UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________
FORM 10-Q
_____________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934 | |
For the quarterly period ended June 30, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission File Number: 001-37806
(Exact name of registrant as specified in its charter)
_____________________________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
(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 ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | ||
Non-accelerated filer | ☐ | Smaller reporting company | ||
Emerging growth company | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ý
Securities registered pursuant to Section 12(b) of the act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
As of July 26, 2019, 121,541,496 shares of the registrant’s Class A common stock and 14,346,097 shares of registrant’s Class B common stock were outstanding.
TWILIO INC.
Quarterly Report on Form 10-Q
For the Three Months Ended June 30, 2019
TABLE OF CONTENTS
Page | ||
1
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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; |
• | 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; |
• | the evolution of technology affecting our products and markets; |
• | our ability to introduce new products and enhance existing products; |
• | our ability to comply with modified or new industry standards, laws and regulations applying to our business, including the General Data Protection Regulation (“GDPR”), the California Consumer Privacy Act of 2018 and other privacy regulations that may be implemented in the future, and increased costs associated with such compliance; |
• | our ability to optimize our network service provider coverage and connectivity; |
• | our ability to manage changes in network service provider fees that we pay in connection with the delivery of communications on our platform; |
• | our ability to work closely with email inbox service providers to maintain deliverability rates; |
• | our ability to pass on our savings associated with our platform optimization efforts to our customers; |
• | the impact and expected results from changes in our relationship with our larger customers; |
• | our ability to attract and retain enterprises and international organizations as customers for our products; |
• | our ability to form and expand partnerships with technology partners and consulting partners; |
• | 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; |
• | the sufficiency of our cash and cash equivalents to meet our liquidity needs; |
• | 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 service the interest on our convertible notes and repay such notes, to the extent required; |
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• | our customers' and other platform users' violation of our policies or other misuse of our platform; and |
• | our ability to successfully integrate and realize the benefits of our past or future strategic acquisitions or investments, including our acquisition of SendGrid, Inc. (“SendGrid”). |
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 Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
3
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
TWILIO INC.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
As of June 30, 2019 | As of December 31, 2018 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Short-term marketable securities | ||||||||
Accounts receivable, net | ||||||||
Prepaid expenses and other current assets | ||||||||
Total current assets | ||||||||
Restricted cash | ||||||||
Property and equipment, net | ||||||||
Operating right of use asset | ||||||||
Intangible assets, net | ||||||||
Goodwill | ||||||||
Other long-term assets | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | $ | ||||||
Accrued expenses and other current liabilities | ||||||||
Deferred revenue and customer deposits | ||||||||
Operating lease liability, current | ||||||||
Financing lease liability, current | ||||||||
Note payable, current | ||||||||
Total current liabilities | ||||||||
Operating lease liability, noncurrent | ||||||||
Financing lease liability, noncurrent | ||||||||
Note payable, noncurrent | ||||||||
Convertible senior notes, net | ||||||||
Other long-term liabilities | ||||||||
Total liabilities | ||||||||
Commitments and contingencies (Note 12) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock | ||||||||
Class A and Class B common stock | ||||||||
Additional paid-in capital | ||||||||
Accumulated other comprehensive income | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Total stockholders’ equity | ||||||||
Total liabilities and stockholders’ equity | $ | $ | ||||||
4
TWILIO INC.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenue | $ | $ | $ | $ | ||||||||||||
Cost of revenue | ||||||||||||||||
Gross profit | ||||||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | ||||||||||||||||
Sales and marketing | ||||||||||||||||
General and administrative | ||||||||||||||||
Total operating expenses | ||||||||||||||||
Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Other expenses, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Loss before provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Income tax benefit (provision) | ( | ) | ( | ) | ||||||||||||
Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Net loss per share attributable to common stockholders, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
5
TWILIO INC.
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized gain (loss) on marketable securities | ( | ) | ||||||||||||||
Foreign currency translation | ( | ) | ||||||||||||||
Total other comprehensive income (loss) | ( | ) | ( | ) | ||||||||||||
Comprehensive loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See accompanying notes to condensed consolidated financial statements.
6
TWILIO INC.
Condensed Consolidated Statements of Stockholders' Equity
(In thousands, except share amounts)
(Unaudited)
Common Stock Class A | Common Stock Class B | Additional Paid In Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Total Stockholders' Equity | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||
Balance as of December 31, 2018 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||
Net loss | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||
Exercises of vested stock options | — | — | ||||||||||||||||||||||||||||
Vesting of early exercised stock options | — | — | — | — | — | |||||||||||||||||||||||||
Vesting of restricted stock units | — | — | — | — | — | — | ||||||||||||||||||||||||
Value of equity awards withheld for tax liability | ( | ) | — | ( | ) | — | ( | ) | — | — | ( | ) | ||||||||||||||||||
Conversion of shares of Class B common stock into shares of Class A common stock | ( | ) | ( | ) | — | — | — | — | ||||||||||||||||||||||
Shares issued in acquisition | — | — | — | — | ||||||||||||||||||||||||||
Equity awards assumed in acquisition | — | — | — | — | — | — | ||||||||||||||||||||||||
Unrealized gain on marketable securities | — | — | — | — | — | — | ||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||
Balance as of March 31, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||
Net loss | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||
Issuance of common stock in connection with a public offering, net of underwriter discounts | — | — | — | — | ||||||||||||||||||||||||||
Costs related to the public offering | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||
Exercises of vested stock options | — | — | — | |||||||||||||||||||||||||||
Vesting of restricted stock units | — | — | — | — | ||||||||||||||||||||||||||
Value of equity awards withheld for tax liability | ( | ) | — | ( | ) | — | ( | ) | — | — | ( | ) | ||||||||||||||||||
Conversion of shares of Class B common stock into shares of Class A common stock | ( | ) | ( | ) | — | — | — | — | ||||||||||||||||||||||
Shares issued under ESPP | — | — | — | — | — | |||||||||||||||||||||||||
Equity awards assumed in acquisition (measurement period adjustment) | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||
Unrealized gain on marketable securities | — | — | — | — | — | — | ||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||
Balance as of June 30, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
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TWILIO INC.
Condensed Consolidated Statements of Stockholders' Equity, continued
(In thousands, except share amounts)
(Unaudited)
Common Stock Class A | Common Stock Class B | Additional Paid In Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Total Stockholders' Equity | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||
Balance as of December 31, 2017 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||
Net loss | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||
Adjustment to opening retained earnings due to adoption of ASC 606 | — | — | — | — | — | — | ||||||||||||||||||||||||
Exercises of vested stock options | — | — | — | — | ||||||||||||||||||||||||||
Vesting of early exercised stock options | — | — | — | — | — | |||||||||||||||||||||||||
Vesting of restricted stock units | — | — | — | — | — | — | ||||||||||||||||||||||||
Value of equity awards withheld for tax liability | ( | ) | — | ( | ) | — | ( | ) | — | — | ( | ) | ||||||||||||||||||
Conversion of shares of Class B common stock into shares of Class A common stock | ( | ) | ( | ) | — | — | — | — | ||||||||||||||||||||||
Unrealized loss on marketable securities | — | — | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||
Foreign currency translation | — | — | — | — | — | — | ||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||
Balance as of March 31, 2018 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||
Net loss | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||
Exercises of vested stock options | — | — | — | — | ||||||||||||||||||||||||||
Vesting of early exercised stock options | — | — | — | — | — | — | ||||||||||||||||||||||||
Vesting of restricted stock units | — | — | — | — | — | — | ||||||||||||||||||||||||
Value of equity awards withheld for tax liability | ( | ) | — | ( | ) | — | ( | ) | — | — | ( | ) | ||||||||||||||||||
Conversion of shares of Class B common stock into shares of Class A common stock | ( | ) | ( | ) | — | — | — | — | ||||||||||||||||||||||
Shares issued under ESPP | — | — | — | — | — | |||||||||||||||||||||||||
Issuance of debt conversion option | — | — | — | — | — | — | ||||||||||||||||||||||||
Debt conversion option issuance costs | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||
Capped call option issuance costs | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||
Unrealized loss on marketable securities | — | — | — | — | — | — | ||||||||||||||||||||||||
Foreign currency translation | — | — | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | |||||||||||||||||||||||||
Balance as of June 30, 2018 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
8
TWILIO INC.
Condensed Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
Depreciation and amortization | ||||||||
Right-of-use asset amortization | ||||||||
Net amortization of investment premium and discount | ( | ) | ( | ) | ||||
Amortization of debt discount and issuance costs | ||||||||
Stock-based compensation | ||||||||
Amortization of deferred commissions | ||||||||
Provision for doubtful accounts | ||||||||
Tax benefit related to release of valuation allowance | ( | ) | ||||||
Write-off of long lived assets | ||||||||
Other tax benefit realized in the period | ( | ) | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | ( | ) | ( | ) | ||||
Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
Other long-term assets | ( | ) | ( | ) | ||||
Accounts payable | ||||||||
Accrued expenses and other current liabilities | ||||||||
Deferred revenue and customer deposits | ||||||||
Operating right of use liability | ( | ) | ||||||
Long-term liabilities | ( | ) | ( | ) | ||||
Net cash (used in) provided by operating activities | ( | ) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Acquisitions, net of cash acquired | ||||||||
Purchases of marketable securities and other investments | ( | ) | ( | ) | ||||
Proceeds from sales and maturities of marketable securities | ||||||||
Capitalized software development costs | ( | ) | ( | ) | ||||
Purchases of long-lived assets | ( | ) | ( | ) | ||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from a public offering, net of underwriting discount | ||||||||
Payments of costs related to the public offering | ( | ) | ||||||
Proceeds from issuance of convertible senior notes | ||||||||
Payment of debt issuance costs | ( | ) | ||||||
Purchase of capped call | ( | ) | ||||||
Principal payments on notes payable | ( | ) | ||||||
Principal payments on financing leases | ( | ) | ||||||
Proceeds from exercises of stock options | ||||||||
Proceeds from shares issued under ESPP | ||||||||
Value of equity awards withheld for tax liabilities | ( | ) | ( | ) | ||||
Net cash provided by financing activities | ||||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | ||||||||
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ||||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period | ||||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period | $ | $ | ||||||
Cash paid for income taxes, net | $ | $ | ||||||
Cash paid on finance leases | $ | $ | ||||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Purchases of property, equipment and intangible assets, accrued but not paid | $ | $ | ||||||
Purchases of property and equipment through finance leases | $ | $ | ||||||
Acquisition holdback | $ | $ | — | |||||
Acquisition - value of common stock issued, stock awards assumed and measurement period adjustments | $ | $ | ||||||
Stock-based compensation capitalized in software development costs | $ | $ | ||||||
Debt offering costs, accrued but not paid | $ | $ | ||||||
Costs related to public offerings, accrued but not paid | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
9
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 is the leader in the Cloud Communications Platform category and enables developers to build, scale and operate real-time communications within their software applications via simple-to-use Application Programming Interfaces (“API”). The power, flexibility, and reliability offered by the Company’s software building blocks empower entities of virtually every shape and size to build world-class engagement into their customer experience.
The Company’s headquarters are located in San Francisco, California, and the Company has subsidiaries in Australia, Bermuda, Colombia, Czech Republic, Estonia, France, Germany, Hong Kong, Ireland, Japan, the Netherlands, Singapore, Spain, Sweden, United Kingdom and the United States.
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 our Annual Report on Form 10-K filed with the SEC on March 1, 2019 (“Annual Report”).
The condensed consolidated balance sheet as of December 31, 2018, included herein, was derived from the audited financial statements as of that date, but may 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 2019 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.
(c)Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are used for, but not limited to, revenue allowances and returns; recoverability of long-lived and intangible assets; capitalization and useful life of the Company’s capitalized internal-use software development costs; fair value of acquired intangible assets and goodwill; accruals and contingencies. Estimates are based on historical experience and on various assumptions that the Company believes are reasonable under current circumstances. However, future events are subject to change and best estimates and judgments may require further adjustments; therefore, actual results could differ materially from those estimates. Management periodically evaluates such estimates and they are adjusted prospectively based upon such periodic evaluation.
10
(d)Concentration of Credit Risk
Financial instruments that potentially expose the Company to a concentration of credit risk consist primarily of cash, cash equivalents, marketable securities, restricted cash and accounts receivable. The Company maintains cash, cash equivalents, marketable securities and restricted cash with financial institutions that management believes are financially sound and have minimal credit risk exposure although the balances will exceed insured limits.
As of June 30, 2019, and December 31, 2018, no customer organization represented more than 10% of the Company’s gross accounts receivable.
(e)Deferred Revenue and Customer Deposits
Deferred revenue is recorded when cash payments are received in advance of future usage on non-cancelable contracts. Customer refundable prepayments are recorded as customer deposits. During the three and six months ended June 30, 2019, the Company recognized $4.7 million and $15.4 million of revenue, respectively, and during the three and six months ended June 30, 2018, the Company recognized $3.6 million and $7.2 million of revenue, respectively, that was included in the deferred revenue and customer deposits balance as of the beginning of the year.
(f)Deferred Sales Commissions
(g) Recently Adopted Accounting Guidance
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, "Leases (Topic 842)", which was further clarified in July 2018 by ASU 2018‑10, “Codification Improvements to Topic 842, Leases”, and ASU 2018‑11, “Leases-Targeted Improvements”. ASU 2018-10 provides narrow amendments to clarify how to apply certain aspects of the new lease standard. ASU 2018-11 addresses implementation issues related to the new lease standard. The standard is effective for interim and annual reporting periods beginning after December 15, 2018. Under the new standard, lessees are required to recognize in the balance sheet the right-of-use ("ROU") assets and lease liabilities that arise from operating leases. The Company adopted the standard using the optional alternative method on a prospective basis with an effective date as of the beginning of the Company’s fiscal year, January 1, 2019, and applied it to the operating leases that existed on that date. Prior year comparative financial information was not recast under the new standard and continues to be presented under ASC 840. The Company elected to utilize the package of practical expedients available for expired or existing contracts which allowed the Company to carryforward historical assessments of (a) whether contracts are or contain leases, (b) lease classification, and (c) initial direct costs. The Company elected the use of hindsight practical expedient in determining the lease term and assessing the likelihood that lease renewal, termination or purchase option will be exercised. The Company also elected to apply the short-term lease exception for all leases. Under the short-term lease exception, the Company will not recognize ROU assets or lease liabilities for leases that, at the acquisition date, have a remaining lease term of 12 months or less.
As a result of implementing this guidance, the Company recognized a $123.5 million net operating ROU asset and a $132.0 million operating lease liability in its condensed consolidated balance sheet as of January 1, 2019. The ROU asset was presented net of deferred rent of $9.0 million as of January 1, 2019, in the accompanying condensed consolidated balance sheet
11
and as a change within operating cash flows. In addition, on February 1, 2019, the Company acquired through its business combination with SendGrid approximately $33.7 million in operating ROU assets, $32.6 million in operating lease liability, $14.2 million in finance ROU assets and $13.6 million in finance lease liability.
The Company measured the lease liability at the present value of the future lease payments as of January 1, 2019. The Company used its incremental borrowing rate to discount the lease payments. The Company derived the discount rate, adjusted for differences in the term and payment patterns, from the information available at the adoption date. The right-of-use asset is valued at the amount of the lease liability adjusted for the remaining December 31, 2018, balance of unamortized lease incentives, prepaid rent and deferred rent. The lease liability is subsequently measured at the present value of unpaid future lease payments as of the reporting date with a corresponding adjustment to the right-of-use asset. Absent a lease modification, the Company will continue to utilize the January 1, 2019, incremental borrowing rate.
The Company recognizes lease costs on a straight-line basis and presents these costs as operating expenses within the consolidated statements of operations and comprehensive loss. The Company presents lease payments within the cash flows from operations within the consolidated statements of cash flows.
The financial results for the three and six months ended June 30, 2019, are presented under the new standard, while the comparative periods presented are not adjusted and continue to be reported in accordance with the Company’s historical accounting policy.
See Note 5, “Right-of-use Assets and Lease Liabilities” for further information.
In March 2019, the FASB issued ASU 2019-01, “Codification Improvements” to Leases (Topic 842). This pronouncement did not have a material impact on the Company's financial statements.
In August 2018, the FASB issued ASU 2018‑13, “Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments under ASU 2018‑13 remove, add and modify certain disclosure requirements on fair value measurements in ASC 820. The amendments are effective for interim and annual periods beginning after December 15, 2019. The Company early adopted this guidance effective April 1, 2019. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In July 2018, the FASB issued ASU 2018-09, "Codification Improvements ", which does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several topics. Certain updates are applicable immediately while others provide for a transition period to adopt as part of the next fiscal year beginning after December 15, 2018. The Company adopted this guidance effective April 1, 2019. The adoptions of this guidance did not have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU 2017‑04, “Simplifying the Test for Goodwill Impairment”, which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective prospectively for interim and annual reporting periods beginning after December 15, 2019. The Company early adopted this guidance effective April 1, 2019. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
(h) Recently Issued Accounting Guidance, Not yet Adopted
In August 2018, the FASB issued ASU 2018‑15, “Intangibles—Goodwill and Other—Internal‑Use Software (Subtopic 350‑40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract”. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal‑use software. The standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016‑13, “Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments”, which changes the impairment model for most financial assets. The new model uses a forward‑looking expected loss method, which will generally result in earlier recognition of allowances for losses. In November 2018, the FASB issued ASU 2018‑19, “Codification Improvements to Topic 326, Financial Instruments—Credit
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3. Fair Value Measurements
The following tables provide the financial assets measured at fair value on a recurring basis as of June 30, 2019, and December 31, 2018, (in thousands):
Amortized Cost or Carrying Value | Gross Unrealized Gains | Gross Unrealized Losses Less Than 12 Months | Gross Unrealized Losses More Than 12 Months | Fair Value Hierarchy as of June 30, 2019 | Aggregate Fair Value | |||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||||||||||
Cash and cash equivalents: | ||||||||||||||||||||||||||||||||
Money market funds | $ | $ | — | $ | — | $ | — | $ | $ | — | $ | — | $ | |||||||||||||||||||
Reverse repurchase agreements | — | — | — | — | — | |||||||||||||||||||||||||||
Commercial paper | — | — | — | |||||||||||||||||||||||||||||
Total included in cash and cash equivalents | — | — | — | — | ||||||||||||||||||||||||||||
Marketable securities: | ||||||||||||||||||||||||||||||||
U.S. Treasury securities | ( | ) | — | — | ||||||||||||||||||||||||||||
Corporate debt securities and commercial paper | ( | ) | ( | ) | — | |||||||||||||||||||||||||||
Total marketable securities< | ||||||||||||||||||||||||||||||||