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 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
______________________________________________

FORM 10-Q 
___________________________________

 
x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934
 
For the quarterly period ended September 30, 2018
 
o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 001-38285
 
Bandwidth Inc.
(Exact name of registrant as specified in its charter)
 ______________________________________________
 
Delaware
56-2242657
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
900 Main Campus Drive
Raleigh, NC 27606
(Address of principal executive offices) (Zip Code)
 
(800) 808-5150
(Registrant’s telephone number, including area code)
______________________________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
x
Smaller reporting company
o
Emerging growth company
x

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 pursuant to Section 13(a) of the Exchange Act.    o 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

As of October 22, 2018, 12,655,226 shares of the registrant’s Class A common stock and 6,699,691 shares of registrant’s Class B common stock were outstanding, respectively.



Table of Contents
BANDWIDTH INC.
Quarterly Report on Form 10-Q 
For the Three Months Ended September 30, 2018
TABLE OF CONTENTS
Page

1

Table of Contents
Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements contained in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. Forward-looking statements generally can be identified by the words “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “estimate,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations strategy, plans or intentions. Forward looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
• our ability to attract and retain customers, including large enterprises;
• our approach to identifying, attracting and keeping new and existing customers, as well as our expectations regarding customer turnover;
• our beliefs regarding network traffic growth and other trends related to the usage of our products and services;
• our expectations regarding revenue, costs, expenses, gross margin, dollar based net retention rate, adjusted EBITDA, Non-GAAP net income and capital expenditures;
• our beliefs regarding the growth of our business and how that impacts our liquidity and capital resources requirements;
• the sufficiency of our cash and cash equivalents to meet our liquidity needs;
• our ability to attract, train, and retain qualified employees and key personnel;
• our beliefs regarding the expense and productivity of and competition for our sales force;
• our expectations regarding headcount;
• our ability to maintain and benefit from our corporate culture;
• our plans to further invest in and grow our business, and our ability to effectively manage our growth and associated investments;
• our ability to introduce new products and services and enhance existing products and services;
• our ability to compete successfully against current and future competitors;
• the evolution of technology affecting our products, services and markets;
• the impact of certain new accounting standards and guidance as well as the time and cost of continued compliance with existing rules and standards;
• our beliefs regarding the use of non-generally accepted accounting principles in the United States of America (“GAAP”) financial measures;
• our ability to maintain, protect and enhance our intellectual property;
• our expectations regarding litigation and other pending or potential disputes;
• our ability to comply with modified or new laws and regulations; and
• the increased expenses associated with being a public company.
We caution you that the foregoing list may not contain all the forward-looking statements made in this Quarterly Report on Form 10-Q.
2

Table of Contents
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

3

Table of Contents
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements


4

Table of Contents

BANDWIDTH INC.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)

December 31,
2017
September 30,
2018
Assets 
Current assets: 
Cash and cash equivalents $37,627 $48,574 
Marketable securities  14,936 
Accounts receivable, net of allowance for doubtful accounts 21,225 23,780 
Prepaid expenses and other current assets 6,400 7,839 
Total current assets 65,252 95,129 
Property and equipment, net 14,946 21,770 
Intangible assets, net 7,643 7,219 
Deferred costs, non-current 2,068 1,771 
Other long-term assets 1,192 769 
Goodwill 6,867 6,867 
Deferred tax asset 6,526 15,568 
Total assets $104,494 $149,093 
Liabilities and stockholders’ equity 
Current liabilities: 
Accounts payable $3,025 $4,294 
Accrued expenses and other current liabilities 15,725 20,294 
Current portion of deferred revenue and advanced billings 5,768 7,052 
Total current liabilities 24,518 31,640 
Other liabilities 716 2,605 
Deferred revenue, net of current portion 2,549 6,612 
Total liabilities 27,783 40,857 
Stockholders’ equity: 
Class A and Class B common stock 17 19 
Additional paid-in capital 102,465 114,778 
Accumulated deficit (25,771)(6,558)
Accumulated other comprehensive loss  (3)
Total stockholders’ equity 76,711 108,236 
Total liabilities and stockholders’ equity $104,494 $149,093 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


5

Table of Contents
BANDWIDTH INC.
Condensed Consolidated Statements of Operations and Comprehensive Income
(In thousands, except share and per share amounts)
(Unaudited)
Three months ended
September 30, 
Nine months ended
September 30, 
2017201820172018
Revenue $41,338 $50,454 $120,489 $151,770 
Cost of revenue 22,571 27,474 66,431 79,404 
Gross profit 18,767 22,980 54,058 72,366 
Operating expenses: 
Research and development 2,771 5,895 7,862 14,111 
Sales and marketing 3,128 5,422 8,099 14,598 
General and administrative 9,797 11,576 25,691 33,635 
Total operating expenses 15,696 22,893 41,652 62,344 
Operating income 3,071 87 12,406 10,022 
Other (expense) income, net (538)103 (1,950)242 
Income before taxes 2,533 190 10,456 10,264 
Income tax (provision) benefit (899)2,320 (3,886)8,949 
Net income $1,634 $2,510 $6,570 $19,213 
Other comprehensive loss 
Unrealized loss on marketable securities, net of income tax benefit $ $(1)$ $(3)
Total comprehensive income $1,634 $2,509 $6,570 $19,210 
Earnings per share: 
Net income$1,634 $2,510 $6,570 $19,213 
Less: net income allocated to participating securities 213  858  
Net income attributable to common stockholders $1,421 $2,510 $5,712 $19,213 
Net income per share: 
Basic $0.12 $0.13 $0.48 $1.05 
Diluted $0.11 $0.12 $0.42 $0.91 
Weighted average number of common shares outstanding: 
Basic 11,828,657 19,072,196 11,814,045 18,300,435 
Diluted 13,252,737 21,146,124 13,487,649 21,065,802 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

Table of Contents

BANDWIDTH INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

Nine months ended
September 30, 
20172018
Operating activities 
Net income $6,570 $19,213 
Adjustments to reconcile net income to net cash provided by operating activities: 
Depreciation and amortization 4,272 4,109 
Accretion of bond discount  (80)
Amortization of debt issuance costs 96 48 
Stock-based compensation 1,102 2,017 
Change in fair value of shareholders’ anti-dilutive arrangement 689  
Deferred taxes 3,450 (9,041)
Loss on disposal of property and equipment 55 27 
Changes in operating assets and liabilities: 
Accounts receivable (1,864)(2,555)
Prepaid expenses and other assets (1,470)(1,122)
Deferred costs (3,556)345 
Accounts payable (2,339)(778)
Accrued expenses and other liabilities 1,267 6,471 
Deferred revenue and advanced billings 1,405 5,347 
Net cash provided by operating activities 9,677 24,001 
Investing activities 
Purchase of property and equipment (2,155)(4,921)
Capitalized software development costs (2,586)(3,511)
Proceeds from sale of property and equipment 3 3 
Purchase of marketable securities  (23,860)
Maturities of marketable securities  9,000 
Net cash used in investing activities (4,738)(23,289)
Financing activities 
Borrowings on line of credit 4,000  
Repayments on line of credit (9,000) 
Payments on capital leases (49)(74)
Repayments on term loan (1,500) 
Payment of costs related to the initial public offering  (285)
Proceeds from issuances of common stock 174 10,584 
Net cash (used in) provided by financing activities (6,375)10,225 
Net (decrease) increase in cash, cash equivalents, and restricted cash (1,436)10,937 
Cash, cash equivalents, and restricted cash, beginning of period 7,028 37,870 
Cash, cash equivalents, and restricted cash, end of period $5,592 $48,807 
Supplemental disclosure of cash flow information 
Cash paid during the year for interest $1,346 $74 
Cash paid for taxes $691 $155 
Supplemental disclosure of noncash investing and financing activities 
Purchase of property and equipment, accrued but not paid $168 $2,107 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7


BANDWIDTH INC.
Notes to Condensed Consolidated Financial Statements
(In thousands except share and per share amounts)
(Unaudited)

1. Organization and Description of Business 
Bandwidth Inc. (together with its subsidiaries, “Bandwidth” or the “Company”) was founded in July 2000 and incorporated in Delaware on March 29, 2001. The Company’s headquarters are located in Raleigh, North Carolina. The Company is a cloud-based, software-powered communications platform-as-a-service (“CPaaS”) provider that enables enterprises to create, scale and operate voice or text communications services across any mobile application or connected device.
The Company has two operating and reportable segments, CPaaS and Other. CPaaS revenue is derived from usage and monthly services fees charged for usage of Voice, Messaging, 911 and Phone Numbers solutions through the Company’s proprietary CPaaS software application programming interfaces. Other revenue consists of fees charged for services provided such as: SIP trunking, data resale, and a hosted Voice-over Internet Protocol (“VoIP”). The Other segment also includes revenue from traffic generated by other carriers, SMS registration fees and other miscellaneous product lines.

2. Summary of Significant Accounting Policies 
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting. Certain information and disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K filed with the SEC on February 26, 2018.
The condensed consolidated balance sheet as of December 31, 2017, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by GAAP on an annual reporting basis. Additionally, certain items in the prior period financial statements have been reclassified to conform with the current year presentation.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive income and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2018 or any future period.
Principles of Consolidation
The consolidated financial statements include the accounts of Bandwidth Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

8


Notes to Condensed Consolidated Financial Statements (continued)
(In thousands except share and per share amounts)
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the amounts reported in these financial statements and accompanying notes. Although the Company believes that the estimates it uses are reasonable, due to the inherent uncertainty involved in making these estimates, actual results reported in future periods could differ from those estimates. These estimates in the consolidated financial statements include, but are not limited to, allowance for doubtful accounts, recoverability of long lived and intangible assets, customer relationship period, valuation allowances on tax assets, certain accrued expenses, and contingencies.
Cash and Cash Equivalents
The Company classifies all highly liquid investments with stated maturities of three months or less from date of purchase as cash equivalents and all highly liquid investments with stated maturities of greater than three months from the date of purchase as current marketable securities. The Company has a policy of making investments only with commercial institutions that have at least an investment grade credit rating. The Company invests its cash primarily in government securities and obligations, corporate debt securities, money market funds and reverse repurchase agreements (RRAs). RRAs are collateralized by deposits in the form of Government Securities and Obligations for an amount not less than 102% of their value. The Company does not record an asset or liability as the Company is not permitted to sell or repledge the associated collateral. The Company has a policy that the collateral has at least an "A" (or equivalent) credit rating. The Company utilizes a third party custodian to manage the exchange of funds and ensure that collateral received is maintained at 102% of the value of the RRAs on a daily basis. RRAs with stated maturities of greater than three months from the date of purchase are classified as marketable securities.

Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows:
For the nine months ended September 30, 2018:
December 31, 2017September 30, 2018
Cash and cash equivalents $37,627 $48,574 
Restricted cash 243 233 
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows $37,870 $48,807 
For the nine months ended September 30, 2017:
December 31, 2016September 30, 2017
Cash and cash equivalents $6,788 $5,366 
Restricted cash 240 226 
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows $7,028 $5,592 
Restricted cash is for Automated Clearing House (“ACH”) availability, customer deposits and for credit card security. The Company has classified this asset as a long-term asset in order to match the expected period of restriction and is included in Other long-term assets in the condensed consolidated balance sheets.
9


Notes to Condensed Consolidated Financial Statements (continued)
(In thousands except share and per share amounts)
Concentration of Credit Risk
Financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents, marketable securities and trade accounts receivable. Cash deposits may be in excess of insured limits. The Company believes that the financial institutions that hold its cash deposits are financially sound and, accordingly, minimal credit risk exists with respect to these balances.
With regard to customers, credit evaluation and account monitoring procedures are used to minimize the risk of loss. The Company believes that no additional credit risk beyond amounts provided for by the allowance for doubtful accounts are inherent in accounts receivable. As of December 31, 2017, one customer represented approximately 13% of the Company’s accounts receivable, net of allowance for doubtful accounts. As of September 30, 2018, one customer represented approximately 11% of the Company’s accounts receivable, net of allowance for doubtful accounts.
For the three and nine months ended September 30, 2017 and 2018, no individual customer represented more than 10% of the Company’s total revenue.
Recently Adopted Accounting Standards
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09, Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements. The ASU 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 was effective for fiscal years and interim periods within those years beginning after December 15, 2017. The adoption of this standard did not have a material impact on the Company’s financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business, which amends the guidance of FASB Accounting Standards Codification Topic 805, “Business Combinations,” adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. This guidance was effective for annual and interim periods beginning after December 15, 2017. The impact from the adoption of this standard is dependent upon future transactions.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, which requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 was effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. The adoption of this standard did not have a material impact on the Company’s financial statements. 

In November 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires companies to account for the income tax effects of intercompany transfers of assets other than inventory (e.g., intangible assets) when the transfer occurs. This guidance was effective for fiscal years beginning after December 15, 2017. The adoption of this standard did not have a material impact on the Company’s financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments, which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should
10


Notes to Condensed Consolidated Financial Statements (continued)
(In thousands except share and per share amounts)
be applied when cash receipts and cash payments have aspects of more than one class of cash flows. ASU 2016-15 was effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company adopted this standard retrospectively and it had no material impact on the Company’s financial statements.

Recent Accounting Pronouncements Not Yet Adopted
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which addresses the income tax effects of items in accumulated other comprehensive income (“AOCI”) which were originally recognized in other comprehensive income, rather than in income from continuing operations. Specifically, it permits a reclassification from AOCI to retained earnings for the adjustment of deferred taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate resulting from the U.S. tax law changes enacted in December 2017. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The new guidance must be applied either on a prospective basis in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the U.S. tax law changes are recognized. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company’s financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment. The ASU requires impairment charges to be based on the first step in today’s two-step impairment test. ASU 2017-04 is effective for annual and interim impairment tests performed in periods beginning after December 15, 2021, and early adoption is permitted. Management does not expect the adoption of this guidance to have a significant impact on the Company’s financial statements.

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. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of the new leases standard. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, to give entities another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. 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 the Company expects the adoption of this standard to result in an increase to the reported assets and liabilities, it has not yet determined the full impact the adoption of this standard will have on its 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 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 the Company beginning in the year ended December 31, 2019. This guidance can be applied either retrospectively to each period presented or as a cumulative effect
11


Notes to Condensed Consolidated Financial Statements (continued)
(In thousands except share and per share amounts)
adjustment as of the date of adoption. 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 the Company beginning January 1, 2019.

The Company has selected the modified retrospective transition method of adoption and is in the process of completing its evaluation of the potential impacts of the new standard on its consolidated financial statements. While the Company has not yet completed the full analysis of the impact of the new standard, based on the Company’s evaluation to date, the Company does not believe there will be material changes to its revenue recognition. The Company expects that its revenue will continue to be recognized based on the usage by its customers, in the period the traffic traverses the Company’s network. The Company is still assessing the impact of the new standard on its accounting for sales commissions.

3. Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, marketable securities, accounts receivable, accounts payable and accrued expenses approximate fair value as of December 31, 2017 and September 30, 2018 because of the relatively short duration of these instruments. Marketable securities consist of U.S. treasury securities not otherwise classified as cash equivalents. All marketable securities are considered to be available-for-sale and are recorded at their estimated fair values. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive loss.
The Company evaluated its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. The following table summarizes the assets measured at fair value as of December 31, 2017 and September 30, 2018:
Fair value measurements on a recurring basis
December 31, 2017 
Level 1 Level 2 Level 3 Total 
Financial assets: 
Money market account (included in cash and cash equivalents $28,015 $ $ $28,015 
Total financial assets $28,015 $ $ $28,015 
There were no marketable securities as of December 31, 2017.

12


Notes to Condensed Consolidated Financial Statements (continued)
(In thousands except share and per share amounts)
Amortized cost or carrying value Unrealized gains Unrealized losses Fair value measurements on a recurring basis
September 30, 2018 
Level 1 Level 2 Level 3 Total 
Financial assets: 
Cash and cash equivalents: 
Money market account $15,406 $ $ $15,406 $ $ $15,406 
U.S. Reverse repurchase agreements 21,000    21,000  21,000 
Total included in cash and cash equivalents 36,406   15,406 21,000  36,406 
Marketable securities: 
U.S. treasury securities 14,940  (4)14,936  14,936 
Total marketable securities 14,940  (4)14,936   14,936 
Total financial assets $51,346 $ $(4)$30,342 $21,000 $ $51,342 
The Company classifies its marketable securities as current assets as they are available for current operating needs. The following table summarizes the contractual maturities of marketable securities as of September 30, 2018:
Amortized cost Aggregate fair value 
Financial assets: 
Less than one year $14,940 $14,936 
Total $14,940 $14,936 
For fixed income securities that had unrealized losses as of September 30, 2018, the Company determined that no other-than-temporary impairment existed. As of September 30, 2018, all securities in an unrealized loss position have been in an unrealized loss position for less than one year. During the three and nine months ended September 30, 2018, there were $6,000 and $9,000, respectively, in maturities of marketable securities. Interest earned on marketable securities in the three and nine months ended September 30, 2018 was $22 and $70, respectively, and is recorded as other (expense) income, net, in the accompanying condensed consolidated statements of operations and comprehensive income.

4. Financial Statement Components 
Accounts receivable, net of allowance for doubtful accounts consist of the following:
December 31,September 30,
20172018
Trade accounts receivable $44,692 $12,374 
Unbilled accounts receivable 8,653 11,831 
Allowance for doubtful accounts (32,463)(786)
Other accounts receivable 343 361 
Total accounts receivable, net $21,225 $23,780 

13


Notes to Condensed Consolidated Financial Statements (continued)
(In thousands except share and per share amounts)
Components of allowance for doubtful accounts are as follows:
Three months ended
September 30, 
Nine months ended
September 30, 
Allowance for doubtful accounts: 2017201820172018
Balance, beginning of period $112 $142 $255 $189 
Charged to bad debt expense 83 73 95 283 
Deductions (1) (19)(102)(174)(359)
Balance, end of period $176 $113 $176 $113 
________________________
(1) Write off of uncollectible accounts after all collection efforts have been exhausted. 
Three months ended
September 30, 
Nine months ended
September 30, 
Allowance for CABS revenue: 2017201820172018
Balance, beginning of period $27,401 $1,331 $22,316 $32,274 
Charged to bad debt expense  42  42 
Write-off of previously outstanding and fully reserved billings related to settlement    (24,968)
Billings deemed not probable of collection (1) 2,485 9 7,613 310 
Revenue recognized from outstanding billings previously deemed uncollectible related to settlement    (6,268)
Deductions (2) (22)(709)(65)(717)
Balance, end of period $29,864 $673 $29,864 $673 
________________________
(1) Represents amounts billed in the period but where collectibility is not probable based on customers collection experience. Amounts were charged to a contra-revenue account. 
(2) Write off of uncollectible accounts after all collection efforts have been exhausted.
 
Three months ended
September 30, 
Nine months ended
September 30, 
CABS revenue: 2017201820172018
Billed $4,992 $3,105 $14,501 $10,313 
Revenue recognized from current billings (2) 2,507 3,096 6,888 10,003 
Billings deemed not probable of collection (1) $2,485 $9 $7,613 $310 
________________________
(1) Represents amounts billed in the period but where collectibility is not probable based on customers collection experience. Amounts were charged to a contra-revenue account. 
(2) Does not include $6,268 in revenue recognized in the nine months ended September 30, 2018, as a result of a settlement agreement related to previously billed and outstanding and uncollectible invoices.

14


Notes to Condensed Consolidated Financial Statements (continued)
(In thousands except share and per share amounts)
On January 29, 2018, the Company and Verizon entered into a settlement agreement to resolve an ongoing dispute and litigation with Verizon, which is a CABS customer of the Company. The settlement agreement also resolved Verizon’s counter-claims against the Company. Pursuant to the settlement agreement, Verizon made a lump sum payment to the Company on February 8, 2018 of $4,400, which was recognized as revenue. Immediately following receipt of the $4,400 payment, the Company issued to Verizon bill credits with respect to other CABS amounts previously billed and reserved to Verizon of $24,968. The amount credited to Verizon comprised the majority of the allowance for CABS revenue as of December 31, 2017. The Company recognized as revenue $6,268, including the $4,400 payment made on February 8, 2018 and the other current outstanding Verizon CABS receivables which had been previously reserved as uncollectible, but for which collection was no longer in doubt as a result of the settlement. The settlement agreement also specifies certain terms for the Company’s CABS billings to Verizon prospectively.

Accrued expenses and other current liabilities consisted of the following:
December 31,September 30,
20172018
Accrued expense $6,851 $11,003 
Accrued compensation and benefits 5,237 5,243 
Accrued sales, use, and telecom related taxes 3,030 3,102 
Other accrued expenses 607 946 
Total accrued expenses and other current liabilities $15,725 $20,294 


5. Property and Equipment 
Property and equipment, net consisted of the following: 
December 31,September 30,
20172018
Furniture and fixtures $863 $1,338 
Computer and office equipment 7,545 7,342 
Telecommunications equipment 19,985 24,181 
Leasehold improvements 453 1,917 
Software development costs 15,517 19,121 
Automobile 10 10 
Total cost 44,373 53,909 
Less—accumulated depreciation (29,427)(32,139)
Total property and equipment, net $14,946 $21,770 
The Company capitalized $988 and $2,586 of software development costs in the three and nine months ended September 30, 2017, respectively, and $1,964 and $3,511 in the three and nine months ended September 30, 2018, respectively.

Amortization expense related to capitalized software development costs were $524 and $1,659 in the three and nine months ended September 30, 2017, respectively, and $432 and $1,305 in the three and nine months ended September 30, 2018, respectively.

15


Notes to Condensed Consolidated Financial Statements (continued)
(In thousands except share and per share amounts)
The Company recognized depreciation expense, which includes amortization of capitalized software development costs, as follows:
Three months ended
September 30, 
Nine months ended
September 30, 
2017201820172018
Cost of revenue $1,161 $1,135 $3,245 $3,214 
Research and development 29 47 51 108 
Sales and marketing 6 13 20 35 
General and administrative 45 101 327 328 
Total depreciation expense $1,241 $1,296 $3,643 $3,685 

6. Intangible Assets 
Intangible assets consisted of the following as of December 31, 2017:
Gross
Amount 
Accumulated
Amortization 
Net Carrying
Value 
Amortization
Period 
(Years) 
Customer relationships $10,396 $(3,552)$6,844 20
Domain name and related trademarks 2,678 (2,643)35 3–7
Licenses, amortizable 341 (341) 2
Non-compete agreements 139 (139) 2–5
Developed technology 775 (775) 3
Licenses, indefinite lived 764 — 764 Indefinite 
Total intangible assets, net $15,093 $(7,450)$7,643 
Intangible assets consisted of the following as of September 30, 2018:
Gross
Amount 
Accumulated
Amortization 
Net Carrying
Value 
Amortization
Period 
(Years) 
Customer relationships $10,396 $(3,941)$6,455 20
Domain name and related trademarks 2,678 (2,678) 3–7
Licenses, amortizable 341 (341) 2
Non-compete agreements 139 (139) 2–5
Developed technology 775 (775) 3
Licenses, indefinite lived 764 — 764 Indefinite 
Total intangible assets, net $15,093 $(7,874)$7,219 
Amortization expense for definite lived intangible assets was $210 and $629 in the three and nine months ended September 30, 2017, respectively, and $130 and $424 in the three and nine months ended September 30, 2018, respectively.
16


Notes to Condensed Consolidated Financial Statements (continued)
(In thousands except share and per share amounts)
Future estimated amortization expense for definite lived intangible assets subsequent to September 30, 2018 is as follows:
Amount 
2018 (remaining) $130 
2019520 
2020520 
2021520 
2022520 
Thereafter 4,245 
$6,455 

7. Debt 
Revolving Loan

As of December 31, 2017 and September 30, 2018, the Company had $0 outstanding on the revolving loan and was in compliance with all financial and non-financial covenants for all periods presented. The available borrowing capacity under the revolving loan was $25,000 as of September 30, 2018.

As of December 31, 2017 and September 30, 2018, the outstanding unamortized loan fees associated with the availability of the revolving loan were $175 and $127, respectively, and are included in other long-term assets.

Capital Leases

The Company leases various equipment under leases accounted for as capital leases with expiration dates through December 2018. As of December 31, 2017, cost and accumulated depreciation of the assets under capital leases recorded by the Company were $1,951 and $1,855, respectively. As of September 30, 2018, cost and accumulated depreciation of the assets under capital leases recorded by the Company were $1,951 and $1,879, respectively.

Remaining payments due on the Company’s capital lease obligations as of September 30, 2018, are as follows:
Amount 
2018 (remaining) $17 
Less amount representing interest  
Current portion of long-term capital lease obligation (1) 17 
Less current maturities 17 
Long-term capital lease obligation $ 
______________________
(1) Included in accrued expenses and other current liabilities on the condensed consolidated balance sheets.

8. Segment and Geographic Information 
The Company has two reportable segments, CPaaS and Other. Segments are primarily evaluated based on revenue and gross profit. The Company does not allocate operating expenses, interest expense or income tax expense to its segments. Accordingly, the Company does not report such information. Additionally, the Chief Operating Decision Maker does not evaluate the Company’s operating segments using discrete asset information. The segments share the majority of the Company’s assets. Therefore, no segment asset information is reported.
17


Notes to Condensed Consolidated Financial Statements (continued)
(In thousands except share and per share amounts)
Three months ended
September 30, 
Nine months ended
September 30, 
2017201820172018
CPaaS 
Revenue $33,397 $41,537 $96,591 $120,267 
Cost of revenue 19,247 23,996 56,394 69,038 
Gross profit $14,150 $17,541 $40,197 $51,229 
Other 
Revenue $7,941 $8,917 $23,898 $31,503 
Cost of revenue 3,324 3,478 10,037 10,366 
Gross profit $4,617 $5,439 $13,861 $21,137 
Consolidated 
Revenue $41,338 $50,454 $120,489 $151,770 
Cost of revenue 22,571 27,474 66,431 79,404 
Gross profit $18,767 $22,980 $54,058 $72,366 
All assets were held in the United States as of December 31, 2017 and September 30, 2018.

The Company generates its revenue primarily in the United States. Revenue by geographical area is detailed in the table below (which is determined based on the customer billing address):
Three months ended
September 30, 
Nine months ended
September 30, 
2017201820172018
United States $41,188 $50,325 $120,090 $151,303 
International 150 129 399 467 
Total $41,338 $50,454 $120,489 $151,770 

9. Stockholders’ Equity 
Preferred Stock
As of December 31, 2017 and September 30, 2018, the Company had authorized 10,000,000 shares of undesignated preferred stock, par value $0.001, of which no shares were issued and outstanding.

Common Stock
As of December 31, 2017 and September 30, 2018, the Company had authorized 100,000,000 shares of Class A common stock with one vote per share and 20,000,000 shares of Class B common stock with ten votes per share, each par value $0.001. As of December 31, 2017, 4,197,831 and 13,440,724 shares of Class A and B common stock, respectively, were issued and outstanding. As of September 30, 2018, 12,347,482 and 7,001,405 shares of Class A and B common stock, respectively, were issued and outstanding.
Shares of Class B common stock are convertible into shares of Class A common stock upon the stockholder’s voluntary written notice to the Company’s transfer agent or a transfer by the stockholder, subject to limited exceptions for transfers for estate planning purposes.

18


Notes to Condensed Consolidated Financial Statements (continued)
(In thousands except share and per share amounts)
The Company had reserved shares of common stock for issuance under stock-based award agreements as follows:
December 31,September 30,
20172018
Stock options issued and outstanding 3,659,791