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 OF 1934

For the quarterly period ended March 31, 2020

OR

☐ 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 ☐

Indicate by check mark whether the registrant has submitted electronically and posted to its corporate web site, if any, 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 and post such files).  Yes x  No ☐

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	☒	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.    ☐ 

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

As of April 30, 2020, 19,432,593 shares of the registrant’s Class A common stock and 4,427,151 shares of registrant’s Class B common stock were outstanding, respectively.

BANDWIDTH INC.

Table of Contents

		Page
Special Note Regarding Forward-Looking Statements		2
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	4
	Unaudited Condensed Consolidated Balance Sheets as of December 31, 2019 and March 31, 2020	4
	Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2020	5
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2020	6
	Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity	7
	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2020	9
	Notes to Unaudited Condensed Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	50
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	88
Item 6.	Exhibits	89
	Signatures	91

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, 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, including international offerings, 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 comply with modified or new industry standards, laws and regulations applicable to our products, services and 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 Secure Telephone Identity Revisited (“STIR”) and Signature-based Handling of Asserted Information Using toKENs (“SHAKEN”) (together, “STIR/SHAKEN”) and other robocalling prevention and anti-spam standards and increased costs associated with such compliance;

2

•our customers’ violation of our policies or other misuse of our platform;

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

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

•our ability to service the interest on our Convertible Notes (as defined herein) and repay such Convertible Notes, to the extent required;

•our expectations about the impact of public health epidemics, such as COVID-19 (coronavirus), or natural disasters on our business, results of operations and financial condition; and

•our ability to successfully integrate and benefit from any future strategic acquisitions or investments.

We caution you that the foregoing list may not contain all 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.

3

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

BANDWIDTH INC.

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

	As of December 31,		As of March 31,
	2019		2020
Assets
Current assets:
Cash and cash equivalents	$	184,414	$	491,982
Restricted cash	590		25,878
Accounts receivable, net of allowance for doubtful accounts	30,187		37,072
Prepaid expenses and other current assets	9,260		10,149
Deferred costs	2,498		1,792
Total current assets	226,949		566,873
Property and equipment, net	41,654		43,905
Operating right-of-use asset	21,031		19,873
Intangible assets, net	6,569		6,439
Deferred costs, non-current	1,952		3,054
Other long-term assets	1,533		1,626
Goodwill	6,867		6,867
Deferred tax asset, net	34,861		16,639
Total assets	$	341,416	$	665,276
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	4,190	$	5,325
Accrued expenses and other current liabilities	27,328		23,781
Current portion of deferred revenue	5,177		5,046
Advanced billings	4,167		4,851
Operating lease liability, current	4,876		4,973
Total current liabilities	45,738		43,976
Operating lease liability, net of current portion	19,868		18,486
Deferred revenue, net of current portion	5,720		6,272
Convertible senior notes	—		268,383
Total liabilities	71,326		337,117
Stockholders’ equity:
Class A and Class B common stock	24		23
Additional paid-in capital	275,553		334,777
Accumulated deficit	(5,528)		(6,586)
Accumulated other comprehensive income (loss)	41		(55)
Total stockholders’ equity	270,090		328,159
Total liabilities and stockholders’ equity	$	341,416	$	665,276

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

4

BANDWIDTH INC.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

	Three months ended March 31,
	2019		2020
Revenue	$	53,321	$	68,518
Cost of revenue	28,766		36,359
Gross profit	24,555		32,159
Operating expenses:
Research and development	7,717		9,530
Sales and marketing	8,349		9,417
General and administrative	14,333		16,096
Total operating expenses	30,399		35,043
Operating loss	(5,844)		(2,884)
Other income (expense), net	201		(906)
Loss before income taxes	(5,643)		(3,790)
Income tax benefit	7,635		2,732
Net income (loss)	$	1,992	$	(1,058)
Net income (loss) per share
Basic	$	0.10	$	(0.04)
Diluted	$	0.09	$	(0.04)
Weighted average number of common shares outstanding:
Basic	20,498,104		23,563,569
Diluted	21,975,944		23,563,569

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

5

BANDWIDTH INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

	Three months ended March 31,
	2019		2020
Net income (loss)	$	1,992	$	(1,058)
Other comprehensive income (loss)
Unrealized gain on marketable securities, net of income taxes	8		—
Foreign currency translation, net of income taxes	—		(96)
Other comprehensive income (loss)	8		(96)
Total comprehensive income (loss)	$	2,000	$	(1,154)

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

6

Table of Contents of Contents

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 (loss) income		Accumulated deficit		Total stockholders’ equity
	Shares	Amount		Shares	Amount
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
Costs in connection with public offering	—	—		—	—		(49)		—		—		(49)
Exercises of vested stock options	366,405	—		—	—		2,446		—		—		2,446
Vesting of restricted stock units	20,003	—		—	—		—		—		—		—
Equity awards withheld for tax liability	(3,665)	—		—	—		(274)		—		—		(274)
Conversion of Class B voting common stock to Class A voting common stock	826,441	1		(826,441)	(1)		—		—		—		—
Unrealized gain on marketable securities	—	—		—	—		—		13		—		13
Foreign currency translation	—	—		—	—		—		12		—		12
Stock based compensation	—	—		—	—		1,630		—		—		1,630
Net income	—	—		—	—		—		—		3,472		3,472
Balance at June 30, 2019	17,732,453	18		5,627,061	5		271,628		32		(2,558)		269,125
Exercises of vested stock options	108,361	—		—	—		868		—		—		868
Vesting of restricted stock units	19,064	—		—	—		—		—		—		—
Equity awards withheld for tax liability	(2,762)	—		—	—		(180)		—		—		(180)
Conversion of Class B voting common stock to Class A voting common stock	449,660	—		(449,660)	—		—		—		—		—
Unrealized loss on marketable securities	—	—		—	—		—		(21)		—		(21)
Foreign currency translation	—	—		—	—		—		(46)		—		(46)
Stock based compensation	—	—		—	—		1,654		—		—		1,654
Net loss	—	—		—	—		—		—		(1,014)		(1,014)
Balance at September 30, 2019	18,306,776	18		5,177,401	5		273,970		(35)		(3,572)		270,386

7

Table of Contents of Contents

BANDWIDTH INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share amounts)

(Unaudited)

Exercises of vested stock options	11,206	—		—	—		108		—		—		108
Vesting of restricted stock units	19,510	—		—	—		—		—		—		—
Equity awards withheld for tax liability	(3,014)	—		—	—		(191)		—		—		(191)
Conversion of Class B voting common stock to Class A voting common stock	250,000	1		(250,000)	—		—		—		—		1
Unrealized gain on marketable securities	—	—		—	—		—		1		—		1
Foreign currency translation	—	—		—	—		—		75		—		75
Stock based compensation	—	—		—	—		1,666						1,666
Net loss	—	—		—	—		—		—		(1,956)		(1,956)
Balance at December 31, 2019	18,584,478	19		4,927,401	5		275,553		41		(5,528)		270,090
Issuance of debt conversion option	—	—		—	—		104,553		—		—		104,553
Debt conversion option issuance costs, net of tax	—	—		—	—		(3,731)		—		—		(3,731)
Capped call option purchase price	—	—		—	—		(43,320)		—		—		(43,320)
Exercises of vested stock options	32,059	—		—	—		244		—		—		244
Vesting of restricted stock units	103,824	—		—	—		—		—		—		—
Equity awards withheld for tax liability	(14,411)	—		—	—		(1,021)		—		—		(1,021)
Conversion of Class B voting common stock to Class A voting common stock	500,250	—		(500,250)	(1)		—		—		—		(1)
Foreign currency translation	—	—		—	—		—		(96)		—		(96)
Stock based compensation	—	—		—	—		2,499		—		—		2,499
Net loss	—	—		—	—		—		—		(1,058)		(1,058)
Balance at March 31, 2020	19,206,200	$	19	4,427,151	$	4	$	334,777	$	(55)	$	(6,586)	$	328,159

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,
	2019		2020
Cash flows from operating activities
Net income (loss)	$	1,992	$	(1,058)
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation and amortization	2,209		3,298
Right-of-use asset amortization	919		1,158
Accretion of bond discount	(119)		—
Amortization of debt discount and issuance costs	122		1,753
Stock-based compensation	1,676		2,499
Deferred taxes	(7,664)		(2,337)
Loss on disposal of property and equipment	296		233
Changes in operating assets and liabilities:
Accounts receivable	(3,889)		(6,899)
Prepaid expenses and other assets	(1,552)		(991)
Deferred costs	604		(396)
Accounts payable	(435)		304
Accrued expenses and other liabilities	(1,729)		(4,991)
Deferred revenue and advanced billings	(527)		1,105
Operating right-of-use liability	(938)		(1,285)
Net cash used in operating activities	(9,035)		(7,607)
Cash flows from investing activities
Purchase of property and equipment	(1,239)		(3,638)
Capitalized software development costs	(595)		(790)
Purchase of marketable securities	(50,990)		—
Proceeds from sales and maturities of marketable securities	9,000		—
Net cash used in investing activities	(43,824)		(4,428)
Cash flows from 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)		—
Proceeds from issuance of convertible senior notes	—		400,000
Payment of debt issuance costs	(125)		(11,048)
Purchase of capped call	—		(43,320)
Proceeds from exercises of stock options	3,935		244