| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K filed with the SEC on February 15, 2019. The condensed consolidated balance sheet as of December 31, 2018, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by GAAP on an annual reporting basis. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive income (loss) and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2019 or any future period. 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’s deficit or net income. Principles of Consolidation The condensed 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 GAAP requires the Company to make estimates and judgments that affect the amounts reported in these financial statements and accompanying notes. 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 in the consolidated financial statements include, but are not limited to, allowance for doubtful accounts, recoverability of long lived and intangible assets, estimated period of benefit, valuation allowances on deferred tax assets, certain accrued expenses, and contingencies. Cash and Cash Equivalents The Company classifies all highly liquid investments with stated maturities of three months or less from date of purchase as cash equivalents and all highly liquid investments with stated maturities of greater than three months from the date of purchase as current marketable securities. The Company has a policy of making investments only with commercial institutions that have at least an investment grade credit rating. The Company invests its cash primarily in government securities and obligations, corporate debt securities, money market funds and reverse repurchase agreements (“RRAs”). RRAs are collateralized by deposits in the form of Government Securities and Obligations for an amount not less than 102% of their value. The Company does not record an asset or liability as the Company is not permitted to sell or repledge the associated collateral. The Company has a policy that the collateral has at least an “A” (or equivalent) credit rating. The Company utilizes a third party custodian to manage the exchange of funds and ensure that collateral received is maintained at 102% of the value of the RRAs on a daily basis. RRAs with stated maturities of greater than three months from the date of purchase are classified as marketable securities. Restricted Cash Restricted cash is primarily for Automated Clearing House availability, customer deposits, employee withholding tax liability not yet remitted, and for credit card security. The Company has classified this asset as a long-term asset in order to match the expected period of restriction. 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. 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. As of December 31, 2018, one individual customer represented approximately 18% of the Company’s accounts receivable, net of allowance for doubtful accounts. As of September 30, 2019, one individual customer represented approximately 11% of the Company’s accounts receivable, net of allowance for doubtful accounts. For the three and nine months ended September 30, 2018 and 2019, no individual customer represented more than 10% of the Company’s total revenue. Foreign currency translation The Company has foreign operations with non-USD functional currencies. The Euro and British Pound are the functional currencies for the Company’s international operations. Foreign exchange gains and losses, which result from the process of remeasuring foreign currency transactions into the appropriate functional currency, are included in other income, net in the Company’s condensed consolidated statements of operations. The impact of changes in foreign currency exchange rates resulting from the translation of foreign currency financial statements into U.S. dollars for financial reporting purposes is included in other comprehensive income (loss), which is a separate component of stockholders’ equity. Assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at average rates for the period. Recently Adopted Accounting Standards On January 1, 2019, the Company adopted the guidance of ASC 606, Revenue from Contracts with Customers, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2019. The Company ’ s results for reporting periods beginning after January 1, 2019 are presented in accordance with the provisions under ASC 606 and prior period amounts have not been adjusted and continue to be reported in accordance with the Company ’ s revenue recognition policy as further described in Note 2, Summary of Significant Accounting Policies, to its Annual Report on Form 10-K for the year ended December 31, 2018. In connection with the adoption of ASC 606, the Company recognized a net increase to its opening accumulated deficit of $174 as of January 1, 2019, related to a discount present in one of its contracts. Prior to the adoption of ASC 606, the Company recognized the majority of its revenue based on the usage of its customers in the period the traffic traversed the Company ’ s network. The Company determined that ASC 606 continues to support the recognition of revenue over time for the majority of the Company ’ s contracts due to the continuous transfer of control to the customer. The adoption of ASC 606 did not result in a change in the Company ’ s accounting for its commission costs, which will continue to be expensed as incurred. The Company pays commissions over time and a corresponding requisite substantive service condition exists for the employee to receive the commission. The Company determined the timing of the commission payments and the underlying service performed by the employee were commensurate. The impact on the Company ’ s balance sheet presentation includes separately presenting customer refundable prepayments as advanced billings, whereas under ASC 605 these were included in the current portion of deferred revenue and advanced billings. 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 contract; • determination of the transaction price; • allocation of the transaction price to the performance obligations in the contract; and • recognition of revenue, when, or as, the Company satisfies a performance obligation. Nature of Products and Services Revenue consists primarily of the sale of communications services offered through Application Programming Interface (“API”) software solutions to large enterprise, as well as small and medium-sized business, customers and is generally derived from usage and service fees in both the CPaaS and Other segments. 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. Service fees include the provision and management of phone numbers and emergency services access. The majority of the Company ’ s revenue is generated from usage-based fees earned from customers accessing 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 and usage-based fees are recognized in revenue in the period the traffic traverses the Company ’ s network. For the three and nine months ended September 30, 2018, the revenue from usage-based fees represented $26,874 and $77,024 of CPaaS revenue, respectively, and $7,182 and $25,924 of Other revenue, respectively. For the three and nine months ended September 30, 2019, the revenue from usage-based fees represented $34,812 and $95,509 of CPaaS revenue, respectively, and $7,650 and $21,709 of Other revenue, respectively. Revenue from service fees is recognized on a ratable basis as the service is provided, which is typically one month. For the three and nine months ended September 30, 2018, the revenue from service fees represented $13,959 and $41,177 of CPaaS revenue, respectively, and $1,735 and $5,579 of Other revenue, respectively. For the three and nine months ended September 30, 2019, the revenue from service fees represented $15,430 and $45,318 of CPaaS revenue, respectively, and $1,342 and $4,381 of Other revenue, respectively. The remaining $704 and $2,066 for the three and nine months ended September 30, 2018, respectively, and $1,257 and $3,674 for the three and nine months ended September 30, 2019, 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 each performance obligation based on its relative standalone selling price. Generally, standalone selling prices are determined based on the prices charged to 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. The 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. Contract Assets and Liabilities The following table provides information about receivables and contract liabilities from contracts with customers: September 30, 2019 Receivables (1) $ 30,030 Contract liabilities (2) 10,775 ________________________ (1) Included in accounts receivable, net of allowance on the consolidated balance sheet. (2) Included in current portion of deferred revenue and deferred revenue, net of current portion on the condensed consolidated balance sheet. Deferred revenue is recorded when cash payments are received in advance of 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. Customer refundable payments are recorded as advanced billings. During the three and nine months ended September 30, 2019, the Company recognized revenue of $1,601 and $6,209, respectively, related to its contract liabilities. The Company expects to recognize $5,020 in revenue over the next twelve months related to its contract liabilities as of September 30, 2019. Other than adoption of ASC 606, there were no changes to the Company ’ s significant accounting policies as described in its Annual Report on Form 10-K for the year ended December 31, 2018. Recent Accounting Pronouncements Not Yet Adopted In October 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-17, Consolidation (Topic 810), Targeted Improvements to Related Party Guidance for Variable Interest Entities , which addresses the cost and complexity of financial reporting associated with consolidation of variable interest entities (“VIE”). Since the Company will lose status as an emerging growth company as of December 31, 2019, which is the last day of the fiscal year, ASU 2018-17 will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The new guidance must be applied on a retrospective basis as a cumulative-effect adjustment as of the date of adoption. Management does not expect the adoption of this guidance to have a significant impact on the Company’s financial statements. In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract . This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Since the Company will lose status as an emerging growth company as of December 31, 2019, which is the last day of the fiscal year, ASU 2018-15 will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. ASU 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, and early adoption is permitted. An entity is permitted to early adopt either the entire standard or only the provisions that eliminate or modify requirements. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company’s financial statements. 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 public business entities that are SEC filers for annual and interim impairment tests performed in periods beginning after December 15, 2019, and early adoption is permitted. Management does not expect the adoption of this guidance to have a significant impact on the Company’s financial statements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses: Measurement of Credit Losses on Financial Instruments , which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses , which clarifies that receivables arising from operating leases are not within the scope of Topic 326, Financial Instruments – Credit Losses. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which clarifies how to apply certain aspects of the new credit losses standard. These ASUs are effective for public business entities that are SEC filers for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company is evaluating the effect of adopting this accounting guidance, but does not expect adoption will have a material impact to its consolidated financial statements. 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. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of the new leases standard. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, to give entities another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, to clarify how to apply certain aspects of the new lease standard. Since the Company will lose status as an emerging growth company as of December 31, 2019, the last day of the fiscal year, ASU 2016-02 will be effective for the 2019 annual reporting period. 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. The Company is in the process of completing its adoption of ASU 2016-02, including reviewing its lease portfolio, completing the implementation and testing of the third-party software solution and exercising internal controls over adoption and implementation of ASU 2016-02. Therefore, the estimated impact on the Company ’ s condensed consolidated balance sheets cannot currently be determined. However, the Company expects the adoption of ASU 2016-02 will have a material impact on its condensed consolidated balance sheets through the recognition of right of use assets and lease liabilities for its operating leases. The Company does not expect any material changes to its condensed consolidated statements of operations or condensed consolidated statements of cash flows. |
