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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2020
or
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☐ | 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)
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Delaware | | | | | 11-3547680 |
(State or other jurisdiction of incorporation or organization) | | | | | (IRS Employer Identification No.) |
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23 Main Street | Holmdel | , | NJ | , | 07733 |
(Address of principal executive offices) | | | | | (Zip Code) |
Registrant’s telephone number, including area code: (732) 528-2600
(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:
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.001 | | VG | | Nasdaq Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No 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.
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Large accelerated filer | x | | Accelerated filer | o |
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Non-accelerated filer | o | | | |
Smaller reporting company | ☐ | | Emerging growth company | ☐ |
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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.
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Class | Outstanding at | | July 31, 2020 | |
Common Stock, par value $0.001 | | 245,551,723 | | | shares |
VONAGE HOLDINGS CORP.
INDEX
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Part 1 - Financial Information | | |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4 | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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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.
GLOSSARY OF TERMS
When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below:
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2018 Credit Facility | | $100 million senior secured term loan and $500 million revolving facility due 2023 |
Convertible Senior Notes | | $345 million aggregate principal amount of 1.75% convertible notes due 2024 |
API | | Application Program Interfaces |
API Platform Group | | Comprised of CPaaS programmable communication solutions for business customers |
Applications Group | | Comprised of UCaaS and CCaaS communication solutions for business customers |
ASC | | The FASB Accounting Standards Codification, which the FASB established as the source of authoritative GAAP |
ASU | | Accounting Standards Updates - updates to the ASC |
CCaaS | | Contact Center as a Service |
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CPaaS | | Communications Platform as a Service |
CRM | | Customer Relationship Management |
Exchange Act | | The Securities Exchange Act of 1934, as amended |
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EPS | | Earnings Per Share |
FASB | | Financial Accounting Standards Board |
FCC | | Federal Communications Commission |
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IP | | Internet Protocol |
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LIBOR | | London Inter-Bank Offered Rate |
MPLS | | Multi-Protocol Label Switching |
NOLs | | Net Operating Losses |
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SaaS | | Software as a Service |
SAB | | Staff Accounting Bulletin |
SD-WAN | | Software-Defined Wide Area Network |
SEC | | U.S. Securities and Exchange Commission |
SIP | | Session Initiation Protocol |
SMB | | Small to medium-sized business |
SMS | | Short Message Service |
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UCaaS | | Unified Communications as a Service |
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USF | | Federal Universal Service Fund |
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VoIP | | Voice over Internet Protocol |
PART 1 - FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
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| June 30, 2020 | | December 31, 2019 |
Assets | (Unaudited) | | |
Current assets: | | | |
Cash and cash equivalents | $ | 47,565 | | | $ | 23,620 | |
Accounts receivable, net of allowance of $9,708 and $5,494, respectively | 114,554 | | | 101,813 | |
Inventory, net of allowance of $65 and $76, respectively | 997 | | | 1,475 | |
Deferred customer acquisition costs, current portion | 15,868 | | | 13,834 | |
Prepaid expenses | 24,413 | | | 22,338 | |
Other current assets | 6,211 | | | 9,988 | |
Total current assets | 209,608 | | | 173,068 | |
Property and equipment, net of accumulated depreciation of $115,807 and $109,646, respectively | 40,163 | | | 48,371 | |
Operating lease right-of-use assets | 31,329 | | | 50,847 | |
Goodwill | 593,722 | | | 602,970 | |
Software, net of accumulated amortization of $102,665 and $102,133, respectively | 60,521 | | | 40,300 | |
Deferred customer acquisition costs | 60,545 | | | 55,148 | |
Restricted cash | 2,046 | | | 2,015 | |
Intangible assets, net of accumulated amortization of $247,635 and $221,182, respectively | 214,284 | | | 249,905 | |
Deferred tax assets | 110,040 | | | 108,347 | |
Other assets | 33,631 | | | 33,729 | |
Total assets | $ | 1,355,889 | | | $ | 1,364,700 | |
Liabilities and Stockholders’ Equity | | | |
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Current liabilities: | | | |
Accounts payable | $ | 29,383 | | | $ | 42,366 | |
Accrued expenses | 145,467 | | | 137,589 | |
Deferred revenue, current portion | 65,171 | | | 59,464 | |
Operating lease liabilities, current portion | 11,396 | | | 12,477 | |
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Total current liabilities | 251,417 | | | 251,896 | |
Indebtedness under revolving credit facility | 245,500 | | | 220,500 | |
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Convertible senior notes, net | 283,619 | | | 276,658 | |
Operating lease liabilities | 25,042 | | | 45,722 | |
Other liabilities | 2,672 | | | 2,862 | |
Total liabilities | 808,250 | | | 797,638 | |
Commitments and Contingencies (Note 9) | | | |
Stockholders’ Equity: | | | |
Common stock, par value 0.001 per share; 596,950 shares authorized at June 30, 2020, and December 31, 2019 | 320 | | | 316 | |
Additional paid-in capital | 1,519,055 | | | 1,494,469 | |
Accumulated deficit | (643,194) | | | (631,009) | |
Treasury stock, at cost | (319,314) | | | (306,043) | |
Accumulated other comprehensive (loss) income | (9,228) | | | 9,329 | |
Total stockholders’ equity | 547,639 | | | 567,062 | |
Total liabilities and stockholders’ equity | $ | 1,355,889 | | | $ | 1,364,700 | |
See accompanying notes to condensed consolidated financial statements.
VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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| Three Months Ended | | | | Six Months Ended | | |
| June 30, | | | | June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
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Revenues: | | | | | | | |
Service, access and product revenues | $ | 296,516 | | | $ | 279,025 | | | $ | 579,593 | | | $ | 539,135 | |
USF revenues | 14,017 | | | 18,559 | | | 28,397 | | | 37,990 | |
Total revenues | 310,533 | | | 297,584 | | | 607,990 | | | 577,125 | |
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Operating Expenses: | | | | | | | |
Service, access and product cost of revenues (excluding depreciation and amortization) | 119,971 | | | 109,662 | | | 233,009 | | | 203,642 | |
USF cost of revenues | 14,017 | | | 18,559 | | | 28,397 | | | 37,990 | |
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Sales and marketing | 90,827 | | | 95,362 | | | 176,448 | | | 190,885 | |
Engineering and development | 19,784 | | | 16,891 | | | 38,987 | | | 33,417 | |
General and administrative | 42,820 | | | 36,615 | | | 83,702 | | | 72,074 | |
Depreciation and amortization | 20,692 | | | 20,662 | | | 41,177 | | | 41,876 | |
Total operating expenses | 308,111 | | | 297,751 | | | 601,720 | | | 579,884 | |
Income (loss) from operations | 2,422 | | | (167) | | | 6,270 | | | (2,759) | |
Other Income (Expense): | | | | | | | |
Interest expense | (9,321) | | | (8,487) | | | (17,403) | | | (16,063) | |
Other income (expense), net | (38) | | | (147) | | | 191 | | | (563) | |
Total other expense, net | (9,359) | | | (8,634) | | | (17,212) | | | (16,626) | |
Loss before income tax benefit | (6,937) | | | (8,801) | | | (10,942) | | | (19,385) | |
Income tax (expense) benefit | (1,493) | | | 13,325 | | | (1,243) | | | 23,375 | |
Net (loss) income | $ | (8,430) | | | $ | 4,524 | | | $ | (12,185) | | | $ | 3,990 | |
| | | | | | | |
(Loss) Earnings per common share: | | | | | | | |
Basic | $ | (0.03) | | | $ | 0.02 | | | $ | (0.05) | | | $ | 0.02 | |
Diluted | $ | (0.03) | | | $ | 0.02 | | | $ | (0.05) | | | $ | 0.02 | |
Weighted-average common shares outstanding: | | | | | | | |
Basic | 245,385 | | | 242,475 | | | 244,506 | | | 241,507 | |
Diluted | 245,385 | | | 249,720 | | | 244,506 | | | 249,521 | |
See accompanying notes to condensed consolidated financial statements.
VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) / INCOME
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
| June 30, | | | | June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
Net (loss) income | $ | (8,430) | | | $ | 4,524 | | | $ | (12,185) | | | $ | 3,990 | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustment, net of tax expense (benefit) of $281, $(342), $(189), and $91, respectively | 4,069 | | | (6,343) | | | (19,558) | | | (1,135) | |
Unrealized gain (loss) on derivatives, net of tax expense (benefit) of $46, $264, $(4) and $292, respectively | 1,419 | | | (794) | | | 1,001 | | | (1,481) | |
Total other comprehensive income (loss) | 5,488 | | | (7,137) | | | (18,557) | | | (2,616) | |
Comprehensive (loss) income | $ | (2,942) | | | $ | (2,613) | | | $ | (30,742) | | | $ | 1,374 | |
See accompanying notes to condensed consolidated financial statements.
VONAGE HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | | | | | | | | |
| Six Months Ended | | |
| June 30, | | |
| 2020 | | 2019 |
Cash flows from operating activities: | | | |
Net (loss) income | $ | (12,185) | | | $ | 3,990 | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation and amortization | 12,967 | | | 13,120 | |
Amortization of intangibles | 28,210 | | | 28,756 | |
| | | |
Deferred income taxes | (1,952) | | | (24,852) | |
Amortization of deferred customer acquisition costs | 7,567 | | | 4,921 | |
| | | |
Allowances for doubtful accounts and obsolete inventory | 3,509 | | | 475 | |
Amortization of financing costs and debt discount | 7,367 | | | 1,769 | |
Loss on disposal of property and equipment | 740 | | | 444 | |
Share-based expense | 22,442 | | | 19,231 | |
Changes in derivatives | 1,055 | | | (265) | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | (16,927) | | | (23,268) | |
Inventory | 484 | | | 444 | |
Prepaid expenses and other current assets | 1,413 | | | 1,494 | |
Deferred customer acquisition costs | (15,389) | | | (15,372) | |
| | | |
Accounts payable and accrued expenses | (4,318) | | | 18,139 | |
Deferred revenue | 6,533 | | | 6,399 | |
Other assets - deferred cloud computing implementation costs | (3,013) | | | (8,310) | |
Other assets and liabilities | 300 | | | 952 | |
Net cash provided by operating activities | 38,803 | | | 28,067 | |
Cash flows used in investing activities: | | | |
Capital expenditures | (4,855) | | | (9,456) | |
Purchase of intangible assets | (190) | | | — | |
Acquisition and development of software assets | (20,199) | | | (12,997) | |
| | | |
| | | |
Net cash used in investing activities | (25,244) | | | (22,453) | |
Cash flows provided by/(used in) financing activities: | | | |
| | | |
Payments for short and long-term debt | (50,000) | | | (406,000) | |
Proceeds from issuance of long-term debt | 75,000 | | | 479,000 | |
Payments of debt issuance costs | — | | | (8,891) | |
Payments for capped call transactions and costs | — | | | (28,325) | |
Common stock repurchases | — | | | (10,000) | |
Employee taxes paid on withholding shares | (13,179) | | | (19,023) | |
Proceeds from exercise of stock options | 243 | | | 1,264 | |
Net cash provided by financing activities | 12,064 | | | 8,025 | |
Effect of exchange rate changes on cash | (1,647) | | | (1,101) | |
Net increase in cash, cash equivalents, and restricted cash | 23,976 | | | 12,538 | |
Cash, cash equivalents, and restricted cash, beginning of period | 25,635 | | | 7,104 | |
Cash, cash equivalents, and restricted cash, end of period | $ | 49,611 | | | $ | 19,642 | |
Supplemental disclosures of cash flow information: | | | |
Cash paid (received) during the periods for: | | | |
Interest | $ | 8,856 | | | $ | 13,462 | |
Income taxes | $ | (2,766) | | | $ | 2,226 | |
Non-cash investing activities: | | | |
Acquisition of long-term assets included in accounts payable and accrued expenses | $ | 1,980 | | | $ | 67 | |
Debt issuance costs included in accounts payable and accrued liabilities | $ | — | | | $ | 1,154 | |
| | | |
See accompanying notes to condensed consolidated financial statements.
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 March 31, 2019 | | $ | 314 | | | $ | 1,424,173 | | | $ | (612,061) | | | $ | (293,575) | | | $ | 11,291 | | | $ | 530,142 | |
| | | | | | | | | | | | |
Stock option exercises | | 1 | | | 783 | | | | | | | | | 784 | |
Share-based expense | | | | 11,216 | | | | | | | | | 11,216 | |
Employee taxes paid on withholding shares | | | | | | | | (457) | | | | | (457) | |
Common stock repurchases | | (1) | | | | | | | (9,999) | | | | | (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) | |
Foreign currency translation adjustment | | | | | | | | | | (6,343) | | | (6,343) | |
Unrealized gain on derivatives | | | | | | | | | | (794) | | | (794) | |
Net income | | | | | | 4,524 | | | | | | | 4,524 | |
Balance at June 30, 2019 | | $ | 314 | | | $ | 1,464,742 | | | $ | (607,537) | | | $ | (304,031) | | | $ | 4,154 | | | $ | 557,642 | |
| | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Treasury Stock | | Accumulated Other Comprehensive Income | | Total |
Balance at March 31, 2020 | | $ | 320 | | | $ | 1,506,664 | | | $ | (634,764) | | | $ | (318,791) | | | $ | (14,716) | | | $ | 538,713 | |
Stock option exercises | | — | | | 88 | | | | | | | | | 88 | |
Share-based expense | | | | 12,303 | | | | | | | | | 12,303 | |
Employee taxes paid on withholding shares | | | | | | | | (523) | | | | | (523) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | | | | | | 4,069 | | | 4,069 | |
Unrealized loss on derivatives | | | | | | | | | | 1,419 | | | 1,419 | |
Net loss | | | | | | (8,430) | | | | | | | (8,430) | |
Balance at June 30, 2020 | | $ | 320 | | | $ | 1,519,055 | | | $ | (643,194) | | | $ | (319,314) | | | $ | (9,228) | | | $ | 547,639 | |
See accompanying notes to condensed consolidated financial statements. | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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, 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 | | | 1,259 | | | | | | | | | 1,264 | |
Share-based expense | | | | 19,231 | | | | | | | | | 19,231 | |
Employee taxes paid on withholding shares | | | | | | | | (19,023) | | | | | (19,023) | |
Common stock repurchases | | (1) | | | | | | | (9,999) | | | | | (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) | |
Foreign currency translation adjustment | | | | | | | | | | (1,135) | | | (1,135) | |
Unrealized gain on derivatives | | | | | | | | | | (1,481) | | | (1,481) | |
Net income | | | | | | 3,990 | | | | | | | 3,990 | |
Balance at June 30, 2019 | | $ | 314 | | | $ | 1,464,742 | | | $ | (607,537) | | | $ | (304,031) | | | $ | 4,154 | | | $ | 557,642 | |
| | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Treasury Stock | | Accumulated Other Comprehensive Income | | Total |
Balance at December 31, 2019 | | $ | 316 | | | $ | 1,494,469 | | | $ | (631,009) | | | $ | (306,043) | | | $ | 9,329 | | | $ | 567,062 | |
Stock option exercises | | 4 | | | 239 | | | | | | | | | 243 | |
Share-based expense | | | | 24,347 | | | | | | | | | 24,347 | |
Employee taxes paid on withholding shares | | | | | | | | (13,271) | | | | | (13,271) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | | | | | | (19,558) | | | (19,558) | |
Unrealized loss on derivatives | | | | | | | | | | 1,001 | | | 1,001 | |
Net loss | | | | | | (12,185) | | | | | | | (12,185) | |
Balance at June 30, 2020 | | $ | 320 | | | $ | 1,519,055 | | | $ | (643,194) | | | $ | (319,314) | | | $ | (9,228) | | | $ | 547,639 | |
See accompanying notes to condensed consolidated financial statements.
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, our strategy is to continually redefine business communications. We are making communications more flexible, intelligent and personal to help enterprises the world over stay ahead. We provide unified communications, contact centers and programmable communications APIs, built on what we believe to be the world's most flexible cloud communications platform. True to our roots as a technology disruptor, our flexible approach helps us better serve the growing collaboration, communications, and customer experience needs of companies, across all communications channels.
For our Business customers, we provide innovative, cloud-based Applications, comprised of integrated voice, text, video, data, collaboration, and mobile applications over our flexible, scalable SIP-based VoIP network. We also offer API solutions designed to enhance the way businesses communicate with their customers by embedding communications into apps, websites and business processes. 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 have a robust set of product families tailored to serve the full range of the business value chain, from the SMB market, through mid-market and enterprise markets. We provide customers with multiple deployment options, designed to provide the reliability and quality of service they demand. We provide customers the ability to integrate our cloud communications platform with many cloud-based productivity and CRM solutions, including Google’s G Suite, Zendesk, Salesforce’s Sales Cloud, Oracle, and Clio. With our ability to integrate these cloud-based, workplace tools, Vonage integrates the entire business communications value chain - from employee communications that maximize productivity to the direct engagement with customers that APIs provides. When combined with our MPLS network, as well as voice services over customers' broadband networks via our SmartWan solution, we create a differentiated offering.
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 68% and 71% of our consolidated revenues for the three months ended June 30, 2020 and 2019 and 69% and 72% for the six months ended June 30, 2020 and 2019, 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 six months ended June 30, 2020 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, 2019 filed with the Securities and Exchange Commission on February 21, 2020.
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 of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates, including uncertainty in the current economic environment due to the recent outbreak of the novel coronavirus COVID-19.
VONAGE HOLDINGS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
We base our estimates on historical experience, available market information, appropriate valuation methodologies, and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Estimates are used for such items as depreciable lives for long-lived assets including intangible assets, tax provisions, uncollectible accounts, convertible notes, and assets and liabilities assumed in business combinations, among others. In addition, estimates are used to test long-lived assets and goodwill for impairment.
COVID-19 has created and may continue to create uncertainty in customer payments, reduced usage, and issuance of customer credits to distressed customers served by certain product lines. As of the date of our condensed consolidated financial statements, we are not aware of any specific event or circumstance that would require us to materially update our estimates or judgments. However, these estimates may change as new events occur and additional information is obtained, which may result in changes being recognized in our condensed consolidated financial statements in future periods. In particular and in light of the COVID-19 pandemic, the assumptions and estimates associated with collectability assessment of revenue and credit losses of accounts receivable may have a material impact our consolidated financial statements in future periods, depending on the continued duration or degree of the impact of the COVID-19 pandemic on the global economy.
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, net assets or cash flows.
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 the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.
Service, Access, and Product Cost of Revenues
Service, access, and product cost of revenues excludes depreciation and amortization expense of $11,148 and $9,144 for the three months ended June 30, 2020 and 2019 and $22,304 and $18,562 for the six months ended June 30, 2020 and 2019, respectively. In addition, costs of goods sold included in service, access, and product cost of revenues during the three months ended June 30, 2020 and 2019 were $2,419 and $5,563 and during the six months ended June 30, 2020 and 2019 were $6,095 and $11,191, respectively.
Sales and Marketing Expenses
We incurred advertising costs, which are included in sales and marketing of $14,290 and $16,586 for the three months ended June 30, 2020 and 2019 and $23,750 and $34,336 for the six months ended June 30, 2020 and 2019, respectively.
Fair Value of Financial Instruments
Certain of the Company's other financial instruments, which include cash and cash equivalents, restricted cash, accounts receivable and accounts payable, approximate fair value due to their short-term nature and as such are classified as Level 1. We believe the fair value of our 2018 Credit Facility at June 30, 2020 and December 31, 2019 was approximately the same as its carrying amount as the facility bears interest at a variable rate indexed to current market conditions and is classified as Level 2 within the fair value hierarchy.
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.
As of June 30, 2020 and December 31, 2019, the fair value of the 1.75% convertible senior notes due 2024 (the “Convertible Senior Notes”) was approximately $316,958 and $309,641, respectively. 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 June 30, | | | | As of December 31, | | |
| 2020 | | 2019 | | 2019 | | 2018 |
Cash and cash equivalents | $ | 47,565 | | | $ | 17,963 | | | $ | 23,620 | | | $ | 5,057 | |
Restricted cash | 2,046 | | | 1,679 | | | 2,015 | | | 2,047 | |
Total cash, cash equivalents and restricted cash | $ | 49,611 | | | |