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 OF 1934 

For the quarterly period ended March 31, 2019

OR

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

For the transition period from     to

Commission File Number: 001-38285

Bandwidth Inc.

(Exact name of registrant as specified in its charter)

 ______________________________________________

Delaware	56-2242657
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

900 Main Campus Drive

Raleigh, NC 27606

(Address of principal executive offices) (Zip Code)

(800) 808-5150

(Registrant’s telephone number, including area code)

_____________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, par value $0.001 per share	BAND	NASDAQ Global Select Market

_____________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	x	Smaller reporting company	o
		Emerging growth company	x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o 

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

As of April 30, 2019, 16,546,956 shares of the registrant’s Class A common stock and 6,453,501 shares of registrant’s Class B common stock were outstanding, respectively.

Bandwidth Inc.

Quarterly Report on Form 10-Q 

For the Three Months Ended March 31, 2019

Table of Contents

		Page
Special Note Regarding Forward Looking Statement		2
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	4
	Unaudited Condensed Consolidated Balance Sheets as of December 31, 2018 and March 31, 2019	5
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2018 and 2019	6
	Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity	6
	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2019	7
	Notes to Unaudited Condensed Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	45
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	79
Item 6.	Exhibits	79
	Signatures	81

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”). All statements contained in this Quarterly Report on Form 10-Q, other than statements of historical fact, are forward-looking statements. Forward-looking statements generally can be identified by the words “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “estimate,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

•our ability to attract and retain customers, including large enterprises;

•our approach to identifying, attracting and keeping new and existing customers, as well as our expectations regarding customer turnover;

•our beliefs regarding network traffic growth and other trends related to the usage of our products and services;

•our expectations regarding revenue, costs, expenses, gross margin, dollar based net retention rate, adjusted EBITDA, other non-generally accepted accounting principles in the United States of America (“GAAP”) net income and capital expenditures;our beliefs regarding the growth of our business and how that impacts our liquidity and capital resources requirements;

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

•our ability to attract, train, and retain qualified employees and key personnel;

•our beliefs regarding the expense and productivity of, and competition for, our sales force;

•our expectations regarding headcount;

•our ability to maintain and benefit from our corporate culture;

•our plans to further invest in and grow our business, and our ability to effectively manage our growth and associated investments;

•our ability to introduce new products and services and enhance existing products and services;

•our ability to compete successfully against current and future competitors;

•the evolution of technology affecting our products, services and markets;

•the impact of certain new accounting standards and guidance, as well as the time and cost of continued compliance with existing rules and standards;

•our beliefs regarding the use of non-GAAP financial measures;

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

•our expectations regarding litigation and other pending or potential disputes;

•our ability to comply with modified or new laws and regulations; and

•the increased expenses associated with being a public company.

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

2

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

3

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

4

Bandwidth Inc.

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

	December 31,		March 31,
	2018		2019
Assets
Current assets:
Cash and cash equivalents	$	41,261	$	138,871
Marketable securities	17,400		59,520
Accounts receivable, net of allowance for doubtful accounts	24,009		27,898
Prepaid expenses and other current assets	6,114		6,971
Deferred costs	2,630		2,344
Total current assets	91,414		235,604
Property and equipment, net	25,136		26,363
Intangible assets, net	7,089		6,959
Deferred costs, non-current	1,828		1,433
Other long-term assets	727		1,409
Goodwill	6,867		6,867
Deferred tax asset	17,359		25,020
Total assets	$	150,420	$	303,655
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	3,418	$	3,369
Accrued expenses and other current liabilities	21,393		21,768
Current portion of deferred revenue	5,324		5,421
Advanced billings	2,588		2,203
Total current liabilities	32,723		32,761
Deferred rent, net of current portion	2,503		2,660
Deferred revenue, net of current portion	6,424		6,359
Total liabilities	41,650		41,780
Stockholders’ equity:
Class A and Class B common stock	19		23
Additional paid-in capital	116,600		267,875
Accumulated deficit	(7,848)		(6,030)
Accumulated other comprehensive (loss) income	(1)		7
Total stockholders’ equity	108,770		261,875
Total liabilities and stockholders’ equity	$	150,420	$	303,655

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

Bandwidth Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited)

	Three months ended March 31,
	2018		2019
Revenue	$	53,012	$	53,321
Cost of revenue	25,364		28,766
Gross profit	27,648		24,555
Operating expenses:
Research and development	3,781		7,717
Sales and marketing	4,522		8,349
General and administrative	10,569		14,333
Total operating expenses	18,872		30,399
Operating income (loss)	8,776		(5,844)
Other income, net	49		201
Income (loss) before income taxes	8,825		(5,643)
Income tax (provision) benefit	(2,634)		7,635
Net income	$	6,191	$	1,992
Other Comprehensive income
Unrealized (loss) gain on marketable securities, net of income taxes	$	(6)	$	8
Total comprehensive income	$	6,185	$	2,000
Earnings per share:
Net income attributable to common stockholders	$	6,191	$	1,992
Net income per share:
Basic	$	0.35	$	0.10
Diluted	$	0.30	$	0.09
Weighted average number of common shares outstanding:
Basic	17,658,611		20,498,104
Diluted	20,484,753		21,975,944

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

Bandwidth Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share amounts)

(Unaudited)

	Class A voting common Stock			Class B voting common Stock			Additional paid-in capital		Accumulated other comprehensive income (loss)		Accumulated deficit		Total stockholders’ equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2017	4,197,831	$	4	13,440,725	$	13	$	102,465	$	—	$	(25,771)	$	76,711
Exercises of vested stock options	5,000	1		—	—		34		—		—		35
Exercise of warrants to purchase common stock	—	—		48,904	—		36		—		—		36
Costs in connection with initial public offering	—	—		—	—		(285)		—		—		(285)
Unrealized loss on marketable securities	—	—		—	—		—		(6)		—		(6)
Stock based compensation	—	—		—	—		493		—		—		493
Net income	—	—		—	—		—		—		6,191		6,191
Balance at March 31, 2018	4,202,831	5		13,489,629	13		102,743		(6)		(19,580)		83,175
Exercises of vested stock options	1,112,646	1		—	—		6,932		—		—		6,933
Vesting of restricted stock units	6,512	—		—	—		—		—		—		—
Conversion of Class B voting common stock to Class A voting common stock	6,052,910	6		(6,052,910)	(6)		—		—		—		—
Issuance of Class A voting common stock	330	—		—	—		—		—		—		—
Unrealized gain on marketable securities	—	—		—	—		—		4		—		4
Stock based compensation	—	—		—	—		762		—		—		762
Net income	—	—		—	—		—		—		10,512		10,512
Balance at June 30, 2018	11,375,229	12		7,436,719	7		110,437		(2)		(9,068)		101,386
Exercises of vested stock options	534,474	—		—	—		3,579		—		—		3,579
Vesting of restricted stock units	2,466	—		—	—		—		—		—		—
Conversion of Class B voting common stock to Class A voting common stock	435,313	—		(435,313)	—		—		—		—		—
Unrealized loss on marketable securities	—	—		—	—		—		(1)		—		(1)
Stock based compensation	—	—		—	—		762		—		—		762
Net income	—	—		—	—		—		—		2,510		2,510
Balance at September 30, 2018	12,347,482	12		7,001,406	7		114,778		(3)		(6,558)		108,236
Exercises of vested stock options	72,569	—		—	—		500		—		—		500
Vesting of restricted stock units	2,022	—		—	—		—		—		—		—
Conversion of Class B voting common stock to Class A voting common stock	490,674	1		(490,674)	(1)		—		—		—		—
Unrealized gain on marketable securities	—	—		—	—		—		2		—		2

7

Bandwidth Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share amounts)

(Unaudited)

Stock based compensation	—	—		—	—		1,322		—		—		1,322
Net income	—	—		—	—		—		—		(1,290)		(1,290)
Balance at December 31, 2018	12,912,747	13		6,510,732	6		116,600		(1)		(7,848)		108,770
Issuance of common stock in connection with follow on public offering, net of underwriting discounts	2,875,000	3		—	—		147,388		—		—		147,391
Costs in connection with public offering	—	—		—	—		(785)		—		—		(785)
Exercises of vested stock options	589,510	1		—	—		3,934		—		—		3,935
Vesting of restricted stock units	105,367	—		—	—		—		—		—		—
Equity awards withheld for tax liability	(16,585)	—		—	—		(938)		—		—		(938)
Conversion of Class B voting common stock to Class A voting common stock	57,230	—		(57,230)	—		—		—		—		—
Adjustment to opening retained earnings due to adoption of ASC 606	—	—		—	—		—		—		(174)		(174)
Unrealized gain on marketable securities	—	—		—	—		—		8		—		8
Stock based compensation	—	—		—	—		1,676		—		—		1,676
Net income	—	—		—	—		—		—		1,992		1,992
Balance at March 31, 2019	16,523,269	$	17	6,453,502	$	6	$	267,875	$	7	$	(6,030)	$	261,875

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

8

Bandwidth Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Three months ended March 31,
	2018		2019
Operating activities
Net income	$	6,191	$	1,992
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	1,387		2,209
Accretion of bond discount	(6)		(119)
Amortization of debt issuance costs	16		122
Stock-based compensation	493		1,676
Deferred taxes	2,611		(7,664)
Loss on disposal of property and equipment	9		296
Changes in operating assets and liabilities:
Accounts receivable	(3,179)		(3,889)
Prepaid expenses and other assets	(471)		(1,552)
Deferred costs	146		604
Accounts payable	(656)		(435)
Accrued expenses and other liabilities	(1,165)		(1,729)
Deferred revenue and advanced billings	5,876		(527)
Deferred rent	(9)		(19)
Net cash provided by (used in) operating activities	11,243		(9,035)
Investing activities
Purchase of property and equipment	(961)		(1,239)
Capitalized software development costs	(441)		(595)
Purchase of marketable securities	(8,498)		(50,990)
Maturities of marketable securities	—		9,000
Net cash used in investing activities	(9,900)		(43,824)
Financing activities
Proceeds from the follow-on public offering, net of underwriting discounts	—		147,391
Payment of costs related to the follow-on public offering	—		(159)
Payment of costs related to the initial public offering	(285)		—
Payments on capital leases	(25)		—
Payment of debt issuance costs	—		(125)
Proceeds from exercises of stock options	34		3,935
Proceeds from exercises of warrants	36		—
Equity awards withheld and paid for tax liabilities	—		(589)
Net cash (used in) provided by financing activities	(240)		150,453
Net increase in cash, cash equivalents, and restricted cash	1,103		97,594
Cash, cash equivalents, and restricted cash, beginning of period	37,870		41,501
Cash, cash equivalents, and restricted cash, end of period	$	38,973	$	139,095
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	19	$	33
Cash paid for taxes	$	90	$	114

9

Bandwidth Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

Supplemental disclosure of noncash investing and financing activities
Purchase of property and equipment, accrued but not paid	$	785	$	1,768
Costs related to the follow-on public offering, accrued but not paid	$	—	$	549
Equity awards withheld for tax liabilities, accrued but not paid	$	—	$	349

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

10

Bandwidth Inc.

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

(Unaudited)

1. Organization and Description of Business 

Bandwidth Inc. (together with its subsidiaries, “Bandwidth” or the “Company”) was founded in July 2000 and incorporated in Delaware on March 29, 2001. The Company’s headquarters are located in Raleigh, North Carolina. The Company is a cloud-based, software-powered communications platform-as-a-service (“CPaaS”) provider that enables enterprises to create, scale and operate voice or text communications services across any mobile application or connected device.

The Company has two operating and reportable segments, CPaaS and Other. CPaaS revenue is derived from usage and monthly services fees charged for usage of Voice, Messaging, 911 and Phone Numbers solutions through the Company’s proprietary CPaaS software application programming interfaces. Other revenue consists of fees charged for services provided such as: SIP trunking, data resale, and a hosted Voice-over Internet Protocol (“VoIP”). The Other segment also includes revenue from traffic generated by other carriers, SMS registration fees and other miscellaneous product lines.

Follow-on Public Offering

On March 11, 2019, the Company completed a follow-on public offering in which the Company sold 2,875,000 shares of its Class A common stock, including 375,000 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at a public offering price of $54.25 per share. The Company received aggregate proceeds of $146,597, after deducting underwriting discounts and offering expenses paid and payable by the Company. 

2. Summary of Significant Accounting Policies 

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting. Certain information and disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K filed with the SEC on February 15, 2019.

The condensed consolidated balance sheet as of December 31, 2018, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by GAAP on an annual reporting basis. Additionally, certain items in the prior period financial statements have been reclassified to conform with the current year presentation.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive income and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2019 or any future period.

Reclassification

The Company reclassified certain prior year amounts to conform to the current year presentation. These reclassifications had no impact on the previously reported total assets, liabilities, stockholder’s deficit or net income.

11

Notes to Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Bandwidth Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the amounts reported in these financial statements and accompanying notes. Although the Company believes that the estimates it uses are reasonable, due to the inherent uncertainty involved in making these estimates, actual results reported in future periods could differ from those estimates. These estimates in the consolidated financial statements include, but are not limited to, allowance for doubtful accounts, recoverability of long lived and intangible assets, customer relationship period, valuation allowances on tax assets, certain accrued expenses, and contingencies.

Cash and Cash Equivalents

The Company classifies all highly liquid investments with stated maturities of three months or less from date of purchase as cash equivalents and all highly liquid investments with stated maturities of greater than three months from the date of purchase as current marketable securities. The Company has a policy of making investments only with commercial institutions that have at least an investment grade credit rating. The Company invests its cash primarily in government securities and obligations, corporate debt securities, money market funds and reverse repurchase agreements (“RRAs”). RRAs are collateralized by deposits in the form of Government Securities and Obligations for an amount not less than 102% of their value. The Company does not record an asset or liability as the Company is not permitted to sell or repledge the associated collateral. The Company has a policy that the collateral has at least an “A” (or equivalent) credit rating. The Company utilizes a third party custodian to manage the exchange of funds and ensure that collateral received is maintained at 102% of the value of the RRAs on a daily basis. RRAs with stated maturities of greater than three months from the date of purchase are classified as marketable securities.

Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows:

	December 31,		March 31,
	2018		2019
Cash and cash equivalents	$	41,261	$	138,871
Restricted cash	240		224
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows	$	41,501	$	139,095

Restricted cash is for Automated Clearing House availability, customer deposits and for credit card security. The Company has classified this asset as a long-term asset in order to match the expected period of restriction and is included in Other long-term assets in the condensed consolidated balance sheets.

Concentration of Credit Risk

Financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents, marketable securities and trade accounts receivable. Cash deposits may be in excess of insured limits. The Company believes that the financial institutions that hold its cash deposits are financially sound and, accordingly, minimal credit risk exists with respect to these balances.

12

Notes to Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

With regard to customers, credit evaluation and account monitoring procedures are used to minimize the risk of loss. The Company believes that no additional credit risk beyond amounts provided for by the allowance for doubtful accounts are inherent in accounts receivable. As of December 31, 2018, one customer represented approximately 18% of the Company’s accounts receivable, net of allowance for doubtful accounts. As of March 31, 2019, one customer represented approximately 16% of the Company’s accounts receivable, net of allowance for doubtful accounts.

For the three months ended March 31, 2018 and 2019, no individual customer represented more than 10% of the Company’s total revenue.

Recently Adopted Accounting Standards

On January 1, 2019, the Company adopted the guidance of ASC 606, Revenue from Contracts with Customers, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2019. The Company’s results for reporting periods beginning after January 1, 2019 are presented in accordance with the provisions under ASC 606 and prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s revenue recognition policy as further described in Note 2, Summary of Significant Accounting Policies, to its Annual Report on Form 10-K for the year ended December 31, 2018.

In connection with the adoption of ASC 606, the Company recognized a net increase to its opening accumulated deficit of $174 as of January 1, 2019, related to a discount present in one of its contracts.

Prior to the adoption of ASC 606, the Company recognized the majority of its revenue based on the usage of its customers in the period the traffic traversed the Company’s network. The Company determined that ASC 606 continues to support the recognition of revenue over time for the majority of the Company’s contracts due to the continuous transfer of control to the customer.

The adoption of ASC 606 did not result in a change in the Company’s accounting for its commission costs, which will continue to be expensed as incurred. The Company pays commissions over time and a corresponding requisite substantive service condition exists for the employee to receive the commission. The Company determined the timing of the commission payments and the underlying service performed by the employee were commensurate. 

The impact on the Company’s balance sheet presentation includes separately presenting customer refundable prepayments as advanced billings, whereas under ASC 605 these were included in the current portion of deferred revenue and advanced billings.

Revenue Recognition

Revenue recognition commences upon transfer of control of promised goods or services to customers in an amount that the Company expects to receive in exchange for those products or services.

The Company determines revenue recognition through the following steps:

•identification of the contract, or contracts, with a customer;

•identification of the performance obligations in the contract;

•determination of the transaction price;

•allocation of the transaction price to the performance obligations in the contract; and

•recognition of revenue, when, or as, the Company satisfies a performance obligation.

13

Notes to Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Nature of Products and Services

Revenue consists primarily of the sale of communications services offered through Application Programming Interface (“API”) software solutions to large enterprise, as well as small and medium-sized business, customers and is generally derived from usage and service fees in both the CPaaS and Other segments. Usage revenue includes voice communication (primarily driven by inbound minutes, outbound minutes and toll-free minutes) and messaging communication (driven by the number of messages) that traverse the platform and network. Service fees include the provision and management of phone numbers and emergency services access.

The majority of the Company’s revenue is generated from usage-based fees earned from customers accessing the Company’s communications platform. Access to the Company’s communication platform is considered a series of distinct services, with continuous transfer of control to the customer, comprising one performance obligation and usage-based fees are recognized in revenue in the period the traffic traverses the Company’s network. For the three months ended March 31, 2018, the revenue from usage-based fees represented $24,568 of CPaaS revenue and $12,164 of Other revenue. For the three months ended March 31, 2019, the revenue from usage-based fees represented $29,050 of CPaaS revenue and $6,792 of Other revenue.

Revenue from service fees is recognized on a ratable basis as the service is provided, which is typically one month. For the three months ended March 31, 2018, the revenue from service fees represented $13,685 of CPaaS revenue and $1,951 of Other revenue. For the three months ended March 31, 2019, the revenue from service fees represented $14,754 of CPaaS revenue and $1,516 of Other revenue.

The remaining $644 and $1,209 for the three months ended March 31, 2018 and 2019, respectively, are generated from other miscellaneous services.

Infrequently, Bandwidth’s contracts with customers may include multiple performance obligations. For such arrangements, revenues are allocated to each performance obligation based on its relative standalone selling price. Generally, standalone selling prices are determined based on the prices charged to similar customers for similar services.

When required as part of providing service, revenues and associated expenses related to nonrefundable, upfront service activation and setup fees are deferred and recognized over the longer of the associated service contract period or estimated customer life.

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

The Company maintains a reserve for sales credits. Credits are accounted for as variable consideration and are estimated based on several inputs including historical experience and current trends of credit issuances. Adjustments to the reserve are recorded against revenue.

The Company has various sales commission plans for which eligible employees can earn commissions from the sale of products and services to customers. Eligible employees must be employed at the time of payment in order to receive a commission. The Company pays commissions over time and a corresponding requisite substantive service condition exists for the employee to receive the commission. The Company determined that the timing of the commission payments and the underlying service performed by the employee were commensurate. Accordingly, sales commissions are generally expensed as incurred. These costs are recorded within sales and marketing expenses.

14

Notes to Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

Contract Assets and Liabilities

The following table provides information about receivables and contract liabilities from contracts with customers:

	March 31, 2019
Receivables (1)	$	27,898
Contract liabilities (2)	11,780

________________________

(1) Included in accounts receivable, net of allowance on the consolidated balance sheet. 

(2) Included in current portion of deferred revenue and deferred revenue, net of current portion on the consolidated balance sheet.

Deferred revenue is recorded when cash payments are received in advance of future usage on contracts. Customer refundable payments are recorded as advanced billings. Revenue is typically recognized in the month following when service is rendered or, in the case of nonrefundable upfront fees, over the estimated period of benefit. During the three months ended March 31, 2019, the Company recognized revenue of $2,218, related to its contract liabilities. The Company expects to recognize $5,421 in revenue over the next twelve months related to its deferred revenue as of March 31, 2019.

Other than adoption of ASC 606, there were no changes to the Company’s significant accounting policies as described in its Annual Report on Form 10-K for the year ended December 31, 2018.

Recent Accounting Pronouncements Not Yet Adopted

In October 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-17, Consolidation (Topic 810), Targeted Improvements to Related Party Guidance for Variable Interest Entities, which addresses the cost and complexity of financial reporting associated with consolidation of variable interest entities (“VIE”). ASU 2018-17 is effective for emerging growth companies following private company adoption dates in fiscal years beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020, with early adoption permitted. The new guidance must be applied on a retrospective basis as a cumulative-effect adjustment as of the date of adoption. Management does not expect the adoption of this guidance to have a significant impact on the Company’s financial statements.

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. ASU 2018-15 is effective for emerging growth companies following private company adoption dates in fiscal years beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated 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, which eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. ASU 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, and early adoption is permitted. An entity is permitted to early adopt either the entire standard or only the provisions that eliminate or modify requirements. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company’s financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment. The ASU requires impairment charges to be based on the first step in today’s two-step impairment test. ASU 2017-04 is effective for public business entities that are U.S. SEC

15

Notes to Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

filers for annual and interim impairment tests performed in periods beginning after December 15, 2021, and early adoption is permitted. Management does not expect the adoption of this guidance to have a significant impact on the Company’s financial statements.

In 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 Losses, which clarifies that receivables arising from operating leases are not within the scope of Topic 326, Financial Instruments – Credit Losses. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. These ASUs are effective for public business entities that are SEC filers for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company is evaluating the impact of this guidance on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases. The standard will affect all entities that lease assets and will require lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of less than one year) as of the date on which the lessor makes the underlying asset available to the lessee. For lessors, accounting for leases is substantially the same as in prior periods. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of the new leases standard. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, to give entities another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, to clarify how to apply certain aspects of the new lease standard. ASU 2016-02 is effective for emerging growth companies following private company adoption dates in fiscal years beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020, and early adoption is permitted. For leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, lessees and lessors must apply a modified retrospective transition approach. While the Company expects the adoption of this standard to result in an increase to the reported assets and liabilities, it has not yet determined the full impact the adoption of this standard will have on its financial statements and related disclosures.

3. Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, marketable securities, accounts receivable, accounts payable and accrued expenses approximate fair value as of December 31, 2018 and March 31, 2019 because of the relatively short duration of these instruments. Marketable securities consist of U.S. treasury securities not otherwise classified as cash equivalents. All marketable securities are considered to be available-for-sale and are recorded at their estimated fair values. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive income.

The Company evaluated its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. The following table summarizes the assets measured at fair value as of December 31, 2018 and March 31, 2019:

16

Notes to Consolidated Financial Statements (continued)

(In thousands, except share and per share amounts)

	Amortized cost or carrying value		Unrealized gains		Unrealized losses		Fair value measurements on a recurring basis December 31, 2018
							Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents:
Money market account	$	8,194	$	—	$	—	$	8,194	$	—	$	—	$	8,194
U.S. Reverse repurchase agreements	26,000		—		—		—		26,000		—		26,000
Total included in cash and cash equivalents	34,194		—		—		8,194		26,000		—		34,194
Marketable securities:
U.S. treasury securities	17,402		—		(2)		17,400		—		—		17,400
Total marketable securities	17,402		—		(2)		17,400		—		—		17,400
Total financial assets	$	51,596	$	—	$	(2)	$	25,594	$	26,000	$	—	$	51,594

	Amortized cost or carrying value		Unrealized gains		Unrealized losses		Fair value measurements on a recurring basis March 31, 2019
							Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents:
Money market account	$	17,380	$	—	$	—	$	17,380	$	—	$	—	$	17,380
U.S. Reverse repurchase agreements	115,000		—		—		—		115,000		—		115,000
Total included in cash and cash equivalents	132,380		—		—		17,380		115,000		—		132,380
Marketable securities:
U.S. treasury securities	59,509		11		—		59,520		—		—		59,520
Total marketable securities	59,509		11		—		59,520		—		—		59,520
Total financial assets	$	191,889	$	11	$	—