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 87 Consolidated Balance Sheets 90 Consolidated Statements of Operations 91 Consolidated Statements of Comprehensive Income (Loss) 92 Consolidated Statements of Changes in Stockholders’ Equity 93 Consolidated Statements of Cash Flows 95 Notes to Consolidated Financial Statements 97 86 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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2022 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 Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates. 87 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. We have served as the Company’s auditor since 2012. /s/ Ernst & Young LLP Raleigh, North Carolina February 25, 2022 88 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, 2021, 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, 2021, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, 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, 2021, and the related notes and our report dated February 25, 2022 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. 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 February 25, 2022 89 Table of Contents BANDWIDTH INC. Consolidated Balance Sheets (In thousands, except share and per share amounts) As of December 31, 2020 2021 Assets Current assets: Cash and cash equivalents $ 72,163 $ 331,453 Restricted cash 9,274 836 Other investments 40,000 — Accounts receivable, net of allowance for doubtful accounts 55,243 61,572 Deferred costs 2,411 3,204 Prepaid expenses and other current assets 14,508 15,820 Total current assets 193,599 412,885 Property, plant and equipment, net 51,645 69,604 Operating right-of-use asset, net 19,491 14,061 Intangible assets, net 248,055 211,217 Deferred costs, non-current 3,604 4,676 Other long-term assets 1,975 8,673 Goodwill 372,239 344,423 Total assets $ 890,608 $ 1,065,539 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 11,665 $ 9,142 Accrued expenses and other current liabilities 63,065 65,921 Current portion of deferred revenue 6,515 6,248 Advanced billings 5,429 6,380 Operating lease liability, current 5,515 5,807 Total current liabilities 92,189 93,498 Other liabilities 1,707 6,018 Operating lease liability, net of current portion 17,202 10,958 Deferred revenue, net of current portion 6,386 7,634 Deferred tax liability 61,005 48,396 Convertible senior notes 282,196 486,440 Total liabilities 460,685 652,944 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, 2020 and 2021; 22,413,004 and 23,177,988 shares issued and outstanding as of December 31, 2020 and 2021, respectively 22 23 Class B voting common stock, $ 0.001 par value; 20,000,000 shares authorized as of December 31, 2020 and 2021; 2,496,125 and 1,965,170 shares issued and outstanding as of December 31, 2020 and 2021, respectively 2 2 Additional paid-in capital 451,463 502,477 Accumulated deficit ( 49,505 ) ( 76,867 ) Accumulated other comprehensive income (loss) 27,941 ( 13,040 ) Total stockholders’ equity 429,923 412,595 Total liabilities and stockholders’ equity $ 890,608 $ 1,065,539 See accompanying notes. 90 Table of Contents BANDWIDTH INC. Consolidated Statements of Operations (In thousands, except share and per share amounts) Year ended December 31, 2019 2020 2021 Revenue: CPaaS revenue $ 197,944 $ 298,090 $ 413,948 Other revenue 34,650 45,023 76,959 Total revenue 232,594 343,113 490,907 Cost of revenue: CPaaS cost of revenue 110,343 160,706 217,403 Other cost of revenue 14,616 24,546 54,981 Total cost of revenue 124,959 185,252 272,384 Gross profit 107,635 157,861 218,523 Operating expenses: Research and development 31,461 42,059 55,173 Sales and marketing 35,020 40,552 51,817 General and administrative 58,847 88,755 113,770 Total operating expenses 125,328 171,366 220,760 Operating loss ( 17,693 ) ( 13,505 ) ( 2,237 ) Other income (expense), net: Interest income (expense), net 2,446 ( 13,672 ) ( 28,784 ) Other income (expense), net 23 ( 1,795 ) ( 174 ) Total other income (expense), net 2,469 ( 15,467 ) ( 28,958 ) Loss before income taxes ( 15,224 ) ( 28,972 ) ( 31,195 ) Income tax benefit (provision) 17,718 ( 15,005 ) 3,833 Net income (loss) $ 2,494 $ ( 43,977 ) $ ( 27,362 ) Earnings per share: Net income (loss) per share: Basic $ 0.11 $ ( 1.83 ) $ ( 1.09 ) Diluted $ 0.10 $ ( 1.83 ) $ ( 1.09 ) Weighted average number of common shares outstanding: Basic 22,640,461 24,092,574 25,090,916 Diluted 23,923,777 24,092,574 25,090,916 See accompanying notes. 91 Table of Contents BANDWIDTH INC. Consolidated Statements of Comprehensive Income (Loss) (In thousands) Year ended December 31, 2019 2020 2021 Net income (loss) $ 2,494 $ ( 43,977 ) $ ( 27,362 ) Other comprehensive income (loss) Unrealized gain on marketable securities, net 1 — — Foreign currency translation, net of income taxes 41 27,900 ( 41,150 ) Unrealized gain on employee benefit plan, net of income taxes — — 169 Total other comprehensive income (loss) 42 27,900 ( 40,981 ) Total comprehensive income (loss) $ 2,536 $ ( 16,077 ) $ ( 68,343 ) See accompanying notes. 92 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, 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 ) 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 Issuance of debt conversion option — — — — 66,908 — — 66,908 Debt conversion option issuance costs, net of tax — — — — ( 2,019 ) — — ( 2,019 ) Capped call option purchase price — — — — ( 25,500 ) — — ( 25,500 ) Exercises of vested stock options 73,985 — — — 923 — — 923 Vesting of restricted stock units 186,502 — — — — — — — Equity awards withheld for tax liability ( 26,458 ) — — — ( 3,835 ) — — ( 3,835 ) Conversion of Class B voting common stock to Class A voting common stock 530,955 1 ( 530,955 ) — — — — 1 93 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 Foreign currency translation — — — — — ( 41,150 ) — ( 41,150 ) Unrealized gain on employee benefit pension plan — — — — — 169 — 169 Stock based compensation — — — — 14,537 — — 14,537 Net loss — — — — — — ( 27,362 ) ( 27,362 ) Balance at December 31, 2021 23,177,988 $ 23 1,965,170 $ 2 $ 502,477 $ ( 13,040 ) $ ( 76,867 ) $ 412,595 See accompanying notes. 94 Table of Contents BANDWIDTH INC. Consolidated Statements of Cash Flows (In thousands) Year ended December 31, 2019 2020 2021 Cash flows from operating activities Net income (loss) $ 2,494 $ ( 43,977 ) $ ( 27,362 ) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities Depreciation and amortization 9,538 16,803 36,642 Right-of-use asset amortization 4,269 4,812 5,722 Accretion of bond discount ( 700 ) — — Gain on sale of marketable securities ( 4 ) — — Amortization of debt discount and issuance costs 177 15,647 26,754 Stock-based compensation 6,626 9,881 14,537 Deferred taxes ( 17,502 ) 14,266 ( 8,318 ) Loss on disposal of property and equipment 456 334 832 Changes in operating assets and liabilities: Accounts receivable ( 6,178 ) ( 18,832 ) ( 6,711 ) Prepaid expenses and other assets ( 4,245 ) ( 3,823 ) ( 6,751 ) Accounts payable 1,145 315 1,992 Accrued expenses and other liabilities 6,028 14,393 9,693 Operating right-of-use liability ( 3,357 ) ( 5,301 ) ( 6,227 ) Net cash (used in) provided by operating activities ( 1,253 ) 4,518 40,803 Cash flows from investing activities Purchase of property and equipment ( 22,215 ) ( 12,273 ) ( 20,686 ) Capitalized software development costs ( 3,544 ) ( 2,319 ) ( 3,926 ) Purchase of land — — ( 30,017 ) Proceeds from sale of land — — 17,462 Purchase of marketable securities ( 68,361 ) — — Proceeds from sales and maturities of marketable securities 86,467 — — Purchase of other investments — ( 230,780 ) — Proceeds from sales and maturities of other investments — 190,780 40,000 Acquisition, net of cash acquired — ( 400,493 ) — Net cash (used in) provided by investing activities ( 7,653 ) ( 455,085 ) 2,833 Cash flows from financing activities Payments on finance leases — ( 28 ) ( 212 ) 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 — 400,000 250,000 Purchase of capped call — ( 43,320 ) ( 25,500 ) Payment of Acquisition holdback — — ( 6,689 ) Payment of debt issuance costs ( 167 ) ( 11,990 ) ( 7,544 ) Proceeds from exercises of stock options 7,357 4,073 926 Value of equity awards withheld for tax liabilities ( 1,406 ) ( 1,844 ) ( 3,954 ) Net cash provided by financing activities 152,418 346,891 207,027 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 9 ) 109 189 Net increase (decrease) in cash, cash equivalents, and restricted cash 143,503 ( 103,567 ) 250,852 Cash, cash equivalents, and restricted cash, beginning of period 41,501 185,004 81,437 Cash, cash equivalents, and restricted cash, end of period $ 185,004 $ 81,437 $ 332,289 95 Table of Contents BANDWIDTH INC. Consolidated Statements of Cash Flows (In thousands) Supplemental disclosure of cash flow information Cash paid for interest $ 341 $ 579 $ 1,476 Cash (refunded) paid for taxes $ ( 178 ) $ 454 $ 1,999 Right-of-use assets obtained in exchange for new operating lease liabilities $ 4,528 $ 3,105 $ 526 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 $ 1,375 $ 6,043 $ 3,760 Lease incentive $ — $ — $ 4,677 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 $ 127 Acquisition of equipment through finance leases $ — $ 113 $ 160 See accompanying notes. 96 Table of Contents BANDWIDTH INC. Notes to Consolidated Financial Statements 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. 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. 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 97 Table of Contents Notes to Consolidated Financial Statements (continued) 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. 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. Revenue Recognition Revenue recognition commences upon transfer of control of promised goods or services to customers in an amount that the Company expects to receive in exchange for those products or services. The Company determines revenue recognition through the following steps: • identification of the contract, or contracts, with a customer; • identification of the performance obligations in the contract; • determination of the transaction price; • allocation of the transaction price to the performance obligations in the contract; and • recognition of revenue, when, or as, the Company satisfies a performance obligation. Nature of Products and Services Revenue consists primarily of the sale of communications services offered through Application Programming Interface (“API”) software solutions to large enterprise, as well as small and medium-sized business, customers and is generally derived from usage and service fees in both the CPaaS and Other segments. Usage revenue includes voice communication (primarily driven by inbound minutes, outbound minutes and toll-free minutes) and messaging communication (driven by the number of messages) that traverse the platform and network. Service fees include the provision and management of phone numbers and emergency services access. The majority of the Company’s revenue is generated from usage-based fees earned from customers accessing the Company’s communications platform. Access to the Company’s communication platform is considered a series of distinct services, with continuous transfer of control to the customer, comprising one performance obligation and usage-based fees are recognized in revenue in the period the traffic traverses the Company’s network. For the years ended December 31, 2019, 2020 and 2021 the revenue from usage-based fees represented $ 131.6 million, $ 219.8 million and $ 319.0 million of CPaaS revenue, respectively, and $ 29.0 million, $ 40.8 million and $ 73.5 million 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, 2019, 2020 and 2021 the revenue from service fees represented $ 61.2 million, $ 72.3 million and $ 87.6 million of CPaaS revenue, respectively, and $ 5.6 million, $ 4.2 million and $ 3.5 million of Other revenue, respectively. The remaining $ 5.1 million, $ 6.0 million and $ 7.3 million of CPaaS revenue for the years ended December 31, 2019, 2020 and 2021, 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. 98 Table of Contents Notes to Consolidated Financial Statements (continued) When required as part of providing service, revenues and associated expenses related to nonrefundable, upfront service activation and setup fees are deferred and recognized over the longer of the associated service contract period or estimated customer life. The Company’s contracts do not contain general rights of return. However, occasionally credits may be issued. The Company’s contracts do not provide customers with the right to take possession of the software supporting the applications. Amounts that have been invoiced are recorded in accounts receivable and in revenue or deferred revenue depending on whether the revenue recognition criteria have been met. The Company maintains a reserve for sales credits. Credits are accounted for as variable consideration and are estimated based on several inputs including historical experience and current trends of credit issuances. Adjustments to the reserve are recorded against revenue. The Company has various sales commission plans for which eligible employees can earn commissions from the sale of products and services to customers. Eligible employees must be employed at the time of payment in order to receive a commission. The Company pays commissions over time and a corresponding requisite substantive service condition exists for the employee to receive the commission. The Company determined that the timing of the commission payments and the underlying service performed by the employee were commensurate. Accordingly, sales commissions are generally expensed as incurred. These costs are recorded within sales and marketing expenses. Contract Assets and Liabilities The following table provides information about receivables and contract liabilities from contracts with customers: As of December 31, 2020 2021 (In thousands) Receivables (1) $ 55,243 $ 61,572 Contract liabilities (2) 12,901 13,882 ________________________ (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 from the date the fee is incurred by the customer. Customer refundable payments are recorded as advanced billings. During the year ended December 31, 2021, the Company recognized revenue of $ 5.7 million related to contract liabilities recorded at the beginning of the year. The Company expects to recognize $ 6.2 million in revenue over the next 12 months related to its contract liabilities as of December 31, 2021. 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 99 Table of Contents Notes to Consolidated Financial Statements (continued) 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 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. All highly liquid investments with original stated maturities of greater than three months from the date of purchase are classified as current marketable securities, with the exception of time deposits with maturities greater than ninety days 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 utilizes money market funds as an investment option and only invests in AAA rated funds. Restricted Cash Restricted cash consists primarily of 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 100 Table of Contents Notes to Consolidated Financial Statements (continued) 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 $ 1.2 million and $ 1.7 million for uncollectible accounts and customer balances that are disputed were required as of December 31, 2020 and December 31, 2021, 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, 2020 and December 31, 2021. The Company includes unbilled receivables in its accounts receivable balance. Generally, these receivables represent earned revenue from services provided to customers, which will be billed in the next billing cycle. All amounts are considered collectible and billable. As of December 31, 2020 and December 31, 2021, unbilled receivables were $ 27.7 million and $ 31.8 million, respectively. Concentration of Credit Risk Financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents, 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, 2020 and December 31, 2021, one individual customer represented approximately 11 % and 10 %, respectively, of the Company’s accounts receivable, net of allowance for doubtful accounts. For the years ended December 31, 2019, 2020 and 2021, no individual customer represented more than 10% of the Company’s 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 101 Table of Contents Notes to Consolidated Financial Statements (continued) specific upgrades and enhancements when the expenditures will result in additional functionality, and expenses 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 incurs debt issuance costs associated with obtaining and entering into credit agreements and issuing convertible notes. These costs customarily include non-refundable structuring fees, commitment fees, up-front fees and syndication expenses. The Company has a policy of deferring and amortizing these costs based on the effective interest method over the term of the credit agreements or the convertible notes, as applicable. Amortization of Intangibles Intangible assets determinable economic lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful life of each asset on a straight-line basis. The Company determines the useful lives of identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors the Company considers when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, the Company's long-term strategy for using the asset, any laws or other local regulations which could impact the useful life of the asset and other economic factors, including competition and specific market conditions. Intangible assets without determinable economic lives are carried at cost, not amortized and reviewed for impairment at least annually. Refer to Note 8, “Goodwill and Intangible Assets” to these consolidated financial statements, for the useful lives of the Company's intangible assets as of December 31, 2020 and December 31, 2021. 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, 2020 and 2021, the Company has recorded goodwill of $ 372.2 million and $ 344.4 million, respectively. No goodwill impairment charges were recorded for the years ended December 31, 2019, 2020 and 2021. 102 Table of Contents Notes to Consolidated Financial Statements (continued) 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 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 $ 1.5 million, $ 1.6 million and $ 1.8 million for the years ended December 31, 2019, 2020 and 2021, 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, 2021, 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 103 Table of Contents Notes to Consolidated Financial Statements (continued) 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 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 to purchase common stock, restricted stock units and redeemable convertible preferred stock are considered to be potential common stock. Foreign currency translation The Company has foreign operations with non-USD functional currencies. The Euro and British Pound are the primary 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 . 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 104 Table of Contents Notes to Consolidated Financial Statements (continued) 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 (expense), net in the Company’s consolidated statements of operations. The Company recorded less than $ 0.1 million in related gains and losses during each of the years ended December 31, 2019, 2020 and 2021. Fair Value of Financial Instruments 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 December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 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. The Company adopted this standard on January 1, 2021 on a prospective basis, which did not have a material impact on the Company’s financial statements. 105 Table of Contents Notes to Consolidated Financial Statements (continued) Recent Accounting Pronouncements Not Yet Adopted In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt —Modifications and Extinguishments (Subtopic 470-50), Compensation--Stock Compensation (Topic 718), and Derivatives and Hedging--Contracts in Entity's Own Equity (Subtopic 815-40) , which is intended to provide clarity surrounding the treatment for a modification or an exchange of a freestanding equity-classified written call option. The amendments also provide guidance for the recognition and measurement of earnings-per-share (“EPS”) for certain modifications or exchanges of freestanding equity-classified written call options for entities that present EPS. The amendments do not affect a holder’s accounting for freestanding call options. ASU 2021-04 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company did not and does not expect to have any modification or exchanges of freestanding written call options classified in equity during the reporting period and therefore does not expect adoption will have a material impact 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 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 will adopt the new guidance on January 1, 2022 using the modified retrospective approach resulting in adjustments in accumulated deficit and paid in capital. The Company will also record an increase in the convertible notes balance as a result of the reversal of the separation of the convertible debt between debt and equity. The adoption of this standard will decrease the amount of non-cash interest expense to be recognized in future periods as a result of eliminating the discount associated with the equity component. The number of diluted shares will increase as a result of transitioning from the treasury stock method to the as-if converted method for the calculation. The Company is currently quantifying the effect of adopting this new accounting guidance on its financial statements and earnings per share calculations. 3. Business Combination Voxbone Acquisition On November 2, 2020, the Company acquired all 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”). Voice Topco directly or indirectly held all of the issued and outstanding shares of Voxbone S.A., which (with its subsidiaries) was the operating subsidiary of Voice Topco (“Voxbone”). The transaction was valued at € 446 million. As consideration for the Share Purchase, the Company (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 the Company’s 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). During the year ended December 31, 2021 the Company made measurement period adjustments to reflect facts and circumstances in existence as of October 31, 2020, the effective date of the Share Purchase (the “Effective Date”). The adjustments primarily related to certain state and local tax liabilities as well as an adjustment related to the finalization of the net working capital adjustment which were not reasonably estimable at the Effective Date and 106 Table of Contents Notes to Consolidated Financial Statements (continued) consisted of a $ 1.0 million increase to goodwill and $ 1.0 million increase to accrued expenses and other current liabilities. The Company, in accordance with the Share Purchase Agreement (“SPA”), paid the selling stockholders $ 7.6 million, which included $ 7.4 million of the amount held in escrow as a holdback amount and $ 0.2 million in interest earned from the escrow. 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, 2020 and 2021 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, 2020 and December 31, 2021: Fair value measurements on a recurring basis December 31, 2020 Level 1 Level 2 Level 3 Total (In thousands) 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 Fair value measurements on a recurring basis December 31, 2021 Level 1 Level 2 Level 3 Total (In thousands) Financial assets: Cash and cash equivalents: Money market account $ 241,157 $ — $ — $ 241,157 Total financial assets $ 241,157 $ — $ — $ 241,157 As of the years ended December 31, 2020 and 2021, the fair value of the 2026 Convertible Notes, as further described in Note 9, “Debt”, was approximately $ 716.3 million and $ 427.1 million, respectively. As of December 31, 2021, the fair value of the 2028 Convertible Notes, as further described in Note 9, “Debt”, was approximately $ 194.2 million. 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 the years ended December 31, 2020 and 2021, the fair value of the Pension Plan’s assets, as further described in Note 14, “Employee Benefit Plans”, was approximately $ 2.9 million and $ 3.0 million, respectively. The fair value was determined by an independent actuary and is considered as Level 2 in the fair value hierarchy. 107 Table of Contents Notes to Consolidated Financial Statements (continued) The Company monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. There were no transfers between Levels 1, 2 or 3 during the years ended December 31, 2020 and 2021. The money market account is included in cash and cash equivalents in the consolidated balance sheets as of December 31, 2020 and December 31, 2021. During the year ended December 31, 2019, there was $ 69.0 million in maturities of marketable securities. There were no maturities in marketable securities during the years ended December 31, 2020 and 2021, respectively. There were no sales of marketable securities for the years ended December 31, 2020 and 2021. Proceeds and gross realized gains from sales of marketable securities were $ 17.5 million and less than $0.1 million, 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 (expense), net, in the consolidated statements of operations. Interest earned on marketable securities was less than $ 0.1 million for the years ended December 31, 2019, 2020 and 2021, 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, 2020 2021 (In thousands) Trade accounts receivable $ 26,504 $ 31,036 Unbilled accounts receivable 27,692 31,786 Allowance for doubtful accounts and reserve for expected credit losses ( 1,203 ) ( 1,661 ) Other accounts receivable 2,250 411 Total accounts receivable, net $ 55,243 $ 61,572 Components of allowance for doubtful accounts and reserve for expected credit losses are as follows: Year ended December 31, 2020 2021 (In thousands) Allowance for doubtful accounts: Balance, beginning of period $ ( 769 ) $ ( 1,203 ) Charged to bad debt expense ( 1,322 ) ( 913 ) Deductions (1) 888 416 Impact of foreign currency translation — 39 Balance, end of period $ ( 1,203 ) $ ( 1,661 ) ________________________ 108 Table of Contents Notes to Consolidated Financial Statements (continued) (1) Write off of uncollectible accounts after all collection efforts have been exhausted. Accrued expenses and other current liabilities consisted of the following: As of December 31, 2020 2021 (In thousands) Accrued expense $ 31,549 $ 31,264 Accrued compensation and benefits 19,534 19,042 Accrued sales, use, VAT and telecommunications related taxes 9,142 11,046 Current portion of finance lease 183 177 Other accrued expenses 2,657 4,392 Total accrued expenses and other current liabilities $ 63,065 $ 65,921 6. Right-of-Use Asset and Lease Liabilities Right-of-use (“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 general and administrative expense on the Company’s consolidated statements 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 general and administrative expense on the Company’s consolidated statements of operations. The Company presents the operating leases in long-term assets and current and long-term liabilities in the accompanying consolidated balance sheets. Finance leases are reported in property, plant and equipment, net, accrued expenses and other current liabilities, and other liabilities on the Company’s consolidated balance sheets. The Company sub-leases approximately 17,073 square feet of office space to a related party, Relay, Inc. (f/k/a Republic Wireless, Inc.) (“Relay”). Future minimum sub-lease receipts required under the non-cancellable lease are as follows: As of December 31, 2021 (In thousands) 2022 $ 249 As of December 31, 2021, the Company had various leased properties in the United States and internationally, with remaining lease terms of six months to 5 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 liabilities. The Company has one lease with an early-termination option, which it does not expect to exercise. The Company has a lease not yet commenced, with a lease term of 20 years and two options to extend the lease by a term of ten years each, up to twenty additional years in total. The components of lease expense recorded in general and administrative expenses in the consolidated statement of operations were as follows: 109 Table of Contents Notes to Consolidated Financial Statements (continued) Year ended December 31, 2019 2020 2021 (In thousands) Operating lease cost $ 5,548 $ 5,949 $ 6,818 Finance lease cost: Depreciation of assets — 20 218 Interest on lease liabilities — 2 18 Sublease income (1) ( 643 ) ( 384 ) ( 384 ) Total net lease cost $ 4,905 $ 5,587 $ 6,670 ________________________ (1) See Note 16, “Related Parties” to these consolidated financial statements, for additional details on sublease income. During the years ended December 31, 2019, 2020 and 2021, short-term operating lease expense was $ 0.0 million, $ 0.2 million and $ 1.3 million, respectively. Supplemental balance sheet information related to leases was as follows: As of December 31, Leases Classification 2020 2021 (In thousands) Assets: Operating lease assets Operating right-of-use asset, net (1) $ 19,491 $ 14,061 Finance lease assets Property, plant and equipment, net (2) 464 373 Total leased assets $ 19,955 $ 14,434 Liabilities: Current Operating Operating lease liability, current $ 5,515 $ 5,807 Finance Accrued expenses and other current liabilities 183 177 Non-current Operating Operating lease liability, net of current portion 17,202 10,958 Finance Other liabilities 282 202 Total lease liabilities $ 23,182 $ 17,144 ________________________ (1) Operating lease assets are recorded net of accumulated amortization of $ 9.1 million and $ 14.8 million as of December 31, 2020 and December 31, 2021, respectively. (2) Finance lease assets are recorded net of accumulated depreciation of $ 0.0 million and $ 0.2 million as of December 31, 2020 and December 31, 2021, respectively. 110 Table of Contents Notes to Consolidated Financial Statements (continued) Supplemental cash flow and other information related to leases was as follows: Year ended December 31, 2019 2020 2021 (In thousands) Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 3,357 $ 5,301 $ 6,227 Financing cash flows from finance leases — 28 212 $ 3,357 $ 5,329 $ 6,439 Weighted average remaining lease term (in years) Operating leases 4.35 3.79 2.95 Finance leases — 2.99 2.44 Weighted average discount rate Operating leases 4.98 % 4.81 % 4.78 % Finance leases — % 4.00 % 3.91 % Maturities of lease liabilities were as follows: As of December 31, 2021 Operating Leases Finance Leases (In thousands) 2022 $ 6,422 $ 191 2023 6,601 121 2024 2,649 75 2025 1,623 10 2026 692 — Total lease payments 17,987 397 Less: imputed interest ( 1,222 ) ( 18 ) Total lease obligations 16,765 379 Less: current obligations ( 5,807 ) ( 177 ) Long-term lease obligations $ 10,958 $ 202 On June 4, 2021, the Company purchased approximately 40 acres of undeveloped land (the “Property”) in Raleigh, North Carolina, from the State of North Carolina (the “State”). The Company paid $ 30.0 million for the land. Additionally, as consideration for the Property, the Company agreed to construct, at its expense, a parking lot and related improvements (the “Parking Improvements”) on land owned by the State adjacent to the Property. The estimated cost of construction of the Parking Improvements was $ 7.8 million. Subsequent to the purchase of the Property, the Company sold a portion of the Property constituting approximately 23.76 acres (the “Conveyed Parcel”) to USEF Edwards Mill Owner, LLC (the “Developer”) for $ 17.5 million. In addition, the Developer agreed to construct, at its expense, the Parking Improvements in connection with the Company’s purchase of the Property from the State. The Company retained approximately 17.06 acres of the Property, which was recorded at cost and is included in the Company’s consolidated balance sheet as a component property, plant and equipment, net. The 111 Table of Contents Notes to Consolidated Financial Statements (continued) Company recorded an asset for the Developer’s obligation to construct the Parking Improvements at the Developer's expense, which is included as a component of prepaid expenses and other current assets in the consolidated balance sheet as of December 31, 2021. A lease incentive of $ 4.7 million was recognized for the difference between the consideration received from the Developer for the Conveyed Parcel and the cost basis of the Conveyed Parcel and is included as a component of other liabilities on the consolidated balance sheet. On October 1, 2021, the developer delivered the completed parking improvements and the State released the Company from its liability. On May 27, 2021, the Company entered into a Lease Agreement (the “Lease”) with the Developer for the Conveyed Parcel, together with improvements for office and related infrastructure to be constructed thereon, collectively constituting approximately 534,000 gross square feet (the “Project”). The lease became effective upon closing of the sale of the Conveyed Parcel to the Developer. When construction of the Project is completed, the Company intends to relocate its corporate headquarters to the Project. The lease term will commence upon substantial completion of the final building to be delivered, as evidenced by a certificate of occupancy issued by the City of Raleigh (the “Commencement Date”), and continue for a period of twenty ( 20 ) years (the “Initial Term”). It is anticipated that the Commencement Date will occur in May 2023. The Company has the option to renew the Initial Term for two ten-year periods at a rental rate equal to 100 % of the then-prevailing market rental rate for comparable buildings in the Raleigh, North Carolina, market. Upon the effective date, the Company deposited $ 2.5 million with the Developer as security on the lease. The deposit is included in other long-term assets on the Company’s consolidated balance sheet. Additionally, the Company placed $ 3.0 million in escrow to fund the certain tenant improvements expected to be constructed as part of the development of the Project. No right-of-use assets or lease liabilities have been recognized in connection with the lease as of December 31, 2021. Future lease payments are included in Note 13, “Commitments and Contingencies”. Asset Retirement Obligation The Company has an obligation to return one of its leased properties to its original leased condition. These costs 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, 2021, asset retirement obligation was $ 0.2 million included in other liabilities. 112 Table of Contents Notes to Consolidated Financial Statements (continued) 7. Property, Plant and Equipment Property, plant and equipment, net consisted of the following: As of December 31, 2020 2021 (In thousands) Furniture and fixtures $ 2,341 $ 2,240 Computer and office equipment 4,077 5,419 Telecommunications equipment 60,651 76,963 Leasehold improvements 6,285 6,970 Software 3,901 6,942 Internal-use software development 19,968 22,917 Automobile 502 616 Land — 17,269 Total cost 97,725 139,336 Less—accumulated depreciation ( 46,080 ) ( 69,732 ) Total property, plant and equipment, net $ 51,645 $ 69,604 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 $ 6.0 million and $ 7.5 million as of December 31, 2020 and 2021, respectively. The Company capitalized $ 3.6 million, $ 2.3 million, and $ 3.9 million of software development costs for the years ended December 31, 2019, 2020 and 2021, respectively. Amortization expense related to capitalized software development costs $ 2.0 million, $ 2.0 million, and $ 1.8 million for the years ended December 31, 2019, 2020 and 2021, respectively. As of December 31, 2021, unamortized implementation costs related to cloud computing arrangements are $ 0.4 million, of which $ 0.1 million are included in prepaid expenses and other current assets and $ 0.3 million are included in other long-term assets. The Company leases automobiles under leases accounted for as finance leases with expiration dates ranging from February 28, 2022 to June 30, 2025. As of December 31, 2020, cost and accumulated depreciation of the assets under finance leases recorded by the Company were $ 0.5 million and less than $0.1 million, respectively. As of December 31, 2021, cost and accumulated depreciation of the assets under finance leases recorded by the Company were $ 0.6 million and $ 0.2 million, respectively. The Company recognized an impairment of $ 0.3 million, $ 0.2 million, and $ 0.5 million during the years ended December 31, 2019, 2020 and 2021, 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. 113 Table of Contents Notes to Consolidated Financial Statements (continued) The Company recognized depreciation expense, which includes amortization of capitalized software development costs, as follows: Year ended December 31, 2019 2020 2021 (In thousands) Cost of revenue $ 6,583 $ 9,536 $ 12,051 Research and development 268 670 1,189 Sales and marketing 112 120 124 General and administrative 2,055 2,811 4,159 Total depreciation expense $ 9,018 $ 13,137 $ 17,523 114 Table of Contents Notes to Consolidated Financial Statements (continued) 8. Goodwill and Intangible Assets Goodwill The changes in carrying amount of goodwill were as follows: Total (In thousands) 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 Measurement period adjustment 999 Impact of foreign currency translation ( 28,815 ) Balance as of December 31, 2021 $ 344,423 Intangible Assets Intangible assets, net consisted of the following as of December 31, 2020: Gross Amount Accumulated Amortization Net Carrying Value Amortization Period (In thousands) (In years) Customer relationships $ 166,955 $ ( 6,850 ) $ 160,105 15 - 20 Developed technology 89,439 ( 2,253 ) 87,186 10 Other, definite lived 3,158 ( 3,158 ) — 2 - 7 Licenses, indefinite lived 764 — 764 Indefinite Total intangible assets, net $ 260,316 $ ( 12,261 ) $ 248,055 Intangible assets, net consisted of the following as of December 31, 2021: Gross Amount Accumulated Amortization Net Carrying Value Amortization Period (In thousands) (In years) Customer relationships $ 155,081 $ ( 16,861 ) $ 138,220 15 - 20 Developed technology 82,548 ( 10,315 ) 72,233 10 Other, definite lived 3,158 ( 3,158 ) — 2 - 7 Licenses, indefinite lived 764 — 764 Indefinite Total intangible assets, net $ 241,551 $ ( 30,334 ) $ 211,217 115 Table of Contents Notes to Consolidated Financial Statements (continued) The Company recognized amortization expense as follows: Year ended December 31, 2019 2020 2021 (In thousands) Cost of revenue $ — $ 1,445 $ 8,543 General and administrative 520 2,221 10,576 Total amortization expense $ 520 $ 3,666 $ 19,119 The remaining weighted average amortization period for definite lived intangible assets is 12 years. Future estimated amortization expense for definite lived intangible assets is as follows: As of December 31, 2021 (In thousands) 2022 $ 18,344 2023 18,344 2024 18,344 2025 18,344 2026 18,344 Thereafter 118,733 $ 210,453 9. Debt Revolving Loan On May 25, 2021, the Company terminated the Credit and Security Agreement, dated as of November 4, 2016 as amended and restated as of March 1, 2019, among the Company, Key Bank National Association, and KeyBanc Capital Markets Inc. (the “Credit Agreement”). The agreement provided for a secured $ 25 million revolving credit facility (the “Credit Facility”). As of December 31, 2020 and at the date of termination, no outstanding indebtedness existed under the Credit Facility and the Company was in compliance with all financial and non-financial covenants. As of December 31, 2020, unamortized debt issuance costs were $ 0.1 million, of which were included in prepaid expenses and other current assets, and other long-term assets. As of December 31, 2021, there were no outstanding debt issuance costs. Convertible Senior Notes and Capped Call Transactions 2026 Convertible Notes On February 28, 2020, the Company issued $ 400 million 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 116 Table of Contents Notes to Consolidated Financial Statements (continued) Securities Act (the “2026 Convertible Notes”). The interest on the 2026 Convertible Notes is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2020. The 2026 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 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 the Company, or converted pursuant to their terms. The total net proceeds from the 2026 Convertible Notes, after deducting initial purchaser discounts, costs related to the 2026 Capped Calls (as defined herein), and debt issuance costs, paid by the Company, were approximately $ 344.7 million. Each $0.001 principal amount of the 2026 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 2026 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 2026 Convertible Notes in connection with such make-whole fundamental change or during the relevant redemption period. The 2026 Convertible Notes will be redeemable in whole or in part at the Company's option on or after March 6, 2023, but before the fortieth ( 40 th ) scheduled trading day before the maturity date, at a cash redemption price equal to 100 % of the principal amount of the 2026 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 2026 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 $0.001 principal amount of 2026 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 2026 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 2026 Convertible Notes may, at their option, convert all or a portion of their 2026 Convertible Notes regardless of the foregoing conditions. Prior to and during the nine months ended September 20, 2021, the conditional conversion feature of the 2026 Convertible Notes was triggered as the last reported sale price of the Company's Class A common stock was 117 Table of Contents Notes to Consolidated Financial Statements (continued) 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 2026 Convertible Notes were convertible, in whole or in part, at the option of the holders between July 1, 2020 through September 30, 2021. The conditional conversion feature of the 2026 Convertible Note was not triggered from October 1, 2021 through December 31, 2021 as the last reported sale price of the Company's Class A common stock was not 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 (the last trading day of the calendar quarter). Whether the 2026 Convertible Notes will be convertible following such period will depend on the satisfaction of this condition or another conversion condition in the future. The Company continues to classify the 2026 Convertible Notes as a long-term liability in its consolidated balance sheet as of December 31, 2021, 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 2026 Convertible Notes with cash. No sinking fund is provided for the 2026 Convertible Notes. Upon the occurrence of a fundamental change (as defined in the 2026 Indenture) prior to the maturity date, holders may require the Company to repurchase all or a portion of the 2026 Convertible Notes for cash at a price equal to the principal amount of the 2026 Convertible Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In accounting for the issuance of the 2026 Convertible Notes, the Company separated the 2026 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 $ 125.2 million and was determined by deducting the fair value of the liability component from the par value of the 2026 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 2026 Convertible Notes. The carrying amount of the equity component was $ 57.5 million 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 2026 Convertible Notes. In accounting for the transaction costs related to the 2026 Convertible Notes, the Company allocated the total amount incurred to the liability and equity components of the 2026 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 $ 8.2 million, were recorded as an additional debt discount and are amortized to interest expense using the effective interest method over the contractual terms of the 2026 Convertible Notes. Issuance costs attributable to the equity component of $ 3.7 million were netted with the equity component in stockholders’ equity. 2028 Convertible Notes On March 16, 2021, the Company issued $ 250 million aggregate principal amount of 0.50 % Convertible Notes due April 1, 2028 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act (the “2028 Convertible Notes and, together with the 2026 Convertible Notes, the “Convertible Notes”). 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. 118 Table of Contents Notes to Consolidated Financial Statements (continued) The 2028 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 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 the Company, 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 (as defined herein), and debt issuance costs, paid by the Company, were approximately $ 217 million. Each $0.001 principal amount of the 2028 Convertible Notes is initially convertible into 5.5781 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 $ 179.27 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 2028 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 2028 Convertible Notes in connection with such make-whole fundamental change or during the relevant redemption period. The 2028 Convertible Notes will be redeemable in whole or in part at the Company's option on or after April 6, 2025, but before the fortieth (40 th ) scheduled trading day before the maturity date, at a cash redemption price equal to 100 % of the principal amount of the 2028 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. On or after April 6, 2025 until the close of business on the scheduled trading day immediately preceding the maturity date, the 2028 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, 2021 (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 $0.001 principal amount of 2028 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 2028 Convertible Notes for redemption. On or after October 1, 2027, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 2028 Convertible Notes may, at their option, convert all or a portion of their Convertible Notes regardless of the foregoing conditions. 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 2028 Convertible Notes with cash. 119 Table of Contents Notes to Consolidated Financial Statements (continued) No sinking fund is provided for the 2028 Convertible Notes. Upon the occurrence of a fundamental change (as defined in the 2028 Indenture) prior to the maturity date, holders may require the Company to repurchase all or a portion of the 2028 Convertible Notes for cash at a price equal to the principal amount of the 2028 Convertible Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In accounting for the issuance of the 2028 Convertible Notes, the Company separated the 2028 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 $ 66.9 million and was determined by deducting the fair value of the liability component from the par value of the 2028 Convertible Notes. The difference represents the debt discount that is amortized to interest expense at an effective interest rate of 5.125 % over the term of the 2028 Convertible Notes. The carrying amount of the equity component was $ 39.4 million 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 4.959 % over the contractual terms of the 2028 Convertible Notes. In accounting for the transaction costs related to the 2028 Convertible Notes, the Company allocated the total amount incurred to the liability and equity components of the 2028 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 $ 5.5 million, were recorded as an additional debt discount and are amortized to interest expense using the effective interest method over the contractual terms of the 2028 Convertible Notes. Issuance costs attributable to the equity component of $ 2.0 million were netted with the equity component in stockholders’ equity. The net carrying amount of the liability components of the 2026 and 2028 Convertible Notes were as follows: As of December 31, 2020 2021 2026 Convertible Notes: (In thousands) Principal $ 400,000 $ 400,000 Unamortized discount ( 110,546 ) ( 92,034 ) Unamortized debt issuance costs ( 7,258 ) ( 6,043 ) 2026 Convertible Notes net carrying amount $ 282,196 $ 301,923 2028 Convertible Notes: Principal $ — $ 250,000 Unamortized discount — ( 60,488 ) Unamortized debt issuance costs — ( 4,995 ) 2028 Convertible Notes net carrying amount $ — $ 184,517 Total net carrying amount $ 282,196 $ 486,440 120 Table of Contents Notes to Consolidated Financial Statements (continued) The net carrying amount of the equity components of the 2026 and 2028 Convertible Notes were as follows: As of December 31, 2020 2021 2026 Convertible Notes: (In thousands) Proceeds allocated to the conversion options (debt discount) $ 125,152 $ 125,152 Issuance costs ( 3,742 ) ( 3,742 ) 2026 Convertible Notes net carrying amount $ 121,410 $ 121,410 2028 Convertible Notes: Proceeds allocated to the conversion options (debt discount) $ — $ 66,908 Issuance costs — ( 2,019 ) 2028 Convertible Notes net carrying amount $ — $ 64,889 Total net carrying amount $ 121,410 $ 186,299 The following table sets forth the interest expense recognized related to the 2026 and 2028 Convertible Notes: Year ended December 31, 2020 2021 2026 Convertible Notes: (In thousands) Contractual interest expense $ 841 $ 1,000 Amortization of debt discount 14,606 18,505 Amortization of debt issuance costs 959 1,214 Total interest expense related to the 2026 Convertible Notes $ 16,406 $ 20,719 2028 Convertible Notes: Contractual interest expense $ — $ 991 Amortization of debt discount — 6,419 Amortization of debt issuance costs — 532 Total interest expense related to the 2028 Convertible Notes $ — $ 7,942 Total interest expense $ 16,406 $ 28,661 In connection with the offering of the 2026 Convertible Notes and the 2028 Convertible Notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the “2026 Capped Calls” and the “2028 Capped Calls,” respectively and, collectively, the “Capped Calls”). The 2026 Capped Calls and the 2028 Capped Calls each have an initial strike price of approximately $ 91.03 and $ 179.27 per share, respectively, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Convertible Notes and the 2028 Convertible Notes. The 2026 Capped Calls and the 2028 Capped Calls have initial cap prices of $ 137.40 and $ 260.76 per share subject to certain adjustments, respectively. The 2026 Capped Calls and the 2028 Capped Calls cover, subject to anti-dilution adjustments, approximately 4,394,276 and 1,394,525 shares of Class A common stock for the 2026 Convertible Notes and 2028 Convertible Notes, respectively. The Capped Calls are generally intended to reduce or offset the potential dilution to the Class A common stock upon any conversion of the 2026 Convertible Notes and 2028 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 121 Table of Contents Notes to Consolidated Financial Statements (continued) any convertible securities remain outstanding and (ii) March 1, 2026 for the 2026 Capped Calls and April 1, 2028 for the 2028 Capped Calls, 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 $ 43.3 million and $ 25.5 million incurred to purchase the 2026 Capped Calls and the 2028 Capped Calls, respectively, was recorded as a reduction to additional paid-in capital in the accompanying consolidated balance sheets. The Convertible Notes are effectively subordinated to the Company’s future senior secured indebtedness, if any, to the extent of the value of the collateral securing that indebtedness. The Convertible notes are the senior, unsecured obligations of the Company and are equal in right of payment with the Company’s future senior unsecured indebtedness, if any, senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Convertible Notes and 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. 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. Year ended December 31, 2019 2020 2021 (In thousands) CPaaS Revenue $ 197,944 $ 298,090 $ 413,948 Cost of revenue 110,343 160,706 217,403 Gross profit $ 87,601 $ 137,384 $ 196,545 Other Revenue $ 34,650 $ 45,023 $ 76,959 Cost of revenue 14,616 24,546 54,981 Gross profit $ 20,034 $ 20,477 $ 21,978 Consolidated Revenue $ 232,594 $ 343,113 $ 490,907 Cost of revenue 124,959 185,252 272,384 Gross profit $ 107,635 $ 157,861 $ 218,523 The Company’s long-lived assets were primarily held in the United States as of December 31, 2020 and December 31, 2021. As of December 31, 2020 and December 31, 2021, long-lived assets held outside of the United States were $ 11.2 million and $ 9.2 million, respectively. 122 Table of Contents Notes to Consolidated Financial Statements (continued) 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, 2019 2020 2021 (In thousands) CPaaS United States $ 192,506 $ 281,757 $ 364,412 International 5,438 16,333 49,536 Total $ 197,944 $ 298,090 $ 413,948 Other United States $ 33,664 $ 42,692 $ 69,051 International 986 2,331 7,908 Total $ 34,650 $ 45,023 $ 76,959 11. Stockholders’ Equity Preferred Stock As of December 31, 2020 and December 31, 2021, 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, 2020 and December 31, 2021, 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, 2020, 22,413,004 and 2,496,125 shares of Class A common stock and Class B common stock, respectively, were issued and outstanding. As of December 31, 2021, 23,177,988 and 1,965,170 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, 2019, 2020 and 2021, no dividends were declared. Dividend payments are not subject to restriction. 123 Table of Contents Notes to Consolidated Financial Statements (continued) 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, 2020 2021 Stock options issued and outstanding 255,000 180,209 Nonvested restricted stock units issued and outstanding 450,614 344,486 Stock-based awards available for grant under the 2017 Plan 2,020,342 3,060,674 2,725,956 3,585,369 12. Stock Based Compensation 2010 Stock Option Plan As of July 26, 2010, the Company adopted the 2010 Equity Compensation Plan (the “2010 Plan”). 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 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, 2021, the shares available for grant under the 2017 Plan were automatically increased by 1,120,650 shares. 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 generally 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 members of the 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 . 124 Table of Contents Notes to Consolidated Financial Statements (continued) Stock Options The following summarizes the stock option activity for the period 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, 2020 255,000 $ 10.82 4.42 $ 36,426 Granted — — Exercised ( 73,985 ) 12.47 Forfeited or cancelled ( 806 ) 10.49 Outstanding as of December 31, 2021 180,209 $ 10.14 3.39 $ 11,104 Options vested and exercisable at December 31, 2021 180,209 $ 10.14 3.39 $ 11,104 Options vested and expected to vest as of December 31, 2021 180,209 $ 10.14 3.39 $ 11,104 Year ended December 31, 2019 2020 2021 (In thousands) Aggregate intrinsic value of stock options exercised $ 57,159 $ 54,088 $ 9,297 Total estimated grant date fair value of options vested 729 416 247 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, 2021, 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, 2021. As of December 31, 2021, the Company had no unrecognized compensation cost related to non-vested stock options. All outstanding stock options are fully vested. Restricted Stock Units The following summarizes the RSU activity for the period presented: Number of awards outstanding Weighted-average grant date fair value (Per share) Nonvested RSUs as of December 31, 2020 450,614 $ 51.58 Granted 154,360 143.31 Vested ( 186,502 ) 67.40 Forfeited or cancelled ( 73,986 ) 74.84 Nonvested RSUs as of December 31, 2021 344,486 $ 82.38 As of December 31, 2021, total unrecognized compensation cost related to non-vested RSUs was $ 21.6 million, which will be amortized over a weighted-average period of 2.71 years. 125 Table of Contents Notes to Consolidated Financial Statements (continued) Stock-Based Compensation Expense The Company recognized total stock-based compensation expense as follows: Year ended December 31, 2019 2020 2021 (In thousands) Cost of revenue $ 211 $ 208 $ 252 Research and development 1,461 2,118 2,648 Sales and marketing 1,199 1,525 1,890 General and administrative 3,755 6,030 9,747 Total $ 6,626 $ 9,881 $ 14,537 13. Commitments and Contingencies Operating Leases The Company leases office space under operating lease agreements that expire over the next 5 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 associated with the services received. The service agreement is non-cancellable and contains annual minimum commitments. On August 1, 2020, the Company amended the agreement to require annual minimum commitments of $ 0.6 million and $ 0.3 million in 2021 and 2022, respectively. In addition, as of December 31, 2021, the Company has $ 18.1 million in other non-cancellable purchase obligations, consisting of primarily network equipment maintenance and software license contracts, of which $ 13.2 million will be fulfilled within one year. On May 27, 2021, the Company entered into the Lease with the Developer for the Conveyed Parcel, together with the Project. The respective obligations of the Company and the Developer under the Lease were conditioned upon the Developer acquiring fee simple title to the Conveyed Parcel, which occurred on June 4, 2021. The Lease term will commence upon the Commencement Date and continue for the Initial Term. It is anticipated that the Commencement Date will occur in May 2023. If the Commencement Date does not occur within one hundred twenty ( 120 ) days from the scheduled Commencement Date, the Company shall be entitled to certain rent abatements, as described in the Lease. If the Commencement Date is not delivered within twelve ( 12 ) months of the scheduled Commencement Date, the Company may terminate the Lease. The Company has the option to renew the Initial Term for two ten-year periods. Base rent payments will begin on the Commencement Date. The initial base rent will increase by 1.85 % on each anniversary of the Commencement Date. Total lease payments over the Initial Term are approximately $ 495.7 million. 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. On December 7, 2021, the Company entered into a non-cancelable operating lease agreement for its London, UK, facilities. The lease term commenced on January 1, 2022 and will continue for the initial term of 24 months. Total lease payments over the initial term are approximately $ 3.6 million. The lease will automatically renew on a month by month basis after the initial lease term. 126 Table of Contents Notes to Consolidated Financial Statements (continued) Legal Matters The Company is involved as a defendant in various litigation, including, but not limited to, 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. 14. Employee Benefit Plans 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 Voxbone S.A.’s U.S. defined contribution 401(k). In connection with that acquisition, the Company also assumed sponsorship for a non-U.S. defined contribution plan for which it pays 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 $ 1.7 million, $ 2.2 million, and $ 3.8 million for the years ended December 31, 2019, 2020 and 2021, respectively. In addition, as a result of the acquisition of Voxbone S.A., the Company assumed sponsorship for Voxbone S.A.’s non-U.S. defined benefit pension plans. The liability recognized is the present value of the defined benefit obligation at the end of the reporting period less the fair value of the plan assets and is included in other liabilities in the accompanying consolidated balance sheets. 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: 127 Table of Contents Notes to Consolidated Financial Statements (continued) As of December 31, 2020 2021 (In thousands) Change in benefit obligation: Benefit obligation at beginning of year $ — $ 4,064 Service cost 75 396 Interest cost 3 21 Actuarial loss (gain) 15 ( 237 ) Taxes, insurance premiums and administrative expenses ( 9 ) ( 55 ) Acquisitions/plan mergers 3,980 — Impact of foreign currency translation — ( 315 ) Benefit obligation at end of year $ 4,064 $ 3,874 Change in plan assets: Fair value of plan assets at beginning of year $ — $ 2,882 Return on plan assets 8 14 Actuarial gain 2 6 Employer contribution 57 335 Acquisitions/plan mergers 2,824 — Taxes, insurance premiums and administrative expenses ( 9 ) ( 55 ) Impact of foreign currency translation — ( 224 ) Fair value of plan assets at end of year 2,882 2,958 Funded status, net liability $ 1,182 $ 916 The following table presents the balance sheet location of the Company’s pension liability for the Company’s non-U.S. defined benefit pension plans: As of December 31, 2020 2021 (In thousands) Other liabilities $ 1,182 $ 916 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 2021 (In thousands) Projected benefit obligation $ 4,064 $ 3,874 Accumulated benefit obligation 3,450 3,282 Fair value of plan assets 2,882 2,958 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. 128 Table of Contents Notes to Consolidated Financial Statements (continued) Pretax amounts for net periodic benefit cost and other amounts for the defined benefit pension plans consisted of the following components: Year ended December 31, 2020 2021 (In thousands) Service cost $ 75 $ 396 Interest cost 3 21 Return on plan assets ( 8 ) ( 14 ) Net periodic pension cost 70 403 Changes in plan assets and benefit obligations included in other comprehensive income (loss): Unrecognized net actuarial loss beginning of year — 17 Actuarial loss (gain) on benefit obligation 15 ( 237 ) Actuarial loss (gain) on fair value of plan assets 2 ( 6 ) Impact of foreign currency translation — ( 1 ) Total included in other comprehensive income (loss) (before tax effect) 17 ( 227 ) Total recognized in net periodic benefit cost and included in other comprehensive income (loss) $ 87 $ 176 The Company uses significant judgment 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 actuarial gains and losses recognized in the pension expense are determined using the so-called “10% corridor” method, i.e. actuarial gains and losses which exceed 10% of the higher of the plan assets and the projected benefit obligation are amortized on a straight line basis over the average remaining service period of the active plan participants. Any prior service costs are amortized on a straight line basis over the average remaining service period of the active plan participants. 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. 129 Table of Contents Notes to Consolidated Financial Statements (continued) Significant assumptions used in determining benefit obligations and net periodic benefit cost are as follows: Year ended December 31, 2020 2021 Defined benefit obligations: Discount rate 0.50 % 0.90 % Rate of salary increase 4.07 % 4.27 % Inflation 1.60 % 1.80 % Defined benefit cost: Discount rate 1.50 % 0.90 % Rate of salary increase 4.37 % 4.27 % Rate of return on plan assets 0.50 % 0.90 % Inflation 1.90 % 1.80 % 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 2021 (In thousands) Assets held by: Insurance companies (collective and individual) $ 2,882 $ 2,958 Expected Cash Flows The Company expects to contribute $ 0.3 million to its non-U.S. defined benefit pension plans during 2022. 130 Table of Contents Notes to Consolidated Financial Statements (continued) The following table summarizes projected benefit payments from the Company’s pension plans through 2031, including benefits attributable to estimated future service: As of December 31, 2021 (In thousands) 2022 $ 4 2023 4 2024 31 2025 4 2026 6 2027-2031 34 $ 83 15. Income Taxes The following table presents domestic and foreign components of loss before income taxes for the tax years ended December 31, 2019, 2020 and 2021: Year Ended December 31, 2019 2020 2021 (In thousands) United States $ ( 15,229 ) $ ( 25,745 ) $ ( 27,547 ) International 5 ( 3,227 ) ( 3,648 ) Loss before income taxes $ ( 15,224 ) $ ( 28,972 ) $ ( 31,195 ) Benefit (provision) for income taxes from operations consists of the following: Year Ended December 31, 2019 2020 2021 (In thousands) Current: Federal $ 81 $ 431 $ ( 2,713 ) State 132 ( 87 ) ( 145 ) Foreign 3 ( 1,083 ) ( 1,627 ) Total 216 ( 739 ) ( 4,485 ) Deferred: Federal 15,205 ( 9,847 ) ( 364 ) State 2,297 ( 5,176 ) — Foreign — 757 8,682 Total 17,502 ( 14,266 ) 8,318 Income tax benefit (provision) $ 17,718 $ ( 15,005 ) $ 3,833 131 Table of Contents Notes to Consolidated Financial Statements (continued) 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, 2019, 2020 and 2021: Year Ended December 31, 2019 2020 2021 Federal Tax Rate 21.0 % 21.0 % 21.0 % State Tax Rate 3.1 2.0 2.8 Non-deductible expenses ( 1.6 ) ( 9.2 ) ( 4.4 ) Research credit 7.2 10.5 6.2 Stock-based compensation 88.6 46.8 13.9 Change in valuation allowance — ( 123.4 ) 16.3 Deferred tax rate change ( 0.3 ) 0.2 ( 0.2 ) Voxbone US 338(g) gain — — ( 8.9 ) Intangibles and deferred adjustments — — ( 40.2 ) Foreign rate differential — — 1.3 Other ( 1.6 ) 0.3 4.5 Total 116.4 % ( 51.8 ) % 12.3 % 132 Table of Contents Notes to Consolidated Financial Statements (continued) The following table presents the significant components of the Company’s net deferred tax liability: As of December 31, 2020 2021 (In thousands) Deferred tax assets: Allowance for doubtful accounts $ 134 $ 262 Accrued liabilities 3,478 3,412 Operating lease liabilities 4,878 3,456 Deferred revenue 1,702 1,880 Stock-based compensation - deferred tax asset 1,968 2,278 OID 9,433 8,848 Tax credits 7,270 9,214 Net operating losses 47,385 50,285 Other deferred tax assets 2,207 4,166 Total deferred tax assets 78,455 83,801 Less: valuation allowance ( 37,771 ) ( 32,224 ) Net deferred tax assets 40,684 51,577 Deferred tax liabilities: Property and equipment 8,038 7,813 Goodwill 989 1,130 Intangibles 60,667 49,470 Operating lease assets 4,092 2,860 Debt 27,766 38,411 Other liability 137 289 Total deferred tax liabilities 101,689 99,973 Net deferred tax liability $ ( 61,005 ) $ ( 48,396 ) 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 maintained that in 2021 a valuation allowance against US deferred tax assets was required. As of December 31, 2021, the Company had approximately $ 195.5 million in US federal net operating loss carryforwards, $ 5.6 million in UK loss carryforwards, and $ 9.2 million 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, 2021, the Company had approximately $ 138.1 million in state net operating loss carryforwards. If not utilized, some state net operating loss carryforwards will expire at various dates beginning in 2023. 133 Table of Contents Notes to Consolidated Financial Statements (continued) A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Year Ended December 31, 2020 2021 (In thousands) Unrecognized tax benefits—January 1, $ 1,398 $ 2,414 Gross increases—tax positions in prior period 402 — Gross increases—tax positions in current period 614 648 Unrecognized tax benefits—December 31, $ 2,414 $ 3,062 If the $ 3.1 million of unrecognized tax benefit is recognized, it would not impact the effective tax rate due to the valuation allowance on the Company's net U.S. deferred tax assets. The Company has not incurred any material tax interest or penalties with respect to income taxes in the years ended December 31, 2020 and 2021 . The Company expects no material changes in the twelve months following December 31, 2021 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 2018 - 2020 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, Relay, Inc. (f/k/a Republic Wireless, Inc.) (“Relay”), which was incorporated in Delaware. On November 30, 2016, the Company completed a pro-rata distribution of the common stock of Relay 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 Relay 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 Relay. The Company has determined the equity owners of Relay are related parties of Bandwidth. The Company has certain involvement with Relay via ongoing services arrangements, with these ongoing services arrangements creating a variable interest in Relay. The Company assessed the relationship with Relay under guidance for variable interest entities (“VIE”). Because investors in Relay have disproportionate voting rights, the Company concluded that Relay 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 Relay. The Company recorded a reduction of rent expense under the Facilities Sharing Agreement of $ 0.6 million, $ 0.4 million, and $ 0.4 million for the years ended December 31, 2019, 2020 and 2021, 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, 2020 and December 31, 2021. 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, 2020 and December 31, 2021. 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 Relay of $ 2.6 million, $ 2.2 million, and $ 1.8 million for the years ended December 31, 2019, 2020 and 134 Table of Contents Notes to Consolidated Financial Statements (continued) 2021, respectively. The Company recognized such amounts as revenue in the accompanying consolidated statements of operations. As of December 31, 2020 and December 31, 2021, the Company had a receivable of $ 0.2 million and $ 0.1 million, respectively, under the Master Services Agreement. Subsequent to the expiration of the 180-day IPO blackout window on May 9, 2018, Relay 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, Relay of $ 1.8 million, $ 1.4 million, and $ 0.4 million for the years ended December 31, 2019, 2020 and 2021, respectively. As of December 31, 2020 and December 31, 2021, the Company had no amounts that were due to Relay. On September 30, 2019, the Company entered into a services agreement with Relay. Pursuant to the terms of the new agreement, Relay receives services performed by the Company’s legal department, effective September 30, 2019. The Company is compensated by Relay for these services based on costs incurred by the Company. The Company received net compensation of less than $ 0.1 million for the years ended December 31, 2019 and 2021. The Company received net compensation of $ 0.1 million for the year ended December 31, 2020, which is included in general and administrative expenses in the consolidated statements of operations. As of December 31, 2020 and December 31, 2021, the Company had receivables of less than $ 0.1 million under this agreement. 17. Basic and Diluted Income (Loss) per Common Share Basic net income (loss) per share is computed by dividing net income (loss) 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. 135 Table of Contents Notes to Consolidated Financial Statements (continued) The components of basic and diluted income (loss) per share are as follows: Year ended December 31, 2019 2020 2021 (In thousands, except share and per share amounts) Earnings per share Net income (loss) attributable to common stockholders $ 2,494 $ ( 43,977 ) $ ( 27,362 ) Net income (loss) per share: Basic $ 0.11 $ ( 1.83 ) $ ( 1.09 ) Diluted $ 0.10 $ ( 1.83 ) $ ( 1.09 ) Weighted average number of common shares outstanding Basic 22,640,461 24,092,574 25,090,916 Dilutive effect of stock options, restricted stock units, and warrants 1,283,316 — — Diluted 23,923,777 24,092,574 25,090,916 The following common share equivalents were excluded from the weighted average shares used to calculate net loss per common share because their effects would have been anti-dilutive: As of December 31, 2019 2020 2021 Stock options issued and outstanding — 255,000 180,209 Restricted stock units issued and outstanding — 450,614 344,486 Convertible senior notes (1) — 1,022,941 987,149 Total — 1,728,555 1,511,844 ________________________ (1) As of December 31, 2020 and December 31, 2021, the Company used the treasury stock method to calculate the dilutive impact of the 2026 and 2028 Convertible Notes because at that time the Company expected to settle the principal amount of these notes in cash and any excess in shares of the Company ’ s Class A common stock. As of December 31, 2020 and December 31, 2021, the conversion spread, calculated using the average market price of Class A common stock during the period consistent with the treasury stock method, had a dilutive impact for the 2026 Convertible Notes on diluted net income per share of Class A common stock when the average market price of the Company ’ s Class A common stock for a given period exceeded the conversion price of $ 91.03 per share. As of December 31, 2021, the conversion spread for the 2028 Convertible Notes was anti-dilutive as the average market price of the Company ’ s Class A common stock for a given period did not exceed the conversion price of $ 179.27 per share. 136 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 137 Table of Contents