0001272830-19-000240.txt : 20191106 0001272830-19-000240.hdr.sgml : 20191106 20191106164601 ACCESSION NUMBER: 0001272830-19-000240 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 82 CONFORMED PERIOD OF REPORT: 20190930 FILED AS OF DATE: 20191106 DATE AS OF CHANGE: 20191106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VONAGE HOLDINGS CORP CENTRAL INDEX KEY: 0001272830 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 113547680 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-32887 FILM NUMBER: 191196947 BUSINESS ADDRESS: STREET 1: 23 MAIN STREET CITY: HOLMDEL STATE: NJ ZIP: 07733 BUSINESS PHONE: 732-528-2600 MAIL ADDRESS: STREET 1: 23 MAIN STREET CITY: HOLMDEL STATE: NJ ZIP: 07733 10-Q 1 a10-qq319.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2019
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 001-32887 
VONAGE HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
 
Delaware
 
11-3547680
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
 
 
23 Main Street
Holmdel
,
NJ
,
07733
(Address of principal executive offices)
 
 
 
 
(Zip Code)
Registrant’s telephone number, including area code: (732528-2600
(Former name, former address and former fiscal year, if changed since last report): Not Applicable

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.001
 
VG
 
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  x  No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
x
  
Accelerated filer
o
 
 
 
 
 
Non-accelerated filer
o  
  
 
 
Smaller reporting company
 
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  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at
October 31, 2019
Common Stock, par value $0.001
 
242,626,703
 
shares


 

VONAGE HOLDINGS CORP.
INDEX
 
Part 1 - Financial Information
 
 
 
 
 
 
Page
Item 1.
Condensed Consolidated Financial Statements and Notes
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

Financial Information Presentation
For the financial information discussed in this Quarterly Report on Form 10-Q, other than per share and per line amounts, dollar amounts are presented in thousands, except where noted.

2

 

PART 1 - FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value) 
(Unaudited) 
 
September 30,
2019
 
December 31,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
18,741

 
$
5,057

Accounts receivable, net of allowance of $4,984 and $3,542, respectively
94,423

 
75,342

Inventory, net of allowance of $61 and $152, respectively
970

 
1,470

Deferred customer acquisition costs, current portion
12,529

 
11,755

Prepaid expenses
28,146

 
26,496

Other current assets
8,110

 
7,634

Total current assets
162,919

 
127,754

Property and equipment, net of accumulated depreciation of $110,631 and $104,999, respectively
48,330

 
49,262

Operating lease right-of-use assets
53,561

 

Goodwill
589,923

 
598,499

Software, net of accumulated amortization of $99,981 and $100,870, respectively
34,269

 
17,430

Deferred customer acquisition costs
50,672

 
37,881

Restricted cash
2,054

 
2,047

Intangible assets, net of accumulated amortization of $203,530 and $162,788, respectively
255,256

 
299,911

Deferred tax assets
103,302

 
102,560

Other assets
32,148

 
24,144

Total assets
$
1,332,434

 
$
1,259,488

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
47,158

 
$
53,262

Accrued expenses
116,488

 
87,370

Deferred revenue, current portion
61,105

 
53,447

Operating lease liabilities, current portion
13,260

 

Current portion of notes payable

 
10,000

Total current liabilities
238,011

 
204,079

Indebtedness under revolving credit facility
235,500

 
425,000

Notes payable, net of current portion

 
84,228

Convertible senior notes, net
273,265

 

Operating lease liabilities
47,872

 

Other liabilities
3,021

 
10,413

Total liabilities
797,669

 
723,720

Commitments and Contingencies (Note 10)

 

Stockholders’ Equity:
 
 
 
Common stock, par value $0.001 per share; 596,950 shares authorized at September 30, 2019, and December 31, 2018
315

 
310

Additional paid-in capital
1,481,077

 
1,415,682

Accumulated deficit
(628,634
)
 
(611,985
)
Treasury stock, at cost
(305,381
)
 
(275,009
)
Accumulated other comprehensive (loss) income
(12,612
)
 
6,770

Total stockholders’ equity
534,765

 
535,768

Total liabilities and stockholders’ equity
$
1,332,434

 
$
1,259,488

See accompanying notes to condensed consolidated financial statements.

3

 


VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Total revenues
$
302,534

 
$
261,531

 
$
879,659

 
$
774,979

 
 
 
 
 
 
 
 
Operating Expenses:
 
 
 
 
 
 
 
Cost of revenues (exclusive of depreciation and amortization)
133,833

 
104,351

 
375,465

 
315,122

Sales and marketing
83,628

 
74,380

 
274,513

 
229,201

Engineering and development
16,901

 
14,309

 
50,318

 
35,504

General and administrative
41,306

 
37,620

 
113,380

 
97,376

Depreciation and amortization
21,319

 
16,024

 
63,195

 
51,886

Total operating expenses
296,987

 
246,684

 
876,871

 
729,089

Income from operations
5,547

 
14,847

 
2,788

 
45,890

Other Income (Expense):
 
 
 
 
 
 
 
Interest expense
(8,454
)
 
(3,036
)
 
(24,517
)
 
(9,294
)
Other income (expense), net
58

 
347

 
(505
)
 
431

Total other income (expense), net
(8,396
)
 
(2,689
)
 
(25,022
)
 
(8,863
)
(Loss) Income before income taxes benefit
(2,849
)
 
12,158

 
(22,234
)
 
37,027

Income tax (expense) benefit
(18,248
)
 
(2,570
)
 
5,127

 
5,644

Net (loss) income
$
(21,097
)
 
$
9,588

 
$
(17,107
)
 
$
42,671

 
 
 
 
 
 
 
 
(Loss) Earnings per common share:
 
 
 
 
 
 
 
Basic
$
(0.09
)
 
$
0.04

 
$
(0.07
)
 
$
0.18

Diluted
$
(0.09
)
 
$
0.04

 
$
(0.07
)
 
$
0.17

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
242,336

 
239,303

 
241,786

 
236,775

Diluted
242,336

 
249,516

 
241,786

 
248,780




See accompanying notes to condensed consolidated financial statements.

4

 

VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) / INCOME
(In thousands)
(Unaudited)
 
  
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net (loss) income
$
(21,097
)
 
$
9,588

 
$
(17,107
)
 
$
42,671

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax expense (benefit) of $847, ($2,346), $938, and ($3,702), respectively
(16,459
)
 
1,525

 
(17,594
)
 
(4,576
)
Unrealized (loss) gain on derivatives, net of tax expense (benefit) of $71, ($745), $364 and ($354), respectively
(307
)
 
530

 
(1,788
)
 
1,538

Total other comprehensive (loss) income
(16,766
)
 
2,055

 
(19,382
)
 
(3,038
)
Comprehensive (loss) income
$
(37,863
)
 
$
11,643

 
$
(36,489
)
 
$
39,633




See accompanying notes to condensed consolidated financial statements.

5

 

VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Nine Months Ended
 
September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(17,107
)
 
$
42,671

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
20,098

 
24,412

Amortization of intangibles
43,097

 
27,306

Deferred income taxes
(7,630
)
 
(9,506
)
Amortization of deferred customer acquisition costs
7,981

 
7,002

Allowance for doubtful accounts and obsolete inventory
1,384

 
1,643

Amortization of financing costs and debt discount
5,311

 
764

Loss on disposal of property and equipment
745

 
168

Loss on extinguishment of debt

 
14

Share-based expense
32,152

 
24,495

Changes in derivatives
(398
)
 
(65
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
(23,211
)
 
(15,085
)
Inventory
552

 
1,274

Prepaid expenses and other current assets
(2,238
)
 
6,416

Deferred customer acquisition costs
(21,708
)
 
(18,008
)
Accounts payable and accrued expenses
24,043

 
6,898

Deferred revenue
6,867

 
(2,704
)
Other assets - deferred cloud computing implementation costs
(11,929
)
 
(5,009
)
Other assets and liabilities
1,841

 
1,777

Net cash provided by operating activities
59,850

 
94,463

Cash flows used in investing activities:
 
 
 
Capital expenditures
(15,426
)
 
(10,687
)
Acquisition and development of software assets
(20,836
)
 
(6,198
)
Acquisitions, net of cash acquired
(3,000
)
 
(32,299
)
Net cash used in investing activities
(39,262
)
 
(49,184
)
Cash flows provided by/(used in) financing activities:
 
 
 
Principal payments on capital lease obligations and other financing obligations

 
(119
)
Payments for short and long-term debt
(418,500
)
 
(293,688
)
Proceeds from issuance of long-term debt
479,000

 
272,000

Payments of debt issuance costs
(9,715
)
 
(3,376
)
Payments for capped call transactions and costs
(28,325
)
 

Common stock repurchases
(10,000
)
 

Employee taxes paid on withholding shares
(20,372
)
 
(31,064
)
Proceeds from exercise of stock options
1,678

 
6,117

Net cash used in financing activities
(6,234
)
 
(50,130
)
Effect of exchange rate changes on cash
(663
)
 
(757
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
13,691

 
(5,608
)
Cash, cash equivalents, and restricted cash, beginning of period
7,104

 
33,327

Cash, cash equivalents, and restricted cash, end of period
$
20,795

 
$
27,719

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the periods for:
 
 
 
Interest
$
17,108

 
$
8,454

Income taxes
$
3,435

 
$
5,669

Non-cash investing activities:
 
 
 
Capital expenditures included in accounts payable and accrued liabilities
$
657

 
$
1,840

Debt issuance costs included in accounts payable and accrued liabilities
$
328

 
$

Issuance of shares for asset acquisition
$
3,000

 
$

See accompanying notes to condensed consolidated financial statements.

6

 

VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
 
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income
 
Total
Balance at June 30, 2018
 
$
309

 
$
1,396,407

 
$
(614,630
)
 
$
(271,890
)
 
$
8,916

 
$
519,112

Stock option exercises
 
1

 
1,061

 
 
 
 
 
 
 
1,062

Share-based expense
 
 
 
8,523

 
 
 
 
 
 
 
8,523

Employee taxes paid on
  withholding shares
 
 
 
 
 
 
 
(2,446
)
 
 
 
(2,446
)
Foreign currency translation
  adjustment
 
 
 
 
 
 
 
 
 
1,525

 
1,525

Unrealized gain on derivatives
 
 
 
 
 
 
 
 
 
530

 
530

Net income
 
 
 
 
 
9,588

 
 
 
 
 
9,588

Balance at September 30, 2018
 
$
310

 
$
1,405,991

 
$
(605,042
)
 
$
(274,336
)
 
$
10,971

 
$
537,894


 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income
 
Total
Balance at June 30, 2019
 
$
314

 
$
1,464,742

 
$
(607,537
)
 
$
(304,031
)
 
$
4,154

 
$
557,642

Stock option exercises
 
1

 
414

 
 
 
 
 
 
 
415

Share-based expense
 
 
 
12,921

 
 
 
 
 
 
 
12,921

Employee taxes paid on withholding
  shares
 
 
 
 
 
 
 
(1,350
)
 
 
 
(1,350
)
Common stock issued for acquisition of assets
 
 
 
3,000

 
 
 
 
 
 
 
3,000

Foreign currency translation
adjustment
 
 
 
 
 
 
 
 
 
(16,459
)
 
(16,459
)
Unrealized loss on derivatives
 
 
 
 
 
 
 
 
 
(307
)
 
(307
)
Net loss
 
 
 
 
 
(21,097
)
 
 
 
 
 
(21,097
)
Balance at September 30, 2019
 
$
315

 
$
1,481,077

 
$
(628,634
)
 
$
(305,381
)
 
$
(12,612
)
 
$
534,765




See accompanying notes to condensed consolidated financial statements.


7

 

VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)

 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income
 
Total
Balance at December 31, 2017
 
$
298

 
$
1,375,391

 
$
(672,561
)
 
$
(244,239
)
 
$
14,009

 
$
472,898

Cumulative effect adjustment upon
  the adoption of Topic 606
 
 
 
 
 
24,848

 
 
 
 
 
24,848

Stock option exercises
 
12

 
6,105

 
 
 
 
 
 
 
6,117

Share-based expense
 
 
 
24,495

 
 
 
 
 
 
 
24,495

Employee taxes paid on
  withholding shares
 
 
 
 
 
 
 
(30,097
)
 
 
 
(30,097
)
Foreign currency translation
  adjustment
 
 
 
 
 
 
 
 
 
(4,576
)
 
(4,576
)
Unrealized gain on derivatives
 
 
 
 
 
 
 
 
 
1,538

 
1,538

Net income
 
 
 
 
 
42,671

 
 
 
 
 
42,671

Balance at September 30, 2018
 
$
310

 
$
1,405,991

 
$
(605,042
)
 
$
(274,336
)
 
$
10,971

 
$
537,894


 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income
 
Total
Balance at December 31, 2018
 
$
310

 
$
1,415,682

 
$
(611,985
)
 
$
(275,009
)
 
$
6,770

 
$
535,768

Cumulative effect adjustment upon
the adoption of Topic 842
 
 
 
 
 
458

 
 
 
 
 
458

Stock option exercises
 
5

 
1,673

 
 
 
 
 
 
 
1,678

Share-based expense
 
 
 
32,152

 
 
 
 
 
 
 
32,152

Employee taxes paid on withholding
  shares
 
 
 
 
 
 
 
(20,372
)
 
 
 
(20,372
)
Common stock repurchases
 

 
 
 
 
 
(10,000
)
 
 
 
(10,000
)
Equity component of convertible
  notes, net of issuance costs and tax
 
 
 
50,123

 
 
 
 
 
 
 
50,123

Purchase of capped calls, net of tax
 
 
 
(21,553
)
 
 
 
 
 
 
 
(21,553
)
Common stock issued for acquisition of assets
 
 
 
3,000

 
 
 
 
 
 
 
3,000

Foreign currency translation
  adjustment
 
 
 
 
 
 
 
 
 
(17,594
)
 
(17,594
)
Unrealized loss on derivatives
 
 
 
 
 
 
 
 
 
(1,788
)
 
(1,788
)
Net loss
 
 
 
 
 
(17,107
)
 
 
 
 
 
(17,107
)
Balance at September 30, 2019
 
$
315

 
$
1,481,077

 
$
(628,634
)
 
$
(305,381
)
 
$
(12,612
)
 
$
534,765




See accompanying notes to condensed consolidated financial statements.


8


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)



Note 1.    Nature of Business
Nature of Operations
Vonage Holdings Corp. (“Vonage”, “Company”, “we”, “our”, “us”) is incorporated as a Delaware corporation. At Vonage, we are redefining business communications. We are embracing technology to transform how businesses communicate to create better business outcomes. Our cloud communications platform enables businesses of all sizes to collaborate more productively and engage their customers more efficiently across any device. All of our cloud communications solutions are designed to allow businesses to be more productive by integrating communications with all their existing business productivity tools and our programmable solutions allow customers to engage with their customers via embedded voice, chat, or messaging to create seamless and contextual communications that makes doing business easier for end customers.
For our business customers, we provide innovative, cloud-based Unified Communications as a Service, or UCaaS, solutions, comprised of integrated voice, text, video, data, collaboration, and mobile applications over our flexible, scalable Session Initiation Protocol, or SIP, based Voice over Internet Protocol, or VoIP, network. We also offer Communications Platform as a Service, or CPaaS, solutions designed to enhance the way businesses communicate with their customers by embedding communications into apps, websites and business processes. With the acquisition of NewVoiceMedia on October 31, 2018, Vonage also provides customers with a robust Contact Center as a Service, or CCaaS, offering, driving intelligent interactions for customers through emerging technologies such as skills-based routing, real-time sentiment analysis and chatbots. NewVoiceMedia's cloud contact center solution, combined with Vonage's offering, provides an end-to-end communications experience for enhanced customer engagement and conversation. In combination, our products and services permit our business customers to communicate with their customers and employees through any cloud-connected device, in any place, at any time without the often costly investment required with on-site equipment.
We also provide a robust suite of feature-rich residential communication solutions that allow consumers to connect their home phones and mobile phones on one number and we offer attractive international long distance rates that help create a loyal base of satisfied customers.
Customers in the United States represented 72% and 79% of our consolidated revenues for the three months ended September 30, 2019 and 2018 and 72% and 80% for the nine months ended September 30, 2019 and 2018, respectively, with the balance in Canada, the United Kingdom, China, Singapore, Netherlands, and other countries around the world.
Unaudited Interim Financial Information
The accompanying unaudited interim condensed consolidated financial statements and information have been prepared in accordance with accounting principles generally accepted in the United States and in accordance with the SEC's regulations for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these financial statements contain all normal and recurring adjustments considered necessary to present fairly the Company's financial position, results of operations, comprehensive income, cash flows, and stockholders’ equity for the periods presented. The results for the nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on February 27, 2019.
Use of Estimates
Our condensed consolidated financial statements and notes thereof are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates.

9


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


Reclassifications
Reclassifications have been made to our condensed consolidated financial statements for the prior year periods to conform to classifications used in the current year periods. The reclassifications did not affect results of operations or net assets.
Note 2.    Summary of Significant Accounting Policies
This footnote should be read in conjunction with the complete description of our significant accounting policies under Note 2, Summary of Significant Accounting Policies to our Annual Report on Form 10-K for the year ended December 31, 2018.
Cost of Revenues
Cost of revenues excludes depreciation and amortization expense of $9,658 and $6,386 for the three months ended September 30, 2019 and 2018 and $28,220 and $19,046 for the nine months ended September 30, 2019 and 2018, respectively. In addition, costs of goods sold included in cost of revenues during the three months ended September 30, 2019 and 2018 were $5,921 and $6,386 and during the nine months ended September 30, 2019 and 2018 were $17,112 and $18,854, respectively.
Sales and Marketing Expenses
We incurred advertising costs, which are included in sales and marketing, of $11,437 and $12,883 for the three months ended September 30, 2019 and 2018 and $45,773 and $41,805 for the nine months ended September 30, 2019 and 2018, respectively.
Leases
At inception of a contract, the Company determines whether the contract is or contains a lease. Further, the Company determines if the arrangement qualifies as an operating lease or a finance lease. Operating leases are included in operating lease right-of-use assets, operating lease liabilities - current portion and operating lease liabilities on the Company's consolidated balance sheet. The Company does not have any finance leases as of September 30, 2019 and January 1, 2019.
A right-of-use asset represents the Company's right to use the underlying asset for the lease term and the lease liabilities represent our obligation to make lease payments under the leasing arrangement. We recognize an operating lease right-of-use asset and operating lease liability at the arrangement's commencement date based upon the present value of the lease payments over the lease term. We utilize our incremental borrowing rate based on the information available at the commencement date in order to determine the present value of lease payments or the implicit rate when readily determinable. The Company's lease arrangements may include options to extend or terminate the lease arrangement. Such options are included in the determination of lease term when it is reasonably certain that the Company will exercise that option. The Company recognizes lease expense for lease payments on a straight-line basis over the term of the lease. The Company has made an accounting policy election for leases that at the commencement date have terms of twelve months or less to not recognize an operating lease right-of-use assets or operating lease liabilities on its balance sheet. Instead, the Company recognizes lease payments as an expense in accordance with the lease terms.
Fair Value of Financial Instruments
The Company records certain of its financial assets at fair value on a recurring basis as described below. Certain of the Company's other financial instruments, which include cash and cash equivalents, accounts receivable and accounts payable, approximate fair value because of their short-term maturities. We believe the fair value of our 2018 Credit Facility at September 30, 2019 and December 31, 2018 was approximately the same as its carrying amount as market conditions, including available interest rates, credit spread relative to our credit rating, and illiquidity, remain relatively unchanged from the issuance date of our debt obligations for a similar debt instrument and are classified as Level 3 within the fair value hierarchy.

10


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


We account for financial assets using a framework that establishes a hierarchy that ranks the quality and reliability of the inputs, or assumptions, we use in the determination of fair value, and we classify financial assets and liabilities carried at fair value in one of the following three categories:
Level 1 - quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2 - observable prices that are based on inputs not quoted on active markets but corroborated by market data; and
Level 3 - unobservable inputs when there is little or no market data available, thereby requiring an entity to develop its own assumptions. The fair value hierarchy gives the lowest priority to Level 3 inputs.
The following table presents the assets that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of September 30, 2019 and December 31, 2018:
 
September 30, 2019
 
December 31, 2018
Level 2 Measurements
 
 
 
Interest rate swaps (1)
$
106

 
$
1,859


(1) Included in other assets on our condensed consolidated balance sheets.

As of September 30, 2019, the fair value of the 1.75% convertible senior notes due 2024 (the “Convertible Senior Notes”) was approximately $355,202. The fair value was determined based on the quoted price for the Convertible Senior Notes in an inactive market on the last trading day of the reporting period and is classified as Level 2 in the fair value hierarchy.
Supplemental Balance Sheet Information

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to amounts included in the consolidated statements of cash flows:
 
As of September 30,
 
As of December 31
 
2019
 
2018
 
2018
 
2017
Cash and cash equivalents
$
18,741

 
$
25,735

 
$
5,057

 
$
31,360

Restricted cash
2,054

 
1,984

 
2,047

 
1,967

Total cash, cash equivalents and restricted cash
$
20,795

 
$
27,719

 
$
7,104

 
$
33,327




Intangible assets, net
 
September 30, 2019
 
December 31, 2018
Customer relationships
$
158,804

 
$
187,887

Developed technology
91,547

 
104,368

Patents and patent licenses
1,655

 
2,514

Trade names
3,250

 
5,005

Non-compete agreements

 
137

Finite-lived intangible assets, net
$
255,256

 
$
299,911



11


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)



Accrued expenses
 
September 30, 2019
 
December 31, 2018
Compensation and related taxes and temporary labor
$
28,410

 
$
33,249

Marketing
13,728

 
10,238

Taxes and fees
17,903

 
11,189

Telecommunications
36,500

 
21,403

Interest
2,147

 
65

Customer credits
2,701

 
3,325

Professional fees
3,167

 
2,049

Inventory
997

 
1,188

Other accruals
10,935

 
4,664

Accrued expenses
$
116,488

 
$
87,370


Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which requires the use of a new current expected credit loss ("CECL") model in estimating allowances for doubtful accounts with respect to accounts receivable, straight-line receivable and notes receivable. Receivables from revenue transactions, or trade receivables, are recognized when the corresponding revenue is recognized under ASC Topic 606, Revenue from Contracts with Customers. The CECL model requires that the Company estimate its lifetime expected credit loss with respect to these receivables and record allowances that when deducted from the balance of the receivables, represent the estimated net amounts expected to be collected. Given the generally short term nature of trade receivables, we do not expect to apply a discounted cash flow methodology. However, the Company will consider whether historical loss rates are consistent with expectations of forward-looking estimates for our trade receivables. In November 2018, the FASB issued ASU 2018-19 to clarify that operating lease receivables recorded by lessors are explicitly excluded from the scope of Topic 326. In April 2019, the FASB issued ASU 2019-04 to improve certain codifications including Topic 326 where accrued interest on receivables, recoveries, variable interest rates and prepayments are addressed. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. While we are still evaluating the impact of this guidance on our condensed consolidated financial statements, we currently believe it will not have a material impact upon adoption.

12


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


The following standard was adopted by the Company during the nine months ended September 30, 2019:
In January 2017, the FASB issued Accounting Standards Update ("ASU") 2017-04, "Intangibles - Goodwill and Other". The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. This ASU is effective for an annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted this ASU during the third quarter of 2019. The adoption of this ASU did not have a material impact on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" which replaces the guidance on accounting for leases in Topic 840. The new guidance increases transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance sheet for most leases and disclose key information about leasing arrangements.
The Company adopted the new standard on January 1, 2019 using a modified retrospective transition approach, which involves applying the new standard to all leases existing at the date of the initial application with any cumulative impact of the adoption recorded to retained earnings. In addition, we elected the package of practical expedients permitted under the transition guidance which allows the Company to carry forward the historical lease classification. The adoption of Topic 842 has had a significant effect on our balance sheet, mostly related to (1) the recognition of new right-of-use assets and new lease liabilities on our balance sheet for our existing operating leases (most notably leases of office space and co-location space); and (2) the derecognition of existing assets (most notably prepaid rent), and existing liabilities (most notably deferred rent) related to such leases. It will not materially affect our earnings or cash flows. We recorded the following transactions on January 1, 2019:
Recognized currently unrecognized right-of-use assets of $57.3 million net of deferred rent and lease incentives which were previously included in other liabilities.
Recognized currently unrecognized lease liabilities of $64.5 million (based on the present value of the remaining minimum rental payments for existing operating leases).
Recognized an adjustment to retained earnings of $458 thousand related to release of deferred tax assets.
Note 3.  Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers which is further described in Note 2, Summary of Significant Accounting Policies to our Annual Report on Form 10-K for the year ended December 31, 2018.
Disaggregation of Revenue
The following tables details our revenue from customers disaggregated by primary geographical market, source of revenue, and timing of revenue recognition. The tables also include a reconciliation of the disaggregated revenue for our Business and Consumer segments.
 
Three Months Ended
 
Three Months Ended
 
September 30, 2019
 
September 30, 2018
 
Business
 
Consumer
 
Total
 
Business
 
Consumer
 
Total
Primary geographical markets
 
 
 
 
 
 
 
 
 
 
 
United States
$
127,976

 
$
88,567

 
$
216,543

 
$
107,446

 
$
99,061

 
$
206,507

Canada
2,138

 
4,817

 
6,955

 
919

 
5,781

 
$
6,700

United Kingdom
13,910

 
2,620

 
16,530

 
6,505

 
3,054

 
$
9,559

Other Countries (1)
62,506

 

 
62,506

 
38,765

 

 
$
38,765

 
$
206,530

 
$
96,004

 
$
302,534

 
$
153,635

 
$
107,896

 
$
261,531

Major Sources of Revenue
 
 
 
 
 
 
 
 
 
 
 
Service revenues
$
183,701

 
$
83,981

 
$
267,682

 
$
133,709

 
$
97,093

 
$
230,802

Access and product revenues
12,120

 
69

 
12,189

 
12,427

 
92

 
12,519

USF revenues
10,709

 
11,954

 
22,663

 
7,499

 
10,711

 
18,210

 
$
206,530

 
$
96,004

 
$
302,534

 
$
153,635

 
$
107,896

 
$
261,531


13


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


(1) No individual other international country represented greater than 10% of total revenue during the periods presented.
 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2019
 
September 30, 2018
 
Business
 
Consumer
 
Total
 
Business
 
Consumer
 
Total
Primary geographical markets
 
 
 
 
 
 
 
 
 
 
 
United States
$
363,312

 
$
270,270

 
$
633,582

 
$
311,562

 
$
309,056

 
$
620,618

Canada
5,496

 
14,927

 
20,423

 
2,293

 
18,275

 
$
20,568

United Kingdom
53,416

 
8,315

 
61,731

 
20,315

 
9,503

 
$
29,818

Other Countries (1)
163,923

 

 
163,923

 
103,975

 

 
$
103,975

 
$
586,147

 
$
293,512

 
$
879,659

 
$
438,145

 
$
336,834

 
$
774,979

Major Sources of Revenue
 
 
 
 
 
 
 
 
 
 
 
Service revenues
$
523,060

 
$
260,225

 
$
783,285

 
$
377,703

 
$
301,954

 
$
679,657

Access and product revenues
35,524

 
197

 
35,721

 
37,674

 
472

 
38,146

USF revenues
27,563

 
33,090

 
60,653

 
22,768

 
34,408

 
57,176

 
$
586,147

 
$
293,512

 
$
879,659

 
$
438,145

 
$
336,834

 
$
774,979

(1) No individual other international country represented greater than 10% of total revenue during the periods presented.
In addition, the Company recognizes service revenues from its customers through subscription services provided or through usage or pay-per-use type arrangements. During the three and nine months ended September 30, 2019, the Company recognized $146,127 and $467,893 related to subscription services, $87,677 and $242,192 related to usage, and $68,730 and $169,574 related to other revenues such as USF, other regulatory fees, and credits. During the three and nine months ended September 30, 2018, the Company recognized $149,091 and $452,257 related to subscription services, $63,857 and $175,764 related to usage, and $48,583 and $146,958 related to other revenues such as USF, other regulatory fees, and credits.
Contract Assets and Liabilities
The following table provides information about receivables and contract liabilities from contracts with customers:
 
September 30, 2019
December 31, 2018
Receivables (1)
$
94,423

$
75,342

Contract liabilities (2)
61,105

53,447


(1) Amounts included in accounts receivables on our condensed consolidated balance sheet.
(2) Amounts included in deferred revenues and other liabilities on our condensed consolidated balance sheet.
Our deferred revenue represents the advance consideration received from customers for subscription services and is predominantly recognized over the following performance period which is generally a month as transfer of control occurs. During the three and nine months ended September 30, 2019, the Company recognized revenue of $111,739 and $344,935, respectively, related to its contract liabilities. During the three and nine months ended September 30, 2018, the Company recognized revenue of $105,494 and $332,480, respectively, related to its contract liabilities. We expect to recognize $61,105 into revenue over the next twelve months related to our deferred revenue as of September 30, 2019.

14


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


Contract Acquisition Costs
We have various commission programs for internal sales personnel and channel partners that are incremental to the acquisition of customer contracts. These costs are recorded as deferred contract acquisition costs on the consolidated balance sheets which eligible employees and third parties may earn commission on sales of services and products to customers. We expect that these commission fees are recoverable and, therefore, we have capitalized $63,201 and $49,636 as contract costs, net of accumulated amortization, as of September 30, 2019 and December 31, 2018, respectively, included within deferred customer acquisitions costs, current portion and deferred customer acquisition costs on our condensed consolidated balance sheet. Capitalized commission fees are amortized to sales and marketing expense over estimated customer life, which is 7 years for Business customers. The amounts amortized to sales and marketing expense were $3,060 and $7,981 for the three and nine months ended September 30, 2019, and $2,579 and $7,002 for the three and nine months ended September 30, 2018, respectively. There were no impairment losses recognized in relation to the costs capitalized during the three and six months ended September 30, 2019 and 2018. In addition, the Company expenses sales commissions for commission plans related to customer arrangements deemed less than a year and for residuals and renewals.
   
Note 4. Acquisitions and Dispositions

Acquisition of NewVoiceMedia
On October 31, 2018, the Company acquired 100% of the issued and outstanding shares of NewVoiceMedia Limited (“NewVoiceMedia”), a cloud Contact Center-as-a-Service (CCaaS) provider, for a purchase price of $350,179 paid in cash.
The acquisition was recorded as a business combination under ASC 805, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair value on the acquisition date. The initial accounting for the business combination is not complete because the evaluations necessary to assess the fair values of certain net assets acquired inclusive of deferred tax liabilities is still in process. The allocation of the purchase price may be modified up to one year from the date of the acquisition as more information is obtained about the fair value of assets acquired and liabilities assumed. The Company expects its analysis to be completed by the close of the fourth quarter. Under the terms of the offer, NewVoiceMedia shareholders received cash in the amount of approximately $341 million as well as transactions costs incurred by NewVoiceMedia which were paid by the Company of approximately $9 million on the date of the acquisition.

15


VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)


The table below summarizes the NewVoiceMedia assets acquired and liabilities assumed as of October 31, 2018:
 
Preliminary Acquisition Date Fair Value as of December 31, 2018
 
Measurement period adjustments
 
Revised Preliminary Acquisition Date Fair Value
Assets
 
 
 
 
 
Cash and cash equivalents
$
1,994

 
 
 
$
1,994

Accounts receivable
13,747

 
(1,448
)
 
12,299

Other current assets
3,907

 
 
 
3,907

Property and equipment
3,474

 
 
 
3,474

Intangible assets
154,300

 
 
 
154,300

Other assets
378

 
 
 
378

Total assets acquired
177,800

 
(1,448
)
 
176,352

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Accounts payable
4,712

 
 
 
4,712

Accrued expenses
4,145