Commitments and Contingencies

9 Months Ended

Sep. 30, 2019

Commitments and Contingencies Disclosure [Abstract]

Operating Leases

The Company has entered into various non-cancelable operating lease agreements for certain of its offices and co-location facilities with lease periods expiring between the years ending December 31, 2019 and 2027. Certain of these arrangements have free or escalating rent payment provisions. The Company recognizes rent expense on a straight-line basis over the lease period. The difference between the rent paid and the straight-line rent is recorded as deferred rent, which is included in accrued expenses and other current liabilities and other noncurrent liabilities on the condensed consolidated balance sheets. Rent expense was $3.1 million and $1.7 million for the three months ended September 30, 2019 and 2018, respectively, and $8.5 million and $5.0 million for the nine months ended September 30, 2019 and 2018, respectively. Refer to the table below for the aggregate future minimum lease payments under non-cancelable operating leases as of September 30, 2019. As of September 30, 2019, the Company had $6.7 million in restricted cash related to irrevocable standby letters of credit established according to the requirements under lease agreements.

Bandwidth & Co-location Commitments

The Company enters into long-term non-cancelable agreements with providers in various countries to purchase capacity, such as bandwidth and co-location space, for the Company’s global cloud platform. Bandwidth and co-location costs for paying customers are recorded as cost of revenue in the condensed consolidated statements of operations and as sales and marketing expense in the condensed consolidated statements of operations for free customers. Such costs totaled $9.7 million and $6.8 million for the three months ended September 30, 2019 and 2018, respectively, and $26.8 million and $19.5 million for the nine months ended September 30, 2019 and 2018, respectively. Refer to the table below for long-term bandwidth and co-location commitments under non-cancelable contracts with various networks and Internet service providers as of September 30, 2019.

Purchase Commitments

Open purchase commitments are for the purchase of services under non-cancelable contracts. They are not recorded as liabilities on the condensed consolidated balance sheet as of September 30, 2019 as the Company has not yet received the related services. Refer to the table below for purchase commitments under non-cancelable contracts with various vendors as of September 30, 2019.


	Payments Due by Period as of September 30, 2019
	Total		2019 (remaining three months)		2020		2021		2022		2023		Thereafter
	(in thousands)
Non-cancelable:
Open purchase agreements⁽¹⁾	$	12,669	$	315	$	1,887	$	1,938	$	1,489	$	1,373	$	5,667
Bandwidth and co-location commitments⁽²⁾	36,072		6,189		17,802		8,035		2,441		1,237		368
Operating lease obligations⁽³⁾	54,508		2,928		12,359		11,136		8,620		5,334		14,131
Other commitments⁽⁴⁾	37		37		—		—		—		—		—
Total	$	103,286	$	9,469	$	32,048	$	21,109	$	12,550	$	7,944	$	20,166

(1)Open purchase commitments are for the purchase of services under non-cancelable contracts. They were not recorded as liabilities on the condensed consolidated balance sheet as of September 30, 2019 as the Company had not yet received the related services.

(2)Long-term commitments for bandwidth usage and co-location with various networks and Internet service providers. The costs for services not yet received were not recorded as liabilities on the condensed consolidated balance sheet as of September 30, 2019.

(3)Office space and equipment under non-cancelable operating leases. Total payments listed represent total minimum future lease payments.

(4)Consists of note payable under the IPA agreements and amount includes accrued interest at the contractual rate.

Build-to-Suit Lease Financing Obligation

The Company entered into a lease whereby the Company is deemed the accounting owner under build-to-suit lease accounting. The fair value of the leased property and corresponding financing obligation are included in property and equipment, net and build-to-suit lease financing obligation, respectively, on the condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018. As of September 30, 2019, the Company’s future minimum lease payments required under this non-cancelable obligation were as follows:


	Build-to-Suit Lease
	(in thousands)
Year ending December 31,
2019 (remaining three months)	$	659
2020	2,673
2021	2,753
2022	2,355
2023	—
Total minimum lease payments	$	8,440

The Company recognizes an increase in the fair value of the asset as additional building costs are incurred during the construction period and a corresponding increase in the build-to-suit lease financing obligation for any construction costs to be reimbursed by the landlord. As of September 30, 2019 and December 31, 2018, $10.5 million and $10.4 million, respectively, of build-to-suit lease financing obligation was included on the condensed consolidated balance sheets.

Legal Matters

From time to time the Company is a party to various legal proceedings that arise in the ordinary course of business. In addition, third parties may from time to time assert claims against the Company in the form of letters and other communications. Management currently believes that there is no pending or threatened legal proceeding to which the Company is a party that is likely to have a material adverse effect on the Company’s condensed consolidated financial statements. However, the results of legal proceedings are inherently unpredictable and if an unfavorable ruling were to occur in any of the legal proceedings there exists the possibility of a material adverse effect on the

Company’s financial position, results of operations, and cash flows. The Company accrues for legal proceedings that it considers probable and for which the loss can be reasonably estimated. The Company discloses potential losses when they are reasonably possible. Legal costs incurred and expected to be incurred related to litigation matters are expensed as incurred.

The Company’s platform and associated products are subject to various restrictions under U.S. export control and sanctions laws and regulations, including the U.S. Department of Commerce’s Export Administration Regulations (EAR) and various economic and trade sanctions regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Controls (OFAC). The U.S. export control laws and U.S. economic sanctions laws include restrictions or prohibitions on the sale or supply of certain products and services to U.S. embargoed or sanctioned countries, governments, persons and entities and also require authorization for the export of certain encryption items. In addition, various countries regulate the import of certain encryption technology, including through import permitting and licensing requirements and have enacted or could enact laws that could limit the Company’s ability to distribute its platform.

Although the Company takes precautions to prevent its platform and associated products from being accessed or used in violation of such laws, the Company may have inadvertently allowed its platform and associated products to be accessed or used by some customers in apparent violation of U.S. economic sanctions laws, including by users in embargoed or sanctioned countries, and the Company may have exported or allowed the download of certain software prior to making required filings with the U.S. Department of Commerce’s Bureau of Industry and Security. As a result, the Company has submitted to OFAC and to the Bureau of Industry and Security a voluntary self-disclosure concerning potential violations, and the Company has submitted a voluntary self-disclosure to the Census Bureau regarding potential violations of the Foreign Trade Regulations related to some incorrect electronic export information statements to the U.S. government for certain hardware exports, which were authorized. If the Company is found to be in violation of U.S. economic sanctions or export control laws, it could result in substantial fines and penalties for the Company and for the individuals working for the Company. The Company may also be adversely affected through other penalties, reputational harm, loss of access to certain markets or otherwise. No loss has been recognized in the condensed consolidated financial statements for this loss contingency as it is not probable a loss has been incurred and the range of a possible loss is not yet estimable.