Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K
2018-05-08
Earnings, Exhibits
8-K
2018-02-13
Earnings, Officers, Exhibits
Comparables
GSK
GlaxoSmithKline
98,910
HRL
Hormel Foods
21,160
TNDM
Tandem Diabetes Care
3,740
ENS
Enersys
2,820
UFI
Unifi
371
SIFY
Sify Technologies
250
MNLO
Menlo Therapeutics
163
CASM
CAS Medical Systems
0
GDFF
Global Diversified Futures Fund
0
ICLD
Intercloud Systems
0
TWLO 2019-03-31
Content
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibits
EX-31.1
twlo-20190331xex311.htm
EX-31.2
twlo-20190331ex312.htm
EX-32.1
twlo-20190331xex321.htm
Twilio Earnings 2019-03-31
TWLO 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 twlo-20190331x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________
FORM 10-Q
_____________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934
For the quarterly period ended March 31, 2019
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-37806
Twilio Inc.
(Exact name of registrant as specified in its charter)
_____________________________________________
Delaware
26-2574840
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
375 Beale Street, Suite 300
San Francisco, California 94105
(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.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
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 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
Class A Common Stock, par value $0.001 per share
TWLO
The New York Stock Exchange
As of April 30, 2019, 110,265,143 shares of the registrant’s Class A common stock and 16,001,547 shares of registrant’s Class B common stock were outstanding.
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;
•the impact and expected results from changes in our relationship with our larger customers;
•the sufficiency of our cash and cash equivalents to meet our liquidity needs;
•anticipated technology trends, such as the use of and demand for cloud communications;
•our ability to continue to build and maintain credibility with the global software developer community;
•our ability to attract and retain customers to use our products;
•our ability to attract and retain enterprises and international organizations as customers for our products;
•our ability to form and expand partnerships with technology partners and consulting partners;
•the evolution of technology affecting our products and markets;
•our ability to introduce new products and enhance existing products;
•our ability to optimize our network service provider coverage and connectivity;
•
our ability to 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;
•our ability to successfully enter into new markets and manage our international expansion;
•
the attraction and retention of qualified employees and key personnel;
•
our ability to effectively manage our growth and future expenses and maintain our corporate culture;
•
our anticipated investments in sales and marketing and research and development;
•
our ability to maintain, protect and enhance our intellectual property;
•
our ability to successfully defend litigation brought against us;
•
our ability to service the interest on our convertible notes and repay such notes, to the extent required;
•
our customers' and other platform users' violation of our policies or other misuse of our platform;
•
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
2
other privacy regulations that may be implemented in the future, and increased costs associated with such compliance; 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 March 31, 2019
As of December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents
$
377,730
$
487,215
Short-term marketable securities
541,167
261,128
Accounts receivable, net
105,149
97,712
Prepaid expenses and other current assets
39,081
26,893
Total current assets
1,063,127
872,948
Restricted cash
1,101
18,119
Property and equipment, net
105,158
63,534
Operating right of use asset
156,511
—
Intangible assets, net
503,947
27,558
Goodwill
2,277,220
38,165
Other long-term assets
13,009
8,386
Total assets
$
4,120,073
$
1,028,710
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
22,418
$
18,495
Accrued expenses and other current liabilities
107,295
96,343
Deferred revenue and customer deposits
23,348
22,972
Operating lease liability, current
21,147
—
Financing lease liability, current
6,044
—
Note payable, current
2,087
—
Total current liabilities
182,339
137,810
Operating lease liability, noncurrent
143,950
—
Financing lease liability, noncurrent
9,124
—
Note payable, noncurrent
2,773
—
Convertible senior notes, net
440,337
434,496
Other long-term liabilities
14,037
18,169
Total liabilities
792,560
590,475
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock
—
—
Class A and Class B common stock
126
100
Additional paid-in capital
3,733,241
808,527
Accumulated other comprehensive income
2,323
1,282
Accumulated deficit
(408,177
)
(371,674
)
Total stockholders’ equity
3,327,513
438,235
Total liabilities and stockholders’ equity
$
4,120,073
$
1,028,710
See accompanying notes to condensed consolidated financial statements.
4
TWILIO INC.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended March 31,
2019
2018
Revenue
$
233,139
$
129,116
Cost of revenue
107,089
59,582
Gross profit
126,050
69,534
Operating expenses:
Research and development
77,855
37,576
Sales and marketing
71,607
32,822
General and administrative
64,176
23,393
Total operating expenses
213,638
93,791
Loss from operations
(87,588
)
(24,257
)
Other (expenses) income, net
(636
)
665
Loss before benefit (provision) for income taxes
(88,224
)
(23,592
)
Benefit (provision) for income taxes
51,721
(137
)
Net loss attributable to common stockholders
$
(36,503
)
$
(23,729
)
Net loss per share attributable to common stockholders, basic and diluted
$
(0.31
)
$
(0.25
)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted
116,590,513
94,673,557
See accompanying notes to condensed consolidated financial statements.
5
TWILIO INC.
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)
Three Months Ended March 31,
2019
2018
Net loss
$
(36,503
)
$
(23,729
)
Other comprehensive (loss) income:
Unrealized gain (loss) on marketable securities
1,041
(317
)
Foreign currency translation
—
731
Total other comprehensive (loss) income
1,041
414
Comprehensive loss attributable to common stockholders
$
(35,462
)
$
(23,315
)
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, 2017
69,906,550
$
70
24,063,246
$
24
$
608,165
$
2,025
$
(250,438
)
$
359,846
Net loss
—
—
—
—
—
—
(23,729
)
(23,729
)
Adjustment to opening retained earnings due to adoption of ASC 606
—
—
—
—
—
—
713
713
Exercises of vested stock options
—
—
1,190,387
1
6,677
—
—
6,678
Vesting of early exercised stock options
—
—
—
21
—
—
21
Vesting of restricted stock units
491,501
—
52,716
—
—
—
—
—
Value of equity awards withheld for tax liability
(8,352
)
—
(4,380
)
—
(371
)
—
—
(371
)
Conversion of shares of Class B common stock into shares of Class A common stock
1,358,716
1
(1,358,716
)
(1
)
—
—
—
—
Unrealized loss on marketable securities
—
—
—
—
—
(317
)
—
(317
)
Foreign currency translation
—
—
—
—
—
731
—
731
Stock-based compensation
—
—
—
—
18,968
—
—
18,968
Balance as of March 31, 2018
71,748,415
$
71
23,943,253
$
24
$
633,460
$
2,439
$
(273,454
)
$
362,540
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
80,769,763
$
80
19,310,465
$
20
$
808,527
$
1,282
$
(371,674
)
$
438,235
Net loss
—
—
—
—
—
—
(36,503
)
(36,503
)
Exercise of vested stock options
748,679
1
1,023,984
1
15,326
—
—
15,328
Vesting of early exercised stock options
—
—
—
9
—
—
9
Vesting of restricted stock units
641,406
—
39,360
—
—
—
—
—
Value of equity awards withheld for tax liability
(5,860
)
—
(4,431
)
—
(1,062
)
—
—
(1,062
)
Conversion of shares of Class B common stock into shares of Class A common stock
4,339,519
4
(4,339,519
)
(4
)
—
—
—
—
Shares issued in acquisition
23,555,081
24
—
—
2,658,874
—
—
2,658,898
Equity awards assumed in acquisition
—
—
—
—
191,620
—
—
191,620
Unrealized gain on marketable securities
—
—
—
—
—
1,041
—
1,041
Stock-based compensation
—
—
—
—
59,947
—
—
59,947
Balance as of March 31, 2019
110,048,588
$
109
16,029,859
$
17
$
3,733,241
$
2,323
$
(408,177
)
$
3,327,513
See accompanying notes to condensed consolidated financial statements.
7
TWILIO INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended March 31,
2019
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$
(36,503
)
$
(23,729
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization
21,248
5,631
Right-of-use asset amortization
4,854
—
Net amortization of investment premium and discount
(1,359
)
28
Amortization of debt discount and issuance costs
5,841
—
Stock-based compensation
58,324
17,540
Amortization of deferred commissions
670
—
Provision for doubtful accounts
11
375
Tax benefit related to release of valuation allowance
(51,644
)
—
Write-off of internally developed software and intangible assets
245
182
Changes in operating assets and liabilities:
Accounts receivable
(206
)
(14,612
)
Prepaid expenses and other current assets
(9,479
)
2,512
Other long-term assets
(2,959
)
(1,169
)
Accounts payable
1,161
6,703
Accrued expenses and other current liabilities
4,348
22,789
Deferred revenue and customer deposits
377
1,185
Operating right of use liability
(1,784
)
—
Long-term liabilities
(2,258
)
(499
)
Net cash (used in) provided by operating activities
(9,113
)
16,936
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities
(419,498
)
(42,693
)
Proceeds from sale of marketable securities
13,708
—
Maturities of marketable securities
126,810
27,600
Capitalized software development costs
(5,351
)
(4,795
)
Purchases of property and equipment
(2,653
)
(940
)
Purchases of intangible assets
—
(112
)
Acquisitions, net of cash acquired
156,783
—
Net cash used in investing activities
(130,201
)
(20,940
)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable
(494
)
—
Principal payments on financing leases
(961
)
—
Proceeds from exercises of stock options
15,328
6,678
Value of equity awards withheld for tax liabilities
(1,062
)
(371
)
Net cash provided by financing activities
12,811
6,307
Effect of exchange rate changes on cash, cash equivalents and restricted cash
—
148
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(126,503
)
2,451
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period
505,334
120,788
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period
$
378,831
$
123,239
Cash paid for income taxes, net
$
(34
)
$
18
Cash paid on finance leases
$
148
$
—
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchases of property, equipment and intangible assets, accrued but not paid
$
1,821
$
473
Purchases of property and equipment through finance leases
$
13,616
$
—
Value of common stock issued and equity awards assumed in acquisition
$
2,850,518
$
—
Stock-based compensation capitalized in software development costs
$
1,623
$
1,428
See accompanying notes to condensed consolidated financial statements.
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, 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.
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.
The Company sells its services to a wide variety of customers. If the financial condition or results of operations of any significant customers deteriorate substantially, operating results could be adversely affected. To reduce credit risk, management performs ongoing credit evaluations of the financial condition of significant customers. The Company does not require collateral from its credit customers and maintains reserves for estimated credit losses on customer accounts when considered necessary. Actual credit losses may differ from the Company’s estimates. During the three months ended March 31, 2019 and 2018, respectively, there was no customer organization that accounted for more than 10% of the Company’s total revenue.
As of March 31, 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 months ended March 31, 2019 and 2018, the Company recognized $10.8 million and $3.6 million of revenue that was included in the deferred revenue and customer deposits balance as of January 1, 2019 and 2018, respectively.
(f)Deferred Sales Commissions
The Company records an asset for the incremental costs of obtaining a contract with a customer, for example, sales commissions that are earned upon execution of contracts. The Company uses the portfolio of data method to determine the estimated period of benefit of capitalized commissions which is determined to be five years. Amortization expense related to these capitalized costs related to initial contracts, upsells and renewals, is recognized on a straight line basis over the estimated period of benefit of the capitalized commissions. Total net capitalized costs as of March 31, 2019 and December 31, 2018 were $13.3 million and $9.4 million, respectively, and are included in prepaid expenses and other current and long‑term assets in the accompanying condensed consolidated balance sheets. Amortization of these assets was $0.7 million and $0.2 million in the three months ended March 31, 2019 and 2018, respectively, and is included in sales and marketing expense in the accompanying condensed consolidated statements of operations.
(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 by ASU 2018‑10, “Codification Improvements to Topic 842, Leases”, and ASU 2018‑11, “Leases-Targeted Improvements”, both issued in July 2018. ASU 2018-10 provides narrow amendments to clarify how to apply certain aspects of the new lease standard and ASU 2018-11 and 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 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 quarter ended March 31, 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 material impact on the Company's 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 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 reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact the new standard will have on its 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 does not expect the adoption of this guidance to 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 will adopt this guidance upon its effective date. The Company does not expect the adoption of this guidance to have a material impact on the Company’s 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 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. In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which clarifies treatment of certain credit losses. These ASUs are effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company is evaluating the impact of this guidance on its consolidated financial statements.
3. Fair Value Measurements
The following tables provide the financial assets measured at fair value on a recurring basis as of March 31, 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 March 31, 2019
Aggregate
Fair Value
Level 1
Level 2
Level 3
Financial Assets:
Cash and cash equivalents:
Money market funds
$
287,941
$
—
$
—
$
—
287,941
$
—
$
—
$
287,941
Reverse repurchase agreements
25,000
25,000
25,000
Commercial paper
29,336
—
—
—
29,336
29,336
Total included in cash and cash equivalents
342,277
—
—
—
287,941
54,336
—
342,277
Marketable securities:
U.S. Treasury securities
154,173
79
(2
)
154,250
—
—
154,250
Corporate debt securities, commercial paper, and certificates of deposit
386,293
729
(20
)
(85
)
5,000
381,917
—
386,917
Total marketable securities
540,466
808
(22
)
(85
)
159,250
381,917
—
541,167
Total financial assets
$
882,743
$
808
$
(22
)
$
(85
)
$
447,191
$
436,253
$
—
$
883,444
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 December 31, 2018
Aggregate
Fair Value
Level 1
Level 2
Level 3
Financial Assets:
Cash and cash equivalents:
Money market funds
$
420,234
$
—
$
—
$
—
420,234
$
—
$
—
$
420,234
Reverse repurchase agreements
35,000
—
—
—
—
35,000
—
35,000
Commercial paper
9,983
—
—
—
—
9,983
—
9,983
Total included in cash and cash equivalents
465,217
—
—
—
—
420,234
44,983
—
465,217
Marketable securities:
U.S. Treasury securities
59,785
—
(7
)
(9
)
59,769
—
—
59,769
Corporate debt securities and commercial paper
201,683
23
(123
)
(224
)
—
201,359
—
201,359
Total marketable securities
261,468
23
(130
)
(233
)
59,769
201,359
—
261,128
Total financial assets
$
726,685
$
23
$
(130
)
$
(233
)
$
480,003
$
246,342
$
—
$
726,345
As the Company views its marketable securities as available to support current operations, it has classified all available for sale securities as short-term. As of March 31, 2019 and December 31, 2018, for fixed income securities that were
in unrealized loss positions, the Company has determined that (i) it does not have the intent to sell any of these investments, and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of March 31, 2019 and December 31, 2018, the Company anticipates that it will recover the entire amortized cost basis of such fixed income securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three months ended March 31, 2019. Interest earned on marketable securities was $1.5 million and $0.7 million in the three months ended March 31, 2019 and 2018, respectively. The interest is recorded as other income (expense), net, in the accompanying condensed consolidated statements of operations.
The following table summarizes the contractual maturities of marketable securities as of March 31, 2019 and December 31, 2018 (in thousands):
As of March 31, 2019
As of December 31, 2018
Amortized
Cost
Aggregate
Fair Value
Amortized
Cost
Aggregate
Fair Value
Financial Assets:
Less than one year
$
420,271
$
420,342
$
261,468
$
261,128
One to two years
120,195
120,825
—
—
Total
$
540,466
$
541,167
$
261,468
$
261,128
The Company enters into reverse securities repurchase agreements, primarily for short-term investments with maturities of 90 days or less. As of March 31, 2019 and December 31, 2018, the Company was party to reverse repurchase agreements totaling $25.0 million and $35.0 million, respectively, which were reported in cash and equivalents in the accompanying condensed consolidated balance sheets. Under these reverse securities repurchase agreements, the Company typically lends available cash at a specified rate of interest and holds U.S. government securities as collateral during the term of the agreement. Collateral value is in excess of the amounts loaned under these agreements.
As of March 31, 2019, and December 31, 2018, the fair value of the 0.25% convertible senior notes due 2023 (the “Notes”), as further described in Note 9 below, was approximately $1,060.5 million and $743.4 million, respectively. The fair value of the Notes is determined based on the closing price on the last trading day of the reporting period and is considered as Level 2 in the fair value hierarchy.
As of March 31, 2019, the note payable is recorded at its carrying amount, which approximates its fair value based on the proximity of its effective interest rate to the current market rates. The note payable is considered as Level 2 in the fair value hierarchy.
4. Property and Equipment
Property and equipment consisted of the following (in thousands):
As of March 31, 2019
As of December 31, 2018
Capitalized internal-use software development costs
$
78,950
$
72,647
Data center equipment (1)
15,151
—
Leasehold improvements
31,799
15,293
Office equipment
18,458
13,563
Furniture and fixtures (1)
6,661
4,918
Software
6,067
1,849
Total property and equipment
157,086
108,270
Less: accumulated depreciation and amortization
(51,928
)
(44,736
)
Total property and equipment, net
$
105,158
$
63,534
_______________
(1)
Data center equipment and furniture and fixtures contain assets under finance leases. See Note 5 below for further detail.
Depreciation and amortization expense was $7.6 million and $4.2 million for the three months ended March 31, 2019 and 2018, respectively.
The Company capitalized $7.0 million and $6.4 million in internal-use software development costs in the three months ended March 31, 2019 and 2018, respectively of which $1.6 million and $1.4 million was stock-based compensation expense for each respective period. Amortization of capitalized software development costs was $3.8 million and $2.7 million in the three months ended March 31, 2019 and 2018, respectively.
5. Right-of-Use Asset and Lease Liabilities
The Company determines if an arrangement is a lease at inception. The Company presents the operating leases in long-term assets and current and long-term liabilities. Finance lease assets are included in property and equipment, net, and finance lease liabilities are presented in current and long-term liabilities in the accompanying condensed consolidated balance sheet as of March 31, 2019.
Right-of-use ("ROU") assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not generally provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company’s lease agreements may have lease and non-lease components, which the Company generally accounts for as a single lease component. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company’s lease agreements do not contain any residual value guarantees. Leases with an initial term of twelve months or less are not recorded on the balance sheet.
The Company has entered into various operating lease agreements for data centers and office space, and various financing leases agreements for data center and office equipment and furniture.
As of March 31, 2019, the Company had 20 leased properties, with remaining lease terms of less than one year to 10 years, some of which include options to extend the leases for up to 5 years.
The components of lease expense recorded in the condensed consolidated statement of operations were as follows (in thousands):
Maturities of lease liabilities were as follows (in thousands):
As of March 31, 2019
Operating Leases
Finance Leases
2019 (remaining nine months)
$
23,869
$
4,962
2020
29,848
6,015
2021
28,062
3,130
2022
27,602
807
2023
27,127
413
Thereafter
68,033
1,354
Total lease payments
204,541
16,681
Less: imputed interest
(39,444
)
(1,513
)
Total lease obligations
165,097
15,168
Less: current obligations
(21,147
)
(6,044
)
Long-term lease obligations
$
143,950
$
9,124
Disclosures related to periods prior to adoption of the New Lease Standard
Rent expense was $2.1 million for the three months ended March 31, 2018. As of March 31, 2019, the Company had additional operating and finance lease obligations of $43.1 million and $1.1 million, respectively, related to a lease that will commence during the second quarter of fiscal year 2020 with a lease term of 6.8 years.
Future minimum lease payment obligations under noncancelable operating and finance leases were as follows (in thousands):
As of December 31, 2018
Operating Leases
Finance Leases
2019 (remaining nine months)
$
24,128
$
306
2020
29,527
512
2021
30,898
573
2022
30,492
590
2023
30,122
608
Thereafter
81,316
1,939
Total lease payments
$
226,483
$
4,528
6. Business Combinations
Fiscal 2019 Acquisitions
SendGrid, Inc.
In February 2019, the Company acquired all outstanding shares of SendGrid, Inc. ("SendGrid"), the leading email API platform, by issuing 23.6 million shares of its Class A common stock with a total value of $2,658.9 million. The Company also assumed all of the outstanding stock options and restricted stock units of SendGrid as converted into stock options and restricted stock units, respectively, of the Company based on the conversion ratio provided in the Agreement and Plan of Merger and Reorganization, as amended ("Merger Agreement").
The acquisition added additional products and services to the Company's offerings for its customers. With these additional products, the Company now offers an Email API and Marketing Campaigns product leveraging the Email API. The acquisition has also added new customers, new employees, technology assets and intellectual property assets.
The acquisition was accounted for as a business combination and the total purchase price was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date and the excess was recorded as goodwill. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of the date of this Quarterly Report on Form 10-Q, and may be adjusted during the measurement period of up to 12 months from the date of acquisition as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill. As of March 31, 2019, the primary areas that are not yet finalized due to information that may become available subsequently and may result in changes in the values assigned to various assets and liabilities include purchase consideration and purchase price, including related tax impact, and valuation of tangible and intangible assets.
The purchase price of $2,850.5 million reflects the $2,658.9 million fair value of 23.6 million shares of the Company's Class A common stock transferred as consideration for all outstanding shares of SendGrid, and the $191.6 million fair value of the pre-combination services of SendGrid employees reflected in the equity awards assumed by the Company on the acquisition date.
The fair value of the 23.6 million shares transferred as consideration was determined on the basis of the closing market price of the Company's Class A common stock on the acquisition date. The fair value of the equity awards was determined (a) for options, by using a Black-Scholes option pricing model with the applicable assumptions as of the acquisition date, and (b) for restricted stock units, by using the closing market price of the Company's Class A common stock on the acquisition date.
The fair value of the unvested stock awards, for which post-combination service is required, will be recorded as share-based compensation expense over the respective vesting period of each award.
The purchase price components are summarized in the following table (in thousands):
Total
Fair value of Class A common stock transferred
$
2,658,898
Fair value of the pre-combination service through equity awards
191,620
Total purchase price
$
2,850,518
The following table presents the preliminary purchase price allocation recorded in the Company's condensed consolidated balance sheet as of March 31, 2019 (in thousands). The Company expects to continue to obtain information to assist it in determining the fair values of the net assets acquired at the acquisition date during the measurement period:
Total
Cash and cash equivalents
$
156,783
Accounts receivable and other current assets
11,635
Property and equipment, net
39,188
Operating right of use asset
33,742
Intangible assets
490,000
Other assets
1,664
Goodwill
2,239,055
Accounts payable and other liabilities
(11,114
)
Operating lease liability
(32,568
)
Financing lease liability
(13,616
)
Note payable
(5,387
)
Deferred tax liability
(58,864
)
Total purchase price
$
2,850,518
The Company acquired a net deferred tax liability of $58.9 million in this business combination that is included in long-term liabilities in the accompanying condensed consolidated balance sheet. This amount was offset by a release of a valuation allowance on deferred tax assets of $49.2 million.
Identifiable intangible assets are comprised of the following (in thousands):
Total
Estimated life (in years)
Developed technology and software
$
301,000
7
Customer relationships
169,000
7
Trade names
20,000
5
Total intangible assets acquired
$
490,000
Developed technology consists of software products and domain knowledge around email delivery developed by SendGrid, which enables the delivery of email reliably and at scale. Customer relationships consists of contracts with platform users that purchase SendGrid’s products and services that carry distinct value. Trade names represent the Company’s right to the SendGrid trade names and associated design, as it exists as of the acquisition closing date.
The goodwill is primarily attributable to the future cash flows to be realized from the acquired platform technology, acquired intangibles, assembled workforce and operational synergies. Goodwill is not deductible for tax purposes.
The estimated fair value of the intangible assets acquired was determined by the Company, and the Company considered or relied in part upon a valuation report of a third‑party expert. The Company used an income approach to estimate the fair values of the developed technology, an incremental income approach to estimate the value of the customer relationships and a relief from royalty method to estimate the fair value of the trade name.
Net tangible assets were valued at their respective carrying amounts as of the acquisition date, as the Company believes that these amounts approximate their current fair values.
The acquired entity's results of operations were included in the Company's condensed consolidated financial statements from the date of acquisition, February 1, 2019. For the period from February 1, 2019, through March 31, 2019, SendGrid contributed net operating revenue of $28.6 million which is reflected in the accompanying condensed consolidated statement of operations for the three month ended March 31, 2019. Due to the integrated nature of the Company's operations, the Company believes that it is not practicable to separately identify earnings of SendGrid on a stand-alone basis.
During the three months ended March 31, 2019, the Company incurred costs related to this acquisition of $12.4 million that were expensed as incurred and recorded in general and administrative expenses in the accompanying condensed consolidated statement of operations.
The following pro forma condensed combined financial information gives effect to the acquisition of SendGrid as if it were consummated on January 1, 2018 (the beginning of the comparable prior reporting period), and includes pro forma adjustments related to the amortization of acquired intangible assets, share-based compensation expense and direct and incremental transaction costs reflected in the historical financial statements. The Company's and SendGrid's direct and incremental transaction costs of $39.4 million are excluded from pro forma condensed combined net loss for the three month period ended March 31, 2019, presented below. The Company's direct and incremental transaction costs of $12.4 million are included in the pro forma condensed combined net loss for the three month period ended March 31, 2018, presented below. The pro forma condensed combined net loss includes reversal of the valuation allowance release of $49.2 million in the three month period ended March 31, 2019, and a tax benefit of $56.1 million that would have resulted from the acquisition in the three month period ended March 31, 2018. The pro forma condensed combined financial information is presented for informational purposes only. The pro forma condensed combined financial information is not intended to represent or be indicative of the results of operations that would have been reported had the acquisition occurred on January 1, 2018, and should not be taken as representative of future results of operations of the combined company. The following table presents the pro forma condensed combined financial information (in thousands):
Total estimated future amortization expense was as follows (in thousands):
As of March 31, 2019
2019 (remaining nine months)
$
56,796
2020
83,027
2021
81,516
2022
80,123
2023
68,435
Thereafter
133,755
Total
$
503,652
8. Accrued Expenses and Other Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
As of March 31, 2019
As of December 31, 2018
Accrued payroll and related
$
16,858
$
9,886
Accrued bonus and commission
8,130
8,564
Accrued cost of revenue
27,554
29,901
Sales and other taxes payable
26,578
23,631
ESPP contributions
6,501
2,672
Deferred rent
—
1,418
VAT liability
2,129
2,217
Acquisition holdback
2,000
—
Accrued other expense
17,545
18,054
Total accrued expenses and other current liabilities
$
107,295
$
96,343
Other long-term liabilities consisted of the following (in thousands):
As of March 31, 2019
As of December 31, 2018
Deferred rent
$
—
$
7,569
Deferred tax liability
11,734
5,181
Acquisition holdback
290
2,290
Capital lease obligation
—
2,170
Accrued other expense
2,013
959
Total other long-term liabilities
$
14,037
$
18,169
9. Notes Payable
(a) Convertible Senior Notes and Capped Call Transactions
In May 2018, the Company issued $550.0 million aggregate principal amount of 0.25% convertible senior notes due 2023 in a private placement, including $75.0 million aggregate principal amount of such Notes pursuant to the exercise in full of the over-allotment options of the initial purchasers (collectively, the “Notes”). The interest on the Notes is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2018.
The Notes may bear special interest under specified circumstances relating to the Company’s failure to comply with its reporting obligations under the indenture relating to the issuance of Notes (the “indenture”) or if the Notes are not freely tradeable as required by the indenture. The Notes will mature on June 1, 2023, unless earlier repurchased or redeemed by the
Company or converted pursuant to their terms. The total net proceeds from the debt offering, after deducting initial purchaser discounts and debt issuance costs, paid or payable by us, were approximately $537.0 million.
Each $1,000 principal amount of the Notes is initially convertible into 14.1040 shares of the Company’s Class A common stock par value $0.001, which is equivalent to an initial conversion price of approximately $70.90 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a make-whole fundamental change, as defined in the indenture, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change or during the relevant redemption period.
Prior to the close of business on the business day immediately preceding March 1, 2023, the Notes may be convertible at the option of the holders only under the following circumstances:
(1) during any calendar quarter commencing after September 30, 2018, and only during such calendar quarter, if the last reported sale price of the Class A common stock for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is more than or equal to 130% of the conversion price on each applicable trading day;
(2) during the five business days period after any five consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of Notes for such trading day was less than 98% of the product of the last reported sale price of the Class A common stock and the conversion rate on each such trading day;
(3) upon the Company’s notice that it is redeeming any or all of the Notes; or
(4) upon the occurrence of specified corporate events.
On or after March 1, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the Notes may, at their option, convert all or a portion of their Notes regardless of the foregoing conditions.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of Class A common stock, or a combination of cash and shares of Class A Common Stock, at the Company’s election. It is the Company’s current intent to settle the principal amount of the Notes with cash.
During the three months ended March 31, 2019, the conditional conversion feature of the Notes was triggered as the last reported sale price of the Company's Class A common stock was more than or equal to 130% of the conversion price for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on March 29, 2019 (the last trading day of the calendar quarter), and therefore the Notes are currently convertible, in whole or in part, at the option of the holders between April 1, 2019 through June 30, 2019. Whether the Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition in the future. The Company may redeem the Notes, in whole or in part, at its option, on or after June 1, 2021 but before the 35th scheduled trading day before the maturity date, at a cash redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, if the last reported sale price of the Class A Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading days ending on, and including, the trading day immediately before the date the redemption notices were sent; and the trading day immediately before such notices were sent.
No sinking fund is provided for the Notes. Upon the occurrence of a fundamental change (as defined in the indenture) prior to the maturity date, holders may require the Company to repurchase all or a portion of the Notes for cash at a price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The Notes are senior unsecured obligations and will rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment with the Company’s existing and future liabilities that are not so subordinated; effectively subordinated to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of current or future subsidiaries of the Company.
The foregoing description is qualified in its entirety by reference to the text of the indenture and the form of 0.25% convertible senior notes due 2023, which were filed as exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 and are incorporated herein by reference.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $119.4 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense at an annual effective interest rate of 5.7% over the contractual terms of the Notes.
In accounting for the transaction costs related to the Notes, the Company allocated the total amount incurred to the liability and equity components of the Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component were approximately $10.2 million, were recorded as an additional debt discount and are amortized to interest expense using the effective interest method over the contractual terms of the Notes. Issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity.
The net carrying amount of the liability component of the Notes was as follows (in thousands):
As of March 31, 2019
As of December 31, 2018
Principal
$
550,000
$
550,000
Unamortized discount
(101,101
)
(106,484
)
Unamortized issuance costs
(8,562
)
(9,020
)
Net carrying amount
$
440,337
$
434,496
The net carrying amount of the equity component of the Notes was as follows (in thousands):
As of March 31, 2019
As of December 31, 2018
Proceeds allocated to the conversion options (debt discount)
$
119,435
$
119,435
Issuance costs
(2,819
)
(2,819
)
Net carrying amount
$
116,616
$
116,616
The following table sets forth the interest expense recognized related to the Notes (in thousands):
Three Months Ended March 31, 2019
Contractual interest expense
$
344
Amortization of debt issuance costs
458
Amortization of debt discount
5,383
Total interest expense related to the Notes
$
6,185
In connection with the offering of the Notes, the Company entered into privately-negotiated capped call transactions with certain counterparties (the “capped calls”). The capped calls each have an initial strike price of approximately $70.90 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The capped calls have initial cap prices of $105.04 per share, subject to certain adjustments. The capped calls cover, subject to anti-dilution adjustments, approximately 7,757,200 shares of Class A Common Stock. The capped calls are generally intended to reduce or offset the potential dilution to the Class A Common Stock upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. The capped calls expire on the earlier of (i) the last day on which any convertible securities remain outstanding and (ii) June 1, 2023, subject to earlier exercise. The capped calls are subject to either
adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including a merger event, a tender offer, and a nationalization, insolvency or delisting involving the Company. In addition, the capped calls are subject to certain specified additional disruption events that may give rise to a termination of the capped calls, including changes in law, insolvency filings, and hedging disruptions. The capped call transactions are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost of $58.5 million incurred to purchase the capped call transactions was recorded as a reduction to additional paid-in capital in the accompanying condensed consolidated balance sheet.
(b) Note Payable
In connection with the SendGrid acquisition, the Company assumed a note payable that was an arrangement of SendGrid with a financing company to acquire software and related professional services in exchange for a note payable. As of March 31, 2019, the outstanding balance on the note payable was $4.9 million and is recorded in the current and long term liabilities and the related software is included in property and equipment, net, in the accompanying condensed consolidated balance sheet. The note payable bears effective interest at 6.6% per annum compounded monthly and matures in August 2021. Principal and interest payments of are as follows:
Year Ending December 31:
Principal
Interest
2019 (remaining nine months)
$
1,533
$
214
2020
2,165
165
2021
1,162
28
Total minimum payments
$
4,860
$
407
10. Supplemental Balance Sheet Information
A roll‑forward of the Company’s reserves for the three months ended March 31, 2019 and 2018 is as follows (in thousands):
Revenue by geographic area is based on the IP address at the time of registration. The following table sets forth revenue by geographic area (in thousands):
Three Months Ended March 31,
2019
2018
Revenue by geographic area:
United States
$
166,553
$
98,635
International
66,586
30,481
Total
$
233,139
$
129,116
Percentage of revenue by geographic area:
United States
71
%
76
%
International
29
%
24
%
Long-lived assets outside the United States were not significant.
12. Commitments and Contingencies
(a)Lease and Other Commitments
The Company entered into various non-cancelable operating lease agreements for its facilities that expire over the next ten years. See Note 5 to these condensed consolidated financial statements for additional detail on the Company's operating and finance lease commitments.
In the three months ended March 31, 2019, the Company entered into a 24 month non-cancelable agreement with a cloud services vendor for a total commitment of $1.4 million. Additionally, as a result of its acquisition of SendGrid, the Company assumed a non-cancelable cloud services vendor contract with a remaining value of $22.4 million and a remaining term of three years.
(b)Legal Matters
On April 30, 2015 and March 28, 2016, Telesign Corporation ("Telesign") filed lawsuits (which were subsequently consolidated) against the Company in the United States District Court, Central District of California (“Telesign I/II”). Telesign alleges in Telesign I/II that the Company is infringing four U.S. patents that it holds: U.S. Patent No. 7,945,034 (“034”), U.S. Patent No. 8,462,920 (“920”), U.S. Patent No. 8,687,038 (“038”) and U.S. Patent No. 9,300,792 (“792”). The consolidated Telesign I/II actions have been transferred to the United States District Court, Northern District. The patent infringement allegations in the lawsuit relate to the Company’s two-factor authentication use case, Authy and an API tool to find information about a phone number. Telesign seeks, among other things, to enjoin us from allegedly infringing the patents, along with damages for lost profits and damages based on a reasonable royalty.
On March 8, 2017, in response to a petition by the Company, the U.S. Patent and Trademark Officer (“PTO”) issued an order instituting an inter partes review for the ‘792 patent. On March 6, 2018, the PTO found all claims challenged by the Company in the inter partes review unpatentable. Telesign did not appeal the PTO’s decision, and it is final. On October 19, 2018, the district court granted the Company's motion that all remaining asserted claims of the asserted patents are invalid under 35 U.S.C. §101 and entered judgment in the Company’s favor. On November 8, 2018, Telesign appealed the judgment to the United States Court of Appeals for the Federal Circuit where the case is now pending. Based on, among other things, final judgment being entered by the district court in the Company’s favor, the Company does not believe a loss is reasonably possible or estimable.
On December 1, 2016, the Company filed a patent infringement lawsuit against Telesign in the United States District Court, Northern District of California (“Telesign III”), alleging indirect infringement of United States Patent No. 8,306,021 (“021”), United States Patent No. 8,837,465 (“465”), United States Patent No. 8,755,376 (“376”), United States Patent
No. 8,736,051 (“051”), United States Patent No. 8,737,962 (“962”), United States Patent No. 9,270,833 (“833”), and United States Patent No. 9,226,217 (“217”). Telesign filed a motion to dismiss the complaint on January 25, 2017. In two orders, issued on March 31, 2017 and April 17, 2017, the court granted Telesign’s motion to dismiss with respect to the ‘962, ‘833, ‘051 and ‘217 patents, but denied Telesign’s motion to dismiss as to the ‘021, ‘465 and ‘376 patents. On August 23, 2017, Telesign petitioned the PTO for inter partes review of the ‘021, ‘465, and ‘376 patents. On March 9, 2018, the PTO denied Telesign’s petition for inter partes review of the ‘021 patent and granted Telesign’s petitions for inter partes review of the ‘465 and ‘376 patents. On March 6, 2019, the PTO found all claims challenged by Telesign in the inter partes review unpatentable. The company has appealed the decisions to the United States Court of Appeals for the Federal Circuit. Telesign III is currently stayed pending resolution of the inter partes reviews (and appeals from them) of the ‘465 and ‘376 patents. The Company is seeking a judgment of infringement, a judgment of willful infringement, monetary and injunctive relief, enhanced damages, and an award of costs and expenses against Telesign.
On February 18, 2016, a putative class action complaint was filed in the Alameda County Superior Court in California, entitled Angela Flowers v. Twilio Inc. The complaint alleges that the Company’s products permit the interception, recording and disclosure of communications at a customer’s request and are in violation of the California Invasion of Privacy Act. The complaint seeks injunctive relief as well as monetary damages. On January 2, 2018, the court issued an order granting in part and denying in part the plaintiff’s class certification motion. The court certified two classes of individuals who, during specified time periods, allegedly sent or received certain communications involving the accounts of three of the Company’s customers that were recorded. Following mediation, on January 7, 2019, the parties signed a long form settlement agreement, providing for a payment of $10 million into a common fund and injunctive relief involving certain updates to Twilio’s Acceptable Use Policy and customer documentation. On January 15, 2019, the court entered an order granting preliminary approval of the settlement, and the parties signed an amended settlement agreement to conform to the court’s order. A final approval hearing is scheduled for June 11, 2019. Given insurance coverage, the Company continues to estimate its potential liability in the Flowers matter to be $1.7 million and carries this reserved amount in its condensed consolidated balance sheet as of March 31, 2019, presented elsewhere in this Quarterly Report on Form 10‑Q.
On September 1, 2015, Twilio was named as a defendant in a First Amended Complaint in a putative class action captioned Jeremy Bauman v. David Saxe, et al. pending in the United States District Court, District of Nevada relating to the alleged sending of unsolicited text messages to the plaintiffs and putative class members. The Company filed a motion to dismiss, which was granted, and on September 20, 2016 the plaintiff filed a Second Amended Complaint with additional allegations that the Company violated the Telephone Consumer Protection Act (“TCPA”), and the Nevada Deceptive Trade Practices Act (“NDTPA”), NRS 41.600(2)(e). On January 10, 2019, the court granted Plaintiffs’ motion for class certification under the TCPA and denied plaintiff’s request to certify a class under the NDTPA. On February 13, 2019, the court issued an order denying the Company’s motion to dismiss as to Plaintiffs’ TCPA claim and granting dismissal as to Plaintiffs’ NDTPA claim. The Company intends to vigorously defend itself against and believes it has meritorious defenses to this lawsuit. It is too early in these matters to reasonably predict the probability of the outcomes or to estimate the range of possible loss, if any.
SendGrid Stockholder Litigation
On December 5, 2018, purported stockholders of SendGrid filed putative class action complaints in the United States District Court for the District of Delaware, Rosenblatt v. SendGrid, Inc., et al., Case No. 1:18‑cv‑01931‑UNA (the “Rosenblatt Complaint”), and in the United States District Court for the District of Colorado, Chen v. SendGrid, Inc., et al., Case No. 1:18‑cv‑03131‑MEH (the “Chen Complaint”), against SendGrid, the individual members of the SendGrid board of directors (the “Individual Defendants”), Twilio and Topaz Merger Subsidiary, Inc. Thereafter, on December 19, 2018 and January 3, 2019, purported stockholders of SendGrid filed putative class action complaints against SendGrid and the Individual Defendants in the United States District Court for the District of Colorado, respectively, Bushansky v. SendGrid, Inc., et al., 1:18‑cv‑03260‑SKC (the “Bushansky Complaint”), and Conner v. SendGrid, Inc., et al., 1:19‑cv‑00016‑PAB‑SKC (the “Conner Complaint”). As of February 11, 2019, all four complaints have been voluntarily dismissed.
Among other things, the Rosenblatt Complaint alleged that SendGrid and the Individual Defendants misrepresented and/or omitted material information in a registration statement on Form S‑4, rendering it false and misleading and in violation of the Exchange Act and related regulations. In addition, the Rosenblatt Complaint alleged that the Individual Defendants and Twilio acted as controlling persons within the meaning and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective registration statement on Form S‑4.
The Rosenblatt Complaint sought, among other things, rescission of the merger or rescissory damages, an order directing the SendGrid board of directors to file a registration statement on Form S‑4 that does not contain any untrue statements of material fact and states all material facts, a declaration that the defendants violated Sections 14(a) and/or 20(a) of
the Exchange Act and Rule 14a‑9 promulgated thereunder and an award of plaintiff costs, including reasonable attorneys’ and experts’ fees. On February 11, 2019, the Rosenblatt Complaint was voluntarily dismissed.
Among other things, the Chen Complaint alleged that the defendants misrepresented and/or omitted material information in a registration statement on Form S‑4, rendering it false and misleading and in violation of the Exchange Act and related regulations. In addition, the Chen Complaint alleged that the Individual Defendants acted as controlling persons within the meaning and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective Form S‑4. The Chen Complaint also alleged that the Individual Defendants breached their fiduciary duties to SendGrid stockholders, and that the other defendants aided and abetted such breaches, by seeking to sell SendGrid through an allegedly unfair process and for an unfair price and on unfair terms, and by failing to disclose all material information. The Chen Complaint sought, among other things, rescission of the merger or rescissory damages, an order directing the SendGrid board of directors to commence a new sale process, a declaration that the merger agreement was agreed to in breach of the Individual Defendants’ fiduciary duties and is therefore unlawful and unenforceable, an order directing the defendants to account to the putative class for damages allegedly sustained, and an award of plaintiff costs, including reasonable attorneys’ and experts’ fees. On February 4, 2019, the Chen Complaint was voluntarily dismissed.
Among other things, the Bushansky and Conner Complaints alleged that SendGrid and the Individual Defendants misrepresented and/or omitted material information in a Schedule 14A Definitive Proxy Statement, rendering it false and misleading and in violation of the Exchange Act and related regulations. In addition, the Bushansky and Conner Complaints alleged that the Individual Defendants acted as controlling persons within the meaning and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective Schedule 14A Definitive Proxy Statement. The Bushansky and Conner Complaints sought, among other things, rescission of the merger or rescissory damages, and an award of plaintiff costs, including reasonable attorneys’ and experts’ fees. On February 4, 2019, the Bushansky Complaint was voluntarily dismissed. On February 11, 2019, the Conner Complaint was voluntarily dismissed.
In addition to the litigation discussed above, from time to time, the Company may be subject to legal actions and claims in the ordinary course of business. The Company has received, and may in the future continue to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights. Future litigation may be necessary to defend itself, its partners and its customers by determining the scope, enforceability and validity of third‑party proprietary rights, or to establish its proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.
Legal fees and other costs related to litigation and other legal proceedings are expensed as incurred and are included in general and administrative expenses in the accompanying condensed consolidated statements of operations.
(c)Indemnification Agreements
The Company has signed indemnification agreements with all of its board members and executive officers. The agreements indemnify the board members and executive officers from claims and expenses on actions brought against the individuals separately or jointly with the Company for certain indemnifiable events. Indemnifiable Events generally mean any event or occurrence related to the fact that the board member or the executive officer was or is acting in his or her capacity as a board member or an executive officer for the Company or was or is acting or representing the interests of the Company.
In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to business partners, customers and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties and other liabilities relating to or arising from the Company’s various products, or its acts or omissions. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, the Company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments. The terms of such obligations may vary.
As of March 31, 2019 and December 31, 2018, no amounts were accrued.
(d)Other Taxes
The Company conducts operations in many tax jurisdictions throughout the United States. In many of these jurisdictions, non-income-based taxes, such as sales and use and telecommunications taxes are assessed on the Company’s
operations. Prior to March 2017, the Company had not billed nor collected these taxes from its customers and, in accordance with U.S. GAAP, recorded a provision for its tax exposure in these jurisdictions when it was both probable that a liability had been incurred and the amount of the exposure could be reasonably estimated. These estimates included several key assumptions including, but not limited to, the taxability of the Company’s services, the jurisdictions in which its management believes it has nexus, and the sourcing of revenues to those jurisdictions. Starting in March 2017, the Company began collecting these taxes from customers in certain jurisdictions, and since then, has expanded the number of jurisdictions where these taxes are being collected. Effective January 2018, the Company began to collect taxes in one additional jurisdiction and accordingly, from January 2018, the Company is not recording an additional provision for its exposure for new activities in that jurisdiction. The Company expects to continue to expand the number of jurisdictions where these taxes will be collected in the future. Simultaneously, the Company was and continues to be in discussions with certain states regarding its prior state sales and other taxes, if any, that the Company may owe.
As of March 31, 2019 and December 31, 2018, the liability recorded for these taxes was $25.2 million and $22.6 million, respectively.
In the event other jurisdictions challenge management’s assumptions and analysis, the actual exposure could differ materially from the current estimates.
13. Stockholders’ Equity
(a)Preferred Stock
As of March 31, 2019 and December 31, 2018 , the Company had authorized 100,000,000 shares of preferred stock, par value $0.001, of which no shares were issued and outstanding.
(b)Common Stock
As of March 31, 2019 and December 31, 2018, the Company had authorized 1,000,000,000 shares of Class A common stock and 100,000,000 shares of Class B common stock, each par value $0.001 per share. As of March 31, 2019 and December 31, 2018, 110,048,588 shares and 80,769,763 shares of Class A common stock and 16,029,859 shares and 19,310,465 shares of Class B common stock, respectively, were issued and outstanding. Holders of Class A and Class B common stock are entitled to one vote per share and 10 votes per share, respectively, and the shares of Class A common stock and Class B common stock are identical, except for voting and conversion rights.
The Company had reserved shares of common stock for issuance as follows:
As of March 31, 2019
As of December 31, 2018
Stock options issued and outstanding
10,045,155
7,978,369
Nonvested restricted stock units issued and outstanding
8,813,737
8,262,902
Class A common stock reserved for Twilio.org
776,334
572,676
Stock-based awards available for grant under 2016 Plan
16,496,032
9,313,354
Stock-based awards available for grant under 2016 ESPP
4,093,581
3,092,779
Class A common stock reserved for the convertible senior notes
10,472,165
10,472,165
Total
50,697,004
39,692,245
14. Stock-Based Compensation
2008 Stock Option Plan
The Company maintained a stock plan, the 2008 Stock Option Plan, as amended and restated (the “2008 Plan”), which allowed the Company to grant incentive (“ISO”), non‑statutory (“NSO”) stock options and restricted stock units (“RSU”) to its employees, directors and consultants to participate in the Company’s future performance through stock‑based awards at the discretion of the board of directors. Under the 2008 Plan, options to purchase the Company’s common stock could not be
granted at a price less than fair value in the case of ISOs and NSOs. Fair value was determined by the board of directors, in good faith, with input from valuation consultants. On June 22, 2016, the plan was terminated in connection with the Company’s IPO. Accordingly, no shares are available for future issuance under the 2008 Plan. The 2008 Plan continues to govern outstanding equity awards granted thereunder. The Company’s right of first refusal for outstanding equity awards granted under the 2008 Plan terminated upon completion of the IPO. Options granted include provisions for early exercisability.
2016 Stock Option Plan
The Company’s 2016 Stock Option and Incentive Plan (the “2016 Plan”) became effective on June 21, 2016. The 2016 Plan provides for the grant of ISOs, NSOs, restricted stock, RSUs, stock appreciation rights, unrestricted stock awards, performance share awards, dividend equivalent rights and cash-based awards to employees, directors and consultants of the Company. A total of 11,500,000 shares of the Company’s Class A common stock were initially reserved for issuance under the 2016 Plan. These available shares automatically increase each January 1, beginning on January 1, 2017, by 5% of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31, or such lesser number of shares as determined by the Company’s compensation committee. On January 1, 2019 and 2018, the shares available for grant under the 2016 Plan were automatically increased by 5,004,011 shares and 4,698,490 shares, respectively.
Under the 2016 Plan, the stock options are granted at a price per share not less than 100% of the fair market value per share of the underlying common stock on the date of grant. Under both plans, stock options generally expire 10 years from the date of grant and vest over periods determined by the board of directors. The vesting period for new-hire options and restricted stock units is generally a four-year term from the date of grant, at a rate of 25% after one year, then monthly or quarterly, respectively, on a straight-line basis thereafter. In July 2017, the Company began granting restricted stock units to existing employees that vest in equal quarterly installments over a four year service period.
SendGrid Equity Awards Assumed in Acquisition
In connection with its acquisition of SendGrid, the Company assumed all stock options and restricted stock units issued under SendGrid’s 2009, 2012 or 2017 Stock Incentive Plans that were outstanding on the date of acquisition. The assumed equity awards will continue to be outstanding and will be governed by the provisions of their respective plans.
2016 Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (“2016 ESPP”) became effective on June 21, 2016. A total of 2,400,000 shares of the Company’s Class A common stock were initially reserved for issuance under the 2016 ESPP. These available shares will automatically increase each January 1, beginning on January 1, 2017, by the lesser of 1,800,000 shares of the common stock, 1% of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31 or such lesser number of shares as determined by the Company’s compensation committee. On January 1, 2019 and 2018, the shares available for grant under the 2016 Plan were automatically increased by 1,000,802 shares and 939,698 shares, respectively.
The 2016 ESPP allows eligible employees to purchase shares of the Company’s Class A common stock at a discount of up to 15% through payroll deductions of their eligible compensation, subject to any plan limitations. Except for the initial offering period, the 2016 ESPP provides for separate six-month offering periods beginning in May and November of each fiscal year, starting in May 2017.
On each purchase date, eligible employees will purchase the Company’s stock at a price per share equal to 85% of the lesser of (i) the fair market value of the Company’s Class A common stock on the offering date or (ii) the fair market value of the Company’s Class A common stock on the purchase date.
In the three months ended March 31, 2019 and 2018, no shares of Class A common stock were purchased under the 2016 ESPP, and 113,959 shares are expected to be purchased in the second quarter of 2019. As of March 31, 2019, total unrecognized compensation cost related to the 2016 ESPP was $0.8 million, which will be amortized over a weighted-average period of 0.1 years.