What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-01 compared with 2020-02-21 · 170 added, 119 removed, 348 unchanged (45% of the section changed)

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Our fiscal year ends on December 31.

We are a leading cloud-based communications platform for enterprises 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 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 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.

We are a leading global enterprise cloud communications company.

Our solutions include a broad range of software Application Programming Interfaces (“APIs”) for voice, messaging and emergency services.

Our sophisticated and easy-to-use software APIs allow enterprises to enhance their products and services by incorporating advanced, global connectivity for voice, messaging and emergency services communications capabilities.

Companies use our platform to more frequently and seamlessly connect with their end users, add voice calling capabilities to applications and devices, transition from on-premise to cloud-based communication tools and applications, integrate messaging capabilities into applications or software, build interactive voice response systems for contact centers, offer end users new mobile application experiences including emergency services and improve employee productivity, among other use cases.

We have established a reputation as a leader in the Communications Platform-as-a-Service (“CPaaS”) space through our innovation-rich culture and focus on empowering enterprises with end-to-end communications solutions.

We are the only CPaaS provider in the industry that owns and operates a nationwide IP voice network in the U.S.

In 2020 we acquired Voxbone, a leading European-based communications platform with its own IP voice network assembled by building relationships with local carriers around the globe.

Our deep U.S.

presence and global platform extending across more than 60 countries serves enterprises in countries representing more than 90% of global gross domestic product.

We believe that our current and future customers will benefit from using a unified software platform, network and team to serve people around the world.

Our voice software APIs allow enterprises to make and receive phone calls and create advanced voice experiences.

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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.

We believe our network is capital-efficient and supports 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.

We are able to control the quality and provide the support our customers expect, while meeting regulatory, scalability and cost requirements more efficiently.

For the years ended December 31, 2018, 2019 and 2020, total revenue was $204.1 million, $232.6 million and $343.1 million, respectively.

CPaaS revenue for the years ended December 31, 2017, 2018 and 2019 was $131.6 million, $164.4 million and $197.9 million, respectively, representing an increase of 25% in 2018 and 20% in 2019.

Net income for the years ended December 31, 2017, 2018 and 2019 was $6.0 million, $17.9 million and $2.5 million, respectively.

For the years ended December 31, 2017, 2018 and 2019, the number of active CPaaS customer accounts was 965, 1,230 and 1,728, respectively, representing a year over year increase of 27% in 2018 and 40% in 2019.

For the years ended December 31, 2018, 2019 and 2020, CPaaS revenue was $164.4 million, $197.9 million and $298.1 million, respectively, representing an increase of 20% in 2019 and 51% in 2020.

Net income in 2018 and 2019 was $17.9 million and $2.5 million, respectively, and net loss in 2020 was $44.0 million.

As of December 31, 2018, 2019 and 2020, the number of active CPaaS customer accounts was 1,230, 1,728 and 2,848, respectively, representing a year over year increase of 40% in 2019, and 65% in 2020.

Acquisition of Voxbone

On October 12, 2020, we entered into the Share Purchase Agreement pursuant to which we acquired all of the A Ordinary Shares, B Ordinary Shares and C Ordinary Shares of Voice Topco.

Voice Topco directly or

Management ’ s Discussion and Analysis

indirectly holds all of the issued and outstanding shares of Voxbone S.A., which (with its subsidiaries) is the operating subsidiary of Voice Topco.

On November 2, 2020 we completed the Share Purchase in a transaction valued at €446 million.

As consideration for the Share Purchase, we (i) paid the Selling Stockholders approximately $400 million (or approximately €338 million based on prevailing exchange rates at the close of business on October 9, 2020) at the Closing and (ii) issued to the Selling Stockholders at the Closing shares of our Class A common stock, with an aggregate value of approximately €108 million (or approximately $128 million based on prevailing exchange rates at the close of business on October 9, 2020).

COVID-19 Update

In December 2019, a novel coronavirus disease (“COVID-19”) was reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern.

On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic.

The circumstances caused by COVID-19 resulted in increased use of our services during the twelve months ended December 31, 2020 because of more reliance on our offerings to connect people during a time of physical distancing and work from home environments.

Increased usage was mostly driven by large enterprise customers that offer unified communications as a service (“UCaaS”) and meeting solutions.

We anticipate significant usage of these services and solutions to continue until the effects of COVID-19 abate.

We believe that usage of many of these services and solutions will continue after the effects of COVID-19 abate as employees and enterprises utilize work from home arrangements more prevalently.

The broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain.

As a result of the COVID-19 pandemic, nearly all of our employees in the United States and Europe worked from home during the calendar year ending on December 31, 2020 and we implemented certain travel restrictions, neither of which disrupted our operations.

The COVID-19 pandemic and its adverse effects have become more prevalent in the locations where we, our customers, suppliers and third-party business partners conduct business and, as a result, we may experience disruptions in our operations.

As COVID-19 effects abate, we may experience curtailed customer demand that could materially adversely impact our business, results of operations and overall financial performance in future periods.

Specifically, we may experience impact from enterprises reducing usage of our services or delaying decisions to implement our services.

The effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods.

See “Item 1A.

Risk Factors” for further discussion of the possible impact of the COVID-19 pandemic on our business.

Key Performance Indicators

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Free cash flow $ 10,186 $ (27,012) $ (10,074)

Management ’ s Discussion and Analysis

Number of Active CPaaS Customer Accounts

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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.

Management ’ s Discussion and Analysis

Key Components of Statements of Operations

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For the years ended December 31, 2018, 2019 and 2020, we generated 34%, 31% and 24% of our CPaaS revenue, respectively, in each period from monthly per unit fees.

The remaining 2% to 3% of our CPaaS revenue is generated from other miscellaneous services.

The remaining 2%, 3% and 2% of our CPaaS revenue is generated from other miscellaneous services.

Management ’ s Discussion and Analysis

The remainder of our revenue is generated by our Other segment.

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We expect that our operating expenses will increase in absolute dollars.

Management ’ s Discussion and Analysis

Research and Development

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Sales and marketing expenses also include expenditures related to advertising, marketing, our brand awareness activities, sales support and professional services fees.

Management ’ s Discussion and Analysis

We focus our sales and marketing efforts on creating sales leads and establishing and promoting our brand.

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General and administrative expenses also include costs related to product management and reporting, customer billing and collection functions, information services, professional services fees, credit card processing fees, rent associated with our headquarters in Raleigh, North Carolina 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.

For the years ended December 31, 2018, 2019 and 2020, our effective tax rate was (154.1)%, 116.4% and (51.8)%, respectively.

The increase in our effective tax rate is primarily due to the change in book income before taxes.

We recorded $11.9 million and $13.5 million in net excess tax benefit from equity compensation for the years ended December 31, 2018 and 2019, respectively.

The decrease in our effective tax rate is primarily due to the change in judgment related to the realizability of certain deferred tax assets and the resulting valuation allowance.

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, 2020, the Company continues to maintain a valuation allowance for its U.S.

federal and state and U.K.

net deferred tax assets.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the “Cares Act”) was enacted.

The Cares Act includes multiple income tax provisions that impact our tax expense, such as relaxing limitations on the deductibility of interest and the use of net operating losses arising in taxable years beginning after December 31, 2017.

We have accounted for the estimated impact of the Cares Act.

Management ’ s Discussion and Analysis

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Operating income (loss) 6,752 (17,693) (13,505)

Other (expense) income, net

Interest (expense) income, net (1,728) 301 2,446

Other income, net — — 23

Total other (expense) income, net (1,728) 301 2,469

Other income (expense), net

Interest income (expense), net 301 2,446 (13,672)

Other income (expense), net — 23 (1,795)

Total other income (expense), net 301 2,469 (15,467)

Income (loss) before income taxes 7,053 (15,224) (28,972)

Income tax (provision) benefit (6,918) 10,870 17,718

Net income $ 5,971 $ 17,923 $ 2,494

Income tax benefit (provision) 10,870 17,718 (15,005)

Net income (loss) $ 17,923 $ 2,494 $ (43,977)

Management ’ s Discussion and Analysis

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Operating income (loss) 3 % (8) % (4) %

Other (expense) income, net

Interest (expense) income, net (1) % — % 1 %

Other income, net — % — % — %

Total other (expense) income, net (1) % — % 1 %

Other income (expense), net

Interest income (expense), net — % 1 % (4) %

Other income (expense), net — % — % (1) %

Total other income (expense), net — % 1 % (5) %

Income (loss) before income taxes 3 % (7) % (8) %

Income tax (provision) benefit (4) % 5 % 8 %

Net income 4 % 9 % 1 %

Income tax benefit (provision) 5 % 8 % (4) %

Net income (loss) 9 % 1 % (13) %

(*) Columns may not foot due to rounding.

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In 2020, total revenue increased by $110.5 million, or 48%, compared to the same period in 2019, and CPaaS revenue increased by $100.1 million, or 51%, compared to the same period in 2019.

The increase in CPaaS revenue was primarily attributable to an increase in the usage of all our service offerings, particularly our voice and messaging usage, which accounted for $34.3 million of the increase in CPaaS revenue, and our phone number services and 911-enabled phone number services, which accounted for $8.8 million of the increase in CPaaS revenue.

This increase in CPaaS revenue was partially offset by $9.6 million related to 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.

Messaging usage increased in the year due to higher volumes of messages related to political campaigns for the U.S.

elections in November.

The situation caused by COVID-19 also caused increased usage in the year because of more reliance on our offerings to connect people during a time of physical distancing and work from home environment.

Increased usage was mostly driven by large enterprise customers that offer UCaaS services and meeting solutions and our phone number services.

Our phone number services and 911-enabled phone number services accounted for $13.2 million of the increase in CPaaS revenue.

In 2020, CPaaS revenue also increased by $11.8 million from higher usage pricing due to a shift in product mix to products with a higher rate compared to the same period in 2019.

In addition, $16.6 million of growth was attributable to the acquisition of Voxbone for the period from November 1, 2020 through December 31, 2020.

The changes in usage and price in 2020 compared to the same period in 2019 were reflected in our dollar-based net retention rate of 131%.

In addition, revenue from new CPaaS customers contributed $22.9 million , or 11%, to CPaaS revenue for 2020 compared to $11.7 million , or 7%, in the same period in 2019.

The increase in usage was also attributable to a 65% increase in the number of active CPaaS customer accounts, from 1,728 as of December 31, 2019 to 2,848 as of December 31, 2020.

In addition, revenue from new CPaaS customers contributed $11.7 million, or 7%, to CPaaS revenue for 2019 compared to $8.7 million, or 7%, to CPaaS revenue in the same period in 2018.

As a percentage of total revenue, CPaaS revenue increased from 85% in 2019 to 87% in the same period in 2020 .

Other revenue decreased by $5.0 million, or 13%, in 2019 due to lower indirect revenue, which decreased by $2.7 million, primarily due to the settlement of a dispute in 2018.

Other revenue also decreased due to the expected decline of legacy revenue, which decreased by $2.3 million, compared to the same period in 2018 .

Other revenue increased by $10.4 million, or 30%, in 2020 due to higher indirect revenue, which increased by $12.7 million primarily due to an increase in messaging surcharges and indirect voice revenue, offset by the expected decline of legacy revenue, which decreased by $2.3 million, compared to the same period in 2019 .

Cost of Revenue and Gross Margin

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In 2020, total gross profit increased by $50.2 million, or 47%, compared to the same period in 2019 .

Total gross margin decreased from 47% to 46% during the same period, primarily from a decrease in other gross margin in 2019 as a result of higher indirect revenue in 2018 due to settlement of a dispute.

Total gross margin was 46% for both years.

In 2020, CPaaS cost of revenue increased by $50.4 million, or 46%, compared to the same period in 2019.

CPaaS cost of revenue increased primarily due to an increase in voice usage costs of net $4.5 million due to growth in minutes used by customers, partially offset by a decrease in the cost per minute from vendors.

Network costs also increased $8.0 million due to network expansions and personnel costs.

Cost of messaging increased by $2.3 million due to growth in messages used by customers.

Cost of phone numbers increased by $1.2 million.

CPaaS cost of revenue increased due to an increase in voice usage costs of $25.0 million due to growth in minutes used by customers.

Cost of messaging increased by $10.3 million due to growth in messages used by customers, including an increase related to political campaigns and increased cost per message.

Network costs also increased $13.0 million due to network expansions and depreciation expense.

Cost of phone numbers and 911 increased by $2.1 million.

COVID-19 and the increased usage resulting from the work at home environment generated increased voice usage costs and network expansions.

CPaaS gross margin increased from 44% in 2019 to 46% in 2020.

Excluding depreciation and stock-based compensation of $4.6 million in 2018 and $6.8 million in 2019 , CPaaS Non-GAAP gross margin was 45% and 48% for 2018 and 2019, respectively, and total Non-GAAP gross margin was 49% for both periods.

In 2019, o ther cost of revenue increased by $0.8 million compared to the same period in 2018, primarily due to a $1.9 million increase in cost of indirect revenue related to messaging surcharges and cost of carrier access revenue offset by a $1.1 million decrease as a result of churn in legacy services.

Excluding depreciation and stock-based compensation of $6.8 million in 2019 and $9.7 million in 2020, CPaaS Non-GAAP gross margin was 48% and 50%, respectively, and total Non-GAAP gross margin was 49% for both years.

In 2020, o ther cost of revenue increased by $9.9 million compared to the same period in 2019, primarily due to a $10.8 million increase in cost of indirect revenue related to messaging surcharges offset by a $0.9 million decrease in costs as a result of the expected churn in legacy services.

Operating Expenses

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In 2020, R&D expenses related to the expansion of our product offerings increased by $10.6 million, or 34%, compared to the same period in 2019.

This increase was primarily due to increased personnel costs of $9.8 million and non-headcount costs of $0.8 million.

In 2019, sales and marketing expenses increased by $14.3 million, or 69%, compared to the same period in 2018 primarily due to an overall increase in sales personnel costs of $11.6 million and non-headcount costs of $2.7 million.

This increase was primarily due to increased personnel costs of $10.1 million including the impact of growth in headcount as a result of the Acquisition and an increase in non-headcount costs of $0.5 million.

In 2020, sales and marketing expenses increased by $5.5 million, or 16%, compared to the same period in 2019, primarily due to an overall increase in sales personnel costs of $6.6 million including the impact of growth in headcount as a result of the Acquisition offset by a decrease in non-headcount costs of $1.1 million.

In 2020, g eneral and administrative expenses increased by $29.9 million , or 51%, compared to the same period in 2019.

This increase was due to higher personnel cost of $4.1 million, facilities expense of $1.6 million, hosted software costs of $1.4 million, higher bad debt expense of $1.1 million primarily related to a write-off with a customer, professional expenses of $1.0 million, depreciation and amortization costs of $1.0 million, other non-headcount costs of $0.8 million and bank charges and license costs of $0.3 million, which contributed to the overall increase in general and administrative expenses.

Interest Income, Net

In 2019, interest income increased by $2.1 million compared to the same period in 2018, due to a $2.2 million increase in interest income from the investment of follow-on equity offering proceeds offset by $0.1 million increase in interest expense.

Income Tax Benefit

In 2019, income tax benefit increased by $6.8 million compared to the same period in 2018.

The effective tax rate for the twelve months ended December 31, 2019 was 116.4% compared to (154.1)% in the same period in 2018.

The increase in our effective tax rate is primarily due to the change in book income before taxes.

This increase was due to $12.7 million in costs which consist of mainly fees for financial and legal services, due diligence services and success fees related to the acquisition of Voxbone, higher personnel cost of $11.9 million due to the impact of growth in headcount as a result of the Acquisition, depreciation and amortization costs of $3.1 million, facilities costs of $1.4 million, bank charges and license costs of $1.1 million, professional costs of $0.6 million, and expensed IT charges of $0.6 million, offset by lower other non-headcount costs of $0.9 million and travel and entertainment expenses of $0.6 million, which contributed to the overall increase in general and administrative expenses.

As a percentage of revenue, total operating expenses for the years ended December 31, 2018, 2019 and 2020 increased from 43% to 53% and 50%, respectively, as operating expenditures growth exceeded corresponding growth in revenue in 2019 and 2020.

Interest Income (Expense), Net

In 2020, interest expense, net increased by $16.1 million compared to the same period in 2019, due to a $0.1 million decrease in interest income from the investment of follow-on equity offering proceeds and a $16.2 million increase in interest expense related to the Convertible Notes.

See Note 9, “Debt” to the consolidated financial statements, for additional details.

Management ’ s Discussion and Analysis

Income Tax Benefit (Provision)

In 2020, income tax benefit decreased by $32.7 million compared to the same period in 2019.

The effective tax rate for the twelve months ended December 31, 2020 was (51.8)% compared to 116.4% in the same period in 2019.

The decrease in our effective tax rate is primarily due to the change in judgment related to the realizability of certain deferred tax assets and the resulting valuation allowance.

Comparison of the Years Ended December 31, 2018 and 2019

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In addition, revenue from new CPaaS customers contributed $11.7 million, or 7%, to CPaaS revenue for 2019 compared to $8.7 million, or 7%, to CPaaS revenue in the same period in 2018.

As a percentage of total revenue, CPaaS revenue remained flat at 81% from 2018 to the same period in 2017.

Other revenue increased by $8.3 million, or 26%, primarily due to the settlement of a dispute and a higher than usual amount of indirect revenue, which increased by $11.1 million.

This increase was partially offset by the expected declines in our legacy services of $2.8 million.

As a percentage of total revenue, CPaaS revenue increased from 81% in 2018 to 85% in the same period in 2019 .

Other revenue decreased by $5.0 million, or 13%, in 2019 due to lower indirect revenue, which decreased by $2.7 million, primarily due to the settlement of a dispute in 2018.

Other revenue also decreased due to the expected decline of legacy revenue, which decreased by $2.3 million, compared to the same period in 2018 .

Cost of Revenue and Gross Margin

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Total gross margin 47 % 46 %

Management ’ s Discussion and Analysis

In 2019, total gross profit increased by $11.7 million, or 12%, compared to the same period in 2018 .

Total gross margin increased from 45% to 47% during the same period.

In 2019, CPaaS cost of revenue increased by $16.0 million, or 17%, compared to the same period in 2018.

CPaaS cost of revenue increased primarily due to an increase in voice usage costs of $11.7 million due to growth in minutes used by customers, partially offset by a decrease in the cost per minute from vendors.

Network costs also increased $5.6 million due to network expansions.

Cost of messaging increased by $1.3 million due to growth in messages used by customers and increased cost per

Management ’ s Discussion and Analysis

message from vendors.

Cost of phone numbers increased by $0.1 million, offset by a $0.3 million decrease in 911 enabled numbers costs.

CPaaS gross margin was 42% and 43% for 2017 and 2018, respectively.

Excluding depreciation and stock-based compensation of $4.4 million in 2017 and $4.6 million 2018, CPaaS Non-GAAP gross margin was 46% and 45% for 2017 and 2018, respectively, and total Non-GAAP gross margin was 48% and 49% for the same periods.

Other cost of revenue increased by $0.4 million, which was due to a $1.6 million increase in cost of indirect revenue related to cost of carrier access revenue, partially offset by a $1.2 million decrease as a result of churn in legacy services.

Network costs also increased $8.0 million due to network expansions and personnel costs.

Cost of messaging increased by $2.3 million due to growth in messages used by customers.

Cost of phone numbers increased by $1.2 million.

CPaaS gross margin increased from 43% in 2018 to 44% in 2019.

Operating Expenses

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Total operating expenses $ 89,216 $ 125,328 $ 36,112 40 %

In 2018, R&D expenses increased by $10.1 million, or 94%, compared to the same period in 2017.

This increase was primarily due to increased personnel costs of $8.8 million and other non-headcount costs of $1.3 million.

In 2018, sales and marketing expenses increased by $9.5 million, or 85%, compared to the same period in 2017 primarily due to an overall increase in sales personnel costs of $8.1 million and other non-headcount costs of $1.4 million.

In 2018, general and administrative expenses increased by $10.5 million, or 28%, compared to the same period in 2017.

This increase was due to higher personnel cost of $4.5 million, professional expenses of $2.3 million, hosted software costs of $1.4 million, facilities expense of $1.3 million, and other non-headcount costs of $1.0 million, which contributed to the overall increase in general and administrative expenses.

In 2019, R&D expenses related to the expansion of our product offerings increased by $10.6 million, or 51%, compared to the same period in 2018.

This increase was primarily due to increased personnel costs of $9.8 million and non-headcount costs of $0.8 million.

In 2019, g eneral and administrative expenses increased by $11.3 million , or 24%, compared to the same period in 2018.

Interest Income, Net

In 2018, interest income increased by $2.0 million compared to the same period in 2017, due to the repayment of all outstanding debt in 2017 with the proceeds from our initial public offering and increased interest income from investments in marketable securities.

Income Tax Benefit

In 2018, income tax expense decreased by $17.8 million compared to the same period in 2017.

The effective tax rate for 2018 was (154.1)% compared to 53.7% in the same period in 2017.

The decrease in our effective tax rate is primarily due to the impact of tax deductions from stock option exercises, as well as the decrease in the federal statutory tax rate under the Act.

In 2017 we incurred additional income tax expense of $2,073 due to the re-measurement of our deferred tax assets at the lower corporate tax rate.

In accordance with SAB118, all accounting related to the Act was completed in Q4 of 2018.

There was no change to the provisional re-measurement of our deferreds that was recorded in Q4 of 2017.

In 2019, income tax benefit increased by $6.8 million compared to the same period in 2018.

The effective tax rate for the twelve months ended December 31, 2019 was 116.4% compared to (154.1)% in the same period in 2018.

The increase in our effective tax rate is primarily due to the change in book income before taxes.

Management ’ s Discussion and Analysis

Quarterly Results of Operations

The following tables set forth our unaudited quarterly statements of operations data for each of the eight quarters ended December 31, 2019.

The following tables set forth our unaudited quarterly statements of operations results for each of the eight quarters ended December 31, 2020.

The information for each quarter has been prepared on a basis consistent with our audited consolidated financial statements included in this Annual Report on Form 10-K, and reflect, 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.

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Total operating expenses 30,399 30,452 31,992 32,485 35,043 35,049 37,367 63,907

Operating income (loss) 8,776 1,159 87 (3,270) (5,844) (3,783) (4,605) (3,461)

Other income:

Interest income, net 49 90 103 59 201 719 778 748

Operating (loss) income (5,844) (3,783) (4,605) (3,461) (2,884) (268) 1,864 (12,217)

Other income (loss):

Interest income (expense), net 201 719 778 748 (859) (3,864) (4,200) (4,749)

Other income (expense), net — 10 (1) 14 (47) (4) (6) (1,738)

Realized gain (loss) on investments — — 4 (4) — — — —

Total other income 49 90 103 59 201 729 781 758

Income (loss) before income taxes 8,825 1,249 190 (3,211) (5,643) (3,054) (3,824) (2,703)

Income tax (provision) benefit (2,634) 9,263 2,320 1,921 7,635 6,526 2,810 747

Total other income (loss) 201 729 781 758 (906) (3,868) (4,206) (6,487)

Loss before income taxes (5,643) (3,054) (3,824) (2,703) (3,790) (4,136) (2,342) (18,704)

Income tax benefit (provision) 7,635 6,526 2,810 747 2,732 (16,505) (10) (1,222)

Net income (loss) $ 1,992 $ 3,472 $ (1,014) $ (1,956) $ (1,058) $ (20,641) $ (2,352) $ (19,926)

Unrealized (loss) gain on marketable securities, net of income tax benefit (6) 4 (1) 2 8 13 (21) 1

Unrealized gain (loss) on marketable securities, net of income tax benefit 8 13 (21) 1 — — — —

Foreign currency translation — 12 (46) 75 (96) (23) 139 27,880

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Liquidity and Capital Resources

To date, our principal sources of liquidity have been the proceeds of $74.4 million from our initial public offering in November 2017 and $147.4 million from our follow-on public offering in March 2019, each net of underwriting discounts and commissions, in addition to free cash flow driven by payments received from customers using our services.

We believe that our cash and cash equivalents balances, our marketable securities portfolio, 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.

To date, our principal sources of liquidity have been the proceeds of $74.4 million from our initial public offering in November 2017, $147.4 million from our follow-on public offering in March 2019 and $344.7 million from our issuance of the Convertible Notes in February 2020, each net of underwriting discounts and commissions, in addition to free cash flow driven by payments received from customers using our services.

We believe that our cash and cash equivalents balances, our short-term investments portfolio, 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.

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Effect of exchange rate changes on cash, cash equivalents and restricted cash — (9) 109

Net increase in cash, cash equivalents, and restricted cash $ 30,842 $ 3,631 $ 143,503

Net increase (decrease) in cash, cash equivalents, and restricted cash $ 3,631 $ 143,503 $ (103,567)

Cash Flows from Operating Activities

In 2020, cash provided by operating activities was $4.5 million, consisting of net loss of $44.0 million adjusted for non-cash items.

These non-cash items included depreciation and amortization expense of $16.8 million, amortization of debt discount and issuance costs of $15.6 million, deferred tax benefit of $14.3 million, stock-based compensation expenses of $9.9 million, right-of-use asset amortization of $4.8 million and loss on disposal of property and equipment of $0.3 million, offset by cash used by changes in operating assets and liabilities of $13.3 million.

Cash generated in operating assets and liabilities included an increase in accrued expenses and other liabilities of $11.5 million and an increase in deferred revenue and advanced billings of $2.8 million.

Offsetting these cash generating items in assets and liabilities were an increase in accounts receivable of $18.8 million, a decrease in operating right-of-use liability of $5.3 million, a increase in accounts payable of $0.3 million, an increase in prepaid expenses and other assets of $2.3 million and an increase of deferred costs of $1.6 million.

In 2019, cash used in operating activities was $1.3 million, consisting of net income of $2.5 million adjusted for non-cash items.

These non-cash items included depreciation and amortization expense of $9.6 million, stock-based compensation expenses of $6.6 million, right-of-use asset amortization of $4.3 million, loss on disposal of property and equipment of $0.5 million, offset by deferred tax benefit of $17.5 million, cash used by changes in operating assets and liabilities of $6.6 million, and accretion of bond discount of $0.7 million.

Management ’ s Discussion and Analysis

operating assets and liabilities of $6.6 million, and accretion of bond discount of $0.7 million.

Cash generated from operating assets and liabilities included an increase in accrued expenses and other liabilities of $5.5 million, an increase in accounts payable of $1.1 million, and an increase in deferred revenue and advanced billings of $0.6 million.

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Offsetting these cash generating items in assets and liabilities were an increase in accounts receivable of $2.8 million, an increase in prepaid expenses and other assets of $1.9 million and a decrease in accounts payable of $0.2 million, respectively.

Management ’ s Discussion and Analysis

In 2017, cash provided by operating activities was $14.6 million, consisting of net income of $6.0 million adjusted for non-cash items.

These non-cash items included depreciation and amortization expense of $5.7 million, deferred tax expense of $6.2 million, stock-based compensation expenses of $1.8 million and cash used for changes in operating assets and liabilities of $5.7 million.

Cash outflows from operating assets and liabilities included increases in accounts receivable of $4.4 million, prepaid expenses and other assets of $1.6 million, deferred costs of $0.9 million along with a decrease in accounts payable of $2.4 million.

Offsetting these cash outflows was an increase in deferred rent of $0.2 million, increase in deferred revenue and advanced billings of $2.6 million and an increase in accrued expenses and other liabilities of $1.0 million.

Cash Flows from Investing Activities

In 2020, cash used in investing activities was $455.1 million mainly from the costs related to the Acquisition of $400.5 million, net of cash.

In addition, cash used in investing activities was the purchase of other investments of $230.8 million, the purchase of property and equipment of $12.3 million and capitalized internally developed software costs of $2.3 million, offset by the proceeds from sales and maturities of other investments of $190.8 million.

In 2019, cash used in investing activities was $7.7 million from the proceeds from the sales and maturities of marketable securities of $86.4 million, offset by the investment in marketable securities of $68.4 million, the purchase of property and equipment of $22.2 million and capitalized internally developed software costs of $3.5 million.

In 2018, cash used in investing activities from continuing operations was $31.7 million from the investment in marketable securities of $35.2 million, the purchase of property and equipment of $12.4 million and capitalized internally developed software costs of $2.0 million, partially offset by maturities of marketable securities of $18.0 million.

In 2017, cash used in investing activities from continuing operations was $8.0 million from the purchase of property and equipment of $5.0 million and capitalized internally developed software costs of $2.9 million.

Cash Flows from Financing Activities

In 2020, cash provided by financing activities was $346.9 million consisting primarily of $400.0 million in proceeds from the issuance of the Convertible Notes and $4.1 million in proceeds from the issuance of stock options, partially offset by $43.3 million in capped call purchases, $12.0 million in payments of debt issuance cost, and $1.9 million in value of equity awards withheld for tax liabilities.

In 2019, cash provided by financing activities was $152.4 million consisting primarily of $147.4 million in proceeds from the follow-on public offering, $7.4 million in proceeds from the issuance of stock options, partially offset by $1.4 million in value of equity awards withheld for tax liabilities, $0.8 million in payments related to the cost of the follow-on public offering and $0.2 million in payments of debt issuance cost.

In 2018, cash provided by financing activities from continuing operations was $10.7 million consisting primarily of $11.1 million in proceeds from the exercises of stock options, partially offset by $0.3 million in payments related to the cost of our initial public offering and $0.1 million in payments on capital leases.

In 2017, cash provided by financing activities from continuing operations was $24.2 million consisting primarily of $74.4 million in net proceeds from our initial public offering, $0.2 million in proceeds from the issuances of common stock as a result of options exercised, and $0.1 million in proceeds from exercise of warrants, partially offset by net repayments of $9.0 million on our line of credit, $0.1 million in payments on capital leases, and $40.0 million in repayments on our term loan.

On March 1, 2019, we amended and restated our Credit and Security Agreement with KeyBank National Association.

The agreement is for 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 .

The term of the amended and restated Credit and Security Agreement is three years and matures on March 1, 2022.

This agreement requires that a specified minimum liquidity amount must be maintained in cash and cash equivalents at all times and that we meet a minimum revenue level on a quarterly basis.

On June 4, 2019, KeyBank National Association and Pacific Western Bank entered into an Assignment and Acceptance Agreement, whereby KeyBank National Association, as the Assignor, sold and assigned $10.0 million of our Revolving Credit Commitment to Pacific Western Bank, the Assignee.

KeyBank National Association retains $15.0 million of our Revolving Credit Commitment.

In 2018, cash provided by financing activities was $10.7 million consisting primarily of $11.1 million in proceeds from the exercises of stock options, partially offset by $0.3 million in payments related to the cost of our initial public offering and $0.1 million in payments on capital leases.

On February 25, 2020, we entered into a waiver agreement, with respect to our revolving loan (the “Credit Facility”) with KeyBank National Association and Pacific Western Bank (collectively, the “Lenders”), which

Management ’ s Discussion and Analysis

As of December 31, 2019, we had $0 outstanding on the revolving loan and were in compliance with all financial and non-financial covenants for all periods presented.

The available borrowing capacity under our revolving credit facility loan was $25.0 million as of December 31, 2019.

As of December 31, 2019, the outstanding unamortized loan fees for the revolving loan were $0.1 million and were included in prepaid expenses and other current assets, and other long-term assets in the Company’s consolidated balance sheets.

provided for consent to accommodate the issuance of the Convertible Notes and the Capped Calls.

The waiver agreement required us to covenant with the Lenders to deposit an amount of funds into a controlled account, which restricted the ability to use such funds until the Credit Facility was paid in full or terminated.

If we had failed to comply with these covenants or to make payments under our indebtedness when due, we would have been in default under that indebtedness, which could, in turn, have resulted in that indebtedness becoming immediately payable in full.

On April 27, 2020, a First Amendment Agreement to the Credit Security Agreement was executed in which the Lenders consented to remove the previously existing cash collateral requirement and to terminate the previously required controlled account.

As of December 31, 2020, we had $0 outstanding under the Credit Facility and were in compliance with all financial and non-financial covenants for all periods presented.

The available borrowing capacity under our Credit Facility was $25.0 million as of December 31, 2020.

As of December 31, 2020, the outstanding unamortized loan fees for the Credit Facility were $0.1 million and were included in prepaid expenses and other current assets, and other long-term assets in our consolidated balance sheets.

On February 28, 2020, we issued $400.0 million aggregate principal amount of the Convertible Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act, including $50.0 million aggregate principal amount of such Convertible Notes pursuant to the exercise in full of the initial purchasers’ over-allotment option.

The interest on the Convertible Notes is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2020.

Management ’ s Discussion and Analysis

The Convertible Notes may bear special interest under specified circumstances relating to our failure to comply with its reporting obligations under the indenture governing the Convertible Notes (the “Indenture”) or if the Convertible Notes are not freely tradeable as required by the Indenture.

The Convertible Notes will mature on March 1, 2026, unless earlier repurchased, redeemed by us, or converted pursuant to their terms.

The total net proceeds from the Convertible Notes, after deducting initial purchaser discounts, costs related to the Capped Calls, and debt issuance costs, paid or payable by us, were approximately $344.7 million.

Contractual Obligations and Other Commitments

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Operating leases (1) $ 22,536 $ 6,408 $ 13,193 $ 2,935 $ —

Finance leases (1) 492 195 238 59 —

Convertible Notes (2) 400,000 — — — 400,000

Purchase obligations (3) 14,278 9,028 4,486 762 2

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(1) Operating leases represent total future minimum rent payments under non-cancellable operating lease agreements.

(1) Operating and finance leases represent total future minimum rent payments under non-cancellable lease agreements.

(2) See Note 9, “Debt” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for a discussion of our Convertible Notes.

(3) Purchase obligations represent total non-cancelable purchase commitments and future minimum payments under contracts to various service providers, excluding agreements that are cancellable without penalty.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.

We do not have any holdings in variable interest entities.

With the acquisition of Voxbone, we have off-balance sheet agreements for short term office and automobile leases in the amount of $1,249 and $24, respectively, ending prior to the year ended December 31, 2021 .

Critical Accounting Policies and Significant Judgments and Estimates

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Revenue 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.

Management ’ s Discussion and Analysis

The majority of our revenue is generated from usage-based fees earned from customers accessing our communications platform.

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Usage-based fees are recognized in revenue in the period the traffic traverses our network.

Management ’ s Discussion and Analysis

Revenue from service-based fees, such as the provision and management of phone numbers and emergency services access, is recognized on a ratable basis as the service is provided, which is typically one month.

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Adjustments to the reserve are recorded against revenue.

Business Combinations

We use 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 management's valuation and involves making significant estimates and assumptions based on facts and circumstances that existed as of the acquisition date.

We use 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.

Goodwill and Intangible Assets

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We completed our annual goodwill impairment analysis in each of the years ended December 31, 2018, 2019 and 2020 and no impairment charges were recorded.

As of December 31, 2019 goodwill was $6.9 million.

As of December 31, 2020 goodwill was $372.2 million which has been assigned to the CPaaS segment.

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.

Management ’ s Discussion and Analysis

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.

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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, 2019, intangible assets, net of accumulated amortization, were $6.6 million, which consists primarily of client relationships and client contracts.

As of December 31, 2020, intangible assets, net of accumulated amortization, were $248.1 million, which consists primarily of client relationships, client contracts and developed technology.

No indicators of impairment were identified for the years ended December 31, 2018, 2019 and 2020.

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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

Management ’ s Discussion and Analysis

for maintenance and minor upgrades and enhancements.

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, 2020, software development costs, net of accumulated amortization, were $6.0 million.

Capitalized costs of platform and other software applications are included in property and equipment.

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Other Contingencies

Management ’ s Discussion and Analysis

We are subject to legal proceedings and litigation arising in the ordinary course of business.

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Any revisions could have a material effect on our results of operations.

We conduct operations in many tax jurisdictions throughout the United States.

In many of these jurisdictions, non-income-based taxes and fees, such as sales and use taxes, 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 conduct operations in many tax jurisdictions throughout the United States and the rest of the world.

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.

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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 $3.0 million, $4.7 million and $5.4 million as of December 31, 2017, 2018 and 2019, respectively.

These estimates are based on several key assumptions, including the taxability of our services, the

Management ’ s Discussion and Analysis

jurisdictions in which we believe we have nexus and the sourcing of revenue to those jurisdictions.

As a result, we have recorded a liability of $4.7 million, $5.4 million and $9.1 million as of December 31, 2018, 2019 and 2020, 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 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis