TWILIO INC, 10-K filed on 3/1/2018
Annual Report
Document and Entity Information (USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Jun. 30, 2017
Jan. 31, 2018
Common Class A
Jan. 31, 2018
Common Class B
Entity Registrant Name
TWILIO INC 
 
 
 
Entity Central Index Key
0001447669 
 
 
 
Document Type
10-K 
 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
 
Amendment Flag
false 
 
 
 
Current Fiscal Year End Date
--12-31 
 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
 
Entity Voluntary Filers
No 
 
 
 
Entity Current Reporting Status
Yes 
 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
 
Entity Public Float
 
$ 1,678 
 
 
Entity Common Stock, Shares Outstanding
 
 
70,176,391 
24,054,845 
Document Fiscal Year Focus
2017 
 
 
 
Document Fiscal Period Focus
FY 
 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 115,286 
$ 305,665 
Short-term marketable securities
175,587 
Accounts receivable, net
43,113 
26,203 
Prepaid expenses and other current assets
19,279 
21,512 
Total current assets
353,265 
353,380 
Restricted cash
5,502 
7,445 
Property and equipment, net
50,541 
37,552 
Intangible assets, net
20,064 
10,268 
Goodwill
17,851 
3,565 
Other long-term assets
2,559 
484 
Total assets
449,782 
412,694 
Current liabilities:
 
 
Accounts payable
11,116 
4,174 
Accrued expenses and other current liabilities
53,614 
59,308 
Deferred revenue
13,797 
10,222 
Total current liabilities
78,527 
73,704 
Long-term liabilities
11,409 
9,543 
Total liabilities
89,936 
83,247 
Commitments and contingencies (Note 10)
   
   
Stockholders' equity:
 
 
Preferred stock, $0.001 par value, 100,000,000 shares authorized, none issued
   
   
Common stock, $0.001 par value per share: Authorized shares 1,100,000,000 as of December 31, 2017 and 2016; Issued and outstanding shares 93,969,796 and 87,248,548 as of December 31, 2017 and 2016
94 
87 
Additional paid-in capital
608,165 
516,090 
Accumulated other comprehensive income
2,025 
 
Accumulated deficit
(250,438)
(186,730)
Total stockholders' equity
359,846 
329,447 
Total liabilities and stockholders' equity
$ 449,782 
$ 412,694 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2017
Dec. 31, 2016
Preferred Stock
 
 
Preferred stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Preferred stock, authorized (in shares)
100,000,000 
100,000,000 
Preferred stock, issued (in shares)
Common Stock
 
 
Common stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Common stock, authorized (in shares)
1,100,000,000 
1,100,000,000 
Common stock, issued (in shares)
93,969,796 
87,248,548 
Common stock, outstanding (in shares)
93,969,796 
87,248,548 
Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Consolidated Statements of Operations
 
 
 
Revenue
$ 399,020 
$ 277,335 
$ 166,919 
Cost of revenue
182,895 
120,520 
74,454 
Gross profit
216,125 
156,815 
92,465 
Operating expenses:
 
 
 
Research and development
120,739 
77,926 
42,559 
Sales and marketing
100,669 
65,267 
49,308 
General and administrative
59,619 
51,077 
35,991 
Charitable contribution
1,172 
3,860 
 
Total operating expenses
282,199 
198,130 
127,858 
Loss from operations
(66,074)
(41,315)
(35,393)
Other income (expenses), net
3,071 
317 
11 
Loss before provision for income taxes
(63,003)
(40,998)
(35,382)
Provision for income taxes
(705)
(326)
(122)
Net loss
(63,708)
(41,324)
(35,504)
Deemed dividend to investors in relation to tender offer
 
 
(3,392)
Net loss attributable to common stockholders
$ (63,708)
$ (41,324)
$ (38,896)
Net loss per share attributable to common stockholders, basic and diluted (in dollars per share)
$ (0.70)
$ (0.78)
$ (2.19)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted (in shares)
91,224,607 
53,116,675 
17,746,526 
Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Consolidated Statements of Comprehensive Loss
 
 
 
Net loss
$ (63,708)
$ (41,324)
$ (38,896)
Other comprehensive income:
 
 
 
Unrealized loss on marketable securities
(598)
 
 
Foreign currency translation
2,623 
 
 
Total other comprehensive income
2,025 
 
 
Comprehensive loss attributable to common stockholders
$ (61,683)
$ (41,324)
$ (38,896)
Consolidated Statements of Stockholders' Equity (USD $)
In Thousands, except Share data, unless otherwise specified
IPO
Common Stock
Common Class A
USD ($)
IPO
Additional Paid-in Capital
USD ($)
IPO
Common Class A
IPO
USD ($)
Follow-on Public Offering
Common Stock
Common Class A
USD ($)
Follow-on Public Offering
Additional Paid-in Capital
USD ($)
Follow-on Public Offering
Common Class A
Follow-on Public Offering
USD ($)
Preferred Stock
Convertible preferred stock
USD ($)
Common Stock
Common Class A
USD ($)
Common Stock
Common Class B
USD ($)
Additional Paid-in Capital
USD ($)
Accumulated Other Comprehensive Income
USD ($)
Accumulated Deficit
USD ($)
Common Class A
Common Class B
Total
USD ($)
Beginning balance at Dec. 31, 2014
 
 
 
 
 
 
 
 
$ 111,691 
 
$ 17 
$ 8,920 
 
$ (89,434)
 
 
$ 31,194 
Beginning balance (in shares) at Dec. 31, 2014
 
 
 
 
 
 
 
 
42,482,490 
 
17,446,051 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(35,504)
 
 
(35,504)
Issuance of stock
 
 
 
 
 
 
 
 
125,448 
 
 
 
 
 
 
 
125,448 
Issuance of stock (in shares)
 
 
 
 
 
 
 
 
11,494,249 
 
 
 
 
 
 
 
 
Exercise of vested stock options
 
 
 
 
 
 
 
 
 
 
3,126 
 
 
 
 
3,128 
Exercise of vested stock options (in shares)
 
 
 
 
 
 
 
 
 
 
1,696,318 
 
 
 
 
 
 
Vesting of early exercised stock options
 
 
 
 
 
 
 
 
 
 
 
201 
 
 
 
 
201 
Exercises of unvested stock options (in shares)
 
 
 
 
 
 
 
 
 
 
70,874 
 
 
 
 
 
 
Repurchase of shares in tender offer
 
 
 
 
 
 
 
 
(315)
 
(2)
 
 
(17,076)
 
 
(17,393)
Repurchase of shares in tender offer (in shares)
 
 
 
 
 
 
 
 
(365,916)
 
(1,869,156)
 
 
 
 
 
 
Deemed dividend in relation to tender offer
 
 
 
 
 
 
 
 
 
 
 
 
 
(3,392)
 
 
(3,392)
Repurchase of unvested stock options (in shares)
 
 
 
 
 
 
 
 
 
 
(20,084)
 
 
 
 
 
 
Issuance of Series T convertible preferred Stock in acquisition
 
 
 
 
 
 
 
 
3,087 
 
 
 
 
 
 
 
3,087 
Issuance of Series T convertible preferred Stock in acquisition (in shares)
 
 
 
 
 
 
 
 
897,618 
 
 
 
 
 
 
 
 
Stock-based compensation
 
 
 
 
 
 
 
 
 
 
 
9,856 
 
 
 
 
9,856 
Ending balance at Dec. 31, 2015
 
 
 
 
 
 
 
 
239,911 
 
17 
22,103 
 
(145,406)
 
 
116,625 
Ending balance (in shares) at Dec. 31, 2015
 
 
 
 
 
 
 
 
54,508,441 
 
17,324,003 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(41,324)
 
 
(41,324)
Issuance of stock
12 
160,414 
 
160,426 
65,279 
 
65,281 
 
 
 
 
 
 
 
 
 
Issuance of stock (in shares)
11,500,000 
 
 
 
1,691,222 
 
 
 
 
 
 
 
 
 
 
 
 
Costs related to public offerings
 
 
 
(4,900)
 
 
 
(800)
 
 
 
(5,730)
 
 
 
 
(5,730)
Conversion of convertible preferred stock to common stock in connection with initial public offering
 
 
 
 
 
 
 
 
(239,911)
 
54 
239,857 
 
 
 
 
 
Conversion of convertible preferred stock to common stock in connection with initial public offering (in shares)
 
 
 
 
 
 
 
 
(54,508,441)
 
54,508,441 
 
 
 
 
 
 
Exercise of vested stock options
 
 
 
 
 
 
 
 
 
 
8,390 
 
 
 
 
8,392 
Exercise of vested stock options (in shares)
 
 
 
 
 
 
 
 
 
 
2,168,287 
 
 
 
 
 
 
Vesting of early exercised stock options
 
 
 
 
 
 
 
 
 
 
 
636 
 
 
 
 
636 
Vesting of restricted stock units (in shares)
 
 
 
 
 
 
 
 
 
19,178 
68,345 
 
 
 
 
 
 
Value of equity awards withheld for tax liability
 
 
 
 
 
 
 
 
 
 
 
(1,037)
 
 
 
 
(1,037)
Value of equity awards withheld for tax liability (in shares)
 
 
 
 
 
 
 
 
 
(1,578)
(27,036)
 
 
 
 
 
 
Exercises of unvested stock options (in shares)
 
 
 
 
 
 
 
 
 
 
126,365 
 
 
 
 
 
 
Conversion of shares of Class B common stock into shares of Class A common stock
 
 
 
 
 
 
 
 
 
37 
(37)
 
 
 
 
 
 
Conversion of shares of Class B common stock into shares of Class A common stock (in shares)
 
 
 
 
 
 
 
 
 
36,787,588 
(36,787,588)
 
 
 
 
 
 
Repurchase of unvested stock options (in shares)
 
 
 
 
 
 
 
 
 
 
(1,625)
 
 
 
 
 
 
Stock-based compensation
 
 
 
 
 
 
 
 
 
 
 
26,178 
 
 
 
 
26,178 
Escrow shares returned to the issuer (in shares)
 
 
 
 
 
 
 
 
 
 
(127,054)
 
 
 
 
 
 
Ending balance at Dec. 31, 2016
 
 
 
 
 
 
 
 
 
51 
36 
516,090 
 
(186,730)
 
 
329,447 
Ending balance (in shares) at Dec. 31, 2016
 
 
 
 
 
 
 
 
 
49,996,410 
37,252,138 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(63,708)
 
 
(63,708)
Exercise of vested stock options
 
 
 
 
 
 
 
 
 
 
25,591 
 
 
 
 
25,597 
Exercise of vested stock options (in shares)
 
 
 
 
 
 
 
 
 
 
5,186,539 
 
 
 
 
 
 
Vesting of early exercised stock options
 
 
 
 
 
 
 
 
 
 
 
378 
 
 
 
 
378 
Vesting of restricted stock units (in shares)
 
 
 
 
 
 
 
 
 
360,116 
351,255 
 
 
 
 
 
 
Value of equity awards withheld for tax liability
 
 
 
 
 
 
 
 
 
 
 
(678)
 
 
 
 
(678)
Value of equity awards withheld for tax liability (in shares)
 
 
 
 
 
 
 
 
 
 
(22,538)
 
 
 
 
 
 
Exercises of unvested stock options (in shares)
 
 
 
 
 
 
 
 
 
 
22,510 
 
 
 
 
 
 
Conversion of shares of Class B common stock into shares of Class A common stock
 
 
 
 
 
 
 
 
 
18 
(18)
 
 
 
 
 
 
Conversion of shares of Class B common stock into shares of Class A common stock (in shares)
 
 
 
 
 
 
 
 
 
18,710,499 
(18,710,499)
 
 
 
 
 
 
Shares issued under ESPP
 
 
 
 
 
 
 
 
 
 
11,917 
 
 
 
 
11,918 
Shares issued under ESPP (in shares)
 
 
 
 
 
 
 
 
 
794,142 
 
 
 
 
 
 
 
Donated common stock
 
 
 
 
 
 
 
 
 
 
 
1,172 
 
 
 
 
1,172 
Donated common stock (in shares)
 
 
 
 
 
 
 
 
 
45,383 
 
 
 
 
 
 
 
Repurchase of unvested stock options
 
 
 
 
 
 
 
 
 
 
 
(100)
 
 
 
 
(100)
Repurchase of unvested stock options (in shares)
 
 
 
 
 
 
 
 
 
 
(16,159)
 
 
 
 
 
 
Unrealized loss on marketable securities
 
 
 
 
 
 
 
 
 
 
 
 
(598)
 
 
 
(598)
Foreign currency translation
 
 
 
 
 
 
 
 
 
 
 
 
2,623 
 
 
 
2,623 
Stock-based compensation
 
 
 
 
 
 
 
 
 
 
 
53,795 
 
 
 
 
53,795 
Ending balance at Dec. 31, 2017
 
 
 
 
 
 
 
 
 
$ 70 
$ 24 
$ 608,165 
$ 2,025 
$ (250,438)
 
 
$ 359,846 
Ending balance (in shares) at Dec. 31, 2017
 
 
 
 
 
 
 
 
 
69,906,550 
24,063,246 
 
 
 
 
 
 
Consolidated Statements of Stockholders' Equity (Parenthetical) (Preferred Stock, Series E Preferred Stock, USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Preferred Stock |
Series E Preferred Stock
 
Consolidated Statements of Stockholders' Equity
 
Costs related to issuance of stock
$ 4.6 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$ (63,708)
$ (41,324)
$ (35,504)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
18,764 
8,315 
4,226 
Amortization of bond premium
262 
 
 
Stock-based compensation
49,619 
24,225 
8,877 
Value of donated common stock
1,172 
 
 
Provision for doubtful accounts
580 
1,145 
705 
Tax benefit related to acquisition
 
 
(108)
Write-off of internal-use software
561 
711 
113 
(Gain) loss on lease termination
(295)
94 
 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(15,280)
(8,254)
(10,506)
Prepaid expenses and other current assets
2,214 
(13,755)
(2,128)
Other long-term assets
(1,989)
(135)
(162)
Accounts payable
5,433 
1,714 
658 
Accrued expenses and other current liabilities
(3,312)
24,182 
13,202 
Deferred revenue
3,560 
4,076 
1,974 
Long-term liabilities
(841)
9,097 
(109)
Net cash provided by (used in) operating activities
(3,260)
10,091 
(18,762)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
(Increase) decrease in restricted cash
3,118 
(7,439)
 
Purchases of marketable securities
(293,186)
 
 
Maturities of marketable securities
115,877 
 
 
Capitalized software development costs
(17,280)
(11,527)
(8,409)
Purchases of property and equipment
(9,248)
(14,174)
(1,715)
Purchases of intangible assets
(290)
(785)
(494)
Acquisition, net of cash acquired
(22,621)
(8,500)
(1,761)
Net cash used in investing activities
(223,630)
(42,425)
(12,379)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from Initial Public Offering, net of underwriting discounts
 
160,426 
 
Proceeds from Follow-On Public Offering, net of underwriting discounts
 
65,281 
 
Payments of costs related to public offerings
(430)
(4,606)
(694)
Net proceeds from issuance of convertible preferred stock
 
 
125,448 
Proceeds from exercises of vested options
25,597 
8,392 
3,128 
Proceeds from exercises of nonvested options
130 
710 
277 
Proceeds from shares issued in ESPP
11,918 
 
 
Value of equity awards withheld for tax liabilities
(678)
(1,037)
 
Repurchases of common and preferred stock
(100)
(2)
(20,810)
Net cash provided by financing activities
36,437 
229,164 
107,349 
Effect of exchange rate changes on cash and cash equivalents
74 
 
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(190,379)
196,830 
76,208 
CASH AND CASH EQUIVALENTS-Beginning of year
305,665 
108,835 
32,627 
CASH AND CASH EQUIVALENTS-End of year
115,286 
305,665 
108,835 
Cash paid for income taxes
605 
225 
46 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Purchases of property, equipment and intangible assets, accrued but not paid
235 
4,201 
97 
Stock-based compensation capitalized in software development costs
4,176 
1,953 
979 
Vesting of early exercised options
378 
636 
201 
Business combination measurement period adjustments
(149)
 
 
Series T convertible preferred stock issued as part of purchase price in the Authy acquisition
 
 
3,087 
Costs related to public offerings, accrued but not paid
 
$ 430 
$ 1,265 
Organization and Description of Business
Organization and Description of Business

1. Organization and Description of Business

        Twilio Inc. (the "Company") was incorporated in the state of Delaware on March 13, 2008. The Company is the leader in the Cloud Communications Platform category and enables developers to build, scale and operate real-time communications within their software applications via simple-to-use Application Programming Interfaces, or API. The power, flexibility, and reliability offered by the Company's software building blocks empower entities of virtually every shape and size to build world-class engagement into their customer experience.

        The Company's headquarters are located in San Francisco, California and the Company has subsidiaries in the United Kingdom, Estonia, Ireland, Colombia, Germany, Hong Kong, Singapore, Bermuda, Spain, Sweden and Australia.

Initial Public Offering

        In June 2016, the Company completed an initial public offering ("IPO") in which the Company sold 11,500,000 shares of its newly authorized Class A common stock, which included 1,500,000 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at the public offering price of $15.00 per share. The Company received net proceeds of $155.5 million, after deducting underwriting discounts and offering expenses paid by the Company, from the sale of its shares in the IPO. Immediately prior to the completion of the IPO, all shares of common stock then outstanding were reclassified as shares of Class B common stock and all shares of convertible preferred stock then outstanding were converted into 54,508,441 shares of common stock on a one-to-one basis, and then reclassified as shares of Class B common stock. See Note 11 for further discussion of Class A and B common stock.

Follow-on Public Offering

        In October 2016, the Company completed a follow-on public offering ("FPO") in which the Company sold 1,691,222 shares of its Class A common stock, which included 1,050,000 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at a public offering price of $40.00 per share. In addition, another 6,358,778 shares of the Company's Class A common stock were sold by the selling stockholders of the Company, which included 906,364 shares sold pursuant to the exercise of employee stock options by certain selling stockholders. The Company received aggregate proceeds of $64.4 million, after deducting underwriting discounts and offering expenses paid and payable by the Company. The Company did not receive any of the net proceeds from the sales of shares by the selling stockholders.

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

 

 

 

           

(a)          

Basis of Presentation

        The Company's consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP").

 

 

 

           

(b)          

Principles of Consolidation

        The consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

 

 

 

           

(c)          

Use of Estimates

        The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are used for, but not limited to, revenue allowances and returns; valuation of the Company's stock and stock-based awards; recoverability of long-lived and intangible assets; capitalization and useful life of the Company's capitalized internal-use software development costs; fair value of acquired intangible assets and goodwill; accruals and contingencies. Estimates are based on historical experience and on various assumptions that the Company believes are reasonable under current circumstances. However, future events are subject to change and best estimates and judgments may require further adjustments; therefore, actual results could differ materially from those estimates. Management periodically evaluates such estimates and they are adjusted prospectively based upon such periodic evaluation.

 

 

 

           

(d)          

Concentration of Credit Risk

        Financial instruments that potentially expose the Company to a concentration of credit risk consist primarily of cash, cash equivalents, marketable securities, restricted cash and accounts receivable. The Company maintains cash, cash equivalents, restricted cash and marketable securities with financial institutions that management believes are financially sound and have minimal credit risk exposure although the balances will exceed insured limits.

        The Company sells its services to a wide variety of customers. If the financial condition or results of operations of any significant customers deteriorate substantially, operating results could be adversely affected. To reduce credit risk, management performs ongoing credit evaluations of the financial condition of significant customers. The Company does not require collateral from its credit customers and maintains reserves for estimated credit losses on customer accounts when considered necessary. Actual credit losses may differ from the Company's estimates. During the year ended December 31, 2017, there was no customer organization that accounted for more than 10% of the Company's total revenue. During the year ended December 31, 2016, one customer organization represented approximately 14% of the Company's total revenue. During the year ended December 31, 2015, a different customer organization represented approximately 17% of the Company's total revenue.

        As of December 31, 2017, no customer organizations represented more than 10% of the Company's gross accounts receivable. As of December 31, 2016, one customer organization represented approximately 16% of the Company's gross accounts receivable.

 

 

 

           

(e)          

Revenue Recognition

        The Company derives its revenue primarily from usage-based fees earned from customers accessing the Company's enterprise cloud computing services invoiced or paid monthly. The Company provides services to its customers under pay-as-you-go contracts and term-based contracts ranging in duration from one month to 48 months. Customers that pay via credit card are either billed in advance or as they use service. Larger customers are billed in arrears via invoices for services used. Certain customers have contracts that provide for a minimum monthly commitment and some customers have contracts that provide for a commitment that may be of a quarterly, annual or other specific durations.

        The Company recognizes revenue from these transactions when all of the following criteria are satisfied:

 

 

 

           

•          

there is persuasive evidence of an arrangement; 

           

•          

the service has been or is being provided to the customer; 

           

•          

the amount of the fees to be paid by the customer is fixed or determinable; and 

           

•          

collectability of the fees is reasonably assured.

        Term-based contracts revenue is recognized on a straight-line basis over the contractual term of the arrangement beginning on the date that the service is made available to the customer, provided that all other revenue recognition criteria have been met. Usage-based fees are recognized as delivered.

        The Company's arrangements do not contain general rights of return. However, credits may be issued to customers on a case-by-case basis. The contracts do not provide customers with the right to take possession of the software supporting the applications. Amounts that have been invoiced are recorded in accounts receivable and in revenue or deferred revenue, depending on whether the revenue recognition criteria have been met.

        The reserve for sales credits was $1.8 million and $0.5 million as of December 31, 2017 and 2016, respectively, and is included in accounts receivable, net in the accompanying consolidated balance sheets. The reserve for sales credits is calculated based on historical trends and any specific risks identified in processing transactions. Changes in the reserve are recorded against revenue.

        The Company collects various taxes and fees as an agent in connection with the sale of its services and remits these amounts to the respective taxing authorities. These taxes and fees have been presented on a net basis in the consolidated statements of operations and are recorded as a component of accrued liabilities in the accompanying consolidated balance sheets until remitted to the respective taxing authority.

 

 

 

           

(f)          

Cost of Revenue

        Cost of revenue consists primarily of costs of communications services purchased from network service providers. Cost of revenue also includes fees to support the Company's cloud infrastructure, personnel costs, such as salaries and stock-based compensation for the customer care and support services employees, and non-personnel costs, such as amortization of capitalized internal-use software development costs.

 

 

 

           

(g)          

Research and Development Expenses

        Research and development expenses consist primarily of personnel costs, cloud infrastructure fees for staging and development, outsourced engineering services, amortization of capitalized internal-use software development costs and an allocation of general overhead expenses. The Company capitalizes the portion of its software development costs that meets the criteria for capitalization.

 

 

 

           

(h)          

Internal-Use Software Development Costs

        Certain costs of platform and other software applications developed for internal use are capitalized. The Company capitalizes qualifying internal-use software development costs that are incurred during the application development stage. Capitalization of costs begins when two criteria are met: (i) the preliminary project stage is completed and (ii) it is probable that the software will be completed and used for its intended function. Capitalization ceases when the software is substantially complete and ready for its intended use, including the completion of all significant testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality and expenses costs incurred for maintenance and minor upgrades and enhancements. Costs related to preliminary project activities and post-implementation operating activities are also expensed as incurred.

        Capitalized costs of platform and other software applications are included in property and equipment. These costs are amortized over the estimated useful life of the software on a straight-line basis over three years. Management evaluates the useful life of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. The amortization of costs related to the platform applications is included in cost of revenue, while the amortization of costs related to other software applications developed for internal use is included in research and development expenses.

 

 

 

           

(i)          

Advertising Costs

        Advertising costs are expensed as incurred and were $4.9 million, $3.5 million and $2.9 million in the years ended December 31, 2017, 2016 and 2015, respectively. Advertising costs are included in sales and marketing expenses in the accompanying consolidated statements of operations.

 

 

 

           

(j)          

Stock-Based Compensation

        All stock-based compensation to employees, including the purchase rights issued under the Company's 2016 Employee Stock Purchase Plan (the "ESPP"), is measured on the grant date based on the fair value of the awards on the date of grant. This cost is recognized as an expense following the ratable attribution method, over the requisite service period, for stock options, and the straight-line attribution method, over the offering period, for the purchase rights issued under the ESPP. The Company uses the Black-Scholes option pricing model to measure the fair value of its stock options and the purchase rights issued under the ESPP. The fair value of the restricted stock units is determined using the fair value of the Company's Class A common stock on the date of grant. Prior to adoption of ASU 2016-09, the stock-based compensation was recorded net of estimated forfeitures.

        In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share -Based Payment Accounting." This new guidance was intended to simplify several areas of accounting for stock-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company early adopted this guidance in the quarter ended December 31, 2016. The new guidance allows entities to account for forfeitures as they occur. The Company elected to account for forfeitures as they occur and adopted this provision on a modified retrospective basis. The $0.1 million of cumulative prior years' impact as well as the impact on the first three quarters of 2016 of $75,000 was recognized as an increase to stock-based compensation during the quarter ended December 31, 2016, as the impact on prior periods was insignificant. Adoption of all other changes in the new guidance did not have a significant impact on the Company's consolidated financial statements.

        Prior to the IPO, the fair value of the Company's common stock was determined by the estimated fair value of the Company's common stock at the time of grant. After the IPO, the Company uses the market closing price of its Class A common stock as reported on the New York Stock Exchange for the fair value.

        Compensation expense for stock options granted to nonemployees is calculated using the Black-Scholes option pricing model and is recognized in expense over the service period. Compensation expense for nonemployee stock options subject to vesting is revalued at each reporting date until the stock options are vested.

        The Black-Scholes option pricing model requires the use of complex assumptions, which determine the fair value of stock-based awards. These assumptions include:

 

 

 

           

•          

Fair value of the common stock.  Prior to the Company's IPO, the board of directors considered numerous objective and subjective factors to determine the fair value of the Company's common stock at each meeting at which awards are approved. The factors included, but were not limited to: (i) contemporaneous valuations of the Company's common stock by an unrelated third party; (ii) the prices at which the Company sold shares of its convertible preferred stock to outside investors in arms-length transactions; (iii) the rights, preferences and privileges of the Company's convertible preferred stock relative to those of its common stock; (iv) the Company's results of operations, financial position and capital resources; (v) current business conditions and projections; (vi) the lack of marketability of the Company's common stock; (vii) the hiring of key personnel and the experience of management; (viii) the introduction of new products; (ix) the risk inherent in the development and expansion of the Company's products; (x) the Company's stage of development and material risks related to its business; (xi) the fact that the option grants involve illiquid securities in a private company; and (xii) the likelihood of achieving a liquidity event, such as an initial public offering or sale of the Company, in light of prevailing market conditions; 

           

•          

Expected term.  The expected term represents the period that the stock-based awards are expected to be outstanding. The Company uses the simplified calculation of expected term, as the Company does not have sufficient historical data to use any other method to estimate 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 those of the Company, such as the size and operational and economic similarities to the Company's principal business operations; 

           

•          

Risk -free interest rate.  The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal the expected term of the stock-based awards; and 

           

•          

Expected dividend.  The expected dividend is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock.

        If any of the assumptions used in the Black-Scholes model changes, stock-based compensation for future options may differ materially compared to that associated with previous grants.

 

 

 

           

(k)          

Income Taxes

        The Company accounts for income taxes in accordance with authoritative guidance which requires the use of the asset and liability approach. Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carry-forwards. Deferred tax amounts are determined by using the enacted tax rates expected to be in effect when the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance reduces the deferred tax assets to the amount that is more likely than not to be realized.

        The Company recognizes the effect of uncertain income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

        The Company records interest and penalties related to uncertain tax positions in the provision for income taxes in the consolidated statements of operations.

 

 

 

           

(l)          

Foreign Currency Translation

        The functional currency of the Company's foreign subsidiaries is generally the U.S. dollar. Accordingly, the subsidiaries remeasure monetary assets and liabilities at period-end exchange rates, while non-monetary items are remeasured at historical rates. Revenue and expense accounts are remeasured at the average exchange rate in effect during the year. Remeasurement adjustments are recognized in the consolidated statements of operations as other income or expense in the year of occurrence. Foreign currency transaction gains and losses were insignificant for all periods presented.

        For those entities where the functional currency is a foreign currency, adjustments resulting from translating the financial statements into U.S. dollars are recorded as a component of accumulated other comprehensive income (loss) in stockholders' equity. Monetary assets and liabilities denominated in a foreign currency are translated into US dollars at the exchange rate on the balance sheet date. Revenue and expenses are translated at the weighted average exchange rates during the period. Equity transactions are translated using historical exchange rates. Foreign currency transaction gains and losses are included in other income (expense), net in the consolidated statements of operations.

 

 

 

           

(m)          

Comprehensive Income (Loss)

        Comprehensive income (loss) refers to net income (loss) and other revenue, expenses, gains and losses that, under generally accepted accounting principles, are recorded as an element of stockholders' equity but are excluded from the calculation of net income (loss).

        For the years ended December 31, 2016 and 2015, the Company's operations did not give rise to any material items includable in comprehensive income (loss), which were not already in net income (loss). Accordingly, for those periods, the Company's comprehensive income (loss) is the same as its net income (loss).

 

 

 

           

(n)          

Net Loss Per Share Attributable to Common Stockholders

        The Company calculates its basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for companies with participating securities. All series of convertible preferred stock are considered to be participating securities as the holders of the preferred stock are entitled to receive a non-cumulative dividend on a pro rata pari passu basis in the event that a dividend is declared or paid on common stock. Shares of common stock issued upon early exercise of stock options that are subject to repurchase are also considered to be participating securities, because holders of such shares have non-forfeitable dividend rights in the event a dividend is declared or paid on common stock. Under the two-class method, in periods when the Company has net income, net income attributable to common stockholders is determined by allocating undistributed earnings, calculated as net income less current period convertible preferred stock non-cumulative dividends, between common stock and the convertible preferred stock. In computing diluted net income attributable to common stockholders, undistributed earnings are re-allocated to reflect the potential impact of dilutive securities. The Company's basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The diluted net loss per share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. The dilutive effect of these potential common shares is reflected in diluted earnings per share by application of the treasury stock method. For purposes of this calculation, convertible preferred stock, options to purchase common stock, unvested restricted stock units, common stock issued subject to future vesting, any shares of stock committed under the ESPP, any shares of stock held in escrow and any shares of stock reserved for future donations are considered common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is antidilutive.

        Since the Company's IPO in 2016, Class A and Class B common stock are the only outstanding equity of the Company. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to 10 votes per share. Shares of Class B common stock may be converted into Class A common stock at any time at the option of the stockholder on a one-for-one basis, and are automatically converted into Class A common stock upon sale or transfer, subject to certain limited exceptions. Shares of Class A common stock are not convertible.

 

 

 

           

(o)          

Cash and Cash Equivalents

        The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist of funds deposited into money market funds. All credit and debit card transactions that process as of the last day of each month and settle within the first few days of the subsequent month are also classified as cash and cash equivalents as of the end of the month in which they were processed.

 

 

 

           

(p)          

Restricted Cash

        Restricted cash consists of cash deposited into a savings account with a financial institution as collateral for the Company's obligations under its facility leases of premises located in San Francisco, California. The facility lease for the Company's old office space expired in January 2017 and the facility lease for the Company's new office space expires in October 2024. The restricted cash balances as of December 31, 2017 and December 31, 2016 were $5.5 million and $8.6 million, respectively.

 

 

 

           

(q)          

Accounts Receivable and Allowance for Doubtful Accounts

        Accounts receivable are recorded net of the allowance for doubtful accounts and the reserve for sales credits. The allowance for doubtful accounts is estimated based on the Company's assessment of its ability to collect on customer accounts receivable. The Company regularly reviews the allowance by considering certain factors such as historical experience, credit quality, age of accounts receivable balances and other known conditions that may affect a customer's ability to pay. In cases where the Company is aware of circumstances that may impair a specific customer's ability to meet their financial obligations, a specific allowance is recorded against amounts due from the customer which reduces the net recognized receivable to the amount the Company reasonably believe will be collected. The Company writes-off accounts receivable against the allowance when a determination is made that the balance is uncollectible and collection of the receivable is no longer being actively pursued. The allowance for doubtful accounts was $1.0 million and $1.1 million as of December 31, 2017 and 2016, respectively.

 

 

 

           

(r)          

Costs Related to the Public Offerings

        Costs related to the public offerings, which consist of direct incremental legal, printing and accounting fees, are deferred until the offering is completed. Upon completion of the offering, these costs are offset against the offering proceeds within the consolidated statements of stockholders' equity. As of December 31, 2016, the Company recorded in its consolidated statement of stockholders' equity $5.7 million in total offering costs, of which $4.9 million and $0.8 million related to the IPO and the FPO, respectively.

 

 

 

           

(s)          

Property and Equipment

        Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful life of the related asset. Maintenance and repairs are charged to expenses as incurred.

        The useful lives of property and equipment are as follows:

                                                                                                                                                                                    

Capitalized software development costs

 

3 years

Office equipment

 

3 years

Furniture and fixtures

 

5 years

Software

 

3 years

Leasehold improvements

 

5 years or remaining lease term

 

 

 

 

           

(t)          

Intangible Assets

        Intangible assets recorded by the Company are costs directly associated with securing legal registration of patents and trademarks, acquiring domain names and the fair value of identifiable intangible assets acquired in business combinations.

        Intangible assets with determinable economic lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful life of each asset on a straight-line basis. The Company determines the useful lives of identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors the Company considers when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, the Company's long-term strategy for using the asset, any laws or other local regulations which could impact the useful life of the asset and other economic factors, including competition and specific market conditions. Intangible assets without determinable economic lives are carried at cost, not amortized and reviewed for impairment at least annually.

        The useful lives of the intangible assets are as follows:

                                                                                                                                                                                    

Developed technology

 

3 - 4 years

Customer relationships

 

5 - 8 years

Supplier relationships

 

5 years

Trade names

 

2 years

Patents

 

20 years

Trademarks

 

Indefinite

Domain names

 

Indefinite

 

 

 

 

           

(u)          

Goodwill

        Goodwill represents excess of the aggregate purchase price over the fair value of net identifiable assets acquired in a business combination. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that it operates as one reporting unit and has selected November 30 as the date to perform its annual impairment test. In the valuation of goodwill, management must make assumptions regarding estimated future cash flows to be derived from the Company's business. If these estimates or their related assumptions change in the future, the Company may be required to record impairment for these assets. Management may first evaluate qualitative factors to assess if it is more likely than not that the fair value of a reporting unit is less than its carrying amount and to determine if a two-step impairment test is necessary. Management may choose to proceed directly to the two-step evaluation, bypassing the initial qualitative assessment. The first step of the impairment test involves comparing the fair value of the reporting unit to its net book value, including goodwill. If the net book value exceeds its fair value, then the Company would perform the second step of the goodwill impairment test to determine the amount of the impairment loss. The impairment loss would be calculated by comparing the implied fair value of the goodwill to its net book value. In calculating the implied fair value of goodwill, the fair value of the entity would be allocated to all of the other assets and liabilities based on their fair values. The excess of the fair value of the entity over the amount assigned to other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. No goodwill impairment charges have been recorded for any period presented.

 

 

 

           

(v)          

Impairment of Long-Lived Assets

        The Company evaluates long-lived assets, including property and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If such evaluation indicates that the carrying amount of the asset or the asset group is not recoverable, any impairment loss would be equal to the amount the carrying value exceeds the fair value. There was no impairment during the years ended December 31, 2017, 2016 and 2015. The value of the internally-developed software written-off due to abandonment was $0.6 million, $0.7 million and $0.1 million in the years ended December 31, 2017, 2016 and 2015, respectively.

 

 

 

           

(w)          

Deferred Revenue

        Deferred revenue consists of cash deposits from customers to be applied against future usage and customer billings in advance of revenues being recognized from the Company's contracts. Deferred revenue is generally expected to be recognized during the succeeding 12-month period and is thus recorded as a current liability. Deferred revenue is refunded in cash upon termination of customer accounts.

 

 

 

           

(x)          

Business Combinations

        The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill is measured as the excess of the consideration transferred over the fair value of assets acquired and liabilities assumed on the acquisition date. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed, these estimates are inherently uncertain and subject to refinement. The authoritative guidance allows a measurement period of up to one year from the date of acquisition to make adjustments to the preliminary allocation of the purchase price. As a result, during the measurement period the Company may record adjustments to the fair values of assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon conclusion of the measurement period or final determination of the values of the assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments will be recorded to the consolidated statement of operations.

 

 

 

           

(y)          

Segment Information

        The Company's Chief Executive Officer is the chief operating decision maker, who reviews the Company's financial information presented on a consolidated basis for purposes of allocating resources and evaluating the Company's financial performance. Accordingly, the Company has determined that it operates in a single reporting segment.

 

 

 

           

(z)          

Fair Value of Financial Instruments

        The Company applies fair value accounting for all financial instruments on a recurring basis. The Company's financial instruments, which include cash, cash equivalents, accounts receivable and accounts payable are recorded at their carrying amounts, which approximate their fair values due to their short-term nature. Restricted cash is long-term in nature and consists of cash in a savings account, hence its carrying amount approximates its fair value. Marketable securities consist of U.S. treasury securities and high credit quality corporate debt securities. All marketable securities are considered to be available-for-sale and recorded at their estimated fair values. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive income (loss). In valuing these items, the Company uses inputs and assumptions that market participants would use to determine their fair value, utilizing valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

        Impairments are considered to be other than temporary if they are related to deterioration in credit risk or if it is likely that the security will be sold before the recovery of its cost basis. Realized gains and losses and declines in value deemed to be other than temporary are determined based on the specific identification method and are reported in other income (expense), net.

        The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

 

 

 

           

•          

Level 1 Inputs:  Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. 

           

•          

Level 2 Inputs:  Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. 

           

•          

Level 3 Inputs:  Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

        A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

 

 

           

(aa)          

Recent Accounting Pronouncements Not Yet Adopted

        In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") 2017-09, "Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting", which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The guidance is effective prospectively for interim and annual periods beginning after December 15, 2017 and early adoption is permitted. The Company will adopt this guidance upon its effective date. The Company does not expect the adoption of this guidance to have a material impact on the Company's financial position, results of operations or cash flows.

        In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment", which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective prospectively for interim and annual reporting periods beginning after December 15, 2019. The Company will adopt this guidance upon its effective date. The Company does not expect the adoption of this guidance to have a material impact on the Company's financial position, results of operations or cash flows.

        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 is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted under certain circumstances. The Company will adopt this guidance upon its effective date and implement it next time there is a potential business combination.

        In November 2016, the FASB issued ASU 2016-18, "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. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company will adopt this guidance upon its effective date and its impact will be a function of the amounts of restricted cash the Company has at that time and the movements therein.

        In October 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers Other Than Inventory", which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company will adopt this guidance upon its effective date. The Company does not expect the adoption of this guidance to have any material impact on the Company's financial position, results of operations or cash flows.

        In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments", which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.

        In February 2016, the FASB issued ASU No. 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. For public companies, the new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. 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, the Company has not yet determined the full impact that the adoption of this standard will have on its consolidated 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 U.S. 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 which deferred, by one year, the effective date for the new revenue reporting standard for entities reporting under U.S. GAAP. In accordance with the deferral, this guidance will be effective for the Company beginning January 1, 2018 and 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 January 1, 2017. 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 determining whether an entity's promise to grant a license provides a customer with either a right to use the entity's intellectual property (which is satisfied at a point in time) or a right to access the entity's intellectual property (which is satisfied over time). In May 2016, the FASB issued ASU 2016-12 "Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients", which amends the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard's contract criteria. In September 2017, the FASB issued ASU 2017-13, "Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)". These amendments provide additional clarification and implementation guidance on the previously issued ASUs. These amendments do not change the core principles of the guidance stated in ASU 2014-09, instead they are intended to clarify and improve operability of certain topics included within the revenue standard. In November 2017, the FASB issued ASU 2017-14, which includes amendments to certain SEC paragraphs within the FASB Accounting Standards Codification (Codification). ASU 2017-14 amends the Codification to incorporate SEC Staff Accounting Bulletin (SAB) No. 116 and SEC Interpretive Release on Vaccines for Federal Government Stockpiles (SEC Release No. 33-10403) that bring existing SEC staff guidance into conformity with the FASB's adoption of and amendments to ASC Topic 606, Revenue from Contracts with Customers. The effective date and transition requirements for ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2017-13 and ASU 2017-14 are the same as the effective date and transition requirements for ASU 2014-09. The Company has evaluated the potential changes from the adoption of the new standard on its financial statements and disclosures, and is in the process of implementing appropriate changes to its business processes, systems and controls to support revenue recognition and disclosures under the new standard. Based on this evaluation, the Company will adopt the requirements of the new standard in the first quarter of 2018, using the modified retrospective transition method with a cumulative catch adjustment to retained earnings as of January 1, 2018. Under the new standard, based on the Company's preliminary assessment, the Company does not believe there will be material changes to its revenue recognition and the expectation is that the majority of the Company's revenue will continue to be recognized according to the usage by its customers, in the period in which that usage occurs.

        The Company is also assessing the impact of adoption of the new standard on its accounting for sales commissions. The Company's current accounting policy requires capitalization and amortization of the deferred commissions. Under the new standard, the amounts capitalized will be recognized as amortization over the expected customer life. The Company's preliminary assessment of its analyses of the amortizable life of the deferred commissions under the new guidance at three years. Further review of certain commission plans is yet to be completed to finalize the impact on the consolidated statements of financial position, results of operations and cash flows.

        There will not be any significant tax impact to the Company's consolidated statements of operations and consolidated balance sheet relating to the adoption of the new standard as there will be a full valuation allowance due to the Company's history of continued losses.

Fair Value Measurements
Fair Value Measurements

3. Fair Value Measurements

        The following tables provide the assets measured at fair value on a recurring basis as of December 31, 2017 and 2016 (in thousands):

                                                                                                                                                                                    

 

 

 

 

 

 

Fair Value Hierarchy as of
December 31, 2017

 

 

 

 

 

Amortized
Cost or
Carrying
Value

 

 

 

 

 

 

 

Net
Unrealized
Losses

 

Aggregate
Fair Value

 

 

 

Level 1

 

Level 2

 

Level 3

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

95,432

 

$

 

$

95,432

 

$

 

$

 

$

95,432

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Total included in cash and cash equivalents

 

 

95,432

 

 

 

 

95,432

 

 

 

 

 

 

95,432

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

59,962

 

 

(216

)

 

59,746

 

 

 

 

 

 

59,746

 

Corporate debt securities

 

 

116,223

 

 

(382

)

 

 

 

115,841

 

 

 

 

115,841

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Total marketable securities

 

 

176,185

 

 

(598

)

 

59,746

 

 

115,841

 

 

 

 

175,587

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Total financial assets

 

$

271,617

 

$

(598

)

$

155,178

 

$

115,841

 

$

 

$

271,019

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

        There were no marketable securities as of December 31, 2016.

                                                                                                                                                                                    

 

 

 

 

As of December 31, 2016

 

 

 

Total
Carrying
Value

 

 

 

Level I

 

Level 2

 

Level 3

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (included in cash and cash equivalents)

 

$

274,135

 

$

274,135

 

$

 

$

 

$

274,135

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

Total financial assets

 

$

274,135

 

$

274,135

 

$

 

$

 

$

274,135

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

        As the Company views these securities as available to support current operations, it has classified all available-for-sale securities as short term. The following table summarizes the contractual maturities of marketable securities as of December 31, 2017 (in thousands):

                                                                                                                                                                                    

 

 

Amortized
Cost

 

Aggregate
Fair Value

 

Financial Assets:

 

 

 

 

 

 

 

Less than one year

 

$

108,584

 

$

108,360

 

One to two years

 

 

67,601

 

 

67,227

 

​  

​  

​  

​  

Total

 

$

176,185

 

$

175,587

 

​  

​  

​  

​  

​  

​  

​  

​  

        For fixed income securities that had unrealized losses as of December 31, 2017, the Company has determined that no other-than-temporary impairment existed. As of December 31, 2017, all securities in an unrealized loss position have been in an unrealized loss position for less than one year. Interest earned on marketable securities in the year ended December 31, 2017 was $2.6 million and is recorded as other income (expense), net, in the accompanying consolidated statement of operations.

Property and Equipment
Property and Equipment

4. Property and Equipment

        Property and equipment consisted of the following (in thousands):

                                                                                                                                                                                    

 

 

As of December 31,

 

 

 

2017

 

2016

 

Capitalized internal-use software development costs

 

$

49,177

 

$

28,661

 

Leasehold improvements

 

 

14,246

 

 

14,063

 

Office equipment

 

 

9,652

 

 

5,729

 

Furniture and fixtures

 

 

1,976

 

 

1,576

 

Software

 

 

1,675

 

 

968

 

​  

​  

​  

​  

Total property and equipment

 

 

76,726

 

 

50,997

 

Less: accumulated depreciation and amortization

 

 

(26,185

)

 

(13,445

)

​  

​  

​  

​  

Total property and equipment, net

 

$

50,541

 

$

37,552

 

​  

​  

​  

​  

​  

​  

​  

​  

        Depreciation and amortization expense was $13.1 million, $7.4 million and $3.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.

        The Company capitalized $21.5 million, $13.5 million and $9.4 million in internal-use software development costs in the years ended December 31, 2017, 2016 and 2015, respectively, of which $4.2 million, $2.0 million and $1.0 million, respectively, was stock-based compensation expense. Amortization of capitalized software development costs was $8.4 million, $5.5 million and $2.8 million in the years ended December 31, 2017, 2016 and 2015, respectively. The amortization expense was allocated as follows (in thousands):

                                                                                                                                                                                    

 

 

Year Ended December 31,

 

 

 

2017

 

2016

 

2015

 

Cost of revenue

 

$

4,788

 

$

3,304

 

$

1,793

 

Research and development

 

 

3,619

 

 

2,182

 

 

1,045

 

​  

​  

​  

​  

​  

​  

Total

 

$

8,407

 

$

5,486

 

$

2,838

 

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

​  

 

Business Combinations
Business Combinations

5. Business Combinations

Beepsend, AB

        In February 2017, the Company completed its acquisition of Beepsend AB, a messaging provider based in Sweden, specializing in messaging and SMS solutions, for a total purchase price of $23.0 million, paid in cash, of which $5.0 million was held in escrow. The escrow will continue for 18 months after the transaction closing date and may be extended under certain circumstances.

        Additionally, the Company deposited $2.0 million into a separate escrow account that will be released to certain employees on the first and second anniversaries of the closing date, provided the underlying service conditions are met. This amount is recorded as prepaid compensation in the accompanying consolidated balance sheet and is amortized into expense as the services are rendered.

        The acquisition was accounted for as a business combination and, accordingly, the total purchase price was allocated to the preliminary net tangible and intangible assets and liabilities based on their preliminary fair values on the acquisition date. The prepaid compensation subject to service conditions is accounted for as a post-acquisition compensation expense and recorded as research and development expense in the accompanying consolidated statement of operations. During the measurement period in 2017, the Company recorded a net adjustments of $0.1 million to the preliminary purchase price allocation. As of December 31, 2017 the purchase price allocation is final.

        The acquired entity's results of operations have been included in the consolidated financial statements of the Company from the date of acquisition.

        The following table presents the purchase price allocation, as adjusted, recorded in the Company's consolidated balance sheet (in thousands):

                                                                                                                                                                                    

 

 

Total

 

Net tangible liabilities

 

$

(3,575

)

Goodwill(1)

 

 

12,837

 

Intangible assets(2)

 

 

13,700

 

​  

​  

Total purchase price

 

$

22,962

 

​  

​  

​  

​  


 

 

 

(1)          

Goodwill represents the excess of purchase price over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed. The goodwill in this transaction is primarily attributable to the future cash flows to be realized from the acquired technology platform, existing customer and supplier relationships as well as operational synergies. Goodwill is deductible for tax purposes.

(2)          

Identifiable finite-lived intangible assets were comprised of the following:

                                                                                                                                                                                    

 

 

Total

 

Estimated
life
(in years)

Developed technology

 

$

5,000

 

4

Customer relationships

 

 

6,100

 

7 - 8

Supplier relationships

 

 

2,600

 

5

​  

​  

Total intangible assets acquired

 

$

13,700

 

 

​  

​  

​  

​  

        The Company acquired a net deferred tax liability of $2.6 million in this business combination that is included in the long-term liabilities in the accompanying consolidated balance sheet.

        The estimated fair value of the intangible assets acquired was determined by the Company, and the Company considered or relied in part upon a valuation report of a third-party expert. The Company used income approaches to estimate the fair values of the identifiable intangible assets. Specifically, the developed technology asset class was valued using the-relief-from royalty method, while the customer relationships asset class was valued using a multi-period excess earnings method and the supplier relationships asset class was valued using an incremental cash flow method.

        The Company incurred costs related to this acquisition of $0.7 million, of which $0.3 million and $0.4 million were incurred during fiscal years 2017 and 2016, respectively. All acquisition related costs were expensed as incurred and have been recorded in general and administrative expenses in the accompanying consolidated statements of operations.

        Pro forma results of operations for this acquisition are not presented as the financial impact to the Company's consolidated financial statements is immaterial.

Kurento Open Source Project

        In November 2016, the Company acquired certain assets from Tikal Technologies S.L., a Spanish corporation, behind the Kurento Open Source Project. The acquired assets consisted of (a) proprietary WebRTC media processing technologies, (b) certain licenses, patents and trademarks and (c) certain employee relationships behind the WebRTC technology. The purchase price consisted of $8.5 million in cash, of which $1.5 million was placed into escrow to indemnify the Company against breaches of general representations, warranties, claims and tax compliance matters. The escrow is effective for 24 months and 10 days from the acquisition date and may be extended under certain circumstances.

        The acquisition was accounted for as a business combination and, accordingly, the total purchase price was allocated to the identifiable intangibles assets acquired based on their respective fair values on the acquisition date. The excess of the purchase price over the fair values of the identifiable assets acquired was recorded as goodwill. The Company considered or relied in part upon a valuation report of a third-party expert.

        The following table presents the final purchase price allocation recorded in the Company's consolidated balance sheet (in thousands):

                                                                                                                                                                                    

 

 

Total

 

Intangible assets(1)

 

$

8,100

 

Goodwill(2)

 

 

400

 

​  

​  

Total purchase price

 

$

8,500

 

​  

​  

​  

​  


 

 

 

(1)          

The intangible assets consist of developed technology with the estimated useful life of 3 years on the date of acquisition.

(2)          

The goodwill in this transaction is primarily attributable to the future cash flows to be realized from the acquired technology and the future development initiatives of the acquired workforce. The goodwill is deductible for tax purposes.

        The Company incurred cost related to this acquisition of $0.1 million that were expensed as incurred and have been recorded in general and administrative expenses in the accompanying consolidated statement of operations.

Authy, Inc.

        In February 2015, the Company completed its acquisition of Authy, Inc. ("Authy"), a Delaware corporation with operations in Bogota, Colombia and San Francisco, California. Authy had developed a two-factor authentication online security solution. The Company's purchase price of $6.1 million for all of the outstanding shares of capital stock of Authy consisted of $3.0 million in cash and $3.1 million representing the fair value of 389,733 shares of the Company's Series T convertible preferred stock, of which 180,000 shares were placed in escrow. The escrow was effective until the first anniversary of the closing date, and has continued beyond that date as a result of certain circumstances. As of December 31, 2017, the Company has not released any shares out of the escrow. Additionally, the Company issued 507,885 shares of its Series T convertible preferred stock, which converted into shares of Class B common stock immediately prior to the closing of the IPO, to a former shareholder of Authy that had a fair value of $4.0 million and were subject to a service condition over a period of three years, as amended. In August 2016, the unvested shares were reduced by 127,054 shares due to the non-fulfillment of certain conditions of the merger agreement. In December 2016, all remaining unvested shares vested.

        The acquisition was accounted for as a business combination and, accordingly, the total purchase price was allocated to the identifiable tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the acquisition date. The cost of shares subject to vesting and performance conditions was accounted for as a post-acquisition compensation expense and recorded as research and development expense in the accompanying consolidated statements of operations. The Company recorded $2.4 million and $0.6 million of stock-based compensation expense related to these shares in the years ended December 31, 2016 and 2015, respectively.

        Authy's results of operations have been included in the consolidated financial statements of the Company from the date of acquisition.

        This transaction was intended to qualify as a tax-free reorganization under Section 368(a) of the IRS Code.

        The fair value of the Series T convertible preferred stock was determined by the board of directors of the Company with input from a third-party valuation consultant.

        The following table presents the final purchase price allocation recorded in the Company's consolidated balance sheet (in thousands):

                                                                                                                                                                                    

 

 

Total

 

Net tangible assets

 

$

1,165

 

Goodwill(1)

 

 

3,165

 

Intangible assets(2)

 

 

1,760

 

​  

​  

Total purchase price

 

$

6,090

 

​  

​  

​  

​  

The Company acquired a net deferred tax liability of $0.1 million in this business combination.

 

 

 

 


 

 

 

(1)          

Goodwill represents the excess of purchase price over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed. The goodwill in this transaction is primarily attributable to the future cash flows to be realized from the acquired technology platform, existing customer base and the future development initiatives of the assembled workforce. Goodwill is not deductible for tax purposes.

(2)          

Identifiable finite-lived intangible assets were comprised of the following:

                                                                                                                                                                                    

 

 

Total

 

Estimated
life
(in years)

Developed technology

 

$

1,300

 

3

Customer relationships

 

 

400

 

5

Trade name

 

 

60

 

2

​  

​