What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-01 compared with 2020-02-21 · 647 added, 423 removed, 786 unchanged (58% of the section changed)

2 unchanged sentences

Index to Consolidated Financial Statements

Report s of Independent Registered Public Accounting Firm

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Comprehensive Income

Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ (Deficit) Equity

Consolidated Statements of Comprehensive Income (Loss)

Consolidated Statements of Changes in Stockholders’ Equity

Consolidated Statements of Cash Flows

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We have audited the accompanying consolidated balance sheets of Bandwidth Inc.

(the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in redeemable convertible preferred stock and stockholders' (deficit) equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”).

(the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2019, 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 21, 2020 expressed an unqualified opinion thereon.

Adoption of ASU No.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Update (ASU) No.

2016-02, Leases (Topic 842), and the related amendments.

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, 2020, 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 March 1, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The 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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of critical audit matters 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition

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Revenue for these services is recognized in the period the usage occurs.

Monthly service fees include the provisioning and management of phone numbers and 911-enabled phone number services, which are recognized based on the quantity of phone numbers in service and the quantity of phone numbers with 911-enabled services during the month, respectively.

Monthly service fees include the provisioning and management of phone numbers and emergency services access, which are recognized based on the quantity of phone numbers in service and the quantity of phone numbers with emergency services access during the month, respectively.

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 911-enabled services 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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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, 911-enabled phone number services, and messaging services, 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 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 911-enabled services during the period.

To test the Company’s revenue, our audit procedures included, among other procedures, 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 911-enabled services during the period.

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 services, and tested the IT general controls over those systems, including testing of user access and change management controls.

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.

Business Combination

Description of the

Matter As explained in Note 3 to the consolidated financial statements, on November 2, 2020 the Company completed the acquisition of Voice Topco Limited (“Voxbone”) for total estimated purchase consideration of $519.4 million.

The acquisition was accounted for as a business combination.

The Company recorded intangible assets from this acquisition, including customer relationships and developed technology of $148.5 million and $84.1 million, respectively.

The Company used the multi-period excess earning method to estimate the preliminary fair value of the customer relationships and the relief from royalty method to estimate the preliminary fair value of the developed technology, each of which are based on management’s estimates and assumptions.

Auditing the Company's accounting for its acquisition of Voxbone was complex and subjective due to the significant estimation uncertainty in determining the fair value of the above identified intangible assets, which was primarily due to the sensitivity of the respective fair values to the underlying assumptions.

The fair value estimate of the customer relationships intangible asset included significant assumptions in the prospective financial information (including revenue growth) and the discount rate.

The fair value estimate of the developed technology intangible asset included significant assumptions in the prospective financial information (including revenue growth and royalty rate) and the discount rate.

These significant assumptions for each of the identified intangible assets are forward-looking and could be affected by future economic and market conditions.

How We Addressed

the Matter in Our

Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the accounting for the acquisition.

Our tests included controls over the estimation process and models to estimate the fair values of the above identified intangible assets, as well as controls over management’s review of the valuation methodologies and significant assumptions discussed above.

To test the estimated fair values of the customer relationship and developed technology intangible assets, we performed audit procedures that included, among others, evaluating the Company's selection of the valuation methodologies, testing the significant assumptions, and testing the completeness and accuracy of the underlying data.

For example, we compared the significant assumptions in the prospective financial information, including the forecasted revenue growth rates, to current industry trends, as well as to the historical performance of the acquired business.

With the assistance of our valuation specialists, we evaluated the valuation methodologies, and significant assumptions, including royalty rate and discount rates.

This included understanding and validating the source information underlying the determination of the royalty rate and discount rates and testing the mathematical accuracy of the calculations.

In addition, we developed a range of independent estimates for the discount rates using publicly available market data for comparable entities and comparing those to the discount rates selected by management.

/s/ Ernst & Young LLP

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Raleigh, North Carolina

February 21, 2020

March 1, 2021

Report of Independent Registered Public Accounting Firm

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(the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, 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, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in redeemable convertible preferred stock and stockholders ’ (deficit) equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and our report dated February 21, 2020 expressed an unqualified opinion thereon.

As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Voice Topco Limited (“Voxbone”) which was acquired on November 2, 2020, which is included in the 2020 consolidated financial statements of the Company and constituted 3% of total assets as of December 31, 2020, and 5% of total revenue for the year then ended.

Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Voxbone.

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, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated March 1, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

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Raleigh, North Carolina

February 21, 2020

March 1, 2021

BANDWIDTH INC.

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Current assets:

Cash, cash equivalents and restricted cash $ 41,501 $ 185,004

Marketable securities 17,400 —

Cash and cash equivalents $ 184,414 $ 72,163

Restricted cash 590 9,274

Other investments — 40,000

Accounts receivable, net of allowance for doubtful accounts 30,187 55,243

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Property and equipment, net 41,654 51,645

Operating right-of-use asset — 21,031

Operating right-of-use asset, net 21,031 19,491

Intangible assets, net 6,569 248,055

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Goodwill 6,867 372,239

Deferred tax asset 17,359 34,861

Deferred tax asset, net 34,861 —

Total assets $ 341,416 $ 890,608

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Total current liabilities 45,738 92,189

Other liabilities — 1,707

Operating lease liability, net of current portion 19,868 17,202

Deferred rent, net of current portion 2,503 —

Deferred revenue, net of current portion 5,720 6,386

Deferred tax liability — 61,005

Convertible senior notes — 282,196

Total liabilities 71,326 460,685

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Accumulated deficit ( 5,528 ) ( 49,505 )

Accumulated other comprehensive (loss) income ( 1 ) 41

Accumulated other comprehensive income 41 27,941

Total stockholders’ equity 270,090 429,923

Total liabilities and stockholders’ equity $ 341,416 $ 890,608

See accompanying notes.

See accompany notes.

BANDWIDTH INC.

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

Other (expense) income:

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

Other income, net — — 23

Total other (expense) income ( 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) 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 )

Earnings per share:

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

Income allocated to participating securities 644 — —

Net income attributable to common stockholders $ 5,327 $ 17,923 $ 2,494

Net income per share:

Net income (loss) per share:

Basic $ 0.96 $ 0.11 $ ( 1.83 )

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BANDWIDTH INC.

Consolidated Statements of Comprehensive Income

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

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2018 2019 2020

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

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

Other comprehensive (loss) income

Unrealized (loss) gain on marketable securities, net ( 1 ) 1 —

Foreign currency translation — — 41

Foreign currency translation, net of income taxes — 41 27,900

Total other comprehensive (loss) income ( 1 ) 42 27,900

Total comprehensive income $ 5,971 $ 17,922 $ 2,536

Total comprehensive income (loss) $ 17,922 $ 2,536 $ ( 16,077 )

See accompanying notes.

BANDWIDTH INC.

Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders ’ (Deficit) Equity

(In thousands, except 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 other comprehensive (loss) income Accumulated deficit Total stockholders’ (deficit) equity

Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount

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 )

BANDWIDTH INC.

Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders ’ (Deficit) Equity

Consolidated Statements of Changes in Stockholders ’ Equity

(In thousands, except share amounts)

Series A redeemable convertible preferred stock Class A voting

Class A voting

common stock Class B voting

Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount

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

common stock Additional paid-in capital Accumulated other comprehensive (loss) income Accumulated deficit Total stockholders’ equity

Shares Amount Shares Amount

Balance at December 31, 2017 4,197,831 $ 4 13,440,725 $ 13 $ 102,465 $ — $ ( 25,771 ) $ 76,711

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Balance at December 31, 2018 12,912,747 13 6,510,732 6 116,600 ( 1 ) ( 7,848 ) 108,770

BANDWIDTH INC.

Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders ’ (Deficit) Equity

(In thousands, except share amounts)

Series A redeemable convertible preferred stock Class A voting

common stock Class B voting

Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount

Issuance of common stock in connection with follow on public offering, net of underwriting discounts 2,875,000 3 — — 147,388 — — 147,391

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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 )

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 (loss) income Accumulated deficit Total stockholders’ equity

Shares Amount Shares Amount

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

See accompanying notes.

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Cash flows from operating activities

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

Adjustments to reconcile net income to net cash provided by (used in) operating activities

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

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities

Depreciation and amortization 5,824 9,538 16,803

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Gain on sale of marketable securities — ( 4 ) —

Amortization of debt issuance costs 376 64 177

Amortization of debt discount and issuance costs 64 177 15,647

Stock-based compensation 3,339 6,626 9,881

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Changes in operating assets and liabilities:

Accounts receivable ( 4,387 ) ( 2,784 ) ( 6,178 )

Accounts receivable, net of allowances ( 2,784 ) ( 6,178 ) ( 18,832 )

Prepaid expenses and other assets ( 1,926 ) ( 4,176 ) ( 2,258 )

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Proceeds from sales and maturities of marketable securities 18,000 86,467 —

Purchase of other investments — — ( 230,780 )

Proceeds from sales and maturities of other investments — — 190,780

Acquisition, net of cash acquired — — ( 400,493 )

Net cash used in investing activities ( 31,683 ) ( 7,653 ) ( 455,085 )

Cash flows from financing activities

Borrowings on line of credit 4,000 — —

Repayments on line of credit ( 9,000 ) — —

Payments on capital leases ( 73 ) ( 92 ) —

Repayments on term loan ( 40,000 ) — —

Payments on finance leases ( 92 ) — ( 28 )

Payment of costs related to the initial public offering ( 285 ) — —

Payment of costs related to the follow-on public offering — — ( 757 )

Proceeds from the initial public offering, net of underwriting discounts 74,400 — —

Proceeds from the follow-on public offering, net of underwriting discounts — 147,391 —

Payment of costs related to the follow-on public offering — ( 757 ) —

Proceeds from issuance of convertible senior notes — — 400,000

Payment of debt issuance costs ( 25 ) ( 167 ) ( 11,990 )

Purchase of capped call — — ( 43,320 )

Proceeds from exercises of stock options 11,046 7,357 4,073

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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, cash equivalents, and restricted cash, beginning of period 37,870 41,501 185,004

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Supplemental disclosure of cash flow information

Cash paid during the year for interest $ 1,535 $ 107 $ 341

Cash paid for interest $ 107 $ 341 $ 579

Cash paid (refunded) for taxes $ 155 $ ( 178 ) $ 454

Right-of-use assets obtained in exchange for new operating lease liabilities $ — $ 4,528 $ 3,105

Property and equipment obtained in exchange for new finance lease liabilities $ — — $ 462

Supplemental disclosure of noncash investing and financing activities

Purchase of property and equipment, accrued but not paid $ 1,204 $ 1,375 $ 6,043

Value of common stock issued in acquisition $ — $ — $ 106,379

Acquisition holdback $ — $ — $ 8,595

Equity awards withheld for tax liabilities, accrued but not paid $ — $ 177 $ 247

Acquisition of equipment through finance leases $ — $ — $ 113

See accompanying notes.

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(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, and the Company has subsidiaries in the Netherlands, United Kingdom, Germany and Spain.

The Company is a cloud-based, software-powered communications platform-as-a-service (“CPaaS”) provider that enables enterprises to create, scale and operate voice or messaging communications services across any mobile application or connected device.

The Company’s headquarters are located in Raleigh, North Carolina.

The Company is an international cloud-based, software-powered communications platform-as-a-service (“CPaaS”) provider that enables enterprises to create, scale and operate voice or messaging communications services across any mobile application or connected device.

The Company has two operating and reportable segments, CPaaS and Other.

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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, the Company’s Registration Statement on Form S-1 relating to the initial public offering (“IPO”) of its Class A common stock was declared effective by the SEC.

In connection 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.

Follow-on Public Offering

On March 11, 2019, the Company completed a follow-on public equity offering in which the Company sold 2,875,000 shares of its Class A common stock, including 375,000 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at a public offering price of $ 54.25 per share.

The Company received aggregate proceeds of $ 146,557 , after deducting underwriting discounts and offering expenses paid by the Company.

On November 2, 2020, Bandwidth completed the acquisition (the “Business Combination” or the “Transaction”) of Voxbone S.A., a private limited liability company registered under the laws of Belgium, pursuant to the Share Purchase Agreement (“SPA”) dated as of October 12, 2020, in which Bandwidth agreed to acquire all of the A Ordinary Shares, B Ordinary Shares and C Ordinary Shares of Voice Topco Limited (“Voice Topco”).

Voice Topco directly or indirectly held all of the issued and outstanding shares of Voxbone, S.A., which is the operating subsidiary of Voice Topco.

Voice Topco and its subsidiaries are collectively referred to “Voxbone” herein.

Upon closing of the Transaction, Bandwidth paid cash consideration in Euros equivalent to $ 413,005 in US dollars, which included a holdback amount of $ 8,153 (the “Holdback”), and issued 663,394 Class A common shares at $ 160.355 per share for the purchase of Voxbone.

Bandwidth’s management has concluded that the acquired assets and assumed liabilities of Voxbone, together with acquired processes and employees, represent a business as defined in the Financial Accounting Standards Board's (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations.

Accordingly, the Transaction has been accounted for as a Business Combination, with Voxbone as a wholly owned subsidiary of Bandwidth.

See Note 3, “ Business Combination ” to these consolidated financial statements, for additional details.

Summary of Significant Accounting Policies

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All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

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.

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, estimated cash flows on asset retirement obligation.

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, reserve for sales credits, recoverability of long lived and intangible assets, estimated period of benefit, valuation allowances on deferred tax assets, certain accrued expenses, and contingencies.

Effective January 1, 2020, due to the continued growth in customers and low churn rates, the Company updated its calculation of the estimated period of benefit for nonrefundable upfront fees from 3 to 4 years.

For the year ended December 31, 2020 the Company reduced total revenue by approximately $ 1,632 and reduced cost of revenue by approximately $ 859 , related to the change in the estimated period of benefit.

Effective July 1, 2020, due to significant investment in software during the first half of 2020 and management's expectation that such investment would yield benefit for a longer period of time, the Company updated its estimated useful life for internal-use software development from 3 to 4 years.

For the year ended December 31, 2020, the Company reduced cost of revenue by $ 314 and general and administrative expense by $ 104 .

Revenue Recognition

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Revenue Recognition Policy

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

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.

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Nature of Products and Services

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

customers and is generally derived from usage and service fees in both the CPaaS and Other segments.

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.

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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.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

The Company maintains a reserve for sales credits.

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These costs are recorded within sales and marketing expenses.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Contract Assets and Liabilities

The following table provides information about receivables and contract liabilities from contracts with customers:

December 31, 2019

As of December 31,

Receivables (1) $ 30,187 $ 55,243

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Cost of revenue also contains costs related to the support of the network, web services and cloud infrastructure, capacity planning and management, rent for network facilities, software licenses, hardware and software maintenance fees, and network engineering services.

Personnel costs (including non-cash stock-based compensation expenses) associated with personnel who are responsible for the delivery of services, operation 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.

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Research and Development

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Research and development expenses consist primarily of personnel costs (including non-cash stock-based compensation expenses), outsourced software development and engineering services and cloud infrastructure fees for staging and development outsourced engineering services.

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General and administrative expenses consist primarily of personnel costs for support personnel and executives in accounting, finance, legal, information services, human resources and administrative functions.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

General and administrative expenses also include costs related to product management and reporting, data services, customer billing and collection functions, and other professional services fees, credit card processing fees, rent associated with the Company’s headquarters in Raleigh, North Carolina, depreciation and amortization.

Cash, Cash Equivalents and Restricted Cash

The Company classifies all highly liquid investments with stated maturities of three months or less from the 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.

Cash deposits are primarily in financial institutions in the US.

However, cash for monthly operating costs of international operations are deposited in banks outside the US.

Cash and Cash Equivalents

The Company classifies all highly liquid investments with original stated maturities of three months or less from the date of purchase as cash equivalents and all highly liquid investments with original stated maturities of greater than three months from the date of purchase as current marketable securities, with the exception of time deposits which are classified as other investments.

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 only with commercial institutions that have at least an investment grade credit rating.

5 unchanged sentences

RRAs with stated maturities of greater than three months from the date of purchase are classified as marketable securities.

As of December 31, 2018 and 2019, cash and cash equivalents were $ 41,261 and $ 184,414 , respectively.

Restricted cash consists primarily of customer deposits, employee withholding tax liability and employee benefits contributions not yet remitted.

Restricted Cash

Restricted cash consists primarily of the Holdback remaining to be paid to the Selling Stockholders of Voxbone, employee withholding tax liability and employee benefits contributions not yet remitted.

The Company has classified this asset as a short-term asset in order to match the expected period of restriction.

As of December 31, 2018 and 2019, restricted cash was $ 240 and $ 590 , respectively.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are stated at realizable value, net of an allowance for doubtful accounts.

Accounts Receivable and Current Expected Credit Losses

Accounts receivable are stated at realizable value, net of allowances, which includes an allowance for doubtful 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.

If the financial condition of customers were to deteriorate, resulting in their inability to make required payments, additional provisions for doubtful accounts would be required and would increase bad debt expense.

Management has evaluated the collectability of trade accounts receivable and determined that allowances of approximately $ 906 and $ 769 for uncollectible accounts and customer balances that are disputed were required as of December 31, 2018 and 2019, respectively.

Refer to Note 4, “Financial Statement Components,” for a rollforward of the components of the allowance for doubtful accounts as of December 31, 2018 and 2019.

The Company regularly reviews the composition of the accounts receivable aging, historical bad debts, changes in payment patterns, customer creditworthiness, current economic trends, and reasonable and supportable forecasts about the future.

Relevant risk characteristics include customer size and historical loss patterns.

Management has evaluated the expected credit losses related to trade accounts receivable and determined that allowances of approximately $ 769 and $ 1,203 for uncollectible accounts and customer balances that are disputed were required as of December 31, 2019 and December 31, 2020, respectively.

Refer to Note 5, “Financial Statement Components” to these consolidated financial statements, for a rollforward of the components of the allowances as of December 31, 2019 and December

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Refer to the Recently Adopted Accounting Standard section for the adoption of ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses for discussion of financial assets measured at amortized cost, including trade receivables.

The Company includes unbilled receivables in its accounts receivable balance.

1 unchanged sentence

All amounts are considered collectible and billable.

As of December 31, 2018 and 2019, unbilled receivables were $ 11,174 and $ 16,200 , respectively.

As of December 31, 2019 and December 31, 2020, unbilled receivables were $ 16,200 and $ 27,692 , 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.

Financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents, marketable securities, other investments 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 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.

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 December 31, 2019, no individual customer represented more than 10% of the Company’s accounts receivable, net of allowance for doubtful accounts.

As of December 31, 2020, one individual customer represented approximately 11 % of the Company’s accounts receivable, net of allowance for doubtful accounts.

For the years ended December 31, 2018, 2019 and 2020, no individual customer represented more than 10% of the Company’s total revenue.

3 unchanged sentences

Computer hardware and software 1 to 7 years

Internal-use software development costs 3 years

Internal-use software development costs 4 to 7 years

Furniture and fixtures 2 to 5 years

Leasehold improvements Shorter of the estimated lease term or useful life

Leasehold improvements Shorter of the estimated lease term or 4 to 7 years

Maintenance and repairs are charged to expense as incurred.

2 unchanged sentences

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 contract or the estimated period of benefit, which is approximately three years.

The Company capitalizes these costs and amortizes them over the longer of the term of the customer contract or the estimated period of benefit, which is approximately four years .

Internal-Use Software Development Costs

4 unchanged sentences

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.

The Company also capitalizes costs related to specific upgrades and enhancements when the expenditures will result in additional functionality, and expenses

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

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 and equipment.

These costs are amortized over the estimated useful life of the software on a straight-line basis over three years.

These costs are amortized over the estimated useful life of the software on a straight-line basis over four 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.

3 unchanged sentences

The Company has a policy to defer and amortize these costs based on the effective interest method over the term of the credit agreements.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

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 change that would more likely than not reduce the fair value of the reporting unit or indefinite-lived intangible asset below its carrying value.

The Company tests goodwill at the reporting unit level and has determined that it has two-reporting units, CPaaS and Other.

The Company tests goodwill at the reporting unit level and has determined that it has 2 -reporting units, CPaaS and Other.

All Goodwill is allocated to the CPaaS reporting unit.

9 unchanged sentences

If these estimates or related assumptions change in the future, the Company may be required to record an impairment charge.

As of December 31, 2018 and 2019, the Company has recorded goodwill of $ 6,867 .

As of December 31, 2019 and 2020, the Company has recorded goodwill of $ 6,867 and $ 372,239 , respectively.

No goodwill impairment charges were recorded for the years ended December 31, 2018, 2019 and 2020.

3 unchanged sentences

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

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

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.

Advertising Costs

8 unchanged sentences

The Company uses the Black-Scholes option pricing model, net of estimated forfeitures, to measure the fair value of its stock options.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

The Company has elected to estimate expected forfeitures, and, as such, the Company must also determine a forfeiture rate to calculate the stock-based compensation for awards.

9 unchanged sentences

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.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

The Company recognizes potential accrued interest and penalties associated with unrecognized tax positions in income tax expense.

10 unchanged sentences

For purposes of the diluted net income (loss) per share calculation, options and warrants to purchase common stock and redeemable convertible preferred stock are considered to be potential common stock.

Historically, the Company issued securities other than common stock that participated in dividends (“Participating Securities”), and therefore utilized the two-class method to calculate net income per share.

Historically, the Company issued securities other than common stock that participated in dividends (“Participating Securities”).

These Participating Securities included the Series A redeemable convertible preferred stock.

The two-class method requires a portion of net income to be allocated to the Participating Securities to determine the net income

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

attributable to common stockholders.

Net income attributable to the common stockholders is equal to the net income less dividends paid on preferred stock with any remaining earnings allocated in accordance with the bylaws between the outstanding common and redeemable convertible preferred stock as of the end of each period.

On November 9, 2017, the Participating Securities were converted into shares of Old Class A common stock, which converted to Class B common stock immediately prior to the IPO.

On November 9, 2017, the Participating Securities were converted to Class B common stock immediately prior to the IPO.

Foreign currency translation

1 unchanged sentence

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 consolidated statements of operations.

The Company recorded $ 9 in related gains during the year ended December 31, 2019.

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 (loss) income, 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.

All of the assets and liabilities of these subsidiaries are converted to U.S.

dollars at the exchange rate in effect at the balance sheet date, and equity accounts are carried at historical exchange rates.

Revenue and expenses are translated at average exchange rates in effect during each reporting period.

Income and expense items are translated at average rates for the period.

The net effect of foreign currency translation adjustments is included in shareholder's equity as a component of "Accumulated other comprehensive loss" line item in the accompanying consolidated balance sheets.

Foreign currency transaction gains and losses are the result of exchange rate changes during the period of time between the consummation and cash settlement of transactions denominated in currencies other than the functional currency.

Foreign currency transaction gains and losses are recognized in current period earnings as incurred.

The Company recorded $ 0 , $ 9 , $ 32 in related gains during the years ended December 31, 2018, 2019 and 2020.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, marketable securities, accounts receivable, accounts payable and accrued expenses approximate fair value as of December 31, 2018 and December 31, 2019 because of the relatively short duration of these instruments.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

the relatively short duration of these instruments.

Marketable securities consist of U.S.

12 unchanged sentences

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Comprehensive Income

Comprehensive Income (Loss)

The Company has elected to present Comprehensive Income (Loss) and its components as a separate financial statement.

Comprehensive income refers to net income and other revenue, expenses, gains and losses that, under generally accepted accounting principles, are recorded as an element of stockholders’ equity but are excluded from the calculation of net income.

For the year ended December 31, 2017, the Company’s operations did not give rise to any material items in comprehensive income, which were not already in net income.

Accordingly, for that period, the Company’s comprehensive income is the same as its net income.

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842) , which was further clarified in July 2018 by ASU 2018-10, Codification Improvements to Topic 842, Leases , ASU 2018-11, Leases-Targeted Improvements , and ASU 2019-01, Leases (Topic 842):

Codification Improvements, .

ASU 2018-10 provides narrow amendments to clarify how to apply certain aspects of the new lease standard.

ASU 2018-11 addresses implementation issues related to the new lease standard.

ASU 2019-01 clarifies how to apply certain aspects of the new lease standard.

Under the new standard, lessees are required to recognize in the balance sheet the right-of-use (“ROU”) assets and lease liabilities that arise from operating leases.

As a result of the Company no longer qualifying for emerging growth Company filing status based on its public float as of the most recent second fiscal quarter, the ASU was adopted as of December 31, 2019 with an effective date as of the beginning of the Company’s fiscal year, January 1, 2019.

The standard was applied to the operating leases that existed on that date using the optional alternative method on a prospective basis.

Prior year comparative financial information was not recast under the new standard and continues to be presented under ASC 840.

The Company elected to utilize the package of practical expedients available for expired or existing contracts which allowed the Company to carryforward historical assessments of (a) whether contracts are or contain leases, (b) lease classification, and (c) initial direct costs.

The Company also elected to apply the short-term lease exception for all leases.

The Company did not elect the use of hindsight practical expedient in determining the lease term and assessing the likelihood that lease renewal, termination or purchase option will be exercised.

Under the short-term lease exception, the Company will not recognize ROU assets or lease liabilities for leases that, at the acquisition date, have a remaining lease term of 12 months or less.

As a result of losing emerging growth status on June 30, 2019, the Company implemented this guidance for the year ended December 31, 2019.

The Company recognized a $ 20,772 operating ROU asset and a $ 23,808 operating lease liability in its consolidated balance sheet as of January 1, 2019, with no material impact to its consolidated statements of operations.

The Company measured the lease liability at the present value of the future lease payments as of January 1, 2019.

The Company used its incremental borrowing rate to discount the lease payments as of January 1, 2019.

The Company derived the discount rate, adjusted for differences in the term and payment patterns, from the information available at the adoption date.

The right-of-use asset is valued at the amount of the lease liability adjusted for the remaining December 31, 2018, balance of unamortized lease incentives, prepaid rent and deferred rent.

The lease liability is subsequently measured at the present value of unpaid future lease payments as of the reporting date with a corresponding adjustment to the right-of-use asset.

Absent a lease modification, the Company will continue to utilize the January 1, 2019, incremental borrowing rate.

The Company recognizes operating lease costs on a straight-line basis and presents these costs as operating expenses within the consolidated statements of operations.

Within the consolidated statements of cash flows the Company presents the lease payments made on the operating leases within cash flows from operating activities and principal payments made on the finance leases as part of financing activities.

The financial results for the year ended December 31, 2019 are presented under the new standard, while the comparative periods presented are not adjusted and continue to be reported in accordance with the Company’s historical accounting policy.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

See Note 5, “Right-of-Use Asset and Lease Liabilities” for further information.

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, I ncome Taxes (Topic 740):

Simplifying the Accounting for Income Taxes , which is intended to simplify various aspects related to accounting for income taxes.

ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application.

ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

Early adoption is permitted, including adoption in an interim period.

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 August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40):

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ( “ 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.

ASU 2018-15 will be effective for the Company in interim and annual reporting periods beginning after December 15, 2019.

The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

ASU 2018-15 is effective for interim and annual reporting periods beginning after December 15, 2019.

As a result of the Company ’ s prospective adoption of this standard, the Company capitalized i mplementation costs related to cloud computing arrangements of $ 572 as of December 31, 2020.

See Note 7, “Property and Equipment” to these consolidated financial statements, for additional details.

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 the Company for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years.

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.

ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019 and for interim periods within those fiscal years.

The adoption of this standard did not have a material impact on the Company ’ s financial statements.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

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 the Company in periods beginning after December 15, 2019.

Management does not expect the adoption of this guidance to have a significant impact on the Company’s financial statements.

The ASU removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation.

A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019.

The adoption of this standard did not have a material impact on the Company’s financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses:

7 unchanged sentences

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses , which clarifies how to apply certain aspects of the new credit losses standard.

The accounting standard is effective for the Company for annual and interim periods beginning after December 15, 2019.

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.

The accounting standard is effective for annual and interim periods beginning after December 15, 2019.

The Company adopted this standard for financial assets measured at amortized cost, including trade receivables.

Results for the reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.

The adoption of this standard did not have a material impact on the Company’s financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In October 2020, the FASB issued ASU 2020-10, Codification Improvements , which is intended to address suggestions received from stakeholders on the Accounting Standards Codification and to make other incremental improvements to GAAP.

The FASB's intentions for this update is to clarify the codification or correct unintended application of guidance and is not expected to result in a significant change in practice.

Amendments include removal of certain references in concept statements, simplification to wording, and the addition of all disclosure-related guidance in the disclosure sections of the codification.

The amendments in this update do not change GAAP and transition guidance is primarily for entities that may have applied guidance being amended in an inconsistent manner.

This update is effective for annual periods beginning after December 15, 2020, for public business entities.

The Company is evaluating the effect of this update on its financial statements.

In August 2020, the FASB issued 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) , which is intended to address 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 earnings-per-share (EPS) guidance on the basis of feedback from financial statement users.

ASU 2020-06 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021.

Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

The Company is evaluating the effect of adopting this new accounting guidance on its financial statements but does not intend to early adopt.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes , which is intended to simplify various aspects related to accounting for income taxes.

ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

guidance to improve consistent application.

ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

Early adoption is permitted, including adoption in an interim period.

The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on its financial statements.

Business Combination

Voxbone Acquisition

On November 2, 2020, the Company completed the acquisition of Voxbone for total estimated purchase consideration of approximately $ 519,384 , consisting of cash and 663,394 shares of Bandwidth’s Class A common stock.

The total estimated purchase consideration is subject to adjustment upon finalization of the net working capital adjustment.

Voxbone is an international enterprise cloud communications leader with European-based communications platform and IP voice network.

With a global network and extensive regulatory expertise, Voxbone is a national operator in markets around the world, with coverage across 93 % of the world by GDP.

The Company acquired Voxbone to accelerate its international strategy by several years, giving the company a footprint in 60 + countries.

The purchase consideration exchanged to consummate the acquisition reflects the fair value of the Company's shares issued and the cash paid to the holders of Voxbone’s equity.

The fair value of the shares is based on the final closing price of shares of Bandwidth Class A common stock prior to the effective time of the acquisition, which was $ 160.355 per share, determined as of October 30, 2020.

Preliminary Purchase Price Allocation

For purposes of accounting for the acquisition, the Company was determined to be the accounting acquirer.

The Company applied the acquisition method of accounting with respect to the identifiable assets and liabilities of Voxbone, which have been measured at their estimated fair value as of the date of the business combination.

Estimates of the fair value of Voxbone’s assets represent management’s best estimate of assumptions about future events and uncertainties, including significant judgments related to future cash flows, discount rates, competitive trends, margin and revenue growth assumptions, royalty rate, customer attrition rates, market comparables, and others, as applicable.

Inputs used were generally obtained from historical data, supplemented by current and anticipated market conditions and growth rates.

The following table summarizes the preliminary allocation of purchase price to the identifiable assets acquired and liabilities assumed by Bandwidth, with the excess of purchase price over the fair value of Voxbone’s net assets recorded as goodwill.

Due to the timing and the magnitude of the transaction and the multi-jurisdictional nature of the net assets acquired, initial accounting for the acquisition is not complete, and further measurement period adjustments may occur in fiscal year 2021.

The Company has estimated the preliminary fair value of net assets acquired based on information currently available and will continue to adjust those estimates as additional information becomes available, including the refinement of market participant assumptions and finalization of tax returns in the pre-acquisition period.

The Company will reflect measurement period adjustments in the period in which the adjustments are determined.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

The aggregate purchase consideration has been preliminarily allocated as follows:

Estimated fair value

Purchase Price:

Fair value of cash paid (1)

Fair value of Bandwidth common stock issued

Total purchase consideration

________________________

(1) Amount subject to adjustment upon finalization of the net working capital adjustment.

Estimated fair value

Purchase Price Allocation:

Accounts receivable 5,873

Other current assets 3,315

Property and equipment 3,865

Intangible assets 232,600

Other non-current assets 3,418

Total current liabilities ( 17,581 )

Deferred tax liability ( 58,149 )

Other non-current liabilities ( 4,881 )

Net identifiable assets acquired 172,820

Goodwill 346,564

Net assets acquired $ 519,384

Identifiable intangible assets

The estimated preliminary fair value and weighted average useful life of the Voxbone identifiable intangible assets are as follows.

Fair value Weighted average useful life

Developed technology $ 84,100 10

Customer relationships 148,500 15

Preliminary fair value of identifiable intangible assets

Developed technology represents certain proprietary technology that Voxbone uses to deliver its services.

Preliminary fair values were determined using a relief from royalty methodology, which estimates the cost savings generated by a company based upon the ownership of an asset for which it would otherwise have had to pay royalties or license fees on revenues earned through the use of the asset.

The discount rate used was determined at the time of measurement based on an analysis of the implied internal rate of return of the transaction, weighted average cost of capital and weighted average return on assets.

The economic useful life was determined based on the technology cycle related to each developed technology, as well as the cash flows over the forecast period.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Customer relationships represent the preliminary fair value of existing relationships with the Voxbone customers.

The preliminary fair value of customer relationships was determined using the Multi-Period Excess Earning Method, which involves isolating the net earnings attributable to the asset being measured based on the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life.

The valuation includes the valuation of the assembled workforce, using the Cost Approach, for purposes of calculating contributory asset charges to be used in the Multi-Period Excess Earning Method valuations.

The economic useful life was determined based on historical customer attrition rates.

The Company believes that the amounts of purchased intangible assets recorded represent the preliminary fair values of and approximates the amounts a market participant would pay for these intangible assets as of the acquisition date.

The fair value of accounts receivables acquired is $ 5,873 , with the gross contractual amount being $ 6,453 .

The Company expects $ 580 to be uncollectible.

The excess of the consideration for the acquisition over the preliminary fair value of net assets acquired was recorded as goodwill.

The estimated goodwill recognized is attributable primarily to expected synergies and expanded market opportunities from combining the Company’s operations with those of Voxbone.

The goodwill created in the acquisition is not expected to be deductible for tax purposes and is subject to revision as the purchase price allocation is completed.

Goodwill arising from the acquisition has been allocated to the CPaaS reporting segment.

Transaction Costs

The Company recognized $ 14,458 of acquisition related costs that were expensed in the current period.

These costs consist of mainly fees for financial and legal services, due diligence services, success fees, and net loss on foreign currency exchange directly associated with cash payments in foreign currencies as instructed by SPA of which $ 12,675 is included in general and administrative expenses and $ 1,783 is included in other income (expense), net in the consolidated statements of operations.

Results of Voxbone Subsequent to the Acquisition

The operating results of Voxbone have been included in the Company’s consolidated financial statements from the date of acquisition through December 31, 2020.

The Company’s consolidated statement of operations for the year ended December 31, 2020 included revenues of $ 17,541 and a net loss of ($ 3,112 ), which includes the effects of purchase accounting adjustments, primarily the amortization of intangible assets.

Unaudited Pro Forma Information

The following unaudited pro forma financial information summarizes the combined results of operations for the Company and Voxbone as if the acquisition had been completed on January 1, 2019.

The pro forma results have been prepared for comparative purposes only, and do not necessarily represent what the revenue or results of operations would have been had the acquisition been completed on January 1, 2019.

In addition, these results are not intended to be a projection of future operating results and do not reflect synergies that might be achieved.

The unaudited pro forma information includes adjustments for the preliminary purchase price accounting impact (including, but not limited to, amortization for intangible assets, the purchase accounting effect on deferred revenue, transaction costs and related tax impacts) and the alignment of accounting policies.

The pro forma results for the period ending December 31, 2020 also include the non-recurring transaction costs totaling $ 14,458 .

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Year ended December 31,

Revenue $ 297,377 $ 411,830

Net loss attributable to common stockholders $ ( 7,737 ) $ ( 42,675 )

Fair Value Measurements

The carrying amounts of cash and cash equivalents, other investments, accounts receivable, accounts payable and accrued expenses approximate fair value as of December 31, 2019 and 2020 because of the relatively short duration of these instruments.

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 summarizes the assets measured at fair value as of December 31, 2018 and 2019:

Amortized cost or carrying value Unrealized gains Unrealized losses Fair value measurements on a recurring basis

The following table summarizes the assets measured at fair value as of December 31, 2019 and December 31, 2020:

Fair value measurements on a recurring basis

December 31, 2019

3 unchanged sentences

Money market account $ 25,000 $ — $ — $ 25,000

Reverse repurchase agreements 26,000 — — — 26,000 — 26,000

Total included in cash and cash equivalents 34,194 — — 8,194 26,000 — 34,194

Marketable securities:

treasury securities 17,402 — ( 2 ) 17,400 — — 17,400

Total marketable securities 17,402 — ( 2 ) 17,400 — — 17,400

Time deposits 75,250 — — 75,250

Total financial assets $ 100,250 $ — $ — $ 100,250

5 unchanged sentences

Money market account $ 57,517 $ — $ — $ 57,517

Other investments:

Time deposits 40,000 — — 40,000

Total financial assets $ 97,517 $ — $ — $ 97,517

The Company classifies its marketable securities as current assets as they are available for current operating needs.

There were no marketable securities as of December 31, 2019.

As of December 31, 2020, the fair value of the Convertible Notes, as further described in Note 9, “Debt”, was approximately $ 716,250 .

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 December 31, 2020, the fair value of the Pension Plan's assets, as further described in Note 14, “Employee Benefit Plan”, was approximately $ 2,882 .

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, 2018 and 2019.

The money market account is included in cash, cash equivalents and restricted cash in the consolidated balance sheets as of December 31, 2018 and 2019.

During the years ended December 31, 2017, 2018 and 2019 there were $ 0 , $ 18,000 and $ 69,000 in maturities of marketable securities, respectively.

There were no sales of marketable securities for the years ended December 31, 2017 and 2018.

Proceeds and gross realized gains from sales of marketable securities were $ 17,467 and $ 4 , respectively, for the year ended

In such instances,

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

December 31, 2019.

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, 2019 and 2020.

The money market account is included in cash and cash equivalents in the consolidated balance sheets as of December 31, 2019 and December 31, 2020.

During the December 31, 2018, 2019 and 2020 there were $ 18,000 , $ 69,000 and $ 0 in maturities of marketable securities, respectively.

There were no sales of marketable securities for the years ended December 31, 2018 and 2020.

Proceeds and gross realized gains from sales of marketable securities were $ 17,467 and $ 4 , respectively for the year ended December 31, 2019.

The cost of the securities sold was based on the specific identification method and the gross realized gain is recorded as other income, net, in the consolidated statements of operations.

Interest earned on marketable securities was $ 0 , $ 77 and $ 6 for the years ended December 31, 2017, 2018 and 2019 respectively, and is recorded within interest (expense) income, net, in the accompanying consolidated statements of operations.

Interest earned on marketable securities was $ 77 , $ 6 , and $ 0 for the years ended December 31, 2018, 2019 and 2020 respectively, and is recorded within other income (expense), net in the accompanying consolidated statements of operations.

Financial Statement Components

Accounts receivable, net of allowance for doubtful accounts consist of the following:

Accounts receivable, net of allowances consist of the following:

As of December 31,

1 unchanged sentence

Unbilled accounts receivable 16,200 27,692

Allowance for doubtful accounts ( 906 ) ( 769 )

Allowance for doubtful accounts and reserve for expected credit losses

( 769 ) ( 1,203 )

Other accounts receivable 64 2,250

Total accounts receivable, net $ 30,187 $ 55,243

Components of allowance for doubtful accounts are as follows:

Components of allowance for doubtful accounts and reserve for expected credit losses are as follows:

Year ended December 31,

3 unchanged sentences

Deductions (1) 1,680 888

Billings deemed not probable of collection (2) ( 357 ) —

Write-off of previously outstanding and fully reserved billings related to settlement 24,968 —

Revenue recognized from outstanding billings previously deemed uncollectible related to settlement 6,268 —

Balance, end of period $ ( 769 ) $ ( 1,203 )

1 unchanged sentence

(1) Write off of uncollectible accounts after all collection efforts have been exhausted.

(2) Represents amounts billed in the period but where collectability is not probable based on customer's collection experience.

Amounts were charged to a contra-revenue account.

On January 29, 2018, the Company and Verizon entered into a settlement agreement to resolve an 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 , which was recognized as revenue.

Immediately following receipt of the $ 4,400 payment, the Company issued to Verizon credits with respect to other CABS amounts previously billed to Verizon and fully reserved of $ 24,968 .

The amount credited to Verizon comprised the majority of the allowance for CABS revenue as of December 31, 2017.

The Company recognized as revenue $ 6,268 , including the $ 4,400 payment made on February 8, 2018 and the other current outstanding Verizon CABS receivables which had been previously reserved as uncollectible, but for which collection was no longer in doubt as a result of the settlement.

The settlement agreement also specifies certain terms for the Company’s CABS billings to Verizon prospectively.

Notes to Condensed Consolidated Financial Statements (continued)

4 unchanged sentences

Accrued compensation and benefits 8,284 19,534

Accrued sales, use, and telecom related taxes 4,742 5,439

Deferred rent, current portion 298 —

Accrued sales, use, VAT and telecommunications related taxes 5,439 9,142

Other accrued expenses 904 2,657

Current portion of finance lease — 183

Total accrued expenses and other current liabilities $ 27,328 $ 63,065

Right-of-Use Asset and Lease Liabilities

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).

Under the new standard, lessees are required to recognize in the balance sheet the right-of-use (“ROU”) assets and lease liabilities that arise from operating leases.

As a result of the Company no longer qualifying as an “emerging growth company” based on its public float as of the end of the three months ended June 30, 2019, the ASU was adopted as of December 31, 2019 with an effective date as of the beginning of the Company’s fiscal year, January 1, 2019.

The standard was applied to the operating leases that existed on that date using the optional alternative method on a prospective basis.

Prior year comparative financial information was recast under the new standard to be presented under ASC 842.

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.

Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

The Company did not have any finance leases as of December 31, 2019.

As the Company’s leases do not generally provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company’s lease agreements do not contain any restrictive covenants, variable lease payments or residual value guarantees.

All leases with an initial term of 12 months or less are not recorded on the balance sheet and are not material.

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 included in cost of sales and selling, general, and administrative expense on our consolidated statement 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 cost of sales on our consolidated statement of operations.

The Company presents the operating leases in long-term assets and current and long-term liabilities in the accompanying consolidated balance sheet as of December 31, 2020.

The Company leases approximately 216,000 square feet of office space under operating lease agreements that expire at various dates beginning in 2022 and extend through 2025 in several locations within the United States including its headquarters, which is located in Raleigh, NC.

The leases contain escalation clauses and various landlord concessions including tenant improvement allowances.

On January 1, 2019, the Company entered into an amendment to an office building lease for the Company’s headquarters.

The amendment provides an additional 30,114 square feet to the previous 87,605 square feet and extends the lease term to January 31, 2024.

In addition, this amendment gives the Company the option to extend the lease for an additional five -year term.

The amendment to the office building lease commenced in April 2019.

On May 29, 2019, the Company further amended the lease to provide an additional 2,322 square feet for a total of 120,041 square feet of office space.

This amendment commenced in June 2019.

On April 4, 2019, the Company entered into an amendment to an office building lease.

The amendment provides an additional 5,286 square feet to the previous 4,122 square feet for a total of 9,408 square feet of office space and extends the lease term to September 30, 2024.

In addition, this amendment gives the Company the option to extend the lease for an additional five -year term.

The amendment to the office building lease commenced in July 2019.

On January 1, 2019, the Company entered into an amendment to an office building lease relating to 40,657 square feet of office space, which the Company sub-leases to a related party, Republic Wireless, Inc.

Finance leases are reported in property and equipment, net, accrued expenses and other current liabilities, and other liabilities on the Company's consolidated balance sheet.

The Company sub-leases approximately 17,073 square feet of office space to a related party, Republic Wireless, Inc.

( “ Republic ” ).

The amendment gives the Company the options to extend the lease for an additional period of approximately 18 months and a subsequent additional five -year term.

The amendment to the office building lease commenced in January 2019.

On May 29, 2019, the Company further amended the sub-lease to reduce the square feet of office space sub-leased to 17,073 .

No other terms were amended.

The amendment to the office building sub-lease commenced in June 2019.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Future minimum sub-lease receipts required under the non-cancellable lease are as follows:

As of December 31,

As of December 31, 2019, the Company had six leased properties, with remaining lease terms of 2.58 years to 5.67 years, some of which include options to extend the leases for up to five years.

None of the options to extend the leases are recognized in operating lease ROU assets or lease liabilities.

None of the leases include options to terminate the lease.

As of December 31, 2020, the Company had various leased properties in the United States and the rest of the world, with remaining lease terms of eleven months to 6 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

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

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:

1 unchanged sentence

Operating lease cost $ 5,548 $ 5,949

Finance lease cost:

Amortization of assets — 20

Interest on lease liabilities — 2

Sublease income (1) ( 643 ) ( 384 )

2 unchanged sentences

(1) See Note 16, “Related Parties” to these consolidated financial statements, for additional details on sublease income.

During the years ended December 31, 2019 and 2020, short-term operating lease expense were $ 22 and $ 199 , respectively.

Supplemental balance sheet information related to leases was as follows:

Leases Classification As of December 31, 2019

Operating lease assets Operating right-of-use asset, net of accumulated amortization (1) $ 21,031

As of December 31,

Leases Classification 2019 2020

Operating lease assets Operating right-of-use asset, net (1) $ 21,031 $ 19,491

Finance lease assets Property and equipment, net (2) — 464

Total leased assets $ 21,031 $ 19,955

Operating Operating lease liability, current $ 4,876 $ 5,515

Operating Operating lease liability, non-current 19,868

Finance Accrued expenses and other current liabilities — 183

Operating Operating lease liability, net of current portion 19,868 17,202

Finance Other liabilities — 282

Total lease liabilities $ 24,744 $ 23,182

________________________

(1) Operating lease assets are recorded net of accumulated amortization of $ 4,269 as of December 31, 2019.

Supplemental cash flow and other information related to leases was as follows:

Year ended December 31, 2019

Cash paid for amounts included in the measurement of operating lease liabilities:

Weighted average remaining operating lease term (in years):

Weighted average operating lease discount rate:

(1) Operating lease assets are recorded net of accumulated amortization of $ 4,269 and $ 9,083 as of December 31, 2019 and December 31, 2020, respectively.

(2) Finance lease assets are recorded net of accumulated depreciation of $ 0 and $ 28 as of December 31, 2019 and December 31, 2020, respectively.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Supplemental cash flow and other information related to leases was as follows:

Year ended December 31,

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases $ 3,357 $ 5,301

Financing cash flows from finance leases — 28

$ 3,357 $ 5,329

Weighted average remaining lease term (in years)

Operating leases 4.35 3.79

Finance leases — 2.99

Weighted average discount rate

Operating leases 4.98 % 4.81 %

Finance leases — % 4.00 %

Maturities of operating lease liabilities were as follows:

7 unchanged sentences

Long-term lease obligations $ 17,202

Disclosures related to periods prior to adoption of the New Lease Standard

Rent expense was $ 3,327 and $ 4,331 in the years ended December 31, 2017 and 2018, respectively.

Future minimum lease payment obligations under non-cancelable operating and finance leases were as follows:

As of December 31, 2018

Thereafter 2,343

In conjunction with the sub-lease under the Facilities Service Agreement with Republic, the Company recorded a reduction of rent expense of $ 949 and $ 1,005 for the years ended December 31, 2017 and 2018, respectively, which is included in general and administrative expenses in the consolidated statements of operations.

Future minimum sub-lease receipts required under the non-cancellable lease are as follows:

As of December 31, 2018

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Maturities of financing lease liabilities were as follows:

As of December 31,

Total lease payments 492

imputed interest ( 27 )

Total lease obligations 465

current obligations ( 183 )

Long-term lease obligations $ 282

Asset Retirement Obligation

The Company has an obligation to return one of its leased properties to its original leased condition.

These cost are accrued at the present value of expected cost to settle the obligation using estimated cash flows.

The cash flows are discounted at a current pre-tax rate that reflects the risk specific to the retirement liability.

The estimated future cost of restoration is reviewed annually and adjusted as appropriate.

As of December 31, 2020, asset retirement obligation was $ 240 included in other liabilities.

Property and Equipment

15 unchanged sentences

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.

The Company amortizes the asset on a straight-line basis over the useful life, which is estimated to be 4 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 $ 5,746 and $ 5,957 as of December 31, 2019 and 2020, respectively.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

The Company capitalized $ 2,028 , $ 3,612 and $ 2,319 of software development costs for the years ended December 31, 2018, 2019 and 2020, respectively.

Amortization expense related to capitalized software development costs were $ 1,482 , $ 2,024 , and $ 1,963 for the years ended December 31, 2018, 2019 and 2020, respectively.

As of December 31, 2020, unamortized implementation costs related to cloud computing arrangements are $ 572 , of which $ 144 are included in prepaid expenses and other current assets and $ 429 are included in other long-term assets.

The Company leases automobiles under leases accounted for as finance leases with expiration dates ranging from December 31, 2021 to April 30, 2025.

As of December 31, 2020, cost and accumulated depreciation of the assets under finance leases recorded by the Company were $ 492 and $ 28 , respectively.

There were no finance leases as of December 31, 2019.

The Company recognized an impairment of $ 158 , $ 275 , and $ 227 during the years ended December 31, 2018, 2019 and 2020, respectively, related to capitalized software development costs that provided no future benefit and therefore were impaired.

This expense is reflected within cost of revenue in the accompanying consolidated statements of operations.

The Company capitalized $ 2,942 , $ 2,028 and $ 3,612 of software development costs in the years ended December 31, 2017, 2018 and 2019, respectively.

The Company recognized depreciation expense, which includes amortization of capitalized software development costs, as follows:

8 unchanged sentences

(In thousands, except share and per share amounts)

Goodwill and Intangible Assets

The changes in carrying amount of goodwill were as follows:

Balance as of December 31, 2019 $ 6,867

Goodwill additions related to 2020 acquisition 346,564

Impact of foreign currency translation 18,808

Balance as of December 31, 2020 $ 372,239

Intangible Assets

3 unchanged sentences

Value Amortization

Dash acquisition and other intangibles:

Customer relationships $ 10,396 $ ( 4,591 ) $ 5,805 20

6 unchanged sentences

Value Amortization

Dash acquisition and other intangibles:

Customer relationships $ 10,396 $ ( 5,111 ) $ 5,285 20

1 unchanged sentence

Licenses, indefinite lived 764 — 764 Indefinite

Total intangible assets, net $ 15,093 $ ( 8,524 ) $ 6,569

Amortization expense for definite lived intangible assets was $ 839 , $ 554 and $ 520 for the years ended December 31, 2017, 2018 and 2019, respectively.

The remaining amortization period for definite lived intangible assets is 11 years.

Total Dash acquistion and other intangible assets 15,093 ( 9,044 ) 6,049

Voxbone acquistion:

Customer relationships 156,559 ( 1,739 ) 154,820 15

Developed technology 88,664 ( 1,478 ) 87,186 10

Total Voxbone acquisition 245,223 ( 3,217 ) 242,006

Total intangibles, net $ 260,316 $ ( 12,261 ) $ 248,055

Amortization expense for definite lived intangible assets was $ 554 , $ 520 , $ 3,666 for the years ended December 31, 2018, 2019 and 2020 respectively.

The remaining weighted average amortization period for definite lived intangible assets is 13 years.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Future estimated amortization expense for definite lived intangible assets is as follows:

As of December 31,

2021 $ 19,824

Thereafter 148,171

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, 2018 and 2019 and concluded no impairment exists.

Revolving Loan

On March 1, 2019, the Company amended and restated its Credit and Security Agreement with KeyBank National Association (“KeyBank”).

The agreement is for a $ 25,000 revolving loan, which includes a swing line of up to $ 1,000 and limits letters of credit commitments to a maximum of $ 2,500 .

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

Loans under the Credit Agreement will bear interest at the highest of (i) the bank’s prime rate, (ii) the federal funds effective rate plus 0.5

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

percent, and (iii) the London Interbank Offered Rate plus 1.00 percent.

The term of the amended and restated Credit and Security Agreement is 3 years and matures on March 1, 2022.

Loans under the Credit Agreement will bear interest at the highest of (i) the bank’s prime rate, (ii) the federal funds effective rate plus 0.5 percent, and (iii) the London Interbank Offered Rate plus 1.00 percent.

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

In connection with amending its Credit and Security Agreement on March 1, 2019, the Company incurred $ 142 in debt issuance costs.

Unamortized debt issuance costs from the original Credit and Security Agreement of $ 106 were recorded as interest expense.

In addition, the Company incurred and capitalized $ 25 of periodic loan fees.

As of December 31, 2018, unamortized debt issuance costs, which were included in prepaid expenses and other current assets in the accompanying consolidated balance sheets, were $ 136 .

As of December 31, 2019 the outstanding debt issuance costs are $ 125 , of which $ 70 are included in prepaid expenses and other current assets and $ 55 are included in other long-term assets.

On June 4, 2019, KeyBank and Pacific Western Bank entered into an Assignment and Acceptance Agreement, whereby KeyBank, as the Assignor, sold and assigned $ 10,000 of the Company's Revolving Credit Commitment to Pacific Western Bank, the Assignee.

KeyBank retains $ 15,000 of the Revolving Credit Commitment.

As of December 31, 2018 and December 31, 2019, the Company had $ 0 outstanding on the revolving loan and was in compliance with all financial and non-financial covenants for all periods presented.

The available borrowing capacity under the revolving loan was $ 25,000 as of December 31, 2019.

On February 25, 2020, the Company entered into a waiver agreement with respect to its revolving loan (the “Credit Facility”) with KeyBank National Association and Pacific Western Bank (the “Lenders”), which provided for consent to accommodate the issuance of the Convertible Notes and entry into the Capped Calls (as defined below).

The waiver agreement (“Cash Collateral Requirement”) required the Company 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 the Company had failed to comply with these covenants or to make payments under its indebtedness when due, the Company 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, the First Amendment Agreement to the Credit Security Agreement was executed in which the Lenders consented to remove the cash collateral requirement and to terminate the controlled account.

As of December 31, 2019, unamortized debt issuance costs were $ 125 , of which $ 70 were in included in prepaid expenses and other current assets and $ 55 were included in other long-term assets.

As of December 31, 2020, the outstanding debt issuance costs are $ 83 , of which $ 74 are included in prepaid expenses and other current assets and $ 9 are included in other long-term assets.

As of December 31, 2019 and December 31, 2020, the Company had $ 0 outstanding on the Credit Facility and was in compliance with all financial and non-financial covenants for all periods presented.

The available borrowing capacity under the Credit Facility was $ 25,000 as of December 31, 2020.

Convertible Senior Notes and Capped Call Transactions

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

On February 28, 2020, the Company issued $ 400,000 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 “Convertible Notes”).

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.

The 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 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 the Company, 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 by the Company, were approximately $ 344,722 .

Each $1 principal amount of the 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 unpaid special interest.

In addition, upon the occurrence of a make-whole fundamental change, as defined in the 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 Convertible Notes in connection with such make-whole fundamental change or during the relevant redemption period.

The Convertible Notes will be redeemable in whole or in part at the Company's option on or after March 6, 2023, but before the 40th scheduled trading day before the maturity date, at a cash redemption price equal to 100 % of the principal amount of the 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 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 $1 principal amount of 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;

(4) if the Company calls such Convertible Notes for redemption.

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 Convertible Notes may, at their option, convert all or a portion of their Convertible Notes regardless of the foregoing conditions.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

During the year ended December 31, 2020, the conditional conversion feature of the 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 Notes were convertible, in whole or in part, at the option of the holders between July 1, 2020 through December 31, 2020.

Whether the Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition in the future.

The Company continues to classify the Notes as a long-term liability in its consolidated balance sheet as of December 31, 2020, 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 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 Convertible Notes with cash.

No sinking fund is provided for the Convertible Notes.

Upon the occurrence of a fundamental change (as defined in the indenture) prior to the maturity date, holders may require the Company to repurchase all or a portion of the Convertible Notes for cash at a price equal to the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The Convertible Notes are the senior, unsecured obligations of the Company and are equal in right of payment with the Company’s existing and future senior unsecured indebtedness, senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Convertible Notes and effectively subordinated to the Company’s existing and future senior secured indebtedness (including the Company’s $ 25,000 Credit Facility), to the extent of the value of the collateral securing that indebtedness.

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.

In accounting for the issuance of the Convertible Notes, the Company separated the 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 $ 125,152 and was determined by deducting the fair value of the liability component from the par value of the Convertible Notes.

The difference represents the debt discount that is amortized to interest expense at an effective interest rate of 6.763 % over the term of the Convertible Notes.

The carrying amount of the equity component was $ 57,485 and is recorded in additional paid-in-capital.

The equity component is not remeasured as long as it continues 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, is amortized to interest expense at an annual effective interest rate of 6.907 % over the contractual terms of the Convertible Notes.

In accounting for the transaction costs related to the Convertible Notes, the Company allocated the total amount incurred to the liability and equity components of the 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 $ 8,217 , were recorded as an additional debt discount and are amortized to interest expense using the effective interest method over the contractual terms of the Convertible Notes.

Issuance costs attributable to the equity component of $ 3,742 were netted with the equity component in stockholders’ equity.

The net carrying amount of the liability component of the Convertible Notes was as follows:

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

As of December 31,

Principal $ 400,000

Unamortized discount ( 110,546 )

Unamortized debt issuance costs ( 7,258 )

Net carrying amount $ 282,196

The net carrying amount of the equity component of the Convertible Notes was as follows:

As of December 31,

Proceeds allocated to the conversion options (debt discount) $ 125,152

Issuance costs ( 3,742 )

Net carrying amount $ 121,410

The following table sets forth the interest expense recognized related to the Convertible Notes:

Year ended December 31,

Contractual interest expense $ 841

Amortization of debt discount 14,606

Amortization of debt issuance costs 959

Total interest expense related to the Convertible Notes $ 16,406

In connection with the offering of the Convertible Notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the “Capped Calls”).

The Capped Calls each have an initial strike price of approximately $ 91.03 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Convertible Notes.

The Capped Calls have initial cap prices of $ 137.40 per share, subject to certain adjustments.

The Capped Calls cover, subject to anti-dilution adjustments, approximately 4,394,276 shares of Class A common stock.

The Capped Calls are generally intended to reduce or offset the potential dilution to the Class A common stock upon any conversion of the 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 (i) the last day on which any convertible securities remain outstanding and (ii) March 1, 2026, 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 $ 43,320 incurred to purchase the Capped Calls was recorded as a reduction to additional paid-in capital in the accompanying consolidated balance sheets.

Segment and Geographic Information

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Therefore, no segment asset information is reported.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Year ended December 31,

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Revenue by geographic area is detailed in the table below (which is determined based on the customer billing address):

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Year ended December 31,

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Stockholders’ 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 December 31, 2016, the Company had 710,000 issued 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.

Preferred Stock

On November 9, 2017, the Company filed its second amended and restated certificate of incorporation and 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, 2018 and 2019.

As of December 31, 2016, 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.

As of December 31, 2019 and December 31, 2020, the Company had 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, 2019 and December 31, 2020, the Company had authorized 100,000,000 shares of Class A common stock, par value $ 0.001 per share, 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.

As of December 31, 2019, 18,584,478 and 4,927,401 shares of Class A common stock and Class B common stock, respectively, were issued and outstanding.

Notes to Condensed Consolidated Financial Statements (continued)

(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, 2018 and 2019.

As of December 31, 2018 and 2019, there were 12,912,747 and 18,584,478 shares, respectively, of Class A common stock issued and outstanding at $ 0.001 par value per share.

As of December 31, 2018 and 2019, there were 6,510,732 and 4,927,401 shares, respectively, of Class B common stock issued and outstanding at $ 0.001 par value per share.

As of December 31, 2020, 22,413,004 and 2,496,125 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 upon the stockholder’s voluntary written notice to the Company’s transfer agent or a transfer by the stockholder, subject to limited exceptions for transfers for estate planning purposes.

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2010 Stock Option Plan

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

As of July 26, 2010, the Company adopted the 2010 Equity Compensation Plan (the “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.

Eligible plan participants include employees, directors and consultants.

The 2010 Plan permits the granting of incentive stock options and non-qualified stock options.

On November 9, 2017, the 2010 Plan was terminated in connection with the Company’s IPO.

On November 9, 2017, the 2010 Plan was terminated in connection with the Company’s initial public offering.

Accordingly, no shares are available for future issuance under the 2010 Plan.

However, the 2010 Plan continues to govern the terms and conditions of the outstanding awards granted thereunder.

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, 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.

2017 Incentive Award Plan

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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’s Class A common stock were originally reserved for issuance under the 2017 Plan.

A total of 1,050,000 shares of the Company’s

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

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 final day of the immediately preceding calendar year.

On January 1, 2019, the shares available for grant under the 2017 Plan were automatically increased by 645,637 shares.

On January 1, 2020, the shares available for grant under the 2017 Plan were automatically increased by 929,224 shares for a total of 2,239,578 .

The terms of the stock option grants are determined by the Company’s Board of Directors.

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The stock options have a contractual life of ten years .

Restricted stock units (“RSU”) granted under the 2017 Plan are subject to a time-based vesting condition.

Restricted stock units (“RSUs”) granted under the 2017 Plan are subject to a time-based vesting condition.

The compensation expense related to these awards is based on the grant date fair value of the RSUs and is recognized on a ratable basis over the applicable service period.

The Company granted restricted stock units to its non-employee Board of Directors, some of which vested immediately while others vest 25 % as of each calendar quarter immediately following the grant date.

The Company granted RSUs to its non-employee Board of Directors, some of which vested immediately while others vest 25 % as of each calendar quarter immediately following the grant date.

Certain RSUs awarded to executives vest over four years with 50 % vesting in the first year in 12.5 % increments on each calendar quarter immediately following the grant date and the remaining 50 % earned over years two, three and four.

Other RSUs awarded to executives and employees generally are earned over a service period of four years .

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Stock Options

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Aggregate intrinsic value is computed based on the difference between the option exercise price and the fair value of the Company’s common stock as of December 31, 2020, based on the Company’s Class A common stock price as reported on the NASDAQ Global Select Market.

The weighted average grant-date fair value of stock options granted was $ 7.72 and $ 11.10 for the years ended December 31, 2017 and 2018, respectively.

No options were granted for the year ended December 31, 2020.

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As of December 31, 2020, total unrecognized compensation cost related to all non-vested stock options was $ 152 , which will be amortized over a weighted-average period of 0.66 years.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Restricted Stock Units

The following summarizes the restricted stock unit activity for the periods presented:

The following summarizes the RSU activity for the periods presented:

Number of awards outstanding Weighted-average grant date fair value (per share)

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As of December 31, 2020, total unrecognized compensation cost related to non-vested RSUs was $ 18,319 , which will be amortized over a weighted-average period of 2.72 years.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Stock-Based Compensation Expense

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________________________

(1) On September 1, 2017, the Company reached a separation agreement with an executive.

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.

(1) On December 21, 2018, the Company reached a separation agreement with an executive.

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The service agreement is non-cancellable and contains annual minimum commitments of $ 1,200 , to be fulfilled over five years or for as long as the Company continues to receive services from this vendor.

In addition, as of December 31, 2019 the Company has $ 8,565 in other non-cancellable purchase obligations, consisting of primarily network equipment maintenance and software license contracts, of which $ 4,915 will be fulfilled within a year.

On August 1, 2020, the Company amended the agreement to require annual minimum commitments of $ 600 and $ 300 in 2021 and 2022, respectively.

In addition, as of December 31, 2020, the Company has $ 13,378 in other non-cancellable purchase obligations, consisting of primarily network equipment maintenance and software license contracts, of which $ 8,428 will be fulfilled within one year.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

On May 16, 2020, the Company entered into an indemnity agreement with a development company (the “developer”) relating to predevelopment work for approximately 40 acres of vacant land in Raleigh, North Carolina, currently owned by the State of North Carolina (the “State”), upon which the Company intends to construct its office headquarters.

The indemnity agreement requires the Company to reimburse the developer one-half of the predevelopment work expenses plus two-thirds of a near future amount to be incurred, to a maximum of $ 597 , if certain conditions are not satisfied.

As of December 31, 2020, the Company expects all of the required conditions to be satisfied.

On June 15, 2020, the Company signed a Purchase and Sale Agreement (the “Purchase and Sale Agreement”) with the State regarding the proposed sale to Bandwidth of the approximately 40 acres of vacant land located at the southwest quadrant of Reedy Creek Road and Edwards Mill Road in Raleigh, North Carolina (the “Land”).

The consideration for the proposed sale of the Land to Bandwidth is $ 30,000 .

As part of the purchase and Sale Agreement, the Company is obligated to provide and improve parking facilities for the use by the State of NC which were previously located on the Land.

The Purchase and Sale Agreement is subject to due diligence, approvals and other customary closing conditions.

Legal Matters

The Company is involved as a defendant in various 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 received a Civil Investigative Demand from the Consumer Protection Division of the North Carolina Department of Justice, though the Company has not been served with a complaint 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.

While the results of these legal proceedings cannot be predicted with certainty, in the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position or results of operations.

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Employee Benefit Plan

The Company sponsors a defined contribution 401(k) plan which allows eligible employees to defer a portion of their compensation.

The Company sponsors a U.S.

defined contribution 401(k), which allows eligible U.S.-based employees to defer a portion of their compensation.

The Company, at its discretion, may make matching contributions.

The Company made matching contributions of $ 806 , $ 1,117 and $ 1,731 for the years ended December 31, 2017, 2018 and 2019, respectively.

With the acquisition of Voxbone S.A.

on November 1, 2020, the Company assumed sponsorship for their U.S.

defined contribution 401(k).

The Company also assumed sponsorship for a non-U.S.

defined contribution plan for which they pay 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 $ 1,117 , $ 1,731 , and $ 2,202 for the years ended December 31, 2018, 2019 and 2020, respectively.

In addition, as a result of the acquisition of Voxbone S.A., the Company assumed sponsorship for their non-U.S.

defined benefit pension plans.

The liability recognized in the balance sheet in respect to these plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of the plan assets.

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,

Change in benefit obligation:

Benefit obligation at beginning of year $ —

Service cost 75

Interest cost 3

Actuarial loss 15

Taxes, insurance premiums and administrative expenses ( 9 )

Acquisitions/plan mergers 3,980

Benefit obligation at end of year $ 4,064

Change in plan assets:

Fair value of plan assets at beginning of year $ —

Return on plan assets 8

Actuarial loss 2

Employer contribution 57

Acquisitions/plan mergers 2,824

Taxes, insurance premiums and administrative expenses ( 9 )

Fair value of plan assets at end of year 2,882

Funded status, net liability $ 1,182

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

The following table presents the balance sheet location of the Company’s pension liability:

As of December 31,

Other liabilities $ 1,182

The accumulated benefit obligation for the Company's non-U.S.

defined benefit pension plans was $ 3,450 as of December 31, 2020.

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,

Projected benefit obligation $ 4,064

Accumulated benefit obligation 3,450

Fair value of plan assets 2,882

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 expense, net.

Pretax amounts for net periodic benefit cost and other amounts included in other comprehensive income (loss) for the defined benefit pension plans consisted of the following components:

Year ended December 31,

Service cost $ 75

Interest cost 3

Return on plan assets ( 8 )

Net periodic pension cost 70

Changes in plan assets and benefit obligations included in other comprehensive income (loss):

Change in net actuarial loss 17

Total (before tax effect) 17

Total recognized in net periodic benefit cost and included in other comprehensive income (loss) $ 87

The Company uses significant judgement 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.

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.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Significant assumptions used in determining benefit obligations and net periodic benefit cost are as follows:

Year ended December 31,

Defined benefit obligations:

Discount rate 0.50 %

Rate of salary increase 4.07 %

Inflation 1.60 %

Defined benefit cost:

Discount rate 1.50 %

Rate of salary increase 4.37 %

Rate of return on plan assets 0.50 %

Inflation 1.90 %

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,

Assets held by:

Insurance companies (collective) $ 2,853

Insurance companies (individual) 29

Total $ 2,882

Expected Cash Flows

The Company expects to contribute $ 341 to its non-U.S.

defined benefit pension plans during 2021.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

The following table summarizes projected benefit payments from the Company's pension plans through 2030, including benefits attributable to estimated future service:

As of December 31,

The following table presents domestic and foreign components of income (loss) before income taxes for the tax years ended December 31, 2018, 2019 and 2020:

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

(Provision) benefit for income taxes from operations consists of the following:

Benefit (provision) for income taxes from operations consists of the following:

Year Ended December 31,

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State 1,888 2,297 ( 5,176 )

Foreign — — 757

Total 10,833 17,502 ( 14,266 )

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

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

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

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, 2018, 2019 and 2020:

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Stock-based compensation ( 168.0 ) 88.6 46.8

Change in valuation allowance — — ( 123.4 )

Deferred tax rate change ( 0.7 ) ( 0.3 ) 0.2

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Total ( 154.1 ) % 116.4 % ( 51.8 ) %

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

The following table presents the significant components of the Company’s net deferred tax assets:

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Deferred revenue 1,682 1,702

Intangibles 85 —

Stock-based compensation - deferred tax asset 2,109 1,968

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Other deferred tax assets 90 2,207

Total deferred tax assets 46,941 78,455

valuation allowance — ( 37,771 )

Net deferred tax assets 46,941 40,684

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Operating lease assets 5,295 4,092

Debt — 27,766

Other liability 96 137

Total deferred tax liabilities 12,080 101,689

Net deferred tax asset $ 17,359 $ 34,861

Net deferred tax asset (liability) $ 34,861 $ ( 61,005 )

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

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’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 determined that in 2019 no valuation allowance against deferred tax assets was required.

As of December 31, 2019, the Company had approximately $ 125,367 in federal net operating loss carryforwards and $ 5,078 in federal tax credits.

All 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 to offset up to 80% of taxable income in any given year.

Based on an analysis of these factors, the Company determined that in 2020 a valuation allowance against US and UK deferred tax assets was required.

As of December 31, 2020, the Company had approximately $ 187,385 in US federal net operating loss carryforwards, $ 5,263 in UK loss carryforwards, and $ 9,653 in federal tax credits.

All US 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 to offset up to 80% of taxable income in any given year.

The federal tax credits start to expire at various dates beginning in 2032.

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If not utilized, some state net operating loss carryforwards will expire at various dates beginning in 2023.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

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Gross increases—tax positions in current period 367 614

Lapse of statute of limitations ( 28 ) —

Unrecognized tax benefits—December 31, $ 1,398 $ 2,414

If the $ 1,398 of unrecognized tax benefit is recognized, it would impact the effective tax rate.

If the $ 2,414 of unrecognized tax benefit is recognized, it would not impact the effective tax rate.

The Company has not incurred any material tax interest or penalties with respect to income taxes in the years ended December 31, 2019 and 2020 .

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federal income tax returns as well as income tax returns in many U.S.

The tax years 2014 - 2018 remain open to examination by the major jurisdictions in which the Company is subject to tax due to the carryforward of net operating losses.

states and foreign jurisdictions.

The tax years 2017 - 2019 remain open to examination by the major jurisdictions in which the Company is subject to tax.

Related Parties

On April 20, 2015, the Company created a wholly owned subsidiary, 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.

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 November 30, 2016.

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 below, 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 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 Condensed Consolidated Financial Statements (continued)

(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 further below.

The Company believes that for US Federal income tax purposes, the Spin-Off qualifies 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.

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”).

In connection with the Spin-Off on November 30, 2016, the Company and Republic entered into certain agreements in order to govern the ongoing relationships between the two companies after the Spin-Off and to provide for an orderly transition.

1 unchanged sentence

The equity holders of Bandwidth pre-initial public offering are comprised of substantially the same individuals and entities that are the equity owners of Republic.

The Transition Services Agreement specified certain services to be provided by the Company for a period of up to two years from the Spin-Off, which ended in November 2018.

These services included insurance administration, billing and collections, and other technical support as well as legal services related to intellectual property.

The Company was compensated by Republic for these services based on costs incurred by the Company.

The Company received net compensation under the Transition Services Agreement of $ 575 and $ 80 for the years ended December 31, 2017 and 2018, respectively, which is included in general and administrative expenses in the consolidated statements of operations.

No amounts were due to the Company under the Transition Services Agreement as of December 31, 2018.

The Facilities Sharing Agreement specifies that the Company will sublet office space to Republic for at least 63 months.

The Company has determined the equity owners of Republic are related parties of Bandwidth.

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 (“VIE”).

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

investors in Republic have disproportionate 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 VIE is limited to amounts due under the service agreements between the Company and Republic.

The Company recorded a reduction of rent expense under the Facilities Sharing Agreement of $ 1,005 , $ 643 , and $ 384 for the years ended December 31, 2018, 2019 and 2020 respectively, which is included in general and administrative expenses in the consolidated statements of operations.

No amounts were due to the Company under the Facilities Sharing Agreement as of December 31, 2018 and 2019.

No amounts were due to the Company under the Facilities Sharing Agreement as of December 31, 2019 and December 31, 2020.

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 were no amounts outstanding or payable under this agreement as of December 31, 2018 and 2019.

There were no amounts outstanding or payable under this agreement as of December 31, 2019 and December 31, 2020.

The Master Services Agreement specifies certain wholesale telecommunications services to be provided by the Company.

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The Company recognized such amounts as revenue in the accompanying consolidated statements of operations.

As of December 31, 2018 and 2019, the Company had a receivable of $ 327 and $ 161 , respectively, under the Master Services Agreement.

As of December 31, 2019 and December 31, 2020, the Company had a receivable of $ 161 and $ 170 , respectively, under the Master Services Agreement.

On March 1, 2019, an amendment to the current Master Services Agreement was executed.

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Pursuant to the revenue commitment schedule, Republic agreed to spend a minimum of $ 100 per month during the 11 -month period commencing July 1, 2019 through May 31, 2020.

There are no minimum commitments beyond May 31, 2020.

Subsequent to the expiration of the 180-day IPO blackout window on May 9, 2018, Republic employees that held Bandwidth stock options began exercising their options.

Upon exercise, Bandwidth withholds the employee tax amounts due from the proceeds.

Bandwidth had collected on behalf of, and remitted withholding tax

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

to, Republic of $ 0 , $ 9,213 and $ 1,781 for the years ended December 31, 2017, 2018 and 2019 respectively.

There were no amounts outstanding or payable as of December 31, 2018 and 2019.

Bandwidth had collected on behalf of, and remitted withholding tax to, Republic of $ 9,213 , $ 1,781 , and $ 1,401 for the years ended December 31, 2018, 2019 and 2020 respectively.

As of December 31, 2019 and December 31, 2020, the Company had no amounts were due to Republic.

On September 30, 2019, the Company entered into a services agreement with Republic.

1 unchanged sentence

The Company is compensated by Republic for these services based on costs incurred by the Company.

The Company received net compensation under this agreement of $ 31 for the year ended December 31, 2019, which is included in general and administrative expenses in the consolidated statements of operations.

As of December 31, 2019, the Company had a receivable of $ 10 under this agreement.

Basic and Diluted Income per Common Share

During the year ended December 31, 2017, the Company used the two-class method to compute net income per common share, because it had issued securities, other than common stock, that contractually entitled the holders to participate in dividends and earnings.

These participating securities included the Company’s redeemable convertible preferred stock which had 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 with net income, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period.

Net income attributable to common stockholders is computed by subtracting from net income the portion of current period earnings that the participating securities would have been entitled 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 income per common share is computed under the two-class method by using the weighted average number of shares of common stock outstanding, plus, for periods with net income attributable to common stockholders, the potential dilutive effects of stock options and warrants.

The Company analyzed the potential dilutive effect of any outstanding dilutive securities under the “if-converted” method and treasury-stock method when calculating 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.

Subsequent to the IPO in November 2017, the Company no longer had outstanding securities other than common stock, which required holders’ participation in dividends and earnings;

therefore, the Company was no longer required to calculate EPS under the two-class method.

Basic net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period.

Diluted net income per share is computed by giving effect to all potential shares of common stock, including stock options, stock related to unvested restricted stock awards, and outstanding warrants to the extent dilutive.

The Company received net compensation under this agreement of $ 31 and $ 69 for the years ended December 31, 2019 and 2020, respectively, which is included in general and administrative expenses in the consolidated statements of operations.

As of December 31, 2019 and December 31, 2020, the Company had a receivable of $ 10 and $ 2 under this agreement, respectively.

Basic and Diluted Income (Loss) per Common Share

Basic net income (loss) per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period.

Diluted net income (loss) per share is computed by giving effect to all potential shares of common stock, including stock options and stock related to unvested restricted stock awards.

Notes to Condensed Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

The components of basic and diluted income per share are as follows:

The components of basic and diluted (loss) income per share are as follows:

Year ended December 31,

1 unchanged sentence

Earnings per share

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

net income allocated to participating securities 644 — —

Net income attributable to common stockholders $ 5,327 $ 17,923 $ 2,494

Net income per share:

Net income (loss) attributable to common stockholders $ 17,923 $ 2,494 $ ( 43,977 )

Net income (loss) per share:

Basic $ 0.96 $ 0.11 $ ( 1.83 )

4 unchanged sentences

Diluted 21,140,382 23,923,777 24,092,574

The following common share equivalents have been excluded from the calculation of weighted-average common shares outstanding, because the effect is anti-dilutive for the periods presented:

Year ended December 31,

2017 2018 2019

Anti-dilutive disclosure

Series A redeemable convertible preferred stock outstanding 1,522,123 — —

Stock options issued and outstanding 50,604 — —

There were no common share equivalents with anti-dilutive effects for the years ended December 31, 2018 and 2019.

The common share equivalents with anti-dilutive effects excluded from the weighted average shares used to calculate net loss per common share were 1,728,555 , which consists of 255,000 stock options, 450,614 nonvested RSUs outstanding and 1,022,941 from convertible debt conversion for the year ended December 31, 2020.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data