What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-25 compared with 2021-03-01 · 292 added, 205 removed, 313 unchanged (61% of the section changed)

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

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

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

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

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

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

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

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For the years ended December 31, 2019, 2020 and 2021, total revenue was $232.6 million, $343.1 million, and $490.9 million, respectively.

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

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

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

Acquisition of Voxbone

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

Voice Topco directly or

For the years ended December 31, 2019, 2020 and 2021, our CPaaS segment revenue was $197.9 million, $298.1 million, and $413.9 million, respectively, representing an increase of 51% in 2020 and 39% in 2021.

Net income in 2019 was $2.5 million, and net loss in 2020 and 2021 was $44.0 million and $27.4 million, respectively.

As of December 31, 2019, 2020 and 2021, the number of active CPaaS customer accounts was 1,728, 2,848, and 3,228, respectively, representing a year-over-year increase of 40% in 2019, 65% in 2020 and 13% in 2021.

Management ’ s Discussion and Analysis

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

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

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

Acquisition of Voxbone

On November 2, 2020, we acquired a ll of the A Ordinary Shares, B Ordinary Shares and C Ordinary Shares of Voice Topco Limited ( “ Voice Topco ” ) through a Share Purchase Agreement (the “ Share Purchase Agreement ” and such purchase, the “Share Purchase” ) (the “Acquisition”) .

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

The Acquisition was valued at €446 million.

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

COVID-19 Update

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

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

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

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

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

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

The novel coronavirus (“COVID-19”) pandemic persisted throughout 2021 and remains an issue today, impacting areas of the United States and the rest of the world to varying degrees.

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

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

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

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

The COVID-19 pandemic and its adverse effects have been prevalent in the locations where we, our customers, suppliers and third-party business partners conduct business.

During the year ended December 31, 2021, we experienced stable or increased usage by our customers that had been most impacted by COVID-19, including large enterprise customers that offer unified communications as a service (“UCaaS”), meeting solutions, travel, hospitality and ridesharing services, among others.

We acknowledge there may be additional impacts to the economy and our business going forward as a result of COVID-19, and we expect there may be some volatility in customer demand and buying habits as the pandemic continues.

offices have remained open to employees, subject to applicable government regulations.

Appropriate measures are being taken to protect the health of our employees who return to the office.

We have also reinstated business travel, subject to applicable government regulations.

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

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

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

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

See “Item 1A.

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

Beginning on September 25, 2021, our communications network was subjected to a distributed denial of service attack (the “DDoS Attack”) initially causing intermittent communications services disruptions affecting certain of our markets and customers.

A DDoS attack is a malicious attempt to disrupt the normal traffic of a targeted server, service or network by overwhelming the target or its surrounding infrastructure with a flood of unwanted internet traffic from multiple sources, resulting in the slowdown or blockage of legitimate traffic.

Our mitigation efforts, in conjunction with our partners from leading cybersecurity firms, have proved successful.

Our network has been largely stable and operating at normal service levels since the evening of September 29, 2021, although there have been some continued intermittent disruptions.

We estimate that the impact from lost transaction volume and customer credits attributable to the DDoS Attack reduced CPaaS revenue for the full year 2021 by approximately $10.0 million.

Management ’ s Discussion and Analysis

Key Performance Indicators

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Adjusted EBITDA (1)

$ (1,050) $ 26,176 $ 49,600

Free cash flow (1)

Management ’ s Discussion and Analysis

$ (27,012) $ (10,074) $ 3,636

________________________

(1) See “ Non-GAAP Financial Measures ” , discussed elsewhere in Management ’ s Discussion and Analysis.

Number of Active CPaaS Customer Accounts

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We define an active CPaaS customer account at the end of any period as an individual account, as identified by a unique account identifier, for which we have recognized at least $100 of revenue in the last month of the period.

We believe that the use of our platform by active CPaaS customer accounts at or above the $100 per month threshold is a stronger indicator of potential future engagement than trial usage of our platform at levels below $100 per month.

We believe usage of our platform by an active CPaaS customer at or above the $100 per month threshold is a stronger indicator of potential future engagement than trial usage at levels below $100 per month.

A single organization may constitute multiple unique active CPaaS customer accounts if it has multiple unique account identifiers, each of which is treated as a separate active CPaaS customer account.

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Our dollar-based net retention rate compares the CPaaS revenue from customers in a quarter to the same quarter in the prior year.

Customers of acquired businesses are included in the subsequent year ’ s calendar quarter of acquisition.

To calculate the dollar-based net retention rate, we first identify the cohort of customers that generate CPaaS revenue and that were customers in the same quarter of the prior year.

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Our dollar-based net retention rate decreases when such customers cease or reduce usage of a product or when we lower prices on our solutions.

As our customers grow their business and extend the use of our platform, they sometimes create multiple customer accounts with us for operational or other reasons.

Management ’ s Discussion and Analysis

As our customers grow their businesses and increase usage of our platform, they sometimes create multiple customer accounts with us for operational or other reasons.

As such, when we identify a significant customer organization (defined as a single customer organization generating more than 1% of CPaaS revenue in a quarterly reporting period) that has created a new CPaaS customer, this new customer is tied to, and CPaaS revenue from this new customer is included with, the original CPaaS customer for the purposes of calculating this metric.

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We generate a majority of our revenue from our CPaaS segment.

CPaaS revenue is derived from voice usage, phone number services, 911-enabled phone number services, messaging services and other services.

We generate a portion of our CPaaS revenue from usage-based fees, which include voice calling and messaging services.

For the years ended December 31, 2018, 2019 and 2020, we generated 64%, 66% and 74% of our CPaaS revenue, respectively, from usage-based fees.

We also earn monthly fees from services such as phone number services and 911 access service.

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

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

Management ’ s Discussion and Analysis

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

Other revenue is composed of revenue earned from our legacy services and indirect revenue.

Other revenue as a percentage of total revenue is expected to continue to decline over time.

CPaaS revenue is derived from reoccurring sources such as per minute voice usage and voice calling, per text message usage and other usage services and fees, and from monthly recurring charges arising from phone number services, 911-enabled phone number services, messaging services and other services.

For the years ended December 31, 2019, 2020 and 2021, we generated 66%, 74% and 72%, respectively of our CPaaS revenue from reoccurring sources.

The large bulk of our remaining CPaaS revenue is generated from recurring monthly charges.

The remainder of our revenue not classified in our CPaaS segment is generated by our Other segment.

Other segment revenue is composed of revenue earned from various communications services and products, indirect revenue and messaging surcharge revenue.

We recognize accounts receivable at the time the customer is invoiced.

Additionally, we record a receivable and revenue for unbilled revenue if the services have been delivered and are billable in subsequent periods.

Additionally, we record a receivable for unbilled revenue if services have been delivered and are billable in subsequent periods.

Unbilled revenue made up 54%, 50% and 52% of outstanding accounts receivable, net of allowance for doubtful accounts, as of December 31, 2019, 2020 and 2021, respectively.

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Gross margin is calculated by subtracting cost of revenue from revenue, divided by total revenue, expressed as a percentage.

Our cost of revenue and gross margin have been, and will continue to be, affected by several factors, including the timing and extent of our investments in our network, our ability to manage off-network minutes of use and messaging costs, the product mix of revenue, the timing of amortization of capitalized software development costs and the extent to which we periodically choose to pass on any cost savings to our customers in the form of lower usage prices.

Our cost of revenue and gross margin have been, and will continue to be, affected by several factors, including the timing and extent of our investments in our network, our ability to manage off-network minutes of use and messaging costs, changes to the mix or amount of personnel-related costs included in our cost of revenue, the product mix of revenue, the timing of amortization of capitalized software development costs and fluctuations in the price we charge our customers for services.

Management ’ s Discussion and Analysis

Operating Expenses

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

Management ’ s Discussion and Analysis

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

We plan to continue to invest in sales and marketing in order to expand our CPaaS customer base by growing headcount, driving our go-to-market strategies, building brand awareness, advertising and sponsoring additional marketing events.

General and Administrative

General and administrative expenses consist primarily of personnel costs, including stock-based compensation, for our accounting, finance, legal, human resources and administrative support personnel, and executives.

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

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

For the years ended December 31, 2019, 2020 and 2021, our effective tax rate was 116.4%, (51.8)%, and 12.3%, respectively.

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

Judgment is required in determining whether deferred tax assets will be realized in full or in part.

Management assesses the available positive and negative evidence on a jurisdictional basis to estimate if deferred tax assets will be recognized and when it is more likely than not that all or some deferred tax assets will not be realized, and a valuation allowance must be established.

The increase in our effective tax rate is primarily due to a change in the valuation allowance related to certain deferred tax assets.

Judgment is required in a determination as to whether deferred tax assets will be realized in full or in part.

Management assesses available positive and negative evidence on a jurisdictional basis to estimate if deferred tax assets will be recognized, or when it is more likely than not that all or some deferred tax assets will not be realized and a valuation allowance must be established.

As of December 31, 2021, the Company continues to maintain a valuation allowance for its U.S.

federal and state and U.K.

net deferred tax assets.

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

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

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

federal and state net deferred tax assets.

Management ’ s Discussion and Analysis

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Total operating expenses 125,328 171,366 220,760

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

Operating loss (17,693) (13,505) (2,237)

Other income (expense), net

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Total other income (expense), net 2,469 (15,467) (28,958)

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

Loss before income taxes (15,224) (28,972) (31,195)

Income tax benefit (provision) 17,718 (15,005) 3,833

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Total operating expenses 53 % 50 % 45 %

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

Operating loss (8) % (4) % — %

Other income (expense), net

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Total other income (expense), net 1 % (5) % (6) %

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

Loss before income taxes (7) % (8) % (6) %

Income tax benefit (provision) 8 % (4) % 1 %

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Total revenue $ 343,113 $ 490,907 $ 147,794 43 %

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

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

elections in November.

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

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

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

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

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

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

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

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

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

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

In 2021, total revenue increased by $147.8 million, or 43%, and CPaaS revenue increased by $115.9 million, or 39%, compared with the same period in 2020.

As a percentage of total revenue, CPaaS revenue was 84% in 2021 compared with 87% in 2020.

Revenue earned on our international platform contributed $81.5 million of this increase to total revenue and $78.8 million to CPaaS revenue.

Excluding the higher amounts attributable to our international platform, revenue from all of our CPaaS offerings increased from the same period in 2020 led by growth in our voice and messaging offerings of $20.4 million, and phone number services and 911-enabled phone number services of $16.7 million.

We believe our revenue results were lowered by approximately $10.0 million in 2021 from lost transaction volume and customer credits due to the previously disclosed DDoS Attack.

These increases in usage volume period-over-period, including the negative impact of approximately $10.0 million from lower transaction volume, yielded our dollar-based net retention rate of 110%.

Active CPaaS customer accounts increased 13% to 3,228 as of December 31, 2021, as compared with 2,848 as of December 31, 2020 active accounts as of December 31, 2020.

Other revenue increased by $31.9 million, or 71%, in 2021 primarily due to higher indirect revenue, which increased by $30.6 million due to an increase in messaging surcharges and indirect voice revenue, and $2.7 million due to reoccurring revenue earned from our international platform .

Cost of Revenue and Gross Margin

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Management ’ s Discussion and Analysis

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

Total gross margin was 46% for both years.

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

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

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

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

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

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

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

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

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

In 2021, total gross profit increased by $60.7 million, or 38%, compared with the same period in 2020, driven by higher revenue and improved operating leverage offset by unfavorable segment mix, which resulted in total gross margin of 45% for the year ended December 31, 2021 compared with 46% for the year ended December 31, 2020 .

As a component of total gross margin, our CPaaS gross margin grew from 46% to 47% for the years ended December 31, 2020 and 2021 , respectively.

Higher CPaaS gross margins arose from higher revenue, improved operating leverage and product mix.

Our higher revenue drove correspondingly higher CPaaS cost of revenue for the year ended December 31, 2021 of $56.7 million, or 35%, compared with the same period in 2020.

CPaaS cost of revenue increased due to an increase in network costs of $22.8 million due to both network expansions and amortization expense, partially related to our international platform, voice usage costs of $22.5 million, c osts of phone numbers and 911 of $8.7 million, and cost of messaging of $2.7 million from increased cost per message and higher messaging sales volumes.

Excluding depreciation, amortization and stock-based compensation of $20.8 million for the year ended December 31, 2021 and $11.2 million for the year ended December 31, 2020 , CPaaS Non-GAAP gross margins increased to 53%, compared with 50% for the year ended December 31, 2020 , and total Non-GAAP gross margins were 49% and 49%, respectively, for the years ended December 31, 2020 and 2021.

Higher CPaaS Non-GAAP gross margins were driven by revenue growth, improved operating leverage, improved product mix and the inclusion of higher margin sales from our international platform.

See “ Non-GAAP Financial Measures ” , discussed elsewhere in Management ’ s Discussion and Analysis.

In 2021, o ther cost of revenue increased by $30.4 million compared with the same period in 2020.

This was primarily due to increased indirect revenue and costs related to messaging surcharges, resulting in decreased Other gross margin from 45% to 29%.

Operating Expenses

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Total operating expenses $ 171,366 $ 220,760 $ 49,394 29 %

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

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

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

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

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

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

As a percentage of revenue, total operating expenses for the years ended December 31, 2020 and 2021 decreased from 50% to 45%, respectively, as revenue growth exceeded corresponding growth in operating expenditures in 2021.

In 2021, R&D expenses increased by $13.1 million, or 31%, compared with the same period in 2020.

This increase was due to increased personnel costs of $10.0 million including the impact of growth in headcount as a result of the Acquisition, and an increase in non-headcount costs of $3.1 million.

In 2021, sales and marketing expenses increased by $11.3 million , or 28%, compared with th e same period in 2020, primarily due to an increase in sales personnel costs of $7.8 million, which included the impact of growth in headcount as a result of the Acquisition, and an increase in non-headcount costs of $3.5 million.

Management ’ s Discussion and Analysis

In 2021, g eneral and administrative expenses increased by $25.0 million , or 28%, compared with the same period in 2020.

This increase was primarily due to higher personnel costs of $13.9 million resulting from the impact of growth in headcount as a result of the Acquisition, depreciation and amortization costs of $10.0 million, facilities costs of $3.2 million, and other costs of $2.2 million, offset by a decrease in professional costs of $4.3 million.

Interest Income (Expense), Net

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

In 2021, interest expense, net of interest income, increased by $15.1 million compared with the same period in 2020, due to a $12.4 million increase in interest expense related to the Convertible Notes and a $2.5 million decrease in interest income from the investment of follow-on equity offering proceeds.

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

Management ’ s Discussion and Analysis

Income Tax Benefit (Provision)

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

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

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

Income Tax Benefit

In 2021, income tax expense decreased by $18.8 million compared with the same period in 2020.

The effective tax rate for the year ended December 31, 2021, was 12.3% compared with (51.8)% in the same period in 2020.

The increase in our effective tax rate is primarily due to a change in the valuation allowance related to certain deferred tax assets.

Comparison of the Years Ended December 31, 2019 and 2020

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

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

This increase in CPaaS revenue was partially offset by $9.6 million related to pricing decreases that we have implemented over time with our customers in the form of lower usage prices to increase the reach and scale of our platform.

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

elections in November.

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

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

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

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

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

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

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

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

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

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

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

Management ’ s Discussion and Analysis

Cost of Revenue and Gross Margin

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Total gross margin 46 % 46 %

Management ’ s Discussion and Analysis

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

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

Total gross margin was 46% for both years.

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

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

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

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

Cost of phone numbers increased by $1.2 million.

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

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

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

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

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

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

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

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

Operating Expenses

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

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

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

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

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

Interest Income, Net

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

Income Tax Benefit

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

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

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

Management ’ s Discussion and Analysis

Quarterly Results of Operations

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

The information for each quarter has been prepared on a basis consistent with our audited consolidated financial statements included in this Annual Report on Form 10-K, and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair presentation of the financial information contained in those statements.

Our historical results are not necessarily indicative of the results that may be expected in the future.

The following quarterly financial data should be read in conjunction with our audited consolidated financial statements included in this Annual Report on Form 10-K.

Three Months Ended

2019 June 30,

2019 September 30,

2019 December 31,

2019 March 31,

2020 June 30,

2020 September 30,

2020 December 31,

(Unaudited, in thousands, except per share amounts)

CPaaS revenue $ 45,013 $ 47,989 $ 51,499 $ 53,443 $ 59,121 $ 67,076 $ 73,762 $ 98,131

Other revenue 8,308 8,790 8,992 8,560 9,397 9,714 10,996 14,916

Total revenue 53,321 56,779 60,491 62,003 68,518 76,790 84,758 113,047

Cost of revenue:

CPaaS cost of revenue 25,300 26,473 29,297 29,273 31,892 37,229 39,346 52,239

Other cost of revenue 3,466 3,637 3,807 3,706 4,467 4,780 6,181 9,118

Total cost of revenue 28,766 30,110 33,104 32,979 36,359 42,009 45,527 61,357

Gross profit:

24,555 26,669 27,387 29,024 32,159 34,781 39,231 51,690

Operating expenses:

Research and development 7,717 7,656 7,939 8,149 9,530 9,554 10,232 12,743

Sales and marketing 8,349 8,514 8,784 9,373 9,417 8,655 9,001 13,479

General and administrative 14,333 14,282 15,269 14,963 16,096 16,840 18,134 37,685

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

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

Other income (loss):

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

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

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

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

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

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

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

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

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

Total comprehensive income (loss), net of income tax $ 2,000 $ 3,497 $ (1,081) $ (1,880) $ (1,154) $ (20,664) $ (2,213) $ 7,954

Net income (loss) per share:

Basic $ 0.10 $ 0.15 $ (0.04) $ (0.08) $ (0.04) $ (0.86) $ (0.10) $ (0.81)

Diluted $ 0.09 $ 0.14 $ (0.04) $ (0.08) $ (0.04) $ (0.86) $ (0.10) $ (0.81)

Management ’ s Discussion and Analysis

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

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

Interest Expense, Net

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

Income Tax Provision

In 2020, income tax benefit decreased by $32.7 million compared to the same period in 2019 The effective tax rate for the twelve months ended December 31, 2020 was (51.8)% compared to 116.4% in the same period in 2019.

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

Liquidity and Capital Resources

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

We believe that our cash and cash equivalents balances, our short-term investments portfolio, our credit facility and the cash flows generated by our operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

Our liquidity for the year ended December 31, 2021 was provided by positive free cash flow, derived from our cash flow from operations of $40.8 million less expenditures for capital equipment.

In the last three years, we have also supplemented our liquidity with proceeds from our issuance of the Convertible Notes in February 2020 and March 2021, respectively.

We used a majority of the proceeds from the issuance of our 2026 Convertible Notes to consummate the Acquisition.

We believe that our cash and cash equivalents balances and the cash flows generated by our operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

However, our belief may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect.

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If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected.

Management ’ s Discussion and Analysis

Our principal future commitments consist of (i) an aggregate of $650.0 million in Convertible Notes (see Note 9, “Debt” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for a discussion of our 2026 Convertible Notes and our 2028 Convertible Notes), (ii) a $495.7 million non-cancelable lease for our future office headquarters, which is anticipated to commence in May of 2023 (the “ Headquarters Lease ” ), (iii) a $3.6 million non-cancelable lease for our London office, (iv) $18.1 million in non-cancelable purchase obligations and future minimum payments under contracts to various service providers, and (v) $15.8 million in future minimum rent payments for our current office space.

The initial base rent for the Headquarters Lease will be $38.79 per square foot, or approximately $20.7 million per annum, and will increase by 1.85% on each anniversary of the commencement date.

In addition, we are required to deposit an amount equal to the final “ Cost of the Work ” (as defined in the lease agreement) minus the amount of allowance for certain tenant improvements (the “ Excess Costs ” ) with USEF Edwards Mill Owner, LLC and Chicago Title Insurance Company when such amount has been determined.

The final calculation of Excess Costs for the Headquarters Lease is expected to be approximately $12.6 million to occur in March 2022.

See Note 13, “Commitments and Contingencies” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for future lease commitments.

Statement of Cash Flows

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(In thousands)

Net cash provided by (used in) operating activities $ 24,633 $ (1,253) $ 4,518

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

Net cash (used in) provided by operating activities $ (1,253) $ 4,518 $ 40,803

Net cash (used in) provided by investing activities (7,653) (455,085) 2,833

Net cash provided by financing activities 152,418 346,891 207,027

2 unchanged sentences

Cash Flows from Operating Activities

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

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

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

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

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

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

In 2021, net cash provided by operating activities was $40.8 million, consisting of net loss of $27.4 million adjusted for non-cash items of $76.2 million, and offset by cash used by changes in operating assets and liabilities of $8.0 million.

Cash used in operating assets and liabilities included an increase in accounts receivable of $6.7 million, a decrease in operating right-of-use liability of $6.2 million, and an increase in prepaid expenses and other assets of $6.8 million.

Offsetting these cash use items in assets and liabilities was an increase in accrued expenses and other liabilities of $9.7 million, and an increase in accounts payable of $2.0 million.

The non-cash items included depreciation and amortization expense of $36.7 million, amortization of debt discount and issuance costs of $26.8 million, stock-based compensation expenses of $14.5 million, right-of-use asset amortization of $5.7 million, and loss on disposal of property and equipment of $0.8 million, offset by a deferred tax benefit of $8.3 million.

In 2020, net cash provided by operating activities was $4.5 million, consisting of net loss of $44.0 million adjusted for non-cash items of $61.8 million and offset by cash used by changes in operating assets and liabilities of $13.3 million.

Cash generated in operating assets and liabilities included an increase in accrued expenses and other liabilities of $14.4 million, and an increase in accounts payable of $0.3 million.

Offsetting these cash generating

Management ’ s Discussion and Analysis

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

items in assets and liabilities were an increase in accounts receivable of $18.8 million, a decrease in operating right-of-use liability of $5.3 million, and an increase in prepaid expenses and other assets of $3.8 million.

The non-cash items included depreciation and amortization expense of $16.8 million, amortization of debt discount and issuance costs of $15.6 million, deferred tax expense of $14.3 million, stock-based compensation expenses of $9.9 million, right-of-use asset amortization of $4.8 million, and loss on disposal of property and equipment of $0.3 million.

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

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

Offsetting these cash generating items in assets and liabilities were an increase in accounts receivable of $6.2 million, an increase in prepaid expenses and other assets of $4.2 million, and a decrease in operating right-of-use liability of $3.4 million.

In 2018, cash provided by operating activities was $24.6 million, consisting of net income of $17.9 million adjusted for non-cash items.

These non-cash items included depreciation and amortization expense of $5.8 million, stock-based compensation expenses of $3.3 million, deferred tax benefit of $10.8 million and cash provided by changes in operating assets and liabilities of $8.3 million.

Cash generated from operating assets and liabilities included an increase in deferred revenue and advanced billings of $6.0 million, an increase in accrued expenses and other liabilities of $4.8 million, increase in deferred rent of $2.1 million and a decrease in deferred costs of $0.2 million.

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

Cash Flows from Investing Activities

In 2021, net cash provided by investing activities was $2.8 million.

Cash provided by investing activities included proceeds from sales and maturities of other investments of $40.0 million, proceeds from the sale of land of $17.5 million, offset by the purchase of land of $30.0 million, purchase of property and equipment of $20.7 million and capitalized internally developed software costs of $3.9 million.

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

1 unchanged sentence

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

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

Cash Flows from Financing Activities

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

In 2021, net cash provided by financing activities was $207.0 million consisting primarily of $250.0 million in proceeds from the issuance of the 2028 Convertible Notes and $0.9 million in proceeds from the issuance of stock options, partially offset by $25.5 million in the purchase of the 2028 Capped Calls, $7.5 million in payments of debt issuance cost, $6.7 million in payment of holdback proceeds to former Voxbone shareholders, $4.0 million in value of equity awards withheld for tax liabilities, and $0.2 million in payments on finance leases.

In 2020, cash provided by financing activities was $346.9 million consisting primarily of $400.0 million in proceeds from the issuance of the Convertible Notes and $4.1 million in proceeds from the issuance of stock options, partially offset by $43.3 million in the purchase of the 2026 Capped Calls, $12.0 million in payments of debt issuance cost, and $1.9 million in value of equity awards withheld for tax liabilities.

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

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

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

Management ’ s Discussion and Analysis

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

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

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

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

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

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

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

On May 25, 2021, we terminated the Credit and Security Agreement, dated as of November 4, 2016, as amended and restated as of March 1, 2019, among the Company, KeyBank National Association, and KeyBanc Capital Markets Inc.

(the “Credit Agreement”).

The Credit Agreement provided for a secured $25.0 million revolving credit facility.

As of May 25, 2021, no borrowings were outstanding under the Credit Agreement.

As of December 31, 2021, we had no outstanding unamortized loan fees for the Credit Agreement.

On March 16, 2021, we issued $250.0 million aggregate principal amount of the 2028 Convertible Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act.

The interest on the 2028 Convertible Notes is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2021.

The 2028 Convertible Notes may bear special interest under specified circumstances relating to our failure to comply with our reporting obligations under the indenture governing the 2028 Convertible Notes (the “2028 Indenture”) or if the 2028 Convertible Notes are not freely tradeable as required by the 2028 Indenture.

The 2028 Convertible Notes will mature on April 1, 2028, unless earlier repurchased, redeemed by us, or converted pursuant to their terms.

The total net proceeds from the 2028 Convertible Notes, after deducting initial purchaser discounts, costs related to the 2028 Capped Calls, and debt issuance costs, paid or payable by us, were approximately $217.0 million .

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

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

Management ’ s Discussion and Analysis

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

The 2026 Convertible Notes may bear special interest under specified circumstances relating to our failure to comply with our reporting obligations under the indenture governing the 2026 Convertible Notes (the “2026 Indenture”) or if the 2026 Convertible Notes are not freely tradeable as required by the 2026 Indenture.

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

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

Contractual Obligations and Other Commitments

The following table summarizes our non-cancellable contractual obligations as of December 31, 2020:

Non-GAAP Financial Measures

We use Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP net (loss) income, Adjusted EBITDA and free cash flow for financial and operational decision making and to evaluate period-to-period differences in our performance.

Non-GAAP gross profit, Non-GAAP gross margin, Non-GAAP net (loss) income, Adjusted EBITDA and free cash flow are non-GAAP financial measures, which we believe are useful for investors in evaluating our overall financial performance.

We believe these measures provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key performance indicators used by management in its financial and operational decision making.

See below for a reconciliation of each of the non-GAAP financial measures described below.

Non-GAAP Gross Profit and Non-GAAP Gross Margin

GAAP defines gross profit as revenue less cost of revenue.

Cost of revenue includes all expenses associated with our various service offerings as more fully described under the caption “Key Components of Statements of Operations-Cost of Revenue and Gross Margin.” We define Non-GAAP gross profit as gross profit after adding back the following items:

• depreciation and amortization;

• amortization of acquired intangible assets related to acquisitions;

Management ’ s Discussion and Analysis

• stock-based compensation.

We calculate Non-GAAP gross margin by dividing Non-GAAP gross profit by revenue, expressed as a percentage of revenue.

In our calculation of Non-GAAP gross profit and Non-GAAP gross margin, we eliminate the impact of depreciation and amortization, amortization of acquired intangible assets related to acquisitions, and stock-based compensation, all non-cash items, because we do not consider them indicative of our core operating performance.

The exclusion of these items facilitates comparisons of our operating performance on a period-to-period basis.

Management uses Non-GAAP gross profit and Non-GAAP gross margin to evaluate operating performance and to determine resource allocation among our various service offerings.

We believe Non-GAAP gross profit and Non-GAAP gross margin provide useful information to investors and others to understand and evaluate our operating results in the same manner as our management and board of directors and allows for better comparison of financial results among our competitors.

Non-GAAP gross profit and Non-GAAP gross margin may not be comparable to similarly titled measures of other companies because other companies may not calculate Non-GAAP gross profit and Non-GAAP gross margin or similarly titled measures in the same manner we do.

Year ended December 31,

2019 2020 2021

(In thousands)

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

Finance leases (1) 492 195 238 59 —

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

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

Total $ 437,306 $ 15,631 $ 17,917 $ 3,756 $ 400,002

Consolidated Gross Profit $ 107,635 $ 157,861 $ 218,523

Consolidated Gross Profit Margin % 46 % 46 % 45 %

Depreciation 6,583 9,536 12,051

Amortization of acquired intangible assets — 1,445 8,543

Stock-based compensation 211 208 252

Non-GAAP Gross Profit $ 114,429 $ 169,050 $ 239,369

Non-GAAP Gross Margin % 49 % 49 % 49 %

Year ended December 31,

2019 2020 2021

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

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

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

Off-Balance Sheet Arrangements

We do not have any holdings in variable interest entities.

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

(In thousands)

CPaaS Gross Profit $ 87,601 $ 137,384 $ 196,545

CPaaS Gross Profit Margin % 44 % 46 % 47 %

Depreciation 6,583 9,536 12,051

Amortization of acquired intangible assets — 1,445 8,543

Stock-based compensation 211 208 252

Non-GAAP CPaaS Gross Profit $ 94,395 $ 148,573 $ 217,391

Non-GAAP CPaaS Gross Margin % 48 % 50 % 53 %

There are no Non-GAAP adjustments to gross profit for the Other segment.

Management ’ s Discussion and Analysis

Non-GAAP Net (Loss) Income

We define Non-GAAP net (loss) income as net income or loss adjusted for certain items affecting period-to-period comparability.

Non-GAAP net (loss) income excludes:

• stock-based compensation;

• amortization of acquired intangible assets related to acquisitions;

• amortization of debt discount and issuance costs for convertible debt;

• acquisition related expenses;

• impairment charges of intangibles assets , if any ;

• loss (gain) on disposal of property and equipment;

• net cost associated with early lease terminations and leases without economic benefit

• estimated tax impact of above adjustments;

• income tax benefit resulting from excess tax benefits associated with the exercise of stock options, vesting of restricted stock units and equity compensation;

• expense resulting from recording the valuation allowance on our deferred tax assets.

We calculate Non-GAAP basic and diluted shares by adding the weighted average of outstanding Series A redeemable convertible preferred stock, if any, to the weighted average number of outstanding basic and diluted shares, respectively.

The tax-effect of Non-GAAP adjustments is determined using a blended rate of statutory tax rates in the jurisdictions where we have tax filings.

When we have a valuation allowance recorded and no tax benefits will be recognized, the rate is considered to be zero.

We believe Non-GAAP net (loss) income is a meaningful measure because by removing certain non-cash and other expenses, we are able to evaluate our operating results in a manner we believe is more indicative of the current period’s performance.

We believe the use of Non-GAAP net (loss) income may be helpful to investors because it provides consistency and comparability with past financial performance, facilitates period-to-period comparisons of results of operations and assists in comparisons with other companies, many of which may use similar Non-GAAP financial information to supplement their GAAP results.

Management ’ s Discussion and Analysis

Year ended December 31,

2019 2020 2021

(In thousands)

Net income (loss) $ 2,494 $ (43,977) $ (27,362)

Stock-based compensation 6,626 9,881 14,537

Amortization of acquired intangibles 520 3,666 19,119

Amortization of debt discount and issuance costs for convertible debt — 15,565 26,672

Acquisition-related expenses — 14,458 —

Loss on disposal of property and equipment 456 334 832

Estimated tax effects of adjustments (1)

(1,914) (758) (15,036)

Valuation allowance (2)

— 15,024 9,552

Income tax benefit of equity compensation (13,484) — (2,603)

Non-GAAP net (loss) income $ (5,302) $ 14,193 $ 25,711

Net income (loss) per share, basic and diluted

Basic $ 0.11 $ (1.83) $ (1.09)

Diluted $ 0.10 $ (1.83) $ (1.09)

Non-GAAP net (loss) income per Non-GAAP share

Basic $ (0.23) $ 0.59 $ 1.02

Diluted $ (0.23) $ 0.55 $ 0.97

Non-GAAP weighted average number of shares outstanding

Non-GAAP basic shares 22,640,461 24,092,574 25,090,916

Convertible debt conversion — 1,022,941 987,149

Stock options issued and outstanding — 443,738 180,318

Nonvested RSUs outstanding — 352,854 197,538

Non-GAAP diluted shares 22,640,461 25,912,107 26,455,921

________________________

(1) The Non-GAAP tax-effect adjustments are calculated based on statutory tax rates in the jurisdictions where we have has tax filings.

When we have a valuation allowance recorded and no tax benefits will be recognized, the rate in that jurisdiction is considered to be zero.

The rate was 25.2%, 1.8%, 13.2% for the years ended December 31, 2019, 2020 and 2021, respectively.

(2) The Company recognized a tax expense of $0.0 million, $15.0 million, and $9.6 million to record a valuation allowance on U.S.

deferred tax assets in the years ended December 31, 2019, 2020 and 2021 , respectively.

Adjusted EBITDA

We define Adjusted EBITDA as net income or losses from continuing operations, adjusted to reflect the addition or elimination of certain income statement items including, but not limited to:

• income tax provision (benefit);

• interest (income) expense, net;

• depreciation and amortization expense;

• acquisition related expenses;

Management ’ s Discussion and Analysis

• stock-based compensation expense;

• impairment of intangible assets, if any;

• loss (gain) on disposal of property and equipment, if any;

• net cost associated with early lease terminations and leases without economic benefit

Adjusted EBITDA is a key measure u sed by management to understand and evaluate our core operating performance and trends, to generate future operating plans and to make strategic decisions regarding the allocation of capital.

In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis.

Year ended December 31,

2019 2020 2021

(In thousands)

Net income (loss) $ 2,494 $ (43,977) $ (27,362)

Income tax (benefit) provision (1)

(17,718) 15,005 (3,833)

Interest (income) expense, net (2,446) 13,672 28,784

Depreciation 9,018 13,137 17,523

Amortization 520 3,666 19,119

Acquisition-related expenses — 14,458 —

Stock-based compensation 6,626 9,881 14,537

Loss on disposal of property and equipment 456 334 832

Adjusted EBITDA $ (1,050) $ 26,176 $ 49,600

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(1) Includes $0.0 million, $15.0 million, and $9.6 million of tax expense to record a valuation allowance on U.S.

deferred tax assets for the years ended December 31, 2019, 2020 and 2021 , respectively.

Free Cash Flow

Free cash flow represents net cash provided by or used in operating activities less net cash used in the acquisition of property and equipment and capitalized development costs of software for internal use.

We believe free cash flow is a useful indicator of liquidity and provides information to management and investors about the amount of cash generated from our core operations that can be used to invest in our business.

Free cash flow has certain limitations because it does not represent the total increase or decrease in the cash balance for the period, it does not take into consideration investment in long-term securities, nor does it represent residual cash flows available for discretionary expenditures.

Therefore, it is important to evaluate free cash flow along with our consolidated statements of cash flows.

Year ended December 31,

2019 2020 2021

(In thousands)

Net cash (used in) provided by operating activities $ (1,253) $ 4,518 $ 40,803

Net cash used in investing in capital assets (1) (2)

(25,759) (14,592) (37,167)

Free cash flow $ (27,012) $ (10,074) $ 3,636

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(1) Represents the acquisition cost of property, equipment and capitalized development costs for software for internal use.

Management ’ s Discussion and Analysis

(2) Includes the net cash used from the purchase of land of $(30.0) million offset by the proceeds from sale of land of $17.5 million from investing activities of the consolidated statement of cash flows for the year ended December 31, 2021.

Critical Accounting Policies and Significant Judgments and Estimates

5 unchanged sentences

Revenue Recognition and Deferred Revenue

We generate revenue primarily from the sale of communication services to enterprise customers.

We generate revenue primarily from the sale of communications services to enterprise customers.

Revenue recognition commences upon transfer of control of promised goods or services to customers in an amount that we expect to receive in exchange for those goods or services.

Management ’ s Discussion and Analysis

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

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

We generally enter into arrangements with customers that are typically 2 to 3 years in length with an auto-renewal feature.

We enter into arrangements with customers that are typically 2 to 3 years in length with an auto-renewal feature.

When required as part of providing service, revenues and associated expenses related to nonrefundable, upfront service activation and setup fees are deferred and recognized over the longer of the associated service contract period or estimated period of benefit.

2 unchanged sentences

We maintain 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.

Credits are accounted for as variable consideration and are estimated based on several inputs including historical experience, contractual obligations and current trends of credit issuances.

Adjustments to the reserve are recorded against revenue.

3 unchanged sentences

The fair values of the assets acquired and liabilities assumed are determined based upon management's valuation and involves making significant estimates and assumptions based on facts and circumstances that existed as of the acquisition date.

We use a measurement period following the acquisition date to gather information that existed as of the acquisition date that is needed to determine the fair value of the assets acquired and liabilities assumed.

Management ’ s Discussion and Analysis

The measurement period ends once all information is obtained, but no later than one year from the acquisition date.

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Long-lived assets, including intangible assets with definite lives, are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise.

Management ’ s Discussion and Analysis

We evaluate the recoverability of our long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable.

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We evaluate the useful life of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

Management ’ s Discussion and Analysis

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that are included in the financial statements.

9 unchanged sentences

Other Contingencies

Management ’ s Discussion and Analysis

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

1 unchanged sentence

If the potential loss from any legal proceeding or litigation is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss.

Significant judgment is required to determine the probability of a loss and whether the amount of the loss is reasonably estimable.

Significant judgment is involved in the determination of the probability of a loss and whether the amount of the loss is reasonably estimable.

The outcome of any proceeding is not determinable in advance.

2 unchanged sentences

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

We conduct operations in many tax jurisdictions throughout the United States and the rest of the world.

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

In many of these jurisdictions, non-income-based taxes and fees, such as sales and use taxes, Value Added Taxes (“VAT”), telecommunications taxes, and regulatory fees including those associated with (or potentially associated with) VoIP telephony services or 911 services, are assessed or may be assessed on our operations.

9 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis