10-Q 1 a16-16801_110q.htm 10-Q

Table of Contents

 

 

 

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, 2016

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-37806

 

Twilio Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

26-2574840

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

645 Harrison Street, Third Floor

San Francisco, California 94107

(Address of principal executive offices) (Zip Code)

 

(415) 390-2337

(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

o

Accelerated filer

o

 

 

 

 

Non-accelerated filer

x  (Do not check if a smaller reporting company)

Smaller reporting company

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 31, 2016, 34,410,267 shares of the registrant’s Class A common stock and 52,718,865 shares of registrant’s Class B common stock were outstanding, respectively.

 

 

 



Table of Contents

 

TWILIO INC.

 

Quarterly Report on Form 10-Q

 

For the Three Months Ended September 30, 2016

 

TABLE OF CONTENTS

 

 

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements (unaudited)

3

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015

3

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

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

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

Item 4.

Controls and Procedures

34

 

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60

 

 

 

Item 6.

Exhibits

61

 

 

 

 

Signatures

62

 

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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, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” 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 future financial performance, including our revenue, cost of revenue, gross margin and operating expenses, ability to generate positive cash flow and ability to achieve and sustain profitability;

 

·                  the sufficiency of our cash and cash equivalents to meet our liquidity needs;

 

·                  anticipated technology trends, such as the use of and demand for cloud communications;

 

·                  our ability to continue to build and maintain credibility with the global software developer community;

 

·                  our ability to attract and retain customers to use our products;

 

·                  our ability to attract and retain enterprises and international organizations as customers for our products;

 

·                  our ability to expand partnerships with independent software vendors and system integrators;

 

·                  the evolution of technology affecting our products and markets;

 

·                  our ability to introduce new products and enhance existing products;

 

·                  our ability to optimize our network service provider coverage and connectivity;

 

·                  our ability to pass on our savings associated with our platform optimization efforts to our customers;

 

·                  our ability to successfully enter into new markets and manage our international expansion;

 

·                  the attraction and retention of qualified employees and key personnel;

 

·                  our ability to effectively manage our growth and future expenses and maintain our corporate culture;

 

·                  our anticipated investments in sales and marketing and research and development;

 

·                  our ability to maintain, protect and enhance our intellectual property;

 

·                  our ability to successfully defend litigation brought against us;

 

·                  our ability to comply with modified or new laws and regulations applying to our business; and

 

·                  the increased expenses associated with being a public company.

 

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

 

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.

 

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Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

TWILIO INC.

 

Condensed Consolidated Balance Sheets

 

(In thousands)

 

(Unaudited)

 

 

 

As of September 30,
2016

 

As of December 31,
2015

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

252,225

 

$

108,835

 

Accounts receivable, net

 

29,352

 

19,094

 

Prepaid expenses and other current assets

 

18,266

 

8,546

 

Total current assets

 

299,843

 

136,475

 

Restricted cash

 

8,613

 

1,170

 

Property and equipment, net

 

25,975

 

14,058

 

Intangible assets, net

 

2,560

 

2,292

 

Goodwill

 

3,165

 

3,165

 

Other long-term assets

 

410

 

356

 

Total assets

 

$

340,566

 

$

157,516

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

6,217

 

$

2,299

 

Accrued expenses and other current liabilities

 

50,541

 

31,998

 

Deferred revenue

 

9,492

 

6,146

 

Total current liabilities

 

66,250

 

40,443

 

Other long-term liabilities

 

10,042

 

448

 

Total liabilities

 

76,292

 

40,891

 

Commitments and contingencies (Note 11)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Convertible preferred stock

 

 

239,911

 

Class A and Class B common stock

 

85

 

17

 

Additional paid-in capital

 

438,311

 

22,103

 

Accumulated deficit

 

(174,122

)

(145,406

)

Total stockholders’ equity

 

264,274

 

116,625

 

Total liabilities and stockholders’ equity

 

$

340,566

 

$

157,516

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

 

TWILIO INC.

 

Condensed Consolidated Statements of Operations

 

(In thousands, except share and per share amounts)

 

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Revenue

 

$

71,533

 

$

44,262

 

$

195,383

 

$

115,581

 

Cost of revenue

 

31,285

 

19,602

 

86,315

 

51,974

 

Gross profit

 

40,248

 

24,660

 

109,068

 

63,607

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

21,106

 

11,602

 

53,339

 

29,470

 

Sales and marketing

 

15,873

 

12,067

 

47,451

 

36,100

 

General and administrative

 

14,545

 

9,935

 

36,773

 

25,235

 

Total operating expenses

 

51,524

 

33,604

 

137,563

 

90,805

 

Loss from operations

 

(11,276

)

(8,944

)

(28,495

)

(27,198

)

Other income (expenses), net

 

138

 

(28

)

92

 

(58

)

Loss before (provision) benefit for income taxes

 

(11,138

)

(8,972

)

(28,403

)

(27,256

)

(Provision) benefit for income taxes

 

(116

)

(36

)

(313

)

12

 

Net loss

 

(11,254

)

(9,008

)

(28,716

)

(27,244

)

Deemed dividend to investors in relation to tender offer

 

 

(3,392

)

 

(3,392

)

Net loss attributable to common stockholders

 

$

(11,254

)

$

(12,400

)

$

(28,716

))

$

(30,636

)

Net loss per share attributable to common stockholders, basic and diluted

 

$

(0.13

)

$

(0.70

)

$

(0.68

)

$

(1.70

)

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted

 

83,887,901

 

17,805,486

 

42,030,989

 

17,981,477

 

 

See accompanying notes to condensed consolidated financial statements.

 

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TWILIO INC.

 

Condensed Consolidated Statements of Cash Flows

 

(In thousands)

 

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net loss

 

$

(28,716

)

$

(27,244

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

5,292

 

2,816

 

Stock-based compensation

 

15,649

 

5,808

 

Provision for doubtful accounts

 

1,017

 

322

 

Tax benefit related to acquisition

 

 

(108

)

Write-off of internally developed software

 

188

 

87

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(11,275

)

(8,321

)

Prepaid expenses and other current assets

 

(11,561

)

424

 

Other long-term assets

 

(59

)

(81

)

Accounts payable

 

2,317

 

1,104

 

Accrued expenses and other current liabilities

 

18,625

 

9,628

 

Deferred revenue

 

3,346

 

1,362

 

Other long-term liabilities

 

9,596

 

(157

)

Net cash provided by (used in) operating activities

 

4,419

 

(14,360

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Increase in restricted cash

 

(7,439

)

 

Capitalized software development costs

 

(8,447

)

(6,080

)

Purchases of property and equipment

 

(5,282

)

(1,243

)

Purchases of intangible assets

 

(646

)

(353

)

Acquisition, net of cash acquired

 

 

(1,761

)

Net cash used in investing activities

 

(21,814

)

(9,437

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from initial public offering, net of underwriting discounts

 

160,426

 

 

Payments of costs related to initial public offering

 

(3,936

)

 

Net proceeds from issuance of convertible preferred stock

 

 

125,863

 

Proceeds from exercises of stock options

 

4,753

 

2,102

 

Value of equity awards withheld for tax liabilities

 

(518

)

 

Tax benefit related to stock-based compensation

 

62

 

 

Repurchases of stock

 

(2

)

(20,801

)

Net cash provided by financing activities

 

160,785

 

107,164

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

143,390

 

83,367

 

CASH AND CASH EQUIVALENTS—Beginning of period

 

108,835

 

32,627

 

CASH AND CASH EQUIVALENTS—End of period

 

$

252,225

 

$

115,994

 

Cash paid for income taxes

 

$

153

 

$

15

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

Purchases of property, equipment and intangible assets, accrued but not paid

 

$

2,373

 

$

72

 

Stock-based compensation capitalized in software development costs

 

$

1,068

 

$

627

 

Vesting of early exercised options

 

$

512

 

$

163

 

Series E convertible preferred stock issuance costs, accrued but not paid

 

$

 

$

400

 

Series T convertible preferred stock issued as part of purchase price in the Authy acquisition

 

$

 

$

3,087

 

Costs related to the public offerings, accrued but not paid

 

$

368

 

$

284

 

 

See accompanying notes to condensed consolidated financial statements.

 

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TWILIO INC.

 

Notes to Condensed Consolidated Financial Statements

 

(Unaudited)

 

1. Organization and Description of Business

 

Twilio Inc. (the “Company”) was incorporated in the state of Delaware on March 13, 2008. The Company provides a Cloud Communications Platform that enables developers to build, scale and operate communications within software applications through the cloud primarily as a pay-as-you-go service. The Company’s product offerings fit three basic categories: Programmable Voice, Programmable Messaging and Programmable Video. The Company also provides use case products, such as a two-factor authentication solution.

 

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 and Bermuda.

 

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 commissions and offering expenses paid and payable by the Company, from sales of its shares in the IPO.  Immediately prior to the completion of the IPO, all shares of common stock then outstanding were reclassified as 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 12 for further discussion of Class A and B common stock.

 

As of September 30, 2016, 15,591,449 shares of the Company’s Class A common stock and 68,926,649 shares of the Company’s Class B common stock were outstanding.

 

2. Summary of Significant Accounting Policies

 

(a)                                 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 (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. 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 final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on June 23, 2016 (the “Prospectus”).

 

The condensed consolidated balance sheet as of December 31, 2015, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by U.S. GAAP on an annual reporting basis.

 

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 loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2016 or any future period.

 

(b)                                 Principles of Consolidation

 

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

 

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(c)          Use of Estimates

 

The preparation of consolidated 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; 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, restricted cash and accounts receivable. The Company maintains cash, cash equivalents and restricted cash with financial institutions that management believes are financially sound and have minimal credit risk exposure.

 

The Company sells its services to a wide variety of customers. If the financial condition or results of operations of any one of the large 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. As of September 30, 2016, there was one customer organization that represented approximately 25% of the Company’s gross accounts receivable. As of December 31, 2015, two customer organizations represented approximately 11% each of the Company’s gross accounts receivable.

 

In the three months ended September 30, 2016, one customer organization represented 15% of the Company’s total revenue and in the three months ended September 30, 2015 a different customer organization represented 16% of the Company’s total revenue. In the nine months ended September 30, 2016, two customer organizations represented 10% and 13% of the Company’s total revenue, and in the nine months ended September 30, 2015, one customer organization represented 17% of the Company’s total revenue.

 

(e)           Significant Accounting Policies

 

There have been no changes to our significant accounting policies described in the Prospectus.

 

(f)                                    Recently Issued Accounting Guidance, Not yet Adopted

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“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 condensed consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. This standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company is evaluating the impact of this guidance on its condensed 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 condensed consolidated financial statements and related disclosures.

 

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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. The effective date and transition requirements for ASU 2016-08, ASU 2016-10 and ASU 2016-12 are the same as the effective date and transition requirements for ASU 2014-09. The Company is evaluating the impact that these ASUs will have on its condensed consolidated financial statements and related disclosures and has not yet selected a transition method.

 

3. Fair Value Measurements

 

The following tables provide the assets measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 (in thousands):

 

 

 

Total
Carrying

 

As of September 30, 2016

 

 

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

Money market funds (included in cash and cash equivalents)

 

$

236,832

 

$

236,832

 

$

 

$

 

$

236,832

 

Total financial assets

 

$

236,832

 

$

236,832

 

$

 

$

 

$

236,832

 

 

 

 

Total
Carrying

 

As of December 31, 2015

 

 

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

Money market funds (included in cash and cash equivalents)

 

$

80,886

 

$

80,886

 

$

 

$

 

$

80,886

 

Total financial assets

 

$

80,886

 

$

80,886

 

$

 

$

 

$

80,886

 

 

The fair value of the Company’s Level 1 financial instruments, approximate their carrying amount due to their short term nature.

 

There were no realized or unrealized losses for the three and nine months ended September 30, 2016 and 2015. There were no other-than-temporary impairments for these instruments as of September 30, 2016 and December 31, 2015.

 

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4. Property and Equipment

 

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

 

 

 

As of
September 30,
2016

 

As of
December 31,
2015

 

 

 

 

 

 

 

Capitalized software development costs

 

$

25,311

 

$

16,030

 

Office equipment

 

4,623

 

2,662

 

Furniture and fixtures

 

924

 

393

 

Software

 

877

 

755

 

Leasehold improvements

 

5,413

 

568

 

Total property and equipment

 

37,148

 

20,408

 

Less: accumulated depreciation and amortization

 

(11,173

)

(6,350

)

Total property and equipment, net

 

$

25,975

 

$

14,058

 

 

Depreciation and amortization expense was $1.9 million and $4.9 million for the three and nine months ended September 30, 2016, respectively, and $1.0 million and $2.4 million for the three and nine months ended September 30, 2015, respectively.

 

The Company capitalized $3.4 million and $9.5 million of software development costs in the three and nine months ended September 30, 2016, respectively, of which $0.4 million and $1.1 million, respectively, was stock-based compensation expense. The Company capitalized $2.6 million and $6.7 million of software development costs in the three and nine months ended September 30, 2015, respectively, of which $0.3 million and $0.6 million, respectively, was stock-based compensation expense.

 

5. Acquisition of Authy, Inc.

 

On February 23, 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 are held in escrow. This 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 September 30, 2016 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 graded vesting over a period of three years, as amended. As of September 30, 2016 the remaining unvested shares were reduced by 127,054 shares due to the non-fulfillment of certain conditions of the merger agreement. As of September 30, 2016, 99,367 shares have vested.

 

6. Intangible Assets

 

Intangible assets consisted of the following (in thousands):

 

 

 

As of September 30, 2016

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Amortizable intangible assets:

 

 

 

 

 

 

 

Developed technology

 

$

1,300

 

$

(695

)

$

605

 

Customer relationships

 

400

 

(128

)

272

 

Trade name

 

60

 

(48

)

12

 

Patent

 

1,419

 

(43

)

1,376

 

Total amortizable intangible assets

 

3,179

 

(914

)

2,265

 

Non-amortizable intangible assets:

 

 

 

 

 

 

 

Domain

 

32

 

 

32

 

Trademark

 

263

 

 

263

 

Total

 

$

3,474

 

$

(914

)

$

2,560

 

 

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As of December 31, 2015

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Amortizable intangible assets:

 

 

 

 

 

 

 

Developed technology

 

$

1,300

 

$

(370

)

$

930

 

Customer relationships

 

400

 

(68

)

332

 

Trade name

 

60

 

(26

)

34

 

Patent

 

1,021

 

(25

)

996

 

Total

 

$

2,781

 

$

(489

)

$

2,292

 

 

Amortization expense was $0.1 million and $0.4 million for the three and nine months ended September 30, 2016, respectively, and $0.1 million and $0.3 million for the three and nine months ended September 30, 2015, respectively.

 

Total estimated future amortization expense was as follows (in thousands):

 

 

 

Total

 

Years ending December 31:

 

 

 

2016 (remaining three months)

 

$

146

 

2017

 

557

 

2018

 

183

 

2019

 

119

 

2020

 

51

 

Thereafter

 

1,209

 

Total

 

$

2,265

 

 

7. Accrued Expenses and Other Liabilities

 

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

As of
September 30,
2016

 

As of
December 31,
2015

 

Accrued payroll and related

 

$

4,977

 

$

972

 

Accrued bonus and commission

 

1,217

 

1,832

 

Accrued cost of revenue

 

9,125

 

6,496

 

Sales and other taxes payable

 

26,682

 

17,634

 

Accrued other expense

 

8,540

 

5,064

 

Total accrued expenses and other current liabilities

 

$

50,541

 

$

31,998

 

 

Other long-term liabilities consisted of the following (in thousands):

 

 

 

As of
September 30,
2016

 

As of
December 31,
2015

 

Deferred rent

 

$

9,881

 

$

364

 

Accrued other expense

 

161

 

84

 

Total other long-term liabilities

 

$

10,042

 

$

448

 

 

8. Supplemental Balance Sheet Information

 

(a) Allowance for doubtful accounts (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Balance, beginning of period

 

$

795

 

$

517

 

$

486

 

$

210

 

Additions

 

170

 

(46

)

1,017

 

322

 

Write-offs

 

(16

)

(6

)

(554

)

(67

)

Balance, end of period

 

$

949

 

$

465

 

$

949

 

$

465

 

 

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(b)  Sales credit reserve (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Balance, beginning of period

 

$

652

 

$

552

 

$

714

 

$

312

 

Additions

 

169

 

637

 

1,012

 

1,167

 

Deductions against reserve

 

(337

)

(72

)

(1,242

)

(362

)

Balance, end of period

 

$

484

 

$

1,117

 

$

484

 

$

1,117

 

 

9. Revenue by Geographic Area

 

Revenue by geographic area is based on the IP address at the time of registration. The following table sets forth revenue by geographic area (dollars in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Revenue by geographic area:

 

 

 

 

 

 

 

 

 

United States

 

$

60,535

 

$

38,312

 

$

165,528

 

$

99,159

 

International

 

10,998

 

5,950

 

29,855

 

16,422

 

Total

 

$

71,533

 

$

44,262

 

$

195,383

 

$

115,581

 

 

 

 

 

 

 

 

 

 

 

Percentage of revenue by geographic area:

 

 

 

 

 

 

 

 

 

United States

 

85

%

87

%

85

%

86

%

International

 

15

%

13

%

15

%

14

%

 

10. Credit Facility

 

Effective January 2015, the Company entered into a $15.0 million revolving credit agreement. Under this agreement, amounts available to be borrowed are based on the Company’s prior month’s monthly recurring revenue. Advances on the line of credit bear interest payable monthly at Wall Street Journal prime rate plus 1%. Borrowings are secured by substantially all of the Company’s assets, with limited exceptions. If there are borrowings under the credit line, there are certain restrictive covenants with which the Company must comply. The credit facility expires in March 2017. As of September 30, 2016 and December 31, 2015, the total amount available to the Company to be borrowed was $15.0 million and the Company had no outstanding balance on this credit facility in either period presented.

 

11. Commitments and Contingencies

 

(a)                                 Lease Commitments

 

The Company entered into various non-cancelable operating lease agreements for its facilities over the next eight years. Certain operating leases contain provisions under which monthly rent escalates over time. When lease agreements contain escalating rent clauses or free rent periods, the Company recognizes rent expense on a straight-line basis over the term of the lease. The Company’s San Francisco, California facility lease agreement, entered into in January 2016, included a tenant improvement allowance which provided for the landlord to pay for tenant improvements on behalf of the Company for up to $8.3 million. This amount was recorded on the lease inception date into other current assets and current and long-term liabilities in the accompanying condensed consolidated balances sheet. Based on the terms of this landlord incentive and involvement of the Company in the construction process, the leasehold improvements purchased under the landlord incentive were determined to be property of the Company.

 

Rent expense was $2.1 million and $5.1 million, respectively, for the three and nine months ended September 30, 2016, and $1.0 million and $3.0 million, respectively, for the three and nine months ended September 30, 2015.

 

Additionally, the Company has contractual commitments with its cloud infrastructure provider, network service providers and other vendors that are non-cancellable and expire within one to five years.

 

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Future minimum lease payments under non-cancelable operating leases were as follows (in thousands):

 

Year Ending
December 31:

 

Total (1)

 

2016 (remaining three months)

 

$

1,813

 

2017

 

8,596

 

2018

 

6,984

 

2019

 

5,673

 

2020

 

5,408

 

Thereafter

 

20,963

 

Total minimum lease payments

 

$

49,437

 

 


(1) The future minimum lease payments do not reflect the $8.3 million tenant improvement allowance.

 

Future minimum payments under other existing noncancellable purchase obligations were as follows (in thousands).

 

Year Ending
December 31:

 

Total

 

2016 (remaining three months)

 

$

11,469

 

2017

 

5,195

 

2018

 

1,564

 

2019

 

593

 

2020

 

32

 

Thereafter

 

16

 

Total payments

 

$

18,869

 

 

(b)                                 Legal Matters

 

On April 30, 2015, Telesign Corporation, or Telesign, filed a lawsuit against the Company in the United States District Court, Central District of California (“Telesign I”). Telesign alleges that the Company is infringing three U.S. patents that it holds: U.S. Patent No. 8,462,920 (“‘920”), U.S. Patent No. 8,687,038 (“‘038”) and U.S. Patent No. 7,945,034 (“‘034”). The patent infringement allegations in the lawsuit relate to the Company’s Programmable Authentication products, its two-factor authentication use case and an API tool to find information about a phone number. The Company has petitioned the U.S. Patent and Trademark Office for inter partes review of the patents at issue. On March 9, 2016, the District Court stayed the court case pending the resolution of those proceedings. On June 28, 2016, the Patent and Trademark Office instituted the inter partes review of the ‘034 patent, briefing on which has now begun, including Telesign’s contingent motion to amend the ‘034 patent. On July 8, 2016, the Patent and Trademark Office denied the Company’s petition for inter partes review of the ‘920 and ‘038 patents.  The Company subsequently petitioned for rehearing on this decision, and the request for rehearing was fully briefed by both parties on October 11, 2016. On July 20, 2016, Telesign applied to the court to lift the stay on Telesign I. The Company opposed the request, and on September 15, 2016, the court denied the request to lift the stay on Telesign I.

 

On March 28, 2016, Telesign filed a second lawsuit against the Company in the United States District Court, Central District of California (“Telesign II”), alleging infringement of U.S. Patent No. 9,300,792 (“‘792”) held by Telesign. The ‘792 patent is in the same patent family as the ‘920 and ‘038 patents asserted in Telesign I, and the infringement allegations in Telesign II relate to the Company’s Programmable Authentication products and its two-factor authentication use case. On May 23, 2016, the Company moved to dismiss the complaint in Telesign II.  On August 3, 2016, the United States District Court, Central District of California, issued an order granting Twilio’s motion to dismiss Telesign’s complaint with leave to amend. Telesign filed an amended complaint on September 2, 2016 and the Company moved to dismiss the amended complaint on September 16, 2016. With respect to each of the patents asserted in Telesign I and Telesign II, the complaints seek, among other things, to enjoin the Company from allegedly infringing the patents, along with damages for lost profits.

 

On February 18, 2016, a putative class action complaint was filed in the Alameda County Superior Court in California, entitled Angela Flowers v. Twilio Inc. The complaint alleges that the Company’s products permit the interception, recording and disclosure of communications at a customer’s request and are in violation of the California Invasion of Privacy Act. The complaint seeks injunctive relief as well as monetary damages. On May 27, 2016, the Company filed a demurrer to the complaint. On August 2, the court issued an order denying the demurrer in part and granted it in part, with leave to amend by August 18, 2016 to address any claims under California’s Unfair Competition Law. The plaintiff opted not to amend the complaint. Discovery has already begun, and will continue until August 2017, when the plaintiff must file their motion for class certification.

 

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The Company intends to vigorously defend these lawsuits and believes it has meritorious defenses to each.  It is too early in these matters to reasonably predict the probability of the outcomes or to estimate ranges of possible losses. In addition to the litigation matters discussed above, from time to time, the Company is a party to legal action and subject to claims that arise in the ordinary course of business. The claims are investigated as they arise and loss estimates are accrued, when probable and reasonably estimable. While it is not feasible to predict or determine the ultimate outcome of these matters, the Company believes that these legal proceedings will not have a material adverse effect on its financial position or results of operations.

 

(c)                                  Indemnification Agreements

 

The Company has signed indemnification agreements with all of its board members and executive officers. The agreements indemnify the board members and executive officers from claims and expenses on actions brought against the individuals separately or jointly with the Company for certain indemnifiable events. Indemnifiable Events generally mean any event or occurrence related to the fact that the board member or the executive officer was or is acting in his or her capacity as a board member or an executive officer for the Company or was or is acting or representing the interests of the Company.

 

In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties and other liabilities relating to or arising from the Company’s various products, or its acts or omissions. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, the Company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments. The terms of such obligations may vary.

 

As of September 30, 2016 and December 31, 2015, no amounts had been accrued.

 

(d)                                 Other taxes

 

The Company conducts operations in many tax jurisdictions throughout the United States. In many of these jurisdictions, non-income-based taxes, such as sales and use and telecommunications taxes are assessed on the Company’s operations. Historically, the Company has not billed or collected these taxes and, in accordance with U.S. GAAP, has recorded a provision for its tax exposure in these jurisdictions when it is both probable that a liability has been incurred and the amount of the exposure can be reasonably estimated. As a result, the Company recorded a liability of $26.7 million and $17.6 million as of September 30, 2016 and December 31, 2015, respectively. These estimates include several key assumptions including, but not limited to, the taxability of the Company’s services, the jurisdictions in which its management believes it has nexus, and the sourcing of revenues to those jurisdictions. In the event these jurisdictions challenge management’s assumptions and analysis, the actual exposure could differ materially from the current estimates.

 

12. Stockholders’ Equity

 

(a)                                 Convertible Preferred Stock

 

Immediately prior to the completion of the IPO, all shares of convertible preferred stock then outstanding were automatically 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.

 

(b)                                 Preferred Stock

 

As of September 30, 2016, the Company had authorized 100,000,000 shares of preferred stock, par value $0.001, of which no shares were issued and outstanding.

 

(c)                                  Common Stock

 

Immediately prior to the completion of the IPO, all shares of common stock then outstanding were reclassified as Class B common stock. Shares offered and sold in the IPO were newly authorized shares of Class A common stock.

 

As of September 30, 2016, the Company had authorized 1,000,000,000 shares of Class A common stock and 100,000,000 shares of Class B common stock, each par value $0.001 per share, of which 15,591,449 shares and 68,926,649 shares of Class A and Class B common stock, respectively, were issued and outstanding.  Holders of Class A and Class B common stock are entitled to one vote per share and ten votes per share, respectively, and the shares of Class A common stock and Class B common stock are identical, except for voting and conversion rights. As of September 30, 2016, the outstanding Class B common stock included 461,464 shares related to the Authy acquisition that were held in escrow.

 

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Table of Contents

 

As of December 31, 2015, the Company had 17,324,003 shares of common stock outstanding.

 

As of September 30, 2016, and December 31, 2015, the Company had reserved shares of common stock, on an as-if converted basis, for issuance as follows:

 

 

 

As of
September 30,
2016

 

As of
December 31,
2015

 

Conversion of convertible preferred stock outstanding

 

 

54,508,441

(1)

Stock options issued and outstanding

 

16,476,973

 

16,883,837

 

Nonvested restricted stock units issued and outstanding

 

1,639,378

 

71,000

 

Common stock reserved for Twilio.org

 

780,397

 

888,022

 

Stock-based awards available for grant under 2008 Plan

 

 

14,920

 

Stock-based awards available for grant under 2016 Plan

 

10,584,863

 

 

Common stock reserved for issuance under 2016 ESPP plan

 

2,400,000

 

 

Total

 

31,881,611

 

72,366,220

 

 


(1)                                     Includes 687,885 shares of Series T convertible preferred stock related to the Authy acquisition held in escrow as of December 31, 2015.

 

(d)                                 Stock Repurchases

 

Following the closing of the Series E convertible preferred stock financing, on August 21, 2015, the Company repurchased an aggregate of 365,916 shares of Series A preferred stock and Series B preferred stock from certain preferred stockholders, and repurchased an aggregate of 1,869,156 shares of common stock from certain current and former employees for $22.8 million in cash, which transaction is referred to as the 2015 Repurchase. The 2015 Repurchase was conducted at a price in excess of the fair value of the Company’s common stock at the date of repurchase. No special rights or privileges were conveyed to the employees and former employees. However, not all employees were invited to participate in the 2015 Repurchase. The Company recorded a compensation expense in the amount of $2.0 million for the year ended December 31, 2015, which was the excess of the common stock repurchase price above the fair value of the common stock on the date of repurchase. Of this expense, $0.8 million, $0.1 million and $1.1 million were classified as research and development, sales and marketing and general and administrative expenses, respectively, in the accompanying condensed consolidated statement of operations. The excess of the preferred stock repurchase price above the carrying value of the preferred stock was recorded as a deemed dividend in the three and nine months ended September 30, 2015. The Company retired the shares repurchased in the 2015 Repurchase as of August 21, 2015.

 

(e)                                  Twilio.org

 

On September 2, 2015, the Company’s board of directors approved the reservation of 888,022 shares of the Company’s common stock, which represented 1% of the Company’s outstanding capital stock on as-converted basis, to fund Twilio.org’s activities. Subsequently, on May 13, 2016, the Company’s board of directors authorized a reduction of 107,625 shares reserved to offset equity grants to Twilio.org employees. As of September 30, 2016, the total remaining shares reserved for Twilio.org was 780,397.

 

Twilio.org is a part of the Company and not a separate legal entity. The objective for Twilio.org is to further the philanthropic goals of the Company. As of September 30, 2016 and December 31, 2015, none of the reserved shares were issued and outstanding.

 

13. Stock-Based Compensation

 

2008 Stock Option Plan

 

The Company granted options under its 2008 Stock Option Plan (the “2008 Plan”), as amended and restated, until June 22, 2016, when the plan was terminated in connection with the Company’s IPO. Accordingly, no shares are available for future issuance under the 2008 Plan.  The 2008 Plan continues to govern outstanding equity awards granted thereunder.

 

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Table of Contents

 

2016 Stock Option Plan

 

The Company’s 2016 Equity Incentive Plan (the “2016 Plan”) became effective on June 21, 2016. The 2016 Plan provides for the grant of ISOs, NSOs, restricted stock, RSUs, stock appreciation rights, unrestricted stock awards, performance share awards, dividend equivalent rights and cash-based awards to employees, directors and consultants of the Company. A total of 11,500,000 shares of the Company’s Class A common stock were initially reserved for issuance under the 2016 Plan. These available shares will automatically increase each January 1, beginning on January 1, 2017, by 5% of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31, or such lesser number of shares as determined by the Company’s Compensation Committee.

 

2016 Employee Stock Purchase Plan

 

The Company’s Employee Stock Purchase Plan (“2016 ESPP”) became effective on June 21, 2016. A total of 2,400,000 shares of the Company’s Class A common stock were initially reserved for issuance under the 2016 ESPP. These available shares will automatically increase each January 1, beginning on January 1, 2017, by the lesser of 1,800,000 shares of the common stock, 1% of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31 or such lesser number of shares as determined by the Company’s compensation committee.

 

The 2016 ESPP allows eligible employees to purchase shares of the Company’s Class A common stock at a discount of up to 15% through payroll deductions of their eligible compensation, subject to any plan limitations. Except for the initial offering period, the 2016 ESPP provides for separate six-month offering periods beginning each November 16 and May 16 of each fiscal year.

 

On each purchase date, eligible employees will purchase the Company’s stock at a price per share equal to 85% of the lesser of (i) the fair market value of the Company’s Class A common stock on the offering date or (ii) the fair market value of the Company’s Class A common stock on the purchase date.

 

For the three and nine months ended September 30, 2016, no shares of common stock were purchased under the 2016 ESPP and 604,865 shares are expected to be purchased at the end of the initial offering period. The Company selected the Black-Scholes option-pricing model as the method for determining the estimated fair value for the Company’s 2016 ESPP. As of September 30, 2016, total unrecognized compensation cost related to 2016 ESPP was $2.2 million, net of estimated forfeitures, which will be amortized over a weighted-average period of 0.62 years.

 

Stock option activity under the 2008 Plan and the 2016 Plan during the nine months ended September 30, 2016 was as follows:

 

Stock Options

 

 

 

Number of
options
outstanding

 

Weighted-
average
exercise
price
(per
share)

 

Weighted-
average
remaining
contractual
term
(in years)

 

Aggregate
intrinsic
value
(in
thousands)

 

Outstanding options as of December 31, 2015

 

16,883,837

 

$

5.31

 

8.30

 

$

80,758

 

Granted

 

1,894,850

 

10.73

 

 

 

 

 

Exercised

 

(1,290,255

)

3.68

 

 

 

 

 

Forfeited and cancelled

 

(1,011,459

)

6.78

 

 

 

 

 

Outstanding options as of September 30, 2016

 

16,476,973

 

$

5.97

 

8.01

 

$

962,128

 

Options vested and exercisable as of September 30, 2016

 

7,061,282

 

$

4.03

 

7.22

 

$

426,041

 

Options vested and expected to vest as of September 30, 2016

 

15,672,768

 

$

5.86

 

7.97

 

$

916,842

 

 

Aggregate intrinsic value represents the difference between the fair value of the Company’s common stock and the exercise price of outstanding “in-the-money” options. Prior to the IPO, the fair value of the Company’s common stock was estimated by the Company’s board of directors. After the IPO, the fair value of the Company’s common stock is the Company’s stock price as reported on the New York Stock Exchange. The aggregate intrinsic value of stock options exercised was $4.4 million and $15.7 million for the three and nine months ended September 30, 2016, respectively, and $1.4 million and $7.6 million for the three and nine months ended September 30, 2015, respectively.

 

The total estimated grant date fair value of options vested was $4.9 million and $11.4 million for the three and nine months ended September 30, 2016, respectively, and $2.6 million and $5.4 million for the three and nine months ended September 30, 2015, respectively. No options were granted in the three months ended September 30, 2016. The weighted-average grant-date fair value of options granted was $5.52 for the nine months ended September 30, 2016, and $4.93 and $4.23 for the three and nine months ended September 30, 2015, respectively.

 

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Table of Contents

 

As of September 30, 2016, total unrecognized compensation cost related to non-vested stock options was $31.9 million, net of estimated forfeitures, which will be amortized over a weighted-average period of 2.48 years.

 

Restricted Stock Units

 

 

 

Number of
awards
outstanding

 

Weighted-
average
grant date
fair value
(per
share)

 

Aggregate
intrinsic
value
(in
thousands)

 

Nonvested RSUs as of December 31, 2015

 

71,000

 

$

9.39

 

$

716

 

Granted

 

1,709,377

 

32.79

 

 

 

Vested

 

(38,849

)

13.59

 

 

 

Forfeited and cancelled

 

(102,150

)

14.26

 

 

 

Nonvested RSUs as of September 30, 2016

 

1,639,378

 

$

33.39

 

$

105,510

 

 

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Prior to June 22, 2016, the Company granted RSUs (“Pre-IPO RSUs”) under its 2008 Plan to its employees that vested upon the satisfaction of both a service condition and a liquidity condition. The service condition for the majority of these awards will be satisfied over four years. The liquidity condition was satisfied upon occurrence of the Company’s IPO in June 2016. RSUs granted on or after the completion of the Company’s IPO (“Post-IPO RSUs”) under the 2016 Plan are not subject to a liquidity condition in order to vest. The compensation expense related to these grants is based on the grant date fair value of the RSUs and is recognized on a ratable basis over the applicable service period, net of estimated forfeitures. The majority of Post-IPO RSUs are earned over a service period of two to four years.

 

As of September 30, 2016, total unrecognized compensation cost related to nonvested RSUs was $44.5 million, net of estimated forfeitures, which will be amortized over a weighted-average period of 3.42 years.

 

Equity Awards Granted to Nonemployees

 

In the three months ended September 30, 2016, the Company granted 30,255 restricted stock units to a nonemployee. The award is vested upon the satisfaction of a service condition over two years starting in August 2015. The stock-based compensation expense recorded in relation to this award was $1.0 million in the three months ended September 30, 2016.  No options or restricted stock units were granted to nonemployees in the three and nine months ended September 30, 2015. In the three months ended December 31, 2015 the Company granted 30,000 stock options to a  nonemployee. These options vest upon the satisfaction of a service condition over a four year period. The stock-based compensation expense recorded in relation to this award was $0.2 million and $0.2 million in the three and nine months ending September 30, 2016, respectively.

 

Early Exercises of Nonvested Options

 

As of September 30, 2016 and December 31, 2015, the Company recorded a liability of $0.4 million and $0.2 million, respectively, for 74,451 and 52,407 unvested shares, respectively, that were early exercised by employees and were subject to repurchase at the respective period end. These amounts are reflected in current and non-current liabilities on the Company’s consolidated balance sheets.

 

Valuation Assumptions

 

The fair value of employee stock options was estimated on the date of grant using the following assumptions in the Black-Scholes option pricing model:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Employee Stock Options:

 

 

 

 

 

 

 

 

 

Fair value of common stock

 

*

 

$

7.78

 

$10.09-$15.00

 

$7.07 – 9.10

 

Expected term (in years)

 

*

 

6.08

 

6.08

 

6.08

 

Expected volatility

 

*

 

48.62

%

51.4%-53.0%

 

51.4% - 54.9%

 

Risk-free interest rate

 

*

 

1.7

%

1.3%-1.5%

 

1.4% - 1.9%

 

Dividend rate

 

*

 

0

%

0%

 

0%

 

 


*The Company did not grant stock options in the three month ended September 30, 2016.

 

Employee Stock Purchase Plan:

 

 

 

 

 

 

 

 

 

Expected term (in years)

 

0.9

 

 

0.9

 

 

Expected volatility

 

52

%

 

52%

 

 

Risk-free interest rate

 

0.6

%

 

0.6%

 

 

Dividend rate

 

0

%

 

0%

 

 

 

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Stock-Based Compensation Expense

 

The Company recorded the total stock-based compensation expense as follows (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Cost of revenue

 

$

84

 

$

17

 

$

135

 

$

45

 

Research and development

 

3,741

 

980

 

7,636

 

2,439

 

Sales and marketing

 

1,432

 

691

 

3,282

 

1,624

 

General and administrative

 

2,391

 

553

 

4,596

 

1,700

 

Total

 

$

7,648

 

$

2,241

 

$

15,649

 

$

5,808

 

 

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14. Net Loss per Share Attributable to Common Stockholders

 

Basic and diluted net loss per common share is presented in conformity with the two-class method required for participating securities.

 

Class A and Class B common stock are the only outstanding equity in 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 ten 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, and are automatically converted into Class A common stock upon sale or transfer, subject to certain limited exceptions.

 

Basic net loss per share attributable to common stockholders is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share attributable to common stockholders is computed using the weighted-average number of common shares and, if dilutive, potential common shares outstanding during the period. The dilutive effect of these potential common shares is reflected in diluted earnings per share by application of the treasury stock method.

 

The following table sets forth the calculation of basic and diluted net loss per share attributable to common stockholders during the periods presented (in thousands, except share and per share data):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Net loss attributable to common stockholders

 

$

(11,254

)

$

(12,400

)

$

(28,716

)

$

(30,636

)

Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted

 

83,887,901

 

17,805,486

 

42,030,989

 

17,981,477

 

Net loss per share attributable to common stockholders, basic and diluted

 

$

(0.13

)

$

(0.70

)

$

(0.68

)

$

(1.70

)

 

The following outstanding shares of common stock equivalents were excluded from the calculation of diluted net loss per share attributable to common stockholders because their effect would have been anti-dilutive:

 

 

 

As of September 30,

 

 

 

2016

 

2015

 

Conversion of convertible preferred stock outstanding

 

 

54,508,441

(1)

Issued and outstanding options

 

16,476,973

 

15,740,181

 

Nonvested RSUs issued and outstanding

 

1,639,378

 

50,000

 

Common stock reserved for Twilio.org

 

780,397

 

888,022

 

Shares committed under 2016 ESPP

 

604,865

 

 

Unvested shares subject to repurchase

 

74,451

 

38,451

 

Total

 

19,576,064

 

71,225,095

 

 


(1)                                     Includes 687,885 shares of Series T convertible preferred stock related to the Authy acquisition held in escrow.

 

15. Related Party Transactions

 

In 2015, two of the Company’s vendors participated in the Company’s Series E convertible preferred stock financing and owned approximately 2.09% and 1.05%, respectively, of the Company’s outstanding capital stock as of September 30, 2016, and 2.5% and 1.2%, respectively, of the Company’s capital stock, on as-if converted basis, as of December 31, 2015. During the three and nine months ended September 30, 2016, the amount of software services the Company purchased from the first vendor was $3.7 million and $10.3 million, respectively. During the three and nine months ended September 30, 2015, the amount of software services the Company purchased from the same vendor was $2.7 million and $8.4 million, respectively. The amounts due to this vendor that were accrued as of September 30, 2016 and December 31, 2015 were $1.5 million and $0, respectively.

 

The amount of services the Company purchased from the second vendor was $0.1 million and $0.3 million for the three and nine months ended September 30, 2016, respectively, and $0.2 million and $0.4 million for the three and nine months ended September 30, 2015, respectively. No amounts were due to this vendor as of September 30, 2016 and December 31, 2015.

 

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16. Employee Benefit Plan

 

The Company sponsors a 401(k) defined contribution plan covering all employees. There were no employer contributions to the plan in the three and nine months ended September 30, 2015. The employer contribution to the plan was $0.2 million and $0.9 million in the three and nine months ended September 30, 2016, respectively.

 

17. Subsequent Events

 

In October 2016, the Company completed a follow-on public offering 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 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 commissions and estimated offering expenses paid and payable by the Company. Of the net proceeds the Company received in this offering, $3.86 million was reserved to fund and support the operations of Twilio.org, and the number of shares of the Company’s Class A common stock that was reserved for that purpose was reduced by 100,000. The Company did not receive any of the net proceeds from the sales of shares by the selling stockholders.

 

In October 2016, the Company entered into a non-binding term sheet with SpeakEasy Tech, Inc., or SpeakEasy, pursuant to which the Company proposed to purchase up to $1,000,000 of convertible notes from SpeakEasy. The proposed investment is subject to the Company’s due diligence review, negotiation of definitive agreements and certain closing conditions. Byron Deeter, a member of the Company’s board of directors, is also a member of the board of directors of SpeakEasy. In addition, Mr. Deeter is a partner of Bessemer Ventures Partners, and entities affiliated with Bessemer Venture Partners own more than 5% of the Company’s outstanding capital stock and own more than 10% of the outstanding capital stock of SpeakEasy.

 

In October 2016, the Company entered into a three-year agreement with the first vendor referenced in Note 15 to purchase services from this vendor for an aggregate purchase commitment amount of $57.7 million over the course of the three-year contractual period.

 

* * * * * *

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our final prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission on October 21, 2016 (the “Prospectus”). In addition to historical financial information, the following discussion contains forward-looking statements that is based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in this Quarterly Report on Form 10-Q and in our Prospectus. Our fiscal year ends on December 31.

 

Overview

 

We are the leader in the Cloud Communications Platform category. We enable developers to build, scale and operate real-time communications within software applications.

 

Our developer-first platform approach consists of three things: our Programmable Communications Cloud, Super Network and Business Model for Innovators. Our Programmable Communications Cloud software enables developers to embed voice, messaging, video and authentication capabilities into their applications via our simple-to-use Application Programming Interfaces, or APIs. We do not aim to provide complete business solutions, rather our Programmable Communications Cloud offers flexible building blocks that enable our customers to build what they need. The Super Network is our software layer that allows our customers’ software to communicate with connected devices globally. It interconnects with communications networks around the world and continually analyzes data to optimize the quality and cost of communications that flow through our platform. Our Business Model for Innovators empowers developers by reducing friction and upfront costs, encouraging experimentation, and enabling developers to grow as customers as their ideas succeed.

 

We have relationships with network service providers globally to enable our platform to deliver excellent quality at reasonable cost to our customers. We support our global business through 22 cloud data centers in seven regions around the world and have developed direct relationships with network service providers globally.

 

Our business model is primarily focused on reaching and serving the needs of developers. We established and maintain our leadership position by engaging directly with, and cultivating, our developer community. We reach developers through community events and conferences, including our SIGNAL developer conferences, to demonstrate how every developer can create differentiated applications incorporating communications using our products.

 

Once developers are introduced to our platform, we provide them with a low-friction trial experience. By accessing our easy-to-configure APIs, extensive self-service documentation and customer support team, developers can build our products into their applications and then test such applications through free trials. Once they have decided to use our products beyond the initial free trial period, customers provide their credit card information and only pay for the actual usage of our products. Historically, we have acquired the substantial majority of our customers through this self-service model. As customers expand their usage of our platform, our relationships with them often evolve to include business leaders within their organizations. Once our customers reach a certain spending level with us, we support them with account managers or customer success advocates within our sales organization to ensure their satisfaction and expand their usage of our products.

 

When potential customers do not have the available developer resources to build their own applications, we refer them to our network of Solution Partners, who embed our products in their solutions, such as software for contact centers and sales force and marketing automation that they sell to other businesses.

 

We recently began to supplement our self-service model with a sales effort aimed at engaging larger potential customers, strategic leads and existing customers through an enterprise sales approach. We have supplemented this sales effort with a new product launch, Twilio Enterprise Plan, which provides new capabilities for advanced security, access management and granular administration. Our sales organization targets technical and business leaders who are seeking to leverage software to drive competitive differentiation. As we educate these leaders on the benefits of developing applications that incorporate our products to differentiate their business, they often consult with their developers regarding implementation. We believe that developers are often advocates for our products as a result of our developer-focused approach. Our sales organization includes sales development, inside sales, field sales and sales engineering personnel.

 

We generate the substantial majority of our revenue from charging our customers based on their usage of our software products that they have incorporated into their applications. A smaller portion of our revenue comes from products for which we charge monthly flat fees, such as phone numbers or premium customer support. Customers that register in our self-service model

 

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Table of Contents

 

typically pay up-front via credit card, and draw down their balance as they purchase or use our products. Most of our customers draw down their balance in the same month they pay up front and, as a result, our deferred revenue at any particular time is not a meaningful indicator of future revenue. As our customers’ usage grows, some of our customers enter into contracts and are invoiced monthly in arrears. Many of these customer contracts have terms of 12 months and typically include some level of minimum revenue commitment. Most customers with minimum revenue commitment contracts generate a significant amount of revenue in excess of their minimum revenue commitment in any period. Historically, the aggregate minimum commitment revenue from customers with which we have contracts has constituted a minority of our revenue in any period, and we expect this to continue in the future.

 

Our developer-focused products are delivered to customers and users through our Super Network, which uses software to optimize communications on our platform. We interconnect with communications networks globally to deliver our products, and therefore we have arrangements with network service providers in many regions throughout the world.  Historically, a substantial majority of our cost of revenue has been network service provider fees. We seek to optimize our network service provider coverage and connectivity through continuous improvements in routing and sourcing in order to lower the usage expenses we incur for network service provider fees. As we benefit from our platform optimization efforts, we sometimes pass these savings on to customers in the form of lower usage prices for our products in an effort to drive increased usage and expand the reach and scale of our platform. In the near term, we intend to operate our business to expand the reach and scale of our platform and to grow our revenue, rather than to maximize our gross margins.

 

We have achieved significant growth in recent periods. For the three months ended September 30, 2016 and 2015 our revenue was $71.5 million and $44.3 million, respectively, and our Base Revenue was $64.1 million and $36.7 million, respectively. In the three months ended September 30, 2016 and 2015, our 10 largest Active Customer Accounts generated an aggregate of 31% and 33% of our revenue, respectively. For the three months ended September 30, 2016 and 2015, among our 10 largest Active Customer Accounts we had three and one Variable Customer Accounts, respectively, representing 10% and 16% of our revenue, respectively. We incurred a GAAP net loss of $11.3 million and $9.0 million for the three months ended September 30, 2016 and 2015, respectively. See “—Key Business Metrics—Base Revenue” for a discussion of Base Revenue.

 

Initial Public Offering

 

In June 2016, we closed our initial public offering (“IPO”), at which time we sold a total of 11,500,000 shares of our Class A common stock.  We received net cash proceeds of $155.5 million, net of underwriting discounts and commissions and other costs associated with the offering paid or payable by us.

 

Follow-On Public Offering

 

In October 2016, we completed a follow-on public offering in which we sold 1,691,222 shares of our 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 our Class A common stock were sold by our selling stockholders, which included 906,364 shares sold pursuant to the exercise of employee stock options by certain selling stockholders. We received aggregate proceeds of $64.4 million, after deducting underwriting discounts and commissions and estimated offering expenses paid and payable by us. Of the net proceeds we received in this offering, $3.86 million was reserved to fund and support the operations of Twilio.org, and the number of shares of our Class A common stock that was reserved for that purpose was reduced by 100,000. We did not receive any of the net proceeds from the sales of shares by the selling stockholders.

 

Investment in SpeakEasy

 

In October 2016, we entered into a non-binding term sheet with SpeakEasy Tech, Inc., or SpeakEasy, pursuant to which we proposed to purchase up to $1,000,000 of convertible notes from SpeakEasy. The proposed investment is subject to our due diligence review, negotiation of definitive agreements and certain closing conditions. Byron Deeter, a member of our board of directors, is also a member of the board of directors of SpeakEasy. In addition, Mr. Deeter is a partner of Bessemer Ventures Partners, and entities affiliated with Bessemer Venture Partners own more than 5% of our outstanding capital stock and own more than 10% of the outstanding capital stock of SpeakEasy.

 

Stock Repurchases

 

On August 21, 2015, we repurchased an aggregate of 365,916 shares of Series A preferred stock and Series B preferred stock from certain preferred stockholders, and repurchased an aggregate of 1,869,156 shares of common stock from certain current and former employees, for $22.8 million in cash, which transaction we refer to as the 2015 Repurchase. The 2015 Repurchase was conducted at a price in excess of the fair value of our common stock at the date of repurchase. No special rights or privileges were conveyed to the employees and former employees. However, not all employees were invited to participate in the 2015 Repurchase. We recorded a compensation expense in the amount of $2.0 million, which represented the excess of the common stock repurchase

 

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price above the fair value of the common stock on the date of repurchase. The excess of the preferred stock repurchase price above the carrying value of the preferred stock was recorded as a deemed dividend in the three and nine months ended September 30, 2015. We retired the shares repurchased in the 2015 Repurchase as of August 21, 2015.

 

Key Business Metrics

 

 

 

Three Months
Ended
September 30,

 

 

 

2016

 

2015

 

Number of Active Customer Accounts (as of end date of period)

 

34,457

 

23,822

 

Base Revenue (in thousands)

 

$

64,099

 

$

36,729

 

Base Revenue Growth Rate

 

75

%

77

%

Dollar-Based Net Expansion Rate

 

155

%

156

%

 

Number of Active Customer Accounts.  We believe that the number of our Active Customer Accounts is an important indicator of the growth of our business, the market acceptance of our platform and future revenue trends. We define an Active Customer Account at the end of any period as an individual account, as identified by a unique account identifier, for which we have recognized at least $5 of revenue in the last month of the period. We believe that the use of our platform by Active Customer Accounts at or above the $5 per month threshold is a stronger indicator of potential future engagement than trial usage of our platform or usage at levels below $5 per month. A single customer may constitute multiple Active Customer Accounts if it has multiple unique account identifiers, each of which is treated as a separate Active Customer Account.

 

In the three months ended September 30, 2016 and 2015, revenue from Active Customer Accounts represented over 99% of total revenue in each period.

 

Base Revenue.  We monitor Base Revenue as one of the more reliable indicators of future revenue trends. Base Revenue consists of all revenue other than revenue from Active Customer Accounts with large customers that have never entered into 12-month minimum revenue commitment contracts with us, which we refer to as Variable Customer Accounts. While almost all of our customer accounts exhibit some level of variability in the usage of our products, based on our experience, we believe that Variable Customer Accounts are more likely to exhibit significant fluctuations in usage of our products from period to period, and therefore that revenue from Variable Customer Accounts may also fluctuate significantly from period to period. This behavior is best evidenced by the decision of such customers not to enter into contracts with us that contain minimum revenue commitments, even though they may spend significant amounts on the use of our products and they may be foregoing more favorable terms often available to customers that enter into committed contracts with us. This variability adversely affects our ability to rely upon revenue from Variable Customer Accounts when analyzing expected trends in future revenue.

 

For historical periods, through March 31, 2016, we defined a Variable Customer Account as a customer account that (i) was with a customer that had never signed a minimum revenue commitment contract with us for a term of at least 12 months and (ii) had met or exceeded 1% of our revenue in any quarter in the periods presented through March 31, 2016. To allow for consistent period-to-period comparisons, in the event a customer account qualified as a Variable Customer Account as of March 31, 2016, or a previously Variable Customer Account ceased to be an Active Customer Account as of such date, we included such customer account as a Variable Customer Account in all periods presented. For reporting periods starting after March 31, 2016, we define a Variable Customer Account as a customer account that (a) has been categorized as a Variable Customer Account in any prior quarter, as well as (b) any new customer account that (i) is with a customer that has never signed a minimum revenue commitment contract with us for a term of at least 12 months and (ii) meets or exceeds 1% of our revenue in a quarter. Once a customer account is deemed to be a Variable Customer Account in any period, it remains a Variable Customer Account in subsequent periods unless such customer enters into a minimum revenue commitment contract with us for a term of at least 12 months.

 

In the three months ended September 30, 2016 and 2015, we had eight Variable Customer Accounts, which represented 10% and 17%, respectively, of our total revenue.

 

Dollar-Based Net Expansion Rate.  Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with customers that have Active Customer Accounts and to increase their use of the platform. An important way in which we track our performance in this area is by measuring the Dollar-Based Net Expansion Rate for our Active Customer Accounts, other than our Variable Customer Accounts. Our Dollar-Based Net Expansion Rate increases when such Active Customer Accounts increase usage of a product, extend usage of a product to new applications or adopt a new product. Our Dollar-Based Net Expansion Rate decreases when such Active Customer Accounts cease or reduce usage of a product or when we lower usage prices on a product. We believe measuring our Dollar-Based Net Expansion Rate on revenue generated from our Active Customer Accounts, other than our Variable Customer Accounts, provides a more meaningful indication of the performance of our efforts to increase revenue from existing customers.

 

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Table of Contents

 

Our Dollar-Based Net Expansion Rate compares the revenue from Active Customer Accounts, other than Variable Customer Accounts, in a quarter to the same quarter in the prior year. To calculate the Dollar-Based Net Expansion Rate, we first identify the cohort of Active Customer Accounts, other than Variable Customer Accounts, that were Active Customer Accounts in the same quarter of the prior year. The Dollar-Based Net Expansion Rate is the quotient obtained by dividing the revenue generated from that cohort in a quarter, by the revenue generated from that same cohort in the corresponding quarter in the prior year. When we calculate Dollar-Based Net Expansion Rate for periods longer than one quarter, we use the average of the applicable quarterly Dollar-Based Net Expansion Rates for each of the quarters in such period.

 

In the three months ended September 30, 2016, our Dollar-Based Net Expansion Rate was 155%, compared to 156% in the three months ended September 30, 2015.

 

Key Components of Statements of Operations

 

Revenue.  We derive our revenue primarily from usage-based fees earned from customers using the software products within our Programmable Communications Cloud. These usage-based software products include our Programmable Voice, Programmable Messaging, Programmable Video and the recently introduced Programmable Wireless products. We also earn monthly flat fees from certain fee-based products, such as telephone numbers and customer support. We do not generate any revenue directly from our Super Network or Business Model for Innovators.

 

Customers typically pay up-front via credit card in monthly prepaid amounts and draw down their balances as they purchase or use our products. As customers grow they automatically receive tiered usage discounts. Our larger customers often enter into contracts that contain minimum revenue commitments, which may contain more favorable pricing. Customers on such contracts typically are invoiced monthly in arrears for products used.

 

Amounts that have been charged via credit card or invoiced are recorded in accounts receivable and in revenue or deferred revenue, depending on whether the revenue recognition criteria have been met. Given that our credit card prepayment amounts tend to be approximately equal to our credit card consumption amounts in each period, and that we do not have many invoiced customers on pre-payment contract terms, our deferred revenue at any particular time is not a meaningful indicator of future revenue.

 

We define U.S. revenue as revenue from customers with IP addresses at the time of registration in the United States, and we define international revenue as revenue from customers with IP addresses at the time of registration outside of the United States.

 

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Table of Contents

 

Cost of Revenue and Gross Margin.  Cost of revenue consists primarily of fees paid to network service providers. Cost of revenue also includes cloud infrastructure fees, personnel costs, such as salaries and stock-based compensation for our customer support employees, and non-personnel costs, such as amortization of capitalized internal-use software development costs. Our arrangements with network service providers require us to pay fees based on the volume of phone calls initiated or text messages sent, as well as the number of telephone numbers acquired by us to service our customers. Our arrangements with our cloud infrastructure provider require us to pay fees based on our server capacity consumption.

 

Our gross margin has been and will continue to be affected by a number of factors, including the timing and extent of our investments in our operations, our ability to manage our network service provider and cloud infrastructure-related fees, the mix of U.S. revenue compared to international revenue, the timing of amortization of capitalized software development costs and the extent to which we periodically choose to pass on our cost savings from platform optimization efforts to our customers in the form of lower usage prices.

 

Operating Expenses.  The most significant components of operating expenses are personnel costs, which consist of salaries, benefits, bonuses, stock-based compensation and compensation expenses related to stock repurchases from employees. We also incur other non-personnel costs related to our general overhead expenses. We expect that our operating costs will increase in absolute dollars.

 

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

 

Sales and Marketing.  Sales and marketing expenses consist primarily of personnel costs, including commissions for our sales employees. Sales and marketing expenses also include expenditures related to advertising, marketing, our brand awareness activities and developer evangelism, costs related to our SIGNAL developer conferences, credit card processing fees, professional services fees and an allocation of our general overhead expenses.

 

General and Administrative.  General and administrative expenses consist primarily of personnel costs for our accounting, finance, legal, human resources and administrative support personnel and executives. General and administrative expenses also include costs related to business acquisitions, legal and other professional services fees, sales and other taxes, depreciation and amortization and an allocation of our general overhead expenses.

 

Our general and administrative expenses include a significant amount of sales and other taxes to which we are subject based on the manner we sell and deliver our products. Historically, we have not collected such taxes from our customers and have therefore recorded such taxes as general and administrative expenses. We expect that these expenses will decline in future years as we continue to implement our sales tax collection mechanisms and start collecting these taxes from our customers.

 

Provision for Income Taxes.  Our provision for income taxes has not been historically significant to our business as we have incurred operating losses to date. Our provision for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business.

 

Non-GAAP Financial Measures

 

We use the following non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes.  We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance, facilitates period-to-period comparisons of results of operations, and assists in comparisons with other companies, many of which use similar non-GAAP financial information to supplement their GAAP results. Non-GAAP financial information is presented for supplemental informational purposes only, and should not be considered a substitute for financial information presented in accordance with generally accepted accounting principles, and may be different from similarly-titled non-GAAP measures used by other companies.  Whenever we use a non-GAAP financial measure, a reconciliation is provided to the most closely applicable financial measure stated in accordance with generally accepted accounting principles. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.

 

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Non-GAAP Gross Profit and Non-GAAP Gross Margin.  We define non-GAAP gross profit and non-GAAP gross margin as GAAP gross profit and GAAP gross margin, respectively, adjusted to exclude share-based compensation and amortization of acquired intangibles.

 

 

 

Three Months Ended
September 30,

 

 

 

2016

 

2015

 

 

 

(In thousands)

 

Reconciliation:

 

 

 

 

 

Gross profit

 

$

40,248

 

$

24,660

 

Non-GAAP Adjustments:

 

 

 

 

 

Stock-based compensation

 

84

 

17

 

Amortization of acquired intangible assets

 

70

 

70

 

Non-GAAP gross profit

 

$

40,402

 

$

24,747

 

 

 

 

 

 

 

GAAP gross margin

 

56

%

56

%

Non-GAAP gross margin

 

56

%

56

%

 

Non-GAAP Operating Expenses.  We define non-GAAP operating expenses (including categories of operating expenses) as GAAP operating expenses (and categories of operating expenses) adjusted to exclude, as applicable, share-based compensation, amortization of acquired intangibles, expenses related to stock repurchase and acquisition-related expenses.

 

 

 

Three Months Ended
September 30,

 

 

 

2016

 

2015

 

 

 

(In thousands)

 

Reconciliation:

 

 

 

 

 

Operating expenses

 

$

51,524

 

$

33,604

 

Non-GAAP Adjustments:

 

 

 

 

 

Stock-based compensation

 

(7,564

)

(2,224

)

Amortization of acquired intangible assets

 

(66

)

(65

)

Stock repurchase

 

 

(1,965

)

Acquisition related expenses

 

(137

)

 

Non-GAAP operating expenses

 

$

43,757

 

$

29,350

 

 

Non-GAAP Operating Loss and Non-GAAP Operating Margin.  We define non-GAAP operating loss and non-GAAP operating margin as GAAP operating loss and GAAP operating margin, respectively, adjusted to exclude share-based compensation, amortization of acquired intangibles, expenses related to stock repurchase and acquisition-related expenses.

 

 

 

Three Months Ended
September 30,

 

 

 

2016

 

2015

 

 

 

(In thousands)

 

Reconciliation:

 

 

 

 

 

Loss from operations

 

$

(11,276

)

$

(8,944

)

Non-GAAP Adjustments:

 

 

 

 

 

Stock-based compensation

 

7,648

 

2,241

 

Amortization of acquired intangible assets

 

136

 

135

 

Stock repurchase

 

 

1,965

 

Acquisition related expenses

 

137

 

 

Non-GAAP loss from operations

 

$

(3,355

)

$

(4,603

)

 

 

 

 

 

 

GAAP operating margin

 

(16

)%

(20

)%

Non-GAAP operating margin

 

(5

)%

(10

)%

 

26



Table of Contents

 

Results of Operations

 

The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of our historical results are not necessarily indicative of the results that may be expected in the future.

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(In thousands)

 

Revenue

 

$

71,533

 

$

44,262

 

$

195,383

 

$

115,581

 

Cost of revenue(1) (2)

 

31,285

 

19,602

 

86,315

 

51,974

 

Gross profit

 

40,248

 

24,660

 

109,068

 

63,607

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development(1) (2)

 

21,106

 

11,602

 

53,339

 

29,470

 

Sales and marketing(1)

 

15,873

 

12,067

 

47,451

 

36,100

 

General and administrative(1) (2)

 

14,545

 

9,935

 

36,773

 

25,235

 

Total operating expenses

 

51,524

 

33,604

 

137,563

 

90,805

 

Loss from operations

 

(11,276

)

(8,944

)

(28,495

)

(27,198

)

Other income (expenses), net

 

138

 

(28

)

92

 

(58

)

Loss before (provision) benefit for income taxes

 

(11,138

)

(8,972

)

(28,403

)

(27,256

)

(Provision) benefit for income taxes

 

(116

)

(36

)

(313

)

12

 

Net loss

 

(11,254

)

(9,008

)

(28,716

)

(27,244

)

Deemed dividend to investors in relation to tender offer

 

 

(3,392

)

 

(3,392

)

Net loss attributable to common stockholders

 

$

(11,254

)

$

(12,400

)

$

(28,716

)

$

(30,636

)

 


(1)                                     Includes stock-based compensation expense as follows:

 

 

 

Three Months
Ended
September 30,

 

Nine Months
Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(In thousands)

 

Cost of revenue

 

$

84

 

$

17

 

$

135

 

$

45

 

Research and development

 

3,741

 

980

 

7,636

 

2,439

 

Sales and marketing

 

1,432

 

691

 

3,282

 

1,624

 

General and administrative

 

2,391

 

553

 

4,596

 

1,700

 

Total

 

$

7,648

 

$

2,241

 

$

15,649

 

$

5,808

 

 

(2)                                     Includes amortization of acquired intangible assets as follows:

 

 

 

Three Months
Ended
September 30,

 

Nine Months
Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(In thousands)

 

Cost of revenue

 

$

70

 

$

70

 

$

210

 

$

119

 

Research and development

 

38

 

38

 

114

 

142

 

General and administrative

 

28

 

27

 

83

 

66

 

Total

 

$

136

 

$

135

 

$

407

 

$

327

 

 

27



Table of Contents

 

 

 

Three Months
Ended
September 30,

 

Nine Months
Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Consolidated Statements of Operations, as a percentage of revenue:**

 

 

 

 

 

 

 

 

 

Revenue

 

100

%

100

%

100

%

100

%

Cost of revenue

 

44

 

44

 

44

 

45

 

Gross profit

 

56

 

56

 

56

 

55

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

30

 

26

 

27

 

25

 

Sales and marketing

 

22

 

27

 

24

 

31

 

General and administrative

 

20

 

22

 

19

 

22

 

Total operating expenses

 

72

 

76

 

70

 

79

 

Loss from operations

 

(16

)

(20

)

(15

)

(24

)

Other income (expenses), net

 

*

 

*

 

*

 

*

 

Loss before (provision) benefit for income taxes

 

(16

)

(20

)

(15

)

(24

)

(Provision) benefit for income taxes

 

*

 

*

 

*

 

*

 

Net loss

 

(16

)

(20

)

(15

)

(24

)

Deemed dividend to investors in relation to tender offer

 

 

(8

)

 

(3

)

Net loss attributable to common stockholders

 

(16

)%

(28

)%

(15

)%

(27

)%

 


*            Less than 0.5% of revenue.

 

**         Columns may not add up to 100% due to rounding.

 

Comparison of the Three Months Ended September 30, 2016 and 2015

 

Revenue

 

 

 

Three Months
Ended
September 30,

 

 

 

 

 

 

 

2016

 

2015

 

Change

 

 

 

(Dollars in thousands)

 

Base Revenue

 

$

64,099

 

$

36,729

 

$

27,370

 

75

%

Variable Revenue

 

7,434

 

7,533

 

(99

)

(1

)%

Total revenue

 

$

71,533

 

$

44,262

 

$

27,271

 

62

%

 

In the three months ended September 30, 2016, Base Revenue increased by $27.4 million, or 75%, compared to the same period last year, and represented 90% and 83% of total revenue in the three months ended September 30, 2016 and 2015, respectively. This increase was primarily attributable to an increase in the usage of all of our products, particularly our Programmable Messaging products and Programmable Voice products, and the adoption of additional products by our existing customers. This increase was partially offset by pricing decreases that we have implemented over time for our customers in the form of lower usage prices in an effort to increase the reach and scale of our platform. The changes in usage and price in the three months ended September 30, 2016 were reflected in our Dollar-Based Net Expansion Rate of 155%. The increase in usage was also attributable to a 45% increase in the number of Active Customer Accounts, from 23,822 as of September 30, 2015 to 34,457 as of September 30, 2016.

 

In the three months ended September 30, 2016, Variable Revenue decreased by $0.1 million, or 1%, compared to the same period last year, and represented 10% and 17% of total revenue in the three months ended September 30, 2016 and 2015, respectively. This decrease was primarily attributable to the fluctuating nature of our Variable Customers. As these customers increase or decrease their usage of our products, Variable Revenue also varies from period to period.

 

U.S. revenue and international revenue represented $60.5 million, or 85%, and $11.0 million, or 15%, respectively, of total revenue in the three months ended September 30, 2016, compared to $38.3 million, or 87%, and $6.0 million, or 13%, respectively, of total revenue in the three months ended September 30, 2015. The increase in international revenue in absolute dollars and as a percentage of total revenue was attributable to the growth in usage of our products, particularly our Programmable Messaging products and Programmable Voice products, by our existing international customers and to a 63% increase in the number of international Active Customer Accounts, driven in part by our focus on expanding our sales to customers outside of the United States.

 

Cost of Revenue and Gross Margin

 

 

 

Three Months
Ended
September 30,

 

 

 

 

 

 

 

2016

 

2015

 

Change

 

 

 

(Dollars in thousands)

 

Cost of revenue

 

$

31,285

 

$

19,602

 

$

11,683

 

60

%

Gross margin

 

56

%

56

%

 

 

 

 

 

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Table of Contents

 

In the three months ended September 30, 2016, cost of revenue increased by $11.7 million, or 60%, compared to the same period last year. The increase in cost of revenue was primarily attributable to a $10.3 million increase in network service providers’ fees, a $0.7 million increase in cloud infrastructure fees to support the growth in usage of our products and a $0.4 million increase in amortization expense related to our internal-use software and acquired intangible assets.

 

Operating Expenses

 

 

 

Three Months
Ended
September 30,

 

 

 

 

 

 

 

2016

 

2015

 

Change

 

 

 

(Dollars in thousands)

 

Research and development

 

$

21,106

 

$

11,602

 

$

9,504

 

82

%

Sales and marketing

 

15,873

 

12,067

 

3,806

 

32

%

General and administrative

 

14,545

 

9,935

 

4,610

 

46

%

Total operating expenses

 

$

51,524

 

$

33,604

 

$

17,920

 

53

%

 

In the three months ended September 30, 2016, research and development expenses increased by $9.5 million, or 82%, compared to the same period last year. The increase was primarily attributable to a $7.6 million increase in personnel costs, net of a $0.8 million increase in capitalized software development costs, largely as a result of a 55% average increase in our research and development headcount due to our continued focus on product development and enhancement. The increase was also due in part to a $0.8 million increase in cloud infrastructure fees to support the staging and development of our products, $0.6 million increase in facilities expenses to accommodate our headcount growth, a $0.3 million increase in amortization expense related to our internal-use software and acquired intangible assets and a $0.2 million increase related to employee travel.  These increases were partially offset by a $0.8 million decrease in compensation expense in 2016 because we did not undertake repurchases of our stock as we had in our 2015 Repurchase.

 

In the three months ended September 30, 2016, sales and marketing expenses increased by $3.8 million, or 32%, compared to the same period last year. The increase was primarily attributable to a $2.1 million increase in personnel costs, largely as a result of a 24% average increase in sales and marketing headcount as we continued to expand our sales efforts in the United States and internationally, a $0.7 million increase in marketing and advertising costs, a $0.4 million increase in credit card processing fees due to increased volume, a $0.2 million increase in facilities expenses to accommodate our headcount growth and a $0.2 million increase related to our international SIGNAL conference.

 

In the three months ended September 30, 2016, general and administrative expenses increased by $4.6 million, or 46%, compared to the same period last year. The increase was primarily attributable to a $2.8 million increase in personnel costs, largely as a result of a 31% average increase in headcount to support the growth of our business, a $1.2 million increase in sales and other taxes, a $0.5 million increase in facilities and related expenses, a $0.2 million increase in professional services fees, a $0.2 million increase in depreciation and amortization expense and a $0.1 million increase in business acquisition related costs.  These increases were partially offset by a $1.1 million decrease in compensation expense in 2016 because we did not undertake repurchases of our stock as we had in our 2015 Repurchase.

 

Comparison of the Nine Months Ended September 30, 2016 and 2015

 

Revenue

 

 

 

Nine Months
Ended September 30,

 

 

 

 

 

 

 

2016

 

2015

 

Change

 

 

 

(Dollars in thousands)

 

Base Revenue

 

$

170,303

 

$

93,354

 

$

76,949

 

82

%

Variable Revenue

 

25,080

 

22,227

 

2,853

 

13

%

Total revenue

 

$

195,383

 

$

115,581

 

$

79,802

 

69

%

 

In the nine months ended September 30, 2016, Base Revenue increased by $76.9 million, or 82%, compared to the same period last year, and represented 87% and 81% of total revenue in the nine months ended September 30, 2016 and 2015, respectively. This increase was primarily attributable to an increase in the usage of all our products, particularly our Programmable Messaging products and Programmable Voice products, and the adoption of additional products by our existing customers. This increase was

 

29



Table of Contents

 

partially offset by pricing decreases that we have implemented over time for our customers in the form of lower usage prices in an effort to increase the reach and scale of our platform. The changes in usage and price in the nine months ended September 30, 2016 were reflected in our Dollar-Based Net Expansion Rate of 163%. The increase in usage was also attributable to a 45% increase in the number of Active Customer Accounts, from 23,822 as of September 30, 2015 to 34,457 as of September 30, 2016.

 

In the nine months ended September 30, 2016, Variable Revenue increased by $2.9 million, or 13%, compared to the same period last year, and represented 13% and 19% of total revenue in the nine months ended September 30, 2016 and 2015, respectively. This increase was primarily attributable to the increase in the usage of products by our existing Variable Customer Accounts.

 

U.S. revenue and international revenue represented $165.5 million, or 85%, and $29.9 million, or 15%, respectively, of total revenue in the nine months ended September 30, 2016 compared to $99.2 million, or 86%, and $16.4 million, or 14%, respectively, of total revenue in the nine months ended September 30, 2015. The increase in international revenue in absolute dollars was attributable to the growth in usage of our products, particularly our Programmable Messaging products and Programmable Voice products, by our existing international Active Customer Accounts and to a 63% increase in the number of international Active Customer Accounts, driven in part by our focus on expanding our sales to customers outside of the United States.

 

Cost of Revenue and Gross Margin

 

 

 

Nine Months
Ended September 30,

 

 

 

 

 

 

 

2016

 

2015

 

Change

 

 

 

(Dollars in thousands)

 

Cost of revenue

 

$

86,315

 

$

51,974

 

$

34,341

 

66

%

Gross margin

 

56

%

55

%

 

 

 

 

 

In the nine months ended September 30, 2016, cost of revenue increased by $34.3 million, or 66%, compared to the same period last year. The increase in cost of revenue was primarily attributable to a $30.4 million increase in network service providers’ fees, a $1.8 million increase in cloud infrastructure fees to support the growth in usage of our products and a $1.2 million increase in amortization expense for our internal-use software and acquired intangible assets.

 

In the nine months ended September 30, 2016, gross margin improved primarily as a result of cost savings from our continued platform optimization efforts.

 

Operating Expenses

 

 

 

Nine Months
Ended September 30,

 

 

 

 

 

 

 

2016

 

2015

 

Change

 

 

 

(Dollars in thousands)

 

Research and development

 

$

53,339

 

$

29,470

 

$

23,869

 

81

%

Sales and marketing

 

47,451

 

36,100

 

11,351

 

31

%

General and administrative

 

36,773

 

25,235

 

11,538

 

46

%

Total operating expenses

 

$

137,563

 

$

90,805

 

$

46,758

 

51

%

 

In the nine months ended September 30, 2016, research and development expenses increased by $23.9 million, or 81%, compared to the same period last year. The increase was primarily attributable to a $19.0 million increase in personnel costs, net of a $3.0 million increase in capitalized software development costs, largely as a result of a 58% average increase in our research and development headcount as a result of our continued focus on product development and enhancement. The increase was also due in part to a $1.3 million increase in our facilities expenses to accommodate our headcount growth, a $0.8 million increase in cloud infrastructure fees to support the staging and development of our products, a $0.8 million increase in amortization expense related to our internal-use software and acquired intangible assets and a $0.8 million increase related to software licenses. These increases were partially offset by a $0.8 million decrease in compensation expense in 2016 because we did not undertake repurchases of our stock as we had in our 2015 Repurchase.

 

In the nine months ended September 30, 2016, sales and marketing expenses increased by $11.4 million, or 31%, compared to the same period last year. The increase was primarily attributable to a $6.3 million increase in personnel costs, largely as a result of a 28% increase in sales and marketing headcount as we continued to expand our sales efforts in the United States and internationally, a $1.1 million increase in credit card processing fees due to higher transaction volumes, a $0.8 million increase related to our SIGNAL developer conferences, a $0.6 million increase in employee travel, a $0.6 million increase in professional services expense, a $0.6 million increase related to software licenses, a $0.5 million increase in facilities related expenses and a $0.3 million increase in advertising expenses.

 

30



Table of Contents

 

In the nine months ended September 30, 2016, general and administrative expenses increased by $11.5 million, or 46%, compared to the same period last year. The increase was primarily attributable to a $5.7 million increase in personnel costs, largely as a result of a 44% increase in headcount to support the growth of our business, a $3.9 million increase in sales and other taxes, a $1.4 million increase in professional service fees unrelated to Authy acquisition, a $0.5 million increase in depreciation and amortization expense and a $0.4 million increase in facilities expenses.  These increases were partially offset by a $1.1 million decrease in compensation expense in 2016 because we did not undertake repurchases of our stock as we had in our 2015 Repurchase and a $1.0 million decrease in professional service fees related to the acquisition of Authy in 2015.

 

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Table of Contents

 

Liquidity and Capital Resources

 

Through September 30, 2016, our principal sources of liquidity have been the net proceeds of $155.5 million, after deducting underwriting discounts and offering expenses paid or payable by us, from our initial public offering in June 2016, the net proceeds we received through private sales of equity securities, as well as payments we received from customers using our products. From our inception through March 31, 2016, we completed several rounds of equity financing through the sales of our convertible preferred stock for total net proceeds of $237.1 million. We believe that our cash and cash equivalents balances, our credit facility and the cash flows generated by our operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, our belief may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section of this Quarterly Report on Form 10-Q titled “Risk Factors.” We cannot assure you that we will be able to raise additional capital on acceptable terms, or at all. In addition, if we fail to meet our operating plan during the next 12 months, our liquidity could be adversely affected.

 

Credit Facility

 

On March 19, 2015, we entered into a $15.0 million revolving line of credit with Silicon Valley Bank, or SVB. Under this credit facility, outstanding borrowings are based on our prior month’s monthly recurring revenue. Advances on the line of credit bear interest payable monthly at Wall Street Journal prime rate plus 1%. Borrowings are secured by substantially all of our assets, with limited exceptions. In order to be able to borrow against the credit line, we must comply with certain restrictive covenants. We are currently in compliance with these covenants. This credit facility expires in March 2017. As of September 30, 2016, the total amount available to be borrowed by us was $15.0 million and we had no outstanding balance on this credit facility.

 

Cash Flows

 

The following table summarizes our cash flows for the periods indicated (in thousands):

 

 

 

Nine Months
Ended September 30,

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Cash provided by (used in) operating activities

 

$

4,419

 

$

(14,360

)

Cash used in investing activities

 

(21,814

)

(9,437

)

Cash provided by financing activities

 

160,785

 

107,164

 

Net increase in cash and cash equivalents

 

$

143,390

 

$

83,367

 

 

Cash Flows from Operating Activities

 

In the nine months ended September 30, 2016, cash provided by operating activities consisted primarily of our net loss of $28.7 million adjusted for non-cash items, including $15.6 million of stock-based compensation expense, $5.3 million of depreciation and amortization expense and $11.0 million of cumulative changes in operating assets and liabilities. With respect to changes in operating assets and liabilities, accounts payable and other liabilities increased $20.9 million and deferred revenue increased $3.3 million, primarily due to increases in transaction volumes and additional accruals of sales and other taxes. Other long-term liabilities increased $9.6 million, primarily due to the $9.5 million increase in the deferred rent related to our new office lease in San Francisco, California.  These increases were partially offset by an increase in accounts receivable and prepaid expenses of $22.8 million, which resulted from the growth of our business, the timing of cash receipts from certain of our larger customers, pre-payments for cloud infrastructure fees and certain operating expenses and an $8.0 million increase related to the tenant improvement allowance under our new San Francisco, California office lease.

 

In the nine months ended September 30, 2015, cash used in operating activities consisted primarily of our net loss of $27.2 million adjusted for non-cash items, including $5.8 million of stock-based compensation expense, $2.8 million of depreciation and amortization expense and $4.0 million of cumulative changes in operating assets and liabilities. With respect to changes in operating assets and liabilities, accounts payable and other liabilities increased $10.7 million and deferred revenue increased $1.4 million, which was primarily due to increases in transaction volumes and additional accruals of sales and other taxes. This was offset by an increase in accounts receivable and prepaid expenses of $7.9 million, which primarily resulted from the growth of our business and the timing of cash receipts from certain of our larger customers.

 

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Table of Contents

 

Cash Flows from Investing Activities

 

In the nine months ended September 30, 2016, cash used in investing activities was $21.8 million, primarily consisting of a $7.4 million increase in restricted cash mainly to secure our new San Francisco, California office lease, $8.4 million of payments for capitalized software development as we continued to build new products and enhance our existing products, and a $5.3 million increase in purchases of capital assets primarily related to the leasehold improvements under our new office lease.

 

In the nine months ended September 30, 2015, cash used in investing activities was $9.4 million, primarily consisting of $6.1 million of payments for capitalized software development as we continued to build new products and enhance our existing products, $1.8 million of payments related to the acquisition of Authy, net of $1.2 million of cash acquired, and $1.2 million of payments related to purchases of property and equipment as we continued to expand our offices and grow our headcount to support the growth of our business.

 

Cash Flows from Financing Activities

 

In the nine months ended September 30, 2016, cash provided by financing activities was $160.8 million, primarily consisting of $160.4 million of proceeds raised in our initial public offering, net of underwriting discounts, and $4.8 million of proceeds from stock options exercises by our employees. These cash inflows were partially offset by $3.9 million of costs paid in connection with our initial public offering.

 

In the nine months ended September 30, 2015, cash provided by financing activities was $107.2 million, primarily consisting of $125.9 million proceeds from our sales of Series E convertible preferred stock, net of issuance expenses, and $2.0 million proceeds from stock option exercises by our employees. This was partially offset by the $20.8 million of payments made in 2015 in connection with our 2015 Repurchase.

 

Critical Accounting Policies and Estimates

 

Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

 

We believe that the assumptions and estimates associated with revenue recognition, stock-based compensation, the valuation of goodwill and intangible assets, internal-use software development costs, accruals and legal contingencies have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

 

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in the Prospectus.

 

Recently Issued Accounting Guidance

 

See Note 2 of the notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a summary of recently issued and adopted accounting pronouncements

 

Contractual Obligations and Other Commitments

 

Our principal commitments consist of obligations under our operating leases for office space and contractual commitments to our cloud infrastructure and network service providers.

 

See Note 11 of the notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion of our commitments under contractual obligations.

 

Off-Balance Sheet Arrangements

 

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

 

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Item 3.                          Quantitative and Qualitative Disclosures about Market Risk

 

Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to certain market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities as follows:

 

Interest Rate Risk

 

We had cash and cash equivalents of $252.2 million as of September 30, 2016, which consisted of bank deposits and money market funds. The cash and cash equivalents are held for working capital purposes. Such interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in interest income have not been significant. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. Due to the short-term nature of our investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. The interest rate on our outstanding credit facility is fixed. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.

 

Currency Exchange Risks

 

The functional currency of our foreign subsidiaries is the U.S. dollar. Therefore, we are exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars. The local currencies of our foreign subsidiaries are the British pound, the euro, the Colombian peso, the Singapore dollar and the Hong Kong dollar. Our 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 fiscal year. If there is a change in foreign currency exchange rates, the conversion of our foreign subsidiaries’ financial statements into U.S. dollars would result in a realized gain or loss which is recorded in our consolidated statements of operations. We do not currently engage in any hedging activity to reduce our potential exposure to currency fluctuations, although we may choose to do so in the future. A hypothetical 10% change in foreign exchange rates during any of the periods presented would not have had a material impact on our consolidated financial statements.

 

Item 4.                          Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective.

 

Changes in Internal Control

 

There were no changes in our internal control over financial reporting in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations on Effectiveness of Controls

 

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

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PART II — OTHER INFORMATION