Amendment No.1 to Form S-1
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As filed with the Securities and Exchange Commission on October 23, 2017.

Registration No. 333-220945

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1 TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Bandwidth Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7372   56-2242657

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

900 Main Campus Drive

Raleigh, NC 27606

(800) 808-5150

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

David A. Morken

Chairman and Chief Executive Officer

Bandwidth Inc.

900 Main Campus Drive

Raleigh, NC 27606

(800) 808-5150

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Michael Benjamin, Esq.

John Chory, Esq.

Shagufa Hossain, Esq.

Latham & Watkins LLP

885 Third Avenue

New York, NY 10022

(212) 906-1200

 

W. Christopher Matton, Esq.

General Counsel

Bandwidth Inc.

900 Main Campus Drive

Raleigh, NC 27606

(800) 808-5150

 

Sophia Hudson, Esq.

Richard D. Truesdell Jr., Esq.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, NY 10017

(212) 450-4000

 

 

Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued             , 2017

Class A Shares

 

LOGO

CLASS A COMMON STOCK

 

 

Bandwidth Inc. is offering                  shares of its Class A common stock. This is our initial public offering and no public market currently exists for our shares of Class A common stock. We anticipate that the initial public offering price will be between $                 and $                 per share.

 

 

Following this offering, we will have two classes of authorized common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock will be identical, except with respect to voting and conversion rights. Each share of Class A common stock will be entitled to one vote per share. Each share of Class B common stock is entitled to ten votes per share and is convertible into one share of Class A common stock. Outstanding shares of Class B common stock will represent approximately     % of the voting power of our outstanding capital stock immediately following the completion of this offering, with our directors, executive officers and 5% stockholders, and their respective affiliates, holding approximately     % of the voting power of our capital stock following this offering.

 

 

We intend to apply to list our Class A common stock on the NASDAQ Global Select Market under the symbol “BAND.”

Upon completion of this offering, we will not be a “controlled company” under the corporate governance rules for NASDAQ-listed companies. However, we expect we will receive the necessary regulatory approvals on or prior to January 31, 2018 to allow us to become a “controlled company” under the corporate governance rules for NASDAQ-listed companies. Upon conversion of Class B common stock owned by certain of our shareholders into Class A common stock, David A. Morken, our cofounder and chief executive officer, will become our controlling shareholder holding approximately     % of the voting power of our capital stock following this offering. See “The Common Stock Split and the Reorganizations.”

 

 

We are an “emerging growth company” as defined under the federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings. Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 18.

 

 

PRICE $         A SHARE

 

 

 

      

Price to
Public

      

Underwriting

Discounts and

Commissions

      

Proceeds to
Company(1)

 

Per share

       $                              $                              $                      

Total

       $                              $                              $                      

 

(1) See the section titled “Underwriters” for additional information regarding compensation payable to the underwriters.

We and the selling stockholders have granted the underwriters the right to purchase up to an additional              shares of Class A common stock, of which 50% will be sold by us and the remaining 50% will be sold by the selling stockholders, to cover over-allotments at the initial public offering price less the underwriting discount. We will not receive any proceeds from the sale of shares by the selling stockholders.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of Class A common stock to purchasers on                 , 2017.

 

 

 

MORGAN STANLEY  

KEYBANC CAPITAL MARKETS

  BAIRD

 

CANACCORD GENUITY   JMP SECURITIES

 

 

                , 2017.


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LOGO

 

52 Million    PHONE NUMBERS* 99 . Billion MESSAGES** 338 EMPLOYEES* 18 Years OF BUILDING UP 26.5 Billion MINUTES** HQ RALEIGH, NC 8 Million    911-ENABLED PHONE NUMBERS* BANDWIDTH

We develop & deliver the power to communicate *As of June 30, 2017, **For the twelve months ending on June 30, 2017.


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LOGO

 

POWERED BY bandwidth


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LOGO

 

“Choosing Bandwidth’s APIs built atop their own network meant we could cut out an unnecessary layer of complexity and grow adoption at an even faster rate. With our original provider, we knew scalability was going to be an issue. Bandwidth was able to support our high volume of users, without impacting deliverability or our bottom line.” Jeff Zwelling Chief Operating Officer ZipRecruiter “Bandwidth shares our dedication to providing WebEx clients with the most reliable service in the conferencing industry. Their customer-centric approach to service gives us the confidence we can deliver world class services to our global customer base.” Gagan Pabla Director of Service Operations Cisco-WebEx “We’ve worked with Bandwidth for over a decade. The Bandwidth software platform and network give us the flexibility, quality, and economics essential for our success. Call quality is the backbone of Dialpad. Without it, the freedom to connect everyone, be everywhere, and create anything doesn’t stand a chance. With the help of Bandwidth, we deliver the most reliable, highest quality voice system out there.” Craig Walker Founder & Chief Executive Officer Dialpad “Bandwidth and team are true partners. They began with us at the concept stage and delivered for us all the way through launch and beyond. These are innovative guys who are more flexible, transparent, and more agile than any network provider I’veever worked with.” Greg Woock Founder & Chief Executive Officer Pinger/Sideline “One of our highest priorities at Rover is to deliver superior customer service; Bandwidth’s telecom tools allow us provide a convenient mobile experience. SMS enables sitters and pet owners to easily communicate through channels they’re used to. Bandwidth allowed us to scale and meet our growing need with minimal transition costs.” Philip Kimmey Co-Founder & Director of Software Development Rover.com WebEx THE POWER TO COMMUNICATE DEVELOP & DELIVER THE POWER TO COMMUNICATE


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Risk Factors

     18  

The Common Stock Split and the Reorganizations

     48  

Market and Industry Data

     50  

Trademarks

     51  

Special Note Regarding Forward-Looking Statements

     52  

Use of Proceeds

     54  

Dividend Policy

     55  

Capitalization

     56  

Dilution

     58  

Selected Consolidated Financial and Other Data

     60  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     62  
     Page  

Letter from the Cofounder

     89  

Business

     91  

Management

     105  

Executive Compensation

     110  

Certain Relationships and Related Party Transactions

     120  

Principal and Selling Stockholders

     125  

Description of Capital Stock

     128  

Shares Eligible for Future Sale

     133  

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders of Our Class A Common Stock

     135  

Underwriters

     139  

Legal Matters

     148  

Experts

     148  

Where You Can Find More Information

     148  

Index to Consolidated Financial Statements

     F-1  
 

 

 

Through and including                 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

We and the selling stockholders have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared or have been prepared on our behalf or to which we have referred you. We, the selling stockholders and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of Class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the Class A common stock.

For investors outside the United States: None of we, the selling stockholders or any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you. You should read the entire prospectus carefully together with our consolidated financial statements and the related notes appearing elsewhere in this prospectus before you decide to invest in our Class A common stock. This prospectus contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those discussed in the “Risk Factors” and other sections of this prospectus. Unless the context otherwise requires, the terms “Bandwidth,” “the company,” “we,” “us” and “our” in this prospectus refer to Bandwidth Inc. and its consolidated subsidiaries.

OVERVIEW

Overview

We are a leading cloud-based communications platform for enterprises in the United States. Our solutions include a broad range of software application programming interfaces (“APIs”) for voice and text functionality and our owned and managed, purpose-built Internet protocol (“IP”) voice network, one of the largest in the nation. Our sophisticated and easy-to-use software APIs allow enterprises to enhance their products and services by incorporating advanced voice and text capabilities. Companies use our platform to more frequently and seamlessly connect with their end users, add voice calling capabilities to residential Internet of Things (“IoT”) devices, offer end users new mobile application experiences and improve employee productivity, among other use cases. By owning and operating a capital-efficient, purpose-built IP voice network, we are able to offer advanced monitoring, reporting and analytics, superior customer service, dedicated operating teams, personalized support, and flexible cost structures. Over the last ten years, we have pioneered the Communications platform-as-a-service (“CPaaS”) space through our innovation-rich culture and focus on empowering enterprises with end-to-end communications solutions.

As technologies evolve and new mobile applications and connected devices proliferate, enterprises must adapt and innovate their communications solutions to create a “connected” experience anywhere, anytime, on any device. Enterprises looking to capitalize on trends such as voice as an interface and application-to-person (“A2P”) messaging need solutions that are reliable, secure, scalable and cost-efficient. Most software-powered communications providers rely heavily on leased networks and cannot provide enterprise-grade service and support. We believe traditional large-scale network providers lack the capabilities to build robust software platforms for agile development of communications solutions. Enterprises focus on their core businesses and lack the technical know-how or strategic flexibility to build the customized solutions they require in-house. As a result, enterprises need a third-party, end-to-end, cloud-based software solution that eliminates the complexity and expense of building and maintaining their own communications platform.

Our solutions address enterprises’ communications needs, and we believe they are shaping the future of how enterprises connect through embedded voice and text for applications and devices. At the core of our solutions are our communications software APIs, which allow companies to build products and services on top of our cloud-based, out-of-the-box software. Our software APIs include pre-defined functions that are easily customizable for specific use cases without the challenge and expense of building and deploying complex code. Moreover, our platform collects and analyzes terabytes of call and messaging data records in real-time and provide a seamless integration to CRM and Business Intelligence analytics tools to provide meaningful data driven actionable insights for critical business decisions. Customers can then launch and scale applications and solutions with reliability using our own nationwide IP voice network. Our voice software APIs allow enterprises to make and receive phone calls and create advanced voice experiences. Integration with our purpose-built IP

 



 

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voice network ensures enterprise-grade functionality and secure, high-quality connections. Our messaging software APIs provide enterprises with advanced tools to connect with end users via messaging. Our customers also use our solutions to enable 911 response capabilities, real-time provisioning and activation of phone numbers and toll-free number messaging.

We are the only CPaaS provider in the industry with our own nationwide IP voice network, which we have purpose-built for our platform. Our network is capital-efficient and custom-built to support the applications and experiences that make a difference in the way enterprises communicate. Since a communications platform is only as strong as the network that backs it, we believe our network provides a significant competitive advantage in the control, quality, pricing power and scalability of our offering. We are able to control the quality and provide the support our customers expect, as well as efficiently meet scalability and cost requirements.

Our customers currently include only enterprises, which includes large enterprises, small and medium-sized businesses, emerging technology companies and any other business. Our customers operate in a diverse set of industries, including technology, communications, hospitality and services, that need to launch and scale robust communications experiences. Our customers choose Bandwidth because we empower them to embed seamless communications within their products and services in a reliable, flexible, scalable and cost-efficient manner. Our customers include Google Voice, Microsoft Office 365 Skype for Business, Dialpad, GoDaddy, Kipsu, Rover and ZipRecruiter, among many others. We do not currently have any consumer or residential customers, although our enterprise customers may utilize our solutions to serve their own consumer or residential customers or end users.

Our usage-based revenue model allows us to grow with our customers and increase our revenue base as our customers deepen their usage of our solutions. Our CPaaS customers increased use of our platform from no minutes or messages in 2008 to 27 billion minutes and 10 billion messages in the twelve months ended June 30, 2017. Our dollar-based net retention rate, which measures our customers’ increased utilization of our platform, was 115%, 111% and 107% for the year ended December 31, 2015 and 2016 and the six months ended June 30, 2017, respectively. See “—Key Performance Indicators” for an explanation of how we calculate our dollar-based net retention rate.

We have continued growing our business in recent periods. For the years ended December 31, 2015 and 2016 and the six months ended June 30, 2017, our revenue was $137.8 million, $152.1 million and $79.2 million, respectively, and our net (loss) income was $(6.7) million, $22.4 million and $4.9 million, respectively.

INDUSTRY BACKGROUND

Communications are the Heartbeat of How Enterprises Operate, Drive Growth and Innovate

Communications have reached a tipping point as enterprises are embedding mission-critical communications functions in their products and services. With the unprecedented growth of mobile technologies and connected devices that comprise the IoT, enterprises compete to provide real-time value to their customers across a myriad of devices. Enterprises seeking to effectively operate, drive growth and innovate must navigate the convergence of software-powered communications and the proliferation of mobile applications and smart devices that create a “connected” experience.

Additionally, voice-first user interfaces built on artificial intelligence (“AI”) technology are becoming a natural extension of existing voice-enabled devices such as mobile phones. According to comScore, as of Q2 2017, one in two smartphone users in the United States uses voice technology on their smartphones. Of those smartphone users, 49% use it weekly and 34% use it daily. Additionally, as of March 2017, smart speakers, such

 



 

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as Amazon Echo or Google Home, were in 8% of connected homes in the United States. According to Gartner, by 2018, more than 2 billion people will use conversational AI to interact with virtual personal assistants (“VPAs”), virtual customer assistants and other AI-enabled smartphones and connected devices on a regular basis. By 2020, more than 50% of cloud interactions in homes with VPA speakers will be conversational.

Enterprises Today Operate in Real-Time with Distributed Architectures

Successful enterprises today are focused on innovating their core product offerings and building a strategic advantage to reach and empower their customers. Enterprises are adopting a distributed approach in deploying cloud-based third-party software solutions. As a result, rapidly proliferating mobile technologies, big data and cloud-based software services have transformed how these enterprises can run their businesses. Additionally, organizations can customize their offerings to customers by building on top of cloud-based, out-of-the-box software APIs. Third-party, cloud-based solutions eliminate the complexity and cost of building and maintaining their own communications solution.

Communications Solutions are Still a Challenge for Enterprises

Large enterprises and small and medium-sized businesses struggle to build, deploy and manage their own software-powered communications platforms. As communications have grown more sophisticated and complex, software-based APIs have become the backbone for core communications functions such as provisioning and porting phone numbers, A2P voice and messaging services, and 911 services at scale. Enterprises focus on their core businesses and lack the technical know-how or strategic flexibility to build, customize and scale these software APIs from the ground up.

Enterprises seeking to embed end-to-end communications solutions can turn to other software-powered communications providers or traditional large-scale network providers. Neither fully addresses the complex needs of the enterprise. Enterprises require the versatility of a cloud-based software platform coupled with the reliability of a network provider to address their end-to-end communications requirements.

OUR MARKET OPPORTUNITY

To establish and maintain their competitive advantage, enterprises need to be able to leverage cloud-based software that enables superior communications products and experiences. Software is redefining communications, and CPaaS solutions are becoming critical to business communications. CPaaS allows enterprises to leverage the latest software-based tools without significant investments in their own communications solution or the need to maintain relationships with large-scale network providers.

The CPaaS market is large and rapidly growing. According to International Data Corporation (“IDC”), the global CPaaS market will be $8.2 billion in 2021. We focus on the CPaaS market in the United States, which comprises the majority of the market opportunity in the near term. Ovum estimates that there will be 348 billion minutes of over-the-top Voice-over Internet Protocol (“VoIP”) calls in the United States in 2017 and 742 billion in 2021. Ovum also estimates that 181 billion A2P messages will be sent in the United States in 2017 and 179 billion in 2021. Assuming our current market pricing, we estimate our addressable market of minutes of over-the-top VoIP calls and messages to be $3.3 billion for those services in 2017 and $6.2 billion in 2021, a compound annual growth rate of 17%. Market growth will be driven by enterprise demand for cloud applications and the need to integrate communications services into any workflow, customer-facing application or business process.

 



 

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Furthermore, we believe the rapid evolution of technologies, which is delivering new and innovative messaging and voice solutions, will bolster the need for our software-powered communications platform in a variety of new use cases:

 

    Rise of Voice as an Interface. We believe that the shift from a text-driven interface to an increasingly voice-driven interface will further expand our total addressable market. VPAs such as Amazon’s Alexa, Google’s Assistant, Microsoft’s Cortana, Apple’s Siri and Facebook’s M are examples of the first widely adopted user interface since the keyboard, mouse and touchscreen.

 

    Integration of Voice Within Applications. Over the last decade, voice calling has migrated away from single-purpose devices such as a desk phone or a smartphone to a fully integrated solution within enterprise applications such as Google Suites, Microsoft Office 365, Facebook Workplace and Slack. Enterprise users communicate and collaborate using these applications, which use software-powered communications platforms such as our Bandwidth Communications Platform to carry out the calling and messaging functionalities.

 



 

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OUR PLATFORM

Our Bandwidth Communications Platform empowers enterprises to create and scale voice or text communications services across any application and device. Our software platform and IP voice network enable our enterprise customers to rapidly develop and deploy real-time and mission-critical, software-powered communications solutions. Our sophisticated and easy-to-use software APIs allow enterprises to enhance their products and services by incorporating advanced voice and text capabilities. By owning and operating a capital-efficient, purpose-built IP voice network, we are able to offer advanced monitoring, reporting and analytics, superior customer service, dedicated operating teams, personalized support and flexible cost structures.

Our cloud-based platform is a proprietary CPaaS offering consisting of voice and messaging solutions:

 

    Voice Software API. We provide flexible software APIs that are used to build voice calling within applications, innovative call flows between users or machines, call recording, text-to-speech for interactive voice response, call detail records, conference calling or bridging and more. We provide the ability to have customized high-quality call routing for business voice use cases and global reach. Our voice quality monitoring service provides tools and processes for network quality tests and proactive tuning.

 

    Messaging API. Our software APIs for messaging deliver a complete wireless experience, including: delivery receipts, SMS, MMS, long text support, emoji support and bi-directional unicode (international characters) and short codes interoperability.

 

    911 Software API. We are the only software platform that provides complete communications solutions with integrated 911 services. We can instantly connect numbers or applications to emergency services with reliable and accurate emergency routing. Our Dynamic Geospatial Routing uses geocoding to enable real-time routing based on X,Y coordinates of the caller and defined Public Safety Access Point boundaries. Our Advanced “Next Generation 911” “i3”-ready NENA i2 “Enhanced” service network covers approximately 98% of the U.S.

OUR COMPETITIVE STRENGTHS

In our 18 years of business, we have prided ourselves on maintaining a start-up culture and our focus on continuous innovation. We have innovated on our CPaaS offerings to empower our enterprise customers with the most comprehensive software-powered communications platform that integrates seamlessly with one of the largest IP voice networks in the U.S. that we have built and operate. Our innovation-rich culture, customer-centric solutions and track record of successful execution provide us with the following competitive strengths:

 

    Highly Scalable Platform Built for the Enterprise. We built our Bandwidth Communications Platform from the ground up as an enterprise-grade cloud application. As a result, our deployment is fast, our software APIs are flexible and easy-to-use, and we enable enterprises to launch and scale on day one. Our software APIs allow the enterprise customers we serve to grow with flexibility and seamlessly embed communications in their applications or devices. Our scalable platform allows us to serve large-scale Internet companies and cloud service providers.

 

    Broadest, Most Complete Solutions in the Industry. We provide enterprises the broadest, most complete communications services solutions in the industry through our integrated software and IP voice network. Our large library of voice and text APIs enables our customers to incorporate into their products and services a broad range of capabilities not otherwise attainable.

 

   

Purpose-Built IP Voice Network. Our Bandwidth Communications Platform’s IP voice network, which we own and operate nationwide, supports our ability to scale at a reliable and consistent quality for the

 



 

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enterprises we serve. The control and scale we have over our own IP voice network integrated with our Bandwidth Communications Platform provides us distinct competitive advantages that include consistent high quality, in-depth enterprise support, real-time network visibility and economies of scale. Our IP voice network supported approximately 27 billion minutes and 10 billion messages for the twelve months ended June 30, 2017 and approximately 52 million active phone numbers and 8 million 911-enabled phone numbers as of June 30, 2017.

 

    Deep Experience and Expertise in Voice and Messaging. The combination of our versatile software API platform and our IP voice network control allows us to offer not just best efforts, but best-in-class voice and messaging solutions for enterprises. Our senior leadership team has a combined 135 years of industry experience and an average tenure with Bandwidth of almost 10 years. Additionally, we have approximately 80 full-time software developers and engineers focused on voice and messaging, which represents approximately 25% of our employees.

 

    Growing, Long-Term Relationships with Low Customer Churn. We deliver comprehensive solutions that address the unique and complex needs of the enterprises we serve. As a result, these enterprises have continued to innovate and grow with our platform over extended timeframes. Our relationship with each of the enterprises we serve often expands across different product suites, divisions and use cases over time. Our customers include large enterprises and small and medium-sized businesses across various industries, and we rarely lose customers that have been on our platform for more than three months. For example, our largest enterprise customer has been on our platform for more than ten years. Based on surveys conducted after customer interactions, since January 1, 2017, our customers have expressed a 97% satisfaction rate.

 

    CPaaS-Based 911 Network Capabilities. We believe we are the only CPaaS software provider with 911 capabilities. We believe our 911 capabilities provide a significant advantage as compared to software platform providers that are enabling residential voice services through new connected device experiences. Moreover, our dynamic geospatial routing capability routes 911 calls based on a real-time location of the caller to produce industry-leading results.

OUR GROWTH STRATEGY

 

    Grow Our Enterprise Customer Base. We believe that there is a substantial opportunity to increase our enterprise customer base across a broad range of industries and companies. Building on our strong sales and marketing efficiency foundation of 181% in 2016, we plan to continue to grow and invest in our direct sales force and marketing to increase our enterprise customer base. Sales and marketing efficiency is calculated by taking CPaaS revenue for the year ended December 31, 2016 less CPaaS revenue for the equivalent period in the prior year and dividing it by sales and marketing expenses for the year ended December 31, 2015.

 

    Expand Existing Enterprise Relationships. We will continue to expand our relationships with our existing enterprise customers. For example, enterprises often initially purchase only our voice solution and later expand to also purchase our messaging and 911 services. Additionally, we are able to help enterprises scale efficiently and offer their solutions to more of their customers as they grow.

 

   

Continue to Innovate Our Platform. We are committed to building on our track record of leveraging our innovative product capabilities to meet our customers’ needs, just as we have done for 18 years, through dramatic waves of change in communications technology. We were early to deploy software-based networks and to offer hosted cloud-based voice services, while building out one of the fastest growing IP voice networks over the last ten years. Our team has continued to adapt to a dynamic environment to grow our business, and we intend to invest in continued development of our platform

 



 

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and product features to support new use cases such as VPAs and help our enterprise customers succeed as communications technologies evolve.

 

    Continue Our Focus on Enterprise Customer Satisfaction. We intend to continue focusing on delivering world-class services and support to the enterprises we serve to ensure a high level of satisfaction. We believe that satisfied customers provide vital product feedback, purchase additional services, renew contracts at a high rate and provide broad advocacy and new customer referrals for our business.

 

    Explore the Development and Growth of Our International Offerings. Today, our international services are limited to outbound international calling and outbound international messaging. Some of our enterprise customers operate globally or have plans to do so. While we do not have specific expansion plans, we are actively exploring opportunities, including those where we might have a cost or quality advantage in serving our customers.

 

    Pursue Acquisitions and Strategic Investments Selectively. We may selectively pursue acquisitions and strategic investments in businesses and technologies that strengthen our platform.

RISK FACTORS

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. Some of these risks are:

 

    The market in which we participate is highly competitive, and if we do not compete effectively, our business, results of operations and financial condition could be harmed.

 

    If we are unable to attract new customers in a cost-effective manner then our business, results of operations and financial condition would be adversely affected.

 

    The market for some of our services and platform is new and unproven, may decline or experience limited growth and is dependent in part on developers continuing to adopt our platform and use our services.

 

    If we do not develop enhancements to our services and introduce new services that achieve market acceptance, our business, results of operations and financial condition could be adversely affected.

 

    We have experienced rapid growth and expect our growth to continue, and if we fail to effectively manage our growth, then our business, results of operations and financial condition could be adversely affected.

 

    If we are not able to maintain and enhance our brand and increase market awareness of our company and services, then our business, results of operations and financial condition may be adversely affected.

 

    The communications industry faces significant regulatory uncertainties and the resolution of these uncertainties could harm our business, results of operations and financial condition.

 

    The trading price of our Class A common stock may be volatile, and you could lose all or part of your investment.

 

    The dual class structure of our common stock will have the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of this offering, including our directors, executive officers and significant stockholders who will hold in the aggregate     % of the voting power of our capital stock following the completion of this offering. This will limit or preclude your ability to influence corporate matters, including the election of directors, amendments to our organizational documents and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval.

 



 

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CORPORATE INFORMATION

We are incorporated under the laws of the State of Delaware. Our principal executive offices are located at 900 Main Campus Drive, Suite 500, Raleigh, North Carolina 27606, and our telephone number is (800) 808-5150. Our website address is www.bandwidth.com. Our website and the information contained on, or that can be accessed through, our website are not part of this prospectus.

IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). We will remain an emerging growth company until the earlier of (1) December 31, 2022 (the last day of the fiscal year following the fifth anniversary of our initial public offering), (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (3) the last day of the fiscal year in which we are deemed to be a “large accelerated filer,” as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and (4) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. Any reference herein to “emerging growth company” has the meaning ascribed to it in the JOBS Act.

An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

    being permitted to present only two years of audited financial statements and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus;

 

    not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended;

 

    reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements, including in this prospectus; and

 

    exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We have elected to take advantage of certain of the reduced disclosure obligations in this prospectus and may elect to take advantage of other reduced reporting requirements in our future filings with the Securities and Exchange Commission (“SEC”). As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

The JOBS Act also provides that an emerging growth company can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

 



 

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THE OFFERING

 

Class A common stock offered by us

               shares

Class A common stock to be outstanding after this offering

  


            shares

Class B common stock to be outstanding after this offering

  


            shares

Option to purchase additional shares of Class A common stock

  


            shares

Voting power of our Class A common stock

   Outstanding shares of our Class A common stock will represent approximately     % of the voting power of our capital stock after this offering.

Use of proceeds

  

We estimate that the net proceeds from the sale of shares of our Class A common stock in this offering will be approximately $         million (or approximately $         million if the underwriters’ option to purchase additional shares of our Class A common stock from us and the selling stockholders is exercised in full), based upon the initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

We intend to use the net proceeds from this offering for working capital and general corporate purposes, including further expansion of our sales and marketing and research and development (“R&D”), to repay indebtedness and for capital expenditures. In addition, we may use a portion of the proceeds from this offering for strategic acquisitions of, or investments in, complementary businesses, technologies or other assets, although we currently have no agreements, commitments or understandings with respect to any such transaction. We will not receive any proceeds from the sale of shares by the selling stockholders. For more information about the selling stockholders, see “Principal and Selling Stockholders.”

 

KeyBanc Capital Markets Inc. and certain of its affiliates are lenders and/or agents under our Credit and Security Agreement, dated as of November 4, 2016 (our “credit facility”), as well as an underwriter in this offering and, to the extent proceeds from this offering are used to repay amounts outstanding thereunder, will receive a portion of the net proceeds from this offering in connection with the repayment of our credit facility. See “Use of Proceeds” for additional information.

 



 

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The common stock split and the reorganizations

  

Prior to this offering, we had three classes of shares: (1) Series A Redeemable Convertible Preferred Stock (“Series A preferred stock”), (2) Class A voting common stock (“Old Class A common stock”) and (3) Class B non-voting common stock (“Old Class B common stock”). On October 23, 2017, we filed an amendment to our first amended and restated certificate of incorporation that provided for a 2.50-for-1 split of each class of our common stock (the “common stock split”). Both our Series A preferred stock and our Old Class A common stock had one vote per share. Following approval of our second amended and restated certificate of incorporation by our board of directors and each class of our capital stock and immediately prior to its effectiveness, we expect that our Series A preferred stock will convert into 2.50 shares of our Old Class A common stock. Upon the effectiveness of our second amended and restated certificate of incorporation and the effectiveness of our second amended and restated bylaws, each of which will occur prior to the pricing of this offering, (i) each share of our Old Class A common stock will be reclassified as one share of Class B common stock and will have ten votes per share, (ii) each share of our Old Class B common stock will be reclassified as one share of Class A common stock with one vote per share and (iii) options and warrants exercisable into our Old Class A common stock and Old Class B common stock will become exercisable into Class B common stock and Class A common stock, respectively (collectively, the “Pre-IPO Reorganization”).

 

We have received regulatory approval from the Federal Communications Commission (“FCC”) and expect to receive regulatory approvals from various state public utility commissions on or prior to January 31, 2018 that would allow for David A. Morken, our cofounder and chief executive officer, to become our controlling shareholder. Upon receipt of those approvals, we expect that a sufficient number of shares of our Class B common stock (other than those held or controlled by Mr. Morken and those subject to the lock-up agreements described in “Certain Relationships and Related Party Transactions—Company Lock-up Agreements”) will be converted into Class A common stock in order for us to become a “controlled company” (the “IPO-Related Reorganization”). Upon completion of the IPO-Related Reorganization, we expect that we will become a “controlled company” under the corporate governance rules for NASDAQ-listed companies and will be controlled by Mr. Morken, who is expected to hold approximately         % of the voting power of our outstanding capital stock. Holders of

 



 

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   shares of Class B common stock are not required to convert their shares of Class B common stock to shares of Class A common stock and therefore, we cannot assure you that a sufficient number of shares of Class B common stock will convert into Class A common stock. If a sufficient number do not convert, we will not become a controlled company under the corporate governance rules for NASDAQ-listed companies. See “Risk Factors—Following the IPO-Related Reorganization, we plan to elect to take advantage of the “controlled company” exemption to the corporate governance rules for NASDAQ-listed companies, which could make our Class A common stock less attractive to some investors or otherwise harm our stock price.” If and when we become a controlled company, Mr. Morken will have the ability
   to control the outcome of matters submitted to our stockholders for approval, including the election of our directors and the approval of any change of control transaction. See “The Common Stock Split and the Reorganizations” and “Description of Capital Stock” for more information.

Voting rights

   Immediately prior to this offering, we will have two classes of authorized common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock will be identical, except with respect to voting and conversion rights. Each share of Class A common stock will be entitled to one vote per share. Each share of Class B common stock is entitled to ten votes per share and is convertible into one share of Class A common stock. Outstanding shares of Class B common stock will represent approximately     % of the voting power of our outstanding capital stock immediately following the completion of this offering, with our directors, executive officers, and 5% stockholders, and their respective affiliates, holding approximately     % of the voting power of our capital stock following this offering.

Directed share program

   At our request, the underwriters have reserved up to             shares of our Class A common stock, or approximately 2.5% of the shares of Class A common stock being offered by us pursuant to this prospectus, for sale at the initial public offering price to our directors, officers and employees and certain other persons associated with us, as designated by us. The number of shares of Class A common stock available for sale to the general public will be reduced to the extent that these individuals purchase all or a portion

 



 

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   of the reserved shares of Class A common stock. Any reserved shares of Class A common stock not so purchased will be offered by the underwriters to the general public on the same basis as the other shares of Class A common stock offered by this prospectus. For further information regarding our directed share program, please see “Underwriters.”

Risk factors

   See the section titled “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our Class A common stock.

Proposed symbol

   “BAND”

 

 

After the completion of the common stock split and after giving effect to the Pre-IPO Reorganization, the total number of shares of our Class A and Class B common stock outstanding after this offering is based on 34,840 shares of our Class A common stock and 13,586,454 shares of our Class B common stock outstanding, as of September 30, 2017, and excludes:

 

    3,315,487 shares of our Class A common stock issuable upon the exercise of outstanding options as of September 30, 2017 at a weighted-average exercise price of $7.00 per share;

 

    347,399 shares of our Class B common stock issuable upon the exercise of outstanding options as of September 30, 2017 at a weighted-average exercise price of $5.80 per share;

 

    no shares of our Class B common stock reserved for future issuance under our 2001 Stock Option Plan, 115,292 shares of our Class A common stock reserved for future grant or issuance under our 2010 Equity Compensation Plan and             shares of our Class A common stock reserved for future grant or issuance under our 2017 Incentive Award Plan; and

 

    64,691 shares of our Class B common stock issuable upon the exercise of outstanding warrants as of September 30, 2017 at a weighted-average exercise price of $2.31 per share.

Unless otherwise stated, information in this prospectus (except for the historical financial statements) assumes:

 

    completion of the Pre-IPO Reorganization;

 

    no exercises of options or warrants outstanding as of September 30, 2017; and

 

    no exercise by the underwriters of their option to purchase up to an additional             shares of our Class A common stock from us and the selling stockholders.

 



 

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION

The following tables set forth a summary of our historical consolidated financial data as of, and for the periods ended on, the dates indicated. The consolidated statements of operations data for the years ended December 31, 2015 and 2016 and the consolidated balance sheets as of December 31, 2015 and 2016 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the six months ended June 30, 2016 and 2017 and the consolidated balance sheet data as of June 30, 2017 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to state fairly the financial information set forth in those statements. You should read this data together with our consolidated financial statements and related notes appearing elsewhere in this prospectus and the information in “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of our future results, and the results of operations for the six months ended June 30, 2017, are not necessarily indicative of the results to be expected for the full year or any other period. The summary consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

 



 

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    Year ended
December 31,
    Six months
ended June 30,
 
    2015     2016     2016     2017  
    (In thousands, except share and per share amounts)  

Consolidated Statements of Operations Data:

       

Revenue:

       

CPaaS revenue

  $ 101,502     $ 117,078     $ 56,651     $ 63,194  

Other revenue

    36,299       35,057       18,118       15,957  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    137,801       152,135       74,769       79,151  

Cost of revenue:

       

CPaaS cost of revenue

    64,760       71,218       35,379       37,147  

Other cost of revenue

    14,482       14,000       7,283       6,713  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    79,242       85,218       42,662       43,860  

Gross profit

    58,559       66,917       32,107       35,291  

Operating expenses:

       

Research and development

    7,375       8,520       3,767       5,091  

Sales and marketing

    8,620       9,294       4,458       4,971  

General and administrative

    34,602       33,859       15,672       15,894  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    50,597       51,673       23,897       25,956  

Operating income

    7,962       15,244       8,210       9,335  

Other expense:

       

Interest expense, net

    (589     (908     (369     (859

Change in fair value of shareholders’ anti-dilutive arrangement(1)

                      (553
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

    (589     (908     (369     (1,412
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

    7,373       14,336       7,841       7,923  

Income tax (provision) benefit

    (408     11,094       (269     (2,987
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    6,965       25,430       7,572       4,936  

Loss from discontinued operations, net of income taxes

    (13,665     (3,072     (3,011      
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (6,700   $ 22,358     $ 4,561     $ 4,936  
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations attributable to common stockholders

  $ 6,034     $ 22,075     $ 6,565     $ 4,291  

Income from continuing operations attributable to participating securities

    931       3,355       1,007       645  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations per share attributable to common stockholders, basic

  $ 0.52     $ 1.89     $ 0.57     $ 0.36  
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average outstanding shares used in computing net income from continuing operations per share attributable to common stockholders, basic

    11,497,727       11,678,568       11,580,783       11,806,619  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations per share attributable to common stockholders, diluted

  $ 0.48     $ 1.72     $ 0.51     $ 0.33  
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average outstanding shares used in computing net income from continuing operations per share attributable to common stockholders, diluted

    12,456,540       12,870,632       12,820,334       12,977,606  
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma income from continuing operations per share attributable to common stockholders, basic(2)

  $ 0.52     $ 1.89     $ 0.57     $ 0.36  
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average outstanding shares used in computing pro forma income from continuing operations per share attributable to common stockholders, basic(2)

    13,272,727       13,453,568       13,355,783       13,581,619  
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma income from continuing operations per share attributable to common stockholders, diluted(2)

  $ 0.49     $ 1.74     $ 0.52     $ 0.33  
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average outstanding shares used in computing pro forma income from continuing operations per share attributable to common stockholders, diluted(2)

    14,231,540       14,645,632       14,595,334       14,572,606  
 

 

 

   

 

 

   

 

 

   

 

 

 

 



 

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     As of December 31,     As of
June 30,
2017
 
     2015     2016    
     (In thousands)  

Consolidated Balance Sheets Data:

      

Cash and cash equivalents

   $ 10,059     $ 6,788     $ 5,679  

Working capital

     (26,972     (2,427     4,449  

Property and equipment, net

     10,257       11,180       11,562  

Total assets

     63,146       69,973       68,238  

Total stockholders’ deficit

     (19,074     (22,374     (16,839

 

(1) Relates to anti-dilutive arrangements with certain of our shareholders. See Note 2 to our consolidated financial statements included elsewhere in this prospectus.
(2) Pro forma earnings per share data give effect to the Pre-IPO Reorganization. This pro forma earnings per share data is presented for informational purposes only and does not purport to represent what our pro forma net income (loss) or earnings (loss) per share actually would have been had the Pre-IPO Reorganization occurred on January 1, 2015 or to project our net income or earnings per share for any future period.

KEY PERFORMANCE INDICATORS

We monitor the following key performance indicators (“KPIs”) to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions. We believe the following KPIs are useful in evaluating our business:

 

     Year ended
December 31,
2015
    Year ended
December 31,
2016
    Six months
ended

June 30,
2016
    Six months
ended

June 30,
2017
 
     (Dollars in thousands)  

Number of active CPaaS customer accounts (as of balance sheet date)(a)

     704       798       756       865  

Dollar-based net retention rate(b)

     115     111     112     107

Adjusted EBITDA(c)

   $ 18,912     $ 23,470     $ 12,269     $ 12,655  

Adjusted net (loss) income(c)

   $ (2,305   $ 23,968     $ 5,659     $ 5,747  

Free cash flow(c)

   $ 13,549     $ 10,881     $ 7,185     $ 2,285  

 

(a) We believe that the number of active CPaaS customer accounts is an important indicator of the growth of our business, the market acceptance of our platform and our future revenue trends. We define an active CPaaS customer account at the end of any period as an individual account, as identified by a unique account identifier, for which we have recognized at least $100 of revenue in the last month of the period. We believe that the use of our platform by active CPaaS customer accounts at or above the $100 per month threshold is a stronger indicator of potential future engagement than trial usage of our platform at levels below $100 per month. A single organization may constitute multiple unique active CPaaS customer accounts if it has multiple unique account identifiers, each of which is treated as a separate active CPaaS customer account. Customers who pay after using our platform and customers that have credit balances are included in the number of active CPaaS customer accounts. Customers from our Other segment are excluded in the number of active CPaaS customer accounts, unless they are also CPaaS customers. In each of the years ended December 31, 2015 and 2016 and the six months ended June 30, 2017, revenue from active CPaaS customer accounts represented approximately 99% of total CPaaS revenue.
(b) Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with our existing customers that generate CPaaS revenue and seek to increase their use of our platform. We track our performance in this area by measuring the dollar-based net retention rate for our customers who generate CPaaS revenue. Our dollar-based net retention rate compares the CPaaS revenue from customers in a quarter to the same quarter in the prior year. To calculate the dollar-based net retention rate, we first identify the cohort of customers that generate CPaaS revenue and that were customers in the same quarter of the prior year. The dollar-based net retention rate is obtained by dividing the CPaaS revenue generated from that cohort in a quarter, by the CPaaS revenue generated from that same cohort in the corresponding quarter in the prior year. When we calculate dollar-based net retention rate for periods longer than one quarter, we use the average of the quarterly dollar-based net retention rates for the quarters in such period.

 



 

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Our dollar-based net retention rate increases when such customers increase usage of a product, extend usage of a product to new applications or adopt a new product. Our dollar-based net retention rate decreases when such customers cease or reduce usage of a product or when we lower prices on our solutions. As our customers grow their business and extend the use of our platform, they sometimes create multiple customer accounts with us for operational or other reasons. As such, when we identify a significant customer organization (defined as a single customer organization generating more than 1% of CPaaS revenue in a quarterly reporting period) that has created a new CPaaS customer, this new customer is tied to, and CPaaS revenue from this new customer is included with, the original CPaaS customer for the purposes of calculating this metric. For the six months ended June 30, 2017, our dollar-based net retention rate was 107%, compared to 112% in the same period in 2016. The primary driver of this decrease was our decision to curtail services to strategic competitors. For the year ended December 31, 2016, our dollar-based net retention rate was 111%, compared to 115% for the year ended December 31, 2015. This decrease was driven by the decision to lower pricing in exchange for longer term contracts with certain of our key customers.

(c) We use adjusted EBITDA, adjusted net (loss) income and free cash flow for financial and operational decision making and as a means to evaluate period-to-period differences in our performance. Adjusted EBITDA , adjusted net (loss) income and free cash flow are not calculated in accordance with U.S. generally accepted accounting principles (“GAAP”) but we believe are useful for investors in evaluating our overall financial performance. We believe these measures provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key performance indicators used by management in its financial and operational decision making. Adjusted EBITDA is a key measure used by management to understand and evaluate our core operating performance and trends, to generate future operating plans and to make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis.

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

 

    income tax expense (benefit);

 

    interest expense, net;

 

    depreciation and amortization expense;

 

    stock-based compensation expense;

 

    impairment of intangible assets;

 

    loss (gain) from disposal of property and equipment; and

 

    change in fair value of financial instruments including any shareholder anti-dilutive arrangement.

 

     Year ended
December 31,
     Six months ended
June 30,
 
     2015      2016      2016      2017  
     (In thousands)  

Income from continuing operations

   $ 6,965      $ 25,430      $ 7,572      $ 4,936  

Income tax expense (benefit)(1)

     408        (11,094      269        2,987  

Interest expense, net

     589        908        369        859  

Depreciation

     6,167        5,251        2,775        2,401  

Amortization

     908        891        446        420  

Stock-based compensation

     3,493        1,370        854        490  

Impairment of intangible assets(2)

            695                

Loss (gain) on disposal of property and equipment

     382        19        (16      9  

Change in fair value of shareholders’ anti-dilutive arrangement(3)

                          553  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 18,912      $ 23,470      $ 12,269      $ 12,655  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) Income tax benefit was $11,094 for the year ended December 31, 2016. This benefit was primarily the result of $14,138 of benefit being recognized due to the release of the deferred tax asset valuation allowance subsequent to the spin-off of Republic Wireless.
  (2) The impairment of intangible assets was $695 for the year ended December 31, 2016 and was due to the Company’s evaluation that a trade name acquired during the Dash acquisition provided no further benefit.
  (3) Change in fair value of shareholders’ anti-dilutive arrangement was $553 for the six months ended June 30, 2017 and relates to an anti-dilutive agreement which allows certain principal non-founder shareholders the ability to purchase additional shares of common stock. See Note 2, Summary of Significant Accounting Policies, Fair Value of Financial Instruments, for further explanation.

 



 

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We define adjusted net (loss) income as net income adjusted for certain items affecting period to period comparability. Adjusted net (loss) income excludes:

 

    stock-based compensation;

 

    change in fair value of stockholders’ antidilutive arrangement;

 

    amortization of acquired intangible assets related to the Dash acquisition;

 

    impairment charges of intangibles assets;

 

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

 

    estimated tax impact of above adjustments.

We believe that adjusted net (loss) income is a meaningful measure because by removing certain non-recurring charges and non-cash expenses we present our operating results directly associated with the period’s performance. We believe the use of adjusted net (loss) income may be helpful to investors because it provides consistency and comparability with past financial performance, facilitates period-to-period comparisons of results of operations and assists in comparisons with other companies, many of which use similar non-GAAP financial information to supplement their GAAP results.

 

     Year ended
December 31,
     Six months ended
June 30,
 
     2015      2016      2016      2017  
     (In thousands)  

Net (loss) income

   $ (6,700    $ 22,358      $ 4,561      $ 4,936  

Stock-based compensation

     3,493        1,370        854        490  

Change in fair value of stockholders’ anti-dilutive arrangement(1)

                          553  

Amortization of acquired intangibles

     520        520        260        260  

Impairment of intangible assets(2)

            695                

Loss (gain) on disposal of property and equipment

     382        19        (16      9  

Estimated tax effect of adjustments(3)

            (994             (501
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net (loss) income

   $ (2,305    $ 23,968      $ 5,659      $ 5,747  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) Change in fair value of shareholders’ anti-dilutive arrangement was $553 for the six months ended June 30, 2017 and relates to an anti-dilutive agreement which allows certain principal non-founder shareholders the ability to purchase additional shares of common stock. See Note 2, Summary of Significant Accounting Policies, Fair Value of Financial Instruments, for further explanation.
  (2) The impairment of intangible assets was $695 for the year ended December 31, 2016 and was due to the Company’s evaluation that a trade name acquired during the Dash acquisition provided no further benefit.
  (3) The Company recorded a full valuation allowance on its net deferred tax assets as of December 31, 2015 and June 30, 2016. The income tax expense recorded in the Company’s consolidated statement of operations for the aforementioned periods relates to the change in deferred tax liability for indefinite lived intangibles and various state minimum taxes. The non-GAAP adjustments would not be impacted by these tax expenses and, as a result, no tax effect has been recorded for the year ended December 31, 2015 and the six months ended June 30, 2016. The valuation allowance was released in the fourth quarter of 2016 in connection with the spin-off of Republic Wireless. For periods following the valuation allowance release, including the year ended December 31, 2016 and the six months ended June 30, 2017, the Company has calculated the income tax effect of the non-GAAP adjustments using the blended U.S. federal and state statutory rate of approximately 38.2%.

Free cash flow represents net cash provided by (used in) operating activities from continuing operations less net cash used in investing activities from continuing operations. We believe that free cash flow is a useful indicator of liquidity and provides information to management and investors about the amount of cash generated from our core operations that can be used for investing in our business. Free cash flow has certain limitations in that it does not represent the total increase or decrease in the cash balance for the period, nor does it represent the residual cash flows available for discretionary expenditures. Therefore, it is important to evaluate free cash flow along with our consolidated statements of cash flows.

 

     Year ended
December 31,
     Six months ended
June 30,
 
     2015      2016      2016      2017  
    

(In thousands)

 

Net cash provided by operating activities from continuing operations

   $ 18,651      $ 16,942      $ 10,553      $ 5,080  

Net cash used in investing activities from continuing operations(1)

     (5,102      (6,061      (3,368      (2,795
  

 

 

    

 

 

    

 

 

    

 

 

 

Free cash flow

   $ 13,549      $ 10,881      $ 7,185      $ 2,285  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 



 

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RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding to invest in our Class A common stock. The occurrence of any of the following risks could harm our business, financial condition, results of operations or prospects. In that case, the trading price of our Class A common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business

The success of our growth and expansion plans depends on a number of factors that are beyond our control.

We have grown our business considerably over the last several years. We cannot guarantee that we will be able to maintain our growth or that we will choose to target the same pace of growth in the future. Our success in achieving continued growth depends upon several factors including:

 

    the availability and retention of qualified and effective personnel with the expertise required to sell and operate effectively or successfully;

 

    the overall economic health of new and existing markets;

 

    the number and effectiveness of competitors;

 

    the pricing structure under which we will be able to purchase services required to serve our customers;

 

    the availability to us of technologies needed to remain competitive; and

 

    federal and state and regulatory conditions, including the maintenance of state regulation that protects us from unfair business practices by traditional network service providers or others with greater market power who have relationships with us as both competitors and suppliers.

The market in which we participate is highly competitive, and if we do not compete effectively, our business, results of operations and financial condition could be harmed.

The market for cloud communications is rapidly evolving, significantly fragmented and highly competitive, with relatively low barriers to entry in some segments. The principal competitive factors in our market include completeness of offering, credibility with developers, global reach, ease of integration and programmability, product features, platform scalability, reliability, security and performance, brand awareness and reputation, the strength of sales and marketing efforts, customer support, as well as the cost of deploying and using our services. Our competitors fall into two primary categories:

 

    CPaaS companies, such as Twilio and Nexmo, that offer a narrower set of software APIs, less robust customer support and fewer other features while relying on third-party networks and physical infrastructure; and

 

    network service providers that offer limited developer functionality on top of their own networks and physical infrastructure, such as AT&T, Level 3 and Verizon.

Some of our competitors and potential competitors are larger and have greater name recognition, longer operating histories, more established customer relationships, a larger global reach, larger budgets and significantly greater resources than we do. In addition, they have the operating flexibility to bundle competing products and services at little or no incremental cost, including offering them at a lower price as part of a larger sales transaction. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. In addition, some competitors may offer services that address one or a limited number of functions at lower prices, with greater depth than our services or in different geographies. Our current and potential competitors may develop and

 

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market new services with comparable functionality to our services, and this could lead to us having to decrease prices in order to remain competitive. In addition, some of our competitors have lower list prices than us, which may be attractive to certain customers even if those services have different or lesser functionality. If we are unable to maintain our current pricing due to the competitive pressures, our margins will be reduced and our business, results of operations and financial condition would be adversely affected. Customers utilize our services in many ways, and use varying levels of functionality that our services offer or are capable of supporting or enabling within their applications. Customers that use many of the features of our services or use our services to support or enable core functionality for their applications may have difficulty or find it impractical to replace our services with a competitor’s services, while customers that use only limited functionality may be able to more easily replace our services with competitive offerings.

With the introduction of new services and new market entrants, we expect competition to intensify in the future. In addition, some of our customers choose to use our services and our competitors’ services at the same time. Moreover, as we expand the scope of our services, we may face additional competition. Further, customers and consumers may choose to adopt other forms of electronic communications or alternative communication platforms, including developing necessary networks and platforms in-house.

Furthermore, if our competitors were to merge such that the combined entity would be able to compete fully with our service offering, then our business, results of operations and financial condition may be adversely effected. If one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape could also adversely affect our ability to compete effectively. In addition, pricing pressures and increased competition generally could result in reduced revenue, reduced margins, increased losses or the failure of our services to achieve or maintain widespread market acceptance, any of which could harm our business, results of operations and financial condition.

We presently operate in the United States and provide certain limited services in Canada. Our IP voice network, which is at the core of our product offerings, is located in the United States and, absent existing or future customer demand, we have no immediate plans to expand our network internationally. Our current and potential competitors have developed and may develop in the future product solutions that are available internationally as well as domestically. To the extent that customers seek product solutions that include support and scaling internationally, they may choose to use other service providers to fill their communication service needs. Furthermore, while we believe the U.S. market is sufficiently large and expanding to allow us to continue to grow our business, we may face slower growth due to our lack of exposure to international markets. Each of these factors could lead to reduced revenue, slower growth and lower brand name recognition amongst our industry competitors, any or all of which could harm our business, results of operations and financial condition.

If we are unable to attract new customers in a cost-effective manner, then our business, results of operations and financial condition would be adversely affected.

In order to grow our business, we must continue to attract new customers in a cost-effective manner. We use a variety of marketing channels to promote our services, our Bandwidth Communications Platform, and we periodically adjust the mix of our marketing programs. If the costs of the marketing channels we use increase dramatically, then we may choose to use alternative and less expensive channels, which may not be as effective as the channels we currently use. As we add to or change the mix of our marketing strategies, we may need to expand into more expensive channels than those we are currently in, which could adversely affect our business, results of operations and financial condition. We will incur marketing expenses before we are able to recognize any revenue that the marketing initiatives may generate, and these expenses may not result in increased revenue or brand awareness. We have made in the past, and may make in the future, significant expenditures and investments in new marketing campaigns, including using a significant portion of the proceeds of this offering to expand our sales and marketing efforts as further disclosed in “Use of Proceeds.” For example, our sales and marketing efficiency, which is calculated as the result of CPaaS revenue for the year ended December 31, 2016 less CPaaS revenue for the equivalent period in the prior year divided by sales and marketing expenses for the

 

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year ended December 31, 2015, was 181%. We cannot assure you that any new investments in sales and marketing, including any increased focus on enterprise sales efforts, will lead to the cost-effective acquisition of additional customers or increased sales or that our sales and marketing efficiency will be consistent with prior periods. If we are unable to maintain effective marketing programs, then our ability to attract new customers could be materially and adversely affected, our advertising and marketing expenses could increase substantially and our results of operations may suffer.

The market for some of our services and platform is new and unproven, may decline or experience limited growth and is dependent in part on enterprises and developers continuing to adopt our platform and use our services.

We have been developing and providing a cloud-based platform that enables developers and organizations to integrate voice and messaging communications capabilities into their software applications. This market is relatively new and unproven and is subject to a number of risks and uncertainties. We believe that our future success will depend in large part on the growth, if any, of this market. For example, the utilization of software APIs by developers and organizations to build communications functionality into their applications is still relatively new, and developers and organizations may not recognize the need for, or benefits of, our services and platform. Moreover, if they do not recognize the need for and benefits of our services and platform, they may decide to adopt alternative services and/or develop the necessary services in-house to satisfy their business needs. In order to grow our business and expand our market position, we intend to focus on educating enterprise customers about the benefits of our services and platform, expanding the functionality of our services and bringing new technologies to market to increase market acceptance and use of our platform. Our ability to expand the market that our services and platform address depends upon a number of factors, including the cost, performance and perceived value associated with such services and platform. The market for our services and platform could fail to grow significantly or there could be a reduction in demand for our services and platform as a result of a lack of customer acceptance, technological changes or challenges, competing services, platforms and services, decreases in spending by current and prospective customers, weakening economic conditions and other causes. If our market does not experience significant growth or demand for our services and platform decreases, then our business, results of operations and financial condition could be adversely affected.

We must increase the network traffic and resulting revenue from the services that we offer to realize our targets for anticipated revenue growth, cash flow and operating performance.

We must increase the network traffic and resulting revenue from our inbound and outbound voice calling, text messaging, emergency voice functions, telephone numbers and related services at acceptable margins to realize our targets for anticipated revenue growth, cash flow and operating performance. If:

 

    we do not maintain or improve our current relationships with existing key customers;

 

    we are not able to expand the available capacity on our network to meet our customers’ demands in a timely manner;

 

    we do not develop new large wholesale and enterprise customers; or

 

    our customers determine to obtain these services from either their own network or from one of our competitors,

then we may be unable to increase or maintain our revenue at acceptable margins.

Our business depends on customers increasing their use of our services and any loss of customers or decline in their use of our services could materially and adversely affect our business, results of operations and financial condition.

Our ability to grow and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with existing customers and to have them increase their usage of our Bandwidth

 

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Communications Platform. If our customers do not increase their use of our services, then our revenue may decline and our results of operations may be harmed. Customers generally are charged based on the usage of our services. Most of our customers do not have long-term contractual financial commitments to us and, therefore, most of our customers may reduce or cease their use of our services at any time without penalty or termination charges. We cannot accurately predict customers’ usage levels and the loss of customers or reductions in their usage levels of our services may each have a negative impact on our business, results of operations and financial condition. If a significant number of customers cease using, or reduce their usage of, our services, then we may be required to spend significantly more on sales and marketing than we currently plan to spend in order to maintain or increase revenue from customers. Such additional sales and marketing expenditures could adversely affect our business, results of operations and financial condition.

If we are unable to increase the revenue that we derive from enterprises, our business, results of operations and financial condition may be adversely affected.

We currently generate all of our revenue from enterprise customers. Our ability to expand our sales to enterprise customers will depend, in part, on our ability to effectively organize, focus and train our sales and marketing personnel and to attract and retain sales personnel with experience selling to enterprises. We believe that there is significant competition for experienced sales professionals with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth in the future will depend, in part, on our ability to recruit, train and retain a sufficient number of experienced sales professionals, particularly those with experience selling to enterprises. In addition, even if we are successful in hiring qualified sales personnel, new hires require significant training and experience before they achieve full productivity, particularly for sales efforts targeted at enterprises and new territories. Our recent hires and planned hires may not become as productive as quickly as we expect and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business.

With respect to enterprise customers, the decision to adopt our services may require the approval of multiple technical and business decision makers, including security, compliance, procurement, operations and IT. In addition, while enterprise customers may quickly deploy our services on a limited basis, before they will commit to deploying our services at scale, they often require extensive education about our services and significant customer support time, engage in protracted pricing negotiations and seek to secure readily available development resources. In addition, sales cycles for enterprises are inherently complex, and some enterprise customers may not generate revenue that justifies the cost to obtain such customers. In addition, these complex and resource-intensive sales efforts could place additional strain on our limited product and engineering resources. Further, enterprises, including some of our customers, may choose to develop their own solutions that do not include our services. They also may demand reductions in pricing as their usage of our services increases, which could have an adverse impact on our gross margin. Our efforts to sell to these potential customers may not be successful. If we are unable to increase the revenue that we derive from enterprises, then our business, results of operations and financial condition may be adversely affected.

If we do not develop enhancements to our services and introduce new services that achieve market acceptance, our business, results of operations and financial condition could be adversely affected.

Our ability to attract new customers and increase revenue from existing customers depends in part on our ability to enhance and improve our existing services, increase adoption and usage of our services and introduce new services. The success of any enhancements or new services depends on several factors, including timely completion, adequate quality testing, actual performance quality, market-accepted pricing levels and overall market acceptance. Enhancements and new services that we develop may not be introduced in a timely or cost-effective manner, may contain errors or defects, may have interoperability difficulties with our Bandwidth Communications Platform or other services or may not achieve the broad market acceptance necessary to generate significant revenue. In certain instances, the introduction of new services requires the successful development of new technology. To the extent that upgrades of existing technology are required for the

 

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introduction of new services, the success of these upgrades may be dependent on reaching mutually acceptable terms with vendors and on vendors meeting their obligations in a timely manner.

Furthermore, our ability to increase the usage of our services depends, in part, on the development of new use cases for our services, which may be outside of our control. Our ability to generate usage of additional services by our customers may also require increasingly sophisticated and more costly sales efforts and result in a longer sales cycle. If we are unable to successfully enhance our existing services to meet evolving customer requirements, increase adoption and usage of our services or develop new services, or if our efforts to increase the usage of our services are more expensive than we expect, then our business, results of operations and financial condition would be adversely affected.

We have experienced rapid growth and expect our growth to continue, and if we fail to effectively manage our growth, then our business, results of operations and financial condition could be adversely affected.

We have experienced substantial growth in our business since inception, which has placed and may continue to place significant demands on our corporate culture, operational infrastructure and management. We believe that our corporate culture has been a critical component of our success. We have invested substantial time and resources in building our team and nurturing our culture. As we expand our business and mature as a public company, we may find it difficult to maintain our corporate culture while managing this growth. Any failure to manage our anticipated growth and organizational changes in a manner that preserves the key aspects of our culture could hurt our chance for future success, including our ability to recruit and retain personnel, and effectively focus on and pursue our corporate objectives. This, in turn, could adversely affect our business, results of operations and financial condition.

In addition, in order to successfully manage our rapid growth, our organizational structure has become more complex. In order to manage these increasing complexities, we will need to continue to scale and adapt our operational, financial and management controls, as well as our reporting systems and procedures. The expansion of our systems and infrastructure will require us to commit substantial financial, operational and management resources before our revenue increases and without any assurances that our revenue will increase.

Finally, continued growth could strain our ability to maintain reliable service levels for our customers. If we fail to achieve the necessary level of efficiency in our organization as we grow, then our business, results of operations and financial condition could be adversely affected.

Our pricing and billing systems are complex and errors could adversely affect our revenue and profits.

Our pricing and billing efforts are complex to develop and challenging to implement. To be profitable, we must have accurate and complete information about the costs associated with voice and text communications, and properly incorporate such information into our pricing model. Our pricing model must also reflect accurate and current information about the market for our services, including the pricing of competitive alternatives for our services, as well as reliable forecasts of traffic volume. We may determine pricing for our services based on data that is outdated or otherwise flawed. Even if we have complete and accurate market information, we may not set prices to optimize both revenue and profitability. If we price our services too high, the amount of traffic that our customers may route to our network may decrease and accordingly our revenue may decline. If we price our services too low, our margins may be adversely affected, which will reduce our ability to achieve and maintain profitability.

Additionally, we rely heavily on third parties to provide us with key software and services for our billing. If these third parties cease to provide those services to us for any reason, or fail to perform billing services accurately and completely, we may not be able to deliver accurate invoices promptly. Delays in invoicing can lead to delays in revenue recognition, and inaccuracies in our billing could result in lost revenue. If we fail to adapt quickly and effectively to changes affecting our costs, pricing and billing, our profitability and cash flow will be adversely affected.

 

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We must continue to develop effective business support systems to implement customer orders and to provide and bill for services.

We depend on our ability to continue to develop effective business support systems. This complicated undertaking requires significant resources and expertise and support from third-party vendors. Following the development of the business support systems, the data migration must be completed for the full benefit of the systems to be realized. Business support systems are needed for:

 

    quoting, accepting and inputting customer orders for services;

 

    provisioning, installing and delivering services;

 

    providing customers with direct access to the information systems included in our Bandwidth Communications Platform so that they can manage the services they purchase from us, generally through web-based customer portals; and

 

    billing for services.

Because our business provides for continued rapid growth in the number of customers that we serve, the volume of services offered, as well as the integration of any acquired companies’ business support systems, if any, we must continue to develop our business support systems on a schedule sufficient to meet proposed milestone dates. If we fail to develop effective business support systems or complete the data migration into these systems, it could materially adversely affect our ability to implement our business plans, realize anticipated benefits from our acquisitions, if any, and meet our financial goals and objectives.

If we are not able to maintain and enhance our brand and increase market awareness of our company and services, then our business, results of operations and financial condition may be adversely affected.

We believe that maintaining and enhancing our brand identity and increasing market awareness of our company and services are critical to achieving widespread acceptance of our company and our Bandwidth Communications Platform, as well as to strengthen our relationships with our existing customers and to our ability to attract new customers. The successful promotion of our brand will depend largely on our continued marketing efforts, our ability to continue to offer high quality services and our ability to successfully differentiate our services from competing products and services. Our brand promotion activities may not be successful or yield increased revenue. In addition, independent industry analysts often provide reviews of our services and competing products and services, which may significantly influence the perception of our services in the marketplace. If these reviews are negative or not as strong as reviews of our competitors’ services, then our brand may be harmed.

From time to time, our customers have complained about our services, such as complaints about our pricing and customer support. If we do not handle customer complaints effectively, then our brand and reputation may suffer, our customers may lose confidence in us and they may reduce or cease their use of our services. In addition, many of our customers post and discuss on social media about products and services, including our services and our Bandwidth Communications Platform. Our success depends, in part, on our ability to generate positive customer feedback and minimize negative feedback on social media channels where existing and potential customers seek and share information. If actions we take or changes we make to our services or our Bandwidth Communications Platform upset these customers, then their online commentary could negatively affect our brand and reputation. Complaints or negative publicity about us, our services or our Bandwidth Communications Platform could materially and adversely affect our ability to attract and retain customers, our business, results of operations and financial condition.

The promotion of our brand also requires us to make substantial expenditures, and we anticipate that these expenditures will increase as our market becomes more competitive and as we expand into new markets. To the extent that these activities increase revenue, this revenue still may not be enough to offset the increased expenses

 

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we incur. If we do not successfully maintain and enhance our brand, then our business may not grow, we may see our pricing power reduced relative to competitors and we may lose customers, all of which would adversely affect our business, results of operations and financial condition.

Any failure to deliver and maintain high-quality customer support may adversely affect our relationships with our customers and prospective customers and could adversely affect our reputation, business, results of operations and financial condition.

Many of our customers depend on our customer support team to assist them in deploying or using our services effectively, to help them resolve post-deployment issues quickly and to provide ongoing support. If we do not devote sufficient resources or are otherwise unsuccessful in assisting our customers effectively, it could adversely affect our ability to retain existing customers and could prevent prospective customers from adopting our services. We may be unable to respond quickly enough to accommodate short-term increases in demand for customer support. We also may be unable to modify the nature, scope and delivery of our customer support to compete with changes in the support services provided by our competitors. Increased demand for customer support, without corresponding revenue, could increase costs and adversely affect our business, results of operations and financial condition. Our sales are highly dependent on our business reputation and on positive recommendations from existing customers. Any failure to deliver and maintain high-quality customer support, or a market perception that we do not maintain high-quality customer support, could adversely affect our reputation, business, results of operations and financial condition.

Our revenue is concentrated in a limited number of enterprise customers.

A significant portion of our revenue is concentrated among a limited number of enterprise customers. For the twelve months ended June 30, 2017, our top ten customers accounted for 29.2% of our CPaaS revenue. If we lost one or more of our top ten customers, or, if one or more of these major customers significantly decreased orders for our services, our business would be materially and adversely affected.

Breaches of our networks or systems, or those of third parties upon which we rely, could degrade our ability to conduct our business, compromise the integrity of our services and our Bandwidth Communications Platform, result in significant data losses and the theft of our intellectual property, damage our reputation, expose us to liability to third parties and require us to incur significant additional costs to maintain the security of our networks and data.

We depend upon our IT systems to conduct virtually all of our business operations, ranging from our internal operations and R&D activities to our marketing and sales efforts and communications with our customers and business partners. Cyber attacks, including through the use of malware, computer viruses, dedicated denial of services attacks, credential harvesting and other means for obtaining unauthorized access to or disrupting the operation of our networks and systems and those of our suppliers, vendors and other service providers, could cause harm to our business, including by misappropriating our proprietary information or that of our customers, employees and business partners or to cause interruptions of our services and our Bandwidth Communications Platform. Cyber attacks may cause equipment failures, loss of information, including sensitive personal information of customers or employees or valuable technical and marketing information, as well as disruptions to our or our customers’ operations. Cyber attacks against companies have increased in frequency, scope and potential harm in recent years. Further, the perpetrators of cyber attacks are not restricted to particular groups or persons. These attacks may be committed by company employees or external actors operating in any geography, including jurisdictions where law enforcement measures to address such attacks are unavailable or ineffective, and may even be launched by or at the behest of nation states. While, to date, we have not been subject to cyber attacks which, individually or in the aggregate, have been material to our operations or financial condition, the preventive actions we take to reduce the risks associated with cyber attacks, including protection of our systems and networks, may be insufficient to repel or mitigate the effects of a major cyber attack in the future. Because the techniques used by such individuals or entities to access, disrupt or sabotage devices, systems

 

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and networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques, and we may not become aware in a timely manner of such a security breach which could exacerbate any damage we experience. Additionally, we depend upon our employees and contractors to appropriately handle confidential and sensitive data, including customer data and customer proprietary network information pursuant to applicable federal law, and to deploy our IT resources in a safe and secure manner that does not expose our network systems to security breaches or the loss of data. Any data security incidents, including internal malfeasance by our employees, unauthorized access or usage, virus or similar breach or disruption of us or our services providers, could result in a loss of confidential information, theft of our intellectual property, damage to our reputation, loss of customers, litigation, regulatory investigations, fines, penalties and other liabilities.

Our existing general liability insurance may not cover, or may cover only a portion of, any potential claims related to security breaches to which we are exposed or may not be adequate to indemnify us for all or any portion of liabilities that may be imposed. Accordingly, if our cybersecurity measures and those of our service providers, fail to protect against unauthorized access, attacks (which may include sophisticated cyber attacks) and the mishandling of data by our employees and contractors, then our reputation, business, results of operations and financial condition could be adversely affected.

We are currently subject to litigation related to taxes and charges associated with our provision of 911 services, which could divert management’s attention and adversely affect our results of operations.

We, along with many other telecommunications companies and similar service providers, currently are subject to litigation and a civil investigation regarding our billing, collection and remittance of non-income-based taxes and other similar charges regarding 911 services alleged to apply in certain states, counties, and municipalities located in Alabama, Georgia, Illinois, Minnesota, North Carolina, Pennsylvania, Rhode Island, South Carolina and the District of Columbia. We may face similar litigation in other jurisdictions in the future. While we are vigorously defending these lawsuits, litigation is inherently uncertain. Tax assessments, penalties and interest or future requirements arising from these lawsuits, or any other lawsuits that may arise in other jurisdictions, may adversely affect our business, results of operations and financial condition.

We face a risk of litigation resulting from customer misuse of our services and software to make or send unauthorized calls and/or text messages in violation of the Telephone Consumer Protection Act.

Calls and/or text messages originated by our customers may subject us to potential risks. For example, the Telephone Consumer Protection Act of 1991 (the “TCPA”) restricts telemarketing and the use of technologies that enable automatic calling and/or SMS text messages without proper consent. This may result in civil claims against us and requests for information through third-party subpoenas or regulatory investigations. The scope and interpretation of the laws that are or may be applicable to the making and/or delivery of calls and/or text messages are continuously evolving and developing. If we do not comply with these laws or regulations or if we become liable under these laws or regulations due to the failure of our customers to comply with these laws by obtaining proper consent, we could become subject to lawsuits, fines, civil penalties, potentially significant statutory damages, consent decrees, injunctions, adverse publicity, loss of user confidence in our services, loss of users and other adverse consequences, which could materially harm our business.

The communications industry faces significant regulatory uncertainties and the resolution of these uncertainties could harm our business, results of operations and financial condition.

If current or future regulations change, the FCC or state regulators may not grant us any required regulatory authorization or may take action against us if we are found to have provided services without obtaining the necessary authorizations, or to have violated other requirements of their rules and orders. Delays in receiving required regulatory approvals or the enactment of new adverse regulation or regulatory requirements may slow our growth and have a material adverse effect on our business, results of operations and financial condition.

 

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Proceedings before the FCC could limit our access to various network services or further increase the rates we must pay for such services. Likewise, proceedings before the FCC could impact the availability and price of special access facilities. Other proceedings before the FCC could result in an increase in the amount we pay to other carriers or a reduction in the revenue we derive from other carriers in, or retroactive liability for, access charges and reciprocal compensation. Additionally, other proceedings before the FCC could result in increases in the cost of regulatory compliance. For example, the FCC has opened a proceeding to examine how to improve the delivery of emergency 911 services and whether to expand requirements to include communications services not currently subject to emergency calling obligations. A number of states also have proceedings pending that could impact our access to and the rates we pay for network services. Other state proceedings could limit our pricing and billing flexibility. Our business would be substantially impaired if the FCC, the courts or state commissions eliminated our access to the facilities and services we use to serve our customers, substantially increased the rates we pay for facilities and services, increased the costs or complexity associated with providing emergency 911 services or adversely affected the revenue we receive from other carriers or our customers. In addition, congressional legislative efforts to rewrite the Telecommunications Act of 1996 or enact other telecommunications legislation, as well as various state legislative initiatives, may cause major industry and regulatory changes. We cannot predict the outcome of these proceedings or legislative initiatives or the effects, if any, that these proceedings or legislative initiatives may have on our business and operations.

While we believe we are currently in compliance with all federal, state and local rules and regulations, these regulations are subject to interpretation and the relevant regulators may determine that our application of these rules and regulations is not consistent with their interpretation. Additionally, in certain instances, third parties or government agencies may bring action with federal, state or local regulators if they believe a provider has breached applicable rules and regulations.

The effects of increased regulation of IP-based service providers are unknown.

While the FCC has to date generally subjected IP-based service providers to less stringent regulatory oversight than traditional common carriers, the FCC has more recently imposed certain regulatory obligations on providers of VoIP services, including the obligations to contribute to the Universal Service Fund, to provide 911 services and/or to comply with the Communications Assistance for Law Enforcement Act. Some states have imposed taxes, fees and/or surcharges on VoIP telephony services. The imposition of additional regulations could have a material adverse effect on our business.

We must obtain and maintain permits and licenses to operate our network.

If we are unable, on acceptable terms and on a timely basis, to obtain and maintain the permits and licenses needed to expand and operate our network, our business could be materially adversely affected. In addition, the cancellation or non-renewal of the permits or licenses that are obtained could materially adversely affect our business. In particular, although we have received approval from the FCC, we are currently awaiting approval from various state public utility commissions in connection with our expected change of control (the “Necessary Approvals”). Upon the effectiveness of our second amended and restated articles of incorporation, holders of our Class B common stock will be prohibited from converting their shares of Class B common stock to Class A common stock prior to the earlier of: (i) the receipt of the Necessary Approvals and (ii) the 181st day following the date of this prospectus (the “Conversion Commencement Date”). If we have not received the Necessary Approvals by the Conversion Commencement Date, we will not be able to restrict holders of our Class B common stock from converting their shares of Class B common stock to Class A common stock, which may result in a change of control. If a change of control occurs prior to receipt of regulatory approval in a jurisdiction, we may be subject to fines, penalties, enforcement actions or loss of our authorization in such jurisdiction. In the event we are the target of an acquisition, the regulatory agencies responsible for granting, renewing or transferring permits and licenses may delay or reject applications to transfer such permits or licenses and as a result these uncertainties, we may not be as attractive an acquisition target.

 

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Our operations are subject to regulation and require us to obtain and maintain several governmental licenses and permits. If we violate those regulatory requirements or fail to obtain and maintain those licenses and permits, including payment of related fees, if any, we may not be able to conduct our business. Moreover, those regulatory requirements could change in a manner that significantly increases our costs or otherwise adversely affects our operations.

In the ordinary course of operating our network and providing our services, we must obtain and maintain a variety of telecommunications and other licenses and authorizations. We also must comply with a variety of regulatory obligations. There can be no assurance we can maintain our licenses or that they will be renewed upon their expiration. Our failure to obtain or maintain necessary licenses, authorizations or to comply with the obligations imposed upon license holders, including the payment of fees, may cause sanctions or additional costs, including the revocation of authority to provide services.

Our operations are subject to regulation at the national level and, often, at the state and local levels. Changes to existing regulations or rules, or the failure to regulate going forward in areas historically regulated on matters such as network neutrality, licensing fees, environmental, health and safety, privacy, intercarrier compensation, emergency 911 services interconnection and other areas, in general or particular to our industry, may increase costs, restrict operations or decrease revenue. Our inability or failure to comply with telecommunications and other laws and regulations could cause the temporary or permanent suspension of our operations, and if we cannot provide emergency calling functionality through our Bandwidth Communications Platform to meet any new federal or state requirements, the competitive advantages that we currently have may not persist, adversely affecting our ability to obtain and to retain enterprise customers which could have an adverse impact on our business.

Our business could suffer if we cannot obtain or retain local or toll-free numbers, are prohibited from obtaining local or toll-free numbers, or are limited to distributing local or toll-free numbers to only certain customers.

Our future success depends on our ability to procure large quantities of local and toll-free numbers in the United States in desirable locations at a reasonable cost and without restriction. Our ability to procure and distribute numbers depends on factors outside of our control, such as applicable regulations, the practices of the communications carriers that provide numbers to us in certain jurisdictions, the cost of these numbers and the level of demand for new numbers. Due to their limited availability, there are certain popular area code prefixes and specialized “vanity” toll-free numbers that we may not be able to obtain in desired quantities or at all. Our inability to acquire or retain numbers for our operations would make our services, including our Bandwidth Communications Platform, less attractive to potential customers that desire assignments of particular numbering resources. In addition, future growth of our customer base, together with growth of customer bases of other providers of communications services, has increased, which increases our dependence on needing large quantities of local and toll-free numbers associated with desirable area codes or specific toll-free numbering resources at a reasonable cost and without restriction. If we are not able to obtain or retain adequate local and toll-free numbers, or attractive subsets of such resources, our business, results of operations and financial condition could be materially adversely affected.

Intellectual property and proprietary rights of others could prevent us from using necessary technology to provide our services or subject us to expensive intellectual property litigation.

If technology that we require to provide our services, including our Bandwidth Communications Platform, was determined by a court to infringe a patent held by another entity that will not grant us a license on terms acceptable to us, we could be precluded by a court order from using that technology and we would likely be required to pay significant monetary damages to the patent holder. The successful enforcement of these patents, or our inability to negotiate a license for these patents on acceptable terms, could force us to cease (i) using the relevant technology and (ii) offering services incorporating the technology. If a claim of infringement was

 

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brought against us based on the use of our technology or against our customers based on their use of our services for which we are obligated to indemnify, we could be subject to litigation to determine whether such use or sale is, in fact, infringing. This litigation could be expensive and distracting, regardless of the outcome.

While our own limited patent portfolio may deter other operating companies from bringing such actions, patent infringement claims are increasingly being asserted by patent holding companies, which do not use technology and whose sole business is to enforce patents against operators, such as us, for monetary gain. Because such patent holding companies, commonly referred to as patent “trolls,” do not provide services or use technology, the assertion of our own patents by way of counter-claim would be largely ineffective.

Our use of open source software could negatively affect our ability to sell our services and subject us to possible litigation.

Our services, including our Bandwidth Communications Platform, incorporate open source software, and we expect to continue to incorporate open source software in our services in the future. Few of the licenses applicable to open source software have been interpreted by courts, and there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our services, including our Bandwidth Communications Platform. Moreover, although we have implemented policies to regulate the use and incorporation of open source software into our services, we cannot be certain that we have not incorporated open source software in our services in a manner that is inconsistent with such policies. If we fail to comply with open source licenses, we may be subject to certain requirements, including requirements that we offer our services that incorporate the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and that we license such modifications or derivative works under the terms of applicable open source licenses. If an author or other third-party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from generating revenue from customers using services that contained the open source software and required to comply with onerous conditions or restrictions on these services. In any of these events, we and our customers could be required to seek licenses from third parties in order to continue offering our services and to re-engineer our services or discontinue offering our services to customers in the event re-engineering cannot be accomplished on a timely basis. Any of the foregoing could require us to devote additional R&D resources to re-engineer our services, could result in customer dissatisfaction and may adversely affect our business, results of operations and financial condition.

Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.

Our agreements with customers and other third parties typically include indemnification or other provisions under which we agree to indemnify or otherwise be liable to them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons or other liabilities relating to or arising from our services or platform or other acts or omissions. The term of these contractual provisions often survives termination or expiration of the applicable agreement. Large indemnity payments or damage claims from contractual breach could harm our business, results of operations and financial condition. Although we normally contractually limit our liability with respect to such obligations, we may still incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other current and prospective customers, reduce demand for our services and adversely affect our business, results of operations and financial condition.

 

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The storage, processing and use of personal information and related data subjects us to evolving governmental laws and regulation, commercial standards, contractual obligations and other legal obligations related to consumer and data privacy, which may have a material impact on our costs, use of our services, or expose us to increased liability.

Federal, state, local and foreign laws and regulations, commercial obligations and industry standards, each provide for obligations and restrictions with respect to data privacy and security, as well as the collection, storage, retention, protection, use, processing, transmission, sharing, disclosure and protection of personal information and other customer data, including customer proprietary network information under applicable federal law. The evolving nature of these obligations and restrictions subjects us to the risk of differing interpretations, inconsistency or conflicts among countries or rules, and creates uncertainty regarding their application to our business.

These obligations and restrictions may limit our ability to collect, store, process, use, transmit and share data with our customers, employees and third-party providers and to allow our customers to collect, store, retain, protect, use, process, transmit, share and disclose data with others through our services. Compliance with, and other burdens imposed by, such obligations and restrictions could increase the cost of our operations and impact our ability to market our services through effective segmentation.

Failure to comply with obligations and restrictions related to applicable data protection laws, regulations, standards, and codes of conduct, as well as our own posted privacy policies and contractual commitments could subject us to lawsuits, fines, criminal penalties, statutory damages, consent decrees, injunctions, adverse publicity, loss of user confidence in our services, and loss of users, which could materially harm our business. Because these obligations and restrictions have continued to develop and evolve rapidly, it is possible that we may not be, or may not have been, compliant with each such obligation and restriction. Additionally, third-party contractors may have access to customer or employee data. If these or other third-party vendors violate obligations and restrictions related to applicable data protection laws or our policies, such violations may also put our customers’ or employees’ information at risk and could in turn have a material and adverse effect on our business.

If we fail to protect our internally developed systems, technology and software and our patents and trademarks, we may become involved in costly litigation or our business or brand may be harmed.

Our ability to compete effectively is dependent in large part upon the maintenance and protection of systems and software that we have developed internally, including some systems and software-based on open standards. While we have eight U.S. patents and six pending U.S. patent applications, we cannot patent much of the technology that is important to our business. In addition, our pending patent applications may not be granted, and any issued patent that we own may be challenged, narrowed, invalidated or circumvented. To date, we have relied on patent, copyright and trade secret laws, as well as confidentiality procedures and licensing arrangements, to establish and protect our rights to our technology. While we typically enter into confidentiality agreements with our employees, consultants, customers, and vendors in an effort to control access to and distribution of technology, software, documentation and other information, these agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Despite these precautions, it may be possible for a third-party to copy or otherwise obtain and use our technology without authorization. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any rights against such party. Policing unauthorized use of our technology is difficult. The steps we take may not prevent misappropriation of the technology we rely on. In addition, effective protection may be unavailable or limited in some jurisdictions outside the United States. Litigation may be necessary in the future to enforce or protect our rights or to determine the validity and scope of the rights of others. That litigation could cause us to incur substantial costs and divert resources away from our daily business, which in turn could adversely affect our business, results of operations and financial condition.

 

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The unlicensed use of our brands by third parties could harm our reputation, cause confusion among our customers or impair our ability to market our services. Accordingly, we have registered numerous trademarks and service marks and have applied for registration of our trademarks and service marks in the United States to establish and protect our brand names as part of our intellectual property strategy. We cannot assure you that our pending or future trademark applications will be approved. Although we anticipate that we would be given an opportunity to respond to any such rejections, we may be unable to overcome any such rejections. In addition, in proceedings before the United States Patent and Trademark Office third parties are given an opportunity to oppose pending trademark applications and seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. In the event that our trademarks are successfully challenged, we could be forced to rebrand our services, which could result in loss of brand name recognition. Moreover, successful opposition to our applications might encourage third parties to make additional oppositions or commence trademark infringement proceedings against us, which could be costly and time consuming to defend against. If we decide to take limited or no action to protect our trademarks, our trademark rights may be diluted and subject to challenge or invalidation, which could materially and adversely affect our brand in the marketplace. Certain of the trademarks we may use may become so well known by the public that their use becomes generic and they lose trademark protection. Over the long term, if we are unable to establish name recognition based on our trademark and tradenames, then we may not be able to compete effectively and our business may be adversely affected. Further, we cannot assure you that competitors will not infringe our trademarks or that we will have adequate resources to enforce our trademarks.

We are subject to litigation in the ordinary course of business, and uninsured judgments or a rise in insurance premiums may adversely affect our results of operations.

In the ordinary course of business, we are subject to various claims and litigation. Any such claims, regardless of merit, could be time-consuming and expensive to defend and could divert management’s attention and resources. In accordance with customary practice, we maintain insurance against some, but not all, of these potential claims. We may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the risks presented. The levels of insurance we maintain may not be adequate to fully cover any and all losses or liabilities. Further, we may not be able to maintain insurance at commercially acceptable premium levels or at all. If any significant judgment, claim (or a series of claims) or other event is not fully insured or indemnified against, it could have a material adverse impact on our business, financial condition and results of operations. There can be no assurance as to the actual amount of these liabilities or the timing thereof. We cannot be certain that the outcome of current or future litigation will not have a material adverse impact on our business and results of operations.

We may be liable for the information that content owners or distributors distribute over our network.

The law relating to the liability of private network operators for information carried on or disseminated through their networks remains unsettled. While we disclaim any liability for third-party content in our services agreements, we may become subject to legal claims relating to the content disseminated on our network, even though such content is owned or distributed by our customers or a customer of our customers. For example, lawsuits may be brought against us claiming that material distributed using our network was inaccurate, offensive or violated the law or the rights of others. Claims could also involve matters such as defamation, invasion of privacy and copyright infringement. In addition, the law remains unclear over whether content may be distributed from one jurisdiction, where the content is legal, into another jurisdiction, where it is not. Companies operating private networks have been sued in the past, sometimes successfully, based on the nature of material distributed, even if the content is not owned by the network operator and the network operator has no knowledge of the content or its legality. It is not practical for us to monitor all of the content distributed using our network. We may need to take costly measures to reduce our exposure to these risks or to defend ourselves against such claims, which could adversely affect our results of operations and financial condition.

 

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Third parties may fraudulently use our name to obtain access to customer accounts and other personal information, use our services to commit fraud or steal our services, which could damage our reputation, limit our growth or cause us to incur additional expenses.

Our customers may have been subject to “phishing,” which occurs when a third-party calls or sends an email or pop-up message to a customer that claims to be from a business or organization that provides services to the customer. The purpose of the inquiry is typically to encourage the customer to visit a bogus website designed to look like a website operated by the legitimate business or organization or provide information to the operator. At the bogus website, the operator attempts to trick the customer into divulging customer account or other personal information such as credit card information or to introduce viruses through “Trojan horse” programs to the customers’ computers. This could result in identity theft from our customers and the unauthorized use of our services. Third parties also have used our communications services to commit fraud. If we are unable to detect and prevent “phishing” and other similar methods, use of our services for fraud and similar activities, our brand reputation and growth may suffer and we may incur additional costs, including costs to increase security, or be required to credit significant amounts to customers.

Third parties also have used our communications services without paying, including by submitting fraudulent credit information and fraudulent credit card information. This has resulted in our incurring the cost of providing the services, including incurring call termination fees, without any corresponding revenue. We have implemented anti-fraud procedures in order to limit the expenses resulting from theft of service. If our procedures are not effective, theft of service could significantly increase our expenses and adversely affect our business, results of operations and financial condition.

If our customers or their end users do not accept the differences between our service and traditional telephone service, they may choose to remain with their current telephone service provider or may choose to return to service provided by traditional network service providers.

Aspects of our services based on VoIP, including our Bandwidth Communications Platform, are not the same as traditional network service providers. Our continued growth is dependent on the adoption of our services by mainstream customers and their end users, so these differences are important. For example:

 

    Our 911 calling services are different, in significant respects, from the 911 service associated with traditional wireline and wireless telephone providers and, in certain cases, with other VoIP providers.

 

    In the event of a power loss or Internet access interruption experienced by a customer, our service may be interrupted.

 

    Our customers’ end users may experience lower call quality than they are used to from traditional wireline or wireless telephone companies, including static, echoes and delays in transmissions.

 

    Our customers’ end users may not be able to call premium-rate telephone numbers such as 1-900 numbers and 976 numbers.

If customers or customers’ end users do not accept the differences between our service and traditional network service providers, they may choose to remain with their current telephone service provider or may choose to return to service provided by traditional network service providers.

We may lose customers if we experience failures of our system or Bandwidth Communications Platform that significantly disrupt the availability and quality of the services that we provide. Such failures may also cause interruptions to service delivery and the completion of other corporate functions.

Our operations depend on our ability to limit and mitigate interruptions or degradation in service for customers. Interruptions in service or performance problems, for whatever reason, could undermine our customers’ confidence in our services and cause us to lose customers or make it more difficult to attract new

 

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ones. Because many of our services are critical to the businesses or daily lives of many of our customers or our customers’ end users, any significant interruption or degradation in service also could result in lost profits or other losses to customers. Although our service agreements generally limit our liability for service failures and generally exclude any liability for “consequential” damages such as lost profits, a court might not enforce these limitations on liability, which could expose us to financial loss. We also sometimes provide our customers with committed service levels. If we fail to meet these committed service levels, we could be required to provide service credits or other compensation to our customers, which could adversely affect our results of operations.

The failure of any equipment or facility on our network, including our network operations control centers and network data storage locations, could interrupt customer service and other corporate functions until we complete necessary repairs or install replacement equipment. Our business continuity plans also may be inadequate to address a particular failure that we experience. Delays, errors or network equipment or facility failures could result from natural disasters, disease, accidents, terrorist acts, power losses, security breaches, vandalism or other illegal acts, computer viruses or other causes. These delays, errors or failures could significantly impair our business due to:

 

    service interruptions;

 

    misfunction of our Bandwidth Communications Platform on which our enterprise users rely for voice, messaging or 911 functionality;

 

    exposure to customer liability;

 

    the inability to install new service;

 

    the unavailability of employees necessary to provide services;

 

    the delay in the completion of other corporate functions such as issuing bills and the preparation of financial statements; or

 

    the need for expensive modifications to our systems and infrastructure.

Defects or errors in our services could diminish demand for our services, harm our business and results of operations and subject us to liability.

Our customers use our services for important aspects of their businesses, and any errors, defects or disruptions to our services and any other performance problems with our services could damage our customers’ businesses and, in turn, hurt our brand and reputation. We provide regular updates to our services, which have in the past contained, and may in the future contain, undetected errors, failures, vulnerabilities and bugs when first introduced or released. Real or perceived errors, failures or bugs in our services could result in negative publicity, loss of or delay in market acceptance of our platform, loss of competitive position, lower customer retention or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem. In addition, we may not carry insurance sufficient to compensate us for any losses that may result from claims arising from defects or disruptions in our services. As a result, our brand and reputation could be harmed, and our business, results of operations and financial condition may be adversely affected.

If our 911 services do not function properly, we may be exposed to significant liability from our users.

Certain of our IP telephony offerings, as well as the 911 solutions that we offer are subject to FCC rules governing the delivery of emergency calling services. Similar to other providers of IP telephony services, our 911 service are different from those associated with traditional telecommunications services. These differences may lead to an inability to make and complete calls that would not occur for users of traditional telephony services. For example, to provide the emergency calling services required by the FCC’s rules to our IP telephony consumers, we may use components of both the wireline and wireless infrastructure in unique ways that can

 

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result in failed connections and calls routed to incorrect emergency call centers. Routing emergency calls over the Internet may be adversely affected by power outages and network congestion that may not occur for users of traditional telephony services. Emergency call centers may not be equipped with appropriate hardware or software to accurately process and respond to emergency calls initiated by consumers of our IP telephony services, and calls routed to the incorrect emergency call center can significantly delay response times for first responders. Users of our IP telephony services from a fixed address are required to manually update their location information, and failure to do so may result in dispatching of assistance to the wrong location. Even manual updates made appropriately require a certain amount of time before the updated address appears in the relevant databases which could result in misrouting emergency calls to the wrong emergency calling center, dispatching first responders to the wrong address, or both. Moreover, the relevant rules with respect to what address information should be provided to emergency call centers when the call originates from a mobile application are unsettled. As a result, we could be subject to enforcement action by the FCC or other entities—possibly exposing us to significant monetary penalties, cease and desist orders, civil liability, loss of user confidence in our services, loss of users, and other adverse consequences, which could materially harm our business. The FCC’s rules, and some states, also impose other obligations on us, such as properly recording our customers’ registered locations, obtaining affirmative acknowledgement from customers that they are aware of the differences between emergency calling services associated with IP telephony as compared with traditional telecommunications services, and distribution of appropriate warning labels to place on or near hardware used to place IP telephony calls. Failure to comply with these requirements, or failure of our Bandwidth Communications Platform such that 911 calls did not complete or were misrouted, may result in FCC enforcement action, state attorneys’ general investigations, potential exposure to significant monetary penalties, cease and desist orders, civil liability to our users and their customers, loss of user confidence in our services, loss of users, and other adverse consequences, which could materially harm our business.

The FCC’s rules also require that we timely report certain 911 service outages. We recently reported a 911 service outage to the FCC in their automated Network Outage Reporting System on July 25, 2017, related to a 53-minute outage event on June 26, 2017, that may have met FCC reporting thresholds. The FCC may make further inquiries regarding matters related to any reported 911 service outage. Any inquiry could result in FCC enforcement action, potential monetary penalties and other adverse consequences.

Termination of relationships with key suppliers could cause delay and additional costs.

Our business is dependent on third-party suppliers for fiber, computers, software, transmission electronics and related network components, as well as providers of network colocation facilities that are integrated into our network, some of which are critical to the operation of our business. If any of these critical relationships is terminated, a supplier either exits or curtails its business as a result of economic conditions, a supplier fails to provide critical services or equipment, or the supplier is forced to stop providing services due to legal constraints, such as patent infringement, and we are unable to reach suitable alternative arrangements quickly, we may experience significant additional costs or we may not be able to provide certain services to customers. If that happens, our business, results of operations and financial condition could be materially adversely affected.

Many of our third-party suppliers do not have long-term committed contracts with us and may terminate their agreements with us without notice or by providing 30 days prior written notice. Although we expect that we could receive similar services from other third-party suppliers, if any of our arrangements with our third-party suppliers are terminated, we could experience interruptions in our ability to make our services available to customers, as well as delays and additional expenses in arranging alternative providers. If a significant portion of our third-party suppliers fail to provide these services to us on a cost-effective basis or otherwise terminate these services, the delay caused by qualifying and switching to other providers could be time consuming and costly and could adversely affect our business, results of operations and financial condition.

One of our third-party suppliers, Level 3, provides us with certain 911 call routing and termination services. Pursuant to the agreement with Level 3, Level 3 is our preferred provider for these services until December 31,

 

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2020, after which the agreement automatically renews for consecutive one-year periods, unless terminated by either Level 3 or us. After December 31, 2020, Level 3 may cancel the agreement upon two years’ notice and we may cancel the agreement upon one year’s notice. If our agreement with Level 3 terminates for any reason other than our default, Level 3 must continue to provide these services to us for at least two years to allow us to transition to another provider. We are obligated to pay Level 3 a minimum of $100,000 per month for as long as the agreement continues. Additionally, Level 3 has a right of first refusal to provide these 911 call routing and termination services to us in additional geographic areas.

Our growth and financial health are subject to a number of economic risks.

The financial markets in the United States have experienced substantial uncertainty during recent years. This uncertainty has included, among other things, extreme volatility in securities prices, drastically reduced liquidity and credit availability, rating downgrades of certain investments and declining values with respect to others. If capital and credit markets continue to experience uncertainty and available funds remain limited, we may not be able to obtain debt or equity financing or to refinance our existing indebtedness on favorable terms or at all, which could affect our strategic operations and our financial performance and force modifications to our operations. These conditions currently have not precluded us from accessing credit markets or financing our operations, but there can be no assurance that financial markets and confidence in major economies will not deteriorate. An extended period of economic deterioration could materially adversely affect our results of operations and financial condition and exacerbate some of the other risk factors contained in this prospectus. For example, our customers might defer or entirely decline purchases of our services due to tighter credit or negative financial news or reduce demand for our services. Our customers also may not be able to obtain adequate credit, which could adversely affect the timeliness of their payments to us or ultimately result in a filing by the customer for protection from creditors under applicable insolvency or bankruptcy laws. If our customers cannot make timely payments to us, our accounts receivable could increase. The demand for, and the prices of, our services also may decline due to the actions of our competitors or otherwise.

Key vendors upon which we rely also could be unwilling or unable to provide us with the materials or services that we need to operate our Bandwidth Communications Platform or otherwise on a timely basis or on terms that we find acceptable. Our financial counterparties, insurance providers or others also may default on their contractual obligations to us. If any of our key vendors fail, we may not be able to replace them without disruptions to, or deterioration of, our services and we also may incur higher costs associated with new vendors. Transitioning to new vendors also may result in the loss of the value of assets associated with our integration of third-party services into our network or service offerings.

Our customer churn rate may increase.

Customer churn occurs when a customer discontinues service with us, whether voluntarily or involuntarily, such as a customer switching to a competitor or going out of business. Changes in the economy, increased competition from other providers, or issues with the quality of service we deliver can impact our customer churn rate. We cannot predict future pricing by our competitors, but we anticipate that price competition will continue. Lower prices offered by our competitors could contribute to an increase in customer churn. We cannot predict the timing, duration or magnitude of any deteriorated economic conditions or its impact on our target of customers. Higher customer churn rates could adversely affect our revenue growth. Higher customer churn rates could cause our dollar-based net retention rate to decline. A sustained and significant growth in the churn rate could have a material adverse effect on our business.

The market prices for certain of our services have decreased in the past and may decrease in the future, resulting in lower revenue than we anticipate.

Market prices for certain of our services have decreased over recent years. These decreases resulted from downward market pressure and other factors including:

 

    technological changes and network expansions, which have resulted in increased transmission capacity available for sale by us and by our competitors; and

 

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    some of our competitors have been willing to accept smaller operating margins in the short term in an attempt to increase long-term revenue.

To retain customers and revenue, we must sometimes reduce prices in response to market conditions and trends. We cannot predict to what extent we may need to reduce our prices to remain competitive or whether we will be able to sustain future pricing levels as our competitors introduce competing services or similar services at lower prices. Our ability to meet price competition may depend on our ability to operate at costs equal to or lower than our competitors or potential competitors. As our prices for some of our services decrease, our operating results may suffer unless we are able to either reduce our operating expenses or increase traffic volume from which we can derive additional revenue.

The need to obtain additional IP circuits from other providers increases our costs. In addition, the need to interconnect our network to networks that are controlled by others could increase our costs.

We lease over 150,000 IP circuits from third parties nationwide. We could incur material expenses if we were required to locate alternative IP circuits. We may not be able to obtain reasonable alternative IP circuits if needed. Failure to obtain usage of alternative IP circuits, if necessary, could have a material adverse effect on our ability to carry on business operations. In addition, some of our agreements with other providers require the payment of amounts for services whether or not those services are used. Our reliance on third-party providers may reduce our operating flexibility, ability to make timely service changes and ability to control quality of service.

In the normal course of business, we need to enter into interconnection agreements with many local telephone companies, as well as the owners of networks that our customers desire to access to deliver their services. We are not always able to secure these interconnection agreements on favorable terms. Costs of obtaining service from other communications carriers comprise a significant proportion of the operating expenses of long distance carriers. Changes in regulation, particularly the regulation of telecommunication carriers and local access network owners, could indirectly, but significantly, affect our competitive position. These changes could increase or decrease the costs of providing our services. Further, if problems occur with our third-party providers or local telephone companies, it may cause errors or poor quality communications, and we could encounter difficulties identifying the source of the problem. The occurrence of errors or poor quality communications on our services, whether caused by our platform or a third-party provider, may result in the loss of our existing customers or the delay of adoption of our services by potential customers and may adversely affect our business, results of operations and financial condition.

We depend largely on the continued services of our senior management and other key employees, the loss of any of whom could adversely affect our business, results of operations and financial condition.

Our future performance depends on the continued services and contributions of our senior management and other key employees to execute on our business plan, to develop our platform, to deliver our services to customers, to attract and retain customers and to identify and pursue opportunities. The loss of services of senior management or other key employees could significantly delay or prevent the achievement of our development and strategic objectives. In particular, we depend to a considerable degree on the vision, skills, experience and effort of our Cofounder, Chief Executive Officer and Chairman, David A. Morken. The replacement of any of our senior management personnel would likely involve significant time and costs, and such loss could significantly delay or prevent the achievement of our business objectives. The loss of the services of our senior management or other key employees for any reason could adversely affect our business, results of operations and financial condition.

If we are unable to hire, retain and motivate qualified personnel, our business will suffer.

Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. We believe that there is, and will continue to be, intense competition for highly skilled management, technical,

 

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sales and other personnel with experience in our industry in the Raleigh, North Carolina area, where our headquarters are located, and in other locations where we maintain offices. We must provide competitive compensation packages and a high-quality work environment to hire, retain and motivate employees. If we are unable to retain and motivate our existing employees and attract qualified personnel to fill key positions, we may be unable to manage our business effectively, including the development, marketing and sale of our services, which could adversely affect our business, results of operations and financial condition. To the extent we hire personnel from competitors, we also may be subject to allegations that they have been improperly solicited or hired, or that they divulged proprietary or other confidential information.

Volatility in, or lack of performance of, our stock price may also affect our ability to attract and retain key personnel. Many of our key personnel are, or will soon be, vested in a substantial amount of shares of Class A common stock, Class B common stock or stock options. Employees may be more likely to terminate their employment with us if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or, conversely, if the exercise prices of the options that they hold are significantly above the trading price of our Class A common stock. If we are unable to retain our employees, our business, results of operations and financial condition could be adversely affected.

Our management team has limited experience managing a public company.

Most members of our management team have limited, if any, experience managing a publicly-traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company. As a result of being a public company, we will be subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, results of operations and financial condition.

We could be subject to liability for historic and future sales, use and similar taxes, which could adversely affect our results of operations.

We conduct operations in many tax jurisdictions throughout the United States. In many of these jurisdictions, non-income-based taxes such as sales, use and telecommunications taxes, including those associated with (or potentially associated with) VoIP telephony services or 911 services, are or may be assessed on our operations. The systems and procedures necessary to comply in these jurisdictions are complex to develop and challenging to implement. Additionally, we rely heavily on third parties to provide us with key software and services for compliance. If these third parties cease to provide those services to us for any reason, or fail to perform services accurately and completely, we may not be able to accurately bill, collect or remit applicable non-income-based taxes. Historically, we have not billed or collected certain of these taxes and, in accordance with GAAP, we have recorded a provision for our tax exposure in these jurisdictions when it is both probable that a liability has been incurred and the amount of the exposure can be reasonably estimated. These estimates include several key assumptions including, but not limited to, the taxability of our services, the jurisdictions in which we believe we have nexus, and the sourcing of revenue to those jurisdictions. In the event these jurisdictions challenge our assumptions and analysis, our actual exposure could differ materially from our current estimates.

Taxing authorities also may periodically perform audits to verify compliance and include all periods that remain open under applicable statutes, which customarily range from three to four years. At any point in time, we may undergo audits that could result in significant assessments of past taxes, fines and interest if we were found to be non-compliant. During the course of an audit, a taxing authority may, as a matter of policy, question our interpretation and/or application of their rules in a manner that, if we were not successful in substantiating our position, could potentially result in a significant financial impact to us.

 

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Furthermore, certain jurisdictions in which we do not collect sales, use and similar taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties and interest or future requirements may adversely affect our business, results of operations and financial condition.

We may be subject to significant U.S. federal income tax-related liabilities if certain ownership changes were to occur, including as a result of subsequent issuances or acquisitions of our stock, and we may determine to forego certain transactions in light of such liabilities as well as the restrictions and obligations imposed by and under the Tax Sharing Agreement.

We may be subject to significant U.S. federal income tax-related liabilities with respect to our prior distribution of all of the issued and outstanding shares of the common stock of Republic Wireless, Inc. (“Republic Wireless”), our former subsidiary, to our stockholders as of and on November 30, 2016 (the “Spin-Off”), if certain ownership changes were to occur. In particular, even if the Spin-Off otherwise qualifies as a tax-free transaction to us and our stockholders under Section 355, Section 368(a)(1)(D) and related provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), it may result in corporate-level taxable gain to us under Section 355(e) of the Code (“Section 355(e)”) if there is a 50% or greater change in ownership, by vote or value, of shares of our stock or Republic Wireless’s stock occurring as part of a plan or series of related transactions that includes the Spin-Off. In addition, pursuant to the Tax Sharing Agreement, dated November 30, 2016, between us and Republic Wireless (the “Tax Sharing Agreement”), we and Republic Wireless are each prohibited from taking or failing to take any action that prevents the Spin-Off from qualifying for tax-free treatment under Section 355, Section 368(a)(1)(D) and related provisions of the Code, and we and Republic Wireless must generally indemnify one another for any taxes or losses incurred by the other (or its respective subsidiaries), as applicable, resulting from the application of Section 355(e) to the Spin-Off as a result of subsequent actions we or Republic Wireless take or fail to take. See the section titled “Certain Relationships and Related Party Transactions—Tax Sharing Agreement” for further discussion of the Tax Sharing Agreement.

To preserve the tax-free nature of the Spin-Off to us as well as Republic Wireless (and its subsidiaries), we might forego certain transactions that might otherwise have been advantageous. In particular, we might continue to operate certain of our business operations for the foreseeable future even if a sale or discontinuance of such business might have otherwise been advantageous.

In addition, for purposes of Section 355(e), any acquisitions or issuances of our stock, including pursuant to the Pre-IPO Reorganization, this offering or the IPO-Related Reorganization, or Republic Wireless’s stock that occur within two years after the Spin-Off will generally be presumed to be part of a plan or series of related transactions with respect to the Spin-Off. Although we or Republic Wireless may be able to rebut that presumption, determining whether an acquisition or issuance is part of a plan or series of related transactions under these rules is generally complex, inherently factual and subject to interpretation of the facts and circumstances of a particular case. For this purpose, whether any increase in voting power by holders of our Class B common stock by reason of the conversion by other holders of our Class B common stock to our Class A common stock should be considered an acquisition of voting power as part of a plan or series of related transactions is unclear.

In light of the implications that would arise for us if Section 355(e) were to apply to the Spin-Off, we received an opinion from Kilpatrick Townsend & Stockton LLP, our special tax counsel, in conjunction with this offering to the effect that (i) as of the date of this offering, we will not be required to recognize gain with respect to the Spin-Off pursuant to Section 355(e) as a result of one or more persons directly or indirectly acquiring our stock, and (ii) any increases in voting power attributable to conversions of our Class B common stock to Class A common stock by those who hold our Class B common stock as of the date of this offering will not cause us to recognize gain with respect to the Spin-Off pursuant to Section 355(e) (the “Tax Opinion”). The Tax Opinion is not binding on the Internal Revenue Service (the “IRS”) or the courts, however, and the IRS or the courts may

 

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not agree with the conclusions reached in the Tax Opinion. Moreover, the Tax Opinion will be based upon, among other things, current law and certain assumptions and representations as to factual matters made by us. Any change in currently applicable law, which may be retroactive, or the failure of any such assumptions or representations to be true, could adversely affect the validity of the conclusions reached in the Tax Opinion. If the conclusions in the Tax Opinion were not correct and Section 355(e) were to apply to the Spin-Off, we would be liable for significant U.S. federal income tax related liabilities and indemnity obligations under the Tax Sharing Agreement.

Even if Section 355(e) does not apply to the Spin-Off as of the date of this offering or as a result of an increase in voting power attributable to conversions of our Class B common stock by those who hold such stock as of the date of this offering, subsequent acquisitions or issuances of our stock could be treated as part of a plan or series of related transactions with respect to the Spin-Off. Accordingly, in light of the requirements of Section 355(e), we might forego share repurchases, stock issuances and other strategic transactions for some period of time following this offering. Notwithstanding the foregoing, it is possible that we, Republic Wireless or the holders of our respective stock might inadvertently cause, permit or otherwise not prevent a change in the ownership of our stock or Republic Wireless’s stock to occur, which would cause Section 355(e) to apply to the Spin-Off, thereby triggering significant U.S. federal income tax-related liabilities and indemnity obligations under the Tax Sharing Agreement of approximately $50 million. This approximation is based on our current expectations and the tax laws in effect on the date of this prospectus. However, we cannot provide any assurance that this estimate will prove to be accurate in the event that Section 355(e) were to apply.

If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, capitalized internal-use software costs, other non-income taxes, business combination and valuation of goodwill and purchased intangible assets and share-based compensation. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our Class A common stock.

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), and the rules and regulations of the applicable listing standards of the NASDAQ Global Select Market. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and place significant strain on our personnel, systems and resources.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods

 

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specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to develop, maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight.

Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our consolidated financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting could also adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NASDAQ Global Select Market. We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we will be required to provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report on Form 10-K.

Our independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material and adverse effect on our business, results of operations and financial condition and could cause a decline in the trading price of our Class A common stock.

If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.

We review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. As of June 30, 2017, we carried a net $14.9 million of goodwill and intangible assets. An adverse change in market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates, could result in a change to the estimation of fair value that could result in an impairment charge to our goodwill or intangible assets. Any such charges may adversely affect our results of operations.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not

 

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previously approved. We may take advantage of these exemptions for so long as we are an “emerging growth company,” which could be as long as five years following the completion of this offering. We cannot predict if investors will find our Class A common stock less attractive because we will rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and the trading price of our Class A common stock may be more volatile.

Earthquakes, hurricanes, fires, floods, power outages, terrorist attacks and other significant events could disrupt our business and ability to serve our clients.

A significant event, such as an earthquake, hurricane, a fire, a flood or a power outage, could have a material adverse effect on our business, results of operations or financial condition. Our IP network is designed to be redundant and to offer seamless backup support in an emergency. While our network is designed to withstand the loss of any one data center at any point in time, the simultaneous failure of multiple data centers could disrupt our ability to serve our clients. Additionally, certain of our capabilities cannot be made redundant feasibly or cost-effectively. Acts of physical or cyber terrorism or other geopolitical unrest also could cause disruptions in our business. The adverse impacts of these risks may increase if our disaster recovery plans prove to be inadequate.

As we have elected to avail ourselves of the JOBS Act extended accounting transition period, our financial statements may not be easily comparable to other companies.

Pursuant to the JOBS Act, as an “emerging growth company,” we can elect to avail ourselves of the extended transition period for any new or revised accounting standards that may be issued by the Public Company Accounting Oversight Board or the SEC. We have elected to avail ourselves of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an “emerging growth company,” expect to adopt the standard on the timeline for private companies. This may make comparison of our financial statements with other public companies that are not emerging growth companies or emerging growth companies that have opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

Our financial condition and growth may depend upon the successful integration of acquired businesses. We may not be able to efficiently and effectively integrate acquired operations, and thus may not fully realize the anticipated benefits from such acquisitions.

Achieving the anticipated benefits of any acquisitions depends in part upon whether we can integrate new businesses in an efficient and effective manner. The integration of any acquired businesses involves a number of risks, including, but not limited to:

 

    demands on management related to any significant increase in size after the acquisition;

 

    the disruption of ongoing business and the diversion of management’s attention from the management of daily operations to management of integration activities;

 

    failure to fully achieve expected synergies and costs savings;

 

    unanticipated impediments in the integration of departments, systems, including accounting systems, technologies, books and records and procedures, as well as in maintaining uniform standards, controls, including internal control over financial reporting required by the Sarbanes-Oxley Act, procedures and policies;

 

    loss of customers or the failure of customers to order incremental services that we expect them to order;

 

    failure to provision services that are ordered by customers during the integration period;

 

    higher integration costs than anticipated; and

 

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    difficulties in the assimilation and retention of highly qualified, experienced employees, many of whom may be geographically dispersed.

Successful integration of any acquired businesses or operations will depend on our ability to manage these operations, realize opportunities for revenue growth presented by strengthened service offerings and expanded geographic market coverage, obtain better terms from our vendors due to increased buying power, and eliminate redundant and excess costs to fully realize the expected synergies. Because of difficulties in combining geographically distant operations and systems which may not be fully compatible, we may not be able to achieve the financial strength and growth we anticipate from the acquisitions.

We may not realize our anticipated benefits from our acquisitions, if any, or may be unable to efficiently and effectively integrate acquired operations as planned. If we fail to integrate acquired businesses and operations efficiently and effectively or fail to realize the benefits we anticipate, we would be likely to experience material adverse effects on our business, financial condition, results of operations and future prospects.

Our credit facility contains restrictive and financial covenants that may limit our operating flexibility.

Our credit facility contains certain restrictive covenants that either limit our ability to, or require a mandatory prepayment in the event we, among other things, incur additional indebtedness, issue guarantees, create liens on assets, make certain investments, merge with or acquire other companies, change business locations, pay dividends or make certain other restricted payments, transfer or dispose of assets, enter into transactions with affiliates and enter into various specified transactions. We, therefore, may not be able to engage in any of the foregoing transactions unless we obtain the consent of our lenders or prepay the outstanding amount under our credit facility. Our credit facility also contains certain financial covenants and financial reporting requirements. Our obligations under our credit facility are secured by all of our property, with certain exceptions. We may not be able to generate sufficient cash flow or sales to meet the financial covenants or pay the principal and interest under our credit facility. Furthermore, future working capital, borrowings or equity financing could be unavailable to repay or refinance the amounts outstanding under our credit facility. In the event of a liquidation, all outstanding principal and interest would have to be repaid prior to distribution of assets to unsecured creditors, and the holders of our Class A and Class B common stock would receive a portion of any liquidation proceeds only if all of our creditors, including our lenders, were first repaid in full.

If we are unable to comply with the restrictive and financial covenants in our credit facility, there would be a default under the terms of that agreement, and this could result in an acceleration of payment of funds that have been borrowed.

If we were unable to comply with the restrictive and financial covenants in our credit facility, there would be a default under the terms of that agreement. As a result, any borrowings under other instruments that contain cross-acceleration or cross default provisions may also be accelerated and become due and payable. If any of these events occur, there can be no assurance that we would be able to make necessary payments to the lenders or that we would be able to find alternative financing. Even if we were able to obtain alternative financing, there can be no assurance that it would be on terms that are acceptable.

Risks Related to Our Initial Public Offering and Ownership of Our Class A Common Stock

An active trading market for our Class A common stock may never develop or be sustained.

We have applied to list our Class A common stock on the NASDAQ Global Select Market under the symbol “BAND”. We cannot assure you that an active trading market for our Class A common stock will develop on that exchange or elsewhere or, if developed, that any market will be sustained. Accordingly, we cannot assure you of the likelihood that an active trading market for our Class A common stock will develop or be maintained, the liquidity of any trading market, your ability to sell your shares of our Class A common stock when desired or the prices that you may obtain for your shares.

 

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The trading price of our Class A common stock may be volatile, and you could lose all or part of your investment.

Prior to this offering, there has been no public market for shares of our Class A common stock. The initial public offering price of our Class A common stock will be determined through negotiation between us and the underwriters. This price does not necessarily reflect the price at which investors in the market will be willing to buy and sell shares of our Class A common stock following this offering. In addition, the trading price of our Class A common stock following this offering is likely to be volatile and could be subject to fluctuations in response to various factors, some of which are beyond our control. These fluctuations could cause you to lose all or part of your investment in our Class A common stock since you might be unable to sell your shares at or above the price you paid in this offering. Factors that could cause fluctuations in the trading price of our Class A common stock include the following:

 

    price and volume fluctuations in the overall stock market from time to time;

 

    volatility in the trading prices and trading volumes of technology stocks;

 

    volatility in the trading volumes of our Class A common stock;

 

    changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

 

    sales of shares of our Class A common stock by us or our stockholders;

 

    failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

    the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;

 

    announcements by us or our competitors of new products or services;

 

    the public’s reaction to our press releases, other public announcements and filings with the SEC;

 

    rumors and market speculation involving us or other companies in our industry;

 

    actual or anticipated changes in our results of operations or fluctuations in our results of operations;

 

    actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally;

 

    litigation involving us, our industry or both;

 

    regulatory actions or developments affecting our operations, those of our competitors or our industry more broadly;

 

    developments or disputes concerning our intellectual property or other proprietary rights;

 

    announced or completed acquisitions of businesses, products, services or technologies by us or our competitors;

 

    new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

    changes in accounting standards, policies, guidelines, interpretations or principles;

 

    new rules adopted by certain index providers, such as S&P Dow Jones, that limit or preclude inclusion of companies with multi-class capital structures in certain of their indices;

 

    any significant change in our management; and

 

    general economic conditions and slow or negative growth of our markets.

 

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In addition, in the past, securities class action litigation has often been instituted following periods of volatility in the overall market and the market price of a particular company’s securities. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

A substantial portion of the outstanding shares of our Class A and Class B common stock after this offering will be restricted from immediate resale, but may be sold on a stock exchange in the near future. The large number of shares eligible for public sale or subject to rights requiring us to register them for public sale could depress the market price of our Class A common stock.

The market price of our Class A common stock could decline as a result of sales of a large number of shares of our Class A common stock in the market after this offering, and the perception that these sales could occur may also depress the market price of our Class A common stock. Based on              shares of our capital stock outstanding as of September 30, 2017, we will have             shares of our Class A and Class B common stock outstanding after this offering. Our executive officers, directors and the holders of substantially all of our capital stock and securities convertible into or exchangeable for our capital stock have entered into market standoff agreements with us or have entered or will enter into lock-up agreements with the underwriters under which they have agreed, subject to specific exceptions, not to sell any of our stock for 180 days following the date of this prospectus. We refer to such period as the lock-up period. Due to these agreements and the provisions of our investors’ rights agreement described further in the section titled “Description of Capital Stock—Registration Rights,” and subject to the provisions of Rule 144 or Rule 701, shares of our Class A and Class B common stock will be available for sale in the public market as follows:

 

                shares of Class B common stock will be immediately available for sale in the public market, following conversion to Class A common stock;

 

    beginning on the date of this prospectus, all             shares of our Class A common stock sold in this offering will be immediately available for sale in the public market; and

 

    beginning 181 days after the date of this prospectus, subject to the Company Lock-up Agreements (as defined in Certain Relationships and Related Party Transactions—Company Lock-up Agreements), the remainder of the shares of our Class A and Class B common stock will be eligible for sale in the public market from time to time thereafter, subject in some cases to the volume and other restrictions of Rule 144.

Upon completion of this offering, stockholders owning an aggregate of up to 1,646,933 shares will be entitled, under contracts providing for registration rights, to require us to register shares owned by them for public sale in the United States. In addition, we intend to file a registration statement to register shares reserved for future issuance under our equity compensation plans. Upon effectiveness of that registration statement, subject to the satisfaction of applicable exercise periods and expiration of the market standoff agreements and lock-up agreements referred to above, the shares issued upon exercise of outstanding stock options will be available for immediate resale in the United States in the open market.

Sales of our shares as restrictions end or pursuant to registration rights may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause the trading price of our Class A common stock to fall and make it more difficult for you to sell shares of our Class A common stock.

 

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The dual class structure of our common stock will have the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of this offering, including our directors, executive officers and significant stockholders who will hold in the aggregate     % of the voting power of our capital stock following the completion of this offering. This will limit or preclude your ability to influence corporate matters, including the election of directors, amendments to our organizational documents and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval.

Our Class A common stock, which is the stock we are offering in this offering, has one vote per share, and our Class B common stock has ten votes per share. Following this offering, our directors, executive officers and holders of more than 5% of our common stock, and their respective affiliates, will hold in the aggregate     % of the voting power of our capital stock. Because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively will continue to control a majority of the combined voting power of our common stock and therefore be able to control all matters submitted to our stockholders for approval. This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments to our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may feel are in your best interest as one of our stockholders.

Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. See the section titled “Description of Capital Stock—Anti-Takeover Provisions” for additional information.

Following the IPO-Related Reorganization, we expect that we will become controlled by David A. Morken, our Cofounder and Chief Executive Officer, whose interests may differ from other stockholders.

Following the IPO-Related Reorganization, we expect David A. Morken, our Cofounder and Chief Executive Officer will control approximately     % of the combined voting power of our outstanding capital stock (or approximately     % if the underwriters exercise their option to purchase additional shares in full). As a result, Mr. Morken will have the ability to control the appointment of our management, the entering into of mergers, sales of substantially all or all of our assets and other extraordinary transactions and influence amendments to our certificate of incorporation and bylaws. So long as Mr. Morken continues to control a majority of the voting power of our outstanding capital stock, he will have the ability to control the vote in any election of directors and will have the ability to prevent any transaction that requires shareholder approval regardless of whether other shareholders believe the transaction is in our best interests. In any of these matters, the interests of Mr. Morken may differ from or conflict with your interests. Moreover, this concentration of ownership may also adversely affect the trading price for our Class A common stock to the extent investors perceive disadvantages in owning stock of a company with a controlling shareholder.

Following the IPO-Related Reorganization, we plan to elect to take advantage of the “controlled company” exemption to the corporate governance rules for NASDAQ-listed companies, which could make our Class A common stock less attractive to some investors or otherwise harm our stock price.

Following the IPO-Related Reorganization, we expect that we will qualify as a “controlled company” under the corporate governance rules for NASDAQ-listed companies and expect to take advantage of related exemptions to the corporate governance rules. As a result, we will not be required to have a majority of our board of directors be independent, nor will we be required to have a compensation committee or an independent nominating function. Accordingly, should the interests of our controlling stockholder differ from those of other stockholders, the other stockholders may not have the same protections afforded to stockholders of companies

 

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that are subject to all of the corporate governance rules for NASDAQ-listed companies. Our status as a controlled company could make our Class A common stock less attractive to some investors or otherwise harm our stock price. If fewer shares of Class B common stock are converted into shares of Class A common stock than we expect, Mr. Morken may not control sufficient voting power of our outstanding capital stock for us to qualify as a “controlled company” under the corporate governance rules for NASDAQ-listed companies. If we are not a “controlled company” by the first anniversary of our listing on NASDAQ, we will have to comply with the corporate governance standards applicable to non-controlled companies, including with respect to independent directors, and we may not have a long-lead time to satisfy those standards.

We cannot predict the impact our capital structure may have on our stock price.

In July 2017, S&P Dow Jones, a provider of widely followed stock indices, announced that companies with multiple share classes, such as ours, will not be eligible for inclusion in certain of their indices. As a result, our Class A common stock will likely not be eligible for these stock indices. Additionally, FTSE Russell, another provider of widely followed stock indices, recently stated that it plans to require new constituents of its indices to have at least five percent of their voting rights in the hands of public stockholders. Many investment funds are precluded from investing in companies that are not included in such indices, and these funds would be unable to purchase our Class A common stock if we were not included in such indices. We cannot assure you that other stock indices will not take a similar approach to S&P Dow Jones or FTSE Russell in the future. Exclusion from indices could make our Class A common stock less attractive to investors and, as a result, the market price of our Class A common stock could be adversely affected.

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our Class A common stock adversely, the trading price of our Class A common stock and trading volume could decline.

The trading market for our Class A common stock will be influenced by the research and reports that securities or industry analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our Class A common stock in an adverse manner, or provide more favorable recommendations about our competitors relative to us, the trading price of our Class A common stock would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the trading price of our Class A common stock or trading volume to decline.

We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.

The net proceeds from the sale of our shares of our Class A common stock by us in this offering may be used for general corporate purposes, including sales and marketing activities, including further expansion of our product development and sales and marketing organizations, repayment of indebtedness, working capital, general and administrative matters and capital expenditures. We also may use a portion of the net proceeds to acquire businesses, products, services or technologies. However, we do not have agreements or commitments for any specific acquisitions at this time. Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. Until the net proceeds are used, they may be placed in investments that do not produce significant income or that may lose value.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The initial public offering price of $         per share of Class A common stock, which is the midpoint of the price range set forth on the cover page of this prospectus, is substantially higher than the net tangible book value

 

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per share of our outstanding Class A common stock immediately after this offering. Therefore, if you purchase our Class A common stock in this offering, you will incur immediate dilution of $         in the net tangible book value per share of Class A common stock from the price you paid. In addition, purchasers who bought shares of Class A common stock from us in this offering will have contributed     % of the total consideration paid to us by our stockholders to purchase shares of our common stock, in exchange for acquiring approximately     % of the outstanding shares of our capital stock as of September 30, 2017 after giving effect to this offering. The exercise of outstanding stock options and the vesting of restricted stock units will result in further dilution.

Anti-takeover provisions contained in our second amended and restated certificate of incorporation and second amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

Our second amended and restated certificate of incorporation, second amended and restated bylaws and Delaware law contain or will contain provisions which could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our board of directors. Among other things, our second amended and restated certificate of incorporation and second amended and restated bylaws will include provisions:

 

    authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our Class A and Class B common stock;

 

    limiting the liability of, and providing indemnification to, our directors and officers;

 

    limiting the ability of our stockholders to call and bring business before special meetings;

 

    providing for a dual class common stock structure in which holders of our Class B common stock have the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the outstanding shares of our Class A and Class B common stock, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets;

 

    providing that our board of directors will be classified into three classes of directors with staggered three-year terms;

 

    prohibiting stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

    requiring super-majority voting to amend some provisions in our second amended and restated certificate of incorporation and second amended and restated bylaws;

 

    requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors; and

 

    controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents certain stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of at least two-thirds of our outstanding common stock not held by such 15% or greater stockholder.

Any provision of our second amended and restated certificate of incorporation, second amended and restated bylaws or Delaware law that has the effect of delaying, preventing or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our Class A common stock and could also affect the price that some investors are willing to pay for our Class A common stock.

 

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Our second amended and restated certificate of incorporation and our second amended and restated bylaws will include super-majority voting provisions that will limit your ability to influence corporate matters.

Our second amended and restated certificate of incorporation and our second amended and restated bylaws will include provisions that require the affirmative vote of two-thirds of all of the outstanding shares of our capital stock entitled to vote to effect certain changes. These changes include amending or repealing our second amended and restated bylaws or second amended and restated certificate of incorporation or removing a director from office for cause. Because, following the IPO-Related Reorganization, we expect Mr. Morken will control the majority of the voting power of our outstanding capital stock, he will have the ability to prevent any such changes, which will limit your ability to influence corporate matters.

We may need additional capital in the future and such capital may be limited or unavailable. Failure to raise capital when needed could prevent us from growing in accordance with our plans.

We may require more capital in the future from equity or debt financings to fund our operations, finance investments in equipment and infrastructure, acquire complementary businesses and technologies, and respond to competitive pressures and potential strategic opportunities. If we are required to raise additional funds through further issuances of equity or other securities convertible into equity, our existing stockholders could suffer significant dilution, and any new shares we issue could have rights, preferences or privileges senior to those of the holders of our Class A common stock. The additional capital we may seek may not be available on favorable terms or at all. In addition, our credit facility limits our ability to incur additional indebtedness under certain circumstances. If we are unable to obtain capital on favorable terms or at all, we may have to reduce our operations or forego opportunities, and this may have a material adverse effect on our business, financial condition and results of operations.

We do not intend to pay dividends for the foreseeable future.

We have never declared or paid any cash dividends on our Class A common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. In addition, the terms of our credit facility contain restrictions on our ability to declare and pay cash dividends on our capital stock. Accordingly, investors must rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

If a large number of shares of our Class A common stock is sold in the public market, the sales could reduce the trading price of our Class A common stock and impede our ability to raise future capital.

We cannot predict what effect, if any, future issuances by us of our Class A common stock will have on the market price of our Class A common stock. In addition, shares of our Class A common stock that we issue in connection with an acquisition may not be subject to resale restrictions. The market price of our Class A common stock could drop significantly if certain large holders of our Class A common stock, or recipients of our Class A common stock in connection with an acquisition, sell all or a significant portion of their shares of Class A common stock or are perceived by the market as intending to sell these shares other than in an orderly manner. In addition, these sales could impair our ability to raise capital through the sale of additional Class A common stock in the capital markets.

 

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THE COMMON STOCK SPLIT AND THE REORGANIZATIONS

Common Stock Split

Prior to this offering, we had three classes of shares: (1) Series A Redeemable Convertible Preferred Stock (“Series A preferred stock”), (2) Class A voting common stock (“Old Class A common stock”) and (3) Class B non-voting common stock (“Old Class B common stock”). Both our Series A preferred stock and our Old Class A common stock had one vote per share and our Old Class B common stock was non-voting. On October 23, 2017, we filed an amendment to our first amended and restated certificate of incorporation that provided for a 2.50-for-1 split of each class of our then existing common stock (the “common stock split”).

Pre-IPO Reorganization

Our board of directors, as well as shareholders representing a majority of our outstanding Series A preferred stock, our outstanding Old Class A common stock and our outstanding Old Class B common stock, each voting as a separate class, are expected to approve our second amended and restated certificate of incorporation prior to the commencement of this offering. Following such approval and prior to the effectiveness of our second amended and restated certificate of incorporation and the pricing of this offering, we expect that each of our outstanding shares of Series A preferred stock will convert into 2.50 shares of our Old Class A common stock. Following such conversion of our outstanding Series A preferred stock into Old Class A common stock and immediately prior to the pricing of this offering, we expect to file our second amended and restated certificate of incorporation with the Secretary of State for the State of Delaware. Upon the effectiveness of our second amended and restated certificate of incorporation and the effectiveness of our second amended and restated bylaws, (i) each share of our Old Class A common stock, including those shares of our Old Class A common stock issued upon the conversion of our then outstanding Series A preferred stock, will be reclassified as one share of Class B common stock, with each share of Class B common stock having ten votes per share, (ii) each share of our Old Class B common stock will be reclassified as one share of Class A common stock, with each share of Class A common stock having one vote per share, and (iii) options and warrants exercisable into shares of Old Class A common stock will become exercisable into shares of Class B common stock and options exercisable into shares of Old Class B common stock will be exercisable into shares of Class A common stock (collectively, the “Pre-IPO Reorganization”).

IPO-Related Reorganization

Related to our expected change of control whereby Mr. Morken will control more than 50% of the voting power of our capital stock, we are currently awaiting regulatory approval for such a change of control. To date, we have received regulatory approval from the FCC and expect to receive regulatory approvals from various state public utility commissions on or prior to January 31, 2018. Upon receipt of those approvals, we expect that a sufficient number of our shares of Class B common stock will be converted into Class A common stock to cause Mr. Morken to control more than 50% of the voting power of our capital stock (the “IPO-Related Reorganization”). It is expected that each of David A. Morken, John C. Murdock, Henry R. Kaestner, Susan Bowen, Lerner, Leona Toal and Scott and Tamsen Toal will enter into Company Lock-up Agreements, pursuant to which those shareholders agree not to convert that portion of their Class B common stock to Class A common stock subject to such lock-up prior to December 31, 2018. See “Certain Relationships and Related Party Transactions—Company Lock-up Agreements.”

With the exception of Class B common stock held or controlled by those subject to the Company Lock-up Agreements, including David A. Morken, we expect that a sufficient number of shares of our Class B common stock will be converted to shares of Class A common stock and that holders of our Class B common stock will convert their shares of Class B common stock to shares of Class A common stock either voluntarily or in connection with or due to the anticipated sale of their shares in the public market. Once a sufficient number of our Class B common stock have been converted to Class A common stock, we will become a “controlled

 

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company” under the corporate governance rules for NASDAQ-listed companies and will be controlled by Mr. Morken, who is expected to hold approximately     % of the voting power of our outstanding capital stock, assuming all holders of Class B common stock who are able to do so (other than the shares held or controlled by those subject to the Company Lock-Up Agreements, including Mr. Morken) are converted to Class A common stock. Holders of shares of Class B common stock are not required to convert their shares of Class B common stock to shares of Class A common stock and therefore, we cannot assure you that a sufficient number of shares of Class B common stock will convert into Class A common stock. If a sufficient number do not convert, we will not become a controlled company under the corporate governance rules for NASDAQ-listed companies.

If and when we become a controlled company, Mr. Morken will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors and the approval of any change of control transaction. See “Risk Factors—Following the IPO-Related Reorganization, we plan to elect to take advantage of the “controlled company” exemption to the corporate governance rules for NASDAQ-listed companies, which could make our Class A common stock less attractive to some investors or otherwise harm our stock price” and “Description of Capital Stock” for more information.

 

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MARKET AND INDUSTRY DATA

The market data and other statistical information used throughout this prospectus are based on independent industry publications, reports by market research firms or other published independent sources. Some market data and statistical information are also based on our good faith estimates, which are derived from management’s knowledge of our industry and such independent sources referred to above. Certain market, ranking and industry data included in this prospectus, including the size of certain markets and our size or position and the positions of our competitors within these markets, including our services relative to our competitors, are based on estimates of our management. These estimates have been derived from our management’s knowledge and experience in the markets in which we operate, as well as information obtained from surveys, reports by market research firms, our customers, distributors, suppliers, trade and business organizations and other contacts in the markets in which we operate. References herein to our being a leader in a market or service offering refer to our belief that we have a leading market share position in each specified market, unless the context otherwise requires. In addition, the discussion herein regarding our various markets is based on how we define the markets for our services, which services may be either part of larger overall markets or markets that include other types of services.

While we believe the industry, market and competitive position data included in this prospectus is reliable and is based on reasonable assumptions, such data involves risks and uncertainties and are subject to change based on various factors, including those discussed in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us. Information based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. In some cases, we do not expressly refer to the sources from which data is derived.

Certain monetary amounts, percentages and other figures included in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables or charts may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

Certain information in this prospectus is contained in independent industry publications. The source of these independent industry publications is provided below:

 

    comScore, Inc., Looking Ahead to the Voice Era, July 2017.

 

    Gartner, Inc., Forecast Snapshot: VPA-Enabled Wireless Speakers, Worldwide, 2016-2021, Werner Goertz and Ranjit Atwal, August 2017.

 

    International Data Corporation, Worldwide Telecommunications Spending, August 2017.

 

    International Data Corporation, Worldwide Voice and Text Messaging Communications Platform-as-a-Service Forecast, 2017-2021, March 2017.

 

    Ovum, Mobile Messaging Traffic and Revenue Forecast: 2016-21, November 2016.

 

    Ovum, OTT VoIP Forecast: 2016-21, January 2017.

The Gartner Report described herein, (the “Gartner Report”) represents research opinions or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc. (“Gartner”), and are not representations of fact. The Gartner Report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Report are subject to change without notice.

 

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TRADEMARKS

“Bandwidth” and our other registered or common law trade names, trademarks or service marks appearing in this prospectus are our property. We own or otherwise have rights to the trademarks, service marks, copyrights and trade names, including those mentioned in this prospectus, used in conjunction with the marketing and sale of our services. This prospectus includes trademarks, which are protected under applicable intellectual property laws and are our property and the property of our subsidiaries. This prospectus also contains trademarks, service marks, copyrights and trade names of other companies, which are the property of their respective owners. Unless the context otherwise indicates, we do not intend our use or display of other companies’ trademarks, service marks, copyrights or trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies. Solely for convenience, our trademarks, service marks, trade names and copyrights referred to in this prospectus may appear without the ®,™ or © symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, service marks, trade names and copyrights.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. In some cases you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

 

    The market in which we participate is highly competitive, and if we do not compete effectively, our business, results of operations and financial condition could be harmed.

 

    If we are unable to attract new customers in a cost-effective manner, then our business, results of operations and financial condition would be adversely affected.

 

    The market for some of our services is new and unproven, may decline or experience limited growth and is dependent in part on developers continuing to adopt our platform and use our services.

 

    If we do not develop enhancements to our services and introduce new services that achieve market acceptance, our business, results of operations and financial condition could be adversely affected.

 

    We have experienced rapid growth and expect our growth to continue, and if we fail to effectively manage our growth, then our business, results of operations and financial condition could be adversely affected.

 

    If we are not able to maintain and enhance our brand and increase market awareness of our company and services, then our business, results of operations and financial condition may be adversely affected.

 

    The communications industry faces significant regulatory uncertainties and the resolution of these uncertainties could harm our business, results of operations and financial condition.

 

    The trading price of our Class A common stock may be volatile, and you could lose all or part of your investment.

 

    The dual class structure of our common stock will have the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of this offering, including our directors, executive officers and significant stockholders who will hold in the aggregate     % of the voting power of our capital stock following the completion of this offering. This will limit or preclude your ability to influence corporate matters, including the election of directors, amendments to our organizational documents and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval.

 

    Other risk factors included under “Risk Factors” in this prospectus.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person

 

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assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.

You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of the shares of our Class A common stock offered by us will be approximately $         million, based upon the initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ over-allotment option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds will be approximately $         million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares by the selling stockholders pursuant to the exercise by the underwriters of their option to purchase additional shares of our Class A common stock.

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the net proceeds that we receive from this offering by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of Class A common stock offered by us would increase (decrease) the net proceeds that we receive from this offering by approximately $         million, assuming the assumed initial public offering price remains the same and after deducting the estimated underwriting discount and estimated offering expenses payable by us.

The principal purposes of this offering are to increase our capitalization and financial flexibility. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us of this offering. However, we currently intend to use the net proceeds to us from this offering primarily for general corporate purposes, including sales and marketing activities, including further expansion of our product development and sales and marketing organizations, repayment of indebtedness, working capital, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments. We will have broad discretion over the uses of the net proceeds in this offering. Pending these uses, we intend to invest the net proceeds from this offering in short-term, investment-grade interest-bearing securities such as money market funds, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government.

KeyBanc Capital Markets Inc. and certain of its affiliates are lenders and/or agents under our credit facility, as well as an underwriter in this offering, and, to the extent proceeds from this offering are used to repay amounts outstanding thereunder, will receive a portion of the net proceeds from this offering in connection with the repayment of our credit facility. Interest for borrowings under our credit facility are determined by reference to (a) the highest of (i) the London interbank offered rate for loans in Eurodollars for a period of one month plus 1.00%, (ii) the Federal Funds Effective Rate plus 0.50% or (iii) the interest rate established by the Administrative Agent as the Administrative Agent’s prime rate plus (b) an applicable margin, which ranges from 1.25% to 1.75% per annum based on a leverage ratio. As of June 30, 2017, we had $41.5 million of outstanding indebtedness under our credit facility, consisting of $39.0 million outstanding under our term loan facility and $2.5 million outstanding under our revolving credit facility. Beginning on March 31, 2017, the term loan is payable in consecutive equal quarterly installments with the balance payable in full on November 3, 2021. See Note 7 to our consolidated financial statements included elsewhere in this prospectus for further details. The outstanding indebtedness under our credit facility was incurred for general corporate purposes and to repay existing indebtedness.

 

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DIVIDEND POLICY

We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on our capital stock. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on a number of factors, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. In addition, the terms of our credit facility contain restrictions on our ability to declare and pay cash dividends on our capital stock.

 

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CAPITALIZATION

The following table shows our cash and cash equivalents and our capitalization as of June 30, 2017 on:

 

    an actual basis after giving effect to the common stock split;

 

    a pro forma basis, giving effect to the Pre-IPO Reorganization; and

 

    a pro forma as adjusted basis, giving effect to the pro forma adjustments set forth above, our receipt of the net proceeds from our sale of             shares of Class A common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and the use of proceeds to repay existing indebtedness.

You should read this table together with our consolidated financial statements and related notes, and the sections titled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are included elsewhere in this prospectus.

 

     As of June 30, 2017  
     Actual     Pro
Forma
    Pro Forma
as Adjusted
 
     (In thousands, except share and per
share information)
 

Cash and cash equivalents

   $ 5,679     $ 5,679     $    
  

 

 

   

 

 

   

 

 

 

Total debt

     38,714       38,714    

Redeemable convertible preferred stock:

      

Series A preferred stock; $0.001 par value; 1,200,000 shares authorized; 710,000 shares issued and outstanding; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     21,818          
  

 

 

   

 

 

   

 

 

 

Stockholders’ deficit:

      

Old Class A common stock, $0.001 par value; 25,000,000(1) shares authorized; 11,791,420 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     12          

Old Class B common stock, $0.001 par value, 5,000,000(1) shares authorized; 34,840 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

              

Class A common stock, $0.001 par value; no shares authorized or issued, actual; 25,000,000 shares authorized and 34,840 shares issued and outstanding pro forma;             shares authorized and             shares issued and outstanding pro forma as adjusted

              

Class B common stock, $0.001 par value; no shares authorized or issued, actual; 5,000,000 shares authorized and 13,566,420 shares issued and outstanding, pro forma;             shares authorized and             shares issued and outstanding, pro forma as adjusted

           14    

Additional paid-in capital

     9,955       31,771    

Accumulated deficit

     (26,806     (26,806  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ deficit

     (16,839     4,979    
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 43,693     $ 43,693     $  
  

 

 

   

 

 

   

 

 

 

 

(1)

On October 19, 2017, the Company approved and on October 23, 2017 the Company amended its Certificate of Incorporation allowing the Company to change the total number of authorized shares as follows: (i) 30,000,000 shares of Common Stock, $0.001 par value per

 

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  share of which 25,000,000 shares were designated as Class A Voting Common Stock, and of which 5,000,000 shares were designated as Class B Non-Voting Common Stock and (ii) 1,200,000 shares of Preferred Stock, $0.001 par value per share.

The table set forth above is based on the number of shares of common stock outstanding as of June 30, 2017. The table does not reflect                 shares of our Class A common stock reserved for issuance under the 2017 Plan, which we plan to adopt in connection with this offering.

Additionally, the information presented above assumes:

 

    an initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus;

 

    no exercise of the option to purchase additional shares of our Class A common stock by the underwriters; and

 

    the adoption of our second amended and restated certificate of incorporation and second amended and restated bylaws prior to the pricing of this offering.

Each $1.00 increase (decrease) in the assumed public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, assuming completion of the Pre-IPO Reorganization and the common stock split, would increase (decrease) our pro forma additional paid-in capital and decrease (increase) total stockholders’ deficit by approximately $             million and $             million, respectively, and would increase (decrease) total capitalization by approximately $            million, in each case assuming that the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting assumed underwriting discounts and commissions and other estimated offering expenses payable by us. We may also increase (decrease) the number of shares of Class A common stock we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares of Class A common stock offered by us at an assumed offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, assuming completion of the Pre-IPO Reorganization and the common stock split, would increase (decrease) our pro forma additional paid-in capital and decrease (increase) total stockholders’ deficit by approximately $            million and $             million, respectively, and would increase (decrease) total capitalization by approximately $            million. The pro forma information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

If the underwriters’ option to purchase additional shares of our Class A common stock from us and certain selling stockholders were exercised in full, pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ deficit and shares of Class A common stock outstanding as of June 30, 2017 would be $             million, $             million, $             million and                 shares, respectively.

 

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DILUTION

If you invest in our Class A common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our Class A common stock after this offering. Dilution results from the fact that the per share offering price of the Class A common stock is substantially in excess of the book value per share of our Class A common stock after this offering. Our pro forma net tangible book value as of June 30, 2017 was $         million, or $         per share of our Class A common stock. Pro forma net tangible book value per share represents our total tangible assets reduced by the amount of our total liabilities, divided by the total number of shares of our Class A common stock outstanding after giving effect to (i) the filing and effectiveness of our second amended and restated certificate of incorporation and the effectiveness of our second amended and restated bylaws, each of which will occur prior to the pricing of this offering and (ii) the automatic conversion of all outstanding shares of our convertible preferred stock into shares of Class B common stock prior to the pricing of this offering.

After giving effect to the sale of             shares of Class A common stock that we are offering at an assumed initial public offering price of $         per share, which is the midpoint of the range listed on the cover page of this prospectus, and after deducting the estimated underwriting discount and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2017 would have been $         million, or $         per share of Class A common stock. This amount represents an immediate increase in pro forma net tangible book value of $         per share of Class A common stock to our existing stockholders before this offering and an immediate dilution in pro forma net tangible book value of $         per share of Class A common stock to new investors purchasing shares of Class A common stock in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share of Class A common stock after this offering from the amount of cash that a new investor paid for a share of Class A common stock. The following table illustrates this dilution, assuming the underwriters do not exercise their option to purchase additional shares of Class A common stock:

 

Assumed initial public offering price per share of Class A common stock

    $           

Pro forma net tangible book value per share of Class A common stock as of June 30, 2017

  $             

Increase in pro forma net tangible book value per share of Class A common stock attributable to new investors in this offering

   

Pro forma as adjusted net tangible book value per share of Class A common stock immediately after this offering

   
   

 

 

 

Dilution in pro forma net tangible book value per share of Class A common stock to new investors in this offering

    $  
   

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $         per share of Class A common stock, which is the midpoint of the range listed on the cover page of this prospectus, would increase or decrease the pro forma as adjusted net tangible book value per share of Class A common stock after this offering by approximately $        , and dilution in pro forma as adjusted net tangible book value per share of Class A common stock to new investors by approximately $        , assuming that the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and estimated offering expenses payable by us. Similarly, each increase or decrease of 1,000,000 shares of Class A common stock in the number of shares offered by us would increase or decrease, as applicable, our pro forma as adjusted net tangible book value by $         per share of Class A common stock and increase or decrease, as applicable, the dilution to new investors by $         per share of Class A common stock, assuming the assumed initial public offering price remains the same, and after deducting the estimated underwriting discount and estimated offering expenses payable by us.

 

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If the underwriters’ option to purchase additional shares of Class A common stock from us and certain selling stockholders is exercised in full, the pro forma as adjusted net tangible book value per share of Class A common stock, as adjusted to give effect to this offering, would be $         per share, and the dilution in pro forma net tangible book value per share of Class A common stock to new investors in this offering would be $         per share.

The following table summarizes, on a pro forma basis as of June 30, 2017, the differences between the number of shares of Class A common stock purchased from us, the total consideration paid to us in cash and the average price per share that existing owners and new investors paid. The calculation below is based on an assumed initial public offering price of $         per share of Class A common stock, which is the midpoint of the range listed on the cover page of this prospectus, before deducting the estimated underwriting discount and estimated offering expenses payable by us.

 

     Shares of Class A
Common Stock Purchased
    Total Consideration     Average Price
Per Share
of Class A
Common Stock
 
     Number      Percent     Amount      Percent    

Existing stockholders

               $                        $           

New investors

            

Total

        100.0   $        100.0  

The foregoing tables and calculations are based on the number of shares of our Class A common stock outstanding as of June 30, 2017 after the completion of the common stock split and after giving effect to the Pre-IPO Reorganization, and excludes:

 

    3,237,397 shares of our Class A common stock issuable upon the exercise of outstanding options as of June 30, 2017 at a weighted-average exercise price of $6.70 per share;

 

    367,462 shares of our Class B common stock issuable upon the exercise of outstanding options as of June 30, 2017 at a weighted-average exercise price of $5.74 per share;

 

    0 shares of our Class B common stock reserved for future issuance under our 2001 Stock Option Plan, 69,037 shares of our Class A common stock reserved for future grant or issuance under our 2010 Equity Compensation Plan and          shares of our Class A common stock reserved for future grant or issuance under our 2017 Incentive Award Plan, each as of June 30, 2017; and

 

    64,691 shares of our Class B common stock issuable upon the exercise of outstanding warrants as of June 30, 2017 at a weighted-average exercise price of $2.31 per share.

To the extent any of these outstanding options or warrants are exercised, there will be further dilution to new investors. To the extent all of such outstanding options and warrants had been exercised as of June 30, 2017, the pro forma as adjusted net tangible book value per share of Class A common stock after this offering would be $            , and total dilution per share of Class A common stock to new investors would be $            .

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares of our Class A common stock from us and the selling stockholders. If the underwriters’ option to purchase additional shares of our Class A common stock were exercised in full, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our Class A common stock outstanding upon completion of this offering.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included within this prospectus. The consolidated statements of operations data for the years ended December 31, 2015 and 2016 and the consolidated balance sheets as of December 31, 2015 and 2016, are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the six months ended June 30, 2016 and 2017 and the consolidated balance sheet data as of June 30, 2017, are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to state fairly the financial information set forth in those statements. Our historical results are not necessarily indicative of our future results, and the results of operations for the six months ended June 30, 2017, are not necessarily indicative of the results to be expected for the full year or any other period. The selected consolidated financial data in this section are not intended to replace our consolidated financial statements and the related notes, and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Year ended
December 31,
    Six months
ended June 30,
 
     2015     2016     2016     2017  
     (In thousands, except share and per share amounts)  

Consolidated Statements of Operations Data:

        

Revenue:

      

CPaaS revenue

   $ 101,502     $ 117,078     $ 56,651     $ 63,194  

Other revenue

     36,299       35,057       18,118       15,957  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     137,801       152,135       74,769       79,151  

Cost of revenue:

      

CPaaS cost of revenue

     64,760       71,218       35,379       37,147  

Other cost of revenue

     14,482       14,000       7,283       6,713  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     79,242       85,218       42,662       43,860  

Gross profit

     58,559       66,917       32,107       35,291  

Operating expenses:

      

Research and development

     7,375       8,520       3,767       5,091  

Sales and marketing

     8,620       9,294       4,458       4,971  

General and administrative

     34,602       33,859       15,672       15,894  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     50,597       51,673       23,897       25,956  

Operating income

     7,962       15,244       8,210       9,335  

Other expense:

      

Interest expense, net

     (589     (908     (369     (859

Change in fair value of shareholders’ anti-dilutive arrangement

                       (553
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (589     (908     (369     (1,412
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     7,373       14,336       7,841       7,923  

Income tax (provision) benefit

     (408     11,094       (269     (2,987
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     6,965       25,430       7,572       4,936  

Loss from discontinued operations, net of income taxes

     (13,665     (3,072     (3,011      
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (6,700   $ 22,358     $ 4,561     $ 4,936  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Year ended
December 31,
     Six months
ended June 30,
 
     2015      2016      2016      2017  
     (In thousands, except share and per share amounts)  

Income from continuing operations attributable to common stockholders

   $ 6,034      $ 22,075      $ 6,565      $ 4,291  

Income from continuing operations attributable to participating securities

     931        3,355        1,007        645  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income from continuing operations per share attributable to common stockholders, basic

   $ 0.52      $ 1.89      $ 0.57      $ 0.36  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average outstanding shares used in computing net income from continuing operations per share attributable to common stockholders, basic

     11,497,727        11,678,568        11,580,783        11,806,619  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income from continuing operations per share attributable to common stockholders, diluted

   $ 0.48      $ 1.72      $ 0.51      $ 0.33  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average outstanding shares used in computing net income from continuing operations per share attributable to common stockholders, diluted

     12,456,540        12,870,632        12,820,334        12,977,606  
  

 

 

    

 

 

    

 

 

    

 

 

 

Pro forma income from continuing operations per share attributable to common stockholders, basic(2)

   $ 0.52      $ 1.89      $ 0.57      $ 0.36  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average outstanding shares used in computing pro forma income from continuing operations per share attributable to common stockholders, basic(2)

     13,272,727        13,453,568        13,355,783        13,581,619  
  

 

 

    

 

 

    

 

 

    

 

 

 

Pro forma income from continuing operations per share attributable to common stockholders, diluted(2)

   $ 0.49      $ 1.74      $ 0.52      $ 0.33  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average outstanding shares used in computing pro forma income from continuing operations per share attributable to common stockholders, diluted(2)

     14,231,540        14,645,632        14,595,334        14,572,606  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of December 31,     As of June 30,  
     2015     2016     2017  
     (In thousands)  

Consolidated Balance Sheets Data:

      

Cash and cash equivalents

   $ 10,059     $ 6,788     $ 5,679  

Working capital

     (26,972     (2,427     4,449  

Property and equipment, net

     10,257       11,180       11,562  

Total assets

     63,146       69,973       68,238  

Total stockholders’ deficit

     (19,074     (22,374     (16,839

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and in other parts of this prospectus. Our fiscal year ends on December 31.

Overview

We are a leading cloud-based communications platform for enterprises in the United States. Our solutions include a broad range of software APIs for voice and text functionality and our owned and managed, purpose-built IP voice network, one of the largest in the nation. Our sophisticated and easy-to-use software APIs allow enterprises to enhance their products and services by incorporating advanced voice and text capabilities. Companies use our platform to more frequently and seamlessly connect with their end users, add voice calling capabilities to residential IoT devices, offer end users new mobile application experiences and improve employee productivity, among other use cases. By owning and operating a capital-efficient, purpose-built IP voice network, we are able to offer advanced monitoring, reporting and analytics, superior customer service, dedicated operating teams, personalized support, and flexible cost structures. Over the last ten years, we have pioneered the CPaaS space through our innovation-rich culture and focus on empowering enterprises with end-to-end communications solutions.

Our voice software APIs allow enterprises to make and receive phone calls and create advanced voice experiences. Integration with our purpose-built IP voice network ensures enterprise-grade functionality and secure, high-quality connections. Our messaging software APIs provide enterprises with advanced tools to connect with end users via messaging. Our customers also use our solutions to enable 911 response capabilities, real-time provisioning and activation of phone numbers and toll-free number messaging.

We are the only CPaaS provider in the industry with our own nationwide IP voice network, which we have purpose-built for our platform. Our network is capital-efficient and custom-built to support the applications and experiences that make a difference in the way enterprises communicate. Since a communications platform is only as strong as the network that backs it, we believe our network provides a significant competitive advantage in the control, quality, pricing power and scalability of our offering. We are able to control the quality and provide the support our customers expect, as well as efficiently meet scalability and cost requirements.

Segments

Our business is organized into two segments:

CPaaS Segment. Our CPaaS segment includes our software-powered platform, which empowers customers with highly sophisticated yet easy-to-use software APIs to customize and scale their communications solutions rapidly and securely in a seamless manner. We define and calculate our CPaaS business as all voice and text communications services we provide customers through our software API or web-based user interfaces and our IP voice network infrastructure. For the years ended December 31, 2015 and 2016 and the six months ended June 30, 2016 and 2017, CPaaS revenue accounted for 74%, 77%, 76% and 80% of our total revenue, respectively.

Other Segment. Our Other segment consists of all revenue other than that generated from our CPaaS segment. This includes our legacy services—SIP trunking, data resale and hosted voice—which require limited resources to operate and minimal to no expected investment in the future. Our Other segment also includes revenue from the carrier access billing system, SMS registration fees and other miscellaneous product lines, which we expect will continue to generate revenue even as our legacy services revenue declines.

 

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Factors Affecting Our Performance

Our financial performance will be affected by our ability to grow our business, as well as the impact of seasonality from period-to-period. We believe that the growth of our business and our future success are dependent upon a number of factors, including our ability to acquire new CPaaS customers, grow our existing CPaaS customer base and make investments for growth and scale. While each of these areas presents significant opportunities for us, they also pose important challenges that we must successfully address in order to sustain the growth of our business and improve our results of operations. Our future growth and profitability will depend upon many variables, including the success of our growth strategies and the timing and size of investments and expenditures that we choose to undertake, as well as market growth and other factors that are not within our control. We expect to use the proceeds from this offering to fund these growth strategies and to continue to expand our business.

Acquiring New CPaaS Customers

We believe that the shift from legacy communications solutions to a modern software-driven cloud-based communications platform is in its early stages. We intend to target our CPaaS solutions to large enterprises and fast-growing businesses that want to leverage our platform as a part of their service offering by continuing to invest in expanding our sales organization. We target these enterprises because they capture a substantial part of the demand for advanced communications capabilities in the United States and we believe these enterprises are likely to realize the greatest value from our enterprise-grade platform. We are also committed to supporting our expanded sales team with more robust marketing programs to improve our brand awareness.

Our business and results of operations will depend on our ability to continue to add new enterprises as CPaaS customers. In some instances, we may acquire enterprise customers that may scale their usage of our platform rapidly and may cause fluctuations in our results of operations and financial metrics and make forecasting our future results of operations and financial metrics more difficult.

Expanding Penetration Within Our Existing CPaaS Customer Base

Our CPaaS customers often start with small deployments on our platform and then expand their usage significantly as they derive value from using our platform. Our business and results of operations will depend on our ability to expand our existing customers’ use of our platform services. We believe that there is a significant opportunity to drive additional sales to existing customers, and expect to invest in sales, marketing and customer support to achieve additional revenue growth from existing customers.

Investments in Future Growth

We believe that we are only beginning to penetrate our market opportunity with large enterprises, and we intend to continue to invest to grow our customer base. We expect to continue to make significant investments in R&D activities, including by further developing our platform features to support new use cases. We also plan to continue to invest in operational and administrative functions to support our expected growth and our transition to a public company.

Investments for Scale

As our business grows, we plan to continue to invest in our IP voice network and platform optimization efforts. Ultimately, we expect to realize cost savings through economies of scale, but we may incur costs during phases of expansion and optimization. Historically, we have made minimal investments to maintain our network and platform. The majority of our investments for scale have been success-based capital expenditures fueled by customer demand, and we expect this to continue in the future.

 

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Seasonality

Although we have not historically experienced significant seasonality with respect to our revenue throughout the year, we have seen seasonality related to the usage-based revenue from our enterprise customers. Usage from our customers is affected by the number of business days in a month. Traditionally, seasonality in the fourth quarter results in lower usage revenue due to the amount of business days and number of holidays in November and December. Historically, the impact of fewer business days in the fourth quarter is consistent from year-to-year. However, to the extent this seasonality is more pronounced in the future, it may cause fluctuations in our results of operations and financial metrics. Monthly recurring charges associated with phone numbers and 911-enabled phone numbers are not dependent upon the number of business days in a month, and are therefore not subject to the seasonality related to our usage-based revenue.

Key Performance Indicators

We monitor the following KPIs to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions. We believe the following KPIs are useful in evaluating our business:

 

     Year ended
December 31,
    Six months ended
June 30,
 
     2015     2016     2016     2017  
     (Dollars in thousands)  

Number of active CPaaS customer accounts (as of balance sheet date)

     704       798       756       865  

Dollar-based net retention rate

     115     111     112     107

Adjusted EBITDA

   $ 18,912     $ 23,470     $ 12,269     $ 12,655  

Free cash flow

   $ 13,549     $ 10,881     $ 7,185     $ 2,285  

Number of Active CPaaS Customer Accounts

We believe that the number of active CPaaS customer accounts is an important indicator of the growth of our business, the market acceptance of our platform and our future revenue trends. We define an active CPaaS customer account at the end of any period as an individual account, as identified by a unique account identifier, for which we have recognized at least $100 of revenue in the last month of the period. We believe that the use of our platform by active CPaaS customer accounts at or above the $100 per month threshold is a stronger indicator of potential future engagement than trial usage of our platform at levels below $100 per month. A single organization may constitute multiple unique active CPaaS customer accounts if it has multiple unique account identifiers, each of which is treated as a separate active CPaaS customer account. As of June 30, 2017, with the exception of two active CPaaS customer accounts that were part of the same organization, all other active CPaaS customer accounts were related to unique organizations. Customers who pay after using our platform and customers that have credit balances are included in the number of active CPaaS customer accounts. Customers from our Other segment are excluded in the number of active CPaaS customer accounts, unless they are also CPaaS customers. In each of the years ended December 31, 2015 and 2016 and the six months ended June 30, 2017, revenue from active CPaaS customer accounts represented approximately 99% of total CPaaS revenue.

Dollar-based Net Retention Rate

Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with our existing customers that generate CPaaS revenue and seek to increase their use of our platform. We track our performance in this area by measuring the dollar-based net retention rate for our customers who generate CPaaS revenue. Our dollar-based net retention rate compares the CPaaS revenue from customers in a quarter to the same quarter in the prior year. To calculate the dollar-based net retention rate, we first identify the cohort of customers that generate CPaaS revenue and that were customers in the same quarter of

 

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the prior year. The dollar-based net retention rate is obtained by dividing the CPaaS revenue generated from that cohort in a quarter, by the CPaaS revenue generated from that same cohort in the corresponding quarter in the prior year. When we calculate dollar-based net retention rate for periods longer than one quarter, we use the average of the quarterly dollar-based net retention rates for the quarters in such period.

Our dollar-based net retention rate increases when such customers increase usage of a product, extend usage of a product to new applications or adopt a new product. Our dollar-based net retention rate decreases when such customers cease or reduce usage of a product or when we lower prices on our solutions. As our customers grow their business and extend the use of our platform, they sometimes create multiple customer accounts with us for operational or other reasons. As such, when we identify a significant customer organization (defined as a single customer organization generating more than 1% of CPaaS revenue in a quarterly reporting period) that has created a new CPaaS customer, this new customer is tied to, and CPaaS revenue from this new customer is included with, the original CPaaS customer for the purposes of calculating this metric. For the six months ended June 30, 2017, our dollar-based net retention rate was 107%, compared to 112% in the same period in 2016. The primary driver of this decrease was our decision to curtail services to strategic competitors. For the year ended December 31, 2016, our dollar-based net retention rate was 111%, compared to 115% for the year ended December 31, 2015. This decrease was driven by the decision to lower pricing in exchange for contract extensions with certain of our key customers.

Non-GAAP Financial Measures

We use adjusted EBITDA, adjusted gross profit, adjusted gross margin and free cash flow for financial and operational decision making and to evaluate period-to-period differences in our performance. Adjusted EBITDA, adjusted gross profit, adjusted gross margin and free cash flow are non-GAAP financial measures, which we believe are useful for investors in evaluating our overall financial performance. We believe these measures provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key performance indicators used by management in its financial and operational decision making. For a reconciliation of each of the non-GAAP financial measures described below, see “—Reconciliation of Non-GAAP Financial Measures.”

Adjusted EBITDA

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

 

    income tax expense (benefit);

 

    interest expense, net;

 

    depreciation and amortization expense;

 

    stock-based compensation expense;

 

    impairment of intangible assets;

 

    loss (gain) from disposal of property and equipment; and

 

    change in fair value of financial instruments, including any change in shareholders’ anti-dilutive arrangements.

Adjusted EBITDA is a key measure used by management to understand and evaluate our core operating performance and trends, to generate future operating plans and to make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis.

 

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Adjusted Gross Profit and Adjusted Gross Margin

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

 

    depreciation and amortization; and

 

    stock-based compensation.

We add back depreciation and amortization and stock-based compensation because they are non-cash items. We eliminate the impact of these non-cash items because we do not consider them indicative of our core operating performance. Their exclusion facilitates comparisons of our operating performance on a period-to-period basis. Therefore, we believe that showing gross margin, as adjusted to remove the impact of these non-cash expenses, such as depreciation, amortization and stock-based compensation, is helpful to investors in assessing our gross profit and gross margin performance in a way that is similar to how management assesses our performance.

We calculate adjusted gross margin by dividing adjusted gross profit by revenue, expressed as a percentage of revenue.

Management uses adjusted gross profit and adjusted gross margin to evaluate operating performance and to determine resource allocation among our various service offerings. We believe that adjusted gross profit and adjusted gross margin provide useful information to investors and others to understand and evaluate our operating results in the same manner as our management and board of directors and allows for better comparison of financial results among our competitors. Adjusted gross profit and adjusted gross margin may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted gross profit and adjusted gross margin or similarly titled measures in the same manner as we do.

Adjusted Net (Loss) Income

We define adjusted net (loss) income as net income adjusted for certain items affecting period to period comparability. Adjusted net (loss) income excludes:

 

    stock-based compensation;

 

    change in fair value of stockholders’ antidilutive arrangement;

 

    amortization of acquired intangible assets related to the Dash acquisition;

 

    impairment charges of intangibles assets;

 

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

 

    estimated tax impact of above adjustments.

We believe that adjusted net (loss) income is a meaningful measure because by removing certain non-recurring charges and non-cash expenses we present our operating results directly associated with the period’s performance. We believe the use of adjusted net (loss) income may be helpful to investors because it provides consistency and comparability with past financial performance, facilitates period-to-period comparisons of results of operations and assists in comparisons with other companies, many of which use similar non-GAAP financial information to supplement their GAAP results.

Free Cash Flow

Free cash flow represents net cash provided by (used in) operating activities from continuing operations less net cash used in investing activities from continuing operations. We believe that free cash flow is a useful

 

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indicator of liquidity and provides information to management and investors about the amount of cash generated from our core operations that can be used for investing in our business. Free cash flow has certain limitations in that it does not represent the total increase or decrease in the cash balance for the period, nor does it represent the residual cash flows available for discretionary expenditures. Therefore, it is important to evaluate free cash flow along with our consolidated statements of cash flows.

Acquisitions and Dispositions

Republic Wireless

On April 20, 2015, we created a wholly owned subsidiary, Republic Wireless, Inc., which was incorporated in Delaware. On November 30, 2016, we completed a pro-rata distribution of the common stock of Republic Wireless to our shareholders of record in a tax-free spin-off. In connection with the Spin-Off, we entered into a number of services agreements with Republic Wireless (the “Transition Services Agreements”). See “Certain Relationships and Related Party Transactions—Transactions with Republic Wireless.”

Dash

On February 22, 2011, we acquired substantially all of the assets of Dash Carrier Services, LLC and related entities, together a provider of 911 services, for total consideration of $21.1 million. We used substantially all of the proceeds of our only institutional equity financing to finance the acquisition. In connection with the acquisition, we recorded $6.9 million of goodwill.

Key Components of Statements of Operations

Revenue

We derive a majority of our revenue from our CPaaS segment. For the years ended December 31, 2015 and 2016 and the six months ended June 30, 2016 and 2017 we generated 74%, 77%, 76% and 80%, respectively, of our total revenue from our CPaaS customers. CPaaS revenue is derived from voice usage, phone number services, 911-enabled phone number services, messaging services and other services. For the year ended December 31, 2016, our voice usage, phone number services, 911-enabled phone number services, messaging service and other services accounted for 53%, 22%, 18%, 4% and 3% of our CPaaS revenue, respectively. We expect voice minutes and messaging services to increase as a percentage of CPaaS revenue in the future. We derive a portion of our CPaaS revenue from usage-based fees which includes voice calling and messaging services. For the years ended December 31, 2015 and 2016 and the six months ended June 30, 2016 and 2017 we generated 55%, 56%, 56% and 57% of our CPaaS revenue, respectively, from usage-based fees. We also earn monthly fees from services such as phone number services and 911 access service. We generated 42% of our CPaaS revenue in 2015 and 41% of our CPaaS revenue in 2016 and for the six months ended June 30, 2016 and June 30, 2017 from monthly per unit fees. The remaining 2-3% of our CPaaS revenue is generated from other miscellaneous services.

The remainder of our revenue is generated by our Other segment. Other revenue made up 26%, 23%, 24% and 20% of our total revenue in the years ended December 31, 2015 and 2016 and the six months ended June 30, 2016 and 2017, respectively. Other revenue is composed of revenue earned from our legacy services and indirect revenue. For the years ended December 31, 2015 and 2016 and the six months ended June 30, 2016 and 2017 we generated $24.3 million, $20.1 million, $10.5 million and $8.9 million in revenue from our legacy services and $12.0 million, $15.0 million, $7.6 million and $7.0 million from indirect revenue, respectively. Other revenue as a percentage of total revenue is expected to continue to decline over time.

Customers typically pay for usage in arrears and pay one month in advance for monthly recurring fees and set up fees. The majority of our customers enter into contracts which specify the product they are purchasing and the rates for each product. Customers sometimes have minimum monthly usage commitments through a specified ramp-up period. Larger customers receive volume discounts in the form of monthly tiered pricing.

 

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We recognize accounts receivable at the time the customer is invoiced. Additionally, we record a receivable and revenue for unbilled revenue if the services have been delivered and are billable in subsequent periods. Unbilled revenue made up 47%, 44% and 46% of outstanding accounts receivable, net of allowance for doubtful accounts as of December 31, 2015, December 31, 2016 and June 30, 2017, respectively.

Cost of Revenue and Gross Margin

CPaaS cost of revenue consists primarily of fees paid to other network service providers from whom we buy services such as minutes of use, phone numbers, messages, porting of customer numbers and network circuits. Cost of revenue also contains costs related to support of our IP voice network, web services, cloud infrastructure, capacity planning and management, rent for network facilities, software licenses, hardware and software maintenance fees and network engineering services. Personnel costs (including non-cash stock-based compensation expenses) associated with personnel who are responsible for the delivery of services, operation and maintenance of our communications network, and customer support as well as, third-party support agreements and depreciation of network equipment, amortization of internally developed software and gain (loss) on disposal of property and equipment are also included in cost of revenue.

Other cost of revenue consists of costs supporting non-CPaaS services including leased circuit costs paid to third party providers, internet connectivity expenses, minutes of use, direct operations, contractors, regulatory fees, surcharges and other pass-through costs and software and hardware maintenance fees.

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

Operating Expenses

The most significant components of operating expenses are personnel costs, which consist of salaries, benefits, bonuses, and stock-based compensation expenses. We also incur other non-personnel costs related to our general overhead expenses, including facility expenses, software licenses, web services, depreciation and amortization of assets unrelated to delivery of our services. We expect that our operating expenses will increase in absolute dollars.

Research and Development

R&D expenses consist primarily of personnel costs (including non-cash stock-based compensation expenses), outsourced software development and engineering service and cloud infrastructure fees for staging and development of outsourced engineering services. We capitalize the portion of our software development costs in instances where we invest resources to develop software for internal use. We plan to use a portion of the net proceeds from this offering to increase our investment in R&D to enhance current product offerings and develop new services.

Sales and Marketing

Sales and marketing expenses consist primarily of personnel costs, including commissions for our sales employees and non-cash stock-based compensation expenses. Sales and marketing expenses also include expenditures related to advertising, marketing, our brand awareness activities, sales support and professional services fees.

 

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We focus our sales and marketing efforts on creating sales leads and establishing and promoting our brand. We plan to use a portion of the net proceeds from this offering to increase the investment in sales and marketing in order to expand our CPaaS customer base by growing headcount, driving our go-to-market strategies, building brand awareness, advertising and sponsoring additional marketing events.

General and Administrative

General and administrative expenses consist primarily of personnel costs, including stock-based compensation, for our accounting, finance, legal, human resources and administrative support personnel and executives. General and administrative expenses also include costs related to product management and reporting, customer billing and collection functions, information services, professional services fees, credit card processing fees, rent associated with our headquarters in Raleigh, North Carolina and our other offices, and depreciation and amortization. We expect that we will incur increased costs associated with supporting the growth of our business and to meet the increased compliance requirements associated with our transition to, and operation as, a public company.

Income Taxes

Our income tax expense and effective tax rate are impacted by the establishment or release of deferred tax asset valuation allowances. For example, in the fourth quarter of 2016, as a result of the Spin-Off, our evaluation of available positive and negative evidence resulted in a judgment that the realization of the tax benefits for deferred tax assets did meet the “more likely than not” standard and therefore we recognized a $14.1 million benefit due to the release of the deferred tax asset valuation allowance subsequent to the Spin-Off. Additionally, we have federal and state net operating loss carryforwards that expire at various dates beginning in 2035 and 2020, respectively. The federal credit carryforwards begin to expire in 2030. Our future utilization of net operating losses and credits may be limited if certain changes in ownership occur.

 

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Results of Operations

Consolidated Results of Operations

The following table sets forth the consolidated statements of operations for the periods indicated.

 

     Year ended
December 31,
    Six months ended
June 30,
 
     2015     2016     2016     2017  
     (In thousands)  

Revenue

        

CPaaS revenue

   $ 101,502     $ 117,078     $ 56,651     $ 63,194  

Other revenue

     36,299       35,057       18,118       15,957  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     137,801       152,135       74,769       79,151  

Cost of revenue

        

CPaaS cost of revenue

     64,760       71,218       35,379       37,147  

Other cost of revenue

     14,482       14,000       7,283       6,713  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     79,242       85,218       42,662       43,860  

Gross profit

        

CPaaS

     36,742       45,860       21,272       26,047  

Other

     21,817       21,057       10,835       9,244  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

     58,559       66,917       32,107       35,291  

Operating expenses

        

Research and development

     7,375       8,520       3,767       5,091  

Sales and marketing

     8,620       9,294       4,458       4,971  

General and administrative

     34,602       33,859       15,672       15,894  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     50,597       51,673       23,897       25,956  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     7,962       15,244       8,210       9,335  

Other expense

        

Interest expense, net

     (589     (908     (369     (859

Change in fair value of shareholders’ anti-dilutive arrangement

                       (553
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     7,373       14,336       7,841       7,923  

Income tax (provision) benefit

     (408     11,094       (269     (2,987
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     6,965       25,430       7,572       4,936  

(Loss) from discontinued operations, net of income tax

     (13,665     (3,072     (3,011      
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (6,700   $ 22,358     $ 4,561     $ 4,936  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table sets forth our results of operations as a percentage of our total revenue for the periods presented.

 

     Year ended
December 31,
    Six months ended
June 30,
 
     2015     2016     2016     2017  

Revenue

        

CPaaS revenue

     74     77     76     80

Other revenue

     26     23     24     20
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100     100     100     100

Cost of revenue

        

CPaaS cost of revenue

     64     61     62     59

Other cost of revenue

     40     40     40     42
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     58     56     57     55

Gross profit

        

CPaaS

     36     39     38     41

Other

     60     60     60     58
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

     42     44     43     45

Operating expenses

        

Research and development

     5     6     5     6

Sales and marketing

     6     6     6     6

General and administrative

     25     22     21     20
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     37     34     32     33
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     6     10     11     12

Other expense

        

Interest expense, net

     0     (1 )%      0     (1 )% 

Change in fair value of shareholders’ anti-dilutive arrangement

                       (1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     5     9     10     10

Income tax provision (benefit)

     0     (7 )%      0     4
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     5     17     10     6

Loss from discontinued operations, net of income tax

     (10 )%      (2 )%      (4 )%       
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (5 )%      15     6     6
  

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Six Months Ended June 30, 2016 and 2017

Revenue

 

     Six months ended
June 30,
              
     2016      2017      Change  
     (In thousands)               

CPaaS revenue

   $ 56,651      $ 63,194      $ 6,543       12

Other revenue

     18,118        15,957        (2,161     (12 )% 
  

 

 

    

 

 

    

 

 

   

Total revenue

   $ 74,769      $ 79,151      $ 4,382       6
  

 

 

    

 

 

    

 

 

   

For the six months ended June 30, 2017, total revenue increased by $4.4 million, or 6%, compared to the same period in 2016. CPaaS revenue increased by $6.5 million, or 12%, compared to the same period in 2016. As a percentage of total revenue, CPaaS revenue increased from 76% to 80% from the six months ended June 30,

 

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2016 to June 30, 2017. The increase in CPaaS revenue was primarily attributable to an increase in the usage of all our service offerings, particularly our voice and messaging usage, which accounted for $7.4 million of the increase in CPaaS revenue, and additionally our phone number services and 911-enabled phone number services, which accounted for $1.8 million of the increase in CPaaS revenue. This overall increase in CPaaS revenue was partially offset by $2.6 million related to pricing decreases that we have implemented over time with our customers in the form of lower usage prices to increase the reach and scale of our platform. The changes in usage and price in the six months ended June 30, 2017 were reflected in our dollar-based net retention rate of 107%. The decline in the dollar-based net retention rate in the six months ended June 30, 2017 was primarily due to a strategic decision to no longer service a particular customer. The increase in usage was also attributable to a 14% increase in the number of active CPaaS customer accounts, from 756 as of June 30, 2016 to 865 as of June 30, 2017. In addition, revenue from new CPaaS customers contributed $2.6 million, or 5%, to CPaaS revenue for the six months ended June 30, 2017 compared to $2.1 million, or 4%, to CPaaS revenue in the same period in 2016. Other revenue decreased by $2.2 million, driven by the expected decline in legacy services of $1.6 million and decreases in indirect revenue of $0.6 million.

Cost of Revenue and Gross Margin

 

     Six months ended
June 30,
              
     2016      2017      Change  
     (In thousands)               

Cost of revenue:

          

CPaaS cost of revenue

   $ 35,379      $ 37,147      $ 1,768       5

Other cost of revenue

     7,283        6,713        (570     (8 )% 
  

 

 

    

 

 

    

 

 

   

Total cost of revenue

   $ 42,662      $ 43,860      $ 1,198       3
  

 

 

    

 

 

    

 

 

   

Gross profit

   $ 32,107      $ 35,291      $ 3,184       10
  

 

 

    

 

 

    

 

 

   

Gross margin:

          

CPaaS

     38%        41%       

Other

     60%        58%       

Total gross margin

     43%        45%       

For the six months ended June 30, 2017, total cost of revenue increased by $1.2 million and total gross margin increased by 2% due to improved CPaaS gross margin. CPaaS cost of revenue increased by $1.8 million, or 5%. This increase in cost of revenue was attributable to increased customer usage, partially offset by a decline in unit costs for 911, phone numbers and voice services. CPaaS cost of revenue increases were comprised of a $0.3 million increase in network costs, a $0.4 million increase in cost of phone numbers, a $0.5 million increase in cost of messaging and a $0.4 million increase in cost of voice minutes. CPaaS gross margin increased from 38% for the six months ended June 30, 2016 to 41% for the six months ended June 30, 2017. Without taking into account the impact of depreciation of $2.3 million for the six months ended June 30, 2016 and depreciation of $2.1 million for the six months ended June 30, 2017, CPaaS adjusted gross margin would have been 42% and 45% for the six months ended June 30, 2016 and 2017, respectively, and total gross margin would have been 46% and 47% for the six months ended June 30, 2016 and 2017, respectively.

Cost of Other revenue decreased by $0.6 million as the churn in legacy services drove lower overall costs from our third-party carriers. Other gross margin declined by 2% due to revenue churn and the reduction of indirect revenue.

 

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Operating Expenses

 

     Six months ended
June 30,
               
     2016      2017      Change  
     (In thousands)                

Research and development

   $ 3,767      $ 5,091      $ 1,324        35

Sales and marketing

     4,458        4,971        513        12

General and administrative

     15,672        15,894        222        1
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 23,897      $ 25,956      $ 2,059        9
  

 

 

    

 

 

    

 

 

    

For the six months ended June 30, 2017, research and development expenses increased by $1.3 million, or 35%, compared to the same period in 2016. This increase is due primarily to an increase in research and development headcount and contracted development.

For the six months ended June 30, 2017, sales and marketing expenses increased by $0.5 million, compared to the same period in 2016, also due primarily to additional headcount in the sales organization to accelerate CPaaS revenue growth.

General and administrative expenses increased by $0.2 million for the six months ended June 30, 2017 compared to the same period in 2016. This increase was due to an increase in consulting costs partially offset by billing of transition service expenses for corporate support provided to Republic Wireless under the Transition Services Agreements.

Interest Expense, Net

For the six months ended June 30, 2017 interest expense increased by $0.5 million, compared to the same period in 2016 due to increased borrowings under our credit facility that we entered into in November 2016.

Income Tax Expense

For the six months ended June 30, 2017 income tax expense increased by $2.7 million compared to the same period in 2016 due to the valuation allowance release in 2016 subsequent to the Spin-Off. The effective tax rate for the six months ended June 30, 2017 was 37.7% compared to 3.4% for the six months ended June 30, 2016.

Loss from Discontinued Operations, Net of Income Taxes

For the six months ended June 30, 2017 loss from discontinued operations decreased by $3.0 million, compared to the same period in 2016 due to the Spin-Off which occurred on November 30, 2016.

Comparison of the Years Ended December 31, 2015 and 2016

Revenue

 

     Year ended
December 31,
              
     2015      2016      Change  
     (In thousands)               

CPaaS revenue

   $ 101,502      $ 117,078      $ 15,576       15

Other revenue

     36,299        35,057        (1,242     (3 )% 
  

 

 

    

 

 

    

 

 

   

Total revenue

   $ 137,801      $ 152,135      $ 14,334       10
  

 

 

    

 

 

    

 

 

   

 

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In 2016, total revenue increased by $14.3 million, or 10%, compared to 2015. CPaaS revenue increased by $15.6 million, or 15%, compared to the prior year. As a percentage of total revenue, CPaaS revenue increased from 74% to 77% year over year. The increase in CPaaS revenue was primarily attributable to an increase in the usage of all our service offerings, particularly our voice and messaging usage, which accounted for $8.6 million of the increase in CPaaS revenue, and additionally our phone number services and 911-enabled phone number services, which accounted for $7.4 million of the increase in CPaaS revenue. This overall increase in CPaaS revenue was partially offset by $0.4 million related to pricing decreases that we have implemented over time with our customers in the form of lower usage prices to increase the reach and scale of our platform, as well as in exchange for contract renewals for certain key customers. The changes in usage and price for the year ended December 31, 2016 were reflected in our dollar-based net retention rate of 111%. The increase in usage was also attributable to a 13% increase in the number of active CPaaS customer accounts, from 704 as of December 31, 2015 to 798 as of December 31, 2016. In addition, revenue from new CPaaS customers contributed $4.2 million, or 4%, to CPaaS revenue year over year. Other revenue decreased by $1.2 million, or 3%, due to declines in our legacy services of $4.2 million, partially offset by a $3.0 million increase in indirect revenue related to new messaging and toll-free number registration fees.

Cost of Revenue and Gross Margin

 

     Years ended
December 31,
              
     2015      2016      Change  
     (In thousands)               

Cost of revenue:

          

CPaaS cost of revenue

   $ 64,760      $ 71,218      $ 6,458       10

Other cost of revenue

     14,482        14,000        (482     (3 )% 
  

 

 

    

 

 

    

 

 

   

Total cost of revenue

   $ 79,242      $ 85,218      $ 5,976       8
  

 

 

    

 

 

    

 

 

   

Gross profit

   $ 58,559      $ 66,917      $ 8,358       14
  

 

 

    

 

 

    

 

 

   

Gross margin:

          

CPaaS

     36%        39%       

Other

     60%        60%       

Total gross margin %

     42%        44%       

Total gross profit increased by $8.4 million in 2016 as compared to 2015 and total gross margin increased from 42% to 44% from 2015 to 2016. CPaaS cost of revenue increased by $6.5 million, or 10%, in 2016. All CPaaS services saw an increase in cost of revenue but the overall increase was largely driven by the cost for minutes of use, which increased by $3.4 million due to growth in minutes used by customers, partially offset by a slight decrease in the cost per minute. Network costs increased by $2.0 million and cost of messaging increased by $0.5 million. Cost of phone numbers increased by $0.4 million due to an increase in phone numbers used by customers, partially offset by decreased cost per phone number. 911 costs remained constant due to an increase 911-enabled phone numbers used by customers, partially offset by decreased cost per record. CPaaS gross margin increased from 36% for the year ended December 31, 2015 to 39% for the year ended December 31, 2016. Without taking into account the impact of depreciation of $5.2 million and stock-based compensation of $0.1 million for the year ended December 31, 2015 and depreciation of $4.5 million, stock-based compensation expenses of $0.1 million for the year ended December 31, 2016, CPaaS adjusted gross margin would have been 41% and 43% for the years ended December 31, 2015 and 2016, respectively, and total gross margin would have been 46% and 47% for the same periods.

Cost of Other revenue decreased by $0.5 million, which was due to a $2.1 million decrease as a result of churn in legacy services, partially offset by a $1.6 million increase in cost of indirect revenue from 2015 to 2016 related to new required messaging and toll-free number registration fees. Total gross margin was affected by churn and a reduction in indirect margins.

 

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Operating Expenses

 

     Years ended
December 31,
              
     2015      2016      Change  
     (in thousands)               

Research and development

   $ 7,375      $ 8,520      $ 1,145       16

Sales and marketing

     8,620        9,294        674       8

General and administrative

     34,602        33,859        (743     (2 )% 
  

 

 

    

 

 

    

 

 

   

Total operating expenses

   $ 50,597      $ 51,673      $ 1,076       2
  

 

 

    

 

 

    

 

 

   

For the year ended December 31, 2016, R&D expenses increased by $1.1 million, or 16%, compared to the year ended December 31, 2015. This increase was due primarily to increases in hosting software costs and increased headcount.

For the year ended December 31, 2016, sales and marketing expenses increased by $0.7 million, or 8%, compared to the year ended December 31, 2015 due to an overall increase in sales headcount.

General and administrative expenses decreased by $0.7 million for the year ended December 31, 2016, or 2%, compared to the year ended December 31, 2015 mostly due to a decrease in stock-based compensation expenses. This decrease was partially offset by increases in headcount, increases from gains on fixed asset disposals, increases in consulting fees and increased rent.

Interest Expense, Net

For the year ended December 31, 2016 interest expense increased by $0.3 million compared to the same period in 2015 due to increased borrowings on our credit facility that we entered into in November 2016.

Income Tax Expense

For the year ended December 31, 2016 income tax expense decreased by $11.5 million compared to the same period in 2015 due to the release of the valuation allowance in 2016 subsequent to the Spin-Off. The effective tax rate for the year ended December 31, 2016 was (77.4)% compared to 5.5% for the year ended December 31, 2015.

Loss from Discontinued Operations, Net of Income Tax

For the year ended December 31, 2016, loss from discontinued operations decreased by $10.6 million compared to the same period in 2015 due to the Spin-Off in December 2016.

 

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Quarterly Results

The following tables set forth our unaudited quarterly statements of operations data for each of the six quarters ended June 30, 2017. The information for each quarter has been prepared on a basis consistent with our audited consolidated financial statements included in this prospectus, and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair presentation of the financial information contained in those statements.

 

     Three months ended  
     March 31,
2016
    June 30,
2016
    Sept. 30,
2016
    Dec. 31,
2016
    March 31,
2017
    June 30,
2017
 
     (In thousands)  

Revenue:

            

CPaaS revenue

   $ 27,735     $ 28,916     $ 30,249     $ 30,178     $ 31,647     $ 31,547  

Other revenue

     9,204       8,914       8,354       8,585       7,978       7,979  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     36,939       37,830       38,603       38,763       39,625       39,526  

Cost of revenue:

            

CPaaS cost of revenue

     17,220       18,159       18,197       17,642       18,228       18,919  

Other cost of revenue

     3,792       3,491       3,317       3,400       3,338       3,375  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     21,012       21,650       21,514       21,042       21,566       22,294  

Gross profit:

            

CPaaS gross profit

     10,515       10,757       12,052       12,536       13,419       12,628  

Other gross profit

     5,412       5,423       5,037       5,185       4,640       4,604  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

     15,927       16,180       17,089       17,721       18,059       17,232  

Operating expenses:

            

Research and development

     1,854       1,913       2,390       2,363       2,682       2,409  

Sales and marketing

     2,189       2,269       2,418       2,418       2,558       2,413  

General and administrative

     7,455       8,217       7,898       10,289       7,637       8,257  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     11,498       12,399       12,706       15,070       12,877       13,079  

Operating income

     4,429       3,781       4,383       2,651       5,182       4,153  

Change in fair value of shareholders’ anti-dilutive arrangement

                                   (553

Interest expense

     (184     (185     (229     (310     (421     (438
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     4,245       3,596       4,154       2,341       4,761       3,162  

Income tax (provision) benefit

     (182     (87     (137     11,500       (1,772     (1,215
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     4,063       3,509       4,017       13,841       2,989       1,947  

(Loss) income from discontinued operations, net of income tax

     (1,028     (1,983     (728     667              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 3,035     $ 1,526     $ 3,289     $ 14,508     $ 2,989     $ 1,947  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and Capital Resources

To date, our principal sources of liquidity have been the free cash flow driven by payments received from customers using our services, as well as borrowings under our senior secured credit facility. We believe that our cash and cash equivalents balances, our credit facility and the cash flows generated by our operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

 

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Statement of Cash Flows

The following table summarizes our cash flows from continuing operations for the periods indicated:

 

     Year ended
December 31,
    Six months ended
June 30,
 
     2015     2016     2016     2017  
     (In thousands)  

Net cash provided by operating activities from continuing operations

   $ 18,651     $ 16,942     $ 10,553     $ 5,080  

Net cash used by investing activities from continuing operations

     (5,102     (6,061     (3,368     (2,795

Net cash provided by (used in) financing activities from continuing operations

     11,038       (1,053     (659     (3,394
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 24,587     $ 9,828     $ 6,526     $ (1,109
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Operating Activities

For the six months ended June 30, 2017, cash provided by operating activities from continuing operations was $5.1 million, which primarily consisted of net income of $4.9 million, depreciation and amortization of $2.8 million, deferred taxes of $2.5 million, change in fair value of shareholders’ anti-dilutive arrangement of $0.6 million and stock-based compensation expenses of $0.5 million, partially offset by a decrease in working capital of $6.2 million. Working capital consisted primarily of decreases in accounts payable of $2.9 million, accrued liabilities of $2.2 million and an increase in prepaid expenses and other assets of $1.2 million.

For the six months ended June 30, 2016, cash provided by operating activities from continuing operations was $10.6 million, which primarily consisted of net income of $4.6 million, depreciation and amortization of $3.2 million, discontinued operations of $3.0 million and $0.9 million of stock-based compensation expenses, partially offset by a decrease in working capital of $1.3 million. Working capital consisted primarily of increases in accounts receivable of $2.5 million, deferred revenue of $1.7 million, accounts payable of $1.7 million, offset by a decrease in accrued expenses and other liabilities of $1.0 million, an increase in prepaid expenses and other assets of $0.7 million and increase in deferred costs of $0.6 million.

For the year ended December 31, 2016, cash provided by operating activities from continuing operations was $16.9 million, which primarily consisted of net income of $22.4 million, depreciation and amortization of $6.1 million, $1.4 million of stock-based compensation expenses, a decrease in working capital of $5.7 million, discontinued operations of $3.1 million, and impairment of intangible asset of $0.7 million, partially offset by $11.1 million in deferred taxes. Working capital consisted primarily of increases in accounts receivable of $4.0 million, prepaid expenses of $0.8 million, deferred costs of $1.0 million and deferred revenue of $0.5 million.

For the year ended December 31, 2015, cash provided by operating activities from continuing operations was $18.7 million due to net loss of $6.7 million and $13.7 million of cash provided by discontinued operations, depreciation and amortization of $7.1 million, $3.5 million of stock-based compensation expenses, loss on disposal of property and equipment of $0.4 million, deferred taxes of $0.3 million and an increase in working capital of $0.4 million. Working capital consisted of a decrease in deferred costs of $2.9 million, an increase in accounts payable of $1.0 million and a decrease in accrued expenses and other liabilities of $2.5 million, and increases in prepaid expenses of $0.6 million and accounts receivable of $0.5 million.

We have an ongoing dispute and litigation with MCI Communications Services, Inc. d/b/a Verizon Business and Verizon Select Services, Inc. (collectively, “Verizon”), which is a carrier access billing (“CABS”) customer. Billings to Verizon were approximately $6.8 million and $10.4 million for the year ended December 31, 2015 and 2016, respectively, and $2.9 million and $4.7 million for the six months ended June 30, 2016 and 2017, respectively. We recognize revenue for this customer only to the extent to which payments have been made and/

 

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or billings are not disputed. These outstanding amounts represent disputed and unpaid billings and are fully reserved within our allowance for doubtful accounts. We have not recognized revenue related to the outstanding and disputed balances. Only if and when we reach an agreement with Verizon to settle the outstanding and disputed billings which results in a payment for any or all amounts outstanding, will we recognize any revenue. Recognition of revenue as a result of a settlement of disputed balances will result in an increase in cash flows from operating activities for the relevant period.

Cash Flows from Investing Activities

For the six months ended June 30, 2017, cash used in investing activities from continuing operations was $2.8 million from the purchase of property, plant and equipment and capitalized internally developed software costs.

For the six months ended June 30, 2016, cash used in investing activities from continuing operations was $3.4 million used to purchase property, plant and equipment and capitalized internally developed software costs.

For the year ended December 31, 2016, cash used in investing activities from continuing operations was $6.1 million used to purchase property, plant and equipment and capitalized internally developed software costs.

For the year ended December 31, 2015, cash used in investing activities from continuing operations was $5.1 million used to purchase property, plant and equipment and capitalized internally developed software costs.

Cash Flows from Financing Activities

For the six months ended June 30, 2017, cash used in financing activities from continuing operations was $3.4 million consisting primarily of net repayments of $2.5 million on our line of credit and $1.0 million in payments on our term loan.

For the six months ended June 30, 2016, cash used in financing activities from continuing operations was $0.7 million consisting primarily of net repayments of $1.5 million on our line of credit, partially offset by $0.9 million in proceeds from issuance of common stock.

For the year ended December 31, 2016, cash used in financing activities from continuing operations was $1.1 million consisting primarily of $30.0 million in cash distribution to Republic Wireless as part of the Spin-Off, net repayments of $12.0 million on our line of credit, partially offset by $40.0 million in borrowings on our term loan and $1.0 million in proceeds from issuance of common stock.

For the year ended December 31, 2015, cash provided from financing activities from continuing operations was $11.0 million due to the net $11.0 million in borrowings under our line of credit.

Debt

On November 4, 2016, we entered into a Credit and Security Agreement with a syndicate of four banks. The agreement includes a $40 million term loan, and a $25 million revolving loan, which includes a swing line of up to $1 million and limits letters of credit commitments to a maximum of $2.5 million. Substantially all assets of the Company are pledged as security to the Credit and Security Agreement. The term of the Credit and Security Agreement is five years and matures on November 3, 2021. The interest rate used for the debt is based on our election to either apply the Federal Funds Effective Rate or LIBOR plus a stated margin, as defined in the Credit and Security Agreement. This agreement requires us to meet a certain leverage ratio and minimum debt service coverage ratio each quarter on a trailing 12-month basis.

 

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As of June 30, 2017, the Company has $39 million outstanding on the term loan and $2.5 million on the revolving loan and was in compliance with all financial covenants. The availability under the Credit and Security Agreement was $22.5 million as of June 30, 2017. Beginning on March 31, 2017, the term loan is payable in consecutive equal quarterly payment installments with the balance payable in full on the maturity date.

KeyBanc Capital Markets Inc. and certain of its affiliates are lenders and/or agents under our credit facility, as well as an underwriter in this offering, and, to the extent proceeds from this offering are used to repay amounts outstanding thereunder, will receive a portion of the net proceeds from this offering in connection with the repayment of our credit facility.

Contractual Obligations and Other Commitments

The following table summarizes our non-cancelable contractual obligations as of December 31, 2016:

 

     Total      Less
Than

1 Year
     1 to 2
Years
     3 to 5
Years
     More
Than
5 Years
 
     (In thousands)  

As of December 31, 2016:

              

Term loan

   $ 40,000      $ 2,000      $ 3,000      $ 35,000      $  

Interest expense(1)

     5,198        1,224        1,148        2,826         

Operating leases(2)

     19,933        2,992        3,632        11,417        1,892  

Capital leases

     165        101        64                

Purchase obligations(3)

     5,700        1,625        1,675        2,400         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 70,996      $ 7,942      $ 9,519      $ 51,643      $ 1,892  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Interest has been calculated on the term loan based on an interest rate of 3.125% which was the rate in effect as of December 31, 2016. Actual cash flows may differ significantly due to changes in underlying estimates.
(2) Operating leases represent total future minimum rent payments under non-cancellable operating lease agreements.
(3) Purchase obligations represent total future minimum payments under contracts to various service providers. Purchase obligations exclude agreements that are cancellable without penalty.

We lease office space under operating lease agreements in several locations within the United States, including our headquarters, which are located at 900 Main Campus Drive in Raleigh, NC. These operating lease agreements expires on various dates through 2022. These leases contain escalation clauses and various landlord. We recognize the total minimum lease payments on a straight-line basis over the term of the lease. On September 26, 2016, we amended the operating lease agreement for our headquarters with one of our landlords. The sixty-three month lease, began on April 14, 2017 and provided for an additional 40,657 square feet of office space, as well as an extension of the termination date of the lease for approximately 128,200 square feet of office space.

In conjunction with the Spin-Off, we entered into a Facilities Service Agreement with Republic Wireless in which it agrees to sub-lease 40,657 square feet of office space also in Raleigh, NC. The sub-lease is non-cancellable and extends to May 2022. We account for these receipts as a reduction to rent expense, which is included in operating expenses in the consolidated statements of operations. See “Certain Relationships and Related Party Transactions—Transactions with Republic Wireless—Facilities Sharing Agreement.”

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.

 

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Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue, costs and expenses during the reported periods. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstance, including the terms of our existing contracts, our evaluation of trends in the industry, information provided by our clients and information available from outside sources as appropriate. Actual results may differ from those estimates under different assumptions or conditions, and to the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements on page F-8, we believe the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements.

Revenue Recognition and Deferred Revenue

We generate revenue primarily from the sale of communication services to enterprise customers. We recognize revenue when all of the following criteria are met (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the fee is fixed or determinable; and (iv) collection is reasonably assured. If collection is not reasonably assured, we defer revenue recognition until collectability becomes reasonably assured. Our arrangements do not contain general rights of return. We generally enter into arrangements with customers that are typically 2 to 3 years in length. Incremental direct costs incurred related to the acquisition of a customer contract are expensed as incurred.

Stock-Based Compensation

Stock options awarded to employees, directors and non-employee third parties are measured at fair value on each grant date. Options subject to service-based vesting generally vest annually over a four-year period. The determination of the fair value of stock-based compensation arrangements on the grant date requires judgment. We recognize stock-based compensation expense using the Black-Scholes option-pricing model, net of estimated forfeitures, in order to determine the fair value of stock options, the output of which is affected by a number of variables. These variables include the fair value of our common stock, expected term of the options, expected stock price volatility, risk-free interest rate and expected dividends, which are estimated as follows:

 

    Fair value of our common stock. The fair value of the shares of our common stock underlying stock options has historically been established by our board of directors with the assistance of an independent third-party valuation firm. Because there has been no public market for our common stock, our board of directors has relied on this independent valuation and other factors to establish the fair value of our common stock at the time of grant of the option. The determination of the fair value of our common stock is discussed further below.

 

    Expected term. The expected term was estimated using the simplified method allowed under SEC guidance as we do not have sufficient historical data to use any other method to estimate the expected term.

 

    Expected volatility. The expected volatility is derived from an average of the historical volatilities of the common stock of several entities with characteristics similar to ours, such as the size, and operational and economic similarities to our principle business operations. We use this method because we have limited information on the volatility of our common stock.

 

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    Risk-free interest rate. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.

 

    Expected dividends. The expected dividend is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock.

In addition to the assumptions used in the Black-Scholes option-pricing model, we must also determine a forfeiture rate to calculate the stock-based compensation for awards. Through June 30, 2017, we recognized compensation for only the portion of options expected to vest using an estimated forfeiture rate that was derived from historical employee termination behavior.

Determination of the Fair Value of Common Stock

We are a private company with no active public market for our common stock, and therefore we have periodically determined for financial reporting purposes the estimated per share fair value of our common stock at various dates using contemporaneous valuations performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants Practice Aid, “Valuation of Privately-Held Company Equity Securities Issued as Compensation.” In conducting the contemporaneous valuations, we considered all objective and subjective factors that we believed to be relevant for each valuation conducted, including the following:

 

    contemporaneous unrelated third-party valuations of our common stock;

 

    the rights, preferences and privileges of our redeemable convertible preferred stock relative to those of our common stock;

 

    our results of operations, financial position and capital resources;

 

    current business conditions and projections;

 

    the lack of marketability of our common stock;

 

    the hiring of key personnel and the experience of our management;

 

    the introduction of new products;

 

    the risk inherent in the development and expansion of our products;

 

    the fact that the option grants involve illiquid securities in a private company;

 

    the likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company, given the prevailing market conditions;

 

    industry trends and competitive environment; and

 

    overall economic indicators, including gross domestic product, employment, inflation and interest rates.

In valuing our common stock, we have historically determined the equity value of our Company using both the income and the market approach valuation methods:

 

    The income approach estimates value based on the expectation of future cash flows that a company will generate. These future cash flows are discounted to their present values using a discount rate derived from an analysis of the cost of capital of comparable publicly traded companies in our industry as of each valuation date and is adjusted to reflect the risks inherent in our cash flows.

 

    The market approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business. From the comparable companies, a representative market value multiple is determined and then applied to the subject. The estimated value for our common stock is then discounted by a non-marketability factor (discount for lack of marketability) due to the fact that stockholders of private companies do not have access to trading markets similar to those enjoyed by stockholders of public companies, which affects liquidity.

 

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As a result of the recent determination to potentially pursue strategic financing through an IPO, in June 2017, we began using the Probability-Weighted Expected Return Method (“PWERM”) in order to estimate the value of our common stock based on various outcomes. Using the PWERM, the value of our common stock is estimated based upon a probability-weighted analysis of varying values for our common stock assuming possible future events for the company, including an initial public offering and a stay private company scenario in which operations continue as a privately held company. Application of this approach involves the use of estimates, judgment and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses and future cash flows, discount rates, market multiples, the selection of comparable companies and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.

The dates of our contemporaneous valuations have not always coincided with the dates of our stock-based compensation grants. In such instances, management’s estimates have been based on the most recent contemporaneous valuation of our shares of common stock and our assessment of additional objective and subjective factors we believed were relevant as of the grant date. The additional factors considered when determining any changes in fair value between the most recent contemporaneous valuation and the grant dates included our stage of development, our operating and financial performance, current business conditions and the market performance of comparable publicly traded companies. Following this offering, we will rely on the closing price of our common stock traded in the public market on the date of grant to determine the fair value of our common stock.

Goodwill and Intangible Assets

Goodwill

Goodwill represents the excess of the aggregate fair value of consideration transferred in a business combination, over the fair value of assets acquired, net of liabilities assumed. Goodwill is not amortized, but is subject to an annual impairment test. We test goodwill for impairment annually on December 31 of each calendar year or more frequently if events or changes in business circumstances indicate the asset might be impaired. Goodwill is tested for impairment at the reporting unit level. In evaluating the recoverability of goodwill, we perform a qualitative analysis to determine whether events and circumstances exist that indicate that it is more likely than not that goodwill is impaired. The qualitative factors we consider include but are not limited to, macroeconomic conditions, industry and market conditions, company-specific events and changes in circumstances. We completed our annual goodwill impairment analysis in each of the years ended December 31, 2015 and 2016 and no impairment charges were recorded. As of June 30, 2017 goodwill was $6.9 million.

Long-Lived Assets

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

We evaluate the recoverability of our long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of long-lived assets are measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. As of June 30, 2017, intangible assets, net of accumulated amortization, were $8.1 million, which consists primarily of client relationships and client contracts. As part of our annual evaluation of intangibles, we re-evaluated our marketing and trade name assets and concluded that there was no further benefit to a trade name acquired in the Dash acquisition. As a result, we impaired the intangible asset and recognized a loss of $695. No indicators of impairment were identified for the year ended December 31, 2015 or the six months ended June 30, 2017.

 

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Internal-Use Software Development Costs

We capitalize 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. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality and expense costs incurred for maintenance and minor upgrades and enhancements. Costs related to preliminary project activities and post-implementation operating activities are expensed as incurred.

Capitalized costs of platform and other software applications are included in property and equipment. These costs are amortized over the estimated useful life of the software on a straight-line basis over three years, which is recorded in cost of revenue in the statement of operations. We evaluate the useful life of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that are included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We reduce the measurement of a deferred tax asset to the extent we believe these assets will more likely than not be realized. In making such a determination, we consider all available positive and negative evidence, including projected future taxable income, the expected timing of future reversals of existing taxable temporary differences, projected future taxable income, prudent tax-planning strategies, and results of recent operations.

We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon technical merits, it is more likely than not that the position will be sustained upon examination. The tax benefit recognized is measured as the largest amount of benefit determined on a cumulative probability basis that we believe is more likely than not to be realized upon ultimate settlement of the position. We recognize potential accrued interest and penalties associated with unrecognized tax positions in income tax expense.

Other Contingencies

We are subject to legal proceedings and litigation arising in the ordinary course of business. Periodically, we evaluate the status of each legal matter and assess our potential financial exposure. If the potential loss from any legal proceeding or litigation is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required to determine the probability of a loss and whether the amount of the loss is reasonably estimable. The outcome of any proceeding is not determinable in advance. As a result, the assessment of a potential liability and the amount of any accruals recorded are based only on the information available to us at the time. As additional information becomes available, we reassess the potential liability related to the legal proceeding or litigation, and may revise our estimates. Any revisions could have a material effect on our results of operations.

We conduct operations in many tax jurisdictions throughout the United States. In many of these jurisdictions, non-income-based taxes and fees, such as sales and use taxes, telecommunications taxes, and regulatory fees including those associated with (or potentially associated with) VoIP telephony services or 911

 

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services, are assessed or may be assessed on our operations. We are subject to indirect taxes, and may be subject to certain other taxes and surcharges in some of these jurisdictions. We generally bill and collect from our customers these taxes and surcharges. We record a liability for tax collected from customers but not yet paid to the appropriate jurisdiction. In addition, we record a provision for non-income based taxes and fees in jurisdictions where it is both probable that liability has been incurred and the amount of the exposure can be reasonably estimated. As a result, we have recorded a liability of $4.6 million and $2.8 million and $2.6 million as of December 31, 2015 and 2016 and for the six months ended June 30, 2017, respectively. These estimates are based on several key assumptions, including the taxability of our services, the jurisdictions in which we believe we have nexus and the sourcing of revenue to those jurisdictions. In the event these jurisdictions challenge our assumptions and analysis, our actual exposure could differ materially from our current estimates.

Recent Accounting Pronouncements

Recently Adopted

In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The effective date of ASU 2016-09 for public business entities is for fiscal years beginning after December 15, 2016. Early adoption is permitted and the Company adopted the amendments in ASU 2016-09 effective January 1, 2016. This standard simplifies several aspects of the accounting for equity-based payment awards, including the income tax consequences and classification on the statement of cash flows. Certain changes implemented by this standard are required to be applied retrospectively, while other changes are required to be applied prospectively. The Company elected to continue to estimate forfeitures when recording stock-based compensation expense.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740), which requires that all deferred tax assets and liabilities, including any related valuation allowance, be classified as noncurrent on the balance sheet. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016 for public entities, and early adoption is permitted. We elected to early adopt ASU 2015-17 beginning with our year ended December 31, 2015.

Not Yet Adopted

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements. ASU 2017-09 provides guidance on the types of changes to terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718, Compensation—Stock Compensation. ASU 2017-09 is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and early adoption is permitted. We are evaluating the impact of this guidance on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases.” The standard will affect all entities that lease assets and will require lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of less than one year) as of the date on which the lessor makes the underlying asset available to the lessee. For lessors, accounting for leases is substantially the same as in prior periods. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020, and early adoption is permitted. For leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, lessees and lessors must apply a modified retrospective transition approach. While we expect the adoption of this standard to result in an increase to the reported assets and liabilities, we have not yet determined the full impact that the adoption of this standard will have on our financial statements and related disclosures.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This new guidance will replace most existing GAAP guidance on this topic. The new revenue recognition standard

 

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provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers: Deferral of the effective date”, which deferred by one year the effective date for the new revenue reporting standard for entities reporting under GAAP. In accordance with the deferral, this guidance will be effective for us beginning January 1, 2019. This guidance can be applied either retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption. Early adoption is permitted beginning on January 1, 2017. In December 2016, the FASB issued ASU 2016-20, “Revenue from Contracts with Customers, Technical Corrections and Improvements to Topic 606,” which made 12 additional technical corrections and improvements to the new revenue standard. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” clarifying the implementation guidance on principal versus agent considerations. Specifically, an entity is required to determine whether the nature of a promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). The determination influences the timing and amount of revenue recognition. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing”, clarifying the implementation guidance on identifying performance obligations and licensing. Specifically, the amendments reduce the cost and complexity of identifying promised goods or services and improve the guidance for determining whether promises are separately identifiable. The amendments also provide implementation guidance on accounting for an entity’s promise to grant a license. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients,” clarifying guidance on assessing collectability, presentation of sales taxes, noncash consideration, completed contracts and contract modifications. The effective date and transition requirements for ASU 2016-20, ASU 2016-08 and ASU 2016-10 are the same as the effective date and transition requirements for ASU 2014-09, which will be effective for us beginning January 1, 2019.

We are still assessing all potential impacts of the new standard on our consolidated financial statements. Given the comprehensive nature of the standard, we have already taken steps to identify the impact on our consolidated financial results. We have completed a diagnostic which highlighted differences between current accounting policies and the new standard. Additionally, we have engaged a third-party service provider to assist in our evaluation of customer contracts to identify the attributes that could result in a different accounting treatment under ASU 2014-09. From an information technology perspective, we have identified the business requirements and required functionality of a new technology solution and are in the process of meeting with third-party software providers to determine which technology to implement. We have not yet reached a conclusion as to whether the quantitative effect of the adoption of the new standard on our revenue will be material. We will continue to monitor and assess the impact of the changes of the new standard and the related interpretations of its application as they become available.

JOBS Act Accounting Election

We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

 

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Quantitative and Qualitative Disclosures about Market Risk

We are exposed to certain market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and, to a lesser extent, foreign currency exchange rates and inflation:

Interest Rate Risk

Our primary exposure to market risk relates to interest rate changes. We had cash and cash equivalents totaling $5.7 million as of June 30, 2017, which were held for working capital purposes. Our cash and cash equivalents are comprised primarily of interest bearing checking accounts.

Such interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in interest income have not been significant. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. Due to the short-term nature of our investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates.

We had debt totaling $41.5 million as of June 30, 2017. Our debt is comprised of $2.5 million outstanding under our revolving line of credit account and $39 million outstanding under our term loan. The revolving line of credit had an interest rate based on the 1-month LIBOR rate plus 225 basis points as of June 30, 2017. The term loan had an interest rate based on the 3-month LIBOR rate plus 225 basis points. A one-eighth percentage point increase or decrease in the applicable rate for our credit facility (assuming the revolving portion of the credit facility is fully drawn) would have an annual impact of $0.1 million on cash interest expense.

Foreign Currency Risk

Our customers consume our services primarily in the United States. Our revenue and expenses are denominated in U.S. dollars and as a result we have no foreign currency risk.

Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. We continue to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

 

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Reconciliation of Non-GAAP Financial Measures

Reconciliations of the above mentioned non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the tables below (in thousands):

Adjusted EBITDA

 

     Year ended
December 31,
    Six months ended
June 30,
 
     2015      2016     2016     2017  
    

(In thousands)

 

Income from continuing operations

   $ 6,965      $ 25,430     $ 7,572     $ 4,936  

Income tax provision (benefit)(1)

     408        (11,094     269       2,987  

Interest expense, net

     589        908       369       859  

Depreciation

     6,167        5,251       2,775       2,401  

Amortization

     908        891       446       420  

Stock-based compensation

     3,493        1,370       854       490  

Impairment of intangible assets(2)

            695              

Loss (gain) on disposal of property and equipment

     382        19       (16     9  

Change in fair value of shareholders’ anti-dilutive arrangement(3)

                        553  
  

 

 

    

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 18,912      $ 23,470     $ 12,269     $ 12,655  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Income tax benefit was $11,094 for the year ended December 31, 2016. This benefit was primarily the result of $14,138 of benefit being recognized due to the release of the deferred tax asset valuation allowance subsequent to the Spin-Off.
(2) The impairment of intangible assets was $695 for the year ended December 31, 2016 and was due to the Company’s evaluation that a trade name acquired during the Dash acquisition provided no further benefit.
(3) Change in fair value of shareholders’ anti-dilutive arrangement was $553 for the six months ended June 30, 2017 and relates to an antidilutive agreement which allows certain principal non-founder shareholders the ability to purchase additional shares of common stock. See Note 2, Summary of Significant Accounting Policies, Fair Value of Financial Instruments, for further explanation.

 

     Year ended
December 31,
    Six months ended
June 30,
 
     2015     2016     2016     2017  
     (In thousands)  

Net (loss) income

   $ (6,700   $ 22,358     $ 4,561     $ 4,936  

Stock-based compensation

     3,493       1,370       854       490  

Change in fair value of stockholders’ anti-dilutive arrangement(1)

                       553  

Amortization of acquired intangibles

     520       520       260       260  

Impairment of intangible assets(2)

           695              

Loss (gain) on disposal of property and equipment

     382       19       (16     9  

Estimated tax effects of adjustments(3)

           (994           (501
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net (loss) income

     $(2,305)       $23,968       $5,659       $5,747  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Change in fair value of shareholders’ anti-dilutive arrangement was $553 for the six months ended June 30, 2017 and relates to an anti-dilutive agreement which allows certain principal non-founder shareholders the ability to purchase additional shares of common stock. See Note 2, Summary of Significant Accounting Policies, Fair Value of Financial Instruments, for further explanation.
(2) The impairment of intangible assets was $695 for the year ended December 31, 2016 and was due to the Company’s evaluation that a trade name acquired during the Dash acquisition provided no further benefit.
(3)

The Company recorded a full valuation allowance on its net deferred tax assets as of December 31, 2015 and June 30, 2016. The income tax expense recorded in the Company’s consolidated statement of operations for the aforementioned periods relates to the change in deferred tax liability for indefinite lived intangibles and various state minimum taxes. The non-GAAP adjustments would not be impacted by these tax expenses and as a result, no tax effect has been recorded for the year ended December 31, 2015 and the six months ended June 30, 2016. The valuation allowance was released in the fourth quarter of 2016 in connection with the spin-off of Republic Wireless. For periods following the valuation

 

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  allowance release, including the year ended December 31, 2016 and the six months ended June 30, 2017, the Company has calculated the income tax effect of the non-GAAP adjustments using the blended U.S. federal and state statutory rate of approximately 38.2%.

Adjusted Gross Profit and Adjusted Gross Margin

 

     Year ended
December 31,
    Six months ended
June 30,
 
Consolidated    2015     2016     2016     2017  
     (In thousands)  

Gross profit

   $ 58,559     $ 66,917     $ 32,107     $ 35,291  

Depreciation

     5,258       4,574       2,359       2,083  

Stock-based compensation

     45       61       28       41  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted gross profit

   $ 63,862     $ 71,552     $ 34,494     $ 37,415  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted gross margin

     46     47     46     47
  

 

 

   

 

 

   

 

 

   

 

 

 

By Segment

 

     Year ended
December 31,
    Six months ended
June 30,
 
CPaaS    2015     2016     2016     2017  
     (In thousands)  

Gross profit

   $ 36,742     $ 45,860     $ 21,272     $ 26,047  

Depreciation

     5,258       4,574       2,359       2,083  

Stock-based compensation

     45       61       28       41  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted gross profit

   $ 42,045     $ 50,495     $ 23,659     $ 28,171  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted gross margin

     41     43     42     45
  

 

 

   

 

 

   

 

 

   

 

 

 

Other

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

 

     Year ended
December 31,
    Six months ended
June 30,
 
Free Cash Flow    2015     2016     2016     2017  
    

(In thousands)

 

Net cash provided by operating activities from continuing operations

   $ 18,651     $ 16,942     $ 10,553     $ 5,080  

Net cash used in investing activities from continuing operations(1)

     (5,102     (6,061     (3,368     (2,795
  

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 13,549     $ 10,881     $ 7,185     $ 2,285  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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LETTER FROM THE COFOUNDER

Dear Investors,

Thank you for considering investing in Bandwidth. My name is David Morken and I’m the Cofounder, Chairman and CEO of our 338-person software company based near Research Triangle Park in Raleigh, North Carolina.

As of June 30, 2017 we served 865 active CPaaS customer accounts that use our software platform and network to add voice calls, text messages and 911 services to their applications and devices. These creative teams spend an average of more than $150,000 each year with us. We love working with them and the feeling seems mutual—once they find us (which hasn’t always been easy) they almost never leave. You might use Bandwidth today if you use Google Voice, Microsoft Office 365 Skype for Business, Ring Central or smartphone apps like Pinger, GrubHub and ZipRecruiter.

So why raise capital now? We believe we are entering a golden age of communications heralded by the rise of massive and accessible computing power and intelligent devices. We are honored to serve many of the leading companies who are ushering in this grand, new era. Our software, network and amazing team give companies like Google, Microsoft and others the powerful tools they need to deliver the highest quality voice, messaging and emergency services for any application, website or device. Simply put, we develop and deliver the power to communicate.

As we look forward, we believe the dramatic rise of voice as an interface for everything from search, to music, to calling smartphones will drive more demand for our services in the future than ever before. Amazon’s Alexa, Google Assistant, Apple’s Siri, Microsoft’s Cortana, and Facebook M are all examples of voice as an interface, the first new user interface since the mouse and touchscreen. And if the past is prologue, we are well-positioned to succeed in the future.

Over the last 12 months we’ve reached several major milestones. We’ve grown our platform and network to support 52 million active phone numbers, 27 billion minutes of calls, 10 billion text messages and 8 million 911-enabled phone numbers.

These milestones are consistent with our progress over the last 18 remarkable years. We’ve been fortunate to grow during economic highs and lows. Founded in 1999, we survived the tech bubble and by 2007 were ranked as the 4th Fastest Growing Privately Held Company from 2002 to 2007 by the Inc. 500. In 2008, we built one of the fastest growing all-IP voice networks and in 2010 were among the first to offer cloud-based business voice.

In 2011, we launched Republic Wireless, a nationwide cellular smartphone service that pioneered calling and texting over Wi-Fi. We signed up over 100,000 people for service in our first week and grew Republic Wireless annual revenue to $90 million dollars in five years before spinning it out as a separate company last year.

We have historically focused on growing profitably. When deploying capital, we follow the courage of our convictions but are impatient for profits. We have grown the business primarily out of profits and have raised a total of only $33.5 million of equity capital. For our early funding we relied on cofounders, friends and family. Since then, we funded one acquisition but fueled our organic growth with free cash flows.

How we work together is important to our success in the future. We define our culture with three Ps—Purpose, People and Principles. Our purpose is to accomplish our mission and it is our top priority. Second are our people, who are essential to accomplishing our mission. As a result, we invest heavily and happily in our people. We do this through our Whole Person framework: programs and policies designed to strengthen our

 

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body, mind and spirit. At the very heart of our company culture is our desire to grow from strength to strength through every season. Our third P stands for our principles. We are committed to strong principles which we define and share across the entire company. More importantly, we live by them.

As you consider investing with us, please allow me to thank those who have been most responsible for our success. To our many customers and our investors, thank you! To our team, you are the best—everyone should have the opportunity to work with a group of people as talented, fun, disciplined and committed to each other and to serving customers as you are. Henry Kaestner is the greatest friend and cofounder anyone could pray for, which is exactly what I did the day before we met. We would both like to thank our amazing brides, children and parents for always supporting our business. And as we have always done, Henry and I give God the glory for our work together. We know it is only because of his providence, our team’s perspiration, and our customers’ success that we can invite you to invest in Bandwidth.

Thank you,

David Morken

Cofounder, Chairman, and CEO

 

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BUSINESS

Overview

We are a leading cloud-based communications platform for enterprises in the United States. Our solutions include a broad range of software APIs for voice and text functionality and our owned and managed, purpose-built IP voice network, one of the largest in the nation. Our sophisticated and easy-to-use software APIs allow enterprises to enhance their products and services by incorporating advanced voice and text capabilities. Companies use our platform to more frequently and seamlessly connect with their end users, add voice calling capabilities to residential IoT devices, offer end users new mobile application experiences and improve employee productivity, among other use cases. By owning and operating a capital-efficient, purpose-built IP voice network, we are able to offer advanced monitoring, reporting and analytics, superior customer service, dedicated operating teams, personalized support, and flexible cost structures. Over the last ten years, we have pioneered the CPaaS space through our innovation-rich culture and focus on empowering enterprises with end-to-end communications solutions.

As technologies evolve and new mobile applications and connected devices proliferate, enterprises must adapt and innovate their communications solutions to create a “connected” experience anywhere, anytime, on any device. Enterprises looking to capitalize on trends such as voice as an interface and A2P messaging need solutions that are reliable, secure, scalable and cost-efficient. Most software-powered communications providers rely heavily on leased networks and cannot provide enterprise-grade service and support. We believe traditional large-scale network providers lack the capabilities to build robust software platforms for agile development of communications solutions. Enterprises focus on their core businesses and lack the technical know-how or strategic flexibility to build the customized solutions they require in-house. As a result, enterprises need a third-party, end-to-end, cloud-based software solution that eliminates the complexity and expense of building and maintaining their own communications platform.

Our solutions address enterprises’ communications needs, and we believe they are shaping the future of how enterprises connect through embedded voice and text for applications and devices. At the core of our solutions are our communications software APIs, which allow companies to build products and services on top of our cloud-based, out-of-the-box software. Our software APIs include pre-defined functions that are easily customizable for specific use cases without the challenge and expense of building and deploying complex code. Moreover, our platform collects and analyzes terabytes of call and messaging data records in real-time and provide a seamless integration to CRM and Business Intelligence analytics tools to provide meaningful data driven actionable insights for critical business decisions. Customers can then launch and scale applications and solutions with reliability using our own nationwide IP voice network. Our voice software APIs allow enterprises to make and receive phone calls and create advanced voice experiences. Integration with our purpose-built IP voice network ensures enterprise-grade functionality and secure, high-quality connections. Our messaging software APIs provide enterprises with advanced tools to connect with end users via messaging. Our customers also use our solutions to enable 911 response capabilities, real-time provisioning and activation of phone numbers, and toll-free number messaging.

We are the only CPaaS provider in the industry with our own nationwide IP voice network, which we have purpose-built for our platform. Our network is capital-efficient and custom-built to support the applications and experiences that make a difference in the way enterprises communicate. Since a communications platform is only as strong as the network that backs it, we believe our network provides a significant competitive advantage in the control, quality, pricing power and scalability of our offering. We are able to control the quality and provide the support our customers expect, as well as efficiently meet scalability and cost requirements.

Our customers currently include only enterprises, which includes large enterprises, small and medium-sized businesses, emerging technology companies and any other business. Our customers operate in a diverse set of industries, including technology, communications, hospitality and services, that need to launch and scale robust

 

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communications experiences. Our customers choose Bandwidth because we empower them to embed seamless communications within their products and services in a reliable, flexible, scalable and cost-efficient manner. Our customers include Google Voice, Microsoft Office 365 Skype for Business, Dialpad, GoDaddy, Kipsu, Rover and ZipRecruiter, among many others. We do not currently have any consumer or residential customers, although our enterprise customers may utilize our solutions to serve their own consumer or residential customers or end users.

Our usage-based revenue model allows us to grow with our customers and increase our revenue base as our customers deepen their usage of our solutions. Our CPaaS customers increased use of our platform from no minutes or messages in 2008 to 27 billion minutes and 10 billion messages in the twelve months ended June 30, 2017. Our dollar-based net retention rate, which measures our customers’ increased utilization of our platform, was 115%, 111% and 107% for the year ended December 31, 2015 and 2016 and the six months ended June 30, 2017, respectively.

We have continued growing our business in recent periods. For the years ended December 31, 2015 and 2016 and the six months ended June 30, 2017, our revenue was $137.8 million, $152.1 million and $79.2 million, respectively, and our net (loss) income was $(6.7) million, $22.4 million and $4.9 million, respectively.

Industry Background

Communications are the Heartbeat of How Enterprises Operate, Drive Growth and Innovate

Communications have reached a tipping point as enterprises are embedding mission-critical communications functions in their products and services. With the unprecedented growth of mobile technologies and connected devices that comprise the IoT, enterprises compete to provide real-time value to their customers across a myriad of devices. Enterprises seeking to effectively operate, drive growth and innovate must navigate the convergence of software-powered communications and the proliferation of mobile applications and smart devices that create a “connected” experience. For instance, providing enterprise customer support with automated real-time text-based messaging is the “new normal”. Enterprises such as Rover and ZipRecruiter provide a stream of real-time updates to their end users, and Ovum estimates 181 billion messages will be sent A2P in 2017 in the United States.

Additionally, voice-first user interfaces built on AI technology are becoming a natural extension of existing voice-enabled devices such as mobile phones. According to comScore, as of Q2 2017, one in two smartphone users in the United States uses voice technology on their smartphones. Of those smartphone users, 49% use it weekly and 34% use it daily. Additionally, as of March 2017, smart speakers, such as Amazon Echo or Google Home, were in 8% of connected homes in the United States. According to Gartner, by 2018, more than 2 billion people will use conversational AI to interact with VPAs, virtual customer assistants and other AI-enabled smartphones and connected devices on a regular basis. By 2019, all languages spoken in the major VPA speaker markets will be supported, increasing adoption by 25%. By 2020, more than 50% of cloud interactions in homes with VPA speakers will be conversational. Additionally, according to Gartner, enterprise use cases will start in several vertical industries over the next two to three years.

Software, in the form of APIs, plays a critical role in laying the foundation of communications across core business disciplines, from product development to customer support. The reliability, security and scalability of software-powered communications are vital for enterprise success.

Enterprises Today Operate in Real-Time with Distributed Architectures

Successful enterprises today are focused on innovating their core product offerings and building a strategic advantage to reach and empower their customers. Enterprises are adopting a distributed approach in deploying cloud-based third-party software solutions. As a result, rapidly proliferating mobile technologies, big data and

 

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cloud-based software services have transformed how these enterprises can run their businesses. Additionally, organizations can customize their offerings to customers by building on top of cloud-based, out-of-the-box software APIs. Third-party, cloud-based solutions eliminate the complexity and cost of building and maintaining their own communications solution. Enterprises are empowered by software APIs, which include pre-defined functions that are easily customizable for specific use cases without the challenge and expense of building and deploying complex code.

Communications Solutions are Still a Challenge for Enterprises

Large enterprises and small and medium-sized businesses struggle to build, deploy and manage their own software-powered communications platforms. As communications have grown more sophisticated and complex, software-based APIs have become the backbone for core communications functions such as provisioning and porting phone numbers, A2P voice and messaging services, and 911 services at scale. Enterprises focus on their core businesses and lack the technical know-how or strategic flexibility to build, customize and scale these software APIs from the ground up.

Enterprises seeking to embed end-to-end communications solutions can turn to other software-powered communications providers or traditional large-scale network providers. Neither fully addresses the complex needs of the enterprise.

Software-powered communications providers that rely heavily on third-party networks act as “middlemen” between the enterprise and third-party network providers and cannot fulfill critical communications requirements, such as full service-level agreements, guaranteed levels of uptime and reliability and real-time visibility into network performance. Moreover, the lack of network ownership often makes them less cost-competitive and vulnerable to third-party price increases. Additionally, such software-powered communications providers address fewer use cases and do not provide a comprehensive, cloud-based end-to-end communications suite, including voice, text, 911 and phone number provisioning.

Similarly, traditional large-scale network providers have not evolved with today’s enterprises in mind. They have heavily invested in infrastructure and hardware, but have failed to adapt to a software-first world. We believe these incumbents lack the capabilities to build robust software platforms for agile development of communications solutions. As a result, they are unable to offer their enterprise customers scalable software-based voice and text experiences in those enterprise customers’ applications and devices.

Enterprises require the versatility of a cloud-based software platform coupled with the reliability of a network provider to address their end-to-end communications requirements.

Our Market Opportunity

To establish and maintain their competitive advantage, enterprises need to be able to leverage cloud-based software that enables superior communications products and experiences. Software is redefining communications, and CPaaS solutions are becoming critical to business communications. CPaaS allows enterprises to leverage the latest software-based tools without significant investments in their own communications solution or the need to maintain relationships with large-scale network providers. These solutions enable enterprises to embed voice, chat or messaging services within their business or consumer applications and, we believe, are the foundation for next-generation communications.

The CPaaS market is large and rapidly growing. According to IDC, the global CPaaS market will be $8.2 billion in 2021. We focus on the CPaaS market in the United States, which comprises the majority of the market opportunity in the near term. Ovum estimates that there will be 348 billion minutes of over-the-top VoIP calls in the United States in 2017 and 742 billion in 2021. Ovum also estimates that 181 billion A2P messages will be sent in the United States in 2017 and 179 billion in 2021. Assuming our current market pricing, we estimate our

 

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addressable market of minutes of over-the-top VoIP calls and messages to be $3.3 billion for those services in 2017 and $6.2 billion in 2021, a compound annual growth rate of 17%. Market growth will be driven by enterprise demand for cloud applications and the need to integrate communications services into any workflow, customer-facing application or business process.

In addition to addressing the API-driven CPaaS market, we are also disrupting network-centric telecom incumbents, which, according to IDC, together generated $1.4 trillion of revenue in 2016. Software-powered communications are displacing network-centric telecom incumbents by enabling more phone calls and messages to be generated and received within applications, and by provisioning numbers through IP voice networks.

Furthermore, we believe the rapid evolution of technologies, which is delivering new and innovative messaging and voice solutions, will bolster the need for our software-powered communications platform in a variety of new use cases:

 

    Rise of Voice as an Interface. We believe that the shift from a text-driven interface to an increasingly voice-driven interface will further expand our total addressable market. VPAs such as Amazon’s Alexa, Google’s Assistant, Microsoft’s Cortana, Apple’s Siri and Facebook’s M are examples of the first widely adopted user interface since the keyboard, mouse and touchscreen. We believe this new interface will further drive our growth as users increasingly rely on voice to communicate, including calling, messaging or using 911 services.

 

    Integration of Voice Within Applications. Over the last decade, voice calling has migrated away from single-purpose devices such as a desk phone or a smartphone to a fully integrated solution within enterprise applications such as Google Suites, Microsoft Office 365, Facebook Workplace and Slack. Enterprise users communicate and collaborate using these applications, which use software-powered communications platforms such as our Bandwidth Communications Platform to carry out the calling and messaging functionalities.

Our Platform

Our Bandwidth Communications Platform empowers enterprises to create and scale voice or text communications services across any application and device. Our software platform and IP voice network enable our enterprise customers to rapidly develop and deploy real-time and mission-critical, software-powered communications solutions. Our sophisticated and easy-to-use software APIs allow enterprises to enhance their products and services by incorporating advanced voice and text capabilities. By owning and operating a capital-efficient, purpose-built IP voice network, we are able to offer advanced monitoring, reporting and analytics, superior customer service, dedicated operating teams, personalized support and flexible cost structures.

Our cloud-based platform is a proprietary CPaaS offering consisting of voice and messaging solutions:

Voice Software API. We provide flexible software APIs that are used to build voice calling within applications, innovative call flows between users or machines, call recording, text-to-speech for interactive voice response, call detail records, conference calling or bridging and more. We provide the ability to have customized high-quality call routing for business voice use cases and global reach. Our voice quality monitoring service provides tools and processes for network quality tests and proactive tuning. While we provide a wide range of functionalities, some of the common use cases are:

 

    Enabling local and toll-free numbers via software API: Our platform empowers enterprises with a capability to activate and manage phone numbers instantly and at scale. On our network, we have provisioned approximately 52 million active U.S. numbers, including 3 million toll-free numbers. Using our easy to use software APIs, our enterprise customers can easily add additional lines to their business as well as for their end users.

 

    Automating voice communication while preserving privacy: Our software APIs enable voice communication capabilities from a mobile application to an individual or a group with or without disclosing personal identity

 

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    Embedding ‘click-to-call’ communication feature: We enhance our enterprise customers mobile and web marketing capabilities by embedding click-to-call functionality in their customer outreach, including advertising campaigns that enables them to connect with consumers instantly

 

    Real-time call analytics: We provide our enterprise customers with real-time call analytics through our dashboard that correlates the raw data from calls with CRM records, including the call duration, customer sentiment and other attributes, in order to provide meaningful contextual sales and other business insights

Messaging API. Our software APIs for messaging deliver a complete wireless experience, including: delivery receipts, SMS, MMS, long text support, emoji support and bi-directional unicode (international characters) and short codes interoperability. While we provide a wide range of functionalities, some of the common use cases are:

 

    Automated real-time notification and alerts: Our software APIs empower our enterprise customers with predefined functionalities to send and receive text messages to and from an application to an individual or a group. Our customers often build more customized use cases on top of our predefined use cases. For instance, ZipRecruiter uses this functionality to update job seekers of available jobs in real time via automated text alerts

 

    Two-factor authentication: We enable enterprises to verify the identity and maintain security of end users through our software-based SMS verification service that sends unique codes to end users in order to log in to mobile and web applications

 

    Group messaging: Enterprises utilize our platform to collaborate with their end users on a real-time basis by enabling group messaging within their user community to share messages, videos, carry out polls and surveys amongst other uses without leaving the application

911 Software API. We are the only software platform that provides complete communications solutions with integrated 911 services. We can instantly connect numbers or applications to emergency services with reliable and accurate emergency routing. Our Dynamic Geospatial Routing uses geocoding to enable real-time routing based on X,Y coordinates of the caller and defined Public Safety Access Point boundaries. Our Advanced “Next Generation 911” “i3”-ready NENA i2 “Enhanced” service network covers approximately 98% of the U.S.

Key Benefits of Our Software Platform

Our Bandwidth Communications Platform provides the following benefits to the enterprises we serve:

 

    Easy to Build and Deploy. Our easy-to-use, intuitive software APIs are ready to launch and scale from day one. We enable enterprises to rapidly and easily scale communications functionalities to a vast range of applications and devices. Our technology requires minimal lines of code to build customized applications, which allows for rapid composition of customized solutions and seamless embedding within other applications.

 

    Easy to Scale. We enable enterprises to easily scale nationwide at launch, without sacrificing quality, while meeting the most stringent requirements. We can deliver full end-to-end automation for even the largest of enterprises using our IP voice network, which is the largest of any CPaaS provider based on the number of rate centers, a measure for the footprint covered by our IP voice network. We are able to support high user volumes without impacting deliverability. Our software, built on our own IP voice network, removes complexity, eliminates performance degradation and increases cost efficiencies at scale.

 

    Flexibility. Our software APIs are easy to deploy and use and allow for the creation of solutions to address a broad array of use cases. Our software can be implemented directly into product workflow for a variety of custom solutions such as creation of virtual call centers, group messaging and dynamic call location routing. We enable developers to easily and rapidly innovate with our platform.

 

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Key Benefits of Our Network

Our owned and managed IP voice network provides the following benefits to the enterprises we serve:

 

    Enhanced Quality and Reliability. We offer greater levels of quality and delivery assurance than providers offering services across the public Internet or through partnerships. As a result, the enterprises we serve have enjoyed 99.9% network uptime since January 1, 2017 and we have not experienced any material system failures in the past three years.

 

    Total Accountability. The ability to vertically integrate our software platform with our own IP voice network provides us with a differentiated ability to continuously monitor, report and resolve any software- or network-related issues on a real-time basis. For our enterprise customers, having a single platform solution for their entire communications requirements, including software and network, provides tremendous value with respect to time and financial resources. Our service-level agreements with our enterprise customers assures that we provide high quality service and gives them peace of mind and confidence in our service.

 

    Lower Total Cost to Our Customers. The differentiated pairing of our software combined with owning the delivery capability through our IP voice network leads to significant savings for the enterprises we serve as compared to our competitors. Our IP voice network lowers total cost to our customers as compared to our competitors because of our reduced capital expenditure requirements and lower marginal costs at scale, which we are able to pass on to our customers.

 

    Scale. At peak times, over 200,000 concurrent calls traverse our network. We have grown from zero phone numbers used by end users in 2008 to approximately 52 million active numbers nationwide today, representing 7.7% of the total according to the North American Number Plan Administration. Our IP voice network supported approximately 27 billion minutes and 10 billion text messages in the twelve months ended June 30, 2017 and served approximately 8 million 911-enabled phone num