Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered by this Annual Report on Form 10-K. Based on the evaluation of our disclosure controls and procedures as of December 31, 2021, our principal executive officer and principal financial officer concluded that, as of such date, due to the material weaknesses described below, our disclosure controls and procedures were not effective as of December 31, 2021.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, to provide reasonable assurance regarding the reliability of financing reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer and oversight of the board of directors, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2021, based on the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this evaluation, due to the material weaknesses described below, management concluded that our internal control over financial reporting is disclosure not effective as of December 31, 2021.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.
Material Weaknesses
We identified a material weakness in our internal control over financial reporting for the year ended December 31, 2020 which remains unremediated for the year ended December 31, 2021. The material weakness related to a lack of sufficient, qualified finance and accounting resources commensurate with the complexity of the Company's operations and financial reporting requirements. This control deficiency, aggregated with the other deficiencies, constitutes a material weakness and impacted our overall control environment.
We also identified a material weakness in our internal control over financial reporting during the quarter ended September 30, 2021 related to our accounting for internal-use software costs. The material weakness resulted from a lack of timely and complete identification of internal-use software costs for capitalization, for which we recorded out-of-period adjustments during the year ended December 31, 2021.
We also identified a material weakness in our internal control over financial reporting during the year ended December 31, 2021 related to the system implementation of our stock plan administration system. Specifically, certain of our systems controls were not designed to prevent the sale of unvested shares, which allowed certain holders of restricted stock to sell shares that had not yet vested.
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The above material weaknesses resulted in misstatements to our financial statements, or could result in misstatements to our financial statements in the future, if not remediated. Notwithstanding the material weaknesses, management has concluded that the financial statements included elsewhere in this Annual Report present fairly, in all material respects, our financial position, results of operations and cash flows in the conformity with U.S. GAAP.
The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included in Part II, Item 8—Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Remediation Efforts with Respect to the Material Weaknesses
The process of implementing an effective system of internal control over financial reporting is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations.
We continue to evaluate and implement measures designed to ensure that control deficiencies contributing to the material weaknesses are remediated, such that these controls are designed, implemented, and operating effectively. The Audit Committee is fully engaged and supportive of management’s efforts to remediate the material weaknesses. These remediation actions are ongoing and include or are expected to include:
Actions related to the remediation of all material weaknesses in internal control over financial reporting, including the material weakness related to a lack of sufficient, qualified finance and accounting resources commensurate with the complexity of the Company's operations and financial reporting requirements:
• We appointed our new CFO in the third quarter of 2021, and we have recruited and hired several senior leaders in the finance and accounting teams since then. We will continue to hire, retain and oversee qualified finance and accounting resources at all levels to support the Company, including external advisors when appropriate.
• We are enhancing quarterly reporting of the remediation measures and progress to the Audit Committee of the Board of Directors.
Actions specific to the remediation of the material weakness in internal control over financial reporting during the quarter ended September 30, 2021 related to our accounting for internal-use software costs:
• We have and will continue to enhance our process and expand our review controls to ensure complete and timely identification of internal use software costs subject to capitalization.
• We have and will continue to implement additional training of finance, accounting and other Company personnel involved in this process.
• We will continue to work with qualified external advisors to support these efforts.
Actions specific to remediate the material weakness in internal control over financial reporting financial reporting during the year ended December 31, 2021 related to the design of controls for system implementations associated with a migration of our stock plan administration system:
• Updating the design and review of controls for system implementations.
• We have and will continue to leverage internal expertise in systems implementation for the design of controls for systems implementations.
• We will continue to work with qualified external advisors to support these efforts.
As we continue to evaluate and work to improve our internal control over financial reporting, we may decide to take additional measures to address control deficiencies or modify the remediation plans described above. We believe that these actions will remediate the material weaknesses, however the weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Management believes the foregoing plans will effectively remediate the deficiencies constituting the material weaknesses. However, there is no assurance as to when such remediation will be completed. As the remediation plans are or continue to be implemented, management may take additional measures or modify the plan elements described above.
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Changes in Internal Control over Financial Reporting
Except for the identification of the material weaknesses and remediation activities described above, there were no changes during the quarter ended December 31, 2021 in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Fastly, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Fastly, Inc. and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and the related notes (collectively referred to as the “financial statements”) as of and for the year ended December 31, 2021, of the Company and our report dated March 1, 2022, expressed an unqualified opinion on those financial statements.
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.
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting :
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Sufficiency of Finance and Accounting Resources - There is a lack of sufficient qualified finance and accounting resources commensurate with the complexity of the Company's operations and financial reporting requirements.
Accounting for Internal-Use Software Costs – Certain of the Company’s controls were not designed to identify on a timely basis qualified costs for capitalization as internal-use software, which resulted in the Company recording out-of-period adjustments during the fiscal year ended December 31, 2021.
System Implementation of Stock Plan Administration System – Certain of the Company’s systems controls were not designed to prevent the sale of unvested shares, which allowed certain holders of restricted stock to sell shares that had not yet vested.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the financial statements as of and for the year ended December 31, 2021, of the Company, and this report does not affect our report on such financial statements.
/s/ Deloitte & Touche LLP
San Francisco, California
March 1, 2022
Item 9B. Other Information
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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PART III
Item 10. Directors, Executive Officers, and Corporate Governance
Information required by this Item is incorporated by reference to the sections of our proxy statement to be filed with the SEC no later than 120 days after December 31, 2021 in connection with our 2022 Annual Meeting of Stockholders (the "Proxy Statement").
We have adopted a Code of Business Conduct and Ethics that applies to our officers, directors and employees, which is available on our website at www.fastly.com. The Code of Business Conduct and Ethics is intended to qualify as a "code of ethics" within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K. In addition, we intend to promptly disclose (1) the nature of any amendment to our Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions and (2) the nature of any waiver, including an implicit waiver, from a provision of our code of ethics that is granted to one of these specified officers, the name of such person who is granted the waiver and the date of the waiver on our website in the future.
Item 11. Executive Compensation
Information required by this Item is incorporated by reference to our Proxy Statement.
Item 12. S ecurity Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this Item is incorporated by reference to our Proxy Statement.
Item 13. Certain Relationships and Related Transactions and Director Independence
Information required by this Item is incorporated by reference to our Proxy Statement.
Item 14. Principal Accountant Fees and Services
Information required by this Item is incorporated by reference to our Proxy Statement.
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PART IV
Item 15. Exhibits
(a)(1) Financial statements
The information concerning Fastly’s financial statements and the Report of Independent Registered Public Accounting Firm required by this Item 15(a)(1) is incorporated by reference herein to the section of this Annual Report on Form 10-K in Part II, Item 8, "Financial Statements and Supplementary Data."
(a)(2) Financial statement schedules
All financial statement schedules have been omitted as the information is not required under the related instructions or is not applicable or because the information required is already included in the financial statements or the notes to those financial statements.
(a)(3) Exhibits
We have filed, or incorporated into this Annual Report on Form 10-K by reference, the exhibits listed on the accompanying Exhibit Index immediately preceding the signature page of this Annual Report on Form 10-K.
Exhibit
Number Exhibit Description Form File No. Exhibit Filing Date Filed Herewith
2.1 Agreement and Plan of Reorganization, dated August 26, 2020.
8-K 001-38897 2.1 October 12, 2020
3.1 Amended and Restated Certificate of Incorporation .
8-K 001-38897
3.1 May 21, 2019
3.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation.
8-K 001-38897 3.1 June 10, 2020
3.3 Certificate of Retirement .
8-K 001-38897 3.1 July 13, 2021
3.4 Amended and Restated Bylaws .
10-Q 001-38897 3.3 August 7, 2020
4.1 Form of Class A common stock certificate of Fastly, Inc.
S-1/A 333-230953 4.1 May 6, 2019
4.2 Reference is made to Exhibits 3.1 through 3.3.
4.3 Indenture, dated as of March 5, 2021, by and between Fastly, Inc. and U.S. Bank National Association, as Trustee.
8-K 001-38897 4.1 March 5, 2021
4.4 Form of Note, representing Fastly, Inc.’s 0% Convertible Senior Notes due 2026 (included as Exhibit A to the Indenture filed as Exhibit 4.3).
8-K 001-38897 4.2 March 5, 2021
4.5 Description of Securities.
X
10.1+ 2011 Equity Incentive Plan, as amended to date.
S-1 333-230953 10.2 April 19, 2019
10.2+ Forms of Option Agreement, Notice of Stock Option Grant, and Exercise Notice under 2011 Equity Incentive Plan.
S-1 333-230953 10.3 April 19, 2019
10.3+ 2019 Equity Incentive Plan.
S-1/A 333-230953 10.4 May 6, 2019
10.4+ Forms of Option Agreement, Notice of Stock Option Grant, and Exercise Notice under 2019 Equity Incentive Plan.
S-1/A 333-230953 10.5 May 6, 2019
10.5+ Form of Restricted Stock Unit Award Agreement under 2019 Equity Incentive Plan .
10-Q 001-38897 10.3 August 9, 2019
10.6+ 2019 Employee Stock Purchase Plan.
S-1/A 333-230953 10.7 May 6, 2019
10.7 Form of Indemnification Agreement by and between Fastly, Inc. and each of its directors and executive officers .
S-1/A 333-230953 10.8 May 6, 2019
10.8+ Cash Incentive Bonus Plan.
S-1/A 333-230953 10.9 May 6, 2019
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Exhibit
Number Exhibit Description Form File No. Exhibit Filing Date Filed Herewith
10.9+ Employment Terms by and between Fastly, Inc. and Artur Bergman, dated May 3, 2019.
S-1/A 333-230953 10.10 May 6, 2019
10.10+ Transition and Separation Agreement by and between Fastly, Inc. and Adriel Lares, dated May 4, 2021.
8-K 001-38897 10.1 May 5, 2021
10.11+ Offer Letter Agreement, by and between Fastly, Inc. and Paul Luongo, dated November 27, 2013.
S-1 333-230953 10.13 April 19, 2019
10.12 Office Lease Agreement, by and between Fastly, Inc. and CLPF-475 Brannan Street, L.P., dated August 22, 2014.
S-1 333-230953 10.17 April 19, 2019
10.13 First Amendment to Lease Agreement, by and between Fastly, Inc. and CLPF-475 Brannan Street, L.P., dated May 27, 2015.
S-1 333-230953 10.18 April 19, 2019
10.14 Second Amendment to Lease Agreement, by and between Fastly, Inc. and CLPF-475 Brannan Street, L.P., dated March 11, 2019.
S-1 333-230953 10.32 April 19, 2019
10.15+ Executive Change in Control and Severance Benefit Plan.
S-1/A 333-230953 10.31 May 6, 2019
10.16+ Non-Employee Director Compensation Policy, as amended.
8-K 001-38897
99.1 November 3, 2021
10.17 Stock Ownership Guidelines.
S-1/A 333-230953 10.33 May 6, 2019
10.18+ Employment Agreement, by and between Fastly International (Holdings) Ltd. and Joshua Bixby dated February 19, 2020.
8-K 001-38897 10.1 February 20, 2020
10.19+ Equity Offer Letter, by and between Fastly, Inc. and Joshua Bixby dated February 19, 2020 .
8-K 001-38897 10.2 February 20, 2020
10.20+ Modification to Offer Letter Agreement, by and between Fastly, Inc. and Artur Bergman dated February 19, 2020.
8-K 001-38897 10.3 February 20, 2020
10.21+ Signal Sciences Corp. 2014 Stock Option and Grant Plan.
S-8 333-249504
99.1 October 10, 2020
10.22 Senior Secured Credit Facilities Credit Agreement, among Fastly, Inc., the several lenders from time to time party thereto, and Silicon Valley Bank, dated as of February 16, 2021.
10-K 001-38897 10.23 March 1, 2021
10.23+ Offer Letter Agreement, by and between Fastly, Inc. and Brett Shirk, dated February 9, 2021 .
X
10.24+ Offer Letter by and between Fastly, Inc. and Ronald W. Kisling, dated June 22, 2021.
8-K 001-38897 10.1 June 29, 2021
21.1 Subsidiaries of the Registrant.
10-K 001-38897 21.1 March 1, 2021
23.1 Consent of Independent Registered Public Accounting Firm.
X
24.1 Power of Attorney (contained on the signature page of this report). X
31.1 Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X
31.2 Certification of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X
32.1* Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
150
Exhibit
Number Exhibit Description Form File No. Exhibit Filing Date Filed Herewith
32.2* Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101. INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. X
101.SCH Inline XBRL Taxonomy Schema Linkbase Document. X
101.CAL Inline XBRL Taxonomy Calculation Linkbase Document. X
101.DEF Inline XBRL Taxonomy Definition Linkbase Document. X
101.LAB Inline XBRL Taxonomy Labels Linkbase Document. X
101.PRE Inline XBRL Taxonomy Presentation Linkbase Document. X
104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
__________
+ Indicates management contract or compensatory plan.
* The certifications furnished in Exhibit 32.1 and 32.2 hereto are deemed to be furnished with this Annual Report on Form 10-K and will not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, Fastly, Inc. has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
FASTLY, INC.
Date: March 1, 2022 By: /s/ Joshua Bixby
Joshua Bixby
Chief Executive Officer (Principal Executive Officer)
Date: March 1, 2022 By: /s/ Ronald W. Kisling
Ronald W. Kisling
Chief Financial Officer (Principal Financial and Accounting Officer)
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Joshua Bixby and Ronald W. Kisling, and each of them, as his or her true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for such individual in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or the individual’s substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Signature Title Date
/s/ Joshua Bixby Chief Executive Officer and Director March 1, 2022
Joshua Bixby (Principal Executive Officer)
/s/ Ronald W. Kisling Chief Financial Officer March 1, 2022
Ronald W. Kisling (Principal Financial Officer and Principal Accounting Officer)
/s/ Artur Bergman Chief Architect, Executive Chairperson and Chairperson of the March 1, 2022
Artur Bergman Board of Directors
/s/ Aida Álvarez Director March 1, 2022
Aida Álvarez
/s/ Richard Daniels Director March 1, 2022
Richard Daniels
/s/ David Hornik Director March 1, 2022
David Hornik
/s/ Paula Loop Director March 1, 2022
Paula Loop
/s/ Charles Meyers Director March 1, 2022
Charles Meyers
/s/ Christopher B. Paisley Director March 1, 2022
Christopher B. Paisley
/s/ Vanessa Smith Director March 1, 2022
Vanessa Smith
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