SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Commission File Number 001-32887

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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a ~~nonaccelerated~~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.

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

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

VONAGE HOLDINGS CORP.

INDEX


Part 1 - Financial Information

~~Part 1 - Financial Information~~					Page

		~~Page~~
Item 1.	Condensed Consolidated Financial Statements and Notes			4
			Condensed Consolidated Balance Sheets as of September 30, ~~2017 (Unaudited)~~2020 and December 31, ~~2016~~2019		34
			~~Unaudited~~ Condensed Consolidated Statements of ~~Income~~Operations for the Three and Nine Months Ended September 30, ~~2017~~2020 and ~~2016~~2019		45
			~~Unaudited~~ Condensed Consolidated Statements of Comprehensive Income / (Loss) for the Three and Nine Months Ended September 30, ~~2017~~2020 and ~~2016~~2019		56
			~~Unaudited~~ Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2017~~2020 and ~~2016~~2019		67
			~~Unaudited~~ Condensed Consolidated Statement s of Stockholders’ Equity for the Three and Nine Months Ended September 30, ~~2017~~2020 and 2019		78
			Notes to Unaudited Condensed Consolidated Financial Statements		810

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

Item 3.			Quantitative and Qualitative Disclosures About Market Risk		4347

Item 4			Controls and Procedures		4347

Part II. Other Information

Item 1.			Legal Proceedings		4548

Item 1A.			Risk Factors		4548

Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds		4549

Item 3.			Defaults Upon Senior Securities		4549

Item 4.			Mine Safety Disclosures		4549

Item 5.			Other Information		4549

Item 6.			Exhibits		4650

			Signature		4751

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)

~~(Unaudited)~~


	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

September 30,
2017 December 31,
2016
Assets
(revised)⁽¹⁾
Current assets:
Cash and cash equivalents $ 29,869
$ 29,078
Marketable securities —
601
Accounts receivable, net of allowance of $2,897 and $2,093, respectively 42,435
36,688
Inventory, net of allowance of $124 and $117, respectively 2,683
4,116
Deferred customer acquisition costs, current 1,466
2,610
Prepaid expenses 23,324
26,041
Other current assets 2,686
3,147
Total current assets 102,463
102,281
Property and equipment, net of accumulated depreciation of $143,265 and $129,166, respectively 45,760
48,415
Goodwill 371,535
360,363
Software, net of accumulated amortization of $94,917 and $87,626, respectively 23,574
21,971
Restricted cash 1,827
1,851
Intangible assets, net of accumulated amortization of $117,905 and $88,419, respectively 181,522
199,256
Deferred tax assets 192,879
184,210
Other assets 15,059
17,319
Total assets $ 934,619
$ 935,666
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 33,070
$ 30,751
Accrued expenses 76,163
109,195
Deferred revenue, current portion 31,332
32,442
Current maturities of capital lease obligations 206
3,288
Current portion of notes payable 18,750
18,750
Total current liabilities 159,521
194,426
Indebtedness under revolving credit facility 182,000
209,000
Notes payable, net of debt related costs and current portion 77,361
91,124
Other liabilities 6,123
4,575
Total liabilities 425,005
499,125

Commitments and Contingencies (Note 7)

Stockholders’ Equity
Common stock, par value $0.001 per share; 596,950 shares authorized at September 30, 2017 and December 31, 2016; 295,633 and 282,319 shares issued at September 30, 2017 and December 31, 2016, respectively; 228,478 and 219,001 shares outstanding at September 30, 2017 and December 31, 2016, respectively 295
282
Additional paid-in capital 1,359,975
1,310,847
Accumulated deficit (617,288 ) (641,869 )
Treasury stock, at cost, 67,155 shares at September 30, 2017 and 63,318 shares at December 31, 2016 (243,594 ) (219,125 )
Accumulated other comprehensive loss 10,226
(13,594 )
Total stockholders’ equity 509,614
436,541
Total liabilities and stockholders’ equity $ 934,619
$ 935,666

~~(1) see Note 3.~~ ~~Correction of Prior Period Financial Statements~~

See accompanying notes to condensed consolidated financial statements.

VONAGE HOLDINGS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF ~~INCOME~~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

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016

(revised)⁽¹⁾

(revised)⁽¹⁾
Total revenues $ 253,083
$ 248,359
$ 748,266
$ 708,858

Operating Expenses:
Cost of service (exclusive of depreciation and amortization) 96,632
87,377
281,902
232,605
Cost of goods sold 6,306
8,591
19,786
26,009
Sales and marketing 73,576
83,731
235,245
246,676
Engineering and development 6,956
8,075
21,996
22,152
General and administrative 26,811
27,538
98,411
89,261
Depreciation and amortization 18,179
18,018
54,520
53,215
Total operating expenses 228,460
233,330
711,860
669,918
Income from operations 24,623
15,029
36,406
38,940
Other Income (Expense):
Interest income 3
19
12
65
Interest expense (3,821 ) (3,974 ) (11,385 ) (9,477 )
Other income (expense), net 465
(495 ) 931
(237 )
Total other income (expense), net (3,353 ) (4,450 ) (10,442 ) (9,649 )
Income before income taxes 21,270
10,579
25,964
29,291
Income tax expense (10,668 ) (3,539 ) (4,624 ) (14,102 )
Net income $ 10,602
$ 7,040
$ 21,340
$ 15,189
Earnings per common share:
Basic $ 0.05
$ 0.03
$ 0.10
$ 0.07
Diluted $ 0.04
$ 0.03
$ 0.09
$ 0.07
Weighted-average common shares outstanding:
Basic 227,943
217,000
223,956
214,872
Diluted 242,720
234,868
242,552
227,499

~~(1) see Note 3.~~ ~~Correction of Prior Period Financial Statements~~

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 $0, $71, $(4) and $364, respectively	0		(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)

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016

(revised)⁽¹⁾

(revised)⁽¹⁾
Net income $ 10,602
$ 7,040
$ 21,340
$ 15,189
Other comprehensive income:
Foreign currency translation adjustment 6,390
3,372
23,622
1,659
Unrealized (loss)/gain on available-for-sale securities —
(3 ) 1
23
Unrealized gain on derivatives 197
—
197
—
Total other comprehensive income 6,587
3,369
23,820
1,682
Comprehensive income $ 17,189
$ 10,409
$ 45,160
$ 16,871

~~(1) see Note 3.~~ ~~Correction of Prior Period Financial Statement~~s

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,
2017
2016⁽¹⁾
Cash flows from operating activities:
Net income $ 21,340
$ 15,189
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and impairment charges 25,930
27,841
Amortization of intangibles 28,458
25,374
Deferred income taxes 2,475
11,647
Change in contingent consideration —
(7,362 )
Allowance for doubtful accounts 562
720
Allowance for obsolete inventory 339
514
Amortization of debt issuance costs 300
800
Gain on sale of business (1,377 ) —
Loss on disposal of fixed assets 132
—
Share-based expense 28,997
27,128
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (3,970 ) (5,244 )
Inventory 1,156
582
Prepaid expenses and other current assets 3,369
(2,161 )
Deferred customer acquisition costs 1,284
1,906
Accounts payable 1,388
(17,252 )
Accrued expenses (32,390 ) (7,509 )
Deferred revenue (1,477 ) (2,785 )
Other assets and liabilities 4,084
226
Net cash provided by operating activities 80,600
69,614
Cash flows from investing activities:
Capital expenditures (15,790 ) (19,980 )
Purchase of marketable securities —
(5,664 )
Maturities and sales of marketable securities 602
9,036
Acquisition and development of software assets (9,438 ) (8,987 )
Acquisition of businesses, net of cash acquired —
(163,042 )
Proceeds from sale of business 1,000
—
Net cash used in investing activities (23,626 ) (188,637 )
Cash flows from financing activities:
Principal payments on capital lease obligations and other financing obligations (5,701 ) (7,453 )
Principal payments on notes and revolving credit facility (56,063 ) (48,125 )
Proceeds received from draw down of revolving credit facility and issuance of notes payable 15,000
181,250
Debt related costs —
(1,316 )
Common stock repurchases (9,542 ) (32,902 )
Employee taxes paid on withholding shares (14,927 ) (4,359 )
Proceeds from exercise of stock options 14,476
6,169
Net cash (used)/provided by financing activities (56,757 ) 93,264
Effect of exchange rate changes on cash 550
518
Net decrease in cash, cash equivalents, and restricted cash 767
(25,241 )
Cash, cash equivalents, and restricted cash, beginning of period 30,929
60,313
Cash, cash equivalents, and restricted cash, end of period $ 31,696
$ 35,072
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 10,147
$ 8,216
Income taxes $ 5,395
$ 5,165
Non-cash investing and financing activities:
Capital expenditures included in accounts payable and accrued liabilities $ 2,231
$ 2,962
Issuance of common stock in connection with acquisition of business $ —
$ 31,591
Contingent consideration in connection with acquisition of business $ —
$ 16,472
Assumption of options in connection with acquisition of business $ —
$ 4,779


	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)		0
Acquisition and development of software assets	(30,256)		(20,836)
Acquisitions, net of cash acquired	0		(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	0		(9,715)
Payments for capped call transactions and costs	0		(28,325)
Common stock repurchases	0		(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

~~(1) See Note 2.~~ ~~Summary of Significant Accounting Policies~~ ~~for reclassification due to the adoptions of new Accounting Standard Updates and Note 3.~~ ~~Correction of Prior Period Financial Statements~~

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.

Shares Common Stock
Additional
Paid-in
Capital

Accumulated
Deficit

Treasury
Stock

Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance at December 31, 2016 (Revised) ⁽¹⁾
219,001
$ 282
$ 1,310,847
$ (641,869 ) $ (219,125 ) $ (13,594 ) $ 436,541
Cumulative effect adjustment upon the adoption of ASU 2016-09 5,668
3,241
8,909
Stock option exercises 13,314
13
14,463
14,476
Share-based expense 28,997
28,997
Employee taxes paid on withholding shares (2,238 ) (14,927 ) (14,927 )
Common stock repurchases (1,599 ) (9,542 ) (9,542 )
Foreign currency translation adjustment 23,622
23,622
Unrealized gain on available-for-sale securities 1
1
Unrealized gain on derivatives 197
197
Net income 21,340
21,340
Balance at September 30, 2017 228,478
$ 295
$ 1,359,975
$ (617,288 ) $ (243,594 ) $ 10,226
$ 509,614


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

~~(1) see Note 3.~~ ~~Correction of Prior Period Financial Statements~~

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. ~~Basis~~Nature of ~~Presentation~~Business

Nature of Operations

Vonage Holdings Corp. (“Vonage”, “Company”, “we”, “our”, “us”) is incorporated as a Delaware corporation. WeAt Vonage, we are observing a ~~leading provider of cloud communications services for business. We transform~~secular shift in the way ~~people work~~businesses need to operate. We believe that this shift is driving a growing communications revolution across all industries and ~~businesses operate through a portfolio~~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 ~~internal collaboration among employees, while also keeping companies closely connected~~our business customers to fundamentally change how they engage with their customers ~~across any mode of communication, on any device.~~

Through our Nexmo subsidiary which was acquired on June 3, 2016, we are a global leader in the Communications-Platform-as-a-Service ("CPaaS") segment of the cloud communications market, providing innovative communication application program interfaces ("APIs") for text messaging and voice communications, allowing developers and enterprises to embed contextual communications into mobile apps, websites and business workflows via text, social media, chat apps and voice. With just few lines of code, developers can send and receive text messages and build programmable voice applications. Nexmo, the Vonage API Platform can scale from one API call to billions. The platform makes it easy for any of our developers to access communication services via software and APIs. Through Nexmo weteam members. We have a ~~global network~~robust set of ~~interconnected carriers delivering our API-based~~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 ~~platform, enabling businesses to communicate~~and collaboration among team members and external engagement with their customers reliably and with ease, no matter where in the world they are located. The addition of our Nexmo products to our business offering allows our customers to address their full communications needs, from employee to employee communications through business to customer communications.customers.

We also provide a robust suite of feature-rich residential communication ~~solutions.~~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 ~~84%~~68% and ~~89%~~72% of our consolidated revenues for the three months ended September 30, ~~2017~~2020 and ~~2016~~2019 and ~~86%~~69% and ~~92%~~72% for the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively, with the balance in Canada, the United Kingdom, China, Singapore, Netherlands, and other ~~countries. Nexmo Inc. ("Nexmo") has operations in the United States, United Kingdom, Hong Kong, and Singapore, and provides CPaaS solutions to our customers located in many~~ 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 ~~statement of~~ stockholders’ equity for the periods presented. The results for the ~~three and~~ nine months ended September 30, ~~2017~~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, ~~2016~~2019 filed with the Securities and Exchange Commission on February ~~28, 2017~~.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 ~~reported~~of assets and ~~disclosed in~~liabilities at the ~~condensed consolidated~~date of the financial statements and the ~~accompanying notes.~~reported amounts of revenues and expenses during the reporting period. Actual results could differ ~~materially~~ from these ~~estimates.~~

~~Reclassifications~~

~~Reclassifications have been made to our condensed consolidated financial statements for the prior year period to conform to classification used~~estimates, including uncertainty in the current ~~year period. The reclassifications did not affect results from operations or net assets.~~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 1, ~~Basis~~2, Summary of ~~Presentation and~~ Significant Accounting Policies to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019.

Service, Access, and Product Cost of ~~Services~~Revenues

~~Cost~~Service, access, and product cost of ~~services~~revenues excludes depreciation and amortization expense of ~~$6,852~~$13,649 and ~~$7,460~~$9,658 for the three months ended September 30, ~~2017~~2020 and ~~2016~~2019 and ~~$20,497~~$35,953 and ~~$21,278~~$28,220 for the nine months ended September 30, ~~2017~~2020 and ~~2016,~~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.

~~Advertising Costs~~Sales and Marketing Expenses

We incurred advertising costs, which are included in sales and marketing of ~~$11,423~~$10,785 and ~~$18,765~~$11,437 for the three months ended September 30, ~~2017~~2020 and ~~2016~~2019 and ~~$43,760~~$34,535 and ~~$55,723~~$45,773 for the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively.

~~Engineering and Development Expenses~~

Engineering and development expenses primarily include personnel and related costs for developers responsible for new products, and software engineers maintaining and enhancing existing products. Research and development costs related to new product development included in engineering and development were $5,662 and $6,234 for the three months ended September 30, 2017 and 2016 and $17,357 and $16,544 for the nine months ended September 30, 2017 and 2016, respectively.

~~Restructuring Activities~~

During the nine months ended September 30, 2017, we recognized $4 million of costs associated with restructuring activities included in general and administrative expense and is primarily comprised of costs associated with severance and other employee related costs. As of September 30, 2017, $1.2 million remained accrued related to restructuring activities and $2.8 million was paid during the third quarter of 2017.

~~Derivative Financial Instruments~~

~~The Company accounts for derivative financial instruments under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 815,~~ ~~Derivatives and Hedging~~, which requires the Company to record all derivatives on the balance sheet at fair value unless they qualify for a normal purchase or normal sale exception. Changes in the fair value of non-hedge derivatives are immediately recognized into earnings. Changes in the fair value of derivatives accounted for as hedges, if elected for hedge accounting, are either recognized in earnings as an offset to the changes in the fair value of the related hedged assets and liabilities or deferred and recognized as a component of accumulated other comprehensive income ("OCI") until the hedged transactions occur and are recognized in earnings.

Beginning the quarter ended September 30, 2017, the Company entered into three interest rate swaps used to mitigate variability in earnings due to fluctuations in interest rates. Each swap has been designated and qualifies as a cash flow hedges. At the inception of the forward contract, the hedging relationship is expected to be highly effective in achieving offsetting cash flows attributed to the hedged risk. The Company assesses hedge effectiveness under the critical terms matched method at inception and at least quarterly through the life of the hedging relationship. If the critical terms of the interest rate swap match the terms of the forecasted transaction, the Company concludes that the hedge is effective.

Fair Value of Financial Instruments

~~The Company records certain~~Certain of ~~its financial assets at fair value on a recurring basis. The~~the Company's other financial instruments, which ~~includes~~include cash and cash equivalents, restricted cash, accounts receivable and accounts payable, approximate fair value ~~because of~~due to their short-term maturities. The carrying amounts of our capital leases approximate fair value of these obligations based upon management’s best estimates of interest rates that would be available for similar debt obligations at September 30, 2017nature and ~~December 31, 2016.~~as such are classified as Level 1. We believe the fair value of our ~~debt~~2018 Credit Facility at September 30, ~~2017~~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 ~~including available interest rates, credit spread relative to our credit rating,~~ and ~~illiquidity, remain relatively unchanged from~~is classified as Level 2 within the ~~issuance date of our debt on June 3, 2016 for a similar debt instrument.~~ 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 ~~Measurements~~ - 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 ~~Measurements~~ - observable prices that are based on inputs not quoted on active markets but corroborated by market data; and

•Level 3 ~~Measurements~~ - unobservable inputs when there is little or no market data available, thereby requiring an entity to develop its own assumptions.

The ~~following table presents the assets and liabilities that are measured and recognized at~~ fair value ~~on a recurring basis classified under~~hierarchy gives the ~~appropriate level~~lowest priority to Level 3 inputs.

As of September 30, 2020 and December 31, 2019, the fair value ~~hierarchy~~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 ~~of September 30, 2017 and December 31, 2016:~~

September 30, 2017 December 31, 2016
Level 1 Measurements
Money market fund ⁽¹⁾
$ —
$ 300
Level 2 Measurements
Available-for-sale securities ⁽²⁾
$ —
$ 601
Interest rate swap ⁽³⁾
$ 197
$ —

~~(1) Included~~Level 2 in ~~cash and cash equivalents on our condensed consolidated balance sheet.~~

~~(2) Included in marketable securities on our condensed consolidated balance sheet.~~

~~(3) Included in other assets on our condensed consolidated balance sheet.~~the fair value hierarchy.

Supplemental Balance Sheet Information

~~Cash,~~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

September 30,
2017 December 31, 2016
Cash and cash equivalents $ 29,869
$ 29,078

Cash collateralized letter of credit-lease deposits $ 1,561
$ 1,578
Cash reserves 266
273
Restricted cash $ 1,827
$ 1,851

Cash, cash equivalents, and restricted cash $ 31,696
$ 30,929

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
	September 30, 2017		December 31, 2016			Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Gross Carrying Value		Accumulated Amortization		Net Carrying Value
Customer relationships	126,758		133,774		Customer relationships	$	275,205	$	(139,232)	$	135,973	$	272,767	$	(115,583)	$	157,184
Developed technology	49,054		57,245		Developed technology	169,175		(97,151)		72,024		169,722		(80,523)		89,199
Patents and patent licenses	4,410		5,547		Patents and patent licenses	20,905		(20,395)		510		20,554		(19,228)		1,326
Trade names	521		1,033		Trade names	7,025		(7,025)		0		7,074		(4,878)		2,196
Non-compete agreements	779		1,657		Non-compete agreements	1,017		(1,017)		0		970		(970)		0
Intangible assets, net	$	181,522	$	199,256
Total intangible assets					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)

September 30,
2017 December 31, 2016
Compensation and related taxes and temporary labor $ 25,292
$ 35,308
Marketing 11,330
12,754
Taxes and fees 8,537
19,234
Acquisition related consideration accounted for as compensation 2,134
6,608
Telecommunications 15,974
14,896
Settlement —
5,000
Other accruals 7,950
10,473
Customer credits 1,143
2,074
Professional fees 2,844
1,680
Inventory 959
1,168
Accrued expenses $ 76,163
$ 109,195
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.

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 ~~2017,~~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 ~~Standards Update ("ASU") 2017-12, "Derivatives~~for Convertible Instruments and ~~Hedging"~~Contracts in an Entity's Own Equity". ~~The~~This ASU ~~improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements and~~ simplifies the ~~application~~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 ~~hedge accounting guidance in current generally accepted accounting principles ("GAAP"). It also amends the disclosures requirements by requiring a tabular disclosure related~~if-converted method to ~~the effect on the incomes statement of fair value and cash flow hedges and eliminating the ineffective portion of the change in fair value of hedging instrument disclosures. This~~be applied to convertible instruments when calculating earnings per share. The ASU is effective for fiscal years beginning after December 15, ~~2018, and~~2021, including interim periods within those fiscal ~~years.~~years, using either a modified retrospective or a full retrospective approach. Early adoption is permitted ~~in any interim period after issuance of this ASU. We do not expect a material impact of adopting ASU 2017-12 on our condensed consolidated financial statements and related disclosures.~~

In January 2017, FASB issued 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. We are currently evaluating the impact of adopting ASU 2017-04 on our condensed consolidated financial statements and related disclosures.

~~In October 2016, FASB issued ASU 2016-16, "Income Taxes". This ASU improves the accounting for income tax consequences of intra-entity transfers of assets other than inventory. This ASU is effective~~ for fiscal years beginning after December 15, ~~2017 on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption~~2020. The Company is ~~permitted as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance. We are~~ currently evaluating the impact of ~~adopting ASU 2016-16~~this standard on our condensed consolidated financial ~~statements and related disclosures.~~

In August 2016, FASB issued ASU 2016-15, "Statement of Cash Flows". This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective for fiscal years beginning after December 15, 2017 on a retrospective basis. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2016-15 will not have a material impact on our condensed consolidated financial statements and related disclosures.

In February 2016, FASB issued ASU 2016-02, "Leases". This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for all entities. The adoption of this ASU will increase our assets and liabilities for real estate and equipment operating leases for which we are the lessee. We will adopt this ASU when effective. We are currently evaluating the effect of adopting ASU 2016-02 on our condensed consolidated financial statements and related disclosures.statements.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

In ~~January 2016,~~March 2020, the FASB issued ASU ~~2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities"~~2020-04, "Reference Rate Reform (Topic 848)". This ASU ~~provide guidance concerning certain matters involving~~provides an easier and more cost efficient way for companies to modify contracts that reference the ~~recognition, measurement,~~London Interbank Offered Rate ("LIBOR") and ~~disclosure~~other rates that are being phased out. The ASU (1) allows eligible contracts that are modified to be accounted for as a continuation of ~~financial assets~~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 ~~financial liabilities. The guidance does not alter the basic framework for classifying~~(3) enables companies to make a one-time election to transfer or sell held-to-maturity debt ~~instruments held as financial assets. This ASU~~securities that are affected by rate reform. It is effective ~~for fiscal years beginning after~~as of March 12, 2020 through December ~~15, 2017, including interim periods within those fiscal years. Early adoption is not permitted, with some exceptions.~~31, 2022. The Company adopted the ASU when effective. The adoption of this ASU ~~2016-01 will~~did not have a material impact on our condensed consolidated financial statements and related disclosures.

In ~~May 2014,~~December 2019, the FASB issued ASU ~~2014-09, "Revenue from Contracts with Customers (Topic 606)" which was further amended through various updates issued~~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 ~~FASB thereafter. The amendments~~tax basis of ~~Topic 606 clarify~~goodwill should be considered as part of the ~~principles for recognizing revenue~~business combination and ~~provide~~when it should be considered a ~~common revenue standard for U.S. GAAP to improve financial reporting. The core principle of these standards are~~separate transaction;(3) specifying that an entity ~~should recognize revenue~~is not required to ~~depict~~allocate the ~~transfer~~consolidated amount of ~~promised goods~~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 services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Topic 606 also amends the current guidance for the recognition of costs to obtain and fulfill contracts with customers requiring that all incremental costs of obtaining and direct costs of fulfilling contracts with customers such as commissions be deferred and recognized over the expected customer life. In August 2015, an ASU was issued by the FASB which deferred the effective date to annual and interim periods beginning on or after December 15, 2017. We will adopt the requirements of the new standardrates in the ~~first quarter of 2018~~annual effective tax rate computation and anticipate using the modified retrospective transition method under which the standard will be applied only to the most current period presented and the cumulative effect of applying the standard will be recognized at the date of initial application.

We are in the process of evaluating the impact of the standard with respect to the terms of our revenue arrangements and will finalize our expected impact of the pronouncement along with implementation of changes to our internal controls and disclosures as necessary to support the new accounting during the fourth quarter of 2017. We expect the timing of recognition of our sales commissions will also be impacted as a substantial portion of these costs which are currently expensed will be capitalized under the revised standard and amortized over the period of benefit.

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

In November 2016, FASB issued ASU 2016-18, "Statement of Cash Flows". This ASU requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.other minor improvements. This ASU is effective for fiscal years beginning after December 15, ~~2017,~~2020, and interim periods within those fiscal years. Early adoption of the amendments is permitted, including adoption in anany interim period ~~and any adjustments should be reflected as~~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 ~~beginning of~~ASU did not have a material impact on our condensed consolidated financial statements and related disclosures.

In June 2016, the fiscal year that includes that interim period. We adopted this ASU in the first quarter of 2017 and applied the retrospective transition method for each period presented. For the nine months ended September 30, 2016, $791 and $11 were reclassified from investing activity and effect of exchange rate changes on cash, respectively, and $51, $2,587 and $1,836 were adjusted to acquisition of business, net of cash acquired, and cash, cash equivalents, and restricted cash, beginning of the period and end of the period balances, respectively.

~~In March 2016,~~ FASB issued ASU ~~2016-09, "Improvements~~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 ~~Employee Share-Based Payment Accounting"~~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. ~~This ASU is issued as part of~~The CECL model requires that the Company estimate its ~~Simplification Initiative. The areas for simplification in this ASU involve several aspects~~lifetime expected credit loss with respect to these receivables and record allowances that when deducted from the balance of the ~~accounting~~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 share- based payment transactions, including the income tax consequences, recognition of share-based expense, classification of awards as either equity or liabilities, and classification on the statement of cash flows.our trade receivables. This ASU is effective for fiscal years beginning after December 15, ~~2016, including~~2019, and interim periods within those fiscal years. WeThe 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 ~~the first quarter~~its estimate of ~~2017. We elected to account for forfeitures when they occur versus our prior practice of estimating the number of awards that are~~ expected ~~to vest. The election of this new ASU resulted in a one-time adjustment in 2017 to accumulated deficit and to~~credit losses additional ~~paid-in-capital of $5,668 and the corresponding benefit to our accumulated deficit and deferred tax asset of $2,285~~reserves related to trade receivables for those customers in industries most significantly impacted by these events. The Company will continue to actively monitor the ~~reversal~~impact of ~~forfeiture rate as~~the COVID-19 pandemic on its estimate of December 31, 2016. In addition, a benefit to our accumulated deficit and deferred tax asset of $6,624 was recorded for excess tax benefits on equity compensation as of December 31, 2016. We also classified cash paid by us when directly withholding shares for tax-withholding purposes as a financing activity. As a result, $4,359 was reclassified from operating activity to financing activity for the nine months ended September 30, 2016.expected credit losses.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 3. Revenue Recognition

In July 2015, FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory". This ASU applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value,The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers which is ~~the estimated selling prices~~further described in ~~the ordinary course~~Note 2, Summary of ~~business, less reasonably predicable costs of completion, disposal~~Significant Accounting Policies and ~~transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, first-out ("LIFO") or~~Note 3, Revenue Recognition to the retail inventory. This ASU is effective for annual and interim periods beginning after December 15, 2016, and is applied prospectively. We adopted ASU 2015-11 in the first quarter of 2017 and the adoption of this ASU did not have a material impact on our condensed 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 ~~related disclosures.~~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		0		73,597		62,506		0		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		0		213,782		163,923		0		$	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

~~Note 3. Correction of Prior Period Financial Statements~~

In ~~connection with~~addition, the preparation of our condensed consolidated financial statements for the quarter ended March 31, 2017, and our remediation efforts related to the material weakness in our internal control over financial reporting related to our controls over the preparation of the annual tax provision, we identified an error as of December 31, 2016 in our recognition of a deferred tax asset related to contingent consideration with vesting requirements paid in connection with the acquisition of Nexmo. Based in part upon the vesting requirements of contingent consideration, we recorded the consideration as compensation expense in general and administrative expense in our consolidated statements of operations. However, for tax purposes the contingent consideration should have been recorded as merger consideration and not deductible compensation. The correction of this error requires the reversal of the deferred tax asset on the consolidated balance sheets and related tax benefits of $4,756 as of December 31, 2016. In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we evaluated the error and determined that the related impact was not material to our results of operationsCompany recognizes service revenues from its customers through subscription services provided or ~~financial position for any prior annual~~through usage or interim period, but that correcting the $4,756 cumulative impact of the error would be material to our results of operations for the three months ended March 31, 2017. Accordingly, we have corrected the consolidated balance sheets as of December 31, 2016 and will correct this error in all prior periods presented by revising the appropriate condensed consolidated financial statements. This error had no impact on the three months ended March 31, 2016. The impact to the consolidated balance sheet as of December 31, 2016 and the consolidated statements of income for the three and six months ended June 30, 2016,pay-per-use type arrangements. During the three and nine months ended September 30, ~~2016,~~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 ~~year ended December 31, 2016 is~~$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 ~~follows:~~

USF, other regulatory fees, and credits.

Consolidated Balance Sheets
As of December 31, 2016
As Reported Adjustment As Revised

Deferred tax assets, non-current $ 188,966
$ 4,756
$ 184,210
Total assets 940,422
4,756
935,666
Accumulated deficit (637,113 ) 4,756
(641,869 )
Total stockholders' equity 441,297
4,756
436,541
Total liabilities and stockholders' equity 940,422
4,756
935,666

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.

Condensed Consolidated Statements of Income
Three Months Ended Six Months Ended
June 30, 2016 June 30, 2016
As Reported Adjustment As Revised As Reported Adjustment As Revised

Income tax expense $ (1,562 ) $ 679
$ (2,241 ) $ (9,884 ) $ 679
$ (10,563 )
Net income 897
679
218
8,828
679
8,149
Net income per common share: ��
   Basic $ —
$ —
$ —
$ 0.04
$ —
$ 0.04
   Diluted $ —
$ —
$ —
$ 0.04
$ —
$ 0.04

Three Months Ended Nine Months Ended
September 30, 2016 September 30, 2016
As Reported Adjustment As Revised As Reported Adjustment As Revised

Income tax expense $ (1,501 ) $ 2,038
$ (3,539 ) $ (11,385 ) $ 2,717
$ (14,102 )
Net income 9,078
2,038
7,040
17,906
2,717
15,189
Net income per common share:
   Basic $ 0.04
$ 0.01
$ 0.03
$ 0.08
$ 0.01
$ 0.07
   Diluted $ 0.04
$ 0.01
$ 0.03
$ 0.08
$ 0.01
$ 0.07

Three Months Ended Year Ended
December 31, 2016 December 31, 2016
As Reported Adjustment As Revised As Reported Adjustment As Revised

Income tax expense $ (1,553 ) $ 2,039
$ (3,592 ) $ (12,938 ) $ 4,756
$ (17,694 )
Net income 1
2,039
(2,038 ) 17,907
4,756
13,151
Net income per common share:
   Basic $ —
$ 0.01
$ (0.01 ) $ 0.08
$ 0.02
$ 0.06
   Diluted $ —
$ 0.01
$ (0.01 ) $ 0.08
$ 0.02
$ 0.06

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 ~~earnings~~loss per share for the three and nine months ended September 30, ~~2017~~2020 and ~~2016:~~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)

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Numerator
(revised)⁽¹⁾

(revised)⁽¹⁾
Net income $ 10,602
$ 7,040
$ 21,340
$ 15,189
Denominator
Basic weighted average common shares outstanding 227,943
217,000
223,956
214,872
Dilutive effect of stock options and restricted stock units 14,777
17,868
18,596
12,627
Diluted weighted average common shares outstanding 242,720
234,868
242,552
227,499
Basic earnings per share
Basic earnings per share $ 0.05
$ 0.03
$ 0.10
$ 0.07
Diluted earnings per share
Diluted earnings per share $ 0.04
$ 0.03
$ 0.09
$ 0.07

~~(1) see Note 3.~~ ~~Correction of Prior Period Financial Statements~~

For the three and nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, the following were excluded from the calculation of diluted ~~earnings~~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.

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Restricted stock units 4,938
8,130
2,458
11,120
Stock options 5,362
9,766
4,023
12,017
10,300
17,896
6,481
23,137

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)		$	(2,849)		$	(28,941)		$	(22,234)
Income tax benefit (expense)	7,937			(18,248)			6,694			5,127
Effective tax rate	44.1		%	(640.5)		%	23.1		%	23.1		%

The Company calculates its provision for income taxes during its interim reporting periods by applying an estimate of the annual effective tax rate for the full year "ordinary" income or loss for the respective reporting period. In addition, adjustments are recorded for discrete period items and changes to our state effective tax rate which can cause the rate to fluctuate from quarter to quarter.

For the three and nine months ended September 30, 2020, our effective tax rate was different than the statutory rate primarily due to a discrete tax benefit recognized during the nine months related to excess tax benefits on equity compensation. In addition, the Company’s annual effective tax rate for the current year has been impacted by an increase in permanent items related to limitations on executive compensation and the inclusion of foreign income in the U.S. due to foreign disregarded entities compared to the overall pretax loss for the quarter.

For the three and nine months ended September 30, 2019, our effective tax rate was different than the statutory rate primarily due to the recognition of discrete period tax benefits related to excess tax benefits on equity compensation. In addition, the Company’s actual effective tax rate for the previous year had reduced the expected annual benefit as a result of permanent adjustments related to limitations on executive compensation deductibility and inclusion of income in the U.S. due to foreign disregarded entities.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, which is commonly known as the CARES Act, was enacted into law. As permitted by the CARES Act, the Company has accelerated the refund request for previously paid Alternative Minimum Taxes, of which $4,207 has been received, and has deferred $4,441 associated with the employer portion of the social security payroll tax. We continue to assess the Company's potential benefits of the CARES Act and ongoing government guidance related to COVID-19.

Uncertain Tax Positions

The Company had uncertain tax benefits of $841 and $914 as of September 30, 2020 and December 31, 2019, respectively. The Company recognizes interest and penalties related to uncertain tax benefits in income tax expense. The Company recognized a benefit of $29 and $40 of interest and penalties, respectively, during the three and nine months ended September 30, 2020 and incurred $149 interest and penalties for the nine months ended September 30, 2019. The following table reconciles the total amounts of uncertain tax benefits:


	September 30, 2020		December 31, 2019
Balance as of January 1	$	914	$	1,107
Increase due to current year positions	111		155
Decrease due to prior year positions	0		(243)
Decrease due to settlements and payments	(173)		(86)
Decrease due to lapse of applicable statute of limitations	(5)		(71)
(Decrease) increase due to foreign currency fluctuation	(6)		52
Uncertain tax benefits as of the end of the period	$	841	$	914

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Net Operating Loss Carry Forwards

As of September 30, 2020, the Company has U.S. Federal and state NOL carryforwards of $454,506 and $237,667, respectively, which expire at various times through 2037. In addition, we have NOLs for United Kingdom tax purposes of $165,104 with no expiration date.

Note 6. Long-Term ~~Note and Revolving Credit Facility~~Debt

This footnote should be read in conjunction with the complete description of our financing arrangements under Note 6,8, Long-Term Debt ~~and Revolving Credit Facility~~, to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019.

~~A schedule~~The following table summarizes the Company's long-term debt as of ~~long-term note and revolving credit facility at~~ September 30, ~~2017~~2020 and December 31, ~~2016~~2019:


	September 30, 2020		December 31, 2019

Revolving credit facility - due 2023	240,500		220,500
Convertible senior notes - due 2024	345,000		345,000
Long-term debt including current maturities	585,500		565,500

Less unamortized discount	51,912		61,234
Less debt issuance costs	5,912		7,108
Total long-term debt	$	527,676	$	497,158

Convertible Senior Notes

In June 2019, the Company issued $300.0 million aggregate principal amount of 1.75% convertible senior notes due 2024 in a private placement and an additional $45.0 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment option of the initial purchasers (collectively, "Convertible Senior Notes"). The Convertible Senior Notes are the Company's senior unsecured obligations. The Convertible Senior Notes will mature on June 1, 2024, unless earlier redeemed, repurchased or converted. We may not redeem the notes prior to June 5, 2022. The total net proceeds from the offering, after deducting initial purchase discounts and expenses payable by the Company, were $334.8 million.

Each $1,000 principal amount of the Convertible Senior Notes is initially convertible into 59.8256 shares of the Company's common stock, which is equivalent to an initial conversion price of approximately $16.72 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid interest. In addition, upon the occurrence of a make-whole fundamental change or a redemption period, each as defined in the indenture setting forth the terms of the Convertible Senior Notes, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Convertible Senior Notes in connection with such make-whole fundamental change or during the relevant redemption period.

Prior to December 1, 2023, the notes will be convertible only upon satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. We will satisfy any conversion election by paying or delivering, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock. During the nine months ended September 30, 2020, the conditions allowing holders of the Convertible Senior Notes to convert were not met.

The net carrying amount of the liability component of the Convertible Senior Notes was as follows:


	September 30, 2020
Principal	$	345,000
Unamortized discount	(51,912)
Unamortized issuance cost	(5,912)
Net carrying amount	$	287,176

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

September 30,
2017 December 31,
2016
2.50-3.25% Term note - due 2020, net of debt related costs $ 77,361
$ 91,124
2.50-3.25% Revolving credit facility - due 2020 182,000
209,000
Total Long-term note and revolving credit facility $ 259,361
$ 300,124
The following table sets forth the interest expense recognized related to the Convertible Senior Notes:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Contractual interest expense	$	1,510	$	1,543	$	4,528	$	1,819
Amortization of debt discount	3,159		2,948		9,322		3,435
Amortization of debt issuance costs	398		391		1,196		465
Total interest expense related to the Convertible Senior Notes	$	5,067	$	4,882	$	15,046	$	5,719

~~2016 Financing~~In connection with the pricing of the Convertible Senior Notes and subsequently in connection with the exercise of the initial purchaser's option to purchase additional notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the "Capped Calls"). The Capped Calls each have a strike price of $16.72 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Convertible Senior Notes. The Capped Calls have initial cap prices of $23.46 per share, subject to certain adjustments. The Capped Calls are expected generally to reduce potential dilution to the Company's common stock upon any conversion of notes and/or offset any cash payments the Company is required to make in excess of the aggregate principal amount of converted notes, as the case may be, with such reduction and/or offset subject to a cap. The initial cap price of the Capped Call transactions was $23.46. The net cost of $28,325 incurred to purchase the Capped Calls and related income tax benefit of $6,772 was recorded as a reduction to additional paid-in capital on the Company's consolidated balance sheet during the quarter ended June 30, 2019 and are not accounted for as derivatives.

2018 Term Note and Revolving Credit Facility

On ~~June 3, 2016, we~~July 31, 2018, the Company entered into ~~Amendment No. 1 to~~ the ~~Amended and Restated~~2018 Credit ~~Agreement (the “2016 Credit Facility”)~~Facility consisting of a ~~$125.0~~$100 million senior secured term ~~note~~loan and a ~~$325.0~~$500 million revolving credit facility. The co-borrowers under the ~~2016~~2018 Credit Facility are the Company and Vonage America Inc., the Company’s wholly owned subsidiary. Obligations under the ~~2016~~2018 Credit Facility are guaranteed, fully and unconditionally, by the Company’s other United States ~~material~~ subsidiaries and are secured by substantially all of the assets of each borrower and each guarantor.

We used $197.8 million of the net available proceeds of the 2016 Credit Facility to retire all of the debt under our prior credit facility. We used $179.0 million from our 2016 Credit Facility in connection with the acquisition of Nexmo on June 3, 2016. Remaining proceeds from the term note and the undrawn revolving credit facility under the 2016 Credit Facility will be used for general corporate purposes. During the nine months ended September 30, ~~2017,~~2020, we ~~made mandatory repayments of $14.1 million under the term note and made discretionary repayments of $42.0~~borrowed $75 million under the revolving credit facility ~~respectively,~~ and ~~borrowed $15.0~~repaid $55 million under the revolving ~~credit~~ facility. In addition, the effective interest rate was ~~4.25%~~2.94% as of September 30, ~~2017.~~

2020. During the nine months ended September 30, 2019, we repaid $323.5 million under the revolving credit facility, $95 million under the 2018 term note, and borrowed $134 million under the revolving credit facility. As of September 30, 2020, we were in compliance with all covenants, including financial covenants, for the 2018 Credit Facility.

Interest Rate ~~Swap~~Swaps

On July 14, 2017, we executed on ~~three~~3 interest rate swap agreements ~~in order~~ to hedge the variability of expected future cash interest ~~payments related to the 2016 Credit Facility.~~payments. The swaps ~~have~~had an aggregate notional amount of $150 million and were effective on July 31, ~~2017 through June 3, 2020 concurrent with the term of the 2016 Credit Facility.~~2017. Under the swaps our interest rate iswas fixed at 4.7%. The swaps expired on June 3, 2020 at which time the Company recognized previously deferred amounts within interest expense. The interest rate swaps ~~are~~were accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

As of ~~September 30, 2017,~~December 31, 2019, the fair market value of the swaps was ~~$197,~~$18, which iswas included in other assets ~~and accumulated OCI~~ on ~~the face of~~ our condensed consolidated balance sheet. As of September 30, 2017, the critical terms of the swap agreements have not changed and therefore, there is no ineffectiveness to be recorded and all changes in the fair value of the interest rate swaps are recorded in accumulated OCI. The following table summarizes the effects of ASC 815 on the Company's accumulated OCI balance attributable to cash flow derivatives:


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

Accumulated OCI beginning balance	$	0	$	(506)	$	(1,001)	$	975
Reclassified from accumulated OCI to income:
Due to reclassification of previously deferred amounts	0		(133)		1,051		(398)
Change in fair value of cash flow hedge accounting contracts, net of tax	0		(174)		(50)		(1,390)
Accumulated OCI ending balance, net of tax benefit of $0 and $29, respectively	$	0	$	(813)	$	0	$	(813)
Gains expected to be reclassified from accumulated OCI during the next 12 months	$	0	$	531	$	0	$	531

Note 7. Leases

Three and Nine Months Ended
September 30,
2017

Accumulated OCI beginning balance $ —
Mark-to-market of cash flow hedge accounting contracts 197
Accumulated OCI ending balance $ 197
Gains expected to be realized from accumulated OCI during the next 12 months $ —

The Company entered into various non-cancelable operating lease agreements for certain of our existing office and telecommunications co-location space as well as operating leases for certain equipment. The operating leases expire at various times through 2026. We are committed to pay a portion of the buildings’ operating expenses as required under the arrangements which we will separate as a non-lease component when readily determinable. The Company did not have any finance leases as of September 30, 2020 and December 31, 2019.

The Company incurred operating lease expense, excluding lease abandonment, of $2,919 and $8,784, respectively, during the three and nine months ended September 30, 2020 and $3,529 and $11,196, respectively, during the three and nine months ended September 30, 2019, related to its operating leases. In addition, the Company received sub-lease income of $293 and $904, respectively, during the three and nine months ended September 30, 2020 and $330 and $966, respectively, during the three and nine months ended September 30, 2019. Additionally, the remaining weighted average lease term for our operating leases was 3.90 years and the weighted average discount rate utilized to measure the Company's operating leases was 5.04% as of September 30, 2020.

Supplemental cash flow related to the Company's operating leases is as follows:


	Nine Months Ended
	September 30, 2020		September 30, 2019

Cash paid for amounts included in the measurement of lease liabilities	$	12,090	$	12,753
Right-of-use assets obtained in exchange for lease obligations	$	1,261	$	7,718

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Maturities of operating lease liabilities as of September 30, 2020 and December 31, 2019 are as follows:


	September 30, 2020		December 31, 2019

For the year ended December 31, 2020 (excluding the nine months ended September 30, 2020 for the period ended September 30, 2020)	$	3,047	15,017
2021	12,019		11,663
2022	8,199		7,599
2023	6,554		7,197
2024	2,252		6,592
Thereafter	4,541		21,178
Total lease payments	36,612		69,246
Less imputed interest	(3,384)		(11,047)
Total	$	33,228	$	58,199

During the first quarter of 2020, the Company amended one of its office leases to remove a renewal period of 5 years beyond the initial lease term. In the Company's adoption of ASC 842, the Company had included the available renewal term within the transition asset and liability as the renewal was highly probable at the time of adoption. As a result, the Company's operating lease liability was reduced by $15,825 with a corresponding reduction in the Company's operating lease right-of-use assets as of March 31, 2020. During the third quarter of 2020, the Company abandoned a portion of one of its office leases and as such, the Company reduced its operating lease right-of-use asset by $6,061 as of September 30, 2020 by accelerating the amortization of the right-of-use asset through the cease use date which is included in general and administrative expense.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 6.8. Common Stock

As of September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, the Company had 596,950 shares of common stock authorized and had ~~10,318~~15,009 shares available for grants under our share-based compensation programs as of September 30, ~~2017.~~2020. For a detailed description of our share-based compensation programs refer to Note 9, 10, Employee Stock Benefit Plans in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~

~~Common Stock Repurchases~~

~~On December 9, 2014, Vonage's Board of Directors authorized a program for~~2019. The following table reflects the ~~Company to repurchase up to $100.0 million of its outstanding~~changes in the Company's common stock ~~(the "2014 $100.0 million repurchase program"). Repurchases under the 2014 $100.0 million repurchase program are expected to be made over a four-year period ending on December 31, 2018.~~issued and outstanding:

~~We repurchased the following shares of common stock with cash resources under the 2014 $100.0 million repurchase program during the three and nine months ended September 30, 2017 and 2016:~~


For the Three Months Ended
(in thousands)	Issued	Treasury	Outstanding
Balance at June 30, 2019	314,725	(72,757)	241,968
Shares issued under the 2015 Equity Incentive Plan	465	0	465
Employee taxes paid on withholding shares	0	(113)	(113)
Assets acquisition	240	0	240
Common stock repurchase	0	0	0
Balance at September 30, 2019	315,430	(72,870)	242,560

Balance at June 30, 2020	320,155	(74,700)	245,455
Shares issued under the 2015 Equity Incentive Plan	2,784	0	2,784
Employee taxes paid on withholding shares	0	(61)	(61)
Balance at September 30, 2020	322,939	(74,761)	248,178

For the Nine Months Ended
(in thousands)	Issued	Treasury	Outstanding
Balance at December 31, 2018	309,736	(69,993)	239,743
Shares issued under the 2015 Equity Incentive Plan	5,454	0	5,454
Employee taxes paid on withholding shares	0	(2,024)	(2,024)
Assets acquisition	240	0	240
Common stock repurchase	0	(853)	(853)
Balance at September 30, 2019	315,430	(72,870)	242,560

Balance at December 31, 2019	315,808	(72,959)	242,849
Shares issued under the 2015 Equity Incentive Plan	7,131	0	7,131
Employee taxes paid on withholding shares	0	(1,802)	(1,802)


Balance at September 30, 2020	322,939	(74,761)	248,178

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Shares of common stock repurchased —
—
1,599
7,400
Value of common stock repurchased $ —
$ —
$ 9,510
$ 32,762

As of September 30, 2017, $42,533 remained of our 2014 $100.0 million repurchase program. The repurchase program expires on December 31, 2018 but may be suspended or discontinued at any time without notice.VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In any period under the 2014 $100.0 million repurchase program, cash used in financing activities related to common stock repurchases may differ from the comparable change in stockholders' equity, reflecting timing differences between the recognition ofthousands, except per share ~~repurchase transactions and their settlement for cash.~~amounts)

(Unaudited)

Note 7.9. Commitments and Contingencies

Litigation

From time to time ~~in addition to those identified below,~~ we are subject to legal proceedings, claims and investigations ~~and proceedings in the ordinary course of~~relating to our business, including claims of alleged infringement of ~~third-party patents and other~~commercial, employment, intellectual property rights, ~~commercial, employment,~~ and other matters. From time to time, we receive letters or other communications from third parties inviting us to obtain patent licenses that might be relevant to our business or alleging that our services infringe upon ~~third party~~third-party patents or other intellectual property. In accordance with generally accepted accounting principles, we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. These provisions, if any, are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. We believe that we have valid defenses with respect to the legal matters pending against us and are vigorously defending these matters. Given the uncertainty surrounding litigation and our inability to assess the likelihood of a favorable or unfavorable outcome in ~~the~~such matters ~~noted below~~ and our inability to reasonably estimate the amount of loss or range of loss, it is possible that the resolution of one or more of these matters could have a material adverse effect on our condensed consolidated financial position, cash flows or results of operations.

~~VONAGE HOLDINGS CORP.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In thousands, except per share amounts)~~

~~(Unaudited)~~

~~Litigation~~

~~IP Matters~~

~~RPost Holdings, Inc.~~On August 24, 2012, RPost Holdings, Inc., RPost Communications Limited, and RMail Limited (collectively, “RPost”) filed a lawsuit against StrongMail Systems, Inc. (“StrongMail”) in the United States District Court for the Eastern District of Texas alleging that StrongMail’s products and services, including its electronic mail marketing services, are covered by United States Patent Nos. 8,224,913, 8,209,389, 8,161,104, 7,966,372, and 6,182,219. On February 11, 2013, RPost filed an amended complaint, adding 27 new defendants, including Vonage America Inc. RPost’s amended complaint alleges willful infringement of the RPost patents by Vonage and each of the other new defendants because they are customers of StrongMail. StrongMail has agreed to fully defend and indemnify Vonage in this lawsuit. Vonage answered the complaint on May 7, 2013. On September 17, 2015, the Court ordered the consolidation for pre-trial purposes of this case with other cases by RPost. The lead case has been administratively closed and stayed since January 30, 2014 due to multiple pending actions by third parties regarding ownership of the patents at issue. On September 1, 2017, the parties in the consolidated actions filed a joint notice regarding status of the co-pending actions. Plaintiffs requested that the stay be lifted, while defendants maintain that the stay should remain in place.

~~AIP Acquisition LLC~~. On January 3, 2014, AIP Acquisition LLC (“AIP”), filed a lawsuit against Vonage Holdings Corp., Vonage America, Inc., and Vonage Marketing LLC in the U.S. District Court for the District of Delaware alleging that Vonage’s products and services are covered by United States Patent No. 7,269,247. Vonage filed an answer and counterclaims on February 25, 2014. AIP filed an amended complaint on March 18, 2014, which Vonage answered on April 4, 2014. On April 8, 2014, the Court stayed the case pending final resolution of non-party Level 3’s inter partes review request of United States Patent No. 7,724,879, which is a continuation of the ‘247 patent. On October 8, 2014, the Patent Office issued a Final Written Decision, finding all challenged claims of the ‘879 patent to be invalid. On November 10, 2015, the Federal Circuit rejected AIP’s appeal and affirmed the Patent Office’s rejection of the ‘879 patent.

Cisco petitioned for inter partes review of the ‘247 patent on November 25, 2014, which was granted on May 20, 2015. On May 18, 2016, the Patent Office issued a Final Written Decision, finding all challenged claims of the ‘247 patent to be invalid. AIP appealed to the Federal Circuit, filing its opening brief on December 15, 2016. On December 20, 2016, the Patent Office filed a notice of intervention in the appellate proceedings. Briefing on the appeal is complete, and oral argument was held on October 3, 2017.

~~Commercial Litigation~~

~~Merkin & Smith, et al~~. On September 27, 2013, Arthur Merkin and James Smith filed a putative class action lawsuit against Vonage America, Inc. in the Superior Court of the State of California, County of Los Angeles, alleging that Vonage violated California’s Unfair Competition Law by charging its customers fictitious 911 taxes and fees. On October 30, 2013, Vonage filed a notice removing the case to the United States District Court for the Central District of California. On November 26, 2013, Vonage filed its Answer to the Complaint. On December 4, 2013, Vonage filed a Motion to Compel Arbitration, which the Court denied on February 4, 2014. On March 5, 2014, Vonage appealed that decision to the United States Court of Appeals for the Ninth Circuit. On March 26, 2014, the district court proceedings were stayed pending the appeal. On February 29, 2016, the Ninth Circuit reversed the district court’s ruling and remanded with instructions to grant the motion to compel arbitration. On March 22, 2016, Merkin and Smith filed a petition for rehearing. On May 4, 2016, the Ninth Circuit withdrew its February 29, 2016 decision and issued a new order reversing the district court’s order and remanded with instructions to compel arbitration. The Ninth Circuit also declared as moot the petition for rehearing. On June 27, 2016, the lower court stayed the case pending arbitration. A joint status report was filed with the District Court on December 23, 2016. A second joint status report was filed with the District Court on March 23, 2017. A third joint status report was filed with the District Court on June 27, 2017. A fourth joint status report was filed with the District Court on September 26, 2017.

~~DSA Promotions, LLC v. Vonage America, Inc.~~ ~~On September 28, 2017, DSA Promotions, LLC ("DSA") filed suit in the District Court of Dallas County, Texas, seeking payment of approximately~~ ~~$162~~ for goods and materials provided by DSA to Vonage. Vonage was served with the Original Petition and Request for Disclosure on October 13, 2017. DSA makes its claim based upon the doctrine of suit on a sworn account, quantum meruit and unjust enrichment. Vonage removed the matter from Dallas County District Court to the United States Federal Court for the Northern District of Texas, Dallas Division, on Monday, November 6, 2017. Vonage's responsive pleadings are due on Monday, November 13, 2017.

~~VONAGE HOLDINGS CORP.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In thousands, except per share amounts)~~

~~(Unaudited)~~

Regulation

Telephony services are subject to a broad spectrum of state, federal and ~~federal~~foreign regulations. Because of the uncertainty over whether ~~Voice over Internet Protocol (“VoIP”)~~VoIP should be treated as a telecommunications or information service, we have been involved in a substantial amount of state and federal regulatory activity. Implementation and interpretation of the existing laws and regulations is ongoing and is subject to litigation by various federal and state agencies and courts. Due to the uncertainty over the regulatory classification of VoIP service, there can be no assurance that we will not be subject to new regulations or existing regulations under new interpretations, and that such change would not introduce material additional costs to our business.

~~Federal - Net Neutrality~~

~~Clear and enforceable~~ The Company continues to monitor federal regulations relating to net neutrality, rules make it more difficult for broadband Internet service providers to block or discriminate against Vonage service. In addition, explicitly applying net neutrality rules to wireless broadband Internet service providers could create greater opportunities for VoIP applications that run on wireless broadband Internet service. In December 2010, the Federal Communications Commission ("FCC") adopted net neutrality rules that applied strong net neutrality rules to wired broadband Internet service providers and limited rules to wireless broadband Internet service providers. On January 14, 2014, the D.C. Circuit Court of Appeals vacated a significant portion of the 2010 rules. On May 15, 2014, the FCC issued a Notice of Proposed Rulemaking (NPRM) proposing new net neutrality rules. After public response to the NPRM, the FCC adopted new neutrality rules on February 26, 2015. These rules prohibit broadband Internet service providers from: (1) blocking or throttling lawful content applications, or services; (2) imposing paid prioritization arrangements; and (3) unreasonably interfering or unreasonably disadvantaging consumers or edge providers. In addition, broadband Internet service providers are required to make certain disclosures regarding their network management practices, network performance, and commercial terms. These net neutrality rules apply the same requirements to wired and wireless broadband Internet service providers. Several parties filed appeals which are pending at the D.C. Circuit Court of Appeals. Oral arguments at the D.C. Circuit Court of Appeals were held on December 4, 2015. On June 14, 2016, the D.C. Circuit of Appeals denied the appeals. Several parties filed a petition for rehearing en banc on July 29, 2016, which was denied on May 1, 2017. On July 2, 2017 Chief Justice John Roberts extended the time within which interested parties could file a petition for a writ of certiorari until September 28, 2017. Multiple interested parties and intervenors filed petitions. The Supreme Court has not yet ruled on the petitions.

~~Federal - Rural Call Completion Issues~~

~~On February 7, 2013, the FCC released a NPRM on~~ rural call completion issues. The NPRM proposed new detailed reporting requirements to gauge rural call completion performance. Rural carriers have argued that VoIP provider call completion performance to rural areas is generally poor. On October 28, 2013, the FCC adopted an order on rural call completion imposing new reporting obligations and restricting certain call signaling practices. The call signaling rules went into effect on January 31, 2014. We filed for extensions of the rules, which the FCC granted, and as of April 17, 2014, we were compliant with the FCC call signaling rules. The effective date for the reporting requirements was April 1, 2015. We could be subject to an FCC enforcement action in the future in the event the FCC took the position that our rural call completion performance is inadequate or we were not compliant with the FCC’s order. On June 22, 2017, the FCC issued a Second Further Notice of Proposed Rulemaking. The FCC has proposed changes to the FCC's rules that allegedly would more effectively address rural call completion problems while reducing burdens on covered providers. Vonage is reviewing and evaluating the FCC's proposed changes.

~~Federal - NPRM - Number Slamming~~

~~On July 13, 2017, the FCC adopted a NPRM regarding ways to protect consumers from~~issues, number slamming, 911 access, access to telecommunication equipment and ~~cramming without impeding competition or impairing the ability~~services by persons with disabilities, caller ID services, number portability, unwanted calls to reassigned numbers, and robocalling. As we continue to expand globally, these types of ~~consumers~~regulations are likely to ~~switch providers. Vonage is monitoring this NPRM.~~

~~Federal - NPRM Toll Free Assignment Modernization~~

On September 26, 2017 the FCC issued a NPRM regarding the modernization of toll free number assignment. The FCC proposes amending its rules to allow for the use of an auction to assign certain toll free numbers - such as vanitybe similarly enacted and ~~repeater numbers - in order to better promote the equitable and efficient use of numbers (especially as afforded~~enforced by the ~~opening of the 833 toll free code). Vonage will continue to monitor activity with respect to this NPRM.~~

~~Federal - NOI - Enterprise Communications Systems Access to 911~~

On September 26, 2017, the FCC adopted a Notice of Inquiry ("NOI") with respect to 911 access, routing and location in Enterprise Communication Systems. Vonage will monitor activity related to this NOI.

~~VONAGE HOLDINGS CORP.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In thousands, except per share amounts)~~

~~(Unaudited)~~

~~Federal - Access to Telecommunication Equipment and Services by Persons with Disabilities~~

At its open meeting scheduled for October 24, 2017, the FCC applied its wireline hearing aid compatibility rules/standards to handsets that provide advanced communication services, which includes interconnected and non-interconnected Voice over IP. The rules include certain coupling and volume control requirements that would allow the handsets to work better for persons with hearing aids. There are also testing and certification requirements, which typically apply to the handset manufacturer. The FCC also adopted a requirement for volume control in wireless handsets. The new rules have a two-year phase in for new phones and do not require the modification to existing handsets.

~~Federal - Rules and Policies Regarding Caller ID Services~~

At its open meeting on October 24, 2017, the FCC issued a report and order regarding amendments to the Commission’s rules to exempt threatening calls from current Caller ID blocking roles so that, among other changes, law enforcement and security personnel have timely access to information they need to aid their investigations. The order exempts threatening calls from the CPN privacy rules.

~~Federal - Part 43 Report and Order~~

At its open meeting scheduled for October 24, 2017, the FCC issued a report and order based on a March 23, 2017 NPRM to eliminate the filing of annual traffic and revenue reports and streamline circuit capacity reports.

~~Federal - Number Portability NPRM and NOI~~

At its open meeting scheduled for October 24, 2017, the FCC released a NPRM that would allow carriers flexibility in conducting number portability database queries to promote nationwide number portability and eliminate the dialing party requirement as it applies to interexchange service. The NOI seeks comments on industry number portability models and how number administration might be improved for more efficient technical, operational, administrative and legal processes. Vonage is monitoring this NPRM and NOI.

~~State Telecommunications Regulation~~

In general, the focus of interconnected VoIP telecommunications regulation is at the federal level. On November 12, 2004, the FCC issued a declaratory ruling providing that our service is subject to federal regulation and preempted the Minnesota Public Utilities Commission (“MPUC”) from imposing certain of its regulations on us. The FCC's decision was based on its conclusion that our service is interstate in nature and cannot be separated into interstate and intrastate components. On March 21, 2007, the United States Court of Appeals for the 8th Circuit affirmed the FCC's declaratory ruling preempting state regulation of our service.

While this ruling does not exempt us from all state oversight of our service, it effectively prevents state telecommunications regulators from imposing certain burdensome and inconsistent market entry requirements and certain other state utility rules and regulations on our service. State regulators continue to probe the limits of federal preemption in their attempts to apply state telecommunications regulation to interconnected VoIP service. On July 16, 2009, the Nebraska Public Service Commission and the Kansas Corporation Commission filed a petition with the FCC seeking a declaratory ruling or, alternatively, adoption of a rule declaring that state authorities may apply universal service funding requirements to nomadic VoIP providers. We participated in the FCC proceedings on the petition. On November 5, 2010, the FCC issued a declaratory ruling that allowed states to assess state USF on nomadic VoIP providers on a going forward basis provided that the states comply with certain conditions to ensure that imposing state USF does not conflict with federal law or policy.

Minnesota - More recently on July 28, 2015, the MPUC found that it has authority to regulate Charter’s fixed, interconnected VoIP service. Charter challenged the MPUC’s order at the U.S. District Court for Minnesota. This challenge is currently pending. In September 2017 amicus briefs were filed in support of the Minnesota PUC's appeal of the Charter decision by AARP, the AARP Foundation, Professor Barbara Cherry, the National Association of Regulatory Utility Commissioners and the national Association of State Consumer Advocates and the Mid-Minnesota Legal Aid.

Arizona - on August 14, 2017, the Arizona Corporation Commission issued an opinion and order with respect to amendments to the Arizona Universal Services Fund. The rulemaking allows for, among other things, the collection of additional USF surcharges in Arizona to fund the E-rate Broadband Special Construction Project Matching Fund Program. The Commission held hearing on September 12 and 13, 2017. Vonage will continue to monitor this rulemaking to determine its effect upon its business activities within Arizona.

~~We expect that state public utility commissions and state legislators will continue their attempts to apply state telecommunications regulations to nomadic VoIP service.~~

~~VONAGE HOLDINGS CORP.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In thousands, except per share amounts)~~

~~(Unaudited)~~

local regulatory authorities.

State and Municipal Taxes

In accordance with generally accepted accounting principles, we make a provision for a liability for taxes when it is both probable that a liability has been incurred and the amount of the liability or range of liability can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. ~~For a period of~~From time to time, we did not collect or remit state or municipal taxes (such as sales, excise, utility, use, and ad valorem taxes), fees or surcharges (“Taxes”) on the charges to our customers for our services, except that we historically complied with the New Jersey sales tax. We have received inquiries ~~or demands~~ from a number of ~~state~~states and ~~municipal~~local taxing agencies with respect to the remittance of sales, use, telecommunications, and ~~911 agencies seeking payment~~excise taxes. Several jurisdictions are currently conducting tax audits of ~~Taxes~~the Company's records. While the Company collects or has accrued for taxes that it believes are ~~applied~~required to or collected from customers of providers of traditional public switched telephone network services. Although we have consistently maintained that these Taxes do not apply to our service for a variety of reasons depending on the statute or rule that establishes such obligations, we are now collecting and remitting sales taxes in certain of those states including a number of states that have changed their statutes to expressly include VoIP. In addition, many states address how VoIP providers should contribute to support public safety agencies, andbe remitted, it has reviewed its positions in those ~~states we remit~~various jurisdictions as well as other regulatory fees ~~to the~~and has established appropriate ~~state agencies. We could also be contacted by state or municipal taxing and 911 agencies regarding Taxes that do explicitly apply to VoIP and these agencies could seek retroactive payment of Taxes.~~reserves. As such, we have established reserves of ~~$901~~$7,923 and ~~$1,763~~$3,175 as of September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively, as our best estimate of the potential tax exposure for any retroactive assessment.

~~Note 8. Acquisitions and Dispositions~~

~~Sale of Hosted Infrastructure Product Line~~

On May 31, 2017, we completed the sale of our Hosted Infrastructure product line for up to $4.0 million consideration comprised of $1.0 million received upon closing an additional $0.5 million of contingent consideration received during the third quarter and the potential for up to $2.5 million further consideration based on the achievement of financial objectives for net sales during the 18 months following closing. The results of our Hosted Infrastructure product line have been included within our business segment. As a result of the sale, we recorded a gain of $1,377 within other income for the nine months ended September 30, 2017. This disposal did not represent a strategic shift in operations and, therefore, did not qualify for presentation as discontinued operations.

~~Acquisition of Nexmo~~

Nexmo is a global leader in the Communications-Platform-as-a-Service (“CPaaS”) segment of the cloud communications market. Nexmo provides innovative communication application program interfaces (“APIs”) for text messaging and voice communications, allowing developers and enterprises to embed contextual communications into mobile apps, websites and business workflows via text, social media, chat apps and voice.

Pursuant to the Agreement and Plan of Merger dated May 5, 2016 and further amended on June 2, 2016, by and among the Company, Neptune Acquisition Corp., a Delaware corporation and newly formed indirect, wholly owned subsidiary of Vonage (“Merger Sub”), Nexmo, a Delaware corporation, and Shareholder Representative Services LLC, a Colorado limited liability company, as representative of the security holders of Nexmo, on June 3, 2016, Merger Sub, on the terms and subject to the conditions thereof, merged with and into Nexmo, and Nexmo became a wholly owned indirect subsidiary of Vonage.

Under the agreement, Nexmo shareholders received consideration of $231,122, with an additional earn-out opportunity (the "contingent consideration") of up to $20,000 contingent upon Nexmo achieving certain performance targets. Of the consideration, $194,684 (net of cash acquired of $16,094) was paid at close, consisting of $163,093 of cash (net of $16,094 of cash acquired) and 6,823 in shares of Vonage common stock valued at $31,591. The remaining $36,438 of the $231,122 purchase price is in the form of restricted cash, restricted stock and options held by Nexmo management and employees (the "Employee Payout Amount"), subject to vesting requirements over time and to be amortized to compensation expense quarterly until vested. We financed the transaction with $179,000 from our 2016 Credit Facility.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

~~The consideration was allocated to acquisition cost as follows:~~

Cash paid at closing (inclusive of cash acquired of $16,094) $ 179,186
Stock paid at closing 31,591
Contingent consideration (described below) 16,472
Employee Payout Amount (described below) 4,779
Acquisition Cost $ 232,028

In addition, Nexmo shareholders were eligible to earn a Variable Payout Amount of up to $20,000, subject to the achievement of certain performance targets during the 12 month period following the closing of the transaction. We estimated using probability weighting that the value of the contingent consideration was $17,840 at the acquisition date and included that amount in acquisition cost at the net present value amount of $16,472. As of December 31, 2016, Nexmo did not achieve the performance targets necessary to earn the Variable Payout Amount but the parties agreed to a $5,000 settlement that the parties were paid in the first quarter of 2017.

In addition, Nexmo management and employees were eligible to earn an Employee Payout Amount of $36,438 attributable to restricted cash, restricted stock and assumed options, of which $4,779 is included in acquisition cost as service had been provided pre-acquisition and $31,659 will be recorded as post-acquisition expense assuming all amounts vest, of which $31,087 is being recognized as compensation expense and $572 related to interest expense as continued employment is a condition of receiving consideration. Pursuant to the merger agreement, $20,372 of the cash consideration and $5,081 of the stock consideration were placed in escrow for unknown liabilities that may have existed as of the acquisition date.

For the nine months ended September 30, 2017, we incurred approximately $28 and for the three and nine months ended September 30, 2016, we incurred approximately $257 and $5,316, respectively, in acquisition related transaction costs, which were recorded in general and administrative expense in the accompanying condensed consolidated statements of income. For the full year 2016, we incurred approximately $5.5 million in acquisition related transaction costs.

The acquisition was accounted for using the acquisition method of accounting under which assets and liabilities of Nexmo were recorded at their respective fair values including an amount for goodwill representing the difference between the acquisition consideration and the fair value of the identifiable net assets. We do not expect any portion of this goodwill to be deductible for tax purposes. The goodwill attributable to the acquisition has been recorded as a non-current asset and is not amortized, but is subject to an annual review for impairment. The factors that contributed to goodwill include synergies that are specific to our consolidated business, the acquisition of a talented workforce that provides us with expertise in the small and medium business markets, as well as other intangible assets that do not qualify for separate recognition.

The acquisition price was allocated to the tangible and identified intangible assets acquired and liabilities assumed as of the closing date. The fair values assigned to identifiable intangible assets assumed were based on management’s current estimates and assumptions. The accounting for the Nexmo acquisition was completed during the three months ended June 30, 2017, at which point the fair values became final. The table below summarizes the provisional amounts recognized for assets acquired and liabilities assumed as of December 31, 2016 as well as adjustments made through the nine months ended September 30, 2017, when the allocation became final. Measurement period adjustments primarily reflect the tax impact of the acquisition date fair values.

~~VONAGE HOLDINGS CORP.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In thousands, except per share amounts)~~

~~(Unaudited)~~

~~The purchase price was allocated as follows:~~

Acquisition Date Fair Value as of December 31, 2016 Measurement period adjustments Revised Acquisition Date Fair Value
Assets
Current assets:
Cash and cash equivalents $ 16,094
$ —
$ 16,094
Accounts receivable 8,764
—
8,764
Prepaid expenses and other current assets 3,507
—
3,507
Total current assets 28,365
—
28,365
Property and equipment 757
—
757
Software, net 242
—
242
Intangible assets 101,770
—
101,770
Restricted cash 51
—
51
Total assets acquired 131,185
—
131,185

Liabilities
Current liabilities:
Accounts payable 1,841
—
1,841
Accrued expenses 9,299
—
9,299
Deferred revenue, current portion 1,735
—
1,735
Total current liabilities 12,875
—
12,875
Deferred tax liabilities, net, non-current 29,355
(5,482 ) 23,873
Total liabilities assumed 42,230
(5,482 ) 36,748

Net identifiable assets acquired 88,955
5,482
94,437
Goodwill 143,073
(5,482 ) 137,591
Total purchase price $ 232,028
$ —
$ 232,028

~~Identifiable intangible assets recognized in connection with the acquisition included:~~

Customer relationships $ 85,900
Developed technologies 13,768
Non-compete agreements 972
Trade names 1,130
$ 101,770

~~Goodwill~~

~~The following table provides a summary of the changes in the carrying amounts of goodwill which is attributable to our business segment:~~

Balance at December 31, 2016 $ 360,363
Decrease in goodwill related acquisition of Nexmo (5,482 )
Currency translation adjustments 16,654
Balance at September 30, 2017 $ 371,535

~~VONAGE HOLDINGS CORP.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In thousands, except per share amounts)~~

~~(Unaudited)~~

~~Pro forma financial information~~

The following unaudited supplemental pro forma information presents the combined historical results of operations of Vonage and Nexmo for the nine months ended September 30, 2016, as if the acquisition had been completed at the beginning of 2016.

Nine Months Ended
September 30,
2016
Revenues $ 743,083
Net income $ 12,718
Earnings per common share - basic $ 0.06
Earnings per common share - diluted $ 0.05

The pro forma financial information includes certain adjustments to reflect expenses in the appropriate pro forma periods as though the companies were combined as of the beginning of 2016 and includes the pro-forma impact of amortization of identifiable intangibles assets and interest expense on borrowings under our revolving line of credit utilized to, in part, finance the acquisition. The pro forma data was also adjusted to eliminate non-recurring transaction costs incurred by us as well as the related tax impact. The pro forma results are not necessarily indicative of the results that we would have achieved had the transaction actually occurred on January 1, 2016 and does not purport to be indicative of future financial operating results nor does it reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisition.

Note 9.10. Industry Segment and Geographic Information

ASC 280, ~~"Segment Reporting"~~Segment Reporting establishes reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. Under ASC 280, the method for determining what information to report is based upon the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. Our chief operating decision-maker reviews revenue and gross margin information for each of our reportable segments, but does not review operating expenses on a segment by segment basis. In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by the reportable segments. Beginning the three months ended September 30, 2020, the Company began to referring to the Vonage Communications Platform segment which had previously been referred to as the Business segment.

~~Business~~Vonage Communications Platform

~~For~~The Vonage Communications Platform is our ~~Business customers, we provide innovative, cloud-based~~single enterprise cloud communications platform, offering our wide range of enterprise communications services and solutions including Communications APIs, 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 (SIP) based Voice over Internet Protocol, or VoIP, network. Through Nexmo, the~~Contact Center Communications The Vonage ~~API Platform, we also offer~~ Communications Platform ~~as a Service, or CPaaS, solutions designed~~brings unique value to ~~enhance~~businesses by providing multiple communications channels - video, voice, messaging, email and verification - that integrate into applications, products and workflows. This delivers both the ~~way businesses communicate~~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 ~~embedding communications into apps, websites~~ and ~~business processes. Together we~~team members. We have a robust set of ~~product families tailored~~solutions and services that meet the needs of businesses of all sizes, from micro, to ~~serve the full range of the business value chain, from the small and medium business, or~~ SMB ~~market,~~ through mid-market and ~~enterprise markets.~~enterprise. We provide customers with multiple deployment options designed to provide the reliability and quality of service they demand. ~~We provide customers the ability to~~Vonage solutions also integrate ~~our cloud communications platform~~ with ~~many cloud-based~~today's leading business applications, CRM and productivity ~~and CRM solutions,~~tools,, including Google’s G Suite, Zendesk, Salesforce’s Sales ~~Cloud,~~and Service Clouds, Microsoft Dynamics, ServiceNow, Oracle, and Clio among others, to drive internal communications and ~~other CRM solutions. In combination, our products~~collaboration among team members and ~~services permit our business~~external engagement with 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.~~

Consumer

For our Consumer customers, we enable users to access and utilize our UCaaS services and features, via ~~their existing internet connections,~~a single “identity,” either a number or user name, regardless of how they are connected to the Internet, including over 3G/4G, LTE, Cable, or DSL broadband networks. This technology enables us to offer our Consumer customers attractively priced voice ~~communication~~and messaging services and other features around the world on a variety of devices.

~~VONAGE HOLDINGS CORP.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(In thousands, except per share amounts)~~

~~(Unaudited)~~

For our segments we categorize revenues as follows:

Services revenues. Services revenues consists primarily of revenue attributable to our communication services for Consumer and ~~Software Defined Wide Area Network, or SD-WAN, UCaaS~~Communications APIs, Unified Communications and ~~CPaaS services~~Contact Center Solutions for ~~Business,~~VCP.

~~Product~~Access and product revenues. Product revenues include equipment sold to customers, shipping and handling, professional services, and broadband ~~access.~~access, as well as revenues associated with providing access services to VCP customers.

USF revenues. USF revenues represent fees passed on to customers to offset required contributions to the ~~Federal Universal Service Fund (“USF”) and related fees.~~USF.

For our segments we categorize cost of revenues as follows:

Services cost of revenues. Services cost of revenues consists of costs associated with network operations and technical support personnel, communication origination, and termination services provided by third party carriers and excludes depreciation and amortization.

~~Product~~Access and product cost of revenues. Product cost of revenues includes equipment sold to customers, shipping and handling, professional services, cost of certain products including equipment or services that we give customers as promotions, and broadband ~~access.~~access, as well as costs associated with providing access services to VCP customers.

USF cost of revenues. USF cost of revenues represents contributions to the Federal ~~Universal Service Fund (“USF”)~~USF and related fees.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Information about our segment results for the three and nine months ended September 30, ~~2017~~2020 were as follows:


	Three Months Ended									Nine Months Ended										Three Months Ended									Nine Months Ended
	September 30, 2017									September 30, 2017										September 30, 2020									September 30, 2020
	Business			Consumer			Total			Business			Consumer			Total				VCP			Consumer			Total			VCP			Consumer			Total
Revenues																			Revenues
Service revenues	$	109,483		$	111,913		$	221,396		$	305,599		$	346,666		$	652,265		Service revenues	$	218,456		$	71,693		$	290,149		$	626,416		$	223,981		$	850,397
Product revenues⁽¹⁾	13,085			94			13,179			39,837			498			40,335
Service and product revenues	122,568			112,007			234,575			345,436			347,164			692,600
Access and product revenues (1)																			Access and product revenues (1)	8,757			85			8,842			27,987			200			28,187
Service, access and product revenues excluding USF																			Service, access and product revenues excluding USF	227,213			71,778			298,991			654,403			224,181			878,584
USF revenues	6,738			11,770			18,508			19,386			36,280			55,666			USF revenues	6,613			11,045			17,658			15,925			30,130			46,055
Total revenues	129,306			123,777			253,083			364,822			383,444			748,266			Total revenues	233,826			82,823			316,649			670,328			254,311			924,639

Cost of revenues																			Cost of revenues
Service cost of revenues⁽²⁾	50,777			19,434			70,211			139,218			62,969			202,187			Service cost of revenues (2)	105,593			8,287			113,880			298,588			25,470			324,058
Product cost of revenues⁽¹⁾	12,702			1,517			14,219			38,360			5,475			43,835
Service and product cost of revenues	63,479			20,951			84,430			177,578			68,444			246,022
Access and product cost of revenues (1)																			Access and product cost of revenues (1)	9,894			469			10,363			31,756			1,438			33,194
Service, access and product cost of revenues excluding USF																			Service, access and product cost of revenues excluding USF	115,487			8,756			124,243			330,344			26,908			357,252
USF cost of revenues	6,738			11,770			18,508			19,386			36,280			55,666			USF cost of revenues	6,613			11,045			17,658			15,925			30,130			46,055
Total cost of revenues	70,217			32,721			102,938			196,964			104,724			301,688			Total cost of revenues	122,100			19,801			141,901			346,269			57,038			403,307

Segment gross margin																			Segment gross margin
Service margin	58,706			92,479			151,185			166,381			283,697			450,078			Service margin	112,863			63,406			176,269			327,828			198,511			526,339
Product margin	383			(1,423		)	(1,040		)	1,477			(4,977		)	(3,500		)
Gross margin ex-USF (Service and product margin)	59,089			91,056			150,145			167,858			278,720			446,578
USF margin	—			—			—			—			—			—
Access and product margin																			Access and product margin	(1,137)			(384)			(1,521)			(3,769)			(1,238)			(5,007)
Gross margin excluding USF (Service, access and product margin)																			Gross margin excluding USF (Service, access and product margin)	111,726			63,022			174,748			324,059			197,273			521,332

Segment gross margin	$	59,089		$	91,056		$	150,145		$	167,858		$	278,720		$	446,578		Segment gross margin	$	111,726		$	63,022		$	174,748		$	324,059		$	197,273		$	521,332

Segment gross margin %																			Segment gross margin %
Service margin %	53.6		%	82.6		%	68.3		%	54.4		%	81.8		%	69.0		%	Service margin %	51.7		%	88.4		%	60.8		%	52.3		%	88.6		%	61.9		%
Gross margin ex-USF (Service and product margin %)	48.2		%	81.3		%	64.0		%	48.6		%	80.3		%	64.5		%
Gross margin excluding USF (Service, access and product margin %)																			Gross margin excluding USF (Service, access and product margin %)	49.2		%	87.8		%	58.4		%	49.5		%	88.0		%	59.3		%
Segment gross margin %	45.7		%	73.6		%	59.3		%	46.0		%	72.7		%	59.7		%	Segment gross margin %	47.8		%	76.1		%	55.2		%	48.3		%	77.6		%	56.4		%

(1) Includes customer premise equipment, access, ~~professional services,~~ and shipping and handling.

(2) Excludes depreciation and amortization of ~~$5,053~~$12,691 and ~~$1,799~~$958 for the three months ended September 30, ~~2017~~2020 and ~~$14,931~~$32,370 and ~~$5,566~~$3,583 for the nine months ended September 30, ~~2017,~~2020, respectively.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Information about our segment results for the three and nine months ended September 30, ~~2016~~2019 were as follows:

Product revenues ⁽¹⁾

Access and product revenues (1)

Service cost of revenues⁽²⁾

Service cost of revenues (2)

Product cost of revenues ⁽¹⁾

Access and product cost of revenues (1)

(1) Includes customer premise equipment, access, ~~professional services,~~ and shipping and handling.

(2) Excludes depreciation and amortization of ~~$5,015~~$8,492 and ~~$2,445~~$1,166 for the three months ended September 30, ~~2016~~2019 and ~~$13,807~~$24,684 and ~~$7,471~~$3,536 for the nine months ended September 30, ~~2016, respectively~~2019, respectively.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

A reconciliation of the total of the reportable segments' gross margin to consolidated income before ~~provision for~~ income taxes is as follows:

Information about our operations by geographic location is as follows:

Other Countries⁽¹⁾

~~(1) No individual other international country represented greater than 10% of total revenue during the periods presented.~~

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note ~~10. Income Taxes~~11. Cash Flow Information

~~Effective Tax Rate~~Detail of supplemental disclosures for cash flow and non-cash investing and financing information was as follows:

~~The income tax provision consisted of the following:~~


	Nine Months Ended
	September 30,
	2020		2019
Cash paid (received) during the periods for:
Interest	$	10,887	$	17,108
Income taxes	(4)		$	3,435
Non-cash investing activities:
Acquisition of long-term assets included in accounts payable and accrued expenses	$	2,791	$	657
Stock-based compensation expense capitalized in internally developed software costs	3,042		0
Debt issuance costs included in accounts payable and accrued liabilities	0		328
Issuance of shares for asset acquisition	0		3,000

We recognize income tax expense equal to pre-tax income multiplied by our effective income tax rate. In addition, adjustments are recorded for discrete period items and changes to our state effective tax rate which can cause the rate to fluctuate from quarter to quarter.

For the three and nine months ended September 30, 2017, our effective tax rate was different than the statutory rate due to discrete period tax benefits of $9,539 and $1,433 which were recognized related to excess tax benefits on equity compensation recognized primarily in the first quarter of 2017 as well as an adjustment to our deferred asset related to stock compensation.

For the three and nine months ended September 30, 2016, our effective tax rate was different than the statutory rate due to a discrete period tax expense of $1,220 recorded due to expired stock options recognized in the first quarter of 2016 which was partially offset by $389 which was recorded during the second quarter of 2016 and $661 which was recorded in the third quarter of 2016. The provision also includes the federal alternative minimum tax and state and local income taxes.

~~We do not have any uncertain tax positions as of September 30, 2017 and December 31, 2016.~~

~~Net Operating Loss Carry Forwards ("NOLs")~~

As of December 31, 2016, we had cumulative domestic Federal NOLs of $575,476 and cumulative state NOLs of $158,848, expiring at various times from years ending 2017 through 2036. In addition, we had NOLs for United Kingdom tax purposes of $43,006 with no expiration date. In connection with the completion of our accounting of the acquisition of Nexmo, we adjusted our cumulative domestic Federal NOLs to $585,622 as of September 30, 2017 and did not impact our cumulative state NOLs or the United Kingdom.

On June 8, 2017, at the Vonage 2017 annual meeting of stockholders, stockholders ratified the extension of the Tax Benefits Preservation Plan ("Preservation Plan") through June 30, 2019. Refer to Note 8, ~~Common Stock~~ ~~to our Annual Report on Form 10-K for the year ended December 31, 2016 for a complete description of the Preservation Plan.~~

You should read the following discussion together with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and our audited financial statements included in our Annual Report on Form 10-K. This discussion contains forward-looking statements. These forward-looking statements are based on information available at the time the statements are made and/or management’s belief as of that time with respect to future events and involve risks and uncertainties that could cause actual results and outcomes to be materially different. Important factors that could cause such differences include but are not limited to: realizing the benefits of optimization and cost-saving initiatives; the impact of the COVID-19 pandemic; the competition we face; the expansion of competition in the cloud communications market; risks related to the acquisition or integration of businesses we have acquired; our ability to adapt to rapid changes in the cloud communications market; the nascent state of the cloud communications for business market; our ability to retain customers and attract new ~~customers;~~customers cost-effectively; the risk associated with developing and maintaining effective internal sales teams and effective distribution channels; ~~risks related to the acquisition or integration of businesses we have acquired;~~ security breaches and other compromises of information security; risks associated with sales of our services to medium-sized and enterprise customers; our reliance on ~~third party~~third-party hardware and software; our dependence on ~~third party~~third-party facilities, equipment, systems and services; system disruptions or flaws in our technology and systems; our ability to comply with data privacy and related regulatory matters; our ability to scale our business and grow efficiently; our dependence on third party vendors; the impact of fluctuations in economic conditions, particularly on our small and medium business customers; our ability to ~~comply with data privacy and related regulatory matters; our ability to~~ obtain or maintain relevant intellectual property ~~licenses; failure~~licenses or to protect our trademarks and internally developed software; restrictions in our debt agreements that may limit our operating flexibility; our ability to obtain additional financing if required; our ability to raise funds necessary to settle conversion of the 2024 convertible senior notes; conditional conversion features of the convertible senior notes; the cash settlement of the convertible senior notes; the effects of the capped call transactions in connection with the convertible senior notes; fraudulent use of our name or services; intellectual property and other litigation that have been and may be brought against us; reliance on third parties for our 911 services; uncertainties relating to regulation of ~~VoIP~~business services; risks associated with legislative, regulatory or judicial actions regarding our ~~CPaaS~~business products; ~~the impact of governmental export controls or sanctions on our CPaaS products; our ability to establish and expand strategic alliances;~~ risks associated with operating abroad; risks associated with the taxation of our business; ~~risks associated with a material weakness in our internal controls; our dependence upon key personnel;~~ governmental regulation and taxes in our international operations; liability under anti-corruption ~~laws;~~laws or from governmental export controls or economic sanctions; our dependence on our customers' ~~existing~~unimpeded access to broadband connections; ~~differences between our services and traditional telephone service; restrictions in our debt agreements that may limit our operating flexibility;~~ foreign currency exchange risk; ~~the market for our stock; our ability to obtain additional financing if required; any reinstatement of holdbacks by our credit card processors;~~ our history of net losses and ability to achieve consistent profitability in the future; our ability to fully realize the benefits of our net operating loss carry-forwards if an ownership change occurs; certain provisions of our charter documents; and other factors that are set forth ~~in the~~under “Risk Factors” in Item 1A of our Annual Report on Form 10-K ~~in our Quarterly Reports on Form 10-Q and in our Current Reports on Form 8-K.~~for the fiscal year ended December 31, 2019. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, and therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to the date this Form 10-Q is filed with the Securities and Exchange Commission.

Financial Information Presentation

For the financial information discussed in this Quarterly Report on Form 10-Q, other than per share ~~per line~~ and per ~~seat~~line amounts, dollar amounts are presented in thousands, except where noted. All trademarks are the property of their owners.

Overview ~~and Strategy~~

At Vonage, we are observing a ~~leading provider of cloud communications services for businesses and consumers. Our business services transform~~secular shift in the way ~~people work~~businesses need to operate. We believe that this shift is driving a growing communications revolution across all industries and ~~businesses operate through a portfolio~~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 ~~that enable internal collaboration among employees, while also keeping companies closely connected with~~and API programming architectures as part of their customers, across any mode of communication, on any cloud-connected device. Vonage customers can choose among or combine two separate service delivery options to suit their specific cloud communication needs. They can buy Vonage Business as a subscription and they can buy our Vonage API Platform and consume our cloud communication as a service product as programmable modules, delivered via application program interfaces.digital transformation. We also provide a robust suite of feature-rich residential communication ~~solutions.~~solutions through our legacy Consumer business.

~~For~~Vonage Communications Platform

Our strategic business is the Vonage Communications Platform, which is our ~~Business customers, we provide innovative, cloud-based~~single, enterprise cloud communications platform, offering our wide range of enterprise communications services and solutions including APIs, Unified Communications, ~~as a Service, or UCaaS, solutions, comprised~~and Contact Center Applications. Our strategy is to leverage the Vonage Communications Platform to deliver powerful communications services and solutions.

The Vonage Communications Platoform 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 ~~integrated voice, text, video, data, collaboration,~~business continuity, remote work, and ~~mobile applications over our flexible, scalable Session Initiation Protocol (SIP) based Voice over Internet Protocol, or VoIP, network. Through our acquisition~~remote delivery of ~~Nexmo in 2016, we also offer CPaaS solutions designed~~services that are now essential for companies to ~~enhance the way businesses communicate with their~~work and serve customers ~~by embedding communications into apps, websites and business processes. In combination, our~~from anywhere. Our products and services ~~permit~~enable our business customers to ~~communicate~~fundamentally change how they engage 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~~team members. Vonage has a robust set of ~~product families tailored~~solutions and services that meet the needs of businesses of all sizes, from micro, to ~~serve the full range of the business value chain, from the small and medium business, or~~ SMB ~~market,~~ through mid-market and ~~enterprise markets.~~enterprise. We provide customers with multiple deployment options, designed to provide the reliability and quality of service they demand. ~~We provide customers the ability to~~Vonage solutions also integrate ~~our cloud communications platform~~ with ~~many cloud-based~~today's leading business applications, CRM and productivity ~~and CRM solutions,~~tools, including Google’s G Suite, Zendesk, Salesforce’s Sales ~~Cloud,~~and Service Clouds, Microsoft Dynamics, ServiceNow, Oracle, and ~~Clio.~~

~~Our Business strategy is~~Clio among others, to ~~support the full range of business customers, using two product families: Vonage Essentials, based on our proprietary call processing platform that is purpose-built for SMB~~drive internal communication and mid-market customers; and Vonage Premier, based on Broadsoft’s call processing platform in combination with other Vonage cloud based solutions, which serves larger customers, from mid-market businesses through large enterprises. We also organized our salesforce to address the full business market. We believe operating two platforms at scale enables us to deliver the right products and solutions to address the needs of diverse customers while maximizing our subscriber economics, regardless of segment served. Revenues are generated primarily through the sale of subscriptions for our UCaaS services. Our revenue generation efforts are focused on customer acquisition and retention as well as providing additional services to existing customers as they grow and scale.

Our diverse customer base spans a wide variety of industries, including manufacturing, automotive, legal, information technology, financial services, construction, real estate, engineering, healthcare, and non-profit.

~~Vonage Essentials~~. Vonage Essentials customers subscribe to our cloud-based communication services, delivered through our proprietary platform that is purpose-built for SMB and mid-market customers. Essentials provides a cost-effective, scalable, feature-rich solution, delivered over-the-top of a customer’s broadband, typically month-to-month without a commitment. Vonage Essentials is sold primarily through our direct telesales and online channels, and is increasingly sold through our channel partners and field sales teams. We believe the strength of the Vonage brand directly contributes to a lower-cost customer acquisition model and provides attractive subscriber economics.

~~Vonage Premier.~~ Our Vonage Premier offerings are tailor-made for the large mid-market and enterprise segments. Vonage Premier is a feature-rich/fully managed solution that utilizes Broadsoft Inc.’s ("Broadsoft") enterprise-grade call processing platform, in combination with other cloud services like advanced contact center, video conferencing and speak2dial, and can be provided with high-level quality of service ("QoS"), which is generally delivered over our national MPLS network, with 21 network Points of Presence (POPs) across the country. Vonage can also provide QoS-level quality over-the-top of the customer’s broadband through our Smart-WAN router solution. Customers value our proprietary provisioning and feature-management tool, named Zeus, which enables the rapid deployment of solutions directly by Vonage while giving full visibility to our channel partners and our customers. Further differentiating Vonage is our robust service delivery team comprised ofcollaboration among team members ~~specializing in project management, voice~~ and ~~data provisioning, and line number porting. This team is intensely focused on providing an outstanding customer experience, and is rapidly becoming a competitive differentiator.~~

Our Vonage Premier offering is sold primarily through our channel partners, and our field and enterprise sales teams, and generally requires a three-year contract. We are a preferred provider for many of the largest master agents in the country, harnessing a network of over 20,000 sub agents selling both Vonage Premier and Vonage Essentials. We believe we have one of the largest multi-channel distribution sales platforms in our industry to serve the full range of businessexternal engagement with customers. We plan to capitalize on the growing adoption of cloud-based communications and collaboration solutions by continuing to expand our salesforce, expand into new markets, and enhance our relationships with existing customers to provide additional functionality and overall business value that can be achieved with our UCaaS platform.

~~Nexmo, the Vonage API Platform~~. We are a global leader in the CPaaS segment of the cloud communications market, providing innovative communication APIs for text messaging and voice communications, allowing developers and enterprises to embed contextual communications into mobile apps, websites and business workflows via text, social media, chat apps and voice. With just few lines of code, developers can send and receive text messages and build programmable voice applications. Nexmo, the Vonage API Platform can scale from one API call to billions. The platform makes it easy for any of our over 200,000 developers to access communication services via software and APIs. Through Nexmo we have a global network of interconnected carriers delivering our API-based communications platform, enabling businesses to communicate with their customers reliably and with ease, no matter where in the world they are located. The addition of our Nexmo products to our Business offering allows our customers to address their full communications needs, from employee to employee communications through business to customer communications.

For our Consumer customers, we enable users to access and utilize our services and features, via their existing internet connections, including over 3G/4G, LTE, Cable, or DSL broadband networks. This technology enables us to offer our Consumer customers attractively priced voice ~~communication~~and messaging services and other features around the world on a variety of devices.

Consumer is a non-strategic business over the long-term horizon. Our Consumer strategy ~~is focused on the continued penetration of~~continues to focus our ~~core North American markets, where we will continue~~foundational pivot away from our heritage consumer telephony to ~~provide value in domestic and international long distance and target under-served segments.~~

We generate revenue through the acquisition and retention of Consumer customers. We are focused on optimizing the Consumer business for profitability to improve the strong cash flows of the business. During 2017, we continued our disciplined focus on marketing efficiency by shifting customer acquisition spend to our higher performing channels, improving the quality of customers we acquire and driving lower churn, all of which drive higher customer life-time value. This focus has led to a reallocation of marketing spend to our Business segment.

~~The result of these initiatives has been to create a strong cash flow business which provides financial stability, as well as cost synergies and structural advantages to our Business segment.~~an enterprise cloud communications platform company.

Services ~~outside~~Outside of the United ~~States.~~ States

We currently have UCaaS and consumer operations in the United States, United Kingdom, and Canada and believe that our low-cost Internet based communications platform enables us to cost effectively deliver voice and messaging services to other locations throughout the world. Through Nexmo, we have operations in the United States, United Kingdom, Canada, Israel, Hong Kong, and Singapore, and provide ~~CPaaS~~a wide range of communications solutions to our customers located in many countries around the world.

~~We had approximately 2.3 million combined consumer subscriber lines~~Impact of COVID-19

A novel strain of coronavirus, or COVID-19, was first identified in China in December 2019 and subsequently declared a pandemic in March 11, 2020, by the World Health Organization. To date, COVID-19 has impacted nearly all regions around the world and resulted in travel restrictions and business ~~seats as~~slowdowns worldwide. The full impact of ~~September 30, 2017. Customers~~the pandemic on our business, operations and financial results has and will depend on various factors that continue to evolve, which we may not accurately predict. In response to the COVID-19 pandemic, governments across the world have enacted measures aimed at containing the spread of the virus, including ordering the closure of all businesses not deemed "essential," restricting residents to their homes, and the practice of social distancing when engaging in authorized activities. While some of these restrictions have been lifted on a global scale, many regions, including the United States ~~represented 84%~~where Vonage is headquartered, are experiencing a resurgence of COVID-19. As a result of the COVID-19 pandemic, all travel has been severely curtailed to protect the health of our ~~consolidated revenues at~~employees and to comply with local guidelines, and we have temporarily closed the majority of Vonage offices worldwide (including our corporate headquarters), both of which disrupt how we typically operate our business.

COVID-19 has impacted some of our customers more than others, including customers in the travel, hospitality, retail, and other industries where physical interaction is critical. We have experienced and expect that we will continue to experience slowdowns in bookings and customer payments, customer churn and reduced usage, and issuance of customer credits to distressed customers served by certain product lines in the Vonage Communications Platform. In addition, COVID-19 may have impacts on many additional aspects of our operations, directly and indirectly, including with respect to its impacts on customer behaviors, our business and our employees, and the market generally, and the scope and nature of these impacts continue to evolve each day.

Recent Significant Events

Coincident with the July 1st appointment of Mr. Read as President and Chief Executive Officer, the Company initiated a business-wide optimization and alignment project to focus the Company's resources and drive stronger operational execution, which also includes the previously announced Consumer evaluation. In connection with this project, the Company initiated a reduction in workforce which resulted in a restructuring charge during the three months ended September 30, ~~2017, with~~2020. In addition, the ~~balance~~Company abandoned a portion of one of its leased facilities. These actions are expected to result in ~~Canada,~~a reduction in operating expenses of approximately $50 million annually. The Company expects to reinvest a portion of the ~~United Kingdom,~~cost savings into key areas of the business. Additionally, the Company may have opportunities for further cost saving initiatives as the Company continues to streamline and ~~other countries. Nexmo has operations~~optimize its business processes which may result in ~~the United States, United Kingdom, Hong Kong, and Singapore, and provides CPaaS solutions to our customers located in many countries around the world.~~further restructuring charges.

Trends in Our Industry

A ~~number~~variety of trends in our industry have a significant effect on our results of operations and are important to an understanding of our financial statements.

Competitive landscape. The business cloud communications markets and consumer services market in which we participate are highly competitive. We face ~~intense~~ competition from a broad set of companies, including (i) SaaS companies, CCaaS companies, other alternative communication providers, other providers of cloud communication services and (ii) traditional telephone, ~~companies,~~ wireless ~~companies,~~service providers, cable companies, and alternative ~~communication providers. Most traditional wireline~~communications providers with consumer offerings. As the cloud communications market evolves, and ~~wireless telephone service providers~~the convergence of voice, video, messaging, mobility and ~~cable companies are substantially larger and better capitalized than~~data networking technologies accelerates, we are and have the advantage of a large existing customer base. In addition, because our competitors provide other services, they often choose to offer VoIP services or other voice services as part of a bundle that includes other products, such as video, high speed Internet access, and wireless telephone service, which we do not offer. In addition, such competitors may face competition in the future ~~require new~~from companies that do not currently compete in the market, including companies that currently compete in other sectors, companies that serve consumers rather than business customers, or ~~existing customers making changes~~companies which expand their market presence to ~~their service~~include cloud communications. Moreover, as businesses and educational institutions are quickly pivoting to ~~purchase voice services when purchasing high speed Internet access. Further, as wireless providers offer more minutes at lower prices, better coverage,~~cloud-based communications in light the increased need for remote work and ~~companion landline alternative services, their services have become more attractive~~remote learning due to households as a replacement for wireline service. We also compete against alternative communication providers, such as Twilio, Ooma, magicJack, Skype, WhatsApp, and Google Voice. Some of these service providers have chosen to sacrifice telephony revenue in order to gain market share and have offered their services at low prices or for free. As we continue to introduce applications that integrate different forms of voice and messaging services over multiple devices,the COVID-19 pandemic, we are ~~facing~~experiencing intense competition from our existing competitors, and also emerging competitors, ~~focused on similar integration, as well as from alternative voice communication providers. In addition, our competitors have partnered and may in the future partner with other competitors~~seeking to ~~offer products and services, leveraging their collective competitive positions. We also are subject to the risk of future disruptive technologies. In connection with our emphasis~~capitalize on the ~~international long distance market in the United States, we face competition from low-cost international calling cards~~growing needs for businesses and ~~VoIP providers in addition~~educators to ~~traditional telephone companies, cable companies, and wireless companies, each of which may implement promotional pricing targeting international long distance callers.~~transform their operations.

Regulation. Our business has developed in a relatively lightly regulated environment. The United States and other countries, however, are examining how VoIP services should be regulated. In particular, state telecommunications regulators continue to try to regulate VoIP service despite the FCC’s 2004 Vonage Preemption Order that preempted state regulation. For example, on July 28, 2015, the Minnesota Public Utility Commission found that it has authority to regulate Charter’s ‘fixed' interconnected VoIP service. In addition to regulatory matters that directly address VoIP, a number of other regulatory initiatives could impact our business. One such regulatory initiative is net neutrality. On February 26, 2015, the FCC adopted strong net neutrality rules. Several parties filed appeals which are pending at the D.C. Circuit Court of Appeals. Oral arguments at the D.C. Circuit Court of Appeals were held on December 4, 2015. On June 14, 2016, the D.C. Circuit of Appeals denied the appeals. Several parties filed a petition for rehearing en banc on July 29, 2016, which was denied on May 1, 2017. See ~~also~~ the discussion under "Regulation" in Note 79 to our condensed consolidated financial statements for a discussion of regulatory issues that impact us. On July 2, 2017, Chief Justice John Roberts extended the time within which interested parties could file a petition for a writ of certiorari until September 28, 2017. Multiple interest parties and intervenors filed petitions. The Supreme Court has not yet ruled on the petitions.

The table below includes key operating data that our management uses to measure the growth and operating performance of the ~~Business~~Vonage Communications Platform segment:


Vonage Communications Platform	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
Service revenue per customer	$	527		$	451		$	504		$	435
Vonage Communications Platform revenue churn	1.2		%	1.0		%	1.0		%	1.1		%

Business
Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Revenues ⁽¹⁾
$ 129,306
$ 106,309
$ 364,822
$ 265,841
Average monthly revenues per seat ⁽²⁾
$ 43.53
$ 45.50
$ 43.70
$ 44.96
Seats (at period end) ⁽²⁾
709,736
615,728
709,736
615,728
Revenue churn ⁽²⁾
1.2 % 1.4 % 1.3 % 1.4 %

(1) Includes revenue from CPaaS of $38,364 and $99,780 for the three and nine months ended September 30, 2017, respectively, and $23,909 and$31,607 for the three and nine months ended September 30, 2016, respectively.

~~Revenues.~~ ~~Includes revenues from our business customers from acquired entities and excludes revenues from our legacy business customers.~~

~~Average monthly~~Service Revenue per Customer. Service revenues per ~~seat.~~ ~~Average monthly revenues per seat~~customer for a particular period is calculated by dividing the average monthly service revenues for ~~that~~the period by the ~~simple~~ average number of ~~seats for the period, and dividing the result by~~customers over the number of months in the period. The ~~simple~~ average number of ~~seats for the period~~customers is the number of ~~seats~~customers on the first day of the period, plus the number of ~~seats~~customers on the last day of the period, divided by two. ~~Our average monthly~~Service revenues excludes revenues from trading and auction customers. Service revenue per ~~seat decreased~~customer increased from ~~$45.50 and $44.96~~$451 for the three months ended September 30, 2019 to $527 for the three months ended September 30, 2020 primarily driven by the Company's successful efforts to attract larger business customers and to expand services provided to our existing business customers. Service revenue per customer increased from $435 for the nine months ended September 30, ~~2016, respectively,~~2019 to ~~$43.53 and $43.70~~$504 for the ~~three and~~ nine months ended September 30, ~~2017 due~~2020 primarily driven by the Company's successful efforts to attract larger VCP customers and to expand services provided to our ~~plan to sell access more selectively and the removal of revenues associated with our Hosted Infrastructure product line which was sold at the end of May 2017.~~existing VCP customers.

~~Seats. S~~eats include, as of a particular date, all paid seats from which a customer can make an outbound telephone call on that date and virtual seats. Seats exclude electronic fax lines and toll free numbers, which do not allow outbound telephone calls by customers. Seats increased from 615,728 as of September 30, 2016 to 709,736 as of September 30, 2017. This increase is due to continued growth in our business customers as we have increased marketing investment to attract these more profitable customers.

Vonage Communications Platform Revenue ~~Churn.~~ ~~Revenue~~Churn. Vonage Communications Platform revenue churn is calculated by dividing the ~~monthly recurring~~ revenue from customers or customer locations that have ~~terminated~~been confirmed to be foregone during a period by the simple average of the total ~~monthly recurring~~ revenue from all customers in that period. Revenue for purposes of determining VCP revenue churn is service revenue excluding revenue from our trading and auction customers, and usage in excess of a ~~given period.~~customer’s contracted service plan, regulatory fees charged to customers, and credits. The simple average of total ~~monthly recurring~~ revenue from all customers during the period is the total ~~monthly recurring~~ revenue as defined herein on the first day of the period, plus the total ~~monthly recurring~~ revenue as defined herein on the last day of the period, divided by two. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period if termination occurred within the first month after activation. Other companies may calculate business revenue churn differently, and their business revenue churn data may not be directly comparable to ours. ~~Revenue~~Vonage Communications Platform revenue churn ~~was 1.4%~~increased from 1.0% for the three ~~and~~months ended September 30, 2019 to 1.2% for the three months ended September 30, 2020. Vonage Communications Platform revenue churn decreased from 1.1% for the nine months ended September 30, ~~2016, respectively, and 1.2% and 1.3%~~2019 to 1.0% for the ~~three and~~ nine ~~months ended~~ months ended September 30, ~~2017,~~2020, respectively. Our revenue churn ~~will~~may fluctuate over time due to economic conditions, seasonality in certain customer's operations, loss of customers who are acquired, and competitive pressures including promotional pricing. We are continuing to invest in our overall quality of service which includes customer care headcount and systems, billing systems, on-boarding processes and self-service options to ensure we scale our processes to our growth and continue to improve the overall customer experience.

The table below includes key operating data that our management uses to measure the growth and operating performance of the Consumer segment:


Consumer	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
Average monthly revenues per subscriber line	$	28.31		$	27.56		$	27.71		$	26.91
Subscriber lines (at period end)	951,729			1,136,112			951,729			1,136,112
Customer churn	1.8		%	1.8		%	1.7		%	1.8		%

Consumer Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Revenues $ 123,777
$ 142,050
$ 383,444
$ 443,017
Average monthly revenues per subscriber line $ 26.29
$ 26.36
$ 26.18
$ 26.55
Subscriber lines (at period end) 1,543,760
1,767,212
1,543,760
1,767,212
Customer churn 1.9 % 2.2 % 2.0 % 2.2 %

~~Revenues.~~ ~~Represents revenue from our Consumer customers including revenues from our legacy business customers using Vonage VoIP products.~~

Average ~~monthly revenues~~Monthly Revenues per ~~subscriber line.~~ Subscriber Line. Average monthly revenues per subscriber line for a particular period is calculated by dividing our revenues for that period by the simple average number of subscriber lines for the period, and dividing the result by the number of months in the period. The simple average number of subscriber lines for the period is the number of subscriber lines on the first day of the period, plus the number of subscriber lines on the last day of the period, divided by two. Our average monthly revenues per subscriber line ~~decreased~~increased from ~~$26.36 and $26.55~~$27.56 for the three ~~and~~months ended September 30, 2019 to $28.31 for the three months ended September 30, 2020 due primarily to the Company's ability to retain its more tenured customers. Our average monthly revenues per subscriber line increased from $26.91 for the nine months ended September 30, ~~2016, respectively~~2019 to ~~$26.29 and $26.18~~$27.71 for the ~~three and~~ nine months ended September 30, ~~2017, respectively,~~2020 due primarily to ~~lower international long distance pay-per-use revenue.~~the Company's ability to retain its more tenured customers.

Subscriber ~~lines.~~ Lines. Our subscriber lines include, as of a particular date, all paid subscriber lines from which a customer can make an outbound telephone call on that date. Our subscriber lines include fax lines, including fax lines bundled with subscriber lines in our small office home office calling plans and soft phones, but do not include our virtual phone numbers and toll free numbers, which only allow inbound telephone calls to customers. Subscriber lines decreased from ~~1,767,212~~1,136,112 as of September 30, ~~2016~~2019 to ~~1,543,760~~951,729 as of September 30, ~~2017,~~2020, reflecting planned actions to enhance the profitability of the assisted sales channel by eliminating lower performing locations and restructuring the pricing offers, and to shift investment to our business market.

Customer ~~churn.~~ Churn. Customer churn is calculated by dividing the number of customers that have terminated during a period by the simple average of number of customers in a given period. The simple average number of customers during the period is the number of customers on the first day of the period, plus the number of customers on the last day of the period, divided by two. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period if termination occurred within the first month after activation. Other companies may calculate customer churn differently, and their customer churn data may not be directly comparable to ours. Customer churn was flat at 1.8% for the three months ended September 30, 2019 and 2020, respectively. Customer churn decreased from ~~2.2%~~1.8% for ~~both~~ the ~~three and~~ nine months ended September 30, ~~2016,~~2019 to ~~1.9% and 2.0%~~1.7% for the ~~three and~~ nine months ended September 30, ~~2017,~~2020, respectively. We maximize customer value by focusing marketing spend on higher return channels and away from assisted selling channels which had higher early life churn. We monitor customer churn on a daily basis and use it as an indicator of the level of customer satisfaction. Customers who have been with us for a year or more tend to have a lower churn rate than customers who have not. In addition, our customers who are international callers generally churn at a lower rate than customers who are domestic callers. Our customer churn will fluctuate over time due to economic conditions, competitive pressures including promotional pricing targeting international long distance callers, marketplace perception of our services, and our ability to provide high quality customer care and network quality and add future innovative products and services. See the discussion above for detail regarding churn impacting our business customers.

Revenues consist of services revenue and customer equipment and shipping fee revenue. Substantially all of our revenues are services revenue. For Consumer customers in the United States, we offer domestic and international rate plans, including a variety of residential plans and mobile plans. For our VCP customers, we offer micro, SMB, mid-market, and enterprise customers several service plans with different pricing structures and contractual requirements ranging in duration from month-to-month to three years. In addition, we provide managed equipment to VCP customers for which the customers pay a monthly fee. Customers also have the opportunity to purchase premium features for additional fees. In addition, we derive revenue from usage-based fees earned from customers using our cloud-based software products. These usage-based software products include our messaging, voice, Verify and chat APIs. Usage-based fees include number of text messages sent or received using our messaging APIs, minutes of call duration activity for our voice APIs, and number of converted authentications for our Verify API. Services revenue is offset by the cost of certain customer acquisition activities, such as rebates and promotions. In addition, in certain instances, we charge disconnect fees which are recognized as revenue at the time the disconnect fees are collected from our customer.

In the United States, we charge regulatory, compliance and intellectual property, and E-911 recovery fees on a monthly basis to defray costs, and to cover taxes that we are charged by the suppliers of telecommunications services. In addition, we recognize revenue on a gross basis for contributions to the USF and related fees. All other taxes are recorded on a net basis.

Revenues are generated from sales of customer equipment directly to customers for replacement devices, or for upgrading their device at the time of customer sign-up for which we charge an additional fee. In addition, customer equipment and shipping revenues include revenues from the sale of VoIP telephones in order to access our small and medium business services. Customer equipment and shipping revenues also include the fees that customers are charged for shipping their customer equipment to them.

Operating expenses consist of cost of revenues, sales and marketing expense, engineering and development expense, general and administrative expense, and depreciation and amortization.

Results of Operations

The following table sets forth, as a percentage of total revenues, our condensed consolidated ~~statement~~statements of operations for the periods indicated:


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

Total revenues	100	%	100	%	100	%	100	%

Operating Expenses:
Cost of revenues (exclusive of depreciation and amortization)	45		44		44		43
Sales and marketing	27		28		28		31
Engineering and development	6		5		6		6
General and administrative	18		14		15		13
Depreciation and amortization	7		7		7		7
Total operating expenses	103		98		100		100
(Loss) Income from operations	(3)		2		—		—
Other Income (Expense):
Interest expense	(2)		(3)		(3)		(3)
Other income (expense), net	—		—		—		—
Total other income (expense), net	(2)		(3)		(3)		(3)
Loss before income tax benefit	(5)		(1)		(3)		(3)
Income tax benefit (expense)	2		(6)		1		1
Net loss	(3)	%	(7)	%	(2)	%	(2)	%

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016

Total revenues 100 % 100 % 100 % 100 %

Operating Expenses:
Cost of service (exclusive of depreciation and amortization) 38
35
38
33
Cost of goods sold 3
4
3
4
Sales and marketing 29
34
31
35
Engineering and development 3
3
3
3
General and administrative 11
11
13
13
Depreciation and amortization 7
7
7
7
Total operating expenses 91
94
95
95
Income from operations 9
6
5
5
Other Income (Expense):
Interest income —
—
—
—
Interest expense (1 ) (2 ) (1 ) (1 )
Other income (expense), net —
—
—
—
Total other income (expense), net (1 ) (2 ) (1 ) (1 )
Income before income taxes 8
4
4
4
Income tax benefit (expense) (4 ) (1 ) (1 ) (2 )
Net income 4 % 3 % 3 % 2 %

Management's ~~discussion~~Discussion of the ~~results~~Results of ~~operations~~Operations for the Three and Nine Months Ended September 30, ~~2017~~2020 and ~~2016~~2019

The Company reported loss before income taxes of $17,999 and $2,849 for the three months ended September 30, 2020 and 2019, respectively. The higher loss before income taxes for the three months ended September 30, 2020 was primarily due to higher operating expenses of $22,183. The increase in operating expenses was mainly driven by an increase in general and administrative expense resulting from costs associated with the employee exit costs as a result of restructuring activities, the abandonment of a portion of one of the Company's office locations and increased reserves associated with indirect taxes. Also attributing was an increase in engineering and development expenses in connection with the Company's continued focus on innovation, and an increase in sales and marketing expenses as the Company began increasing media marketing spending which had been delayed as a result of the COVID-19 pandemic. The increase in operating expenses was slightly offset by higher gross margin of $6,047 primarily as a result of higher usage of APIs within the VCP segment as well as lower operating expenses due to adjustments to compensation related reserves.

The Company reported loss before income taxes of $28,941 and $22,234 for the nine months ended September 30, 2020 and 2019, respectively. The higher loss before income taxes for the nine months ended September 30, 2020 was primarily due to higher operating expenses of $24,245. The increase in operating expenses was mainly driven by an increase in general and administrative expense resulting from costs associated with the employee exit costs as a result of restructuring activities, the abandonment of a portion of the Company's office locations and increased reserves associated with indirect taxes. Also attributing was an increase in engineering and development expenses in connection with the Company's continued focus on innovation. The increase in operating expenses was slightly offset by decrease in sales and marketing expenses due to lower media marketing costs along with certain marketing events being cancelled as a result of the COVID-19 pandemic. The increase in operating expenses was offset by higher gross margin of $17,138 primarily as a result of higher usage of APIs within the VCP segment.

The Company reported net loss of $10,062 and $22,247 for the three and nine months ended September 30, 2020, and $21,097 and $17,107 for the three and nine months ended September 30, 2019, respectively. The decrease in net loss for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was due to the increase in loss before income taxes as discussed above. While the Company reported a larger loss before tax for the three months ended September 30, 2020, the Company recognized a tax benefit of $7,937 as compared to tax expense of $18,248 during the prior year quarter. The prior year income tax expense of $18,248 was driven by a reduction of the prior year's expected tax benefit resulting from permanent adjustments on such items as executive compensation.

The increase in net loss for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due to the decrease in loss before income taxes discussed above and the decrease in income tax of $1,567 due to a tax benefit related to stock compensation.

We calculate gross margin ~~in order to evaluate operating revenues~~ as total revenues less cost of ~~service,~~revenues, which primarily consists of fees that we pay to third parties on an ongoing basis in order to provide our services and ~~cost of goods sold which primarily includes~~ costs incurred when a customer first subscribes to our service. The following table presents consolidated revenues, cost of revenues and the composition of gross margin for the three and nine ~~month periods ending~~months ended September 30, ~~2017~~2020 and ~~2016:~~2019:


(in thousands, except percentages)	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2020		2019		Dollar Change		Percent Change		2020		2019		Dollar Change		Percent Change
Service, access and product revenues	$	298,991	$	279,871	$	19,120	7	%	$	878,584	$	819,006	$	59,578	7	%
USF revenues	$	17,658	$	22,663	$	(5,005)	(22)	%	$	46,055	$	60,653	$	(14,598)	(24)	%
Total revenues	$	316,649	$	302,534	$	14,115	5	%	$	924,639	$	879,659	$	44,980	5	%

Service, access and product cost of revenues	124,243		111,170		13,073		12	%	357,252		314,812		42,440		13	%
USF cost of revenues	17,658		22,663		(5,005)		(22)	%	46,055		60,653		(14,598)		(24)	%
Total cost of revenues (1)	141,901		133,833		8,068		6	%	403,307		375,465		27,842		7	%
Gross margin	$	174,748	$	168,701	$	6,047	4	%	$	521,332	$	504,194	$	17,138	3	%

(in thousands, except percentages) Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 Dollar
Change Percent
Change 2017 2016
Dollar
Change

Percent
Change
Total revenues $ 253,083
$ 248,359
$ 4,724
2 % $ 748,266
$ 708,858
$ 39,408
6 %
Cost of service 96,632
87,377
9,255
11 % 281,902
232,605
49,297
21 %
Cost of goods sold 6,306
8,591
(2,285 ) (27 )% 19,786
26,009
(6,223 ) (24 )%
Gross margin $ 150,145
$ 152,391
$ (2,246 ) (1 )% $ 446,578
$ 450,244
$ (3,666 ) (1 )%

(1) Excludes depreciation and amortization of ~~$6,852~~$13,649 and ~~$7,460~~$9,658 for the three months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively and ~~$20,497~~$35,953 and ~~$21,278~~$28,220 for the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively.

Total revenues and cost of revenues were impacted by the following trends and uncertainties:

~~Business Gross Margin~~

Product revenues⁽¹⁾

Service cost of revenues⁽²⁾

Product cost of revenues⁽¹⁾

~~Excludes depreciation and amortization for the three and~~ ~~nine months ended~~ ~~September 30, 2017 of $5,053 and $14,931, respectively and for the three and~~ ~~nine months ended~~ ~~September 30, 2016 of $5,015, and $13,807, respectively.~~

Three Months Ended September 30, ~~2017~~2020 compared to Three Months Ended September 30, ~~2016~~2019

~~Service revenues.~~ ~~Service~~Total revenues increased ~~by $22,821, or 26%, due primarily to Nexmo which represents 17% of~~5% for the ~~total increase~~three months ended September 30, 2020 as compared to the prior year ~~quarter~~period. The increase was primarily due to the VCP customer growth driving an increase in revenues of $27,296 as a result of increased usage on the Company's API Platform in the current year. Despite a decline in USF revenues, the Company has continue to grow overall VCP revenues. USF revenues have declined as more of the Company's VCP services are based upon software service rather than telecommunication services. The increase in total revenues was partially offset by declining Consumer revenues of $13,181 in connection with the continued decline of Consumer subscriber lines. The Company continues to ~~focus on growth in CPaaS since~~expect that the ~~acquisition of Nexmo in June 2016. In addition, the prior year results excludes a current year correction in reporting a~~Consumer portion of ~~revenues on a gross basis rather than net which also has resulted~~the Company's overall business will become less significant. The Company will focus its resources in an effort to increase market share in revenue. This correction did not have a material impact. Service revenues were also favorably impacted by an increase in the number of UCaaS seats as we have shifted marketing investments from Consumer to attract more profitable Business customers. During 2017, our CPaaS revenue growth has predominately come from lower margin business for which our strategy of increasing higher margin CPaaS integrated voice business is currently underway. This increase is slightly offset by decrease in service revenues attributed to the sale of our Hosted Infrastructure product line completed on May 31, 2017.its VCP communications platforms.

~~Service cost of revenues.~~ ~~Service~~Total cost of revenues increased ~~by $15,919, or 46%, primarily driven by an increase in costs associated with Nexmo due to higher usage volumes~~6% for the three months ended September 30, 2020 as compared to the prior ~~year.~~year period driven by increased costs incurred in servicing our VCP customers of $10,181 due to the increase in customers and higher volume of API usage. This was partially offset by a decrease in costs in Consumer of $2,113 as subscriber lines continue to decline resulting in lower international and long-distance termination costs.

Nine Months Ended September 30, 2020 compared to Nine Months Ended September 30, 2019

~~USF revenues and USF cost of revenues.~~ ~~USF~~Total revenues increased ~~by $709, or 12% and USF cost of revenues increased by $709, or 12%, due to synchronization of methodologies across Business segment and increase in the number of UCaaS seats.~~

~~Nine Months EndedSeptember 30, 2017 compared toNine Months EndedSeptember 30, 2016~~

~~Service revenues.~~ ~~Service revenues increased by $95,385, or 45%, due primarily to the acquisition of Nexmo on June 3, 2016 which attributed to approximately 32% of the increase as compared to~~5% for the nine months ended September 30, ~~2016. Also attributing~~2020 as compared to the prior year period. The increase was primarily due to the VCP customer growth driving an increase in revenues of $84,181 despite a decline in USF revenues as more of the Company's VCP services are based upon software service rather than telecommunication services. This was partially offset by declining Consumer revenues of $39,201 in connection with the continued decline of Consumer subscriber lines. The Company continues to expect that the Consumer portion of the Company's overall business will become less significant. The Company reallocates resources to increase market share in its VCP communications platforms.

Total cost of revenues increased 7% for the nine months ended September 30, 2020 as compared to the prior year period driven by increased costs incurred in servicing our VCP customers of $33,887 due to the increase in ~~the current year~~customers and overall usage. This was ~~an increase~~partially offset by a decrease in ~~the number~~costs in Consumer of ~~UCaaS seats~~$6,045 as ~~we have shifted marketing investments from Consumer~~subscriber lines continue to ~~attract more profitable Business customers.~~

~~Service cost of revenues.~~ Service cost of revenues increased by $66,430, or 91%, due primarily to the acquisition of Nexmo along with the prospective presentation beginning the quarter ended June 30, 2017 of costs associated with Nexmo's trading activities on a gross basis as discussed above. Costs during the current year period are also slightly higher due to increased technical care costsdecline resulting in lower international and ~~network operations cost in support of growth in the segment.~~

~~USF revenues and USF cost of revenues.~~ USF revenues increased by $3,554, or 22% and USF cost of revenues increased by $3,543, or 22%, due to synchronization of methodologies across Business segment and increase in the number of UCaaS seats.long-distance termination costs.

~~Consumer Gross Margin~~

Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except percentages) 2017 2016 Dollar
Change Percent
Change 2017 2016 Dollar
Change Percent
Change
Revenues
Service revenues $ 111,913
$ 128,167
$ (16,254 ) (13 )% $ 346,666
$ 399,401
$ (52,735 ) (13 )%
Product revenues⁽¹⁾
94
207
(113 ) (55 )% 498
514
(16 ) (3 )%
Service and product revenues 112,007
128,374
(16,367 ) (13 )% 347,164
399,915
(52,751 ) (13 )%
USF revenues 11,770
13,676
(1,906 ) (14 )% 36,280
43,102
(6,822 ) (16 )%
Total revenues 123,777
142,050
(18,273 ) (13 )% 383,444
443,017
(59,573 ) (13 )%

Cost of revenues
Service cost of revenues⁽²⁾
19,434
24,973
(5,539 ) (22 )% 62,969
77,220
(14,251 ) (18 )%
Product cost of revenues⁽¹⁾
1,517
3,331
(1,814 ) (54 )% 5,475
11,196
(5,721 ) (51 )%
Service and product cost of revenues 20,951
28,304
(7,353 ) (26 )% 68,444
88,416
(19,972 ) (23 )%
USF cost of revenues 11,770
13,676
(1,906 ) (14 )% 36,280
43,102
(6,822 ) (16 )%
Total cost of revenues 32,721
41,980
(9,259 ) (22 )% 104,724
131,518
(26,794 ) (20 )%

Segment gross margin
Service margin 92,479
103,194
(10,715 ) (10 )% 283,697
322,181
(38,484 ) (12 )%
Gross margin ex-USF (Service and product margin) 91,056
100,070
(9,014 ) (9 )% 278,720
311,499
(32,779 ) (11 )%
Segment gross margin $ 91,056
$ 100,070
$ (9,014 ) (9 )% $ 278,720
$ 311,499
$ (32,779 ) (11 )%
Vonage Communications Platform Gross Margin for the Three and Nine Months Ended September 30, 2020 and 2019


	Three Months Ended								Nine Months Ended
	September 30,								September 30,
(in thousands, except percentages)	2020		2019		Dollar Change		Percent Change		2020		2019		Dollar Change		Percent Change
Revenues
Service revenues	$	218,456	$	183,701	$	34,755	19	%	$	626,416	$	523,060	$	103,356	20	%
Access and product revenues(1)	8,757		12,120		(3,363)		(28)	%	27,987		35,524		(7,537)		(21)	%
Service, access and product revenues excluding USF	227,213		195,821		31,392		16	%	654,403		558,584		95,819		17	%
USF revenues	6,613		10,709		(4,096)		(38)	%	15,925		27,563		(11,638)		(42)	%
Total revenues	233,826		206,530		27,296		13	%	670,328		586,147		84,181		14	%

Cost of revenues
Service cost of revenues (2)	105,593		87,352		18,241		21	%	298,588		243,496		55,092		23	%
Access and product cost of revenues (1)	9,894		13,858		(3,964)		(29)	%	31,756		41,323		(9,567)		(23)	%
Service, access and product cost of revenues excluding USF	115,487		101,210		14,277		14	%	330,344		284,819		45,525		16	%
USF cost of revenues	6,613		10,709		(4,096)		(38)	%	15,925		27,563		(11,638)		(42)	%
Total cost of revenues	122,100		111,919		10,181		9	%	346,269		312,382		33,887		11	%

Segment gross margin
Service margin	112,863		96,349		16,514		17	%	327,828		279,564		48,264		17	%
Gross margin excluding USF (Service, access and product margin)	111,726		94,611		17,115		18	%	324,059		273,765		50,294		18	%
Segment gross margin	$	111,726	$	94,611	$	17,115	18	%	$	324,059	$	273,765	$	50,294	18	%


Segment gross Margin %
Service margin %	51.7	%	52.4	%	52.3	%	53.4%
Gross margin excluding USF (Service, access and product margin) %	49.2	%	48.3	%	49.5	%	49.0%
Segment gross margin %	47.8	%	45.8	%	48.3	%	46.7%

a.Includes customer premise equipment, access, and shipping and handling.

b.Excludes depreciation and amortization of $12,691 and $8,492 for the three months ended September 30, 2020 and 2019, respectively and $32,370 and $24,684 for the nine months ended September 30, 2020 and 2019, respectively.

Segment gross Margin %
Service margin % 82.6 % 80.5 % 81.8 % 80.7 %
Gross margin ex-USF (Service and product margin) % 81.3 % 78.0 % 80.3 % 77.9 %
Segment gross margin % 73.6 % 70.4 % 72.7 % 70.3 %


~~(1)~~	~~Includes customer premise equipment, professional services, and shipping and handling.~~


~~(2)~~	~~Excludes depreciation and amortization for the three and~~ ~~nine months ended~~ ~~September 30, 2017 of $1,799 and $5,566, respectively and for the three and~~ ~~nine months ended~~ ~~September 30, 2016 of $2,445, and $7,471, respectively.~~

Three Months Ended September 30, ~~2017~~2020 compared to Three Months Ended September 30, ~~2016~~2019

~~Service revenues. Service revenues decreased by $16,254, or 13%, due to a decline~~The following table describes the increase in subscriber lines reflecting planned actions to enhance profitability by modulating marketing spend, restructuring pricing offers, and targeting consumers with lower subscriber acquisition cost and churn profiles.

~~Service cost of revenues. Service cost of revenues decreased by $5,539, or 22% due~~VCP gross margin for the three months ended September 30, 2020 as compared to the ~~corresponding~~three months ended September 30, 2019:


	(in thousands)
Service gross margin increase is primarily due to increased usage of the Company's API services as customers expand their use of video APIs as a result of the ongoing COVID-19 pandemic along with an overall increase in the customer base	$	16,514
Access and product gross margin increased due to lower costs providing access services to VCP customers during the current quarter	601

Increase in segment gross margin	$	17,115

Vonage Communications Platform service gross margin percentage decreased to 51.7% for the three months ended September 30, 2020 from 52.4% for the three months ended September 30, 2019. The decrease in business service ~~revenues~~gross margin percentage is a result of ~~13%~~greater proportion of lower margin services across our VCP segment during the quarter ended September 30, 2020 as compared to the same period in ~~line with planned actions~~the prior quarter as usage of APIs has grown. Our gross margin percentage may continue to ~~enhance profitability.~~be impacted by changes in the mix of service offerings provided to our customers across our VCP segment.

~~Product cost of revenues. Product cost of revenues decreased by $1,814, or 54%,~~Nine Months Ended September 30, 2020 compared to Nine Months Ended September 30, 2019

The following table describes the increase in VCP gross margin for the nine months ended September 30, 2020 as compared to the three months ended September 30, 2019:


	(in thousands)
Service gross margin increase is primarily due to increased usage on the Company's API Platform as customers expand their use of video APIs as a result of the ongoing COVID-19 pandemic along with an overall increase in the customer base	$	48,264
Access and product gross margin increased due to lower costs providing access services to VCP customers during the current quarter	2,030

Increase in segment gross margin	$	50,294

Vonage Communications Platform service gross margin percentage decreased to 52.3% for the nine months ended September 30, 2020 from 53.4% for the nine months ended September 30, 2019. The decrease in business service gross margin percentage is a result of a greater proportion of lower margin services across our VCP segment during nine months ended September 30, 2020 as compared to the same period in the prior year as usage of APIs has grown. Our gross margin percentage may continue to be impacted by changes in the mix of service offerings provided to our customers across our VCP segment.

Consumer Gross Margin for the Three and Nine Months Ended September 30, 2020 and 2019


	Three Months Ended								Nine Months Ended
	September 30,								September 30,
(in thousands, except percentages)	2020		2019		Dollar Change		Percent Change		2020		2019		Dollar Change		Percent Change
Revenues
Service revenues	$	71,693	$	83,981	$	(12,288)	(15)	%	$	223,981	$	260,225	$	(36,244)	(14)	%
Access and product revenues(1)	85		69		16		23	%	200		197		3		2	%
Service, access and product revenues excluding USF	71,778		84,050		(12,272)		(15)	%	224,181		260,422		(36,241)		(14)	%
USF revenues	11,045		11,954		(909)		(8)	%	30,130		33,090		(2,960)		(9)	%
Total revenues	82,823		96,004		(13,181)		(14)	%	254,311		293,512		(39,201)		(13)	%

Cost of revenues
Service cost of revenues (2)	8,287		8,587		(300)		(3)	%	25,470		26,706		(1,236)		(5)	%
Access and product cost of revenues (1)	469		1,373		(904)		(66)	%	1,438		3,287		(1,849)		(56)	%
Service, access and product cost of revenues excluding USF	8,756		9,960		(1,204)		(12)	%	26,908		29,993		(3,085)		(10)	%
USF cost of revenues	11,045		11,954		(909)		(8)	%	30,130		33,090		(2,960)		(9)	%
Total cost of revenues	19,801		21,914		(2,113)		(10)	%	57,038		63,083		(6,045)		(10)	%

Segment gross margin
Service margin	63,406		75,394		(11,988)		(16)	%	198,511		233,519		(35,008)		(15)	%
Gross margin excluding USF (Service, access and product margin)	63,022		74,090		(11,068)		(15)	%	197,273		230,429		(33,156)		(14)	%
Segment gross margin	$	63,022	$	74,090	$	(11,068)	(15)	%	$	197,273	$	230,429	$	(33,156)	(14)	%


Segment gross Margin %
Service margin %	88.4	%	89.8	%	88.6	%	89.7%
Gross margin excluding USF (Service, access and product margin) %	87.8	%	88.1	%	88.0	%	88.5%
Segment gross margin %	76.1	%	77.2	%	77.6	%	78.5%

a.Includes customer premise equipment and shipping and handling.

b.Excludes depreciation and amortization of $958 and $1,166 for the three months ended September 30, 2020 and 2019, and $3,583 and $3,536 for the nine months ended September 30, 2020 and 2019, respectively.

Three Months Ended September 30, 2020 compared to Three Months Ended September 30, 2019

The following table describes the decrease in ~~customers'~~consumer gross margin for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019:


	(in thousands)
Service gross margin decreased primarily due to a decrease in subscriber lines of 16% resulting in lower gross margin of $12,015 as we have reallocated resources to focus on attracting VCP customers	$	(11,988)
Access and product gross margin increased 71% primarily due to lower equipment costs associated with sales to customers during the current quarter	920

Decrease in segment gross margin	$	(11,068)

Consumer service gross margin percentage decreased to 88.4% for the three months ended September 30, 2020 from 89.8% for the three months ended September 30, 2019 due to ~~lower new customer additions.~~slightly higher international and domestic termination rates.

~~USF revenues. USF revenues decreased by $1,906, or 14%, and USF cost of revenues decreased by $1,906, or 14% due to lower subscriber lines.~~

Nine Months EndedSeptember 30, ~~2017~~2020 compared toNine Months EndedSeptember 30, ~~2016~~2019

~~Service revenues~~. Service revenues decreased by $52,735, or 13%, due to a decline in subscriber lines of 10% from December 31, 2016 reflecting planned actions to enhance profitability by modulating marketing spend, restructuring pricing offers, and targeting consumers with lower subscriber acquisition cost and churn profiles.

~~Service cost of revenues~~. Service cost of revenues decreased by $14,251, or 18% due to fewer subscriber lines reflecting planned actions to enhance profitability by modulating marketing spend, restructuring pricing offers, and targeting consumers with lower subscriber acquisition cost and churn profiles.

~~Product cost of revenues. Product cost of revenues decreased by $5,721, or 51%, due to~~The following table describes the decrease in ~~customers'~~consumer gross margin for the nine months ended September 30, 2020 as compared to the three months ended September 30, 2019:


	(in thousands)
Service gross margin decreased primarily due to a decrease in subscriber lines of 16% resulting in lower gross margin of $35,216 as we have reallocated resources to focus on attracting VCP customers.	$	(35,008)
Access and product gross margin increased 60% primarily due to lower equipment costs associated with sales to customers during the current quarter	1,852

Decrease in segment gross margin	$	(33,156)

Consumer service gross margin percentage decreased to 88.6% for the nine months ended September 30, 2020 from 89.7% for the nine months ended September 30, 2019 due to ~~lower new customer additions~~slightly higher international and ~~a decrease in reserve related to inventory.~~domestic termination rates.

~~USF revenues and USF cost of revenues. USF revenues decreased by $6,822, or 16%, and USF cost of revenues decreased by $6,822, or 16% due to lower subscriber lines.~~

Other Operating Expenses

The following table presents our other operating costs during the three and nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively:


	Three Months Ended								Nine Months Ended
	September 30,								September 30,
(in thousands, except percentages)	2020		2019		Dollar Change		Percent Change		2020		2019		Dollar Change		Percent Change
Sales and marketing	$	85,505	$	83,628	$	1,877	2	%	$	261,953	$	274,513	$	(12,560)	(5)	%
Engineering and development	20,110		16,901		3,209		19	%	59,097		50,318		8,779		17	%
General and administrative	56,835		41,306		15,529		38	%	140,537		113,380		27,157		24	%
Depreciation and amortization	22,887		21,319		1,568		7	%	64,064		63,195		869		1	%
Total other operating expenses	$	185,337	$	163,154	$	22,183	14	%	$	525,651	$	501,406	$	24,245	5	%

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 Dollar
Change Percent
Change 2017 2016 Dollar
Change Percent
Change
Sales and marketing $ 73,576
$ 83,731
$ (10,155 ) (12 )% $ 235,245
$ 246,676
$ (11,431 ) (5 )%
Engineering and development 6,956
8,075
(1,119 ) (14 )% 21,996
22,152
(156 ) (1 )%
General and administrative 26,811
27,538
(727 ) (3 )% 98,411
89,261
9,150
10 %
Depreciation and amortization 18,179
18,018
161
1 % 54,520
53,215
1,305
2 %
Total other operating expenses $ 125,522
$ 137,362
$ (11,840 ) (9 )% $ 410,172
$ 411,304
$ (1,132 ) — %

Three Months Ended September 30, ~~2017~~2020 compared to Three Months Ended September 30, ~~2016~~2019

Total other operating expenses ~~decreased~~increased by ~~$11,840~~$22,183 as compared to the three months ended September 30, ~~2016~~2019 due to the following:

Sales and marketing expense decreased by $10,155 due to a reduction in Consumer marketing through traditional media outlets reflecting planned actions to enhance profitability by targeting consumers with lower subscriber acquisition cost and churn profiles which was largely offset by an increase in Business marketing as we have shifted marketing investment to attract these more profitable customers.

•Engineering and development expense ~~decreased~~increased by ~~$1,119~~$3,209, in connection with the Company's continued transformation focused on innovation and developing further functionality related to its proprietary platform in order to support customers through the mid-market and enterprise sector.

•General and administrative expense increased by $15,529, primarily due to ~~decreased~~the expense accrued associated with the employee exit costs associated with ~~engineering costs~~restructuring activities, the abandonment of a portion of one of the Company's office locations along with increased professional services related to ~~Consumer as compared to the prior year as~~strategic business reviews undertaken by the Company, ~~has focused on~~and an increase in stock compensation due to increased headcount in the ~~ongoing growth of the Business segment.~~current year.

Nine Months Ended September 30, ~~2017~~2020 compared to Nine Months Ended September 30, ~~2016~~2019

Total other operating expenses ~~decreased~~increased by ~~$1,132~~$24,245 as compared to the nine months ended September 30, ~~2016~~2019 due to the following:

•Sales and marketing expense decreased by ~~$11,431~~$12,560, primarily due to ~~a shift~~decreased spending in ~~traditional~~the current period related to media marketing ~~investments from Consumer~~initiatives, less travel by the Company's sales force, and attending fewer sales conferences this period than in the prior period due to ~~Business customers as part of~~the COVID-19 pandemic. These were offset by an ~~effort to attract these more profitable customers~~increase in reserves for expected credit losses for trade receivables during the current year.

•Engineering and development expense increased by $8,779, in connection with the Company's continued transformation focused on innovation and developing further functionality related to its proprietary platform in order to support customers through the mid-market and enterprise sector.

•General and administrative expense increased by ~~$9,150~~$27,157, primarily due to the ~~acquisition of Nexmo during~~expense accrued associated with the ~~prior year along with~~employee exit costs associated with restructuring activities, the abandonment of a portion of one of the Company's leased office locations, an increase in professional services related to strategic business reviews undertaken by the Company in the current year, higher personnel costs and stock compensation along with employee exit costs incurred during the current year ~~period.~~including CEO succession costs.

Other Income (Expense)


(in thousands, except percentages)	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2020		2019		Dollar Change		Percent Change		2020		2019		Dollar Change		Percent Change
Interest expense	$	(7,373)	$	(8,454)	$	1,081	13	%	$	(24,776)	$	(24,517)	$	(259)	(1)	%
Other income (expense), net	(37)		58		(95)		(164)	%	154		(505)		659		130	%
	$	(7,410)	$	(8,396)	$	986			$	(24,622)	$	(25,022)	$	400

(in thousands, except percentages) Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 Dollar
Change Percent
Change 2017 2016 Dollar
Change Percent
Change
Interest income $ 3
$ 19
$ (16 ) (84 )% $ 12
$ 65
$ (53 ) (82 )%
Interest expense (3,821 ) (3,974 ) 153
4 % (11,385 ) (9,477 ) (1,908 ) (20 )%
Other income (expense), net 465
(495 ) 960
(194 )% 931
(237 ) 1,168
(493 )%
$ (3,353 ) $ (4,450 ) $ 1,097
$ (10,442 ) $ (9,649 ) $ (793 )

Three Months Ended September 30, ~~2017~~2020 compared to Three Months Ended September 30, ~~2016~~2019

Interest expense. The decrease in interest expense of ~~$153,~~$1,081, or 4%13%, was ~~driven~~mainly due to lower interest expense due to lower principal balances on our 2018 Credit Facility, offset by ~~lower~~an increase in interest expense associated with the ~~Company's capital lease as compared to the prior year.~~

~~Other income (expense), net.~~ ~~The increase~~Convertible Senior Notes issued in other income (expense), net of $960, or 194%, was attributable to losses associated with foreign currency in the prior year along with additional gain recognized during the quarter associated with contingent consideration from the sale of the Hosted Infrastructure product line.June 2019.

Nine Months Ended September 30, ~~2017~~2020 compared to Nine Months Ended September 30, ~~2016~~2019

Interest expense. The increase in interest expense of ~~$1,908,~~$259, or ~~20%~~1%, was mainly due ~~mainly~~ to the ~~funds we borrowed from~~realization of losses associated with the ~~2016 Credit Facility~~unwind of the Company's interest rate swaps in June ~~2016~~2020 and an increase in ~~connection~~interest expense associated with the ~~acquisition of Nexmo and the additional funds we borrowed~~Convertible Senior Notes issued in ~~the first quarter of 2017~~June 2019, offset by lower interest expense due to ~~fund operations.~~lower principal balances on our 2018 Credit Facility.

~~Other income (expense), net.~~ ~~The increased in other income (expense), net of $1,168, or 493%, was due the sale of the Hosted Infrastructure product line during the second quarter of 2017.~~

~~Provision for~~ Income Taxes

~~During~~


(in thousands, except percentages)	Three Months Ended										Nine Months Ended
	September 30,										September 30,
	2020			2019			Dollar Change		Percent Change		2020			2019			Dollar Change		Percent Change
Income tax (expense) benefit	$	7,937		$	(18,248)		$	26,185	143	%	$	6,694		$	5,127		$	1,567	31	%
Effective tax rate	(44)		%	641		%					(23)		%	(23)		%

Three Months Ended September 30, 2020 compared to Three Months Ended September 30, 2019

The tax benefit recorded for the three months ended September 30, 2020 compared to the tax provision for the three months ended September 30, 2019 is primarily due to increase in pretax loss and lower current period discrete tax benefits on equity compensation. In addition, during the three months ended September 30, 2019 the Company had reduced its expected annual tax benefit as a result of permanent adjustments primarily related to limitations on executive compensation.

Nine Months Ended September 30, 2020 compared to Nine Months Ended September 30, 2019

The tax benefit for the nine months ended September 30, ~~2017, we recognized~~2020 compared to the nine months ended September 30, 2019 is primarily due to current year losses along with current period discrete ~~period tax benefits of $9,539 and $1,433 which were recognized related to excess~~ tax benefits on equity ~~compensation recognized primarily in the first quarter of 2017 as well as an adjustment to our deferred asset related to stock~~ compensation.

In the first quarter of 2016 a discrete period tax expense of $1,220 was recorded related to expired stock options which was partially offset by $389 which was recorded during the second quarter of 2016 and $661 which was recorded in the third quarter of 2016. The provision also includes the federal alternative minimum tax and state and local income taxes.

Liquidity and Capital Resources

Overview

For the nine months ended September 30, ~~2017,~~2020, we ~~generated~~had lower net cash from ~~operations.~~operations compared to the prior year due to higher operating expenses during the current year. We expect to continue to balance efforts to grow our revenue ~~while~~with seeking to consistently ~~achieving~~achieve operating profitability. To grow our revenue, we continue to make investments in growth initiatives, marketing, ~~application~~applications development, network quality and expansion, and customer care. ~~Although we believe we will achieve consistent profitability in the future, we ultimately may not be successful and we may not achieve consistent profitability.~~ We believe that cash flow from operations and cash on hand will fund our operations for at least the next twelve months.

The following table sets forth a summary of our cash flows for the periods indicated:


	Nine Months Ended
	September 30,
(in thousands)	2020		2019		Dollar Change
Net cash provided by operating activities	$	51,431	$	59,850	$	(8,419)
Net cash used in investing activities	(38,234)		(39,262)		1,028
Net cash provided by (used in) financing activities	12,871		(6,234)		19,105
Effect of exchange rate changes on cash and cash equivalents	(1,334)		(663)		(671)

Nine Months Ended
September 30,
2017 2016 Dollar
Change
(in thousands)
Net cash provided by operating activities $ 80,600
$ 69,614
10,986
Net cash used in investing activities (23,626 ) (188,637 ) 165,011
Net cash (used)/provided by financing activities (56,757 ) 93,264
(150,021 )

Operating Activities

~~Cash~~The following table describes the changes in cash provided by operating activities ~~increased to $80,600~~ for the nine months ended September 30, ~~2017~~2020 as compared to ~~$69,614 for~~ the nine months ended September 30, 2016, primarily due to an increase in earnings as compared to the prior period attributed to decrease in deferred taxes of $9,172 and contingent consideration of $7,362 during the prior year period, offset by an increase in stock compensation expense during the nine months ended September 30, 2017 associated with the acquisition of Nexmo of $1,869.2019:

Changes in working capital requirements include changes in accounts receivable, inventory, prepaid and other assets, accounts payable, accrued and other liabilities, and deferred revenue and costs. Cash used for working capital requirements decreased by $5,681 during the nine months ended September 30, 2017 compared to the prior year period.


	(in thousands)
Increase in operating income adjusted for non-cash items primarily due to increased gross margin driven by growth within VCP during the quarter	$	11,382
Decrease in working capital driven primarily by timing of accounts receivable collections, prepayments for annual licenses, CEO succession payments and vendor payments which was slightly offset by improvement in operating cash flows as a result of benefits under the CARES Act	(19,801)
Decrease in cash provided by operating activities	$	(8,419)

Investing Activities

~~Cash~~The following table describes the changes in cash used in investing activities for the nine months ended September 30, ~~2017 of $23,626 was mainly attributable~~2020 as compared to the purchase of capital expenditures of $15,790 and development of software assets of $9,438, offset by the sales of marketable securities of $602 and cash proceeds of $1,000 associated with the sale of the Hosted Infrastructure product line in the second quarter of 2017.

~~Cash used in investing activities for~~ the nine months ended September 30, 2016 of $188,637 was mainly attributable to the acquisition of Nexmo for cash proceeds of $163,042, purchase of capital expenditures of $19,980 and development of software assets of $8,987, offset by the sales of marketable securities, net of purchase of $3,372.2019:


	(in thousands)
Increase in payments to acquire and develop software assets	(9,420)
Decrease in payments related to capital expenditures	7,708
Decrease in payment to acquire business	3,000
Increase in payments to acquire new patents	(260)
Decrease in cash used in investing activities	$	1,028

Financing Activities

~~Cash used~~The following table describes the changes in cash provided by (used in) financing activities for the nine months ended September 30, ~~2017 of $56,757 was primarily attributable~~2020 as compared to $14,063 in 2016 term note principal payments, $42,000 in 2016 revolving credit facility principal payments, $2,500 in patent license payments, $3,201 in capital lease payments, $9,542 in common stock repurchases, and $14,927 in employee taxes paid on withholding shares, offset by $14,476 in proceeds received from the exercise of stock options and $15,000 in proceeds received from issuance of notes payable.

~~Cash provided by financing activities for~~ the nine months ended September 30, ~~2016~~2019:


	(in thousands)
Decreased borrowings net of repayments during the current year	$	(40,500)
Prior period amount represents payment for the capped call transaction in connection with the June 2019 issuance of the Convertible Senior Notes	28,325
Prior period amount represents payments for share repurchases in connection with the June 2019 issuance of the Convertible Senior Notes	10,000
Prior period amount represents payments for financing costs in connection with the June 2019 issuance of the Convertible Senior Notes	9,715
Decrease in payments associated with taxes on share based compensation due to lower vesting in 2020	5,192
Decrease in proceeds received from exercise of stock options due to fewer exercises in 2020	6,373
Increase in cash provided by financing activities	$	19,105

Sources of ~~$93,264 was primarily attributable~~Liquidity

The principal sources of liquidity are derived from available borrowings under our existing financing arrangements, existing cash on hand, and cash flows from operations. As described in Note 6, Long-Term Debt, to ~~$181,250 in net proceeds received from our 2016~~the Condensed Consolidated Financial Statements, the Company's financing arrangements consist of its Convertible Senior Notes and the 2018 Credit Facility ~~and $6,169 in proceeds received from the exercise~~comprised of ~~stock option, offset by $9,375 in 2016~~a $100,000 term note ~~principal payments, $25 million in 2016~~and a $500,000 revolving credit ~~facility principal payments, $3,750~~facility. The COVID-19 pandemic has caused disruption in ~~2015 term note principal payments, $10 million~~global capital markets. This could result in 2015 revolving credit facility principal payments, $4,250 in patent license payments, $3,203 in capital lease payments, $32,902 in common stock repurchases, $1,316 in debt related costs payments, and $4,359 in employee taxes paidfuture financing becoming more difficult or expensive to obtain or the Company may not be able to obtain financing on ~~withholding shares.~~

~~Available Borrowings Under the 2016 Credit Facility~~acceptable terms or at all.

We maintain significant availability under our lines of credit to meet our short-term liquidity requirements. As of September 30, ~~2017,~~2020, amounts available under the ~~2016~~2018 Credit Facility totaled ~~$143~~$259.5 million.

~~State~~

Uses of Liquidity

The Company's requirements for liquidity and ~~Local Sales Taxes~~

~~We also have contingent liabilities~~capital resources are generally for ~~state~~the purposes of operating activities, debt service obligations, restructuring initiatives, and local sales taxes. As of September 30, 2017, we had a reserve of $901. If our ultimate liability exceeds this amount, it could affect our liquidity unfavorably. However, we do not believe it will significantly impair our liquidity.

~~Capital Expenditures~~

capital expenditures. For the nine months ended September 30, ~~2017,~~2020, capital expenditures were primarily for the implementation of software solutions and purchase of network equipment as we continue to expand our network. Our capital expenditures for the nine months ended September 30, ~~2017~~2020, were ~~$25,228,~~$38,234, of which ~~$9,438~~$30,256 was for software acquisition and development. The majority of these expenditures are comprised of investments in information technology and systems infrastructure, including an electronic data warehouse, online customer service, and customer management platforms. For ~~2017,~~full year 2020, we ~~believe~~estimate our capital and software expenditures will be approximately $35,000. This amount is net of Tenant Improvement capital dollars we are investing in our Holmdel, New Jersey headquarters which are being refunded by the building owner in connection with the long-term lease renewal we executed in the fourth quarter of 2015.$55 million.

~~Common Stock Repurchases~~State and Local Sales Taxes

~~On December 9, 2014, Vonage's Board of Directors authorized a new program~~We have contingent liabilities for ~~the Company to repurchase up to $100.0 million of its outstanding common stock. Repurchases under the new program are expected to be made over a four-year period ending on December 31, 2018.~~

~~Under the current program, the timing~~state and amount of repurchases will be determined by management based on its evaluation of market conditions, the trading price of the stock and will vary based on available capital resources and other financial and operational performance, market conditions, securities law limitations, and other factors. Repurchases may be made in the open market or through private transactions from time to time. The repurchases will be made using available cash balances. In any period, under each repurchase program, cash used in financing activities related to common stock repurchases may differ from the comparable change in stockholders' equity, reflecting timing differences between the recognition of share repurchase transactions and their settlement for cash.

local sales taxes. As of September 30, ~~2017, approximately $42,533 remained~~2020, we had a reserve of $7,923. If our ~~2014 $100.0 million repurchase program. The repurchase program expires on December 31, 2018 but may be suspended or discontinued at any time without notice.~~ultimate liability exceeds this amount, it could affect our liquidity unfavorably. However, we do not believe it will significantly impair our liquidity.

Off-Balance Sheet Arrangements

Obligations under Certain Guarantee Contracts

We enter guarantee arrangements in the normal course of business to facilitate transactions with third parties. These arrangements include financial and performance guarantees, stand-by letters of credit, debt guarantees and indemnifications. As of September 30, ~~2017~~2020 and December 31, ~~2016~~2019 we had stand-by letters of credit totaling ~~$1,561~~$1,502 and ~~$1,578,~~$1,528, respectively.

Contractual Obligations and Commitments

Except as set forth below and in Note 7. 9. Commitments and Contingencies included in Part 1, Item 1 of this Form 10-Q, there were no significant changes in our commitments under contractual obligations as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019.

Contingencies

~~There has been~~From time to time we are subject to legal proceedings, claims and ~~may be in the future substantial litigation in the areas in which we operate regarding~~investigations relating to our business, including claims of alleged infringement of ~~third-party patents and other~~commercial, employment, intellectual property rights, ~~commercial, employment~~ and other matters. ~~We record~~From time to time, we receive letters or other communications from third parties inviting us to obtain patent licenses that might be relevant to our business or alleging that our services infringe upon third-party patents or other intellectual property. In accordance with generally accepted accounting principles, we make a provision for a ~~liability~~loss when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. Such legal proceedings are inherently unpredictable and subject to further uncertainties. Should any of these estimates and assumptions change it is possible that the resolution of the matters described in Note 7. 9, Commitments and Contingencies included in Part 1, Item 1 of this Form 10-Q could have a material adverse effect on our condensed consolidated financial position, cash flows or results of operations.

Critical Accounting Policies

Our consolidated financial statements and accompanying notes are prepared in accordance with U.S. GAAP. Our significant accounting policies are described in Note 1, ~~Basis~~2, Summary of ~~Presentation and~~ Significant Accounting Policies to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019. The preparation of financial statements and related disclosures in compliance with GAAP requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. The application of these policies involves judgment regarding future events and these judgments could materially affect the financial statements and disclosures based on varying ~~assumptions, which may be appropriate to use.~~assumptions.

We identify our most critical accounting policies as those that are the most pervasive and important to the portrayal of our financial position and results of operations, and those that require the most difficult, subjective or complex judgments by management regarding estimates. Our critical accounting policies include revenue recognition, ~~impairment~~valuation of goodwill and ~~long lived~~intangible assets, income taxes and ~~valuation allowance for deferred taxes, share-based compensation, inventory and accounting for business combinations.~~

capitalized software. As of September 30, ~~2017,~~2020, our goodwill is attributable to our ~~Business~~VCP operating segment. We perform our annual test of goodwill on October 1st. Additionally, we will assess our goodwill for impairment between annual tests when specific circumstances dictate.

COVID-19 has created and may continue to create uncertainty in bookings and 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 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 duration or degree of the impact of the COVID-19 pandemic on the global economy.



Item 3.			Quantitative and Qualitative Disclosures about Market Risk

We are exposed to financial market risks, including changes in currency exchange rates and interest rates.

Foreign Exchange Risk

We sell our products and services primarily in the United States, Canada, ~~and~~ the European ~~Union. Changes in currency exchange rates affect the valuation in our financial statements of the assets~~Union, and ~~liabilities of these operations. We also have a~~Asia. A portion of our sales denominated in Euros, the Canadian Dollar, and the British Pound Sterling, which are ~~also~~ affected by changes in currency exchange rates. Our financial results could be affected by changes in foreign currency exchange rates, although foreign exchange risks have not been material to our financial position or results of operations to date.

On January 31, 2020, the United Kingdom officially withdrew from the European Union or , "EU". While the UK will no longer be a member of the EU, it will still be subject to EU rules and remain a member of the Customs Union for a period of time as it negotiates the rules to be applied to future trading, taxes, and other relationships. Uncertainty and currency volatility in the British Pound Sterling exchange rate is expected to continue in the short term. In the longer term, any impact from the Brexit on the Company's operations and financial statements will depend on the outcome of future negotiations.

Interest Rate and Debt Risk

Our exposure to market risk for changes in interest rates primarily relates to our long-term debt. In order to hedge the variability of expected future cash interest payments related to the 2016 Credit Facility we have entered into three interest rate swap agreements which were executed on July 14, 2017. The swaps have an aggregate notional amount of $150 million and are effective on July 31, 2017 through June, 3, 2020 concurrent with the term of the 2016 Credit Facility. Under the swaps our interest rate is fixed at 4.7%. The interest rate swaps will be accounted for as cash flow hedges in accordance with ASC 815, ~~Derivatives and Hedging~~.

As of September 30, ~~2017,~~2020, if the interest rate on our variable rate debt changed by 1% on our ~~2016 term note,~~2018 Revolving Credit Facility, our annual debt service payment would change by approximately ~~$1 million.~~ $2,405.

As of September 30, ~~2017, if the~~2020, we had $345.0 million outstanding on our 1.75% convertible senior notes due 2024. The Notes have 1.75% percent fixed annual interest rates and, therefore, our economic interest rate exposure on our ~~variable~~convertible senior notes is fixed. However, the values of the convertible senior notes are exposed to interest rate ~~debt changed~~risk. Generally, the fair market value of our fixed interest rate convertible senior notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair values of the convertible senior notes are affected by 1%our stock price. The fair value of the convertible senior notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines in value. Additionally, we carry the convertible senior notes at face value less unamortized discount on our ~~2016 revolving credit facility, our annual debt service payment would change by approximately $1.8 million.~~balance sheet, and we present the fair value for required disclosure purposes only.



Item 4.			Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) required by Securities Exchange Act Rules 13a-15(b) or 15d-15(b), our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective as of such date due to the material weakness in internal control over financial reporting that was disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 related to our controls over the preparation of the annual tax provision.effective.

~~Material Weakness.~~ ~~As disclosed in Part II. Item 9A.~~ ~~Controls and Procedures~~ in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, in connection with the preparation of our condensed consolidated financial statements as of and for the year ended December 31, 2016, we identified a material weakness in our internal control over financial reporting related to our controls over the preparation of the annual tax provision.

Changes in Internal Controls. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial ~~reporting, except for changes in connection with the implementation~~reporting. In response to COVID-19, we have undertaken measures to protect our employees, partners, and clients, including encouraging employees to work remotely. These measures have compelled us to modify some of ~~the remediation plan described below.~~

~~Remediation Plan. Management has begun implementing a remediation plan to address the~~our control ~~deficiency that led to the material weakness. The remediation plan includes (i) the implementation of additional review~~ procedures, designed to enhance our tax provision controls and (ii) strengthening our tax provision controls with improved documentation standards, oversight, and training. In the course of this remediation, we identified an additional error caused by the control deficiency identified at year-end, as described in more detail in Note 3 ~~Correction of Prior Period Financial Statements.~~however, those modifications have so far not been material. We are ~~implementing enhanced review procedures~~continually monitoring and ~~documentation standards~~assessing the COVID-19 situation in order to minimize the impact on the design, implementation, and operating effectiveness of our ~~plan is to remediate this material weakness by the end of 2017, subject to there being sufficient opportunities to conclude, through testing, that the enhanced control is operating effectively.~~internal controls.

Part II—Other Information



Item 1.			Legal Proceedings

We are subject to a number of lawsuits, government investigations and claims arising out of the conduct of our business. See a discussion of our litigation matters in Note 79 of Notes to our Condensed Consolidated Financial Statements, which is incorporated herein by reference.



Item 1A.			Risk Factors

~~There~~Other than the risk factor set forth below, there have been no material changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2019 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

We may not fully realize the expected benefits of our business optimization plans or other cost-saving initiatives, which may negatively impact our results of operations and financial condition.

During the third quarter of 2020, the Company initiated a business optimization and alignment project to focus the use of Company resources and drive operational execution, which also includes the previously announced Consumer evaluation. In connection with this project, the Company initiated a reduction in workforce and abandoned a portion of one of its leased facilities. The Company may pursue similar cost-saving initiatives in the future. We may not achieve the operational improvements and efficiencies that we have targeted in this project.

Implementing any restructuring, optimization, or cost-savings plan presents significant potential risks that may impair our ability to achieve anticipated operating improvements and/or cost reductions. These risks include (but are not limited to) higher than anticipated costs in implementing these plans, management distraction from ongoing business activities, failure to maintain adequate controls and procedures while executing these plans, damage to our reputation, brand image, and workforce attrition beyond our planned reductions, and our ability to provide optimal service to our customers. Any of these risks could have a negative impact on our profitability and on our results of operations and financial condition.



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

~~Item 2(a) and (b) are not~~Not applicable.

~~(c) Common stock repurchases (in thousands, except per share value):~~

During the three months ended September 30, 2017, we did not repurchase Vonage Holdings Corp. common stock pursuant to the 2014 $100.0 million repurchase program. When executed, repurchases occur in the open market and pursuant to a trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934. As of September 30, 2017, approximately $42,533 remained of our 2014 $100.0 million repurchase program.



Item 3.			Defaults Upon Senior Securities

None.



Item 4.			Mine Safety Disclosures

Not applicable.



Item 5.			Other Information

None.



Item 6.			Exhibits

See accompanying Exhibit Index for a list of the exhibits filed or furnished with this Quarterly Report on Form 10-Q.

EXHIBIT INDEX



10.1	Fixed Term Employment Contract, by and between the Company and Tim Shaughnessy, dated August 17, 2020
~~31.1~~
31.1	Certification of the Company’s Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002(1)~~2002*

31.2		Certification of the Company’s Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002(1)~~2002*

32.1		Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002(1)~~2002*

101			The following financial ~~statements~~information from Vonage Holdings Corp.’s's Quarterly Report on Form 10-Q for the ~~three and nine months~~quarter ended September 30, ~~2017, filed with the Securities and Exchange Commission on November 7, 2017,~~2020 formatted in Inline XBRL ~~(eXtensible~~(Extensible Business Reporting Language): includes: (i) the Condensed Consolidated Balance ~~Sheets;~~Sheets, (ii) the Condensed Consolidated Statements of ~~Operations;~~Operations, (iii) the Condensed Consolidated Statements of Comprehensive ~~Income;~~(Loss) Income, (iv) the Condensed Consolidated Statements of Cash ~~Flows;~~Flows, (v) the Condensed Consolidated Statements of ~~Stockholders’ Deficit;~~Stockholders Equity, and (vi) ~~the~~ Notes to the Condensed Consolidated Financial Statements.

~~(1) Filed herewith.~~


*104			~~Management contract or compensatory plan or arrangement.~~			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.

SIGNATURE

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

VONAGE HOLDINGS CORP.

Dated:

November ~~7, 2017~~5, 2020

By:

/s/ ~~David T. Pearson~~Tim Shaughnessy

~~David T. Pearson~~

Tim Shaughnessy
Chief Financial Officer ~~and Treasurer~~

(Principal Financial Officer and Duly Authorized Officer)

~~EXHIBIT INDEX~~




~~31.1~~			~~Certification of the Company’s Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)~~

~~31.2~~			~~Certification of the Company’s Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)~~

~~32.1~~			~~Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)~~

~~101~~			The following financial statements from Vonage Holdings Corp.’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017, filed with the Securities and Exchange Commission on November 7, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Cash Flows; (v) the Condensed Consolidated Statements of Stockholders’ Deficit; and (vi) the Notes to Condensed Consolidated Financial Statements.

~~(1) Filed herewith.~~


*	~~Management contract or compensatory plan or arrangement.~~


	September 30, 2017		December 31, 2016			September 30, 2020		December 31, 2019
Long-lived assets:					Long-lived assets:
United States	$	621,750	$	629,269	United States	$	640,472	$	640,277
United Kingdom	392		450		United Kingdom	280,450		299,660
Israel	249		286		Israel	1,381		1,609
	$	622,391	$	630,005		$	922,303	$	941,546



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



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



	September 30, 2017			December 31, 2016
Assets				(revised)⁽¹⁾
Current assets:
Cash and cash equivalents	$	29,869		$	29,078
Marketable securities	—			601
Accounts receivable, net of allowance of $2,897 and $2,093, respectively	42,435			36,688
Inventory, net of allowance of $124 and $117, respectively	2,683			4,116
Deferred customer acquisition costs, current	1,466			2,610
Prepaid expenses	23,324			26,041
Other current assets	2,686			3,147
Total current assets	102,463			102,281
Property and equipment, net of accumulated depreciation of $143,265 and $129,166, respectively	45,760			48,415
Goodwill	371,535			360,363
Software, net of accumulated amortization of $94,917 and $87,626, respectively	23,574			21,971
Restricted cash	1,827			1,851
Intangible assets, net of accumulated amortization of $117,905 and $88,419, respectively	181,522			199,256
Deferred tax assets	192,879			184,210
Other assets	15,059			17,319
Total assets	$	934,619		$	935,666
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	33,070		$	30,751
Accrued expenses	76,163			109,195
Deferred revenue, current portion	31,332			32,442
Current maturities of capital lease obligations	206			3,288
Current portion of notes payable	18,750			18,750
Total current liabilities	159,521			194,426
Indebtedness under revolving credit facility	182,000			209,000
Notes payable, net of debt related costs and current portion	77,361			91,124
Other liabilities	6,123			4,575
Total liabilities	425,005			499,125

Commitments and Contingencies (Note 7)

Stockholders’ Equity
Common stock, par value $0.001 per share; 596,950 shares authorized at September 30, 2017 and December 31, 2016; 295,633 and 282,319 shares issued at September 30, 2017 and December 31, 2016, respectively; 228,478 and 219,001 shares outstanding at September 30, 2017 and December 31, 2016, respectively	295			282
Additional paid-in capital	1,359,975			1,310,847
Accumulated deficit	(617,288		)	(641,869		)
Treasury stock, at cost, 67,155 shares at September 30, 2017 and 63,318 shares at December 31, 2016	(243,594		)	(219,125		)
Accumulated other comprehensive loss	10,226			(13,594		)
Total stockholders’ equity	509,614			436,541
Total liabilities and stockholders’ equity	$	934,619		$	935,666



	Nine Months Ended
	September 30,
	2017			2016⁽¹⁾
Cash flows from operating activities:
Net income	$	21,340		$	15,189
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and impairment charges	25,930			27,841
Amortization of intangibles	28,458			25,374
Deferred income taxes	2,475			11,647
Change in contingent consideration	—			(7,362		)
Allowance for doubtful accounts	562			720
Allowance for obsolete inventory	339			514
Amortization of debt issuance costs	300			800
Gain on sale of business	(1,377		)	—
Loss on disposal of fixed assets	132			—
Share-based expense	28,997			27,128
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(3,970		)	(5,244		)
Inventory	1,156			582
Prepaid expenses and other current assets	3,369			(2,161		)
Deferred customer acquisition costs	1,284			1,906
Accounts payable	1,388			(17,252		)
Accrued expenses	(32,390		)	(7,509		)
Deferred revenue	(1,477		)	(2,785		)
Other assets and liabilities	4,084			226
Net cash provided by operating activities	80,600			69,614
Cash flows from investing activities:
Capital expenditures	(15,790		)	(19,980		)
Purchase of marketable securities	—			(5,664		)
Maturities and sales of marketable securities	602			9,036
Acquisition and development of software assets	(9,438		)	(8,987		)
Acquisition of businesses, net of cash acquired	—			(163,042		)
Proceeds from sale of business	1,000			—
Net cash used in investing activities	(23,626		)	(188,637		)
Cash flows from financing activities:
Principal payments on capital lease obligations and other financing obligations	(5,701		)	(7,453		)
Principal payments on notes and revolving credit facility	(56,063		)	(48,125		)
Proceeds received from draw down of revolving credit facility and issuance of notes payable	15,000			181,250
Debt related costs	—			(1,316		)
Common stock repurchases	(9,542		)	(32,902		)
Employee taxes paid on withholding shares	(14,927		)	(4,359		)
Proceeds from exercise of stock options	14,476			6,169
Net cash (used)/provided by financing activities	(56,757		)	93,264
Effect of exchange rate changes on cash	550			518
Net decrease in cash, cash equivalents, and restricted cash	767			(25,241		)
Cash, cash equivalents, and restricted cash, beginning of period	30,929			60,313
Cash, cash equivalents, and restricted cash, end of period	$	31,696		$	35,072
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest	$	10,147		$	8,216
Income taxes	$	5,395		$	5,165
Non-cash investing and financing activities:
Capital expenditures included in accounts payable and accrued liabilities	$	2,231		$	2,962
Issuance of common stock in connection with acquisition of business	$	—		$	31,591
Contingent consideration in connection with acquisition of business	$	—		$	16,472
Assumption of options in connection with acquisition of business	$	—		$	4,779



	Shares		Common Stock		Additional Paid-in Capital		Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
Balance at December 31, 2016 (Revised) ⁽¹⁾	219,001		$	282	$	1,310,847	$	(641,869	)	$	(219,125	)	$	(13,594	)	$	436,541
Cumulative effect adjustment upon the adoption of ASU 2016-09					5,668		3,241									8,909
Stock option exercises	13,314		13		14,463											14,476
Share-based expense					28,997											28,997
Employee taxes paid on withholding shares	(2,238	)								(14,927		)				(14,927		)
Common stock repurchases	(1,599	)								(9,542		)				(9,542		)
Foreign currency translation adjustment													23,622			23,622
Unrealized gain on available-for-sale securities													1			1
Unrealized gain on derivatives													197			197
Net income							21,340									21,340
Balance at September 30, 2017	228,478		$	295	$	1,359,975	$	(617,288	)	$	(243,594	)	$	10,226		$	509,614



	September 30, 2017		December 31, 2016
Level 1 Measurements
Money market fund ⁽¹⁾	$	—	$	300
Level 2 Measurements
Available-for-sale securities ⁽²⁾	$	—	$	601
Interest rate swap ⁽³⁾	$	197	$	—


	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		0
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



Consolidated Balance Sheets
	As of December 31, 2016
	As Reported			Adjustment		As Revised

Deferred tax assets, non-current	$	188,966		$	4,756	$	184,210
Total assets	940,422			4,756		935,666
Accumulated deficit	(637,113		)	4,756		(641,869		)
Total stockholders' equity	441,297			4,756		436,541
Total liabilities and stockholders' equity	940,422			4,756		935,666



Condensed Consolidated Statements of Income
		Three Months Ended								Six Months Ended
		June 30, 2016								June 30, 2016
		As Reported			Adjustment		As Revised			As Reported			Adjustment		As Revised

Income tax expense		$	(1,562	)	$	679	$	(2,241	)	$	(9,884	)	$	679	$	(10,563	)
Net income		897			679		218			8,828			679		8,149
Net income per common share:	��
Basic		$	—		$	—	$	—		$	0.04		$	—	$	0.04
Diluted		$	—		$	—	$	—		$	0.04		$	—	$	0.04

		Three Months Ended								Nine Months Ended
		September 30, 2016								September 30, 2016
		As Reported			Adjustment		As Revised			As Reported			Adjustment		As Revised

Income tax expense		$	(1,501	)	$	2,038	$	(3,539	)	$	(11,385	)	$	2,717	$	(14,102	)
Net income		9,078			2,038		7,040			17,906			2,717		15,189
Net income per common share:
Basic		$	0.04		$	0.01	$	0.03		$	0.08		$	0.01	$	0.07
Diluted		$	0.04		$	0.01	$	0.03		$	0.08		$	0.01	$	0.07

		Three Months Ended								Year Ended
		December 31, 2016								December 31, 2016
		As Reported			Adjustment		As Revised			As Reported			Adjustment		As Revised

Income tax expense		$	(1,553	)	$	2,039	$	(3,592	)	$	(12,938	)	$	4,756	$	(17,694	)
Net income		1			2,039		(2,038		)	17,907			4,756		13,151
Net income per common share:
Basic		$	—		$	0.01	$	(0.01	)	$	0.08		$	0.02	$	0.06
Diluted		$	—		$	0.01	$	(0.01	)	$	0.08		$	0.02	$	0.06



	September 30, 2017		December 31, 2016
2.50-3.25% Term note - due 2020, net of debt related costs	$	77,361	$	91,124
2.50-3.25% Revolving credit facility - due 2020	182,000		209,000
Total Long-term note and revolving credit facility	$	259,361	$	300,124



	Three and Nine Months Ended
	September 30,
	2017

Accumulated OCI beginning balance	$	—
Mark-to-market of cash flow hedge accounting contracts	197
Accumulated OCI ending balance	$	197
Gains expected to be realized from accumulated OCI during the next 12 months	$	—



Cash paid at closing (inclusive of cash acquired of $16,094)	$	179,186
Stock paid at closing	31,591
Contingent consideration (described below)	16,472
Employee Payout Amount (described below)	4,779
Acquisition Cost	$	232,028



	Acquisition Date Fair Value as of December 31, 2016		Measurement period adjustments			Revised Acquisition Date Fair Value
Assets
Current assets:
Cash and cash equivalents	$	16,094	$	—		$	16,094
Accounts receivable	8,764		—			8,764
Prepaid expenses and other current assets	3,507		—			3,507
Total current assets	28,365		—			28,365
Property and equipment	757		—			757
Software, net	242		—			242
Intangible assets	101,770		—			101,770
Restricted cash	51		—			51
Total assets acquired	131,185		—			131,185

Liabilities
Current liabilities:
Accounts payable	1,841		—			1,841
Accrued expenses	9,299		—			9,299
Deferred revenue, current portion	1,735		—			1,735
Total current liabilities	12,875		—			12,875
Deferred tax liabilities, net, non-current	29,355		(5,482		)	23,873
Total liabilities assumed	42,230		(5,482		)	36,748

Net identifiable assets acquired	88,955		5,482			94,437
Goodwill	143,073		(5,482		)	137,591
Total purchase price	$	232,028	$	—		$	232,028




Customer relationships	$	85,900
Developed technologies	13,768
Non-compete agreements	972
Trade names	1,130
	$	101,770



Balance at December 31, 2016	$	360,363
Decrease in goodwill related acquisition of Nexmo	(5,482		)
Currency translation adjustments	16,654
Balance at September 30, 2017	$	371,535



	Nine Months Ended
	September 30,
	2016
Revenues	$	743,083
Net income	$	12,718
Earnings per common share - basic	$	0.06
Earnings per common share - diluted	$	0.05


~~(1)~~	~~Includes customer premise equipment, access, professional services, and shipping and handling.~~