Bandwidth Inc. 10-K

Item 8. Financial Statements and Supplementary Data BANDWIDTH INC. Index to Consolidated Financial Statements Page Reports of Independent Registered Public Accounting Firm 88 Consolidated Balance Sheets 93 Consolidated Statements of Operations 94 Consolidated Statements of Comprehensive Income (Loss) 95 Consolidated Statements of Changes in Stockholders’ Equity 96 Consolidated Statements of Cash Flows 98 Notes to Consolidated Financial Statements 100 87 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Bandwidth Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Bandwidth Inc. (the Company) as of December 31, 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, 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 These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit 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. 88 Table of Contents Revenue Recognition Description of the Matter As discussed in Note 2, the Company recognizes revenue from the sale of communications services offered through software solutions, which are generally derived from usage and monthly service fees from 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. Revenue for these services is recognized in the period the usage occurs. Monthly service fees include the provisioning and management of phone numbers and emergency services access, which 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 emergency services access during the month. Given the complex automated systems utilized to capture, process, and ultimately record revenue, performing procedures to audit revenue required a high degree of auditor judgment and extensive audit effort. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls that address the risks of material misstatement relating to the measurement and occurrence of revenue. This included involvement of audit professionals with significant experience in the use of information technology (IT) to support business operations and related controls. With the involvement of our IT professionals, we identified the significant systems used to capture and process voice usage, phone number services, emergency services access, and messaging 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 emergency services access during the period. To test the Company’s revenue, our audit procedures included, among other procedures, performing data analytics by extracting data from the Company’s systems to evaluate the completeness and accuracy of recorded revenues, testing a sample of revenue transactions, which included evaluating the transaction price based on inspection of customer contracts and approved rate tables, as well as testing the mathematical accuracy of the recorded revenue based on the voice and messaging usage, as well as the quantity of phone numbers in service and quantity of phone numbers with emergency services access during the period. 89 Table of Contents 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 We have served as the Company’s auditor since 2012. Raleigh, North Carolina March 1, 2021 90 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Bandwidth Inc. Opinion on Internal Control Over Financial Reporting We have audited Bandwidth Inc.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Bandwidth Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria. 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 The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 91 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Raleigh, North Carolina March 1, 2021 92 Table of Contents BANDWIDTH INC. Consolidated Balance Sheets (In thousands, except share and per share amounts) As of December 31, 2019 2020 Assets Current assets: 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 Prepaid expenses and other current assets 9,260 14,508 Deferred costs 2,498 2,411 Total current assets 226,949 193,599 Property and equipment, net 41,654 51,645 Operating right-of-use asset, net 21,031 19,491 Intangible assets, net 6,569 248,055 Deferred costs, non-current 1,952 3,604 Other long-term assets 1,533 1,975 Goodwill 6,867 372,239 Deferred tax asset, net 34,861 — Total assets $ 341,416 $ 890,608 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 4,190 $ 11,665 Accrued expenses and other current liabilities 27,328 63,065 Current portion of deferred revenue 5,177 6,515 Advanced billings 4,167 5,429 Operating lease liability, current 4,876 5,515 Total current liabilities 45,738 92,189 Other liabilities — 1,707 Operating lease liability, net of current portion 19,868 17,202 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 Commitments and contingencies Stockholders’ equity: Preferred stock; $ 0.001 par value; 10,000,000 shares authorized; 0 shares issued — — Class A voting common stock; $ 0.001 par value; 100,000,000 shares authorized as of December 31, 2019 and 2020; 18,584,478 and 22,413,004 shares issued and outstanding as of December 31, 2019 and 2020, respectively 19 22 Class B voting common stock, $ 0.001 par value; 20,000,000 shares authorized as of December 31, 2019 and 2020; 4,927,401 and 2,496,125 shares issued and outstanding as of December 31, 2019 and 2020, respectively 5 2 Additional paid-in capital 275,553 451,463 Accumulated deficit ( 5,528 ) ( 49,505 ) Accumulated other comprehensive income 41 27,941 Total stockholders’ equity 270,090 429,923 Total liabilities and stockholders’ equity $ 341,416 $ 890,608 See accompany notes. 93 Table of Contents BANDWIDTH INC. Consolidated Statements of Operations (In thousands, except share and per share amounts) Year ended December 31, 2018 2019 2020 Revenue: CPaaS revenue $ 164,415 $ 197,944 $ 298,090 Other revenue 39,698 34,650 45,023 Total revenue 204,113 232,594 343,113 Cost of revenue: CPaaS cost of revenue 94,296 110,343 160,706 Other cost of revenue 13,849 14,616 24,546 Total cost of revenue 108,145 124,959 185,252 Gross profit 95,968 107,635 157,861 Operating expenses: Research and development 20,897 31,461 42,059 Sales and marketing 20,731 35,020 40,552 General and administrative 47,588 58,847 88,755 Total operating expenses 89,216 125,328 171,366 Operating income (loss) 6,752 ( 17,693 ) ( 13,505 ) 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 benefit (provision) 10,870 17,718 ( 15,005 ) Net income (loss) $ 17,923 $ 2,494 $ ( 43,977 ) Earnings per share: Net income (loss) per share: Basic $ 0.96 $ 0.11 $ ( 1.83 ) Diluted $ 0.85 $ 0.10 $ ( 1.83 ) Weighted average number of common shares outstanding: Basic 18,573,067 22,640,461 24,092,574 Diluted 21,140,382 23,923,777 24,092,574 See accompanying notes. 94 Table of Contents BANDWIDTH INC. Consolidated Statements of Comprehensive Income (Loss) (In thousands) Year ended December 31, 2018 2019 2020 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, net of income taxes — 41 27,900 Total other comprehensive (loss) income ( 1 ) 42 27,900 Total comprehensive income (loss) $ 17,922 $ 2,536 $ ( 16,077 ) See accompanying notes. 95 Table of Contents 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 Balance at December 31, 2017 4,197,831 $ 4 13,440,725 $ 13 $ 102,465 $ — $ ( 25,771 ) $ 76,711 Exercises of vested stock options 1,724,689 2 — — 11,044 — — 11,046 Vesting of restricted stock units 11,000 — — — — — — — Exercise of warrants to purchase common stock 48,904 — — — 37 — — 37 Conversion of Class B voting common stock to Class A voting common stock 6,929,993 7 ( 6,929,993 ) ( 7 ) — — — — Issuance of Class A voting common stock 330 — — — 11 — — 11 Costs in connection with initial public offering — — — — ( 285 ) — — ( 285 ) Unrealized loss on marketable securities — — — — — ( 1 ) — ( 1 ) Stock based compensation — — — — 3,328 — — 3,328 Net income — — — — — — 17,923 17,923 Balance at December 31, 2018 12,912,747 13 6,510,732 6 116,600 ( 1 ) ( 7,848 ) 108,770 Issuance of common stock in connection with follow on public offering, net of underwriting discounts 2,875,000 3 — — 147,388 — — 147,391 Costs in connection with public offering — — — — ( 834 ) — — ( 834 ) Exercises of vested stock options 1,075,482 1 — — 7,356 — — 7,357 Vesting of restricted stock units 163,944 — — — — — — — Equity awards withheld for tax liability ( 26,026 ) — — — ( 1,583 ) — — ( 1,583 ) Conversion of Class B voting common stock to Class A voting common stock 1,583,331 2 ( 1,583,331 ) ( 1 ) — — — 1 Adjustment to opening retained earnings due to adoption of ASC 606 — — — — — — ( 174 ) ( 174 ) Unrealized gain on marketable securities — — — — — 1 — 1 Foreign currency translation — — — — — 41 — 41 Stock based compensation — — — — 6,626 — — 6,626 Net income — — — — — — 2,494 2,494 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 ) 96 Table of Contents 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. 97 Table of Contents BANDWIDTH INC. Consolidated Statements of Cash Flows (In thousands) Year ended December 31, 2018 2019 2020 Cash flows from 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 Right-of-use asset amortization — 4,269 4,812 Accretion of bond discount ( 164 ) ( 700 ) — Gain on sale of marketable securities — ( 4 ) — Amortization of debt discount and issuance costs 64 177 15,647 Stock-based compensation 3,339 6,626 9,881 Deferred taxes ( 10,833 ) ( 17,502 ) 14,266 Loss on disposal of property and equipment 191 456 334 Changes in operating assets and liabilities: Accounts receivable, net of allowances ( 2,784 ) ( 6,178 ) ( 18,832 ) Prepaid expenses and other assets ( 1,926 ) ( 4,176 ) ( 2,258 ) Deferred costs 243 ( 69 ) ( 1,565 ) Accounts payable ( 169 ) 1,145 315 Accrued expenses and other liabilities 4,826 5,474 11,548 Deferred revenue and advanced billings 6,019 554 2,845 Operating right-of-use liability — ( 3,357 ) ( 5,301 ) Deferred rent 2,080 — — Net cash provided by (used in) operating activities 24,633 ( 1,253 ) 4,518 Cash flows from investing activities Purchase of property and equipment ( 12,419 ) ( 22,215 ) ( 12,273 ) Capitalized software development costs ( 2,028 ) ( 3,544 ) ( 2,319 ) Purchase of marketable securities ( 35,236 ) ( 68,361 ) — 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 Payments on finance leases ( 92 ) — ( 28 ) Payment of costs related to the initial public offering ( 285 ) — — 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 Proceeds from exercises of warrants 37 — — Value of equity awards withheld for tax liabilities — ( 1,406 ) ( 1,844 ) Net cash provided by financing activities 10,681 152,418 346,891 98 Table of Contents BANDWIDTH INC. Consolidated Statements of Cash Flows (In thousands) Effect of exchange rate changes on cash, cash equivalents and restricted cash — ( 9 ) 109 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 Cash, cash equivalents, and restricted cash, end of period $ 41,501 $ 185,004 $ 81,437 Supplemental disclosure of cash flow information 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. 99 Table of Contents BANDWIDTH INC. Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) 1. Organization and Description of Business Bandwidth Inc. (together with its subsidiaries, “Bandwidth” or the “Company”) was founded in July 2000 and incorporated in Delaware on March 29, 2001. The Company’s headquarters are located in Raleigh, North Carolina. The Company is 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. CPaaS revenue is derived from usage and monthly services fees charged for usage of Voice, Messaging, 911 and Phone Numbers solutions through the Company’s proprietary CPaaS software application programming interfaces. Other revenue consists of fees charged for services provided such as: SIP trunking, data resale, and a hosted Voice-over Internet Protocol (“VoIP”). The Other segment also includes revenue from traffic generated by other carriers, SMS registration fees and other miscellaneous product lines. 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. 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements and accompanying notes were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Reclassification The Company reclassified certain prior year amounts to conform to the current year presentation. These reclassifications had no impact on the previously reported total assets, liabilities, stockholder’s deficit or net income. Principles of Consolidation The consolidated financial statements include the accounts of Bandwidth Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. 100 Table of Contents 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. 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 Adoption of Accounting Standards Codification ( “ ASC ” ) 606, “ Revenue from Contracts with Customers ” On January 1, 2019, the Company adopted the guidance of ASC 606, Revenue from Contracts with Customers, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2019. The Company ’ s results for reporting periods beginning after January 1, 2019 are presented in accordance with the provisions under ASC 606 and prior period amounts have not been adjusted and continue to be reported in accordance with the Company ’ s revenue recognition policy as further described in Note 2, Summary of Significant Accounting Policies, to its Annual Report on Form 10-K for the year ended December 31, 2018. In connection with the adoption of ASC 606, the Company recognized a net increase to its opening accumulated deficit of $ 174 as of January 1, 2019, related to a discount present in one of its contracts. Prior to the adoption of ASC 606, the Company recognized the majority of its revenue based on the usage of its customers in the period the traffic traversed the Company ’ s network. The Company determined that ASC 606 continues to support the recognition of revenue over time for the majority of the Company ’ s contracts due to the continuous transfer of control to the customer. The adoption of ASC 606 did not result in a change in the Company ’ s accounting for its commission costs, which will continue to be expensed as incurred. The Company pays commissions over time and a corresponding requisite substantive service condition exists for the employee to receive the commission. The Company determined the timing of the commission payments and the underlying service performed by the employee were commensurate. The impact on the Company ’ s balance sheet presentation includes separately presenting customer refundable prepayments as advanced billings, whereas under ASC 605 these were included in the current portion of deferred revenue and advanced billings. Revenue Recognition Policy 101 Table of Contents 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. The Company determines revenue recognition through the following steps: • identification of the contract, or contracts, with a customer; • identification of the performance obligations in the contract; • determination of the transaction price; • allocation of the transaction price to the performance obligations in the contract; and • recognition of revenue, when, or as, the Company satisfies a performance obligation. Nature of Products and Services Revenue consists primarily of the sale of communications services offered through Application Programming Interface (“API”) software solutions to large enterprise, as well as small and medium-sized business, customers and is generally derived from usage and service fees in both the CPaaS and Other segments. Usage revenue includes voice communication (primarily driven by inbound minutes, outbound minutes and toll-free minutes) and messaging communication (driven by the number of messages) that traverse the platform and network. Service fees include the provision and management of phone numbers and emergency services access. The majority of the Company ’ s revenue is generated from usage-based fees earned from customers accessing the Company ’ s communications platform. Access to the Company ’ s communication platform is considered a series of distinct services, with continuous transfer of control to the customer, comprising one performance obligation and usage-based fees are recognized in revenue in the period the traffic traverses the Company ’ s network. For the years ended December 31, 2018, 2019 and 2020 the revenue from usage-based fees represented $ 105,481 , $ 131,626 and $ 219,817 of CPaaS revenue, respectively, and $ 32,524 , $ 29,012 and $ 40,842 of Other revenue, respectively. Revenue from service fees is recognized on a ratable basis as the service is provided, which is typically one month. For the years ended December 31, 2018, 2019 and 2020 the revenue from service fees represented $ 55,719 , $ 61,193 and $ 72,256 of CPaaS revenue, respectively, and $ 7,174 , $ 5,638 and $ 4,181 of Other revenue, respectively. The remaining $ 3,215 , $ 5,125 and $ 6,017 of CPaaS revenue for the years ended December 31, 2018, 2019 and 2020 respectively, are generated from other miscellaneous services. Infrequently, Bandwidth’s contracts with customers may include multiple performance obligations. For such arrangements, revenues are allocated to each performance obligation based on its relative standalone selling price. Generally, standalone selling prices are determined based on the prices charged to similar customers for similar services. When required as part of providing service, revenues and associated expenses related to nonrefundable, upfront service activation and setup fees are deferred and recognized over the longer of the associated service contract period or estimated customer life. The Company’s contracts do not contain general rights of return. However, occasionally credits may be issued. The Company’s contracts do not provide customers with the right to take possession of the software supporting the applications. Amounts that have been invoiced are recorded in accounts receivable and in revenue or deferred revenue depending on whether the revenue recognition criteria have been met. 102 Table of Contents Notes to Condensed Consolidated Financial Statements (continued) (In thousands, except share and per share amounts) The Company maintains a reserve for sales credits. Credits are accounted for as variable consideration and are estimated based on several inputs including historical experience and current trends of credit issuances. Adjustments to the reserve are recorded against revenue. The Company has various sales commission plans for which eligible employees can earn commissions from the sale of products and services to customers. Eligible employees must be employed at the time of payment in order to receive a commission. The Company pays commissions over time and a corresponding requisite substantive service condition exists for the employee to receive the commission. The Company determined that the timing of the commission payments and the underlying service performed by the employee were commensurate. Accordingly, sales commissions are generally expensed as incurred. These costs are recorded within sales and marketing expenses. Contract Assets and Liabilities The following table provides information about receivables and contract liabilities from contracts with customers: As of December 31, 2019 2020 Receivables (1) $ 30,187 $ 55,243 Contract liabilities (2) 10,897 12,901 ________________________ (1) Included in accounts receivable, net of allowance for doubtful accounts on the consolidated balance sheet. (2) Included in current portion of deferred revenue and deferred revenue, net of current portion on the consolidated balance sheet. Deferred revenue is recorded when cash payments are received in advance of future usage on contracts. Revenue is typically recognized in the following month when service is rendered or, in the case of nonrefundable upfront fees, over the estimated period of benefit. Customer refundable payments are recorded as advanced billings. During the year ended December 31, 2020, the Company recognized revenue of $ 3,599 related to contract liabilities recorded at the beginning of the year. The Company expects to recognize $ 6,515 in revenue over the next twelve months related to its contract liabilities as of December 31, 2020. Cost of Revenue CPaaS cost of revenue consists primarily of fees paid to other network service providers from whom the Company buys services such as minutes of use, phone numbers, messages, porting of customer numbers, and network circuits. 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 and amortization of acquired technology intangibles 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. Operating Expenses Research and Development 103 Table of Contents 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. Sales and Marketing Sales and marketing expenses consist primarily of personnel costs, including commissions for sales employees and non-cash stock-based compensation expenses. Sales and marketing expenses also include expenditures related to advertising, marketing, brand awareness activities, sales support and professional services fees. General and Administrative 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. 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 and its offices worldwide, depreciation and amortization. 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. The Company invests its cash primarily in government securities and obligations, corporate debt securities, money market funds and reverse repurchase agreements (“RRAs”). RRAs are collateralized by deposits in the form of Government Securities and Obligations for an amount not less than 102 % of their value. The Company does not record an asset or liability as the Company is not permitted to sell or repledge the associated collateral. The Company has a policy that the collateral has at least an “A” (or equivalent) credit rating. The Company utilizes a third-party custodian to manage the exchange of funds and ensure that collateral received is maintained at 102 % of the value of the RRAs on a daily basis. RRAs with stated maturities of greater than three months from the date of purchase are classified as marketable securities. Restricted Cash Restricted cash 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. 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, 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 104 Table of Contents Notes to Condensed Consolidated Financial Statements (continued) (In thousands, except share and per share amounts) 31, 2020. 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. Generally, these receivables represent services provided to customers, which will be billed in the next billing cycle. All amounts are considered collectible and billable. 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, 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. 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, 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. Property and Equipment, net Property and equipment, net is stated at cost, less accumulated depreciation and amortization. Depreciation and amortization is calculated on a straight-line basis over the estimated useful lives of those assets as follows: Computer hardware and software 1 to 7 years Internal-use software development costs 4 to 7 years Furniture and fixtures 2 to 5 years Leasehold improvements Shorter of the estimated lease term or 4 to 7 years Maintenance and repairs are charged to expense as incurred. Deferred Costs The Company defers certain direct and incremental upfront costs related to the generation of a revenue stream or obtaining a new customer agreement. These costs include installment fees, activation and other telecommunication fees. The Company capitalizes these costs and amortizes them over the longer of the term of the customer contract or the estimated period of benefit, which is approximately four years . Internal-Use Software Development Costs Internal-use software includes software that has been acquired, internally developed, or modified exclusively to meet the Company’s needs. The Company capitalizes qualifying internal-use software development costs that are incurred during the application development stage. Capitalization of costs begins when two criteria are met: (i) the preliminary project stage is completed, and (ii) it is probable that the software will be completed and used for its intended function. Capitalization ceases when the software is substantially complete and ready for its intended use, including the completion of all significant testing. The Company also capitalizes costs related to specific upgrades and enhancements when the expenditures will result in additional functionality, and expenses 105 Table of Contents 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 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. Debt Issuance Costs The Company incurred debt issuance costs associated with obtaining and entering into credit agreements. These costs customarily include non-refundable structuring fees, commitment fees, up-front fees and syndication expenses. The Company has a policy to defer and amortize these costs based on the effective interest method over the term of the credit agreements. Goodwill The Company reviews goodwill and indefinite-lived intangible assets at least annually, as of December 31, for possible impairment. Goodwill and indefinite-lived intangible assets are reviewed for possible impairment at an interim date if an event occurs or circumstances 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 2 -reporting units, CPaaS and Other. All Goodwill is allocated to the CPaaS reporting unit. Management may first evaluate qualitative factors to assess if it is more likely than not that the fair value of a reporting unit is less than its carrying amount and to determine if a two-step impairment test is necessary. Management may choose to proceed directly to the two-step evaluation, bypassing the initial qualitative assessment. The first step of the impairment test involves comparing the fair value of the reporting unit to its net book value, including goodwill. If the carrying value exceeds its fair value, then the Company would perform the second step of the goodwill impairment test to determine the amount of the impairment loss. The impairment loss would be calculated by comparing the implied fair value of the goodwill to its carrying value. In calculating the implied fair value of goodwill, the fair value of the entity would be allocated to all of the other assets and liabilities based on their fair values. The excess of the fair value of the entity over the amount assigned to other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. The Company makes assumptions regarding estimated future cash flows, discount rates, long-term growth rates and market values to determine each reporting unit’s and indefinite-lived intangible asset’s estimated fair value. If these estimates or related assumptions change in the future, the Company may be required to record an impairment charge. As of December 31, 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. Impairment of Long-Lived Assets The Company evaluates long-lived assets, including property and equipment and definite lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If such evaluation indicates that the carrying amount of the asset or the asset group is not recoverable, any impairment loss would be equal to the amount the carrying value exceeds the fair value. Business Combinations The Company uses the acquisition method of accounting for business combinations which requires the tangible and intangible assets acquired and liabilities assumed to be recorded at their respective fair market value as 106 Table of Contents 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 The Company expenses advertising costs as incurred. Advertising costs totaled $ 953 , $ 1,528 and $ 1,617 for the years ended December 31, 2018, 2019 and 2020, respectively, which are included in sales and marketing expenses in the accompanying consolidated statements of operations. Commissions Commissions consist of variable compensation earned by sales personnel and third-party resellers. Sales commissions associated with the acquisition of a new customer contract are paid over time, based on monthly revenues, and are recognized as sales and marketing expense in the period incurred. Stock-Based Compensation The Company accounts for stock-based compensation expense related to all stock-based awards based on the fair value of the award on the grant date. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period, which is generally four years . The fair value of the restricted stock units is determined using the fair value of the Company’s Class A common stock on the date of grant. The Company uses the Black-Scholes option pricing model, net of estimated forfeitures, to measure the fair value of its stock options. The 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. Through December 31, 2020, the Company recognized compensation for only the portion of options expected to vest using an estimated forfeiture rate that was derived from historical employee termination behavior. If any of the assumptions used in the Black-Scholes option pricing model change, stock-based compensation for future options may differ materially compared to that associated with previous grants. Income Taxes The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates. The Company recognizes the effect of a change in tax rates on deferred tax assets and liabilities in the period that includes the enactment date. The Company reduces the measurement of a deferred tax asset, if necessary, by a valuation allowance if it is more likely than not that it will not realize some or all the deferred tax asset. Quarterly, the Company reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and the implementation of prudent and feasible tax planning strategies. The evaluation of the recoverability of deferred tax assets requires judgment in assessing future profitability. Should there be a change in the ability to recover deferred tax assets, the Company’s income tax provision would increase or decrease in the period in which the assessment is changed. The Company accounts for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon technical merits, it is more likely than not that the position will be sustained upon examination. The tax benefit recognized is measured as the largest amount of benefit determined on a cumulative probability basis that the Company believes is more likely than not to be realized upon ultimate settlement of the 107 Table of Contents Notes to Condensed Consolidated Financial Statements (continued) (In thousands, except share and per share amounts) position. The Company recognizes potential accrued interest and penalties associated with unrecognized tax positions in income tax expense. Operating Segments Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to make operating decisions, allocate resources and in assessing performance. The Company has two operating segments, CPaaS and Other, which are deemed to be reportable segments. The Company’s CODM is its Chief Executive Officer. The CODM evaluates the performance of the Company’s operating segments primarily based on revenue and gross profit. The Company does not analyze discrete segment balance sheet information related to long-term assets. All other financial information is evaluated on a consolidated basis. Earnings per Share Basic earnings per share attributable to common stockholders is calculated by dividing the net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net income per share is calculated by giving effect to all potentially dilutive common stock when determining the weighted-average number of common shares outstanding. For purposes of the diluted net income (loss) per share calculation, options and warrants to purchase common stock 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”). These Participating Securities included the Series A redeemable convertible preferred stock. On November 9, 2017, the Participating Securities were converted to Class B common stock immediately prior to the IPO. Foreign currency translation The Company has foreign operations with non-USD functional currencies. The Euro and British Pound are the functional currencies for the Company’s international operations. 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. 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 $ 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, 2019 and December 31, 2020 because of 108 Table of Contents 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. treasury securities not otherwise classified as cash equivalents. All marketable securities are considered to be available-for-sale and are recorded at their estimated fair values. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive (loss) income. The Company minimizes its credit risk associated with investments by investing primarily in investment grade, liquid securities. The Company policy is designed to preserve capital, maintain liquidity and minimize credit risk, and the policy limits exposure to any one issuer and also establishes minimum credit ratings of approved investments. Periodic evaluations of relative credit standing of those issuers are considered in the Company's investment strategy. The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires use of observable inputs when available, and to minimize the use of unobservable inputs when determining fair value. The three tiers are defined as follows: • Level 1. Observable inputs based on unadjusted quoted prices in active markets for identical assets or liabilities; • Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and • Level 3. Unobservable inputs for which there is little or no market data, which requires the Company to develop its own assumptions. 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. 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. Recently Adopted Accounting Standards 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 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 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. 109 Table of Contents 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 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: Measurement of Credit Losses on Financial Instruments , which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses , which clarifies that receivables arising from operating leases are not within the scope of Topic 326, Financial Instruments – Credit Losses. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which clarifies how to apply certain aspects of the new credit losses standard. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates , which amends certain effective dates for the new standard. 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 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 110 Table of Contents 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. 3. 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. 111 Table of Contents 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) $ 413,005 Fair value of Bandwidth common stock issued 106,379 Total purchase consideration $ 519,384 ________________________ (1) Amount subject to adjustment upon finalization of the net working capital adjustment. Estimated fair value Purchase Price Allocation: Cash $ 4,360 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 (In years) Developed technology $ 84,100 10 Customer relationships 148,500 15 Preliminary fair value of identifiable intangible assets $ 232,600 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. 112 Table of Contents 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. Goodwill 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 . 113 Table of Contents Notes to Condensed Consolidated Financial Statements (continued) (In thousands, except share and per share amounts) Year ended December 31, 2019 2020 (Unaudited) Revenue $ 297,377 $ 411,830 Net loss attributable to common stockholders $ ( 7,737 ) $ ( 42,675 ) 4. 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, 2019 and December 31, 2020: Fair value measurements on a recurring basis December 31, 2019 Level 1 Level 2 Level 3 Total Financial assets: Cash and cash equivalents: Money market account $ 25,000 $ — $ — $ 25,000 Time deposits 75,250 — — 75,250 Total financial assets $ 100,250 $ — $ — $ 100,250 Fair value measurements on a recurring basis December 31, 2020 Level 1 Level 2 Level 3 Total Financial assets: Cash and cash equivalents: Money market account $ 57,517 $ — $ — $ 57,517 Other investments: Time deposits 40,000 — — 40,000 Total financial assets $ 97,517 $ — $ — $ 97,517 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, 114 Table of Contents Notes to Condensed Consolidated Financial Statements (continued) (In thousands, except share and per share amounts) 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 $ 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. 5. Financial Statement Components Accounts receivable, net of allowances consist of the following: As of December 31, 2019 2020 Trade accounts receivable $ 14,692 $ 26,504 Unbilled accounts receivable 16,200 27,692 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 and reserve for expected credit losses are as follows: Year ended December 31, 2019 2020 Allowance for doubtful accounts: Balance, beginning of period $ ( 906 ) $ ( 769 ) Charged to bad debt expense ( 1,543 ) ( 1,322 ) Deductions (1) 1,680 888 Balance, end of period $ ( 769 ) $ ( 1,203 ) ________________________ (1) Write off of uncollectible accounts after all collection efforts have been exhausted. 115 Table of Contents Notes to Condensed Consolidated Financial Statements (continued) (In thousands, except share and per share amounts) Accrued expenses and other current liabilities consisted of the following: As of December 31, 2019 2020 Accrued expense $ 12,701 $ 31,549 Accrued compensation and benefits 8,284 19,534 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 6. 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. 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. 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 ” ). Future minimum sub-lease receipts required under the non-cancellable lease are as follows: As of December 31, 2020 2021 $ 457 2022 249 $ 706 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 116 Table of Contents Notes to Condensed Consolidated Financial Statements (continued) (In thousands, except share and per share amounts) liabilities. The Company has one lease with an early-termination option, which it does not expect to exercise . The components of lease expense recorded in the consolidated statement of operations were as follows: Year ended December 31, 2019 2020 Operating lease cost $ 5,548 $ 5,949 Finance lease cost: Amortization of assets — 20 Interest on lease liabilities — 2 Sublease income (1) ( 643 ) ( 384 ) Total net lease cost $ 4,905 $ 5,587 ________________________ (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: As of December 31, Leases Classification 2019 2020 Assets: 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 Liabilities: Current Operating Operating lease liability, current $ 4,876 $ 5,515 Finance Accrued expenses and other current liabilities — 183 Non-current 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 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. 117 Table of Contents 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, 2019 2020 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: As of December 31, 2020 2021 $ 6,408 2022 6,755 2023 6,623 2024 2,701 2025 1,681 Thereafter 751 Total lease payments 24,919 Less: imputed interest ( 2,202 ) Less: accrued lease incentive — Total lease obligations 22,717 Less: current obligations ( 5,515 ) Long-term lease obligations $ 17,202 118 Table of Contents 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, 2020 2021 $ 195 2022 146 2023 92 2024 55 2025 4 Total lease payments 492 Less: imputed interest ( 27 ) Total lease obligations 465 Less: 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. 7. Property and Equipment Property and equipment, net consisted of the following: As of December 31, 2019 2020 Furniture and fixtures $ 2,373 $ 2,341 Computer and office equipment 4,627 4,077 Telecommunications equipment 44,324 60,651 Leasehold improvements 5,263 6,285 Software 2,018 3,901 Internal-use software development 17,952 19,968 Automobile 10 502 Total cost 76,567 97,725 Less—accumulated depreciation ( 34,913 ) ( 46,080 ) Total property and equipment, net $ 41,654 $ 51,645 The Company capitalizes the costs to design software for internal use related to the development of its platform during the application development stage of the projects. The costs are primarily comprised of salaries and benefits of the projects’ engineers and product development teams. Internally developed software is reported at cost less accumulated amortization. Amortization begins once the project is substantially complete and ready for its intended use. The Company amortizes the asset on a straight-line basis over the useful life, which is estimated to be 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. 119 Table of Contents 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 recognized depreciation expense, which includes amortization of capitalized software development costs, as follows: Year ended December 31, 2018 2019 2020 Cost of revenue $ 4,490 $ 6,583 $ 9,536 Research and development 161 268 670 Sales and marketing 51 112 120 General and administrative 568 2,055 2,811 Total depreciation expense $ 5,270 $ 9,018 $ 13,137 120 Table of Contents Notes to Condensed Consolidated Financial Statements (continued) (In thousands, except share and per share amounts) 8. Goodwill and Intangible Assets Goodwill The changes in carrying amount of goodwill were as follows: Total 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 Intangible assets, net consisted of the following as of December 31, 2019: Gross Amount Accumulated Amortization Net Carrying Value Amortization Period Dash acquisition and other intangibles: (Years) Customer relationships $ 10,396 $ ( 4,591 ) $ 5,805 20 Other, definite lived 3,933 ( 3,933 ) — 2 - 7 Licenses, indefinite lived 764 — 764 Indefinite Total intangible assets, net $ 15,093 $ ( 8,524 ) $ 6,569 Intangible assets, net consisted of the following as of December 31, 2020: Gross Amount Accumulated Amortization Net Carrying Value Amortization Period Dash acquisition and other intangibles: (Years) Customer relationships $ 10,396 $ ( 5,111 ) $ 5,285 20 Other, definite lived 3,933 ( 3,933 ) — 2 - 7 Licenses, indefinite lived 764 — 764 Indefinite 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. 121 Table of Contents 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, 2020 2021 $ 19,824 2022 19,824 2023 19,824 2024 19,824 2025 19,824 Thereafter 148,171 $ 247,291 9. Debt 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 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. 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. 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 122 Table of Contents 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; and (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. 123 Table of Contents 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: 124 Table of Contents Notes to Condensed Consolidated Financial Statements (continued) (In thousands, except share and per share amounts) As of December 31, 2020 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, 2020 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, 2020 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. 10. Segment and Geographic Information The Company has two reportable segments, CPaaS and Other. Segments are primarily evaluated based on revenue and gross profit. The Company does not allocate operating expenses, interest expense or income tax expense to its segments. Accordingly, the Company does not report such information. Additionally, the Chief Operating Decision Maker does not evaluate the Company’s operating segments using discrete asset information. The segments share the majority of the Company’s assets. Therefore, no segment asset information is reported. 125 Table of Contents Notes to Condensed Consolidated Financial Statements (continued) (In thousands, except share and per share amounts) Year ended December 31, 2018 2019 2020 CPaaS Revenue $ 164,415 $ 197,944 $ 298,090 Cost of revenue 94,296 110,343 160,706 Gross profit $ 70,119 $ 87,601 $ 137,384 Other Revenue $ 39,698 $ 34,650 $ 45,023 Cost of revenue 13,849 14,616 24,546 Gross profit $ 25,849 $ 20,034 $ 20,477 Consolidated Revenue $ 204,113 $ 232,594 $ 343,113 Cost of revenue 108,145 124,959 185,252 Gross profit $ 95,968 $ 107,635 $ 157,861 The Company's long-lived assets were primarily held in the United States as of December 31, 2019 and December 31, 2020. As of December 31, 2019 and December 31, 2020, long-lived assets held outside of the United States were $ 2,924 and $ 11,249 , respectively. The Company generates its revenue primarily in the United States. Revenue by geographic area is detailed in the table below (which is determined based on the customer billing address): Year ended December 31, 2018 2019 2020 CPaaS United States $ 164,135 $ 192,506 $ 281,757 International 280 5,438 16,333 Total $ 164,415 $ 197,944 $ 298,090 Other United States $ 39,432 $ 33,664 $ 42,692 International 266 986 2,331 Total $ 39,698 $ 34,650 $ 45,023 11. Stockholders’ Equity Preferred Stock 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. Common Stock 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. 126 Table of Contents Notes to Condensed Consolidated Financial Statements (continued) (In thousands, except share and per share amounts) 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. Voting Rights The holders of Class A common stock and Class B common stock have identical rights, except that holders of Class A voting common stock are entitled to one vote per share of Class A common stock and holder of Class B common stock are entitled to ten votes per share of Class B common stock. Dividends Any dividends or distributions paid or payable to the holders of shares of Class A common stock and Class B common stock shall be paid pro-rata, on an equal priority. During the years ended December 31, 2018, 2019 and 2020, no dividends were declared. Dividend payments are subject to a restriction by the Company’s Credit and Security Agreement prohibiting the Company to pay any dividends or any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock through the term of the agreement. Reserved Shares The Company had reserved shares of Class A common stock for issuance under stock-based award agreements as follows: As of December 31, 2019 2020 Stock options issued and outstanding 853,399 255,000 Nonvested restricted stock units issued and outstanding 392,351 450,614 Stock-based awards available for grant under the 2017 Plan 1,310,354 2,020,342 2,556,104 2,725,956 12. Stock Based Compensation 2010 Stock Option Plan As of July 26, 2010, the Company adopted the 2010 Equity Compensation Plan (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 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. 2017 Incentive Award Plan The Company’s 2017 Incentive Award Plan (the “2017 Plan”) became effective on November 9, 2017. The 2017 Plan provides for the grant of stock options, including incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock, dividend equivalents, restricted stock units, and other stock or cash based awards to employees, consultants and directors of the Company. A total of 1,050,000 shares of the Company’s 127 Table of Contents 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, 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. The Company’s stock options vest based on terms of the stock option agreements, which is generally over four years . The stock options have a contractual life of ten years . 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 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 . Stock Options The following summarizes the stock option activity for the periods presented: Number of options outstanding Weighted- average exercise price (per share) Weighted- average remaining contract life (in years) Aggregate intrinsic value (in thousands) Outstanding as of December 31, 2019 853,399 $ 8.07 3.41 $ 47,770 Granted — — Exercised ( 593,084 ) 6.87 54,088 Forfeited or cancelled ( 5,315 ) 10.30 Outstanding as of December 31, 2020 255,000 $ 10.82 4.42 $ 36,426 Options vested and exercisable at December 31, 2020 223,883 $ 9.99 4.11 $ 32,168 Options vested and expected to vest as of December 31, 2020 254,826 $ 10.82 4.41 $ 36,403 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. No options were granted for the year ended December 31, 2020. The total estimated grant date fair value of options vested was $ 979 , $ 729 , and $ 416 for the years ended December 31, 2018, 2019 and 2020, respectively. 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. 128 Table of Contents Notes to Condensed Consolidated Financial Statements (continued) (In thousands, except share and per share amounts) Restricted Stock Units The following summarizes the RSU activity for the periods presented: Number of awards outstanding Weighted-average grant date fair value (per share) Nonvested RSUs as of December 31, 2019 392,351 $ 35.22 Granted 234,653 73.86 Vested ( 161,067 ) 44.42 Forfeited or cancelled ( 15,323 ) 49.21 Nonvested RSUs as of December 31, 2020 450,614 $ 51.58 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. Stock-Based Compensation Expense The Company recognized total stock-based compensation expense as follows: Year ended December 31, 2018 2019 2020 Cost of revenue $ 114 $ 211 $ 208 Research and development 555 1,461 2,118 Sales and marketing 511 1,199 1,525 General and administrative (1) 2,159 3,755 6,030 Total $ 3,339 $ 6,626 $ 9,881 ________________________ (1) On December 21, 2018, the Company reached a separation agreement with an executive. The agreement resulted in a modification of the former employee ’ s 17,725 non-vested restricted stock units, which accelerated the vesting period, resulting in the recognition of $ 535 of additional stock compensation expense for the year ended December 31, 2018. 13. Commitments and Contingencies Operating Leases The Company leases office space under operating lease agreements that expire over the next 6.00 years. See Note 6, “Right-of-Use Asset and Lease Liabilities” to the consolidated financial statements, for additional details on the Company's operating lease commitments. Contractual Obligations On October 25, 2015, the Company entered into an agreement with a telecommunications service provider. The service agreement requires the Company to pay a monthly recurring charge beginning on January 1, 2016 associated with the services received. 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. 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. 129 Table of Contents 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. 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. 130 Table of Contents Notes to Condensed Consolidated Financial Statements (continued) (In thousands, except share and per share amounts) 14. Employee Benefit Plan 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. 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, 2020 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 $ 1,182 131 Table of Contents 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, 2020 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, 2020 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, 2020 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. 132 Table of Contents 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, 2020 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 % Plan Assets The Company’s non-U.S. defined benefit plans are insured by a third party. The investments are governed by the insurer, who oversees all investment decisions. The insurance contracts are classified as Level 2 because a portion of the underlying funds are valued using significant other observable inputs. The insurance contracts provide for a guaranteed interest credit and a profit-sharing adjustment based on the actual performance of the underlying investment assets of the insurer. The fair value of the contract is determined by the insurer based on the premiums paid by the Company plus interest credits plus the profit-sharing adjustment less benefit payments. The major categories of plan assets are as follows: As of December 31, 2020 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. 133 Table of Contents 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, 2020 2021 $ 5 2022 5 2023 5 2024 35 2025 5 2026-2030 37 $ 92 15. Income Taxes 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: Year Ended December 31, 2018 2019 2020 United States $ 7,053 $ ( 15,229 ) $ ( 25,745 ) International — 5 ( 3,227 ) Income (loss) before income taxes $ 7,053 $ ( 15,224 ) $ ( 28,972 ) Benefit (provision) for income taxes from operations consists of the following: Year Ended December 31, 2018 2019 2020 Current: Federal $ 162 $ 81 $ 431 State ( 125 ) 132 ( 87 ) Foreign — 3 ( 1,083 ) Total 37 216 ( 739 ) Deferred: Federal 8,945 15,205 ( 9,847 ) State 1,888 2,297 ( 5,176 ) Foreign — — 757 Total 10,833 17,502 ( 14,266 ) Income tax benefit (provision) $ 10,870 $ 17,718 $ ( 15,005 ) 134 Table of Contents 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: Year Ended December 31, 2018 2019 2020 Federal Tax Rate 21.0 % 21.0 % 21.0 % State Tax Rate 6.3 3.1 2.0 Non-deductible expenses 1.7 ( 1.6 ) ( 9.2 ) Research credit ( 13.6 ) 7.2 10.5 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 Other ( 0.8 ) ( 1.6 ) 0.3 Total ( 154.1 ) % 116.4 % ( 51.8 ) % The following table presents the significant components of the Company’s net deferred tax assets: As of December 31, 2019 2020 Deferred tax assets: Allowance for doubtful accounts $ 97 $ 134 Accrued liabilities 2,083 3,478 Operating lease liabilities 6,335 4,878 Deferred revenue 1,682 1,702 Stock-based compensation - deferred tax asset 2,109 1,968 OID — 9,433 Tax credits 3,710 7,270 Net operating losses 30,835 47,385 Other deferred tax assets 90 2,207 Total deferred tax assets 46,941 78,455 Less: valuation allowance — ( 37,771 ) Net deferred tax assets 46,941 40,684 Deferred tax liabilities: Property and equipment 5,793 8,038 Goodwill 855 989 Intangibles 41 60,667 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 (liability) $ 34,861 $ ( 61,005 ) 135 Table of Contents 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 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. As of December 31, 2020, the Company had approximately $ 125,334 in state net operating loss carryforwards. If not utilized, some state net operating loss carryforwards will expire at various dates beginning in 2023. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Year Ended December 31, 2019 2020 Unrecognized tax benefits—January 1, $ 1,046 $ 1,398 Gross increases—tax positions in prior period — 402 Gross decreases—tax positions in prior period ( 15 ) — Gross increases—tax positions in current period 367 614 Unrecognized tax benefits—December 31, $ 1,398 $ 2,414 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 . The Company expects no material changes in the twelve months following December 31, 2020 in its uncertain tax positions. The Company files U.S. federal income tax returns as well as income tax returns in many U.S. states and foreign jurisdictions. The tax years 2017 - 2019 remain open to examination by the major jurisdictions in which the Company is subject to tax. 16. 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 (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. The agreements include a Transition Services Agreement, Facilities Sharing Agreement, Tax Sharing Agreement, and Master Services Agreement. 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 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”). Because 136 Table of Contents 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, 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, 2019 and December 31, 2020. The Master Services Agreement specifies certain wholesale telecommunications services to be provided by the Company. The agreement is cancellable at any time by either party. The Company provided telecommunication services to Republic of $ 3,884 , $ 2,602 , and $ 2,180 for the years ended December 31, 2018, 2019 and 2020 respectively. The Company recognized such amounts as revenue in the accompanying consolidated statements of operations. 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. Pursuant to the terms of the new agreement, Republic receives reduced pricing on its messaging services, effective April 1, 2019. All other terms and conditions of the existing agreement remain. On June 20, 2019, Republic executed a further amendment to the current Master Services Agreement. Pursuant to the terms of the June 20, 2019 amendment, Republic receives reduced pricing on its outbound voice services effective on June 20, 2019. Republic also executed a revenue commitment schedule on June 20, 2019. 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 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. Pursuant to the terms of the new agreement, Republic receives services performed by the Company’s legal department, effective September 30, 2019. 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 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. 17. 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. 137 Table of Contents Notes to Condensed Consolidated Financial Statements (continued) (In thousands, except share and per share amounts) The components of basic and diluted (loss) income per share are as follows: Year ended December 31, 2018 2019 2020 Earnings 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 ) Diluted $ 0.85 $ 0.10 $ ( 1.83 ) Weighted Average Number of Common Shares Outstanding Basic 18,573,067 22,640,461 24,092,574 Dilutive effect of stock options, restricted stock units, and warrants 2,567,315 1,283,316 — Diluted 21,140,382 23,923,777 24,092,574 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. 138 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 139 Table of Contents