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vg-20200930

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, 2020


☐			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

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:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001

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.

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 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, 2020

Common Stock, par value $0.001

248,332,776

VONAGE HOLDINGS CORP.

INDEX


Part 1 - Financial Information

		Page
Item 1.	Condensed Consolidated Financial Statements and Notes	4
	Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	4
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019	5
	Condensed Consolidated Statements of Comprehensive Income / (Loss) for the Three and Nine Months Ended September 30, 2020 and 2019	6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019	7
	Condensed Consolidated Statement s of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019	8
	Notes to Unaudited Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47

Item 4	Controls and Procedures	47

Part II. Other Information

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3.	Defaults Upon Senior Securities	49

Item 4.	Mine Safety Disclosures	49

Item 5.	Other Information	49

Item 6.	Exhibits	50

	Signature	51

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:



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


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

CPaaS						Communications Platform as a Service
CRM						Customer Relationship Management
Exchange Act						The Securities Exchange Act of 1934, as amended

EPS						Earnings Per Share
FASB						Financial Accounting Standards Board
FCC						Federal Communications Commission


IP						Internet Protocol

LIBOR						London Inter-Bank Offered Rate
MPLS						Multi-Protocol Label Switching
NOLs						Net Operating Losses


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



UCaaS						Unified Communications as a Service

USF						Federal Universal Service Fund

VCP						Vonage Communications Platform, formerly referred to as Business
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)


	September 30, 2020		December 31, 2019
Assets	(Unaudited)
Current assets:
Cash and cash equivalents	$	48,370	$	23,620
Accounts receivable, net of allowance of $8,808 and $5,494, respectively	119,553		101,813
Inventory, net of allowance of $64 and $76, respectively	614		1,475
Deferred customer acquisition costs, current portion	16,884		13,834
Prepaid expenses	36,362		22,338
Other current assets	6,277		9,988
Total current assets	228,060		173,068
Property and equipment, net of accumulated depreciation of $120,127 and $109,646, respectively	37,449		48,371
Operating lease right-of-use assets	22,971		50,847
Goodwill	606,958		602,970
Software, net of accumulated amortization of $106,857 and $102,133, respectively	69,389		40,300
Deferred customer acquisition costs	62,760		55,148
Restricted cash	1,999		2,015
Intangible assets, net of accumulated amortization of $264,820 and $221,182, respectively	208,507		249,905
Deferred tax assets	115,178		108,347
Other assets	34,643		33,729
Total assets	$	1,387,914	$	1,364,700
Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable	$	34,442	$	42,366
Accrued expenses	149,476		137,589
Deferred revenue, current portion	62,813		59,464
Operating lease liabilities, current portion	11,481		12,477


Total current liabilities	258,212		251,896
Indebtedness under revolving credit facility	240,500		220,500

Convertible senior notes, net	287,176		276,658
Operating lease liabilities	21,747		45,722
Other liabilities	3,048		2,862
Total liabilities	810,683		797,638
Commitments and Contingencies (Note 9)
Stockholders’ Equity:
Common stock, par value 0.001 per share; 596,950 shares authorized at September 30, 2020, and December 31, 2019	323		316
Additional paid-in capital	1,539,527		1,494,469
Accumulated deficit	(653,256)		(631,009)
Treasury stock, at cost	(319,911)		(306,043)
Accumulated other comprehensive income	10,548		9,329
Total stockholders’ equity	577,231		567,062
Total liabilities and stockholders’ equity	$	1,387,914	$	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)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019

Revenues:
Service, access and product revenues	$	298,991	$	279,871	$	878,584	$	819,006
USF revenues	17,658		22,663		46,055		60,653
Total revenues	316,649		302,534		924,639		879,659

Operating Expenses:
Service, access and product cost of revenues (excluding depreciation and amortization)	124,243		111,170		357,252		314,812
USF cost of revenues	17,658		22,663		46,055		60,653

Sales and marketing	85,505		83,628		261,953		274,513
Engineering and development	20,110		16,901		59,097		50,318
General and administrative	56,835		41,306		140,537		113,380
Depreciation and amortization	22,887		21,319		64,064		63,195
Total operating expenses	327,238		296,987		928,958		876,871
(Loss) Income from operations	(10,589)		5,547		(4,319)		2,788
Other Income (Expense):
Interest expense	(7,373)		(8,454)		(24,776)		(24,517)
Other income (expense), net	(37)		58		154		(505)
Total other expense, net	(7,410)		(8,396)		(24,622)		(25,022)
Loss before income tax benefit	(17,999)		(2,849)		(28,941)		(22,234)
Income tax benefit (expense)	7,937		(18,248)		6,694		5,127
Net loss	$	(10,062)	$	(21,097)	$	(22,247)	$	(17,107)

Loss per common share:
Basic and diluted	$	(0.04)	$	(0.09)	$	(0.09)	$	(0.07)

Weighted-average common shares outstanding:
Basic and diluted	246,697		242,336		245,242		241,786

See accompanying notes to condensed consolidated financial statements.

VONAGE HOLDINGS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME / (LOSS)

(In thousands)

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019

Net loss	$	(10,062)	$	(21,097)	$	(22,247)	$	(17,107)
Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax expense (benefit) of $(1,086), $847, $(1,275), and $938, respectively	19,776		(16,459)		218		(17,594)
Unrealized gain (loss) on derivatives, net of tax expense (benefit) of $—, $71, $(4) and $364, respectively	—		(307)		1,001		(1,788)
Total other comprehensive income (loss)	19,776		(16,766)		1,219		(19,382)
Comprehensive income (loss)	$	9,714	$	(37,863)	$	(21,028)	$	(36,489)

See accompanying notes to condensed consolidated financial statements.

VONAGE HOLDINGS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended
	September 30,
	2020		2019
Cash flows from operating activities:
Net loss	$	(22,247)	$	(17,107)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	22,531		20,098
Amortization of intangibles	41,533		43,097

Deferred income taxes	(8,130)		(7,630)
Amortization of deferred customer acquisition costs	11,653		7,981

Allowances for doubtful accounts and obsolete inventory	4,778		1,384
Amortization of financing costs and debt discount	11,127		5,311
Loss on disposal of property and equipment	743		745
Share-based expense	33,972		32,152
Changes in derivatives	1,055		(398)
Changes in operating assets and liabilities:
Accounts receivable	(19,825)		(23,211)
Inventory	869		552
Prepaid expenses and other current assets	(10,453)		(2,238)
Deferred customer acquisition costs	(22,342)		(21,708)

Accounts payable and accrued expenses	1,612		24,043
Deferred revenue	2,997		6,867
Other assets - deferred cloud computing implementation costs	(5,394)		(11,929)
Other assets and liabilities	6,952		1,841
Net cash provided by operating activities	51,431		59,850
Cash flows used in investing activities:
Capital expenditures	(7,718)		(15,426)
Purchase of intangible assets	(260)		—
Acquisition and development of software assets	(30,256)		(20,836)
Acquisitions, net of cash acquired	—		(3,000)

Net cash used in investing activities	(38,234)		(39,262)
Cash flows provided by/(used in) financing activities:

Payments for short and long-term debt	(55,000)		(418,500)
Proceeds from issuance of long-term debt	75,000		479,000
Payments of debt issuance costs	—		(9,715)
Payments for capped call transactions and costs	—		(28,325)
Common stock repurchases	—		(10,000)
Employee taxes paid on withholding shares	(15,180)		(20,372)
Proceeds from exercise of stock options	8,051		1,678
Net cash provided by/(used in) financing activities	12,871		(6,234)
Effect of exchange rate changes on cash	(1,334)		(663)
Net increase in cash, cash equivalents, and restricted cash	24,734		13,691
Cash, cash equivalents, and restricted cash, beginning of period	25,635		7,104
Cash, cash equivalents, and restricted cash, end of period	$	50,369	$	20,795

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 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 gain 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

	Common Stock		Additional Paid-in Capital		Accumulated Deficit		Treasury Stock		Accumulated Other Comprehensive Income		Total
Balance at June 30, 2020	$	320	$	1,519,055	$	(643,194)	$	(319,314)	$	(9,228)	$	547,639
Stock option exercises	3		7,805								7,808
Share-based expense			12,667								12,667
Employee taxes paid on withholding shares							(597)				(597)




Foreign currency translation adjustment									19,776		19,776

Net loss					(10,062)						(10,062)
Balance at September 30, 2020	$	323	$	1,539,527	$	(653,256)	$	(319,911)	$	10,548	$	577,231
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		1,673								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 gain 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

	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	7		8,044								8,051
Share-based expense			37,014								37,014
Employee taxes paid on withholding shares							(13,868)				(13,868)




Foreign currency translation adjustment									218		218
Unrealized loss on derivatives									1,001		1,001
Net loss					(22,247)						(22,247)
Balance at September 30, 2020	$	323	$	1,539,527	$	(653,256)	$	(319,911)	$	10,548	$	577,231

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, we are observing a secular shift in the way businesses need to operate. We believe that this shift is driving a growing communications revolution across all industries and modes of communications. We believe that Vonage's Communications APIs, Unified Communications and Contact Center products and services are well positioned to take advantage of this emerging trend with sizable, growing total addressable markets as companies look to cloud-based communications solutions and API programming architectures as part of their digital transformation.

Our strategic business is the Vonage Communications Platform formerly referred to as "Business," which is our single enterprise cloud communications platform, offering our wide range of enterprise communications services and solutions including Communications APIs, Unified Communications, and Contact Center Communications The Vonage Communications Platform brings unique value to businesses by providing multiple communications channels - video, voice, messaging, email and verification - that integrate into applications, products and workflows. This delivers both the power and the flexibility our customers need to disrupt their industries, and enables the type of business continuity, remote work, and remote delivery of services that are now essential for companies to work and serve customers from anywhere. Vonage products and services enable our business customers to fundamentally change how they engage with their customers and team members. We have a robust set of solutions and services that meet the needs of businesses of all sizes, from micro, to SMB through mid-market and enterprise. We provide customers with multiple deployment options designed to provide the reliability and quality of service they demand. Vonage solutions also integrate with today's leading business applications, CRM and productivity tools,, including Google’s G Suite, Zendesk, Salesforce’s Sales and Service Clouds, Microsoft Dynamics, ServiceNow, Oracle, and Clio among others, to drive internal communications and collaboration among team members and external engagement with customers.

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 72% of our consolidated revenues for the three months ended September 30, 2020 and 2019 and 69% and 72% for the nine months ended September 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 nine months ended September 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 $13,649 and $9,658 for the three months ended September 30, 2020 and 2019 and $35,953 and $28,220 for the nine months ended September 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 September 30, 2020 and 2019 were $2,707 and $5,921 and during the nine months ended September 30, 2020 and 2019 were $8,802 and $17,112, respectively.

Sales and Marketing Expenses

We incurred advertising costs, which are included in sales and marketing of $10,785 and $11,437 for the three months ended September 30, 2020 and 2019 and $34,535 and $45,773 for the nine months ended September 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 September 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 September 30, 2020 and December 31, 2019, the fair value of the 1.75% convertible senior notes due 2024 (the “Convertible Senior Notes”) was approximately $333,953 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 September 30,				As of December 31,
	2020		2019		2019		2018
Cash and cash equivalents	$	48,370	$	18,741	$	23,620	$	5,057
Restricted cash	1,999		2,054		2,015		2,047
Total cash, cash equivalents and restricted cash	$	50,369	$	20,795	$	25,635	$	7,104

The following tables provides supplemental information of intangible assets and accrued expenses within the consolidated balance sheets:

Intangible assets, net


	September 30, 2020						December 31, 2019
	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Gross Carrying Value		Accumulated Amortization		Net Carrying Value
Customer relationships	$	275,205	$	(139,232)	$	135,973	$	272,767	$	(115,583)	$	157,184
Developed technology	169,175		(97,151)		72,024		169,722		(80,523)		89,199
Patents and patent licenses	20,905		(20,395)		510		20,554		(19,228)		1,326
Trade names	7,025		(7,025)		—		7,074		(4,878)		2,196
Non-compete agreements	1,017		(1,017)		—		970		(970)		—
Total intangible assets	$	473,327	$	(264,820)	$	208,507	$	471,087	$	(221,182)	$	249,905

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Accrued expenses


	September 30, 2020		December 31, 2019
Compensation and related taxes and temporary labor	$	35,154	$	40,101
Marketing	18,987		15,294
Taxes and fees	25,736		22,922
Telecommunications	42,511		40,498
Severance	9,121		—
Interest	2,378		873
Customer credits	3,867		2,772
Professional fees	2,770		4,482
Inventory	910		871
Other accruals	8,042		9,776
Accrued expenses	$	149,476	$	137,589

During the third quarter of September 30, 2020, the Company initiated a business-wide optimization and alignment project to focus the Company's resources and drive stronger operational execution, which includes the previously announced Consumer evaluation. In connection with this project, the Company initiated a reduction in workforce incurring accrued severance costs of $9,121 related to employee exits as well as abandoning a portion of its office leases as further described in Note 7, Leases which together resulted in total restructuring expense included in general and administrative expense during the three months ended September 30, 2020 of $15,182.

Goodwill

The Company's goodwill is derived primarily from the acquisitions of Vocalocity, Telesphere, iCore, Simple Signal, Nexmo, TokBox, and NewVoiceMedia which are included in the Company's Vonage Communications Platform segment. The following table provides a summary of the changes in the carrying amounts of goodwill:


Balance at December 31, 2019	$	602,970
Foreign currency translation adjustment	3,988
Balance at September 30, 2020	$	606,958

Recent Accounting Pronouncements

The following standards were adopted by the Company during the current year:

In August 2020, the FASB issued ASU 2020-06, "Debt - Debt with Conversion Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity". This ASU simplifies the accounting for certain convertible instruments such that the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under ASC 815, or that do not result in substantial premiums accounted for as paid-in-captial. As a result, more convertible debt instruments will be accounted for as a single liability measured at its amortized cost. In addition, the ASU requires the use of the if-converted method to be applied to convertible instruments when calculating earnings per share. The ASU is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, using either a modified retrospective or a full retrospective approach. Early adoption is permitted for fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of this standard on our condensed consolidated financial statements.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)". This ASU provides an easier and more cost efficient way for companies to modify contracts that reference the London Interbank Offered Rate ("LIBOR") and other rates that are being phased out. The ASU (1) allows eligible contracts that are modified to be accounted for as a continuation of those contracts - a simplification that eliminates the need for companies to reassess or remeasure the contracts for accounting purposes; (2) permits companies to preserve their hedge accounting during the transition period; and (3) enables companies to make a one-time election to transfer or sell held-to-maturity debt securities that are affected by rate reform. It is effective as of March 12, 2020 through December 31, 2022. The Company adopted the ASU when effective. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes by removing certain exceptions currently permissible under ASC Topic 740. This ASU also requires entities to: (1) recognize a franchise tax that is partially based on income as an income-based tax and account for any incremental amounts incurred as non-income based tax; (2) evaluate when a step-up in the tax basis of goodwill should be considered as part of the business combination and when it should be considered a separate transaction;(3) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; and (4) reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation and other minor improvements. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. The Company adopted the new standard on January 1, 2020. The adoption of the ASU did not have a material impact on our condensed consolidated financial statements and related disclosures.

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. 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 apply a discounted cash flow methodology. However, the Company considers whether historical loss rates are consistent with expectations of forward-looking estimates for our trade receivables. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted the new standard on January 1, 2020. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements and related disclosures. Due to the COVID-19 pandemic and impact on economic conditions, the Company included in its estimate of expected credit losses additional reserves related to trade receivables for those customers in industries most significantly impacted by these events. The Company will continue to actively monitor the impact of the COVID-19 pandemic on its estimate of expected credit losses.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

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 and Note 3, Revenue Recognition to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019.

Disaggregation of Revenue

The following tables detail our revenue from customers disaggregated by primary geographical market and source of revenue. The tables also include a reconciliation of the disaggregated revenue for our Vonage Communications Platform, or VCP, and Consumer segments.


	Three Months Ended						Three Months Ended
	September 30, 2020						September 30, 2019
	VCP		Consumer		Total		VCP		Consumer		Total
Primary geographical markets
United States	$	140,376	$	76,282	$	216,658	$	127,976	$	88,567	$	216,543
Canada	2,261		4,014		6,275		2,138		4,817		6,955
United Kingdom	17,592		2,527		20,119		13,910		2,620		16,530
Other Countries	73,597		—		73,597		62,506		—		62,506
	$	233,826	$	82,823	$	316,649	$	206,530	$	96,004	$	302,534
Major Sources of Revenue
Service revenues	$	218,456	$	71,693	$	290,149	$	183,701	$	83,981	$	267,682
Access and product revenues	8,757		85		8,842		12,120		69		12,189
USF revenues	6,613		11,045		17,658		10,709		11,954		22,663
	$	233,826	$	82,823	$	316,649	$	206,530	$	96,004	$	302,534

	Nine Months Ended						Nine Months Ended
	September 30, 2020						September 30, 2019
	VCP		Consumer		Total		VCP		Consumer		Total
Primary geographical markets
United States	$	399,743	$	234,051	$	633,794	$	363,312	$	270,270	$	633,582
Canada	6,206		12,677		18,883		5,496		14,927		$	20,423
United Kingdom	50,597		7,583		58,180		53,416		8,315		$	61,731
Other Countries	213,782		—		213,782		163,923		—		$	163,923
	$	670,328	$	254,311	$	924,639	$	586,147	$	293,512	$	879,659
Major Sources of Revenue
Service revenues	$	626,416	$	223,981	$	850,397	$	523,060	$	260,225	$	783,285
Access and product revenues	27,987		200		28,187		35,524		197		35,721
USF revenues	15,925		30,130		46,055		27,563		33,090		60,653
	$	670,328	$	254,311	$	924,639	$	586,147	$	293,512	$	879,659

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, 2020, the Company recognized $152,636 and $463,218 related to subscription services, $116,557 and $320,983 related to usage, and $47,456 and $140,438 related to other revenues such as USF, other regulatory fees, and credits. 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.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Contract Assets and Liabilities

The following table provides information about receivables and contract liabilities from contracts with customers:


	September 30, 2020		December 31, 2019
Receivables (1)	$	119,553	$	101,813
Contract liabilities (2)	62,813		59,464

(1) Amounts included in accounts receivables on our condensed consolidated balance sheets.

(2) Amounts included in deferred revenues on our condensed consolidated balance sheet.

Our deferred revenue represents the advance consideration received from customers for subscription services and is predominantly recognized as transfer of control occurs. During the three and nine months ended September 30, 2020, the Company recognized revenue of $106,866 and $325,252, respectively, related to its contract liabilities. 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. We expect to recognize $62,813 into revenue over the next twelve months related to our deferred revenue as of September 30, 2020.

Remaining Performance Obligation

Transaction price allocated to the remaining performance obligation represents contracted revenue that has not yet been recognized. The typical subscription term may range from 1 month to 3 years. Contracted revenue as of September 30, 2020 that has not yet been recognized was approximately $0.4 billion. This excludes contracts with an original expected length of less than one year. The Company expects to recognize the majority of its remaining performance obligation over the next 18 months.

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 a commission on sales of services and products to customers. We expect that these commission fees are recoverable and, therefore, we have capitalized $79,644 and $68,982 as contract costs, net of accumulated amortization, as of September 30, 2020 and December 31, 2019, 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 Vonage Communications Platform customers. The amounts amortized to sales and marketing expense were $4,086 and $11,653 for the three and nine months ended September 30, 2020, and $3,060 and $7,981 for the three and nine months ended September 30, 2019, respectively. There were no impairment losses recognized in relation to the costs capitalized during the nine months ended September 30, 2020 and 2019. In addition, the Company expenses sales commissions for commission plans related to customer arrangements deemed less than a year and for residuals and renewals.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 4. Earnings Per Share

The following table sets forth the computation for basic and diluted loss per share for the three and nine months ended September 30, 2020 and 2019:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Numerator
Net loss	$	(10,062)	$	(21,097)	$	(22,247)	$	(17,107)
Denominator
Weighted average common shares outstanding for basic and diluted net loss per share	246,697		242,336		245,242		241,786



Basic and diluted loss per share
Basic and diluted loss per share	$	(0.04)	$	(0.09)	$	(0.09)	$	(0.07)

For the three and nine months ended September 30, 2020 and 2019, the following were excluded from the calculation of diluted loss per common share because of their anti-dilutive effects:


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2020	2019	2020	2019
Restricted stock units	14,165	10,616	14,165	10,616
Stock options	2,129	5,087	2,129	5,087

	16,294	15,703	16,294	15,703

As the Company expects to settle the principal amount of its outstanding convertible senior notes in cash and any excess in cash or shares of the Company’s common stock, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of the Company’s common stock for a given period exceeds the conversion price of $16.72 per share. The Company's Convertible Senior Notes are further described in Note 6, Long-Term Debt.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 5. Income Taxes

The income tax consisted of the following:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020	2019
Loss before income taxes	$	(17,999)	$	(