10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2020

OR

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

For the Transition Period from              to

Commission File Number: 001-35469

VOCERA COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

Delaware	94-3354663
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Vocera Communications, Inc.

525 Race Street

San Jose, CA 95126

(408) 882-5100

(Address and telephone number of principal executive offices)

_____________________________________________

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
(Title of each class)	(Trading Symbol)	(Name of each exchange on which registered)
Common Stock, $0.0003 par value	VCRA	New York Stock Exchange

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 definition of “large accelerated filer,” “accelerated filer,” “small reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding as of April 30, 2020
Common Stock, $0.0003 par value per share	32,025,518

VOCERA COMMUNICATIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020

INDEX

PART I: FINANCIAL INFORMATION

		Page No.
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Loss	5
	Condensed Consolidated Statements of Stockholders’ Equity	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	28
	PART II: OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	48
Signatures

2

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Vocera Communications, Inc.

Condensed Consolidated Balance Sheets

(In Thousands, Except Share and Par Amounts)

(Unaudited)

	March 31, 2020			December 31, 2019
Assets
Current assets
Cash and cash equivalents	$	31,136		$	25,704
Short-term investments	202,632			204,164
Accounts receivable, net of allowance	26,283			42,547
Other receivables	6,374			6,312
Inventories	6,027			4,576
Prepaid expenses and other current assets	5,694			5,149
Total current assets	278,146			288,452
Property and equipment, net	8,251			8,661
Intangible assets, net	5,141			5,461
Goodwill	49,246			49,246
Deferred commissions	10,307			10,477
Other long-term assets	7,368			8,158
Total assets	$	358,459		$	370,455
Liabilities and stockholders' equity
Current liabilities
Accounts payable	$	3,142		$	6,036
Accrued payroll and other current liabilities	15,311			14,757
Deferred revenue, current	45,987			50,033
Total current liabilities	64,440			70,826
Deferred revenue, long-term	10,689			11,442
Convertible senior notes, net	118,913			117,178
Other long-term liabilities	6,310			7,184
Total liabilities	200,352			206,630
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred stock, $0.0003 par value - 5,000,000 shares authorized as of March 31, 2020 and December 31, 2019; zero shares issued and outstanding	—			—
Common stock, $0.0003 par value - 100,000,000 shares authorized as of March 31, 2020 and December 31, 2019; 31,802,779 and 31,660,709 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively	9			9
Additional paid-in capital	319,671			313,963
Accumulated other comprehensive income (loss)	(777		)	179
Accumulated deficit	(160,796		)	(150,326		)
Total stockholders’ equity	158,107			163,825
Total liabilities and stockholders’ equity	$	358,459		$	370,455

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

3

Vocera Communications, Inc.

Condensed Consolidated Statements of Operations

(In Thousands, Except Per Share Amounts)

(Unaudited)

	Three months ended March 31,
	2020			2019
Revenue
Product	$	17,850		$	14,003
Service	22,823			21,306
Total revenue	40,673			35,309
Cost of revenue
Product	6,364			5,334
Service	10,523			10,290
Total cost of revenue	16,887			15,624
Gross profit	23,786			19,685
Operating expenses
Research and development	9,032			8,146
Sales and marketing	16,963			16,019
General and administrative	6,391			6,580
Total operating expenses	32,386			30,745
Loss from operations	(8,600		)	(11,060		)
Interest income	1,120			1,279
Interest expense	(2,274		)	(2,121		)
Other income (expense), net	(591		)	131
Loss before income taxes	(10,345		)	(11,771		)
Benefit from (provision for) income taxes	(125		)	36
Net loss	$	(10,470	)	$	(11,735	)
Loss per share
Basic	$	(0.33	)	$	(0.38	)
Diluted	$	(0.33	)	$	(0.38	)
Weighted average shares used to compute net loss per share
Basic	31,738			30,800
Diluted	31,738			30,800

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

4

Vocera Communications, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(In Thousands)

(Unaudited)

	Three months ended March 31,
	2020			2019
Net loss	$	(10,470	)	$	(11,735	)
Other comprehensive income (loss), net:
Change in unrealized gain (loss) on investments, net of tax	(956		)	425
Comprehensive loss	$	(11,426	)	$	(11,310	)

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

5

Vocera Communications, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(In Thousands, Except Share Amounts)

(Unaudited)

	Common stock			Additional paid-in capital			Accum. other comprehensive income (loss)			Accumulated deficit			Total stockholders’ equity
	Shares	Amount
Balance at December 31, 2018	30,708,138	$	9	$	295,647		$	(443	)	$	(132,346	)	$	162,867
Exercise of stock options	122,376	—		1,564			—			—			1,564
RSUs released net of shares withheld for tax settlement	60,603	—		(1,271		)	—			—			(1,271		)
Employee stock-based compensation expense	—	—		5,544			—			—			5,544
Net loss	—	—		—			—			(11,735		)	(11,735		)
Other comprehensive loss	—	—		—			425			—			425
Balance at March 31, 2019	30,891,117	9		301,484			(18		)	(144,081		)	157,394

Balance at December 31, 2019	31,660,709	$	9	$	313,963		$	179		$	(150,326	)	$	163,825
Exercise of stock options	77,909	—		731			—			—			731
RSUs released net of shares withheld for tax settlement	64,161	—		(864		)	—			—			(864		)
Employee stock-based compensation expense	—	—		5,841			—			—			5,841
Net loss	—	—		—			—			(10,470		)	(10,470		)
Other comprehensive loss	—	—		—			(956		)	—			(956		)
Balance at March 31, 2020	31,802,779	$	9	$	319,671		$	(777	)	$	(160,796	)	$	158,107

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

6

Vocera Communications, Inc.

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

	Three months ended March 31,
	2020			2019
Cash flows from operating activities
Net loss	$	(10,470	)	$	(11,735	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	1,333			1,890
Inventory provision	42			—
Change in lease-related performance obligations	(346		)	(266		)
Stock-based compensation expense	5,841			5,544
Amortization of debt discount and issuance costs	1,735			1,582
Other	729			24
Changes in operating assets and liabilities:
Accounts receivable	16,264			15,681
Other receivables	(102		)	(1,156		)
Inventories	(1,494		)	(1,637		)
Prepaid expenses and other assets	(417		)	(414		)
Deferred commissions	171			(19		)
Accounts payable	(2,826		)	(1,173		)
Accrued payroll and other liabilities	(17		)	(1,689		)
Deferred revenue	(4,799		)	(5,687		)
Net cash provided by operating activities	5,644			945
Cash flows from investing activities
Purchase of property and equipment	(682		)	(853		)
Purchase of short-term investments	(28,009		)	(31,349		)
Maturities of short-term investments	28,569			29,624
Net cash used in investing activities	(122		)	(2,578		)
Cash flows from financing activities
Cash from lease-related performance obligations	43			—
Proceeds from exercise of stock options	731			1,564
Tax withholdings paid on behalf of employees for net share settlement	(864		)	(1,271		)
Net cash provided by (used in) financing activities	(90		)	293
Net increase in cash and cash equivalents	5,432			(1,340		)
Cash and cash equivalents at beginning of period	25,704			34,276
Cash and cash equivalents at end of period	$	31,136		$	32,936
Supplemental disclosure of non-cash investing and financing activities:
Property and equipment in accounts payable and accrued liabilities	$	390		$	161

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

7

Notes to Unaudited Condensed Consolidated Financial Statements

1. The Company and Summary of Significant Accounting Policies

Organization and Business

Vocera Communications, Inc. and its subsidiaries (collectively the “Company” or “Vocera”) is a provider of secure, integrated, intelligent communication and clinical workflow solutions, focused on empowering mobile workers in healthcare, hospitality, retail, energy, education and other mission-critical mobile work environments, in the United States and internationally. The significant majority of the Company’s business is generated from sales of its solutions in the healthcare market to help its customers improve quality of care, safety, patient and staff experience and increase operational efficiency.

The Vocera communication and collaboration solution includes: an intelligent enterprise software platform; a lightweight, wearable, voice-controlled communication badge and newly introduced Smartbadge; and smartphone applications. The solution enables users to connect instantly with other staff simply by saying the name, function or group name of the desired recipient. It also delivers HIPAA-compliant secure text messages, alerts and alarms directly to the Vocera Badge, Vocera Smartbadge, smartphones and other mobile communication devices both inside and outside the hospital, replacing legacy pagers and in-building wireless phones.

Basis of Presentation

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission, and include the accounts of Vocera and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The year-end condensed consolidated balance sheet data was derived from the Company’s audited financial statements but does not include all disclosures required by GAAP.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s interim consolidated financial information. The results for the quarter presented are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any other interim period or any other future year.

Except for the change in certain accounting policies upon adoption of the accounting standards described below, there have been no material changes to the Company’s significant accounting policies compared to the accounting policies presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Use of Estimates

The preparation of the accompanying unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting periods. The estimates include, but are not limited to, revenue recognition, warranty reserves, accounts receivable reserves, inventory reserves, bonuses, goodwill and intangible assets, stock-based compensation expense, provisions for income taxes and contingencies. Actual results could differ from these estimates, and such differences could be material to the Company’s financial position and results of operations.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued new guidance related to the accounting for credit losses on instruments for both financial services and non-financial services entities. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new guidance was effective for the Company beginning January 1, 2020. The Company applied the guidance using a modified retrospective approach requiring that the Company recognize the cumulative effect of initially applying the impairment standard as an adjustment to opening accumulated deficit in the period of initial application. There was no adjustment to the Company’s opening accumulated deficit in the period as there were no incremental impairment losses as a result of the adoption.

8

In January 2017, the FASB issued new guidance to simplify the accounting for goodwill impairment. The guidance simplifies the measurement of goodwill impairment by removing step 2 of the goodwill impairment test, which requires the determination of the fair value of individual assets and liabilities of a reporting unit.  The new guidance requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis.  The new standard was effective for the Company beginning January 1, 2020. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements.

Recent Accounting Pronouncements

In December 2019, the FASB issued new guidance to simplifying the accounting for income taxes, which removes certain exceptions for intra period allocations, recognizing deferred taxes for investments and calculating income taxes in interim periods. This guidance also reduces complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The new standard is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is evaluating the impact of this new accounting guidance on its condensed consolidated financial statements.

2. Revenue, deferred revenue and deferred commissions

Disaggregation of Revenue

A typical sales arrangement involves multiple arrangements, such as the sales of the Company’s proprietary communication device (“Vocera Badge”), perpetual software licenses, professional services and maintenance and support services which entitle customers to unspecified upgrades, patch releases and telephone-based support. The following table depicts the disaggregation of revenue according to revenue type and is consistent with how the Company evaluates its financial performance:

	Three months ended March 31,
(in thousands)	2020		2019
Product revenue
Device	$	13,903	$	10,060
Software	3,947		3,943
Total product	17,850		14,003
Service revenue
Maintenance and support	18,069		16,393
Professional services and training	4,754		4,913
Total service	22,823		21,306
Total revenue	$	40,673	$	35,309

Contract balances

The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable are recorded at the invoiced amount and in the period the Company delivers goods or provides services or when the Company’s right to consideration is unconditional. Payment terms on invoiced amounts are typically 30 days. The balance of accounts receivable, net of allowance for doubtful accounts, as of March 31, 2020 and December 31, 2019 is presented in the accompanying condensed consolidated balance sheets. In situations where revenue recognition occurs before invoicing, an unbilled receivable is created, which represents a contract asset. As of March 31, 2020 and December 31, 2019, contract assets totaling $4.5 million and $4.3 million, respectively, were included in prepaid and other current assets in the condensed consolidated balance sheets.

Costs to obtain and fulfill a contract

The Company capitalizes certain incremental contract acquisition costs consisting primarily of commissions paid and the related payroll taxes when customer contracts are signed. The Company determines whether costs should be deferred based on its sales compensation plans, if the commissions are incremental and would not have been incurred absent the execution of the customer contract. Sales commissions for renewals of customer contracts are not commensurate with the commissions paid for the acquisition of the initial contract given the substantive difference in commission rates in proportion to their respective contract values.

9

Commissions paid upon the initial acquisition of a contract are amortized over the estimated period of benefit, which may exceed the term of the initial contract. Accordingly, amortization of deferred costs is recognized on a systematic basis that is consistent with the pattern of revenue recognition allocated to each performance obligation and is included in sales and marketing expense in the condensed consolidated statements of operations. The Company determines its estimated period of benefit by evaluating the expected renewals of its customer contracts, the duration of its relationships with its customers and other factors. Deferred costs are periodically reviewed for impairment. Changes in the balance of total deferred commissions (contract asset) during the three months ended March 31, 2020 are as follows:

(in thousands)	December 31, 2019		Additions		Commissions Recognized			March 31, 2020
Deferred commissions	$	10,477	$	2,489	$	(2,659	)	$	10,307

Of the $10.3 million total deferred commissions balance as of March 31, 2020, the Company expects to recognize approximately 48% as commission expense over the next 12 months and the remainder thereafter.

Deferred revenue

The Company records deferred revenue when cash payments are received in advance of the performance under the contract. The current portion of deferred revenue represents the amounts that are expected to be recognized as revenue within one year of the condensed consolidated balance sheet date. Changes in the balance of total deferred revenue (contract liability) during the three months ended March 31, 2020 are as follows:

(in thousands)	December 31, 2019		Additions		Revenue Recognized			March 31, 2020
Deferred revenue	$	61,475	$	14,945	$	(19,744	)	$	56,676

Revenue recognized during the three months ended March 31, 2020 from deferred revenue balances at the beginning of the period was $18.5 million. Revenue recognized during the three months ended March 31, 2019 from deferred revenue balances at the beginning of the period was $15.2 million.

The “contracted but not recognized” performance obligations represent the Company’s deferred revenue and non-cancelable backlog amounts. This balance as of March 31, 2020 was $112.5 million, of which the Company expects to recognize approximately 66% as revenue over the next 12 months and the remainder thereafter.

3. Fair Value of Financial Instruments

The Company’s cash, cash equivalents and short-term investments are carried at their fair values with any differences from their amortized cost recorded in equity as unrealized gains (losses) on marketable securities. As a basis for determining the fair value of its assets and liabilities, the Company follows 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; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. During the three months ended March 31, 2020, there have been no transfers between Level 1 and Level 2 fair value instruments and no transfers in or out of Level 3.

The Company’s money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The fair value of the Company’s Level 2 fixed income securities is obtained from independent pricing services, which may use quoted market prices for identical or comparable instruments or model-driven valuations using observable market data or other inputs, corroborated by observable market data. The Company does not have any financial instruments which are valued using Level 3 inputs.

In addition to its cash, cash equivalents and short-term investments, the Company measures the fair value of its Convertible Senior Notes on a quarterly basis for disclosure purposes. The Company considers the fair value of the Convertible Senior Notes at March 31, 2020 to be a Level 2 measurement due to limited trading activity of the Convertible Senior Notes. Refer to Note 8 to the condensed consolidated financial statements for further information.

10

The Company’s assets that are measured at fair value on a recurring basis, by level, within the fair value hierarchy as of March 31, 2020 and December 31, 2019, are summarized as follows (in thousands):

	March 31, 2020						December 31, 2019
	Level 1		Level 2		Total		Level 1		Level 2		Total
Assets
Money market funds	$	3,855	$	—	$	3,855	$	4,086	$	—	$	4,086
Commercial paper	—		17,899		17,899		—		12,854		12,854
U.S. government agency securities	—		—		—		—		3,000		3,000
Corporate debt securities	—		186,725		186,725		—		188,310		188,310
Total assets measured at fair value	$	3,855	$	204,624	$	208,479	$	4,086	$	204,164	$	208,250

4. Cash, Cash Equivalents and Short-Term Investments

The following tables present cash, cash equivalents and short-term investments (in thousands) as of March 31, 2020 and December 31, 2019:

	As of March 31, 2020
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair value
Cash and cash equivalents:
Demand deposits and other cash	$	25,289	$	—	$	—		$	25,289
Money market funds	3,855		—		—			3,855
Commercial paper	1,994		—		(2		)	1,992
Total cash and cash equivalents	31,138		—		(2		)	31,136
Short-Term Investments:
Commercial paper	15,911		10		(14		)	15,907
Corporate debt securities	187,238		296		(809		)	186,725
Total short-term investments	203,149		306		(823		)	202,632
Total cash, cash equivalents and short-term investments	$	234,287	$	306	$	(825	)	$	233,768

11

	As of December 31, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair value
Cash and cash equivalents:
Demand deposits and other cash	$	21,618	$	—	$	—		$	21,618
Money market funds	4,086		—		—			4,086
Commercial paper	—		—		—			—
Total cash and cash equivalents	25,704		—		—			25,704
Short-Term Investments:
Commercial paper	12,861		—		(7		)	12,854
U.S. government agency securities	3,000		—		—			3,000
U.S. Treasury securities	—		—		—			—
Corporate debt securities	187,866		499		(55		)	188,310
Total short-term investments	203,727		499		(62		)	204,164
Total cash, cash equivalents and short-term investments	$	229,431	$	499	$	(62	)	$	229,868

The Company has determined that the unrealized losses on its short-term investments as of March 31, 2020 and December 31, 2019 do not constitute an “other than temporary impairment.” The unrealized losses for the short-term investments have all been in a continuous unrealized loss position for less than twelve months. The Company’s conclusion of no “other than temporary impairment” is based on the high credit quality of the securities, their short remaining maturity and the Company’s intent and ability to hold such loss securities until maturity.

Classification of the cash, cash equivalents and short-term investments by contractual maturity was as follows:

(in thousands)	One year or shorter		Between 1 and 2 years		Total
Balances as of March 31, 2020
Cash and cash equivalents (1)	$	31,136	$	—	$	31,136
Short-term investments	130,834		71,798		202,632
Cash, cash equivalents and short-term investments	$	161,970	$	71,798	$	233,768
Balances as of December 31, 2019
Cash and cash equivalents (1)	$	25,704	$	—	$	25,704
Short-term investments	113,010		91,154		204,164
Cash, cash equivalents and short-term investments	$	138,714	$	91,154	$	229,868
(1) Includes demand deposits and other cash, money market funds and other cash equivalent securities, all with 0-90 day maturity at purchase.

12

5. Loss Per Share

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):

	Three months ended March 31,
	2020			2019
Numerator:
Net loss	$	(10,470	)	$	(11,735	)
Denominator:
Weighted average shares used to compute net loss per common share - basic	31,738			30,800
Weighted-average shares used to compute net loss per common share - diluted	31,738			30,800
Net loss per share
Basic	$	(0.33	)	$	(0.38	)
Diluted	$	(0.33	)	$	(0.38	)

The following securities were not included in the calculation of diluted shares outstanding as the effect would have been anti-dilutive:

	Three months ended March 31,
(in thousands)	2020	2019
Options to purchase common stock, including ESPP	620	724
Restricted stock units	1,635	1,850

6. Goodwill and Intangible Assets

Goodwill

As of March 31, 2020 and December 31, 2019, the Company had $49.2 million and $49.2 million of goodwill, respectively, with $41.2 million and $8.0 million allocated to the Company’s Product and Services operating segments, respectively. As of March 31, 2020, there were no changes in circumstances indicating that the carrying values of goodwill or acquired intangibles may not be recoverable.

Intangible Assets

Acquisition-related intangible assets are amortized either straight-line, or over the life of the assets on a basis that resembles the economic benefit of the assets. This yields amortization in the latter case that is higher in earlier periods of the useful life.

13

The estimated useful lives and carrying value of acquired intangible assets are as follows:

		March 31, 2020						December 31, 2019
(in thousands)	Range of Useful Life (years)	Gross  Carrying  Amount		Accumulated Amortization		Net  Carrying  Amount		Gross  Carrying  Amount		Accumulated Amortization		Net  Carrying  Amount
Developed technology	3 to 7	$	10,050	$	9,854	$	196	$	10,050	$	9,803	$	247
Customer relationships	7 to 9	10,920		6,088		4,832		10,920		5,819		5,101
Backlog	3	1,400		1,287		113		1,400		1,287		113
Non-compete agreements	2 to 4	460		460		—		460		460		—
Trademarks	3 to 7	1,110		1,110		—		1,110		1,110		—
Intangible assets, net book value		$	23,940	$	18,799	$	5,141	$	23,940	$	18,479	$	5,461

Amortization expense was $0.3 million and $1.0 million for the three months ended March 31, 2020 and 2019, respectively.

Amortization of acquired intangible assets is reflected in the cost of revenue for developed technology and backlog and in operating expenses for the other intangible assets. The estimated future amortization of existing acquired intangible assets as of March 31, 2020 was as follows:

(in thousands)	Future amortization
2020 (remaining nine months)	$	1,036
2021	1,130
2022	1,050
2023	1,050
2024	875
Future amortization expense	$	5,141

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7. Balance Sheet Components

Inventories

(in thousands)	March 31, 2020		December 31, 2019
Raw materials	$	962	$	831
Finished goods	5,065		3,745
Total inventories	$	6,027	$	4,576

Property and equipment, net

(in thousands)	March 31, 2020			December 31, 2019
Computer equipment and software	$	14,088		$	13,596
Furniture, fixtures and equipment	2,554			2,430
Leasehold improvements	5,351			5,283
Manufacturing tools and equipment	2,476			2,435
Construction in process	131			582
Property and equipment, at cost	24,600			24,326
Less: Accumulated depreciation	(16,349		)	(15,665		)
Property and equipment, net	$	8,251		$	8,661

Depreciation and amortization expense for property and equipment was $1.0 million and $0.9 million for the three months ended March 31, 2020 and 2019, respectively.

Net investment in sales-type leases

The Company has sales-type leases with terms of 3 to 4 years. Sales-type lease receivables are collateralized by the underlying equipment. The components of the Company’s net investment in sales-type leases are as follows:

(in thousands)	March 31, 2020			December 31, 2019
Minimum payments to be received on sales-type leases	$	1,796		$	2,078
Less: Unearned interest income and executory revenue portion	(1,097		)	(1,190		)
Net investment in sales-type leases	699			888
Less: Current portion	(346		)	(452		)
Non-current net investment in sales-type leases	$	353		$	436

Sales-type lease activity recognized in the condensed consolidated statement of operations are as follows:

	Three months ended March 31,
(in thousands)	2020			2019
Lease revenue	$	435		$	661
Less: Cost of lease shipments	(10		)	(52		)
Gross profit	425			609
Interest income (expense), net on lease receivable	$	(6	)	$	(3	)
Initial direct cost incurred	$	23		$	31

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There were no allowances for doubtful accounts on these leases as of March 31, 2020 and December 31, 2019. There is no guaranteed or unguaranteed residual value on the leased equipment. The current and non-current net investments in sales-type leases are reported as components of the condensed consolidated balance sheet captions “other receivables” and “other long-term assets,” respectively.

The minimum payments expected to be received for future years under sales-type leases as of March 31, 2020 were as follows:

(in thousands)	Future lease payments
2020 (remaining nine months)	$	716
2021	615
2022	387
2023	78
Total	$	1,796

Accrued payroll and other current liabilities

(in thousands)	March 31, 2020		December 31, 2019
Payroll and related expenses	$	7,276	$	6,053
Accrued payables	1,707		2,674
Operating lease liabilities, current portion	2,336		2,323
Lease financing, current portion	898		1,033
Product warranty	440		420
Customer prepayments	665		631
Sales and use tax payable	469		599
Other	1,520		1,024
Total accrued payroll and other current liabilities	$	15,311	$	14,757

The changes in the Company’s product warranty reserve are as follows:

	Three months ended March 31,
(in thousands)	2020			2019
Warranty balance at the beginning of the period	$	420		$	376
Warranty expense accrued for shipments during the period	108			77
Changes in estimate related to pre-existing warranties	(31		)	(31		)
Warranty settlements made	(57		)	(48		)
Total product warranty	$	440		$	374

Leases

The Company has operating leases for office space at its headquarters and subsidiaries under non-cancelable operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet; lease expense for these leases is recognized on a straight-line basis over the lease term. The Company’s leases have remaining lease terms of approximately ten months to approximately five years. Operating lease cost, including short-term operating leases was $0.7 million and $0.6 million for the three months ended March 31, 2020 and 2019, respectively.

Supplemental balance sheet information related to leases was as follows:

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(in thousands)	March 31, 2020
Other long-term assets	$	5,590
Accrued payroll and other current liabilities	2,336
Other long-term liabilities	4,116
Total operating lease liabilities	$	6,452

Other information related to leases was as follows:

	Three months ended March 31,			Three months ended March 31,
(in thousands)	2020			2019
Supplemental Cash Flow Information
Cash paid for amounts included in the measurement of lease liabilities	$	712		$	630
Right-of-use assets obtained in exchange for lease obligations	$	—		$	689
Weighted average remaining lease term	2.39 years			3.11 years
Weighted average discount rate	8		%	8		%

Maturities of lease liabilities as of March 31, 2020 are as follows:

(in thousands)	Operating leases
2020 (remaining nine months)	$	2,191
2021	2,960
2022	1,326
2023	403
2024	319
Total maturities of lease liabilities	7,199
Less imputed interest	$	(747	)
Total	$	6,452

8. Convertible Senior Notes

In May 2018, the Company issued $143.75 million aggregate principal amount of 1.50% Convertible Senior Notes due 2023, including $18.75 million aggregate principal amount of such notes pursuant to the exercise in full of options granted to the initial purchasers, collectively the “Notes.” The Notes are unsecured, unsubordinated obligations and bear interest at a fixed rate of 1.50% per annum, payable semi-annually in arrears on May 15 and November 15 of each year, commencing on November 15, 2018. The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $138.9 million.

Each $1,000 principal amount of the Notes will initially be convertible into 31.0073 shares of the Company’s common stock, the “Conversion Option,” which is equivalent to an initial conversion price of approximately $32.25 per share, subject to adjustment upon the occurrence of specified events. The Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding February 15, 2023, only under the following circumstances:

(1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2018 (and only during such calendar quarter), if the last reported sale price of the Company common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price of the Notes on each applicable trading day;

(2) during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each day of that ten day consecutive trading day period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate of the Notes on such trading day; or

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(3) upon the occurrence of specified corporate events (as set forth in the indenture governing the Notes).

On or after February 15, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. If certain specified fundamental changes occur (as set forth in the indenture governing the Notes) prior to the maturity date, holders of the Notes may require the Company to repurchase for cash all or any portion of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events occur prior to the applicable maturity date, the Company will increase the conversion rate for a holder who elects to convert their notes in connection with such a corporate event in certain circumstances. It is the Company’s current intent and policy to settle conversions through combination settlement which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount in shares of its common stock. During the three months ended March 31, 2020, the conditions allowing holders of the Notes to convert have not been met. The Notes are therefore not convertible during the three months ended March 31, 2020 and are classified as long-term debt.

In accounting for the transaction, the Notes were separated into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the Conversion Option was $33.4 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component was recorded in additional paid-in capital and will be remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount, the “debt discount,” is amortized to interest expense over the contractual term of the Notes at an effective interest rate of 7.6%.

In accounting for the debt issuance costs of $4.9 million related to the Notes, the Company allocated the total amount incurred to the liability and equity components of the Notes based on their relative values. Issuance costs attributable to the liability component were $3.8 million and will be amortized to interest expense using the effective interest method over the contractual term of the Notes. Issuance costs attributable to the equity component were $1.1 million and are included with the equity component in additional paid-in capital.

The Notes consist of the following:

(in thousands)	March 31, 2020			December 31, 2019
Liability:
Principal	$	143,750		$	143,750
Unamortized debt discount	(22,321		)	(23,880		)
Unamortized issuance costs	(2,516		)	(2,692		)
Net carrying amount	$	118,913		$	117,178
Stockholders’ equity:
Debt discount for conversion option	$	33,350		$	33,350
Issuance costs	$	(1,136	)	$	(1,136	)
Net carrying amount	$	32,214		$	32,214

The total estimated fair value of the Notes as of March 31, 2020 was approximately $142.7 million. The fair value was determined based on the closing trading price per $100 of the Notes as of the last day of trading for the period. The fair value of the Notes is primarily affected by the trading price of the Company’s common stock and market interest rates. Based on the closing price of the Company’s common stock of $21.24 on March 31, 2020, the if-converted value of the Notes of $94.7 million was less than their principal amount.     

Interest expense related to the Notes is as follows:

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	Three months ended March 31,
(in thousands)	2020		2019
Contractual interest expense	$	539	$	539
Amortization of debt discount	1,559		1,422
Amortization of issuance costs	176		160
Total interest expense	$	2,274	$	2,121

Capped Calls

In connection with the pricing of the Notes, the Company entered into privately negotiated capped call transactions with certain counterparties, the “Capped Calls.” The Capped Calls each have an initial strike price of approximately $32.25 per share, subject to certain adjustments, which correspond to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $38.94 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, approximately 4.5 million shares of the Company’s common stock. Conditions that cause adjustments to the initial strike price of the Capped Calls mirror conditions that result in corresponding adjustments for the Notes. The Capped Calls are generally intended to reduce or offset the potential dilution to the Company’s common stock upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the Notes. As these transactions meet certain accounting criteria, the Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. The cost of $8.9 million incurred in connection with the Capped Calls was recorded as a reduction to additional paid-in capital.

The net impact to the Company’s stockholders' equity, included in additional paid-in capital, of the above components of the Notes is as follows:

(in thousands)	March 31, 2020
Conversion option	$	33,350
Purchase of capped calls	$	(8,907	)
Issuance costs	$	(1,136	)
Total	$	23,307

Impact on Earnings Per Share

The Notes will not have an impact on the Company’s diluted earnings per share until they meet the criteria for conversion, as discussed above, as the Company intends to settle the principal amount of the Notes in cash upon conversion. Under the treasury stock method, in periods when the Company reports net income, the Company is required to include the effect of additional shares that may be issued under the Notes when the price of its’ common stock exceeds the conversion price. However, upon conversion, there will be no economic dilution from the Notes until the average market price of the Company’s common stock exceeds the cap price of $38.94 per share, as exercise of the capped calls offsets any dilution from the Notes from the conversion price up to the cap price. Capped Calls are excluded from the calculation of diluted earnings per share, as they would be anti-dilutive under the treasury stock method.

9. Commitments and Contingencies

Non-cancelable Material Commitments

The Company is required to purchase unused, non-cancelable, non-returnable raw material inventory that was purchased by its contract manufacturers based on committed finished goods orders from the Company, certain long lead-time raw materials based on the Company’s forecast and current work-in-progress materials. As of March 31, 2020 and December 31, 2019, approximately $7.6 million and $9.7 million, respectively, of such inventory was purchased and held by the third-party manufacturers which was subject to these purchase guarantees.

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Indemnifications

The Company undertakes, in the ordinary course of business, to (i) defend customers and other parties from certain third-party claims associated with allegations of trade secret misappropriation, infringement of copyright, patent or other intellectual property rights, tortious damage to persons or property or breaches of certain Company obligations relating to confidentiality (e.g., safeguarding protected health information) and (ii) indemnify and hold harmless such parties from certain resulting damages, costs and other liabilities. The term of these undertakings may be perpetual and the maximum potential liability of the Company under certain of these undertakings is not determinable. Based on its historical experience, the Company believes the liability associated with these undertakings is minimal.

The Company has entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of the individual. The Company currently has directors and officers insurance. As there has been no significant history of losses, no expense accrual has been made.

Litigation    

From time to time, the Company may be involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters which arise in the ordinary course of business. The Company defends itself vigorously against any such claims. Although the outcome of these matters is currently not determinable, management expects that any losses from existing matters that are probable or reasonably possible of being incurred as a result of these matters would not be material to the financial statements as a whole.

10. Stock-based Compensation and Awards

Stock Option Activity

A summary of the stock option activity for the three months ended March 31, 2020 is presented below:

	Options Outstanding
	Number of options		Weighted average exercise price		Weighted average remaining contractual term	Aggregate intrinsic value
					(in years)	(in thousands)
Outstanding at December 31, 2019	606,327		$	13.41	3.62	$	4,566
Options granted	—		—
Options exercised	(77,909	)	9.38
Options canceled	—		—
Outstanding at March 31, 2020	528,418		$	14.01	3.38	$	3,974

At March 31, 2020, there was no unrecognized compensation cost related to options. As of March 31, 2020, there were 1,855,146 shares that remained available for future issuance of options, restricted stock units (“RSUs”) or other equity awards under the 2012 Equity Incentive Plan.

Employee Stock Purchase Plan

In March 2012, the Company’s 2012 Employee Stock Purchase Plan (the “ESPP”) was approved. No shares of common stock were purchased during the three months ended March 31, 2020 and 2019. As of March 31, 2020, there were 1,189,618 shares available for future issuance under the ESPP.

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The following Black-Scholes option-pricing assumptions were used for each respective period for the ESPP:

	Three months ended March 31,
	2020	2019
Expected term (in years)	0.50	0.50
Volatility	50.0%	33.0%
Risk-free interest rate	1.59%	2.51%
Dividend yield	0%	0%

Restricted Stock Units

A summary of RSU activity for the three months ended March 31, 2020 is presented below:

	Restricted Stock Units
	Number of shares		Weighted Average Grant Date Fair Value per Share
Outstanding at December 31, 2019	1,550,646		$	28.94
Granted	203,971		22.84
Vested	(101,431	)	31.08
Forfeited	(17,868	)	28.11
Outstanding at March 31, 2020	1,635,318		$	28.06

At March 31, 2020, there was $28.8 million of unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted-average period of 1.75 years.

Allocation of Stock-Based Compensation Expense

The following table presents the allocation of stock-based compensation expense:

	Three months ended March 31,
(in thousands)	2020		2019
Cost of revenue	$	973	$	978
Research and development	966		822
Sales and marketing	1,860		1,720
General and administrative	2,042		2,024
Total stock-based compensation	$	5,841	$	5,544

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11. Segments

The Company has two operating segments, which are both reportable business segments: (i) Product and (ii) Service, both of which are comprised of Vocera and its wholly-owned subsidiaries’ results of operations.

The following table presents a summary of the operating segments:

	Three months ended March 31,
	2020			2019
(in thousands)
Revenue
Product	$	17,850		$	14,003
Service	22,823			21,306
Total revenue	40,673			35,309
Cost of revenue
Product	6,364			5,334
Service	10,523			10,290
Total cost of revenue	16,887			15,624
Gross profit
Product	11,486			8,669
Service	12,300			11,016
Total gross profit	23,786			19,685
Operating expenses	32,386			30,745
Interest expense, net and other	(1,745		)	(711		)
Loss before income taxes	$	(10,345	)	$	(11,771	)

12. Income Taxes

The Company recorded a $(0.1) million and $36,000 (provision for) benefit from income taxes for the three months ended March 31, 2020 and 2019, respectively. The provision recorded for the three months ended March 31, 2020 was primarily due to the accretion of the deferred tax liability associated with indefinite lived intangibles and state income taxes. The benefit recorded for the three months ended March 31, 2019 was primarily due to the tax benefit from the gain recorded in other comprehensive income.

As of March 31, 2020, the Company has provided a valuation allowance against certain federal and state deferred tax assets. Management continues to evaluate the realizability of deferred tax assets and the related valuation allowance. If management’s assessment of the deferred tax assets or the corresponding valuation allowance were to change, the Company would record the related adjustment to income during the period in which management makes the determination.

As of March 31, 2020, there were no material changes to either the nature or the amounts of the uncertain tax positions previously determined for the year ended December 31, 2019.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted and signed into law. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. The Company is currently evaluating the impact of the CARES Act, but at present does not expect the NOL provisions of the CARES Act to result in a material impact to the Company as it has historically generated taxable losses.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our other Securities and Exchange Commission, or SEC, filings, including our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 26, 2020. These discussions contain forward-looking statements reflecting our current expectations that involve risks and uncertainties which are subject to safe harbors under the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements include, but are not limited to, statements concerning our plans, objectives, expectations and intentions, future financial position, future revenues, projected costs, expectations regarding demand and acceptance for our technologies, growth opportunities and trends in the market in which we operate, prospects and plans and objectives of management, and the expected impact of the COVID-19 pandemic on our operations. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.

Business Overview

We are a provider of secure, integrated, intelligent communication and clinical workflow solutions, focused on empowering mobile workers in healthcare, hospitality, retail, energy, education and other mission-critical mobile work environments, in the United States and internationally. The significant majority of our business is generated from sales of our solutions in the healthcare market to help our customers enhance quality of care, safety, patient and staff experience and improve operational efficiency.

We primarily sell products, software maintenance and professional services directly to end users. Total revenue increased 15.2% from $35.3 million for the three months ended March 31, 2019 to $40.7 million for the three months ended March 31, 2020. Our total deferred revenue and backlog was $125.0 million as of March 31, 2020 compared to $136.3 million as of December 31, 2019. For the three months ended March 31, 2019, we recorded a net loss of $11.7 million compared to a net loss of $10.5 million for the three months ended March 31, 2020.

Our diverse customer base ranges from large hospital systems to small local hospitals, as well as other healthcare facilities and customers in non-healthcare markets. We do not rely on any one customer for a substantial portion of our revenue. While we have international customers in other English-speaking countries such as Canada, the United Kingdom, Australia, New Zealand and parts of the Middle East, most of our customers are located in the United States. International customers represented 10.5%, 8.7% and 10.2% of our revenue in the three months ended March 31, 2020, and the years ended December 31, 2019 and 2018, respectively. We believe certain international markets represent attractive growth opportunities. We are exploring plans to expand our presence in other English-speaking markets and enter non-English speaking markets.

We outsource the manufacturing of our hardware products. Our outsourced manufacturing model allows us to scale our business without the significant capital investment and on-going expenses required to establish and maintain manufacturing operations. We work closely with our contract manufacturers, including Sercomm and SMTC Corporation, and key suppliers to manage the procurement, quality and cost of components. We seek to maintain an optimal level of finished goods inventory to meet our forecast for sales and unanticipated shifts in sales volume and mix.

COVID-19 Pandemic

The outbreak of the novel coronavirus, SARS-CoV-2, or COVID-19, has evolved in a global pandemic and public health emergency. Many federal, state and local governments and private entities have mandated various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories and quarantining of people who may have been exposed to the virus. The COVID-19 pandemic has affected our business in several ways:

• We have taken measures to protect the health and safety of our employees by shifting the majority of our employees to remote work.

• We booked some urgent orders in the first quarter to serve hospitals focused on preparations for COVID-19.

• We issued some free “surge” software licenses to our customers that they can use for a limited time while they are responding to the pandemic.

• Our access to our healthcare customers’ locations for sales and implementation activities has been limited in many cases. The sales cycle and implementation timeline for broader strategic deals was elongated as they shifted their primary focus to preparing for and responding to the pandemic.

• We have experienced some delays in receiving parts due to supplier and shipping issues.

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Overall, the outbreak did not have a material impact on our operating results or business in the first quarter of 2020. However, while future impacts can’t be predicted at this time, the shift in hospital resources, attention to treatment of COVID-19 patients and declines in hospital revenues may result in reduced demand for our products and solutions, longer sales cycles and/or delays of customer implementations, which could negatively impact our financial condition.

We have generated operating cash flows in the past and our over $233 million in cash and short-term investments provides us with ample liquidity to meet our needs. However, given the dynamic nature of this situation, we cannot accurately estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows.

Critical Accounting Policies and Estimates

There have been no changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended December 31, 2019, except as disclosed in Note 1 to the condensed consolidated financial statements “Recently Adopted Accounting Pronouncements.”

Results of Operations     

The following table presents our results of operations for the periods indicated. The period-to-period comparisons of results are not necessarily indicative of results for future periods.

	Three months ended March 31,
Consolidated statement of operations data:	2020					2019
	(unaudited)
(in thousands)	Amount			% Revenue		Amount			% Revenue
Revenue
Product	$	17,850		43.9	%	$	14,003		39.7	%
Service	22,823			56.1		21,306			60.3
Total revenue	40,673			100.0		35,309			100.0
Cost of revenue
Product	6,364			15.6		5,334			15.1
Service	10,523			25.9		10,290			29.1
Total cost of revenue	16,887			41.5		15,624			44.2
Gross profit	23,786			58.5		19,685			55.8
Operating expenses:
Research and development	9,032			22.2		8,146			23.1
Sales and marketing	16,963			41.7		16,019			45.4
General and administrative	6,391			15.7		6,580			18.6
Total operating expenses	32,386			79.6		30,745			87.1
Loss from operations	(8,600		)	(21.1	)	(11,060		)	(31.3	)
Interest income	1,120			2.8		1,279			3.6
Interest expense	(2,274		)	(5.6	)	(2,121		)	(6.0	)
Other income (expense), net	(591		)	(1.5	)	131			0.4
Loss before income taxes	(10,345		)	(25.4	)	(11,771		)	(33.3	)
Benefit from (provision for) income taxes	(125		)	(0.3	)	36			0.1
Net loss	$	(10,470	)	(25.7	)%	$	(11,735	)	(33.2	)%

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Revenue:

	Three months ended March 31,
	2020		2019		Change
(in thousands)	Amount		Amount		Amount			%
Product revenue
Device	$	13,903	$	10,060	$	3,843		38.2	%
Software	3,947		3,943		4			0.1
Total product	17,850		14,003		3,847			27.5
Service revenue
Maintenance and support	18,069		16,393		1,676			10.2
Professional services and training	4,754		4,913		(159		)	(3.2	)
Total service	22,823		21,306		1,517			7.1
Total revenue	$	40,673	$	35,309	$	5,364		15.2	%

Three months ended March 31, 2020 compared to the three months ended March 31, 2019.

Total revenue increased $5.4 million, or 15.2%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

Product revenue increased $3.8 million, or 27.5%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Device revenue increased $3.8 million, or 38.2%, and software revenue remained relatively flat for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The increase in device revenue was driven primarily by an increase in the unit volume of badges and related accessories, which we believe was caused in part by our customers’ preparations for surges of COVID-19 patients.

Service revenue increased $1.5 million, or 7.1%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Software maintenance and support revenue increased $1.7 million, or 10.2%, and professional services and training revenue decreased $0.2 million, or 3.2%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The increase in software maintenance and support revenue was primarily the result of having a larger customer base purchasing software maintenance contracts. The decrease in professional services and training revenue was due to a decrease in implementation services for our solutions, which in some cases was the result of our customer’s delaying implementation services while they focus on preparations for the pandemic.

Cost of revenue:

	Three months ended March 31,
	2020			2019			Change
(in thousands)	Amount			Amount			Amount			%
Cost of revenue
Product	$	6,364		$	5,334		$	1,030		19.3	%
Service	10,523			10,290			233			2.3
Total cost of revenue	$	16,887		$	15,624		$	1,263		8.1	%
Gross margin
Product	64.3		%	61.9		%	2.4		%
Service	53.9		%	51.7		%	2.2		%
Total gross margin	58.5		%	55.8		%	2.7		%

Three months ended March 31, 2020 compared to the three months ended March 31, 2019.

Cost of product revenue increased $1.0 million, or 19.3%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. This was primarily driven by higher device revenue. For the same comparative periods, product gross margin as a percentage of product revenue increased primarily as a result of lower amortization of intangibles assets in the first quarter of fiscal year 2020.

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Cost of service revenue increased $0.2 million, or 2.3%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The cost of service revenue increased primarily due to increased headcount. For the same comparative periods, service gross margin as a percentage of service revenue increased primarily as a result of a higher mix of maintenance and support revenue.

Operating expenses:

	Three months ended March 31,
	2020		2019		Change
(in thousands)	Amount		Amount		Amount			%
Operating expenses
Research and development	$	9,032	$	8,146	$	886		10.9	%
Sales and marketing	16,963		16,019		944			5.9
General and administrative	6,391		6,580		(189		)	(2.9	)
Total operating expenses	$	32,386	$	30,745	$	1,641		5.3	%

Three months ended March 31, 2020 compared to the three months ended March 31, 2019.

Research and development expense. Research and development expense increased $0.9 million or 10.9%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. This was primarily due to an increase in compensation and benefits associated with increased headcount as well as an increase of $0.1 million in research and development equipment expense.

Sales and marketing expense. Sales and marketing expense increased $0.9 million or 5.9% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. This was primarily due to an increase in compensation and benefits of $2.2 million resulting from higher headcount and commissions. This increase was offset by a decrease in marketing development of $0.6 million, travel expense of $0.5 million and outside services of $0.2 million.

General and administrative expense. General and administrative expense decreased $0.2 million or 2.9% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. This was primarily due to a decrease in outside services.

Interest Income and Other Expense, Net:

	Three months ended March 31,
(in thousands)	2020			2019			Change
Interest income	$	1,120		$	1,279		$	(159	)
Interest expense	(2,274		)	(2,121		)	(153		)
Other income (expense), net	(591		)	131			(722		)

Three months ended March 31, 2020 compared to the three months ended March 31, 2019.

Interest income. Interest income decreased $0.2 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. This decrease was due to higher cash and short-term investment balances earning a lower rate of return on our investments.

Interest expense. For the three months ended March 31, 2020 we had interest expense of $2.3 million resulting from the amortization of debt discount and debt issuance costs and the contractual interest incurred on the issuance of the Notes. This increased $0.2 million from March 31, 2019 was primarily due to a higher accretion of the Notes.

Other income (expense), net. The change in other expense in the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily due to foreign exchange fluctuations.

Liquidity and Capital Resources

As of March 31, 2020, we had cash and cash equivalents and short-term investments of $233.8 million. We believe that our existing sources of liquidity will satisfy our working capital and capital requirements for at least the next twelve months and the foreseeable future.

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	Three months ended March 31,
(in thousands)	2020			2019
Consolidated Statements of Cash Flow Data:
Net cash provided by operating activities	$	5,644		$	945
Net cash used in investing activities	(122		)	(2,578		)
Net cash provided by (used in) financing activities	(90		)	293
Net increase in cash and cash equivalents	$	5,432		$	(1,340	)

Operating activities

Cash provided by operating activities was $5.6 million for the three months ended March 31, 2020, due to a net loss of $10.5 million, offset by non-cash items such as stock-based compensation of $5.8 million, amortization of debt discount and issuance costs of $1.7 million, an increase in lease-related performance liabilities of $0.3 million and depreciation and amortization of $1.3 million for property and equipment and acquired intangible assets. With respect to changes in assets and liabilities, we experienced a decrease in accounts receivable of $16.3 million, an increase of $0.1 million in other receivables, an increase of $1.5 million in inventories, an increase of $0.4 million in prepaid expenses and other assets, a decrease in deferred commissions of $0.2 million, a decrease of $2.8 million in accounts payable and a $4.8 million decrease in deferred revenue.

Cash provided by operating activities was $0.9 million for the three months ended March 31, 2019, due to a net loss of $11.7 million, offset by non-cash items such as stock-based compensation of $5.5 million, amortization of debt discount and issuance costs of $1.6 million, an increase in lease-related performance liabilities of $0.3 million and depreciation and amortization of $1.9 million for property and equipment and acquired intangible assets. With respect to changes in assets and liabilities, we experienced a decrease in accounts receivable of $15.7 million, an increase of $1.2 million in other receivables, an increase of $1.6 million in inventories, an increase of $0.4 million in prepaid expenses and other assets, an decrease of $1.2 million in accounts payable, a decrease of $1.7 million in accrued payroll and other liabilities and a $5.7 million decrease in deferred revenue.

Investing activities

Cash used in investing activities was $0.1 million for the three months ended March 31, 2020, due to $28.6 million of short-term investment maturities, offset by $28.0 million for purchases of short-term investments. An additional $0.7 million of cash was used for the purchase of property and equipment and leasehold improvements.

Cash used in investing activities was $2.6 million for the three months ended March 31, 2019, due to $29.6 million of short-term investment maturities, offset by $31.3 million for purchases of short-term investments. An additional $0.9 million of cash was used for the purchase of property and equipment and leasehold improvements.

Financing activities

Cash used in financing activities was $0.1 million for the three months ended March 31, 2020, attributable to $0.7 million of proceeds from stock option exercises offset by $0.9 million cash paid for employee taxes collected via net share settlement.

Cash provided by financing activities was $0.3 million for the three months ended March 31, 2019, attributable to $1.6 million of proceeds from stock option exercises. This was partially offset by $1.3 million cash paid for employee taxes paid on net share settlement.

Off-Balance Sheet Arrangements

During the three months ended March 31, 2020, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Refer to Note 9 to the condensed consolidated financial statements, “Commitments and Contingencies,” for a discussion of our non-cancelable purchase commitments.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. To achieve this objective, historically we have invested in money market funds. With the proceeds from our two public offerings in 2012 and the issuance of our convertible senior notes in 2018, we have invested in a broader portfolio of high credit quality short-term securities. To minimize the exposure due to an adverse shift in interest rates, we maintain an average portfolio duration of one year or less.

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Our primary exposure to market risk is interest income and expense sensitivity, which is affected by changes in the general level of the interest rates in the United States. However, because of the short-term nature of our interest-bearing securities, a 10% change in market interest rates would not be expected to have a material impact on our consolidated financial condition or results of operations.

Historically our operations have consisted of research and development and sales activities in the United States. As a result, our financial results have not been materially affected by factors such as changes in foreign currency exchange rates or economic conditions in foreign markets. We are developing plans to expand our international presence. Accordingly, we expect that our exposure to changes in foreign currency exchange rates and economic conditions may increase in future periods.

Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to management, including principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

As of March 31, 2020, we carried out an evaluation under the supervision of, and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2020.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting which occurred during the period covered by this Quarterly Report on Form 10-Q which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters which arise in the ordinary course of business.

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information set forth in this Quarterly Report on Form 10-Q. Our business, financial condition, results of operations or future prospects could be materially and adversely harmed if any of the following risks, or other risks or uncertainties that are not yet identified or that we currently believe are immaterial, actually occur. The trading price of our common stock could decline due to any of these risks or uncertainties, and, as a result, you may lose all or part of your investment.

Risks related to our business and industry

The COVID-19 outbreak has had a material impact on the U.S. and global economies and could have a material adverse impact on our employees, suppliers, manufacturing and customers, which could adversely and materially impact our business, financial condition and results of operations.

The outbreak of the novel coronavirus, SARS-CoV-2, or COVID-19, has evolved into a global pandemic and both a public health and economic emergency. Many federal, state and local governments and private entities have mandated various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories and quarantining of people who may have been exposed to the virus. As the COVID-19 pandemic is complex and rapidly evolving, our business may be negatively affected for a prolonged period of time. At this point, we cannot reasonably estimate the duration and severity of this pandemic, which could have a material adverse impact on our business, results of operations, financial position and cash flows.

The pandemic has and may continue to adversely affect our customers’ operations, our employees and our employee productivity. It may impact the ability of our customers, subcontractors, partners, and suppliers to operate and fulfill their contractual obligations, and result in an increase in payment defaults, collection costs and/or delays or disruptions in performance. In particular, hospitals and healthcare facilities have prioritized the care and treatment of COVID-19 patients above all other actions and have suspended many activities, restricted most visitors and reduced spending unrelated to COVID-19. These customers have also had to suspend elective procedures, which generate a majority of their profits, adding to their financial difficulties. Even when elective procedures resume, it is uncertain whether consumers will seek those procedures due to concerns about COVID-19. In response, some have furloughed staff, including those we ordinarily work with to sell and implement our offerings.

Outside of healthcare, our clients in the hospitality and retail industries have largely suspended operations until stay-at-home orders are lifted, and potentially beyond. Even once lifted, as with healthcare, it is uncertain whether consumers will return to those establishments and how successful these businesses will be. As a result, we have experienced delays in planned deployments and changes in customer demand, and expect additional delays, discounts, customer payment issues, bad debt, potential terminations and unpredictability as our customers continue to respond to the challenges of treating and containing the COVID-19 pandemic.

We have also experienced some disruptions in our supply chain and our manufacturers have similarly experienced disruptions in their supply chains. To the extent our suppliers prioritize the manufacturing of other products or experience facility or business disruptions due to sick employees, stay-at-home orders, supply chain disruptions or otherwise, we may be unable to maintain a sufficient supply of our products to meet demand. Additionally, our employees, in many cases, are working remotely and using various technologies to perform their functions, which may create security risks, inefficiencies and reduced productivity, and reduce the effectiveness of our sales team.

These effects on our business, and the direct effect of the virus and the disruption on our employees and operations, may negatively impact our revenue, profit margins and liquidity in 2020 and beyond. Additionally, the disruption and volatility in the global and domestic capital markets may increase the cost of capital and limit our ability to access capital.

The COVID-19 pandemic has also caused us to modify our business practices including employee travel, customer visits, employee work locations, and cancellation of physical participation in meetings, events and conferences which are important to support our sales approach, and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners. A prolonged disruption or any further unforeseen delay in our operations or within any of our business activities could result in increased costs and reduced revenue. We could also be adversely affected if government authorities impose additional restrictions or extend the length of restrictions on public gatherings, human interactions, mandatory closures, seek voluntary closures, restrict hours of operations or impose curfews, restrict the import or

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export of products or if suppliers issue mass recalls of products. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or otherwise be satisfactory to government authorities. ​

Both the health and economic aspects of the COVID-19 virus are highly fluid and the future course of each is uncertain. For these reasons and other reasons that may come to light if the coronavirus pandemic and associated protective or preventative measures expand, we may experience a material adverse effect on our business operations, revenues and financial condition; however, its ultimate impact is highly uncertain and subject to change.

We have incurred significant losses in the past and will likely experience losses in the future.

We have incurred significant losses in the past and reported a net loss of $10.5 million for the three months ended March 31, 2020. As of March 31, 2020, we had an accumulated deficit of $160.8 million. If we cannot make consistent progress toward future profitability, our business and our stock price may be adversely affected.

Our ability to be profitable in the future depends upon continued demand for our solutions from existing and new customers. Further adoption of our solutions depends upon our ability to improve quality of care, enhance patient and staff satisfaction, increase hospital efficiency and productivity, and bring value to customers outside of healthcare. In addition, our profitability will be affected by, among other things, our ability to execute on our business strategy, the timing and size of orders, the pricing and costs of our solutions, competitive offerings, macroeconomic conditions affecting the health care industry and the extent to which we invest in sales and marketing, research and development and general and administrative resources.

We depend on sales in the healthcare market for the majority of our revenue, and a decrease in sales in the healthcare market would harm our business.

To date, substantially all of our revenue has been derived from sales to the healthcare market and, in particular, hospitals. Sales to the healthcare market accounted for 98%, 96% and 97% of our revenue for the three months ended March 31, 2020 and the years ended December 31, 2019 and 2018, respectively. We anticipate that sales to the healthcare market will represent a significant portion of our revenue for the foreseeable future.

Most of our solutions require a substantial upfront investment by new customers. The cost of the initial deployment depends on the number of users and departments involved, the size and age of the hospital and the condition of the existing wireless infrastructure, if any, within the hospital. Even if hospital personnel determine that our solutions provide compelling benefits over their existing communications methods, their hospitals may not have, or may not be willing to spend, the resources necessary to install and maintain wireless infrastructure to initially deploy and support our solutions or expand our solutions to other departments or users. Hospitals face significant budget constraints from the COVID-19 pandemic, as they have had to postpone elective procedures that provide a significant portion of their revenue. Hospital budgets are also constrained by unpredictable patient population trends and commercial reimbursements, and increasing demands from, and competition for, patients. In addition, both governmental and commercial hospitals are experiencing lower Medicare reimbursement rates and higher compliance demands, which add to these budget pressures. Also as part of the tax reform law that came into effect in December 2017, the tax penalty for violating the individual health insurance mandate under the Patient Protection and Affordable Care Act of 2010 (ACA) was set to zero effective in 2019, essentially repealing it. There have been attempts to repeal or amend the ACA, as well as continue to undertake other healthcare reforms. As a consequence of these regulatory and other factors, we may experience slowdowns and deferral of orders for our solutions, or customers may choose other less expensive solutions, both of which could negatively impact our sales. We might not be able to sustain or increase our revenue from sales of our solutions, or achieve the growth rates that we envision, if hospitals continue to face significant budgetary constraints and reduce their spending on communications systems.

Our sales cycle can be lengthy and unpredictable, which may cause our revenue and operating results to fluctuate significantly.

Our sales cycles can be lengthy and unpredictable. Our sales efforts involve educating our customers about the use and benefits of our solutions, including the technical capabilities of our solutions and the potential cost savings and productivity gains achievable by deploying them. Customers typically undertake a significant evaluation process, which frequently involves not only our solutions but also their existing communications methods and those of our competitors and can result in a lengthy sales cycle that sometimes exceeds twelve months. With our introduction of the Smartbadge, it may take our customers additional time to evaluate this new device and compare it with our Badge and other solutions. This may also result in delays and reductions in orders for our existing Badge. We spend substantial time, effort and money in our sales efforts without any assurance that our efforts will produce sales. Similarly, our increasing dependence on larger, hospital-wide deployments may increase fluctuations in our revenue and operating results because the failure to complete a significant sale, or the loss of a large customer, will have a greater impact on those results. In addition, purchases of our solutions are frequently subject to budget constraints and shifts, multiple approvals, and unplanned administrative, processing and other delays. We have experienced and may continue to experience elongated sales cycles due to ongoing uncertainty caused by the COVID-19 pandemic, as well as past and future healthcare reform legislation, the impact of

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shifting federal government budgets, changes to Medicare and Medicaid reimbursement and potential future statutes and rulemaking.

We depend on a number of sole source and limited source suppliers, and if we are unable to source our components from them, our business and operating results could be harmed.

We depend on sole and limited source suppliers for several hardware components of our solutions, including our batteries and integrated circuits. We purchase inventory generally through individual purchase orders. Any of these suppliers could cease production of our components, cease to provide the necessary levels of support for our use of their components, experience capacity constraints, material shortages, work stoppages, epidemics or contagious diseases, such as the coronavirus outbreak, that negatively impact them and their suppliers, financial difficulties, cost increases or other reductions or disruptions in output, cease operations or be acquired by or enter into exclusive arrangements with, a competitor. For example, we have experienced periodic delays in deliveries from our suppliers as a result of the COVID-19 pandemic. These suppliers typically rely on purchase orders rather than long-term contracts with their suppliers, and as a result, the supplier may not be able to secure sufficient materials at reasonable prices or of acceptable quality to build our components in a timely manner. Any of these circumstances could cause interruptions or delays in the delivery of our solutions to our customers, and this may force us to seek components from alternative sources, which may not have the required specifications, or be available in time to meet demand or on commercially reasonable terms, if at all. Any of these circumstances may also force us to redesign our solutions if a component becomes unavailable in order to incorporate a component from an alternative source.

Our solutions incorporate multiple software components obtained from licensors on a non-exclusive basis, such as voice recognition software, software supporting the runtime execution of our software platform, and database and reporting software. Our license agreements can be terminated for cause. In many cases, these license agreements specify a limited term and are only renewable beyond that term with the consent of the licensor. If a licensor terminates a license agreement for cause, objects to its renewal or conditions renewal on modified terms and conditions, we may be unable to obtain licenses for equivalent software components on reasonable terms and conditions, including licensing fees, warranties or protection from infringement claims. Some licensors may discontinue licensing their software to us or support of the software version used in our solutions. In such circumstances, we may need to redesign our solutions with substantial cost and time investment to incorporate alternative software components or be subject to higher royalty costs. Any of these circumstances could adversely affect the cost and availability of our solutions.

Third-party licensors generally require us to incorporate specific license terms and conditions in our agreements with our customers. If we are alleged to have failed to incorporate these license terms and conditions, we may be subject to claims by these licensors, incur significant legal costs defending ourselves against such claims and, if such claims are successful, be subject to termination of licenses, monetary damages, or an injunction against the continued distribution of one or more of our solutions.

Because we depend on contract manufacturers and original design manufacturers, our operations could be harmed and we could lose sales if we encounter problems with these manufacturers.

We do not have internal manufacturing capabilities and rely upon two contract manufacturers, Sercomm and SMTC, to make our wearable devices. We have entered into manufacturing agreements with Sercomm and SMTC that are terminable by either party with advance notice and may also be terminated for a material uncured breach. We expect to enter into additional contract manufacturing agreements as we expand our business. We also rely on original design manufacturers, or ODMs, to produce accessories, including batteries, chargers and attachments. Any of these suppliers could cease production of our components, cease to provide the necessary levels of support for our use of their components, experience capacity constraints, material shortages, work stoppages, epidemics or contagious diseases that negatively impact them and their suppliers, financial difficulties, cost increases or other reductions or disruptions in output, cease operations or be acquired by, or enter into exclusive arrangements with, a competitor. If Sercomm, SMTC, or another contract manufacturer or an ODM is unable or unwilling to continue manufacturing components of our solutions in the volumes and timeframes that we require, fails to meet our quality specifications or significantly increases its prices, we may not be able to deliver our solutions to our customers with the quantities, quality and performance that they expect in a timely manner. As a result, we could lose sales and our operating results could be harmed.

Sercomm, SMTC, other contract manufacturers or ODMs may experience problems that could impact the quantity and quality of hardware components of our solution, including disruptions in their manufacturing operations due to equipment breakdowns, labor strikes or shortages, component or material shortages and cost increases. Sercomm, SMTC, other contract manufacturers and these ODMs generally rely on purchase orders rather than long-term contracts with their suppliers, and as a result, may not be able to secure sufficient components or other materials at reasonable prices or of acceptable quality to build components of our solutions in a timely manner. The majority of the hardware components of our solution are manufactured in Asia or Mexico, and adverse changes in political or economic circumstances, or health related issues such as epidemics or contagious diseases, in those locations could also disrupt our supply and quality of components of our solutions. In addition, U.S. government officials have recently

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changed and proposed additional changes in trade, tariffs, fiscal or tax policies, and any such changes in the U.S. or in other countries from which we source components of our products could adversely affect our business.

Companies occasionally encounter unexpected difficulties in ramping up production of new products, and we may experience such difficulties with future generations of our products. Sercomm, SMTC, other contract manufacturers and our ODMs also manufacture products for other companies. Generally, our orders represent a relatively small percentage of the overall orders received by Sercomm, SMTC, other contract manufacturers and these ODMs from their customers; therefore, fulfilling our orders may not be a priority in the event Sercomm, SMTC, other contract manufacturers or an ODM is constrained in its ability to fulfill all of its customer obligations. In addition, if Sercomm, SMTC, other contract manufacturers or an ODM is unable or unwilling to continue manufacturing components of our solutions, we may have to identify one or more alternative manufacturers. The process of identifying and qualifying a new contract manufacturer or ODM can be time consuming, and we may not be able to substitute suitable alternative manufacturers in a timely manner or at an acceptable cost. Additionally, transitioning to a new manufacturer may cause us to incur additional costs and delays if the new manufacturer has difficulty manufacturing components of our solutions to our specifications or quality standards.

If we fail to forecast our manufacturing requirements accurately or fail to properly manage our inventory with our contract manufacturer, we could incur additional costs or experience manufacturing delays that could impact the timing of our revenue recognition and adversely affect our operating results.

We place orders with our contract manufacturers, including Sercomm and SMTC, and we and our contract manufacturers place orders with suppliers based on forecasts of customer demand. Because of our international low-cost sourcing strategy, our lead times are long and cause substantially more risk to forecasting accuracy than would result were lead times shorter. Our forecasts are based on multiple assumptions, each of which may introduce errors into our estimates affecting our ability to meet our customers’ demands for our solutions. We also may face additional forecasting challenges due to new product introductions, product transitions in the components of our solutions, or to our suppliers discontinuing production of materials and subcomponents required for our solutions. If demand for our solutions increases significantly, we may not be able to meet demand on a timely basis, and we may need to expend a significant amount of time working with our customers to allocate limited supply and maintain positive customer relations, or we may incur additional costs in order to source additional materials and subcomponents to produce components of our solutions or to expedite the manufacture and delivery of additional inventory. If we underestimate customer demand, our contract manufacturer may have inadequate materials and subcomponents on hand to produce components of our solutions, which could result in manufacturing interruptions, shipment delays, deferral or loss of revenue, and damage to our customer relationships. Conversely, if we overestimate customer demand, we and our contract manufacturers may purchase more inventory than required for actual customer orders, resulting in excess or obsolete inventory, thereby increasing our costs and harming our operating results.

If we fail to successfully develop and introduce new solutions and features to existing solutions, our revenue, operating results and reputation could suffer.

Our success depends, in part, upon our ability to develop and introduce new solutions and to add features to existing solutions that meet existing and new customer requirements. We may not be able to develop and introduce new solutions or features on a timely basis or in response to customers’ changing requirements. Similarly, our new solutions and features may not sufficiently differentiate us from competing solutions such that customers can justify deploying our solutions. We expect to incur costs associated with the development and introduction of new solutions before the anticipated benefits or the returns are realized, if at all. We may experience technical problems and additional costs as we introduce new features to our software platform, deploy future models of our wireless badges (like the new Smartbadge), or deploy new smartphone apps, which can require customers to perform software upgrades to their systems, and integrate new solutions with existing customer clinical systems and workflows. In addition, we may face technical difficulties as we expand into non-English speaking countries and incorporate non-English speech recognition capabilities into our solutions. We also may incur substantial costs or delays in the manufacture of any additional new products or models as we seek to optimize production methods and processes at our contract manufacturers. In addition, we expect that we may at least initially achieve lower gross margins on new models, while endeavoring to reduce manufacturing costs over time. If any of these problems were to arise, our revenue, operating results and reputation could suffer.

If we fail to offer high-quality services and support for any of our solutions, our operating results and our ability to sell those solutions in the future will be harmed.

Our ability to sell our solutions depends on our professional services and technical support teams providing high-quality services and support. Our professional services team assists our customers with their wireless infrastructure assessment, clinical workflow design, communication solution configuration, clinical integration, training and project management during the pre-deployment and deployment stages. Once our solutions are deployed within a customer’s facility, the customer typically depends on our technical support team to help resolve technical issues, assist in optimizing the use of our solutions and facilitate adoption of new

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functionality. If we do not effectively assist our customers in deploying our solutions, succeed in helping our customers quickly resolve technical and other post-deployment issues, or provide effective ongoing support services, our ability to expand the use of our solutions with existing customers and to sell our solutions to new customers will be harmed. If deployment of our solutions is deemed unsatisfactory, we may incur significant costs to attain and sustain customer satisfaction or, in extreme cases, our customers may choose not to deploy our solutions. As we rapidly hire new services and support personnel, we may inadvertently hire underperforming people who will have to be replaced, or fail to effectively train such employees, leading in some instances to slower growth, additional costs and poor customer relations. In addition, the failure of channel partners to provide high-quality services and support in markets outside the United States could also harm sales of our solutions.

As we continue to pursue opportunities for larger deals that have greater technical complexity, including deals that require more complex integrations with our customer’s workflows, we may experience a longer time period for our solutions to deploy and as a result, our revenue recognition for these deals may be delayed. These complex deployments may also be delayed as our customers focus on responding to the COVID-19 pandemic. Additionally, as we enter agreements with new and existing customers for larger and more complex deals across multiple sites, we have been, and may continue to be, required to agree to customer acceptance and cancellation clauses. With acceptance clauses, delays may occur in obtaining customer acceptance regardless of the quality of our products and services, and may cause us to defer revenue recognition where such acceptance provisions are substantive in nature, or they may require us to incur additional professional services or other costs in an effort to obtain such customer acceptance. Cancellation clauses may result in a customer canceling an order for our hardware, software and services, which could impact our revenue.

Our business has gone through cycles of expansion, relative stability and contraction, and if we are not able to manage such cycles effectively, our operating results may suffer.

We have experienced periods of expansion, relative stability and contraction in our revenues and operations in the past. Such fluctuations have placed, and may continue to place, strains on our management systems, infrastructure and other resources. Especially during growth periods, we hire additional direct sales, professional services and marketing personnel domestically and internationally, acquire complementary businesses, technologies or assets, and increase our investment in research and development. Our future operating results depend to a large extent on our ability to successfully implement such plans and manage such investments. To do so successfully we must, among other things:

• manage our expenses in line with our operating plans and current business environment;

• maintain and enhance our operational, financial and management controls, reporting systems and procedures;

• integrate acquired businesses, technologies or assets;

• manage operations in multiple locations and time zones; and

• develop and deliver new solutions and enhancements to existing solutions efficiently and reliably.

We expect to incur costs associated with the investments made to support our business strategy before the anticipated benefits or the returns are realized, if any. If we are unable to grow our business or manage our future growth effectively, we may not be able to take advantage of market opportunities or develop new solutions or enhancements to existing solutions. We may also fail to satisfy customer requirements, maintain quality, execute our business plan or respond to competitive pressures, which could result in lower revenue and a decline in the share price of our common stock.

Our revenue and operating results have fluctuated, and are likely to continue to fluctuate, making our quarterly results difficult to predict, which may cause us to miss analyst expectations and may cause the price of our common stock to decline.

Our operating results have been and may continue to be difficult to predict, even in the near term, and are likely to fluctuate as a result of a variety of factors, many of which are outside of our control.

Comparisons of our revenue and operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. Each of the following factors, among others, could cause our operating results to fluctuate from quarter to quarter:

• the ongoing impact of the COVID-19 pandemic;

• the financial health of our healthcare customers and budgetary constraints on their ability to upgrade their communications, particularly in light of the pandemic;

• the availability of government funding for healthcare facilities operated by the United States federal, state and local governments;

• changes in customer purchasing patterns or sales cycles;

• market acceptance of our Smartbadge and its impact on orders for our existing Badge and related software;

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• changes in the regulatory environment affecting our healthcare customers, including impediments to their ability to obtain reimbursement for their services;

• our ability to expand our sales and marketing operations;

• our ability to successfully integrate acquired businesses, technologies or assets;

• the announcement of new significant contracts or relationships;

• the procurement and deployment cycles of our healthcare customers and the length of our sales cycles;

• changes in how healthcare operating and capital budgets are administered within the enterprise;

• changes in customer deployment timelines;

• variations in the amount of orders booked in a prior quarter but not delivered until later quarters;

• our mix of solutions and the varying revenue recognition rules that apply;

• pricing, including discounts by us or our competitors;

• our ability to expand into non-healthcare markets;

• our ability to develop significant new reseller relationships and maintain existing reseller relationships;

• the financial health of our resellers;

• our ability to successfully deploy our solutions in a timely manner;

• our ability to sell and integrate third-party products and services, and our customer’s satisfaction with those third-party products and services;

• our ability to forecast demand and manage lead times for the manufacture of our solutions;

• our ability to develop and introduce new solutions and features to existing solutions that achieve market acceptance;

• the announcement of a new product, which may cause sales cycles to lengthen;

• federal government shutdowns;

• occurrence of health epidemics or contagious diseases and potential effects on our business and manufacturing operations;

• fluctuations in foreign currencies in the international markets in which we operate; and

• future accounting pronouncements and changes in accounting policies.

We primarily compete in the rapidly evolving and competitive healthcare market, and if we fail to effectively respond to competitive pressures, our business and operating results could be harmed.

We believe that the primary competition for our solutions has consisted of traditional methods using wired and wireless phones, pagers and overhead intercoms. While we believe that our system is superior to these legacy methods, our solutions require a significant infrastructure investment by a hospital and many hospitals' spending is severely constrained by other priorities.

Manufacturers and distributors of product categories such as cellular phones, smartphone applications, pagers, mobile radios and in-building wireless telephones also sell their products to hospitals as components of communication solutions. Of these product categories, in-building wireless telephones and pagers represent the most significant current competition for the sale of our solutions. The market for in-building wireless phones is dominated by communications companies such as Cisco Systems, Ascom and Spectralink. In addition, the growing proliferation of smartphones and related applications, including cloud-based applications, represents another category of competitive offerings. Although our customers value secure text-messaging using smartphones from vendors such as Epic and Cerner, we do not believe most of our potential customers would consider that feature alone an adequate substitute for a comprehensive multi-mode communication solution. Some customers may choose solutions that are not HIPAA-compliant, given their budget constraints. Furthermore, in clinical integrations and middleware, we compete with companies including Connexall, Ascom and Philips Healthcare.

We believe currently there is no directly comparable single competitor that provides a solution for the healthcare market as richly-featured as ours, but we could face such competition in the future. Potential competitors in the healthcare or communications markets include large, multinational companies with significantly more resources to dedicate to product development and sales and marketing. These companies, which may include electronic health record vendors or other large software companies, may have existing relationships within the hospital, which may enhance their ability to gain a foothold in our market. For example, some of the electronic health record vendors have started to offer secure text messaging as an additional service and have said they plan to expand these offerings to complete more directly with us. Additionally, there has been some recent merger and acquisition activity in the healthcare market. These companies may choose to more tightly integrate their offerings. Customers may prefer to purchase a more highly integrated or bundled solution from a single provider or an existing supplier rather than a new supplier, regardless of performance or features. Accordingly, if we fail to effectively respond to competitive pressures, we could experience pricing pressure, reduced profit margins, higher sales and marketing expenses, lower revenue and the loss of market share, any of which would harm our business, operating results or financial condition.

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If we do not achieve the anticipated strategic or financial benefits from our acquisitions or if we cannot successfully integrate them, our business and operating results could be harmed.

We have acquired, and in the future may acquire, complementary businesses, technologies or assets that we believe to be strategic. We may not achieve the anticipated strategic or financial benefits, or be successful in integrating any acquired businesses, technologies or assets. If we cannot effectively integrate the acquired business and products into our business, we may not achieve market acceptance for, or derive significant revenue from, these new solutions.

Integrating newly acquired businesses, technologies and assets could strain our resources, could be expensive and time consuming, and might not be successful. Our recent acquisitions expose us, and we will be further exposed, if we acquire or invest in additional businesses, technologies or assets, to a number of risks, including that we may:

• experience technical issues as we integrate acquired businesses, technologies or assets into our existing solutions;

• encounter difficulties leveraging our existing sales and marketing organizations, and direct sales channels, to increase our revenue from acquired businesses, technologies or assets;

• find that the acquisition does not further our business strategy, we overpaid for the acquisition or the economic conditions underlying our acquisition decision have changed;

• have difficulty retaining key personnel of acquired businesses;

• suffer disruption to our ongoing business and diversion of our management’s attention as a result of transition or integration issues and the challenges of managing geographically or culturally diverse enterprises;

• experience unforeseen and significant problems or liabilities associated with quality, technology and legal contingencies relating to the acquisition, such as intellectual property or employment matters; and

• incur substantial costs to integrate the acquired business.

If we were to proceed with one or more additional significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash. To the extent we issue shares of capital stock or other rights to purchase capital stock, including options and warrants, the ownership of existing stockholders would be diluted. In addition, acquisitions may result in the incurrence of debt, contingent liabilities, large write-offs, or other unanticipated costs, events or circumstances, any of which could harm our operating results.

In addition, from time to time we may enter into negotiations for acquisitions that are not ultimately consummated. These negotiations could result in significant diversion of management time, as well as substantial out-of-pocket costs.

We could be required to record adjustments to our recorded asset balance for intangible assets, including goodwill, that could significantly impact our operating results.

Our balance sheet includes significant intangible assets, including goodwill and other acquired intangible assets. The determination of related estimated useful lives and whether these assets have been impaired involves significant judgment and is subject to certain factors and events over which we have no control. The introduction of new competitive products or services into our markets could impair the value of our intangible assets if they create market conditions that adversely affect the competitiveness of our products and services. Further, declines in our market capitalization may be an indicator that our intangible assets or goodwill carrying values exceed their fair values, which could lead to potential impairment charges that could impact our operating results.

Developments in the healthcare industry and governing regulations have negatively affected and may continue to negatively affect our business.

Substantially all of our revenue is derived from customers in the healthcare industry, in particular, hospitals. The healthcare industry is highly regulated and is subject to changing political, legislative, regulatory and other influences. Developments generally affecting the healthcare industry, including new regulations or new interpretations of existing regulations, could adversely affect spending on information technology and capital equipment by reducing funding, changing healthcare pricing or delivery or creating impediments for obtaining healthcare reimbursements, which together with declining admission trends, could cause our sales to decline and negatively impact our business. For example, the margins of our hospital customers are modest, and potential decreases in reimbursement for healthcare costs may reduce the overall solvency of our customers or cause further deterioration in their financial or business condition.

In the past bills were signed into law that impact the U.S. healthcare system, including the Affordable Care Act (ACA).  Uncertainty surrounding the status of the ACA and its regulations may impact the spending of our healthcare customers, and we cannot predict the effect on our business of any new legislation and regulations that may be adopted if the ACA is significantly changed or repealed or of additional regulations.

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Federal budget activities also impact our customers. Our customers include healthcare facilities run by the Department of Defense and the U.S. Department of Veterans Affairs. During the three months ended March 31, 2020 and years ended December 31, 2019 and 2018, we generated approximately 12%, 17% and 18%, respectively. of our revenue from these customers. Our reseller to the Department of Defense and the U.S. Department of Veterans Affairs represented 21% and 19% of our accounts receivable as of March 31, 2020 and December 31, 2019, respectively. These customers have been and may continue to be impacted by budgetary and legislative actions.

In the past certain departments of the U.S. federal government temporarily stopped operating as a result of failure by the legislative and executive branches of the government to pass bills to keep them operating. There is a risk that the government could be shut down again. Any past or future shutdown may impact our US government customers’ spending decisions, as well as those of our non-US government customers. Any reduction or delay in our customers’, or potential customers’ spending decisions may result in a delay, or reduction, to our revenue.

In addition, many state governments are changing or expanding their healthcare laws, adding additional complexity to understanding the potential impacts.

We are unable to predict the full impact of these new and changing rules on our hospital customers and others in the healthcare industry.  Impacts of these rules have affected and could continue to affect materially our customers’ ability to budget for or purchase our products. The healthcare industry has changed significantly in recent years and we expect that significant changes will continue to occur. We cannot provide assurance that the markets for our solutions will continue to exist at current levels or that we will have adequate technical, financial and marketing resources to react to changes in those markets.

If we fail to increase market awareness of our brand and solutions, and expand our sales and marketing operations, our business could be harmed.

We intend to continue to add personnel and resources in sales and marketing as we focus on expanding awareness of our brand and solutions and capitalize on sales opportunities with new and existing customers. Our efforts to improve sales of our solutions will result in an increase in our sales and marketing expense and general and administrative expense, and these efforts may not be successful. Some newly hired sales and marketing personnel may subsequently be determined to be unproductive and have to be replaced, resulting in operational and sales delays and incremental costs. If we are unable to significantly increase the awareness of our brand and solutions or effectively manage the costs associated with these efforts, our business, financial condition and operating results could be harmed.

Failure to protect our information technology infrastructure against cyber-based attacks, network security breaches, service interruptions, or data corruption could significantly disrupt our operations and adversely affect our business and operating results.

We rely on information technology and telephone networks and systems, including the Internet, to process and transmit sensitive electronic information and to manage or support a variety of business processes and activities, including sales, billing, customer service, procurement and our supply chain. We use enterprise information technology systems to record, process, and summarize financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal, and tax requirements. Our information technology systems, some of which are managed by third-parties, may be susceptible to damage, disruptions or shutdowns due to computer viruses, attacks by computer hackers, failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, telecommunication failures, user errors or catastrophic events. Most of our workforce is currently working remotely as a result of the COVID-19 pandemic, which increases these risks. Although we have developed systems and processes that are designed to protect confidential information and prevent data loss and other security breaches, including systems and processes designed to reduce the impact of a security breach at a third-party vendor, such measures cannot provide absolute security. If our systems are breached or suffer severe damage, disruption or shutdown and we are unable to effectively resolve the issues in a timely manner, our business and operating results may significantly suffer and we may be subject to litigation, government enforcement actions or potential liability. Security breaches could also cause us to incur significant remediation costs, result in product development delays, disrupt key business operations, adversely impact customer relationships, damage our reputation and divert attention of management and key information technology resources.

If hospitals do not have and are not willing to install, upgrade and maintain the wireless infrastructure required to effectively operate our solutions, then they may experience technical problems or not purchase our solutions at all.

The effectiveness of our solutions depends upon the quality and compatibility of the communications environment that our healthcare customers maintain. Our solutions require voice-grade wireless (Wi-Fi) installed through large enterprise environments, which can vary from hospital to hospital and from department to department within a hospital. Many hospitals have not installed

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a voice-grade wireless infrastructure. If potential customers do not have a wireless network that can properly and fully interoperate with our solutions, then such a network must be installed, or an existing Wi-Fi network must be upgraded or modified, for example, by adding access points in stairwells, for our solutions to be fully functional. The additional costs of installing or upgrading a Wi-Fi network may dissuade potential customers from installing our solutions. Furthermore, if changes to a customer’s physical or information technology environment cause integration issues or degrade the effectiveness of our solutions, or if the customer fails to upgrade or maintain its environment as may be required for software releases or updates or to ensure our solution’s effectiveness, the customer may not be able to fully utilize our solutions or may experience technical problems, or these changes may impact the performance of other wireless equipment being used. If such circumstances arise, prospective customers may not purchase or existing customers may not expand their use of or deploy upgraded versions of our solutions, thereby harming our business and operating results.

If we fail to achieve and maintain certification for certain U.S. federal standards, our sales to U.S. government customers will suffer.

We believe that a significant opportunity exists to continue to sell our products to healthcare facilities in the Veterans Administration and Department of Defense (DoD). These customers require independent certification of compliance with specific requirements relating to encryption, security, interoperability and scalability, including Federal Information Processing Standard (FIPS) 140-2 and, as to DoD, certification by its Joint Interoperability and Test Command and under its Information Assurance Certification and Accreditation Process. We have received certification under certain of these standards for military-specific configurations of our solution incorporating our Badge, but we do not have these certifications for our new Smartbadge. We continue to carry out further compliance activities and recertifications, as required. A failure on our part to achieve and maintain compliance and to respond to new threats and vulnerabilities, both as to current products and as to new product versions, could adversely impact our revenue.

Our efforts to sell our solutions in non-healthcare markets may not be successful.

In recent years, we have actively engaged in sales efforts to customers outside the healthcare markets, including hospitality, retail, energy, education and other mobile work environments. We may not be successful in further penetrating the non-healthcare markets upon which we are initially focusing, or other new markets. To date, our solutions have been selected by over 270 customers in non-healthcare markets. Total revenue from non-healthcare customers accounted for 2%, 4% and 3% of our revenue for the three months ended March 31, 2020 and the years ended December 31, 2019 and 2018, respectively. If we cannot maintain these customers by providing solutions that meet their requirements, if we cannot successfully expand our solutions in non-healthcare markets, or if adoption of our solutions remains slow, we may not obtain significant revenue from these markets. We may experience challenges as we expand in non-healthcare markets, including pricing pressure on our solutions, budget constraints due to the COVID-19 pandemic and technical issues as we adapt our solutions for the requirements of new markets. For example, some of our hospitality and retail customers have been significantly impacted by the COVID-19 pandemic and they have been forced to close locations and face significant revenue declines. Our solutions also may not contain the functionality required by these non-healthcare markets or may be too expensive or may not sufficiently differentiate us from competing solutions such that customers can justify deploying our solutions.

We generally recognize revenue from maintenance and support contracts and subscription arrangements over the contract term, and changes in sales may not be immediately reflected in our operating results.

We generally recognize revenue from our customer maintenance and support contracts, extended warranty contracts and subscription arrangements ratably over the contract term, which is typically 12 months, in some cases subject to an early termination right. Revenue from our maintenance and support contracts accounted for 44%, 38% and 35% of our revenue for the three months ended March 31, 2020 and the years ended December 31, 2019 and 2018, respectively. A portion of the revenue we report in each quarter is derived from the recognition of deferred revenue relating to maintenance and support contracts entered into during previous quarters. Consequently, a decline in new or renewed maintenance and support, extended warranty contracts or subscription agreements by our customers in any one quarter may not be immediately reflected in our revenue for that quarter. Such a decline, however, will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our services and potential changes in our rate of renewals may not be fully reflected in our operating results until future periods.

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Our success depends upon our ability to attract, integrate and retain key personnel, and our failure to do so could harm our ability to grow our business.

Our success depends, in part, on the continuing services of our senior management and other key personnel, and our ability to continue to attract, integrate and retain highly skilled personnel, particularly in engineering, sales and marketing. Competition for highly skilled personnel is intense, particularly in the Silicon Valley where our headquarters are located. If we fail to attract, integrate and retain key personnel, our ability to grow our business could be harmed.

The members of our senior management and other key personnel are at-will employees and may terminate their employment at any time without notice. If one or more members of our senior management terminate their employment, we may not be able to find qualified individuals to replace them on a timely basis or at all, and our senior management may need to divert their attention from other aspects of our business. Former employees may also become employees of a competitor. We may also have to pay additional compensation to attract and retain key personnel. We also anticipate hiring additional engineering, marketing and sales, and services personnel to grow our business. Often, significant amounts of time and resources are required to train these personnel. We may incur significant costs to attract, integrate and retain them, and we may lose them to a competitor or another company before we realize the benefit of our investments in them.

Our international operations subject us, and may increasingly subject us in the future, to operational, financial, economic and political risks abroad.

Although we derive a relatively small portion of our revenue from customers outside the United States, we believe that non-U.S. customers could represent an increasing share of our revenue in the future. During the three months ended March 31, 2020 and the years ended December 31, 2019 and 2018, we generated 10.5%, 8.7% and 10.2% of our revenue, respectively, from customers outside of the United States, including Canada, the United Kingdom, Australia, New Zealand and Middle Eastern countries including the United Arab Emirates, Saudi Arabia and Qatar. In 2014, we opened a new innovation center in India and a sales office in Dubai, United Arab Emirates. Accordingly, we are subject to risks and challenges that we would not otherwise face if we conducted our business solely in the United States, including:

• challenges incorporating non-English speech recognition capabilities into our solutions as we expand into non-English speaking jurisdictions;

• difficulties integrating our solutions with wireless infrastructures with which we do not have experience;

• difficulties integrating local dialing plans and applicable PBX standards;

• challenges associated with delivering support, training and documentation in several languages;

• difficulties in staffing and managing personnel and resellers;

• the need to comply with a wide variety of foreign laws and regulations, including increasingly stringent data privacy regulations, requirements for export controls for encryption technology, employment laws, changes in tax laws and tax audits by government agencies;

• political and economic instability in, or foreign conflicts that involve or affect, the countries of our customers;

• the impacts associated with epidemics or contagious diseases;

• adverse effects on us directly, or on our customers and suppliers, of changes in trade, fiscal or tax policies, including the imposition of tariffs;

• difficulties in collecting accounts receivable and longer accounts receivable payment cycles;

• exposure to competitors who are more familiar with local markets;

• risks associated with the Foreign Corrupt Practices Act and local anti-bribery law compliance;

• difficulties associated with resolving contract disputes in foreign countries with varied legal systems;

• limited or unfavorable intellectual property protection in some countries; and

• currency exchange rate fluctuations, which could affect the price of our solutions relative to locally produced solutions.

Any of these factors could harm our existing international business, impair our ability to expand into international markets or harm our operating results.

Our solutions are highly complex and may contain software or hardware defects that could harm our reputation and operating results.

Our solutions incorporate complex technology, are deployed in a variety of complex hospital environments and must interoperate with many different types of devices and hospital systems. While we test the components of our solutions for defects and errors prior to release, we or our customers may not discover a defect or error until after we have deployed our solution, integrated it into the hospital environment and our customer has commenced general use of the solution. In addition, our solutions in some cases are integrated with hardware and software offered by “middleware” vendors in order to interoperate with nurse call systems,

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device alarms and other hospital systems. Our software may be partnered with third party software to provide for potential joint solutions with such third party. Our software may also be deployed on third party devices, including devices we resell, which creates additional complexity because we share control of the customer experience. If we cannot successfully integrate our solutions with these vendors as needed or if any hardware or software of these vendors contains any defect or error, then our solutions may not perform as designed, or may exhibit a defect or error.

Any defects or errors in, or which are attributed to our solutions, or to products or services we resell, could result in:

• delayed market acceptance of our affected solutions;

• loss of revenue or delay in revenue recognition;

• loss of customers or inability to attract new customers;

• diversion of engineering or other resources for remedying the defect or error;

• damage to our brand and reputation;

• delay in delivery of information;

• increased service and warranty costs, including potential replacement costs for product recalls or returns; and

• legal actions by our customers and hospital patients, including product liability claims.

If any of these occur, our operating results and reputation could be harmed.

We face potential liability related to the privacy and security of personal information collected through our solutions.

In connection with our healthcare business, we handle and have access to “Protected Health Information” or “PHI” subject in the United States to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) as amended and supplemented by the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”) , regulations issued pursuant to these statutes, state privacy and security laws and regulations, and associated contractual obligations as a “business associate” of healthcare providers. These statutes, regulations and contractual obligations impose numerous requirements regarding the use and disclosure of PHI with which we must comply. Among other things, HITECH made certain aspects of HIPAA’s rules, notably the “HIPAA Security Rule,” directly applicable to business associates, independent contractors or agents of covered entities that create, receive, maintain or transmit PHI in connection with providing a function on behalf of, or a service to, a covered entity (e.g., health care communication solutions). HITECH also created four new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates and gave state attorneys general new authority to file civil actions for damages or injunctions in federal court to enforce the federal HIPAA regulation and seek attorney’s fees and costs associated with pursuing federal civil actions. The U.S. Department of Health & Human Services Office for Civil Rights (“OCR”) has increased its focus on compliance and continues to train state attorneys general for enforcement purposes. The OCR has recently increased both its efforts to audit HIPAA compliance and its level of enforcement, with one recent penalty exceeding $16 million. Our failure to accurately anticipate the application or interpretation of these statutes, regulations and contractual obligations as we develop our solutions, a failure by us to comply with their requirements (e.g., evolving encryption and security requirements) or an allegation that defects in our products have resulted in noncompliance by our customers could create material civil and/or criminal liability for us, resulting in adverse publicity and negatively affecting our business.

In addition, the use and disclosure of personal health information is subject to laws and regulations in other jurisdictions in which we do business or expect to do business in the future. Any developments stemming from enactment or modification of these laws and regulations, or the failure by us to comply with their requirements or to accurately anticipate the application or interpretation of these laws could create material liability to us, result in adverse publicity and negatively affect our business.

For example, the European Union previously adopted the Data Protection Directive (DPD), imposing strict regulations and establishing a series of requirements regarding the storage of personally identifiable information on computers or recorded on other electronic media. This has been implemented by all EU member states through national laws. DPD provides for specific regulations requiring all non-EU countries doing business with EU member states to provide adequate data privacy protection when receiving personal data from any of the EU member states.  In May 2016, the EU formally adopted the General Data Protection Regulation (GDPR), which applied to all EU member states starting in May 2018 and replaced the DPD. The GDPR introduces new data protection requirements in the EU and substantial fines for breaches of the data protection rules. It increased our responsibility and liability in relation to personal data that we process, and we were required to put in place additional mechanisms ensuring compliance with the new EU data protection rules.  Moreover, in June 2016, United Kingdom voters approved an exit from the EU, or Brexit, which could also lead to further legislative and regulatory changes.  While the Data Protection Act of 2018, that “implements” and complements the GDPR, has achieved Royal Assent on May 23, 2018 and is now effective in the United Kingdom, it is still unclear whether transfer of data from the EEA to the United Kingdom will remain lawful under GDPR. We may incur liabilities, expenses, costs, and other operational losses under GDPR and applicable EU Member States and the United Kingdom privacy laws in connection with any measures we take to comply with them. Additionally, Canada’s Personal Information and Protection of Electronic Documents Act, as well as a variety of provincial statutes, provides Canadian residents with privacy protections in regard to transactions with businesses and organizations in the private sector and sets out ground rules

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for how private sector organizations may collect, use and disclose personal information in the course of commercial activities. A finding that we have failed to comply with applicable laws and regulations regarding the collection, use and disclosure of personal information could create liability for us, result in adverse publicity and negatively affect our business.

Any legislation or regulation in the area of privacy and security of personal information could affect the way we operate our services and could harm our business. For example, the GDPR imposes strict rules on the transfer of personal data out of the EU to the United States. These obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other requirements or our practices. In addition, these rules are consistently under scrutiny. For example, following a decision of the Court of Justice of the EU in October 2015, the transfer of personal data to U.S. companies that had certified as members of the U.S. Safe Harbor Scheme (“Safe Harbor Scheme”) was declared invalid. In July 2016, the European Commission adopted the EU-U.S. Privacy Shield Framework (“Privacy Shield Framework”) which replaced the Safe Harbor Scheme. The Privacy Shield Framework is reviewed by European authorities annually, and there is currently litigation challenging other EU mechanisms for adequate data transfers. It is uncertain whether the Privacy Shield Framework or the standard contractual clauses might similarly be invalidated by European courts. Additionally, other countries (e.g., Australia and Japan) have adopted certain legal requirements for cross-border transfers of personal information.  The costs of compliance with, and the other burdens imposed by, these and other laws or regulatory actions may prevent us from selling our solutions or increase the costs associated with selling our solutions, and may affect our ability to invest in or jointly develop solutions in the United States and in foreign jurisdictions. Further, we cannot assure you that our privacy and security policies and practices will be found sufficient to protect us from liability or adverse publicity relating to the privacy and security of personal information.

In the U.S., California enacted the California Consumer Privacy Act, or the CCPA, on June 28, 2018, which took effect on January 1, 2020 and will be enforceable by the California Attorney General six months after the publication of the final regulations or July 1, 2020. Although the CCPA includes limited exceptions from its prescriptions, including exceptions for PHI collected by covered entities or business associates subject to HIPAA, among others, the CCPA may regulate or impact our processing of personal information depending on the context. It remains unclear what, if any, modifications will be made to this legislation or how it will be interpreted. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the U.S., and, indeed, a number of state legislatures are considering privacy and/or data protection laws, which could increase our potential liability and adversely affect our business. The interplay of federal and state laws (e.g., in addition to California, Massachusetts and Nevada have adopted laws requiring the implementation of certain security measures to protect personal information, and all 50 states and the District of Columbia, Puerto Rico and Guam, have adopted breach notification laws) may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and our customers and potentially exposing us to additional expense, adverse publicity and liability. Further, as regulatory focus on privacy, security and data use issues continues to increase and laws and regulations concerning the protection of personal information expand and become more complex, these potential risks to products and services could intensify.

If our efforts to protect the security of information collected by our customers are unsuccessful, we could become subject to costly government enforcement actions and private litigation, and our sales and reputation could suffer.

The nature of our business involves the receipt and storage of information about our customers. We have implemented programs to detect and alert us to data security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. Companies are increasingly subject to a wide variety of security incidents, cyber-attacks and other attempts to gain unauthorized access. These threats can come from a variety of sources, ranging in sophistication from an individual hacker to malfeasance by employees, consultants or other service providers to state-sponsored attacks. Cyber threats may be generic, or they may be custom-crafted against our information systems. In recent times, cyber-attacks have become more prevalent and much harder to detect and defend against. Our network and storage applications may be vulnerable to cyber-attack, malicious intrusion, malfeasance, loss of data privacy or other significant disruption and may be subject to unauthorized access by hackers, employees, consultants or other service providers. In addition, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to our systems or facilities through fraud, trickery or other forms of deceiving our employees, contractors and temporary staff. If we experience significant data security breaches or fail to detect and appropriately respond to significant data security breaches, we could be exposed to government enforcement actions and private litigation, as well as potentially incur significant costs and diversion of resources to comply with our contractual obligations to notify our customers of such security breaches, particularly with respect to any protected health information affected. In addition, our customers could lose confidence in our ability to protect their information, which could cause them to discontinue using our products or purchasing from us altogether.

The failure of our equipment lease customers to pay us under leasing agreements with them that we do not sell to third party lease finance companies could harm our revenue and operating results.

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In 2012, we began offering our solutions to our customers through multi-year equipment lease agreements. We sell the bulk of these leases, including the related accounts receivables, to third party lease finance companies on a non-recourse basis. We retain unsold leases in-house, which exposes us to the creditworthiness of such lease customers over the lease term. For the leases that we retain in-house, our ability to collect payments from a customer or to recognize revenue for the sale could be impaired if the customer fails to meet its obligations to us such as in the case of its bankruptcy filing or deterioration in its financial position, or has other creditworthiness issues, any of which could harm our revenue and operating results.

Our use of open source and non-commercial software components could impose risks and limitations on our ability to commercialize our solutions.

Our solutions contain software modules licensed under open source and other types of non-commercial licenses, including the GNU Public License, the Apache License and others. We also may incorporate open source and other licensed software into our solutions in the future. Use and distribution of such software may entail greater risks than use of third-party commercial software, as licenses of these types generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some of these licenses require the release of our proprietary source code to the public if we combine our proprietary software with open source software in certain manners. This could allow competitors to create similar products with lower development effort and time and ultimately result in a loss of sales for us.

The terms of many open source and other non-commercial licenses have not been judicially interpreted, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our solutions. In such event, in order to continue offering our solutions, we could be required to seek licenses from alternative licensors, which may not be available on a commercially reasonable basis or at all, to re-engineer our solutions or to discontinue the sale of our solutions in the event we cannot obtain a license or re-engineer our solutions on a timely basis, any of which could harm our business and operating results. In addition, if an owner of licensed software were to allege that we had not complied with the conditions of the corresponding license agreement, we could incur significant legal costs defending ourselves against such allegations. In the event such claims were successful, we could be subject to significant damages, be required to disclose our source code, or be enjoined from the distribution of our solutions.

Claims of intellectual property infringement could harm our business.

Vigorous protection and pursuit of intellectual property rights has resulted in protracted and expensive litigation for many companies in our industry. Although claims of this kind have not materially affected our business to date, there can be no assurance of the absence of such claims in the future. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources, or require us to enter into royalty or licensing agreements, any of which could harm our business and operating results.

Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, and we cannot be certain that we will be successful in defending ourselves against intellectual property claims. In addition, we currently have a limited portfolio of issued patents compared to many other industry participants, and therefore may not be able to effectively utilize our intellectual property portfolio to assert defenses or counterclaims in response to patent infringement claims or litigation brought against us by third parties. Further, litigation may involve patent holding companies or other adverse patent owners who have no relevant products and against whom our potential patents may provide little or no deterrence.

Many potential litigants have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. Furthermore, a successful claimant could secure a judgment that requires us to pay substantial damages or prevents us from distributing certain solutions or performing certain services. We might also be required to seek a license and pay royalties for the use of such intellectual property, which may not be available on commercially acceptable terms or at all. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be successful.

If we are unable to protect our intellectual property rights, our competitive position could be harmed, or we could be required to incur significant expenses to enforce our rights.

Our success depends, in part, on our ability to protect our proprietary technology. We protect our proprietary technology through patent, copyright, trade secret and trademark laws in the United States and similar laws in other countries. We also protect our proprietary technology through licensing agreements, nondisclosure agreements and other contractual provisions. These protections may not be available in all cases or may be inadequate to prevent our competitors from copying, reverse engineering or otherwise obtaining and using our technology, proprietary rights or solutions in an unauthorized manner. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual

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property rights may be inadequate. In addition, third parties may seek to challenge, invalidate or circumvent our patents, trademarks, copyrights and trade secrets, or applications for any of the foregoing. Our competitors may independently develop technologies that are substantially equivalent, or superior, to our technology or design around our proprietary rights. In each case, our ability to compete could be significantly impaired.

To prevent unauthorized use of our intellectual property rights, it may be necessary to prosecute actions for infringement or misappropriation of our proprietary rights. Any such action could result in significant costs and diversion of our resources and management’s attention, and there can be no assurance that we will be successful in such action. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than us. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing or misappropriating our intellectual property. While we plan to continue to protect our intellectual property with, among other things, patent protection, there can be no assurance that:

• current or future U.S. or foreign patent applications will be approved;

• our issued patents will protect our intellectual property and not be held invalid or unenforceable if challenged by third parties;

• we will succeed in protecting our technology adequately in all key jurisdictions in which we develop technology, or we or our competitors operate; or

• others will not independently develop similar or competing products or methods or design around any patents that may be issued to us.

Our failure to obtain patents with claims of a scope necessary to cover our technology, or the invalidation of our patents, or our inability to protect any of our intellectual property, may weaken our competitive position and harm our business and operating results. We might be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may harm our business, operating results and financial condition.

Product liability or other liability claims could cause us to incur significant costs, adversely affect the sales of our solutions and harm our reputation.

Our solutions are utilized by healthcare professionals and others in the course of providing patient care. As a result, patients, family members, physicians, nurses or others may allege we are responsible for harm to patients or healthcare professionals due to defects in, the malfunction of, the characteristics of, or the operation of, our solutions. Any such allegations could harm our reputation and ability to sell our solutions.

Our solutions utilize lithium-ion batteries and electronic components that may overheat or otherwise malfunction as a result of physical or environmental damage. Components of our solutions emit radio frequency (RF) emissions which have been alleged, in connection with cellular phones, to have adverse health consequences. Magnets in our badges may emit electromagnetic radiation and may be alleged to interfere with implanted medical or other devices. While these components of our solutions comply with applicable guidelines, some may allege that these components of our solutions cause adverse health consequences. Also, applicable guidelines may change making these components of our solutions non-compliant. Any such allegations or non-compliance, or any regulatory developments, could negatively impact the sales of our solutions, require costly modifications to our solutions, and harm our reputation.

Although our customer agreements contain terms and conditions, including disclaimers of liability, that are intended to reduce or eliminate our potential liability, we could be required to spend significant amounts of management time and resources to defend ourselves against product liability, tort, warranty or other claims. If any such claims were to prevail, we could be forced to pay damages, comply with injunctions or stop distributing our solutions. Even if potential claims do not result in liability to us, investigating and defending against these claims could be expensive and time consuming and could divert management’s attention away from our business. We maintain general liability insurance coverage, including coverage for errors and omissions; however, this coverage may not be sufficient to cover large claims against us or otherwise continue to be available on acceptable terms. Further, the insurer could attempt to disclaim coverage as to any particular claim.

We may require additional capital to support our business growth, and such capital may not be available.

We intend to continue to make investments to support business growth and may require additional funds to respond to business challenges, which include the need to develop new solutions or enhance existing solutions, enhance our operating infrastructure, expand our sales and marketing capabilities, expand into non-healthcare markets, and acquire complementary businesses, technologies or assets. Accordingly, we may need to engage in additional equity or debt financing to secure funds. Equity and debt financing, however, might not be available when needed or, if available, might not be available on terms satisfactory to us.

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If we raise additional funds through equity financing, our stockholders may experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. If we are unable to obtain adequate financing or financing on terms satisfactory to us in the future, our ability to continue to support our business growth and to respond to business challenges could be significantly limited as we may have to delay, reduce the scope of or eliminate some or all of our initiatives, which could harm our operating results.

Some of our solutions are, and others could become, subject to regulation by the U.S. Food and Drug Administration or similar foreign agencies, which could increase our operating costs.

We provide certain products that are, and others that may become, subject to regulation by the Food and Drug Administration (FDA) and similar agencies in other countries, or the jurisdiction of these agencies could be expanded in the future to include our solutions. The FDA regulates certain products, including software-based products, as “medical devices” based, in part, on the intended use of the product and the risk the device poses to the patient should the device fail to perform properly. For example, the clinical alert notification solution we acquired as part of our acquisition of Extension Healthcare and the clinical communications product we acquired from mVisum are regulated by the FDA as Class II medical devices. Although we have concluded that our wireless badge is a general-purpose communications device not subject to FDA regulation, the FDA could disagree with our conclusion, or changes in our solutions or the FDA’s evolving regulation could lead to FDA regulation of our solutions. Canada and many other countries in which we sell or may sell our solutions could also have similar regulations applicable to our solutions, some of which may be subject to change or interpretation. We may incur substantial operating costs if we are required to register our solutions or components of our solutions as regulated medical devices under U.S. or foreign regulations, obtain premarket approval from the FDA or foreign regulatory agencies, and satisfy the extensive reporting requirements. In addition, failure to comply with these regulations could result in enforcement actions and monetary penalties.

Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by man-made problems such as power disruptions or terrorism.

Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity, and many critical components of our solutions are sourced in Asia and Mexico, regions known to suffer natural disasters and epidemics or contagious diseases. A significant natural disaster, such as an earthquake, fire or a flood, or epidemic or contagious disease, occurring at our headquarters, our other facilities or where our contract manufacturer or its suppliers are located, could harm our business, operating results and financial condition. In addition, acts of terrorism could cause disruptions in our business, the businesses of our customers and suppliers, or the economy as a whole. We also rely on information technology systems to communicate among our workforce located worldwide, and in particular, our senior management, general and administrative, and research and development activities that are coordinated with our corporate headquarters in the San Francisco Bay Area. Any disruption to our internal communications, whether caused by a natural disaster, an epidemic or contagious disease, or by man-made problems, such as power disruptions, in the San Francisco Bay Area, Asia or Mexico could delay our research and development efforts, cause delays or cancellations of customer orders or delay deployment of our solutions, which could harm our business, operating results and financial condition.

If we do not maintain effective internal control over financial reporting or disclosure controls and procedures in the future, the accuracy and timeliness of our financial reporting may be adversely affected.

The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and disclosure controls and procedures quarterly. In particular, we must obtain confidence in 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 of the Sarbanes-Oxley Act. To the extent we find a material weakness or other deficiency in our internal control over financial reporting, the accuracy and timeliness of our financial reporting may be adversely affected.

Multiple negative consequences could ensue if a material weakness in our internal control over financial reporting is identified in the future, or we are not able to comply with the requirements of Section 404 in a timely manner, or we do not maintain effective controls. For example, our reported financial results could be materially misstated or could be restated, we could receive an adverse opinion regarding our controls from our independent registered public accounting firm, or we could be subject to investigations or sanctions by regulatory authorities. All of these outcomes would require additional financial and management resources, and the market price of our stock could decline.

We will continue to incur substantial costs as a result of operating as a public company and our management devotes substantial time to public company compliance obligations.

As a public company, we incur substantial legal, accounting and other expenses. The Sarbanes-Oxley Act, Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and rules subsequently implemented by the SEC and our stock exchange, impose

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various requirements on public companies, including certain corporate governance practices. Our management and other personnel devote a substantial amount of time to these compliance requirements. Moreover, these rules and regulations, along with compliance with accounting principles and regulatory interpretations of such principles, as amended by the JOBS Act, have increased and will continue to increase our legal, accounting and financial compliance costs and have made and will continue to make some activities more time-consuming and costly.

We face risks related to securities litigation that could result in significant legal expenses and settlement or damage awards.

We have in the past been, and may in the future become, subject to claims and litigation alleging violations of the securities laws or other related claims, which could harm our business and require us to incur significant costs. Regardless of the outcome, these matters or future litigation may require significant attention from management and could result in significant legal expenses, settlement costs or damage awards that could have a material impact on our financial position, results of operations and cash flows.

Environmental and social (E&S) regulations, policies and provisions, as well as customer demand, may make our supply chain more complex and may adversely affect our relationships with customers.

There is an increasing focus on the governance of environmental and social risks in our industry. A number of our customers have adopted, or may adopt, procurement policies that include E&S provisions that their suppliers must comply with, or they may seek to include such provisions in their procurement terms and conditions. An increasing number of participants in the industry are also joining voluntary E&S initiatives, such as the Responsible Business Alliance. These E&S provisions and initiatives are subject to change, can be unpredictable, and may be difficult and expensive for us to comply with, given the complexity of our supply chain and our outsourced manufacturing. If we are unable to comply, or are unable to cause our suppliers or contract manufacturers to comply, with such policies or provisions, a customer may stop purchasing products from us, and may take legal action against us, which could harm our reputation, revenue and results of operations.

In addition, as part of their E&S programs, an increasing number of customers are seeking to source products that do not contain minerals sourced from areas where proceeds from the sale of such minerals are likely to be used to fund armed conflict, such as in the Democratic Republic of the Congo. This could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of our equipment. Since our supply chain is complex, we are not currently able to definitively ascertain the origins of all of the minerals and metals used in our products. As a result, we may face difficulties in satisfying these customers’ demands, which may harm our sales and operating results.

Risks Related to the Notes

We have indebtedness in the form of convertible senior notes.

As a result of the Notes offering, we incurred $143.75 million principal amount of indebtedness, the principal amount of which we may be required to pay at maturity in 2023. Holders of the Notes will have the right to require us to repurchase their Notes upon the occurrence of a “fundamental change” (as defined in the indenture governing the Notes) at a purchase price equal to 100% of the principal amount of the Notes to be purchased, plus accrued and unpaid interest, if any. In addition, the indenture for the Notes provides that we are required to repay amounts due under the indenture in the event that there is an event of default for the Notes that results in the principal, premium, if any, and interest, if any, becoming due prior to maturity date of the Notes. There can be no assurance that we will be able to repay this indebtedness when due, or that we will be able to refinance this indebtedness on acceptable terms or at all. In addition, this indebtedness could, among other things:

• heighten our vulnerability to adverse general economic conditions and heightened competitive pressures;

• require us to dedicate a larger portion of our cash flow from operations to interest payments, limiting the availability of cash for other purposes;

• limit our flexibility in planning for, or reacting to, changes in our business and industry; and

• impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes.

In addition, our ability to purchase the Notes or repay prior to maturity any accelerated amounts under the Notes upon an event of default or pay cash upon conversions of the Notes may be limited by law, by regulatory authority or by agreements governing our indebtedness outstanding at the time. Our failure to repurchase Notes at a time when the repurchase is required by the indenture (whether upon a fundamental change or otherwise under the indenture) or pay cash payable on future conversions of the Notes (unless we elect to deliver solely shares of our common stock to settle such conversion) as required by the indenture would

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constitute a default under the indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing any future indebtedness. If the repayment of any related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness, repurchase the Notes or make cash payments upon conversions thereof.

Provisions in the indenture for the Notes may deter or prevent a business combination that may be favorable to you.

If a fundamental change occurs prior to the maturity date of the Notes, holders of the Notes will have the right, at their option, to require us to repurchase all or a portion of their Notes. In addition, if a make-whole fundamental change occurs prior to the maturity date, we will in some cases be required to increase the conversion rate for a holder that elects to convert its notes in connection with such make-whole fundamental change. Furthermore, the indenture for the Notes prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Notes. These and other provisions in the indenture could deter or prevent a third party from acquiring us even when the acquisition may be favorable to our stockholders.

The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported financial results.

Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options (ASC 470-20), an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at the issuance date and the value of the equity component would be treated as debt discount for purposes of accounting for the debt component of the Notes. We are required to record a non-cash interest expense for the amortization of this debt discount for the term of the Notes which will adversely affect our financial results while the Notes are outstanding.

In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of such Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of such Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable, or otherwise elect not to, use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our diluted earnings per share could be adversely affected.

The capped call transactions may affect the value of the Notes and our common stock.

In connection with the issuance of the Notes, we entered into capped call transactions with certain financial institutions (the option counterparties). The capped call transactions are expected generally to reduce the potential dilution upon any conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount upon conversion of the Notes, with such reduction and/or offset subject to a cap. In connection with establishing their initial hedges of the capped call transactions, the option counterparties and/or their respective affiliates purchased shares of our common stock and/or entered into various derivative transactions with respect to our common stock. This activity could have increased (or reduced the size of any decrease in) the market price of our common stock or the Notes at that time. In addition, the option counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock in secondary market transactions (and are likely to do so during any observation period related to a conversion of notes or following any repurchase of notes by us on any fundamental change repurchase date or otherwise). This activity could also cause or avoid an increase or a decrease in the price of our common stock or the Notes. The potential effect, if any, of these transactions and activities on the price of our common stock or the Notes will depend in part on market conditions and cannot be ascertained at this time. Any of these activities could adversely affect the value of our common stock.

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Risks related to our common stock

The market price of our common stock has been, and may continue to be, volatile, and your investment in our stock could suffer a decline in value.

There has been significant volatility in the market price and trading volume of equity securities, which is often unrelated or disproportionate to the financial performance of the companies issuing the securities. These broad market fluctuations may negatively affect the market price of our common stock. The market price of our common stock could fluctuate significantly in response to the factors described in this “Risk Factors” section and elsewhere in this Form 10-Q and other factors, many of which are beyond our control, including:

• actual or anticipated variation in anticipated operating results of us or our competitors;

• the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

• announcements by us or our competitors of new solutions, new or terminated significant contracts, commercial relationships or capital commitments;

• changes in the regulatory environment affecting our healthcare customers, including impediments to their ability to obtain reimbursement for their services, and other actual or anticipated legal or regulatory developments in the United States or foreign countries;

• actual or anticipated developments in our competitors’ businesses or the competitive landscape generally;

• failure of securities analysts to maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

• developments or disputes concerning our intellectual property or other proprietary rights;

• commencement of, or our involvement in, litigation;

• announced or completed acquisitions of businesses, technologies or assets by us or our competitor;

• changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

• price and volume fluctuations attributable to inconsistent trading volume levels of our common stock;

• our decision to seek additional equity or debt financing;

• our public float relative to the total number of shares of our common stock that are issued and outstanding;

• price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

• rumors and market speculation involving us or other companies in our industry;

• the dissemination of adverse or misleading reports or opinions about our business;

• any major change in our management;

• unfavorable economic conditions and slow or negative growth of our markets; and

• other events or factors, including those resulting from war, incidents of terrorism or health epidemics or contagious diseases.

If securities or industry analysts issue an adverse or misleading opinion regarding our stock or do not publish research or reports about our business, our stock price could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us and our business. We do not control these analysts or the content and opinions included in their reports. The price of our common stock could decline if one or more analysts downgrade our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business. If one or more analysts cease coverage of our company or fail to regularly publish reports about our company, we could lose visibility in the financial market, which in turn could cause our stock price to decline. Further, securities or industry analysts may elect not to provide research coverage of our common stock and such lack of research coverage may adversely affect the market price of our common stock.

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We have never paid cash dividends on our capital stock, and we do not anticipate paying any dividends in the foreseeable future.

We have never paid cash dividends on any of our capital stock and currently intend to retain our future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for the foreseeable future.

Our charter documents and Delaware law could discourage, delay or prevent a change of control of our company or change in our management that stockholders consider favorable and cause our stock price to decline.

Certain provisions of our restated certificate of incorporation and restated bylaws and Delaware law could discourage, delay or prevent a change of control of our company or change in our management that the stockholders of our company consider favorable. These provisions:

• authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares and to discourage a takeover attempt;

• prohibit stockholder action by written consent, requiring all stockholder actions to be taken at a meeting of stockholders;

• establish advance notice procedures for nominating candidates to our board of directors or proposing matters that can be acted upon by stockholders at stockholder meetings;

• limit the ability of our stockholders to call special meetings of stockholders;

• prohibit stockholders from cumulating their votes for the election of directors;

• permit newly created directorships resulting from an increase in the authorized number of directors or vacancies on our board of directors to be filled only by majority vote of our remaining directors, even if less than a quorum is then in office;

• provide that our board of directors is expressly authorized to make, alter or repeal our bylaws;

• establish a classified board of directors so that not all members of our board are elected at one time;

• provide that our directors may be removed only for “cause” and only with the approval of the holders of at least 66 2/3rds percent of our outstanding stock; and

• require super-majority voting to amend certain provisions in our certificate of incorporation and bylaws.

Section 203 of the Delaware General Corporation Law may also discourage, delay or prevent a change of control of our company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit Index Number	Exhibit title
31.01	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01+	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	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.
101.SCH	Inline XBRL Taxonomy Schema Linkbase Document
101.CAL	Inline XBRL Taxonomy Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Labels Linkbase Document
101.PRE	Inline XBRL Taxonomy Presentation Linkbase Document
104	Cover Page Interactive Data File - (formatted in Inline XBRL and contained in Exhibit 101).

+ This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		VOCERA COMMUNICATIONS, INC.
Date: May 4, 2020	By:	/S/    Brent D. Lang
		Brent D. Lang Chief Executive Officer
Date: May 4, 2020	By:	/S/    Justin R. Spencer
		Justin R. Spencer Chief Financial Officer
		(Principal Financial Officer)

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EX-31.01

EXHIBIT 31.01

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF

THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Brent D. Lang, certify that:

1. I have reviewed this Quarterly Report on Form 10-K of Vocera Communications, Inc.:

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 4, 2020	/s/ Brent D. Lang
	Brent D. Lang
	Chief Executive Officer

EX-31.02

EXHIBIT 31.02

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF

THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Justin R.Spencer, certify that:

1. I have reviewed this Quarterly Report on Form 10-K of Vocera Communications, Inc.:

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 4, 2020	/s/ Justin R. Spencer
	Justin R. Spencer
	Chief Financial Officer

EX-32.01

EXHIBIT 32.01

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Brent D. Lang, Chief Executive Officer of Vocera Communications, Inc. (the “Company”), and Justin R. Spencer, Chief Financial Officer of the Company, each hereby certifies that, to his knowledge:

1. The Company’s Quarterly Report on Form 10-K for the year ended March 31, 2020, to which this Certification is attached as Exhibit 32.01 (the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

In Witness Whereof, the undersigned have set their hands hereto as of the 4th day of May 2020.

/s/ Brent D. Lang	/s/ Justin R. Spencer
Brent D. Lang	Justin R. Spencer
Chief Executive Officer	Chief Financial Officer

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Balance Sheet Components Maturities of Leases (Details) $ in Thousands	Mar. 31, 2020 USD ($)
Balance Sheet Components [Abstract]
2020 (remaining nine months)	$ 2,191
2020	2,960
2021	1,326
2022	403
2023	319
Total maturities of lease liabilities	7,199
Less imputed interest	(747)
Total	$ 6,452

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Schedule of Product Liability (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Movement in Standard and Extended Product Warranty, Increase (Decrease) [Roll Forward]
Product warranty accrual, at the beginning of the period	$ 420	$ 376
Warranty expenses accrued	108	77
Product Warranty Accrual, Preexisting, Increase (Decrease)	(31)	(31)
Warranty settlements made	(57)	(48)
Product Warranty Accrual	$ 440	$ 374

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Segments

3 Months Ended

Mar. 31, 2020

Segment Reporting [Abstract]

Segments

Segments

The Company has two operating segments, which are both reportable business segments: (i) Product and (ii) Service, both of which are comprised of Vocera and its wholly-owned subsidiaries’ results of operations.

The following table presents a summary of the operating segments:

	Three months ended March 31,
	2020			2019
(in thousands)
Revenue
Product	$	17,850		$	14,003
Service	22,823			21,306
Total revenue	40,673			35,309
Cost of revenue
Product	6,364			5,334
Service	10,523			10,290
Total cost of revenue	16,887			15,624
Gross profit
Product	11,486			8,669
Service	12,300			11,016
Total gross profit	23,786			19,685
Operating expenses	32,386			30,745
Interest expense, net and other	(1,745		)	(711		)
Loss before income taxes	$	(10,345	)	$	(11,771	)

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Balance Sheet Components

3 Months Ended

Mar. 31, 2020

Balance Sheet Components [Abstract]

Balance Sheet Components

Balance Sheet Components

Inventories

(in thousands)	March 31, 2020		December 31, 2019
Raw materials	$	962	$	831
Finished goods	5,065		3,745
Total inventories	$	6,027	$	4,576

Property and equipment, net

(in thousands)	March 31, 2020			December 31, 2019
Computer equipment and software	$	14,088		$	13,596
Furniture, fixtures and equipment	2,554			2,430
Leasehold improvements	5,351			5,283
Manufacturing tools and equipment	2,476			2,435
Construction in process	131			582
Property and equipment, at cost	24,600			24,326
Less: Accumulated depreciation	(16,349		)	(15,665		)
Property and equipment, net	$	8,251		$	8,661

Depreciation and amortization expense for property and equipment was $1.0 million and $0.9 million for the three months ended March 31, 2020 and 2019, respectively.

Net investment in sales-type leases

The Company has sales-type leases with terms of 3 to 4 years. Sales-type lease receivables are collateralized by the underlying equipment. The components of the Company’s net investment in sales-type leases are as follows:

(in thousands)	March 31, 2020			December 31, 2019
Minimum payments to be received on sales-type leases	$	1,796		$	2,078
Less: Unearned interest income and executory revenue portion	(1,097		)	(1,190		)
Net investment in sales-type leases	699			888
Less: Current portion	(346		)	(452		)
Non-current net investment in sales-type leases	$	353		$	436

Sales-type lease activity recognized in the condensed consolidated statement of operations are as follows:

	Three months ended March 31,
(in thousands)	2020			2019
Lease revenue	$	435		$	661
Less: Cost of lease shipments	(10		)	(52		)
Gross profit	425			609
Interest income (expense), net on lease receivable	$	(6	)	$	(3	)
Initial direct cost incurred	$	23		$	31

There were no allowances for doubtful accounts on these leases as of March 31, 2020 and December 31, 2019. There is no guaranteed or unguaranteed residual value on the leased equipment. The current and non-current net investments in sales-type leases are reported as components of the condensed consolidated balance sheet captions “other receivables” and “other long-term assets,” respectively.

The minimum payments expected to be received for future years under sales-type leases as of March 31, 2020 were as follows:

(in thousands)	Future lease payments
2020 (remaining nine months)	$	716
2021	615
2022	387
2023	78
Total	$	1,796

Accrued payroll and other current liabilities

(in thousands)	March 31, 2020		December 31, 2019
Payroll and related expenses	$	7,276	$	6,053
Accrued payables	1,707		2,674
Operating lease liabilities, current portion	2,336		2,323
Lease financing, current portion	898		1,033
Product warranty	440		420
Customer prepayments	665		631
Sales and use tax payable	469		599
Other	1,520		1,024
Total accrued payroll and other current liabilities	$	15,311	$	14,757

The changes in the Company’s product warranty reserve are as follows:

	Three months ended March 31,
(in thousands)	2020			2019
Warranty balance at the beginning of the period	$	420		$	376
Warranty expense accrued for shipments during the period	108			77
Changes in estimate related to pre-existing warranties	(31		)	(31		)
Warranty settlements made	(57		)	(48		)
Total product warranty	$	440		$	374

Leases

The Company has operating leases for office space at its headquarters and subsidiaries under non-cancelable operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet; lease expense for these leases is recognized on a straight-line basis over the lease term. The Company’s leases have remaining lease terms of approximately ten months to approximately five years. Operating lease cost, including short-term operating leases was $0.7 million and $0.6 million for the three months ended March 31, 2020 and 2019, respectively.

Supplemental balance sheet information related to leases was as follows:

(in thousands)	March 31, 2020
Other long-term assets	$	5,590
Accrued payroll and other current liabilities	2,336
Other long-term liabilities	4,116
Total operating lease liabilities	$	6,452

Other information related to leases was as follows:

	Three months ended March 31,			Three months ended March 31,
(in thousands)	2020			2019
Supplemental Cash Flow Information
Cash paid for amounts included in the measurement of lease liabilities	$	712		$	630
Right-of-use assets obtained in exchange for lease obligations	$	—		$	689
Weighted average remaining lease term	2.39 years			3.11 years
Weighted average discount rate	8		%	8		%

Maturities of lease liabilities as of March 31, 2020 are as follows:

(in thousands)	Operating leases
2020 (remaining nine months)	$	2,191
2021	2,960
2022	1,326
2023	403
2024	319
Total maturities of lease liabilities	7,199
Less imputed interest	$	(747	)
Total	$	6,452

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Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2020

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

Fair Value of Financial Instruments

The Company’s cash, cash equivalents and short-term investments are carried at their fair values with any differences from their amortized cost recorded in equity as unrealized gains (losses) on marketable securities. As a basis for determining the fair value of its assets and liabilities, the Company follows 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; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. During the three months ended March 31, 2020, there have been no transfers between Level 1 and Level 2 fair value instruments and no transfers in or out of Level 3.

The Company’s money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The fair value of the Company’s Level 2 fixed income securities is obtained from independent pricing services, which may use quoted market prices for identical or comparable instruments or model-driven valuations using observable market data or other inputs, corroborated by observable market data. The Company does not have any financial instruments which are valued using Level 3 inputs.

In addition to its cash, cash equivalents and short-term investments, the Company measures the fair value of its Convertible Senior Notes on a quarterly basis for disclosure purposes. The Company considers the fair value of the Convertible Senior Notes at March 31, 2020 to be a Level 2 measurement due to limited trading activity of the Convertible Senior Notes. Refer to Note 8 to the condensed consolidated financial statements for further information.

The Company’s assets that are measured at fair value on a recurring basis, by level, within the fair value hierarchy as of March 31, 2020 and December 31, 2019, are summarized as follows (in thousands):

	March 31, 2020						December 31, 2019
	Level 1		Level 2		Total		Level 1		Level 2		Total
Assets
Money market funds	$	3,855	$	—	$	3,855	$	4,086	$	—	$	4,086
Commercial paper	—		17,899		17,899		—		12,854		12,854
U.S. government agency securities	—		—		—		—		3,000		3,000
Corporate debt securities	—		186,725		186,725		—		188,310		188,310
Total assets measured at fair value	$	3,855	$	204,624	$	208,479	$	4,086	$	204,164	$	208,250

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Revenue, deferred revenue, and deferred commissions - Cash Flows From Operating Activities (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Net loss	$ (10,470)	$ (11,735)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred commissions	171	(19)
Deferred revenue	$ (4,799)	$ (5,687)

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Revenue, deferred revenue, and deferred commissions - Narrative (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Revenue from Contract with Customer [Abstract]
Payment terms on invoiced amounts	30 days
Deferred commissions	$ 10,307		$ 10,477
Percentage of deferred commissions to be recognized as commission expense in the next 12 months	48.00%
Revenue recognized pertaining to amounts deferred as of Beginning of Period	$ 18,500
Revenue recognized pertaining to amounts deferred as of End of Period		$ 15,200
Deferred revenue and backlog	$ 112,500
Percentage of deferred revenue to be recognized over the next 12 months	66.00%
Contract with Customer, Asset, before Allowance for Credit Loss	$ 4,500		$ 4,300

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Condensed Consolidated Statement of SHareholders Equity Statement - USD ($) $ in Thousands	Total	Common Stock [Member]	Additional Paid-in Capital [Member]	AOCI Attributable to Parent [Member]	Retained Earnings [Member]	Restricted stock units	Restricted stock units Common Stock [Member]	Restricted stock units Additional Paid-in Capital [Member]	Convertible Senior Notes At 1.50%, Option Portion Convertible Debt
Shares, Outstanding		30,708,138
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest	$ 162,867	$ 9	$ 295,647	$ (443)	$ (132,346)
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period		122,376
Stock Issued During Period, Value, Stock Options Exercised	1,564		1,564
Restricted Stock, Shares Issued Net of Shares for Tax Withholdings							60,603
Adjustments to Additional Paid in Capital, Other	(1,271)							$ (1,271)
APIC, Share-based Payment Arrangement, Increase for Cost Recognition	5,544		5,544
Net loss	(11,735)				(11,735)
Change in unrealized gain (loss) on investments, net of tax	425			425
Shares, Outstanding		30,891,117
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest	157,394	$ 9	301,484	(18)	(144,081)
Shares, Outstanding		31,660,709
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest	163,825	$ 9	313,963	179	(150,326)
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period		77,909
Stock Issued During Period, Value, Stock Options Exercised	731		731
Restricted Stock, Shares Issued Net of Shares for Tax Withholdings							64,161
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested in Period						101,431
Adjustments to Additional Paid in Capital, Other	(864)							$ (864)
APIC, Share-based Payment Arrangement, Increase for Cost Recognition	5,841		5,841
Net loss	(10,470)				(10,470)
Change in unrealized gain (loss) on investments, net of tax	(956)			(956)
Shares, Outstanding		31,802,779
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest	$ 158,107	$ 9	$ 319,671	$ (777)	$ (160,796)
Carrying amount of equity component, net of capped calls									$ 23,307

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Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (Paranthetical) - $ / shares	Mar. 31, 2020	Dec. 31, 2019
Liabilities and stockholders' equity
Common stock par value	$ 0.0003	$ 0.0003
Common stock shares authorized	100,000,000	100,000,000
Common stock shares issued	31,802,779	31,660,709
Common stock shares outstanding	31,802,779	31,660,709
Preferred Stock
Liabilities and stockholders' equity
Preferred stock par value	$ 0.0003	$ 0.0003
Preferred stock shares authorized	5,000,000	5,000,000
Preferred stock shares issued	0	0
Preferred stock shares outstanding	0	0

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Balance Sheet Components (Tables)

3 Months Ended

Mar. 31, 2020

Balance Sheet Components [Abstract]

Inventories

Inventories

(in thousands)	March 31, 2020		December 31, 2019
Raw materials	$	962	$	831
Finished goods	5,065		3,745
Total inventories	$	6,027	$	4,576

Property and Equipment

Property and equipment, net

(in thousands)	March 31, 2020			December 31, 2019
Computer equipment and software	$	14,088		$	13,596
Furniture, fixtures and equipment	2,554			2,430
Leasehold improvements	5,351			5,283
Manufacturing tools and equipment	2,476			2,435
Construction in process	131			582
Property and equipment, at cost	24,600			24,326
Less: Accumulated depreciation	(16,349		)	(15,665		)
Property and equipment, net	$	8,251		$	8,661

Depreciation and amortization expense for property and equipment was $1.0 million and $0.9 million for the three months ended March 31, 2020 and 2019, respectively.

Schedule of Components of Leveraged Lease Investments

Net investment in sales-type leases

The Company has sales-type leases with terms of 3 to 4 years. Sales-type lease receivables are collateralized by the underlying equipment. The components of the Company’s net investment in sales-type leases are as follows:

(in thousands)	March 31, 2020			December 31, 2019
Minimum payments to be received on sales-type leases	$	1,796		$	2,078
Less: Unearned interest income and executory revenue portion	(1,097		)	(1,190		)
Net investment in sales-type leases	699			888
Less: Current portion	(346		)	(452		)
Non-current net investment in sales-type leases	$	353		$	436

Sales-type lease activity recognized in the condensed consolidated statement of operations are as follows:

	Three months ended March 31,
(in thousands)	2020			2019
Lease revenue	$	435		$	661
Less: Cost of lease shipments	(10		)	(52		)
Gross profit	425			609
Interest income (expense), net on lease receivable	$	(6	)	$	(3	)
Initial direct cost incurred	$	23		$	31

There were no allowances for doubtful accounts on these leases as of March 31, 2020 and December 31, 2019. There is no guaranteed or unguaranteed residual value on the leased equipment. The current and non-current net investments in sales-type leases are reported as components of the condensed consolidated balance sheet captions “other receivables” and “other long-term assets,” respectively.

Schedule of Future Minimum Lease Payments for Capital Leases

The minimum payments expected to be received for future years under sales-type leases as of March 31, 2020 were as follows:

(in thousands)	Future lease payments
2020 (remaining nine months)	$	716
2021	615
2022	387
2023	78
Total	$	1,796

Accrued Liabilities

Accrued payroll and other current liabilities

(in thousands)	March 31, 2020		December 31, 2019
Payroll and related expenses	$	7,276	$	6,053
Accrued payables	1,707		2,674
Operating lease liabilities, current portion	2,336		2,323
Lease financing, current portion	898		1,033
Product warranty	440		420
Customer prepayments	665		631
Sales and use tax payable	469		599
Other	1,520		1,024
Total accrued payroll and other current liabilities	$	15,311	$	14,757

Schedule of Product Warranty Liability

The changes in the Company’s product warranty reserve are as follows:

	Three months ended March 31,
(in thousands)	2020			2019
Warranty balance at the beginning of the period	$	420		$	376
Warranty expense accrued for shipments during the period	108			77
Changes in estimate related to pre-existing warranties	(31		)	(31		)
Warranty settlements made	(57		)	(48		)
Total product warranty	$	440		$	374

Information Related to Leases

Supplemental balance sheet information related to leases was as follows:

(in thousands)	March 31, 2020
Other long-term assets	$	5,590
Accrued payroll and other current liabilities	2,336
Other long-term liabilities	4,116
Total operating lease liabilities	$	6,452

Other information related to leases was as follows:

	Three months ended March 31,			Three months ended March 31,
(in thousands)	2020			2019
Supplemental Cash Flow Information
Cash paid for amounts included in the measurement of lease liabilities	$	712		$	630
Right-of-use assets obtained in exchange for lease obligations	$	—		$	689
Weighted average remaining lease term	2.39 years			3.11 years
Weighted average discount rate	8		%	8		%

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Fair Value of Financial Insturments (Tables)

3 Months Ended

Mar. 31, 2020

Fair Value Disclosures [Abstract]

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company’s assets that are measured at fair value on a recurring basis, by level, within the fair value hierarchy as of March 31, 2020 and December 31, 2019, are summarized as follows (in thousands):

	March 31, 2020						December 31, 2019
	Level 1		Level 2		Total		Level 1		Level 2		Total
Assets
Money market funds	$	3,855	$	—	$	3,855	$	4,086	$	—	$	4,086
Commercial paper	—		17,899		17,899		—		12,854		12,854
U.S. government agency securities	—		—		—		—		3,000		3,000
Corporate debt securities	—		186,725		186,725		—		188,310		188,310
Total assets measured at fair value	$	3,855	$	204,624	$	208,479	$	4,086	$	204,164	$	208,250

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Schedule of Finite-Lived Intangible Assets (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
Finite-Lived Intangible Assets [Line Items]
Finite-Lived Intangible Asset, Expected Amortization, Year Two	$ 1,130
Finite-Lived Intangible Asset, Expected Amortization, Year Three	1,050
Finite-Lived Intangible Asset, Expected Amortization, Year Four	1,050
Finite-Lived Intangibles, Amortization Expense, Year Five	875
Accumulated Amortization	18,799	$ 18,479
Finite-Lived Intangible Assets, Net	5,141
Finite-Lived Intangible Assets, Useful Life
Intangible assets, gross	23,940	23,940
Intangible assets, net book value	5,141	5,461
Developed technology
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	10,050	10,050
Accumulated Amortization	9,854	9,803
Finite-Lived Intangible Assets, Net	196	247
Customer relationships
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	10,920	10,920
Accumulated Amortization	6,088	5,819
Finite-Lived Intangible Assets, Net	4,832	5,101
Order or Production Backlog [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	1,400	1,400
Accumulated Amortization	1,287	1,287
Finite-Lived Intangible Assets, Net	113	113
Noncompete Agreements
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	460	460
Accumulated Amortization	460	460
Finite-Lived Intangible Assets, Net	0	0
Trademarks
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	1,110	1,110
Accumulated Amortization	1,110	1,110
Finite-Lived Intangible Assets, Net	$ 0	$ 0
Minimum | Developed technology
Finite-Lived Intangible Assets, Useful Life
Finite-lived intangible asset, useful life	3 years
Minimum | Customer relationships
Finite-Lived Intangible Assets, Useful Life
Finite-lived intangible asset, useful life	7 years
Minimum | Order or Production Backlog [Member]
Finite-Lived Intangible Assets, Useful Life
Finite-lived intangible asset, useful life	3 years
Minimum | Noncompete Agreements
Finite-Lived Intangible Assets, Useful Life
Finite-lived intangible asset, useful life	2 years
Minimum | Trademarks
Finite-Lived Intangible Assets, Useful Life
Finite-lived intangible asset, useful life	3 years
Maximum | Developed technology
Finite-Lived Intangible Assets, Useful Life
Finite-lived intangible asset, useful life	7 years
Maximum | Customer relationships
Finite-Lived Intangible Assets, Useful Life
Finite-lived intangible asset, useful life	9 years
Maximum | Order or Production Backlog [Member]
Finite-Lived Intangible Assets, Useful Life
Finite-lived intangible asset, useful life	3 years
Maximum | Noncompete Agreements
Finite-Lived Intangible Assets, Useful Life
Finite-lived intangible asset, useful life	4 years
Maximum | Trademarks
Finite-Lived Intangible Assets, Useful Life
Finite-lived intangible asset, useful life	7 years

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Property and Equipment (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	$ 24,600		$ 24,326
Less: Accumulated depreciation	(16,349)		(15,665)
Property and equipment, net	8,251		8,661
Depreciation, Depletion and Amortization [Abstract]
Depreciation	1,000	$ 900
Computer equipment and software
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	14,088		13,596
Furniture, fixtures and equipment
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	2,554		2,430
Leasehold improvements
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	5,351		5,283
Manufacturing tools and equipment
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	2,476		2,435
Construction in process
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	$ 131		$ 582

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Narrative (Details) $ in Millions	3 Months Ended
	Mar. 31, 2020 USD ($) shares
Restricted stock units
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Additional Disclosures [Abstract]
Share-based Payment Arrangement, Nonvested Award, Excluding Option, Cost Not yet Recognized, Amount | $	$ 28.8
Stock Comp-other than options - Period for Recognition- Comp cost not yet rocognized	1 year 9 months
2012 Stock Option Plan | Stock options and restricted stock units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Shares Available for Grant	1,855,146
2012 Employee Stock Purchase Plan | ESPP
ESPP plan details [Abstract]
Common Stock, Capital Shares Reserved for Future Issuance	1,189,618

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Stock Option Activity (Details) - Stock Options - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Number of Options (in shares):
Beginning balance	606,327
Options granted	0
Options exercised	(77,909)
Options canceled	0
Ending balance	528,418
Weighted Average Exercise Price (in dollars per share):
Beginning balance	$ 13.41
Options granted	0
Options exercised	9.38
Options canceled	0
Ending balance	$ 14.01
Wtd avg remaining term, Outstanding	3 years 4 months 17 days	3 years 7 months 13 days
Aggregate intrinsic value, Outstanding	$ 3,974		$ 4,566

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Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Cash flows from operating activities
Net loss	$ (10,470)	$ (11,735)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,333	1,890
Inventory provision	42	0
Change in lease-related performance liabilities	(346)	(266)
Stock-based compensation expense	5,841	5,544
Amortization of debt discount and issuance costs	1,735	1,582
Other	729	24
Changes in operating assets and liabilities:
Accounts receivable	16,264	15,681
Other receivables	(102)	(1,156)
Inventories	(1,494)	(1,637)
Prepaid expenses and other assets	(417)	(414)
Deferred commissions	171	(19)
Accounts payable	(2,826)	(1,173)
Increase (Decrease) in Other Accrued Liabilities	(17)	(1,689)
Deferred revenue	(4,799)	(5,687)
Net cash used in operating activities	5,644	945
Cash flows from investing activities
Purchase of property and equipment	(682)	(853)
Purchase of short-term investments	(28,009)	(31,349)
Maturities of short-term investments	28,569	29,624
Net cash used in investing activities	(122)	(2,578)
Cash flows from financing activities
Cash from lease-related performance obligations	43	0
Payment for purchase of capped calls	(8,907)
Proceeds from exercise of stock options	731	1,564
Tax withholdings paid on behalf of employees for net share settlement	(864)	(1,271)
Net cash provided by financing activities	(90)	293
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, Period Increase (Decrease), Including Exchange Rate Effect	5,432	(1,340)
Cash and cash equivalents at beginning of period	25,704	34,276
Cash and cash equivalents at end of period	31,136	32,936
Supplemental disclosure of non-cash investing and financing activities:
Property and equipment in accounts payable and accrued liabilities	$ 390	$ 161

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Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Current assets
Cash and cash equivalents	$ 31,136	$ 25,704
Short-term investments	202,632	204,164
Accounts receivable, net of allowance	26,283	42,547
Other receivables	6,374	6,312
Inventories	6,027	4,576
Prepaid expenses and other current assets	5,694	5,149
Total current assets	278,146	288,452
Property and equipment, net	8,251	8,661
Other long-term assets	5,590
Intangible assets, net	5,141	5,461
Goodwill	49,246	49,246
Deferred commissions	10,307	10,477
Other long-term assets	7,368	8,158
Total assets	358,459	370,455
Current liabilities
Accounts payable	3,142	6,036
Accrued payroll and other current liabilities	15,311	14,757
Deferred revenue, current	45,987	50,033
Total current liabilities	64,440	70,826
Deferred revenue, long-term	10,689	11,442
Convertible senior notes, net	118,913	117,178
Other long-term liabilities	4,116
Other long-term liabilities	6,310	7,184
Total liabilities	200,352	206,630
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred stock, $0.0003 par value - 5,000,000 shares authorized as of March 31, 2020 and December 31, 2019; zero shares issued and outstanding	0	0
Common stock, $0.0003 par value - 100,000,000 shares authorized as of March 31, 2020 and December 31, 2019; 31,802,779 and 31,660,709 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively	9	9
Additional paid-in capital	319,671	313,963
Accumulated other comprehensive income (loss)	(777)	179
Accumulated deficit	(160,796)	(150,326)
Total stockholders’ equity	158,107	163,825
Total liabilities and stockholders’ equity	$ 358,459	$ 370,455

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Convertible Senior Notes (Tables)

3 Months Ended

Mar. 31, 2020

Debt Disclosure [Abstract]

Schedule of Notes

The Notes consist of the following:

(in thousands)	March 31, 2020			December 31, 2019
Liability:
Principal	$	143,750		$	143,750
Unamortized debt discount	(22,321		)	(23,880		)
Unamortized issuance costs	(2,516		)	(2,692		)
Net carrying amount	$	118,913		$	117,178
Stockholders’ equity:
Debt discount for conversion option	$	33,350		$	33,350
Issuance costs	$	(1,136	)	$	(1,136	)
Net carrying amount	$	32,214		$	32,214

Schedule of Interest Expense Related to the Notes

Interest expense related to the Notes is as follows:

	Three months ended March 31,
(in thousands)	2020		2019
Contractual interest expense	$	539	$	539
Amortization of debt discount	1,559		1,422
Amortization of issuance costs	176		160
Total interest expense	$	2,274	$	2,121

Schedule of Net Impact on Stockholders' Equity of Components of Convertible Debt

The net impact to the Company’s stockholders' equity, included in additional paid-in capital, of the above components of the Notes is as follows:

(in thousands)	March 31, 2020
Conversion option	$	33,350
Purchase of capped calls	$	(8,907	)
Issuance costs	$	(1,136	)
Total	$	23,307

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Cash, Cash Equivalents and Short-term Investments (Tables)

3 Months Ended

Mar. 31, 2020

Cash and Cash Equivalents [Abstract]

Schedule of Cash, Cash Equivalents and Available-For-Sale Investments

The following tables present cash, cash equivalents and short-term investments (in thousands) as of March 31, 2020 and December 31, 2019:

	As of March 31, 2020
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair value
Cash and cash equivalents:
Demand deposits and other cash	$	25,289	$	—	$	—		$	25,289
Money market funds	3,855		—		—			3,855
Commercial paper	1,994		—		(2		)	1,992
Total cash and cash equivalents	31,138		—		(2		)	31,136
Short-Term Investments:
Commercial paper	15,911		10		(14		)	15,907
Corporate debt securities	187,238		296		(809		)	186,725
Total short-term investments	203,149		306		(823		)	202,632
Total cash, cash equivalents and short-term investments	$	234,287	$	306	$	(825	)	$	233,768

	As of December 31, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair value
Cash and cash equivalents:
Demand deposits and other cash	$	21,618	$	—	$	—		$	21,618
Money market funds	4,086		—		—			4,086
Commercial paper	—		—		—			—
Total cash and cash equivalents	25,704		—		—			25,704
Short-Term Investments:
Commercial paper	12,861		—		(7		)	12,854
U.S. government agency securities	3,000		—		—			3,000
U.S. Treasury securities	—		—		—			—
Corporate debt securities	187,866		499		(55		)	188,310
Total short-term investments	203,727		499		(62		)	204,164
Total cash, cash equivalents and short-term investments	$	229,431	$	499	$	(62	)	$	229,868

Investments Classified by Contractual Maturity Date

Classification of the cash, cash equivalents and short-term investments by contractual maturity was as follows:

(in thousands)	One year or shorter		Between 1 and 2 years		Total
Balances as of March 31, 2020
Cash and cash equivalents (1)	$	31,136	$	—	$	31,136
Short-term investments	130,834		71,798		202,632
Cash, cash equivalents and short-term investments	$	161,970	$	71,798	$	233,768
Balances as of December 31, 2019
Cash and cash equivalents (1)	$	25,704	$	—	$	25,704
Short-term investments	113,010		91,154		204,164
Cash, cash equivalents and short-term investments	$	138,714	$	91,154	$	229,868
(1) Includes demand deposits and other cash, money market funds and other cash equivalent securities, all with 0-90 day maturity at purchase.

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Schedule of antidilutive securities excluded from computation of earnings per share (Details) - shares shares in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Options to purchase common stock, including ESPP
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	620	724
Restricted stock units
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	1,635	1,850

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Inventories (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Inventory, Net [Abstract]
Raw materials	$ 962	$ 831
Finished goods	5,065	3,745
Total inventories	$ 6,027	$ 4,576

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Segments Operating Segments (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2020 USD ($) Segments	Mar. 31, 2019 USD ($)
Segment Reporting Information [Line Items]
Number of reportable segments | Segments	2
Revenue
Total revenue	$ 40,673	$ 35,309
Cost of revenue
Total cost of revenue	16,887	15,624
Gross profit
Product	11,486	8,669
Service	12,300	11,016
Total gross profit	23,786	19,685
Calculation of pretax profit (loss) [Abstract]
Operating expenses	32,386	30,745
Interest expense, net and other	(1,745)	(711)
Loss before income taxes	(10,345)	(11,771)
Product
Revenue
Total revenue	17,850	14,003
Cost of revenue
Total cost of revenue	6,364	5,334
Service
Revenue
Total revenue	22,823	21,306
Cost of revenue
Total cost of revenue	$ 10,523	$ 10,290

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Summary of Equity B-S-M Assumptiuons (Details) - 2012 Employee Stock Purchase Plan - ESPP	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Equity B-S-M Fair Value Assumptions
Expected Term (in years)	6 months	6 months
Volatility	50.00%	33.00%
Interest Rate	1.59%	2.51%
Dividend yield	0.00%	0.00%
Minimum
Equity B-S-M Fair Value Assumptions
Volatility	50.00%	33.00%
Interest Rate	1.59%	2.51%
Maximum
Equity B-S-M Fair Value Assumptions
Volatility	50.00%	33.00%
Interest Rate	1.59%	2.51%

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Convertible Senior Notes - Convertible Notes and Options (Details)	1 Months Ended	2 Months Ended	3 Months Ended
	May 31, 2018 USD ($) day $ / shares	Jun. 30, 2018 USD ($)	Mar. 31, 2020 USD ($) $ / shares	Mar. 31, 2019 USD ($)	Dec. 31, 2019 USD ($)
Debt Instrument [Line Items]
Net carrying amount			$ 118,913,000		$ 117,178,000
Total interest expense			2,274,000	$ 2,121,000
Convertible Debt | Convertible Senior Notes at 1.50%
Debt Instrument [Line Items]
Aggregate principal amount	$ 143,750,000		143,750,000		143,750,000
Stated interest rate	1.50%
Proceeds from issuance of convertible senior notes, net of issuance costs	$ 138,900,000
Unamortized debt discount			(22,321,000)		(23,880,000)
Unamortized issuance costs			(2,516,000)		(2,692,000)
Net carrying amount			118,913,000		117,178,000
Convertible Debt | Convertible Senior Notes At 1.50%, Option Portion
Debt Instrument [Line Items]
Aggregate principal amount	$ 18,750,000
Stated interest rate	1.50%
Conversion ratio	0.0310073
Convertible debt, conversion price (in dollars per share) | $ / shares	$ 32.25
Denominator in calculation of trading price	$ 1,000
Conditional cash repurchase, percent of principal	100.00%
Carrying amount of the equity component	$ 33,400,000		33,350,000		33,350,000
Debt discount effective interest rate		7.60%
Amortization of debt issuance costs		$ 4,900,000	176,000	160,000
Amortization of debt issuance costs, liability component		3,800,000
Amortization of debt issuance costs, equity component		$ 1,100,000
Issuance costs			(1,136,000)		(1,136,000)
Net carrying amount			32,214,000		$ 32,214,000
Estimated fair value of the Notes			142,700,000
Denominator in closing price calculation			$ 100
If-converted value, share price (in dollars per share) | $ / shares			$ 21.24
If-converted value of the Notes			$ 94,700,000
Contractual interest expense			539,000	539,000
Amortization of debt discount			1,559,000	1,422,000
Total interest expense			$ 2,274,000	$ 2,121,000
Convertible Debt | Convertible Senior Notes At 1.50%, Option Portion | Maximum
Debt Instrument [Line Items]
Convertible debt, threshold trading days | day	20
Convertible debt, threshold consecutive trading days | day	30
Percent of conversion price triggering conversion feature	130.00%
Convertible Debt | Convertible Senior Notes At 1.50%, Option Portion | Minimum
Debt Instrument [Line Items]
Convertible debt, threshold trading days | day	5
Convertible debt, threshold consecutive trading days | day	10
Percent of conversion price triggering conversion feature	98.00%

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Balance Sheet Components Leases (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Condensed Balance Sheet Statements, Captions [Line Items]
Operating lease cost	$ 700	$ 600
Operating leas asset	$ 5,590

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Convertible Senior Notes

3 Months Ended

Mar. 31, 2020

Debt Disclosure [Abstract]

Convertible Senior Notes

Convertible Senior Notes

In May 2018, the Company issued $143.75 million aggregate principal amount of 1.50% Convertible Senior Notes due 2023, including $18.75 million aggregate principal amount of such notes pursuant to the exercise in full of options granted to the initial purchasers, collectively the “Notes.” The Notes are unsecured, unsubordinated obligations and bear interest at a fixed rate of 1.50% per annum, payable semi-annually in arrears on May 15 and November 15 of each year, commencing on November 15, 2018. The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $138.9 million.

Each $1,000 principal amount of the Notes will initially be convertible into 31.0073 shares of the Company’s common stock, the “Conversion Option,” which is equivalent to an initial conversion price of approximately $32.25 per share, subject to adjustment upon the occurrence of specified events. The Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding February 15, 2023, only under the following circumstances:

(1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2018 (and only during such calendar quarter), if the last reported sale price of the Company common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price of the Notes on each applicable trading day;

(2) during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each day of that ten day consecutive trading day period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate of the Notes on such trading day; or

(3) upon the occurrence of specified corporate events (as set forth in the indenture governing the Notes).

On or after February 15, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. If certain specified fundamental changes occur (as set forth in the indenture governing the Notes) prior to the maturity date, holders of the Notes may require the Company to repurchase for cash all or any portion of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events occur prior to the applicable maturity date, the Company will increase the conversion rate for a holder who elects to convert their notes in connection with such a corporate event in certain circumstances. It is the Company’s current intent and policy to settle conversions through combination settlement which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount in shares of its common stock. During the three months ended March 31, 2020, the conditions allowing holders of the Notes to convert have not been met. The Notes are therefore not convertible during the three months ended March 31, 2020 and are classified as long-term debt.

In accounting for the transaction, the Notes were separated into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the Conversion Option was $33.4 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component was recorded in additional paid-in capital and will be remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount, the “debt discount,” is amortized to interest expense over the contractual term of the Notes at an effective interest rate of 7.6%.

In accounting for the debt issuance costs of $4.9 million related to the Notes, the Company allocated the total amount incurred to the liability and equity components of the Notes based on their relative values. Issuance costs attributable to the liability component were $3.8 million and will be amortized to interest expense using the effective interest method over the contractual term of the Notes. Issuance costs attributable to the equity component were $1.1 million and are included with the equity component in additional paid-in capital.

The Notes consist of the following:

(in thousands)	March 31, 2020			December 31, 2019
Liability:
Principal	$	143,750		$	143,750
Unamortized debt discount	(22,321		)	(23,880		)
Unamortized issuance costs	(2,516		)	(2,692		)
Net carrying amount	$	118,913		$	117,178
Stockholders’ equity:
Debt discount for conversion option	$	33,350		$	33,350
Issuance costs	$	(1,136	)	$	(1,136	)
Net carrying amount	$	32,214		$	32,214

The total estimated fair value of the Notes as of March 31, 2020 was approximately $142.7 million. The fair value was determined based on the closing trading price per $100 of the Notes as of the last day of trading for the period. The fair value of the Notes is primarily affected by the trading price of the Company’s common stock and market interest rates. Based on the closing price of the Company’s common stock of $21.24 on March 31, 2020, the if-converted value of the Notes of $94.7 million was less than their principal amount.     

Interest expense related to the Notes is as follows:

	Three months ended March 31,
(in thousands)	2020		2019
Contractual interest expense	$	539	$	539
Amortization of debt discount	1,559		1,422
Amortization of issuance costs	176		160
Total interest expense	$	2,274	$	2,121

Capped Calls

In connection with the pricing of the Notes, the Company entered into privately negotiated capped call transactions with certain counterparties, the “Capped Calls.” The Capped Calls each have an initial strike price of approximately $32.25 per share, subject to certain adjustments, which correspond to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $38.94 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, approximately 4.5 million shares of the Company’s common stock. Conditions that cause adjustments to the initial strike price of the Capped Calls mirror conditions that result in corresponding adjustments for the Notes. The Capped Calls are generally intended to reduce or offset the potential dilution to the Company’s common stock upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the Notes. As these transactions meet certain accounting criteria, the Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. The cost of $8.9 million incurred in connection with the Capped Calls was recorded as a reduction to additional paid-in capital.

The net impact to the Company’s stockholders' equity, included in additional paid-in capital, of the above components of the Notes is as follows:

(in thousands)	March 31, 2020
Conversion option	$	33,350
Purchase of capped calls	$	(8,907	)
Issuance costs	$	(1,136	)
Total	$	23,307

Impact on Earnings Per Share

The Notes will not have an impact on the Company’s diluted earnings per share until they meet the criteria for conversion, as discussed above, as the Company intends to settle the principal amount of the Notes in cash upon conversion. Under the treasury stock method, in periods when the Company reports net income, the Company is required to include the effect of additional shares that may be issued under the Notes when the price of its’ common stock exceeds the conversion price. However, upon conversion, there will be no economic dilution from the Notes until the average market price of the Company’s common stock exceeds the cap price of $38.94 per share, as exercise of the capped calls offsets any dilution from the Notes from the conversion price up to the cap price. Capped Calls are excluded from the calculation of diluted earnings per share, as they would be anti-dilutive under the treasury stock method.

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Cash, Cash Equivalents and Short-term Investments

3 Months Ended

Mar. 31, 2020

Cash and Cash Equivalents [Abstract]

Cash, Cash Equivalents, and Short-term Investments

Cash, Cash Equivalents and Short-Term Investments

The following tables present cash, cash equivalents and short-term investments (in thousands) as of March 31, 2020 and December 31, 2019:

	As of March 31, 2020
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair value
Cash and cash equivalents:
Demand deposits and other cash	$	25,289	$	—	$	—		$	25,289
Money market funds	3,855		—		—			3,855
Commercial paper	1,994		—		(2		)	1,992
Total cash and cash equivalents	31,138		—		(2		)	31,136
Short-Term Investments:
Commercial paper	15,911		10		(14		)	15,907
Corporate debt securities	187,238		296		(809		)	186,725
Total short-term investments	203,149		306		(823		)	202,632
Total cash, cash equivalents and short-term investments	$	234,287	$	306	$	(825	)	$	233,768

	As of December 31, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair value
Cash and cash equivalents:
Demand deposits and other cash	$	21,618	$	—	$	—		$	21,618
Money market funds	4,086		—		—			4,086
Commercial paper	—		—		—			—
Total cash and cash equivalents	25,704		—		—			25,704
Short-Term Investments:
Commercial paper	12,861		—		(7		)	12,854
U.S. government agency securities	3,000		—		—			3,000
U.S. Treasury securities	—		—		—			—
Corporate debt securities	187,866		499		(55		)	188,310
Total short-term investments	203,727		499		(62		)	204,164
Total cash, cash equivalents and short-term investments	$	229,431	$	499	$	(62	)	$	229,868

The Company has determined that the unrealized losses on its short-term investments as of March 31, 2020 and December 31, 2019 do not constitute an “other than temporary impairment.” The unrealized losses for the short-term investments have all been in a continuous unrealized loss position for less than twelve months. The Company’s conclusion of no “other than temporary impairment” is based on the high credit quality of the securities, their short remaining maturity and the Company’s intent and ability to hold such loss securities until maturity.

Classification of the cash, cash equivalents and short-term investments by contractual maturity was as follows:

(in thousands)	One year or shorter		Between 1 and 2 years		Total
Balances as of March 31, 2020
Cash and cash equivalents (1)	$	31,136	$	—	$	31,136
Short-term investments	130,834		71,798		202,632
Cash, cash equivalents and short-term investments	$	161,970	$	71,798	$	233,768
Balances as of December 31, 2019
Cash and cash equivalents (1)	$	25,704	$	—	$	25,704
Short-term investments	113,010		91,154		204,164
Cash, cash equivalents and short-term investments	$	138,714	$	91,154	$	229,868
(1) Includes demand deposits and other cash, money market funds and other cash equivalent securities, all with 0-90 day maturity at purchase.

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Income Taxes

3 Months Ended

Mar. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The Company recorded a $(0.1) million and $36,000 (provision for) benefit from income taxes for the three months ended March 31, 2020 and 2019, respectively. The provision recorded for the three months ended March 31, 2020 was primarily due to the accretion of the deferred tax liability associated with indefinite lived intangibles and state income taxes. The benefit recorded for the three months ended March 31, 2019 was primarily due to the tax benefit from the gain recorded in other comprehensive income.

As of March 31, 2020, the Company has provided a valuation allowance against certain federal and state deferred tax assets. Management continues to evaluate the realizability of deferred tax assets and the related valuation allowance. If management’s assessment of the deferred tax assets or the corresponding valuation allowance were to change, the Company would record the related adjustment to income during the period in which management makes the determination.

As of March 31, 2020, there were no material changes to either the nature or the amounts of the uncertain tax positions previously determined for the year ended December 31, 2019.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted and signed into law. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. The Company is currently evaluating the impact of the CARES Act, but at present does not expect the NOL provisions of the CARES Act to result in a material impact to the Company as it has historically generated taxable losses.

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Revenue, deferred revenue, and deferred commissions - Consolidated Statement of Operations (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Revenue
Total revenue	$ 40,673	$ 35,309
Gross Profit	23,786	19,685
Operating expenses	32,386	30,745
Operating Income (Loss)	(8,600)	(11,060)
Net loss	(10,470)	(11,735)
Product
Revenue
Total revenue	17,850	14,003
Service
Revenue
Total revenue	$ 22,823	$ 21,306

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Revenue, deferred revenue, and deferred commissions - Significant Changes in Deferred Revenue (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Revenue from Contract with Customer [Abstract]
Revenue recognized pertaining to amounts deferred as of Beginning of Period	$ 18,500
Revenue recognized pertaining to amounts deferred as of End of Period		$ 15,200
Change in Contract with Customer, Liability [Roll Forward]
Beginning balance	61,475
Additions	14,945
Revenue Recognized	(19,744)
Ending balance	$ 56,676

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Segments Segments (Tables)

3 Months Ended

Mar. 31, 2020

Segment Reporting [Abstract]

Segments

The following table presents a summary of the operating segments:

	Three months ended March 31,
	2020			2019
(in thousands)
Revenue
Product	$	17,850		$	14,003
Service	22,823			21,306
Total revenue	40,673			35,309
Cost of revenue
Product	6,364			5,334
Service	10,523			10,290
Total cost of revenue	16,887			15,624
Gross profit
Product	11,486			8,669
Service	12,300			11,016
Total gross profit	23,786			19,685
Operating expenses	32,386			30,745
Interest expense, net and other	(1,745		)	(711		)
Loss before income taxes	$	(10,345	)	$	(11,771	)

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Goodwill and Intangible Assets (Tables)

3 Months Ended

Mar. 31, 2020

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Finite-Lived Intangible Assets

The estimated useful lives and carrying value of acquired intangible assets are as follows:

		March 31, 2020						December 31, 2019
(in thousands)	Range of Useful Life (years)	Gross  Carrying  Amount		Accumulated Amortization		Net  Carrying  Amount		Gross  Carrying  Amount		Accumulated Amortization		Net  Carrying  Amount
Developed technology	3 to 7	$	10,050	$	9,854	$	196	$	10,050	$	9,803	$	247
Customer relationships	7 to 9	10,920		6,088		4,832		10,920		5,819		5,101
Backlog	3	1,400		1,287		113		1,400		1,287		113
Non-compete agreements	2 to 4	460		460		—		460		460		—
Trademarks	3 to 7	1,110		1,110		—		1,110		1,110		—
Intangible assets, net book value		$	23,940	$	18,799	$	5,141	$	23,940	$	18,479	$	5,461

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense

Amortization of acquired intangible assets is reflected in the cost of revenue for developed technology and backlog and in operating expenses for the other intangible assets. The estimated future amortization of existing acquired intangible assets as of March 31, 2020 was as follows:

(in thousands)	Future amortization
2020 (remaining nine months)	$	1,036
2021	1,130
2022	1,050
2023	1,050
2024	875
Future amortization expense	$	5,141

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Revenue, deferred revenue, and deferred commissions (Tables)

3 Months Ended

Mar. 31, 2020

Revenue from Contract with Customer [Abstract]

Disaggregation of Revenue

The following table depicts the disaggregation of revenue according to revenue type and is consistent with how the Company evaluates its financial performance:

	Three months ended March 31,
(in thousands)	2020		2019
Product revenue
Device	$	13,903	$	10,060
Software	3,947		3,943
Total product	17,850		14,003
Service revenue
Maintenance and support	18,069		16,393
Professional services and training	4,754		4,913
Total service	22,823		21,306
Total revenue	$	40,673	$	35,309

Contract with Customer, Asset and Liability

hanges in the balance of total deferred commissions (contract asset) during the three months ended March 31, 2020 are as follows:

(in thousands)	December 31, 2019		Additions		Commissions Recognized			March 31, 2020
Deferred commissions	$	10,477	$	2,489	$	(2,659	)	$	10,307

hanges in the balance of total deferred revenue (contract liability) during the three months ended March 31, 2020 are as follows:

(in thousands)	December 31, 2019		Additions		Revenue Recognized			March 31, 2020
Deferred revenue	$	61,475	$	14,945	$	(19,744	)	$	56,676

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The Company and Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2020

Accounting Policies [Abstract]

The Company and Summary of Significant Accounting Policies

The Company and Summary of Significant Accounting Policies

Organization and Business

Vocera Communications, Inc. and its subsidiaries (collectively the “Company” or “Vocera”) is a provider of secure, integrated, intelligent communication and clinical workflow solutions, focused on empowering mobile workers in healthcare, hospitality, retail, energy, education and other mission-critical mobile work environments, in the United States and internationally. The significant majority of the Company’s business is generated from sales of its solutions in the healthcare market to help its customers improve quality of care, safety, patient and staff experience and increase operational efficiency.

The Vocera communication and collaboration solution includes: an intelligent enterprise software platform; a lightweight, wearable, voice-controlled communication badge and newly introduced Smartbadge; and smartphone applications. The solution enables users to connect instantly with other staff simply by saying the name, function or group name of the desired recipient. It also delivers HIPAA-compliant secure text messages, alerts and alarms directly to the Vocera Badge, Vocera Smartbadge, smartphones and other mobile communication devices both inside and outside the hospital, replacing legacy pagers and in-building wireless phones.

Basis of Presentation

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission, and include the accounts of Vocera and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The year-end condensed consolidated balance sheet data was derived from the Company’s audited financial statements but does not include all disclosures required by GAAP.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s interim consolidated financial information. The results for the quarter presented are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any other interim period or any other future year.

Except for the change in certain accounting policies upon adoption of the accounting standards described below, there have been no material changes to the Company’s significant accounting policies compared to the accounting policies presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Use of Estimates

The preparation of the accompanying unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting periods. The estimates include, but are not limited to, revenue recognition, warranty reserves, accounts receivable reserves, inventory reserves, bonuses, goodwill and intangible assets, stock-based compensation expense, provisions for income taxes and contingencies. Actual results could differ from these estimates, and such differences could be material to the Company’s financial position and results of operations.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued new guidance related to the accounting for credit losses on instruments for both financial services and non-financial services entities. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new guidance was effective for the Company beginning January 1, 2020. The Company applied the guidance using a modified retrospective approach requiring that the Company recognize the cumulative effect of initially applying the impairment standard as an adjustment to opening accumulated deficit in the period of initial application. There was no adjustment to the Company’s opening accumulated deficit in the period as there were no incremental impairment losses as a result of the adoption.

In January 2017, the FASB issued new guidance to simplify the accounting for goodwill impairment. The guidance simplifies the measurement of goodwill impairment by removing step 2 of the goodwill impairment test, which requires the determination of the fair value of individual assets and liabilities of a reporting unit.  The new guidance requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis.  The new standard was effective for the Company beginning January 1, 2020. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements.

Recent Accounting Pronouncements

In December 2019, the FASB issued new guidance to simplifying the accounting for income taxes, which removes certain exceptions for intra period allocations, recognizing deferred taxes for investments and calculating income taxes in interim periods. This guidance also reduces complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The new standard is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is evaluating the impact of this new accounting guidance on its condensed consolidated financial statements.

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Condensed Consolidated Statements of Operations - USD ($) shares in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Revenue
Total revenue	$ 40,673,000	$ 35,309,000
Cost of revenue
Total cost of revenue	16,887,000	15,624,000
Gross profit	23,786,000	19,685,000
Operating expenses
Research and development	9,032,000	8,146,000
Sales and marketing	16,963,000	16,019,000
General and administrative	6,391,000	6,580,000
Total operating expenses	32,386,000	30,745,000
Loss from operations	(8,600,000)	(11,060,000)
Interest income	1,120,000	1,279,000
Interest expense	(2,274,000)	(2,121,000)
Other income (expense), net	(591,000)	131,000
Loss before income taxes	(10,345,000)	(11,771,000)
Benefit from (provision for) income taxes	(125,000)	36,000
Net loss	(10,470,000)	$ (11,735,000)
Weighted average shares used to compute net loss per share
Basic and Diluted		30,800
Product
Revenue
Total revenue	17,850,000	$ 14,003,000
Cost of revenue
Total cost of revenue	6,364,000	5,334,000
Service
Revenue
Total revenue	22,823,000	21,306,000
Cost of revenue
Total cost of revenue	$ 10,523,000	$ 10,290,000

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Share-based Compensaton Allocated to Expense Captions (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	$ 5,841
Cost of Sales
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	973	$ 978
Research and Development Expense
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	966	822
Selling and Marketing Expense
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	1,860	1,720
General and Administrative Expense
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	$ 2,042	$ 2,024

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Contractual maturities of cash, cash equivalent and short-term investment (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Debt Securities, Available-for-sale [Line Items]
Cash and cash equivalents	$ 31,136	$ 25,704
Short-term investments	202,632	204,164
Cash, cash equivalents and short-term investments	233,768	229,868
Maturity up to one year
Debt Securities, Available-for-sale [Line Items]
Cash and cash equivalents	31,136	25,704
Short-term investments	130,834	113,010
Cash, cash equivalents and short-term investments	161,970	138,714
maturity between 1 and 2 years [Member]
Debt Securities, Available-for-sale [Line Items]
Cash and cash equivalents	0	0
Short-term investments	71,798	91,154
Cash, cash equivalents and short-term investments	$ 71,798	$ 91,154

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Future amortization schedule (Details) $ in Thousands	Mar. 31, 2020 USD ($)
Goodwill and intangible assets [Abstract]
Finite-Lived Intangible Asset, Expected Amortization, Year One	$ 1,036
Finite-Lived Intangible Asset, Expected Amortization, Year Two	1,130
Finite-Lived Intangible Asset, Expected Amortization, Year Three	1,050
Finite-Lived Intangible Asset, Expected Amortization, Year Four	1,050
Finite-Lived Intangibles, Amortization Expense, Year Five	875
Finite-Lived Intangible Assets, Net	$ 5,141

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Investment in Sales Type Leases (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
Capital Leased Assets [Line Items]
Sales-type and Direct Financing Leases, Lease Receivable, Payments to be Received	$ 1,796	$ 2,078
Sales-type and Direct Financing Leases, Lease Receivable, Undiscounted Excess Amount	1,097	1,190
Net Investment in Lease	699	888
Net Investment in Lease, Current	346	452
Net Investment in Lease, Noncurrent	$ 353	$ 436
Minimum
Capital Leased Assets [Line Items]
Lessors, Capital Leases, Term of contract	3 years
Maximum
Capital Leased Assets [Line Items]
Lessors, Capital Leases, Term of contract	4 years

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Commitments Narrative (Details) - USD ($) $ in Millions	Mar. 31, 2020	Dec. 31, 2019
Inventories
Unrecorded Unconditional Purchase Obligation [Line Items]
Unrecorded Unconditional Purchase Obligation	$ 7.6	$ 9.7

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Balance Sheet Components Other Information Related to Leases (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Balance Sheet Components [Abstract]
Cash paid for amounts included in the measurement of lease liabilities	$ 712	$ 630
Right-of-use assets obtained in exchange for lease obligations	$ 0	$ 689
Weighted average remaining lease term	2 years 4 months 20 days	3 years 1 month 9 days
Weighted average discount rate	8.00%	8.00%

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Accrued Liabilities (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Accrued Liabilities, Current [Abstract]
Payroll and related expenses	$ 7,276	$ 6,053
Accrued payables	1,707	2,674
Deferred Rent Credit, Current	2,336	2,323
Lease financing, current portion	898	1,033
Product warranty	440	420
Customer Refund Liability, Current	665	631
Sales and use tax payable	469	599
Other	1,520	1,024
Total accrued payroll and other current liabilities	$ 15,311	$ 14,757

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The Company and Summary of Significant Accounting Policies Narrative (Details) $ in Thousands	Mar. 31, 2020 USD ($)
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Other long-term assets	$ 5,590
Total operating lease liabilities	$ 6,452

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Revenue, deferred revenue, and deferred commissions - Disaggregation of Revenue (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Total revenue	$ 40,673	$ 35,309
Product Segment [Member]
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Total revenue	17,850	14,003
Product Segment [Member] | Software [Member]
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Total revenue	3,947	3,943
Product Segment [Member] | Device [Member]
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Total revenue	13,903	10,060
Service Segment [Member]
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Total revenue	22,823	21,306
Service Segment [Member] | Maintenance and Support [Member]
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Total revenue	18,069	16,393
Service Segment [Member] | Professional Services and Training [Member]
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Total revenue	$ 4,754	$ 4,913

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Fair Value of Financial Instruments (Details) - USD ($)	3 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value, Assets, Level 2 to Level 1 Transfers, Amount	$ 0
Fair Value, Assets, Level 1 to Level 2 Transfers, Amount	0
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Asset Transfers Into Level 3	0
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Asset, Transfers out of Level 3	0
Assets, Fair Value Disclosure [Abstract]
Cash and cash equivalents	31,136,000	$ 25,704,000
Short-term investments	202,632,000	204,164,000
U.S. government agency securities
Assets, Fair Value Disclosure [Abstract]
Short-term investments		3,000,000
U.S. Treasury securities
Assets, Fair Value Disclosure [Abstract]
Short-term investments		0
Corporate debt securities
Assets, Fair Value Disclosure [Abstract]
Short-term investments	186,725,000	188,310,000
Fair Value, Measurements, Recurring
Assets, Fair Value Disclosure [Abstract]
Total assets measured at fair value	208,479,000	208,250,000
Fair Value, Measurements, Recurring | Level 1
Assets, Fair Value Disclosure [Abstract]
Total assets measured at fair value	3,855,000	4,086,000
Fair Value, Measurements, Recurring | Level 2
Assets, Fair Value Disclosure [Abstract]
Total assets measured at fair value	204,624,000	204,164,000
Fair Value, Measurements, Recurring | U.S. government agency securities
Assets, Fair Value Disclosure [Abstract]
Short-term investments	0	3,000,000
Fair Value, Measurements, Recurring | U.S. government agency securities | Level 1
Assets, Fair Value Disclosure [Abstract]
Short-term investments	0	0
Fair Value, Measurements, Recurring | U.S. government agency securities | Level 2
Assets, Fair Value Disclosure [Abstract]
Short-term investments	0	3,000,000
Fair Value, Measurements, Recurring | Corporate debt securities
Assets, Fair Value Disclosure [Abstract]
Short-term investments	186,725,000	188,310,000
Fair Value, Measurements, Recurring | Corporate debt securities | Level 1
Assets, Fair Value Disclosure [Abstract]
Short-term investments	0	0
Fair Value, Measurements, Recurring | Corporate debt securities | Level 2
Assets, Fair Value Disclosure [Abstract]
Short-term investments	186,725,000	188,310,000
Fair Value, Measurements, Recurring | Money market funds
Assets, Fair Value Disclosure [Abstract]
Cash and cash equivalents	3,855,000	4,086,000
Fair Value, Measurements, Recurring | Money market funds | Level 1
Assets, Fair Value Disclosure [Abstract]
Cash and cash equivalents	3,855,000	4,086,000
Fair Value, Measurements, Recurring | Money market funds | Level 2
Assets, Fair Value Disclosure [Abstract]
Cash and cash equivalents	0	0
Fair Value, Measurements, Recurring | Commercial paper
Assets, Fair Value Disclosure [Abstract]
Short-term investments	17,899,000	12,854,000
Fair Value, Measurements, Recurring | Commercial paper | Level 1
Assets, Fair Value Disclosure [Abstract]
Short-term investments	0	0
Fair Value, Measurements, Recurring | Commercial paper | Level 2
Assets, Fair Value Disclosure [Abstract]
Short-term investments	$ 17,899,000	$ 12,854,000

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Stock-based Compensation and Awards

3 Months Ended

Mar. 31, 2020

Share-based Payment Arrangement [Abstract]

Stock-based Compensation and Award

Stock-based Compensation and Awards

Stock Option Activity

A summary of the stock option activity for the three months ended March 31, 2020 is presented below:

	Options Outstanding
	Number of options		Weighted average exercise price		Weighted average remaining contractual term	Aggregate intrinsic value
					(in years)	(in thousands)
Outstanding at December 31, 2019	606,327		$	13.41	3.62	$	4,566
Options granted	—		—
Options exercised	(77,909	)	9.38
Options canceled	—		—
Outstanding at March 31, 2020	528,418		$	14.01	3.38	$	3,974

At March 31, 2020, there was no unrecognized compensation cost related to options. As of March 31, 2020, there were 1,855,146 shares that remained available for future issuance of options, restricted stock units (“RSUs”) or other equity awards under the 2012 Equity Incentive Plan.

Employee Stock Purchase Plan

In March 2012, the Company’s 2012 Employee Stock Purchase Plan (the “ESPP”) was approved. No shares of common stock were purchased during the three months ended March 31, 2020 and 2019. As of March 31, 2020, there were 1,189,618 shares available for future issuance under the ESPP.

The following Black-Scholes option-pricing assumptions were used for each respective period for the ESPP:

	Three months ended March 31,
	2020	2019
Expected term (in years)	0.50	0.50
Volatility	50.0%	33.0%
Risk-free interest rate	1.59%	2.51%
Dividend yield	0%	0%

Restricted Stock Units

A summary of RSU activity for the three months ended March 31, 2020 is presented below:

	Restricted Stock Units
	Number of shares		Weighted Average Grant Date Fair Value per Share
Outstanding at December 31, 2019	1,550,646		$	28.94
Granted	203,971		22.84
Vested	(101,431	)	31.08
Forfeited	(17,868	)	28.11
Outstanding at March 31, 2020	1,635,318		$	28.06

At March 31, 2020, there was $28.8 million of unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted-average period of 1.75 years.

Allocation of Stock-Based Compensation Expense

The following table presents the allocation of stock-based compensation expense:

	Three months ended March 31,
(in thousands)	2020		2019
Cost of revenue	$	973	$	978
Research and development	966		822
Sales and marketing	1,860		1,720
General and administrative	2,042		2,024
Total stock-based compensation	$	5,841	$	5,544

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Goodwill and Intangible Assets

3 Months Ended

Mar. 31, 2020

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets

Goodwill and Intangible Assets

Goodwill

As of March 31, 2020 and December 31, 2019, the Company had $49.2 million and $49.2 million of goodwill, respectively, with $41.2 million and $8.0 million allocated to the Company’s Product and Services operating segments, respectively. As of March 31, 2020, there were no changes in circumstances indicating that the carrying values of goodwill or acquired intangibles may not be recoverable.

Intangible Assets

Acquisition-related intangible assets are amortized either straight-line, or over the life of the assets on a basis that resembles the economic benefit of the assets. This yields amortization in the latter case that is higher in earlier periods of the useful life.

The estimated useful lives and carrying value of acquired intangible assets are as follows:

		March 31, 2020						December 31, 2019
(in thousands)	Range of Useful Life (years)	Gross  Carrying  Amount		Accumulated Amortization		Net  Carrying  Amount		Gross  Carrying  Amount		Accumulated Amortization		Net  Carrying  Amount
Developed technology	3 to 7	$	10,050	$	9,854	$	196	$	10,050	$	9,803	$	247
Customer relationships	7 to 9	10,920		6,088		4,832		10,920		5,819		5,101
Backlog	3	1,400		1,287		113		1,400		1,287		113
Non-compete agreements	2 to 4	460		460		—		460		460		—
Trademarks	3 to 7	1,110		1,110		—		1,110		1,110		—
Intangible assets, net book value		$	23,940	$	18,799	$	5,141	$	23,940	$	18,479	$	5,461

Amortization expense was $0.3 million and $1.0 million for the three months ended March 31, 2020 and 2019, respectively.

Amortization of acquired intangible assets is reflected in the cost of revenue for developed technology and backlog and in operating expenses for the other intangible assets. The estimated future amortization of existing acquired intangible assets as of March 31, 2020 was as follows:

(in thousands)	Future amortization
2020 (remaining nine months)	$	1,036
2021	1,130
2022	1,050
2023	1,050
2024	875
Future amortization expense	$	5,141

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Balance Sheet Components Supplemental Balance Sheet Information Related to Leases (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Balance Sheet Components [Abstract]
Other long-term assets	$ 5,590
Deferred Rent Credit, Current	2,336	$ 2,323
Other long-term liabilities	4,116
Total operating lease liabilities	$ 6,452

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Future payments- sales type leases (Details) $ in Thousands	Mar. 31, 2020 USD ($)
Balance Sheet Components [Abstract]
Sales-Type and Direct Financing Leases, Lease Receivable, to be Received, Year One	$ 716
Sales-Type and Direct Financing Leases, Lease Receivable, to be Received, Year Four	78
Sales-Type and Direct Financing Leases, Lease Receivable, to be Received, Year Two	615
Sales-Type and Direct Financing Leases, Lease Receivable, to be Received, Year Three	$ 387

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Convertible Senior Notes - Capped Calls (Details) - USD ($) $ / shares in Units, $ in Thousands, shares in Millions	1 Months Ended	3 Months Ended
	May 31, 2018	Mar. 31, 2020	Dec. 31, 2019
Debt Instrument [Line Items]
Capped Calls, initial strike price (in dollars per share)	$ 32.25
Capped Calls, initial cap price (in dollars per share)	$ 38.94
Capped Calls, number of shares covered	4.5
Payment for purchase of capped calls	$ (8,900)	$ (8,907)
Issuance costs		(1,136)
Convertible Debt | Convertible Senior Notes At 1.50%, Option Portion
Debt Instrument [Line Items]
Carrying amount of the equity component	$ 33,400	33,350	$ 33,350
Carrying amount of equity component, net of capped calls		$ 23,307

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Schedule of Available for Sale Securities (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Cash and cash equivalents [Abstract]
Cash and Cash Equivalents, Amortized Cost	$ 31,138	$ 25,704
Cash And Cash Equivalents, Gross Unrealized Gains	0	0
Cash And Cash Equivalents, Gross Unrealized Losses	(2)	0
Cash and cash equivalents	31,136	25,704
Short-term Investments [Abstract]
AFS Securities, Amortized Cost Basis	203,149	203,727
Debt Securities, Available-for-sale, Accumulated Gross Unrealized Gain, before Tax	306	499
Debt Securities, Available-for-sale, Accumulated Gross Unrealized Loss, before Tax	823	62
Short-term investments	202,632	204,164
Cash, Cash Equivalents, and Short-term Investments [Abstract]
Cash, Cash Equiv. And S-T Investments, Amortized Cost	234,287	229,431
Cash, Cash Equivalents And Short Term Investments, Unrealized Gains	306	499
Cash, Cash Equivalents And Short Term Investments, Unrealized Losses	825	62
Cash, cash equivalents and short-term investments	233,768	229,868
Demand deposits and other cash
Cash and cash equivalents [Abstract]
Cash and Cash Equivalents, Amortized Cost	25,289	21,618
Cash And Cash Equivalents, Gross Unrealized Gains	0	0
Cash And Cash Equivalents, Gross Unrealized Losses	0	0
Cash and cash equivalents	25,289	21,618
Money market funds
Cash and cash equivalents [Abstract]
Cash and Cash Equivalents, Amortized Cost	3,855	4,086
Cash And Cash Equivalents, Gross Unrealized Gains	0	0
Cash And Cash Equivalents, Gross Unrealized Losses	0	0
Cash and cash equivalents	3,855	4,086
Commercial Paper in CE
Cash and cash equivalents [Abstract]
Cash and Cash Equivalents, Amortized Cost	1,994	0
Cash And Cash Equivalents, Gross Unrealized Gains	0	0
Cash And Cash Equivalents, Gross Unrealized Losses	(2)	0
Cash and cash equivalents	1,992	0
Commercial paper in STI
Short-term Investments [Abstract]
AFS Securities, Amortized Cost Basis	15,911	12,861
Debt Securities, Available-for-sale, Accumulated Gross Unrealized Gain, before Tax	10	0
Debt Securities, Available-for-sale, Accumulated Gross Unrealized Loss, before Tax	14	7
Short-term investments	15,907	12,854
U.S. government agency securities
Short-term Investments [Abstract]
AFS Securities, Amortized Cost Basis		3,000
Debt Securities, Available-for-sale, Accumulated Gross Unrealized Gain, before Tax		0
Debt Securities, Available-for-sale, Accumulated Gross Unrealized Loss, before Tax		0
Short-term investments		3,000
U.S. Treasury securities
Short-term Investments [Abstract]
AFS Securities, Amortized Cost Basis		0
Debt Securities, Available-for-sale, Accumulated Gross Unrealized Gain, before Tax		0
Debt Securities, Available-for-sale, Accumulated Gross Unrealized Loss, before Tax		0
Short-term investments		0
Corporate Debt Securities
Short-term Investments [Abstract]
AFS Securities, Amortized Cost Basis	187,238	187,866
Debt Securities, Available-for-sale, Accumulated Gross Unrealized Gain, before Tax	296	499
Debt Securities, Available-for-sale, Accumulated Gross Unrealized Loss, before Tax	809	55
Short-term investments	$ 186,725	$ 188,310

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Revenue, deferred revenue, and deferred commissions - Consolidated Balance Sheet (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Other receivables	$ 6,374	$ 6,312
Deferred revenue, current	45,987	50,033
Deferred revenue, long-term	10,689	11,442
Total deferred revenue	56,676	61,475
Stockholders' equity	$ 158,107	$ 163,825

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Revenue, deferred revenue, and deferred commissions - Significant Changes in Deferred Commissions (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2020 USD ($)
Change in Contract with Customer, Asset [Roll Forward]
Beginning balance	$ 10,477
Additions	2,489
Commissions Recognized	(2,659)
Ending balance	$ 10,307

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Commitments

3 Months Ended

Mar. 31, 2020

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies Disclosure

Commitments and Contingencies

Non-cancelable Material Commitments

The Company is required to purchase unused, non-cancelable, non-returnable raw material inventory that was purchased by its contract manufacturers based on committed finished goods orders from the Company, certain long lead-time raw materials based on the Company’s forecast and current work-in-progress materials. As of March 31, 2020 and December 31, 2019, approximately $7.6 million and $9.7 million, respectively, of such inventory was purchased and held by the third-party manufacturers which was subject to these purchase guarantees.

Indemnifications

The Company undertakes, in the ordinary course of business, to (i) defend customers and other parties from certain third-party claims associated with allegations of trade secret misappropriation, infringement of copyright, patent or other intellectual property rights, tortious damage to persons or property or breaches of certain Company obligations relating to confidentiality (e.g., safeguarding protected health information) and (ii) indemnify and hold harmless such parties from certain resulting damages, costs and other liabilities. The term of these undertakings may be perpetual and the maximum potential liability of the Company under certain of these undertakings is not determinable. Based on its historical experience, the Company believes the liability associated with these undertakings is minimal.

The Company has entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of the individual. The Company currently has directors and officers insurance. As there has been no significant history of losses, no expense accrual has been made.

Litigation    

From time to time, the Company may be involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters which arise in the ordinary course of business. The Company defends itself vigorously against any such claims. Although the outcome of these matters is currently not determinable, management expects that any losses from existing matters that are probable or reasonably possible of being incurred as a result of these matters would not be material to the financial statements as a whole.

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Net Loss Per Share

3 Months Ended

Mar. 31, 2020

Earnings Per Share [Abstract]

Net Loss Per Share

Loss Per Share

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):

	Three months ended March 31,
	2020			2019
Numerator:
Net loss	$	(10,470	)	$	(11,735	)
Denominator:
Weighted average shares used to compute net loss per common share - basic	31,738			30,800
Weighted-average shares used to compute net loss per common share - diluted	31,738			30,800
Net loss per share
Basic	$	(0.33	)	$	(0.38	)
Diluted	$	(0.33	)	$	(0.38	)

The following securities were not included in the calculation of diluted shares outstanding as the effect would have been anti-dilutive:

	Three months ended March 31,
(in thousands)	2020	2019
Options to purchase common stock, including ESPP	620	724
Restricted stock units	1,635	1,850

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Net Loss Per Share (Tables)

3 Months Ended

Mar. 31, 2020

Earnings Per Share [Abstract]

Schedule of the computation of basic and diluted net income (loss) per share

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):

	Three months ended March 31,
	2020			2019
Numerator:
Net loss	$	(10,470	)	$	(11,735	)
Denominator:
Weighted average shares used to compute net loss per common share - basic	31,738			30,800
Weighted-average shares used to compute net loss per common share - diluted	31,738			30,800
Net loss per share
Basic	$	(0.33	)	$	(0.38	)
Diluted	$	(0.33	)	$	(0.38	)

Schedule of antidilutive securities excluded from computation of earnings per share

The following securities were not included in the calculation of diluted shares outstanding as the effect would have been anti-dilutive:

	Three months ended March 31,
(in thousands)	2020	2019
Options to purchase common stock, including ESPP	620	724
Restricted stock units	1,635	1,850

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The Company and Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2020

Accounting Policies [Abstract]

Nature of Operations

Organization and Business

Vocera Communications, Inc. and its subsidiaries (collectively the “Company” or “Vocera”) is a provider of secure, integrated, intelligent communication and clinical workflow solutions, focused on empowering mobile workers in healthcare, hospitality, retail, energy, education and other mission-critical mobile work environments, in the United States and internationally. The significant majority of the Company’s business is generated from sales of its solutions in the healthcare market to help its customers improve quality of care, safety, patient and staff experience and increase operational efficiency.

The Vocera communication and collaboration solution includes: an intelligent enterprise software platform; a lightweight, wearable, voice-controlled communication badge and newly introduced Smartbadge; and smartphone applications. The solution enables users to connect instantly with other staff simply by saying the name, function or group name of the desired recipient. It also delivers HIPAA-compliant secure text messages, alerts and alarms directly to the Vocera Badge, Vocera Smartbadge, smartphones and other mobile communication devices both inside and outside the hospital, replacing legacy pagers and in-building wireless phones.

Basis of Presentation

Basis of Presentation

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission, and include the accounts of Vocera and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The year-end condensed consolidated balance sheet data was derived from the Company’s audited financial statements but does not include all disclosures required by GAAP.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s interim consolidated financial information. The results for the quarter presented are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any other interim period or any other future year.

Use of Estimates

Use of Estimates

The preparation of the accompanying unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting periods. The estimates include, but are not limited to, revenue recognition, warranty reserves, accounts receivable reserves, inventory reserves, bonuses, goodwill and intangible assets, stock-based compensation expense, provisions for income taxes and contingencies. Actual results could differ from these estimates, and such differences could be material to the Company’s financial position and results of operations.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued new guidance related to the accounting for credit losses on instruments for both financial services and non-financial services entities. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new guidance was effective for the Company beginning January 1, 2020. The Company applied the guidance using a modified retrospective approach requiring that the Company recognize the cumulative effect of initially applying the impairment standard as an adjustment to opening accumulated deficit in the period of initial application. There was no adjustment to the Company’s opening accumulated deficit in the period as there were no incremental impairment losses as a result of the adoption.

In January 2017, the FASB issued new guidance to simplify the accounting for goodwill impairment. The guidance simplifies the measurement of goodwill impairment by removing step 2 of the goodwill impairment test, which requires the determination of the fair value of individual assets and liabilities of a reporting unit.  The new guidance requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis.  The new standard was effective for the Company beginning January 1, 2020. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements.

Recent Accounting Pronouncements

In December 2019, the FASB issued new guidance to simplifying the accounting for income taxes, which removes certain exceptions for intra period allocations, recognizing deferred taxes for investments and calculating income taxes in interim periods. This guidance also reduces complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The new standard is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is evaluating the impact of this new accounting guidance on its condensed consolidated financial statements.

Fair Value of Fin. Instruments, Policy

Fair Value of Financial Instruments

The Company’s cash, cash equivalents and short-term investments are carried at their fair values with any differences from their amortized cost recorded in equity as unrealized gains (losses) on marketable securities. As a basis for determining the fair value of its assets and liabilities, the Company follows 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; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. During the three months ended March 31, 2020, there have been no transfers between Level 1 and Level 2 fair value instruments and no transfers in or out of Level 3.

The Company’s money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The fair value of the Company’s Level 2 fixed income securities is obtained from independent pricing services, which may use quoted market prices for identical or comparable instruments or model-driven valuations using observable market data or other inputs, corroborated by observable market data. The Company does not have any financial instruments which are valued using Level 3 inputs.

Goodwill, Policy

Goodwill

As of March 31, 2020 and December 31, 2019, the Company had $49.2 million and $49.2 million of goodwill, respectively, with $41.2 million and $8.0 million allocated to the Company’s Product and Services operating segments, respectively. As of March 31, 2020, there were no changes in circumstances indicating that the carrying values of goodwill or acquired intangibles may not be recoverable.

Intangible Assets, Policy

Intangible Assets

Acquisition-related intangible assets are amortized either straight-line, or over the life of the assets on a basis that resembles the economic benefit of the assets. This yields amortization in the latter case that is higher in earlier periods of the useful life.

Purchase commitments

Non-cancelable Material Commitments

The Company is required to purchase unused, non-cancelable, non-returnable raw material inventory that was purchased by its contract manufacturers based on committed finished goods orders from the Company, certain long lead-time raw materials based on the Company’s forecast and current work-in-progress materials. As of March 31, 2020 and December 31, 2019, approximately $7.6 million and $9.7 million, respectively, of such inventory was purchased and held by the third-party manufacturers which was subject to these purchase guarantees.

Segment Reporting, Policy

The Company has two operating segments, which are both reportable business segments: (i) Product and (ii) Service, both of which are comprised of Vocera and its wholly-owned subsidiaries’ results of operations.

Revenue Recognition

Disaggregation of Revenue

A typical sales arrangement involves multiple arrangements, such as the sales of the Company’s proprietary communication device (“Vocera Badge”), perpetual software licenses, professional services and maintenance and support services which entitle customers to unspecified upgrades, patch releases and telephone-based support. The following table depicts the disaggregation of revenue according to revenue type and is consistent with how the Company evaluates its financial performance:

	Three months ended March 31,
(in thousands)	2020		2019
Product revenue
Device	$	13,903	$	10,060
Software	3,947		3,943
Total product	17,850		14,003
Service revenue
Maintenance and support	18,069		16,393
Professional services and training	4,754		4,913
Total service	22,823		21,306
Total revenue	$	40,673	$	35,309

Contract balances

The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable are recorded at the invoiced amount and in the period the Company delivers goods or provides services or when the Company’s right to consideration is unconditional. Payment terms on invoiced amounts are typically 30 days. The balance of accounts receivable, net of allowance for doubtful accounts, as of March 31, 2020 and December 31, 2019 is presented in the accompanying condensed consolidated balance sheets. In situations where revenue recognition occurs before invoicing, an unbilled receivable is created, which represents a contract asset. As of March 31, 2020 and December 31, 2019, contract assets totaling $4.5 million and $4.3 million, respectively, were included in prepaid and other current assets in the condensed consolidated balance sheets.

Costs to obtain and fulfill a contract

The Company capitalizes certain incremental contract acquisition costs consisting primarily of commissions paid and the related payroll taxes when customer contracts are signed. The Company determines whether costs should be deferred based on its sales compensation plans, if the commissions are incremental and would not have been incurred absent the execution of the customer contract. Sales commissions for renewals of customer contracts are not commensurate with the commissions paid for the acquisition of the initial contract given the substantive difference in commission rates in proportion to their respective contract values.

Commissions paid upon the initial acquisition of a contract are amortized over the estimated period of benefit, which may exceed the term of the initial contract. Accordingly, amortization of deferred costs is recognized on a systematic basis that is consistent with the pattern of revenue recognition allocated to each performance obligation and is included in sales and marketing expense in the condensed consolidated statements of operations. The Company determines its estimated period of benefit by evaluating the expected renewals of its customer contracts, the duration of its relationships with its customers and other factors. Deferred costs are periodically reviewed for impairment. Changes in the balance of total deferred commissions (contract asset) during the three months ended March 31, 2020 are as follows:

(in thousands)	December 31, 2019		Additions		Commissions Recognized			March 31, 2020
Deferred commissions	$	10,477	$	2,489	$	(2,659	)	$	10,307

Of the $10.3 million total deferred commissions balance as of March 31, 2020, the Company expects to recognize approximately 48% as commission expense over the next 12 months and the remainder thereafter.

Deferred revenue

The Company records deferred revenue when cash payments are received in advance of the performance under the contract. The current portion of deferred revenue represents the amounts that are expected to be recognized as revenue within one year of the condensed consolidated balance sheet date. Changes in the balance of total deferred revenue (contract liability) during the three months ended March 31, 2020 are as follows:

(in thousands)	December 31, 2019		Additions		Revenue Recognized			March 31, 2020
Deferred revenue	$	61,475	$	14,945	$	(19,744	)	$	56,676

Revenue recognized during the three months ended March 31, 2020 from deferred revenue balances at the beginning of the period was $18.5 million. Revenue recognized during the three months ended March 31, 2019 from deferred revenue balances at the beginning of the period was $15.2 million.

The “contracted but not recognized” performance obligations represent the Company’s deferred revenue and non-cancelable backlog amounts. This balance as of March 31, 2020 was $112.5 million, of which the Company expects to recognize approximately 66% as revenue over the next 12 months and the remainder thereafter.

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Stock-based Compensation and Awards (Tables)

3 Months Ended

Mar. 31, 2020

Share-based Payment Arrangement [Abstract]

Rollforward of stock option activity

A summary of the stock option activity for the three months ended March 31, 2020 is presented below:

	Options Outstanding
	Number of options		Weighted average exercise price		Weighted average remaining contractual term	Aggregate intrinsic value
					(in years)	(in thousands)
Outstanding at December 31, 2019	606,327		$	13.41	3.62	$	4,566
Options granted	—		—
Options exercised	(77,909	)	9.38
Options canceled	—		—
Outstanding at March 31, 2020	528,418		$	14.01	3.38	$	3,974

Equity B-S-M Valuation Assumptions

The following Black-Scholes option-pricing assumptions were used for each respective period for the ESPP:

	Three months ended March 31,
	2020	2019
Expected term (in years)	0.50	0.50
Volatility	50.0%	33.0%
Risk-free interest rate	1.59%	2.51%
Dividend yield	0%	0%

Rollforward of RSA and RSU activty

A summary of RSU activity for the three months ended March 31, 2020 is presented below:

	Restricted Stock Units
	Number of shares		Weighted Average Grant Date Fair Value per Share
Outstanding at December 31, 2019	1,550,646		$	28.94
Granted	203,971		22.84
Vested	(101,431	)	31.08
Forfeited	(17,868	)	28.11
Outstanding at March 31, 2020	1,635,318		$	28.06

Allocation of Recognized Period Costs

The following table presents the allocation of stock-based compensation expense:

	Three months ended March 31,
(in thousands)	2020		2019
Cost of revenue	$	973	$	978
Research and development	966		822
Sales and marketing	1,860		1,720
General and administrative	2,042		2,024
Total stock-based compensation	$	5,841	$	5,544

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Condensed Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Statement of Comprehensive Income [Abstract]
Net loss	$ (10,470)	$ (11,735)
Other comprehensive income (loss), net:
Change in unrealized gain (loss) on investments, net of tax	(956)	425
Comprehensive loss	$ (11,426)	$ (11,310)

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Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2020	Apr. 30, 2020
Entity Listings [Line Items]
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Mar. 31, 2020
Document Transition Report	false
Entity File Number	001-35469
Entity Registrant Name	VOCERA COMMUNICATIONS, INC.
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	94-3354663
Entity Address, Address Line One	525 Race Street
Entity Address, City or Town	San Jose
Entity Address, State or Province	CA
Entity Address, Postal Zip Code	95126
City Area Code	408
Local Phone Number	882-5100
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Large Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		32,025,518
Entity Central Index Key	0001129260
Amendment Flag	false
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q1
Current Fiscal Year End Date	--12-31
New York Stock Exchange
Entity Listings [Line Items]
Title of 12(b) Security	Common Stock, $0.0003 par value
Trading Symbol	VCRA
Security Exchange Name	NYSE

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Revenue, deferred revenue, and deferred commissions

3 Months Ended

Mar. 31, 2020

Revenue from Contract with Customer [Abstract]

Revenue, deferred revenue, and deferred commissions

Revenue, deferred revenue and deferred commissions

Disaggregation of Revenue

A typical sales arrangement involves multiple arrangements, such as the sales of the Company’s proprietary communication device (“Vocera Badge”), perpetual software licenses, professional services and maintenance and support services which entitle customers to unspecified upgrades, patch releases and telephone-based support. The following table depicts the disaggregation of revenue according to revenue type and is consistent with how the Company evaluates its financial performance:

	Three months ended March 31,
(in thousands)	2020		2019
Product revenue
Device	$	13,903	$	10,060
Software	3,947		3,943
Total product	17,850		14,003
Service revenue
Maintenance and support	18,069		16,393
Professional services and training	4,754		4,913
Total service	22,823		21,306
Total revenue	$	40,673	$	35,309

Contract balances

The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable are recorded at the invoiced amount and in the period the Company delivers goods or provides services or when the Company’s right to consideration is unconditional. Payment terms on invoiced amounts are typically 30 days. The balance of accounts receivable, net of allowance for doubtful accounts, as of March 31, 2020 and December 31, 2019 is presented in the accompanying condensed consolidated balance sheets. In situations where revenue recognition occurs before invoicing, an unbilled receivable is created, which represents a contract asset. As of March 31, 2020 and December 31, 2019, contract assets totaling $4.5 million and $4.3 million, respectively, were included in prepaid and other current assets in the condensed consolidated balance sheets.

Costs to obtain and fulfill a contract

The Company capitalizes certain incremental contract acquisition costs consisting primarily of commissions paid and the related payroll taxes when customer contracts are signed. The Company determines whether costs should be deferred based on its sales compensation plans, if the commissions are incremental and would not have been incurred absent the execution of the customer contract. Sales commissions for renewals of customer contracts are not commensurate with the commissions paid for the acquisition of the initial contract given the substantive difference in commission rates in proportion to their respective contract values.

Commissions paid upon the initial acquisition of a contract are amortized over the estimated period of benefit, which may exceed the term of the initial contract. Accordingly, amortization of deferred costs is recognized on a systematic basis that is consistent with the pattern of revenue recognition allocated to each performance obligation and is included in sales and marketing expense in the condensed consolidated statements of operations. The Company determines its estimated period of benefit by evaluating the expected renewals of its customer contracts, the duration of its relationships with its customers and other factors. Deferred costs are periodically reviewed for impairment. Changes in the balance of total deferred commissions (contract asset) during the three months ended March 31, 2020 are as follows:

(in thousands)	December 31, 2019		Additions		Commissions Recognized			March 31, 2020
Deferred commissions	$	10,477	$	2,489	$	(2,659	)	$	10,307

Of the $10.3 million total deferred commissions balance as of March 31, 2020, the Company expects to recognize approximately 48% as commission expense over the next 12 months and the remainder thereafter.

Deferred revenue

The Company records deferred revenue when cash payments are received in advance of the performance under the contract. The current portion of deferred revenue represents the amounts that are expected to be recognized as revenue within one year of the condensed consolidated balance sheet date. Changes in the balance of total deferred revenue (contract liability) during the three months ended March 31, 2020 are as follows:

(in thousands)	December 31, 2019		Additions		Revenue Recognized			March 31, 2020
Deferred revenue	$	61,475	$	14,945	$	(19,744	)	$	56,676

Revenue recognized during the three months ended March 31, 2020 from deferred revenue balances at the beginning of the period was $18.5 million. Revenue recognized during the three months ended March 31, 2019 from deferred revenue balances at the beginning of the period was $15.2 million.

The “contracted but not recognized” performance obligations represent the Company’s deferred revenue and non-cancelable backlog amounts. This balance as of March 31, 2020 was $112.5 million, of which the Company expects to recognize approximately 66% as revenue over the next 12 months and the remainder thereafter.

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Income Taxes (Details) - USD ($)	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Income Tax Disclosure [Abstract]
Income tax expense (benefit)	$ (125,000)	$ 36,000

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Summary of Restricted Stock Activity (Details) - Restricted Stock Units	3 Months Ended
	Mar. 31, 2020 $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock Comp-other than options - Period for Recognition- Comp cost not yet rocognized	1 year 9 months
Number of Shares:
Beginning balance | shares	1,550,646
Granted | shares	203,971
Vested | shares	(101,431)
Forfeited | shares	(17,868)
Ending balance | shares	1,635,318
Weighted Average Grant Date Fair Value per Share (in dollars per share):
Beginning balance | $ / shares	$ 28.94
Granted | $ / shares	22.84
Vested | $ / shares	31.08
Forfeited | $ / shares	28.11
Ending balance | $ / shares	$ 28.06

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Balance Sheet Components Sales Type Lease Activity (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Balance Sheet Components [Abstract]
Lease revenue	$ 435	$ 661
Less: Cost of lease shipments	(10)	(52)
Gross profit	425	609
Sales-type Lease, Interest Income, Lease Receivable	(6)	(3)
Initial direct cost incurred	$ 23	$ 31

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Schedule of the computation of basic and diluted net income (loss) per share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Earnings Per Share [Abstract]
Weighted Average Number of Shares Outstanding, Diluted	31,738	30,800
Weighted Average Number of Shares Outstanding, Basic	31,738	30,800
Numerator:
Net loss	$ (10,470)	$ (11,735)
Denominator:
Weighted Average Number of Shares Outstanding, Basic and Diluted		30,800
Net loss per share
Earnings Per Share, Basic	$ (0.33)	$ (0.38)
Earnings Per Share, Diluted	$ (0.33)	$ (0.38)

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Goodwill and Intangible Assets Narrative (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Finite-Lived Intangible Assets [Line Items]
Goodwill	$ 49,246		$ 49,246
Intangibles - period amortization expense [Abstract]
Amortization expense	300	$ 1,000
Product Segment [Member]
Finite-Lived Intangible Assets [Line Items]
Goodwill	41,200
Service Segment [Member]
Finite-Lived Intangible Assets [Line Items]
Goodwill	$ 8,000