Annual Report
2019
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
FORM 10-K
____________________________
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-38897
____________________________
FASTLY, INC.
(Exact name of registrant as specified in its charter)
____________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
27-5411834
(I.R.S. Employer
Identification Number)
475 Brannan Street, Suite 300
San Francisco, CA 94107
(Address of principal executive offices) (Zip code)
(844) 432-7859
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, or former fiscal year, if changed since last report)
____________________________
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, $0.00002 par value
FSLY
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
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 ☒ No ☐
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 ☒ 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
Non-accelerated filer
☐
☒
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 ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the closing price of $20.28 for a share of
the Registrant’s Class A common stock on June 28, 2019 (the last business day of the registrant's most recently completed second quarter), as reported by the New York
Stock Exchange on such date, was approximately $263.5 million.
As of February 28, 2020, 71.4 million shares of the registrants’ Class A common stock were outstanding and 24.5 million shares of registrant's Class B common
stock were outstanding.
Portions of the registrant’s Definitive Proxy Statement relating to the 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K where indicated. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the
end of the registrant’s fiscal year ended December 31, 2019.
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TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Part I
Part II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplemental Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Part III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Part IV
Exhibits, Financial Statement Schedules
Form 10-K Summary
Signatures
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Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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"), about us and our industry that involve substantial risks and uncertainties. All statements other than statements
of historical facts contained in this report, including statements regarding our future results of operations and financial condition,
business strategy, and plans and objectives of management for future operations, are forward-looking statements. In some cases,
forward-looking statements may be identified by words such as "anticipate," "believe," "continue," "could," "design," "estimate,"
"expect," "intend," "may," "plan," "potentially," "predict," "project," "should," "will," or the negative of these terms or other similar
expressions.
Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available.
These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including
risks described in the section titled "Risk Factors" and elsewhere in this Annual Report on Form 10-K, regarding, among other
things:
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our ability to attract and retain customers;
our ability to increase the usage of our platform by existing customers;
defects, interruptions, security breaches, delays in performance, or similar problems with our platform;
our financial performance, including our revenue, cost of revenue, operating expenses, and our ability to attain and
sustain profitability;
our ability to adapt and respond effectively to rapidly changing technology, evolving industry standards, changing
regulations, and changing customer needs, requirements, or preferences;
the growth of our relevant markets;
our platform’s functionality, scalability, performance, ease of use, reliability, and cost effectiveness relative to that
of our competitors’ products and services;
our ability to compete effectively with existing competitors and new market entrants;
our ability to attract and retain qualified employees and key personnel;
our ability to maintain, protect, and enhance our intellectual property; and
our ability to comply with laws and regulations that currently apply or may become applicable to our business both
in the United States and internationally.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report
on Form 10-K.
Other sections of this Annual Report on Form 10-K may include additional factors that could harm our business and financial
performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time
to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our
business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in,
or implied by, any forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events
and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or
achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any
reason after the date of this report or to conform these statements to actual results or to changes in our expectations. You should
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read this Annual Report on Form 10-K and the documents that we reference in this Annual Report on Form 10-K and have filed
as exhibits to this report with the understanding that our actual future results, levels of activity, performance, and achievements
may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
Investors and others should note that we may announce material business and financial information to our investors using
our investor relations website (www.investors.fastly.com), our filings with the Securities and Exchange Commission, webcasts,
press releases, and conference calls. We use these mediums, including our website, to communicate with investors and the general
public about our company, our products, and other issues. It is possible that the information that we make available on our website
may be deemed to be material information. We therefore encourage investors and others interested in our company to review the
information that we make available on our website.
Item 1. Business
Overview
PART I
Developers are reinventing the way we live, work, and play online. Yet they repeatedly encounter innovation barriers
when delivering modern digital experiences. Expectations for digital experiences are at an all-time high; they must be fast,
secure, and highly personalized. If they aren’t reliable, end-users simply take their business elsewhere. The challenge today is
enabling developers to deliver a modern digital experience while simultaneously providing scale, security, and performance. We
built our edge cloud platform to solve this problem.
The edge cloud is a new category of Infrastructure as a Service ("IaaS") that enables developers to build, secure, and
deliver digital experiences, at the edge of the internet. This service represents the convergence of the Content Delivery Network
("CDN") with functionality that has been traditionally delivered by hardware-centric appliances such as Application Delivery
Controllers ("ADC"), Web Application Firewalls ("WAF"), Bot Detection, and Distributed Denial of Services ("DDoS")
solutions. It also includes the emergence of a new, but growing, edge computing market which aims to move compute power
and logic as close to the end-user as possible. The edge cloud uses the emerging cloud computing, serverless paradigm in which
the cloud provider runs the server and dynamically manages the allocation of machine resources. When milliseconds matter,
processing at the edge is an ideal way to handle highly dynamic and time-sensitive data. The edge cloud complements data
center, central cloud, and hybrid solutions.
Our mission is to fuel the next modern digital experience by providing developers with a programmable and reliable
edge cloud platform that they adopt as their own.
Organizations must keep up with complex and ever-evolving end-user requirements. We help them surpass their end-
users’ expectations by powering fast, secure, and scalable digital experiences. We built a powerful edge cloud platform,
designed from the ground up to be programmable and support agile software development. We believe our platform gives our
customers a significant competitive advantage, whether they were born into the digital age or are just embarking on their digital
transformation journey. Our platform consists of four key components: a programmable edge, a software-defined modern
network, safety in depth, and a philosophy of customer empowerment. Our programmable edge provides developers with real-
time visibility and control, where they can write and deploy code to push application logic to the edge. It supports modern
application delivery processes, freeing developers to innovate without constraints. Our software-defined modern network is
built for the software-defined future. It is powerful, efficient, and flexible, designed to enable us to rapidly scale to meet the
needs of the most demanding customers and never be a barrier to their growth. Our 74 terabit software-centric network is
located in 68 uniquely designed Points of Presence ("POPs") across 53 markets as of December 31, 2019. We define markets as
unique metropolitan areas where we have one or more POPs. Our safety in depth approach integrates security into multiple
layers of development: architecture, engineering, and operations. That's why we invest in building security into the fabric of our
platform, alongside performance. We provide developers and security operations teams with a fast, safe environment to create,
build, and run modern applications.
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Our platform provides developers and security operations teams with solutions that foster innovation without impacting
performance. Finally, being developers ourselves, we empower customers to build great things while supporting their efforts
through frictionless tools and a deeply technical support team that facilitates ongoing collaboration.
We serve both established enterprises and technology-savvy organizations. Our customers represent a diverse set of
organizations across many industries with one thing in common: they are competing by using the power of software to build
differentiation at the edge. With our edge cloud platform, our customers are disrupting existing industries and creating new
ones. For example, several of our customers have reinvented digital publishing by connecting readers through subscription
models to indispensable content, helping people understand the world through deeply reported independent journalism. Our
customers’ software applications use our edge cloud platform to ensure concert goers can buy tickets to the live events they
love, travelers can book flights seamlessly and embark on their next great adventure, and sports fans can stream events in real
time, across all devices. The range of applications that developers build with our edge cloud platform continues to expand
rapidly.
So where do we go from here? Our vision is to create a trustworthy internet, where good thrives. We want all developers
to have the ability to deliver the next transformative digital experience on a global scale. And because big ideas often start
small, we love it when developers experiment and iterate on our edge cloud platform, coming up with exciting new ways to
solve today’s complex problems.
Our usage-based revenue grows as our customers’ websites and applications deliver, process, and protect more traffic, as
they adopt more features of our edge platform and as they more broadly adopt our platform across their organizations. A
meaningful indicator of the increased activity from our existing customers is our Dollar-Based Net Expansion Rate
("DBNER"), a metric used in measuring the revenue growth from existing customers attributed to increased usage of our
platform and purchase of additional services. Our DBNER was 135.5%, 132.0%, and 147.3% for the years ended December 31,
2019, December 31, 2018, and December 31, 2017, respectively. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Key Business Metrics—Dollar-Based Net Expansion Rate” for further discussion of
DBNER.
We have achieved significant growth in recent periods. For the years ended December 31, 2019, December 31, 2018, and
December 31, 2017, our revenue was $200.5 million, $144.6 million, and $104.9 million, respectively. We incurred a net loss of
$51.6 million, $30.9 million, and $32.5 million for the years ended December 31, 2019, December 31, 2018, and December 31,
2017, respectively.
Our Solution: The Developer’s Edge
We have built a powerful, serverless edge cloud platform, designed from the ground up to be programmable and support
agile software development. We process, serve, and secure our customers’ applications as close to their end-users as possible, at
the edge of the internet for enhanced performance and protection. We call this platform the Developer’s Edge and we believe it
gives our customers a significant competitive advantage whether they are just embarking on their digital transformation journey
or natively born into the new digital age.
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Our edge cloud platform is based on several core tenets:
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Developers must be empowered to innovate;
Platforms must innovate ahead of market demands while still being reliable, scalable, and secure; and
Vendors must provide exceptional flexibility and support.
With this in mind, our platform, the Developer’s Edge, consists of four key components: a programmable edge, a
software-defined modern network, safety in depth, and a philosophy of customer empowerment.
Programmable Edge
Our programmable edge sits in an extremely privileged position, between our customers’ applications and their end-
users, placing our services closer to those users. It is designed to create a space for developers to innovate at their own pace, by
providing:
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Full programmability. Our powerful platform allows developers to write and deploy their custom code to
push application logic to the edge. We believe that logic like A/B testing, URL redirects, paywall
authentication, and location/language customization can all be executed faster and more efficiently at the
edge;
Reusable modules. Our platform includes reusable modules based on commonly deployed custom code
examples. We package and add these reusable modules to our platform, which do not require developer
experience to implement.
Real-time visibility and control. Our edge cloud platform is built with instant visibility and control as a
core tenet. We stream log data from our network edge in real time so developers can instantly see the
impact of new code in production, troubleshoot issues as they occur and rapidly identify suspicious
traffic. We also empower developers to make and roll back their own configuration or code changes on
the fly; and
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Agile development. Developers can build Fastly into their technology stack to power continuous
integration and continuous deployment (“CI/CD") efforts. They can use our edge cloud platform to help
push new code to production multiple times a day as they test new features, fix bugs, or enhance existing
offerings.
Edge Use Cases. Below are some examples of use cases our customers have solved for using Fastly’s programmable
edge:
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API acceleration. Accelerate and secure critical application programming interface (“API") responses at
the edge for delightful application experiences, such as instant hotel lookup based on location and real-
time inventory updates between retail stores and their online storefronts;
Internet of things ("IoT"). Process and secure data from connected devices at the edge for instant results
for time-sensitive applications;
Cloud migration. Seamlessly migrate from data center to cloud, hybrid or multi-cloud environments,
enabling the customer to take advantage of the functionality and cost savings of one or more cloud
providers; and
Enabling blockchain. Cache and accelerate individual transactions on the blockchain in real time.
Software-Defined Modern Network
Our edge cloud platform is designed to take advantage of the modern internet. Our philosophy has been to differentiate
through software by building one powerful software-centric network composed of unique and proprietary components. Our
approach is designed to give us the flexibility to innovate and build so we will never be a barrier to our customers’ growth, and
consists of the following key elements:
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Software-centric approach at global scale. From the start, we realized that single purpose hardware-
based solutions that rely on custom-designed chips are inflexible. Custom hardware, like routers, load
balancers, and security appliances, do not have the flexibility to support the dynamic needs of the modern
internet. We started with open source software like Varnish and Linux, then rewrote it to support the use
cases of a multi-tenant, high-performance edge cloud. We created our own proprietary software-defined
networking stack with built-in routing and load balancing, a storage system for optimal storage usage and
performance, a massive data pipeline to send customer logs, a cache invalidation system that purges
content around the world in an average of 150 milliseconds or less, and a proprietary control panel that
allows our customers to update their edge application logic and configurations in seconds around the
world. We architect the software to run on custom-designed servers built upon commodity components
and network hardware so that we can control every aspect of the network, from request to response and
drive as much utilization and scale as possible. Our software-centric approach is designed for better
network efficiency and greater flexibility to scale as we add more services.
POP design. We built Fastly for the internet of today—meaning fewer POPs, each with massive scale
and located at the key interconnection points of the internet. Our POPs are connected directly to the core
internet, each connecting directly to core Internet Service Provider ("ISPs") and 78 Internet Exchange
Points as of December 31, 2019 to offer high performance in long-tail content caching. We run fewer
clusters of more powerful servers that provide superior performance for customers who expect updates to
be pushed out to their global end-users nearly instantaneously. Legacy CDNs do not offer this benefit, as
it is extremely difficult to update hundreds of thousands of servers around the world;
Server efficiency. We have a highly efficient global server footprint because we combine advanced server
and network hardware with our world class software at each of our POPs. As of December 31, 2019, we
had 2,216 servers. Our servers are optimized to handle the complex workloads of compute at the edge by
using high-end Central Processing Units and significant amount of Random Access Memory to process
Varnish Configuration Language ("VCL"). We use solid-state drives, for fast and constant lookup times,
and modern 25 Gigabit Ethernet for robust bandwidth. This, combined with our algorithms and custom
software, gives us the flexibility to scale while dramatically reducing operating burden; and
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One network. We have built a single powerful, compliant network to support customers’ security and
delivery needs:
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Our single network is designed to provide the massive scale needed to defend against today’s
growing DDoS threats without sacrificing performance. The servers in our platform provide all
of the features of our product suite, allowing rapid and predictable scaling; and
We help meet customers’ Payment Card Industry ("PCI"), Health Insurance Portability and
Accountability Act ("HIPAA"), and Service Organization Control ("SOC") needs without
impacting performance. Because of our flexible routing and server architecture, we do not need
to send PCI traffic off to a separate sub-optimal network.
Common Use Cases. Our powerful network along with our operational efficiency can easily handle use cases that are
traditionally solved by CDNs. Some of these examples include:
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Infrastructure-agnostic traffic distribution. Support enterprise hybrid and multi-cloud strategies by
intelligently routing traffic across different cloud providers, or between cloud and on-premise data
centers, regardless of location;
Efficient traffic spike management. Allow enterprises to accommodate traffic spikes by intelligently and
rapidly distributing content requests across their network;
Live streaming at scale. Deliver highly-reliable live streaming experiences with minimal interruptions,
even when concurrently streaming to large global audiences;
Responsive mobile applications. Serve rapidly-changing mobile content from the edge, enabling end-
users to instantly access the very latest news updates, weather forecast, hotel availability, or store
inventory from their mobile applications;
Safety in Depth
We believe that security should be integrated seamlessly into every layer of development: architecture, programming,
and operations. That’s why we built security into the fabric of our platform, alongside performance. We provide developers and
security operations teams with a fast, safe environment to create, build, and run modern applications with:
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Operational agility. Our edge cloud platform minimizes risk through instant visibility and control. Security
operation teams can use our real-time data feeds to see threats and exposures to vulnerabilities as they
emerge. Our products are designed to make rule changes on the fly and update policies around the globe in
seconds based on real-time traffic insights, without having to engage professional services. These features
allow our security offerings to integrate into enterprise security software development cycles, thereby
supporting modern DevSecOps practices.
Performance centric. Fastly’s security offerings allow developers to iterate and test code quickly, while
providing security teams with tools that reduce risk without impeding performance. Our high-bandwidth,
globally distributed network naturally scales to absorb disruptive DDoS attacks. Our WAF and bot detection
solutions are built into our edge cloud platform, allowing us to protect web-based applications with minimal
latency.
Serverless security. Fastly’s platform provides a secure, serverless development platform at the edge. It is
designed to deploy custom applications, without impacting production traffic or having to worry about
patching servers for the latest operating system vulnerabilities. Customers can spin up a sandbox environment
which automatically executes code for a limited period of time and rapidly decommission it, significantly
reducing the attack surface.
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Customer Empowerment Philosophy
Fastly was built by developers, for developers. We believe in empowering our customers to build great things, while
collaborating with them to promote their success. We have a unique understanding of what it takes to deliver a frictionless
customer experience by providing:
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Freedom to try. Our free trial allows developers to sign up and start experimenting with our edge cloud
platform in a frictionless, self-service manner;
Flexible support model. Developers are free to program on our edge cloud platform, taking advantage of
our rich documentation and expertise of our developer community. For customers who require more
guidance, we provide a range of support packages and access to deep technical expertise from front-of-
line support staff to technical account managers; and
Partner friendly. Just as we expose the ability to program at the edge to our customer base, we extend
that power and functionality to our partners as well. This allows our partners to build out applications
that run at the edge, and provide a feature or service that is complementary to our platform. We enable
these integrations with a focus on API-support and a large number of code libraries.
Growth Strategy
Key elements of our growth strategy include the following:
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Invest in our technology platform. We intend to continue to invest in our large-scale, enterprise-grade
edge cloud platform which is both developer-friendly and fully programmable. We will strengthen our
investment in research and development so that we can add new and differentiated products on top of our
edge cloud platform. Since the end of 2014, we have grown our research and development team by a
factor of five, from 36 to 191 people as of December 31, 2019, deepening our talent across multiple
functional groups;
Expansion into additional vertical markets. Our platform offers a broad range of capabilities, and our
customers have diverse needs. To best serve these needs we have successfully adopted a vertical
approach to our sales and marketing efforts. We intend to build upon our initial success in digital
publishing, media and entertainment, technology, online retail, travel and hospitality, and financial
technology services, while expanding into new markets over time;
Further enable channel partners. Our edge cloud platform is the backend of choice for many of the
largest Platform as a Service ("PaaS") vendors serving the developer community. These PaaS vendors
aggregate millions of unique web properties under one brand, using Fastly as their edge cloud. We
believe that more and more web applications will be built on convenient and powerful out-of-the-box
solutions offered by large PaaS vendors. Many of our solution partners are PaaS providers who built us
into their platform to offer faster, more secure and scalable experience. Current examples include
Brightcove, Shopify, Drupal, Magento, WIX, and Adobe Portfolio. As our partners expand their customer
base, we will grow alongside them, providing us with exposure to millions of developers who will
become familiar with us, and potentially become customers themselves;
Invest in marketing. Our developer customers have been our best marketers. Historically, we have grown
based on word-of-mouth and delivering a great product, and have invested relatively small amounts in
marketing. In year ended December 31, 2019, we spent a total of $71.1 million in sales and marketing.
As we look towards our next stage of growth, we plan on significantly increasing our brand and digital
marketing efforts, running campaigns that target both developers and business decision makers across
different verticals;
Expand existing customer relationships. Over time, our customers have expanded their use of our
platform. For the years ended December 31, 2019, December 31, 2018, and December 31, 2017, our
DBNER was 135.5%, 132.0%, and 147.3%, respectively, highlighting the strength of our platform. Many
of our largest customers have grown through a "land and expand" strategy. On average, our customers
have increased their annual spend by more than 20% year over year since 2014, growing from an average
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last 12-months revenue of $35,000 to over $110,000 as of December 31, 2019. In more technically savvy
organizations, developers have championed our solution, paving the way for us to engage with business
decision makers. For more traditional organizations, we are often brought in to initially help facilitate a
move to the cloud and from there we extend our product to support many other use cases. We plan to
continually increase wallet-share over time for existing customers as we build out new products and
features, and as customers continue to fully recognize the value of our platform;
Grow our technology ecosystem. We operate between the "big 3" origin cloud platforms and a growing
community of companies that provide big data, machine learning, and security solutions. In this sense,
we act as the unifying layer for a growing number of cloud services. Current partnerships and
integrations include Sumo Logic, Amazon Web Services ("AWS"), Azure, and Google Cloud Platform.
As customers consume more cloud and software as a service (“SaaS") offerings, we can create additional
value and grow with our partners; and
Extend our global footprint. As our customer base grows, we plan to aggressively scale our network
accordingly. For the years ended December 31, 2019 and December 31, 2018, 29% and 23%,
respectively, of our revenue was generated from customers headquartered outside of the United States.
We are expanding our global corporate footprint to support these international customers. As of
December 31, 2019, we had 68 POPs strategically located in 53 markets, with more additions planned.
We believe significant opportunity exists for further international growth.
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Our Products
Our edge cloud is a globally distributed, programmable platform designed for highly performant and secure web and
application delivery. Our platform supports modern software development processes. We call it the Developer’s Edge, because
it empowers developers to innovate without constraints, as they lead the charge for their organizations’ digital transformation.
We operate a single, software-centric network. Our POPs reside between a customer’s end-users and computing and data
storage solutions, whether on-premise, in the cloud or a mixture of both. Our position on the network allows us to move
functionality closer to end-users at the network edge for faster, more secure experiences. This includes edge compute, edge
delivery, edge security, edge applications like load balancing and image optimization, video on demand, and managed edge
delivery.
Edge Compute
We enable developers to write their own custom logic to solve complex business problems at the network edge.
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Compute@Edge. Launched in beta in November 2019, this next generation serverless offering is
intended to provide developers with a powerful new language-agnostic compute environment. From our
inception, we have given developers the ability to use VCL to build more complex applications on our
edge cloud platform. Compute@Edge is designed to support other popular coding languages. Like all our
offerings, Compute@Edge is built to be secure, performant and scalable; at 35.4 microseconds it offers a
100x faster startup times than other solutions on the market.
Build on Fastly. This is a collection of 80+ code-based solutions designed to help developers solve
problems faster and safer at the edge. Developers can take advantage of pre-built code developed by
Fastly experts (and other customers) to do A/B testing, waiting rooms, website redirects, geofencing and
much more on the edge. Step-by-step tutorials walk them through both simple configurations and more
advanced solutions.
Edge Features. These are the building blocks which developers can use alongside our Build on Fastly
solution library. Combining edge features with pre-built code from our library empowers developers to
create complete solutions to solve problems at the edge.
Client Insights. Gives developers the ability to rapidly adjust the content served to end-users based on
location, device type, and language detection.
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Edge Dictionaries. Empower developers to make real-time decisions from every server in our network.
Edge dictionaries act as a distributed database at the edge, made up of key-value pairs. For example,
Edge Dictionaries allow customers to redirect end-users to a specific country site or update large referrer
spam blacklists in real time.
Edge Access Control Lists ("ACLs"). Help mitigate evolving threats from attackers by letting developers
make changes at scale. ACLs block bad internet protocol ("IP") addresses from visiting customer sites,
and for added security, they can create their own allow-lists.
Edge Delivery
Our edge delivery offerings include full site delivery and streaming for high value media.
Full Site Delivery
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Dynamic Site Acceleration. Speeds up requests and responses between cache nodes in our POPs and
customers’ origin servers, so their web and mobile content is served faster;
Origin Shield. Allows us to designate a specific POP to serve as a shield for a customer’s origin servers.
When web content is refreshed, and multiple end-users request the new content simultaneously, it can
lead to a deluge of requests hitting a customer’s origin server. This can result in poor web or application
performance. With Origin Shield, we collapse all these content requests into a single request and hold it
in queue at the Origin Shield POP. That allows us to go back to the customer’s origin server only once to
retrieve the new content, then serve it to all end-users who requested it. This approach reduces costs for
our customers, while improving performance for their end-users;
Instant Purge. Lets customers clear the cached copy of their content in an average of 150 milliseconds or
less. We allow customers to send a command to our platform that invalidates an old version of their
content throughout our global edge infrastructure. This causes a new version of content be retrieved from
the application server the next time it is requested. This feature enables our customers to serve highly
dynamic content at the edge more quickly and allows for delightful application experiences. Rapidly
changing content like shopping cart items, flight search results, sports scores, or current weather
conditions in any given location can all be served faster from the network edge;
Surrogate Keys. Allow customers to fine-tune purging by tagging related objects across their site with a
key name and description, then purging by that key. They can purge their entire site of a given object or
objects at once, without impacting performance. For example, they could purge any images and content
related to discontinued sale items, discounted products, or outdated news across their site all in one go;
and
Real-time Logging and Stats. Provide metrics and full visibility into end-user requests in real time from
the network edge. Log traffic is encrypted using Transport Layer Security ("TLS") and logs can be
streamed to most major logging endpoint solutions.
Streaming
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Live Streaming. Our platform is designed to concurrently deliver millions of near real-time, high-quality
live streams to our customers’ viewers. Our edge cloud supports the delivery of all major HTTP video
streaming formats, and we partner with multiple online video platform vendors to improve the flexibility
and scale of live streaming workflows, while also reducing total cost of ownership;
Media Shield. Large streaming customers often route traffic across multiple CDNs for redundancy. Our
Media Shield solution supports these efforts, while reducing total cost of ownership and improving
visibility and performance. It does so by collapsing requests for the same video streaming content across
all CDNs into one single request to the customer’s origin server. This reduces requests to origin and
allows us to serve streaming content faster; and
Origin Connect. Ideal for companies moving more than one gigabyte of data, such as media, video, and
streaming companies, Origin Connect provides a direct private network connection between an
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organization’s origin server and an Origin Shield POP. It is an effective way to lower transit costs, reduce
engineering complexity, and improve reliability for high-volume streaming content.
Edge Security
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DDoS. Our high-bandwidth, globally distributed network is built to absorb DDoS attacks without
impacting performance. Customers can respond to attacks in real time, filtering malicious requests at the
network edge, before they reach their origin.
WAF. Our WAF is designed to protect applications from malicious attacks that would otherwise
compromise web servers. It is integrated into our edge cloud platform, minimizing the impact on
performance, since we only inspect requests going to a customer’s origin. Customers get real-time access
to security events and notifications from the edge and can make instant changes to their WAF rules via
our API.
TLS. As part of our standard product, our platform terminates HTTPS connections at our network edge,
offloading encrypted traffic from customer’s web servers for better performance. We provide a number of
different certificate hosting options.
Platform TLS. Our Platform TLS offering is designed to allow customers with multiple web properties to
manage TLS certificates at scale, while enabling a fast, secure experience for their end-users. It supports
delivery and management of hundreds of thousands of certificates, supported by our worldwide TLS
termination and acceleration solution.
Compliance. We speed up the caching and delivery of sensitive content at the edge, helping customers
meet data compliance and privacy regulations such as HIPAA and the General Data Protection
Regulation ("GDPR"), in addition to industry standards such as PCI Data Security Standard and SOC.
Our Assurance Services offering includes support for additional documentation and audit procedures for
customers with these needs.
Edge Applications
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Load Balancer. Our Layer 7 load balancer manages HTTP/HTTPS requests to a customer’s origin using
granular content-aware routing decisions. We allow customers to manage traffic across multiple IaaS
providers, data centers, and hybrid clouds. We also provide improved performance and cost savings over
ADCs, especially during a spike or surge in traffic.
Image Optimizer. We offer a real-time image manipulation and delivery service and store transformations
at the edge. When an image is requested, we resize it, adjust quality, crop/trim, change orientations,
convert formats, and more, all on demand. Transforming images at the edge eliminates latency and
reduces traffic to a customer’s origin servers, allowing them to save on infrastructure and egress costs.
Video on Demand
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Our edge cloud platform is designed to cache and rapidly deliver both frequently and infrequently
requested on-demand videos. We significantly reduce the load on a customer’s origin servers while
accelerating time to first frame. Our on-the-fly-packaging feature facilitates immediate playback,
enhancing viewer experiences across multiple devices and platforms.
Managed Edge Delivery
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Our managed delivery service provides customers with maximum flexibility and control. We deploy our
edge cloud platform on dedicated POPs within a customer’s private network, at locations of their
choosing. This service can be used exclusively, or as part of a hybrid, multi-CDN strategy.
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Partner Ecosystem
Our partner ecosystem consists of companies who build edge applications to integrate with our platform, logging and
analytics providers, and PaaS providers. Our partners are all looking to extend the power of our edge cloud platform to their
customers.
Edge Application Partners
Our edge cloud platform exposes blocks of code that allow trusted partners to develop real-time analysis and
enforcement applications. Building out a massive edge presence is beyond the financial and technical capabilities of all but a
handful of companies. By opening our platform to third parties, we allow these partners to focus on building new and
innovative edge applications, without the capital outlay and complexity of doing it themselves. It opens up new markets and
business models for them.
Logging and Analytics Partners
Logging and analytics partners integrate with our edge cloud platform to deliver enhanced functionality to our joint
customers. Our logging feature provides insights into web and mobile requests and response, such as slow or missing URLs,
most requested URLs, site performance by region, and much more. Our statistics provide insights into things like percentage of
requests per second, request misses, errors, latency, traffic spikes, and global traffic profiles. Both logs and statistics can be
streamed in real time to our logging and analytics partners. This empowers our joint customers to monitor performance,
troubleshoot issues as they occur, and view this data alongside other metrics in consolidated dashboards. Logging and analytics
partners include the following:
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Google. A tight integration with Google Cloud Platform allows real-time logs to be streamed to any
Google Cloud Platform big data service, including Google Cloud Storage, BigQuery, and Bigtable;
Microsoft. Our integration with Microsoft Azure allows real-time logs to be streamed to both Azure Blob
Storage and Kusto;
Datadog. Datadog uses our API to pull in real-time stats and analytics for display in their dashboard;
Looker. Looker combines log data with other data sources in BigQuery, such as Google Analytics,
Google Ads data, or security and firewall data. Customers can then run multiple queries against these
data sets and present findings in Looker dashboards;
Sumo Logic. Sumo Logic integrates with our platform to offer more granular logging data for customers
with large-scale analytics. Customers gain real-time insights into slow URLs, missing or most requested
URLs, site performance by region, and more; and
Logentries. Logentries provides a one-click integration with our platform, making it easy for customers
to quickly set up real-time logs.
PaaS Partners
PaaS partners integrate with our edge cloud platform to make it easier for their developers to scale and secure websites.
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Heroku. Heroku empowers companies to build, deliver, monitor, and scale applications. Our Heroku add-
on lets developers seamlessly integrate their Heroku hosted applications with our edge cloud platform
through the click of a button;
Magento. Magento, an Adobe company, provides a commerce platform that enables merchants to
integrate digital and physical shopping experiences. Our Magento extension lets developers manage their
entire content caching strategy from the Magento control panel while maintaining fast, reliable
performance; and
Drupal and Wordpress. Drupal and Wordpress are CMS partners. They provide self-hosted solutions for
customers to create and manage all the content on their websites. Our Drupal and Wordpress extensions
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allow developers to easily configure and manage their content caching strategy from within these CMS
dashboards.
Our Culture and Employees
Our Values
Technology has the potential to make a radically positive impact on the world, and we aspire to improve human lives
through our work. We were founded on strong ethical principles, and have intentionally grown values-first, scaling our
workforce, services, customer portfolio, and investment partners purposefully. We are only as good as the company we keep,
and this guides our hiring practices as well as the ethics we are committed to upholding as we scale. We believe that as a result
of our values, we have been able to attract great people. We want to serve the very best of the internet. We choose to work with
customers that we believe have integrity, are trustworthy, and do not promote violence or hate. Our eight core values define
who we are and how we choose to grow, hire, train, work, communicate, make decisions, support each other, and serve our
customers.
Hiring Strategy
We are dedicated to building a diverse workforce and leadership team that reflects our values and the unique needs of our
global customer base. We strive to be a company full of kind, honest, passionate, and high-integrity people. We believe in
investing in our people and providing talented individuals with a strong growth path. Our U.S. support engineers are often hired
from code schools, and many code school graduates transition from support into other organizations within the company,
championing the customer voice and infusing our teams with a strong, service-focused mindset. Our engineering staff recruits
world-class experts in every part of the technology stack that makes up the internet, which inspires great developers to join us.
We are building a diverse workforce and inclusive culture that empowers and supports our employees and customers.
Employees
As of December 31, 2019, we had a total of 630 employees worldwide, including 116 employees located outside of the
United States. Our remote-friendly culture allows us to recruit and retain skilled professionals wherever we find them, so our
employees are spread across multiple cities in 16 different countries. Approximately 32% of our employees were based in our
headquarters in San Francisco, California as of December 31, 2019.
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Organization
Sales & Marketing
Our go-to-market model initially focused on reaching and serving the needs of developers. We reach developers through
working groups, community events, conferences, and word-of-mouth. Our platform was built to empower developers to
innovate at their own pace, so our platform is accessible, transparent, and self-service.
Our self-serve pricing matrix is publicly available and allows for customers to receive automatic tiered discounts as their
usage of our products increases. Some organizations choose to enter into negotiated contracts with us. These contracts typically
include specific pricing and a minimum monthly commitment. As developers have expanded their usage of our platform, our
relationships have evolved to include business leaders within their organizations.
Our sales and marketing organizations work together closely to cultivate customer relationships with developers and
business leaders at enterprises and technology-savvy organizations to drive revenue growth. We have vertically-based sales
teams that continue to enhance our value-based selling methodology. Our land and expand sales strategy for enterprise
customers has successfully demonstrated our platform’s capabilities, and our customer support enables broad adoption of our
technology within an organization.
We also offer a trial to developers who sign up, which includes a free balance for testing and experimentation. We do this
in order to strengthen our relationship and reputation within the developer community by providing these developers with the
ability to familiarize themselves with our platform without first becoming a paying customer. Once signed up, developers can
easily access our programmable interface, extensive self-service documentation, and customer support team. Our low-friction
trial experience allows developers to validate that our edge platform works for them at no cost or risk.
Research & Development
Our research and development team members are responsible for the design, development, and reliability of all aspects
of our edge cloud platform. Continuous improvement and innovation are core to our DNA, and these efforts are baked directly
into our service life cycle. Scale, performance, security, and reliability are core functional requirements of everything we build
into our platform to serve our customers.
Our philosophy of customer empowerment guides our research processes. Our product managers regularly engage with
customers and the developer, DevOps and site reliability engineering communities, as well as our internal stakeholders and
subject matter experts, in order to understand customer needs. Our engineering team is comprised of experts with deep
experience, who intimately understand customers’ technical challenges and build solutions accordingly.
Throughout the strategic, design, and build phases of our product life cycle, our development organization works closely
with our product, infrastructure, operations, and compliance teams to design, develop, test, and launch any given solution. We
strive for a balance of rapid iteration without compromise on the core functional requirements that our customers expect: scale,
performance, security, and reliability.
As of December 31, 2019, we had 191 employees in our research and development group. Our research and development
expenses were $46.5 million in the year ended December 31, 2019. Approximately 28% of our research and development group
were based in our headquarters in San Francisco, California as of December 31, 2019.
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Infrastructure
Our infrastructure team is responsible for the design, deployment, and maintenance of the servers and network hardware
that form the foundation of our mission critical environment in 68 POPs in 53 markets as of December 31, 2019. We invest in
research into global internet geography to identify optimal colocation site selection, network partner identification,
and network-to-network interconnection opportunities. These activities allow us to connect in close proximity to core internet
backbones and ISPs, thereby enhancing network performance. We carefully evaluate and test hardware from leading server,
network, and component manufacturers to ensure they comply with our workload performance, system efficiency, and
mean time-to-repair standards. In our process, we evaluate commodity server and network platforms to avoid vendor lock-
in, while optimizing the mix of components in an effort to improve efficiency and optimize our capital expenditures. We intend
to grow the number of data center colocation sites as traffic on our network grows and as demands for new markets justify
investment.
Trust
We uphold transparency and trustworthiness as company values. Our security, compliance and data governance teams, as
well as other departments across the company, continually iterate on our trust programs to better meet growing customer needs,
updated regulatory requirements, and the evolving security threat landscape. To help validate the controls that safeguard our
platform and the data moving through it, we have expanded our portfolio of security and compliance-related assessments and
certifications over time.
Customer Support
We have designed our products and platform to be self-service and require minimal customer support. Customers are
automatically covered by our standard support plan, free of charge, as soon as they sign up with us. They can file a ticket with
the support team, access documentation including online FAQs, API references, and configuration guidelines. Our support
approach is unique as we have built it with developers in mind. Our first-line support employee typically has an engineering
background and is highly technical.
We also provide several options for premier, hands-on support from a team of highly-technical senior support engineers
and technical account managers. They act as a single point of contact for our support, product and engineering teams. Our
support model is global, with 24/7 coverage and support offices located throughout the United States, the United Kingdom, and
Japan.
Partnerships & Strategic Relationships
We believe that building a strong partner ecosystem helps amplify our reach and time-to-market, while providing our
customers with enhanced value from our joint offerings. By investing in these partnerships, we hope to improve customer
satisfaction and retention rates. Our partners and strategic alliances include:
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Integration Partners
Solutions Partners
Referral and Reseller Partners
Central Cloud Partners
Competition
Our platform spans several markets from cloud computing and cloud security to CDNs. We segment the competitive
landscape into four key categories:
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Legacy CDNs like Akamai, Limelight, EdgeCast (part of Verizon Digital Media), Level3, and Imperva
(for security);
Small business focused CDNs like InStart, Cloudflare, StackPath, and Section.io;
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Cloud providers who are starting to offer compute functionality at the edge like Amazon’s CloudFront,
AWS Lambda, and Google Cloud Platform; and
Traditional data center and appliance vendors like F5, Citrix, A10 Networks, Cisco, Imperva, Radware,
and Arbor, as well as networks that offer a range of on-premise solutions for load balancing, WAF, and
DDoS.
The principle competitive factors in our market include:
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Platform scalability and performance;
Global network coverage;
Platform reliability and security;
Ease of integration and programmability;
Credibility with developers;
Ability to support modern application development processes;
Brand awareness, reputation, and trust;
Strength of our sales and marketing efforts;
Quality of customer support; and
Price and network cost savings.
We believe we generally compete favorably with our competitors on the basis of these factors. Our edge cloud platform
integrates many of the point products offered by our competitors which is a key differentiator. However, many of our
competitors have substantially greater financial and technical resources in addition to larger sales and marketing budgets,
broader market distribution, and more mature intellectual property portfolios.
Intellectual Property
We rely on a combination of patent, copyright, trademark, and trade secret laws in the United States and other
jurisdictions, as well as license agreements and other contractual protections, to protect our proprietary technology. We also rely
on a number of registered and unregistered trademarks to protect our brand.
As of December 31, 2019, in the United States, we had 40 issued patents, which expire between September 2033 and
June 2037, 47 patent applications pending for examination, as well as 10 pending provisional applications. As of such date, we
also had nine issued patents and 32 patent applications pending for examination in foreign jurisdictions and 26 Patent
Cooperation Treaty patent applications pending for examination, all of which are related to U.S. patents and patent applications.
In addition, as of December 31, 2019, we had 10 registered trademarks in the United States.
In addition, we seek to protect our intellectual property rights by requiring our employees and independent contractors
involved in development of intellectual property on our behalf to enter into agreements acknowledging that all works or other
intellectual property generated or conceived by them on our behalf are our property, and assigning to us any rights, including
intellectual property rights, that they may claim or otherwise have in those works or property, to the extent allowable under
applicable law.
Despite our efforts to protect our technology and proprietary rights through intellectual property rights, licenses, and
other contractual protections, unauthorized parties may still copy or otherwise obtain and use our software and other
technology. In addition, we intend to continue to expand our international operations, and effective intellectual property,
copyright, trademark, and trade secret protection may be unavailable or limited in foreign countries. Any significant impairment
of our intellectual property rights could harm our business or our ability to compete. Further, companies in the communications
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and technology industries own large numbers of patents, copyrights, and trademarks and frequently threaten litigation, or file
suit based on allegations of infringement or other violations of intellectual property rights. We are currently subject to, and
expect to face in the future, allegations that we have infringed the intellectual property rights of third parties. From time to time,
we also receive demands for indemnification from our customers under the terms of our contracts with them for infringement of
a third-party’s intellectual property rights.
Legal Proceedings
From time to time, we have been and will continue to be subject to legal proceedings and claims. We are not presently a
party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse
effect on our business, results of operations, financial condition, or cash flows. We have 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 ourselves, our partners, and our customers by determining the scope,
enforceability, and validity of third-party proprietary rights, or to establish our 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 us
because of defense and settlement costs, diversion of management resources, and other factors.
Corporate Information
We were initially incorporated under the laws of the State of Delaware in March 2011 under the name SkyCache, Inc. We
changed our name to Fastly, Inc. in May 2012. Our principal executive offices are located at 475 Brannan Street, Suite 300, San
Francisco, California 94107. Our telephone number is 1-844-432-7859. Our website address is www.fastly.com. The
information contained on, or that can be accessed through, our website does not constitute part of this Annual Report on Form
10-K.
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
reports filed or furnished pursuant to Sections 13(a), 14 and 15(d) of the Exchange Act. The SEC maintains a website at https://
www.sec.gov that contains reports, and other information regarding us and other companies that file materials with the SEC
electronically. Copies of our reports on Forms 10-K, Forms 10-Q, and Forms 8-K, may be obtained, free of charge,
electronically through our investor relations website at https://fastly.com/investors as soon as reasonably practicable after we
file such material with, or furnish such material to, the SEC.
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Item 1A.
Risk Factors
Investing in our Class A common stock involves a high degree of risk. Investors should carefully consider the risks and
uncertainties described below, together with all of the other information contained in this Annual Report on Form 10-K,
including the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and related notes, before deciding to invest in our Class A common stock. Unless otherwise
indicated, references to our business being harmed in these risk factors will include harm to our business, reputation, customer
growth, results of operations, financial condition, or prospects. Any of these events could cause the trading price of our Class A
common stock to decline, which would cause our stockholders to lose all or part of their investment. Our business, results of
operations, financial condition, or prospects could also be harmed by risks and uncertainties not currently known to us or that
we currently do not believe are material.
Risks Related to Our Business and Industry
If we are unable to attract new customers, our business will be harmed.
To grow our business, we must continue to attract new customers. To do so, we must successfully convince potential
customers of the benefits and the value of our platform. This may require significant and costly sales efforts that are targeted at
larger enterprises and senior management of these potential customers. These factors significantly impact our ability to add new
customers and increase the time, resources, and sophistication required to do so. In addition, numerous other factors, many of
which are out of our control, may now or in the future impact our ability to acquire new customers, including potential
customers’ commitments to other providers, real or perceived costs of switching to our platform, our failure to expand, retain,
and motivate our sales and marketing personnel, our failure to develop or expand relationships with potential customers and
channel partners, failure by us to help our customers to successfully deploy our platform, negative media or industry or
financial analyst commentary regarding us or our solutions, litigation, and deteriorating general economic conditions. Any of
these factors could impact our ability to attract new customers to our platform. As a result of these and other factors, we may be
unable to attract new customers, which would harm our business.
Our business depends on customers increasing their use of our platform, and any loss of customers or decline in their use of
our platform could harm our business.
Our ability to grow and generate incremental revenue depends, in part, on our ability to maintain and grow our
relationships with existing customers and to have them increase their usage of our platform. If our customers do not increase
their use of our platform, our revenue may decline and our results of operations may be harmed. Customers are charged based
on the usage of our platform. Most of our customers do not have long-term contractual financial commitments to us, and
therefore, most of our customers may reduce or cease their use of our products at any time without penalty or termination
charges. Customers may terminate or reduce their use of our platform for any number of reasons.
In order for us to maintain or improve our results of operations, it is important that our customers use our platform in
excess of their commitment levels, if any, and continue to use our platform on the same or more favorable terms. Our ability to
retain our customers and expand their usage could be impaired for a variety of reasons. For example, our customers may choose
to use other providers. Because our customers’ minimum usage commitments for our platform are relatively low compared to
their expected usage, it can be easy for certain customers to reallocate usage or switch from our platform to an alternative
platform altogether. In addition, even if our customers expand their usage of our platform, we cannot guarantee that they will
maintain those usage levels for any meaningful period of time. If any of these events were to occur, our business may be
harmed.
Our usage and revenue may decline or fluctuate as a result of a number of factors, including customer budget constraints,
customer satisfaction, changes in our customers’ underlying businesses, changes in the type and size of our customers, pricing
changes, competitive conditions, the acquisition of our customers by other companies, and general economic conditions. In
addition, our customers currently have no obligation to renew their commitments for our platform after the expiration of their
contract term, and a majority of our current customer contracts are only one year in duration. The loss of customers or
reductions in their usage of our platform may each have a negative impact on our business, results of operations, and financial
condition. If our customers reduce their usage of or do not continue to use our platform, our revenue and other results of
operations will decline and our business will suffer. In addition, existing customers may negotiate lower rates for their usage in
exchange for an agreement to renew, expand their usage in the future, or adopt new products. As a result, these customers may
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not reduce their usage of our platform, but the revenue we derive from that usage will decrease. If our usage or revenue fall
significantly below the expectations of the public market, securities analysts, or investors, our business would be harmed.
Our future success also depends in part on our ability to expand our existing customer relationships by selling
additional products to our existing customers. The rate at which our customers purchase products from us depends on a number
of factors, including general economic conditions and pricing and services offered by our competitors. If our efforts to sell
additional products to our customers are not successful, our business may be harmed.
If our platform fails to perform properly due to defects, interruptions, delays in performance. or similar problems, and if we
fail to develop enhancements to resolve any defect, interruption, delay, or other problems, we could lose customers, become
subject to service performance or warranty claims or incur significant costs.
Our operations are dependent upon our ability to prevent system interruption. The applications underlying our edge
cloud computing platform are inherently complex and may contain material defects or errors, which may cause disruptions in
availability or other performance problems. We have from time to time found defects and errors in our platform and may
discover additional defects or errors in the future that could result in data unavailability, unauthorized access to, loss,
corruption, or other harm to our customers’ data. These defects or errors could also be found in third-party applications or open
source software on which we rely. We may not be able to detect and correct defects or errors before implementing our products.
Consequently, we or our customers may discover defects or errors after our products have been deployed.
We currently serve our customers from our POPs located in 53 markets. Our customers need to be able to access our
platform at any time, without interruption or degradation of performance. However, we have not developed redundancies for all
aspects of our platform. We depend, in part, on our third-party facility providers’ ability to protect these facilities against
damage or interruption from natural disasters, power or telecommunications failures, criminal acts, public health issues, such as
the recent outbreak of coronavirus (COVID-2019), and similar events. In some cases, third-party cloud providers run their own
platforms that we access, and we are, therefore, vulnerable to their service interruptions. In the event that there are any defects
or errors in software, failures of hardware, damages to a facility, or misconfigurations of any of our services, we may have to
divert resources away from other planned work, could experience lengthy interruptions in our platform, and also incur delays
and additional expenses in arranging new facilities and services. Our customers may choose to divert their traffic away from our
platform as a result of interruptions or delays. Disaster recovery arrangements, including the existence of redundant data centers
that are designed to become active during certain lapses of service, may not function as intended, and any disruptions to our
service could harm our business.
We design our system infrastructure and procure and own or lease the computer hardware used for our platform. Design
and mechanical errors, spikes in usage volume, and failure to follow system protocols and procedures could cause our systems
to fail, resulting in interruptions on our platform. Moreover, we have experienced and may in the future experience system
failures or interruptions in our platform as a result of human error. Any interruptions or delays in our platform, whether caused
by our products or our data centers, third-party error, our own error, natural disasters, public health issues, or security breaches,
or whether accidental or willful, could harm our relationships with customers, reduce customers’ usage of our platform, cause
our revenue to decrease and/or our expenses to increase, and divert resources away from product development. Also, in the
event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur.
These factors in turn could further reduce our revenue, subject us to liability and cause us to issue service credits or cause
customers to fail to renew their customer contracts, any of which could harm our business.
The occurrence of any defects, errors, disruptions in service, failures involving redundant data centers, or other
performance problems, interruptions, or delays with our platform, whether in connection with the day-to-day operations or
otherwise, could result in:
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loss of customers;
reduced customer usage of our platforms;
lost or delayed market acceptance and sales of our products, or the failure to launch products or features
on anticipated timelines;
delays in payment to us by customers;
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injury to our reputation and brand;
legal claims, including warranty and service level agreement claims, against us; or
diversion of our resources, including through increased service and warranty expenses or financial
concessions, and increased insurance costs.
The costs incurred in correcting any material defects, errors, or other performance problems in our platform may be
substantial and could harm our business.
If we fail to forecast our revenue accurately, or if we fail to manage our expenditures, our operating results could be
adversely affected.
Because our recent growth has resulted in the rapid expansion of our business and revenues, we do not have a long
history upon which to base forecasts of future revenue and operating results. We cannot accurately predict customers’ usage or
renewal rates given the diversity of our customer base across industries, geographies and size, and other factors. Accordingly,
we may be unable to accurately forecast our revenues notwithstanding our substantial investments in sales and marketing,
infrastructure, and research and development in anticipation of continued growth in our business. If we do not realize returns on
these investments in our growth, our results of operations could differ materially from our forecasts, which would adversely
affect our results of operations and could disappoint analysts and investors, causing our stock price to decline.
Our limited operating history and our history of operating losses makes it difficult to evaluate our current business and
prospects and may increase the risks associated with your investment.
We were founded in 2011 and have experienced net losses and negative cash flows from operations since inception. Our
limited operating history makes it difficult to evaluate our current business and our future prospects, including our ability to
plan for and model future growth. We have encountered and will continue to encounter risks and difficulties frequently
experienced by rapidly growing companies in constantly evolving industries, including the risks described in this prospectus. If
we do not address these risks successfully, our business may be harmed.
We generated a net loss of $51.6 million for the year ended December 31, 2019, and as of December 31, 2019, we had an
accumulated deficit of $192.0 million. We will need to generate and sustain increased revenue levels and manage costs in future
periods in order to become profitable; even if we achieve profitability, we may not be able to maintain or increase our level of
profitability. We intend to continue to expend significant funds to support further growth and further develop our platform,
including expanding the functionality of our platform, expanding our technology infrastructure and business systems to meet
the needs of our customers, expanding our direct sales force and partner ecosystem, increasing our marketing activities, and
growing our international operations. We will also face increased compliance costs associated with growth, expansion of our
customer base, and the costs of being a public company. Our efforts to grow our business may be costlier than we expect, and
we may not be able to increase our revenue enough to offset our increased operating expenses. We may incur significant losses
in the future for a number of reasons, including the other risks described herein, and unforeseen expenses, difficulties,
complications and delays, and other unknown events. If we are unable to achieve and sustain profitability, our business may be
harmed.
Further, we have limited historical financial data and operate in a rapidly evolving market. As such, any predictions
about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated
in a more predictable market.
If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards, changing
regulations, and changing customer needs, requirements, or preferences, our products may become less competitive.
The market in which we compete is relatively new and subject to rapid technological change, evolving industry standards
and regulatory changes, as well as changing customer needs, requirements, and preferences. The success of our business will
depend, in part, on our ability to adapt and respond effectively to these changes on a timely basis. If we are unable to develop
and sell new products that satisfy our customers and provide enhancements, new features, and capabilities to our platform that
keep pace with rapid technological and industry change, our revenue and operating results could be adversely affected. If new
technologies emerge that enable our competitors to deliver competitive products and applications at lower prices, more
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efficiently, more conveniently, or more securely, such technologies could adversely impact our ability to compete. If our
platform does not allow us or our customers to comply with the latest regulatory requirements, our existing customers may
decrease their usage on our platform and new customers will be less likely to adopt out platform.
Our platform must also integrate with a variety of network, hardware, mobile, and software platforms and technologies,
and we need to continuously modify and enhance our products and platform capabilities to adapt to changes and innovation in
these technologies. If developers widely adopt new software platforms, we would have to attempt to develop new versions of
our products and enhance our platform’s capabilities to work with those new platforms. These development efforts may require
significant engineering, marketing, and sales resources, all of which would affect our business and operating results. Any failure
of our platform’s capabilities to operate effectively with future infrastructure platforms, technologies, and software platforms
could reduce the demand for our platform. If we are unable to respond to these changes in a cost-effective manner, our products
may become less marketable and less competitive or obsolete, and our business may be harmed.
Moreover, our platform is highly technical and complex and relies on the Varnish Configuration Language ("VCL").
Potential developers may be unfamiliar or opposed to working with VCL and therefore decide to not adopt our platform, which
may harm our business.
Failure to effectively develop and expand our marketing and sales capabilities could harm our ability to increase our
customer base and achieve broader market acceptance of our platform.
We have historically benefited from word-of-mouth and other organic marketing to attract new customers. Through
this word-of-mouth marketing, we have been able to build our brand with relatively low marketing and sales costs. This
strategy has allowed us to build a substantial customer base and community of users who use our products and act as advocates
for our brand and our platform, often within their own corporate organizations. However, our ability to further increase our
customer base and achieve broader market acceptance of our edge cloud platform will significantly depend on our ability to
expand our marketing and sales operations. We plan to continue expanding our sales force and strategic partners, both
domestically and internationally. We also plan to dedicate significant resources to sales, marketing, and demand-generation
programs, including various online marketing activities as well as targeted account-based advertising. The effectiveness of our
targeted account-based advertising has varied over time and may vary in the future. All of these efforts will require us to invest
significant financial and other resources and if they fail to attract additional customers our business will be harmed. We have
also used a strategy of offering free trial versions of our platform in order to strengthen our relationship and reputation within
the developer community by providing these developers with the ability to familiarize themselves with our platform without
first becoming a paying customer. However, most trial accounts do not convert to paid versions of our platform, and to date,
only a few users who have converted to paying customers have gone on to generate meaningful revenue. If our other lead
generation methods do not result in broader market acceptance of our platform and the users of trial versions of our platform do
not become, or are unable to convince their organizations to become, paying customers, we will not realize the intended
benefits of this strategy, and our business will be harmed.
We believe that there is significant competition for sales personnel, including sales representatives, sales managers, and
sales engineers, with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will
depend, in large part, on our success in recruiting, training, and retaining sufficient numbers of sales personnel to support our
growth. New hires require significant training and may take significant time before they achieve full productivity. Our recent
hires may not become productive as quickly as we expect, if at all, and we may be unable to hire or retain sufficient numbers of
qualified individuals in the markets where we do business or plan to do business. In addition, particularly if we continue to
grow rapidly, new members of our sales force will have relatively little experience working with us, our platform, and our
business model. If we are unable to hire and train sufficient numbers of effective sales personnel, our sales personnel do not
reach significant levels of productivity in a timely manner, or our sales personnel are not successful in acquiring new customers
or expanding usage by existing customers, our business will be harmed.
The markets in which we participate are competitive, and if we do not compete effectively, our business will be harmed.
The market for cloud computing platforms, particularly enterprise grade products, is highly fragmented, competitive, and
constantly evolving. With the introduction of new technologies and market entrants, we expect that the competitive
environment in which we compete will remain intense going forward. Legacy Content Delivery Networks ("CDNs"), such as
Akamai, Limelight, EdgeCast (part of Verizon Digital Media), Level3, and Imperva, and small business-focused CDNs, such as
Cloudflare, InStart, StackPath, and Section.io, offer products that compete with ours. We also compete with cloud providers
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who are starting to offer compute functionality at the edge like Amazon’s CloudFront, AWS Lambda, and Google Cloud
Platform, as well as traditional data center and appliance vendors like F5, Citrix, A10 Networks, Cisco, Imperva, Radware, and
Arbor Networks, who offer a range of on-premise solutions for load balancing, WAF, and DDoS. Some of our competitors have
made or may make acquisitions or may enter into partnerships or other strategic relationships that may provide more
comprehensive offerings than they individually had offered. Such acquisitions or partnerships may help competitors achieve
greater economies of scale than us. In addition, new entrants not currently considered to be competitors may enter the market
through acquisitions, partnerships, or strategic relationships. We compete on the basis of a number of factors, including:
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our platform’s functionality, scalability, performance, ease of use, reliability, security availability, and
cost effectiveness relative to that of our competitors’ products and services;
our global network coverage;
our ability to utilize new and proprietary technologies to offer services and features previously not
available in the marketplace;
our ability to identify new markets, applications, and technologies;
our ability to attract and retain customers;
our brand, reputation, and trustworthiness;
our credibility with developers;
the quality of our customer support;
our ability to recruit software engineers and sales and marketing personnel; and
our ability to protect our intellectual property.
We face substantial competition from legacy CDNs, small business-focused CDNs, cloud providers, traditional data
center, and appliance vendors. In addition, existing and potential customers may not use our platform, or may limit their use,
because they pursue a “do-it-yourself” approach by putting in place equipment, software, and other technology products for
content and application delivery within their internal systems; enter into relationships directly with network providers instead of
relying on an overlay network like ours; or implement multi-vendor policies to reduce reliance on external providers like us.
Our competitors vary in size and in the breadth and scope of the products and services offered. Many of our competitors and
potential competitors have greater name recognition, longer operating histories, more established customer relationships and
installed customer bases, larger marketing budgets, and greater resources than we do. While some of our competitors provide a
platform with applications to support one or more use cases, many others provide point-solutions that address a single use case.
Other potential competitors not currently offering competitive applications may expand their product offerings to compete with
our platform. Our competitors may be able to respond more quickly and effectively than we can to new or changing
opportunities, technologies, standards, and customer requirements. An existing competitor or new entrant could introduce new
technology that reduces demand for our platform. In addition to application and technology competition, we face pricing
competition. Some of our competitors offer their applications or services at a lower price, which has resulted in pricing
pressures. Some of our larger competitors have the operating flexibility to bundle competing applications and services with
other offerings, including offering them at a lower price or for no additional cost to customers as part of a larger sale of other
products. For all of these reasons, we may not be able to compete successfully and competition could result in the failure of our
platform to achieve or maintain market acceptance, any of which could harm our business.
If we fail to maintain and enhance our brand, our ability to expand our customer base will be impaired and our business,
results of operations and financial condition may suffer.
We believe that maintaining and enhancing our brand is important to continued market acceptance of our existing and
future products, attracting new customers, and retaining existing customers. We also believe that the importance of brand
recognition will increase as competition in our market increases. Successfully maintaining and enhancing our brand will depend
largely on the effectiveness of our marketing efforts, our ability to provide reliable products that continue to meet the needs of
our customers at competitive prices, our ability to maintain our customers’ trust, our ability to continue to develop new
functionality and products, and our ability to successfully differentiate our platform from competitive products and services.
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Additionally, our brand and reputation may be affected if customers do not have a positive experience with our partners’
services. Our brand promotion activities may not generate customer awareness or yield increased revenue, and even if they do,
any increased revenue may not offset the expenses we incurred in building our brand. If we fail to successfully promote and
maintain our brand, our business may be harmed.
We receive a substantial portion of our revenues from a limited number of customers, and the loss of, or a significant
reduction in usage by, one or more of our major customers would result in lower revenues and could harm our business.
Our future success is dependent on establishing and maintaining successful relationships with a diverse set of customers.
We currently receive a substantial portion of our revenues from a limited number of customers. For trailing 12 months ended
December 31, 2019, our top ten customers accounted for approximately 29% of our revenue, respectively. It is likely that we
will continue to be dependent upon a limited number of customers for a significant portion of our revenues for the foreseeable
future and, in some cases, the portion of our revenues attributable to individual customers may increase in the future. The loss
of one or more key customers or a reduction in usage by any major customers would reduce our revenues. If we fail to maintain
existing customers or develop relationships with new customers, our business would be harmed.
We may not be able to scale our business quickly enough to meet our customers’ growing needs. If we are not able to grow
efficiently, our business could be harmed.
As usage of our edge cloud computing platform grows and as the breadth of use cases for our platform expands, we will
need to devote additional resources to improving our platform architecture, integrating with third-party applications and
maintaining infrastructure performance. In addition, we will need to appropriately scale our processes and procedures that
support our growing customer base, including increasing our number of POPs around the world and investments in systems,
training, and customer support.
Any failure of or delay in these efforts could cause impaired system performance and reduced customer satisfaction.
These issues could reduce the attractiveness of our platform to customers, resulting in decreased sales to new customers, lower
renewal rates by existing customers, the issuance of service credits, or requested refunds, which would hurt our revenue growth
and our reputation. Even if we are able to upgrade our systems and expand our staff, any such expansion will be expensive and
complex, and require the dedication of significant management time and attention. We could also face inefficiencies or
operational failures as a result of our efforts to scale our cloud infrastructure. We cannot be sure that the expansion and
improvements to our cloud infrastructure will be effectively implemented on a timely basis, if at all, and such failures would
harm our business.
We may have insufficient transmission bandwidth and colocation space, which could result in disruptions to our platform
and loss of revenue.
Our operations are dependent in part upon transmission bandwidth provided by third-party telecommunications network
providers and access to colocation facilities to house our servers. There can be no assurance that we are adequately prepared for
unexpected increases in bandwidth demands by our customers, particularly when customers experience cyber-attacks. The
bandwidth we have contracted to purchase may become unavailable for a variety of reasons, including service outages, payment
disputes, network providers going out of business, natural disasters, networks imposing traffic limits, or governments adopting
regulations that impact network operations. In some regions, bandwidth providers have their own services that compete with us,
or they may choose to develop their own services that will compete with us. These bandwidth providers may become unwilling
to sell us adequate transmission bandwidth at fair market prices, if at all. This risk is heightened where market power is
concentrated with one or a few major networks. We also may be unable to move quickly enough to augment capacity to reflect
growing traffic or security demands. Failure to put in place the capacity we require could result in a reduction in, or disruption
of, service to our customers and ultimately a loss of those customers. Such a failure could result in our inability to acquire new
customers demanding capacity not available on our platform.
Security incidents and attacks on our platform could lead to significant costs and disruptions that could harm our business,
financial results, and reputation.
Our business is dependent on providing our customers with fast, efficient, and reliable distribution of applications and
content over the internet. We transmit and store our customers’ information, data, and encryption keys as well as our own;
customer information and data may include personally identifiable data of and about their end-users. Maintaining the security
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and availability of our platform, network, and internal IT systems and the security of information we hold on behalf of our
customers is a critical issue for us and our customers. Attacks on our customers and our own network are frequent and take a
variety of forms, including DDoS attacks, infrastructure attacks, botnets, malicious file attacks, cross-site scripting, credential
abuse, ransomware, bugs, viruses, worms, and malicious software programs. Malicious actors can attempt to fraudulently
induce employees or suppliers to disclose sensitive information through spamming, phishing, or other tactics. In addition,
unauthorized parties may attempt to gain physical access to our facilities in order to infiltrate our information systems. We have
in the past been subject to cyber-attacks from third parties, including parties who we believe are sponsored by government
actors. Since our customers share our multi-tenant architecture, an attack on any one of our customers could have a negative
effect on other customers. These attacks have significantly increased the bandwidth used on our platform and have strained our
network. If attacks like these were to occur in the future and if we do not have the systems and processes in place to respond to
them, our business could be harmed.
Security incidents, whether as a result of third-party action, employee or customer error, technology impairment or
failure, malfeasance or criminal activity, or hostile state actors, could result in unauthorized access to, or loss or unauthorized
disclosure of, customer information and data, including personally identifiable data of and about their end-users. Security
incidents involving customer information have in the past resulted in pricing and other concessions, decreased customer usage
and terminations by affected customers, and similar security incidents could occur in the future that result in pricing
concessions, indemnity obligations, and other possible liabilities related to such unauthorized access, loss or disclosure,
including litigation. Further, certain of our insurance policies and the laws of some states may limit or prohibit insurance
coverage for punitive or certain other types of damages or liability arising from gross negligence or intentional misconduct of
us and our suppliers and we cannot assure you that we are adequately insured against the risks that we face.
In recent years, cyber-attacks have increased in size, sophistication, and complexity, increasing exposure for our
customers and us. In addition, as we expand our emphasis on selling security-related products, we may become a more
attractive target for attacks on our infrastructure intended to destabilize, overwhelm, or shut down our platform. For example,
we have had security incidents in the past that have tested the limits of our infrastructure and impacted the performance of our
platform. The costs to us to avoid or alleviate cyber or other security problems and vulnerabilities are significant. However, our
efforts to address these problems and vulnerabilities may not be successful. Any significant breach of our security measures
could:
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lead to the dissemination of proprietary information or sensitive, personal, or confidential data about us,
our employees, or our customers—including personally identifiable information of individuals involved
with our customers and their end-users;
lead to interruptions or degradation of performance in our platform;
threaten our ability to provide our customers with access to our platform;
generate negative publicity about us;
result in litigation and increased legal liability or fines; or
lead to governmental inquiry or oversight.
The occurrence of any of these events could harm our business or damage our brand and reputation, lead to customer
credits, loss of customers, higher expenses, and possibly impede our present and future success in retaining and attracting new
customers. A successful security breach or attack on our infrastructure would be damaging to our reputation and could harm our
business.
Similar security risks exist with respect to our business partners and the third-party vendors that we rely on for aspects of
our information technology support services and administrative functions. As a result, we are subject to the risk that cyber-
attacks on our business partners and third-party vendors may adversely affect our business even if an attack or breach does not
directly impact our systems. It is also possible that security breaches sustained by our competitors could result in negative
publicity for our entire industry that indirectly harms our reputation and diminishes demand for our platform.
The nature of our business exposes us to inherent liability risks.
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Our platform and related applications, including our WAF and DDoS solutions, are designed to provide rapid protection
against web application vulnerabilities and cyber-attacks. However, no security product can provide absolute protection against
all vulnerabilities and cyber-attacks. Our platform is subject to cyber-attacks, and the failure of our platform and related
applications to adequately protect against these cyber-attacks may allow our customers to be attacked. Any adverse
consequences of these attacks, and our failure to meet our customers’ expectations as they relate to such attacks, could harm our
business.
Due to the nature of our applications, we are potentially exposed to greater risks of liability for product or system failures
than may be inherent in other businesses. Although substantially all of our customer agreements contain provisions that limit
our liability to our customers, these limitations may not be sufficient, and we cannot assure you that these limitations will be
enforced or the costs of any litigation related to actual or alleged omissions or failures would not have a material adverse effect
on us even if we prevail.
Failure to comply with U.S. and foreign governmental laws and regulations could harm our business.
Our business is subject to regulation by various federal, state, local, and foreign governments. If we do not comply with
these laws or regulations or if we become liable under these laws or regulations due to the failure of our customers to comply
with these laws, we could face direct liability or delivery of content by our platform may be blocked by certain governments. In
certain jurisdictions, these regulatory requirements may be more stringent than those in the United States. Noncompliance with
applicable regulations or requirements could subject us to investigations, sanctions, enforcement actions, disgorgement of
profits, fines, damages, civil and criminal penalties, injunctions, or other collateral consequences. If any governmental sanctions
are imposed, or if we do not prevail in any possible civil or criminal litigation, our business could be harmed. In addition,
responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in
professional fees. Enforcement actions and sanctions could harm our business. Certain federal statutes in the United States may
apply to us with respect to various activities of our customers, including the Digital Millennium Copyright Act (the “DMCA”),
which provides recourse for owners of copyrighted material who believe their rights under U.S. copyright law have been
infringed on the Internet, and section 230 of the Communications Decency Act (the “CDA”), which addresses blocking and
screening of content on the Internet. Although these and other similar legal provisions provide limited protections from liability
for service providers like us, if we are found not to be protected by the safe harbor provisions of the DMCA, CDA or other
similar laws, or if we are deemed subject to laws in other countries that may not have the same protections or that may impose
more onerous obligations on us, we may owe substantial damages and our brand, reputation, and financial results may be
harmed.
If the U.S. government prohibits our current or potential customers from doing business with us, whether through
policy, regulations or laws, we could face direct liability or our delivery of content by our platform may be blocked. For
example, the U.S. government has expressed concerns about the ability of companies operating in China to do business in the
U.S. or with U.S. companies, and 29% of our total revenue was generated from customers outside of the United States for the
year ended December 31, 2019. As a result, we could lose the ability to contract with current or potential customers, which
could harm our business and reputation.
Our sales to highly regulated organizations and government entities are subject to a number of challenges and risks.
We sell to customers in highly regulated industries such as financial services, insurance, and healthcare, as well as to
various governmental agency customers, including state and local agency customers, and foreign governmental agency
customers. Sales to such entities are subject to a number of challenges and risks. Selling to such entities can be highly
competitive, expensive, and time-consuming, often requiring significant upfront time and expense without any assurance that
these efforts will generate a sale. Government contracting requirements may change and in doing so restrict our ability to sell
into the government sector until we comply with the revised requirements. Government demand and payment for our offerings
are affected by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting
public sector demand for our offerings.
Further, highly regulated and governmental entities may demand shorter contract terms or other contractual provisions
that differ from our standard arrangements, including terms that can lead those customers to obtain broader rights in our
offerings than would be standard. Such entities may have statutory, contractual, or other legal rights to terminate contracts with
us or our partners due to a default or for other reasons, and any such termination may harm our business. In addition, these
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governmental agencies may be required to publish the rates we negotiate with them, which could harm our negotiating leverage
with other potential customers and in turn harm our business.
Our dedication to our values may negatively influence our financial results.
We have taken, and may continue to take, actions that we believe are in the best interests of our customers, our
employees, and our business, even if those actions do not maximize financial results in the short term. For instance, we do not
knowingly allow our platform to be used to deliver content from groups that promote violence or hate, and that conflict with
our values like strong ethical principles of integrity and trustworthiness, among others. However, this approach may not result
in the benefits that we expect, and our employees or third parties may disagree with our interpretation of our values, or take
issue with how we execute on our values, which may result in us becoming a target for negative publicity, increased scrutiny,
lawsuits, or network attacks, in which case our business could be harmed.
We have taken certain precautions due to the recent outbreak of coronavirus (COVID-19) that could harm our business.
In light of the uncertain and rapidly evolving situation relating to the spread of the coronavirus (COVID-19), we have
taken temporary precautionary measures intended to help minimize the risk of the virus to our employees, our customers, and
the communities in which we participate, which could negatively impact our business. As a company with employees,
customers, partners and investors across the globe, we believe in upholding our company value of being good people by doing
our part to help slow the spread of the virus. To this end, we are temporarily requiring all employees to work remotely, have
suspended all non-essential travel worldwide for our employees, are canceling or postponing Fastly-sponsored events, and are
discouraging employee attendance at industry events and in-person work-related meetings. While we have a distributed
workforce and our employees are accustomed to working remotely or working with other remote employees, our workforce is
not fully remote. Our employees travel frequently to establish and maintain relationships with one another and with our
customers, partners, and investors, and some of our business processes assume that employees can review and sign documents
in person. Although we continue to monitor the situation and may adjust our current policies as more information and guidance
become available, temporarily suspending travel and doing business in-person could negatively impact our marketing efforts,
challenge our ability to enter into customer contracts in a timely manner, slow down our recruiting efforts, or create operational
or other challenges as we adjust to a fully-remote workforce, any of which could harm our business. The extent to which the
coronavirus (COVID-19) and our precautionary measures may impact our business will depend on future developments, which
are highly uncertain and cannot be predicted at this time.
If we cannot maintain our company culture as we grow, our success and our business may be harmed.
We believe our culture has been a key contributor to our success to date and that the critical nature of the products that
we provide promotes a sense of greater purpose and fulfillment in our employees. We have invested in building a strong
corporate culture and believe it is one of our most important and sustainable sources of competitive advantage. Any failure to
preserve our culture could negatively affect our ability to recruit and retain personnel and to effectively focus on and pursue our
corporate objectives. As we grow and develop the systems and processes associated with being a public company, we may find
it difficult to maintain these important aspects of our culture. In addition, while we have historically benefited from having a
dispersed workforce, as we grow and our resources become more globally dispersed and our organizational management
structures become more complex, we may find it increasingly difficult to maintain these beneficial aspects of our corporate
culture. If we fail to maintain our company culture, our business may be harmed.
Slower usage growth on our platform and numerous other factors could cause our revenue growth rate to slow.
Increasing usage on our platform is key to our revenue growth. Numerous factors can impact the usage growth of our
platform, including:
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the popularity of our customers’ offerings as compared to those offered by companies that do not use our
platform;
adoption of new technologies that allow end-users to access content from a core cloud without having to
access our network;
customers, particularly large internet platform companies, utilizing their own data centers and
implementing delivery approaches that limit or eliminate reliance on third-party providers like us; and
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macro-economic market and industry pressures.
We base our decisions about expense levels and investments on estimates of our future revenue and future anticipated
rate of growth. Many of our expenses are fixed cost in nature for some minimum amount of time, such as with colocation and
bandwidth providers, so it may not be possible to reduce costs in a timely manner or without the payment of fees to exit certain
obligations early. If we experience slower usage growth on our platform than we expect or than we have experienced in recent
years, our revenue growth rate will slow down and our business may be harmed.
Our growth depends in large part on the success of our partner relationships.
We maintain a partner ecosystem of companies who build edge applications to integrate with our platform. We are
dependent on these partner relationships to amplify our reach and provide our customers with enhanced value from our
platform. Our future growth will be increasingly dependent on the success of our partner relationships, including their
development of useful applications for our platform. If those partnerships do not provide these benefits or if our partners are
unable to serve our customers effectively, we may need to allocate resources internally to provide these services or our
customers may not realize the full value of our platform, which could harm our business.
Moreover, our partners’ business partners may not completely align with our core values and therefore may do business
with companies that we otherwise would not. Our association with these companies could damage our brand and reputation and
potentially harm our business.
We operate in an emerging and evolving market, which may develop more slowly or differently than we expect. If our market
does not grow as we expect, or if we cannot expand our services to meet the demands of this market, our revenue may
decline, or fail to grow, and we may incur operating losses.
The market for edge computing is in an early stage of development. There is considerable uncertainty over the size and
rate at which this market will grow, as well as whether our platform will be widely adopted. Our success will depend, to a
substantial extent, on the widespread adoption of our platform as an alternative to other solutions, such as legacy CDNs,
enterprise data centers, central cloud, and small business-focused CDNs. Some organizations may be reluctant or unwilling to
use our platform for a number of reasons, including concerns about additional costs, uncertainty regarding the reliability, and
security of cloud-based offerings or lack of awareness of the benefits of our platform. Moreover, many organizations have
invested substantial personnel and financial resources to integrate traditional on-premise services into their businesses, and
therefore may be reluctant or unwilling to migrate to cloud-based services. Our ability to expand sales of our product into new
and existing markets depends on several factors, including potential customer awareness of our platform; the timely completion
of data centers in those markets; introduction and market acceptance of enhancements to our platform or new applications that
we may introduce; our ability to attract, retain and effectively train sales and marketing personnel; our ability to develop
relationships with partners; the effectiveness of our marketing programs; the pricing of our services; and the success of our
competitors. If we are unsuccessful in developing and marketing our product into new and existing markets, or if organizations
do not perceive or value the benefits of our platform, the market for our product might not continue to develop or might develop
more slowly than we expect, either of which may harm our business.
The estimates of market opportunity, forecasts of market growth included in this prospectus may prove to be inaccurate, and
any real or perceived inaccuracies may harm our reputation and negatively affect our business. Even if the market in which
we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.
Market opportunity estimates and growth forecasts included in this prospectus are subject to significant uncertainty and
are based on assumptions and estimates that may not prove to be accurate. The variables that go into the calculation of our
market opportunity are subject to change over time, and there is no guarantee that any particular number or percentage of
addressable companies or end-users covered by our market opportunity estimates will purchase our products at all or generate
any particular level of revenues for us. Even if the market in which we compete meets the size estimates and growth forecasted
in this prospectus, our business could fail to grow for a variety of reasons, including reasons outside of our control, such as
competition in our industry.
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Usage of our platform accounts for substantially all of our revenue.
We expect that we will be substantially dependent on our edge cloud platform to generate revenue for the foreseeable
future. As a result, our operating results could suffer due to:
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any decline in demand for our edge cloud platform;
the failure of our edge cloud platform to achieve continued market acceptance;
the market for edge cloud computing services not continuing to grow, or growing more slowly than we
expect;
the introduction of products and technologies that serve as a replacement or substitute for, or represent an
improvement over, our edge cloud platform;
technological innovations or new standards that our edge cloud platform does not address;
sensitivity to current or future prices offered by us or our competitors;
our customers’ development of their own edge cloud platform; and
our inability to release enhanced versions of our edge cloud platform on a timely basis.
If the market for our edge cloud platform grows more slowly than anticipated or if demand for our edge cloud platform
does not grow as quickly as anticipated, whether as a result of competition, pricing sensitivities, product obsolescence,
technological change, unfavorable economic conditions, uncertain geopolitical environment, budgetary constraints of our
customers, or other factors, our business would be harmed.
We expect fluctuations in our financial results and key metrics, making it difficult to project future results, and if we fail to
meet the expectations of securities analysts or investors, our stock price and the value of your investment could decline.
Our operating results, as well as our key metrics (including our DBNER) have fluctuated in the past and are expected to
fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, our past results may not
be indicative of our future performance and period-to-period comparisons of our operating results and key metrics may not be
meaningful. In addition to the other risks described herein, factors that may affect our operating results include the following:
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fluctuations in demand for or pricing of our platform;
our ability to attract new customers;
our ability to retain our existing customers;
fluctuations in the usage of our platform by our customers, which is directly related to the amount of
revenue that we recognize from our customers;
fluctuations in customer delays in purchasing decisions in anticipation of new products or product
enhancements by us or our competitors;
changes in customers’ budgets and in the timing of their budget cycles and purchasing decisions;
the timing of customer payments and any difficulty in collecting accounts receivable from customers;
timing of new functionality of our existing platform;
our ability to control costs, including our operating expenses;
the amount and timing of payment for operating expenses, particularly research and development and
sales and marketing expenses, including commissions;
the amount and timing of costs associated with recruiting, training, and integrating new employees;
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the effects of acquisitions or other strategic transactions;
expenses in connection with acquisitions or other strategic transactions;
our ability to successfully deploy POPs in new regions;
general economic conditions, both domestically and internationally, as well as economic conditions
specifically affecting industries in which our customers participate;
the ability to maintain our partnerships;
the impact of new accounting pronouncements;
changes in the competitive dynamics of our market, including consolidation among competitors or
customers;
significant security breaches of, technical difficulties with, or interruptions to, the delivery and use of our
platform; and
awareness of our brand and our reputation in our target markets.
Additionally, certain large scale events, such as major elections and sporting events, can significantly impact usage of
our platform, which could cause fluctuations in our results of operations. While increased usage of our platform during these
events could result in increased revenue, these seasonal and one-time events could also impact the performance of our platform
during those events and lead to a sub-optimal experience for some customers. Such annual and one-time events may cause
fluctuations in our results of operations as they would impact both our revenue and our operating expenses.
Any of the foregoing and other factors may cause our results of operations to vary significantly. If our quarterly results of
operations fall below the expectations of investors and securities analysts who follow our stock, the price of our Class A
common stock could decline substantially, and our business could be harmed.
Our recent rapid growth may not be indicative of our future growth and, if we continue to grow rapidly, we may not be able
to manage our growth effectively.
We have experienced substantial growth in our business since inception. We are rapidly expanding, and expect to
continue to expand in the future, our international operations. For example, we have also experienced significant growth in the
number of customers, usage, and amount of data delivered across our platform. In addition, our headcount has grown from 449
employees as of December 31, 2018 to 630 employees as of December 31, 2019. This growth has placed and may continue to
place significant demands on our corporate culture, operational infrastructure, and management. We may not continue to grow
as rapidly in the future. Overall growth of our revenue depends on a number of factors, including our ability to:
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address new and developing markets, such as large enterprise customers outside the United States;
control expenses;
recruit, hire, train, and manage additional qualified engineers;
recruit, hire, train, and manage additional sales and marketing personnel;
maintain our corporate culture;
expand our international operations;
implement and improve our administrative, financial and operational systems, procedures, and controls;
attract new customers and increase our existing customers’ usage on our platform;
expand the functionality and use cases for the products we offer on our platform;
provide our customers with customer support that meets their needs; and
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successfully identify and acquire or invest in businesses, products, or technologies that we believe could
complement or expand our products.
We may not successfully accomplish any of the above objectives. We expect to continue to expend substantial financial
and other resources on:
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sales and marketing, including a significant expansion of our sales organization;
our infrastructure, including POP deployments, systems architecture, management tools, scalability,
availability, performance, and security, as well as disaster recovery measures;
product development, including investments in our product development team and the development of
new products and new functionality for our existing products;
acquisitions or strategic investments;
international expansion; and
general administration, including increased legal and accounting expenses associated with being a public
company.
We employ a pricing model that subjects us to various challenges that could make it difficult for us to derive sufficient value
from our customers.
We generally charge our customers for their usage of our platform based on the combined total usage, as well as the
features and functionality enabled. Additionally, once our product is purchased, customers can also buy any combination of
our add-on products. We do not know whether our current or potential customers or the market in general will continue to
accept this pricing model going forward and, if it fails to gain acceptance, our business could be harmed. We also generally
purchase bandwidth from internet service providers and server colocation space from third parties based on expected usage
from our customers. Moreover, if our customers use our platform in a manner that is inconsistent with how we have purchased
bandwidth, servers, and colocation space, our business could be harmed.
We do not have sufficient history with our pricing model to accurately predict the optimal pricing necessary to attract new
customers and retain existing customers.
We have limited experience with respect to determining the optimal prices for our products and, as a result, we have in
the past and expect that we will need to change our pricing model from time to time in the future. As the market for our
products matures, or as new competitors introduce new products or services that compete with ours, we may be unable to attract
new customers at the same price or based on the same pricing models as we have used historically. Pricing decisions may also
impact the mix of adoption among our customers and negatively impact our overall revenue. Moreover, larger organizations
may demand substantial price concessions. As a result, in the future we may be required to reduce our prices or develop new
pricing models, which could adversely affect our revenue, gross margin, profitability, financial position, and cash flow.
Our sales and onboarding cycles with customers can be long and unpredictable, and our sales and onboarding efforts
require considerable time and expense.
The timing of our sales with our enterprise customers and related revenue recognition is difficult to predict because of
the length and unpredictability of the sales cycle for these customers. In addition, for our enterprise customers, the lengthy sales
cycle for the evaluation and implementation of our products may also cause us to experience a delay between expenses for such
sales efforts and the generation of corresponding revenue. The length of our sales cycle for these customers, from initial
evaluation to payment, can range from several months to well over a year and can vary substantially from customer to
customer. Similarly, the onboarding and ramping process with new enterprise customers can take several months. As the
purchase of our products can be dependent upon customer initiatives, our sales cycle can extend to even longer periods of time.
Customers often view a switch to our platform as a strategic decision requiring significant investment and, as a result,
frequently require considerable time to evaluate, test, and qualify our product offering prior to entering into or expanding a
contract commitment. During the sales cycle, we expend significant time and money on sales and marketing and contract
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negotiation activities, which may not result in a completed sale. Additional factors that may influence the length and variability
of our sales cycle include:
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the effectiveness of our sales force, particularly new salespeople, as we increase the size of our sales
force and train our new salespeople to sell to enterprise customers;
the discretionary nature of customers’ purchasing decisions and budget cycles;
customers’ procurement processes, including their evaluation of competing products;
economic conditions and other factors affecting customer budgets;
the regulatory environment in which our customers operate;
integration complexity for a customer deployment;
the customer’s familiarity with edge cloud computing platforms;
evolving customer demands; and
competitive conditions.
Given these factors, it is difficult to predict whether and when a customer will switch to our platform.
Given that it can take several months for our customers to ramp up their usage of our platform, during that time, we may
not be able to generate enough revenue from a particular customer or that customer may not increase their usage in a
meaningful way. Moreover, because the switching costs are fairly low, our customers are able to switch from our platform to
alternative services relatively easily.
We rely on the performance of highly skilled personnel, including our management and other key employees, and the loss of
one or more of such personnel, or of a significant number of our team members, could harm our business.
We believe our success has depended, and continues to depend, on the efforts and talents of senior management and key
personnel, including Artur Bergman, our Chief Architect and Executive Chairman and Joshua Bixby, our Chief Executive
Officer. From time to time, there may be changes in our management team resulting from the hiring or departure of executives
and key employees, which could disrupt our business. We also are dependent on the continued service of our existing software
engineers because of the complexity of our platform. Our senior management and key employees are employed on an at-
will basis. We cannot ensure that we will be able to retain the services of any member of our senior management or other key
employees or that we would be able to timely replace members of our senior management or other key employees should any of
them depart. The loss of one or more of our senior management or other key employees could harm our business.
The failure to attract and retain additional qualified personnel could prevent us from executing our business strategy.
To execute our business strategy, we must attract and retain highly qualified personnel. Competition for executive
officers, software developers, sales personnel, and other key employees in our industry is intense. In particular, we compete
with many other companies for software developers with high levels of experience in designing, developing, and managing
cloud-based software, as well as for skilled sales and operations professionals. In addition, we believe that the success of our
business and corporate culture depends on employing people with a variety of backgrounds and experiences, and the
competition for such diverse personnel is significant. While the market for such talented personnel is particularly competitive in
the San Francisco Bay Area, where our headquarters is located, it is also competitive in other markets where we maintain
operations. Many of the companies with which we compete for experienced personnel have greater resources than we do and
can frequently offer such personnel substantially greater compensation than we can offer. If we fail to attract new personnel or
fail to retain and motivate our current personnel, our business would be harmed.
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If our platform does not achieve sufficient market acceptance, our financial results and competitive position will suffer.
To meet our customers’ rapidly evolving demands, we invest substantial resources in research and development of
enhanced products to incorporate additional functionality or expand the use cases that our platform addresses. Maintaining
adequate research and development resources, such as the appropriate personnel and development technology, to meet the
demands of the market is essential. If we are unable to develop products internally due to inadequate research and development
resources, we may not be able to address our customers’ needs on a timely basis or at all. In addition, if we seek to supplement
our research and development capabilities or the breadth of our products through acquisitions, such acquisitions could be
expensive and we may not successfully integrate acquired technologies or businesses into our business. When we develop or
acquire new or enhanced products, we typically incur expenses and expend resources upfront to develop, market, promote, and
sell the new offering. Therefore, when we develop or acquire and introduce new or enhanced products, they must achieve high
levels of market acceptance in order to justify the amount of our investment in developing or acquiring and bringing them to
market. Our new products or enhancements and changes to our existing products could fail to attain sufficient market
acceptance for many reasons, including:
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failure to predict market demand accurately in terms of functionality and a failure to supply products that
meet this demand in a timely fashion;
defects, errors, or failures;
negative publicity about our platform’s performance or effectiveness;
changes in the legal or regulatory requirements, or increased legal or regulatory scrutiny, adversely
affecting our platform;
emergence of a competitor that achieves market acceptance before we do;
delays in releasing enhancements to our platform to the market; and
introduction or anticipated introduction of competing products by our competitors.
If our platform and any future enhancements do not achieve adequate acceptance in the market, or if products and
technologies developed by others achieve greater acceptance in the market, our business could be harmed.
Beyond overall acceptance of our platform by our customers, it is important that we maintain and grow acceptance of our
platform among the developers that work for our customers. We rely on developers to choose our platform over other options
they may have, and to continue to use and promote our platform as they move between companies. These developers often
make design decisions and influence the product and vendor processes within our customers. If we fail to gain or maintain their
acceptance of our platform, our business would be harmed.
We rely on third-party hosting providers that may be difficult to replace.
We rely on third-party hosting services such as Amazon Web Services ("AWS"), Google, Softlayer (acquired by IBM),
and other cloud providers that facilitate the offering of our platform. Some of these third-party hosting services offer competing
products to ours and therefore may not continue to be available on commercially reasonable terms, or at all. These providers
may be unwilling to do business with us if they view our platform as a threat. Any loss of the right to use any of the hosting
providers could impair our ability to offer our platform until we are able to obtain alternative hosting providers.
If we do not or cannot maintain the compatibility of our platform with third-party applications that our customers use in
their businesses, our business will be harmed.
Because our customers choose to integrate our products with certain capabilities provided by third-party providers, the
functionality and popularity of our platform depends, in part, on our ability to integrate our platform and applications with
third-party applications. These third parties may change the features of their technologies, restrict our access to their
applications, or alter the terms governing use of their applications in a manner that is adverse to our business. Such changes
could functionally limit or prevent our ability to use these third-party technologies in conjunction with our platform, which
would negatively affect adoption of our platform and harm our business. If we fail to integrate our platform with new third-
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party applications that our customers use, we may not be able to offer the functionality that our customers need, which would
harm our business.
The success of our business depends on customers’ continued and unimpeded access to our platform on the internet.
Our customers must have internet access in order to use our platform. Some internet providers may take measures that
affect their customers’ ability to use our platform, such as degrading the quality of the content we transmit over their lines,
giving that content lower priority, giving other content higher priority than ours, blocking our content entirely, or attempting to
charge their customers more for using our platform.
In December 2010, the Federal Communications Commission ("FCC") adopted net neutrality rules barring internet
providers from blocking or slowing down access to online content, protecting services like ours from such interference. The
FCC has repealed the net neutrality rules, and it is currently uncertain how the U.S. Congress will respond to this decision. To
the extent network operators attempt to interfere with our platform, extract fees from us to deliver our platform, or otherwise
engage in discriminatory practices, our business could be adversely impacted. Within such a regulatory environment, we could
experience discriminatory or anti-competitive practices that could impede our domestic and international growth, cause us to
incur additional expense, or otherwise harm our business.
We provide service level commitments under our customer agreements. If we fail to meet these contractual commitments, we
could be obligated to provide credits for future service, or face contract termination with refunds of prepaid amounts, which
could harm our business.
Most of our customer agreements contain service level commitments. If we are unable to meet the stated service level
commitments, including failure to meet the uptime and delivery requirements under our customer agreements, we may be
contractually obligated to provide the affected customers with service credits which could significantly affect our revenues in
the periods in which the uptime and/or delivery failure occurs and the credits are applied. We could also face customer
terminations, which could significantly affect both our current and future revenues. Any service level failures could harm our
business.
If we fail to offer high quality support, our business may be harmed.
Our customers rely on our support team to assist them in deploying our products effectively and resolve technical and
operational issues. High-quality support is important for the renewal and expansion of our agreements with existing customers.
The importance of maintaining high quality support will increase as we expand our business and pursue new customers. If we
do not help our customers quickly resolve issues and provide effective ongoing support, our ability to maintain and expand our
relationships with existing and new customers could suffer and our business could be harmed. Further, increased demand for
customer support, without corresponding revenue, could increase costs and adversely affect our business. In addition, as we
continue to grow our operations and expand internationally, we will need to be able to provide efficient customer support that
meets our customers’ needs globally at scale and our customer support team will face additional challenges, including those
associated with delivering support and documentation in multiple languages. Our failure to do so could harm our business.
Future acquisitions, strategic investments, partnerships, or alliances could be difficult to identify and integrate, divert the
attention of management, disrupt our business, and dilute stockholder value.
We may in the future seek to acquire or invest in businesses, products, or technologies that we believe could complement
or expand our platform, enhance our technical capabilities, or otherwise offer growth opportunities. The pursuit of potential
acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and
pursuing acquisitions, whether or not such acquisitions are completed. In addition, we have only limited experience in acquiring
other businesses and we may not successfully identify desirable acquisition targets or, if we acquire additional businesses, we
may not be able to integrate them effectively following the acquisition. Acquisitions could also result in dilutive issuances of
equity securities or the incurrence of debt, which could adversely affect our operating results, may cause unfavorable
accounting treatment, may expose us to claims and disputes by third parties, including intellectual property claims, and may not
generate sufficient financial returns to offset additional costs and expenses related to the acquisitions. In addition, if an acquired
business fails to meet our expectations, our business may be harmed.
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Because we recognize revenue from usage on our platform over the term of the relevant contract, downturns or upturns in
sales contracts are not immediately reflected in full in our operating results.
Revenue for usage on our platform accounts for substantially all of our total revenue. We recognize revenue over the
term of each of our customer contracts, which are typically one year in length but may be longer in length. As a result, much of
our revenue is generated from contracts entered into during previous periods. Consequently, a decline in new or renewed
contracts in any one quarter may not significantly reduce our revenue for that quarter but could negatively affect our revenue in
future quarters. Our revenue recognition model also makes it difficult for us to rapidly increase our revenue through new
contracts in any period, as revenue from customers is recognized over the applicable term of their contracts.
Seasonality may cause fluctuations in our sales and operating results.
We have experienced, and expect to continue to experience in the future, seasonality in our business, and our operating
results and financial condition may be affected by such trends in the future. We generally experience seasonal fluctuations in
demand for our platform. For example, we typically have customers who increase their usage and requests when they need
more capacity during busy periods, especially in the fourth quarter of the year, and then subsequently scale back. We believe
that the seasonal trends that we have experienced in the past may continue for the foreseeable future, particularly as we expand
our sales to larger enterprises. To the extent we experience this seasonality, it may cause fluctuations in our operating results
and financial metrics, and make forecasting our future operating results and financial metrics difficult. Additionally, we do not
have sufficient experience in selling certain of our products to determine if demand for these products are or will be subject to
material seasonality.
Unfavorable conditions in our industry or the global economy or reductions in information technology spending could harm
our business.
Our results of operations may vary based on the impact of changes in our industry or the global economy on us or our
customers and potential customers. Current or future economic uncertainties or downturns could adversely affect our business
and results of operations. Negative conditions in the general economy both in the United States and abroad, including
conditions resulting from changes in gross domestic product growth, financial and credit market fluctuations, political turmoil,
natural catastrophes, warfare, public health issues, such as the recent outbreak of coronavirus (COVID-2019), and terrorist
attacks on the United States, Europe, the Asia Pacific region, or elsewhere, could cause a decrease in business investments,
including spending on information technology, which would harm our business. To the extent that our platform and our
products are perceived by customers and potential customers as too costly, or difficult to deploy or migrate to, our revenue may
be disproportionately affected by delays or reductions in general information technology spending. Also, our competitors, many
of whom are larger and have greater financial resources than we do, may respond to market conditions by lowering prices and
attempting to lure away our customers. In addition, the increased pace of consolidation in certain industries may result in
reduced overall spending on our products. We cannot predict the timing, strength, or duration of any economic slowdown,
instability, or recovery, generally or within any particular industry.
Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.
Our net operating loss ("NOL") carryforwards could expire unused and be unavailable to offset future income tax
liabilities because of their limited duration or because of restrictions under U.S. tax law. Our NOLs generated in tax years
ending on or prior to December 31, 2019 are only permitted to be carried forward for 20 years under applicable U.S. tax law.
Under the Tax Cuts and Jobs Act (the "Tax Act"), our federal NOLs generated in tax years ending after December 31, 2019 may
be carried forward indefinitely, but the deductibility of such federal NOLs is limited (as described below under "The Tax Act
could adversely affect our business and financial condition"). It is uncertain if and to what extent various states will conform to
the Tax Act.
In addition, under Section 382 of the United States Internal Revenue Code of 1986, as amended (the "Code"), a
corporation that undergoes an "ownership change" is generally subject to limitations on its ability to utilize its pre-
change NOLs to offset future taxable income. We may have experienced ownership changes in the past and may experience
ownership changes in the future as a result of subsequent shifts in our stock ownership (some of which shifts are outside our
control). Furthermore, our ability to utilize NOLs of companies that we have acquired or may acquire in the future may be
subject to limitations. For these reasons, we may not be able to utilize a material portion of the NOLs, even if we were to
achieve profitability.
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Our current operations are international in scope and we plan on further geographic expansion, creating a variety of
operational challenges.
A component of our growth strategy involves the further expansion of our operations and customer base internationally.
For the year ended December 31, 2019, the percentage of revenue generated from customers outside the United States was 29%
of our total revenue, respectively. We currently have offices in Japan, the United Kingdom, and the United States, as well as
employees located throughout the world. We are continuing to adapt to and develop strategies to address international markets
but there is no guarantee that such efforts will have the desired effect. As of December 31, 2019, approximately 18% of our
full-time employees were located outside of the United States. We expect that our international activities will continue to grow
over the foreseeable future as we continue to pursue opportunities in existing and new international markets, which will require
significant management attention and financial resources. In connection with such expansion, we may face difficulties
including costs associated with, varying seasonality patterns, potential adverse movement of currency exchange rates, longer
payment cycle difficulties in collecting accounts receivable in some countries, tariffs and trade barriers, a variety of regulatory
or contractual limitations on our ability to operate, adverse tax events, reduced protection of intellectual property rights in some
countries, and a geographically and culturally diverse workforce and customer base. Failure to overcome any of these
difficulties could harm our business.
Our current and future international business and operations involve a variety of risks, including:
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changes in a specific country’s or region’s political or economic conditions;
greater difficulty collecting accounts receivable and longer payment cycles;
potential or unexpected changes in trade relations, regulations, or laws;
more stringent regulations relating to privacy and data security and the unauthorized use of, or access to,
commercial and personal information, particularly in Europe;
differing labor regulations, especially in Europe and Japan, where labor laws are generally more
advantageous to employees as compared to the United States, including deemed hourly wage and
overtime regulations in these locations;
challenges inherent in efficiently managing an increased number of employees over large geographic
distances, including the need to implement appropriate systems, policies, benefits, and compliance
programs;
challenges to our corporate culture resulting from a dispersed workforce;
difficulties in managing a business in new markets with diverse cultures, languages, customs, legal
systems, alternative dispute systems, and regulatory systems;
increased travel, real estate, infrastructure, and legal compliance costs associated with international
operations;
currency exchange rate fluctuations and the resulting effect on our revenue and expenses, and the cost
and risk of entering into hedging transactions if we chose to do so in the future;
challenges related to providing support and developing products in foreign languages;
limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of
our operations in other countries;
laws and business practices favoring local competitors or general market preferences for local vendors;
potential tariffs and trade barriers;
limited or insufficient intellectual property protection or difficulties enforcing our intellectual property;
political instability or terrorist activities;
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limitations in the ability to travel caused by public health issues, such as the recent outbreak of
coronavirus (COVID-2019);
exposure to liabilities under anti-corruption and anti-money laundering laws, and similar laws and
regulations in other jurisdictions; and
adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and
cash.
Our limited experience in operating our business internationally increases the risk that any potential future expansion
efforts that we may undertake will not be successful. If we invest substantial time and resources to further expand our
international operations and are unable to do so successfully and in a timely manner, our business may be harmed.
Our business is dependent upon the timely supply of certain parts and components manufactured in China to construct
our servers. To the extent that our suppliers are impacted by the coronavirus (COVID-19), it likely will reduce the availability,
or result in delays, of parts and components to us, which in turn could interrupt our ability to complete the construction of our
servers to meet the usage needs of our customers.
Our international operations may subject us to potential adverse tax consequences.
We are expanding our international operations and staff to better support our growth into international markets. Our
corporate structure and associated transfer pricing policies contemplate future growth into the international markets, and
consider the functions, risks, and assets of the various entities involved in the intercompany transactions. The amount of taxes
we pay in different jurisdictions may depend on: the application of the tax laws of the various jurisdictions, including the
United States, to our international business activities; changes in tax rates; new or revised tax laws or interpretations of existing
tax laws and policies; and our ability to operate our business in a manner consistent with our corporate structure and
intercompany arrangements. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies
for pricing intercompany transactions pursuant to our intercompany arrangements or disagree with our determinations as to the
income and expenses attributable to specific jurisdictions. If such a challenge or disagreement were to occur, and our position
was not sustained, we could be required to pay additional taxes, interest, and penalties, which could result in one-
time tax charges, higher effective tax rates, reduced cash flows, and lower overall profitability of our operations. Our financial
statements could fail to reflect adequate reserves to cover such a contingency.
Legal, political, and economic uncertainty surrounding the planned exit of the United Kingdom ("UK") from the European
Union ("EU") may be a source of instability in international markets, create significant currency fluctuations, adversely
affect our operations in the UK, and pose additional risks to our business, revenue, financial condition, and results of
operations.
Following the result of a referendum in 2016, the United Kingdom left the European Union on January 31, 2020,
commonly referred to as Brexit.
Pursuant to the formal withdrawal arrangements agreed between the United Kingdom and the European Union, the UK
will be subject to a transition period until December 31, 2020 (the "Transition Period") during which EU rules will continue to
apply. Negotiations between the UK and the EU are expected to continue in relation to the customs and trading relationship
between the UK and the EU following the expiry of the Transition Period.
The uncertainty concerning the UK’s legal, political, and economic relationship with the EU after the Transition Period
may continue to be a source of instability in the international markets, create significant currency fluctuations, or otherwise
adversely affect trading agreements or similar cross-border co-operation arrangements (whether economic, tax, fiscal, legal,
regulatory, or otherwise).
These developments, or the perception that any of them could occur, have had and may continue to have a significant
adverse effect on global economic conditions and the stability of global financial markets, and could significantly reduce global
market liquidity and limit the ability of key market participants to operate in certain financial markets. In particular, it could
also lead to a period of considerable uncertainty in relation to the UK financial and banking markets, as well as on the
regulatory process in Europe. Asset valuations, currency exchange rates, and credit ratings may also be subject to increased
market volatility.
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If the UK and the EU are unable to negotiate acceptable trading and customs terms or if other EU Member States pursue
withdrawal, barrier-free access between the UK and other EU Member States or among the European Economic Area (EEA)
overall could be diminished or eliminated. The long-term effects of Brexit will depend on any agreements (or lack thereof)
between the UK and the EU and, in particular, any arrangements for the UK to retain access to EU markets either during a
transitional period or more permanently after the Transition Period.
Such a withdrawal from the EU is unprecedented, and it is unclear how the UK’s access to the European single market
for goods, capital, services, and labor within the EU, or single market, and the wider commercial, legal, and regulatory
environment, will impact our UK operations and customers. Our UK operations service customers in the UK as well as in other
countries in the EU and EEA and these operations could be disrupted by Brexit, particularly if there is a change in the UK’s
relationship to the single market.
We may also face new regulatory costs and challenges as a result of Brexit that could have an adverse effect on our
operations. For example, the UK could lose the benefits of global trade agreements negotiated by the EU on behalf of its
members, which may result in increased trade barriers that could make our doing business in the EU and the EEA more
difficult. There may continue to be economic uncertainty surrounding the consequences of Brexit that adversely impact
customer confidence resulting in customers reducing their spending budgets on our solutions, which could harm our business.
Our ability to timely raise capital may be limited, or may be unavailable on acceptable terms, if at all, and our failure to
raise capital when needed could harm our business, and debt or equity issued to raise additional capital may reduce the
value of our Class A common stock.
We have funded our operations since inception primarily through payments received from our customers, sales of equity
securities, and borrowings under our credit facilities. We cannot be certain when or if our operations will generate sufficient
cash to fully fund our ongoing operations or the growth of our business. We intend to continue to make investments to support
our business and may require additional funds. Additional financing may not be available on favorable terms, if at all. If
adequate funds are not available on acceptable terms, we may be unable to invest in future growth opportunities, which could
harm our business, operating results, and financial condition. Furthermore, if we issue additional equity securities, stockholders
will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our
decision to issue securities in future offerings will depend on numerous considerations, including factors beyond our control,
we cannot predict or estimate the amount, timing, or nature of any future issuances of debt or equity securities. As a result, our
stockholders bear the risk of future issuances of debt or equity securities reducing the value of our Class A common stock and
diluting their interests.
We are exposed to fluctuations in currency exchange rates.
Our sales contracts are primarily denominated in U.S. dollars, and therefore substantially all of our revenue is not subject
to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our platform to our
customers outside of the United States, which could adversely affect our operating results. In addition, an increasing portion of
our operating expenses is incurred and an increasing portion of our assets is held outside the United States. These operating
expenses and assets are denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency
exchange rates. While we do not currently engage in hedging efforts, if we do not successfully hedge against the risks
associated with currency fluctuations, our business may be harmed.
Changes in our effective tax rate or tax liability may harm our business.
Our effective tax rate could be adversely impacted by several factors, including:
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Changes in the relative amounts of income before taxes in the various jurisdictions in which we operate
that have differing statutory tax rates;
Changes in tax laws, tax treaties, and regulations or the interpretation of them, including the Tax Act;
Changes to our assessment about our ability to realize our deferred tax assets that are based on estimates
of our future results, the prudence and feasibility of possible tax planning strategies, and the economic
and political environments in which we do business;
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The outcome of current and future tax audits, examinations, or administrative appeals; and
Limitations or adverse findings regarding our ability to do business in some jurisdictions.
Should our effective tax rate rise, our business could be harmed.
We could be required to collect additional sales taxes or be subject to other tax liabilities that may increase the costs our
clients would have to pay for our offering and harm our business.
An increasing number of states have considered or adopted laws that attempt to impose tax collection obligations on out-
of-state companies. Additionally, the Supreme Court of the United States recently ruled in South Dakota v. Wayfair, Inc. et
al ("Wayfair") that online sellers can be required to collect sales and use tax despite not having a physical presence in the
buyer’s state. In response to Wayfair, or otherwise, states or local governments may adopt, or begin to enforce, laws requiring
us to calculate, collect, and remit taxes on sales in their jurisdictions. A successful assertion by one or more states requiring us
to collect taxes where we presently do not do so, or to collect more taxes in a jurisdiction in which we currently do collect some
taxes, could result in substantial tax liabilities, including taxes on past sales, as well as penalties and interest. The imposition by
state governments or local governments of sales tax collection obligations on out-of-state sellers could also create additional
administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on our competitors
and decrease our future sales, which could harm our business.
Adverse tax laws or regulations could be enacted or existing laws could be applied to us, which could adversely affect our
business and financial condition.
We operate and are subject to taxes in the United States and numerous other jurisdictions throughout the world.
Changes to federal, state, local, or international tax laws on income, sales, use, indirect, or other tax laws, statutes, rules,
regulations, or ordinances on multinational corporations are currently being considered by the United States and other countries
where we do business. These contemplated legislative initiatives include, but are not limited to, changes to transfer pricing
policies and definitional changes to permanent establishment that could be applied solely or disproportionately to services
provided over the internet. These contemplated tax initiatives, if finalized and adopted by countries, may ultimately impact our
effective tax rate and could adversely affect our sales activity resulting in a negative impact on our operating results and cash
flows.
In addition, existing tax laws, statutes, rules, regulations, or ordinances could be interpreted, changed, modified, or
applied adversely to us (possibly with retroactive effect), which could require us to pay additional tax amounts, fines or
penalties, and interest for past amounts. The additional tax obligations could relate to our taxes or obligations to report or
withhold on customer taxes. We could take steps to collect customer related taxes, but if we are unsuccessful in collecting such
taxes from our customers, we could be held liable for such costs, thereby adversely impacting our operating results and cash
flows. Further, if our customers must pay additional fines or penalties, it could adversely affect demand for our services.
On December 22, 2017, President Trump signed into law H.R. 1, “An Act to provide for reconciliation pursuant to titles
II and V of the concurrent resolution on the budget for fiscal year 2018,” informally titled the Tax Act, which significantly
revises the Code. The Tax Act, among other things, reduces the corporate tax rate from a top marginal rate of 35% to a flat rate
of 21%, limits the tax deduction for interest expense to 30% of adjusted taxable income (except for certain small businesses),
limits the deduction for net operating losses carried forward from taxable years beginning after December 31, 2017 to 80% of
current year taxable income, eliminates net operating loss carrybacks, imposes a one-time tax on offshore earnings at reduced
rates regardless of whether they are repatriated, eliminates U.S. tax on foreign earnings (subject to certain important
exceptions), allows immediate deductions for certain new investments instead of deductions for depreciation expense over time,
and modifies or repeals many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate,
the U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly
impact how we will apply the law and impact our results of operations in the period issued. In addition, it is uncertain if and to
what extent various states will conform to the Tax Act. The impact of the Tax Act on holders of our Class A common stock is
also uncertain and could be adverse. We urge our stockholders to consult with their legal and tax advisors with respect to this
legislation and the potential tax consequences of investing in or holding our Class A common stock.
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We are subject to anti-corruption, anti-bribery, anti-money laundering and similar laws, and non-compliance with such laws
can subject us to criminal and/or civil liability and harm our business.
We are subject to the U.S. Foreign Corrupt Practices Act, the U.S. domestic bribery statute contained in 18 U.S.C. § 201,
the U.S. Travel Act, the UK Bribery Act, and other anti-bribery and anti-money laundering laws in the countries in which we
conduct activities. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted
broadly to generally prohibit companies and their employees and third-party intermediaries from authorizing, offering or
providing, directly or indirectly, improper payments, or benefits to recipients in the public or private sector. As we increase our
international sales and business and sales to the public sector, we may engage with business partners and third-party
intermediaries to market our platform and to obtain necessary permits, licenses, and other regulatory approvals. In addition, we
or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies
or state-owned or affiliated entities. We can be held liable for the corrupt or other illegal activities of these third-party
intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such
activities.
While we have policies and procedures to address compliance with such laws, we cannot assure you that all of our
employees and agents will not take actions in violation of our policies and applicable laws, for which we may be ultimately
held responsible. As we increase our international sales and business, our risks under these laws may increase.
Detecting, investigating, and resolving actual or alleged violations can require a significant diversion of time, resources, and
attention from senior management. In addition, noncompliance with anti-corruption, anti-bribery, or anti-money laundering
laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution or other enforcement
actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, suspension or
debarment from contracting with certain persons, the loss of export privileges, reputational harm, adverse media coverage, and
other collateral consequences. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed
or if we do not prevail in any possible civil or criminal litigation, our business could be harmed. In addition, responding to any
action will likely result in a materially significant diversion of management’s attention and resources and significant defense
costs and other professional fees. Enforcement actions and sanctions could further harm our business.
Our financial results may be adversely affected by changes in accounting principles applicable to us.
Generally accepted accounting principles in the United States ("U.S. GAAP") are subject to interpretation by the
Financial Accounting Standards Board ("FASB"), the SEC and other various bodies formed to promulgate and interpret
appropriate accounting principles. For example, in May 2014, the FASB issued accounting standards
update No. 2014-09 ("Topic 606"), Revenue from Contracts with Customers, which supersedes nearly all existing revenue
recognition guidance under U.S. GAAP. The core principle of Topic 606 is that an entity should recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services; this new accounting standard also impacts the recognition of sales
commissions. As an “emerging growth company,” the JOBS Act allows us to delay adoption of new or revised accounting
pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have
elected to use this extended transition period under the JOBS Act with respect to new or revised accounting pronouncements,
including Topic 606, and as a result Topic 606 became applicable to us on January 1, 2019.
We have adopted this standard as of January 1, 2019 using the modified retrospective method. The adoption of this
standard did not have a material impact on revenue. As a result of adopting this standard we have recorded an adjustment to
deferred contract costs of $5.7 million as of January 1, 2019, to reflect a reduction in the amount of commission expense
previously recorded. The application of this new guidance could have an adverse effect on our operating results in one or more
periods as compared to what they would have been under previous standards.
Under Topic 606, more estimates, judgments, and assumptions are required within the revenue recognition process than
were previously required. Our reported financial position and financial results may be adversely affected if our estimates or
judgments prove to be wrong, assumptions change, or actual circumstances differ from those in our assumptions. We currently
believe the most significant impact of the standard on our financial results relates to sales commissions. These or other changes
in accounting principles could adversely affect our financial results. Any difficulties in implementing these pronouncements
could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm our
business.
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If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations
could be adversely affected.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our
estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances,
as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Critical Accounting Policies.” The results of these estimates form the basis for making judgments about the carrying values of
assets, liabilities, and equity and the amount of revenue and expenses that are not readily apparent from other sources.
Significant assumptions and estimates used in preparing our consolidated financial statements include those related to
allowance for doubtful accounts, fair value of financial instruments, valuation of stock-based compensation, valuation of
warrant liabilities, and the valuation allowance for deferred income taxes. Our results of operations may be adversely affected if
our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of
operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our
Class A common stock.
Current and future indebtedness could restrict our operations, particularly our ability to respond to changes in our business
or to take specified actions.
Our current credit facilities contain, and any future indebtedness would likely contain, a number of restrictive covenants
that impose significant operating and financial restrictions on us, including restrictions on our ability to take actions that may
otherwise be in our best interests. Our ability to meet those financial covenants can be affected by events beyond our control,
and we may not be able to continue to meet those covenants. In addition, a breach of a covenant under any one of our credit
facilities may result cross-default under a separate credit facility. If we seek to enter into a credit facility we may not be able to
obtain debt financing on terms that are favorable to us, if at all. If we incur additional debt, the debt holders would have rights
senior to holders of common stock to make claims on our assets, and the terms of any debt could restrict our operations,
including our ability to pay dividends on our common stock. If we are unable to obtain adequate financing or financing on
terms that are satisfactory to us when we require it, our ability to continue to support our business growth and to respond to
business challenges could be significantly impaired, and our business may be harmed.
We have previously identified material weaknesses in our internal control over financial reporting, and if we are unable to
implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in
the accuracy and completeness of our financial reports, and the market price of our Class A common stock may be seriously
harmed.
As a public company, we are required to maintain internal control over financial reporting and to report any material
weaknesses in those internal controls, subject to any exemptions that we avail ourselves to under the JOBS Act. For example,
we are required to perform system and process evaluation and testing of our internal control over financial reporting to allow
management to report on the effectiveness of our internal control over financial reporting, as required by Section 404. We are in
the process of designing, implementing, and testing internal control over financial reporting required to comply with this
obligation. That process is time-consuming, costly, and complicated.
We and our independent registered public accounting firm identified material weaknesses in our internal control over
financial reporting for the years ended December 31, 2019, 2018 and 2017, related to the lack of sufficient qualified accounting
and information systems personnel, which led to incorrect application of generally accepted accounting principles, and
insufficiently designed segregation of duties, information technology access security and change management, and controls
over business processes, including the financial statement close and reporting processes with respect to the development of
accounting policies, procedures, and estimates. Management has been actively engaged in remediating the above described
material weakness. The following remedial actions have been taken during the year ended December 31, 2019:
•
•
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hired additional full-time accounting resources with appropriate levels of experience;
continue to actively recruit for open positions within the accounting department and will, as necessary, supplement any
interim staffing needs with temporary resources;
reallocated responsibilities across the accounting organization to ensure that the appropriate level of knowledge and
experience is applied based on risk and complexity of transactions and tasks under review;
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•
•
•
strengthened our internal policies, processes and reviews, including substantial completion of the formal
documentation thereof;
implemented a formal financial month-end close policy and process; and
engaged a professional accounting services firm to help us assess and commence documentation of our internal
controls for complying with the Sarbanes-Oxley Act.
The process of implementing an effective financial reporting system is a continuous effort that requires us to anticipate
and react to changes in our business and the economic and regulatory environments and to expend significant resources to
maintain a financial reporting system that is adequate to satisfy our reporting obligations. As we continue to evaluate and take
actions to improve our internal control over financial reporting, we may take additional actions to address control deficiencies
or modify certain of the remediation measures described above.
While significant progress has been made to enhance our internal control over financial reporting, we are still in the
process of implementing, documenting and testing these processes, procedures and controls. Additional time is required to
complete implementation and to assess and ensure the sustainability of these procedures. We believe the above actions will be
effective in remediating the material weaknesses described above and we will continue to devote significant time and attention
to these remedial efforts. However, the material weaknesses cannot be considered remediated until the applicable remedial
controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating
effectively.
If we identify future material weaknesses in our internal control over financial reporting, if we are unable to comply with
the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if
our independent registered public accounting firm is unable to express an opinion or expresses a qualified or adverse opinion
about the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and
completeness of our financial reports and the market price of our Class A common stock could be negatively affected. In
addition, we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, and other
regulatory authorities, which could require additional financial and management resources.
We may not be able to successfully manage the growth of our business if we are unable to improve our internal systems,
processes and controls.
We need to continue to improve our internal systems, processes, and controls to effectively manage our operations and
growth. We may not be able to successfully implement and scale improvements to our systems and processes in a timely or
efficient manner or in a manner that does not negatively affect our operating results. For example, we may not be able to
effectively monitor certain extraordinary contract requirements or provisions that are individually negotiated by our sales force
as the number of transactions continues to grow. In addition, our systems and processes may not prevent or detect all errors,
omissions, or fraud. We may experience difficulties in managing improvements to our systems, processes, and controls or in
connection with third-party software, which could impair our ability to offer our platform to our customers in a timely manner,
causing us to lose customers, limit us to smaller deployments of our products, or increase our technical support costs.
We could incur substantial costs in protecting or defending our proprietary rights, and any failure to adequately protect our
rights could impair our competitive position and we may lose valuable assets, experience reduced revenue, and incur costly
litigation to protect our rights.
Our success is dependent, in part, upon protecting our proprietary technology. We rely on a combination of patents,
copyrights, trademarks, service marks, trade secret laws, and contractual provisions in an effort to establish and protect our
proprietary rights. However, the steps we take to protect our intellectual property may be inadequate. While we have issued
patents in the United States and other countries and have additional pending patent applications, we may be unable to obtain
patent protection for the technology covered in our patent applications. In addition, any patents issued in the future may not
provide us with competitive advantages, or may be successfully challenged by third parties. Any of our patents, trademarks, or
other intellectual property rights may be challenged or circumvented by others or invalidated through administrative process or
litigation. There can be no guarantee that others will not independently develop similar products, duplicate any of our products,
or design around our patents. Furthermore, legal standards relating to the validity, enforceability, and scope of protection of
intellectual property rights are uncertain. Despite our precautions, it may be possible for unauthorized third parties to copy our
products and use information that we regard as proprietary to create products and services that compete with ours. Some license
provisions protecting against unauthorized use, copying, transfer, and disclosure of our products may be unenforceable under
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the laws of jurisdictions outside the United States. To the extent we expand our international activities, our exposure to
unauthorized copying and use of our products and proprietary information may increase.
We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into
confidentiality agreements with the parties with whom we have strategic relationships and business alliances. No assurance can
be given that these agreements will be effective in controlling access to and distribution of our products and proprietary
information. Further, these agreements do not prevent our competitors or partners from independently developing technologies
that are substantially equivalent or superior to our platform.
In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and
protect these rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade
secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time consuming, and
distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our
efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the
validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology against
unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could
delay further sales or the implementation of our platform, impair the functionality of our platform, delay introductions of new
products, result in our substituting inferior or more costly technologies into our products, or injure our reputation. We will not
be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our
intellectual property. Moreover, policing unauthorized use of our technologies, trade secrets, and intellectual property may be
difficult, expensive, and time-consuming, particularly in foreign countries where the laws may not be as protective of
intellectual property rights as those in the United States and where mechanisms for enforcement of intellectual property rights
may be weak. If we fail to meaningfully protect our intellectual property and proprietary rights, our business may be harmed.
We may in the future be subject to legal proceedings and litigation, including intellectual property disputes, which are costly
and may subject us to significant liability and increased costs of doing business. Our business may suffer if it is alleged or
determined that our technology infringes the intellectual property rights of others.
The software industry is characterized by the existence of a large number of patents, copyrights, trademarks, trade
secrets, and other intellectual property rights. Companies in the software industry are often required to defend against litigation
claims based on allegations of infringement or other violations of intellectual property rights. Our technologies may not be able
to withstand any third-party claims or rights against their use. In addition, many of these companies have the capability to
dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought
against them. Any litigation may also involve patent holding companies or other adverse patent owners that have no relevant
product revenue and against which our patents may therefore provide little or no deterrence. If a third party is able to obtain an
injunction preventing us from accessing such third-party intellectual property rights, or if we cannot license or develop
technology for any infringing aspect of our business, we would be forced to limit or stop selling products impacted by the claim
or injunction or cease business activities covered by such intellectual property, and may be unable to compete effectively. Any
inability to license third party technology in the future would have an adverse effect on our business or operating results, and
would adversely affect our ability to compete. We may also be contractually obligated to indemnify our customers in the event
of infringement of a third party’s intellectual property rights. We receive demands for such indemnification from time to time
and expect to continue to do so. Responding to such claims, including those currently pending, regardless of their merit, can be
time consuming, costly to defend in litigation, and damage our reputation and brand.
Lawsuits are time-consuming and expensive to resolve and they divert management’s time and attention. Although we
carry insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all
liability that may be imposed. We cannot predict the outcome of lawsuits, and the results of any such actions may harm our
business.
Elements of our platform use open source software, which may restrict the functionality of our platform or require that we
release the source code of certain products subject to those licenses.
Our platform incorporates software licensed under open source licenses. Such open source licenses typically require that
source code subject to the license be made available to the public and that any modifications or derivative works to open source
software continue to be licensed under open source licenses. Few courts have interpreted open source licenses, and the manner
in which these licenses may be interpreted and enforced is therefore subject to some uncertainty. We rely on multiple software
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programmers to design our proprietary technologies, and we do not exercise complete control over the development efforts of
our programmers and we cannot be certain that our programmers have not incorporated open source software into our
proprietary products and technologies or that they will not do so in the future. In the event that portions of our proprietary
technology are determined to be subject to an open source license, we could be required to publicly release the affected portions
of our source code, re-engineer all or a portion of our technologies, or otherwise be limited in the licensing of our technologies,
each of which could reduce or eliminate the value of our platform and technologies and materially and adversely affect our
ability to sustain and grow our business.
Provisions in various agreements potentially expose us to substantial liability for intellectual property infringement, data
protection, and other losses.
Our agreements with customers and other third parties generally include provisions under which we are liable or agree to
indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, data protection,
damages caused by us to property or persons, or other liabilities relating to or arising from our platform, services, or other
contractual obligations. Some of these agreements provide for uncapped liability for which we would be responsible, and some
provisions survive termination or expiration of the applicable agreement. Large liability payments could harm our business,
results of operations, and financial condition. Although we normally contractually limit our liability with respect to such
obligations, we may still incur substantial liability related to them, and in case of an intellectual property infringement
indemnification claim, we may be required to cease use of certain functions of our platform as a result of any such claims. Any
dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and
other existing customers and new customers and harm our business. Even when we have contractual protections against such
customer claims, we may choose to honor a customer’s request for indemnification or otherwise seek to maintain customer
satisfaction by issuing customer credits, assisting our customer in defending against claims, or in other ways.
We are subject to governmental regulation and other legal obligations, particularly those related to privacy, data protection,
and information security, and our actual or perceived failure to comply with such obligations could harm our business, by
resulting in litigation, fines, penalties, or adverse publicity and reputational damage that may negatively affect the value of
our business and decrease the price of our common stock. Compliance with such laws could also result in additional costs
and liabilities to us or inhibit sales of our products.
We receive, store, and process personal information and other data from and about actual and prospective customers and
users, in addition to our employees and service providers. In addition, our customers use our platform to collect personally
identifiable information, personal health information, and personal financial information from their end-users. Our handling of
data is subject to a variety of laws and regulations, including regulation by various government agencies, such as the U.S.
Federal Trade Commission ("FTC"), and various state, local, and foreign agencies. Our data handling also is subject to
contractual obligations and industry standards.
The U.S. federal and various state and foreign governments have adopted or proposed limitations on the collection,
distribution, use, and storage of data relating to individuals and businesses, including the use of contact information and other
data for marketing, advertising, and other communications with individuals and businesses. In the United States, various laws
and regulations apply to the collection, processing, disclosure, and security of certain types of data, including the Electronic
Communications Privacy Act, the Computer Fraud and Abuse Act, the Health Insurance Portability and Accountability Act of
1996, the Gramm Leach Bliley Act, and state laws relating to privacy and data security, including the California Consumer
Privacy Act (the “CCPA”), which became effective on January 1, 2020. The CCPA requires companies that process information
on California residents to make new disclosures to consumers about their data collection, use and sharing practices, allows
consumers to opt out of certain data sharing with third parties and provides a new cause of action for data breaches. It remains
unclear how the CCPA will be interpreted and the extent of its impact on our business. Additionally, the FTC and many state
attorneys general are interpreting federal and state consumer protection laws as imposing standards for the online collection,
use, dissemination, and security of data. The laws and regulations relating to privacy and data security are evolving, can be
subject to significant change and may result in ever-increasing regulatory and public scrutiny and escalating levels of
enforcement and sanctions.
In addition, several foreign countries and governmental bodies, including the EU, have laws and regulations dealing with
the handling and processing of personal information obtained from their residents, which in certain cases are more restrictive
than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage,
disclosure, and security of various types of data, including data that identifies or may be used to identify an individual, such as
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names, email addresses, and in some jurisdictions, Internet Protocol ("IP") addresses. Such laws and regulations may be
modified or subject to new or different interpretations, and new laws and regulations may be enacted in the future.
Within the EU, the General Data Protection Regulation ("GDPR") significantly increases the level of sanctions for non-
compliance from those in existing EU data protection law and imposes direct obligations on data processors in addition to data
controllers and may require us to make further changes to our policies and procedures in the future, beyond what we have
already done. EU data protection authorities will have the power to impose administrative fines for violations of the GDPR of
up to a maximum of €20 million or 4% of the data controller’s or data processor’s total worldwide global turnover for the
preceding fiscal year, whichever is higher, and violations of the GDPR may also lead to damages claims by data controllers and
data subjects. Such penalties are in addition to any civil litigation claims by data controllers, customers, and data subjects. Since
we act as a data processor for our customers, we are taking steps to cause our processes to be compliant with applicable
portions of the GDPR, but we cannot assure you that such steps will be effective. In particular, although the UK enacted a Data
Protection Act in May 2018 that is designed to be consistent with the GDPR, due to Brexit (see "—Legal, political, and
economic uncertainty surrounding the planned exit of the United Kingdom ("UK"), from the European Union ("EU"), may be a
source of instability in international markets, create significant currency fluctuations, adversely affect our operations in the UK,
and pose additional risks to our business, revenue, financial condition, and results of operations"), uncertainty remains
regarding how data transfers to and from the UK will be regulated.
The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting,
particularly laws outside the United States, as a result of the rapidly evolving regulatory framework for privacy issues
worldwide. For example, laws relating to the liability of providers of online services for activities of their users and other third
parties are currently being tested by a number of claims, including actions based on invasion of privacy and other torts, unfair
competition, copyright and trademark infringement, and other theories based on the nature and content of the materials
searched, the ads posted, or the content provided by users. As a result of the laws that are or may be applicable to us, and due to
the sensitive nature of the information we collect, we have implemented policies and procedures to preserve and protect our
data and our customers’ data against loss, misuse, corruption, misappropriation caused by systems failures, unauthorized access,
or misuse. If our policies, procedures, or measures relating to privacy, data protection, marketing, or customer communications
fail to comply with laws, regulations, policies, legal obligations, or industry standards, we may be subject to governmental
enforcement actions, litigation, regulatory investigations, fines, penalties, and negative publicity and could cause our
application providers, customers, and partners to lose trust in us, and have an adverse effect on our business, operating results,
and financial condition.
In addition to government regulation, privacy advocates, and industry groups may propose new and different self
regulatory standards that may apply to us. Because the interpretation and application of privacy and data protection laws,
regulations, rules, and other standards are still uncertain, it is possible that these laws, rules, regulations, and other actual or
alleged legal obligations, such as contractual or self-regulatory obligations, may be interpreted and applied in a manner that is
inconsistent with our existing data management practices or the functionality of our platform. If so, in addition to the possibility
of fines, lawsuits, and other claims, we could be required to fundamentally change our business activities and practices or
modify our software, which could have an adverse effect on our business.
Any failure or perceived failure by us to comply with laws, regulations, policies, legal, or contractual obligations,
industry standards, or regulatory guidance relating to privacy or data security, may result in governmental investigations and
enforcement actions (including, for example, a ban by EU Supervisory Authorities on the processing of EU personal data under
the GDPR), litigation, fines and penalties, or adverse publicity, and could cause our customers and partners to lose trust in us,
which could have an adverse effect on our reputation and business. Our obligation to assist our customers in their compliance
with laws, regulations, and policies, like data processing and data protection requirements under the GDPR may also result in
government enforcement actions litigation, fines and penalties, or adverse publicity. We expect that there will continue to be
new proposed laws, regulations, and industry standards relating to privacy, data protection, marketing, consumer
communications, and information security in the United States, the EU, and other jurisdictions, and we cannot determine the
impact such future laws, regulations, and standards may have on our business. Future laws, regulations, standards, and other
obligations or any changed interpretation of existing laws or regulations could impair our ability to develop and market new
functionality and maintain and grow our customer base and increase revenue. Future restrictions on the collection, use, sharing,
or disclosure of data or additional requirements for express or implied consent of our customers, partners, or end-users for the
use and disclosure of such information could require us to incur additional costs or modify our platform, possibly in a material
manner, and could limit our ability to develop new functionality.
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If we are not able to comply with these laws or regulations or if we become liable under these laws or regulations, we
could be directly harmed, and we may be forced to implement new measures to reduce our exposure to this liability. This may
require us to expend substantial resources or to discontinue certain products, which would negatively affect our business,
financial condition, and results of operations. In addition, the increased attention focused upon liability issues as a result of
lawsuits and legislative proposals could harm our reputation or otherwise adversely affect the growth of our business.
Furthermore, any costs incurred as a result of this potential liability could harm our operating results.
We are subject to governmental export and import controls that could impair our ability to compete in international markets
or subject us to liability if we violate such controls.
Our products are subject to U.S. export controls, including the Export Administration Regulations administered by the
U.S. Commerce Department, and economic sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury
Department ("OFAC"), and we incorporate encryption technology into certain of our products. These encryption products and
the underlying technology may be exported outside of the United States only with the required export authorizations.
Furthermore, our activities are subject to U.S. economic sanctions laws and regulations that generally prohibit the direct
or indirect exportation or provision of products and services without the required export authorizations to countries,
governments, and individuals and entities targeted by U.S. embargoes or sanctions, except to the extent authorized by OFAC or
exempt from sanctions. Additionally, the Trump administration has been critical of existing trade agreements and may impose
more stringent export and import controls. Obtaining the necessary export license or other authorization for a particular sale
may not always be possible, and, even if the export license is ultimately granted, the process may be time-consuming and may
result in the delay or loss of sales opportunities. Violations of U.S. sanctions or export control laws can result in significant
fines or penalties, and possible incarceration for responsible employees and managers could be imposed for criminal violations
of these laws.
Other countries also regulate the import and export of certain encryption products and technology through import and
export licensing requirements, and have enacted laws that could limit our ability to distribute our products or could limit our
customers’ ability to implement our products in those countries. Changes in our products or future changes in export and import
regulations may create delays in the introduction of our products in international markets, prevent our customers with
international operations from deploying our products globally, or, in some cases, prevent the export or import of our products to
certain countries, governments, or persons altogether. From time to time, various governmental agencies have proposed
additional regulation of encryption products and technology, including the escrow and government recovery of private
encryption keys. Any change in export or import regulations, economic sanctions or related legislation, increased export and
import controls, or change in the countries, governments, persons, or technologies targeted by such regulations could result in
decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers
with international operations. Any decreased use of our products or limitation on our ability to export or sell our products would
harm our business.
Risks Related to Ownership of Our Class A Common Stock
The dual class structure of our common stock has the effect of concentrating voting control with the holders of our Class B
common stock, including our executive officers, employees, and directors and their affiliates, and limiting your ability to
influence corporate matters.
Our Class B common stock has 10 votes per share, and our Class A common stock has one vote per share. As of
December 31, 2019, our Class B common stock held by stockholders, including our executive officers and directors and their
affiliates, represents approximately 84.8% of the voting power of our outstanding capital stock, and our Chief Architect and
Executive Chairman, Artur Bergman, holds approximately 12.0% of our outstanding classes of common stock as a whole, but
controls approximately 27.8% of the voting power of our outstanding common stock. As a result, our executive officers,
directors, and other affiliates and our Chief Architect and Executive Chairman on his own currently have and will continue to
have significant influence over our management and affairs and over all matters requiring stockholder approval, including
election of directors and significant corporate transactions, such as a merger or other sale of the company or our assets, for the
foreseeable future. If Mr. Bergman’s employment with us is terminated, he will continue to have the same influence over
matters requiring stockholder approval.
In addition, the holders of Class B common stock collectively will continue to be able to control all matters submitted to
our stockholders for approval even if their stock holdings represent less than 50% of the outstanding shares of our common
47
stock. Because of the 10-to-1 voting ratio between our Class B and Class A common stock, the holders of our Class B common
stock collectively will continue to control a majority of the combined voting power of our common stock even when the shares
of Class B common stock represent as little as 10% of the combined voting power of all outstanding shares of our Class A and
Class B common stock. This concentrated control limits the ability for holders of Class A common stock to influence corporate
matters for the foreseeable future, and, as a result, the market price of our Class A common stock could be adversely affected.
Transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock,
which will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who
retain their shares in the long term. If, for example, Mr. Bergman retains a significant portion of his holdings of Class B
common stock for an extended period of time, he could, in the future, control a majority of the combined voting power of our
Class A and Class B common stock. As a board member, Mr. Bergman owes a fiduciary duty to our stockholders and must act
in good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a
controlling stockholder, Mr. Bergman is entitled to vote his shares in his own interests, which may not always be in the interests
of our stockholders generally.
Our stock price may be volatile, and the value of our Class A common stock may decline.
The market price of our Class A common stock may be highly volatile and may fluctuate or decline substantially as a
result of a variety of factors, some of which are beyond our control or are related in complex ways, including:
•
•
•
•
•
•
•
•
•
•
•
•
actual or anticipated fluctuations in our financial condition and operating results;
variance in our financial performance from expectations of securities analysts or investors;
changes in the pricing we offer our customers;
changes in our projected operating and financial results;
changes in laws or regulations applicable to our platform or related products;
announcements by us or our competitors of significant business developments, acquisitions, or new
offerings;
publicity associated with network downtime and problems;
our involvement in litigation;
changes in senior management or key personnel;
the trading volume of our Class A common stock;
changes in the anticipated future size and growth rate of our market; and
general economic, regulatory, and market conditions.
Broad market and industry fluctuations, as well as general economic, political, regulatory, and market conditions, may
negatively impact the market price of our Class A common stock. In addition, given the relatively small public float of shares of
our Class A common stock on the New York Stock Exchange ("NYSE"), the trading market for our shares may be subject to
increased volatility. In the past, companies that have experienced volatility in the market price of their securities have been
subject to securities class action litigation. We may be the target of this type of litigation in the future, which could result in
substantial costs and divert our management’s attention.
Future sales and issuances of our capital stock or rights to purchase capital stock could result in dilution of the percentage
ownership of our stockholders and could cause the price of our Class A common stock to decline.
Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution
to our existing stockholders. We may sell Class A common stock, convertible securities, and other equity securities in one or
more transactions at prices and in a manner as we may determine from time to time. If we sell any such securities in subsequent
48
transactions, investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences,
and privileges senior to those of holders of our Class A common stock.
Future sales of our Class A common stock by existing holders in the public market could cause the market price of our
Class A common stock to decline.
Sales of a substantial number of shares of our Class A common stock in the public market, or the perception that these
sales might occur, could depress the market price of our Class A common stock and could impair our ability to raise capital
through the sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing
market price of our Class A common stock.
As of December 31, 2019, we have outstanding a total of 60,954,694 shares of Class A common stock and
34,062,916 shares of Class B common stock. All of our outstanding shares are eligible for sale in the public market, other than
shares and options held by directors, executive officers, and other affiliates that are subject to volume limitations under Rule
144 of the Securities Act, and various vesting agreements.
Certain holders of shares of our Class B common stock (including shares issuable upon the exercise of outstanding
warrants) have rights, subject to some conditions, to require us to file registration statements for the public resale of the Class A
common stock issuable upon conversion of such shares or to include such shares in registration statements that we may file on
our behalf or for other stockholders.
Future sales also could cause the trading price of our Class A common stock to decline and make it more difficult for
investors to sell shares of our Class A common stock.
If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business,
our Class A common stock price and trading volume could decline.
Our stock price and trading volume are heavily influenced by the way analysts and investors interpret our financial
information and other disclosures. If securities or industry analysts do not publish research or reports about our business, delay
publishing reports about our business, or publish negative reports about our business, regardless of accuracy, our Class A
common stock price and trading volume could decline.
The trading market for our Class A common stock depends, in part, on the research and reports that securities or industry
analysts publish about us or our business. We do not have any control over these analysts. We expect that only a limited number
of analysts will cover our company following our initial public offering. If the number of analysts that cover us declines,
demand for our Class A common stock could decrease and our Class A common stock price and trading volume may decline.
Even if our Class A common stock is actively covered by analysts, we do not have any control over the analysts or the measures
that analysts or investors may rely upon to forecast our future results. Over-reliance by analysts or investors on any particular
metric to forecast our future results may result in forecasts that differ significantly from our own.
Regardless of accuracy, unfavorable interpretations of our financial information and other public disclosures could have
a negative impact on our stock price. If our financial performance fails to meet analyst estimates, for any of the reasons
discussed above or otherwise, or one or more of the analysts who cover us downgrade our Class A common stock or change
their opinion of our Class A common stock, our stock price would likely decline.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid any cash dividends on our capital stock, and we do not intend to pay any cash dividends
in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and
may be restricted by the terms of any then-current credit facility. Accordingly, investors must rely on sales of their Class A
common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
49
We are an "emerging growth company" and our compliance with the reduced reporting and disclosure requirements
applicable to emerging growth companies could make our Class A common stock less attractive to investors.
We are an "emerging growth company," as defined in the JOBS Act, and we expect to take advantage of certain
exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth
companies" including, the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and stockholder approval of any golden parachute payments not previously approved and
extended adoption period for accounting pronouncements. We cannot predict whether investors will find our Class A common
stock less attractive as a result of our reliance on these exemptions. If some investors find our Class A common stock less
attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more
volatile.
We will incur increased costs as a result of operating as a public company, and our management will be required to devote
substantial time to compliance with our public company responsibilities and corporate governance practices.
As a public company, we have incurred and expect to continue to incur significant legal, accounting, and other expenses
that we did not incur as a private company. We expect such expenses to further increase after we are no longer an “emerging
growth company.” The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing
requirements of the NYSE, and other applicable securities rules and regulations impose various requirements on public
companies. Furthermore, the senior members of our management team do not have significant experience with operating a
public company. As a result, our management and other personnel will have to devote a substantial amount of time to
compliance with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance
costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional
costs we will incur as a public company or the timing of such costs.
As a result of being a public company, we are obligated to develop and maintain proper and effective internal controls over
financial reporting and any failure to maintain the adequacy of these internal controls may adversely affect investor
confidence in our company and, as a result, the value of our Class A common stock.
We are required, pursuant to Section 404 to furnish a report by management on, among other things, the effectiveness of
our internal control over financial reporting. This assessment will need to include disclosure of any material weaknesses
identified by our management in our internal control over financial reporting. In addition, our independent registered public
accounting firm will be required to attest to the effectiveness of our internal control over financial reporting in our first annual
report required to be filed with the SEC following the date we are no longer an “emerging growth company.” Over the last year,
we have taken and continue to take additional steps to upgrade our finance and accounting function, including the hiring of
additional financing and accounting personnel, and implement additional policies and procedures associated with the financial
statement close process. Our compliance with Section 404 requires that we incur substantial accounting expense and expend
significant management efforts. We currently have a small internal audit group, and we will need to hire additional accounting
and financial staff with appropriate public company experience and technical accounting knowledge and compile the system
and process documentation necessary to perform the evaluation needed to comply with Section 404.
We have identified a material weakness over financial reporting for the years ended December 31, 2019, 2018 and
2017, related to the lack of sufficient qualified accounting and information systems personnel, which led to incorrect
application of generally accepted accounting principles, and insufficiently designed segregation of duties, information
technology access security and change management, and controls over business processes, including the financial statement
close and reporting processes with respect to the development of accounting policies, procedures, and estimates. While we are
actively working on remediating these identified weaknesses, we may discover additional weaknesses in our system of internal
financial and accounting controls and procedures that could result in a material misstatement of our financial statements. In
addition, our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s
objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be
detected.
50
The rules governing the standards that must be met for our management to assess our internal control over financial
reporting are complex and require significant documentation, testing, and possible remediation. If we are not able to comply
with the requirements of Section 404 in a timely manner, or if we are unable to maintain proper and effective internal controls,
we may not be able to produce timely and accurate financial statements. In addition, in connection with the future attestation
process by our independent registered public accounting firm, we may encounter problems or delays in completing the
implementation of any requested improvements and receiving a favorable attestation. If we cannot favorably assess the
effectiveness of our internal control over financial reporting, or if our independent registered public accounting firm is unable to
provide an unqualified attestation report on our internal controls, our stockholders could lose confidence in our reporting, and
the market price of our stock could decline. In addition, we could be subject to sanctions or investigations by the NYSE, or
SEC, or other regulatory authorities.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company
more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of
our Class A common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect
of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of
incorporation and amended and restated bylaws include provisions that:
•
•
•
•
•
•
•
•
•
authorize our board of directors to issue, without further action by the stockholders, shares of
undesignated preferred stock with terms, rights, and preferences determined by our board of directors
that may be senior to our common stock;
require that any action to be taken by our stockholders be effected at a duly called annual or special
meeting and not by written consent;
specify that special meetings of our stockholders can be called only by our board of directors, the
chairperson of our board of directors, or our chief executive officer;
establish an advance notice procedure for stockholder proposals to be brought before an annual meeting,
including proposed nominations of persons for election to our board of directors;
establish that our board of directors is divided into three classes, with each class serving three-year
staggered terms;
prohibit cumulative voting in the election of directors;
provide that our directors may be removed for cause only upon the vote of the holders of a majority of
our outstanding shares of common stock;
provide that vacancies on our board of directors may be filled only by a majority of directors then in
office, even though less than a quorum;
reflect our two classes of common stock as described above.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current
management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for
appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the
provisions of Section 203 of the Delaware General Corporation Law, which generally, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a
period of three years following the date on which the stockholder became an “interested” stockholder. Any delay or prevention
of a change of control transaction or changes in our management could cause the market price of our Class A common stock to
decline.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and, to
the extent enforceable, the federal district courts of the United States of America will be the exclusive forums for
51
substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable
judicial forum for disputes with us or our directors, officers, or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the
exclusive forum for the following types of actions or proceedings under Delaware statutory or common law for:
•
•
•
•
•
any derivative action or proceeding brought on our behalf;
any action asserting a breach of fiduciary duty;
any action asserting a claim against us arising under the Delaware General Corporation Law,
our amended and restated certificate of incorporation, or our amended and restated bylaws; and
any action asserting a claim against us that is governed by the internal-affairs doctrine.
In addition, our amended and restated certificate of incorporation provides that the federal district courts of the United
States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the
Securities Act, subject to and contingent upon a final adjudication in the State of Delaware of the enforceability of such
exclusive forum provision. These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial
forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits
against us and our directors, officers, and other employees. If a court were to find either exclusive-forum provision in our
amended and restated certificate of incorporation to be inapplicable or unenforceable, we may incur additional costs associated
with resolving the dispute in other jurisdictions. For example, the Court of Chancery of the State of Delaware recently
determined that the exclusive forum provision of federal district courts of the United States of America for resolving any
complaint asserting a cause of action arising under the Securities Act is not enforceable. However, this decision may be
reviewed and ultimately overturned by the Delaware Supreme Court. If this ultimate adjudication were to occur, the federal
district court exclusive forum provision in our amended and restated certificate of incorporation would no longer be contingent.
52
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Our corporate headquarters is located in San Francisco, California and consists of approximately 71,343 square feet of
space under a lease that expires on July 31, 2027. We also maintain offices in Portland, Denver, New York, London, and Tokyo.
We lease all of our facilities and do not own any real property. We expect to add facilities as we grow our employee base and
expand geographically. We believe that our facilities are sufficient to meet our needs for the immediate future, and that, should
it be needed, suitable additional space will be available to accommodate expansion of our operations.
Item 3.
Legal Proceedings
From time to time, we have been and will continue to be subject to legal proceedings and claims. We are not presently
a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material
adverse effect on our business, results of operations, financial condition, or cash flows. We have 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 ourselves, our partners, and our customers by determining the scope,
enforceability, and validity of third-party proprietary rights, or to establish our 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 us
because of defense and settlement costs, diversion of management resources, and other factors.
Item 4.
Mine Safety Disclosures
Not applicable.
53
PART II
Item 5.
Securities
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Market Information
Our Class A common stock has traded on The New York Stock Exchange ("NYSE") under the symbol "FSLY" since
May 17, 2019. Prior to that date, there was no public trading market for our Class A common stock. Our initial public offering
was priced at $16.00 per share on May 17, 2019. On December 31, 2019, the closing price per share of our common stock as
reported on the NYSE was $20.07.
Holders of Record
As of December 31, 2019, there were 52 holders of record of our Class A and 157 holders of our Class B common stock.
The number of beneficial stockholders is substantially greater than the number of holders of record because a large portion of
our common stock is held through brokerage firms.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings
and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be
made at the discretion of our Board of Directors, subject to applicable laws, and will depend on a number of factors, including
our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and
other factors that our Board of Directors may deem relevant. In addition, the terms of our revolving credit facility place certain
limitations on the amount of cash dividends we can pay, even if no amounts are currently outstanding.
Stock Performance Graph
This performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange
Commission, or the SEC, for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act,
or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of
our filings under the Securities Act of 1933, as amended, or the Securities Act.
We have presented below the cumulative total return to our stockholders between May 17, 2019 (the date our Class A
common stock commenced trading on the NYSE) through December 31, 2019 in comparison to the S&P 500 Index and
S&P 500 Information Technology Index. The graph assumes a $100 initial investment at the market close on May 17, 2019
which was our initial trading day in our Class A common stock. Our offering price of our Class A common stock in our IPO,
which had a closing stock price of $23.99 on May 17, 2019, was $16.00 per share. Data for the S&P 500 Index and S&P 500
Information Technology Index assume reinvestment of dividends. The comparisons are based on historical data and are not
indicative of, nor intended to forecast, the future performance of our Class A common stock.
54
Unregistered Sales of Equity Securities
The following sets forth information regarding all unregistered securities sold between January 1, 2019 and May 17,
2019, our initial public offering ("IPO") date (share and per share amounts give effect to the 1-for-2 reverse stock split of our
common stock and preferred stock effected on May 3, 2019):
•
•
From January 1, 2019 to May 17, 2019, we granted stock options to purchase an aggregate of 2,119,092 shares of Class
B common stock at exercise prices ranging from $8.42 to $15.00 per share to a total of 258 employees under our 2011
Equity Incentive Plan; and
From January 1, 2019 to May 17, 2019, we issued an aggregate of 1,330,318 shares of Class B common stock upon the
exercise of options under our 2011 Equity Incentive Plan at exercise prices ranging from $0.03 to $8.24 per share, for an
aggregate purchase price of $2.5 million.
The offers, sales, and issuances of the securities described above were deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act or Regulation D promulgated thereunder or Rule 701
promulgated under the Securities Act as transactions by an issuer not involving a public offering or under benefit plans and
contracts relating to compensation as provided under Rule 701. The recipients of securities in each of these transactions
acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these
transactions was an accredited or sophisticated person and had adequate access, through employment, business, or other
relationships, to information about us.
Use of Proceeds from Public Offering of Class A Common Stock
On May 21, 2019, we closed our initial public offering ("IPO"), in which we sold 12,937,500 shares of Class A common
stock at a price to the public of $16.00 per share, including 1,687,500 shares sold in connection with the exercise of the
underwriters’ option to purchase additional shares. The offer and sale of all of the shares in the IPO were registered under the
Securities Act pursuant to a registration statement on Form S-1 (File No. 333-230953), which was declared effective by the
SEC on May 16, 2019. We raised $192.5 million in net proceeds after deducting underwriting discounts and commissions. No
payments were made by us to directors, officers, or persons owning 10 percent or more of our capital stock or to their
associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries. There has been no
material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on May 17,
2019 pursuant to Rule 424(b). We invested the funds received in accordance with our board approved investment policy, which
provides for investments in obligations of the U.S. government, money market instruments, registered money market funds, and
corporate bonds. The managing underwriters of our IPO were BofA Merrill Lynch, Citigroup, and Credit Suisse. Following the
sale of the shares in connection with the IPO, the offering terminated.
Issuer Purchases of Equity Securities
None.
55
Item 6.
Selected Consolidated Financial Data
We have derived the selected consolidated statements of operations data for the years ended December 31, 2019, 2018,
and 2017 and the Balance Sheet data as of December 31, 2019 and 2018 from our audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that
may be expected in the future. The following selected consolidated financial and other data should be read in conjunction with
"Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations", and our consolidated
financial statements and the related notes appearing in "Item 8--Financial Statements and Supplementary Data", of this Annual
Report on Form 10-K to fully understand factors that may affect the comparability of the information presented below.
Consolidated Statements of Operations Data (in thousands, except per share data)
Year ended December 31,
2018
2017
2019
$
104,900
Revenue
Cost of revenue(1)
Gross profit
Operating expenses:
Research and development(1)
Sales and marketing(1)
General and administrative(1)
Total operating expenses
Loss from operations
Interest income
Interest expense
Other income (expense), net
Loss before income taxes
Income taxes
Net loss
Net loss per share attributable to common stockholders, basic and diluted
Weighted-average shares used in computing net loss per share attributable to
common stockholders, basic and diluted
$
200,462
$
88,322
112,140
46,492
71,097
41,099
158,688
(46,548)
3,287
(5,236)
(2,561)
(51,058)
492
(51,550) $
(0.75) $
$
$
144,563
65,499
79,064
34,618
50,134
23,450
108,202
(29,138)
939
(1,810)
(741)
(30,750)
185
(30,935) $
(1.27) $
48,672
56,228
28,989
40,818
17,451
87,258
(31,030)
443
(1,116)
(539)
(32,242)
208
(32,450)
(1.39)
68,350
24,376
23,402
(1)
Includes stock-based compensation expense as follows (in thousands):
Cost of revenue
Research and development
Sales and marketing
General and administrative
Total stock-based compensation expense
Year ended December 31,
2018
2017
2019
1,410
$
265
$
2,920
3,497
4,318
1,332
1,023
1,459
12,145
$
4,079
$
190
1,040
493
1,086
2,809
$
$
56
Consolidated Balance Sheet Data (in thousands)
Cash, cash equivalents, and marketable securities
Working capital(1)
Total assets
Convertible preferred stock warrant liabilities
Convertible preferred stock
Common Stock
Additional paid-in capital
Accumulated deficit
Total stockholders' equity (deficit)
(1)
Working capital is defined as current assets less current liabilities.
As of December 31,
2019
2018
$
$
$
131,109
212,202
320,969
—
—
2
449,463
(192,009)
257,652
$
$
$
83,642
85,517
162,754
3,261
219,584
1
16,403
(146,186)
(131,927)
57
ITEM 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with
the consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. This
discussion contains forward-looking statements based upon current plans, expectations, and beliefs that involve risks and
uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of
various factors, including those set forth under “Risk Factors” and in other parts of this Annual Report on Form 10-K. Our
fiscal year ends on December 31.
As used herein, "Fastly," "we," "our," "the Company" and similar terms include Fastly, Inc. and its subsidiaries, unless
the context indicates otherwise.
Overview
Developers are reinventing the way we live, work, and play online. Yet they repeatedly encounter innovation barriers
when delivering modern digital experiences. Expectations for digital experiences are at an all-time high; they must be fast,
secure, and highly personalized. If they aren’t reliable, end-users simply take their business elsewhere. The challenge today is
enabling developers to deliver a modern digital experience while simultaneously providing scale, security, and performance. We
built our edge cloud platform to solve this problem.
The edge cloud is a new category of Infrastructure as a Service ("IaaS") that enables developers to build, secure, and
deliver digital experiences, at the edge of the internet. This service represents the convergence of the Content Delivery Network
("CDN") with functionality that has been traditionally delivered by hardware-centric appliances such as Application Delivery
Controllers ("ADC"), Web Application Firewalls ("WAF"), Bot Detection, and Distributed Denial of Service ("DDoS")
solutions. It also includes the emergence of a new, but growing, edge computing market which aims to move compute power
and logic as close to the end-user as possible. The edge cloud uses the emerging cloud computing, serverless paradigm in which
the cloud provider runs the server and dynamically manages the allocation of machine resources. When milliseconds matter,
processing at the edge is an ideal way to handle highly dynamic and time-sensitive data. The edge cloud complements data
center, central cloud, and hybrid solutions.
Our mission is to fuel the next modern digital experience by providing developers with a programmable and reliable
edge cloud platform that they adopt as their own.
Organizations must keep up with complex and ever-evolving end-user requirements. We help them surpass their end-
users’ expectations by powering fast, secure, and scalable digital experiences. We built a powerful edge cloud platform,
designed from the ground up to be programmable and support agile software development. We believe our platform gives our
customers a significant competitive advantage, whether they were born into the digital age or are just embarking on their digital
transformation journey. Our platform consists of four key components: a programmable edge, a software-defined modern
network, safety in depth, and a philosophy of customer empowerment. Our programmable edge provides developers with real-
time visibility and control, where they can write and deploy code to push application logic to the edge. It supports modern
application delivery processes, freeing developers to innovate without constraints. Our software-defined modern network is
built for the software-defined future. It is powerful, efficient, and flexible, designed to enable us to rapidly scale to meet the
needs of the most demanding customers and never be a barrier to their growth. Our 74 terabit software-centric network is
located in 68 uniquely designed Points-of-Presence ("POPs") across 53 markets, as of December 31, 2019. Our safety in depth
approach integrates security into multiple layers of development: architecture, engineering, and operations. That's why we
invest in building security into the fabric of our platform, alongside performance. We believe our platform provides developers
and security operations teams with a fast, safe environment to create, build, and run modern applications. Finally, being
developers ourselves, we empower customers to build great things while supporting their efforts through frictionless tools and a
deeply technical support team that facilitates ongoing collaboration.
We serve both established enterprises and technology-savvy organizations. Our customers represent a diverse set of
organizations across many industries with one thing in common: they are competing by using the power of software to build
differentiation at the edge. With our edge cloud platform, our customers are disrupting existing industries and creating new
ones. For example, several of our customers have reinvented digital publishing by connecting readers through subscription
models to indispensable content, helping people understand the world through deeply reported independent journalism. Our
customers’ software applications use our edge cloud platform to ensure concert goers can buy tickets to the live events they
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love, travelers can book flights seamlessly and embark on their next great adventure, and sports fans can stream events in real
time, across all devices. The range of applications that developers build with our edge cloud platform continues to surpass our
expectations.
We generate substantially all of our revenue from charging our customers based on their usage of our platform. Initially,
customers typically choose to become platform customers, for which we charge fees based on their committed or actual use of
our platform, as measured in gigabytes and requests. Many of our customers generate billings in excess of their minimum
commitment. We also generate revenue from additional products as well as professional and other services, such as
implementation. We charge a flat one-time or recurring fee for these additional products and services.
Potential customers have the opportunity to test our platform for free. If they choose to make use of our platform for live
production delivery, they have the ability to sign up online by providing their credit card information and agreeing to a
minimum monthly fee of $50.
We focus our direct selling efforts on medium to large organizations as well as smaller companies that are exhibiting
significant growth. We engage with and support these customers with our field sales representatives, account managers, and
technical account managers who focus on customer satisfaction and drive expansion of their usage of our platform and
products. These teams work with technical and business leaders to help our customers’ end-users receive the best possible
digital experience, while also lowering our customers’ total cost of ownership. We have established and continue to maintain
our position by improving upon our programmable edge platform and software-defined modern network architecture. We
continue to focus on empowering our developer community through events and conferences, including our Altitude
conferences. The success of these direct selling efforts is reflected by our 288 enterprise customers as of December 31, 2019
that generated 87% of our total revenue for the trailing 12 months ended December 31, 2019.
As our customers become more successful and grow, they typically increase their usage of our platform and adopt
additional Fastly products. A meaningful indicator of the increased activity from our existing customer accounts and overall
customer satisfaction is our Dollar-Based Net Expansion Rate ("DBNER"), which was 135.5%, 132.0%, and 147.3% for the
trailing 12 months ended December 31, 2019, 2018, and 2017 respectively.
We believe that an annual cohort analysis of our customers, as depicted in the chart below, demonstrates our success in
customer expansion. Once a customer begins to generate revenue for us, they tend to increase their usage of our platform, in
particular in their second year. Customer accounts acquired in 2015, 2016, 2017, 2018, and 2019 are referred to as the Cohort,
2015 Cohort, 2016 Cohort, 2017 Cohort, 2018 Cohort, and 2019 Cohort, respectively. Our 2015 Cohort increased its revenue
2.5 times after its first year and has grown at approximately a 44% CAGR over the last four years.
In 2015, we generated $7.8 million of revenue from the 2015 Cohort. Revenue from the 2015 Cohort grew to
$20.1 million in 2016, representing a year-over-year growth rate of 157%. In 2016, we generated $6.6 million of revenue from
the 2016 Cohort. Revenue from the 2016 Cohort grew to $22.0 million in 2017, representing 233% year-over-year growth. In
2017, we generated $5.6 million of revenue from the 2017 Cohort. Revenue from the 2017 Cohort grew to $16.8 million in
2018, representing 200% year-over-year growth. In 2018, we generated $11.2 million of revenue from the 2018 Cohort.
Revenue from the 2018 Cohort grew to $34.4 million in 2019, representing 207% year-over-year growth.
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Summary of Revenue Generated by Customer Cohorts Over Time (in millions):
Customers that have negotiated contracts with us generate a substantial majority of our revenue. These customers
typically purchase one or more products, for which we charge a monthly recurring or one-time fee depending on the products
selected. Some of these customers also choose to purchase various levels of account management and enhanced customer
support for a monthly fee. Typically, the term of these contracts is 12 months and includes a minimum monthly billing
commitment in exchange for more favorable pricing terms. Many of these customers generate billings in excess of their
minimum commitment. In addition, customers can sign up online by providing their credit card information and agreeing to a
minimum monthly fee.
The timing of our sales is difficult to predict. The length of our sales cycle, from initial evaluation to payment, can range
from several months to well over a year and can vary substantially from customer to customer. Similarly, the onboarding and
ramping process with new enterprise customers can take several months.
We have achieved significant growth in recent periods. For the years ended December 31, 2019 and 2018, our revenue
was $200.5 million and $144.6 million, respectively. Our 10 largest customers generated an aggregate of 29% and 32% of our
revenue in the trailing 12 months ended December 31, 2019 and 2018, respectively. We incurred a net loss of $51.6 million and
$30.9 million in the years ended December 31, 2019 and 2018, respectively.
Factors Affecting Our Performance
Winning New Customers
We are focused on continuing to attract new customers. Our customer base includes both large, established enterprises
that are undergoing digital transformation and emerging companies spanning a wide array of industries and verticals. In both
instances, developers within these companies often use and advocate the adoption of our platform by their companies. We also
benefit from word-of-mouth promotion across the broader developer community. We will continue to invest in our developer
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outreach, leveraging it as a cost-efficient approach to attracting new customers. We also plan to dedicate significant resources to
sales and marketing programs, including various online marketing activities as well as targeted account-based advertising.
This will require us to dedicate significant resources to further develop the market for our platform and differentiate our
platform from competitive products and services. We will also need to expand, retain, and motivate our sales and marketing
personnel in order to target our sales efforts at larger enterprises and senior management of these potential customers.
Expanding within our Existing Customer Base
We emphasize retaining our customers and expanding their usage of our platform and adoption of our other products.
Customers often begin with smaller deployments of our programmable edge platform and then expand their usage over time. In
addition, our programmable edge platform includes a variety of other offerings, such as load balancing, shielding, web security,
and WAF. As our customers mature, we assist them in expanding their use of our platform, including the use of additional
offerings beyond edge cloud delivery. As enterprises grow and experience increased traffic, their needs evolve, leading them to
find additional use cases for our platform and expand their usage accordingly. In addition, given that customer acquisition costs
are incurred largely for acquiring and initial onboarding, we gain operating leverage to the extent that existing customers
expand their use of our platform and products.
Our ability to retain our customers and expand their usage could be impaired for a variety of reasons, including a
customer moving to another provider or reducing usage within the term of their contract to their minimum usage commitment.
Even if our customers expand their usage of our platform, we cannot guarantee that they will maintain those usage levels for
any meaningful period of time or that they will renew their commitments.
International Customer Growth
We intend to continue expanding our efforts to attract customers outside of the United States by augmenting our sales
teams and strategically increasing the number of POPs in select international markets. As of December 31, 2019 and 2018, 49%
and 46% of our customers were headquartered outside of the United States, respectively.
Our international expansion, including our global sales efforts, will add increased complexity and cost to our business.
This will require us to significantly expand our sales and marketing capabilities outside of the United States, as well as increase
the number of POPs in select international markets to support our customers. We have limited experience managing the
administrative aspects of a global organization, and we have only recently begun to establish and operate offices in foreign
countries, which could place a strain on our business and culture.
Investing in Sales and Marketing
Our customers have been pivotal in driving brand awareness and broadening our reach. While we continue to leverage
our self-service approach to drive adoption by developers, we intend to continue to expand our sales and marketing efforts, with
an increased focus on sales to enterprises globally. Utilizing our direct sales force, we have multiple selling points within
organizations to acquire new customers and increase usage from our existing customers. We intend to increase our discretionary
marketing spend, including account based and brand spend, to drive the effectiveness of our sales teams. As a result, we expect
our total operating expenses to increase as we continue to expand. Our investments in our sales and marketing teams are
intended to help accelerate our sales, onboarding, and ramp cycles. As of December 31, 2019, we had 69 sales representatives
and sales managers across our company.
These efforts will require us to invest significantly in financial and other resources. Furthermore, we believe that there is
significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve
significant revenue growth will depend, in large part, on our success in recruiting, training, and retaining sufficient numbers of
sales personnel to support our growth.
Continued Investment in Our Platform and Network Infrastructure
We must continue to invest in our platform and network infrastructure to maintain our position in the market. We expect
our revenue growth to be dependent on an expanding customer base and continued adoption of our edge cloud platform. In
anticipation of winning new customers and staying ahead of our customers’ needs, we plan to continue to invest in order to
61
expand the scale and capacity of our software-defined modern network, resulting in increased network service provider fees,
which could adversely affect our gross margins if we are unable to offset these costs with revenue from new customers and
increased revenue from existing customers. Our customers require constant innovation within their own organizations and
expect the same from us. Therefore, we will continue to invest in resources to enhance our development capabilities and
introduce new products and features on our platform. We believe that investment in research and development will contribute to
our long-term growth but may also negatively impact our short-term profitability. For the years ended December 31, 2019 and
2018, our research and development expenses as a percentage of revenue was 23% and 24%, respectively.
Developers use our platform to build custom applications and require a state-of-the-art infrastructure to test and run
these applications. We will continue to invest in our network infrastructure by strategically increasing our POPs. We also
anticipate making investments in upgrading our technology and hardware to continue providing our customers a fast and secure
platform. Our total investment in property and equipment for the years ended December 31, 2019 and 2018 were $30.3 million
and $18.7 million, respectively, representing 15% and 13% of our revenue in such periods. We expect our investment in
property and equipment to increase on an absolute basis and may increase as a percentage of revenue in future periods. Our
gross margins and operating results are impacted by these investments. As of December 31, 2019, we had 68 POPs in 53
markets across 26 countries.
In the event that there are errors in software, failures of hardware, damages to a facility or misconfigurations of any of
our services—whether caused by our products, third-party error, our own error, natural disasters, or security breaches—we
could experience lengthy interruptions in our platform as well as delays and additional expenses in arranging new facilities and
services. In addition, there can be no assurance that we are adequately prepared for unexpected increases in bandwidth demands
by our customers, particularly when customers experience cyber-attacks. The bandwidth we have contracted to purchase may
become unavailable for a variety of reasons, including service outages, payment disputes, network providers going out of
business, natural disasters, networks imposing traffic limits, or governments adopting regulations that impact network
operations.
Uncertainty of the Coronavirus (COVID-19) Outbreak
The extent that the coronavirus (COVID-19) outbreak will spread widely and its impact on our results will depend on
future developments, which are highly uncertain and unpredictable. Although uncertain at this time, the outbreak could impede
our ability to sell, grow and attract new domestic and international customers. Our employees travel frequently to establish and
maintain relationships with our customers. Although we continue to monitor the situation and may adjust our current policies as
more information and guidance become available, suspending travel and doing business in-person could negatively impact our
marketing efforts and also challenge our ability to enter into customer contracts in a timely manner, which in turn could harm
our business performance.
Our business is dependent upon the timely supply of certain parts and components manufactured in China to construct
our servers. To the extent that our suppliers are impacted by the coronavirus (COVID-19) outbreak, it likely will reduce the
availability, or result in delays, of parts and components to us, which in turn could interrupt our ability to timely complete the
construction of our servers to meet the intended usage and needs of our customers.
For additional details, refer to our risk factors included in Part I. Item 1A. of this Annual Report on Form 10-K.
62
Key Business Metrics
We regularly review a number of metrics, including the key metrics presented in the table below, to evaluate our
business, measure our performance, identify trends affecting our business, prepare financial projections, and make strategic
decisions. The calculation of the key metrics and other measures discussed below may differ from other similarly titled metrics
used by other companies, securities analysts, or investors.
Number of customers (as of end of period)
Number of enterprise customers (as of end of period)
Dollar-Based Net Expansion Rate ("DBNER") (trailing 12 months)
Number of Customers
As of December 31,
2019
2018
1,743
288
135.5%
1,582
227
132.0%
We believe that the number of customers is an important indicator of the adoption of our platform. Our definition of a
customer consists of identifiable operating entities with which we have a billing relationship in good standing, from which we
recognized revenue during the period, and are active as of the end of the period. In addition to our paying customers, we also
have trial, developer, nonprofit and open source program, and other non-paying accounts that are excluded from our customer
count metric. As of December 31, 2019 and 2018, we had 1,743 and 1,582 customers, respectively.
Number of Enterprise Customers
Historically our revenue has been driven primarily by a subset of customers who have leveraged our platform
substantially from a usage standpoint. These enterprise customers are defined as customers with revenue in excess of $100,000
over the previous 12-month period. As of December 31, 2019, we had 288 enterprise customers which generated 87% of our
revenue for the trailing 12 months ended December 31, 2019. As of December 31, 2018, we had 227 enterprise customers
which generated 84% of our revenue for the trailing 12 months ended December 31, 2018. We believe the recruitment and
cultivation of enterprise customers is critical to our long-term success.
Dollar-Based Net Expansion Rate ("DBNER")
Our ability to generate and increase our revenue is dependent upon our ability to increase the number of new customers
and usage of our platform and increase the purchase of additional products by our existing customers. We track our
performance in this area by measuring our DBNER. Our DBNER increases when customers increase their usage of our
platform or purchase additional products, and declines when they reduce their usage, benefit from lower pricing on their
existing usage, or curtail their purchases of additional products. We believe DBNER is a key metric in measuring the long-term
value of our customer relationships and our ability to grow our revenue through increased usage of our platform and purchase
of additional products by our existing customers. However, our calculation of DBNER indicates only expansion among
continuing customers and does not indicate any decrease in revenue attributable to former customers, which may differ from
similar metrics of other companies.
We calculate DBNER by dividing the revenue for a given period from customers who remained customers as of the last
day of the given period ("current period") by the revenue from the same customers for the same period measured one year prior
("base period"). The revenue included in the current period excludes revenue from (i) customers that churned after the end of
the base period and (ii) new customers that entered into a customer agreement after the end of the base period. For example, to
calculate our DBNER for the trailing 12 months ended December 31, 2019, we divide (i) revenue for the trailing 12 months
ended December 31, 2019, from customers that entered into a customer agreement prior to January 1, 2019, and that remained
customers as of December 31, 2019, by (ii) revenue for the trailing 12 months ended December 31, 2018 from the same set of
customers.
63
For the trailing 12 months ended December 31, 2019 and 2018 our DBNER was 135.5% and 132.0%, respectively. We
believe that an annual cohort analysis of our customers demonstrates our success in customer expansion. Once a customer
begins to generate revenue for us, they tend to increase their usage of our platform, in particular in their second year. Customer
accounts acquired in 2017, 2018, and 2019 are referred to as the 2017 Cohort, 2018 Cohort, and 2019 Cohort, respectively. As
described above, our customers tend to increase their usage of our platform in their second year, which is typically followed by
more modest increases in usage, if any, in ensuing years. For example, the DBNER for the 2017 Cohort was 305.5% for the
year ended December 31, 2018. However, the DBNER for the 2017 Cohort was 144.3% for the year ended December 31, 2019,
which generally represents their third year as a customer, depending on when they entered into a customer agreement. While
DBNER may fluctuate from quarter to quarter based on, among other things, the timing associated with new customer accounts,
we expect our DBNER to decrease as customers that have used our platform for more than two years become a larger portion of
both our overall customer base and the revenue that we use to calculate DBNER.
We separately monitor customer retention and churn on an annual basis by measuring our annual revenue retention rate,
which we calculate by multiplying the final full month of revenue from a customer that terminated its contract with us (a
"Churned Customer") by the number of months remaining in the same calendar year ("Annual Revenue Churn"). The quotient
of the Annual Revenue Churn from all of our Churned Customers divided by our annual revenue of the same calendar year is
then subtracted from 100% to determine our annual revenue retention rate. We believe this calculation is helpful in that it is
based on the amount of revenue that we would expect to have received in the remaining portion of a particular period had a
customer not terminated its contract with us. It is not indicative of the actual revenue contribution from churned customers in
past periods. By comparing this amount to actual revenue for the period, we are able to assess our ability to replace terminated
revenue by generating revenue from new and continuing customers. Our annual revenue retention rate for the years ended
December 31, 2019 and 2018 was 99.3% and 98.9%, respectively.
Key Components of Statement of Operations
Revenue
We derive our revenue primarily from usage-based fees earned from customers using our platform. We also earn flat fees
from certain products and services.
Customers are generally invoiced in arrears on a monthly basis. Many customers have tiered usage pricing which reflects
discounted rates as usage increases. For most contracts, usage charges are determined on a monthly basis based on actual usage
within the month and do not impact usage charges within any other month. Our larger customers often enter into contracts that
contain minimum billing commitments and reflect discounted pricing associated with such usage levels.
We define U.S. revenue as revenue from customers that have a billing address in the United States, and we define
international revenue as revenue from customers that have a billing address outside of the United States. Our revenue has been
and will continue to be impacted by new and existing customers’ usage of our products, international expansion, and the
success of our sales efforts.
Cost of Revenue and Gross Margin
Cost of revenue consists primarily of fees paid for bandwidth, peering, and colocation. Cost of revenue also includes
personnel costs, such as salaries, benefits, bonuses, and stock-based compensation for our customer support and infrastructure
employees, and non-personnel costs, such as amortization of capitalized internal-use software development costs and
depreciation of our network equipment. Our arrangements with network service providers require us to pay fees based on
bandwidth use, in some cases subject to minimum commitments, which may be underutilized. We expect our cost of revenue to
continue to increase on an absolute basis and may increase as a percentage of revenue, including as a result of depreciation and
amortization associated with capital expenditures in future periods.
Our gross margin has been and will continue to be affected by a number of factors, including the timing and extent of our
investments in our operations, our ability to manage our network service providers and cloud infrastructure-related fees, the
timing of amortization of capitalized software development costs, depreciation of our network equipment, and the extent to
which we periodically choose to pass on our cost savings from network optimization efforts to our customers in the form of
lower usage rates.
64
Research and Development
Research and development expenses consist primarily of personnel costs, including salaries, benefits, bonuses, and
stock-based compensation. Research and development expenses also include cloud infrastructure fees for development and
testing, amortization of capitalized internal-use software development costs, and an allocation of our general overhead
expenses. We capitalize the portion of our software development costs that meet the criteria for capitalization.
We continue to focus our research and development efforts on adding new features and products including new use
cases, improving the efficiency and performance of our network, and increasing the functionality of our existing products. We
expect our research and development expenses to continue to increase on an absolute basis and may increase as a percentage of
revenue in future periods.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel costs, including commissions for our sales employees,
salaries, benefits, bonuses, and stock-based compensation. Sales and marketing expenses also include expenditures related to
advertising, marketing, our brand awareness activities, costs related to our Altitude conferences, professional services fees, and
an allocation of our general overhead expenses.
We focus our sales and marketing efforts on generating awareness of our company, platform and products, creating sales
leads, and establishing and promoting our brand, both domestically and internationally. We plan to increase our investment in
sales and marketing by hiring additional sales and marketing personnel, expanding our sales channels, driving our go-to-market
strategies, building our brand awareness, and sponsoring additional marketing events. We expect our sales and marketing
expenses to continue to increase on an absolute basis and may increase as a percentage of revenue in future periods.
General and Administrative
General and administrative expenses consist primarily of personnel costs, including salaries, benefits, bonuses, and
stock-based compensation for our accounting, finance, legal, human resources and administrative support personnel, and
executives. General and administrative expenses also include costs related to legal and other professional services fees, sales
and other taxes, depreciation and amortization, an allocation of our general overhead expenses, and bad debt expense. We
expect that we will incur costs associated with supporting the growth of our business, our operation as a public company, and to
meet the increased compliance requirements associated with our international expansion.
Our general and administrative expenses include a significant amount of sales and other taxes to which we are subject
based on the manner we sell and deliver our products. Historically, we have not collected such taxes from our customers and
have therefore recorded such taxes as general and administrative expenses. We expect that these expenses will decline in future
years as we continue to implement our sales tax collection mechanisms and start collecting these taxes from our customers. We
expect our general and administrative expenses to continue to increase on an absolute basis and may increase as a percentage of
revenue in future periods.
Income Taxes
Our income tax expense consists primarily of income taxes in certain foreign jurisdictions where we conduct business
and state minimum income taxes in the United States. We have a valuation allowance for deferred tax assets, including net
operating loss carryforwards. We expect to maintain this valuation allowance for the foreseeable future.
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Results of Operations
The following tables set forth our results of operations for the period presented and as a percentage of our revenue for
that period.
Year ended
December 31,
2019
2018
2017
(in thousands)
$
200,462
$
144,563
$
104,900
88,322
112,140
46,492
71,097
41,099
158,688
(46,548)
3,287
(5,236)
(2,561)
(51,058)
492
(51,550) $
65,499
79,064
34,618
50,134
23,450
108,202
(29,138)
939
(1,810)
(741)
(30,750)
185
(30,935) $
48,672
56,228
28,989
40,818
17,451
87,258
(31,030)
443
(1,116)
(539)
(32,242)
208
(32,450)
Year ended December 31,
2019
2018
2017
(in thousands)
$
265
1,410
2,920
3,497
4,318
12,145
$
$
$
190
1,040
493
1,086
2,809
1,332
1,023
1,459
4,079
Consolidated Statement of Operations:
Revenue
Cost of revenue(1)
Gross profit
Operating expenses:
Research and development(1)
Sales and marketing(1)
General and administrative(1)
Total operating expenses
Loss from operations
Interest income
Interest expense
Other expenses, net
Loss before income taxes
Income taxes
Net loss attributable to common stockholders
$
__________
(1) Includes stock-based compensation expense as follows:
Cost of revenue
Research and development
Sales and marketing
General and administrative
Total
$
$
66
Consolidated Statements of Operations, as a percentage of revenue:*
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Interest income
Interest expense
Other expenses, net
Loss before income taxes
Income taxes
Net loss attributable to common stockholders
__________
*
Columns may not add up to 100% due to rounding.
Revenue
Year ended December 31,
2019
2018
2017
100 %
44
100 %
45
100 %
46
56
23
35
21
79
(23)
2
(3)
(1)
(25)
—
(25)%
55
24
35
16
75
(20)
1
(1)
(1)
(21)
—
(21)%
54
28
39
17
83
(30)
—
(1)
(1)
(31)
—
(31)%
Year ended December 31,
2019
2018
2017
(in thousands)
2018 to 2019
Change
2017 to 2018
Change
Revenue
$
200,462
$
144,563
$
104,900
39%
38%
2019 compared to 2018
Revenue was $200.5 million for the year ended December 31, 2019 compared to $144.6 million for the year ended
December 31, 2018, an increase of $55.9 million, or 39%. We had 1,743 customers and 288 enterprise customers as of
December 31, 2019. We had 1,582 customers and 227 enterprise customers as of December 31, 2018. This represents an
increase of 161, or 10%, in customers and 61, or 27%, in enterprise customers from December 31, 2018. Approximately 93% of
our revenue in the year ended December 31, 2019 was driven by usage on our platform. The remainder of our revenue was
generated by our other products and services, including support and professional services.
U.S. revenue was $142.8 million and 71% of revenue for the year ended December 31, 2019, and $110.8 million and
77% of revenue for the year ended December 31, 2018. This represents an increase of $32.0 million, or 29%. International
revenue was $57.6 million and 29% of revenue for the year ended December 31, 2019, and $33.7 million and 23% of revenue
for the year ended December 31, 2018. This represents an increase of $23.9 million, or 71%. We had 891 domestic customers
and 852 international customers as of December 31, 2019. We had 861 domestic customers and 721 international customers as
of December 31, 2018. This is an increase in domestic customers of 30, or 3%, and an increase in international customers of
131, or 18%, compared to December 31, 2018.
2018 compared to 2017
Revenue was $144.6 million for the year ended December 31, 2018 compared to $104.9 million for the year ended
December 31, 2017, an increase of $39.7 million, or 38%. We had 1,582 customers and 227 enterprise customers as of
67
December 31, 2018. We had 1,439 customers and 170 enterprise customers as of December 31, 2017. This was an increase of
143, or 10%, in customers and 57, or 34%, in enterprise customers from December 31, 2017. Approximately 95% of our
revenue in 2018 was driven by usage on our platform. The remainder of our revenue was generated by our other products and
services, including support and professional services.
U.S. revenue was $110.9 million and 77% of revenue for the year ended December 31, 2018. U.S. revenue was $82.7
million and 79% of revenue for the year ended December 31, 2017. This was an increase of $28.2 million, or 34%, from U.S.
revenue for the year ended December 31, 2017. International revenue was $33.7 million and 23% of revenue for the year ended
December 31, 2018. International revenue was $22.2 million and 21% of revenue for the year ended December 31, 2017. This
was an increase of $11.5 million, or 52%, from international revenue for the year ended December 31, 2017. We had 830
domestic customers and 609 international customers in 2017. We had 861 domestic customers and 721 international customers
in 2018. This was an increase in domestic customers of 31, or 4%, from 2017 and an increase in international customers of 112,
or 18%, from 2017.
Cost of Revenue
Year ended December 31,
2019
2018
2017
(in thousands)
2018 to 2019
Change
2017 to 2018
Change
Cost of revenue
$
88,322
$
65,499
48,672
35%
35%
For the years ended December 31, 2019, 2018, and 2017, our cost of revenue consisted of bandwidth, peering, and
colocation fees, as well as personnel costs including salaries, benefits, bonuses, and stock-based compensation for employees
who support the build out and operation of the network. Our cost of revenue also includes depreciation expense for network
equipment, amortization of capitalized internal-use software, and other network costs.
2019 compared to 2018
Cost of revenue was $88.3 million for the year ended December 31, 2019 compared to $65.5 million for the year ended
December 31, 2018, an increase of $22.8 million, or 35%. The increase in cost of revenue was primarily due to an increase in
bandwidth costs of $6.2 million, an increase in colocation costs of $3.9 million, and an increase in other network costs of $2.5
million due to increased traffic on our platform. Personnel costs increased by $5.5 million due to an increase in headcount.
Depreciation and amortization expense increased by $2.9 million due to increased investments in our platform. Travel costs
increased by $0.7 million due to travel associated with the deployment of new POPs. Software licenses increased by $0.5
million.
2018 compared to 2017
Cost of revenue was $65.5 million for the year ended December 31, 2018 compared to $48.7 million for the year ended
December 31, 2017, an increase of $16.8 million, or 35%. The increase in cost of revenue was due to an increase in bandwidth
costs of $3.5 million, an increase of colocation costs of $2.3 million, and an increase in other network costs of $2.3 million due
to increased traffic on our platform. Depreciation and amortization expense increased by $3.2 million due to increased
investments in our platform. Personnel costs increased by $2.7 million due to an increase in headcount.
Gross Profit and Gross Margin
Gross profit
Gross margin
Year ended December 31,
2019
2018
2017
$
112,140
(in thousands)
79,064
$
$
56,228
56%
55%
54%
2018 to 2019
Change
2017 to 2018
Change
42%
1%
41%
1%
68
2019 compared to 2018
Gross profit was $112.1 million for the year ended December 31, 2019 compared to $79.1 million for the year ended
December 31, 2018, an increase of $33.1 million, or 42%. The increase in gross profit in the year ended December 31, 2019
compared to 2018 is due to the increase in revenue from usage of our platform.
Gross margin was 56% for the year ended December 31, 2019 compared to 55% for the year ended December 31, 2018,
an increase of 1%. The increase is due to better utilization of our platform.
2018 compared to 2017
Gross profit was $79.1 million for the year ended December 31, 2018 compared to $56.2 million for the year ended
December 31, 2017, an increase of $22.8 million, or 41%. The increase in gross profit is due to an increase in revenue from
usage of our platform.
Gross margin was 55% for the year ended December 31, 2018 compared to 54% for the year ended December 31, 2017,
an increase of 1%. The increase is due to better utilization of our platform.
Operating Expenses
Year ended December 31,
2019
2018
2017
2018 to 2019
Change
2017 to 2018
Change
Research and development
Sales and marketing
General and administrative
Total operating expenses
Percentage of revenue:
Research and development
Sales and marketing
General and administrative
46,492
71,097
41,099
$
(in thousands)
34,618
50,134
23,450
$
158,688
$
108,202
$
$
$
23%
35%
21%
24%
35%
16%
28,989
40,818
17,451
87,258
28%
39%
17%
34 %
42 %
75 %
47 %
1 %
— %
(5)%
19%
23%
34%
24%
4%
4%
1%
Research and development—2019 compared to 2018
Research and development expenses were $46.5 million for the year ended December 31, 2019 compared to $34.6
million for the year ended December 31, 2018, an increase of $11.9 million, or 34%. This is primarily due to an increase of
$8.1 million of personnel related costs, such as salaries, benefits, bonuses, and stock-based compensation due to an increase in
headcount and an increase in stock-based compensation expense related to the increase in the fair value of our stock options, the
issuance of restricted stock units ("RSUs"), and expense associated with the Employee Stock Purchase Plan ("ESPP").
Software licenses increased by $1.6 million. Travel costs increased by $1.2 million. Facilities and information system costs
increased by $0.9 million. These increases were offset by an increase in the capitalization for internal-use software of $1.2
million.
Research and development—2018 compared to 2017
Research and development expenses were $34.6 million for the year ended December 31, 2018 compared to $29.0
million for the year ended December 31, 2017, an increase of $5.6 million, or 19%. This growth in expenses is due to an
increase of $6.2 million of personnel related costs, such as salaries, benefits, bonuses, and stock-based compensation. This was
offset by an increase in capitalized internal-use software of $1.9 million.
69
Sales and marketing—2019 compared to 2018
Sales and marketing expenses were $71.1 million for the year ended December 31, 2019 compared to $50.1 million for
the year ended December 31, 2018, an increase of $21.0 million, or 42%. This is primarily due to a $13.2 million increase in
personnel related costs, such as salaries, sales commissions, benefits, and stock-based compensation, due to an increase in
headcount, and an increase in stock-based compensation expense related to the increase in the fair value of our stock options,
the issuance of RSUs, and expense associated with the ESPP. Facilities and information costs increased by $2.4 million.
Marketing costs increased by $1.6 million. Professional services increased by $1.5 million. Travel costs increased by $1.3
million. Software licenses increased by $0.8 million.
Sales and marketing—2018 compared to 2017
Sales and marketing expenses were $50.1 million for the year ended December 31, 2018 compared to $40.8 million for
the year ended December 31, 2017, an increase of $9.3 million, or 23%. This is primarily due to an increase of $5.1 million in
personnel related costs, such as salaries, sales commissions, benefits and stock-based compensation, due to an increase in
headcount. Facilities and information system costs increased by $1.5 million. Travel costs increased by $1.1 million. External
marketing costs for marketing events, including our Altitude conferences, sponsorships, and advertising increased by $0.8
million.
General and administrative—2019 compared to 2018
General and administrative costs were $41.1 million for the year ended December 31, 2019 compared to $23.5 million
for the year ended December 31, 2018, an increase of $17.6 million, or 75%. This is primarily due to an increase of $8.5 million
of personnel related costs, such as salaries, benefits, and stock-based compensation, due to an increase in headcount, and an
increase in stock-based compensation expense related to the increase in the fair value of our stock options, the issuance of
RSUs, and expense associated with the ESPP. The increase is also due to an increase of $2.6 million in external professional
services such as legal, accounting, and enterprise systems, an increase of $2.1 million business insurance costs associated with
becoming a public company, an increase of $1.9 million in transaction taxes primarily due to the release of a reserve in the prior
period, and an increase of $1.2 million costs for software licenses, and an increase of $1.1 million in travel costs.
General and administrative—2018 compared to 2017
General and administrative costs were $23.5 million for the year ended December 31, 2018 compared to $17.5 million
for the year ended December 31, 2017, an increase of $6.0 million, or 34%. This increase is due to an increase of $6.2 million
of personnel related costs, such as salaries, benefits, and stock-based compensation due to an increase in headcount, and an
increase of $1.0 million in external professional services such as legal, accounting, and enterprise systems. Transaction taxes
decreased by $1.3 million primarily due to the release of a reserve of $1.9 million that was no longer required.
Other Income and Expense
Interest Income
Year ended December 31,
2019
2018
2017
(in thousands)
2018 to 2019
Change
2017 to 2018
Change
Interest income
$
3,287
$
939
$
443
250%
112%
2019 compared to 2018
Interest income was $3.3 million for the year ended December 31, 2019 compared to $0.9 million for the year ended
December 31, 2018, an increase of $2.3 million, or 250%. This increase is due to interest on proceeds raised from our IPO.
70
2018 compared to 2017
Interest income was $0.9 million for the year ended December 31, 2018 compared to $0.4 million for the year ended
December 31, 2017, an increase of $0.5 million, or 112%. This increase is due to interest on cash raised from our Series F
convertible Preferred Stock financing in 2018.
Interest Expense
Year ended December 31,
2019
2018
2017
(in thousands)
2018 to 2019
Change
2017 to 2018
Change
Interest expense
$
5,236
$
1,810
$
1,116
189%
62%
2019 compared to 2018
Interest expense was $5.2 million for the year ended December 31, 2019 compared to $1.8 million for the year ended
December 31, 2018, an increase of $3.4 million, or 189%. This increase is primarily due to the acceleration of the amortization
of debt issuance costs due to the early payment of the $20.0 million outstanding loan on our Credit Facility as well as an
increase in average outstanding debt.
2018 compared to 2017
Interest expense was $1.8 million for the year ended December 31, 2018 compared to $1.1 million for the year ended
December 31, 2017, an increase of $0.7 million, or 62%. This increase is due to additional borrowings during 2018.
Other income (expense), net
Year ended December 31,
2019
2018
2017
(in thousands)
2018 to 2019
Change
2017 to 2018
Change
Other expense, net
$
2,561
$
741
$
539
246%
37%
2019 compared to 2018
Other expense, net was $2.6 million for the year ended December 31, 2019 compared to $0.7 million for the year ended
December 31, 2018, an increase in other expense, net of $1.8 million, or 246%. This increase is primarily due to mark-to-
market adjustments for warrant liabilities prior to the conversion to additional paid in capital upon the IPO.
2018 compared to 2017
Other expense, net was $0.7 million for the year ended December 31, 2018 compared to $0.5 million for the year ended
December 31, 2017, an increase of $0.2 million, or 37%. This increase is primarily due to mark-to-market adjustments for
warrant liabilities.
Quarterly Results of Operations
The following table sets forth our unaudited quarterly statements of operations data for each of the quarters indicated.
The unaudited quarterly statements of operations data set forth below have been prepared on the same basis as our audited
consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal
recurring adjustments, that are necessary for the fair statement of such data. Our historical results are not necessarily indicative
of the results that may be expected in the future, and the results for any quarter are not necessarily indicative of results to be
71
expected for a full year or any other period. The following quarterly financial data should be read in conjunction with our
consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.
March 31,
2018
June 30,
2018
September
30, 2018
December
31, 2018
March 31,
2019
June 30,
2019
September
30, 2019
December
31, 2019
Three months ended
(unaudited) (in thousands)
$ 32,498
15,384
$ 34,448
15,695
$ 36,820
16,711
$ 40,797
17,709
$ 45,556
19,718
$ 46,173
20,784
$ 49,797
22,292
$ 58,936
25,528
17,114
18,753
20,109
23,088
25,838
25,389
27,505
33,408
7,979
12,343
8,099
11,973
9,233
12,331
9,307
13,487
10,176
15,039
11,244
16,906
12,121
17,560
12,951
21,592
5,702
26,024
(8,910)
137
(381)
(94)
(9,248)
58
4,130
24,202
(5,449)
147
(359)
(140)
(5,801)
35
6,265
27,829
(7,720)
293
(479)
(530)
(8,436)
51
7,353
30,147
(7,059)
362
(591)
23
(7,265)
41
8,700
33,915
(8,077)
416
(1,235)
(776)
(9,672)
55
8,920
10,583
12,896
37,070
(11,681)
861
(2,989)
(1,696)
(15,505)
82
40,264
(12,759)
1,154
(621)
109
(12,117)
46
47,439
(14,031)
856
(391)
(198)
(13,764)
309
$ (9,306) $ (5,836) $ (8,487) $ (7,306) $ (9,727) $ (15,587) $ (12,163) $ (14,073)
23,936
24,127
24,529
24,784
25,290
59,781
93,240
94,045
$
(0.37) $
(0.23) $
(0.31) $
(0.28) $
(0.32) $
(0.20) $
(0.14) $
(0.15)
$
(0.39) $
(0.24) $
(0.35) $
(0.29) $
(0.38) $
(0.26) $
(0.13) $
(0.15)
Consolidated Statement of
Operations:
Revenue
Cost of revenue(1)
Gross profit
Operating expenses:
Research and
development(1)
Sales and marketing(1)
General and
administrative(1)
Total operating expenses
Loss from operations
Interest income
Interest expense
Other income
(expense), net
Loss before income taxes
Income taxes
Net loss attributable to
common stockholders
Weighted-average shares
Per share data based upon
income (loss) from
continuing operations, basic
and diluted
Net loss per share
attributable to common
stockholders, basic and
diluted
__________
(1) Includes stock-based compensation expense as follows:
March 31,
2018
June 30,
2018
September
30, 2018
December
31, 2018
March 31,
2019
June 30,
2019
September
30, 2019
December
31, 2019
Three months ended
Cost of revenue
$
52
$
71
$
Research and development
Sales and marketing
General and administrative
Total stock-based compensation
$
276
225
295
848
$
324
226
369
990
$
55
307
242
357
961
72
(unaudited) (in thousands)
144
$
87
$
425
330
432
369
$
$
293
714
596
438
968
929
$
535
806
1,603
438
$ 1,280
522
$ 1,467
640
$ 2,243
1,505
$ 3,840
1,651
$ 4,595
Consolidated Statement of
Operations:
Revenue
Cost of revenue(1)
Gross profit
Operating expenses:
Research and
development(1)
Sales and marketing(1)
General and administrative(1)
Total operating expenses
Loss from operations
Interest income
Interest expense
Other income (expense), net
Loss before income taxes
Income taxes
Net loss attributable to common
stockholders
Key Business Metrics(1)
Number of customers (as of end
of period)
Number of enterprise customers
(as of end of period)
DBNER (trailing 12 months)
March 31,
2018
June 30,
2018
September
30, 2018
December
31, 2018
March 31,
2019
June 30,
2019
September
30, 2019
December
31, 2019
Three months ended
(unaudited) (percentage values)
100 % 100 %
46 %
47 %
54 %
53 %
100 %
45 %
55 %
100 %
43 %
57 %
100 %
43 %
57 %
100 %
45 %
55 %
100 %
45 %
55 %
100 %
43 %
57 %
25 %
38 %
18 %
80 %
(27)%
— %
(1)%
— %
(28)%
— %
24 %
35 %
12 %
70 %
(16)%
— %
(1)%
— %
(17)%
— %
25 %
33 %
17 %
76 %
(21)%
1 %
(1)%
(1)%
(23)%
— %
23 %
33 %
18 %
74 %
(17)%
1 %
(1)%
— %
(18)%
— %
22 %
33 %
19 %
74 %
(18)%
1 %
(3)%
(2)%
(21)%
— %
24 %
37 %
19 %
80 %
(25)%
2 %
(6)%
(4)%
(34)%
— %
24 %
35 %
21 %
81 %
(26)%
2 %
(1)%
— %
(24)%
— %
22 %
37 %
22 %
80 %
(24)%
1 %
(1)%
— %
(23)%
1 %
(28)%
(17)%
(23)%
(18)%
(21)%
(34)%
(24)%
(24)%
March 31,
2018
June 30,
2018
September
30, 2018
December
31, 2018
March 31,
2019
June 30,
2019
September
30, 2019
December
31, 2019
Three months ended
1,444
1,529
1,516
1,582
1,621
1,627
1,684
1,743
183
288
140.3% 139.1% 136.1% 132.0% 130.4% 132.3% 134.8% 135.5%
227
213
262
274
243
190
__________
(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics”
for our definitions of these metrics.
Quarterly Revenue Trends
Our quarterly revenue increased in each period presented, primarily due to an increase in the usage of our platform by
our existing customers and the addition of new customers.
Quarterly Cost of Revenue Trends
Our cost of revenue increased sequentially in each of the quarters presented, primarily driven by expanded use of our
platform by existing and new customers, which resulted in increased network costs. We expect our cost of revenue to continue
to increase on an absolute basis in future quarters and may periodically increase as a percentage of revenue based on the timing
of investments made in our network.
73
Quarterly Gross Margin Trends
Our gross margin can fluctuate quarter to quarter due to the timing of investments made in our network.
Quarterly Operating Expense Trends
Our operating expenses generally have increased in almost every fiscal quarter primarily due to increases in headcount
and other related expenses to support our growth. Our research and development costs increased sequentially in each of the
quarters presented, primarily driven by increased hiring and investment in our growth as a company. Our sales and marketing
costs can fluctuate based on the timing of our external conferences, such as Altitude. Our general and administrative expenses
for the quarter ended June 30, 2018 reflect the release of $1.9 million of reserves related to a transaction tax matter that was
favorably resolved. We expect our operating expenses to continue to increase on an absolute basis in future quarters.
Liquidity and Capital Resources
As of December 31, 2019, we had cash, cash equivalents, and marketable securities totaling $131.1 million, and
restricted cash totaling $70.1 million. Our cash, cash equivalents, and marketable securities primarily consisted of bank
deposits and money market funds held at major financial institutions and investment-grade commercial paper and corporate
debt securities.
On May 21, 2019, upon the completion of our IPO, we received net proceeds of $192.5 million, after deducting
underwriting discounts and commissions, from sales of 12,937,500 shares of our Class A common stock in the IPO. The net
proceeds include additional proceeds of $25.1 million, net of underwriters' discounts and commissions, from the exercise of the
underwriters' option to purchase an additional 1,687,500 shares of our Class A common stock.
To date, we have financed our operations primarily through equity issuances, payments received from customers, the net
proceeds we received through sales of equity securities, and borrowings under our credit facilities.
Our principal uses of cash in recent periods have been funding our operations and capital expenditures.
We believe that our cash and cash equivalents balances, our credit facilities, and the cash flows generated by our
operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the
next 12 months.
Credit Facility
On November 4, 2019, we entered into a Revolving Credit Agreement for an aggregate commitment amount of $70.0
million with a maturity date of November 3, 2022. The amount of borrowings available under the Revolving Credit Agreement
at any time are collateralized by our cash. As of December 31, 2019, $20.3 million had been drawn on the Revolving Credit
Agreement.
The interest rate associated with each advance under the Revolving Credit Agreement is equal to the sum of LIBOR for
the applicable interest period plus 1.50%, which is a per annum rate based on outstanding borrowings. The commitment fee is
0.20% per annum based on the average daily unused amount of the commitment amount. Interest payments on outstanding
borrowings are due on the last day of each interest period and payments for the commitment fee are due at the end of each
calendar quarter.
74
Cash Flows
The following table summarizes our cash flows for the period indicated:
Cash used in operating activities
Cash used in investing activities
Cash provided by financing activities
Cash Flows from Operating Activities
Year ended December 31,
2019
2018
2017
(in thousands)
$
(31,303) $ (16,985) $ (25,861)
(15,780)
(47,107)
(87,678)
55,406
69,637
168,148
For the year ended December 31, 2019, cash used in operating activities consisted primarily of our net loss of $51.6
million adjusted for non-cash items, including $16.6 million of depreciation and amortization, $12.1 million of stock-based
compensation expense, $0.7 million of amortization of deferred rent, an increase in the fair value of our common stock
warrants of $2.4 million, and amortization of debt issuance costs of $1.9 million. With respect to changes in operating assets
and liabilities, there was an increase in accounts receivable of $12.8 million, primarily due to the growth of our business and
the timing of cash receipts from certain of our larger customers, an increase in other long-term assets of $2.2 million due to the
adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, and an increase of $2.1
million in prepaid expenses and other assets due to pre-payments for SaaS licenses. This was partially offset by an increase of
$5.5 million in accounts payable, accrued expenses, and other liabilities due to timing of payments.
For the year ended December 31, 2018, cash used in operating activities consisted primarily of our net loss of $30.9
million adjusted for non-cash items, including $13.4 million of depreciation and amortization, $4.1 million of stock-based
compensation expense, and an increase in our bad debt expense of $0.6 million. With respect to changes in operating assets and
liabilities, accounts payable, accrued expenses, and other liabilities increased by $4.7 million. This was partially offset by an
increase in accounts receivable of $6.2 million and prepaid expenses and other assets of $2.3 million, primarily due to the
growth of our business and the timing of cash receipts from certain of our larger customers, pre-payments for insurance, rent,
and software licenses, as well as an increase in VAT receivable.
For the year ended December 31, 2017, cash used in operating activities consisted primarily of our net loss of
$32.5 million adjusted for non-cash items, including $2.8 million of stock-based compensation expense, $9.6 million of
depreciation and amortization, and an increase in our bad debt expense of $1.0 million. With respect to changes in operating
assets and liabilities, accounts payable, accrued expenses, and other liabilities increased $2.2 million. This was partially offset
by an increase in accounts receivable and prepaid expenses of $9.6 million, which primarily resulted from the growth of our
business and the timing of cash receipts from certain of our larger customers, pre-payments for travel, benefits, and
commissions as well as an increase in short-term deposits and VAT receivables.
Cash Flows from Investing Activities
For the year ended December 31, 2019, cash used in investing activities was $87.7 million, primarily consisting of
$191.0 million in purchases of marketable securities, $14.6 million of payments related to purchases of property and equipment
to expand our network, and $4.9 million of additions to capitalized internal-use software. This was offset by $123.4 million of
maturities and sales of marketable securities.
For the year ended December 31, 2018, cash used in investing activities was $47.1 million, primarily consisting of $62.7
million in purchases of marketable securities and $16.7 million of payments related to purchases of property and equipment to
expand our network, offset by $35.2 million of maturities of marketable securities.
For the year ended December 31, 2017, cash used in investing activities was $15.8 million, primarily consisting of
$46.1 million in purchases of marketable securities and $13.2 million of payments related to purchases of property and
equipment to expand our network, offset by $43.5 million of maturities of marketable securities.
75
Cash Flows from Financing Activities
For the year ended December 31, 2019, cash provided by financing activities was $168.1 million, primarily consisting of
$192.5 million in proceeds from our IPO, net of underwriting fees, $5.4 million in proceeds from the ESPP, $6.1 million in
proceeds from stock option exercises by our employees and directors. This was partially offset by $30.5 million of net debt
repayments and $5.5 million of payments of costs related to our IPO.
For the year ended December 31, 2018, cash provided by financing activities was $69.6 million, primarily consisting of
$39.9 million of proceeds from our sales of Series F convertible preferred stock, net of issuance expenses, $27.1 million of net
borrowings, and $2.6 million in proceeds from stock option exercises by our employees and directors.
For the year ended December 31, 2017, cash provided by financing activities was $55.4 million, primarily consisting of
$49.8 million in proceeds from our sale of Series E convertible preferred stock, net of issuance expenses, $4.9 million of net
borrowings, and $0.6 million in proceeds from stock option exercises by our employees.
Contractual Obligations and Other Commitments
The following table summarizes our non-cancelable contractual obligations as of December 31, 2019:
Less than 1 Year
1-3 Years
3-5 Years
More than 5
Years
Total
Operating lease obligations(1)
Purchase obligations(2)
Debt(3)
Total
$
$
3,637
$
46,929
5,682
17,233
17,479
27,163
(in thousands)
11,766
$
$
9,824
$
63
—
—
—
42,460
64,471
32,845
56,248
$
61,875
$
11,829
$
9,824
$
139,776
__________
(1) Operating lease represent total future minimum rent payments under non-cancelable operating lease agreements, net of
sublease income of $1.2 million.
Purchase obligations represent total future minimum payments under contracts with our cloud infrastructure provider,
network service providers, and other vendors. Purchase obligations exclude agreements that are cancelable without
penalty.
Debt represents principal and interest payments under our loan and security agreements.
(2)
(3)
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP. The preparation of our consolidated
financial statements requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets,
liabilities, revenue, costs, expenses, and related disclosures. Actual results and outcomes could differ significantly from our
estimates, judgments, and assumptions. To the extent that there are material differences between these estimates and actual
results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects
the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include
various combinations of products and services, each of which are distinct and accounted for as separate performance
obligations. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental
authorities.
We primarily derive revenue from the sale of services to customers executing contracts in which the standard contract
term is one year, although terms may vary by contract. Most of our contracts are non-cancelable over the contractual term.
76
These contracts can commit the customer to a minimum monthly level of usage and specify the rate at which the customer must
pay for actual usage above the monthly minimum.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of
account in Topic 606. Our contracts with customers often include promises to transfer multiple products and services to a
customer. Determining whether products and services are considered distinct performance obligations that should be accounted
for separately versus together may require significant judgment. For contracts with multiple performance obligations, we
allocate the contract transaction price to each performance obligation using our estimate of the standalone selling price ("SSP")
of each distinct good or service in the contract.
Judgment is required to determine the SSP for each distinct performance obligation. We analyze separate sales of our
products and services as a basis for estimating the SSP of our products and services. We then use that SSP as the basis for
allocating the transaction price when our product and services are sold together in a contract with multiple performance
obligations. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we
determine the SSP using information that may include market conditions and other observable inputs. We typically have more
than one SSP for individual products and services due to the stratification of those products and services by customers and
circumstances. In these instances, we may use information, such geographic region and distribution channel, in determining the
SSP.
The transaction price in a contract is typically equal to the minimum commit price in the contract less any discounts
provided. Because our typical contracts represent distinct services delivered over time with the same pattern of transfer to the
customer, usage-based consideration primarily related to actual consumption over the minimum commit levels is allocated to
the period to which it relates. The amount of consideration recognized for usage above the minimum commit price is limited to
the amount we expect to be entitled to receive in exchange for providing services. We have elected to apply the practical
expedient for estimating and disclosing the variable consideration when variable consideration is allocated entirely to a wholly
unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a
single performance obligation from our remaining performance obligations under these contracts.
Performance obligations represent stand-ready obligations that are satisfied over time as the customer simultaneously
receives and consumes the benefits provided by us. These obligations can be content delivery, security, professional services,
support, edge cloud platform services, and others. Accordingly, our revenue is recognized over time, consistent with the pattern
of benefit provided to the customer over the term of the agreement.
At times, customers may request changes that either amend, replace, or cancel existing contracts. Judgment is required to
determine whether the specific facts and circumstances within the contracts should be accounted for as a separate contract or as
a modification.
In contracts where there are timing differences between when we transfer a promised good or service to the customer and
when the customer pays for that good or service, we have determined our contracts do not include a significant financing
component. We have also elected the practical expedient to not measure financing components for any contract where the
timing difference is less than one year.
From time to time we enter into arrangements to establish and run private POPs for customers. These arrangements
include content delivery services as well as professional services and the provision of hardware. For accounting purposes, we
have determined that the provisioning of hardware is an operating lease. We recognize the revenue from these leases monthly
on a straight-line basis over the term of the relevant customer agreements.
On January 1, 2019, we adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU
2014-09 or Topic 606) using the modified retrospective method applied to those contracts which were not completed as of
January 1, 2019. Results for reporting periods beginning after January 1, 2019 are presented under Topic 606, while prior
period amounts are not adjusted, and continue to be reported in accordance with our historical accounting under Topic 605. We
recorded a net increase in stockholders’ equity (retained earnings) of $5.7 million as of January 1, 2019 due to the cumulative
impact of adopting Topic 606 and Topic 340, Other Assets and Deferred Costs. The area most significantly impacted was
related to the treatment of incremental costs of obtaining contracts with customers.
Using Topic 606, we determine revenue recognition through the following steps:
77
•
•
•
•
•
Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, we satisfy a performance obligation.
Stock-Based Compensation—Restricted Stock Units ("RSUs") and Stock Options
We account for stock-based compensation in accordance with the authoritative guidance on stock compensation. Under
the fair value recognition provisions of this guidance, stock-based compensation is measured at the grant date based on the fair
value of the award and is recognized as expense in the statement of operations over the requisite service period, which is
generally the vesting period of the respective award. We account for forfeitures as they occur.
Determining the fair value of stock-based awards at the grant date requires judgment. We estimate the fair value of RSUs
at our stock price on the grant date. We use the Black-Scholes option-pricing model to determine the fair value of stock options
and purchase rights under our Employee Stock Purchase Plan ("ESPP") granted to our employees and directors. The
determination of the grant date fair value of options using an option-pricing model is affected by our estimated common stock
fair value as well as assumptions regarding a number of other complex and subjective variables. These variables include the fair
value of our common stock, the expected term of the options, our expected stock price volatility over the expected term of the
options, risk-free interest rates for the expected term of the award, and expected dividends.
Internal-Use Software Development Costs
We capitalize certain costs related to the development of our platform and other software applications for internal use. In
accordance with authoritative guidance, we begin to capitalize our costs to develop software when preliminary development
efforts are successfully completed, management has authorized and committed project funding, and it is probable that the
project will be completed and the software will be used as intended. We stop capitalizing these costs when the software is
substantially complete and ready for its intended use, including the completion of all significant testing. These costs are
amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be three years. We
also capitalize costs related to specific enhancements when it is probable the expenditure will result in additional functionality
and expense costs incurred for maintenance and minor enhancements. Costs incurred prior to meeting these criteria together
with costs incurred for training and maintenance are expensed as incurred and recorded within research and development
expenses in our consolidated statement of operations. We exercise judgment in determining the point at which various projects
may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over
which the costs are amortized. To the extent that we change the manner in which we develop and test new features and
functionalities related to our platform, assess the ongoing value of capitalized assets, or determine the estimated useful lives
over which the costs are amortized, the amount of internal-use software development costs we capitalize and amortize could
change in future periods.
Legal and Other Contingencies
From time to time, we have been and will continue to be subject to legal proceedings and claims. Periodically, we
evaluate the status of each legal matter and assess our potential financial exposure. If the potential loss from any legal
proceeding or litigation is considered probable and the amount can be reasonably estimated, we accrue a liability for the
estimated loss. Significant judgment is required to determine the probability of a loss and whether the amount of the loss is
reasonably estimable. The outcome of any proceeding is not determinable in advance. As a result, the assessment of a potential
liability and the amount of accruals recorded are based only on the information available to us at the time. As additional
information becomes available, we reassess the potential liability related to the legal proceeding or litigation, and may revise
our estimates. Any revisions could have a material effect on our results of operations.
78
We conduct 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 our operations. We are subject to
indirect taxes, and may be subject to certain other taxes, in some of these jurisdictions. Historically, we have not billed or
collected these taxes and, in accordance with U.S. GAAP, we have recorded a provision for our tax exposure in these
jurisdictions when it is both probable that a liability has been incurred and the amount of the exposure can be reasonably
estimated. As a result, we have recorded a liability of $3.9 million as of December 31, 2019. These estimates are based on
several key assumptions, including the taxability of our products, the jurisdictions in which we believe we have nexus and the
sourcing of revenues to those jurisdictions. In the event these jurisdictions challenge our assumptions and analysis, our actual
exposure could differ materially from our current estimates.
Recent Accounting Pronouncements
Refer to "Note 2--Summary of Significant Accounting Policies" included in the Notes to the Consolidated Financial
Statements.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can
delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as
those standards apply to private companies. We have elected to use this extended transition period for complying with new or
revised accounting standards that have different effective dates for public and private companies until the earlier of the date we
(1) are no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period
provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or
revised accounting pronouncements as of public company effective dates.
79
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to certain market risks in the ordinary course of our business. These risks primarily include interest rate
and currency exchange risks as follows:
Interest Rate Risk
We had cash, cash equivalents, and marketable securities of $131.1 million, and restricted cash of $70.1 million, as of
December 31, 2019, which consisted of bank deposits, money market funds, corporate notes and bonds, commercial paper, U.S.
Treasury securities, and asset-backed securities. The cash and cash equivalents are held for working capital purposes. The
restricted cash is held as cash collateral in connection with our Cash Collateralized Revolving Credit Agreement. Such interest-
earning instruments carry a degree of interest rate risk. To date, fluctuations in interest income have not been significant. The
primary objective of our investment activities is to preserve principal while generating income without significantly increasing
risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial
instruments to manage our interest rate risk exposure. Due to the short-term nature of our investments, we have not been
exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. Amounts borrowed under the
Cash Collateralized Revolving Credit Agreement bear the same interest throughout the initial interest period, which ends in
November 2020, at a rate of LIBOR as of October 31, 2019 plus 1.5%. A hypothetical 10% change in interest rates during the
period presented would not have had a material impact on our consolidated financial statements.
Currency Exchange Risks
The functional currency of our foreign subsidiaries is the U.S. dollar. Therefore, we are exposed to foreign exchange rate
fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars. The local currencies of our
foreign subsidiaries are the British pound and Japanese Yen. Our subsidiaries remeasure monetary assets and liabilities at
period-end exchange rates, while non-monetary items are remeasured at historical rates. Revenue and expense accounts are
remeasured at the average exchange rate in effect during the period. If there is a change in foreign currency exchange rates, the
conversion of our foreign subsidiaries’ financial statements into U.S. dollars would result in a realized gain or loss which is
recorded in our consolidated statements of operations. We do not currently engage in any hedging activity to reduce our
potential exposure to currency fluctuations, although we may choose to do so in the future. A hypothetical 10% change in
foreign exchange rates during the period presented would not have had a material impact on our consolidated financial
statements.
80
Item 8.
Financial Statements and Supplementary Data
FASTLY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are filed as part of this Annual Report on form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The supplementary financial information required by this Item 8 is included in Part II, Item 7 under the caption “Quarterly
Results of Operations”, which is incorporated herein by reference.
81
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Fastly, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Fastly, Inc. and subsidiaries (the "Company") as of
December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive loss, convertible preferred
stock and stockholders' equity (deficit), cash flows, for each of the three years in the period ended December 31, 2019, and the
related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in
all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement, whether due to
error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial
reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
March 3, 2020
San Francisco, California
We have served as the Company's auditor since 2014.
82
FASTLY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net of allowance for doubtful accounts of $1,816 and $1,679 as of
December 31, 2019 and December 31, 2018, respectively
Restricted cash
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Goodwill
Intangible assets, net
Other assets
Total assets
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’
EQUITY (DEFICIT)
Current liabilities:
Accounts payable
Accrued expenses
Current portion of long-term debt
Other current liabilities
Total current liabilities
Long-term debt, less current portion
Convertible preferred stock warrant liabilities
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 9)
Convertible preferred stock series Seed, A, B, C, D, E and F in aggregate, $0.00002 par value;
0 and 54,148,643 shares authorized as of December 31, 2019 and 2018, respectively; 0 and
53,630,213 issued and outstanding at December 31, 2019 and 2018, respectively
Stockholders’ equity (deficit):
Class A and Class B common stock, $0.00002 par value; 1,094,129,050 and 97,500,000 shares
authorized as of December 31, 2019 and 2018, respectively; 94,817,715 and 25,025,836 shares
issued and outstanding at December 31, 2019 and 2018, respectively
Additional paid-in capital
Treasury stock
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity (deficit)
As of
December 31,
2019
As of
December 31,
2018
$
16,142
$
114,967
37,136
70,087
10,991
249,323
60,037
372
1,125
10,112
320,969
$
4,602
$
19,878
4,472
8,169
37,121
25,158
—
1,038
63,317
$
$
36,963
46,679
24,729
—
8,896
117,267
42,354
360
610
2,163
162,754
2,333
15,535
11,370
2,512
31,750
39,439
3,261
647
75,097
—
219,584
2
449,463
—
196
(192,009)
257,652
1
16,403
(2,109)
(36)
(146,186)
(131,927)
162,754
Total liabilities, convertible preferred stock, and stockholders’ equity (deficit)
$
320,969
$
The accompanying notes are an integral part of the consolidated financial statements.
83
FASTLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Interest income
Interest expense
Other income (expense), net
Loss before income taxes
Income taxes
Net loss
Net loss per share attributable to common stockholders, basic and diluted
Weighted-average shares used in computing net loss per share attributable to common
stockholders, basic and diluted
Year ended
December 31,
2019
2018
2017
$
200,462
$
144,563
$
104,900
88,322
112,140
46,492
71,097
41,099
158,688
(46,548)
3,287
(5,236)
(2,561)
(51,058)
492
65,499
79,064
34,618
50,134
23,450
108,202
(29,138)
939
(1,810)
(741)
(30,750)
185
48,672
56,228
28,989
40,818
17,451
87,258
(31,030)
443
(1,116)
(539)
(32,242)
208
$
$
(51,550) $
(30,935) $
(32,450)
(0.75) $
(1.27) $
(1.39)
68,350
24,376
23,402
The accompanying notes are an integral part of the consolidated financial statements.
84
FASTLY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Net loss
Other comprehensive (loss) income:
Foreign currency translation adjustment
Gain (loss) on investments in available-for-sale-securities
Total other comprehensive income (loss)
Comprehensive loss
Year ended
December 31,
2018
2017
2019
(51,550) $
(30,935) $
(32,450)
$
111
121
(1) $
(11)
32
(7)
232
$
(51,318) $
(12) $
(30,947) $
25
(32,425)
$
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
85
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T
FASTLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Amortization of deferred rent
Amortization of debt issuance costs
Stock-based compensation
Provision for doubtful accounts
Change in fair value of preferred stock warrant liabilities
Other adjustments
Interest paid on capital leases
Loss on disposals of property and equipment
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued expenses
Other liabilities
Net cash used in operating activities
Cash flows from investing activities:
Purchases of marketable securities
Sales of marketable securities
Maturities of marketable securities
Purchases of property and equipment
Capitalized internal-use software
Purchases of intangible assets
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from initial public offering, net of underwriting discounts
Payments of costs related to initial public offering
Proceeds from borrowings under notes payable
Payments of debt issuance costs
Repayments of notes payable
Repayments of capital leases
Proceeds from Series E financing
Series E issuance costs
Proceeds from Series F financing
Series F issuance costs
Proceeds from Employee Stock Purchase Plan
Proceeds from exercise of vested stock options
Proceeds from early exercise of stock options
Proceeds from payment of stockholder note
Repurchase of early exercised shares
Net cash provided by financing activities
Effects of exchange rate changes on cash, cash equivalents, and restricted cash
Net increase in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of period
Cash, cash equivalents, and restricted cash at end of period
Year ended
December 31,
2019
2018
2017
$
(51,550) $
(30,935) $
(32,450)
16,553
(711)
1,909
12,145
360
2,404
(591)
(364)
108
(12,767)
(2,095)
(2,222)
2,391
4,401
(1,274)
(31,303)
(190,980)
52,589
70,813
(14,609)
(4,856)
(635)
(87,678)
192,510
(5,469)
20,300
(231)
(49,167)
(1,370)
—
—
—
—
5,402
5,579
520
74
—
168,148
99
49,266
36,963
13,400
(340)
—
4,079
599
606
(354)
(203)
—
(6,234)
(2,325)
10
(372)
3,902
1,182
(16,985)
(62,660)
—
35,210
(16,702)
(2,955)
—
(47,107)
—
—
29,411
(257)
(833)
(1,215)
—
—
40,000
(121)
—
1,561
1,054
50
(13)
69,637
22
5,567
31,396
$
86,229
$
36,963
$
9,642
265
161
2,809
1,024
176
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(105)
113
(6,043)
(3,537)
(94)
1,109
1,009
78
(25,861)
(46,071)
—
43,539
(12,099)
(1,149)
—
(15,780)
—
—
12,774
—
(7,383)
(464)
50,000
(137)
—
—
—
611
5
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—
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(32)
13,733
17,663
31,396
The accompanying notes are an integral part of the consolidated financial statements.
87
FASTLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—Continued
(in thousands)
Year ended
December 31,
2019
2018
2017
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes, net of refunds received
Property and equipment additions not yet paid in cash
Vesting of early-exercised stock options
Capital lease outstanding from current year addition
Warrant issued in connection with debt
Change in other assets from change in accounting principle
Conversion of convertible preferred stock warrants to convertible common stock
warrants
Cashless exercise of common stock warrants
Costs related to initial public offering, accrued but not yet paid
Stock-based compensation capitalized to internal-use software
Reconciliation of cash, cash equivalents, and restricted cash as shown in the statements of
cash flows
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents, and restricted cash
$
$
$
$
$
$
$
$
$
$
$
$
$
5,422
361
7,071
620
7,380
$
$
$
$
$
— $
$
5,727
5,665
1,036
130
441
16,142
70,087
86,229
$
$
$
$
$
$
1,833
55
133
337
429
1,639
$
$
$
$
$
$
— $
— $
— $
— $
— $
996
166
1,838
248
4,324
—
—
—
—
—
—
36,963
—
36,963
$
$
31,309
87
31,396
The accompanying notes are an integral part of the consolidated financial statements.
88
1.
Nature of Business
Fastly, Inc. has built an edge cloud platform that can process, serve, and secure its customer’s applications as close to
their end users as possible. Our edge network spans 68 Points-of-Presence ("POPs") across 53 markets, as of December 31,
2019. We were incorporated in Delaware in 2011 and are headquartered in San Francisco, California.
As used herein, "Fastly," "we," "our," "the Company," and similar terms include Fastly, Inc. and its subsidiaries, unless
the context indicates otherwise.
Stock Split
On May 3, 2019, we implemented a 1-for-2 reverse stock split of our stock. All shares of common stock, stock-based
instruments, and per-share data included in these financial statements give effect to the stock split and the changes in authorized
shares have been adjusted retroactively for all periods presented.
Initial Public Offering ("IPO")
On May 21, 2019 we completed an IPO in which we sold 12,937,500 shares of our newly authorized Class A common
stock, which included 1,687,500 shares sold pursuant to the exercise by the underwriters of an option to purchase additional
shares, at the public offering price of $16.00 per share. We received net proceeds of $192.5 million, after deducting
underwriting discounts and commissions, from sales of our shares in the IPO. The net proceeds include additional proceeds of
$25.1 million, net of underwriters' discounts and commissions, from the exercise of the underwriters' option to purchase an
additional 1,687,500 shares of our Class A common stock. Prior to the closing of the IPO, all shares of common stock then
outstanding were reclassified as Class B common stock. Immediately upon the closing of the IPO, all shares of convertible
preferred stock then outstanding were converted into 53,630,213 shares of Class B common stock on a one-to-one basis.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in accordance with United States generally accepted
accounting principles ("U.S. GAAP").
Certain changes in presentation have been made to conform the prior period presentation to the current period reporting.
We have reclassified a portion of sales from marketable securities to maturities of marketable securities line item in the
Consolidated Statements of Cash Flows. We have also reclassified a portion of purchases of property and equipment to the
capitalized internal-use software line item of the Consolidated Statements of Cash Flows. We have also reclassified a portion of
the proceeds from borrowings under notes payable to the payments of debt issuance costs line item of the Consolidated
Statement of Cash Flows. In addition, as a result of the adoption of ASU 2016-18 (Topic 230), we have shown the changes in
the total of cash, cash equivalents, and restricted cash in the Consolidated Statements of Cash Flows. We have also reclassified
a portion of other accrued liabilities to the accrued colocation and bandwidth costs line in the Accrued Expenses section of
Footnote 5, "Balance Sheet Information".
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of our consolidated financial statements requires us to make estimates, judgments, and assumptions that
affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. Actual results and
outcomes could differ significantly from our estimates, judgments, and assumptions. Significant estimates, judgments, and
assumptions used in these financial statements include, but are not limited to, those related to revenue, accounts receivable and
related reserves, useful lives and realizability of long-lived assets, income tax reserves, and accounting for stock-based
89
compensation. Estimates are periodically reviewed in light of changes in circumstances, facts, and experience. The effects of
material revisions in estimates are reflected in the consolidated financial statements in the period of change and prospectively
from the date of the change in estimate.
Cash, Cash Equivalents and Marketable Securities
We invest our excess cash primarily in short-term fixed income securities, including government and investment-grade
debt securities and money market funds. We classify all liquid investments with stated maturities of three months or less from
date of purchase as cash equivalents. Marketable securities with original maturities greater than three months from purchase
date and remaining maturities less than one year are classified as short-term marketable securities. Marketable securities with
remaining maturities greater than one year as of the balance sheet date and which we intend to hold for greater than one year,
are classified as long-term marketable securities. The fair market value of cash equivalents at December 31, 2019 and 2018
approximated their carrying value. Marketable securities are carried at fair market value, with unrealized gains and losses
considered to be temporary in nature reported in accumulated other comprehensive loss. Cost of securities sold is based on
specific identification. We determine the appropriate classification of our investments in marketable securities at the time of
purchase and reevaluate such designation at each balance sheet date. We have classified and accounted for our marketable
securities as available-for-sale. After considering our capital preservation objectives, as well as our liquidity requirements, we
may sell securities prior to their stated maturities. We carry our available-for-sale securities at fair value, and report the
unrealized gains and losses as a component of other comprehensive loss, except for unrealized losses determined to be other-
than-temporary which are recorded as other expense, net. We determine any realized gains or losses on the sale of marketable
securities on a specific identification method and record such gains and losses as a component of other expense, net. Interest
earned on cash, cash equivalents, and marketable securities was approximately $3.1 million and $0.9 million during the years
ended December 31, 2019 and 2018, respectively. These balances are recorded in interest income in the accompanying
Consolidated Statement of Operations and Comprehensive Loss.
We evaluate the investments periodically for possible other-than-temporary impairment. A decline in fair value below the
amortized costs of debt securities is considered an other-than-temporary impairment if we have the intent to sell the security or
it is more likely than not that we will be required to sell the security before recovery of the entire amortized cost basis. In those
instances, an impairment charge equal to the difference between the fair value and the amortized cost basis is recognized in
other expense. Regardless of our intent or requirement to sell a debt security, impairment is considered other-than-temporary if
we do not expect to recover the entire amortized cost basis.
Restricted Cash
As of December 31, 2019, we had recorded a restricted cash balance of approximately $70.1 million on the accompanying
Consolidated Balance Sheet. This restricted cash balance primarily consists of cash deposited and held in money market funds
as collateral underlying the Cash Collateralized Revolving Credit Agreement ("Credit Agreement") entered into on November
4, 2019. See Note 7, "Debt Instruments" for further details on the Credit Agreement. Interest income earned on restricted cash
was approximately $0.1 million during the year ended December 31, 2019. These balances are recorded in interest income in
the accompanying Consolidated Statement of Operations and Comprehensive Loss. There was no restricted cash as of
December 31, 2018.
Accounts Receivable, net
Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential
uncollectible amounts. We record allowances based upon its assessment of various factors, such as: historical experience, credit
quality of our customers, age of the accounts receivable balances, geographic related risks, economic conditions, and other
factors that may affect a customer's ability to pay. Increases and decreases in the allowance for doubtful accounts are included
as a component of General and administrative expense in the Consolidated Statements of Operations and Comprehensive Loss.
We do not have any off-balance sheet credit exposure related to our customers.
Incremental Costs to Obtain a Contract with a Customer
We capitalize incremental costs associated with obtaining customer contracts, specifically certain commission payments.
We pay commissions based on contract value upon signing a new arrangement with a customer and upon renewal and upgrades
of existing contracts with customers only if the renewal and upgrades result in an incremental increase in contract value. To the
90
extent that renewals and upgrades do not result in an increase in contract value, no additional commissions are paid. We also
incur commission expense on an ongoing basis based upon revenue recognized. In these cases, no incremental costs are
deferred, as the commissions are earned and expensed in the same period for which the associated revenue is recognized. Based
on the nature of our unique technology and services, and the rate at which we continually enhances and updates our technology,
the expected life of the customer arrangement is determined to be approximately five years. Commissions for new
arrangements and renewals are both amortized over five years. Amortization is primarily included in sales and marketing
expense in the consolidated statements of income. The current portion of deferred commission and incentive payments is
included in prepaid expenses and other current assets, and the long-term portion is included in other assets on our Consolidated
Balance Sheets.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash, cash
equivalents, marketable securities, and accounts receivable. The primary focus of our investment strategy is to preserve capital
and meet liquidity requirements. Our investment policy addresses the level of credit exposure by limiting the concentration in
any one corporate issuer or sector and establishing a minimum allowable credit rating. To manage the risk exposure, we invest
cash equivalents and marketable securities in a variety of fixed income securities, including government and investment-grade
debt securities and money market funds. We place our cash primarily in checking and money market accounts with reputable
financial institutions. Deposits held with these financial institutions may exceed the amount of insurance provided on such
deposits, if any.
Concentrations of credit risk with respect to accounts receivable are primarily limited to certain customers to which we
make substantial sales. Our customer base consists of a large number of geographically dispersed customers diversified across
several industries. To reduce risk, we routinely assess the financial strength of our customers. Based on such assessments, we
believe that our accounts receivable credit risk exposure is limited. No customer accounted for more than 10% of revenue for
the years ended December 31, 2019 and 2018, or more than 10% of the total accounts receivable balance as of December 31,
2019 and December 31, 2018.
Fair Value of Financial Instruments
Our financial instruments consist of cash and cash equivalents, marketable securities, accounts receivable, accounts
payable, accrued expenses, debt and convertible preferred stock warrant liabilities. Cash equivalents, marketable securities, and
convertible preferred stock warrant liabilities are carried at fair value. Accounts receivable, accounts payable, and accrued
expenses are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or
payment date. The carrying amount of our debt approximates fair value as the stated interest rate approximates market rates
currently available to us.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of the assets. The estimated useful life of each asset
category is as follows:
Computer and networking equipment
Leasehold improvements
Furniture and fixtures
Office equipment
Internal-use software
3-5 years
Shorter of lease term or 5 years
3 years
3 years
3 years
We periodically review the estimated useful lives of property and equipment and any changes to the estimated useful
lives are recorded prospectively from the date of the change.
Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is included in other expense, net in the Consolidated Statements of Operations and
Consolidated Statements of Comprehensive Loss. Repairs and maintenance costs are expensed as incurred.
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Internal-Use Software Development Costs
Labor and related costs associated with internal-use software during the application development stage are
capitalized. Capitalization of costs begins when the preliminary project stage is completed, management has committed to
funding the project, and it is probable that the project will be completed and the software will be used to perform the function
intended. Capitalization ceases at the point when the project is fully tested and substantially complete and is ready for its
intended purpose. The capitalized amounts are included in property and equipment, net on the Consolidated Balance Sheets. We
amortize such costs over the estimated useful life of the software; completed internal-use software that is used on our network
is amortized to cost of revenue over its estimated useful life. Costs incurred during the planning, training, and post-
implementation stages of the software development life-cycle are expensed as incurred.
Goodwill, Intangible Assets, and Long-lived Assets
Goodwill is the amount by which the cost of acquired net assets in a business combination exceeds the fair value of the
net identifiable assets on the date of purchase and is carried at its historical cost. We test goodwill for impairment on an annual
basis or more frequently if events or changes in circumstances indicate that the asset might be impaired. We perform our annual
impairment test of goodwill as of October 31 and whenever events or circumstances indicate that the asset might be impaired.
Prior to September 30, 2019, we performed our annual impairment test of goodwill as of December 31 and whenever events or
circumstances indicated that the asset might be impaired. We did not have any impairments to goodwill during the years ended
December 31, 2019, 2018, and 2017.
Intangible assets consist of internet protocol addresses and domain names and are amortized over their estimated useful
lives based upon the estimated economic value derived from the related intangible asset.
Long-lived assets, including property and equipment and intangible assets, are reviewed for impairment whenever events
or changes in circumstances, such as service discontinuance, technological obsolescence, significant decreases in our market
capitalization, facility closures, or work-force reductions indicate that the carrying amount of the long-lived asset or asset group
may not be recoverable. When such events occur, we compare the carrying amount of the asset or asset group to the
undiscounted expected future cash flows related to the asset or asset group. If this comparison indicates that an impairment is
present, the amount of the impairment is calculated as the difference between the carrying amount and the fair value of the asset
or asset group. We did not have any impairments during the years ended December 31, 2019 and 2018.
Deferred Offering Costs
As of December 31, 2018, there was $0.3 million of deferred offering costs that had been capitalized, and recorded in
other non-current assets. Upon completion of the IPO, these deferred offering costs were reclassified to stockholders' equity and
recorded against the proceeds of the offering.
Deferred Rent and Lease Accounting
We lease most of our data center facilities and office space under non-cancelable operating lease agreements. Total rent
payments, inclusive of rent increases, rent holidays, rent concessions, leasehold incentives, or any other unusual provisions or
conditions, are expensed on a straight-line basis over the lease term. The difference between the straight-line expense and the
cash payment is recorded as deferred rent.
Convertible Preferred Stock Warrant Liabilities
We recorded our warrants to purchase convertible preferred stock as a liability on the Consolidated Balance Sheets at fair
value upon issuance because the warrants were exercisable for contingently redeemable preferred stock which was classified
outside of stockholders' deficit. The liability associated with these warrants was subject to remeasurement at each balance sheet
date, with changes in fair value recorded in the Consolidated Statement of Operations and Comprehensive Loss as other
expense, net. Immediately upon closing of the IPO, our warrants to purchase convertible preferred stock were automatically
converted to warrants to purchase an equal number of shares of our Class B common stock. As a result, the warrant was
remeasured a final time, immediately prior to the closing of the IPO, and reclassified to additional paid-in capital within
stockholders' equity. Changes in the fair value were recorded within other expense, net on the Consolidated Statement of
Operations.
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Revenue Recognition
Refer to Note 3, "Revenues" in the Notes to Consolidated Financial Statements for our Revenue Recognition policy.
Cost of Revenue
Cost of revenue consists primarily of fees paid to network providers for bandwidth and to third-party network data
centers for housing servers, also known as colocation costs. Cost of revenue also includes employee costs for network
operation, build-out and support and services delivery, network storage costs, cost of managed services and software-as-a-
service, depreciation of network equipment used to deliver our services, and amortization of network-related internal-use
software. The Company enters into contracts for bandwidth with third-party network providers with terms of typically one year.
These contracts generally commit us to pay minimum monthly fees plus additional fees for bandwidth usage above the
committed level. We enter into contracts for colocation services with third-party providers with terms of typically three years.
Research and Development Costs
Research and development costs consist of primarily payroll and related personnel costs for the design, development,
deployment, testing, and enhancement of our edge cloud platform. Costs incurred in the development of our edge cloud
platform are expensed as incurred, excluding those expenses which met the criteria for development of internal-use software.
Advertising Expense
We recognize advertising expense as incurred. We recognized total advertising expense of approximately $1.4 million,
$0.5 million, and $0.7 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Accounting for Stock-Based Compensation
We account for stock-based employee compensation plans under the fair value recognition and measurement provisions,
which require all stock-based payments, including grants of stock options, restricted stock units ("RSUs"), and shares issued
under our Employee Stock Purchase Plan ("ESPP") to be measured based on the grant-date fair value of the award and
recognized as expense over the requisite service period, which is generally the vesting period of the respective award. We
account for forfeitures as they occur.
The fair value of RSUs granted to our employees and directors is based on the grant date fair value. The fair value of
stock options granted to our employees and directors, and of the shares to be issued under our ESPP are based on the Black-
Scholes option-pricing model. The determination of the fair value of a stock-based award is affected by the deemed fair value
of the underlying stock price on the grant date, as well as assumptions regarding a number of other complex and subjective
variables. These variables include the fair value of our common stock, the expected stock price volatility over the expected term
of the options, stock option exercise and cancellation behaviors, risk-free interest rates, and expected dividends:
These assumptions and estimates are as follows:
•
•
•
Fair Value of Common Stock. Because our common stock was not publicly traded until the completion of the IPO, the
Board considered numerous objective and subjective factors to determine the fair value of our Common Stock at each
meeting at which awards were approved. These factors included, but were not limited to (i) contemporaneous third-
party valuations of Common Stock; (ii) the rights and preferences of Series Preferred relative to Common Stock;
(iii) the lack of marketability of Common Stock; (iv) developments in the business; and (v) the likelihood of achieving
a liquidity event, such as an IPO or sale of the Company, given prevailing market conditions.
Expected Term. The expected term represents the period that our stock-based awards are expected to be outstanding.
The expected term assumptions were determined based on the vesting terms, exercise terms, and contractual lives of
the options. The expected term was estimated using the simplified method allowed under Securities and Exchange
Commission (SEC) guidance.
Volatility. Since we do not have a long trading history of our common stock, the expected volatility is determined
based on the historical stock volatilities of its comparable companies. Comparable companies consist of public
93
companies in the Company’s industry, which are similar in size, stage of life cycle, and financial leverage. We intend
to continue to apply this process using the same or similar public companies until a sufficient amount of historical
information regarding the volatility of its share price becomes available, or unless circumstances change such that the
identified companies are no longer similar to us, in which case, more suitable companies whose share prices are
publicly available would be used in the calculation.
Risk-free Interest Rate. The risk-free interest rate used in the Black-Scholes option pricing model is the implied yield
available on U.S. Treasury zero-coupon issues with a remaining term equivalent to that of the options for each
expected term.
Dividend Yield. The expected dividend assumption is based on our current expectations of our anticipated dividend
policy. We have no history of paying any dividends and therefore used an expected dividend yield of zero.
•
•
Foreign Currency Translation
Local currencies of foreign subsidiaries are the functional currencies for financial reporting purposes. Our non-U.S.
subsidiaries have either the British pound or the Japanese yen as the functional currency. For operations outside the United
States that have functional currencies other than the U.S. dollar, the assets and liabilities of our subsidiaries are translated at the
applicable exchange rate as of the balance sheet date, and revenue and expenses are translated at an average rate over the
period. Resulting currency translation adjustments are recorded as a component of accumulated other comprehensive loss, a
separate component of stockholders’ equity (deficit). Gains and losses on intercompany and other non-functional currency
transactions are recorded in other income (expense), net.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this
method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax
bases of assets and liabilities by using enacted tax rates for the year in which the differences are expected to reverse. The effect
of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment
date.
We recognize deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In
making such a determination, we consider all available positive and negative evidence, including future reversals of existing
taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we
determine that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, we would
make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) it
determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the
position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest
amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the
accompanying Consolidated Statement of Operations and Comprehensive Loss. Accrued interest and penalties are included in
accrued expenses on the Consolidated Balance Sheet.
Comprehensive Loss
Comprehensive loss consists of two components: net loss and other comprehensive income (loss). Other comprehensive
income (loss) refers to gains and losses that are recorded as an element of stockholders' equity (deficit) and are excluded from
net loss. Our other comprehensive income (loss) is comprised of foreign currency translation adjustments and gain (loss) on
investments in available-for-sale securities.
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Net Loss Per Share Attributable to Common Stockholders
Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class
method required for multiple classes of common stock and participating securities. Under the two-class method, net income is
attributed to common stockholders and participating securities based on their participation rights. Under the two-class method,
basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common
stockholders by the weighted-average number of shares of common stock outstanding during the period. Prior to the IPO, our
participating securities also included convertible preferred stock. The holders of convertible preferred stock did not have a
contractual obligation to share in our losses, as a result net losses were not allocated to these participating securities. Diluted
earnings per share attributable to common stockholders adjusts basic earnings per share for the potentially dilutive impact of
stock options and redeemable convertible preferred stock. As we have reported losses for the all period presented, all potentially
dilutive securities are antidilutive and accordingly, basic net loss per share equals diluted net loss per share.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers ("Topic 606") ("ASU 2014-09"), which amends the existing accounting standards for
revenue recognition, Topic 605, and outlines a single set of comprehensive principles for recognizing revenue under U.S.
GAAP. Among other things ASU 2014-09 requires entities to assess the products or services promised in contracts with
customers at contract inception to determine the appropriate unit at which to record revenue, which is referred to as a
performance obligation. Revenue is recognized when or as control of the promised products or services is transferred to
customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those
products or services. We have adopted ASU 2014-09 as of January 1, 2019 using the modified retrospective method applied to
those contracts which were not completed as of January 1, 2019. Revenues and contract assets or liabilities for contracts
completed prior to January 1, 2019 are presented under Topic 605, and revenues and contract assets and liabilities from
contracts which were not completed or started after December 31, 2018 are presented under Topic 606. We recorded a net
increase in stockholders’ equity (retained earnings) of $5.7 million as of January 1, 2019 due to the cumulative impact of
adopting Topic 606 and Topic 340, Other Assets and Deferred Costs. Refer to Note 3, "Revenue", in the Notes to the
Consolidated Financial Statements for further information.
In January 2016, FASB issued new guidance, ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10)
Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition,
measurement, presentation, and disclosure of financial instruments, and requires equity securities to be measured at fair value
with changes in fair value recognized through net income. The guidance is effective for financial statements issued for fiscal
years beginning after December 15, 2018. We adopted this guidance effective January 1, 2019, using the prospective approach.
The adoption of ASU 2016-01 did not have a material impact on our consolidated financial statements.
In August 2016, FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230)
Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"), which clarifies how entities should classify cash
receipts and cash payments related to eight specific cash flow matters on the statement of cash flows, with the objective of
reducing existing diversity in practice. ASU 2016-15 designates the appropriate class flow classification, including
requirements to allocate certain components of these cash receipts and payments among operating, investing, and financing
activities. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018. We
adopted this guidance effective January 1, 2019 using the retrospective transition approach for all periods presented. The
adoption of ASU 2016-15 did not have a material impact on our consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230)
("ASU 2016-18"), which requires companies to include amounts generally described as restricted cash and restricted cash
equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. We adopted this guidance effective January 1, 2019, using the retrospective transition approach for all
periods presented. The adoption of ASU 2016-18 did not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805):
Clarifying the Definition of a Business ("ASU 2017-01"), which changes the definition of a business to assist entities with
evaluating whether transactions should be accounted for as transfers of assets or business combinations. The guidance is
effective for financial statements issued for fiscal years beginning after December 15, 2018. We adopted this guidance effective
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January 1, 2019, using the prospective approach. The adoption of ASU 2017-01 did not have a material impact on our
consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles—Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), which eliminates step two from the goodwill
impairment test. Under this guidance, an entity should recognize an impairment charge for the amount by which the carrying
amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. The guidance is
effective for financial statements issued for fiscal years beginning after December 15, 2020, although early adoption is
permitted for annual and interim goodwill impairment testing dates following January 1, 2017. We have elected to early adopt
this guidance beginning in the second quarter of 2019 using the prospective method. The adoption of ASU 2017-04 did not
have a material impact on our consolidated financial statements.
In June 2018, the FASB issued Accounting Standards Update No. 2018-07, Improvements to Nonemployee Share-Based
Payment Accounting ("ASU 2018-07"), which simplifies the accounting for share-based payments granted to nonemployees for
goods and services. Under ASU 2018-07, certain guidance such as payments to nonemployees would be aligned with the
requirements for share-based payments granted to employees. The guidance is effective for fiscal years beginning after
December 15, 2019, and interim periods within that fiscal year, although early adoption is permitted. We have elected to early
adopt the guidance beginning January 1, 2019. The adoption of ASU 2018-07 did not have a material impact on our
consolidated financial statements.
Recently Issued Accounting Standards
We qualify as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012 ("JOBS
Act") and therefore have elected to continue to take advantage of certain exemptions from various public company reporting
requirements, including delaying adoption of new or revised accounting standards until those standards apply to private
companies. We have elected to use this extended transition period under the JOBS Act. The effective dates shown below reflect
the election to use the extended transition period.
In February 2016, the FASB issued new guidance, Accounting Standard Update No. 2016-02, Leases (Topic 842) ("ASU
2016-02"), which establishes the principles to report transparent and economically neutral information about the assets and
liabilities that arise from leases. Accordingly, this new standard introduces a lessee model that brings most operating leases on
the balance sheet and also aligns certain of the underlying principles of the new lessor model with those in the new revenue
recognition standard. The guidance is effective for financial statements issued for fiscal years beginning after December 15,
2020 using the modified retrospective method, although the optional transition method can also be applied. We are currently
evaluating the appropriate transition method and impact of this guidance on our consolidated financial statements and related
disclosures.
In June 2016, FASB issued new guidance, ASU 2016-13, Financial Instruments-Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, which introduces a new methodology for accounting for credit losses
on financial instruments, including available-for-sale debt securities. The guidance establishes a new “expected loss model” that
requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant
information. Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of
available-for-sale debt securities. The guidance is effective for financial statements issued for fiscal years beginning after
December 15, 2020. The Company does not expect the adoption of this standard to have a material impact on its consolidated
financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-15, Intangibles—Goodwill and Other—
Internal-Use Software (ASC 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement ("ASU 2018-15"). This guidance provides that implementation costs be evaluated for capitalization using the
same criteria as that used for internal-use software development costs, with amortization expense being recorded in the same
income statement expense line as the hosted service costs and over the expected term of the hosting arrangement. The guidance
is effective for financial statements issued for fiscal years beginning after December 15, 2020, and interim periods within
annual periods beginning after December 15, 2021, using the prospective method. Early adoption is permitted, including
adoption in any interim period. We are currently evaluating the potential impact of this guidance on our consolidated financial
statements and related disclosures.
96
On December 18, 2019, the FASB released ASU 2019-12 which affects general principles within Topic 740, Income
Taxes. The amendments of ASU 2019-12 are meant to simplify and reduce the cost of accounting for income taxes. The FASB
has stated that the ASU is being issued as part of its Simplification Initiative, which is meant to reduce complexity in
accounting standards by improving certain areas of generally accepted accounting principles (GAAP) without compromising
information provided to users of financial statements. The standard is effective for public companies on the first interim period
within the annual period beginning after December 15, 2020. As we are an emerging growth company, and have elected to use
the extended transition period for complying with any new or revised financial accounting standards, the amendments are
effective for us for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after
December 15, 2022. We are currently evaluating the potential impact of this guidance on our consolidated financial statements
and related disclosures.
3.
Revenue
Adoption of ASC Topic 606, "Revenue from Contracts with Customers"
On January 1, 2019, we adopted ASU 2014-09, ("Topic 606"), Revenue from Contracts with Customers, which replaced
the existing revenue recognition guidance, ("ASC 605"), and outlines a single set of comprehensive principles for recognizing
revenue under U.S. GAAP. Under Topic 606, revenue is recognized when control of the promised goods or services is
transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods
or services. We determine revenue recognition through the following five-step approach:
•
•
•
•
•
identification of the contract, or contracts, with a customer;
identification of the performance obligations in the contract;
determination of the transaction price;
allocation of the transaction price to the performance obligations in the contract; and
recognition of revenue when, or as, we satisfy a performance obligation.
We adopted ASU 2014-09 using the modified retrospective method applied to those contracts which were not completed
as of January 1, 2019. Results for reporting periods beginning after January 1, 2019 are presented under Topic 606, while prior
period amounts are not adjusted, and continue to be reported in accordance with our historical accounting under Topic 605. With
the adoption of Topic 606, we also adopted ASC Topic 340-40, "Other Assets and Deferred Costs". Prior to the adoption of Topic
340, we previously recognized sales commissions related to obtaining customer contracts in the sales and marketing line item of
the Consolidated Statement of Operations. Under Topic 340-40, we capitalize sales commissions as contract costs when they are
incremental, directly incurred to obtain a contract with a customer, and expected to be recoverable. These costs are amortized over
the expected period of benefit on a straight-line basis. We recorded a cumulative catch-up adjustment to the opening retained
earnings of $5.7 million, as of January 1, 2019, due to the cumulative impact of adopting Topic 606 and Topic 340-40. The area
impacted was related to the treatment of incremental costs of obtaining contracts with customers. The impact from applying Topic
606 and Topic 340 as of and for the year ended December 31, 2019 is as follows:
Consolidated Balance Sheets
As of December 31, 2019
As currently
reported
Impact of
adopting ASC 606 and
ASC 340-40
As would have been
reported under previous
revenue standards
10,112
320,969
(192,009)
257,652
320,969
$
$
(in thousands)
(5,588) $
(5,588)
(5,588)
(5,588)
(5,588) $
4,524
315,381
(197,597)
252,064
315,381
Other assets
Total assets
Accumulated deficit
Total stockholders’ equity (deficit)
Total liabilities and stockholders’ equity (deficit)
$
$
97
Consolidated Statements of Operations
Sales and marketing
Total operating expenses
Loss from operations
Loss before income taxes
Net loss
Comprehensive loss
Revenue recognition
Year ended December 31, 2019
As currently
reported
Impact of
adopting ASC 606 and
ASC 340-40
As would have been
reported under previous
revenue standards
$
$
$
71,097
158,688
(46,548)
(51,058)
(51,550)
(51,318) $
(in thousands)
(139) $
(139)
139
139
139
139
$
70,958
158,549
(46,409)
(50,919)
(51,411)
(51,179)
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects
the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include
various combinations of products and services, each of which are distinct and accounted for as separate performance
obligations. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental
authorities.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of
account in Topic 606. Our contracts with customers often include promises to transfer multiple products and services to a
customer. Determining whether products and services are considered distinct performance obligations that should be accounted
for separately versus together may require significant judgment. For contracts with multiple performance obligations, we
allocate the contract transaction price to each performance obligation using our estimate of the standalone selling price ("SSP")
of each distinct good or service in the contract.
Judgment is required to determine the SSP for each distinct performance obligation. We analyze separate sales of our
products and services as a basis for estimating the SSP of our products and services. We then use that SSP as the basis for
allocating the transaction price when our product and services are sold together in a contract with multiple performance
obligations. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we
determine the SSP using information that may include market conditions and other observable inputs. We typically have more
than one SSP for individual products and services due to the stratification of those products and services by customers and
circumstances. In these instances, we may use information, such geographic region and distribution channel, in determining the
SSP.
The transaction price in a contract is typically equal to the minimum commit price in the contract less any discounts
provided. Because our typical contracts represent distinct services delivered over time with the same pattern of transfer to the
customer, usage-based consideration primarily related to actual consumption over the minimum commit levels is allocated to
the period to which it relates. The amount of consideration recognized for usage above the minimum commit price is limited to
the amount we expect to be entitled to receive in exchange for providing services. We have elected to apply the practical
expedient for estimating and disclosing the variable consideration when variable consideration is allocated entirely to a wholly
unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a
single performance obligation from our remaining performance obligations under these contracts.
Performance obligations represent stand-ready obligations that are satisfied over time as the customer simultaneously
receives and consumes the benefits provided by us. These obligations can be content delivery, security, professional services,
support, edge cloud platform services, and others. Accordingly, our revenue is recognized over time, consistent with the pattern
of benefit provided to the customer over the term of the agreement.
At times, customers may request changes that either amend, replace, or cancel existing contracts. Judgment is required to
determine whether the specific facts and circumstances within the contracts should be accounted for as a separate contract or as
a modification.
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In contracts where there are timing differences between when we transfer a promised good or service to the customer and
when the customer pays for that good or service, we have determined our contracts do not include a significant financing
component. We have also elected the practical expedient to not measure financing components for any contract where the
timing difference is less than one year.
From time to time we enter into arrangements to establish and run private POPs for customers. These arrangements
include content delivery services as well as professional services and the provision of hardware. For accounting purposes, we
have determined that the provisioning of hardware is an operating lease. We recognize the revenue from these leases monthly
on a straight-line basis over the term of the relevant customer agreements.
Nature of products and services
We primarily derive revenue from the sale of services to customers executing contracts in which the standard contract
term is one year, although terms may vary by contract. Most of our contracts are non-cancelable over the contractual term.
These contracts commit the customer to a minimum monthly level of usage and specify the rate at which the customer must pay
for actual usage above the monthly minimum.
Revenue by geography is based on the billing address of the customer. The following table presents our net revenue by
geographic region:
United States
All other countries
Total revenue
Year ended December 31,
2019
2018
2017
142,842
57,620
(in thousands)
110,811
$
33,752
200,462
$
144,563
$
$
$
$
82,700
22,200
104,900
The majority of our revenue is derived from enterprise customers, which are defined as customers with revenue in excess
of $100,000 over the previous 12-month period. The following table presents our net revenue for enterprise and non-enterprise
customers:
Enterprise customers
Non-enterprise customers
Total revenue
Contract balances
Year ended December 31,
2019
2018
2017
$
$
174,926
25,536
200,462
(in thousands)
121,639
$
22,924
144,563
$
$
$
86,164
18,736
104,900
The timing of revenue recognition may differ from the timing of invoicing to customers. We have an unconditional right
to consideration when we invoice our customers and record a receivable. We record a contract asset when revenue is recognized
prior to invoicing, or a contract liability (deferred revenue) when revenue is recognized subsequent to invoicing.
Deferred revenue includes amounts billed to customers for which revenue has not been recognized and consists of the
unearned portions of edge cloud platform usage. Our payment terms and conditions vary by contract type, but our standard
terms are that payments are due within 15 days from the date of invoice.
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The following tables present our contract assets, contract liabilities, and certain information related to these balances as
of and for the year ended December 31, 2019:
Contract assets
Contract liabilities(1)
__________
As of December 31, 2019
As of January 1, 2019
$
$
(in thousands)
271
$
317
$
—
1,622
(1) The balance as of January 1, 2019, represents contract liabilities as adjusted for Topic 606.
Year ended December 31, 2019
(in thousands)
Revenue recognized in the period from:
Amounts included in contract liability at the beginning of the period
$
1,539
Remaining performance obligations
As of December 31, 2019, we had $70.7 million of remaining performance obligations, which includes deferred revenue
and amounts that will be invoiced and recognized in future periods. The remaining performance obligations are limited only to
arrangements that meet the definition of a contract under Topic 606 as of December 31, 2019. In addition to the practical
expedient discussed above, we applied the practical expedient giving the optional exemption from disclosing the information
about our remaining performance obligations for our service contracts for which the original contract duration is one year or
less. The typical contract term is one year, although terms may vary by contract. We expect to recognize 89% of this balance
over the next 12 months and the remainder within the following year.
Costs to obtain a contract
We capitalize incremental costs associated with obtaining customer contracts, specifically for sales commissions. These
costs are deferred on our Consolidated Balance Sheets and amortized over the expected period of benefit on a straight-line
basis. Based on the nature of our unique technology and services, the rate at which we continually enhance and update our
technology, and our historical customer retention, the expected period of benefit is determined to be approximately five years.
Amortization is recorded within the sales and marketing line item on the accompanying Consolidated Statements of Operations.
The incremental costs associated with obtaining customer contracts, the majority of which are deferred commissions, are
included in other assets on the accompanying Consolidated Balance Sheets.
As of December 31, 2019 and January 1, 2019, our costs to obtain contracts were as follows:
Deferred commissions(1)
As of December 31, 2019
As of January 1, 2019
$
(in thousands)
6,804
$
5,727
__________
(1) Balance as of January 1, 2019 represents deferred commissions as adjusted for Topic 606.
During the year ended December 31, 2019, we recognized $2.3 million of amortization related to deferred commissions.
These costs are recorded within the sales and marketing line item on the accompanying Consolidated Statements of Operations.
100
4.
Investments and Fair Value Measurements
Our total cash, cash equivalents and marketable securities consisted of the following:
Cash and cash equivalents:
Cash
Money market funds
U.S. Treasury securities
Commercial paper
Total cash and cash equivalents
Marketable securities:
Corporate notes and bonds
Commercial paper
U.S. Treasury securities
Asset-backed securities
Total marketable securities
Available-for-Sale Investments
As of December 31,
2019
2018
(in thousands)
$
$
$
$
11,623
$
2,020
—
2,499
16,142
17,470
5,481
78,160
13,856
$
$
114,967
$
32,546
2,419
1,998
—
36,963
12,852
20,086
5,932
7,809
46,679
The following table summarizes adjusted cost, gross unrealized gains and losses, and fair value related to available-for-
sale securities classified as marketable securities on the accompanying Consolidated Balance Sheets as of December 31, 2019
and December 31, 2018:
Corporate notes and bonds
Commercial paper
U.S. Treasury securities
Asset-backed securities
Amortized
Cost
$
17,462
$
5,481
78,075
13,852
Total available-for-sale investments
$
114,870
$
As of December 31, 2019
Gross
Unrealized
Gain
Gross
Unrealized
Loss
(in thousands)
9
—
85
4
98
$
$
Fair
Value
17,470
5,481
78,160
13,856
114,967
(1) $
—
—
—
(1) $
Corporate notes and bonds
Commercial paper
U.S. Treasury securities
Asset-backed securities
Total available-for-sale investments
As of December 31, 2018
Amortized
Cost
Gross
Unrealized Gain
Gross
Unrealized Loss
Fair
Value
$
$
12,867
$
20,086
5,933
7,817
46,703
$
(in thousands)
— $
—
—
—
— $
(15) $
—
(1)
(8)
(24) $
12,852
20,086
5,932
7,809
46,679
The majority of our securities classified as available-for-sale as of December 31, 2019 have contractual maturities of one
year or less. Certain securities held and classified as available-for-sale as of December 31, 2019 have contractual maturities
101
greater than one year; however, we do not intend to hold these securities to maturity. Consistent with our intentions to hold the
securities for less than 12 months we classify all securities as short-term. As of December 31, 2018, all securities classified as
available-for-sale had contractual maturities of one year or less. There were no securities in a continuous loss position for 12
months or longer as of December 31, 2019 and December 31, 2018. Investments are reviewed periodically to identify possible
other-than-temporary impairments. No impairment loss has been recorded on the securities included in the tables above, as we
believe that the decrease in fair value of these securities is temporary and we expect to recover at least up to the initial cost of
investment for these securities.
Fair Value of Financial Instruments
For certain of our financial instruments, including cash held in banks, accounts receivable, and accounts payable, the
carrying amounts approximate fair value due to their short maturities, and are therefore excluded from the fair value tables
below.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on
the measurement date. There is a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as
follows:
Level 1—Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or liabilities; and
Level 3—Unobservable inputs that are supported by little or no market activity, which require management judgment or
estimation.
We measure our cash equivalents, marketable securities, and convertible preferred stock warrant liabilities at fair value.
We classify our cash equivalents and marketable securities within Level 1 or Level 2 because we value these investments using
quoted market prices or alternative pricing sources and models utilizing market observable inputs. The fair value of our Level 1
financial assets is based on quoted market prices of the identical underlying security. The fair value of our Level 2 financial
assets is based on inputs that are directly or indirectly observable in the market, including the readily available pricing sources
for the identical underlying security that may not be actively traded. Prior to our IPO, we historically classified our convertible
preferred stock warrant liabilities as Level 3. The convertible preferred stock warrant liabilities were valued using the Black-
Scholes option-pricing model to determine the expected payout to calculate the fair value.
Financial assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following types
of instruments:
102
Cash equivalents:
Money market funds
Commercial paper
Total cash equivalents
Marketable securities:
Corporate notes and bonds
Commercial paper
U.S. Treasury securities
Asset-backed securities
Total marketable securities
Restricted cash:
Money market funds
Total restricted cash
Total financial assets
Cash equivalents:
Money market funds
U.S. Treasury securities
Total cash equivalents
Marketable securities:
Corporate notes and bonds
Commercial paper
U.S. Treasury securities
Asset-backed securities
Total marketable securities
Total financial assets
Convertible preferred stock warrant liabilities
Total financial liabilities
As of December 31, 2019
Level 1
Level 2
Level 3
Total
(in thousands)
$
2,020
$
— $
2,020
—
—
—
—
—
2,499
2,499
17,470
5,481
78,160
13,856
114,967
70,087
70,087
72,107
$
—
—
117,466
$
— $
—
—
—
—
—
—
—
—
—
— $
2,020
2,499
4,519
17,470
5,481
78,160
13,856
114,967
70,087
70,087
189,573
As of December 31, 2018
Level 1
Level 2
Level 3
Total
(in thousands)
$
— $
2,419
—
2,419
—
—
—
—
—
2,419
$
— $
— $
1,998
1,998
12,852
20,086
5,932
7,809
46,679
48,677
$
— $
— $
— $
—
—
—
—
—
—
—
— $
$
$
3,261
3,261
2,419
1,998
4,417
12,852
20,086
5,932
7,809
46,679
51,096
3,261
3,261
$
$
$
$
$
The convertible preferred warrant liability is related to the warrants to purchase shares of preferred stock. The fair value
of the warrant liability was determined based on significant inputs not observable in the market, which represents a Level 3
measurement within the fair value hierarchy. Upon the closing of the IPO, the warrant to purchase shares of preferred stock was
converted into a warrant to purchase shares of our common stock. As a result, the warrant liability was remeasured a final time
immediately prior to the IPO and reclassified to additional paid in capital within stockholders' equity.
103
The following table sets forth a summary of the changes in the fair value of our Level 3 financial liabilities:
Fair value as of December 31, 2018
Change in fair value of Level 3 financial liabilities
Conversion of convertible preferred stock warrants into Class B common stock warrants
Fair value as of December 31, 2019
As of December
31, 2019
(in thousands)
$
$
3,261
2,404
(5,665)
—
The gains and losses from re-measurement of Level 3 financial liabilities are recorded as part of other expense, net in the
accompanying Consolidated Statements of Operations.
There were no transfers of assets and liabilities measured at fair value between Level 1 and Level 2, or between Level 2
and Level 3, during the years ended December 31, 2019 and 2018.
5.
Balance Sheet Information
Allowance for Doubtful Accounts
The activity in the accounts receivable reserves was as follows:
Beginning balance
Additions to the reserves
Write-offs/adjustments
Ending balance
Property and Equipment, Net
Property and equipment, net consisted of the following:
Computer and networking equipment
Leasehold improvements
Furniture and fixtures
Office equipment
Internal-use software
Property and equipment, gross
Accumulated depreciation and amortization
Property and equipment, net
104
As of December 31,
2019
2018
(in thousands)
1,679
$
360
(223)
1,816
$
1,119
599
(39)
1,679
As of December 31,
2019
2018
(in thousands)
89,830
$
3,285
681
579
13,901
108,276
(48,239)
60,037
$
65,060
3,259
539
513
8,604
77,975
(35,621)
42,354
$
$
$
$
Depreciation and amortization expense on property and equipment for the years ended December 31, 2019 and 2018 was
approximately $16.4 million and $13.3 million, respectively. Included in these amounts was amortization expense for
capitalized internal-use software costs of approximately $2.2 million and $1.8 million for the years ended December 31, 2019
and 2018, respectively. As of December 31, 2019 and December 31, 2018, the unamortized balance of capitalized internal-use
software costs on our Consolidated Balance Sheets was approximately $8.5 million and $5.4 million, respectively.
Accrued Expenses
Accrued expenses consisted of the following:
Accrued compensation and related benefits
Sales and use tax payable
Accrued colocation and bandwidth costs
Other accrued liabilities
Total accrued expenses
Other Current Liabilities
Other current liabilities consisted of the following:
Liability for early-exercised stock options (see Note 11)
Deferred revenue
Accrued computer and networking equipment
Other current liabilities
Total other current liabilities
Other Long-Term Liabilities
Other long-term liabilities consisted of the following:
Deferred rent
Other long-term liabilities
Total other long-term liabilities
Accumulated Other Comprehensive Loss
As of December 31,
2019
2018
(in thousands)
8,734
3,938
3,237
3,969
$
19,878
$
3,952
3,077
3,049
5,457
15,535
As of December 31,
2019
2018
(in thousands)
467
$
317
7,060
325
8,169
$
597
1,622
—
293
2,512
As of December 31,
2019
2018
(in thousands)
634
$
404
1,038
$
272
375
647
$
$
$
$
The following table summarizes the changes in accumulated other comprehensive loss, which is reported as a component
of stockholders’ equity (deficit):
105
Balance at January 1, 2017
Other comprehensive income (loss)
Balance at December 31, 2017
Other comprehensive income (loss)
Balance at December 31, 2018
Other comprehensive income (loss)
Balance at December 31, 2019
6.
Goodwill and Intangible Assets
Foreign Currency
Translation
Available-for-
sale investments
Accumulated Other
Comprehensive Income
(Loss)
(in thousands)
$
$
(43) $
32
(11)
(1)
(12)
111
99
$
(6) $
(7)
(13)
(11)
(24)
121
97
(49)
25
(24)
(12)
(36)
232
196
The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 are as follows:
Balance, beginning of period
Foreign currency translation
Balance, end of period
Year ended December 31, 2019
2019
2018
$
$
(in thousands)
360
$
12
372
$
382
(22)
360
Intangible assets are comprised of internet protocol address costs and domain name costs that are subject to amortization.
During the year ended December 31, 2019, we purchased additional internet protocol addresses and domain names for a gross
carrying value of $0.6 million and $38.8 thousand, respectively. As of December 31, 2019 and December 31, 2018, our
intangible assets consisted of the following:
As of December 31, 2019
As of December 31, 2018
Gross carrying
value
Accumulated
amortization
Net carrying
value
Gross carrying
value
Accumulated
amortization
Net carrying
value
(in thousands)
Finite-lived intangible assets
Internet protocol
addresses
Domain name
Total finite-lived intangible
assets
$
$
1,448
$
39
(362) $
—
1,086
$
852
$
39
—
(242) $
—
1,487
$
(362) $
1,125
$
852
$
(242) $
610
—
610
106
The annual expected amortization expense of intangible assets subject to amortization as of December 31, 2019 is as
follows:
2020
2021
2022
2023
2024
Thereafter
Total
As of December 31, 2019
(in thousands)
155
158
158
148
145
361
$
1,125
We perform tests for impairment of goodwill and long-lived assets on an annual basis as of October 31 or more
frequently if events or changes in circumstances indicate that the long-lived assets might be impaired. We did not record any
impairment charges during the years ended December 31, 2019 and 2018.
Aggregate expense related to amortization of intangible assets was $0.1 million for both the years ended December 31,
2019 and 2018.
7.
Debt Instruments
Loan and Security Agreement
In July 2013, we entered into a Loan and Security Agreement (the "Facility") with a bank related to an equipment facility
providing us with an equipment line for advances of up to $2.5 million. The Facility was amended in September 2013 to
increase the equipment line for advances up to $5.0 million (as amended, the "Prior Loan Agreement"), November 2014 to
increase the equipment line for advances up to $15.0 million, and August 2016 to increase the equipment line for advances up
to $17.5 million and allowed for reborrowing of amounts repaid under the equipment loan (as amended, the "Senior Loan
Agreement"). The Senior Loan Agreement was additionally amended in February 2017 and March 2017, which extended the
draw period to January 2018.
In November 2017, we entered into a Second Amended and Restated Loan and Security Agreement, which amended the
Senior Loan Agreement and increased the additional equipment line for advances up to an aggregate of $30.0 million through
November 2018. As of December 31, 2018, $29.2 million had been drawn on this Second Amended and Restated Loan and
Security Agreement. The interest rate associated with each advance under the Senior Loan Agreement was 1.75% above the
floating prime rate. Beginning November 2018, we were obligated to make equal monthly payments of principal plus interest
with repayment no later than November 1, 2021.
On November 4, 2019, the outstanding loan of $20.0 million, which was due and payable on November 1, 2021, was
paid in full, in accordance with the terms of the agreement.
107
Capital Lease Agreement
In June 2017, we entered into a Capital Lease Agreement with an equipment provider for $5.0 million in network
equipment, at an annual interest rate of 5.24% over a term of four years. In March 2018, we entered into an additional
agreement with the equipment provider for $0.5 million in network equipment at an annual interest rate of 5.38% over a term of
four years. In February 2019 and March 2019, we entered into additional agreements with the equipment provider for $2.9
million and $1.3 million, respectively, in network equipment, at an annual interest rate of 5.38% over terms of three years. In
August 2019, we entered into an additional agreement with the equipment provider for $1.3 million in network equipment at an
annual interest rate of 6.33% over a term of three years. In November 2019, we entered into an additional capital lease
agreement with the equipment provider for $2.2 million in network equipment at an annual interest rate of 5.69% over a term of
three years. In December 2019, we entered into an additional capital lease agreement with the equipment provider for $1.0
million in network equipment at an annual interest rate of 5.42% over a term of three years. The agreement provides for a
bargain purchase price at the end of the term. The amortization of leased assets is included in depreciation and amortization
expense. The additional agreements incorporate the same terms and conditions as those under the Capital Lease Agreement
entered into in June 2017. As of December 31, 2019 and December 31, 2018, $9.5 million and $3.5 million was outstanding
under the Capital Lease Agreement.
Credit Facility
In December 2018, we entered into a Second Lien Credit Agreement under which were permitted to borrow up to $30.0
million ("Credit Facility"). As part of this agreement, the Second Amendment to Amended and Restated Loan was amended to
allow for this additional indebtedness. The advances under the Credit Facility were subject to interest at a rate of prime plus
4.25%. As of December 31, 2018, $20.0 million had been drawn on this Credit Facility. On July 8, 2019, the $20.0 million
outstanding loan, which was due and payable on December 24, 2021, was paid in full, in accordance with the terms of the
Credit Facility. Upon payment, the Credit Facility was closed.
Cash Collateralized Revolving Credit Agreement ("Revolving Credit Agreement")
In November 2019, we entered into a Revolving Credit Agreement for an aggregate commitment amount of $70.0
million and a maturity date of November 3, 2022. The amount of borrowings available under the Revolving Credit Agreement
at any time are collateralized by our cash.
The interest rate associated with each advance under the Revolving Credit Agreement is equal to the sum of LIBOR for
the applicable interest period plus 1.50%, which is a per annum rate based on outstanding borrowings. The commitment fee is
0.20% per annum based on the average daily unused amount of the commitment amount. Interest payments on outstanding
borrowings are due on the last day of each interest period and payments for the commitment fee are due at the end of each
calendar quarter. As of December 31, 2019, $20.3 million had been drawn on the Revolving Credit Agreement.
108
The following table reflects the carrying values of the debt agreements as of December 31, 2019 and December 31,
2018:
Liability component:
Principal amount—Cash Collateralized Revolving Credit Agreement
Less: unamortized debt issuance costs
Less: current portion of long-term debt
Long-term debt, less current portion—Cash Collateralized Revolving Credit
Agreement
Principal amount—Second Amendment to Amended and Restated Loan and Security
Agreement
Less: unamortized debt issuance costs
Less: current portion of long-term debt
Long-term debt, less current portion—Second Amendment to Amended and Restated
Loan and Security Agreement
Principal amount—Capital Lease Agreement
Less: current portion of long-term debt
Long-term debt, less current portion—Capital Lease Agreement
Total long-term debt, less current portion
$
$
$
$
$
Contractual future repayments for the above as of December 31, 2019 are as follows:
As of December 31,
2019
2018
(in thousands)
$
20,300
(219)
—
20,081
$
—
—
—
— $
9,549
(4,472)
5,077
25,158
$
$
—
—
—
—
49,167
(1,896)
(10,000)
37,271
3,538
(1,370)
2,168
39,439
2020
2021
2022
2023
Total
Principal
Interest
Total
(in thousands)
1,210
$
$
992
794
—
4,472
3,759
21,618
—
5,682
4,751
22,412
—
29,849
$
2,996
$
32,845
$
$
Interest expense related to debt for the years ended December 31, 2019, 2018, and 2017 was $5.2 million, $1.9 million,
and $1.1 million, respectively.
109
8.
Common Stock Warrant Liabilities
We issued convertible preferred stock warrants in connection with debt agreements entered into on various dates as
described in Note 7, "Debt Instruments". Immediately upon closing of the IPO, our warrants to purchase convertible preferred
stock were automatically converted to warrants to purchase an equal number of shares of our Class B common stock. As a
result, the warrant liability was remeasured a final time, immediately prior to the closing of the IPO, and reclassified to
additional paid in capital within stockholders' equity. Changes in the fair value were recorded within other expense, net on the
accompanying Consolidated Statements of Operations.
The fair value of the warrants as of May 17, 2019 was estimated using the following assumptions:
Fair value (in thousands)
Expected remaining term (in years)
Risk-free interest rate
Expected volatility
Dividend yield
Series B
Series C
Series D
Series F
Total
$
1,818
$
792
$
668
$
2,387
$
5,665
4.46
2.17%
39.0%
—
5.47
2.20%
39.3%
—
7.21
2.27%
40.2%
—
9.62
2.37%
42.4%
—
The fair value of the warrants as of December 31, 2018 was estimated using the following assumptions:
Fair value (in thousands)
Expected remaining term (in years)
Risk-free interest rate
Expected volatility
Dividend yield
Series B
Series C
Series D
Series F
Total
$
857
$
407
$
358
$
1,639
$
3,261
4.84
2.62%
50.0%
—
5.84
2.62%
50.0%
—
7.59
2.62%
50.0%
—
10.00
2.80%
50.0%
—
In the year ended December 31, 2019, Class B common stock warrants were exercised under the cashless exercise
method pursuant to the corresponding warrant agreements. As a result of such exercises, we issued 224,102 shares of our Class
B common stock in the year ended December 31, 2019.
As of December 31, 2019, the outstanding warrants are classified and recorded as additional paid-in capital on the
Consolidated Balance Sheets. As of December 31, 2018, the warrants were classified and recorded as convertible preferred
stock warrant liabilities on the Consolidated Balance Sheets.
110
9.
Commitments and Contingencies
Operating Lease Commitments
We lease our facilities under non-cancelable operating leases. These operating leases expire at various dates through July
2027 and generally require the payment of real estate taxes, insurance, maintenance, and operating costs.
The minimum aggregate future obligations under non-cancelable leases as of December 31, 2019 are as follows:
2020
2021
2022
2023
2024
Thereafter
Total
Gross Lease Commitments
Sublease Income
Net Lease Commitment
$
$
(in thousands)
$
(1,219) $
—
—
—
—
4,856
6,143
5,463
5,627
5,796
15,794
43,679
$
—
(1,219) $
3,637
6,143
5,463
5,627
5,796
15,794
42,460
We recognize rent expense on a straight-line basis over the lease period and have accrued for rent expense incurred but
not paid. Rent expense for the years ended December 31, 2019 and 2018 was $7.2 million and $6.9 million, respectively.
During the year ended December 31, 2019 and 2018, we had sublease agreements with tenants of various properties vacated by
us. The amount paid to us by these sublease tenants was approximately $1.2 million and $0.9 million during the years ended
December 31, 2019 and 2018, respectively.
Purchase Commitments
As of December 31, 2019, we had long-term commitments for cost of revenue related agreements (i.e., bandwidth usage,
colocation, peering and other managed services with various networks, internet service providers ("ISPs") and other third-party
vendors), and various non-cancelable software as a service ("SaaS") agreements. Additionally, as of December 31, 2019, we
had entered into purchase orders with various vendors. There have been no material changes to our purchase commitments
related to SaaS agreements as compared to those described in the Prospectus. The minimum future purchase commitments as of
December 31, 2019 were as follows:
2020
2021
2022
2023
2024
Total
Cost of Revenue
Commitments
45,420
11,970
4,457
142
63
SaaS Agreements
(in thousands)
1,509
$
910
—
—
—
Total Purchase
Commitments
46,929
12,880
4,457
142
63
62,052
$
2,419
$
64,471
$
$
111
Legal Matters
We are party to various disputes that management considers routine and incidental to its business. Management does not
expect the results of any of these routine actions to have a material effect on our business, results of operations, financial
condition, or cash flows.
Indemnification
We enter into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, we
agree to indemnify, hold harmless, and reimburse the indemnified party for losses suffered or incurred by the indemnified party,
generally our business partners or customers, in connection with our provision of its services. Generally, these obligations are
limited to claims relating to infringement of a patent, copyright, or other intellectual property right, breach of our security or
data protection obligations, or our negligence, willful misconduct, or violation of law. Subject to applicable statutes of
limitation, the term of these indemnification agreements is generally for the duration of the agreement. The maximum potential
amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we
carry insurance that covers certain third-party claims relating to our services and could limit our exposure in that respect.
We have agreed to indemnify each of our officers and directors during his or her lifetime for certain events or
occurrences that happen by reason of the fact that the officer or director is, was, or has agreed to serve as an officer or director
of the Company. We have director and officer insurance policies that may limit our exposure and may enable us to recover a
portion of certain future amounts paid.
To date, we have not encountered material costs as a result of such indemnification obligations and have not accrued any
related liabilities in our financial statements. In assessing whether to establish an accrual, we consider such factors as the degree
of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss.
10.
Convertible Preferred Stock
As of December 31, 2018, we had seven outstanding series of Preferred Stock ("Series Preferred") each with a par value
of $0.00002 per share, which were convertible at the option of the holder. The Series Preferred was classified as temporary
equity on the accompanying Consolidated Balance Sheets as of December 31, 2018. Immediately upon closing of the IPO, our
convertible preferred stock was automatically converted to shares of our Class B common stock. We had no convertible
preferred stock issued or outstanding as of December 31, 2019.
A summary of the Preferred Stock outstanding as of December 31, 2018 and other related information is as follows:
Series Seed Preferred Stock
Series A Preferred Stock
Series B Preferred Stock
Series C Preferred Stock
Series D Preferred Stock
Series E Preferred Stock
Series F Preferred Stock
Total
As of December 31, 2018
Shares
Issued and
Outstanding
Net
Carrying
Amount
(in thousands except share data)
8,049,364
$
1,200
$
Shares
Authorized
8,049,365
2,733,520
11,058,835
9,805,905
2,733,518
10,945,209
9,753,060
11,675,463
11,627,903
6,609,032
4,216,523
6,609,030
3,912,129
Liquidation
Preference
1,200
1,050
11,260
41,527
75,000
50,000
40,000
1,050
11,260
41,420
74,912
49,863
39,879
54,148,643
53,630,213
$
219,584
$
220,037
112
11.
Stockholders' Equity
Common Stock
Our Amended and Restated Certificate of Incorporation, as amended and restated in May 2019, authorizes the issuance
of 1,000,000,000 shares of Class A common stock and 94,129,050 shares of Class B common stock, each at a par value per
share of $0.00002. Holders of Class A common stock are entitled to one vote per share and holders of Class B common stock
are entitled to 10 votes per share. As of December 31, 2019 and December 31, 2018, 33,863,021 and 25,026,001 shares of Class
B common stock were issued and outstanding, respectively. As of December 31, 2019, 60,954,694 shares of Class A common
stock were issued and outstanding. There were no shares of Class A common stock issued and outstanding as of December 31,
2018.
Preferred Stock
Our Amended and Restated Certificate of Incorporation, as amended and restated in May 2019, authorizes the issuance
of 10,000,000 shares of Preferred Stock, at a par value per share of $0.00002, with rights and preferences, including voting
rights, designated from time to time by the Board of Directors (the "Board"). As of December 31, 2019, there were no shares of
preferred stock issued or outstanding.
Equity Incentive Plans
In March 2011, our stockholders approved the Fastly, Inc. 2011 Equity Incentive Plan ("2011 Plan"). The 2011 Plan was
amended in February 2013, May 2014, July 2015, December 2016, April 2017, and June 2018. The 2011 Plan allows for the
issuance of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, and restricted
stock unit awards ("RSUs") to employees, directors, and consultants of the Company. There were 23,578,923 shares of Class B
common stock reserved for issuance under the 2011 Plan as of December 31, 2019. There were 21,689,410 shares of common
stock reserved for issuance under the 2011 Plan as of December 31, 2018. Options granted under the 2011 Plan generally expire
within 10 years from the date of grant and generally vest over four years, at the rate of 25% on the first anniversary of the date
of grant and ratably on a monthly basis over the remaining 36-month period thereafter based on continued service. Options
granted under our 2011 Plan are exercisable for shares of our Class B common stock. As of December 31, 2019, there were no
shares of Class B common stock available for issuance pursuant to future grants under the 2011 Plan. As of December 31, 2018,
there were 609,804 shares of common stock available for issuance pursuant to future grants under the 2011 Plan.
In May 2019, the Board adopted our 2019 Equity Incentive Plan (the "2019 Plan"), and our stockholders approved the
2019 Plan. The 2019 Plan allows for the issuance of incentive stock options, nonstatutory stock options, stock appreciation
rights, restricted stock awards, RSUs, performance-based stock awards, and other forms of equity compensation, which are
collectively referred to as stock awards. Additionally, the 2019 Plan provides for the grant of performance cash awards.
Incentive stock options may be granted only to employees. All other awards may be granted to employees, including officers,
and to non-employee directors and consultants. Options granted under the 2019 Plan generally expire within 10 years from the
date of grant and generally vest over four years, at the rate of 25% on the first anniversary of the date of grant and ratably on a
monthly basis over the remaining 36-month period thereafter based on continued service. Options are exercisable for shares of
our Common Stock. RSUs granted under the 2019 Plan generally vest over four years, at the rate of 25% on the first
anniversary of the vest date and ratably on a quarterly basis over the remaining 36-month period thereafter based on continued
service. There were 14,400,000 shares of Class A common stock reserved for issuance under the 2019 Plan as of December 31,
2019. There were 12,367,582 shares of Class A common stock available for issuance under the 2019 Plan as of December 31,
2019. No further shares will be issued under the 2011 Plan following the effectiveness of the 2019 Plan.
In May 2019, the Board approved the Employee Stock Purchase Plan ("ESPP"), which was approved by our
stockholders in May 2019. The ESPP allows eligible employees to purchase shares of our Class A common stock through
payroll deductions of up to 15% of their eligible compensation, subject to a maximum of $25,000 per calendar year. Shares
reserved for issuance under the ESPP include 2,500,000 shares of Class A common stock. The ESPP provides for six-month
offering periods, commencing in May and November of each year. At the end of each offering period employees are able to
purchase shares at 85% of the lower of the fair market value of our Class A common stock on the first trading day of the
offering period or on the last day of the offering period.
113
Stock Option Activity
The following table summarizes stock option activity during the year ended December 31, 2019:
Number of Shares
(in thousands)
Weighted-Average
Exercise Price
Outstanding at January 1, 2017
8,467
$
Granted
Exercised
Cancelled/forfeited
Outstanding at December 31, 2017
Granted
Exercised
Cancelled/forfeited
Outstanding at December 31, 2018
Granted
Exercised
Cancelled/forfeited
Outstanding at December 31, 2019
Vested and exercisable at December 31, 2019
3,008
(414)
(691)
10,370
3,984
(1,264)
(880)
12,210
2,516
(2,650)
(807)
11,269
6,994
$
$
1.54
2.90
1.48
1.88
1.92
5.32
2.10
2.64
2.96
10.87
2.45
5.10
4.68
2.68
Weighted-Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic Value
(in thousands)
8.5
$
7,480
8.0
$
16,901
7.8
$
64,590
7.3
6.5
$
$
173,471
121,610
The total pre-tax intrinsic value of options exercised during the years ended December 31, 2019, 2018, and 2017 was
$32.6 million, $3.0 million, and $0.7 million, respectively.
The total grant date fair value of employee options vested for the years ended December 31, 2019, 2018, 2017 was $6.1
million, $3.6 million, and $2.9 million, respectively.
The weighted-average grant date fair value for options granted to employees during the years ended December 31, 2019,
2018, and 2017 was $5.77, $1.78, and $1.56, respectively.
Early Exercise of Stock Options
Certain stock options granted by us are exercisable at the date of grant, with unvested shares subject to repurchase by us
in the event of voluntary or involuntary termination of employment of the stockholder. Such exercises are recorded as a liability
on the accompanying Consolidated Balance Sheets and reclassified into equity as the options vest. As of December 31, 2019,
December 31, 2018, and December 31, 2017, a total of 199,895, 244,658, and 137,831 shares of Class B Common Stock were
subject to repurchase by us at the lower of (i) the fair market value of such shares on the date of repurchase, or (ii) the original
exercise price of such shares. The corresponding exercise value of approximately $0.9 million, $1.0 million, and $0.3 million as
of December 31, 2019, December 31, 2018, and December 31, 2017, respectively, is recorded in other current liabilities and
other liabilities on the accompanying Consolidated Balance Sheets.
114
The activity of non-vested shares as a result of early exercise of options granted to employees and non-employees, is as
follows:
Beginning balance
Early exercise of options
Vested
Repurchased
Ending balance
Employee Stock Options
Year ended December 31,
2019
2018
2017
(in thousands)
245
117
(162)
—
200
138
238
(120)
(11)
245
597
2
(461)
—
138
We estimate the fair value of stock options on the date of grant using the Black-Scholes option-pricing model. Each of
the Black-Scholes inputs is subjective and generally requires significant judgments to determine. We estimated the fair value of
stock option awards during the years ended December 31, 2019, 2018, and 2017 on the date of the grant using the Black-
Scholes option pricing model with the following weighted-average assumptions:
Fair value of common stock
Expected term (in years)
Risk-free interest rate
Expected volatility
Dividend yield
Year ended December 31,
2019
$8.24 - $22.70
2018
$3.86 - $8.16
2017
$2.98 - $3.58
6.02
6.02
5.96
1.55% - 2.5% 2.62% - 3.0%
1.9% - 2.1%
39.1% - 42.7% 40.2% - 41.5%
—%
—%
41% - 45%
—%
During the years ended December 31, 2019 and 2018, and 2017, we recognized stock-based compensation expense from
stock options of approximately $7.9 million, $4.1 million, and $2.8 million, respectively. There were no vested RSUs as of
December 31, 2019, 2018 and 2017.
As of December 31, 2019, total unrecognized stock-based compensation cost related to outstanding unvested stock
options that are expected to vest was $18.2 million. This unrecognized stock-based compensation cost is expected to be
recognized over a weighted-average period of approximately 2.8 years.
RSUs
We began granting RSUs under the 2019 Plan during the year ended December 31, 2019. The fair value of RSUs is
based on the grant date fair value and is expensed on a straight-line basis over the applicable vesting period. RSUs typically
vest over four years, at the rate of 25% on the first anniversary of the vest date and ratably on a quarterly basis over the
remaining 36-month period thereafter, based on continued service. The following table summarizes RSU activity during the
year ended December 31, 2019:
Number of Shares
Weighted-Average Grant Date Fair Value Per Share
Nonvested RSUs as of December 31, 2018
Granted
Cancelled/forfeited
Nonvested RSUs as of December 31, 2019
(in thousands)
— $
1,644
(3)
1,641
$
115
—
20.07
20.07
During the year ended December 31, 2019, we recognized stock-based compensation expense related to RSUs of $2.2
million. There was no stock-based compensation expense recognized related to RSUs during the year ended December 31, 2018
or December 31, 2017.
As of December 31, 2019, total unrecognized stock-based compensation cost related to non-vested RSUs was $30.0
million. This unrecognized stock-based compensation cost is expected to be recognized over a weighted-average period of
approximately 3.6 years.
ESPP
The ESPP allows eligible employees to purchase shares of our common stock through payroll deductions of up to 15% of
their eligible compensation. The ESPP provides for six-month offering periods, commencing in May and November of each
year.
We estimate the fair value of shares to be issued under the ESPP on the first day of the offering period using the Black-
Scholes valuation model. The inputs to the Black-Scholes option pricing model are our stock price on the first date of the
offering period, the risk-free interest rate, the estimated volatility of our stock price over the term of the offering period, the
expected term of the offering period and the expected dividend rate. Stock-based compensation expense related to the ESPP is
recognized on a straight-line basis over the offering period. Forfeitures are recognized as they occur.
We estimated the fair value of shares granted under the ESPP on the first date of the offering period using the Black-
Scholes option pricing model with the following assumptions:
Fair value of common stock
Expected term (in years)
Risk-free interest rate
Expected volatility
Dividend yield
Year ended December 31,
2019
$6.02 - $6.92
0.47-0.50
1.59% - 2.35%
36% - 43%
—%
2018
N/A
N/A
N/A
N/A
N/A
During the year ended December 31, 2019, we withheld $5.5 million in contributions from employees, respectively,
and recognized $2.5 million in stock-based compensation expense related to the ESPP, respectively. During the year ended
December 31, 2019, 305,194 shares of our Class A common stock were purchased under the 2019 ESPP. No contributions were
withheld, and no stock-based compensation expense was recognized related to the ESPP in the year ended December 31, 2018
or December 31, 2017. No common stock was issued under the ESPP in the year ended December 31, 2018 or December 31,
2017.
Stock-based Compensation Expense
The following table summarizes the components of total stock-based compensation expense included in the
accompanying Consolidated Statements of Operations:
Stock-based compensation expense by caption:
Cost of revenue
Research and development
Sales and marketing
General and administrative
Total
116
Year ended December 31,
2019
2018
2017
(in thousands)
$
$
1,410
2,920
3,497
4,318
12,145
$
$
265
1,332
1,023
1,459
4,079
$
$
190
1,040
493
1,086
2,809
12.
Net Loss Per Share Attributable to Common Stockholders
We compute net loss per share using the two-class method required for multiple classes of common stock and
participating securities. The rights of the holders of the Class A common stock and Class B common stock are identical, except
with respect to voting and conversion. Accordingly, the Class A common stock and Class B common stock share equally in our
net losses. Prior to the IPO, our participating securities also included convertible preferred stock. The holders of convertible
preferred stock did not have a contractual obligation to share in our losses, and as a result net losses were not allocated to these
participating securities.
The following table sets forth the calculation of basic and diluted net loss per share attributable to common stockholders
during the periods presented. The shares issued in the IPO, the shares issued pursuant to the exercise by the underwriters of an
option to purchase additional shares, and the shares of Class A and Class B common stock issued upon conversion of the
outstanding shares of convertible preferred stock in the IPO are included in the table below weighted for the period outstanding:
Net loss attributable to common
stockholders
Weighted-average shares used in
computing net loss per share
attributable to common stockholders,
basic and diluted
Net loss per share attributable to
common stockholders, basic and diluted
Year ended December 31,
2019
2018
2017
Class A(1)
Class B(2)
Class A
Class B(2)
Class A
Class B(2)
(in thousands, except per share amounts)
$ (12,084) $ (39,466)
N/A $ (30,935)
N/A $ (32,450)
16,022
52,328
N/A
24,376
N/A
23,402
$
(0.75) $
(0.75)
N/A $
(1.27)
N/A $
(1.39)
__________
(1) Class A common stock includes the issuance of 12.9 million shares of Class A common stock issued by us in connection
with our IPO and shares issued upon the exercise of options subsequent to our IPO.
(2) Class B common stock includes, for all periods presented, the conversion of all of our preferred stock into an aggregate of
53.6 million shares of our Class B common stock upon closing of the IPO.
117
Since we were in a loss position for the periods presented, basic net loss per share is the same as diluted net loss per
share, as the inclusion of all potential common shares outstanding would have been anti-dilutive. The potential shares of
common stock that were excluded from the computation of diluted net loss per share attributable to common stockholders for
the period presented because including them would have been antidilutive are as follows:
Convertible preferred stock
Stock options
RSUs
Early exercised stock options
Convertible common stock warrants
Convertible preferred stock warrants
Shares issuable pursuant to the ESPP
Total
13.
Income Taxes
Loss before income taxes includes the following components:
United States
Foreign
Loss before income taxes
The expense for income taxes consists of the following:
Current tax provision (benefit):
Federal
State
Foreign
Deferred tax provision (benefit):
Federal
State
Foreign
Total tax expense
Number of Shares
As of December 31,
2019
2018
(in thousands)
—
11,269
1,641
200
183
—
247
13,540
53,630
7,847
—
245
—
518
—
62,240
Year ended December 31,
2019
2018
2017
(in thousands)
(30,970) $
(20,088)
(51,058) $
(20,644) $
(10,291)
(30,935) $
(23,372)
(8,870)
(32,242)
Year ended December 31,
2019
2018
2017
(in thousands)
— $
106
386
— $
81
104
—
—
—
—
—
—
—
68
140
—
—
—
208
$
$
$
$
492
$
185
$
118
Reconciliation between our effective tax rate on income from continuing operations and the U.S. federal statutory rate is
as follows:
Provision at federal statutory tax rate
State taxes, net of federal tax impact
Change in valuation allowance
Foreign tax rate differential
Federal statutory tax rate change
Other
Net deferred tax (liabilities) assets
Our deferred tax assets and liabilities were as follows:
Reserves and accruals
Stock-based compensation
Net operating losses
Other
Amortization
Deferred tax assets
Depreciation
State tax
Deferred tax liabilities
Valuation allowance
Net deferred tax (liabilities) assets
Year ended December 31,
2019
2018
2017
21 %
— %
(12)%
(8)%
— %
(2)%
(1)%
21 %
— %
(11)%
(7)%
— %
(4)%
(1)%
34 %
(3)%
13 %
(10)%
(32)%
(3)%
(1)%
Year ended December 31,
2019
2018
$
(in thousands)
1,839
1,116
$
30,750
1,753
642
36,100
(285)
(2,034)
(2,319)
(33,781)
$
— $
1,892
686
25,558
1,780
344
30,260
(212)
(1,706)
(1,918)
(28,342)
—
As of December 31, 2019, we had net operating loss carryforwards for U.S. federal income tax purposes of
approximately $106.0 million and for state income tax purposes of approximately $100.0 million, respectively. The federal net
operating loss carryforwards, if not utilized, will begin to expire in 2031. The state net operating loss carryforward, if not
utilized, will begin to expire on various dates starting in 2021.
Based on all available evidence on a jurisdictional basis the Company believes that it is more likely than not that its
deferred tax assets will not be utilized and has recorded a full valuation allowance against its net deferred tax assets. The
Company assesses on a periodic basis the likelihood that it will be able to recover its deferred tax assets. The Company
considers all available evidence, both positive and negative, including historical losses, the Company determined that it is more
likely than not that the net deferred tax assets will not be fully realizable for the years ended December 31, 2019 and 2018.
Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership
change limitations provided by the Internal Revenue Code of 1986, as amended (the "Code") and similar state provisions. A
detailed analysis to determine whether an ownership change under Section 382 of the Code has occurred has been performed,
and as a result, there is no limitation on the use of net operating loss carryforwards attributable to periods before the change.
119
As of December 31, 2019 and 2018, there were no undistributed earnings of non-U.S. subsidiaries. No provision for U.S.
income and foreign withholding taxes has been made for these permanently reinvested foreign earnings because it is
management’s intention to permanently reinvest such undistributed earnings outside the United States.
As of December 31, 2019 and 2018, we had no uncertain tax positions. Our policy is to recognize interest and penalties
associated with uncertain tax benefits as part of the income tax provision and include accrued interest and penalties with the
related income tax liability on its consolidated balance sheet. To date, we have not recognized any interest and penalties in its
consolidated statements of operations, nor has it accrued for or made payments for interest and penalties. We have no
unrecognized tax benefits as of December 31, 2019 and 2018.
Generally, in the U.S. federal and state taxing jurisdictions, tax periods in which certain loss and credit carryovers are
generated remain open for audit until such time as the limitation period ends for the year in which such losses or credits are
utilized.
14.
Information About Revenue and Geographic Areas
We consider operating segments to be components of the Company in which separate financial information is available
and is evaluated regularly by our Chief Operating Decision Maker ("CODM") in deciding how to allocate resources and in
assessing performance. Our CODM is the Chief Executive Officer ("CEO"). The CEO reviews financial information presented
on a consolidated basis, accompanied by information about revenue, customer size, and industry vertical for purposes of
allocating resources and evaluating financial performance.
We have determined that we operate under one business activity with no segment managers who are held accountable for
operations, operating results, or plans for levels or components below the consolidated unit level. Accordingly, we have
determined that we have a single reporting segment and operating unit structure.
Revenue
Revenue by geography is based on the billing address of the customer. Refer to Note 3, "Revenue" for more information
on net revenue by geographic region.
Long-Lived Assets
The following table presents long-lived assets by geographic region:
United States
All other countries
Total long-lived assets
15.
Related Party Transactions
As of December 31,
As of December 31,
2019
2018
$
$
(in thousands)
40,747
19,290
60,037
$
$
28,723
13,631
42,354
In July 2016, a stockholder borrowed approximately $0.1 million to exercise stock options for 53,125 shares of common
stock pursuant to a promissory note from the stockholder. The note bears interest at a rate of 1.77%. In June 2019, the
promissory note was repaid in full. Prior to repayment, for the purposes of the financial statements, the shares were not reported
as exercised, issued, or outstanding. This stockholder is not one of our executive officers or directors. Approximately $75,000
was outstanding as of December 31, 2018. There was no outstanding balance as of December 31, 2019.
120
16.
Subsequent Events
Capital Lease Agreement
On January 24, 2020, we entered into an additional capital lease agreement with the equipment provider for $1.0 million
in network equipment at an annual interest rate of 5.42% over a term of three years. The agreement provides for a bargain
purchase price at the end of the term. The amortization of leased assets is included in depreciation and amortization expense.
Please refer to Note 7, "Debt Instruments", for more information on our capital lease agreements.
Executive Leadership Change
On February 18, 2020, Artur Bergman ceased to be our Chief Executive Officer and was appointed as our Chief
Architect and Executive Chairperson. Mr. Bergman will continue to serve as a member of our Board of Directors, and was
appointed as Chairperson of the Board on February 18, 2020.
In connection with Mr. Bergman's appointment as Chief Architect and Executive Chairperson, we and Mr. Bergman
entered into a Modification to his Offer Letter Agreement (the “Bergman Employment Agreement”). Under the Bergman
Employment Agreement, Mr. Bergman will receive an initial annual base salary of $35,568. Starting as of January 1, 2021,
Mr. Bergman’s base salary will be increased to an annual rate of $504,000 per year. However, on or before the last day of
November, he may make an irrevocable election to reduce his salary for the following year (but in any case no lower than the
applicable minimum wage), and instead receive restricted stock units covering shares of the Company’s Class A Common Stock
with a value based on the amount of such reduction (each, an “Annual RSU”). Any Annual RSU will be granted in February of
the applicable year and the number of RSUs subject to each Annual RSU will be based on the average trading price of the
Company’s Class A common stock in January of that year. Each Annual RSU will vest in four equal quarterly installments
following the date of grant commencing on February 15th and quarterly thereafter (May, August, and November), in each case
subject to Mr. Bergman’s continued service with the Company.
Pursuant to the Bergman Employment Agreement, we granted Mr. Bergman the following restricted stock unit awards
to acquire up to an aggregate of 170,009 shares of our Class A common stock (each, an “RSU”) under our 2019 Equity
Incentive Plan, which will vest and settle in the following manner:
•
•
•
The first award for 109,027 shares will vest as to 12.5% of the total RSUs on the 15th of August 2020 and
thereafter in 14 equal quarterly installments (i.e. 6.25% of the total RSUs will vest per quarter), in each case
subject to Mr. Bergman’s continued service with us;
The second award for 43,959 shares will vest following the Board’s (or a committee thereof) determination that
Mr. Bergman has achieved Company and individual performance targets for 2020, with a performance target of
100% and a maximum performance target of 200%. Following such determination, the shares will vest, based on
the extent such targets were achieved, in four equal quarterly installments on the 15th of February, May, August,
and November 2021, in each case subject to Mr. Bergman’s continued service with us; and
The third award for 17,023 shares will vest as to 50% of the RSUs on the 15th of August 2020 and thereafter as to
25% of the RSUs on November 15, 2020 and February 15, 2021, in each case subject to Mr. Bergman’s continued
service with us.
On February 18, 2020, the Board concurrently appointed Joshua Bixby as our Chief Executive Officer. In connection
with Mr. Bixby’s appointment, the Board also expanded the size of the Board from six (6) to seven (7) members and appointed
Mr. Bixby to serve as a Class I director. Mr. Bixby’s term as a member of the Board will expire at the meeting of stockholders
to be held in 2020. Mr. Bixby will not serve on any committees of the Board.
In connection with Mr. Bixby's appointment, our subsidiary, Fastly International (Holdings) Ltd., and Mr. Bixby
entered into an Employment Agreement (the “Bixby Employment Agreement”). Under the Bixby Employment Agreement,
Mr. Bixby will receive an initial annual base salary of $35,568. Starting as of January 1, 2021, Mr. Bixby’s base salary will be
increased to an annual rate of $504,000 per year. However, on or before the last day of November, he may make an irrevocable
election to reduce his salary for the following year (but in any case no lower than the applicable minimum wage). We have
separately entered into an Equity Offer Letter with Mr. Bixby (the “Equity Offer Letter”), which provides that, if he makes such
an election to reduce his salary, he will receive an Annual RSU. Each Annual RSU will be granted in February of the applicable
year and the number of RSUs subject to each Annual RSU will be based on the average trading price of the Company’s Class A
121
common stock in January of such year. Each Annual RSU will vest in 4 equal quarterly installments following the date of grant
commencing on February 15th and quarterly thereafter (May, August, and November), in each case subject to Mr. Bixby’s
continued service with the Company.
Pursuant to the Equity Offer Letter, we granted Mr. Bixby the following RSUs to acquire up to an aggregate of
235,425 shares of our Class A common stock under our Plan, which will vest and settle in the following manner:
•
•
•
The first award for 174,443 shares will vest as to 12.5% of the total RSUs on the 15th of August 2020 and
thereafter in 14 equal quarterly installments (i.e. 6.25% of the total RSUs will vest per quarter), in each case
subject to Mr. Bixby’s continued service with us;
The second award for 43,959 shares will vest following the Board’s (or a committee thereof) determination that
Mr. Bixby has achieved Company and individual performance targets for 2020, with a performance target of
100% and a maximum performance target of 200%. Following such determination, the shares will vest, based on
the extent such targets were achieved, in four equal quarterly installments on the 15th of February, May, August,
and November 2021, in each case subject to Mr. Bixby’s continued service with us; and
The third award for 17,023 shares will vest as to 50% of the RSUs on the 15th of August 2020 and thereafter as to
25% of the RSUs on November 15, 2020 and February 15, 2021, in each case subject to Mr. Bixby’s continued
service with us.
The number of shares of Class A common stock granted to both Mr. Bergman and Mr. Bixby pursuant to each RSU
was determined in accordance with the Company’s standard practice by the Board based on the average trading price of the
Company’s Class A common stock in January 2020. Each RSU will be subject to the provisions of our Plan and each related
award agreement.
122
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of our principal executive officer and principal financial officer, has
evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered by this Annual Report
on Form 10-K. Based on the evaluation of our disclosure controls and procedures as of December 31, 2019, our principal
executive officer and principal financial officer concluded that, as of such date, due to the material weakness described below,
our disclosure controls and procedures were not effective.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and
for the assessment of the effectiveness of internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f)
under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the
participation of our management, including our Chief Executive Officer and our Chief Financial Officer, to provide reasonable
assurance regarding the reliability of financing reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of America.
Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer and
oversight of the board of directors, our management conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2019, based on the criteria set forth in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this evaluation, due to
the material weakness described below, management concluded that our disclosure controls and procedures were not effective.
The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in their report which is included in Part II, Item 8,
"Financial Statements and Supplementary Data", of this Annual Report on Form 10-K.
Material Weakness
Management identified material weaknesses in our internal control over financial reporting for the years ended
December 31, 2019, 2018 and 2017, related to the lack of sufficient qualified accounting and information systems personnel,
which led to incorrect application of generally accepted accounting principles, and insufficiently designed segregation of duties,
information technology access security and change management, and controls over business processes, including the financial
statement close and reporting processes with respect to the development of accounting policies, procedures, and estimates.
Management has been actively engaged in remediating the above described material weakness. The following remedial actions
have been taken during the year ended December 31, 2019:
•
•
•
•
•
•
hired additional full-time accounting resources with appropriate levels of experience
continue to actively recruit for open positions within the accounting department and will, as necessary, supplement any
interim staffing needs with temporary resources;
reallocated responsibilities across the accounting organization to ensure that the appropriate level of knowledge and
experience is applied based on risk and complexity of transactions and tasks under review;
strengthened our internal policies, processes and reviews, including substantial completion of the formal
documentation thereof;
implemented a formal financial month-end close policy and process; and
engaged a professional accounting services firm to help us assess and commence documentation of our internal
controls for complying with the Sarbanes-Oxley Act.
123
The process of implementing an effective financial reporting system is a continuous effort that requires us to anticipate
and react to changes in our business and the economic and regulatory environments and to expend significant resources to
maintain a financial reporting system that is adequate to satisfy our reporting obligations. As we continue to evaluate and take
actions to improve our internal control over financial reporting, we may take additional actions to address control deficiencies
or modify certain of the remediation measures described above.
While significant progress has been made to enhance our internal control over financial reporting, we are still in the
process of implementing, documenting and testing these processes, procedures and controls. Additional time is required to
complete implementation and to assess and ensure the sustainability of these procedures. We believe the above actions will be
effective in remediating the material weaknesses described above and we will continue to devote significant time and attention
to these remedial efforts. However, the material weaknesses cannot be considered remediated until the applicable remedial
controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating
effectively.
Notwithstanding the material weaknesses, management has concluded that the financial statements included elsewhere in
this Annual Report present fairly, in all material respects, our financial position, results of operations and cash flows in
conformity with GAAP.
Changes in Internal Control
Other than as described above, there have been no changes in our internal control over financial reporting in connection
with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by
this Annual Report on Form 10-K that materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of
any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls
may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur
and not be detected.
Item 9B.
Other Information
Not applicable.
124
PART III
Item 10.
Directors, Executive Officers, and Corporate Governance
Information required by this Item is incorporated by reference to the sections of our proxy statement to be filed with the
SEC no later than 120 days after December 31, 2019 in connection with our 2020 Annual Meeting of Stockholders (the "Proxy
Statement").
We have adopted a Code of Business Conduct and Ethics that applies to our officers, directors and employees, which is
available on our website at www.fastly.com. The Code of Business Conduct and Ethics is intended to qualify as a "code of
ethics" within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K. In addition, we
intend to promptly disclose (1) the nature of any amendment to our Code of Business Conduct and Ethics that applies to our
principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar
functions and (2) the nature of any waiver, including an implicit waiver, from a provision of our code of ethics that is granted to
one of these specified officers, the name of such person who is granted the waiver and the date of the waiver on our website in
the future.
Item 11.
Executive Compensation
Information required by this Item is incorporated by reference to our Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this Item is incorporated by reference to our Proxy Statement.
Item 13.
Certain Relationships and Related Transactions and Director Independence
Information required by this Item is incorporated by reference to our Proxy Statement.
Item 14.
Principal Accountant Fees and Services
Information required by this Item is incorporated by reference to our Proxy Statement.
125
PART IV
Item 15.
Exhibits
(a)(1) Financial statements
The information concerning Fastly’s financial statements and the Report of Independent Registered Public Accounting Firm
required by this Item 15(a)(1) is incorporated by reference herein to the section of this Annual Report on Form 10-K in Part II,
Item 8, "Financial Statements and Supplementary Data."
(a)(2) Financial statement schedules
All financial statement schedules have been omitted as the information is not required under the related instructions or is not
applicable or because the information required is already included in the financial statements or the notes to those financial
statements.
(a)(3) Exhibits
We have filed, or incorporated into this Annual Report on Form 10-K by reference, the exhibits listed on the accompanying
Exhibit Index immediately preceding the signature page of this Annual Report on Form 10-K.
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
10.1
10.2+
10.3+
10.4+
10.5+
10.6+
10.7+
10.8
10.9+
10.10+
10.11+
Exhibit Description
Form
File No.
Exhibit
Filing Date
Filed
Herewith
X
Amended and Restated Certificate of
Incorporation
Amended and Restated Bylaws
Form of Class A common stock certificate of
Fastly, Inc.
Reference is made to Exhibits 3.1 through 3.2
Description of Securities.
8-K
001-38897
3.1
May 21, 2019
S-1/A 333-230953
3.4
May 6, 2019
S-1/A 333-230953
4.1
May 6, 2019
S-1/A 333-230953
Amended and Restated Investor Rights
Agreement by and among Fastly, Inc. and certain
of its stockholders, dated June 29, 2018.
2011 Equity Incentive Plan, as amended to date. S-1/A 333-230953
S-1/A 333-230953
Forms of Option Agreement, Notice of Stock
Option Grant, and Exercise Notice under 2011
Equity Incentive Plan.
10.1
May 6, 2019
10.2
10.3
May 6, 2019
May 6, 2019
2019 Equity Incentive Plan.
Forms of Option Agreement, Notice of Stock
Option Grant, and Exercise Notice under 2019
Equity Incentive Plan.
Form of Restricted Stock Unit Award Agreement
under 2019 Equity Incentive Plan.
2019 Employee Stock Purchase Plan.
Form of Indemnification Agreement by and
between Fastly, Inc. and each of its directors and
executive officers.
Cash Incentive Bonus Plan.
Employment Terms by and between Fastly, Inc.
and Artur Bergman, dated May 3, 2019.
Independent Contractor Services Agreement, by
and between Fastly, Inc. and Possibilities
Training Group, dated October 28, 2013.
S-1/A 333-230953
S-1/A 333-230953
10.4
10.5
May 6, 2019
May 6, 2019
10-Q 001-38897
10.3
August 9, 2019
S-1/A 333-230953
S-1/A 333-230953
10.7
10.8
May 6, 2019
May 6, 2019
S-1/A 333-230953
10.9
May 6, 2019
S-1/A 333-230953
10.10 May 6, 2019
S-1/A 333-230953
10.11 May 6, 2019
126
Exhibit
Number
10.12+
10.13+
10.14+
10.15
10.16
10.17
10.18
10.19
10.20
10.21+
10.22+
10.23
10.24
21.1
23.1
24.1
31.1
31.2
32.1*
32.2*
Exhibit Description
Offer Letter Agreement, by and between Fastly,
Inc. and Adriel Lares, dated April 26, 2016.
Offer Letter Agreement, by and between Fastly,
Inc. and Paul Luongo, dated November 27,
2013.
Offer Letter Agreement, by and between Fastly,
Inc. and Wolfgang Maasberg, dated March 21,
2016.
Office Lease Agreement, by and between Fastly,
Inc. and CLPF-475 Brannan Street, L.P., dated
August 22, 2014.
First Amendment to Lease Agreement, by and
between Fastly, Inc. and CLPF-475 Brannan
Street, L.P., dated May 27, 2015.
Plain English Warrant Agreement, by and
between Fastly, Inc. and TriplePoint Capital
LLC, dated November 25, 2013.
Warrant to Purchase Stock, by and between
Fastly, Inc. and Hercules Capital, Inc., dated
December 24, 2018.
Warrant to Purchase Stock, by and between
Fastly, Inc. and Westriver Innovation Lending
Fund VIII, L.P., dated December 24, 2018.
Second Amendment to Lease Agreement, by and
between Fastly, Inc. and CLPF-475 Brannan
Street, L.P., dated March 11, 2019.
Executive Change in Control and Severance
Benefit Plan.
Form
S-1/A 333-230953
File No.
Exhibit
Filing Date
10.12 May 6, 2019
Filed
Herewith
S-1/A 333-230953
10.13 May 6, 2019
S-1/A 333-230953
10.14 May 6, 2019
S-1/A 333-230953
10.15 May 6, 2019
S-1/A 333-230953
10.16 May 6, 2019
S-1/A 333-230953
10.20 May 6, 2019
S-1/A 333-230953
10.26 May 6, 2019
S-1/A 333-230953
10.27 May 6, 2019
S-1/A 333-230953
10.30 May 6, 2019
S-1/A 333-230953
10.31 May 6, 2019
Non-Employee Director Compensation Policy.
S-1/A 333-230953
10.32 May 6, 2019
Stock Ownership Guidelines.
S-1/A 333-230953
10.33 May 6, 2019
Credit Agreement between Fastly, Inc. and
Citibank N.A. dated November 4, 2019.
Subsidiaries of the Registrant.
S-1/A 333-230953
21.1
May 6, 2019
Consent of Independent Registered Public
Accounting Firm
Power of Attorney (contained on the signature
page of this report)
Certification of the Chief Executive Officer
pursuant to Exchange Act Rule 13a-14 as
adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of the Chief Financial Officer
pursuant to Exchange Act Rule 13a-14 as
adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of the Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Certification of the Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
127
X
X
X
X
X
Exhibit
Number
101. INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
__________
Exhibit Description
Inline XBRL Instance Document - the instance
document does not appear in the Interactive Data
File because its XBRL tags are embedded within
the Inline XBRL document
Inline XBRL Taxonomy Schema Linkbase
Document
Inline XBRL Taxonomy Calculation Linkbase
Document
Inline XBRL Taxonomy Definition Linkbase
Document
Inline XBRL Taxonomy Labels Linkbase
Document
Inline XBRL Taxonomy Presentation Linkbase
Document
Cover Page Interactive Data File (formatted as
inline XBRL and contained in Exhibit 101)
+
Indicates management contract or compensatory plan.
Form
File No.
Exhibit
Filing Date
Filed
Herewith
X
X
X
X
X
X
*
The certifications furnished in Exhibit 32.1 and 32.2 hereto are deemed to be furnished with this Annual Report on
Form 10-K and will not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, except to the extent that the
Registrant specifically incorporates it by reference.
Item 16.
Form 10-K Summary
None.
128
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, Fastly, Inc. has duly caused this
Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 3, 2020
By:
/s/ Joshua Bixby
FASTLY, INC.
Joshua Bixby
Chief Executive Officer (Principal Executive Officer)
Date: March 3, 2020
By:
/s/ Adriel Lares
Adriel Lares
Chief Financial Officer (Principal Financial and
Accounting Officer)
129
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Artur Bergman and Adriel Lares, and each of them, as his or her true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution, for such individual in any and all capacities, to sign any and all amendments to this
Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for
all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or the individual’s substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the
following persons on behalf of the Company and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Joshua Bixby
Chief Executive Officer and Director
March 3, 2020
Joshua Bixby
(Principal Executive Officer)
/s/ Adriel Lares
Adriel Lares
Chief Financial Officer
March 3, 2020
(Principal Financial Officer and Principal Accounting Officer)
/s/ Artur Bergman
Chief Architect, Executive Chairperson and Chairperson of the
March 3, 2020
Artur Bergman
Board of Directors
/s/ Aida Álvarez
Aida Álvarez
Director
/s/ Sunil Dhaliwal
Director
Sunil Dhaliwal
/s/ David Hornik
Director
David Hornik
/s/ Christopher B. Paisley
Director
Christopher B. Paisley
/s/ Kelly Wright
Kelly Wright
Director
March 3, 2020
March 3, 2020
March 3, 2020
March 3, 2020
March 3, 2020
130
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