deferred revenue, net of current portion on the consolidated balance sheets.
Deferred revenue is recorded when cash payments are met (i) persuasive evidencereceived in advance of an arrangement exists; (ii) delivery has occurred; (iii)future usage on contracts. Revenue is typically recognized in the following month when service is rendered or, in the case of nonrefundable upfront fees, over the estimated period of benefit from the date the fee is fixed or determinable; and (iv) collection is probable. Customers generally enter into arrangements thatincurred by the customer. Customer refundable payments are typically tworecorded as advanced billings. During the year ended December 31, 2022, the Company recognized revenue of $5.7 million related to three yearscontract liabilities recorded at the beginning of the year. The Company expects to recognize $7.2 million in length.revenue over the next 12 months related to its contract liabilities as of December 31, 2022.
Cost of Revenue
CPaaS costCost of revenue consists primarily of fees paid to other network service providers, from whomnetwork operations costs, personnel costs, allocated costs of facilities and information technology, amortization of acquired technology intangibles and depreciation.
Fees paid to other network service providers arise when the Company buyspurchases services such as minutes of use, phone numbers, messages, porting of customer numbers and network circuits. Cost of revenue also contains
Network operations costs related to the support of the network,are incurred for web services and cloud infrastructure, capacity planning and management, rent for network facilities, software licenses, hardware and software maintenance fees, customer support and network engineering services. network-related facility rents.
Personnel costs (including non-cash stock-based compensation expenses) associated with personnelarise for employees who are responsible for the delivery of services, operationand operations and maintenance of, the communications network, customer support, as well as, third party support agreements, and depreciation are also recorded as cost of revenue.
Other cost of revenue consists of amortization of capital software development costs related to platform applications supporting non-CPaaS services including circuit costs paid to third party providers, internet connectivity expenses, minutes of use, contractors, regulatory fees and surcharges, depreciation, and software and hardware maintenance fees.network.
Operating Expenses
Research and Development
Research and development expenses consist primarily of salaries and related personnel costs (including non-cash stock-based compensation expenses), outsourcedfor the design, development, testing and enhancement of our cloud network and software development and engineering services and cloud infrastructure fees for stagingproducts. Research and development outsourced engineering services.expenses include depreciation and allocated costs for facilities and information technology utilized by our research and development staff.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and related personnel costs, including commissions, for sales employees and non-cash stock-based compensation expenses. Sales and marketing expenses also include expenditurescosts related to advertising, marketing, brand awareness activities, sales support and professional services fees.fees, and customer billing and collections functions. Sales and marketing expenses include depreciation, amortization of acquired
Notes to Consolidated Financial Statements (continued)
customer relationship intangible assets, and allocated costs of facilities and information technology utilized by our sales and marketing staff.
General and Administrative
General and administrative expenses consist primarily of salaries and related personnel costs for support personnel and executives in accounting, finance, legal, information services, human resources, corporate, and other administrative and compliance functions. General and administrative expenses also include costs related to product management and reporting, data services, customer billing and collection functions, and otherdepreciation, expenditures for third party professional services, fees, credit card processing fees, rent associated with the Company’s headquarters in Raleigh, North Carolina, depreciation and amortization.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Sharefacilities and per Share Amounts)
information technology utilized by our corporate and administrative staff.
Cash and Cash Equivalents
The Company considersclassifies all highly liquid investments with an original or remaining maturitystated maturities of three months or less atfrom the date of purchase as wellcash equivalents. All highly liquid investments with original stated maturities of greater than three months from the date of purchase are classified as overnight repurchasecurrent marketable securities. Cash deposits are primarily in financial institutions in the United States. However, cash for monthly operating costs of international operations are deposited in banks outside the United States. The Company has a policy of making investments to be cash equivalents.only with commercial institutions that have at least an investment grade credit rating. The Company utilizes money market funds as an investment option and only invests in AAA rated funds.
Restricted Cash
The Company classifies anyRestricted cash consists primarily of employee withholding tax liability and cash equivalents that are currently restricted from use as restricted cash. As of December 31, 2016 and 2017, restricted cash is used to secure letters of credit issued in order to operate the CLEC, for Automated Clearing House availability, customer deposits and for credit card security. As of December 31, 2016 and 2017, restricted cash was $240 and $243, respectively.employee benefits contributions not yet remitted. The Company has classified this asset as a long-termshort-term asset in order to match the expected period of restrictionrestriction.
Marketable Securities
The Company’s marketable securities consist of time deposits, U.S. treasury debt securities, commercial paper, and is includedcorporate debt securities. The Company classifies marketable securities as available-for-sale at the time of purchase and reevaluates such classification as of each balance sheet date. The Company may sell these securities at any time for use in Other long-term assetscurrent operations even if they have not yet reached maturity. As a result, the Company classifies investments with maturities greater than 90 days as marketable securities in the accompanying consolidated balance sheets. Available-for-sale securities are recorded at fair value at the end of each reporting period. Unrealized gains and losses are excluded from earnings and recorded as a separate component within accumulated other comprehensive loss on the consolidated balance sheets until realized. Interest income is reported within other income (expense), net on the consolidated statements of operations. The Company evaluates its investments to assess whether the amortized cost basis is in excess of estimated fair value and determines what amount of that difference, if any, is caused by expected credit losses. Allowance for credit losses are recognized as a charge in other income (expense), net on the consolidated statements of operations, and any remaining unrealized losses are included in accumulated other comprehensive loss on the consolidated balance sheets.
Due to the nature and investment grade of the Company’s marketable securities, there were no credit losses recorded for the year ended December 31, 2022. There have been no impairment charges for any unrealized losses during the period. The Company determines realized gains and losses on the sale of marketable securities using the specific identification method and records such gains and losses in other income (expense), net on the consolidated statements of operations.
Accounts Receivable and Allowance for Doubtful AccountsCurrent Expected Credit Losses
Accounts receivable are stated at realizable value, net of allowances, which includes an allowance for doubtful accounts.accounts and a reserve for expected credit losses. The allowance for doubtful accounts is based on management’s assessment of the collectability of its customer accounts. The Company regularly reviews the composition of the accounts receivable aging, historical bad debts, changes in payment patterns, customer creditworthiness, and current economic trends. Iftrends, and reasonable and supportable forecasts about the financial conditionfuture. Relevant risk
Notes to deteriorate, resulting in their inability to make required payments, additional provisions for doubtful accounts would be requiredConsolidated Financial Statements (continued)
characteristics include customer size and would increase bad debt expense.historical loss patterns. Management has evaluated the collectability ofexpected credit losses related to trade accounts receivable and determined that allowances of approximately $22,571$1.2 million and $32,463$1.7 million for uncollectible accounts and customer balances that are disputed were required as of December 31, 20162022 and 2017,2021, respectively. The allowance for doubtful accounts primarily relates to billings for CABS services where collectability was deemed not probable. Refer to Note 5, "Financial4, “Financial Statement Components,"Components” to these consolidated financial statements, for a rollforward of the components of the allowance for doubtful accountsallowances as of December 31, 20162022 and 2017. Refer also to Note 17, "Subsequent Events," for discussion of the settlement agreement that was entered into subsequent to year-end that resolved the ongoing dispute and litigation with MCI Communications Services, Inc. d/b/a Verizon Business and Verizon Select Services, Inc. (collectively, “Verizon”), which is a CABS customer of the Company.2021.
The Company includes unbilled receivables in its accounts receivable balance. Generally, these receivables represent earned revenue from services provided to customers, which will be billed in the next billing cycle. All amounts are considered collectible and billable. As of December 31, 20162022 and 2017,2021, unbilled receivables were $7,368$33.9 million and $8,653,$31.8 million, respectively.
Concentration of Credit Risk
Financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents, marketable securities and trade accounts receivable. Cash deposits may be in excess of insured limits. The Company believes that the financial institutions that hold its cash deposits are financially sound and, accordingly, minimal credit risk exists with respect to these balances.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Share and per Share Amounts)
With regard to customers, credit evaluation and account monitoring procedures are used to minimize the risk of loss. The Company believes that no additional credit risk beyond amounts provided for by the allowance for doubtful accounts are inherent in accounts receivable. NoAs of December 31, 2022, no individual customer represented more than 10 percent10% of the Company’s accounts receivable, net of allowance for doubtful accounts as of December 31, 2016.accounts. As of December 31, 2017,2021, one individual customer represented approximately 13%10% of the Company'sCompany’s accounts receivable, net of allowance for doubtful accounts.
For the years ended December 31, 2015, 20162022, 2021 and 2017,2020, no individual customer represented more than 10 percent10% of the Company’s total revenue.
Property, Plant and Equipment, netnet
Property, plant and equipment, net is stated at cost, less accumulated depreciation and amortization. Depreciation and amortization is calculated on a straight-line basis over the estimated useful lives of those assets as follows:
|
| | | | |
| Computer hardware and software | 1 to 7 years |
| Internal-use software development costs | 4 to 7 years |
| Furniture and fixtures | 2 to 5 years |
Internal-use software development costsLand | 3 yearsIndefinite |
Furniture and fixtures | 2 to 7 years |
| Leasehold improvements | Shorter of the estimated lease term or useful life4 to 7 years |
Maintenance and repairs are charged to expense as incurred.
Deferred Costs
The Company defers certain direct and incremental upfront costs related to the generation of a revenue stream or obtaining a new customer agreement. These costs include installment fees, activation and other telecommunication fees. The Company capitalizes these costs and amortizes them over the longer of the term of the customer contractscontract or the estimated customer life,period of benefit, which is approximately threefour years.
Internal-Use Software Development Costs
Internal-use software includes software that has been acquired, internally developed, or modified exclusively to meet the Company’s needs. The Company capitalizes qualifying internal-use software development costs that are incurred during the application development stage. Capitalization of costs begins when two criteria are
Notes to Consolidated Financial Statements (continued)
met: (i) the preliminary project stage is completed, and (ii) it is probable that the software will be completed and used for its intended function. Capitalization ceases when the software is substantially complete and ready for its intended use, including the completion of all significant testing. The Company also capitalizes costs related to specific upgrades and enhancements when the expenditures will result in additional functionality, and expenses costs incurred for maintenance and minor upgrades and enhancements. Costs related to preliminary project activities and post-implementation operating activities are expensed as incurred.
Capitalized costs of platform and other software applications are included in property, plant and equipment.equipment, net. These costs are amortized over the estimated useful life of the software on a straight-line basis over threefour to seven years. Management evaluates the useful life of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Share and per Share Amounts)
Debt Issuance Costs
The Company incurredincurs debt issuance costs associated with obtaining and entering into a five-year Creditcredit agreements and Security Agreement in November 2016, which includes a revolving credit facility and a term loan.issuing convertible notes. These costs customarily include non-refundable structuring fees, commitment fees, up-front fees and syndication expenses, which have been deferredexpenses. The Company has a policy of deferring and are being amortizedamortizing these costs based on the effective interest method over the term of the Creditcredit agreements or the convertible notes, as applicable.
Amortization of Intangibles
Intangible assets determinable economic lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful life of each asset on a straight-line basis. The Company determines the useful lives of identifiable intangible assets after considering the specific facts and Security Agreement. The debt issuance costs associated withcircumstances related to each intangible asset. Factors the revolving credit facility are recorded as a deferred cost inCompany considers when determining useful lives include the accompanying consolidated balance sheets. The unamortized debt issuance costs,contractual term of any agreement related to the asset, the historical performance of the asset, the Company's long-term strategy for using the asset, any laws or other local regulations which are included in prepaid expensescould impact the useful life of the asset and other currenteconomic factors, including competition and specific market conditions. Intangible assets inwithout determinable economic lives are carried at cost, not amortized and reviewed for impairment at least annually. Refer to Note 7, “Goodwill and Intangible Assets” to these consolidated financial statements, for the accompanying consolidated balance sheets, were $200 and $175useful lives of the Company's intangible assets as of December 31, 20162022 and 2017, respectively. Debt issuance costs associated2021.
Goodwill
In accordance with Accounting Standards Codification 350, “Intangibles - Goodwill and Other” (“ASC 350”), goodwill is not amortized, but rather is reviewed for impairment at the term loan were recognized as an adjustmentreporting unit level on the last day of the yieldCompany’s fourth quarter of the loan and were reflected as a reduction of the long-term debt balance. As of December 31, 2016 and 2017, unamortized debt issuance costs were $326 and $0, respectively. On November 14, 2017, the term loan was paideach fiscal year, or when there is evidence that events or changes in full and $260 of unamortized debt issuance costs were recorded as interest expense.
Goodwill
The Company reviews goodwill and indefinite-lived intangible assets at least annually, as of December 31, for possible impairment. Goodwill and indefinite-lived intangible assets are reviewed for possible impairment at an interim date if an event occurs or circumstances changeindicate that would more likely than not reduce the fair value of the reporting unit or indefinite-lived intangible asset below itsis less than the carrying value. The Company tests goodwill atamount of the reporting unit, levelincluding goodwill.
The Company establishes its reporting units based on its current organizational structure and management’s view of the business. The Company has determined that it has two-reporting units, CPaaS and Other. All Goodwill is allocatedone reporting unit.
Under ASC 350, the Company has the option to the CPaaS reporting unit. Management may first evaluate qualitative factors to assess ifqualitatively whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. In performing qualitative assessments, consistent with ASC 350-20-35-3C, the Company considers, among other factors, macroeconomic conditions (both in the United States and internationally), the Company’s overall financial performance (including, but not limited to, comparisons to prior periods, current period internal expectations, and comparable peer companies), broader industry and market considerations, and the trading price performance of the Company’s Class A common stock.
As of December 31, 2022, the Company completed its annual qualitative assessment under ASC 350 to determine if a two-step impairment test is necessary. Management may choose to proceed directly towhether the two-step evaluation, bypassing the initial qualitative assessment. The first stepexistence of the impairment test involves comparingevents or circumstances indicated that it was more likely than not that the fair value of its reporting unit was less than its respective carrying value. The Company concluded that based on the
Notes to Consolidated Financial Statements (continued)
relevant events and circumstances, it was more likely than not that the reporting unit to its net book value, including goodwill. If the net book value exceeds itsunit’s fair value then the Company would perform the second step of the goodwill impairment test to determine the amount of the impairment loss. The impairment loss would be calculated by comparing the implied fairexceeded its related carrying value of the goodwill to its net book value. In calculating the implied fair value of goodwill, the fair value of the entity would be allocated to all of the other assets and liabilities based on their fair values. The excess of the fair value of the entity over the amount assigned to other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.
The Company makes assumptions regarding estimated future cash flows, discount rates, long-term growth rates and market values to determine each reporting unit’s and indefinite-lived intangible asset’s estimated fair value. If these estimates or related assumptions change in the future, the Company may be required to record an impairment charge. As of December 31, 2016 and 2017, the Company has recorded goodwill of $6,867.therefore no quantitative assessment was required. No goodwill impairment charges were recorded for the years ended December 31, 2015, 20162022, 2021 and 2017.2020.
Impairment of Long-Lived Assets
The Company evaluates long-lived assets, including property, plant and equipment and definite lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Share and per Share Amounts)
of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If such evaluation indicates that the carrying amount of the asset or the asset group is not recoverable, any impairment loss would be equal to the amount the carrying value exceeds the fair value.
Business Combinations
The Company uses the acquisition method of accounting for business combinations which requires the tangible and intangible assets acquired and liabilities assumed to be recorded at their respective fair market value as of the acquisition date. Goodwill represents the excess of the consideration transferred over the fair value of the net assets acquired. The fair values of the assets acquired and liabilities assumed are determined based upon the Company’s valuation and involves making significant estimates and assumptions based on facts and circumstances that existed as of the acquisition date. The Company uses a measurement period following the acquisition date to gather information that existed as of the acquisition date that is needed to determine the fair value of the assets acquired and liabilities assumed. The measurement period ends once all information is obtained, but no later than one year from the acquisition date.
On November 2, 2020, the Company acquired all shares of Voice Topco Limited through a Share Purchase Agreement (“SPA”). During the year ended December 31, 2021, the Company made measurement period adjustments to reflect facts and circumstances in existence as of October 31, 2020, the effective date of the SPA (the “Effective Date”). The adjustments primarily related to certain state and local tax liabilities as well as an adjustment related to the finalization of the net working capital adjustment, which were not reasonably estimable at the Effective Date and consisted of a $1.0 million increase to goodwill and $1.0 million increase to accrued expense and other current liabilities. Additionally in 2021 and in accordance with the SPA, the Company paid the selling stockholders $7.6 million, which included $7.4 million of the amount held in escrow as a holdback amount and $0.2 million in interest earned from the escrow.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs totaled $329, $197$1.5 million, $1.8 million and $464$1.6 million for the years ended December 31, 2015, 20162022, 2021 and 2017,2020, respectively, which are included in sales and marketing expenses in the accompanying consolidated statements of operations.
Commissions
Commissions consist of variable compensation earned by sales personnel and third-party resellers. Sales commissions associated with the acquisition of a new customer contract are paid over time, based on monthly revenues, and are recognized as sales and marketing expense atin the time the customer has entered into a binding agreement.period incurred.
Stock-Based Compensation
The Company accounts for stock-based compensation expense related to all stock-based awards based on the fair value of the award on the grant date. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period, which is generally three or four years. The fair value of the restricted stock units is determined using the fair value of the Company’s Class A common stock on the date of grant. The Company uses the Black-Scholes option pricing model, net of estimated forfeitures, to measure the fair value of its stock options.
The Black-Scholes option pricing model requires the use of objective and subjective assumptions, which determine the fair-value of stock-based awards. These assumptions include:
Fair value of our common stock. Prior to the Company's IPO, the fair value of the shares of the Company's common stock underlying stock options has historically been established by the board of directors. Numerous objective and subjective factors that were considered included, but were not limited to, the following: i) contemporaneous independent, third-party valuations of the Company's common stock; ii) the rights, preferences and privileges of the Company's redeemable convertible preferred stock relative to those of the Company's common stock; iii) the Company's results of operations, financial position and capital resources; iv) current business conditions and projections; v) the lack of marketability of the Company's common stock; vi) the hiring of key personnel and the experience of the Company's management; vi) the introduction of new products; vii) the risk inherent in the development and expansion of the Company's products; viii) the fact that the option grants involve illiquid securities in a private company; ix) the likelihood of achieving a liquidity event, such as an initial public offering or a sale of the Company, given the prevailing market conditions; x) industry trends and competitive environment; and xi) overall economic indicators, including gross domestic product, employment, inflation and interest rates. After the IPO, the Company uses the market closing price of its Class A common stock as reported on the NASDAQ Global Select Market for the fair value.99
Expected term. The expected term was estimated using the simplified method allowed under SEC guidance as the Company does not have sufficient historical data to use any other method to estimate the expected term.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Share and per Share Amounts)Notes to Consolidated Financial Statements (continued)
Expected volatility. The expected volatility is derived from an average of the historical volatilities of the common stock of several entities with characteristics similar to those of the Company, such as the size, and operational and economic similarities to its principle business operations. The Company uses this method because it has limited information on the volatility of its common stock.
Risk-free interest rate. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similarelected to theestimate expected term of the options for each option groupforfeitures, and, as of the grant date.
Expected dividends. The expected dividend is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock.
In addition to the assumptions used in the Black-Scholes option pricing model,such, the Company must also determine a forfeiture rate to calculate the stock-based compensation expense for awards. Through December 31, 2017,2022, the Company recognized compensation expense for only the portion of optionsrestricted stock units expected to vest using an estimated forfeiture rate that was derived from historical employee termination behavior. If anyAs of the assumptions used in the Black-Scholes option pricing model change, stock-based compensation for futureDecember 31, 2022, all outstanding stock options may differ materially compared to that associated with previous grants.
are fully vested.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates. The Company recognizes the effect of a change in tax rates on deferred tax assets and liabilities in the period that includes the enactment date.
The Company reduces the measurement of a deferred tax asset, if necessary, by a valuation allowance if it is more likely than not that it will not realize some or all the deferred tax asset. Quarterly, the Company reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and the implementation of prudent and feasible tax planning strategies. The evaluation of the recoverability of deferred tax assets requires judgment in assessing future profitability. Should there be a change in the ability to recover deferred tax assets, the Company’s income tax provision would increase or decrease in the period in which the assessment is changed.
The Company accounts for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon technical merits, it is more likely than not that the position will be sustained upon examination. The tax benefit recognized is measured as the largest amount of benefit determined on a cumulative probability basis that the Company believes is more likely than not to be realized upon ultimate settlement of the position. The Company recognizes potential accrued interest and penalties associated with unrecognized tax positions in income tax expense.
Operating Segments
Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to make operating decisions, allocate resources and in assessing performance. The Company has two
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Share and per Share Amounts)
Company’s chief operating segments, CPaaS and Other, which are deemed to be reportable segments. The Company’s CODMdecision maker is its Chief Executive Officer. The CODMOfficer, who evaluates the performance of the Company’s operating segments primarily based on revenue and gross profit. The Company does not analyze discrete segment balance sheet information related to long-term assets, all of which are located in the United States. All otherCompany's financial information is presented on a consolidated basis. Accordingly, the Company has determined that it operates in one operating segment.
Earnings (Loss) per Share
Basic earnings (loss) per share attributable to common stockholders is calculated by dividing the net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period.
Diluted net income (loss) per share is calculated by giving effect to all potentially dilutive common stock when determining the weighted-average number of common shares outstanding. For purposes of the diluted net income (loss) per share calculation, options and warrants to purchase common stock, restricted stock units and redeemable convertible preferred stock are considered to be potential common stock.
Foreign currency translation
The Company has issued securitiesforeign operations with non-USD functional currencies. The Euro and British Pound are the primary functional currencies for the Company’s international operations.
All of the assets and liabilities of these subsidiaries are translated to U.S. dollars at the exchange rate in effect at the balance sheet date, and equity accounts are translated at historical exchange rates. Revenue and expenses are translated at average exchange rates in effect during each reporting period. The net effect of currency
Notes to Consolidated Financial Statements (continued)
translation adjustments is included in shareholder’s equity as a component of accumulated other comprehensive loss in the accompanying consolidated balance sheets.
Foreign currency transaction gains and losses are realized upon cash settlement of transactions denominated in currencies others than common stock that participate in dividends (“Participating Securities”), and therefore utilizes the two-class method to calculate net income (loss) per share. These Participating Securities includefunctional currency. They result from exchange rate changes during the Series A redeemable convertible preferred stock. The two-class method requires a portionperiod of net income (loss) to be allocated to the Participating Securities to determine the net income (loss) attributable to common stockholders. Net income (loss) attributable to the common stockholders is equal to the net income (loss) less dividends paid on preferred stock with any remaining earnings allocated in accordance with the bylawstime between the outstanding commonconsummation and redeemable convertible preferred stockcash settlement of such transactions. When realized, foreign currency transaction gains and losses are recognized in current period earnings as incurred. The Company recorded $0.2 million in related gains during the year ended December 31, 2022 and less than $0.1 million in related losses in each of the years ended December 31, 2021 and 2020 included in other income (expense), net in the Company's consolidated statements of operations.
Unrealized gains and losses result from the process of remeasuring foreign currency assets and liabilities into the appropriate functional currency at exchange rates in place as of the endreporting date. Unrealized gains and losses are reported net in foreign currency translation on the accompanying consolidated statements of each period. On November 9, 2017, the Participating Securities were converted into sharescomprehensive loss.
Fair Value of Old Class A common stock, which converted to Class B common stock immediately prior to the IPO.
Emerging Growth Company StatusFinancial Instruments
The Company minimizes its credit risk associated with investments by investing primarily in investment grade, liquid securities. The Company policy is an “emerging growth company” as defineddesigned to preserve capital, maintain liquidity and minimize credit risk, and the policy limits exposure to any one issuer and also establishes minimum credit ratings of approved investments. Periodic evaluations of relative credit standing of those issuers are considered in the Jumpstart Our Business Startups Act (“JOBS Act”). Company's investment strategy.
The JOBS Act providesCompany uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires use of observable inputs when available, and to minimize the use of unobservable inputs when determining fair value. The three tiers are defined as follows:
•Level 1. Observable inputs based on unadjusted quoted prices in active markets for identical assets or liabilities;
•Level 2. Inputs, other than quoted prices in active markets, that an emerging growth company can take advantageare observable either directly or indirectly; and
•Level 3. Unobservable inputs for which there is little or no market data, which requires the Company to develop its own assumptions.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delayinput that is significant to the adoption of certain accounting standards until those standards would otherwise apply to private companies. fair value measurement.
Comprehensive Loss
The Company has elected to avail itself of this extended transition periodpresent comprehensive loss and its components as a result, it will not adopt new or revisedseparate financial statement. Comprehensive income refers to net income and other revenue, expenses, gains and losses that, under
Notes to Consolidated Financial Statements (continued)
generally accepted accounting standards onprinciples, are recorded as an element of stockholders’ equity but are excluded from the relevant dates on which adoptioncalculation of such standards is required for other public companies.net income.
Recently Adopted Accounting PronouncementsStandards
In March 2016,August 2020, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Accounting Standards Update ("ASU"2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) 2016-09, Compensation—Stock Compensation (Topic 718): Improvements, which is intended to Employee Share-Based Payment Accounting. Theaddress issues identified as a result of the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. For convertible instruments, ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, and enhances information transparency by making targeted improvements to the disclosures for convertible instruments and EPS guidance on the basis of feedback from financial statement users. ASU 2020-06 is effective date of ASU 2016-09 for private business entities is forfiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.2021. Early adoption iswas permitted, and thebut no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted the amendments in ASU 2016-09 effectivenew guidance on January 1, 2016. This standard simplifies several aspects2022 using the modified retrospective approach resulting in decreases in accumulated deficit of $8.8 million, additional paid in capital of $156.2 million, and deferred tax liability of $1.0 million. The Company also recorded an increase in the Convertible Notes balance of $148.4 million as a result of the accounting for equity-based payment awards, includingreversal of the income tax consequencesseparation of the convertible debt between debt and classification on the statementequity. The adoption of cash flows. Certain changes implemented by this standard are requireddecreased the amount of non-cash interest expense to be applied
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Share and per Share Amounts)
retrospectively, while other changes are required to be applied prospectively. The Company elected to continue to estimate forfeitures when recording stock-based compensation expense.
All excess tax benefits and tax deficiencies related toeliminating the discount associated with the equity component. For the year ended December 31, 2016 were recognized in income tax expense. Prior to2022, the combined interest expense of the Convertible Notes was $27.5 million lower upon the adoption of this standard, this amount would have been recorded as additional paid-in capital. This change could create future volatility in the Company’s effective tax rate depending upon the amountASU 2020-06. The number of exercise or vesting activity from stock based awards.
The recognition of previously unrecognized excess tax benefits of $420 was recognizeddiluted shares increased as a cumulative effect adjustment on a modified retrospective basis duringresult of transitioning from the treasury stock method to the as-if converted method which impacted the earnings per share for the year ended December 31, 2016.2022. The transition did not impact the years ended December 31, 2021 and 2020, as the Company recordedincurred a deferred tax asset for previously unrecognized excess tax benefits outstanding as of the January 1, 2016, with an offsetting adjustment to accumulated deficit.net loss in both reporting periods.
In addition, cash flows related to excess tax benefits will no longer be classified as a financing activity apart from other income tax cash flows. The Company has adopted the change in presentation of excess tax benefits in the statements of cash flows on a prospective basis beginning in 2016.
In November 2015,May 2021, the FASB issued Accounting Standards Update 2021-04, Earnings Per Share (Topic 260), Debt —Modifications and Extinguishments (Subtopic 470-50), Compensation--Stock Compensation (Topic 718), and Derivatives and Hedging--Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740)2021-04”), which requiresis intended to provide clarity surrounding the treatment for a modification or an exchange of a freestanding equity-classified written call option. The amendments also provide guidance for the recognition and measurement of earnings-per-share (“EPS”) for certain modifications or exchanges of freestanding equity-classified written call options for entities that all deferred tax assets and liabilities, including any related valuation allowance, be classified as noncurrent on the balance sheet.present EPS. The amendments do not affect a holder’s accounting for freestanding call options. ASU 2015-17 was2021-04 is effective for fiscal years beginning after December 15, 2016 for public entities, and early2021, including interim periods within those fiscal years. Early adoption is permitted. The Company elected to early adopt ASU 2015-17 beginning with the year ended December 31, 2015.
In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paidwas permitted, including adoption in a Cloud Computing Arrangement. This new standard, which provides guidance to customers about whether a cloud computing arrangement includes a software license, was effective January 1, 2016. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.an interim period. The Company adopted this standardthe new guidance on January 1, 2016.2022. The adoption of this standardCompany did not have a materialany modifications or exchanges of freestanding written call options classified in equity during the reporting period and therefore did not have an impact on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which simplifies the presentation of debt issuance costs by requiring that such costs be presented in the consolidated balance sheets as a direct deduction from the carrying value of the associated debt instrument, consistent with debt discounts. Subsequent to the issuance of ASU 2015-03, the SEC staff announced that the presentation of debt issuance costs associated with line-of-credit arrangements may be presented as an asset. This announcement was codified by the FASB in ASU 2015-15. These ASUs were effective for the year ended December 31, 2016, and the adoption did not have a material impact on the Company’s financial condition, results of operations or cash flows.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosures. ASU 2014-15 was effective for the year ended December 31, 2016, and its adoption did not have a material impact on the Company’s financial condition, results of operations or cash flows.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Share and per Share Amounts)
Recent Accounting Pronouncements Not Yet Adopted
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718, Compensation-Stock Compensation. ASU 2017-09 is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and early adoption is permitted. The Company is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment. The ASU requires impairment charges to be based on the first step in today’s two-step impairment test. ASU 2017-04 is effective for annual and interim impairment tests performed in periods beginning after December 15, 2021, and early adoption is permitted. Management doesdid not expect the adoption of this guidance to have any impact on the Company's financial position, results of operations, or cash flows.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business, which amends the guidance of FASB Accounting Standards Codification Topic 805, “Business Combinations”, adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas ofapplicable recent accounting including acquisitions, disposals, goodwill, and consolidation. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted under certain circumstances. The impact from the adoption of this standard is dependent upon future transactions.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments, which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. ASU2016-15 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, and early adoption is permitted. Entities will have to apply the guidance retrospectively, but if it is impracticable to do so for an issue, the amendments related to that issue would be applied prospectively. The Company is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases. The standard will affect all entities that lease assets and will require lessees to recognize a lease liability and a right-of-use asset for all leases (except for short- term leases that have a duration of less than one year) as of the date on which the lessor makes the underlying asset available to the lessee. For lessors, accounting for leases is substantially the same as in prior periods. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020, and early adoption is permitted. For leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, lessees and lessors must apply a modified retrospective transition approach. While the Company expects the adoption of this standard to result in an increase to the reported assets and liabilities, it haspronouncements not yet determined the full impact the adoption of this standard will have on its financial statements and related disclosures.adopted.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This new guidance will replace most existing GAAP guidance on this topic. The new revenue recognition standard
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Share and per Share Amounts)
provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers: Deferral of the effective date,” which deferred by one year the effective date for the new revenue reporting standard for entities reporting under GAAP. In accordance with the deferral, this guidance will be effective for the Company beginning in the year ended December 31, 2019. This guidance can be applied either retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption. In December 2016, the FASB issued ASU 2016-20, “Revenue from Contracts with Customers, Technical Corrections andImprovements to Topic 606,” which made 12 additional technical corrections and improvements to the new revenue standard. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” clarifying the implementation guidance on principal versus agent considerations. Specifically, an entity is required to determine whether the nature of a promise is toprovide the specified good or service itself (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). The determination influences the timing and amount of revenue recognition. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing”, clarifying the implementation guidance on identifying performance obligations and licensing. Specifically, the amendments reduce the cost and complexity of identifying promised goods or services and improve the guidance for determining whether promises are separately identifiable. The amendments also provide implementation guidance on accounting for an entity’s promise to grant a license. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients,” clarifying guidance on assessingcollectability, presentation of sales taxes, noncash consideration, completed contracts andcontract modifications.The effective date and transition requirements for ASU 2016-20, ASU 2016-08 and ASU 2016-10 are the same as the effective date and transition requirements for ASU 2014-09, which will be effective for the Company beginning January 1, 2019.
The Company is still assessing all potential impacts of the new standard on its consolidated financial statements. Given the comprehensive nature of the standard, the Company has already taken steps to identify the impact on its consolidated financial results. The Company has completed a diagnostic which highlighted potential differences between current accounting policies and the new standard. Additionally, the Company has engaged a third-party service provider to assist in its evaluation of customer contracts to identify the attributes that could result in a different accounting treatment under ASU 2014-09. From an information technology perspective, the Company identified the preliminary business requirements and functionality of a new technology solution and have selected a software provider. The Company has not yet reached a conclusion as to whether the quantitative effect of the adoption of the new standard on its revenue will be material. The Company will continue to monitor and assess the impact of the changes of the new standard and the related interpretations of its application as they become available.
3. Discontinued Operations
On April 20, 2015, the Company created a wholly owned subsidiary, Republic Wireless, Inc. (“Republic”), which was incorporated in Delaware. On November 30, 2016, the Company completed a pro-rata distribution of the common stock of Republic to its stockholders of record as of the close of business (the “Spin-Off”). Each of its stockholders received one share of Republic common stock for each share of Bandwidth common or redeemable convertible preferred stock held as of the close of business on
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and per Share Amounts)
November 30, 2016. Accordingly, the results of operations, financial condition and cash flows of Republic have been presented as discontinued operations for all periods presented in the accompanying consolidated financial statements.
The distribution was recorded at the carrying amount of Republic’s net liabilities of $1,101 as of November 30, 2016, as follows:
|
| | | |
| Assets | |
| Accounts receivable, net of allowance for doubtful accounts | $ | 1,199 |
|
| Inventory | 7,305 |
|
| Prepaid expenses and other current assets | 2,540 |
|
| Total current assets | 11,044 |
|
| Property and equipment, net | 1,898 |
|
| Other long-term assets | 196 |
|
| Total assets | $ | 13,138 |
|
|
| | | |
| Liabilities | |
| Accounts payable | $ | 7,126 |
|
| Accrued expenses | 3,662 |
|
| Deferred revenue | 3,310 |
|
| Total current liabilities | 14,098 |
|
| Other long-term liabilities | 141 |
|
| Total liabilities | $ | 14,239 |
|
| Net liabilities of Republic | $ | 1,101 |
|
In addition, the Company distributed $30,000 in cash to Republic in connection with the Spin-Off. Accordingly, the net assets distributed to the stockholders in connection with the Spin-Off was $28,899. Bandwidth has not otherwise provided nor does it intend to provide financial support to Republic.
Given the nature of the Spin-Off transaction, the equity holders of Bandwidth are comprised of substantially the same individuals and entities that are the equity owners of Republic. The Company determined the equity owners of Republic are related parties of Bandwidth. As described in Note 15, the Company has certain involvement with Republic via ongoing services arrangements, with these ongoing services arrangements creating a variable interest in Republic. The Company assessed the relationship with Republic under guidance for variable interest entities, and because investors in Republic have disproportionate voting rights, the Company concluded that Republic is a variable interest entity (“VIE”).
Republic is a provider of Wi-Fi centric mobile services directly to retail consumers. Bandwidth determined it is not the primary beneficiary of Republic, as Bandwidth and its related parties do not individually have power to direct the activities that most significantly impact Republic’s economic performance and power is not shared. Bandwidth’s involvement with Republic involves providing certain support services through the Transition Services Agreement, which does not give it power over key activities. Key activities are directed by the Board of Directors Republic, which require majority approval. Bandwidth does not have direct representation on the Board of Republic and is not able to exert power over its key activities. Bandwidth does not have an implicit variable interest in Republic. Republic is financed primarily through the cash distribution in connection with the Spin-off and its own ongoing operations.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and per Share Amounts)
The Company’s maximum exposure to loss relating to this variable interest entity is limited to amounts due under the service agreements between Bandwidth and Republic as described in Notes 12, "Commitments and Contingencies" and 15, "Related Parties".
The Spin-Off represented a strategic shift to Bandwidth’s business. The Company believes that for US Federal income tax purposes, the Spin-Off will qualify as tax-free for Republic, Bandwidth and its stockholders. The Company entered into a tax sharing agreement with Republic that governs rights and obligations after the Spin-Off regarding income taxes and other taxes, including tax liabilities and benefits, attributes, returns and contests.
The table below provides the operating results of the discontinued operations through the date of the Spin-Off for the years ended December 31, 2016:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 |
| | | | |
| Revenue | $ | 91,304 |
| | $ | 83,156 |
|
| Direct costs of network services and equipment | (78,922 | ) | | (61,582 | ) |
| Operating expense | (24,692 | ) | | (25,502 | ) |
| Depreciation and interest | (1,355 | ) | | (949 | ) |
| Income tax benefit | — |
| | 1,805 |
|
| Loss from discontinued operations | $ | (13,665 | ) | | $ | (3,072 | ) |
4. Fair Value of Financial InstrumentsMeasurements
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value as of December 31, 20162022 and 20172021 because of the relatively short duration of these instruments. The carrying valueMarketable securities consist of long-termtime deposits, corporate debt securities, U.S. treasury securities, and commercial paper not otherwise classified as cash equivalents. All marketable securities are considered to be available-for-sale and are recorded at December 31, 2016 approximatestheir estimated fair value given interest ratesvalues. Unrealized gain and losses for available-for-sale securities are based on market rates. The rates are subject to change monthly, quarterly, semi-annually or annually at the Company’s election.
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis,recorded in periods subsequent to their initial measurement. The hierarchy requires use of observable inputs when available, and to minimize the use of unobservable inputs when determining fair value. The three tiers are defined as follows:other comprehensive loss.
Level 1. Observable inputs based on unadjusted quoted prices in active markets for identical assets or liabilities;102
Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs for which there is little or no market data, which requires the Company to develop its own assumptions.
Notes to Consolidated Financial Statements (continued)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Share and per Share Amounts)
The Company evaluated its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period.
The following table summarizestables summarize the assets measured at fair value as of December 31, 20162022 and 2017:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized cost or carrying value | | Unrealized gains | | Unrealized losses | | Fair value measurements on a recurring basis
December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | | | | | | |
| (In thousands) |
| Financial assets: | | | | | | | | | | | | | |
| Cash and cash equivalents: | | | | | | | | | | | | | |
| Money market account | $ | 36,728 | | | $ | — | | | $ | — | | | $ | 36,728 | | | $ | — | | | $ | — | | | $ | 36,728 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Commercial paper | 28,254 | | | — | | | — | | | 28,254 | | | — | | | — | | | 28,254 | |
| | | | | | | | | | | | | |
| Total included in cash and cash equivalents | $ | 64,982 | | | $ | — | | | $ | — | | | $ | 64,982 | | | $ | — | | | $ | — | | | $ | 64,982 | |
| Marketable securities: | | | | | | | | | | | | | |
| Time deposits | $ | 6,645 | | | $ | — | | | $ | (15) | | | $ | 6,630 | | | $ | — | | | $ | — | | | $ | 6,630 | |
| U.S. treasury securities | 14,718 | | | 74 | | | — | | | 14,792 | | | — | | | — | | | 14,792 | |
| Corporate debt securities | 23,412 | | | — | | | (97) | | | — | | | 23,315 | | | — | | | 23,315 | |
| Commercial paper | 26,142 | | | 352 | | | — | | | 26,494 | | | — | | | — | | | 26,494 | |
| Total marketable securities | $ | 70,917 | | | $ | 426 | | | $ | (112) | | | $ | 47,916 | | | $ | 23,315 | | | $ | — | | | $ | 71,231 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Total financial assets | $ | 135,899 | | | $ | 426 | | | $ | (112) | | | $ | 112,898 | | | $ | 23,315 | | | $ | — | | | $ | 136,213 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Fair value measurements on a recurring basis
December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | | | | | | |
| | | | | | | (In thousands) |
| Financial assets: | | | | | | | | | | | | | |
| Cash and cash equivalents: | | | | | | | | | | | | | |
| Money market account | | | | | | | $ | 241,157 | | | $ | — | | | $ | — | | | $ | 241,157 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Total financial assets | | | | | | | $ | 241,157 | | | $ | — | | | $ | — | | | $ | 241,157 | |
The Company classifies its marketable securities as current assets as they are available for current operating needs. The following table summarizes the contractual maturities of marketable securities as of December 31, 2022:
| | | | | | | | | | | |
| Amortized cost | | Aggregate fair value |
| | | |
| (In thousands) |
| Financial assets: | | | |
| Less than one year | $ | 70,917 | | | $ | 71,231 | |
| | | |
| Total | $ | 70,917 | | | $ | 71,231 | |
As of December 31, 2022, the marketable securities were in an unrealized gain position. The Company has determined that (i) it does not have the intent to sell any of these investments and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. As of December 31, 2022, the Company anticipates that it will recover the entire amortized cost basis of its marketable securities before maturity.
Notes to Consolidated Financial Statements (continued)
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements on a Recurring Basis
December 31, 2016 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Stockholders’ anti-dilutive arrangement | $ | — |
| | $ | — |
| | $ | 184 |
| | $ | 184 |
|
| Total | $ | — |
| | $ | — |
| | $ | 184 |
| | $ | 184 |
|
Proceeds from sales of marketable securities were $34.4 million for the year ended December 31, 2022. There were no sales in marketable securities during the years ended December 31, 2021 and 2020. |
| | | | | | | | | | | | | | | |
| | Fair Value Measurements on a Recurring Basis
December 31, 2017 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Money Market Account | $ | 28,015 |
| | $ | — |
| | $ | — |
| | $ | 28,015 |
|
| Total | $ | 28,015 |
| | $ | — |
| | $ | — |
| | $ | 28,015 |
|
As of December 31, 2022, the fair value of the 2026 Convertible Notes and 2028 Convertible Notes, as further described in Note 8, “Debt,” to these consolidated financial statements, was approximately $180.9 million and $156.5 million, respectively. As of December 31, 2021, the fair value of the 2026 Convertible Notes and the 2028 Convertible Notes was approximately $427.1 million and $194.2 million, respectively. The fair value was determined based on the closing price for the Convertible Notes on the last trading day of the reporting period and is considered as Level 2 in the fair value hierarchy.
As of the years ended December 31, 2022 and 2021, the fair value of the Pension Plan’s assets, as further described in Note 13, “Employee Benefit Plans,” to these consolidated financial statements, was approximately $3.2 million and $3.0 million, respectively. The fair value was determined by an independent actuary and is considered as Level 2 in the fair value hierarchy.
The Company monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. There were no transfers between Levels 1, 2 or 3 during the years ended December 31, 20162022 and 2017.2021.
The money market account is included in cash and cash equivalents in the consolidated balance sheets as of December 31, 20162022 and 2017.2021.
On February 22, 2011, the Company entered into an anti-dilutive arrangement with the Principal Non-Founder Stockholders (“Principal Stockholders”). Under the terms of the agreement, the Principal Stockholders received the right (“shareholders’ anti-dilutive arrangement”) to purchase a pro-rata number of shares based on their ownership percentage of outstanding shares, when certain option holders exercise his or her stock option. The price at which the Principal Stockholders may purchase their pro-rata shares matches the exercise price of the option exercised. The Principal Stockholders have 90 days from the date of receipt of notice to inform the Company of their intention to purchase stock under the terms of the agreement. On a quarterly basis, the Company adjusts this liability to fair value.
The agreement terminates by one of the following events:
closing of a “Qualified Public Offering,” which is defined as one resulting in aggregate net proceeds to the Company equal to or greater than $20 million, or
a “true sale” as defined in the Investors’ Rights Agreement.
The shareholders’ anti-dilutive arrangement is included in other liabilities in the consolidated balance sheets as of December 31, 2016, and as a result of the Company's IPO, the agreement terminated on November 9, 2017.
Prior to the termination date, the fair value of the shareholders’ anti-dilutive arrangement was estimated using the Black-Scholes-Merton option pricing model. The significant unobservable inputs used in the fair
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Share and per Share Amounts)
value measurement of the shareholders’ anti-dilutive arrangement were the fair value of the Company’s stock and the expected term of the options. The expected term was calculated as a weighted average of the estimated time to IPO as of the measurement date and the historical average term of options subject to the agreement which were vested and expired or were exercised. Volatility was based on the historical volatility of certain public entities that are similar to the Company as the Company did not have sufficient historical transactions of its own shares on which to base expected volatility.
5.4. Financial Statement Components
Accounts receivable, net of allowance for doubtful accountsallowances consist of the following:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | | |
| (In thousands) |
| Trade accounts receivable | $ | 40,332 | | | $ | 31,036 | |
| Unbilled accounts receivable | 33,863 | | | 31,786 | |
| Allowance for doubtful accounts and reserve for expected credit losses | (1,191) | | | (1,661) | |
| Other accounts receivable | 1,461 | | | 411 | |
| Total accounts receivable, net | $ | 74,465 | | | $ | 61,572 | |
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2017 |
| Trade accounts receivable | $ | 31,734 |
| | $ | 44,692 |
|
| Unbilled accounts receivable | 7,368 |
| | 8,653 |
|
| Allowance for doubtful accounts | (22,571 | ) | | (32,463 | ) |
| Other accounts receivable | 307 |
| | 343 |
|
| Total accounts receivable, net | $ | 16,838 |
| | $ | 21,225 |
|
Notes to Consolidated Financial Statements (continued)
Components of allowance for doubtful accounts and reserve for expected credit losses are as follows:
|
| | | | | | | |
| | Year Ended December 31, |
| Allowance for doubtful accounts: | 2016 | | 2017 |
| Balance, beginning of period | $ | 238 |
| | $ | 255 |
|
| Charged to bad debt expense | 238 |
| | 176 |
|
| Deductions(1) | (221 | ) | | (242 | ) |
| Balance, end of period | $ | 255 |
| | $ | 189 |
|
________________________
(1) Write off of uncollectible accounts after all collection efforts have been exhausted.
|
| | | | | | | |
| | Year Ended December 31, |
| Allowance for CABS revenue: | 2016 | | 2017 |
| Balance, beginning of period | $ | 12,317 |
| | $ | 22,316 |
|
| Billings deemed not probable of collection(1) | 10,494 |
| | 10,024 |
|
| Deductions(2) | (495 | ) | | (66 | ) |
| Balance, end of period | $ | 22,316 |
| | $ | 32,274 |
|
| | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | |
| | | | | | | | | |
| | | | | (In thousands) | | |
| Allowance for doubtful accounts: | | | | | | | | | |
| Balance, beginning of period | | | | | $ | (1,661) | | | $ | (1,203) | | | |
| Charged to bad debt expense, net of reversals | | | | | (543) | | | (913) | | | |
| Deductions (1) | | | | | 983 | | | 416 | | | |
| Impact of foreign currency translation | | | | | 30 | | | 39 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Balance, end of period | | | | | $ | (1,191) | | | $ | (1,661) | | | |
| | | | | | | | | |
________________________
(1) Represents amounts billed but where collectibility is not probable based on customers collection experience. Amounts were charged to a contra-revenue account. Refer also to Note 17, Subsequent Events," for discussion of the settlement agreement that was entered into subsequent to year-end that resolved the ongoing dispute and litigation with Verizon, which is a CABS customer of the Company and represented the majority of the outstanding CABS receivables and related allowance.
(2) Write offWrite-off of uncollectible accounts after all collection efforts have been exhausted.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Share and per Share Amounts)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| CABS revenue: | 2015 | | 2016 | | 2017 |
| Billed | $ | 15,617 |
| | $ | 19,838 |
| | $ | 19,147 |
|
| Revenue recognized | 8,454 |
| | 9,344 |
| | 9,123 |
|
| Billings deemed not probable of collection(1) | $ | 7,163 |
| | $ | 10,494 |
| | $ | 10,024 |
|
________________________
(1) Represents amounts billed but where collectibility is not probable based on customers collection experience. Amounts were charged to a contra-revenue account.
Accrued expenses and other current liabilities consisted of the following:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | | |
| (In thousands) |
| Accrued expense | $ | 29,990 | | | $ | 31,264 | |
| Accrued compensation and benefits | 21,595 | | | 19,042 | |
| Accrued sales, use, VAT and telecommunications related taxes | 7,799 | | | 11,046 | |
| | | |
| Current portion of finance lease | 143 | | | 177 | |
| | | |
| Income tax payable | 2,235 | | | 3,420 | |
| Other accrued expenses | 815 | | | 972 | |
| Total accrued expenses and other current liabilities | $ | 62,577 | | | $ | 65,921 | |
5. Right-of-Use Asset and Lease Liabilities
Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company determines if an arrangement is a lease at inception. ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Operating lease expense attributable to lease payments is recognized on a straight-line basis over the lease term and is part of allocated facilities costs based on employee headcount within the cost of revenue, research and development, sales and marketing, and general and administrative expense categories on the Company’s consolidated statements of operations. Finance leases result in the recognition of depreciation expense, which is recognized on a straight-line basis over the expected life of the leased asset, and interest expense, which is recognized following an effective interest rate method. Depreciation expense attributable to finance leases is included in operating expenses on the Company’s consolidated statements of operations. The Company presents the operating leases in long-term assets and current and long-term liabilities in the accompanying consolidated balance sheets. Finance leases are reported in property, plant and equipment, net, accrued expenses and other current liabilities, and other liabilities on the Company’s consolidated balance sheets.
The Company has entered into various operating lease agreements for office space and finance lease agreements for automobiles.
Notes to Consolidated Financial Statements (continued)
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2017 |
| Accrued expense | $ | 6,853 |
| | $ | 6,851 |
|
| Accrued compensation and benefits | 4,373 |
| | 5,237 |
|
| Accrued sales, use, and telecom related taxes | 2,769 |
| | 3,030 |
|
| Other accrued expenses | 654 |
| | 515 |
|
| Total accrued expenses | $ | 14,649 |
| | $ | 15,633 |
|
As of December 31, 2022, the Company had various leased properties in the United States and internationally, with remaining lease terms of five months to 4 years, some of which include options to extend the leases for up to 5 years. None of the options to extend the leases are recognized in operating lease ROU assets or lease liabilities. The Company has one lease with an early-termination option, which it does not expect to exercise.
The components of lease expense recorded in the consolidated statement of operations were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | (In thousands) |
| Operating lease cost | | | | | $ | 7,750 | | | $ | 6,818 | | | $ | 5,949 | |
| Finance lease cost: | | | | | | | | | |
| Depreciation of assets | | | | | 183 | | | 218 | | | 20 | |
| Interest on lease liabilities | | | | | 14 | | | 18 | | | 2 | |
| | | | | | | | | |
| | | | | | | | | |
| Sublease income | | | | | (206) | | | (384) | | | (384) | |
| Total net lease cost | | | | | $ | 7,741 | | | $ | 6,670 | | | $ | 5,587 | |
During the years ended December 31, 2022, 2021 and 2020, short-term operating lease expense was $0.6 million, $1.3 million, and $0.2 million, respectively.
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | | | | | | | |
| | As of December 31, |
| Leases | Classification | 2022 | | 2021 |
| | | | |
| | (In thousands) |
| Assets: | | | | |
| Operating lease assets | Operating right-of-use asset, net (1) | $ | 9,993 | | | $ | 14,061 | |
| Finance lease assets | Property, plant and equipment, net (2) | 307 | | | 373 | |
| Total leased assets | $ | 10,300 | | | $ | 14,434 | |
| | | | |
| Liabilities: | | | | |
| Current | | | | |
| Operating | Operating lease liability, current | $ | 7,450 | | | $ | 5,807 | |
| Finance | Accrued expenses and other current liabilities | 143 | | | 177 | |
| Non-current | | | | |
| Operating | Operating lease liability, net of current portion | 4,640 | | | 10,958 | |
| Finance | Other liabilities | 172 | | | 202 | |
| Total lease liabilities | $ | 12,405 | | | $ | 17,144 | |
________________________
(1) Operating lease assets are recorded net of accumulated amortization of $17.7 million and $14.8 million as of December 31, 2022 and 2021, respectively.
(2) Finance lease assets are recorded net of accumulated depreciation of $0.3 million and $0.2 million as of December 31, 2022 and 2021, respectively.
Notes to Consolidated Financial Statements (continued)
Supplemental cash flow and other information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | (In thousands) |
| Cash paid for amounts included in the measurement of lease liabilities | | | | | | | | | |
| Operating cash flows from operating leases | | | | | $ | 7,580 | | | $ | 6,227 | | | $ | 5,301 | |
| | | | | | | | | |
| Financing cash flows from finance leases | | | | | 190 | | | 212 | | | 28 | |
| | | | | $ | 7,770 | | | $ | 6,439 | | | $ | 5,329 | |
| | | | | | | | | |
| Weighted average remaining lease term (in years) | | | | | | | | | |
| Operating leases | | | | | 2.12 | | 2.95 | | 3.79 |
| Finance leases | | | | | 2.53 | | 2.44 | | 2.99 |
| | | | | | | | | |
| Weighted average discount rate | | | | | | | | | |
| Operating leases | | | | | 4.58 | % | | 4.78 | % | | 4.81 | % |
| Finance leases | | | | | 5.48 | % | | 3.91 | % | | 4.00 | % |
| | | | | | | | | |
Maturities of lease liabilities were as follows:
| | | | | | | | | | | | | |
| | | As of December 31, 2022 |
| | | |
| | | Operating Leases | | Finance Leases |
| | | | | |
| | | (In thousands) |
| | | | | |
| 2023 | | | $ | 7,809 | | | $ | 162 | |
| 2024 | | | 2,614 | | | 104 | |
| 2025 | | | 1,587 | | | 51 | |
| 2026 | | | 655 | | | 21 | |
| | | | | |
| | | | | |
| Total lease payments | | | 12,665 | | | 338 | |
| Less: imputed interest | | | (575) | | | (23) | |
| | | | | |
| Total lease obligations | | | 12,090 | | | 315 | |
| Less: current obligations | | | (7,450) | | | (143) | |
| Long-term lease obligations | | | $ | 4,640 | | | $ | 172 | |
Future Corporate Headquarters
On June 4, 2021, the Company purchased approximately 40 acres of undeveloped land (the “Property”) in Raleigh, North Carolina, from the State of North Carolina (the “State”) for $30.0 million. Additionally, as consideration for the Property, the Company agreed to construct, at its expense, a parking lot and related improvements (the “Parking Improvements”) on land owned by the State adjacent to the Property. Subsequent to the purchase of the Property, the Company sold a portion of the Property constituting approximately 23.76 acres (the “Conveyed Parcel”) to USEF Edwards Mill Owner, LLC (the “Developer”) for $17.5 million. The Company retained approximately 17.06 acres of the Property, which was recorded at cost and is included in the Company’s consolidated balance sheets as a component of property, plant and equipment, net. A lease incentive was recognized for the difference between the consideration received from the Developer for the Conveyed Parcel and the cost basis of the Conveyed Parcel and is included as a component of other liabilities on the consolidated balance sheets. As of
Notes to Consolidated Financial Statements (continued)
December 31, 2022, the balance of the lease incentive, including additional incentives obtained during project development, was $10.5 million.
On May 27, 2021, the Company entered into a Lease Agreement (the “Lease”) with the Developer for the Conveyed Parcel, together with improvements for office and related infrastructure to be constructed thereon, collectively constituting approximately 534,000 gross square feet (the “Project”). The lease became effective upon closing of the sale of the Conveyed Parcel to the Developer. When construction of the Project is completed, the Company intends to relocate its corporate headquarters to the Project. The lease term will commence upon substantial completion of the final building to be delivered, as evidenced by a certificate of occupancy issued by the City of Raleigh (the “Commencement Date”), and continue for a period of twenty (20) years (the “Initial Term”). It is anticipated that the Commencement Date will occur in mid-2023. The Company has the option to renew the Initial Term for two ten-year periods at a rental rate equal to 100% of the then-prevailing market rental rate for comparable buildings in the Raleigh, North Carolina, market. Upon the effective date, the Company deposited $2.5 million with the Developer as security on the lease. Additionally, the Company made deposits of $21.7 million to fund certain improvements expected to be constructed as part of the development of the Project. Deposits are recorded in other long-term assets on the Company’s consolidated balance sheets.
No ROU assets or lease liabilities have been recognized in connection with the lease as of December 31, 2022. Future lease payments are included in Note 12, “Commitments and Contingencies,” to these consolidated financial statements.
6. Property, Plant and Equipment
Property, plant and equipment, net consisted of the following:
| | | | As of December 31, |
| | | | | | | 2022 | | 2021 |
| | December 31, | | | | |
| | 2016 | | 2017 | | (In thousands) |
| Furniture and fixtures | $ | 680 |
| | $ | 863 |
| Furniture and fixtures | $ | 16,494 | | | $ | 2,240 | |
| Computer and office equipment | 7,539 |
| | 7,545 |
| Computer and office equipment | 14,160 | | | 5,419 | |
| Telecommunications equipment | 13,718 |
| | 19,985 |
| Telecommunications equipment | 80,251 | | | 76,963 | |
| Leasehold improvements | 453 |
| | 453 |
| Leasehold improvements | 6,410 | | | 6,970 | |
| Software development costs | 13,676 |
| | 15,517 |
| |
| Software | | Software | 7,051 | | | 6,942 | |
| Internal-use software development | | Internal-use software development | 23,677 | | | 22,917 | |
| Automobile | 10 |
| | 10 |
| Automobile | 665 | | | 616 | |
| Land | | Land | 23,090 | | | 17,269 | |
| Total cost | 36,076 |
| | 44,373 |
| Total cost | 171,798 | | | 139,336 | |
| Less—accumulated depreciation | (24,896 | ) | | (29,427 | ) | Less—accumulated depreciation | (72,045) | | | (69,732) | |
| Total property and equipment, net | $ | 11,180 |
| | $ | 14,946 |
| |
| Total property, plant and equipment, net | | Total property, plant and equipment, net | $ | 99,753 | | | $ | 69,604 | |
The Company capitalizes the costs to design software for internal use related to the development of its platform during the application development stage of the projects. The costs are primarily comprised of salaries and benefits of the projects’ engineers and product development teams. Internally developed software is reported at cost less accumulated amortization. Amortization begins once the project is substantially complete and ready for its intended use. The Company amortizes the asset on a straight-line basis over the useful life, which is estimated to be three years. Costs incurred prior to the application development stage, maintenance activities or minor upgrades are expensed in the period incurred. Unamortized software development costs were approximately $4,056$8.4 million and $3,795$7.5 million as of December 31, 20162022 and 2017,2021, respectively.
The Company capitalized $3.8 million, $3.9 million, and $2.3 million of software development costs for the years ended December 31, 2022, 2021 and 2020, respectively.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Share and per Share Amounts)Notes to Consolidated Financial Statements (continued)
Amortization expense related to capitalized software development costs were $2,842, $2,820$2.2 million, $1.8 million, and $2,133$2.0 million for the years ended December 31, 2015, 20162022, 2021 and 2017,2020, respectively. As of December 31, 2022, unamortized implementation costs related to cloud computing arrangements are $0.3 million, of which $0.1 million are included in prepaid expenses and other current assets and $0.2 million are included in other long-term assets.
The Company leases automobiles under leases accounted for as finance leases with expiration dates ranging from February 7, 2023 to June 23, 2026. As of December 31, 2022, cost and accumulated depreciation of the assets under finance leases recorded by the Company were $0.7 million and $0.3 million, respectively. As of December 31, 2021, cost and accumulated depreciation of the assets under finance leases recorded by the Company were $0.6 million and $0.2 million, respectively.
The Company recognized an impairment of $71, $91$0.5 million, $0.5 million, and $81$0.2 million during the years ended December 31, 2015, 20162022, 2021 and 2017,2020, respectively, related to capitalized software development costs that provided no future benefit and therefore were impaired. This expense is reflected within other income (expense), net as of December 31, 2022 and cost of revenue as of December 31, 2021 and 2020 in the accompanying consolidated statements of operations.
The Company capitalized $3,011, $2,230 and $2,942 of software development costs during the years ended December 31, 2015, 2016 and 2017, respectively.
The Company recognized depreciation expense, which includes amortization of capitalized software development costs, as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | (In thousands) |
| Cost of revenue | | | | | $ | 13,602 | | | $ | 12,606 | | | $ | 9,997 | |
| Research and development | | | | | 2,311 | | | 2,166 | | | 1,446 | |
| Sales and marketing | | | | | 1,331 | | | 1,090 | | | 1,275 | |
| General and administrative | | | | | 1,175 | | | 1,661 | | | 419 | |
| Total depreciation expense | | | | | $ | 18,419 | | | $ | 17,523 | | | $ | 13,137 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Cost of revenue | $ | 5,258 |
| | $ | 4,574 |
| | $ | 4,315 |
|
| Research and development | 21 |
| | 29 |
| | 81 |
|
| Sales and marketing | 16 |
| | 21 |
| | 27 |
|
| General and administrative | 872 |
| | 627 |
| | 450 |
|
| Total depreciation expense | $ | 6,167 |
| | $ | 5,251 |
| | $ | 4,873 |
|
Notes to Consolidated Financial Statements (continued) 7. Goodwill and Intangible Assets
Goodwill
The changes in carrying amount of goodwill were as follows:
| | | | | |
| Total |
| |
| (In thousands) |
| Balance as of December 31, 2020 | $ | 372,239 | |
| Measurement period adjustment | 999 | |
| Impact of foreign currency translation | (28,815) | |
| Balance as of December 31, 2021 | 344,423 | |
| |
| Impact of foreign currency translation | (18,018) | |
| Balance as of December 31, 2022 | $ | 326,405 | |
Intangible Assets
Intangible assets, net consisted of the following as of December 31, 2016:2022:
| | | | | | | | | | | Gross
Amount | | Accumulated
Amortization | | Net Carrying
Value | | Amortization
Period |
| | Gross Amount | | Accumulated Amortization | | Net Carrying Value | | Amortization Period | | | | | | | | |
| | | | | | | | (Years) | | (In thousands) | | (In years) |
| Customer relationships | $ | 10,396 |
| | $ | (3,032 | ) | | $ | 7,364 |
| | 20 | Customer relationships | $ | 141,146 | | | $ | (25,037) | | | $ | 116,109 | | | 15 - 20 |
| Domain name and related trademarks | 2,678 |
| | (2,324 | ) | | 354 |
| | 3–7 | |
| Licenses, amortizable | 341 |
| | (341 | ) | | — |
| | 2 | |
| Non-compete agreements | 139 |
| | (139 | ) | | — |
| | 2–5 | |
| | Developed technology | 775 |
| | (775 | ) | | — |
| | 3 | Developed technology | 77,409 | | | (16,772) | | | 60,637 | | | 10 |
| Other, definite lived | | Other, definite lived | 2,828 | | | (2,828) | | | — | | | 2 - 7 |
| Licenses, indefinite lived | 764 |
| | — |
| | 764 |
| | Indefinite | Licenses, indefinite lived | 624 | | | — | | | 624 | | | Indefinite |
| | Total intangible assets, net | $ | 15,093 |
| | $ | (6,611 | ) | | $ | 8,482 |
| | Total intangible assets, net | $ | 222,007 | | | $ | (44,637) | | | $ | 177,370 | | |
Intangible assets, net consisted of the following as of December 31, 2017:2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross
Amount | | Accumulated
Amortization | | Net Carrying
Value | | Amortization
Period |
| | | | | | | |
| (In thousands) | | (In years) |
| Customer relationships | $ | 155,081 | | | $ | (16,861) | | | $ | 138,220 | | | 15 - 20 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Developed technology | 82,548 | | | (10,315) | | | 72,233 | | | 10 |
| Other, definite lived | 3,158 | | | (3,158) | | | — | | | 2 - 7 |
| Licenses, indefinite lived | 764 | | | — | | | 764 | | | Indefinite |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total intangible assets, net | $ | 241,551 | | | $ | (30,334) | | | $ | 211,217 | | | |
|
| | | | | | | | | | | | | |
| | Gross Amount | | Accumulated Amortization | | Net Carrying Value | | Amortization Period |
| | | | | | | | (Years) |
| Customer relationships | $ | 10,396 |
| | $ | (3,552 | ) | | $ | 6,844 |
| | 20 |
| Domain name and related trademarks | 2,678 |
| | (2,643 | ) | | 35 |
| | 3–7 |
| Licenses, amortizable | 341 |
| | (341 | ) | | — |
| | 2 |
| Non-compete agreements | 139 |
| | (139 | ) | | — |
| | 2–5 |
| Developed technology | 775 |
| | (775 | ) | | — |
| | 3 |
| Licenses, indefinite lived | 764 |
| | — |
| | 764 |
| | Indefinite |
| Total intangible assets, net | $ | 15,093 |
| | $ | (7,450 | ) | | $ | 7,643 |
| | |
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Share and per Share Amounts)Notes to Consolidated Financial Statements (continued)
The Company recognized amortization expense as follows:
Amortization expense | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | (In thousands) |
| Cost of revenue | | | | | $ | 7,657 | | | $ | 8,543 | | | $ | 1,445 | |
| | | | | | | | | |
| Sales and marketing | | | | | 9,523 | | | 10,576 | | | 2,221 | |
| | | | | | | | | |
| Total amortization expense | | | | | $ | 17,180 | | | $ | 19,119 | | | $ | 3,666 | |
The remaining weighted average amortization period for definite lived intangible assets was $908, $891 and $839 for the years ended December 31, 2015, 2016 and 2017, respectively. The weighted average amortization period for all definite lived intangible assets is 1911.0 years.
Future estimated amortization expense for definite lived intangible assets subsequent to December 31, 2017 is as follows:
| | | | | |
| As of December 31, 2022 |
| |
| |
| (In thousands) |
| |
| 2023 | $ | 16,977 | |
| 2024 | 16,977 | |
| 2025 | 16,977 | |
| 2026 | 16,977 | |
| 2027 | 16,977 | |
| |
| Thereafter | 91,861 | |
| $ | 176,746 | |
|
| | | |
| | Amount |
| 2018 | $ | 555 |
|
| 2019 | 520 |
|
| 2020 | 520 |
|
| 2021 | 520 |
|
| 2022 | 520 |
|
| Thereafter | 4,244 |
|
| | $ | 6,879 |
|
Costs associated with the acquisition and transfer of the CLEC perpetual licenses from other entities have been capitalized and have an indefinite life. The Company evaluates these indefinite lived intangible assets on an annual basis to assess if any impairment exists. The Company performed its annual assessment on December 31, 2016 and 2017 and concluded no impairment exists.
During the year ended December 31, 2016, the Company re-evaluated its marketing and branding usage of the trade name assets acquired in the Dash acquisition as part of its annual evaluation of its intangible assets, and concluded there was no further benefit from the use of the trade name. The Company impaired the asset and recognized a loss of $695, which is reflected within general and administrative expenses in the accompanying consolidated statements of operations and comprehensive income for the year ended December 31, 2016.
8. Debt
In September 2008,Revolving Credit Facility
On June 6, 2022, the Company entered into a Loancredit agreement (the “Credit Agreement”) among the Company, as borrower,the lenders from time to time party thereto, and SecuritySilicon Valley Bank as administrative agent, issuing lender and swingline lender. The Credit Agreement which includedprovides for a $50.0 million revolving linecredit facility (the “Credit Facility”), including a $20.0 million sublimit for the issuance of letters of credit with a bank. Substantially all assets of the Company were pledged as a Security to the Loan and Security Agreement. This agreement was amended several times to increase the Company’s borrowing limit and extend the maturity date. On December 14, 2015, the Loan and Security Agreement was amended to increase the Company’s borrowing limit to $25,000 and to extend the maturity through December 14, 2017.
On February 24, 2016, the Loan and Security Agreement was amended to add the ability to include an outstanding letter of credit as an advance on the revolving line of credit. On March 28, 2016 the Loan and Security Agreement was further amended to update certain covenants for 2016 performance metrics. On December 1, 2016, the Company paid the Loan and Security Agreement in full.
On November 4, 2016, the Company entered into a Credit and Security Agreement with a syndication of four banks. The agreement includes a $40,000 term loan, and a $25,000 revolving loan, which includes a swing lineswingline subfacility of up to $1,000 and limits letters of credit commitments$5.0 million. The Credit Facility matures on June 6, 2025.
Interest on borrowings under the Credit Facility accrues at an annual rate tied to a maximum of $2,500. Substantially all assets ofbase rate or the Company are pledged as security to the Credit and Security Agreement. The term of the Credit and Security Agreement is five years and matures on November 3, 2021. The interest rate used for the debt is based,Secured Overnight Financing Rate (“SOFR”), at the Company’s election,election. Loans based on eitherSOFR bear interest at a rate equal to SOFR plus an applicable margin between 1.50% and 2.00% depending upon the Federal Funds Effective Rate or LIBORCompany’s consolidated adjusted quick ratio for the immediately preceding quarter, and loans based on the base rate bear interest at a rate equal to the base rate plus a
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands Except Sharean applicable margin between 0.50% and per Share Amounts)
stated margin, as defined in1.00% depending upon the Credit and Security Agreement. OnceCompany’s consolidated adjusted quick ratio for the immediately preceding quarter. The Company repays anyis required to pay a quarterly commitment fee equal to 0.0625% on the unused portion of the term loan, it cannot be re-borrowed.borrowing commitment. The Company is entitled to borrow and repay and borrow under the revolving loan at any time during the term of the Credit and Security Agreement. This agreementAgreement requires that the Company to meet a certain leverageminimum quick ratio and minimum debt service coverage ratio each quarter on a trailing 12-month basis.quarterly basis if the Company does not maintain the minimum liquidity amount of $70.0 million in cash and cash equivalents at all times.
On November 14, 2017, the term loan was paid in full with proceeds from the IPO. As of December 31, 20162022, unamortized debt issuance costs were $0.4 million, of which $0.2 million were included in prepaid expenses and 2017,other current assets and $0.2 million were included in other long-term assets.
As of December 31, 2022, there were no borrowings under the Company had $40,000Credit Facility and $0, respectively, outstanding on the term loan and $5,000 and $0, respectively, on the revolving loan andCompany was in compliance with all financial and non-financial covenants for all periods presented. The available borrowing capacity under the Credit and Security Agreement revolving loanFacility was $25,000$50.0 million as of December 31, 2017.2022.
Capital LeasesNotes to Consolidated Financial Statements (continued)
Convertible Senior Notes and Capped Call Transactions
2026 Convertible Notes
On February 28, 2020, the Company issued $400.0 million aggregate principal amount of 0.25% Convertible Notes due March 1, 2026 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act (the “2026 Convertible Notes”). The interest on the 2026 Convertible Notes is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2020.
The 2026 Convertible Notes may bear special interest under specified circumstances relating to the Company’s failure to comply with its reporting obligations under the indenture governing the 2026 Convertible Notes (the “2026 Indenture”) or if the 2026 Convertible Notes are not freely tradeable as required by the 2026 Indenture. The 2026 Convertible Notes will mature on March 1, 2026, unless earlier repurchased, redeemed by the Company, leases various equipment under leases accounted for as capital leases with expiration dates rangingor converted pursuant to their terms. The total net proceeds from March 2016 through October 2018. As of December 31, 2016, costthe 2026 Convertible Notes, after deducting initial purchaser discounts, costs related to the 2026 Capped Calls (as defined herein), and accumulated depreciation of the assets under capital leases recordeddebt issuance costs, paid by the Company, were $1,951approximately $344.7 million.
Each $0.001 principal amount of the 2026 Convertible Notes is initially convertible into 10.9857 shares of the Company’s Class A common stock, par value $0.001 per share, which is equivalent to an initial conversion price of approximately $91.03 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and $1,807, respectively. Asunpaid special interest. In addition, upon the occurrence of a make-whole fundamental change, as defined in the 2026 Indenture, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2026 Convertible Notes in connection with such make-whole fundamental change or during the relevant redemption period.
The 2026 Convertible Notes will be redeemable in whole or in part at the Company’s option on or after March 6, 2023, but before the fortieth (40th) scheduled trading day before the maturity date, at a cash redemption price equal to 100% of the principal amount of the 2026 Convertible Notes to be redeemed, plus accrued and unpaid interest, if any, if the last reported sale price of the Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading days ending on, and including, the trading day immediately before the date the redemption notices were sent; and the trading day immediately before such notices were sent.
Prior to the close of business on the business day immediately preceding September 1, 2025, the 2026 Convertible Notes may be convertible at the option of the holders only under the following circumstances:
(1)during any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s Class A common stock exceeds 130% of the conversion price for each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
(2)during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “measurement period”) in which the trading price per $0.001 principal amount of 2026 Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company’s Class A common stock on such trading day and the conversion rate on such trading day;
(3)upon the occurrence of certain corporate events or distributions on its Class A common stock; and
(4)if the Company calls such 2026 Convertible Notes for redemption.
Notes to Consolidated Financial Statements (continued)
On or after September 1, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 2026 Convertible Notes may, at their option, convert all or a portion of their 2026 Convertible Notes regardless of the foregoing conditions.
Prior to and during the nine months ended September 30, 2021, the conditional conversion feature of the 2026 Convertible Notes was triggered as the last reported sale price of the Company’s Class A common stock was more than or equal to 130% of the conversion price for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on or after June 30, 2020 (the last trading day of the calendar quarter), and therefore the 2026 Convertible Notes were convertible, in whole or in part, at the option of the holders between July 1, 2020 through September 30, 2021. The conditional conversion feature of the 2026 Convertible Notes was not triggered from October 1, 2021 through December 31, 2022 as the last reported sale price of the Company’s Class A common stock was not more than or equal to 130% of the conversion price for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days (the last trading day of the calendar quarter). Whether the 2026 Convertible Notes will be convertible following such period will depend on the satisfaction of this condition or another conversion condition in the future. The Company continues to classify the 2026 Convertible Notes as a long-term liability in its consolidated balance sheets as of December 31, 2017, cost2022, based on contractual settlement provisions.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of Class A common stock, or a combination of cash and accumulated depreciationshares of Class A common stock, at the Company’s election. It is the Company’s current intent to settle the principal amount of the assets2026 Convertible Notes with cash.
No sinking fund is provided for the 2026 Convertible Notes. Upon the occurrence of a fundamental change (as defined in the 2026 Indenture) prior to the maturity date, holders may require the Company to repurchase all or a portion of the 2026 Convertible Notes for cash at a price equal to the principal amount of the 2026 Convertible Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
In accounting for the issuance of the 2026 Convertible Notes, prior to the adoption of ASU 2020-06, the Company separated the 2026 Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $125.2 million and was determined by deducting the fair value of the liability component from the par value of the 2026 Convertible Notes. The difference represented the debt discount that was amortized to interest expense at an effective interest rate of 6.763% over the term of the 2026 Convertible Notes. The carrying amount of the equity component was $57.5 million and is recorded in additional paid-in-capital. The equity component was not remeasured as long as it continued to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, was amortized to interest expense at an annual effective interest rate of 6.907% over the contractual terms of the 2026 Convertible Notes. Upon adoption of ASU 2020-06 on January 1, 2022, the Company reversed the separation of the debt and equity component representing the conversion option and accounted for the 2026 Convertible Notes in their entirety as debt. The Company also reversed the amortization of the debt discount, with a cumulative adjustment to retained earnings on the adoption date.
In accounting for the transaction costs related to the 2026 Convertible Notes, prior to the adoption of ASU 2020-06, the Company allocated the total amount incurred to the liability and equity components of the 2026 Convertible Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component were approximately $8.2 million, were recorded as an additional debt discount and amortized to interest expense using the effective interest method over the contractual terms of the 2026 Convertible Notes. Issuance costs attributable to the equity component of $3.7 million were netted with the equity component in stockholders’ equity. Upon adoption of ASU 2020-06 on January 1, 2022, the Company reversed the allocation of the issuance costs to the equity component and accounted for the entire amount as debt issuance cost
Notes to Consolidated Financial Statements (continued)
that will be amortized as interest expense at an effective interest rate of 0.513% for the term of the 2026 Convertible Notes with a cumulative adjustment to retained earnings on the adoption date.
During November 2022, the Company entered into separate, privately negotiated repurchase agreements with a limited number of holders of the 2026 Convertible Notes to repurchase approximately $160.0 million aggregate principal amount of the 2026 Convertible Notes for an aggregate cash price of approximately $117.2 million. The Repurchases closed on November 28, 2022. The Company had previously entered into capped call transactions with certain financial institutions in connection with the 2026 Convertible Notes. All of these transactions are expected to remain in effect notwithstanding the Repurchases. Following the Repurchases, approximately $240.0 million principal amount of the 2026 Convertible Notes remain outstanding. The difference between the consideration used to repurchase the 2026 Convertible Notes and the carrying value of the 2026 Convertible Notes resulted in a gain of $40.2 million recorded within other income (expense), net on the Company’s consolidated statements of operations in the year ended December 31, 2022.
2028 Convertible Notes
On March 16, 2021, the Company issued $250.0 million aggregate principal amount of 0.50% Convertible Notes due April 1, 2028 in a private placement to qualified institutional buyers pursuant to Rule 144A under capital leases recordedthe Securities Act (the “2028 Convertible Notes” and, together with the 2026 Convertible Notes, the “Convertible Notes”). The interest on the 2028 Convertible Notes is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2021.
The 2028 Convertible Notes may bear special interest under specified circumstances relating to the Company’s failure to comply with its reporting obligations under the indenture governing the 2028 Convertible Notes (the “2028 Indenture”) or if the 2028 Convertible Notes are not freely tradeable as required by the 2028 Indenture. The 2028 Convertible Notes will mature on April 1, 2028, unless earlier repurchased, redeemed by the Company, or converted pursuant to their terms. The total net proceeds from the 2028 Convertible Notes, after deducting initial purchaser discounts, costs related to the 2028 Capped Calls (as defined herein), and debt issuance costs, paid by the Company, were $1,951approximately $217.0 million.
Each $0.001 principal amount of the 2028 Convertible Notes is initially convertible into 5.5781 shares of the Company’s Class A common stock, par value $0.001 per share, which is equivalent to an initial conversion price of approximately $179.27 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and $1,855, respectively.unpaid special interest. In addition, upon the occurrence of a make-whole fundamental change, as defined in the 2028 Indenture, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2028 Convertible Notes in connection with such make-whole fundamental change or during the relevant redemption period.
The 2028 Convertible Notes will be redeemable in whole or in part at the Company’s option on or after April 6, 2025, but before the fortieth (40th) scheduled trading day before the maturity date, at a cash redemption price equal to 100% of the principal amount of the 2028 Convertible Notes to be redeemed, plus accrued and unpaid interest, if any, if the last reported sale price of the Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading days ending on, and including, the trading day immediately before the date the redemption notices were sent; and the trading day immediately before such notices were sent.
Remaining payments dueOn or after April 6, 2025 until the close of business on the scheduled trading day immediately preceding the maturity date, the 2028 Convertible Notes may be convertible at the option of the holders only under the following circumstances:
(1)during any calendar quarter commencing after the calendar quarter ending on June 30, 2021 (and only during such calendar quarter), if the last reported sale price per share of the Company’s capital lease obligationsClass A common stock exceeds 130% of the conversion price for each of at least 20 trading days, whether or not
Notes to Consolidated Financial Statements (continued)
consecutive, during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
(2)during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “measurement period”) in which the trading price per $0.001 principal amount of 2028 Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company’s Class A common stock on such trading day and the conversion rate on such trading day;
(3)upon the occurrence of certain corporate events or distributions on its Class A common stock; and
(4)if the Company calls such 2028 Convertible Notes for redemption.
On or after October 1, 2027, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 2028 Convertible Notes may, at their option, convert all or a portion of their Convertible Notes regardless of the foregoing conditions.
The conditional conversion feature of the 2028 Convertible Notes was not triggered during the years ended December 31, 2022 and 2021, as the last reported sale price of the Company’s Class A common stock was not more than or equal to 130% of the conversion price for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days (the last trading day of the calendar quarter). Whether the 2028 Convertible Notes will be convertible following such period will depend on the satisfaction of this condition or another conversion condition in the future. The Company continues to classify the 2028 Convertible Notes as a long-term liability in its consolidated balance sheets as of December 31, 2017, are2022, based on contractual settlement provisions.
Upon conversion, the Company will pay or deliver, as follows:the case may be, cash, shares of Class A common stock, or a combination of cash and shares of Class A common stock, at the Company’s election. It is the Company’s current intent to settle the principal amount of the 2028 Convertible Notes with cash.
No sinking fund is provided for the 2028 Convertible Notes. Upon the occurrence of a fundamental change (as defined in the 2028 Indenture) prior to the maturity date, holders may require the Company to repurchase all or a portion of the 2028 Convertible Notes for cash at a price equal to the principal amount of the 2028 Convertible Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. |
| | | |
| | Amount |
| 2018 | $ | 92 |
|
| Less amount representing interest | — |
|
| | 92 |
|
| Less current maturities | 92 |
|
| | $ | — |
|
9. SegmentIn accounting for the issuance of the 2028 Convertible Notes, prior to the adoption of ASU 2020-06, the Company separated the 2028 Convertible Notes into liability and Geographic Information
equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $66.9 million and was determined by deducting the fair value of the liability component from the par value of the 2028 Convertible Notes. The difference represents the debt discount that was amortized to interest expense at an effective interest rate of 5.125% over the term of the 2028 Convertible Notes. The carrying amount of the equity component was $39.4 million and was recorded in additional paid-in-capital. The equity component was not remeasured as long as it continued to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, was amortized to interest expense at an annual effective interest rate of 4.959% over the contractual terms of the 2028 Convertible Notes. Upon adoption of ASU 2020-06 on January 1, 2022, the Company reversed the separation of the debt and equity component representing the conversion option and accounted for the 2028 Convertible Notes in their entirety as debt. The Company has two reportable segments, CPaaS and Other. Segments are primarily evaluated basedalso reversed the amortization of the debt discount, with a cumulative adjustment to retained earnings on revenue and gross profit. The Company does not allocate operating expenses, interest expense or income tax expensethe adoption date.
In accounting for the transaction costs related to its segments. Accordingly,the 2028 Convertible Notes, prior to the adoption of ASU 2020-06, the Company does not report such information. Additionally,allocated the CODM does not evaluatetotal amount incurred to the Company’s operating segments using discrete asset information. The segments share the majorityliability and equity components of the Company’s assets. Therefore, no segment asset information is reported.
2028
Notes to Consolidated Financial Statements (continued)
Convertible Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component were approximately $5.5 million, were recorded as an additional debt discount and amortized to interest expense using the effective interest method over the contractual terms of the 2028 Convertible Notes. Issuance costs attributable to the equity component of $2.0 million were netted with the equity component in stockholders’ equity. Upon adoption of ASU 2020-06 on January 1, 2022, the Company reversed the allocation of the issuance costs to the equity component and accounted for the entire amount as debt issuance cost that will be amortized as interest expense at an effective interest rate of 0.442% for the term of the 2028 Convertible Notes with a cumulative adjustment to retained earnings on the adoption date.
As discussed above, upon adoption of ASU 2020-06, the Company reversed the separation of the debt and equity components of the 2026 Convertible Notes and the 2028 Convertible Notes, and accounted for the Convertible Notes wholly as debt. Additionally, the issuance costs of the 2026 Convertible Notes and the 2028 Convertible Notes were accounted for as debt issuance costs in their entirety. There is no longer a net carrying amount for the equity component as of the adoption date, January 1, 2022.
The net carrying amount of the liability components of the 2026 Convertible Notes and the 2028 Convertible Notes were as follows:
| | | | | | | | | | | | | |
| | | As of December 31, |
| | | 2022 | | 2021 |
| | | | | |
| 2026 Convertible Notes: | | | (In thousands) |
| Principal | | | $ | 240,000 | | | $ | 400,000 | |
| Unamortized discount | | | N/A | | (92,034) | |
| Unamortized debt issuance costs | | | (3,805) | | | (6,043) | |
| 2026 Convertible Notes net carrying amount | | | $ | 236,195 | | | $ | 301,923 | |
| | | | | |
| 2028 Convertible Notes: | | | | | |
| Principal | | | $ | 250,000 | | | $ | 250,000 | |
| Unamortized discount | | | N/A | | (60,488) | |
| Unamortized debt issuance costs | | | (5,649) | | | (4,995) | |
| 2028 Convertible Notes net carrying amount | | | $ | 244,351 | | | $ | 184,517 | |
| Total net carrying amount | | | $ | 480,546 | | | $ | 486,440 | |
Notes to Consolidated Financial Statements (continued)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| CPaaS | | | | | |
| Revenue | $ | 101,502 |
| | $ | 117,078 |
| | $ | 131,572 |
|
| Cost of revenue | 64,760 |
| | 71,218 |
| | 75,859 |
|
| Gross profit | $ | 36,742 |
| | $ | 45,860 |
| | $ | 55,713 |
|
| Other | | | | | |
| Revenue | $ | 36,299 |
| | $ | 35,057 |
| | $ | 31,383 |
|
| Cost of revenue | 14,482 |
| | 14,000 |
| | 13,403 |
|
| Gross profit | $ | 21,817 |
| | $ | 21,057 |
| | $ | 17,980 |
|
| Consolidated | | | | | |
| Revenue | $ | 137,801 |
| | $ | 152,135 |
| | $ | 162,955 |
|
| Cost of revenue | 79,242 |
| | 85,218 |
| | 89,262 |
|
| Gross profit | $ | 58,559 |
| | $ | 66,917 |
| | $ | 73,693 |
|
All assets were held | | | | | | | | | | | | | | | |
| | | As of December 31, | | |
| | | 2022 | | 2021 | | |
| | | | | | | |
| 2026 Convertible Notes: | | | (In thousands) | | |
| Proceeds allocated to the conversion options (debt discount) | | | N/A | | $ | 125,152 | | | |
| Issuance costs | | | N/A | | (3,742) | | | |
| 2026 Convertible Notes net carrying amount | | | N/A | | $ | 121,410 | | | |
| | | | | | | |
| 2028 Convertible Notes: | | | | | | | |
| Proceeds allocated to the conversion options (debt discount) | | | N/A | | $ | 66,908 | | | |
| Issuance costs | | | N/A | | (2,019) | | | |
| 2028 Convertible Notes net carrying amount | | | N/A | | $ | 64,889 | | | |
| Total net carrying amount | | | N/A | | $ | 186,299 | | | |
The following table sets forth the interest expense recognized related to the 2026 and 2028 Convertible Notes:
| | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 |
| | | | | | | |
| 2026 Convertible Notes: | | | | | (In thousands) |
| Contractual interest expense | | | | | $ | 997 | | | $ | 1,000 | |
Amortization of debt discount (1) | | | | | N/A | | 18,505 | |
| Amortization of debt issuance costs | | | | | 1,915 | | | 1,214 | |
| Total interest expense related to the 2026 Convertible Notes | | | | | $ | 2,912 | | | $ | 20,719 | |
| | | | | | | |
| 2028 Convertible Notes: | | | | | | | |
| Contractual interest expense | | | | | $ | 1,250 | | | $ | 991 | |
Amortization of debt discount (1) | | | | | N/A | | 6,419 | |
| Amortization of debt issuance costs | | | | | 1,062 | | | 532 | |
| Total interest expense related to the 2028 Convertible Notes | | | | | $ | 2,312 | | | $ | 7,942 | |
| Total interest expense | | | | | $ | 5,224 | | | $ | 28,661 | |
________________________(1) Upon adoption of ASU 2020-06, the debt discount associated with the equity component on convertible debt outstanding was reversed, which resulted in a decrease in the United Statesamount of non-cash interest expense to be recognized going forward.
In connection with the offering of the 2026 Convertible Notes and the 2028 Convertible Notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the “2026 Capped Calls” and the “2028 Capped Calls,” respectively and, collectively, the “Capped Calls”). The 2026 Capped Calls and the 2028 Capped Calls each have an initial strike price of approximately $91.03 and $179.27 per share, respectively, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Convertible Notes and the 2028 Convertible Notes. The 2026 Capped Calls and the 2028 Capped Calls have initial cap prices of $137.40 and $260.76 per share subject to certain adjustments, respectively. The 2026 Capped Calls and the 2028 Capped Calls cover, subject to anti-dilution adjustments, approximately 4,394,276 and 1,394,525 shares of Class A common stock for the 2026 Convertible Notes and 2028 Convertible Notes, respectively. The
Notes to Consolidated Financial Statements (continued)
Capped Calls are generally intended to reduce or offset the potential dilution to the Class A common stock upon any conversion of the 2026 Convertible Notes and 2028 Convertible Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. The Capped Calls expire on the earlier of December 31, 2016(i) the last day on which any convertible securities remain outstanding and 2017.(ii) March 1, 2026 for the 2026 Capped Calls and April 1, 2028 for the 2028 Capped Calls, subject to earlier exercise. The Capped Calls are subject to either adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including a merger event, a tender offer, and a nationalization, insolvency or delisting involving the Company. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including changes in law, insolvency filings, and hedging disruptions. The Capped Call transactions are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost of $43.3 million and $25.5 million incurred to purchase the 2026 Capped Calls and the 2028 Capped Calls, respectively, was recorded as a reduction to additional paid-in capital in the accompanying consolidated balance sheets.
The Convertible Notes are effectively subordinated to the Company’s future senior secured indebtedness, including the Credit Facility, to the extent of the value of the collateral securing that indebtedness. The Convertible Notes are the senior, unsecured obligations of the Company and are equal in right of payment with the Company’s future senior unsecured indebtedness, if any, senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Convertible Notes and the Convertible Notes will be structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and preferred equity, if any, of the Company’s subsidiaries.
9. Geographic Information
The Company generates its revenue primarily in the United States. Revenue by geographicalgeographic area is detailed in the table below (which is determined based on the customer billing address):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | (In thousands) |
| United States | | | | | $ | 514,036 | | | $ | 433,463 | | | $ | 324,449 | |
| International | | | | | 59,116 | | | 57,444 | | | 18,664 | |
| Total | | | | | $ | 573,152 | | | $ | 490,907 | | | $ | 343,113 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| United States | $ | 137,514 |
| | $ | 151,618 |
| | $ | 162,393 |
|
| International | 287 |
| | 517 |
| | 562 |
|
| Total | $ | 137,801 |
| | $ | 152,135 |
| | $ | 162,955 |
|
10. Redeemable Convertible Preferred StockThe Company’s long-lived assets were primarily held in the United States as of December 31, 2022 and Stockholders’ (Deficit) Equity
Prior to the IPO, the Company had three classes of stock: 1) Series A redeemable convertible preferred stock ("Series A preferred stock"), 2) Old Class A common stock, and 3) Old Class B common stock.
On October 19, 2017, the Company’s Board of Directors approved, and on October 23, 2017 the Company effected, a 2.5-to-1 split of its common stock. In connection with the common stock split, each share of outstanding common stock, option to purchase common stock and warrant to purchase common stock was increased to 2.5 shares of common stock and the exercise price of each outstanding option or warrant to purchase common stock was proportionately decreased. The stock split has been reflected retrospectively in these consolidated financial statements. In connection with the stock split, the conversion ratio of each share of outstanding Series A preferred stock was also adjusted such that each share of outstanding Series A preferred stock converted into 2.5 shares of Old Class A common stock after the 2.5-to-1 split.
Redeemable Convertible Preferred Stock
As of January 1, 2010, the Company had authorized 5,000,000 shares of Series A preferred stock. On February 22, 2011, the Company amended and restated its Certificate of Incorporation such that the Company authorized 1,200,000 shares of preferred stock, all of which have been designated as Series A preferred stock.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and per Share Amounts)
On February 22, 2011, the Company completed the issuance of 663,907 shares of Series A preferred stock at $30.8358 per preferred share. On March 24, 2011, the Company completed the final closing of 46,093 shares of Series A preferred stock at $30.8358 per preferred share.
Pursuant to the Spin-Off, each holder of Series A preferred stock received a share of Republic Class A voting common stock for each share of Series A preferred stock held by such holder equal to the number of shares of Class A common stock into which such share of Series A preferred stock is then convertible.
2021. As of December 31, 2016, the Company had 710,000 issued2022 and outstanding shares of Series A preferred stock.
On November 9, 2017, each share of Series A preferred stock converted into 2.5 shares of Old Class A common stock at the stockholders' option resulting in the issuance of 1,775,000 shares of Old Class A common stock.
Conversion
Each share of Series A preferred stock was convertible, at the option2021, long-lived assets held outside of the shareholder, into such number of fully paidUnited States were $10.8 million and non-assessable shares of common stock as is determined by dividing the Series A original issue price by the Series A conversion price in effect at the time of the conversion. The Series A conversion price was initially equal to $30.8358 and is subject to adjustment related to dilutive transactions. As a result of the stock split, the conversion ratio of each share of outstanding preferred stock also was adjusted, such that each share of outstanding preferred stock converts into 2.5 shares of Old Class A common stock at a conversion price of $12.3343.$9.2 million, respectively.
Liquidation Preference
In the event of any Liquidation Event or Deemed Liquidation Event, the holders of Series A, preferred stock were entitled to receive, in preference to any distribution of the proceeds to the holders of common stock, an amount per share equal to the greater of (1) an amount equal to the original issue price for Series A preferred stock plus declared but unpaid dividends on such share, plus the product of (a) the number of days elapsed since issuance divided by 365, multiplied by (b) 0.08 multiplied by (c) the Series A original issue price, or (2) such amount as would have been payable had all shares of Series A preferred stock had been converted to common stock immediately prior to such Liquidation or Deemed Liquidation Event. If the proceeds thus distributed among the holders of the Series A preferred stock are insufficient to permit payment to such holders of the full preferential amounts, then the entire proceeds available for distribution shall be distributed ratably. Upon completion of the distribution referred to above, all of the remaining proceeds available for distribution shall be distributed to the holders of the Company’s common stock pro rata based on the number of common stock held by each. As of December 31, 2016, the liquidation preference totaled $32,148.
10. Stockholders’ Equity
Redemption
Shares of Series A preferred stock were redeemable by the Company out of funds lawfully available at a price equal to the Series A original issue price per share, plus all declared but unpaid dividends thereon, in three annual installments commencing not more than 60 days after receipt by the Company at any time on or after December 31, 2020, from the holders of a majority of the then-outstanding shares of Series A preferred stock. At each redemption date, shares of Series A Preferred stock were redeemable, on a pro-rata basis in accordance with the number of shares of Series A preferred stock owned by each holder, that number of outstanding shares of Series A preferred stock determined by dividing the total number of shares of Series A
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and per Share Amounts)
preferred stock outstanding by the number of remaining redemption dates (including the redemption date to which such calculation applies).
Voting Rights
The holders of Series A preferred stock were entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of Series A preferred stock are convertible as of the record date for determining stockholders entitled to vote on such matter. Holders of Series A preferred stock shall vote together with the holders of Old Class A common stock as a single class. The holders of record of the shares of Series A preferred stock, exclusively and as a separate class, were entitled to elect one director of the Company.
The Company could not, without the approval of the holders of record of a majority of the shares of Series A preferred stock, as a separate class, undertake certain actions as specified in the Certificate of Incorporation, as amended and restated as of February 22, 2011 and as subsequently amended.
Dividends
The amount of any dividend on an outstanding share of Series A preferred stock is determinable based upon the number of shares of common stock into which such Series A preferred stock is then convertible based upon the original issuance price of a share of Series A preferred stock of $30.8358 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A preferred stock. During the years ended December 31, 2016 and 2017, no dividends were declared.
Preferred Stock
On November 9, 2017,As of December 31, 2022 and 2021, the Company filed its second amended and restated certificate of incorporation andhad authorized 10,000,000 shares of undesignated preferred stock, par value $0.001, of which no shares were issued and outstanding as of December 31, 2017.
outstanding.
Common Stock
As of December 31, 2016,2022 and 2021, the Company had two classes of common stock: (1) Old Class A common stock and (2) Old Class B common stock. The Old Class A common stock had one vote per share and the Old Class B common stock had no voting rights.
As of December 31, 2016, there were 11,779,975 shares of Old Class A common stock issued and outstanding at $0.001 par value per share.
As of December 31, 2016, there were 18,590 shares of Old Class B common stock issued and outstanding at $0.001 par value per share.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and per Share Amounts)
On November 9, 2017, the Company filed its second amended and restated certificate of incorporation. Upon the effectiveness of the Company's second amended and restated certificate of incorporation and the effectiveness of the Company's second amended and restated bylaws, i) each share of Old Class A common stock was reclassified as one share of Class B common stock with ten votes per share, ii) each share of Old Class B common stock was reclassified as one share of Class A common stock with one vote per share. Consequently, the Series A preferred stock, that had previously converted into 2.5 shares of the Old Class A common stock, at the option of the holder, was converted into 1,775,000 shares of Class B common stock.
Subsequent to the effectiveness of the Company’s second amended and restated certificate of incorporation, the Company’s common stock consists of 120,000,000 authorized shares, par value $0.001 per share, of which the authorized Class A common stock consists of 100,000,000 shares and the authorized Class B common stock consists of 20,000,000 shares as of December 31, 2017.
As of December 31, 2017, there were 4,197,831 shares of Class A common stock, issued and outstanding at $0.001 par value $0.001 per share.
As of December 31, 2017, there were 13,440,725share, with one vote per share and 20,000,000 shares of Class B common stock, par value $0.001 per share, with ten votes per share.
Notes to Consolidated Financial Statements (continued)
As of December 31, 2022, 23,379,000 and 1,965,170 shares of Class A common stock and Class B common stock, respectively, were issued and outstanding at $0.001 par value per share. outstanding.
As of December 31, 2021, 23,177,988 and 1,965,170 shares of Class A common stock and Class B common stock, respectively, were issued and outstanding.
Shares of Class B common stock are convertible into shares of Class A common stock on a 1:1 basis upon the stockholder'sstockholder’s voluntary written notice to the Company'sCompany’s transfer agent or a transfer by the stockholder, subject to limited exceptions for transfers for estate planning purposes.
Voting Rights
The holders of Class A common stock and Class B common stock have identical rights, except that holders of Class A voting common stock are entitled to one vote per share of Class A common stock and holder of Class B common stock are entitled to ten votes per share of Class B common stock.
Dividends
Any dividends or distributions paid or payable to the holders of shares of Class A common stock and Class B common stock shall be paid pro rata,pro-rata, on an equal priority. During the yearyears ended December 31, 2017,2022, 2021 and 2020, no dividends were declared.
Dividend payments are not subject to a restriction by the Company’s Loan and Security Agreement prohibiting the Company to pay any dividends or any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock through the term of the agreement.restriction.
Option to Purchase AdditionalReserved Shares
On November 28, 2017, the Underwriters exercised their option to purchase 162,991 of Class B common stock held by certain selling shareholders. Immediately upon transfer, the shares converted into Class A common stock in accordance with the Company's second amendment and restated certificate of incorporation.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and per Share Amounts)
Stock Purchase Warrants
In connection with four notes payable issued December 20, 2010, the Company granted stock purchase warrants to the previous debt holders. The warrants were exercisable for 30,470 shares of the Company’s Old Class A common stock at an exercise price of $5.80 per share. Warrants outstanding at December 31, 2016 and 2017, were 15,844 and 0, respectively.
The Company granted other stock purchase warrants in 2011 that were exercisable for 43,847had reserved shares of the Company’s Old Class A common stock at an exercise price of $0.001 per share. Warrants outstanding to purchase shares of the Company’s Old Class A common stock were 39,000 at December 31, 2016 and 2017, and expire on March 25, 2018.
Additional warrants to purchase 9,846 shares of the Company’s Old Class A common stock were granted in 2011 at an exercise price of $5.80 per share, which expire on February 22, 2018.
Warrants to purchase 4,531 shares of the Company's Old Class A common stock were granted in 2017 at an exercise price of $6.57 per share. Warrants outstanding at December 31, 2017 were 2,504, which expire on January 19, 2018.
Pursuant to the Spin-Off, each holder of a warrant to purchase common stock was issued a warrant to purchase shares of Republic Class A voting common stock with equivalent economic terms. A total of 64,691 and 51,350 shares of common stock were reserved for the issuance of stock purchase warrants at December 31, 2016 and 2017, respectively.
On November 9, 2017, the Company filed its second amended and restated certificate of incorporation. Upon the effectiveness of the Company's second amended and restated certificate of incorporation and the effectiveness of the Company's second amended and restated bylaws, warrants exercisable for shares of Old Class A common stock became exercisable into shares of Class B common stock.
Spin-Off
Pursuant to the Spin-Off, (i) each holder of Old Class A common stock received one share of Republic Class A common stock for each share of Old Class A common stock held by such holder, (ii) each holder of Old Class B common stock received one share of Republic Class B non-voting common stock for each share of Old Class B non-voting common stock held by such holder and (iii) each holder of Series A preferred stock received a number of shares of Republic Class A voting common stock for each share of Series A preferred stock held by such holder equal to the number of shares of Old Class A common stock into which such share of Series A preferred stock is then convertible.issuance under stock-based award agreements as follows:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Stock options issued and outstanding | 159,741 | | | 180,209 | |
| Nonvested restricted stock units issued and outstanding | 2,607,106 | | | 344,486 | |
| Stock-based awards available for grant under the 2017 Plan | 1,879,368 | | | 3,060,674 | |
| 4,646,215 | | | 3,585,369 | |
11. Stock BasedStock-Based Compensation
2001 and 2010 Stock Option PlansPlan
During 2001, the Company adopted the Bandwidth Inc. Stock Option Plan (the "2001 Plan").As of July 26, 2010, the Company adopted the 2010 Equity Compensation Plan (the "2010 Plan"“2010 Plan”). On August 24, 2017, the 2010 Plan was amended to provide for a total of 3,466,275 shares of common stock reserved for issuance under the 2010 Plan.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and per Share Amounts)
Eligible plan participants include employees, directors and consultants. The 2001 Plan and the 2010 Plan each permit the granting of incentive stock options and non-qualified stock options.
Following the effectiveness of the 2010 Plan, the Company did not make any further grants under the 2001 Plan. However, the 2001 Plan continues to govern the terms and conditions of the outstanding awards granted under it. On November 9, 2017, the 2010 Plan was terminated in connection with the Company's IPO.Company’s initial public offering. Accordingly, no shares are available for future issuance under the 2010 Plan. However, the 2010 Plan will continuecontinues to govern the terms and conditions of the outstanding awards granted thereunder.
On November 9, 2017, the Company filed its second amendedAmended and restated certificate of incorporation. Upon the effectiveness of the Company's second amended and restated certificate of incorporation and the effectiveness of the Company's second amended and restated bylaws, options exercisable into shares of Old Class A common stock and Old Class B common stock became exercisable into shares of Class B common stock and Class A common stock, respectively.
Restated 2017 Incentive Award Plan
The Company'sCompany’s Amended and Restated 2017 Incentive Award Plan (the "2017 Plan"(as amended from time to time, the “2017 Plan”) became effective on November 9, 2017. The 2017 Plan provides for the grant of stock options, including incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock, dividend equivalents, restricted stock units, and other stock or cash based awards to employees, consultants and directors of the Company. A total of 1,050,000 shares of the Company'sCompany’s Class A common stock were originally reserved for issuance under the 2017 Plan. These available shares automatically increase each January 1, beginning on January 1, 2018, by 5% of the number of shares of the Company’s Class A common stock outstanding on the
Notes to Consolidated Financial Statements (continued)
final day of the immediately preceding calendar year. On January 1, 2022, the shares available for grant under the 2017 Plan were automatically increased by 1,158,899 shares.
The terms of the stock option grants are determined by the Company’s Board of Directors. The Company’s stock options vest based on terms inof the stock option agreements, which is generally over four years.agreements. The stock options have a contractual life of ten years.
Stock options
Restricted stock units (“RSUs”) granted to employees and non-employee members of the Board of Directors under the 2017 Plan are generally subject to a time-based vesting condition. The fair value, adjusted for the stock split, of options grantedcompensation expense related to these awards is estimated on the date of grant using the Black-Scholes option pricing model based on the assumptions ingrant date fair value of the table below:RSUs and is recognized on a ratable basis over the applicable service period. Vesting schedules may differ as between different categories of award recipients.
|
| | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Expected dividend yield | 0% | | 0% | | 0% |
| Expected stock price volatility | 44% | | 44% | | 44%-49% |
| Average risk-free interest rate | 1.5%-1.9% | | 1.3%-2.0% | | 1.9%-2.3% |
| Expected life | 6.2 years | | 6.2 years | | 6.2 years |
| Fair value of common stock | $9.43-$9.57 | | $9.57-$9.60 | | $9.60-$20.83 |
The following summarizes the stock option activity for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of
options
outstanding | | Weighted-
average
exercise price
(Per share) | | Weighted-
average
remaining
contract life
(In years) | | Aggregate
intrinsic value
(In thousands) |
| Outstanding as of December 31, 2021 | 180,209 | | | $ | 10.14 | | | 3.39 | | $ | 11,104 | |
| Granted | — | | | — | | | | | |
| Exercised | (20,468) | | | 7.95 | | | | | |
| Forfeited or cancelled | — | | | — | | | | | |
| Outstanding as of December 31, 2022 | 159,741 | | | $ | 10.42 | | | 2.57 | | $ | 2,001 | |
| | | | | | | |
| Options vested and exercisable at December 31, 2022 | 159,741 | | | $ | 10.42 | | | 2.57 | | $ | 2,001 | |
| Options vested and expected to vest as of December 31, 2022 | 159,741 | | | $ | 10.42 | | | 2.57 | | $ | 2,001 | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and per Share Amounts)
|
| | | | | | | | | | | | |
| | Number of Options Outstanding | | Weighted- Average Exercise Price (per share) | | Weighted- Average Remaining Contract Life (in years) | | Aggregate Intrinsic value (in thousands) |
| Outstanding as of December 31, 2016 | 3,582,241 |
| | $ | 6.54 |
| | 5.12 | | $ | 11,049 |
|
| Grants | 179,922 |
| | 13.79 |
| |
| |
|
| Exercised | (58,162 | ) | | 5.27 |
| |
| | 445 |
|
| Forfeited or cancelled | (44,210 | ) | | 9.46 |
| |
| |
|
| Outstanding as of December 31, 2017 | 3,659,791 |
| | $ | 6.88 |
| | 4.38 | | $ | 59,436 |
|
| | | | | | | | |
| Options vested and exercisable at December 31, 2017 | 3,209,890 |
| | $ | 6.28 |
| | 3.83 | | $ | 54,051 |
|
| | | | | | | | |
| Options vested and expected to vest as of December 31, 2017 | 3,641,078 |
| | $ | 6.85 |
| | 4.35 | | $ | 59,230 |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | (In thousands) |
| Aggregate intrinsic value of stock options exercised | | | | | $ | 635 | | | $ | 9,297 | | | $ | 54,088 | |
| Total estimated grant date fair value of options vested | | | | | — | | | 247 | | | 416 | |
Aggregate intrinsic value represents the total pre-tax intrinsic value, which is computed based on the difference between the option exercise price and the estimated fair value of the Company’s common stock. This amount changesstock as of December 31, 2022, based on the fair value ofCompany’s Class A common stock price as reported on the Company’s stock.NASDAQ Global Select Market.
The weighted average grant-date fair value of stockNo options were granted was $4.24 , $4.06 and $7.72 for the yearsyear ended December 31, 2015, 2016 and 2017, respectively.2022.
As of December 31, 2022, the Company had no unrecognized compensation cost related to non-vested stock options. All outstanding stock options were fully vested prior to the current year.
Notes to Consolidated Financial Statements (continued)
Restricted Stock Units
The total estimated grant date fair value of options vested was $2,107, $2,082 and $1,299following summarizes the RSU activity for the years endedperiod presented:
| | | | | | | | | | | |
| Number of awards outstanding | | Weighted-average grant date fair value (Per share) |
| Nonvested RSUs as of December 31, 2021 | 344,486 | | | $ | 82.38 | |
| Granted | 2,631,931 | | | 30.43 | |
| Vested | (231,234) | | | 65.03 | |
| Forfeited or cancelled | (138,077) | | | 67.35 | |
| Nonvested RSUs as of December 31, 2022 | 2,607,106 | | | $ | 32.33 | |
As of December 31, 2015, 2016 and 2017, respectively.2022, total unrecognized compensation cost related to non-vested RSUs was $71.9 million, which will be amortized over a weighted-average period of 2.85 years.
Stock-Based Compensation Expense
The Company recognized total stock-based compensation expense in continuing operations as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | (In thousands) |
| Cost of revenue | | | | | $ | 404 | | | $ | 364 | | | $ | 306 | |
| Research and development | | | | | 7,523 | | | 3,681 | | | 3,030 | |
| Sales and marketing | | | | | 2,808 | | | 2,225 | | | 1,834 | |
| General and administrative | | | | | 9,920 | | | 8,267 | | | 4,711 | |
| Total | | | | | $ | 20,655 | | | $ | 14,537 | | | $ | 9,881 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Cost of revenue | $ | 45 |
| | $ | 61 |
| | $ | 80 |
|
| Research and development | 189 |
| | 138 |
| | 155 |
|
| Sales and marketing | 239 |
| | 182 |
| | 172 |
|
| General and administrative (1) | 3,020 |
| | 989 |
| | 1,396 |
|
| Total | $ | 3,493 |
| | $ | 1,370 |
| | $ | 1,803 |
|
________________________
(1) On September 1, 2017, the Company reached a separation agreement with one of its executives. The agreement resulted in a modification of the former employee's 194,234 outstanding options to purchase common stock, which accelerated the vesting period and extended the exercise period, resulting in the recognition of $394 of additional stock compensation expense for the year ended December 31, 2017.
The Company will recognize $1,935 of compensation cost in the future for stock-based employee compensation over the weighted-average period of 2.59 years for stock options granted before December 31, 2017.
12. Commitments and Contingencies
Operating Leases
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and per Share Amounts)
The Company leases office space under operating lease agreements that expire at various dates beginning in 2016 and extend through 2022 in several locations within the United States including its headquarters, which is located in Raleigh, NC. On September 26, 2016, the Company amended its operating lease agreement with one of its landlords. The 63-month lease, which began on April 14, 2017, provides for an additional 40,657 square feet of office space as well as an extension of the termination date for the lease of approximately 128,200 square feet of office space. The leases contain escalation clauses and various landlord concessions including a tenant improvement allowance. The Company recognizes the total minimum lease payments on a straight-line basis over the term of the lease.
Future minimum lease payments required under operating leases asnext 4 years. As of December 31, 2017 are as follows:
|
| | | |
| | Amount |
| 2018 | $ | 3,631 |
|
| 2019 | 3,700 |
|
| 2020 | 3,838 |
|
| 2021 | 3,873 |
|
| 2022 | 2,018 |
|
| | $ | 17,060 |
|
The2022, the Company incurredhas $17.0 million in future minimum rent expense of $1,656, $2,003payments for its current office space. See Note 5, “Right-of-Use Asset and $3,327 for the years ended December 31, 2015, 2016 and 2017, respectively, which is included in general and administrative expenses inLease Liabilities” to the consolidated financial statements, of operations and comprehensive income (loss).for additional details on the Company’s operating lease commitments.
In conjunction with the Spin-Off, the Company signed a Facilities Service Agreement with Republic in which the Company agreed to sub-lease 40,657 square feet of office space to Republic. The sub-lease is non-cancellable and extends to May 2022. The Company recorded a reduction of rent expense of $47 and $949 for the years endedDecember 31, 2016 and 2017, respectively, which is included in general and administrative expenses in the consolidated statements of operations and comprehensive income (loss).Contractual Obligations
Future minimum sub-lease receipts required under the non-cancellable lease asAs of December 31, 2017 are as follows:2022, the Company has $12.0 million in non-cancellable purchase obligations, consisting of primarily network equipment maintenance and software license contracts, of which $9.9 million will be fulfilled within one year.
Notes to Consolidated Financial Statements (continued)
|
| | | |
| | Amount |
| 2018 | $ | 1,020 |
|
| 2019 | 1,042 |
|
| 2020 | 1,065 |
|
| 2021 | 1,089 |
|
| 2022 | 594 |
|
| $ | 4,810 |
|
Contractual Obligations
On October 25, 2015,May 27, 2021, the Company entered into an agreementthe Lease with a telecommunications service provider.the Developer for the Conveyed Parcel, together with the Project. The service agreement requiresrespective obligations of the Company and the Developer under the Lease were conditioned upon the Developer acquiring fee simple title to pay a monthly recurring charge beginningthe Conveyed Parcel, which occurred on
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share June 4, 2021. The Lease term will commence upon the Commencement Date and per Share Amounts)
January 1, 2016 associated withcontinue for the services received. The service agreementInitial Term. It is non-cancellable and contains annual minimum commitments of $1,200 to be fulfilled over five years or for as long asanticipated that the Commencement Date will occur in mid-2023. If the Commencement Date does not occur within one hundred twenty (120) days from the scheduled Commencement Date, the Company continuesshall be entitled to receive services from this vendor. In addition,certain rent abatements, as described in the Lease. If the Commencement Date does not occur within twelve (12) months of the scheduled Commencement Date, the Company may terminate the Lease.
The Company has other non-cancellable purchase obligations totaling $5,249 asthe option to renew the Initial Term for two ten-year periods. Base rent payments will begin on the Commencement Date. The initial base rent will increase by 1.85% on each anniversary of December 31, 2017, which consists primarily of network equipmentthe Commencement Date. Total lease payments over the Initial Term are approximately $495.7 million. See Note 5, “Right-of-Use Asset and Lease Liabilities” to be received in less than one year.the consolidated financial statements, for additional details on the Company's operating lease commitments.
Legal Matters
The Company is involved as a defendant in various litigation, including, but not limited to, (a) lawsuits alleging that the Company failed to bill, collect and remit certain taxes and surcharges associated with the provision of 911 services pursuant to applicable laws in various jurisdictions. In August 2016, the Company receivedjurisdictions, and (b) an action brought by a Civil Investigative Demand from the Consumer Protection Division of the North Carolina Department of Justice, though no formal complaint has been filed in connection with that investigation. The North Carolina Department of Justice is investigating the billing, collection and remission of certain taxes and surcharges associated with 911 service pursuant to applicable laws of the State of North Carolina.
In April 2016, the Company filed counterclaims against Verizon in the United States District Court for the Northern District of Texas. The Company is pursuing collection of unpaid intercarrier compensation charges for providing switched access servicesnon-practicing entity related to the exchange of telecommunications traffic with Verizon entities across the United States. As of October 27, 2017, Verizon has asserted a counterclaim against the Company. alleged patent infringement.
The Company intends to contest such counterclaim vigorously. Verizon’s prior September 2014 complaintvigorously defend these lawsuits and believes that it has meritorious defenses to each. However, litigation is inherently uncertain, and any judgment or injunctive relief entered against the Company and other defendants regarding intercarrier compensation charges for providing switched access services related toor any adverse settlement could adversely affect the exchange of telecommunications traffic has been dismissed without prejudice, but remains subject to appeal. See Note 17, "Subsequent Events," for current developments.
While theCompany’s business, results of these legal proceedings cannot be predicted with certainty, in the opinionoperations and financial condition.
Notes to Consolidated Financial Statements (continued) 13. Employee Benefit PlanPlans
The Company sponsors a U.S. defined contribution 401(k) plan, which allows eligible U.S.-based employees to defer a portion of their compensation. The Company, at its discretion, may make matching contributions. With the acquisition of Voxbone S.A. on November 1, 2020, the Company assumed sponsorship for Voxbone S.A.’s U.S. defined contribution 401(k). In connection with that acquisition, the Company also assumed sponsorship for a non-U.S. defined contribution plan for which it pays fixed contributions into a separate entity. The Company has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current or prior periods. The contributions are recognized as employee benefit expense when they are due. The Company made matching contributions for the defined contribution plans of $698, $716$4.6 million, $3.8 million, and $806$2.2 million for the years ended December 31, 2015, 20162022, 2021 and 2017,2020, respectively.
In addition, as a result of the acquisition of Voxbone S.A., the Company assumed sponsorship for Voxbone S.A.’s non-U.S. defined benefit pension plans. The liability recognized is the present value of the defined benefit obligation at the end of the reporting period less the fair value of the plan assets and is included in other liabilities in the accompanying consolidated balance sheets. The defined benefit obligation is calculated annually by an independent actuary using the Projected Unit Credit Method.
The following table summarizes information for the pension plans:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | | |
| (In thousands) |
| Change in benefit obligation: | | | |
| Benefit obligation at beginning of year | $ | 3,874 | | | $ | 4,064 | |
| Service cost | 268 | | | 396 | |
| Interest cost | 35 | | | 21 | |
| Actuarial gain | (418) | | | (237) | |
| Taxes, insurance premiums and administrative expenses | (50) | | | (55) | |
| | | |
| Impact of foreign currency translation | (207) | | | (315) | |
| Benefit obligation at end of year | $ | 3,502 | | | $ | 3,874 | |
| | | |
| Change in plan assets: | | | |
| Fair value of plan assets at beginning of year | $ | 2,958 | | | $ | 2,882 | |
| Return on plan assets | 26 | | | 14 | |
| Actuarial gain | 72 | | | 6 | |
| Employer contribution | 332 | | | 335 | |
| | | |
| Taxes, insurance premiums and administrative expenses | (50) | | | (55) | |
| Impact of foreign currency translation | (157) | | | (224) | |
| Fair value of plan assets at end of year | 3,181 | | | 2,958 | |
| Funded status, net liability | $ | 321 | | | $ | 916 | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and per Share Amounts)Notes to Consolidated Financial Statements (continued)
The following table presents the balance sheet location of the Company’s pension liability for the Company’s non-U.S. defined benefit pension plans:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | | |
| (In thousands) |
| Other liabilities | $ | 321 | | | $ | 916 | |
The following table summarizes information for the Company’s pension plans with an accumulated benefit obligation in excess of plan assets:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | | |
| (In thousands) |
| Projected benefit obligation | $ | 3,502 | | | $ | 3,874 | |
| Accumulated benefit obligation | 3,265 | | | 3,282 | |
| Fair value of plan assets | 3,181 | | | 2,958 | |
The Company reports the service cost component of net periodic benefit cost in the same line item as other compensation costs arising from the services rendered by the employee and records the other components of net periodic benefit cost in other income (expense), net.
Pretax amounts for net periodic benefit cost and other amounts for the defined benefit pension plans consisted of the following components:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| (In thousands) |
| Service cost | $ | 268 | | | $ | 396 | | | $ | 75 | |
| Interest cost | 35 | | | 21 | | | 3 | |
| Return on plan assets | (26) | | | (14) | | | (8) | |
| Net periodic pension cost | 277 | | | 403 | | | 70 | |
| Changes in plan assets and benefit obligations included in other comprehensive loss: | | | | | |
| Unrecognized net actuarial (gain) loss beginning of year | (227) | | | 17 | | | — | |
| Actuarial (gain) loss on benefit obligation | (418) | | | (237) | | | 15 | |
| Actuarial (gain) loss on fair value of plan assets | (72) | | | (6) | | | 2 | |
| Impact of foreign currency translation | 12 | | | (1) | | | — | |
| | | | | |
| Total included in other comprehensive loss (before tax effect) | (705) | | | (227) | | | 17 | |
| Total recognized in net periodic benefit cost and included in other comprehensive loss | $ | (428) | | | $ | 176 | | | $ | 87 | |
| | | | | |
| | | | | |
| | | | | |
The Company uses significant judgment to determine the measurement of their non-U.S. defined benefit pension plans’ assets and liabilities. These amounts are calculated by an independent actuary. The present value of the defined benefit obligation depends on a number of factors that are determined on an actuarial basis using a number of assumptions. Any change in these assumptions will impact the present value of the defined benefit obligation.
Notes to Consolidated Financial Statements (continued)
The actuarial gains and losses recognized in the pension expense are determined using the so-called “10% corridor” method, i.e. actuarial gains and losses which exceed 10% of the higher of the plan assets and the projected benefit obligation are amortized on a straight line basis over the average remaining service period of the active plan participants. Any prior service costs are amortized on a straight line basis over the average remaining service period of the active plan participants.
The Company determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. In determining the appropriate discount rate, the Company considers the interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related obligation. The other assumptions for pension obligations are based in part on market conditions.
Significant assumptions used in determining benefit obligations and net periodic benefit cost are as follows:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
| Defined benefit obligations: | | | | | |
| Discount rate | 3.80 | % | | 0.90 | % | | 0.50 | % |
| Rate of salary increase | 4.67 | % | | 4.27 | % | | 4.07 | % |
| Inflation | 2.30 | % | | 1.80 | % | | 1.60 | % |
| | | | | |
| Defined benefit cost: | | | | | |
| Discount rate | 3.80 | % | | 0.90 | % | | 1.50 | % |
| Rate of salary increase | 4.67 | % | | 4.27 | % | | 4.37 | % |
| Rate of return on plan assets | 1.20 | % | | 0.90 | % | | 0.50 | % |
| Inflation | 2.30 | % | | 1.80 | % | | 1.90 | % |
Plan Assets
The Company’s non-U.S. defined benefit plans are insured by a third party. The investments are governed by the insurer, who oversees all investment decisions. The insurance contracts are classified as Level 2 because a portion of the underlying funds are valued using significant other observable inputs. The insurance contracts provide for a guaranteed interest credit and a profit-sharing adjustment based on the actual performance of the underlying investment assets of the insurer. The fair value of the contract is determined by the insurer based on the premiums paid by the Company plus interest credits plus the profit-sharing adjustment less benefit payments.
The major categories of plan assets are as follows:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| | | |
| (In thousands) |
| Assets held by: | | | |
| Insurance companies (collective and individual) | $ | 3,181 | | | $ | 2,958 | |
| | | |
| | | |
Expected Cash Flows
The Company expects to contribute $0.3 million to its non-U.S. defined benefit pension plans during 2023.
Notes to Consolidated Financial Statements (continued)
14. Income Taxes
(Provision) benefitThe following table presents domestic and foreign components of income (loss) before income taxes for the tax years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| (In thousands) |
| United States | $ | 30,594 | | | $ | (27,547) | | | $ | (25,745) | |
| International | (13,288) | | | (3,648) | | | (3,227) | |
| Income (loss) before income taxes | $ | 17,306 | | | $ | (31,195) | | | $ | (28,972) | |
Benefit (provision) for income taxes from continuing operations consists of the following:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | | | | |
| 2022 | | 2021 | | 2020 |
| | | | | |
| (In thousands) |
| Current: | | | | | |
| Federal | $ | (2,717) | | | $ | (2,713) | | | $ | 431 | |
| State | (803) | | | (145) | | | (87) | |
| Foreign | (815) | | | (1,627) | | | (1,083) | |
| Total | (4,335) | | | (4,485) | | | (739) | |
| Deferred: | | | | | |
| Federal | 1,004 | | | (364) | | | (9,847) | |
| State | (1) | | | — | | | (5,176) | |
| Foreign | 5,596 | | | 8,682 | | | 757 | |
| Total | 6,599 | | | 8,318 | | | (14,266) | |
| Income tax benefit (provision) | $ | 2,264 | | | $ | 3,833 | | | $ | (15,005) | |
Notes to Consolidated Financial Statements (continued)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Current: | | | | | |
| Federal | $ | — |
| | $ | 66 |
| | $ | (448 | ) |
| State | (104 | ) | | (58 | ) | | (302 | ) |
| Total | (104 | ) | | 8 |
| | (750 | ) |
| Deferred: | | | | | |
| Federal | (272 | ) | | 9,999 |
| | (5,983 | ) |
| State | (32 | ) | | 1,087 |
| | (185 | ) |
| Total | (304 | ) | | 11,086 |
| | (6,168 | ) |
| Total (provision) benefit for income taxes | $ | (408 | ) | | $ | 11,094 |
| | $ | (6,918 | ) |
The following table presents a reconciliation of the statutory federal tax rate and the Company’s effective tax rate for the years ended December 31, 20152022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Federal Tax Rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State Tax Rate - statutory blended rate | 4.3 | | | 4.2 | | | 4.1 | |
| Other effective state tax adjustments | 3.6 | | | (1.4) | | | (2.1) | |
| Non-deductible expenses | 4.0 | | | (6.1) | | | (9.2) | |
| Research tax benefits | (31.6) | | | 7.9 | | | 10.5 | |
| Stock-based compensation | 6.3 | | | 13.9 | | | 46.8 | |
| Change in valuation allowance | (16.1) | | | 16.3 | | | (123.4) | |
| Deferred tax rate change | 0.5 | | | (0.2) | | | 0.2 | |
| Voxbone US 338(g) gain | — | | | (8.9) | | | — | |
| Intangibles and deferred adjustments | (4.7) | | | (40.2) | | | — | |
| Foreign rate differential | 1.6 | | | 1.3 | | | — | |
| Other | (2.0) | | | 4.5 | | | 0.3 | |
| Total | (13.1) | % | | 12.3 | % | | (51.8) | % |
For the year ended December 31, 2022, the Company recognized an income tax benefit of $2.3 million on pre-tax book income of $17.3 million, resulting in an effective income tax rate of (13.1)%. Although the Company has pre-tax book income on a global basis, the Company recognized an income tax benefit due to the valuation allowance position within the U.S. For the year ended December 31, 2021, the Company recognized an income tax benefit of $3.8 million on pre-tax book loss of $31.2 million, resulting in an effective income tax rate of 12.3%. For the year ended December 31, 2020, the Company recognized an income tax expense of $15.0 million on pre-tax book loss of $29.0 million, resulting in an effective income tax rate of (51.8)%.
In 2022, the Company’s valuation allowance in the U.S. continued to offset many of the permanent tax adjustments within the effective tax rate. These adjustments include state taxes, federal research tax credits under Internal Revenue Code Section 41, equity compensation in the U.S., 2016 and 2017:other non-deductible expenditures in the U.S. The Company has disclosed the statutory blended state income tax rate in the income tax rate reconciliation table. This statutory blended state income tax rate is the rate applied to the Company’s U.S. taxable earnings to calculate its state income tax liability. The Company has also disclosed other effective state tax adjustments which primarily include the state tax impact of permanent tax adjustments and the reconciling adjustment to remove the statutory blended state income tax rate effect from income or loss generated outside of the U.S. The Company continues to generate income tax benefits in the current period related to income tax credits recognized for qualified research activities in the U.S. The applicable federal tax law and regulations define qualified research activities as research and development activities conducted in the U.S. that involve a process of experimentation designed to discover new information intended to develop a new or improved business component. Absent the valuation allowance, equity compensation also impacts the effective tax rate to the extent the income tax deduction exceeds or is below the related book expense, as required under ASC 718-740-35-2. Other U.S. non-deductible expenses that are offset by the valuation allowance consist primarily of non-deductible executive compensation under Internal Revenue Code 162(m). As a result of ASU 2020-06, the company decreased its deferred tax liability by $37.2 million related to debt with a corresponding increase of $36.2 million to valuation allowance. The net impact of these income tax changes related to ASU 2020-06 increased additional paid in capital by $30.0 million and accumulated deficit by $29.0 million, and decreased deferred tax liability by $1.0 million.
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Federal | 34.0 | % | | 34.0 | % | | 34.0 | % |
| State | 2.5 |
| | 4.2 |
| | 4.7 |
|
| Non-deductible expenses | 1.0 |
| | 5.0 |
| | 1.2 |
|
| Research credit | (3.2 | ) | | (2.3 | ) | | (1.5 | ) |
| Stock-based compensation | 11.0 |
| | (24.5 | ) | | 0.1 |
|
| Change in valuation allowance | (42.5 | ) | | (98.6 | ) | | — |
|
| Deferred tax rate change | 0.8 |
| | 0.8 |
| | 16.1 |
|
| Other | 1.9 |
| | 4.0 |
| | (0.9 | ) |
| Total | 5.5 | % | | (77.4 | )% | | 53.7 | % |
Notes to Consolidated Financial Statements (continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and per Share Amounts)
The following table presents the significant components of the Company’s net deferred tax assets:liability:
| | | | As of December 31, |
| | | | | | | 2022 | | 2021 |
| | Year Ended December 31, | | | | |
| | 2016 | | 2017 | | (In thousands) |
| Deferred tax assets: | | | | Deferred tax assets: | |
| Allowance for doubtful accounts | $ | 95 |
| | $ | 48 |
| Allowance for doubtful accounts | $ | 173 | | | $ | 262 | |
| Accrued liabilities | 2,011 |
| | 1,687 |
| Accrued liabilities | 4,370 | | | 3,412 | |
| Operating lease liabilities | | Operating lease liabilities | 3,456 | | | 3,456 | |
| Deferred revenue | 241 |
| | 395 |
| Deferred revenue | 1,949 | | | 1,880 | |
| Intangibles | 237 |
| | 166 |
| |
| Stock-based compensation | 6,458 |
| | 4,668 |
| |
| | Stock-based compensation - deferred tax asset | | Stock-based compensation - deferred tax asset | 3,216 | | | 2,278 | |
| OID | | OID | — | | | 8,848 | |
| Section 174 | | Section 174 | 20,997 | | | — | |
| Accrued lease incentive | | Accrued lease incentive | 2,645 | | | — | |
| Tax credits | 2,369 |
| | 2,071 |
| Tax credits | 10,948 | | | 9,214 | |
| Net operating losses | 4,249 |
| | 26 |
| Net operating losses | 25,691 | | | 50,285 | |
| Other | 59 |
| | 37 |
| |
| Other deferred tax assets | | Other deferred tax assets | 4,592 | | | 4,166 | |
| Gross deferred tax assets | | Gross deferred tax assets | 78,037 | | | 83,801 | |
| Less: valuation allowance | | Less: valuation allowance | (65,678) | | | (32,224) | |
| Total deferred tax assets | 15,719 |
| | 9,098 |
| Total deferred tax assets | 12,359 | | | 51,577 | |
| Less: valuation allowance | — |
| | — |
| |
| Net deferred tax assets | 15,719 |
| | 9,098 |
| |
| Deferred tax liability: | | | | |
| Property and equipment | 2,083 |
| | 1,797 |
| |
| Deferred tax liabilities: | | Deferred tax liabilities: | | | |
| Property, plant and equipment | | Property, plant and equipment | 4,890 | | | 7,813 | |
| Goodwill | 654 |
| | 582 |
| Goodwill | 1,272 | | | 1,130 | |
| Intangibles | | Intangibles | 41,591 | | | 49,470 | |
| Operating lease assets | | Operating lease assets | 3,072 | | | 2,860 | |
| Debt | | Debt | — | | | 38,411 | |
| Other liability | 288 |
| | 193 |
| Other liability | — | | | 289 | |
| Total deferred tax liabilities | 3,025 |
| | 2,572 |
| Total deferred tax liabilities | 50,825 | | | 99,973 | |
| Net deferred tax asset | $ | 12,694 |
| | $ | 6,526 |
| |
| Net deferred tax liability | | Net deferred tax liability | $ | (38,466) | | | $ | (48,396) | |
The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax assets. The Company primarily considered the historic performance of Bandwidth, the nature of the Company'sCompany’s deferred tax assets and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. Based on an analysis of these factors, the Company determinedmaintained that in 2017 no2022 a valuation allowance against U.S. deferred tax assets was required.
As of December 31, 2017,2022, the Company had approximately $2,563$100.1 million in U.S. federal net operating loss carryforwards, $3.8 million in U.K. loss carryforwards, and $10.9 million in federal tax credits. IfAll U.S. federal net operating loss carryforwards were generated after the enactment of the Tax Cuts and Jobs Act (the “Act”) and as such do not expire, but can only be utilized theto offset up to 80% of taxable income in any given year. The federal tax credit carryforwards willcredits start to expire at various dates beginning in 2032.
2038.
As of December 31, 2017,2022, the Company had approximately $590$59.6 million in state net operating loss carryforwards. If not utilized, thesome state net operating loss carryforwards will expire at various dates beginning in 2020.2025.
Notes to Consolidated Financial Statements (continued)
At December 31, 2022, the useamount of unremitted earnings generated by the net operating loss and credit carryforwards, under Internal Revenue Code (IRC) §382 and §383, and similar state tax provisionsCompany’s foreign subsidiaries was not significant. The Company does not assert indefinite reinvestment on a portion of its unremitted earnings of certain foreign subsidiaries as of December 31, 2022. On the earnings that are applicable ifnot indefinitely reinvested, the Company experiences an “ownership change.” An ownership change may occur, for example, as a result of issuance of new equity. Should these limitations apply, the carryforwards would be subjectdid not recognize deferred income taxes related to an annual limitation.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted into law. The income tax effects of changes in tax law are recognized in the period when enacted. Among its numerous changes to the Internal Revenue Code, the Act reduces U.S. corporate rates from 35% to 21% for periods beginning on or after January 1, 2018. The Company has incurred additional expense of $2,073those unremitted foreign earnings, due to the remeasurementtax favorable manner in which it would be repatriated. For the subsidiaries that the Company asserts permanent reinvestment, if repatriation were to occur, the Company would be required to accrue U.S. taxes, if any, and remit applicable withholding taxes as appropriate. A determination of the amount of the unrecognized deferred tax assets atliability related to these undistributed earnings is not practicable due to the lower corporate tax rate. Other provisionscomplexity and variety of the Act did not have a significant
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and per Share Amounts)
impactassumptions necessary based on the Company’s consolidated financial statements formanner in which the year ended December 31, 2017, but may impact the effective tax rate in subsequent periods.
Additional federal and state interpretive guidance is still forthcoming that could potentially affect the remeasurement of the deferred tax balance or give rise to new deferred tax amounts. As such, the remeasurement of the deferred tax balance is provisional pending future guidance. Accordingly, the Company is relying on the guidance in the SEC Staff Accounting Bulletin (“SAB”) 118 and has included a reasonable estimate of the effect of the new rules in its Annual Report on Form 10-K while it waits for additional guidance toundistributed earnings would be released. The final impact may differ from this provisional amount due to, among other things, issuance of additional regulatory guidance, changes in interpretations and assumptions the Company has made, and actions the Company may take as a result of the Act. In accordance with SAB 118 the financial reporting impact of the Tax Reform Act will be completed no later than the fourth quarter of 2018.
repatriated.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | Year Ended December 31, |
| | | | | | | 2022 | | 2021 |
| | Year Ended December 31, | | | | |
| | 2016 | | 2017 | | (In thousands) |
| Unrecognized tax benefits—January 1, | $ | 456 |
| | $ | 671 |
| Unrecognized tax benefits—January 1, | $ | 3,062 | | | $ | 2,414 | |
| Gross increases—tax positions in prior period | 104 |
| | — |
| Gross increases—tax positions in prior period | 613 | | | — | |
| Gross decreases—tax positions in prior period | — |
| | — |
| |
| | Gross increases—tax positions in current period | 111 |
| | 64 |
| Gross increases—tax positions in current period | 1,125 | | | 648 | |
| Settlement | — |
| | — |
| |
| Lapse of statute of limitations | — |
| | (4 | ) | |
| | Unrecognized tax benefits—December 31, | $ | 671 |
| | $ | 731 |
| Unrecognized tax benefits—December 31, | $ | 4,800 | | | $ | 3,062 | |
If the $731$4.8 million of unrecognized tax benefit is recognized, it would not impact the effective tax rate.rate due to the valuation allowance on the Company’s net U.S. deferred tax assets.
TheFor the year ended December 31, 2022, the Company hasrecognized interest and penalties of $0.3 million related to income taxes within income tax expense. For the year ended December 31, 2021, the Company did not incurredincur any material tax interest or penalties with respect to income taxes in the years ended December 31, 2016 and 2017.
taxes.
The Company expects no material changes in the twelve months following December 31, 20172022 in its uncertain tax positions.
The Company files U.S. federal income tax returns as well as income tax returns in many U.S. states.states and foreign jurisdictions. The tax years 2008-2010 and 2012-20162017 - 2021 remain open to examination by the major jurisdictions in which the Company is subject to tax due to the carryforward of net operating losses.tax.
15. Related Parties
In connection withOn April 20, 2015, the Spin-Off onCompany created a wholly owned subsidiary, Relay, Inc. (f/k/a Republic Wireless, Inc.) (“Relay”), which was incorporated in Delaware. On November 30, 2016, the Company and Republic entered into certain agreements in ordercompleted a pro-rata distribution of the common stock of Relay to governits stockholders of record as of the ongoing relationships between the two companies after the Spin-Off and to provide for an orderly transition. The agreements include a Transition Services Agreement, Facilities Sharing Agreement, Tax Sharing Agreement, and Master Services Agreement. The equity holdersclose of Bandwidth are comprised of substantially the same individuals and entities that are the equity owners of Republic. The Company has determined the equity owners of Republic are related parties of Bandwidth.business. The Company has certain involvement with RepublicRelay via an ongoing servicesMaster Agreement and a Facilities Sharing Agreement that expired in July 2022. Amounts charged under these arrangements with these ongoing services arrangements creating a variable interest in Republic. The Company assessedtotaled $1.1 million, $1.8 million, and $2.2 million for the relationship with Republic under guidance for variable interest entities. Because investors in Republic have disproportionate
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and per Share Amounts)
voting rights, the Company concluded that Republic is a VIE, but Bandwidth is not a primary beneficiary. The Company’s maximum exposure to loss relating to this variable interest entity is limited to amounts due under the service agreements between the Company and Republic.
The Transition Services Agreement specifies certain services to be provided by the Company for a period of up to two years from the Spin-Off. These services include insurance administration, billing and collections, and other technical support as well as legal services related to intellectual property. The Company is compensated by Republic for these services based on costs incurred by the Company. For the period of December 1, 2016 to December 31, 2016 and the year ended December 31, 2017, the Company received compensation of $1342022, 2021 and $575,2020, respectively, which isand are included in general and administrative expenses inrevenue on the Company’s consolidated statements of operations and comprehensive income (loss).
In addition, there was approximately $0 and $15operations. Amounts due from Republicunder these arrangements totaled less than $0.1 million as of December 31, 20162022 and 2017, respectively, which was recorded within2021, and are reported in accounts receivable, net of allowance for doubtful accounts in the accompanying consolidated balance sheet.sheets.
The Facilities Sharing Agreement specifies that the Company will sublet office space to Republic for at least 63 months. During the period of December 1, 2016 to December 31, 2016 and the year ended December 31, 2017, the Company sublet office space to Republic. For the years ended December 31, 2016 and 2017, the Company received rental payments of $47 and $949, respectively, which is included in general and administrative expenses in the consolidated statements of operations and comprehensive income (loss). No amounts were due to the Company under the Facilities Sharing Agreement as of December 31, 2016 and 2017.
The Tax Sharing Agreement governs rights and obligations after the Spin-Off regarding income taxes and other taxes, including tax liabilities and benefits, attributes, returns and contests. There are no amounts outstanding or payable under this agreement as of December 31, 2016 and 2017.
The Master Services Agreement specifies certain wholesale telecommunications services to be provided by the Company. The agreement is cancellable at any time by either party. During the period of December 1, 2016 to December 31, 2016 and the year ended December 31, 2017, the Company provided telecommunication services to Republic of $173 and $2,451, respectively. The Company recognized such amounts as revenue in the accompanying consolidated statements of operations and comprehensive income (loss). As of December 31, 2016 and 2017, the Company had a receivable of $3 and $311, respectively, under the Master Services Agreement.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and per Share Amounts)Notes to Consolidated Financial Statements (continued)
16. Basic and Diluted Income (Loss) Income per Common Share
The Company uses the two-class method to compute net (loss) income per common share, because it has issued securities, other than common stock, that contractually entitle the holders to participate in dividends and earnings. These participating securities include the Company’s redeemable convertible preferred stock which have non-forfeitable rights to participate in any dividends declared on the Company’s common stock. The two-class method requires earnings for the period to be allocated between common stock and participating securities based upon their respective rights to receive distributed and undistributed earnings.
Under the two-class method, for periods withBasic net income basic net income(loss) per common share is computed by dividing the net income attributable to common stockholders(loss) by the weighted averageweighted-average number of shares of common stock outstanding during the period. NetDiluted net income attributable to common stockholders(loss) per share is computed by subtracting from net income the portion of current period earnings that the participating securities would have been entitledgiving effect to receive pursuant to their dividend rights had all of the period’s earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the participating securities have no obligation to fund losses.
Diluted net (loss) income per common share is computed under the two-class method by using the weighted average number ofpotential shares of common stock, outstanding, plus, for periods with net income attributable to common stockholders, the potential dilutive effects ofincluding stock options and warrants.stock related to unvested restricted stock awards. The Company analyzedis in a net loss position for the potential dilutive effect of any outstanding dilutive securities under the “if-converted” methodyears ended December 31, 2021 and treasury-stock method when calculating2020, and therefore diluted earnings per share, in which it is assumed that the outstanding participating securities convert into common stock at the beginning of the period or date of issuance, if later. The Company reports the more dilutive of the approaches (two-class or “if-converted”) as its diluted net income per share during the period.shares equals basic shares.
The components of basic and diluted earningsincome (loss) per share or EPS, are as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | (In thousands, except share and per share amounts) |
| Earnings per share | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net income (loss) attributable to common stockholders | | | | | $ | 19,570 | | | $ | (27,362) | | | $ | (43,977) | |
| Net income (loss) per share: | | | | | | | | | |
| Basic | | | | | $ | 0.77 | | | $ | (1.09) | | | $ | (1.83) | |
| Diluted | | | | | $ | (0.48) | | | $ | (1.09) | | | $ | (1.83) | |
| Numerator used to compute net income (loss) per share: | | | | | | | | | |
| Basic | | | | | $ | 19,570 | | | $ | (27,362) | | | $ | (43,977) | |
| Net gain on extinguishment of debt, net of taxes | | | | | (39,614) | | | — | | | — | |
| Interest expense on convertible notes, net of taxes | | | | | 5,147 | | | — | | | — | |
Diluted (1) | | | | | $ | (14,897) | | | $ | (27,362) | | | $ | (43,977) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Weighted average number of common shares outstanding: | | | | | | | | | |
| Basic | | | | | 25,282,796 | | | 25,090,916 | | | 24,092,574 | |
| | | | | | | | | |
| Convertible debt conversion | | | | | 5,625,073 | | | — | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Diluted | | | | | 30,907,869 | | | 25,090,916 | | | 24,092,574 | |
________________________(1)Upon the adoption of ASU 2020-06, net income is adjusted for the reversal of the net gain on extinguishment of debt and add back of interest expense as part of the calculation for diluted Non-GAAP earnings per share. See Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements, for additional details on the adoption of ASU 2020-06.
Notes to Consolidated Financial Statements (continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and per Share Amounts)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Income from Continuing Operations | | | | | |
| Income from continuing operations | $ | 6,965 |
| | $ | 25,430 |
| | $ | 5,971 |
|
| Less: income allocated to participating securities | 931 |
| | 3,355 |
| | 644 |
|
| Income from continuing operations attributable to common stockholders | $ | 6,034 |
|
| $ | 22,075 |
| | $ | 5,327 |
|
| Income from continuing operations per share: | | | | | |
| Basic | $ | 0.52 |
| | $ | 1.89 |
| | $ | 0.42 |
|
| Diluted | $ | 0.48 |
| | $ | 1.72 |
| | $ | 0.37 |
|
| Loss from Discontinued Operations | | | | | |
| Loss from discontinued operations, net on income taxes | $ | (13,665 | ) | | $ | (3,072 | ) | | $ | — |
|
| Less: loss allocated to participating securities | (1,827 | ) | | (405 | ) | | — |
|
| Loss from discontinued operations attributable to common stockholders | $ | (11,838 | ) |
| $ | (2,667 | ) | | $ | — |
|
| Loss from discontinued operations per share attributable to stockholders: | | | | | |
| Basic | $ | (1.03 | ) | | $ | (0.23 | ) | | $ | — |
|
| Diluted | $ | (0.95 | ) | | $ | (0.21 | ) | | $ | — |
|
| Net (loss) income | | | | | |
| Net (loss) income | $ | (6,700 | ) | | $ | 22,358 |
| | $ | 5,971 |
|
| Less: (loss) income allocated to participating securities | (896 | ) | | 2,950 |
| | 644 |
|
| Net (loss) income attributable to common stockholders | $ | (5,804 | ) |
| $ | 19,408 |
| | $ | 5,327 |
|
| Net (loss) income per share: | | | | | |
| Basic | $ | (0.50 | ) | | $ | 1.66 |
| | $ | 0.42 |
|
| Diluted | $ | (0.47 | ) | | $ | 1.51 |
| | $ | 0.37 |
|
| Weighted Average Number of Common Shares Outstanding | | | | | |
| Basic | 11,497,727 |
| | 11,678,568 |
| | 12,590,221 |
|
| Dilutive effect of stock options and warrants | 958,813 |
| | 1,192,064 |
| | 1,952,949 |
|
| Diluted | 12,456,540 |
|
| 12,870,632 |
| | 14,543,170 |
|
The following common share equivalents have beenwere excluded from the calculationweighted average shares used to calculate net income (loss) per common share because their effects would have been anti-dilutive:
| | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 | | 2020 |
| Stock options issued and outstanding | 159,741 | | | 180,209 | | | 255,000 | |
| Restricted stock units issued and outstanding | 2,607,106 | | | 344,486 | | | 450,614 | |
Convertible senior notes (1) (2) | 5,625,073 | | | 987,149 | | | 1,022,941 | |
| Total | 8,391,920 | | | 1,511,844 | | | 1,728,555 | |
________________________
(1) As of weighted-averageDecember 31, 2022, subsequent to adopting ASU 2020-06 as of January 1, 2022, the Company used the if-converted method to calculate the dilutive impact of the 2026 Convertible Notes and 2028 Convertible Notes on diluted income per share, if applicable. The Company expected to settle the principal amount of these notes in cash and any excess in shares of the Company’s Class A common stock. The diluted shares outstanding, becausewere calculated based on the effect is anti-dilutiveinitial conversion rate of 10.9857 and 5.5781 shares per $0.001 of the aggregate principal amount for the periods presented:2026 Convertible Notes and 2028 Convertible Notes, respectively. See Note 2, “Summary of Significant Accounting Policies” to the consolidated financial statements, for additional details on the adoption of ASU 2020-06 and Note 8, “Debt” to the consolidated financial statements, for additional details on the Company’s Convertible Notes.
(2) As of December 31, 2021, the Company used the treasury stock method to calculate the dilutive impact of the 2026 Convertible Notes and the 2028 Convertible Notes because at that time the Company expected to settle the principal amount of these notes in cash and any excess in shares of the Company’s Class A common stock. As of December 31, 2021, the conversion spread, calculated using the average market price of Class A common stock during the period consistent with the treasury stock method, had a dilutive impact for the 2026 Convertible Notes on diluted net income per share of Class A common stock when the average market price of the Company’s Class A common stock for a given period exceeded the conversion price of $91.03 per share. As of December 31, 2021, the conversion spread for the 2028 Convertible Notes was anti-dilutive as the average market price of the Company’s Class A common stock for a given period did not exceed the conversion price of $179.27 per share.
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Anti-dilutive Disclosure | | | | | |
| Series A redeemable convertible preferred stock outstanding | 1,775,000 |
| | 1,775,000 |
| | 1,522,123 |
|
| Stock options issued and outstanding | 401,835 |
| | 237,185 |
| | 50,604 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and per Share Amounts)
17. Subsequent Events
On January 12, 2018, the Company entered into an 84 month operating lease agreement to provide 40,035 square feet of additional office space. The new lease is expected to commence in September 2018. Future expected minimum payments under the lease are as follows:
|
| | | |
| | Amount |
| 2018 | $ | 397 |
|
| 2019 | 1,203 |
|
| 2020 | 1,239 |
|
| 2021 | 1,276 |
|
| 2022 and thereafter | 5,011 |
|
| | $ | 9,126 |
|
On January 29, 2018, the Company and Verizon entered into a settlement agreement to resolve the ongoing dispute and litigation with Verizon, which is a CABS customer of the Company. The settlement agreement also resolved Verizon’s counter-claims against the Company. Pursuant to the settlement agreement, Verizon made a lump sum payment to the Company on February 8, 2018 of $4,400. Following receipt of the $4,400 payment, the Company will issue to Verizon bill credits with respect to other CABS amounts previously billed to Verizon, which were previously reserved and comprised the majority of the allowance for CABS revenue as of year-end. The settlement agreement also specifies certain term for the Company's CABS billings to Verizon prospectively. The Company will continue to assess collectability of its outstanding CABS accounts receivable, including amounts due under this settlement agreement.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange ActAct) as of the end of the period covered by this Annual Report on Form 10-K.10-K. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management'sManagement’s Annual Report on Internal Control Over Financial Reporting
ThOur management is Annual Report on Form 10-K does not include a report of management's assessment regardingresponsible for establishing and maintaining adequate internal control over financial reporting, oras such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an attestation reportevaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022 based on the guidelines established in the Internal Control—Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP. Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2022.
The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as permittedstated in its report which is included in Item 8 of this transition period under the rules of the SEC for newly public companies.
Annual Report on Form 10-K.
Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act during the yearquarter ended December 31, 20172022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent limitation on the effectiveness of internal control
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.
Item 9B. Other Information.
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not Applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference to our Proxy Statement relating to our 20182023 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2017.2022.
Codes of Business Conduct and Ethics
Our board of directors has adopted a Code of Business Conduct and Ethics that applies to all officers, directors and employees, which is available on our website at (https://investors.bandwidth.com/corporate-governance/governance-overview) under "Governance Documents"“Governance Documents”. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendments to, or waiver from, a provision of our Code of Business Conduct and Ethics and by posting such information on the website address and location specified above.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to our Proxy Statement relating to our 20182023 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2017.2022.
Item 12. Security Ownership of Certain Beneficial Owners and Management Related Stockholder Matters
The information required by this item is incorporated by reference to our Proxy Statement relating to our 20182023 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2017.2022.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this item is incorporated by reference to our Proxy Statement relating to our 20182023 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2017.2022.
Item 14. Principal Accountant Fees and Services
Our independent registered public accounting firm is Ernst & Young LLP, Raleigh, NC, Auditor Firm ID: 42.
The information required by this item is incorporated by reference to our Proxy Statement relating to our 20182023 Annual Meeting of Shareholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2017.2022.
PART IV
Item 15. Exhibits and Financial Statement Schedules
| |
(a) | (a) The following documents are filed as part of this report: |
See Index to Financial Statements at Item 8 herein.
| |
2. | Financial Statement Schedules |
2.Financial Statement Schedules
Schedules not listed above have been omitted because they are not required, not applicable, or the required information is otherwise included.
3.Exhibits
Exhibit Index
| | | | | | | | | | | | | | | | | | | | |
Exhibit number | Description of Exhibit | | Form | File No. | Exhibit | Filing Date |
| Reorganization Agreement, dated as of November 30, 2016, by and between Bandwidth.com, Inc. and Republic Wireless, Inc. | | S-1 | 333-220945 | 2.1 | 10/13/2017 |
| Share Purchase Agreement, by and between Bandwidth Inc. and Voicebox S.à r.l, Mr Itay Rosenfeld, Mr Stefaan Konings, Mr Dirk Hermans, Mr Gaetan Brichet and Stichting Administratiekantoor Voice, dated October 12, 2020. | | 8-K | 001-38285 | 2.1 | 10/13/2020 |
| Second Amended and Restated Certificate of Incorporation. | | 10-Q | 001-38285 | 3.1 | 12/14/2017 |
| Second Amended and Restated Bylaws. | | 10-Q | 001-38285 | 3.2 | 12/14/2017 |
| Investors’ Rights Agreement. | | S-1 | 333-220945 | 4.2 | 10/13/2017 |
| Form of Buy-Sell Agreement. | | S-1 | 333-220945 | 4.3 | 10/13/2017 |
| Description of Registrant’s Securities. | | | | | Filed herewith |
| Indenture, dated February 28, 2020, between Bandwidth Inc. and Wilmington Trust, National Association | | 8-K | 001-38285 | 4.1 | 3/2/2020 |
| Form of 0.250% Convertible Senior Notes due March 1, 2026 (included as Exhibit A to Exhibit 4.1) | | 8-K | 001-38285 | 4.2 | 3/2/2020 |
| Indenture, dated March 16, 2021, between Bandwidth Inc. and Wilmington Trust, National Association. | | 8-K | 001-38285 | 4.1 | 3/16/2021 |
| Form of 0.50% Convertible Senior Notes due April 1, 2028 (included as Exhibit A to Exhibit 4.1). | | 8-K | 001-38285 | 4.2 | 3/16/2021 |
| | | | | | |
| Form of Indemnification and Advancement Agreement between Bandwidth Inc. and its directors and certain officers. | | 10-K | 001-38285 | 10.1 | 2/25/2022 |
| | | | | | |
| 2010 Equity Compensation Plan and forms of awards thereunder. | | S-1 | 333-220945 | 10.4 | 10/13/2017 |
| | | | | | |
| | | | | | |
| | | | | | |
| Employment Agreement, dated as of January 1, 2015, as amended on March 9, 2017, by and between Bandwidth.com, Inc. and David A. Morken. | | S-1 | 333-220945 | 10.8 | 10/13/2017 |
| | | | | | |
| | | | | | |
| Office Lease, by and between Venture Center LLC and Bandwidth.com, Inc., dated January 22, 2013, as amended to date. | | S-1 | 333-220945 | 10.11 | 10/13/2017 |
| | | | | | | | | | | | | | | | | | | | |
| Sublease, by and between Allied Telesis Capital Corporation and Bandwidth.com, Inc., dated December 1, 2015. | | S-1 | 333-220945 | 10.12 | 10/13/2017 |
| | | | | | |
| Transition Services Agreement, by and between Bandwidth.com, Inc. and Republic Wireless, Inc., dated November 30, 2016. | | S-1 | 333-220945 | 10.14 | 10/13/2017 |
| Transition Services Agreement, by and between Republic Wireless, Inc. and Bandwidth.com, Inc., dated November 30, 2016. | | S-1 | 333-220945 | 10.15 | 10/13/2017 |
| Tax Sharing Agreement, by and between Bandwidth.com, Inc. and Republic Wireless, Inc., dated November 30, 2016. | | S-1 | 333-220945 | 10.16 | 10/13/2017 |
| Employee Matters Agreement, by and between Bandwidth.com, Inc. and Republic Wireless, Inc., dated November 30, 2016. | | S-1 | 333-220945 | 10.17 | 10/13/2017 |
| Master Services Agreement, by and between Bandwidth.com, Inc. and Republic Wireless, Inc., dated November 30, 2016. | | S-1 | 333-220945 | 10.18 | 10/13/2017 |
| Master Service Agreement, by and between Level 3 Communications, LLC and Bandwidth.com, Inc, dated March 14, 2008, as amended to date. | | S-1 | 333-220945 | 10.19 | 10/13/2017 |
| Form of Conversion Lock-up Agreement between Bandwidth Inc. and the Key Holders. | | S-1A | 333-220945 | 10.2 | 10/30/2017 |
| 2017 Incentive Award Plan, and forms of award agreements thereunder. | | S-1A | 333-220945 | 10.21 | 10/30/2017 |
| Office Lease, by and between Keystone-Centennial II, LLC and Bandwidth.com, Inc., dated January 12, 2018. | | 10-K | 001-38285 | 10.22 | 2/26/2018 |
| Office Lease, by and between WP Propco III, LLC and Bandwidth Inc., dated January 1, 2019, Venture III amendment. | | 10-K | 001-38285 | 10.23 | 2/15/2019 |
| Office Lease, by and between WP Propco III, LLC and Bandwidth Inc., dated January 1, 2019, Venture I amendment. | | 10-K | 001-38285 | 10.24 | 2/15/2019 |
| Credit and Security Agreement, dated as of November 4, 2016 as amended and restated as of March 1, 2019, among Bandwidth Inc., KeyBank National Association, and KeyBanc Capital Markets Inc. | | 8-K | 001-38285 | 10.1 | 3/04/2019 |
| | | | | | |
| | | | | | |
| Bill of Sale, dated May 29, 2019. | | 8-K | 001-38285 | 10.2 | 6/3/2019 |
| Assignment and Acceptance Agreement, between KeyBank National Association and Pacific Western Bank, dated June 4, 2019. | | 10-Q | 001-38285 | 10.4 | 8/2/2019 |
| Revenue Commitment Schedule, by and between Bandwidth Inc. and Republic Wireless, Inc., dated July 1, 2019. | | 10-Q | 001-38285 | 10.5 | 8/2/2019 |
| Services Agreement, by and between Bandwidth Inc. and Republic Wireless, Inc. dated September 30, 2019. | | 10-Q | 001-38285 | 10.1 | 11/7/2019 |
| | | | | | |
| Employment Agreement, dated as of December 6, 2019, by and between Bandwidth.com, Inc. and Rebecca Bottorff. | | 10-K | 001-38285 | 10.30 | 2/21/2020 |
| | | | | | |
| Confirmation of Base Capped Call Transaction, dated February 25, 2020, between Bandwidth Inc. and Barclays Bank PLC. | | 8-K | 001-38285 | 10.1 | 3/2/2020 |
| Confirmation of Base Capped Call Transaction, dated February 25, 2020, between Bandwidth Inc. and JPMorgan Chase Bank, National Association, New York Branch. | | 8-K | 001-38285 | 10.2 | 3/2/2020 |
| Confirmation of Base Capped Call Transaction, dated February 25, 2020, between Bandwidth Inc. and Bank of Montreal. | | 8-K | 001-38285 | 10.3 | 3/2/2020 |
| Confirmation of Base Capped Call Transaction, dated February 25, 2020, between Bandwidth Inc. and Morgan Stanley & Co. LLC. | | 8-K | 001-38285 | 10.4 | 3/2/2020 |
| | | | | | | | | | | | | | | | | | | | |
| Confirmation of Base Capped Call Transaction, dated February 25, 2020, between Bandwidth Inc. and Goldman Sachs & Co. LLC. | | 8-K | 001-38285 | 10.5 | 3/2/2020 |
| Confirmation of Additional Capped Call Transaction, dated February 26, 2020, between Bandwidth Inc. and Barclays Bank PLC. | | 8-K | 001-38285 | 10.6 | 3/2/2020 |
| Confirmation of Additional Capped Call Transaction, dated February 26, 2020, between Bandwidth Inc. and JPMorgan Chase Bank, National Association, New York Branch. | | 8-K | 001-38285 | 10.7 | 3/2/2020 |
| Confirmation of Additional Capped Call Transaction, dated February 26, 2020, between Bandwidth Inc. and Bank of Montreal. | | 8-K | 001-38285 | 10.8 | 3/2/2020 |
| Confirmation of Additional Capped Call Transaction, dated February 26, 2020, between Bandwidth Inc. and Morgan Stanley & Co. LLC. | | 8-K | 001-38285 | 10.9 | 3/2/2020 |
| Confirmation of Additional Capped Call Transaction, dated February 26, 2020, between Bandwidth Inc. and Goldman Sachs & Co. LLC. | | 8-K | 001-38285 | 10.10 | 3/2/2020 |
| | | | | | |
| Purchase and Sale Agreement with the State of North Carolina, dated June 15, 2020. | | 8-K | 001-38285 | 10.1 | 6/17/2020 |
| Management Warranty Deed, by and between Bandwidth Inc. and Mr Itay Rosenfeld, Mr Stefaan Konings, Mr Dirk Hermans and Mr Gaetan Brichet, dated October 12, 2020. | | 8-K | 001-38285 | 10.1 | 10/13/2020 |
| Registration Rights Agreement, by and between Bandwidth Inc. and Voicebox S.á r.l, dated Octonber 12, 2020. | | 8-K | 001-38285 | 10.2 | 10/13/2020 |
| | | | | | |
| Confirmation of Base Capped Call Transaction, dated March 11, 2021, between Bandwidth Inc. and Bank of Montreal. | | 8-K | 001-38285 | 10.1 | 3/16/2021 |
| Confirmation of Base Capped Call Transaction, dated March 11, 2021, between Bandwidth Inc. and Citibank, N.A. | | 8-K | 001-38285 | 10.2 | 3/16/2021 |
| Confirmation of Base Capped Call Transaction, dated March 11, 2021, between Bandwidth Inc. and Goldman Sachs & Co. LLC. | | 8-K | 001-38285 | 10.3 | 3/16/2021 |
| Confirmation of Base Capped Call Transaction, dated March 11, 2021, between Bandwidth Inc. and Morgan Stanley & Co. LLC. | | 8-K | 001-38285 | 10.4 | 3/16/2021 |
| | | | | | |
| Purchase and Sale Agreement dated May 27, 2021, between Bandwidth Inc. and USEF Edwards Mill Owner, LLC. | | 8-K | 001-38285 | 10.1 | 5/28/2021 |
| Lease Agreement dated May 27, 2021, between Bandwidth Inc. and USEF Edwards Mill Owner, LLC. | | 8-K | 001-38285 | 10.2 | 5/28/2021 |
| Escrow Agreement dated May 27, 2021, between Bandwidth Inc., USEF Edwards Mill Owner, LLC and Chicago Title Insurance Company. | | 8-K | 001-38285 | 10.3 | 5/28/2021 |
| Employment Agreement, dated July 6, 2021, between the Company and Daryl Raiford. | | 8-K | 001-38285 | 10.1 | 7/8/2021 |
| | | | | | |
| Employment Agreement, dated February 22, 2022, between the Company and Anthony F. Bartolo. | | 8-K | 001-38285 | 10.1 | 2/22/2022 |
| | | | | | |
| Employment Agreement, dated February 24, 2022, between the Company and R. Brandon Asbill. | | 10-K | 001-38285 | 10.52 | 2/25/2022 |
| Amended and Restated 2017 Incentive Award Plan. | | 10-Q | 001-38285 | 10.2 | 5/6/2022 |
| First Amendment to Lease Agreement, dated April 21, 2022, between Bandwidth Inc. and USEF Edwards Mill Owner, LLC. | | 10-Q | 001-38285 | 10.3 | 5/6/2022 |
| First Amendment to Escrow Agreement, dated April 21, 2022, between Bandwidth Inc., USEF Edwards Mill Owner, LLC and Chicago Title Insurance Company. | | 10-Q | 001-38285 | 10.4 | 5/6/2022 |
| | | | | | | | | | | | | | | | | | | | |
| Senior Secured Credit Facilities Credit Agreement, among Bandwidth Inc., the several lenders from time to time party thereto, and Silicon Valley Bank, dated as of June 6, 2022. | | 10-Q | 001-38285 | 10.1^ | 8/4/2022 |
| Forms of Global Restricted Stock Unit Grant Notice and Global Restricted Stock Unit Agreement. | | | | | Filed herewith |
| First Amendment to Employment Agreement, dated March 24, 2022, between the Company and Anthony F. Bartolo. | | | | | Filed herewith |
| First Amendment to Employment Agreement, dated March 25, 2022, between the Company and Daryl E. Raiford. | | | | | Filed herewith |
| List of subsidiaries of Bandwidth Inc. | | | | | Filed herewith |
| Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm. | | | | | Filed herewith |
| Consent of KPMG LLP, Independent Registered Public Accounting Firm. | | 8-K/A | 001-38285 | 23.1 | 1/14/2021 |
| Certificate of the Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | Filed herewith |
| Certification of the Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | Filed herewith |
| Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act 2002. | | | | | Furnished herewith |
| 101.INS | XBRL Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL Document. | | | | | Filed herewith |
| 101.SCH | XBRL Taxonomy Schema Document. | | | | | Filed herewith |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | Filed herewith |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | | | | | Filed herewith |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | | | | | Filed herewith |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | Filed herewith |
^Certain of the exhibits to Exhibit 10.40, 10.41 and 10.49, as applicable, have been omitted in accordance with Regulation S-K Item 601. The Registrant agrees to furnish a copy of all omitted exhibits to the SEC upon its request.
*The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this reportAnnual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | BANDWIDTH INC. |
| | | |
| Date: | February 23, 2023 | By: | /s/ David A. Morken |
| | | David A. Morken |
| | | Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
| Date: | February 23, 2023 | By: | /s/ Daryl E. Raiford |
| | | Daryl E. Raiford |
| | | Chief Financial Officer |
| | | (Principal Financial Officer) |
| | | |
| Date: | February 23, 2023 | By: | /s/ Devin M. Krupka |
| | | Devin M. Krupka |
| | | Senior Vice President, Corporate Controller |
| | | (Principal Accounting Officer) |
| | | |
| Date: | February 23, 2023 | By: | /s/ John C. Murdock |
| | | John C. Murdock |
| | | Director |
| | | |
| Date: | February 23, 2023 | By: | /s/ Brian D. Bailey |
| | | Brian D. Bailey |
| | | Director |
| | | |
| Date: | February 23, 2023 | By: | /s/ Lukas M. Roush |
| | | Lukas M. Roush |
| | | Director |
| | | |
| Date: | February 23, 2023 | By: | /s/ Douglas A. Suriano |
| | | Douglas A. Suriano |
| | | Director |
| | | |
| Date: | February 23, 2023 | By: | /s/ Rebecca Bottorff |
| | | Rebecca Bottorff |
| | | Director |
| | | |
| | | |
| | BANDWIDTH INC. |
| | | |
Date: | February 26, 2018 | By: | /s/ DAVID A. MORKEN |
| | | David A. Morken |
| | | Chief Executive Officer and Chairman |
| | | (Principal Executive Officer) |
| | | |
Date: | February 26, 2018 | By: | /s/ JEFFREY A. HOFFMAN |
| | | Jeffrey A. Hoffman |
| | | Chief Financial Officer |
| | | (Principal Accounting and Financial Officer) |
| | | |
Date: | February 26, 2018 | By: | /s/ JOHN C. MURDOCK |
| | | John C. Murdock |
| | | Director |
| | | |
Date: | February 26, 2018 | By: | /s/ HENRY R. KAESTNER |
| | | Henry R. Kaestner |
| | | Director |
| | | |
Date: | February 26, 2018 | By: | /s/ BRIAN D. BAILEY |
| | | Brian D. Bailey |
| | | Director |
| | | |
Date: | February 26, 2018 | By: | /s/ DOUGLAS A. SURIANO |
| | | Douglas A. Suriano |
| | | Director |
EXHIBIT INDEX
|
| | | | | |
Exhibit number | Description of Exhibit | Form | File No. | Exhibit | Filing Date |
| Reorganization Agreement, dated as of November 30, 2016, by and between Bandwidth.com, Inc. and Republic Wireless, Inc. | S-1 | 333-220945 | 2.1 | 10/13/2017 |
| Second Amended and Restated Certificate of Incorporation. | Q3 10-Q | 001-38285 | 3.1 | 12/14/2017 |
| Second Amended and Restated Bylaws. | Q3 10-Q | 001-38285 | 3.2 | 12/14/2017 |
| Investors’ Rights Agreement. | S-1 | 333-220945 | 4.2 | 10/13/2017 |
| Form of Buy-Sell Agreement. | S-1 | 333-220945 | 4.3 | 10/13/2017 |
| Credit and Security Agreement among Bandwidth.com, Inc., Keybank National Association, Keybanc Capital Markets Inc., Pacific Western Bank, Fifth Third Bank and Silicon Valley Bank, dated as of November 4, 2016. | S-1 | 333-220945 | 10.1 | 10/13/2017 |
| Form of Indemnification Agreement between Bandwidth Inc. and each of its Executive Officers and Directors. | S-1A | 333-220945 | 10.2 | 10/30/2017 |
| 2001 Stock Option Plan and forms of awards thereunder. | S-1 | 333-220945 | 10.3 | 10/13/2017 |
| 2010 Equity Compensation Plan and forms of awards thereunder. | S-1 | 333-220945 | 10.4 | 10/13/2017 |
| Employment Agreement, dated as of October 1, 2008, by and between Bandwidth.com, Inc. and John Murdock. | S-1 | 333-220945 | 10.5 | 10/13/2017 |
| Employment Agreement, dated as of May 3, 2010, by and between Bandwidth.com, Inc. and W. Christopher Matton. | S-1 | 333-220945 | 10.6 | 10/13/2017 |
| Employment Agreement, dated as of September 16, 2011, by and between Bandwidth.com, Inc. and Jeff Hoffman. | S-1 | 333-220945 | 10.7 | 10/13/2017 |
| Employment Agreement, dated as of January 1, 2015, as amended on March 9, 2017, by and between Bandwidth.com, Inc. and David A. Morken. | S-1 | 333-220945 | 10.8 | 10/13/2017 |
| Employment Agreement, dated as of March 1, 2017, by and between Bandwidth.com, Inc. and Henry R. Kaestner. | S-1 | 333-220945 | 10.9 | 10/13/2017 |
| Consulting Agreement, dated as of February 22, 2010, by and between Bandwidth.com, Inc. and Carmichael Investment Partners, LLC. | S-1 | 333-220945 | 10.10 | 10/13/2017 |
| Office Lease, by and between Venture Center LLC and Bandwidth.com, Inc., dated January 22, 2013, as amended to date. | S-1 | 333-220945 | 10.11 | 10/13/2017 |
| Sublease, by and between Allied Telesis Capital Corporation and Bandwidth.com, Inc., dated December 1, 2015. | S-1 | 333-220945 | 10.12 | 10/13/2017 |
| Facilities Sharing Agreement, by and between Bandwidth.com, Inc. and Republic Wireless, Inc., dated November 30, 2016. | S-1 | 333-220945 | 10.13 | 10/13/2017 |
| Transition Services Agreement, by and between Bandwidth.com, Inc. and Republic Wireless, Inc., dated November 30, 2016. | S-1 | 333-220945 | 10.14 | 10/13/2017 |
| Transition Services Agreement, by and between Republic Wireless, Inc. and Bandwidth.com, Inc., dated November 30, 2016. | S-1 | 333-220945 | 10.15 | 10/13/2017 |
| Tax Sharing Agreement, by and between Bandwidth.com, Inc. and Republic Wireless, Inc., dated November 30, 2016. | S-1 | 333-220945 | 10.16 | 10/13/2017 |
| Employee Matters Agreement, by and between Bandwidth.com, Inc. and Republic Wireless, Inc., dated November 30, 2016. | S-1 | 333-220945 | 10.17 | 10/13/2017 |
| Master Services Agreement, by and between Bandwidth.com, Inc. and Republic Wireless, Inc., dated November 30, 2016. | S-1 | 333-220945 | 10.18 | 10/13/2017 |
|
| | | | | |
| Master Service Agreement, by and between Level 3 Communications, LLC and Bandwidth.com, Inc, dated March 14, 2008, as amended to date. | S-1 | 333-220945 | 10.19 | 10/13/2017 |
| Form of Conversion Lock-up Agreement between Bandwidth Inc. and the Key Holders. | S-1A | 333-220945 | 10.20 | 10/30/2017 |
| 2017 Incentive Award Plan, and forms of award agreements thereunder. | S-1A | 333-220945 | 10.21 | 10/27/2017 |
| Office Lease, by and between Keystone-Centennial II, LLC and Bandwidth.com, Inc., dated January 12, 2018. | | | | Filed herewith |
| List of subsidiaries of Bandwidth Inc. | | | | Filed herewith |
| Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. | | | | Filed herewith |
| Certificate of the Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | Filed herewith |
| Certification of the Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | Filed herewith |
| Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act 2002. | | | | Furnished herewith |
| 101.INS | XBRL Instance Document. | | | | Filed herewith |
| 101.SCH | XBRL Taxonomy Schema Document. | | | | Filed herewith |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | Filed herewith |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | | | | Filed herewith |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | | | | Filed herewith |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | | | | Filed herewith |
| |
* | The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed "filed" for purpose of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates by reference
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