TWILIO INC 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Reports of Independent Registered Public Accounting Firm 80 Consolidated Balance Sheets 83 Consolidated Statements of Operations 84 Consolidated Statements of Comprehensive Loss 85 Consolidated Statements of Stockholders' Equity 86 Consolidated Statements of Cash Flows 88 Notes to Consolidated Financial Statements 89 79 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Twilio Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Twilio Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company acquired Segment.io (Segment) during fiscal 2020, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, Segment’s internal control over financial reporting associated with $253.6 million, or 3%, of total assets and $23.0 million, or 1%, of total revenues included in the consolidated financial statements of the Company as of and for the year ended December 31, 2020. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Segment. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Financial Accounting Standards Codification (ASC) Topic 842, Leases. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, 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 Report on Internal Control Over Financial Reporting, appearing under Item 9A(b). Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 80 Table of Contents 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. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Evaluation of the sufficiency of audit evidence over revenue recognition As discussed in Note 2(e) to the consolidated financial statements, the Company’s revenue is derived from usage and non-usage based fees earned from customers accessing the Company’s enterprise cloud computing services. As of December 31, 2020, the Company recorded $1.8 billion in revenues, a portion of which related to Programmable Messaging and Programmable Voice APIs. The Company’s revenue recognition process is highly automated, and revenue is recorded within the Company’s general ledger through reliance on customized and proprietary information technology (IT) systems. We identified the evaluation of the sufficiency of audit evidence over revenue recognition related to the Company’s Programmable Messaging and Programmable Voice APIs as a critical audit matter. This matter required especially subjective auditor judgment because of the large number of information technology (IT) applications involved in the revenue recognition process. Auditor judgment was required in determining the nature and extent of audit evidence obtained over these information systems that process revenue transactions. Involvement of IT professionals with specialized skills and knowledge was required to assist with the performance and evaluation of certain procedures and determination of IT applications subject to testing. The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over revenue recognition. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s Programmable Messaging and Programmable Voice revenue recognition process. We involved IT professionals with specialized skills and knowledge, who assisted in testing controls related to the Company’s general information technology and application controls related to the systems utilized within the Company’s Programmable Messaging and Programmable Voice revenue recognition process. For a sample of customer agreements, we tested the Company’s identification and treatment of significant contract terms, including comparing the pricing reflected in the Company’s revenue IT system to the contractually agreed upon pricing with the customer. For a sample of revenue transactions, we compared the amounts recognized for consistency with underlying documentation, including contracts with customers. We assessed the recorded revenue by comparing revenue to underlying cash receipts. We evaluated credits issued after year end to assess the revenue recorded within the period. In addition, we evaluated the overall sufficiency of audit evidence obtained by assessing the results of procedures performed, including appropriateness of the nature and extent of such evidence. 81 Table of Contents Valuation of the acquisition date intangible assets related to a business combination As discussed in Note 6 to the consolidated financial statements, on November 2, 2020, the Company acquired Segment.io, Inc. (Segment) by issuing shares of its Class A common stock worth approximately $2.5 billion and $413.3 million in cash. As part of the acquisition, the Company acquired $595.0 million of intangible assets, including developed technology and customer relationships. We identified the assessment of the valuation of the acquisition date developed technology and customer relationship intangible assets acquired as a critical audit matter. There was a high degree of subjective auditor judgment in assessing the discount rate, customer retention rate, and forecasted revenue growth rates used to derive the fair value of the developed technology and customer relationship acquired intangible assets. In addition, these fair values were challenging to test due to the sensitivity of the fair value determinations to changes in these assumptions. The following are the primary procedures we performed to address the critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process to value acquired intangible assets, including the Company’s controls over the discount rate, customer retention rate, and forecasted revenue growth rate. We compared prior period forecasted revenue to prior period actual revenue to evaluate the Company’s ability to forecast. We evaluated the Company’s forecasted revenue growth rates used to value developed technology and customer relationship intangible assets by (1) comparing the growth forecast assumptions to historical growth rates of peer companies, and (2) comparing forecasted growth rates to historical growth rates. We evaluated the estimated annual customer retention rate by comparing to Segment’s historical customer retention data. We involved a valuation professional with specialized skills and knowledge, who assisted in testing by: • evaluating the discount rate used by the Company to value the developed technology and customer relationship intangible assets by comparing it against discount rates that were independently developed using publicly available data for comparable companies • recalculating the estimate of the fair value of the developed technology intangible assets acquired using the Company’s forecasted revenue and our independently developed discount rate, and comparing the result to the Company’s fair value estimate • recalculating the estimate of the fair value of the customer relationship intangible assets acquired using the Company’s cash flow forecast and our independently developed discount rate and comparing the result to the Company’s fair value estimate. /s/ KPMG LLP We have served as the Company’s auditor since 2013. Santa Clara, California February 25, 2021 82 Table of Contents TWILIO INC. Consolidated Balance Sheets As of December 31, 2020 2019 (In thousands, except share and per share amounts) ASSETS Current assets: Cash and cash equivalents $ 933,885 $ 253,660 Short-term marketable securities 2,105,906 1,599,033 Accounts receivable, net 251,167 154,067 Prepaid expenses and other current assets 81,377 54,571 Total current assets 3,372,335 2,061,331 Property and equipment, net 183,239 141,256 Operating right-of-use asset 258,610 156,741 Intangible assets, net 966,573 460,849 Goodwill 4,595,394 2,296,784 Other long-term assets 111,282 33,555 Total assets $ 9,487,433 $ 5,150,516 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 60,042 $ 39,099 Accrued expenses and other current liabilities 243,833 147,681 Deferred revenue and customer deposits 87,031 26,362 Operating lease liability, current 48,338 27,156 Finance lease liability, current 9,062 6,924 Total current liabilities 448,306 247,222 Operating lease liability, noncurrent 229,905 139,200 Finance lease liability, noncurrent 17,856 8,746 Convertible senior notes, net 302,068 458,190 Other long-term liabilities 36,633 17,747 Total liabilities 1,034,768 871,105 Commitments and contingencies (Note 12) Stockholders’ equity: Preferred stock, $ 0.001 par value, 100,000,000 shares authorized, none issued — — Class A and Class B common stock, $ 0.001 par value per share Authorized shares 1,100,000,000 as of December 31, 2020 and 2019; Issued and outstanding shares 164,047,524 and 138,412,799 as of December 31, 2020 and 2019 164 138 Additional paid-in capital 9,613,246 4,952,999 Accumulated other comprehensive income 9,046 5,086 Accumulated deficit ( 1,169,791 ) ( 678,812 ) Total stockholders’ equity 8,452,665 4,279,411 Total liabilities and stockholders’ equity $ 9,487,433 $ 5,150,516 See accompanying notes to consolidated financial statements. 83 TWILIO INC. Consolidated Statements of Operations Year Ended December 31, 2020 2019 2018 (In thousands, except share and per share amounts) Revenue $ 1,761,776 $ 1,134,468 $ 650,067 Cost of revenue 846,115 525,551 300,841 Gross profit 915,661 608,917 349,226 Operating expenses: Research and development 530,548 391,355 171,358 Sales and marketing 567,407 369,079 175,555 General and administrative 310,607 218,268 117,548 Total operating expenses 1,408,562 978,702 464,461 Loss from operations ( 492,901 ) ( 369,785 ) ( 115,235 ) Other (expense) income, net ( 11,525 ) 7,569 ( 5,923 ) Loss before benefit (provision) for income taxes ( 504,426 ) ( 362,216 ) ( 121,158 ) Income tax benefit (provision) 13,447 55,153 ( 791 ) Net loss attributable to common stockholders $ ( 490,979 ) $ ( 307,063 ) $ ( 121,949 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 3.35 ) $ ( 2.36 ) $ ( 1.26 ) Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted 146,708,663 130,083,046 97,130,339 See accompanying notes to consolidated financial statements. 84 TWILIO INC. Consolidated Statements of Comprehensive Loss Year Ended December 31, 2020 2019 2018 (In thousands) Net loss $ ( 490,979 ) $ ( 307,063 ) $ ( 121,949 ) Other comprehensive income (loss): Unrealized gain on marketable securities 3,674 3,804 258 Foreign currency translation 286 — ( 1,001 ) Total other comprehensive income (loss), net of tax 3,960 3,804 ( 743 ) Comprehensive loss attributable to common stockholders $ ( 487,019 ) $ ( 303,259 ) $ ( 122,692 ) See accompanying notes to consolidated financial statements. 85 TWILIO INC. Consolidated Statements of Stockholders' Equity Common Stock Class A Common Stock Class B Additional Paid In Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders' Equity Shares Amount Shares Amount (In thousands, except share amounts) Balance as of December 31, 2017 69,906,550 70 24,063,246 24 608,165 2,025 ( 250,438 ) 359,846 Net loss — — — — — — ( 121,949 ) ( 121,949 ) Adjustment to opening retained earnings due to adoption of ASC 606 — — — — — — 713 713 Exercises of vested stock options — — 3,625,991 4 29,732 — — 29,736 Vesting of early exercised stock options — — — — 36 — — 36 Vesting of restricted stock units 1,970,565 2 172,211 — — — — 2 Value of equity awards withheld for tax liability ( 25,932 ) — ( 22,044 ) — ( 2,654 ) — — ( 2,654 ) Exercises of unvested stock options — — 2,041 — — — — — Conversion of shares of Class B common stock into shares of Class A common stock 8,530,980 8 ( 8,530,980 ) ( 8 ) — — — — Shares issued under ESPP 325,262 — — — 10,122 — — 10,122 Issuance of debt conversion option — — — — 119,435 — — 119,435 Debt conversion option issuance costs — — — — ( 2,819 ) — — ( 2,819 ) Capped call option issuance costs — — — — ( 58,465 ) — — ( 58,465 ) Donated common stock 62,338 — — — 5,996 — — 5,996 Unrealized gain on marketable securities — — — — — 258 — 258 Foreign currency translation — — — — — ( 1,001 ) — ( 1,001 ) Stock-based compensation — — — — 98,979 — — 98,979 Balance as of December 31, 2018 80,769,763 80 19,310,465 20 808,527 1,282 ( 371,674 ) 438,235 Net loss — — — — — — ( 307,063 ) ( 307,063 ) Exercises of vested stock options 1,466,813 1 2,154,053 2 37,739 — — 37,742 Recapitalization of a subsidiary — — — — 75 — ( 75 ) — Vesting of early exercised stock options — — — — 21 — — 21 Vesting of restricted stock units 2,775,788 2 117,331 1 — — — 3 Value of equity awards withheld for tax liability ( 23,543 ) — ( 22,095 ) — ( 5,412 ) — — ( 5,412 ) Conversion of shares of Class B common stock into shares of Class A common stock 10,029,127 9 ( 10,029,127 ) ( 9 ) — — — — Shares issued under ESPP 244,628 — — — 19,738 — — 19,738 Issuance of common stock in connection with a follow-on public offering, net of underwriter discounts 8,064,515 8 — — 979,992 980,000 Costs related to the follow-on public offering — — — — ( 953 ) — — ( 953 ) Shares issued in acquisition 23,555,081 24 — — 2,658,874 — — 2,658,898 Value of equity awards assumed in acquisition — — — — 182,554 — — 182,554 Unrealized gain on marketable securities — — — — — 3,804 — 3,804 Stock-based compensation — — — — 271,844 — — 271,844 Balance as of December 31, 2019 126,882,172 $ 124 11,530,627 $ 14 $ 4,952,999 $ 5,086 $ ( 678,812 ) $ 4,279,411 86 TWILIO INC. Consolidated Statements of Stockholders' Equity Common Stock Class A Common Stock Class B Additional Paid In Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders' Equity Shares Amount Shares Amount (In thousands, except share amounts) Balance as of December 31, 2019 126,882,172 $ 124 11,530,627 $ 14 $ 4,952,999 $ 5,086 $ ( 678,812 ) $ 4,279,411 Net loss — — — — — — ( 490,979 ) ( 490,979 ) Exercises of vested stock options 2,263,629 2 1,232,099 1 72,514 — — 72,517 Vesting of restricted stock units 3,525,401 4 29,007 — — — — 4 Value of equity awards withheld for tax liability ( 34,893 ) — ( 4,692 ) — ( 8,778 ) — — ( 8,778 ) Conversion of shares of Class B common stock into shares of Class A common stock 2,235,739 2 ( 2,235,739 ) ( 2 ) — — — — Equity component from partial settlement of 2023 convertible senior notes 2,902,434 3 — — 190,757 — — 190,760 Shares issued under ESPP 291,800 1 — — 32,242 — — 32,243 Donated common stock 88,408 — — — 18,993 — — 18,993 Issuance of common stock in connection with a follow-on public offering, net of underwriter discounts and issuance costs 5,819,838 6 — — 1,408,163 — — 1,408,169 Shares issued in acquisition 9,263,140 9 — — 2,532,347 — — 2,532,356 Value of equity awards assumed in acquisition — — — — 38,972 — — 38,972 Shares issued in acquisition subject to future vesting 258,554 — — — — — — — Unrealized gain on marketable securities — — — — — 3,674 — 3,674 Foreign currency translation — — — — — 286 — 286 Stock-based compensation — — — — 375,037 — — 375,037 Balance as of December 31, 2020 153,496,222 151 10,551,302 13 9,613,246 9,046 ( 1,169,791 ) 8,452,665 See accompanying notes to consolidated financial statements. 87 TWILIO INC . Consolidated Statements of Cash Flows Year Ended December 31, 2020 2019 2018 CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands) Net loss $ ( 490,979 ) $ ( 307,063 ) $ ( 121,949 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 149,660 110,430 26,095 Non-cash reduction to the right-of-use asset 38,395 23,193 — Net amortization of investment premium and discount 6,789 ( 4,501 ) ( 1,496 ) Amortization of debt discount and issuance costs 23,759 23,696 14,053 Stock-based compensation 360,936 264,318 93,273 Amortization of deferred commissions 13,322 4,511 1,350 Tax benefit related to release of valuation allowance ( 16,459 ) ( 55,745 ) — Allowance for credit losses 13,239 2,491 1,515 Value of donated common stock 18,993 — 5,996 Loss on extinguishment of debt 12,863 — — Other adjustments ( 477 ) 674 3,963 Changes in operating assets and liabilities: Accounts receivable ( 81,303 ) ( 51,357 ) ( 58,234 ) Prepaid expenses and other current assets ( 11,636 ) ( 20,316 ) ( 8,739 ) Other long-term assets ( 81,908 ) ( 18,021 ) ( 5,305 ) Accounts payable 10,060 17,255 6,980 Accrued expenses and other current liabilities 88,340 46,154 45,120 Deferred revenue and customer deposits 13,824 2,968 5,958 Operating lease liabilities ( 33,938 ) ( 21,138 ) — Other long-term liabilities ( 826 ) ( 3,501 ) ( 597 ) Net cash provided by operating activities 32,654 14,048 7,983 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired and other related payments ( 333,591 ) 122,749 ( 30,574 ) Purchases of marketable securities and other investments ( 1,636,590 ) ( 2,038,422 ) ( 279,687 ) Proceeds from sales and maturities of marketable securities 1,183,459 697,171 195,497 Capitalized software development costs ( 33,328 ) ( 21,922 ) ( 19,546 ) Purchases of long-lived and intangible assets ( 25,805 ) ( 45,368 ) ( 5,109 ) Net cash used in investing activities ( 845,855 ) ( 1,285,792 ) ( 139,419 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from a public offering, net of underwriting discount and issuance costs 1,408,113 979,123 — Proceeds from issuance of convertible senior notes — — 550,000 Payment of debt issuance costs — — ( 12,941 ) Purchase of capped call — — ( 58,465 ) Principal payments on debt and finance leases ( 10,784 ) ( 11,046 ) — Proceeds from exercises of stock options and shares issued in ESPP 104,760 57,480 39,879 Value of equity awards withheld for tax liabilities ( 8,778 ) ( 5,412 ) ( 2,654 ) Net cash provided by financing activities 1,493,311 1,020,145 515,819 Effect of exchange rate changes on cash, cash equivalents and restricted cash 40 — 163 NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 680,150 ( 251,599 ) 384,546 CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of year 253,735 505,334 120,788 CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of year $ 933,885 $ 253,735 $ 505,334 Cash paid for income taxes, net $ 3,092 $ 1,368 $ 564 Cash paid for interest $ 2,139 $ 2,290 $ 741 NON-CASH INVESTING AND FINANCING ACTIVITIES: Finance lease right-of-use assets assumed in a business combination $ — $ 14,173 $ — Purchases of property and equipment through finance leases $ 20,108 $ 5,848 $ 2,478 Acquisition holdback $ 5,000 $ 7,980 $ 2,290 Value of common stock issued and stock awards assumed in acquisition $ 2,571,328 $ 2,841,452 $ — Value of common stock issued to settle convertible senior notes $ 892,640 $ — $ — Stock-based compensation capitalized in software development costs $ 13,897 $ 7,777 $ 5,706 See accompanying notes to consolidated financial statements. 88 Table of Contents TWILIO INC. Notes to Consolidated Financial Statements 1. Organization and Description of Business Twilio Inc. (the “Company”) was incorporated in the state of Delaware on March 13, 2008. The Company is the leading cloud communications platform and enables developers to build, scale and operate real-time customer engagement within their software applications via simple-to-use Application Programming Interfaces (“API”). The power, flexibility, and reliability offered by the Company’s software building blocks empower entities of virtually every shape and size to build world-class engagement into their customer experience. The Company’s headquarters are located in San Francisco, California, and the Company has subsidiaries in Australia, Bermuda, Brazil, Canada, Colombia, Czech Republic, Estonia, France, Germany, Hong Kong, India, Ireland, Japan, Mexico, the Netherlands, Serbia, Singapore, Spain, Sweden, the United Kingdom and the United States. 2. Summary of Significant Accounting Policies (a) Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). (b) Principles of Consolidation The consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. (c) Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are used for, but not limited to, revenue allowances and sales credit reserves; recoverability of long-lived and intangible assets; capitalization and useful life of the Company’s capitalized internal-use software development costs; fair value of acquired intangible assets and goodwill; accruals and contingencies. Estimates are based on historical experience and on various assumptions that the Company believes are reasonable under current circumstances. However, future events are subject to change and best estimates and judgments may require further adjustments, therefore, actual results could differ materially from those estimates. Management periodically evaluates such estimates and they are adjusted prospectively based upon such periodic evaluation. (d) Concentration of Credit Risk Financial instruments that potentially expose the Company to a concentration of credit risk consist primarily of cash, cash equivalents, marketable securities and accounts receivable. The Company maintains cash, cash equivalents and marketable securities with financial institutions that management believes are financially sound and have minimal credit risk exposure although the balances will exceed insured limits. The Company sells its services to a wide variety of customers. If the financial condition or results of operations of any significant customers deteriorate substantially, operating results could be adversely affected. To reduce credit risk, management performs credit evaluations of the financial condition of significant customers. The Company does not require collateral from its credit customers and maintains reserves for estimated credit losses on customer accounts when considered necessary. Actual credit losses may differ from the Company’s estimates. During the years ended December 31, 2020, 2019 and 2018, no customer organization accounted for more than 10% of the Company’s total revenue. As of December 31, 2020 and 2019, no customer organization represented more than 10% of the Company’s gross accounts receivable. 89 Table of Contents (e) Revenue Recognition Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for credits and any taxes collected from customers, which are subsequently remitted to governmental authorities. 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 The Company's revenue is primarily derived from usage-based fees earned from customers accessing the Company's enterprise cloud computing services. Platform access is considered a monthly series comprising of one performance obligation and usage-based fees are recognized as revenue in the period in which the usage occurs. In the years ended December 31, 2020, 2019 and 2018, the revenue from usage-based fees represented 76 %, 75 % and 84 % of total revenue, respectively. Subscription-based fees are derived from certain non-usage-based contracts, such as with the sales of short codes, customer support and fees charged to access the cloud-based platform of the Company's recently acquired Segment io, Inc. ("Segment") business that is further described in Note 6. Non-usage-based contracts revenue is recognized on a ratable basis over the contractual term which is generally one year or less for the Company's legacy products and one to three years for the contracts acquired with Segment. In the years ended December 31, 2020, 2019 and 2018, the revenue from non-usage-based fees represented 24 %, 25 %, and 16 % of total revenue, respectively. No significant judgments are required in determining whether products and services are considered distinct performance obligations and should be accounted for separately versus together, or to determine the stand-alone selling price ("SSP"). The Company's arrangements do not contain general rights of return. However, credits may be issued on a case-by-case basis. The 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. Remaining Performance Obligations Revenue allocated to remaining performance obligations represents unearned revenue and amounts that were and will be invoiced and recognized as revenue in future periods for non-cancelable multi-year subscription arrangements. The Company applies the optional exemption of not disclosing the transaction price allocated to the remaining performance obligations for its usage-based contracts and contracts with original duration of one year or less. Revenue allocated to remaining performance obligations for contracts with duration from one to three years was $ 84.1 million as of December 31, 2020, of which 59 % is expected to be recognized over the next 12 months. 90 Table of Contents (f) Deferred Revenue and Customer Deposits Deferred revenue is recorded when a non-cancellable contractual right to bill exists or when cash payments are received in advance of future usage on non-cancelable contracts. Customer refundable prepayments are recorded as customer deposits. As of December 31, 2020 and 2019, the Company recorded $ 87.2 million and $ 26.4 million as its deferred revenue and customer deposits, respectively, that are included in deferred revenue and customer deposits and other long-term liabilities in the accompanying consolidated balance sheets. During the years ended December 31, 2020, 2019 and 2018, the Company recognized $ 19.5 million, $ 18.7 million and $ 10.6 million of revenue, respectively, that was included in the deferred revenue and customer deposits balance as of the end of the previous year. (g) Deferred Sales Commissions The Company records an asset for the incremental costs of obtaining a contract with a customer, for example, sales commissions that are earned upon execution of contracts. The Company uses the portfolio of data method to determine the estimated period of benefit of capitalized commissions which is generally determined to be up to sixty months . Amortization expense related to these capitalized costs related to initial contracts, upsells and renewals, is recognized on a straight line basis over the estimated period of benefit of the capitalized commissions. The Company applies the optional exemption of expensing these costs as incurred with amortization periods of one year or less. Total net capitalized costs as of December 31, 2020 and 2019 were $ 85.6 million and $ 30.4 million, respectively, and are included in prepaid expenses and other current and long‑term assets in the accompanying consolidated balance sheets. Amortization of these assets was $ 13.3 million, $ 4.5 million and $ 1.4 million in the years ended December 31, 2020, 2019 and 2018, respectively, and is included in sales and marketing expense in the accompanying consolidated statements of operations. (h) Cost of Revenue Cost of revenue consists primarily of costs of communications services purchased from network service providers. Cost of revenue also includes fees to support the Company's cloud infrastructure, direct costs of personnel, such as salaries and stock-based compensation for the customer care and support services employees, and non-personnel costs, such as amortization of capitalized internal-use software development costs and amortization of acquired intangibles. (i) Research and Development Expense Research and development expenses consist primarily of personnel costs, cloud infrastructure fees for staging and development, outsourced engineering services, amortization of capitalized internal-use software development costs and an allocation of general overhead expenses. The Company capitalizes the portion of its software development costs that meets the criteria for capitalization. (j) Internal-Use Software Development Costs Certain costs of platform and other software applications developed for internal use are capitalized. The Company capitalizes qualifying internal-use software development costs that are incurred during the application development stage. Capitalization of costs begins when two criteria are met: (i) the preliminary project stage is completed and (ii) it is probable that the software will be completed and used for its intended function. Capitalization ceases when the software is substantially complete and ready for its intended use, including the completion of all significant testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Costs incurred for maintenance, minor upgrades and enhancements are expensed. Costs related to preliminary project activities and post-implementation operating activities are also expensed as incurred. Capitalized costs of platform and other software applications are included in property and equipment. These costs are amortized over the estimated useful life of the software on a straight-line basis over three years. 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. The amortization of costs related to the platform applications is included in cost of revenue, while the amortization of costs related to other software applications developed for internal use is included in operating expenses. 91 Table of Contents (k) Advertising Costs Advertising costs are expensed as incurred and were $ 47.2 million, $ 27.0 million and $ 10.6 million in the years ended December 31, 2020, 2019 and 2018, respectively. Advertising costs are included in sales and marketing expenses in the accompanying consolidated statements of operations. (l) Stock-Based Compensation All stock-based compensation to employees, including the purchase rights issued under the Company's 2016 Employee Stock Purchase Plan (the "ESPP"), is measured on the grant date based on the fair value of the awards on the date of grant. These costs are recognized as an expense following straight-line attribution method over the requisite service period. The Company uses the Black-Scholes option pricing model to measure the fair value of its stock options and the purchase rights issued under the ESPP. 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 and recognized as an expense following straight-line attribution method over the requisite service period. Forfeitures are recorded in the period in which they occur. Compensation expense for stock options granted to nonemployees is calculated using the Black-Scholes option pricing model and is recognized in expense over the service period. The Black-Scholes option pricing model requires the use of complex assumptions, which determine the fair value of stock-based awards. These assumptions include: • Fair value of the common stock. The Company uses the market closing price of its Class A common stock, as reported on the New York Stock Exchange, for the fair value. • Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. The Company uses the simplified calculation of expected term, which reflects the weighted-average of time-to-vesting; • Expected volatility. The expected volatility is derived from an average of the historical volatilities of the common stock of the Company and several other entities with characteristics similar to those of the Company, such as the size and operational and economic similarities to the Company's principal business operations; • Risk -free interest rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term of the stock-based awards; and • Expected dividend. The expected dividend is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock. If any of the assumptions used in the Black-Scholes model changes, stock-based compensation for future options may differ materially compared to that associated with previous grants. (m) Income Taxes The Company accounts for income taxes in accordance with authoritative guidance which requires the use of the asset and liability approach. Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carry-forwards. Deferred tax amounts are determined by using the enacted tax rates expected to be in effect when the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance reduces the deferred tax assets to the amount that is more likely than not to be realized. The Company recognizes the effect of uncertain income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to uncertain tax positions in the provision for income taxes in the consolidated statements of operations. 92 Table of Contents (n) Foreign Currency Translation The functional currency of the Company's foreign subsidiaries is generally the U.S. dollar. Accordingly, the subsidiaries remeasure monetary assets and liabilities at period-end exchange rates, while non-monetary items are remeasured at historical rates. Revenue and expense accounts are remeasured at the average exchange rate in effect during the year. Remeasurement adjustments are recognized in the consolidated statements of operations as other income or expense in the year of occurrence. Foreign currency transaction gains and losses were insignificant for all periods presented. For those entities where the functional currency is a foreign currency, adjustments resulting from translating the financial statements into U.S. dollars are recorded as a component of accumulated other comprehensive income (loss) in stockholders' equity. Monetary assets and liabilities denominated in a foreign currency are translated into US dollars at the exchange rate on the balance sheet date. Revenue and expenses are translated at the weighted average exchange rates during the period. Equity transactions are translated using historical exchange rates. Foreign currency transaction gains and losses are included in other (expense) income, net in the consolidated statements of operations. (o) Comprehensive Income (Loss) Comprehensive income (loss) refers to net income (loss) 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 (loss). (p) Net Loss Per Share Attributable to Common Stockholders The Company calculates its basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for companies with participating securities. All series of convertible preferred stock are considered to be participating securities as the holders of the preferred stock are entitled to receive a non-cumulative dividend on a pro rata pari passu basis in the event that a dividend is declared or paid on common stock. Shares of common stock issued upon early exercise of stock options that are subject to repurchase are also considered to be participating securities, because holders of such shares have non-forfeitable dividend rights in the event a dividend is declared or paid on common stock. Under the two-class method, in periods when the Company has net income, net income attributable to common stockholders is determined by allocating undistributed earnings, calculated as net income less current period convertible preferred stock non-cumulative dividends, between common stock and the convertible preferred stock. In computing diluted net income attributable to common stockholders, undistributed earnings are re-allocated to reflect the potential impact of dilutive securities. The Company's basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The diluted net loss per share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. The dilutive effect of these potential common shares is reflected in diluted earnings per share by application of the treasury stock method. The dilutive effect of convertible senior notes is reflected in diluted earnings per share by application of the if-converted method. For purposes of this calculation, convertible preferred stock, options to purchase common stock, unvested restricted stock units, common stock issued subject to future vesting, any shares of stock committed under the ESPP, shares of stock held in escrow, shares subject to future services, shares issuable under the conversion of the Company's convertible senior notes and any shares of stock reserved for future donations are considered common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is antidilutive. Class A and Class B common stock are the only outstanding equity of the Company. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to 10 votes per share. Shares of Class B common stock may be converted into Class A common stock at any time at the option of the stockholder on a one -for-one basis, and are automatically converted into Class A common stock upon sale or transfer, subject to certain limited exceptions. Shares of Class A common stock are not convertible. (q) Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist of cash deposited into money market funds and reverse repurchase agreements. All credit and debit card transactions that process as of the last day of each month and settle within the first few days of the subsequent month are also classified as cash and cash equivalents as of the end of the month in which they were processed. 93 Table of Contents (r) Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are recorded net of the allowance for doubtful accounts. The allowance for doubtful accounts is estimated based on the Company's assessment of its ability to collect on customer accounts receivable. The Company regularly reviews the allowance by considering certain factors such as historical experience, credit quality, age of accounts receivable balances and other known conditions that may affect a customer's ability to pay. In cases where the Company is aware of circumstances that may impair a specific customer's ability to meet their financial obligations, a specific allowance is recorded against amounts due from the customer which reduces the net recognized receivable to the amount the Company reasonably believe will be collected. The Company writes-off accounts receivable against the allowance when a determination is made that the balance is uncollectible and collection of the receivable is no longer being actively pursued. The allowance for doubtful accounts was $ 12.0 million and $ 6.3 million as of December 31, 2020 and 2019, respectively. (s) Costs Related to Public Offerings Costs related to public offerings, which consist of direct incremental legal, printing and accounting fees are deferred until the offering is completed. Upon completion of the offering, these costs are offset against the offering proceeds within the consolidated statements of stockholders' equity. (t) Property and Equipment Property and equipment, both owned and under finance leases, is stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful life of the related asset. Maintenance and repairs are charged to expenses as incurred. The useful lives of property and equipment are as follows: Capitalized internal-use software development costs 3 years Data center equipment 2 - 4 years Office equipment 3 years Furniture and fixtures 5 years Software 3 years Assets under financing lease 5 years or remaining lease term Leasehold improvements 5 years or remaining lease term (u) Leases The Company adopted ASU 2016-02, "Leases (Topic 842)" and applicable updates effective January 1, 2019, and applied it to the operating leases that existed on that date. Prior year comparative financial information was not recast under the new standard and continues to be presented under ASC 840. The Company elected to utilize the package of practical expedients available for expired or existing contracts which allowed the Company to carryforward historical assessments of (a) whether contracts are or contain leases, (b) lease classification, and (c) initial direct costs. The Company elected the use of hindsight practical expedient in determining the lease term and assessing the likelihood that lease renewal, termination or purchase option will be exercised. The Company also elected to apply the short-term lease exception for all leases. Under the short-term lease exception, the Company will not recognize ROU assets or lease liabilities for leases that, at the acquisition date, have a remaining lease term of 12 months or less. As a result, the Company recognized a $ 123.5 million net operating Right-of-use ("ROU") asset and a $ 132.0 million operating lease liability in its consolidated balance sheet as of January 1, 2019. The Company determines if an arrangement is or contains a lease at contract inception. The Company presents the operating leases in long-term assets and current and long-term liabilities. Finance lease assets are included in property and equipment, net, and finance lease liabilities are presented in current and long-term liabilities in the accompanying consolidated balance sheets. 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. Operating lease ROU assets and lease liabilities are measured and recognized at the lease commencement date based on the present value of the remaining lease payments over the lease term, As the Company’s leases do not generally provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company’s 94 Table of Contents lease agreements may have lease and non-lease components, which the Company accounts for as a single lease component. When estimating the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain such options will be exercised. Operating lease costs are recognized in operating expenses in the Company's accompanying consolidated statements of operations on a straight-line basis over the lease term and variable payments are recognized in the period they are incurred. The Company’s lease agreements do not contain any residual value guarantees. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Within the consolidated statements of cash flows, the Company presents the lease payments made on the operating leases as cash flows from operations and principal payments made on the finance leases as part of financing activities. (v) Intangible Assets Intangible assets recorded by the Company are costs directly associated with securing legal registration of patents and trademarks, acquiring domain names and the fair value of identifiable intangible assets acquired in business combinations. Intangible assets with 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. The useful lives of the intangible assets are as follows: Developed technology 3 - 7 years Customer relationships 2 - 8 years Supplier relationships 2 - 5 years Trade names 5 years Order backlog 1 year Patents 20 years Telecommunication licenses Indefinite Trademarks Indefinite Domain names Indefinite (w) Goodwill Goodwill represents the excess of the aggregate purchase price over the fair value of net identifiable assets acquired in a business combination. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that it operates as one reporting unit and has selected November 30 as the date to perform its annual impairment test. In the valuation of goodwill, management must make assumptions regarding estimated future cash flows to be derived from the Company's business. If these estimates or their related assumptions change in the future, the Company may be required to record impairment for these assets. The Company has the option to first perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. However, the Company may elect to bypass the qualitative assessment and proceed directly to the quantitative impairment tests. The impairment test involves comparing the fair value of the reporting unit to its carrying value, including goodwill. A goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value. The impairment is limited to the carrying amount of goodwill. No goodwill impairment charges have been recorded for any period presented. 95 Table of Contents (x) Impairment of Long-Lived Assets The Company evaluates its long-lived assets, including property, equipment and 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. There were no impairments during the years ended December 31, 2020, 2019 and 2018. (y) Business Combinations The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill is measured as the excess of the consideration transferred over the fair value of assets acquired and liabilities assumed on the acquisition date. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed, these estimates are inherently uncertain and subject to refinement. The authoritative guidance allows a measurement period of up to one year from the date of acquisition to make adjustments to the preliminary allocation of the purchase price. As a result, during the measurement period the Company may record adjustments to the fair values of assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon conclusion of the measurement period or final determination of the values of the assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments will be recorded to the consolidated statement of operations. (z) Segment Information The Company's Chief Executive Officer is the chief operating decision maker, who reviews the Company's financial information presented on a consolidated basis for purposes of allocating resources and evaluating the Company's financial performance. Accordingly, the Company has determined that it operates in a single reporting segment. (aa) Fair Value of Financial Instruments The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows: • Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. • Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. • Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. 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. The Company applies fair value accounting for all financial instruments on a recurring basis. The Company's financial instruments, which include cash, cash equivalents, accounts receivable and accounts payable are recorded at their carrying amounts, which approximate their fair values due to their short-term nature. Marketable securities consist of U.S. treasury securities, high credit quality corporate debt securities and reverse repurchase agreements. All marketable securities are considered to be available-for-sale and recorded at their estimated fair values. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive income (loss). In valuing these items, the Company uses inputs and assumptions that market participants would use to determine their fair value, utilizing valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. 96 Table of Contents The fair value of the convertible senior notes due 2023 (the "Notes") is determined based on the closing price for the Notes on the last trading day of the reporting period and is classified as Level 2 in the fair value hierarchy. The fair value of the strategic investments, which consist of debt and equity securities of privately held companies in which the Company does not have a controlling interest or a significant influence, is determined under the measurement alternative on a non-recurring basis adjusting for observable changes in fair value. Impairments are considered to be other than temporary if they are related to deterioration in credit risk or if it is likely that the security will be sold before the recovery of its cost basis. Realized gains and losses and declines in value deemed to be other than temporary are determined based on the specific identification method and are reported in other (expense) income, net. (ab) Recently Adopted Accounting Guidance In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-12, "Simplifying the Accounting for Income Taxes," which simplifies the accounting for income taxes by removing certain exceptions to the general principles for income taxes. The standard is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company elected to early adopt this guidance effective April 1, 2020. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. In August 2018, FASB issued ASU 2018-15, “ Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350‑40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract”. This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing costs incurred to develop or obtain internal-use software. The guidance is effective for interim and annual periods beginning after December 15, 2019. The Company adopted this guidance effective January 1, 2020. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments” , which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses” , which clarifies that receivables arising from operating leases are not within the scope of Topic 326, "Financial Instruments-Credit Losses" . Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, " Leases ". In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which clarifies treatment of certain credit losses. In May 2019, the FASB issued ASU 2019-05, "Financial Instruments — Credit Losses (Topic 326): Targeted Transition Relief", which permits an entity, upon adoption of ASU 2016-13, to irrevocably elect the fair value option (on an instrument-by-instrument basis) for eligible financial assets measured at amortized cost basis. In November 2019, the FASB issued ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses" , which clarifies the accounting treatment and disclosure requirements for assets purchased with credit deterioration, troubled debt restructurings, and certain other investments. In February 2020, the FASB issued ASU 2020-02, "Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842) Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842)." This standard provides guidance regarding methodologies, documentation, and internal controls related to expected credit losses. These ASUs are effective for interim and annual periods beginning after December 15, 2019, and the Company adopted them effective January 1, 2020. As of the date of adoption, this guidance did not have a material impact on the Company's consolidated financial statements. (ac) Recently Issued Accounting Guidance, Not yet Adopted In August 2020, the FASB issued ASU 2020-06, "Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)," which removes certain separation models for convertible debt instruments and convertible preferred stock that require the separation of a convertible debt instrument into a debt component and an equity or derivative component. The ASU also expands disclosure requirements for convertible instruments and simplifies areas of the guidance for diluted earnings-per-share calculations that are impacted by the amendments. The standard is effective for interim and annual periods beginning after December 15, 2021, with early adoption permitted. The Company is evaluating the impact of the adoption of this guidance on its consolidated financial statements. 97 Table of Contents 3. Fair Value Measurements Financial Assets The following tables provide the financial assets measured at fair value on a recurring basis: Amortized Cost or Carrying Value Gross Unrealized Gains Gross Unrealized Losses Fair Value Hierarchy as of December 31, 2020 Aggregate Fair Value Level 1 Level 2 Level 3 Financial Assets: (In thousands) Cash and cash equivalents: Money market funds $ 656,749 $ — $ — $ 656,749 $ — $ — $ 656,749 Commercial paper 2,000 — — — 2,000 — 2,000 Total included in cash and cash equivalents 658,749 — — 656,749 2,000 — 658,749 Marketable securities: U.S. Treasury securities 223,247 389 ( 1 ) 223,635 — — 223,635 Corporate debt securities and commercial paper 1,874,257 8,149 ( 135 ) 50,000 1,832,271 — 1,882,271 Total marketable securities 2,097,504 8,538 ( 136 ) 273,635 1,832,271 — 2,105,906 Total financial assets $ 2,756,253 $ 8,538 $ ( 136 ) $ 930,384 $ 1,834,271 $ — $ 2,764,655 Amortized Cost or Carrying Value Gross Unrealized Gains Gross Unrealized Losses Fair Value Hierarchy as of December 31, 2019 Aggregate Fair Value Level 1 Level 2 Level 3 Financial Assets: (In thousands) Cash and cash equivalents: Money market funds $ 153,252 $ — $ — $ 153,252 $ — $ — $ 153,252 Reverse repurchase agreements 35,800 — — — 35,800 — 35,800 Total included in cash and cash equivalents 189,052 — — 153,252 35,800 — 189,052 Marketable securities: U.S. Treasury securities 215,847 241 ( 3 ) 216,085 — — 216,085 Corporate debt securities and commercial paper 1,378,487 4,516 ( 55 ) 5,000 1,377,948 — 1,382,948 Total marketable securities 1,594,334 4,757 ( 58 ) 221,085 1,377,948 — 1,599,033 Total financial assets $ 1,783,386 $ 4,757 $ ( 58 ) $ 374,337 $ 1,413,748 $ — $ 1,788,085 The Company's primary objective when investing excess cash is preservation of capital, hence the Company's marketable securities primarily consist of U.S. Treasury Securities, high credit quality corporate debt securities, commercial paper and reverse repurchase agreements. As the Company views its marketable securities as available to support current operations, it has classified all available for sale securities as short-term. As of December 31, 2020 and 2019, for fixed income securities that were in unrealized loss positions, the Company has determined that (i) it does not have the intent to sell any of these investments, and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of December 31, 2020 and 2019, the Company anticipates that it will recover the entire amortized cost basis of such fixed income securities before maturity. The Company regularly reviews changes to the rating of its debt securities by rating agencies as well as reasonably monitors the surrounding economic conditions to assess the risk of expected credit losses. As of December 31, 2020, the risk of expected credit losses was not significant. Interest earned on marketable securities was $ 32.4 million, $ 20.8 million and $ 3.0 million in the years ended December 31, 2020, 2019 and 2018, respectively. The interest is recorded as other (expense) income, net, in the accompanying consolidated statements of operations. 98 Table of Contents The following table summarizes the contractual maturities of marketable securities: As of December 31, 2020 As of December 31, 2019 Amortized Cost Aggregate Fair Value Amortized Cost Aggregate Fair Value Financial Assets: (In thousands) Less than one year $ 1,126,091 $ 1,128,927 $ 859,996 $ 861,181 One to three years 971,413 976,979 734,338 737,852 Total $ 2,097,504 $ 2,105,906 $ 1,594,334 $ 1,599,033 From time to time, the Company enters into reverse securities repurchase agreements, primarily for short-term investments with maturities of 90 days or less. As of December 31, 2020, the Company had no reverse repurchase agreements. As of December 31, 2019, the Company was party to reverse repurchase agreements totaling $ 35.8 million, which were reported in cash and equivalents in the accompanying consolidated balance sheet. Under these reverse securities repurchase agreements, the Company typically lends available cash at a specified rate of interest and holds U.S. government securities as collateral during the term of the agreement. Collateral value is in excess of the amounts loaned under these agreements. Strategic Investments As of December 31, 2020 and 2019, the Company held strategic investments with a fair value of $ 9.3 million and $ 5.5 million, respectively, in debt and equity securities of privately held companies in which the Company does not have a controlling interest or significant influence. These securities are recorded as other long-term assets in the accompanying consolidated balance sheets. There were no impairments in the years ended December 31, 2020 and 2019. Financial Liabilities As of December 31, 2020 and 2019, the fair value of the 0.25 % convertible senior notes due 2023 (the “Notes”), as further described in Note 9, was approximately $ 1.7 billion and $ 841.3 million, respectively. 4. Property and Equipment Property and equipment consisted of the following: As of December 31, 2020 2019 (In thousands) Capitalized internal-use software development costs $ 142,489 $ 100,155 Data center equipment (1) 43,477 22,009 Leasehold improvements 69,756 55,886 Office equipment 35,346 25,083 Furniture and fixtures (1) 12,312 10,095 Software 9,943 9,176 Total property and equipment 313,323 222,404 Less: accumulated depreciation and amortization ( 130,084 ) ( 81,148 ) Total property and equipment, net $ 183,239 $ 141,256 ____________________________________ ( 1 ) Data center equipment and furniture and fixtures contain assets under finance leases. See Note 5 for further detail. Depreciation and amortization expense was $ 51.1 million, $ 37.5 million and $ 18.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. 99 Table of Contents The Company capitalized $ 47.1 million, $ 29.7 million and $ 25.3 million in internal‑use software development costs in the years ended December 31, 2020, 2019 and 2018, respectively, of which $ 13.9 million, $ 7.8 million and $ 5.7 million, respectively, was stock‑based compensation expense. Amortization of capitalized software development costs was $ 18.0 million, $ 17.1 million and $ 13.0 million in the years ended December 31, 2020, 2019 and 2018, respectively. The amortization of the capitalized software development costs was allocated as follows: Year Ended December 31, 2020 2019 2018 (In thousands) Cost of revenue $ 11,402 $ 9,546 $ 6,898 Research and development 6,609 7,345 5,437 General and administrative — 213 689 Total $ 18,011 $ 17,104 $ 13,024 5. Right-of-Use Asset and Lease Liabilities The Company has entered into various operating lease agreements for office space and data centers and finance lease agreements for data center and office equipment and furniture. As of December 31, 2020, the Company had 24 leased properties with remaining lease terms of 0.3 years to 8.3 years, some of which include options to extend the leases for up to 5.0 years. The components of the lease expense recorded in the accompanying consolidated statements of operations were as follows: Year Ended December 31, 2020 2019 (In thousands) Operating lease cost $ 49,268 $ 32,558 Finance lease cost: Amortization of assets 9,038 6,090 Interest on lease liabilities 879 708 Short-term lease cost 4,684 6,342 Variable lease cost 7,359 3,792 Total net lease cost $ 71,228 $ 49,490 100 Table of Contents Supplemental balance sheet information related to leases was as follows: As of December 31, Leases Classification 2020 2019 Assets: (In thousands) Operating lease assets Operating right-of-use asset, net of accumulated amortization (1) $ 258,610 $ 156,741 Finance lease assets Property and equipment, net of accumulated depreciation (2) 25,771 14,770 Total leased assets $ 284,381 $ 171,511 Liabilities: Current Operating Operating lease liability, current $ 48,338 $ 27,156 Finance Financing lease liability, current 9,062 6,924 Noncurrent Operating Operating lease liability, noncurrent 229,905 139,200 Finance Finance lease liability, noncurrent 17,856 8,746 Total lease liabilities $ 305,161 $ 182,026 ____________________________________ (1) Operating lease assets are recorded net of accumulated amortization of $ 57.1 million and $ 23.2 million as of December 31, 2020 and December 31, 2019, respectively. (2) Finance lease assets are recorded net of accumulated depreciation of $ 15.0 million and $ 6.0 million as of December 31, 2020 and December 31, 2019, respectively. Supplemental cash flow and other information related to leases was as follows: Year Ended December 31, 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: (In thousands) Operating cash flows from operating leases $ 46,895 $ 28,291 Operating cash flows from finance leases (interest) $ 879 $ 687 Financing cash flows from finance leases $ 8,799 $ 5,646 Weighted average remaining lease term (in years): Operating leases 6.0 6.1 Finance leases 3.3 3.0 Weighted average discount rate: Operating leases 4.8 % 5.5 % Finance leases 3.9 % 5.3 % 101 Table of Contents Maturities of lease liabilities were as follows: As of December 31, 2020 Operating Leases Finance Leases Year Ended December 31, (In thousands) 2021 $ 60,220 $ 9,866 2022 60,258 7,588 2023 49,023 6,841 2024 44,439 3,604 2025 32,225 316 Thereafter 75,410 518 Total lease payments 321,575 28,733 Less: imputed interest ( 43,332 ) ( 1,815 ) Total lease obligations 278,243 26,918 Less: current obligations ( 48,338 ) ( 9,062 ) Long-term lease obligations $ 229,905 $ 17,856 As of December 31, 2020, the Company had an additional operating lease obligation totaling $ 11.0 million for a lease that will commence in the first quarter of 2023 with a lease term of 6.2 years. As of December 31, 2020, the Company had no additional finance leases with future commencement dates. Disclosures related to periods prior to adoption of the New Lease Standard Rent expense was $ 10.3 million for the year ended December 31, 2018. Future minimum lease payment obligations under noncancellable operating and finance leases were as follows: As of December 31, 2018 Operating Leases Financing Leases Year Ended December 31, (In thousands) 2019 $ 24,128 $ 306 2020 29,527 512 2021 30,898 573 2022 30,492 590 2023 30,122 608 Thereafter 81,316 1,939 Total minimum lease payments $ 226,483 $ 4,528 6. Business Combinations Segment.io, Inc. In November 2020, the Company acquired all outstanding shares of Segment, the market-leading customer data platform, by issuing 9.5 million shares of its Class A common stock with a fair value of $ 2.6 billion and $ 413.3 million in cash. Of the total shares of Class A common stock issued at closing, 258,554 shares with the fair value of $ 70.7 million are subject to future vesting and will be recorded in the stock-based compensation expense as the services are provided over a period of 2.41 years. Part of the cash consideration was paid to settle the vested equity awards of Segment employees. The Company assumed all unvested and outstanding equity awards of Segment continuing employees as converted into its own equity awards at the conversion ratio provided in the Agreement and Plan of Reorganization (the "Merger Agreement"). 102 Table of Contents The acquisition added additional products and services to the Company's offerings for its customers. With these additional products, the Company can now offer a customer engagement platform. The acquisition has also added new customers, new employees, technology and intellectual property assets. The acquisition was accounted for as a business combination and the total preliminary purchase price of $ 3.0 billion was allocated to the net tangible and intangible assets and liabilities based on their preliminary fair values on the acquisition date with the excess recorded as goodwill. The values assigned to the assets acquired and liabilities assumed are based on their fair values that was available on the acquisition date. As of December 31, 2020, the areas that are not yet finalized due to information that may become available subsequently to the year end and may result in changes in the values recorded at year end relate to any and all contingencies, including income and other taxes. At the time such contingencies may arise within the measurement period of 12 months from the acquisition closing date, it may result in adjustments to liability balances and goodwill. The purchase price reflects the $ 2.5 billion fair value of $ 9.3 million shares of the Company's Class A common stock transferred as consideration for accredited outstanding shares of Segment, the $ 413.3 million cash consideration for unaccredited shares and vested equity awards and the $ 39.0 million fair value of the pre-combination services of Segment employees reflected in the unvested equity awards assumed by the Company on the acquisition date. The additional 258,554 shares of Class A common issued at closing with future vesting as well as a portion of cash and shares of Class A common stock that were transferred as part of the purchase price are held in escrow. The fair value of the 9.5 million shares of the Company's Class A common stock issued at closing was determined based of its closing price on the acquisition date. The fair value of the assumed unvested equity awards was determined (a) for options, by using a Black-Scholes option pricing model with the applicable assumptions as of the acquisition date, and (b) for restricted stock units, by using the closing market price of the Company's Class A common stock on the acquisition date. The fair value of unvested employee equity awards assumed on the acquisition date was $ 245.3 million. These awards will continue to vest as the Segment employees provide services in the post-acquisition period. The fair value of these awards will be recorded into the stock-based compensation expense over the respective vesting period of each award. The purchase price components are summarized in the following table: Total (In thousands) Fair value of Class A common stock transferred $ 2,532,356 Cash consideration 413,291 Fair value of the pre-combination service through equity awards 38,972 Total purchase price, as adjusted $ 2,984,619 103 Table of Contents The following table presents the preliminary purchase price allocation, as adjusted, recorded in the Company's consolidated balance sheet as of December 31, 2020: Total (In thousands) Cash and cash equivalents $ 93,170 Accounts receivable and other current assets 90,846 Property and equipment, net 5,081 Operating right-of-use asset 52,490 Intangible assets (1) 595,000 Other assets 4,869 Goodwill 2,294,945 Accounts payable and other liabilities ( 24,263 ) Deferred revenue ( 47,013 ) Operating lease liability ( 58,206 ) Deferred tax liability ( 22,300 ) Total purchase price $ 2,984,619 ____________________________________ ( 1 ) Identifiable intangible assets are comprised of the following: Total Estimated life (In thousands) (In years) Developed technology $ 390,000 7 Customer relationships 190,000 6 Order backlog 10,000 1 Trade names 5,000 5 Total intangible assets acquired $ 595,000 The Company acquired a net deferred tax liability of $ 22.3 million in this business combination that is included in long-term liabilities in the accompanying consolidated balance sheet. Developed technology consists of software products and domain knowledge around customer data developed by Segment, which will enable Twilio to layer data across its platform to power timely and personalized communications over the right channel, further enhancing the Company's customer engagement platform. Customer relationships consists of contracts with platform users that purchase Segment’s products and services that carry distinct value. Goodwill generated from this acquisition primarily represents the value that is expected from the increased scale and synergies as a result of the integration of both businesses. Goodwill is not deductible for tax purposes. The estimated fair value of the intangible assets acquired was determined by the Company. The Company engaged a third‑party expert to assist with the valuation analysis. The Company used a relief from royalty method to estimate the fair values of the developed technology and a multi-period excess earnings method to estimate the fair value of the customer relationships and order backlog. Most of the net tangible assets were valued at their respective carrying amounts as of the acquisition date, as the Company believes that these amounts approximate their current fair values, except for ROU lease assets. The value of the acquired operating ROU assets was reduced by $ 6.4 million to their respective fair values as of the acquisition date. The acquired entity's results of operations were included in the Company's consolidated financial statements from the date of acquisition, November 2, 2020. For the year ended December 31, 2020, Segment contributed net operating revenue of $ 23.0 million, which is reflected in the accompanying consolidated statement of operations. Due to the integrated nature of the Company's operations, the Company believes that it is not practicable to separately identify earnings of Segment on a stand-alone basis. 104 Table of Contents During the year ended December 31, 2020, the Company incurred costs related to this acquisition of $ 20.8 million that were expensed as incurred and recorded in general and administrative expenses in the accompanying consolidated statement of operations. The following unaudited pro forma condensed combined financial information gives effect to the acquisition of Segment as if it was consummated on January 1, 2019 (the beginning of the comparable prior reporting period), and includes pro forma adjustments related to the amortization of acquired intangible assets, share-based compensation expense, one-time tax benefit and direct and incremental transaction costs reflected in the historical financial statements. Specifically, the following adjustments were made: • For the year ended December 31, 2020, the Company's and Segment's direct and incremental transaction costs of $ 79.3 million are excluded from the pro forma condensed combined net loss. • For the year ended December 31, 2019, the Company's direct and incremental transaction costs of $ 20.8 are included in the pro forma condensed combined net loss. • In the year ended December 31, 2020, the pro forma condensed combined net loss includes a reversal of the valuation allowance release of $ 13.8 million. • In the year ended December 31, 2019, the pro forma condensed combined net loss includes a one-time tax benefit of $ 38.1 that would have resulted from the acquisition, and an ongoing tax benefit of $ 7.5 million. This unaudited data is presented for informational purposes only and is not intended to represent or be indicative of the results of operations that would have been reported had the acquisition occurred on January 1, 2019. It should not be taken as representative of future results of operations of the combined company. The following table presents the unaudited pro forma condensed combined financial information: Year Ended December 31, 2020 2019 (Unaudited, in thousands) Revenue $ 1,874,720 $ 1,217,502 Net loss attributable to common stockholders $ ( 655,355 ) $ ( 576,962 ) Other Fiscal 2020 Acquisition In fiscal 2020 the Company completed other business and asset acquisitions for a total purchase price of $ 13.0 million paid in cash, of which $ 5.0 million was withheld by the Company for a period up to 60 months. An additional consideration of $ 8.6 million is subject to future vesting and will be settled in shares of fully vested restricted stock units at the end of the vesting period. The Company does not consider these acquisition to be material, individually or in aggregate. The total purchase price was allocated to the tangible and intangibles assets acquired and liabilities assumed based on their fair values at the time of the acquisition. Goodwill of $ 8.8 million was recorded to reflect the excess of purchase price over the net assets acquired and represents the value that the Company expects to realize from expanding its product offerings and other synergies. Goodwill that is expected to be deductible for tax purposes is approximately $ 2.8 million. The acquired entities' results of operations have been included in the consolidated financial statements of the Company from their respective dates of acquisition. As of December 31, 2020, the areas that are not yet finalized due to information that may become available subsequently to the year end and may result in changes in the values recorded at year end relate to any and all contingencies, including income and other taxes. At the time such contingencies may arise within the measurement period of 12 months from the acquisitions closing dates, it may result in adjustments to liability balances and goodwill. 105 Table of Contents The following table summarizes the preliminary purchase price allocation in aggregate for the businesses and assets acquired in fiscal 2020 recorded in the Company's consolidated balance sheet as of December 31, 2020: Total (In thousands) Net liabilities $ ( 45 ) Intangible assets (1) 4,250 Goodwill 8,835 Total preliminary purchase price $ 13,040 ____________________________________ (1) Identifiable intangible assets were comprised of the following: Total Estimated life (In thousands) (In years) Customer relationships 3,750 4 Trademark and tradename 500 3 Total intangible assets acquired $ 4,250 During the year ended December 31, 2020, the Company incurred $ 1.3 million of costs related to these acquisitions that were expensed as incurred and recorded in general and administrative expenses in the accompanying consolidated statement of operation. Pro forma results of operations for these acquisitions are not presented as the financial impact to the Company's consolidated financial statements is immaterial. Fiscal 2019 Acquisitions SendGrid, Inc. In February 2019, the Company acquired all outstanding shares of SendGrid, Inc. ("SendGrid"), the leading email API platform, by issuing 23.6 million shares of its Class A common stock with a total value of $ 2.7 billion. The Company also assumed all of the outstanding stock options and restricted stock units of SendGrid as converted into stock options and restricted stock units, respectively, of the Company based on the conversion ratio provided in the Agreement and Plan of Merger and Reorganization, as amended (the "Merger Agreement"). The acquisition added additional products and services to the Company's offerings for its customers. With these additional products, the Company offers an email API and Marketing Campaigns product leveraging the email API. The acquisition also added new customers, new employees, technology and intellectual property assets. The acquisition was accounted for as a business combination and the total purchase price was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date with the excess recorded as goodwill. Subsequent to the acquisition date of February 1, 2019, and during the measurement period that ended on December 31, 2019, the Company recorded $ 4.4 million of adjustments to goodwill. The adjusted purchase price of $ 2.8 billion reflects the $ 2.7 billion fair value of 23.6 million shares of the Company's Class A common stock transferred as consideration for all outstanding shares of SendGrid, and the $ 182.6 million fair value of the pre-combination services of SendGrid employees reflected in the equity awards assumed by the Company on the acquisition date. The fair value of the 23.6 million shares transferred as consideration was determined on the basis of the closing market price of the Company's Class A common stock on the acquisition date. The fair value of the equity awards was determined (a) for options, by using a Black-Scholes option pricing model with the applicable assumptions as of the acquisition date, and (b) for restricted stock units, by using the closing market price of the Company's Class A common stock on the acquisition date. 106 Table of Contents The unvested stock awards assumed on the acquisition date continue to vest as the SendGrid employees continue to provide services in the post-acquisition period. The fair value of these awards is recorded as stock-based compensation expense over the respective vesting period of each award. The purchase price components, as adjusted, are summarized in the following table: Total (In thousands) Fair value of Class A common stock transferred $ 2,658,898 Fair value of the pre-combination service through equity awards 182,554 Total purchase price, as adjusted $ 2,841,452 The following table presents the purchase price allocation, as adjusted, recorded in the Company's consolidated balance sheet as of December 31, 2019: Total (In thousands) Cash and cash equivalents $ 156,783 Accounts receivable and other current assets 11,635 Property and equipment, net 38,350 Operating right-of-use asset 33,742 Intangible assets (1) 483,000 Other assets 1,664 Goodwill 2,235,193 Accounts payable and other liabilities ( 11,114 ) Operating lease liability ( 32,568 ) Finance lease liability ( 13,616 ) Note payable ( 5,387 ) Deferred tax liability ( 56,230 ) Total purchase price $ 2,841,452 ____________________________________ ( 1 ) Identifiable intangible assets were comprised of the following: Total Estimated life (In thousands) (In years) Developed technology $ 294,000 7 Customer relationships 169,000 7 Trade names 20,000 5 Total intangible assets acquired $ 483,000 The Company acquired a net deferred tax liability of $ 56.2 million in this business combination that was included in long-term liabilities in the accompanying consolidated balance sheet. This amount was offset by a release of a valuation allowance on deferred tax assets of $ 47.9 million. Developed technology consists of software products and domain knowledge around email delivery developed by SendGrid, which enables the delivery of email reliably and at scale. Customer relationships consists of contracts with platform users that purchase SendGrid’s products and services that carry distinct value. Trade names represent the Company’s right to the SendGrid trade names and associated design as it existed on the acquisition closing date. Goodwill generated from this acquisition primarily represents the value that is expected from the increased scale and synergies as a result of the integration of both businesses. Goodwill is not deductible for tax purposes. 107 Table of Contents The estimated fair value of the intangible assets acquired was determined by the Company and the Company considered or relied in part upon a valuation report of a third‑party expert. The Company used an income approach to estimate the fair values of the developed technology, an incremental income approach to estimate the value of the customer relationships and a relief from royalty method to estimate the fair value of the trade name. Most of the net tangible assets were valued at their respective carrying amounts as of the acquisition date, as the Company believes that these amounts approximate their current fair values. The leases acquired were recorded at their respective fair values as of the acquisition date. The acquired entity's results of operations were included in the Company's consolidated financial statements from the date of acquisition, February 1, 2019. For the year ended December 31, 2019, SendGrid contributed net operating revenue of $ 177.1 million, which is reflected in the accompanying consolidated statement of operations. For the year ended December 31, 2019, the Company incurred costs related to this acquisition of $ 13.9 million that were expensed as incurred and recorded in general and administrative expenses in the accompanying consolidated statement of operations. The following unaudited pro forma condensed combined financial information gives effect to the acquisition of SendGrid as if it was consummated on January 1, 2018 (the beginning of the comparable prior reporting period), and includes pro forma adjustments related to the amortization of acquired intangible assets, share-based compensation expense and direct and incremental transaction costs reflected in the historical financial statements. Specifically, the following adjustments were made: • For the year ended December 31, 2019, the Company's and SendGrid's direct and incremental transaction costs of $ 40.8 million are excluded from pro forma condensed combined net loss. • For the year ended December 31, 2018, the Company's direct and incremental transaction costs of $ 13.9 million are included in the pro forma condensed combined net loss. • In the year ended December 31, 2019, the pro forma condensed combined net loss includes a reversal of the valuation allowance release of $ 48.0 million. • In the year ended December 31, 2018, the pro forma condensed combined net loss includes a one-time tax benefit of $ 53.5 million that would have resulted from the acquisition, and an ongoing tax benefit of $ 29.4 million. This unaudited data is presented for informational purposes only and is not intended to represent or be indicative of the results of operations that would have been reported had the acquisition occurred on January 1, 2018. It should not be taken as representative of future results of operations of the combined company. The following table presents the pro forma condensed combined financial information: Year Ended December 31, 2019 2018 (Unaudited, in thousands) Revenue $ 1,148,214 $ 796,607 Net loss attributable to common stockholders $ ( 322,030 ) $ ( 211,705 ) 108 Table of Contents Other Fiscal 2019 Acquisitions In fiscal 2019 the Company acquired several businesses for a total purchase price of $ 43.2 million paid in cash, of which $ 9.1 million was withheld for the period of 18 to 36 months, and $ 12.8 million of deferred equity consideration, which is recorded in the post-acquisition period as the services are provided. The Company does not consider these acquisitions to be material, individually or in aggregate. The acquisitions were accounted for as business combinations and the total purchase price was allocated to the net tangible and intangibles assets acquired and liabilities assumed based on their fair values on the acquisition date and the excess was recorded as goodwill. The acquired entities' results of operations have been included in the consolidated financial statements of the Company from the date of acquisition. The following table summarizes the purchase price allocation in aggregate for the other business acquired in fiscal 2019 recorded in the Company's consolidated balance sheet as of December 31, 2019: Total (In thousands) Net liabilities $ ( 3,219 ) Intangible assets (1) 22,986 Goodwill 23,425 Total preliminary purchase price $ 43,192 ____________________________________ ( 1 ) Identifiable intangible assets were comprised of the following: Total Estimated life (In thousands) (In years) Developed technology $ 11,771 4 - 6 Customer relationships 5,185 3 - 5 Telecommunication licenses 4,370 Indefinite Supplier relationships 1,660 2 Total intangible assets acquired $ 22,986 During the year ended December 31, 2019, the Company incurred $ 1.9 million of costs related to these acquisitions that were expensed as incurred and recorded in general and administrative expenses in the accompanying consolidated statement of operations. Pro forma results of operations for these acquisitions are not presented as the financial impact to the Company's consolidated financial statements is immaterial. 7. Goodwill and Intangible Assets Goodwill Goodwill balance as of December 31, 2020 and 2019, was as follows: Total (In thousands) Balance as of December 31, 2018 $ 38,165 Goodwill additions related to 2019 acquisitions 2,262,622 Measurement period adjustments ( 4,003 ) Balance as of December 31, 2019 $ 2,296,784 Goodwill additions related to 2020 acquisitions 2,303,780 Measurement period adjustments ( 5,170 ) Balance as of December 31, 2020 $ 4,595,394 109 Table of Contents Intangible assets Intangible assets consisted of the following: As of December 31, 2020 Gross Accumulated Amortization Net Amortizable intangible assets: (In thousands) Developed technology $ 724,599 $ ( 113,282 ) $ 611,317 Customer relationships 379,344 ( 59,574 ) 319,770 Supplier relationships 4,356 ( 3,044 ) 1,312 Trade names 25,560 ( 7,921 ) 17,639 Order backlog 10,000 ( 1,667 ) 8,333 Patent 3,360 ( 373 ) 2,987 Total amortizable intangible assets 1,147,219 ( 185,861 ) 961,358 Non-amortizable intangible assets: Telecommunication licenses 4,920 — 4,920 Trademarks and other 295 — 295 Total $ 1,152,434 $ ( 185,861 ) $ 966,573 As of December 31, 2019 Gross Accumulated Amortization Net Amortizable intangible assets: (In thousands) Developed technology $ 333,980 $ ( 55,390 ) $ 278,590 Customer relationships 182,339 ( 26,347 ) 155,992 Supplier relationships 4,356 ( 1,532 ) 2,824 Trade name 20,060 ( 3,727 ) 16,333 Patent 2,707 ( 262 ) 2,445 Total amortizable intangible assets 543,442 ( 87,258 ) 456,184 Non-amortizable intangible assets: Telecommunication licenses 4,370 — 4,370 Trademarks and other 295 — 295 Total $ 548,107 $ ( 87,258 ) $ 460,849 Amortization expense was $ 98.6 million, $ 72.9 million and $ 7.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. 110 Table of Contents Total estimated future amortization expense is as follows: As of December 31, 2020 Year Ended December 31, (In thousands) 2021 $ 171,530 2022 168,563 2023 164,122 2024 162,154 2025 156,480 Thereafter 138,509 Total $ 961,358 8. Accrued Expenses and Other Liabilities Accrued expenses and other current liabilities consisted of the following: As of December 31, 2020 2019 (In thousands) Accrued payroll and related $ 54,683 $ 20,462 Accrued bonus and commission 25,341 12,898 Accrued cost of revenue 80,620 47,563 Sales and other taxes payable 48,390 34,652 ESPP contributions 6,272 4,023 Acquisition holdback 184 6,520 Accrued other expense 28,343 21,563 Total accrued expenses and other current liabilities $ 243,833 $ 147,681 Other long-term liabilities consisted of the following: As of December 31, 2020 2019 (In thousands) Deferred tax liability $ 13,684 $ 7,535 Acquisition holdback 8,800 3,750 Accrued other expenses 14,149 6,462 Total other long-term liabilities $ 36,633 $ 17,747 9. Notes Payable Convertible Senior Notes and Capped Call Transactions In May 2018, the Company issued $ 550.0 million aggregate principal amount of 0.25 % convertible senior notes due 2023 in a private placement, including $ 75.0 million aggregate principal amount of such Notes pursuant to the exercise in full of the over-allotment options of the initial purchasers (collectively, the “Notes”). The interest on the Notes is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2018. 111 Table of Contents The Notes may bear special interest under specified circumstances relating to the Company’s failure to comply with its reporting obligations under the indenture relating to the issuance of Notes (the “indenture”) or if the Notes are not freely tradeable as required by the indenture. The Notes will mature on June 1, 2023, unless earlier repurchased or redeemed by the Company or converted pursuant to their terms. The total net proceeds from the debt offering, after deducting initial purchaser discounts and debt issuance costs paid by us were approximately $ 537.0 million. Each $1,000 principal amount of the Notes is initially convertible into 14.104 shares of the Company’s Class A common stock par value $ 0.001 , which is equivalent to an initial conversion price of approximately $ 70.90 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a make-whole fundamental change, as defined in the indenture, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change or during the relevant redemption period. Prior to the close of business on the business day immediately preceding March 1, 2023, the Notes may be convertible at the option of the holders only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2018, and only during such calendar quarter, if the last reported sale price of the Class A common stock for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is more than or equal to 130 % of the conversion price on each applicable trading day; (2) during the five business days period after any five consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of Notes for such trading day was less than 98 % of the product of the last reported sale price of the Class A common stock and the conversion rate on each such trading day; (3) upon the Company’s notice that it is redeeming any or all of the Notes; or (4) upon the occurrence of specified corporate events. On or after March 1, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the Notes may, at their option, convert all or a portion of their Notes regardless of the foregoing conditions. Upon conversion, the Company may 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 Notes in shares of Class A common stock if a conversion were to occur. During the year ended December 31, 2020, the conditional conversion feature of the Notes was triggered as the last reported sale price of the Company's Class A common stock was more than or equal to 130 % of the conversion price for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on December 31, 2020 (the last trading day of the calendar quarter), and therefore the Notes are currently convertible, in whole or in part, at the option of the holders between January 1, 2021 through March 31, 2021. Whether the Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition in the future. The Company continues to classify the Notes as a long-term liability in its consolidated balance sheet as of December 31, 2020, based on contractual settlement provisions. The Company may redeem the Notes, in whole or in part, at its option, on or after June 1, 2021 but before the 35th scheduled trading day before the maturity date, at a cash redemption price equal to 100 % of the principal amount of the 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. No sinking fund is provided for the Notes. Upon the occurrence of a fundamental change (as defined in the indenture) prior to the maturity date, holders may require the Company to repurchase all or a portion of the Notes for cash at a price equal to 100 % of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. 112 Table of Contents The Notes are senior unsecured obligations and will rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment with the Company’s existing and future liabilities that are not so subordinated; effectively subordinated to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of current or future subsidiaries of the Company. The foregoing description is qualified in its entirety by reference to the text of the indenture and the form of 0.25 % convertible senior notes due 2023, which were filed as exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 and are incorporated herein by reference. In accounting for the issuance of the Notes, the Company separated the 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 $ 119.4 million and was determined by deducting the fair value of the liability component from the par value of the Notes. 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 5.7 % over the contractual terms of the Notes. In accounting for the transaction costs related to the Notes, the Company allocated the total amount incurred to the liability and equity components of the Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component were approximately $ 10.2 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 Notes. Issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity. In the year ended December 31, 2020, the Company converted $ 206.3 million aggregate principal amount of the Notes by issuing 2,902,434 shares of its Class A common stock and $ 2.0 million of cash. Of the $ 894.6 million total value of these transactions, $ 701.9 million and $ 192.7 million were allocated to the equity and liability components, respectively, utilizing an effective interest rate to determine the fair value of the liability component. The selected interest rate reflects the Company's incremental borrowing rate, adjusted for the Company's credit standing on nonconvertible debt with similar maturity. The extinguishment of these Notes resulted in a $ 12.9 million loss that is included in the other (expense) income, net, in the accompanying condensed consolidated statement of operations. The net carrying amount of the liability component of the Notes was as follows: As of December 31, 2020 2019 (In thousands) Principal $ 343,702 $ 549,999 Unamortized discount ( 38,406 ) ( 84,647 ) Unamortized issuance costs ( 3,228 ) ( 7,162 ) Net carrying amount $ 302,068 $ 458,190 The net carrying amount of the equity component of the Notes was as follows: As of December 31, 2020 2019 (In thousands) Proceeds allocated to the conversion options (debt discount) $ 74,636 $ 119,435 Reacquisition of equity component upon conversion ( 657,073 ) — Issuance costs ( 2,819 ) ( 2,819 ) Net carrying amount $ ( 585,256 ) $ 116,616 113 Table of Contents The following table sets forth the interest expense recognized related to the Notes: Year Ended December 31, 2020 2019 (In thousands) Contractual interest expense $ 1,221 $ 1,375 Amortization of debt issuance costs 1,863 1,858 Amortization of debt discount 21,896 21,838 Total interest expense related to the Notes $ 24,980 $ 25,071 In connection with the offering of the Notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the “capped calls”). The capped calls each have an initial strike price of approximately $ 70.90 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The capped calls have initial cap prices of $ 105.04 per share, subject to certain adjustments. The capped calls cover, subject to anti-dilution adjustments, approximately 7,757,200 shares of Class A common stock. The capped calls are generally intended to reduce or offset the potential dilution to the Class A common stock upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. The capped calls expire on the earlier of (i) the last day on which any convertible securities remain outstanding and (ii) June 1, 2023, 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 $ 58.5 million incurred to purchase the capped call transactions was recorded as a reduction to additional paid-in capital in the accompanying consolidated balance sheet. 10. Supplemental Balance Sheet Information A roll‑forward of the Company’s reserves is as follows: (a) Allowance for doubtful accounts: Year Ended December 31, 2020 2019 2018 (In thousands) Balance, beginning of period $ 6,287 $ 4,945 $ 1,033 Additions 13,413 2,226 4,085 Write-offs ( 7,654 ) ( 884 ) ( 173 ) Balance, end of period $ 12,046 $ 6,287 $ 4,945 Percentage of revenue 1 % 1 % 1 % (b) Customer credit reserve: Year Ended December 31, 2020 2019 2018 (In thousands) Balance, beginning of period $ 6,784 $ 3,015 $ 1,761 Additions 50,817 18,143 5,560 Deductions against reserve ( 40,818 ) ( 14,374 ) ( 4,306 ) Balance, end of period $ 16,783 $ 6,784 $ 3,015 Percentage of revenue 1 % 1 % — % 114 Table of Contents 11. Revenue by Geographic Area Revenue by geographic area is based on the IP address or the mailing address at the time of registration. The following table sets forth revenue by geographic area: Year Ended December 31, 2020 2019 2018 Revenue by geographic area: (In thousands) United States $ 1,282,213 $ 808,857 $ 484,809 International 479,563 325,611 165,258 Total $ 1,761,776 $ 1,134,468 $ 650,067 Percentage of revenue by geographic area: United States 73 % 71 % 75 % International 27 % 29 % 25 % Long-lived assets outside of the United States were not significant. 12. Commitments and Contingencies (a) Lease and Other Commitments The Company entered into various non-cancelable operating lease agreements for its facilities with remaining lease terms from less than one year to nine years . See Note 5 to these consolidated financial statements for additional detail on the Company's operating and finance lease commitments. Additionally, the Company has contractual commitments with its cloud infrastructure provider, network service providers and other vendors that are noncancellable and expire within one to three years . Future minimum payments under these noncancellable purchase commitments were as follows. Unrecognized tax benefits are not included in these amounts because any amounts expected to be settled in cash are not material: As of December 31, 2020 Year Ending December 31, (In thousands) 2021 $ 81,988 2022 27,958 2023 29,091 Total payments $ 139,037 (b) Legal Matters On April 30, 2015 and March 28, 2016, Telesign Corporation (“Telesign”) filed lawsuits (which were subsequently consolidated) against the Company alleging that certain of the Company's products infringed four patents owned by TeleSign. The Company challenged the validity of one of the patents at issue in an inter partes review at the U.S. Patent and Trademark Office ("PTO"), and the PTO found all claims challenged by the Company in the inter partes review unpatentable. Telesign did not appeal the PTO's decision and it is final. On October 19, 2018, the district court granted the Company's motion that all remaining asserted claims of the asserted patents are invalid under 35 U.S.C. § 101 and entered judgment in the Company's favor. On November 8, 2018, Telesign appealed the judgment to the United States Court of Appeals for the Federal Circuit. On January 9, 2020, the Federal Circuit Court affirmed the district court’s judgment, and the matter is now concluded. 115 Table of Contents On December 1, 2016, the Company filed a patent infringement lawsuit against Telesign in the United States District Court, Northern District of California, alleging infringement of United States Patent No. 8,306,021 (“021”), United States Patent No. 8,837,465 (“465”), United States Patent No. 8,755,376 (“376”), United States Patent No. 8,736,051 (“051”), United States Patent No. 8,737,962 (“962”), United States Patent No. 9,270,833 (“833”), and United States Patent No. 9,226,217 (“217”). Telesign filed a motion to dismiss the complaint on January 25, 2017. In two orders, issued on March 31, 2017 and April 17, 2017, the court granted Telesign’s motion to dismiss with respect to the ‘962, ‘833, ‘051 and ‘217 patents, but denied Telesign’s motion to dismiss as to the ‘021, ‘465 and ‘376 patents. On August 23, 2017, Telesign petitioned the U.S. Patent and Trademark Office (“U.S. PTO”) for inter partes review of the ‘021, ‘465, and ‘376 patents. On March 9, 2018, the U.S PTO denied Telesign’s petition for inter partes review of the ‘021 patent and granted Telesign’s petitions for inter partes review of the ‘465 and ‘376 patents. On March 6, 2019, the U.S. PTO found all challenged claims of the '465 and '376 patents unpatentable. The Company appealed the decisions to the United States Court of Appeals for the Federal Circuit who, on June 10, 2020, affirmed the U.S. PTO's rulings. The district court litigation had been stayed pending resolution of the inter partes reviews (and appeals from them). After the appeals were concluded, the district court reopened the case and set trial on the ’021 Patent for July 2021. The Company sought a judgment of infringement, a judgment of willful infringement, monetary and injunctive relief, enhanced damages, and an award of costs and expenses against Telesign. A settlement agreement was executed on November 25, 2020, settling all claims. On December 2, 2020, a joint stipulation of dismissal was filed and the Court entered an order dismissing the case with prejudice. This matter is now concluded. In addition to the litigation discussed above, from time to time, the Company may be subject to legal actions and claims in the ordinary course of business. The Company has received, and may in the future continue to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights. Future litigation may be necessary to defend the Company, its partners and its customers by determining the scope, enforceability and validity of third‑party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors. Legal fees and other costs related to litigation and other legal proceedings are expensed as incurred and are included in general and administrative expenses in the accompanying consolidated statements of operations. (c) Indemnification Agreements The Company has signed indemnification agreements with all of its board members and executive officers. The agreements indemnify the board members and executive officers from claims and expenses on actions brought against the individuals separately or jointly with the Company for certain indemnifiable events. Indemnifiable events generally mean any event or occurrence related to the fact that the board member or the executive officer was or is acting in his or her capacity as a board member or an executive officer for the Company or was or is acting or representing the interests of the Company. In the ordinary course of business and in connection with our financing and business combinations transactions, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to business partners, customers and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties and other liabilities relating to or arising from the Company’s various products, or its acts or omissions. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, the Company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments. The terms of such obligations may vary. As of December 31, 2020 and 2019, no amounts were accrued related to any outstanding indemnification agreements. 116 Table of Contents (d) Other Taxes The Company conducts operations in many tax jurisdictions within and outside the United States. In many of these jurisdictions, non-income-based taxes, such as sales, use, telecommunications, and other local taxes are assessed on the Company’s operations. Prior to March 2017, the Company had not billed nor collected these taxes from its customers and, in accordance with U.S. GAAP, recorded a provision for its tax exposure in these jurisdictions when it was both probable that a liability had been incurred and the amount of the exposure could be reasonably estimated. These estimates included several key assumptions including, but not limited to, the taxability of the Company’s services, the jurisdictions in which its management believes it had nexus, and the sourcing of revenues to those jurisdictions. Starting in March 2017, the Company began collecting these taxes from customers in certain jurisdictions and since then has expanded to collect taxes in most jurisdictions where the Company operates. The Company is also in discussions with certain jurisdictions regarding its prior sales and other taxes, if any, that it may owe. In the event any of these jurisdictions disagrees with management’s assumptions and analysis, the assessment of the Company's tax exposure could differ materially from management's current estimates. For example, one jurisdiction has assessed the Company for $ 38.8 million in taxes, including interest and penalties, which exceeded the $ 11.5 million the Company had accrued for the period covered by this assessment. The Company believes that this assessment is incorrect and has disputed it, paid the full amount as required by law, and is seeking a refund or settlement. The payment made in excess of the accrued amount is reflected as a deposit in the Company's accompanying consolidated balance sheet. If a reasonable settlement cannot be reached in the near future, the Company will challenge the jurisdiction’s assessment in court. However, litigation is uncertain and a ruling against the Company may adversely affect its financial position and results of operation. As of December 31, 2020 and 2019, the liability recorded for these taxes was $ 25.6 million and $ 27.0 million, respectively. 13. Stockholders’ Equity Preferred Stock As of December 31, 2020 and 2019, the Company had authorized 100,000,000 shares of preferred stock, par value $ 0.001 , of which no shares were issued and outstanding. Common Stock As of December 31, 2020 and 2019, the Company had authorized 1,000,000,000 shares of Class A common stock and 100,000,000 shares of Class B common stock, each par value $ 0.001 per share. As of December 31, 2020, 153,496,222 shares of Class A common stock and 10,551,302 shares of Class B common stock were issued and outstanding. As of December 31, 2019, 126,882,172 shares of Class A common stock and 11,530,627 shares of Class B common stock were issued and outstanding. Holders of Class A and Class B common stock are entitled to one vote per share and 10 votes per share, respectively, and the shares of Class A common stock and Class B common stock are identical, except for voting and conversion rights. The Company had reserved shares of common stock for issuance as follows: As of December 31, 2020 2019 Stock options issued and outstanding 5,625,735 7,705,848 Nonvested restricted stock units issued and outstanding 7,523,882 8,490,517 Class A common stock reserved for Twilio.org 707,265 795,673 Stock-based awards available for grant under 2016 Plan 18,942,205 14,957,734 Stock-based awards available for grant under 2016 ESPP 4,941,281 3,848,953 Class A common stock reserved for the convertible senior notes 7,569,731 10,472,165 Total 45,310,099 46,270,890 117 Table of Contents Public Equity Offerings In August 2020 and June 2019, the Company completed public equity offerings in which it sold 5,819,838 shares and 8,064,515 shares, respectively, of its Class A common stock at a public offering price of $ 247.00 per share and $ 124.00 per share, respectively. The Company received total proceeds of $ 1.4 billion and $ 979.0 million, respectively, net of underwriting discounts and offering expenses paid and payable by the Company. 14. Stock-Based Compensation 2008 Stock Option Plan The Company maintained a stock plan, the 2008 Stock Option Plan, as amended and restated (the “2008 Plan”), which allowed the Company to grant incentive (“ISO”), non‑statutory (“NSO”) stock options and restricted stock units (“RSU”) to its employees, directors and consultants to participate in the Company’s future performance through stock‑based awards at the discretion of the board of directors. Under the 2008 Plan, options to purchase the Company’s common stock could not be granted at a price less than fair value in the case of ISOs and NSOs. Fair value was determined by the board of directors, in good faith, with input from valuation consultants. On June 22, 2016, the plan was terminated in connection with the Company’s IPO. Accordingly, no shares are available for future issuance under the 2008 Plan. The 2008 Plan continues to govern outstanding equity awards granted thereunder. The Company’s right of first refusal for outstanding equity awards granted under the 2008 Plan terminated upon completion of the IPO. Options granted include provisions for early exercisability. 2016 Stock Option Plan The Company’s 2016 Stock Option and Incentive Plan (the “2016 Plan”) became effective on June 21, 2016. The 2016 Plan provides for the grant of ISOs, NSOs, restricted stock, RSUs, stock appreciation rights, unrestricted stock awards, performance share awards, dividend equivalent rights and cash-based awards to employees, directors and consultants of the Company. A total of 11,500,000 shares of the Company’s Class A common stock were initially reserved for issuance under the 2016 Plan. These available shares automatically increase each January 1, beginning on January 1, 2017, by 5 % of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31, or such lesser number of shares as determined by the Company’s compensation committee. On January 1, 2020 and 2019, the shares available for grant under the 2016 Plan were automatically increased by 6,920,640 shares and 5,004,011 shares, respectively. Under the 2016 Plan, the stock options are granted at a price per share not less than 100 % of the fair market value per share of the underlying common stock on the date of grant. Under both plans, stock options generally expire 10 years from the date of grant and vest over periods determined by the board of directors. The vesting period for new-hire options and restricted stock units is generally a four year term from the date of grant, at a rate of 25 % after one year , then monthly or quarterly, respectively, on a straight-line basis thereafter. In July 2017, the Company began granting restricted stock units to existing employees that vest in equal quarterly installments over a four year service period. Equity Awards Assumed in Acquisitions Segment In connection with its acquisition of Segment, the Company assumed and replaced all stock options and restricted stock units of continuing employees issued under Segment’s 2013 Stock Incentive Plan ("Segment Plan") that were unvested and outstanding on the acquisition date. The assumed equity awards will continue to be outstanding and will be governed by the provisions of the Segment Plan. 118 Table of Contents SendGrid In connection with its acquisition of SendGrid, the Company assumed all stock options and restricted stock units issued under SendGrid’s 2009, 2012 and 2017 Stock Incentive Plans that were outstanding on the date of acquisition. The assumed equity awards will continue to be outstanding and will be governed by the provisions of their respective plans. Additionally, the Company assumed shares of SendGrid common stock that were reserved and available for issuance under SendGrid's 2017 Equity Incentive Plan, on an as converted basis. These shares can be utilized for future equity grants under the Company’s 2016 Plan, to the extent permitted by New York Stock Exchange rules. 2016 Employee Stock Purchase Plan The Company’s Employee Stock Purchase Plan (“2016 ESPP”), as amended, initially became effective on June 21, 2016. A total of 2,400,000 shares of the Company’s Class A common stock were initially reserved for issuance under the 2016 ESPP. These available shares automatically increase each January 1, beginning on January 1, 2017, by the lesser of 1,800,000 shares of the common stock, 1 % of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31 or such lesser number of shares as determined by the Company’s compensation committee. On January 1, 2020 and 2019, the shares available for grant under the 2016 ESPP were automatically increased by 1,384,128 shares and 1,000,802 shares, respectively. The 2016 ESPP allows eligible employees to purchase shares of the Company’s Class A common stock at a discount of up to 15 % through payroll deductions of their eligible compensation, subject to any plan limitations. The 2016 ESPP provides for separate six-month offering periods beginning in May and November of each fiscal year. On each purchase date, eligible employees purchase the Company’s stock at a price per share equal to 85 % of the lesser of (i) the fair market value of the Company’s Class A common stock on the offering date or (ii) the fair market value of the Company’s Class A common stock on the purchase date. As of December 31, 2020, total unrecognized compensation cost related to the 2016 ESPP was $ 6.5 million, which will be amortized over a weighted-average period of 0.37 years. Stock-options and restricted stock units activity under the Company's 2008 Plan and 2016 Plan as well as respective Stock Incentive Plans of SendGrid and Segment was as follows: Stock Options Number of options outstanding Weighted- average exercise price (Per share) Weighted- average remaining contractual term (In years) Aggregate intrinsic value (In thousands) Outstanding options as of December 31, 2019 7,150,848 $ 28.79 6.47 $ 511,971 Granted 692,797 151.06 Assumed in acquisition 1,030,638 67.61 Exercised ( 3,495,728 ) 20.74 Forfeited and canceled ( 307,820 ) 73.46 Outstanding options as of December 31, 2020 5,070,735 $ 51.71 6.85 $ 1,454,222 Options vested and exercisable as of December 31, 2020 2,760,433 $ 23.51 5.53 $ 869,502 Year Ended December 31, 2020 2019 2018 (In thousands, except per share amounts) Aggregate intrinsic value of stock options exercised (1) $ 603,597 $ 394,998 $ 178,504 Total estimated grant date fair value of options vested $ 107,854 $ 81,292 $ 21,761 Weighted-average grant date fair value per share of options granted $ 170.70 $ 58.13 $ 18.40 ____________________________________ ( 1 ) Aggregate intrinsic value represents the difference between the fair value of the Company’s Class A common stock as reported on the New York Stock Exchange and the exercise price of outstanding “in-the-money” options. 119 Table of Contents On February 28, 2017, the Company granted a total of 555,000 shares of performance-based stock options in three distinct awards to an employee with grant date fair values of $ 13.48 , $ 10.26 and $ 8.41 per share for a total grant value of $ 5.9 million. All performance conditions have been met. The following table summarizes the details of the performance options: Number of options outstanding Weighted- average exercise price (Per share) Weighted- average remaining contractual term (in years) Aggregate intrinsic value (In thousands) Outstanding options as of December 31, 2019 555,000 $ 31.72 4.16 $ 36,941 Granted — — Exercised — — Forfeited and canceled — — Outstanding options as of December 31, 2020 555,000 $ 31.72 3.16 $ 170,263 Options vested and exercisable as of December 31, 2020 531,875 $ 31.72 3.16 $ 163,169 As of December 31, 2020, total unrecognized compensation cost related to all nonvested stock options was $ 250.5 million, which will be amortized on a ratable basis over a weighted-average period of 2.3 years. Restricted Stock Units Number of awards outstanding Weighted- average grant date fair value (Per share) Aggregate intrinsic value (In thousands) Nonvested RSUs as of December 31, 2019 8,490,517 $ 74.21 $ 830,167 Granted 3,285,382 196.80 Assumed in acquisition 158,593 273.38 Vested ( 3,557,147 ) 73.67 Forfeited and canceled ( 853,463 ) $ 92.71 Nonvested RSUs as of December 31, 2020 7,523,882 $ 131.76 $ 2,542,858 As of December 31, 2020, total unrecognized compensation cost related to nonvested RSUs was $ 904.7 million, which will be amortized over a weighted-average period of 2.5 years. As of December 31, 2020, the unrecognized compensation cost related to Class A common stock subject to future vesting conditions is $ 65.9 million, which will be amortized over a term of 2.2 years. 120 Table of Contents Valuation Assumptions The fair value of employee stock options was estimated on the date of grant using the following assumptions in the Black-Scholes option pricing model: Year Ended December 31, Employee Stock Options: 2020 2019 2018 Fair value of common stock $ 108.37 - $ 301.72 $ 103.70 - $ 130.70 $ 33.01 - $ 76.63 Expected term (in years) 0.52 - 6.08 0.33 - 6.08 1.00 - 6.08 Expected volatility 51.9 % - 65.1 % 49.0 % - 66.5 % 38.6 % - 44.2 % Risk-free interest rate 0.1 % - 1.4 % 1.6 % - 2.5 % 2.9 % - 3.0 % Dividend rate — % — % — % Year Ended December 31, Employee Stock Purchase Plan: 2020 2019 2018 Expected term (in years) 0.50 0.49 - 0.50 0.50 Expected volatility 54.4 % - 72.1 % 43.1 % - 50.3 % 39.8 % - 47.5 % Risk-free interest rate 0.1 % - 0.2 % 1.6 % - 2.4 % 2.1 % - 2.5 % Dividend rate — % — % — % Stock-Based Compensation Expense The Company recorded total stock-based compensation expense as follows. In the year ended December 31, 2020, stock-based compensation expense associated with the acquisition of Segment was $ 31.7 million. Year Ended December 31, 2020 2019 2018 (In thousands) Cost of revenue $ 8,857 $ 7,123 $ 1,126 Research and development 173,303 126,012 42,277 Sales and marketing 103,450 60,886 23,616 General and administrative 76,301 70,297 26,254 Total $ 361,911 $ 264,318 $ 93,273 15. Net Loss Per Share Attributable to Common Stockholders The following table sets forth the calculation of basic and diluted net loss per share attributable to common stockholders during the periods presented: Year Ended December 31, 2020 2019 2018 Net loss attributable to common stockholders (in thousands) $ ( 490,979 ) $ ( 307,063 ) $ ( 121,949 ) Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted 146,708,663 130,083,046 97,130,339 Net loss per share attributable to common stockholders, basic and diluted $ ( 3.35 ) $ ( 2.36 ) $ ( 1.26 ) 121 Table of Contents The following outstanding shares of common stock equivalents were excluded from the calculation of the diluted net loss per share attributable to common stockholders because their effect would have been anti-dilutive: As of December 31, 2020 2019 2018 Stock options issued and outstanding 5,625,735 7,705,848 7,978,369 Nonvested restricted stock units issued and outstanding 7,523,882 8,490,517 8,262,902 Class A common stock reserved for Twilio.org 707,265 795,673 572,676 Class A common stock committed under 2016 ESPP 103,703 207,792 113,312 Convertible senior notes (1) 4,847,578 3,150,647 233 Class A common stock in escrow 75,612 — — Class A common stock in escrow subject to future vesting 268,030 — — Unvested shares subject to repurchase — — 1,250 Total 19,151,805 20,350,477 16,928,742 ____________________________________ (1) Since, effective with the fourth quarter 2020, the Company expects to settle the principal amount of its outstanding convertible senior notes in shares of the Company's Class A common stock, as of December 21, 2020, the Company used the if-converted method for calculating any potential dilutive effect of the debt settlement on diluted net income per share, if applicable. Prior to the fourth quarter 2020, the Company expected to settle the principal amount of its outstanding convertible senior notes in cash and any excess in shares of the Company's Class A common stock. Hence, as of December 31, 2019 and 2018, the Company used the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread has a dilutive impact 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 exceeds the conversion price of $ 70.90 per share for the Notes. The conversion spread is calculated using the average market price of Class A common stock during the period, consistent with the treasury stock method. 16. Income Taxes The following table presents domestic and foreign components of loss before income taxes for the periods presented: Year Ended December 31, 2020 2019 2018 (In thousands) United States $ ( 403,148 ) $ ( 328,902 ) $ ( 96,448 ) International ( 101,278 ) ( 33,314 ) ( 24,710 ) Loss before provision for income taxes $ ( 504,426 ) $ ( 362,216 ) $ ( 121,158 ) Provision (benefit) for income taxes consists of the following: Year Ended December 31, 2020 2019 2018 Current: (In thousands) State 272 198 139 Foreign 5,215 2,684 881 Total 5,487 2,882 1,020 Deferred: Federal ( 12,719 ) ( 49,393 ) 29 State ( 3,563 ) ( 7,474 ) 19 Foreign ( 2,652 ) ( 1,168 ) ( 277 ) Total ( 18,934 ) ( 58,035 ) ( 229 ) Income tax provision (benefit) $ ( 13,447 ) $ ( 55,153 ) $ 791 122 Table of Contents The following table presents a reconciliation of the statutory federal tax rate and the Company's effective tax rate: Year Ended December 31, 2020 2019 2018 Tax benefit at federal statutory rate 21 % 21 % 21 % State tax, net of federal benefit 12 8 15 Stock-based compensation 24 14 31 Credits 3 4 8 Foreign rate differential ( 4 ) ( 2 ) ( 4 ) Permanent book vs. tax differences ( 1 ) — — Change in valuation allowance ( 51 ) ( 29 ) ( 68 ) Other — ( 1 ) ( 3 ) Effective tax rate 4 % 15 % — % Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table presents the significant components of the Company's deferred tax assets and liabilities: As of December 31, 2020 2019 2018 Deferred tax assets: (In thousands) Net operating loss carryforwards $ 656,755 $ 274,116 $ 116,190 Accrued and prepaid expenses 15,408 11,828 11,594 Stock-based compensation 32,900 35,035 11,147 Research and development credits 92,899 65,955 32,206 Charitable contributions 8,229 3,172 3,100 Capped call 4,475 9,914 13,175 Debt issuance cost 230 493 638 Depreciable property — 2 — Intangibles 135,500 — — Lease liability 68,566 39,117 — Other — — 194 Gross deferred tax assets 1,014,962 439,632 188,244 Valuation allowance ( 677,782 ) ( 255,893 ) ( 147,354 ) Net deferred tax assets 337,180 183,739 40,890 Deferred tax liabilities: Capitalized software ( 19,174 ) ( 13,032 ) ( 10,686 ) Prepaid expenses ( 450 ) ( 1,157 ) ( 838 ) Acquired intangibles ( 231,379 ) ( 107,281 ) ( 2,997 ) Property and equipment ( 85 ) ( 1,578 ) ( 1,990 ) Convertible debt ( 9,495 ) ( 20,745 ) ( 27,164 ) Right-of-use asset ( 66,243 ) ( 39,630 ) — Deferred commissions ( 21,162 ) ( 7,446 ) ( 2,396 ) Other ( 2,876 ) ( 405 ) — Net deferred tax liability $ ( 13,684 ) $ ( 7,535 ) $ ( 5,181 ) 123 Table of Contents The following table summarizes our tax carryforwards, carryovers, and credits: As of December 31, 2020 Expiration Date (If not utilized) (In thousands) Federal net operating loss carryforwards $ 303,793 Various dates beginning in 2029 Federal tax credits $ 79,844 Various dates beginning in 2029 Federal net operating loss carryforwards $ 2,430,006 Indefinite State net operating loss carryforwards $ 1,782,465 Various dates beginning in 2025 State tax credits $ 57,670 Indefinite Foreign net operating loss carryforwards $ 27,941 Indefinite A limitation may apply to the use of the net operating loss and credit carryforwards, under provisions of the Internal Revenue Code of 1986, as amended, and similar state tax provisions that are applicable if the Company experiences an "ownership change." An ownership change may occur, for example, as a result of issuance of new equity. Should these limitations apply, the carryforwards would be subject to an annual limitation, resulting in a potential reduction in the gross deferred tax assets before considering the valuation allowance. 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 such factors as its history of operating losses, 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. Additionally, in December 2020, the Company completed an intra-entity asset transfer of certain intellectual property rights to an Irish subsidiary where its international business is headquartered. The transfer resulted in a step-up in the tax basis of the transferred intellectual property rights and a correlated $ 135.5 million increase in foreign deferred tax assets. At present, the Company does not believe that it is more likely than not that the net deferred tax assets will be realized, and accordingly, a full valuation allowance has been established. The valuation allowance increased by approximately $ 421.9 million and $ 108.5 million during the years ended December 31, 2020 and 2019, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Year Ended December 31, 2020 2019 2018 (In thousands) Unrecognized tax benefit, beginning of year $ 49,042 $ 15,635 $ 9,445 Gross increases for tax positions of prior years 4,259 12,939 1,233 Gross decrease for tax positions of prior years ( 931 ) ( 395 ) ( 4 ) Gross increases for tax positions of current year 138,813 20,863 4,961 Unrecognized tax benefit, end of year $ 191,183 $ 49,042 $ 15,635 As of December 31, 2020, the Company had approximately $ 191.2 million of unrecognized tax benefits. If the $ 191.2 million is recognized, $ 4.4 million would affect the effective tax rate. The remaining amount would be offset by the reversal of related deferred tax assets which are subject to a full valuation allowance. The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of December 31, 2020, the Company has accumulated $ 0.3 million in both interest and penalties related to uncertain tax positions. The Company does not anticipate any significant changes within 12 months of December 31, 2020, in its uncertain tax positions that would be material to the consolidated financial statements taken as a whole because nearly all of the unrecognized tax benefit has been offset by a deferred tax asset, which has been reduced by a valuation allowance. 124 Table of Contents The Company files U.S. federal income tax returns as well as income tax returns in many U.S. states and foreign jurisdictions. As of December 31, 2020, the tax years 2008 through the current period remain open to examination by the major jurisdictions in which the Company is subject to tax. Fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years, which have been carried forward and may be audited in subsequent years when utilized. The Company is fully reserved for all open U.S. federal, state and local, or non-U.S. income tax examinations by any tax authorities. On June 7, 2019, a three-judge panel from the U.S. Court of Appeals for the Ninth Circuit overturned the U.S. Tax Court's decision in Altera Corp. v. Commissioner and upheld the portion of the Treasury regulations under Section 482 of the Internal Revenue Code that requires related parties in a cost-sharing arrangement to share expenses related to share-based compensation. As a result of this decision, the Company's gross unrecognized tax benefits increased to reflect the impact of including share-based compensation in cost-sharing arrangements. On July 22, 2019, Altera filed a petition for a rehearing before the full Ninth Circuit and the request was denied on November 12, 2019. On February 10, 2020, Altera filed a petition to appeal the decision to the Supreme Court and on June 22, 2020 the Supreme Court denied the petition. There is no impact on the Company’s effective tax rate for year ended December 31, 2020 due to a full valuation allowance against its deferred tax assets. We will continue to monitor future developments and their potential effects on our consolidated financial statements. In connection with the Segment acquisition, the Company recorded a net deferred tax liability which provides an additional source of taxable income to support the realization of the pre-existing deferred tax assets and, accordingly, during the year ended December 31, 2020, the Company released a total of $ 13.8 million of its U.S. valuation allowance. The Company continues to maintain a valuation allowance for its U.S. Federal and State net deferred tax assets. In connection with the SendGrid acquisition, the Company recorded a net deferred tax liability which provides an additional source of taxable income to support the realization of the pre-existing deferred tax assets and, accordingly, during the year ended December 31, 2019, the Company released a total of $ 55.0 million of its U.S. valuation allowance. The Company continues to maintain a valuation allowance for its U.S. Federal and State net deferred tax assets. The provision for income taxes recorded in the years ended December 31, 2020 and 2019, consists primarily of income taxes and withholding taxes in foreign jurisdictions in which the Company conducts business. The Company’s U.S. operations have been in a loss position and the Company maintains a full valuation allowance against its U.S. deferred tax assets. 17. Subsequent Events On February 22, 2021, the Company completed a public equity offering in which it sold 4,312,500 shares of its Class A common stock at a public offering price of $ 409.60 per share, including shares sold in connection with the exercise of the underwriters' option to purchase additional shares. The Company received total proceeds of $ 1.8 billion, net of offering expenses paid or payable by the Company. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.