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)~~March 31, 2021 and December 31, ~~2016~~2020		34
			~~Unaudited~~ Condensed Consolidated Statements of ~~Income~~Operations for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020		45
			~~Unaudited~~ Condensed Consolidated Statements of Comprehensive Income / (Loss) for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020		56
			~~Unaudited~~ Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020		67
			~~Unaudited~~ Condensed Consolidated ~~Statement~~Statements of Stockholders’ Equity for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2021 and 2020		78
			Notes to Unaudited Condensed Consolidated Financial Statements		89

Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations		3024

Item 3.			Quantitative and Qualitative Disclosures About Market Risk		4338

Item 4			Controls and Procedures		4338

Part II. Other Information

Item 1.			Legal Proceedings		4539

Item 1A.			Risk Factors		4539

Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds		4539

Item 3.			Defaults Upon Senior Securities		4539

Item 4.			Mine Safety Disclosures		4539

Item 5.			Other Information		4539

Item 6.			Exhibits		4639

			Signature		4740

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)~~


	March 31, 2021		December 31, 2020
Assets	(Unaudited)
Current assets:
Cash and cash equivalents	$	51,623	$	43,078
Accounts receivable, net of allowance of $8,094 and $8,878, respectively	111,584		116,304

Deferred customer acquisition costs, current portion	19,490		18,161
Prepaid expenses	37,133		32,131
Other current assets	3,615		6,230
Total current assets	223,445		215,904
Property and equipment, net of accumulated depreciation of $119,646 and $117,761, respectively	29,848		31,621
Operating lease right-of-use assets	35,745		29,330
Goodwill	620,585		624,328
Software, net of accumulated amortization of $116,855 and $111,642, respectively	88,827		80,638
Deferred customer acquisition costs	68,609		67,529
Restricted cash	2,213		1,919
Intangible assets, net of accumulated amortization of $283,659 and $275,346, respectively	192,113		204,267
Deferred tax assets	106,594		106,374
Other assets	34,762		33,926
Total assets	$	1,402,741	$	1,395,836
Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable	$	31,324	$	17,464
Accrued expenses	154,706		158,080
Deferred revenue, current portion	60,030		65,506
Operating lease liabilities, current portion	10,562		11,554


Total current liabilities	256,622		252,604
Indebtedness under revolving credit facility	210,500		215,500

Convertible senior notes, net	294,444		290,784
Operating lease liabilities	38,349		31,019
Other liabilities	3,561		3,155
Total liabilities	803,476		793,062
Commitments and Contingencies (Note 9)	0		0
Stockholders’ Equity:
Common stock, par value 0.001 per share; 596,950 shares authorized at March 31, 2021, and December 31, 2020	327		324
Additional paid-in capital	1,571,025		1,554,574
Accumulated deficit	(667,597)		(667,221)
Treasury stock, at cost	(337,532)		(320,891)
Accumulated other comprehensive income	33,042		35,988
Total stockholders’ equity	599,265		602,774
Total liabilities and stockholders’ equity	$	1,402,741	$	1,395,836

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
	March 31,
	2021		2020

Revenues:
Service, access and product revenues	$	314,793	$	283,077
USF revenues	18,107		14,380
Total revenues	332,900		297,457

Operating Expenses:
Service, access and product cost of revenues (excluding depreciation and amortization)	138,680		113,038
USF cost of revenues	18,107		14,380

Sales and marketing	81,474		85,621
Engineering and development	20,360		19,203
General and administrative	44,933		40,882
Depreciation and amortization	20,417		20,485
Total operating expenses	323,971		293,609
Income from operations	8,929		3,848
Other Income (Expense):
Interest expense	(7,298)		(8,082)
Other income (expense), net	174		229
Total other expense, net	(7,124)		(7,853)
Income (Loss) before income tax benefit	1,805		(4,005)
Income tax (expense) benefit	(2,181)		250
Net loss	$	(376)	$	(3,755)

Loss per common share:
Basic and diluted	$	0	$	(0.02)

Weighted-average common shares outstanding:
Basic and diluted	249,638		243,627

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
	March 31,
	2021		2020

Net loss	$	(376)	$	(3,755)
Other comprehensive loss:
Foreign currency translation adjustment, net of tax expense (benefit) of $1,293 and $(470), respectively	(2,946)		(23,627)
Unrealized loss on derivatives, net of tax benefit of $0 and $(50), respectively	0		(418)
Total other comprehensive loss	(2,946)		(24,045)
Comprehensive loss	$	(3,322)	$	(27,800)

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


	Three Months Ended
	March 31,
	2021		2020
Cash flows from operating activities:
Net loss	$	(376)	$	(3,755)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	9,614		6,331
Amortization of intangibles	10,803		14,154

Deferred income taxes	999		1,468
Amortization of deferred customer acquisition costs	4,762		3,661

Allowances for doubtful accounts	964		1,448
Amortization of financing costs and debt discount	3,863		3,656
(Gain) Loss on disposal of property and equipment	(7)		741
Share-based expense	14,566		11,116
Changes in derivatives	0		(133)
Changes in operating assets and liabilities:
Accounts receivable	737		2,361

Prepaid expenses and other current assets	(2,305)		(5,387)
Deferred customer acquisition costs	(7,187)		(9,042)

Accounts payable and accrued expenses	16,416		(25,459)
Deferred revenue	(4,821)		2,934
Other assets - deferred cloud computing implementation costs	(1,017)		(669)
Other assets and liabilities	307		(922)
Net cash provided by operating activities	47,318		2,503
Cash flows used in investing activities:
Capital expenditures	(2,553)		(2,887)
Purchase of intangible assets	(62)		(75)
Acquisition and development of software assets	(13,865)		(10,273)


Net cash used in investing activities	(16,480)		(13,235)
Cash flows provided by (used in) financing activities:
Payments for short and long-term debt	(5,000)		0
Proceeds from issuance of long-term debt	0		45,000
Employee taxes paid on withholding shares	(16,641)		(12,656)
Proceeds from exercise of stock options	622		155
Net cash (used in) provided by financing activities	(21,019)		32,499
Effect of exchange rate changes on cash	(980)		(2,290)
Net increase in cash, cash equivalents, and restricted cash	8,839		19,477
Cash, cash equivalents, and restricted cash, beginning of period	44,997		25,635
Cash, cash equivalents, and restricted cash, end of period	$	53,836	$	45,112
Supplemental disclosures of cash flow information:
Cash paid (received) during the periods for:
Interest	$	1,863	$	2,866
Income taxes	$	(3,965)	$	1,249
Non-cash investing activities:
Acquisition of long-term assets included in accounts payable and accrued expenses	$	1,302	$	2,119
Share-based compensation capitalized in internally developed software costs	$	1,266	$	928

~~(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 December 31, 2019	$	316	$	1,494,469	$	(631,009)	$	(306,043)	$	9,329	$	567,062
Stock option exercises	4		151								155
Share-based expense			12,044								12,044
Employee taxes paid on withholding shares							(12,748)				(12,748)
Foreign currency translation adjustment									(23,627)		(23,627)
Unrealized gain on derivatives									(418)		(418)
Net loss					(3,755)						(3,755)
Balance at March 31, 2020	$	320	$	1,506,664	$	(634,764)	$	(318,791)	$	(14,716)	$	538,713

	Common Stock		Additional Paid-in Capital		Accumulated Deficit		Treasury Stock		Accumulated Other Comprehensive Income		Total
Balance at December 31, 2020	$	324	$	1,554,574	$	(667,221)	$	(320,891)	$	35,988	$	602,774
Stock option exercises	3		619								622
Share-based expense			15,832								15,832
Employee taxes paid on withholding shares							(16,641)				(16,641)
Foreign currency translation adjustment									(2,946)		(2,946)

Net loss					(376)						(376)
Balance at March 31, 2021	$	327	$	1,571,025	$	(667,597)	$	(337,532)	$	33,042	$	599,265

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

~~(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. At Vonage, our vision is to accelerate the world's ability to connect. We are observing a secular change in the way business is done, with a fundamental shift in how communications technologies are being leveraged in almost every industry. Through the Vonage Communications Platform, our strategy is to deliver a single leading ~~provider of~~ cloud communications platform that powers our customers' and partners' global engagement solutions using our APIs, Unified Communications, and Contact Center innovations. We believe that the Vonage Communications Platform's products and services ~~for business. We transform the way people work and businesses operate through a portfolio~~are well positioned to take advantage of emerging trends 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 device.~~digital transformation.

~~Through our Nexmo subsidiary~~Our strategic business is the Vonage Communications Platform which ~~was acquired on June 3, 2016, we are~~delivers a ~~global leader in the Communications-Platform-as-a-Service ("CPaaS") segment of the~~single leading cloud communications ~~market,~~platform that powers our customers' and partners' global engagement solutions using our APIs, Unified Communications, and Contact Center innovations. The Vonage Communications Platform brings unique value to businesses by providing ~~innovative communication application program interfaces ("APIs") for text~~multiple communications channels - including video, voice, messaging, email, verification, and ~~voice communications, allowing developers~~artificial intelligence - that integrate into the applications, products and ~~enterprises~~workflows that our customers are already using. We believe this delivers both the power and the flexibility 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 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 the growing need to transform their ~~full~~ communications, ~~needs, from employee~~connections and experiences for customers and enables the type of business continuity, remote work, and remote delivery of services that are now essential for team members.

For our Consumer customers, we enable users to ~~employee communications through business~~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 ~~customer communications.~~

~~We also~~offer our Consumer customers attractively priced voice and messaging services and other features around the world on a variety of devices. Our Consumer strategy is focused on the continued penetration of our core North American markets, which provide ~~a robust suite of feature-rich residential communication solutions.~~value in international long distance and target under-served segments.

Customers in the United States represented ~~84%~~66% and ~~89%~~69% of our consolidated revenues for the three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016 and 86% and 92% for the nine months ended September 30, 2017 and 2016,~~2020, 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~~March 31, 2021 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~~2020 filed with the Securities and Exchange Commission on February ~~28, 2017~~.19, 2021.

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 ongoing 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, 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.~~2020.

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~~$13,647 and ~~$7,460~~$9,609 for the three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020, respectively. In addition, costs of goods sold included service, access, and ~~$20,497 and $21,278 for~~product cost of revenues during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020 were $2,579 and $3,676, respectively.

~~Advertising Costs~~Sales and Marketing Expenses

We incurred advertising costs, which are included in sales and marketing of ~~$11,423~~$9,657 and ~~$18,765~~$9,460 for the three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016 and $43,760 and $55,723 for the nine months ended September 30, 2017 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~~March 31, 2021 and December 31, 2020 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~~fair value hierarchy.

As of ~~our debt~~March 31, 2021 and December 31, 2020, the fair value of the 1.75% convertible senior notes due 2024 (the “Convertible Senior Notes”) was approximately $361,156 and $373,373, respectively. The fair value was determined based on ~~June 3, 2016~~the quoted price for ~~a similar debt instrument.~~ the Convertible Senior Notes in an inactive market on the last trading day of the reporting period and is classified as Level 2 in the fair value hierarchy.

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 the appropriate level of the~~ fair value hierarchy ~~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 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.~~gives the lowest priority to Level 3 inputs.

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 March 31,				As of December 31,
	2021		2020		2020		2019
Cash and cash equivalents	$	51,623	$	43,073	$	43,078	$	23,620
Restricted cash	2,213		2,039		1,919		2,015
Total cash, cash equivalents and restricted cash	$	53,836	$	45,112	$	44,997	$	25,635

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


						March 31, 2021						December 31, 2020
	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	$	281,019	$	(153,678)	$	127,341	$	284,692	$	(150,094)	$	134,598
Developed technology	49,054		57,245		Developed technology	173,416		(109,239)		64,177		173,572		(104,468)		69,104
Patents and patent licenses	4,410		5,547		Patents and patent licenses	20,896		(20,301)		595		20,849		(20,284)		565
Trade names	521		1,033		Trade names	441		(441)		0		500		(500)		0
Non-compete agreements	779		1,657
Intangible assets, net	$	181,522	$	199,256

Total intangible assets					Total intangible assets	$	475,772	$	(283,659)	$	192,113	$	479,613	$	(275,346)	$	204,267

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
In the second half of 2020, the Company initiated a business-wide optimization and alignment project to focus the Company's resources and drive stronger operational execution. In connection with this project, the Company incurred accrued severance costs of $1,294 during the three months ended March 31, 2021, related to further employee exits, which was included in general and administrative expense.

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, 2020	$	624,328
Foreign currency translation adjustment	(3,743)
Balance at March 31, 2021	$	620,585

Recent Accounting Pronouncements

In August ~~2017,~~2020, the FASB issued ASU 2020-06, "Debt - Debt with Conversion Options (Subtopic 470-20) and Derivatives and Hedging - Contractsin 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-capital. 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.~~statements.

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.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 3. Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers which is further described in Note 2, Summary of Significant Accounting Policies and Note 3, Revenue Recognition to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020.

Disaggregation of Revenue

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


	Three Months Ended						Three Months Ended
	March 31, 2021						March 31, 2020
	VCP		Consumer		Total		VCP		Consumer		Total
Primary geographical markets
Americas	$	150,072	$	74,932	$	225,004	$	129,379	$	84,573	$	213,952
EMEA	62,835		2,514		65,349		49,217		2,631		51,848
APAC	42,547		0		42,547		31,657		0		31,657
	$	255,454	$	77,446	$	332,900	$	210,253	$	87,204	$	297,457
Major Sources of Revenue
Service revenues	$	240,442	$	65,697	$	306,139	$	195,649	$	77,243	$	272,892
Access and product revenues	8,598		56		8,654		10,122		63		10,185
USF revenues	6,414		11,693		18,107		4,482		9,898		14,380
	$	255,454	$	77,446	$	332,900	$	210,253	$	87,204	$	297,457

In ~~January 2016, FASB issued ASU 2016-01, "Recognition~~addition, the Company recognizes service revenues from its customers through subscription services provided or through usage or pay-per-use type arrangements. During the three months ended March 31, 2021, the Company recognized $150,453 related to subscription services, $133,652 related to usage, and ~~Measurement of Financial~~$48,795 related to other revenues such as USF, other regulatory fees, and credits. During the three months ended March 31, 2020, the Company recognized $156,455 related to subscription services, $93,047 related to usage, and $47,955 related to other revenues such as USF, other regulatory fees, and credits.

Contract Assets and ~~Financial Liabilities". This ASU provide guidance concerning certain matters involving the recognition, measurement,~~Liabilities

The following table provides information about receivables and disclosure of financial assets and financial liabilities. The guidance does not alter the basic framework for classifying debt instruments held as financial assets. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is not permitted,contract liabilities from contracts with ~~some exceptions. The adoption of ASU 2016-01 will not have a material impact~~customers:


	March 31, 2021		December 31, 2020
Receivables (1)	$	111,584	$	116,304
Contract liabilities (2)	60,030		65,506

(1) Amounts included in accounts receivables on our condensed consolidated ~~financial statements~~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 ~~related disclosures.~~

In May 2014, FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" which was further amended through various updates issued by the FASB thereafter. The amendments of Topic 606 clarify the principles for recognizing revenue and provide a common revenue standard for U.S. GAAP to improve financial reporting. The core principle of these standards are that an entity should recognize revenue to depict the transfer of promised goods 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 andis predominantly recognized over the ~~expected customer life. In August 2015, an ASU was issued by~~following month as transfer of control occurs. During the ~~FASB which deferred~~three months ended March 31, 2021 and March 31, 2020, the ~~effective date~~Company recognized revenue of $106,037 and $108,875, respectively, related to ~~annual and interim periods beginning on or after December 15, 2017.~~its contract liabilities. We ~~will adopt~~expect to recognize $60,030 into revenue over the requirements of the new standard in the first quarter of 2018 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 changesnext twelve months related 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. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, and any adjustments should be reflecteddeferred revenue as of the beginning of 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 to Employee Share-Based Payment Accounting". This ASU is issued as part of its Simplification Initiative. The areas for simplification in this ASU involve several aspects of the accounting 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. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adopted this ASU in the first quarter 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 additional paid-in-capital of $5,668 and the corresponding benefit to our accumulated deficit and deferred tax asset of $2,285 related to the reversal of forfeiture rate as 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, 2016.2021.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Remaining Performance Obligation

~~In July 2015, FASB issued ASU 2015-11, "Simplifying~~Transaction price allocated to the ~~Measurement~~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 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, which is the estimated selling prices in the ordinary course of business, less reasonably predicable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, first-out ("LIFO") or 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 and related disclosures.

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

~~In connection with the preparation of our condensed consolidated financial statements for the quarter ended~~ March 31, ~~2017, and our remediation efforts related~~2021 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 ~~material weakness in our internal control over financial reporting related to our controls~~majority of its remaining performance obligation 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~~next 18 months.

Contract Acquisition Costs

We have various commission programs for internal sales personnel and channel partners that are incremental 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 beencustomer contracts. These costs are recorded as ~~merger consideration and not deductible compensation. The correction of this error requires the reversal of the~~ deferred ~~tax asset~~contract acquisition costs on the consolidated balance sheets which eligible employees and ~~related tax benefits~~third parties may earn a commission on sales of ~~$4,756~~services and products to customers. We expect that these commission fees are recoverable and, therefore, we have capitalized $88,099 and $85,690 as contract costs, net of accumulated amortization, as of March 31, 2021 and December 31, ~~2016. In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality,~~2020, respectively, included within deferred customer acquisitions costs, current portion and ~~SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we evaluated the error~~deferred customer acquisition costs on our condensed consolidated balance sheets. Capitalized commission fees are amortized to sales and ~~determined that the related impact was not material~~marketing expense over estimated customer life, which is 7 years for Vonage Communications Platform customers. The amounts amortized to ~~our results of operations or financial position for any prior annual or interim period, but that correcting the $4,756 cumulative impact of the error would be material to our results of operations~~sales and marketing expense were $4,762 and $3,661, respectively, for the three months ended March 31, ~~2017. Accordingly, we have corrected~~2021 and March 31, 2020, respectively. There were no impairment losses recognized in relation to 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 oncosts capitalized during the three months ended March 31, ~~2016. The impact~~2021 and 2020. In addition, the Company expenses sales commissions for commission plans related to ~~the consolidated balance sheet as of December 31, 2016~~customer arrangements deemed less than a year and ~~the consolidated statements of income~~ for ~~the three~~residuals and ~~six months ended June 30, 2016, the three and nine months ended September 30, 2016, and the three months and year ended December 31, 2016 is as follows:~~

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)

~~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~~March 31, 2021 and ~~2016:~~2020:


	Three Months Ended
	March 31,
	2021		2020
Numerator
Net loss	$	(376)	$	(3,755)
Denominator
Weighted average common shares outstanding for basic and diluted net loss per share	249,638		243,627



Basic and diluted loss per share
Basic and diluted loss per share	$	0	$	(0.02)

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~~March 31, 2021 and ~~2016,~~2020, the following were excluded from the calculation of diluted ~~earnings~~loss per common share because of their anti-dilutive effects:


	Three Months Ended
	March 31,
	2021	2020
Restricted stock units	15,795	13,894
Stock options	1,387	4,878

	17,182	18,772

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. ~~Long-Term Note~~Income Taxes

The income tax consisted of the following:


	Three Months Ended
	March 31,
	2021			2020
Income (loss) before income taxes	$	1,805		$	(4,005)
Income tax (expense) benefit	(2,181)			250
Effective tax rate	120.8		%	6.2		%

Generally, provisions for income taxes during interim reporting periods apply an estimate of the annual effective tax rate for the full year. The provision for income taxes will vary with levels of pre-tax income (loss) and ~~Revolving Credit Facility~~

~~This footnote should~~non-deductible expenses, NOL valuation allowances and other permanent non-deductible charges which can cause the rate to fluctuate from quarter to quarter. An alternative approach may be ~~read in conjunction with~~recorded under a discrete method which applies actual adjustments for the ~~complete description~~period including specific permanent adjustments and geographic distribution of our ~~financing arrangements under Note 6,~~ ~~Long-Term Debt~~pre-tax income (loss). The discrete method was determined to be the appropriate method for calculating the interim tax provision as using the estimated annual effective tax rate method would have produced an unreliable rate stemming from a marginal loss and ~~Revolving Credit Facility~~large permanent adjustments.

For the three months ended March 31, 2021, our effective tax rate was different than the statutory rate primarily due to an increase in permanent items related to limitations on executive compensation, the inclusion of foreign income in the U.S. due to foreign disregarded entities, and limitation on foreign losses.

For the three months ended March 31, 2020, our ~~Annual Report on Form 10-K for~~effective tax rate was different than the ~~year ended December 31, 2016.~~

~~A schedule of long-term note and revolving credit facility at~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016~~ ~~is as follows:~~

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

~~We used $197.8 million of the net available proceeds of the 2016 Credit Facility~~$2,115, which was recognized related 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~~excess tax benefits 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, we made mandatory repayments of $14.1 million under the term note and made discretionary repayments of $42.0 million under the revolving credit facility, respectively, and borrowed $15.0 million under the revolving credit facility.equity compensation. In addition, the Company’s actual effective ~~interest~~tax rate ~~was 4.25%~~for the current year has 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.

Uncertain Tax Positions

The Company had uncertain tax benefits of $1,001 and $632 as of ~~September 30, 2017.~~March 31, 2021 and December 31, 2020, respectively. The Company recognizes interest and penalties related to uncertain tax benefits in income tax expense. The Company incurred interest expense or penalties of $2 and $0, respectively, during the three months ended March 31, 2021 and March 31, 2020. The following table reconciles the total amounts of uncertain tax benefits:


	March 31, 2021		December 31, 2020
Balance as of January 1	$	632	$	914
Increase due to current year positions	375		114
Increase due to prior year positions	4		0
Decrease due to settlements and payments	0		(173)
Decrease due to lapse of applicable statute of limitations	0		(238)
(Decrease) increase due to foreign currency fluctuation	(10)		15
Uncertain tax benefits as of the end of the period	$	1,001	$	632

~~Interest Rate Swap~~Net Operating Loss Carry Forwards

~~On July 14, 2017, we executed on three interest rate swap agreements in order to hedge~~As of March 31, 2021, the ~~variability~~Company has U.S. Federal and state NOL carryforwards of ~~expected future cash interest payments~~$410,731 and $207,769, respectively, which expire at various times through 2037. We have Non-US NOLs of $159,152 primarily related to the 2016 Credit Facility. The swaps have 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. Under the swaps our interest rate is fixed at 4.7%. The interest rate swaps are accounted for as cash flow hedges in accordance with ASC 815, ~~Derivatives and Hedging~~.

~~As of September 30, 2017, the fair market value of the swaps was $197,~~United Kingdom which is included in other assets and accumulated OCI on the face of our consolidated balance sheet. As of September 30, 2017, the critical terms of the swap agreements have not changed and therefore, there ishas 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:expiration date.

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 $ —

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 6. ~~Common Stock~~Long-Term Debt

~~As of September 30, 2017 and December 31, 2016,~~This footnote should be read in conjunction with the ~~Company had 596,950 shares of common stock authorized and had 10,318 shares available for grants under our share-based compensation programs as of September 30, 2017. For a detailed~~complete description of our ~~share-based compensation programs refer~~financing arrangements under Note 8, Long-Term Debt, to ~~Note 9,~~ ~~Employee Benefit Plans~~the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2020.

~~Common Stock Repurchases~~The following table summarizes the Company's long-term debt as of March 31, 2021 and December 31, 2020:

~~On December 9, 2014, Vonage's Board of Directors authorized a program for~~


	March 31, 2021		December 31, 2020
Revolving credit facility - due 2023	210,500		215,500
Convertible senior notes - due 2024	345,000		345,000
Long-term debt including current maturities	555,500		560,500
Less unamortized discount	45,441		48,702
Less debt issuance costs	5,115		5,514
Total long-term debt	$	504,944	$	506,284

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 ~~repurchase up~~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 ~~$100.0 million~~June 5, 2022.

Each $1,000 principal amount of ~~its outstanding~~the Convertible Senior Notes is initially convertible into 59.8256 shares of the Company's common stock, ~~(the "2014 $100.0 million repurchase program"). Repurchases under~~which is equivalent to an initial conversion price of approximately $16.72 per share. The conversion rate is subject to adjustment upon the ~~2014 $100.0 million repurchase program are expected~~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 ~~made over a four-year period ending~~convertible only upon satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on ~~December 31, 2018.~~

the second scheduled trading day immediately preceding the maturity date. We ~~repurchased~~will satisfy any conversion election by paying or delivering, as the ~~following~~case may be, cash, shares of common stock or a combination of cash and shares of common stock. During the three months ended March 31, 2021, 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:


	March 31, 2021
Principal	$	345,000
Unamortized discount	(45,441)
Unamortized issuance cost	(5,115)
Net carrying amount	$	294,444

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

The following table sets forth the interest expense recognized related to the Convertible Senior Notes:


	Three Months Ended
	March 31,
	2021		2020
Contractual interest expense	$	1,509	$	1,509
Amortization of debt discount	3,261		3,054
Amortization of debt issuance costs	399		399
Total interest expense related to the Convertible Senior Notes	$	5,169	$	4,962

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 ~~resources~~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.

2018 Term Note and Revolving Credit Facility

On July 31, 2018, the Company entered into the 2018 Credit Facility consisting of a $100 million senior secured term loan and a $500 million revolving credit facility. The co-borrowers under the ~~2014 $100.0~~2018 Credit Facility are the Company and Vonage America Inc., the Company’s wholly owned subsidiary. Obligations under the 2018 Credit Facility are guaranteed, fully and unconditionally, by the Company’s other United States subsidiaries and are secured by substantially all of the assets of each borrower and each guarantor.

During the three months ended March 31, 2021, we repaid $5 million ~~repurchase program~~under the revolving facility. In addition, the effective interest rate was 2.88% as of March 31, 2021. During the three months ended March 31, 2020, we borrowed $45 million under the revolving credit facility. As of March 31, 2021, we were in compliance with all covenants, including financial covenants, for the 2018 Credit Facility.

The Company entered into various non-cancelable operating lease arrangements 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 2028, some of which provide the Company options to extend the lease for terms up to 5 years beyond the original term. 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 March 31, 2021 and December 31, 2020.

The Company incurred operating lease expense of $2,558 and $2,965, respectively, during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016:~~March 31, 2020, related to its operating leases. In addition, the Company received sub-lease income of $284 and $319, respectively, during the three months ended March 31, 2021 and March 31, 2020. Additionally, the remaining weighted average lease term for our operating leases was 5.03 years and the weighted average discount rate utilized to measure the Company's operating leases was 4.35% as of March 31, 2021.

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

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


	Three Months Ended
	March 31, 2021		March 31, 2020

Cash paid for amounts included in the measurement of lease liabilities	$	2,628	$	4,139
Right-of-use assets obtained in exchange for lease obligations	$	8,431	$	1,261

Maturities of operating lease liabilities as of March 31, 2021 and December 31, 2020 are as follows:


	March 31, 2021		December 31, 2020
2021 (1)	$	9,407	13,134
2022	10,975		9,645
2023	10,735		8,401
2024	6,817		4,148
2025	6,917		4,248
Thereafter	9,525		7,522
Total lease payments	54,376		47,098
Less imputed interest	(5,465)		(4,525)
Total	$	48,911	$	42,573

(1) Excluding three months ended March 31, 2021 for the period ended March 31, 2021.

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 and fourth quarters of 2020, the Company abandoned a few of its office leases and as such, the Company reduced its operating lease right-of-use asset by $9,503 as of December 31, 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 8. Common Stock

As of ~~September 30, 2017, $42,533 remained~~March 31, 2021 and December 31, 2020, the Company had 596,950 shares of common stock authorized and had 9,782 shares available for grants under our share-based compensation programs as of March 31, 2021. For a detailed description of our ~~2014 $100.0 million repurchase program. The repurchase program expires~~share-based compensation programs refer to Note 11, Employee Stock Benefit Plans in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2018 but may be suspended or discontinued at any time without notice.~~

~~In any period under~~2020. The following table reflects the ~~2014 $100.0 million repurchase program, cash used~~changes in ~~financing activities related to~~the Company's common stock ~~repurchases may differ from the comparable change in stockholders' equity, reflecting timing differences between the recognition of share repurchase transactions~~issued and ~~their settlement for cash.~~outstanding:


For the Three Months Ended
(in thousands)	Issued	Treasury	Outstanding
Balance at December 31, 2019	315,808	(72,959)	242,849
Shares issued under the 2015 Equity Incentive Plan	4,072	0	4,072
Employee taxes paid on withholding shares	0	(1,675)	(1,675)
Balance at March 31, 2020	319,880	(74,634)	245,246

Balance at December 31, 2020	323,815	(74,841)	248,974
Shares issued under the 2015 Equity Incentive Plan	3,612	0	3,612
Employee taxes paid on withholding shares	0	(1,316)	(1,316)
Balance at March 31, 2021	327,427	(76,157)	251,270

Note 7.9. Commitments and Contingencies

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)~~

~~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)~~

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.local regulatory authorities.

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)~~

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~~$8,648 and ~~$1,763~~$8,560 as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, 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:~~

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:~~

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

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

~~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.

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 reportable operating segments within the Company for making operating decisions and assessing financial performance. Our chief operating decision-maker reviews revenue and ~~gross margin information~~Adjusted EBITDA for each of our reportable operating segments. Beginning as of December 31, 2020, the Company includes Adjusted EBITDA as this is the measure management uses to evaluate the profitability of our reportable operating segments. The items excluded from Adjusted EBITDA are not separately evaluated for each reportable operating segment. The Company has recast data from prior years to reflect the change how the Company evaluates the profitability of its reportable operating segments ~~but does not review operating expenses on a segment by segment basis.~~to conform to the current year presentation. In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by the reportable ~~segments.~~operating segments as this information is not utilized by management to allocate resources or capital.

~~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 customers to communicate~~external engagement 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.~~customers.

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.

Information about our segment results for the three months ended March 31, 2021 and March 31, 2020 were as follows:


Three Months Ended	Service Revenue		Revenue		Adjusted EBITDA		Depreciation and Amortization
March 31, 2021
Vonage Communications Platform	$	240,442	$	255,454	$	(1,846)	$	20,080
Consumer	65,697		77,446		50,013		337
Total Vonage	$	306,139	$	332,900	$	48,167	$	20,417

March 31, 2020
Vonage Communications Platform	$	195,649	$	210,253	$	(21,088)	$	19,198
Consumer	77,243		87,204		59,925		1,287
Total Vonage	$	272,892	$	297,457	$	38,837	$	20,485

VONAGE HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

~~For~~The Company uses Adjusted EBITDA as the measure of profit or loss for the evaluation of performance and allocation of resources of our ~~segments we categorize revenues~~reportable operating segments. Adjusted EBITDA is defined as ~~follows:~~

~~Services revenues. Services revenues consists primarily of revenue~~net income or net loss attributable to ~~our communication services for Consumer and Software Defined Wide Area Network,~~Vonage before income tax expense or ~~SD-WAN, UCaaS and CPaaS services for Business,~~

~~Product revenues.~~ ~~Product revenues include equipment sold to customers, shipping and handling, professional services, and broadband access.~~

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

~~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 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.

~~USF cost of revenues.~~ ~~USF cost of revenues represents contributions to the Federal Universal Service Fund (“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 were as follows:~~

Product revenues⁽¹⁾

Service cost of revenues⁽²⁾

Product cost of revenues⁽¹⁾

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

~~(2) Excludes~~benefit, interest expense, depreciation and amortization, ~~of $5,053 and $1,799 for the three months ended September 30, 2017 and $14,931 and $5,566 for the nine months ended September 30, 2017, 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 were as follows:~~

Product revenues ⁽¹⁾

Service cost of revenues⁽²⁾

Product cost of revenues ⁽¹⁾

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



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




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



	Three Months Ended									Nine Months Ended
	September 30, 2017									September 30, 2017
	Business			Consumer			Total			Business			Consumer			Total
Revenues
Service revenues	$	109,483		$	111,913		$	221,396		$	305,599		$	346,666		$	652,265
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
USF revenues	6,738			11,770			18,508			19,386			36,280			55,666
Total revenues	129,306			123,777			253,083			364,822			383,444			748,266

Cost of revenues
Service cost of revenues⁽²⁾	50,777			19,434			70,211			139,218			62,969			202,187
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
USF cost of revenues	6,738			11,770			18,508			19,386			36,280			55,666
Total cost of revenues	70,217			32,721			102,938			196,964			104,724			301,688

Segment gross margin
Service margin	58,706			92,479			151,185			166,381			283,697			450,078
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	—			—			—			—			—			—
Segment gross margin	$	59,089		$	91,056		$	150,145		$	167,858		$	278,720		$	446,578

Segment gross margin %
Service margin %	53.6		%	82.6		%	68.3		%	54.4		%	81.8		%	69.0		%
Gross margin ex-USF (Service and product margin %)	48.2		%	81.3		%	64.0		%	48.6		%	80.3		%	64.5		%
Segment gross margin %	45.7		%	73.6		%	59.3		%	46.0		%	72.7		%	59.7		%



	Three Months Ended									Nine Months Ended
	September 30, 2016									September 30, 2016
	Business			Consumer			Total			Business			Consumer			Total
Revenues
Service revenues	$	86,662		$	128,167		$	214,829		$	210,214		$	399,401		$	609,615
Product revenues ⁽¹⁾	13,618			207			13,825			39,795			514			40,309
Service and product revenues	100,280			128,374			228,654			250,009			399,915			649,924
USF revenues	6,029			13,676			19,705			15,832			43,102			58,934
Total revenues	106,309			142,050			248,359			265,841			443,017			708,858

Cost of revenues
Service cost of revenues⁽²⁾	34,858			24,973			59,831			72,788			77,220			150,008
Product cost of revenues ⁽¹⁾	13,101			3,331			16,432			38,465			11,196			49,661
Service and product cost of revenues	47,959			28,304			76,263			111,253			88,416			199,669
USF cost of revenues	6,029			13,676			19,705			15,843			43,102			58,945
Total cost of revenues	53,988			41,980			95,968			127,096			131,518			258,614

Segment gross margin
Service margin	51,804			103,194			154,998			137,426			322,181			459,607
Product margin	517			(3,124		)	(2,607		)	1,330			(10,682		)	(9,352		)
Gross margin ex-USF (Service and product margin)	52,321			100,070			152,391			138,756			311,499			450,255
USF margin	—			—			—			(11		)	—			(11		)
Segment gross margin	$	52,321		$	100,070		$	152,391		$	138,745		$	311,499		$	450,244

Segment gross margin %
Service margin %	59.8		%	80.5		%	72.1		%	65.4		%	80.7		%	75.4		%
Gross margin ex-USF (Service and product margin %)	52.2		%	78.0		%	66.6		%	55.5		%	77.9		%	69.3		%
Segment gross margin %	49.2		%	70.4		%	61.4		%	52.2		%	70.3		%	63.5		%


	Three Months Ended
	March 31,
	2021		2020
Adjusted EBITDA	$	48,167	$	38,837
Interest expense	(7,298)		(8,082)
Depreciation and amortization	(20,417)		(20,485)
Amortization of costs to implement cloud computing arrangements	(896)		(609)
Share-based expense	(14,566)		(11,116)


Organizational transformation	0		(1,194)
Restructuring activities	(1,294)		0
Other non-recurring items	(1,891)		(1,356)
Income (Loss) before taxes	$	1,805	$	(4,005)



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



	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



	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	$	—


	March 31, 2021		December 31, 2020
Compensation and related taxes and temporary labor	$	31,118	$	43,580
Marketing	19,849		15,319
Taxes and fees	31,669		25,977
Telecommunications	48,572		52,975
Severance	1,674		3,594
Interest	2,408		847
Customer credits	3,393		4,738
Professional fees	2,754		1,953
Inventory	907		659
Other accruals	12,362		8,438
Accrued expenses	$	154,706	$	158,080



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	$	—



	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



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


	March 31, 2021		December 31, 2020
Long-lived assets:
United States	$	635,595	$	646,072
United Kingdom	294,600		293,457
Israel	1,178		1,325
	$	931,373	$	940,854


(in thousands, except percentages)	Three Months Ended
	March 31,
	2021		2020		Dollar Change		Percent Change
Service, access and product revenues	$	314,793	$	283,077	$	31,716	11	%
USF revenues	18,107		14,380		3,727		26	%
Total revenues	332,900		297,457		35,443		12	%

Service, access and product cost of revenues	138,680		113,038		25,642		23	%
USF cost of revenues	18,107		14,380		3,727		26	%
Total cost of revenues (1)	156,787		127,418		29,369		23	%
Gross margin	$	176,113	$	170,039	$	6,074	4	%


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


~~(2)~~	~~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.~~


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


Segment gross Margin %
Service margin %	50.1	%	52.8	%
Gross margin excluding USF (Service, access and product margin) %	47.9	%	49.5	%
Segment gross margin %	46.7	%	48.4	%


	(in thousands)
Service gross margin increase is primarily due to increased usage of the Company's API services primarily related to SMS services in APAC	$	17,133
Access and product gross margin increased due to lower costs providing access services to VCP customers during the current quarter	446

Increase in segment gross margin	$	17,579


Segment gross Margin %
Service margin %	87.0	%	89.0	%
Gross margin excluding USF (Service, access and product margin) %	86.3	%	88.2	%
Segment gross margin %	73.2	%	78.2	%


	(in thousands)
Service gross margin decreased primarily due to a decrease in subscriber lines of 16% resulting in lower gross margin of $11,455 which has been declining over recent years as the Company has focused on the growth of the Vonage Communications Platform	$	(11,547)
Access and product gross margin increased 8% primarily due to lower equipment costs associated with sales to customers during the current quarter	42

Decrease in segment gross margin	$	(11,505)


	(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	$	6,501
Increase in working capital driven primarily by timing of vendor payments, prepayments for annual licenses and improvement in operating cash flows as a result of benefits under the CARES Act. This was slightly offset due to the timing in customer payments for annual subscription services	38,314
Increase in cash provided by operating activities	$	44,815


	(in thousands)
Increase in payments to acquire and develop software assets	(3,592)
Decrease in payments related to capital expenditures	334

Decrease in payments to acquire new patents on our developed technology	13
Increase in cash used in investing activities	$	(3,245)


	(in thousands)
Decreased borrowings net of repayments during the current year	$	(50,000)
Decrease in payments associated with taxes on share based compensation due to lower vesting in 2021	(3,985)
Increase in proceeds received from exercise of stock options due to fewer exercises in 2020	467
Decrease in cash (used in) provided by financing activities	$	(53,518)


~~31.1~~
10.1	Amendment No. 1 to Renewal Agreement, dated February 26, 2021, among Vonage Holdings Corp., Legion Partners Asset Management LLC, and each of the signatories thereto (Incorporated by reference to Vonage Holdings Corp.'s Current Report on Form 8-K (File No. 001-32887) filed on February 26, 2021)

10.2	Termination, Separation and Release Agreement, dated March 24, 2021, among Vonage Holdings Corp. and Omar Javaid*†

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,~~March 31, 2021 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.


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




~~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.