VONAGE HOLDINGS CORP.
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Vonage Holdings Corp. definitive Proxy Statement,(the “Company,” “Vonage,” “our,” “us” or “we”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment No. 1”) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “Form 10-K”), which will bewas filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 24, 2022, to provide the information required by Part III of Form 10-K. This information was previously omitted from the Form 10-K in reliance on General Instruction G(3) to Form 10-K, which permits the information in Part III to be incorporated in the Form 10-K by reference from our definitive proxy statement if such statement is filed no later than 120 days after end of our fiscal year. We are filing this Amendment No. 1 to include Part III information in our Form 10-K because we will not file a definitive proxy statement containing this information within 120 days after December 31, 2017, are incorporatedthe end of the fiscal year covered by referencethe Form 10-K. This Amendment No. 1 amends and restates in their entirety Items 10, 11, 12, 13 and 14 of Part III of thisthe Form 10-K.
VONAGE HOLDINGS CORP.
FORWARD-LOOKING STATEMENTSPART III
This Annual Report on Form 10-K contains statementsITEM 10. Directors, Executive Officers and other information which are deemedCorporate Governance
OUR BOARD OF DIRECTORS
Hamid Akhavan
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| Age: 60 |
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| Independent Director since December 2016 |
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| Committees: Technology, Transactions |
Experience:
•Chief Executive Officer at EchoStar Corporation (since April 2022)
•Chairman at Twin Point Capital - Special Opportunities (Jan. 2020 to be “forward-looking” withinMarch 2022)
•Partner at Twin Point Capital, a growth-oriented private equity firm based in New York, NY and Palo Alto, CA (April 2018 to Jan. 2020)
•Partner at Long Arc Capital, a private equity firm specializing in disruptive technology investments (August 2016 to March 2018)
•Chief Executive Officer of Unify Inc. (formerly Siemens Enterprise), a global supplier of Unified Communication (UC) and Contact Center (CC) services (February 2010 to January 2014)
•Chief Operating Officer of Deutsche Telecom (February 2009 to January 2010)
•Chief Executive Officer of T-Mobile International (December 2006 to March 2009)
•Began his career at Jet Propulsion Laboratory (NASA) and Bell Communications Research
Education:
•BS, Electrical Engineering and Computer Science, California Institute of Technology (Caltech)
•MS, Electrical Engineering and Computer Science, Massachusetts Institute of Technology (MIT)
Other Boards:
•National Broadband Ireland (since January 2020)
•Anterix (NASD: ATEX) (since July 2020)
•Blackpoint Cyber (since 2015)
•Servion (since 2016)
•Stealth Monitoring (April 2019 to December 2021)
Qualifications:
Mr. Akhavan has extensive leadership experience at organizations spanning from large public corporations, to private-equity funded companies, to startups, with vast expertise in the meaning of the Private Securities Litigation Reform Act of 1995, or the Litigation Reform Act. These forward-looking statementswireless, software and other information are based on our beliefsservices markets, as well as assumptions made by us using information currently available.in enterprise cloud communications. Mr. Akhavan brings deep international and versatile technology, enterprise and communications experience, and adds significant strategic insight to our Board.
The words "plan," “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate
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Jeffrey A. Citron
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| Age: 51 |
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| Chairman of the Board of Directors since January 2001 |
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| Committees: Transactions (Chair) |
Experience:
•Private Investor
•Managing Partner, KEC Ventures (2011 to us, are intendedpresent)
•President, Mannis Group (January 2015 to identify forward-looking statements. Such statements reflect our current views with respect to future events, are subject to certain risks, uncertainties, and assumptions, and are not a guarantee of future performance. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in such forward-looking statements or information. In lightpresent)
•Interim Chief Executive Officer of the Company (April 2007 to July 2008)
•Chief Strategist of the Company (February 2006 to July 2008)
•Chief Executive Officer of the Company (January 2001 through February 2006)
Qualifications:
As a Founder and former Chief Executive Officer and Chief Strategist of Vonage, Mr. Citron brings deep institutional knowledge and perspective regarding our strengths, challenges, opportunities, and operations to his role as Chairman of our Board of Directors. Mr. Citron brings entrepreneurial and business-building skills and experience to Vonage. He also brings the perspective of a shareholder with significant uncertaintiesstock ownership in these forward-looking statements, you should not place undue reliance on these forward-looking statements. The forward-looking statementsus. In addition, Mr. Citron possesses an extensive understanding of telecommunications technologies, including VoIP technology.
5 VONAGE ANNUAL REPORT 2021
Jan Hauser
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| Age: 63 |
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| Independent Director since September 2019 |
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| Committees: Audit (Chair), Nominating & Governance |
Experience:
•Vice President, Chief Accounting Officer of General Electric Company (NYSE: GE) (April 2013 to September 2018)
•Partner in the Accounting Services Group of PricewaterhouseCoopers ("PwC") National Professional Services Group (1993 to 2013)
•Professional Accounting Fellow in the Office of the Chief Accountant at the Securities and information containedExchange Commission (1991 to 1993)
Education and Certifications:
•Bachelor of Business Administration, Accounting, summa cum laude, University of Wisconsin (Whitewater)
•Certified Public Accountant
Other Boards:
•Enfusion, Inc. (NYSE: ENFN) (since September 2021)
Qualifications:
Ms. Hauser is a global finance leader and retired PwC partner, bringing more than 35 years of experience navigating highly-complex business transactions. She is a stalwart leader through change and has partnered with senior executives and board members during challenging business conditions. With over 19 years as a PwC partner coupled with her SEC experience, Ms. Hauser also possesses deep insight into regulatory policy and procedure. In addition, Ms. Hauser has been determined to be an "Audit Committee Financial Expert" under SEC rules.
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Priscilla Hung
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| Age: 55 |
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| Independent Director since August 2019 |
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| Committees: Nominating & Governance (Chair), Technology |
Experience:
•Chief Operating Officer of Guidewire Software, Inc. (NYSE: GWRE), a technology platform that unifies software, services and partner ecosystem to power property & casualty insurers, serving a global community of more than 350 primary insurers of all sizes and lines of business in this Annual Report on Form 10-K relate40 countries (2017 to eventspresent); Chief Administrative Officer & SVP of Corporate Development (2014 to 2017); other positions including Business Development, Global Alliances, Strategic Finance, Corporate Infrastructure, and state our beliefsLegal Affairs; joined 2005
•Held several management positions at Ariba Inc., including Director of Operations and the assumptions made by us only asDirector of Global Channels and Alliances
•Held several channel, business development, and product marketing positions at Sun Microsystems, Uniface/Compuware, Pyramid/Siemens Nixdorf, and Oracle Corporation
Education:
•MEng, Operation Research & Industrial Engineering, Cornell University
Other Boards:
• Ethos Life (since August 2020)
• Veeva Systems Inc (NYSE: VEEV) (since January 2022)
Qualifications:
Ms. Hung brings more than 30 years of experience in technology and platform-based services to the dateVonage Board, including deep experience in worldwide operations, including product development, corporate and product strategy, presales, product marketing, alliances, information systems technology and security, cloud operations, and customer success.
7 VONAGE ANNUAL REPORT 2021
Carolyn Katz
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| Age: 60 |
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| Independent Director since January 2014 |
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| Committees: Audit, Compensation (Chair) |
Experience:
•Executive Chair of Author & Company, a digital publisher (2012 to present)
•Principal of Providence Equity Partners Inc., a private investment firm specializing in equity investments in telecommunications and media companies (May 2000 to October 2001)
•Held positions at Goldman, Sachs & Co., most recently as a managing director and co-head of Emerging Communications (June 1984 to April 2000)
Education:
•BA, summa cum laude, Princeton University
Other Boards:
•Cogent Communications (Nasdaq: CCOI) (since November 2019)
Qualifications:
Ms. Katz brings more than 20 years of experience in technology and telecommunications to the Vonage Board, including deep experience helping communications companies with corporate development, international expansion and emerging technologies. In addition, Ms. Katz has been determined to be an "Audit Committee Financial Expert" under SEC rules, and provides guidance and perspective on Form 10-K. We do not intend to update these forward-looking statements, except as required by law.financial and strategic matters.
In accordance with the provisions
8 VONAGE ANNUAL REPORT 2021
Michael J. McConnell
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| Age: 56 |
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| Independent Director since March 2019 (pursuant to a Cooperation Agreement with Legion Asset Management Partners, LLC) |
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| Committees: Audit, Nominating & Governance, Transactions |
Experience:
•Private investor
•Chairman of the Litigation Reform Act,Board of Spark Networks, Inc., a global, online dating company (January 2015 until June 2017); Interim Executive Chairman and Chief Executive Officer (August 2014 through December 2014); Director (July 2014 until the company was sold in November 2017)
•Chief Executive Officer of Collectors Universe, Inc., a provider of third-party authentication and grading of high value collectibles (2009 to 2012); Director (2007 to 2013)
•Managing Director of Shamrock Capital Advisors, an investment manager of domestic and international alternative asset funds, where he was a member of the firm’s Executive Committee (1994 to 2007)
Education:
•MBA, University of Virginia, Darden Graduate School of Business Administration
•AB, Economics, Harvard University
Other Boards:
•Adacel Technologies (ASX: ADA) (since May 2017)
•Jacob Stern & Sons (since July 2019)
•OneSpan Inc. (Nasdaq: OSPN) (since June 2021)
•Advisor to Thorney Investments (since January 2016)
Qualifications:
Mr. McConnell brings over 20 years of public company non-executive board experience, public company investor experience, and perspectives as an operating chief executive officer in public companies. In addition, Mr. McConnell has been determined to be an "Audit Committee Financial Expert" under SEC rules.
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Rory Read
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| Age: 60 |
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| Chief Executive Officer of the Company |
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| Director since July 2020 |
Experience:
•Chief Executive Officer of the Company (July 2020 to present)
•Chief Operating Officer of Dell Technologies, Inc. (October 2015 to June 2020); President and CEO of Virtustream, a Dell subsidiary (May 2018 to June 2020); Executive Vice President of Dell Technologies Boomi (December 2016 to June 2020)
•Chief Integration Officer at Dell Technologies, Inc. (October 2015 to April 2018)
•Chief Operating Officer and President Worldwide Commercial Sales at Dell Technologies, Inc. (March 2015 to October 2015)
•Chief Executive Officer of Advanced Micro Devices (August 2011 to October 2014)
•Chief Operating Officer of Lenovo Group Ltd. (2006 to 2011)
•Over 23 years at International Business Machines Corporation, serving various leadership roles globally
Education:
•BA, magna cum laude, Hartwick College
Qualifications:
Mr. Read brings to our Board of Directors extensive knowledge as a global leader in cloud communications helping businesses accelerate their digital transformation. He brings to the Board executive leadership strength and operational expertise which are key to driving transformative change and execution excellence within businesses.
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John J. Roberts
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| Age: 77 |
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| Lead Independent Director since February 2015 |
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| Director since August 2004 |
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| Committees: Audit |
Experience:
•Global Managing Partner for PricewaterhouseCoopers LLP, a provider of assurance, tax, and advisory services (1998 until his retirement in June 2002)
•Chief Operating Officer of Coopers & Lybrand (1994 to 1998, when it merged with Price Waterhouse)
Education and Certifications:
•BSBA, Drexel University
•Certified Public Accountant
Other Boards:
•Pennsylvania Real Estate Investment Trust (NYSE: PEI) (since 2003)
•John & Charlene Roberts Family Foundation (since 2002)
Qualifications:
As a result of his roles at PricewaterhouseCoopers LLP and its predecessors, Mr. Roberts has experience in public company accounting, risk management, disclosure, and financial system management and has been determined to be an "Audit Committee Financial Expert" under SEC rules. He also has extensive public company board experience (including specific experience on audit committees). Mr. Roberts brings this experience to his role as our Lead Independent Director.
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Tien Tzuo
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| Age: 54 |
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| Independent Director since July 2020 |
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| Committees: Compensation |
Experience:
•Founder and Chief Executive of Zuora, Inc. (November 2007-present)
•Chief Strategy Officer of salesforce.com, inc. (2005 to 2008)
•Chief Marketing Officer at salesforce.com, inc., (2003 to 2005)
Education:
•B.S. in Electrical Engineering from Cornell University
•M.B.A. from Stanford University
Other Boards:
•Zuora, Inc. (NYSE: ZUO) (since November 2007) and Chairman (since December 2017)
•Network for Good, Inc. (since 2010)
•Network for Good Donor Advised Fund (since 2006)
Qualifications:
As the founder and CEO of Zuora, we are making investors awarebelieve that such forward-looking statements,Mr. Tzuo is qualified to serve on our Board of Directors based on his industry perspective, including deep experience in cloud-based software, worldwide operations, product development, and product strategy.
12 VONAGE ANNUAL REPORT 2021
Steve Ward
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Age:66
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Independent Director since April 2021
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| Committees: Compensation, Nominating & Governance |
Experience:
•President and Chief Executive Officer - Lenovo Corporation (April 2005 - January 2006)
•IBM Corporation
◦Senior Vice President and General Manager of Personal and Retail Systems Group (March 2003 - April 2005)
◦General Manager of Industrial Sector (February 2000 - March 2003)
◦General Manager of Thinkpad and Mobile Division (January 1998 to March 2000)
◦Chief Information Officer (February 1997 to March 2000)
Education:
•B.S. in Mechanical Engineering from California Polytechnic State University, San Luis Obispo
Other Boards:
•C3.AI (NYSE: AI) (January 2009 - present)
•Carpenter Technology Corporation (NYSE: CRS) (March 2001 - present)
•E2Open (NYSE: ETWO) (2001 - March 2015)
•E-Ink Corporation (2006-2009)
•KLX Inc. (2015- October 2018)
•KLX Energy Services Holdings, Inc. (Nasdaq: KLXE) (September 2018 - July 2021)
•Lenovo Group Limited (2005-2006)
•QD Vision, Inc. (January 2015 - February 2018)
Qualifications:
We believe Mr. Ward is qualified to serve as a member of our board of directors because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Annual Report on Form 10-K, any exhibits to this Form 10-K and other public statements we make. the competition we face; the expansion of competitionhis extensive management experience in the cloud communications market; our ability to adapt to rapid changes in the cloud communications market; the nascent statetechnology industry and as a member of the cloud communications for business market; our ability to retain customersboards of directors of various public companies.
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Director Attributes and attract new customers cost-effectively; the risk associated with developing and maintaining effective internal sales teams and effective distribution channels; risks related to the acquisition or integration of businesses we have acquired; security breaches and other compromises of information security; risks associated with salesNomination Process
We believe that each member of our services to medium-sizedBoard of Directors should possess certain qualities, including ethical character, sound judgment, and enterprise customers; our reliance on third party hardware and software; our dependence on third party facilities, equipment, systems and services; system disruptions or flaws in our technology and systems; our ability to scaledemonstrated business acumen. In addition, Board members should be familiar with our business and grow efficiently;industry, be able to work harmoniously, be free of conflicts of interest, be willing to devote sufficient time to satisfy obligations as a director, and be willing to act in the long-term interests of all shareholders. While we do not have a formal diversity policy, we seek to have Directors representing a range of experiences, qualifications, skills, and backgrounds relevant to our dependenceactivities. We believe that our diversity speaks for itself, and our Nominating and Governance committee has made Board diversity a priority in its evaluation of director candidates.
We added five independent directors, Jan Hauser, Priscilla Hung, Michael McConnell, Tien Tzuo, and Steve Ward, since 2019 and we continue to be committed to ongoing refreshment.
In recruiting and selecting director candidates, our nominating and governance committee considers various factors, including the experience and expertise of existing Board members and the alignment of candidates' abilities and qualifications with the long-term strategic direction of the Company and the qualities described above. To identify director candidates, our nominating and governance committee makes requests to Board members and others for recommendations and uses the services of third-party search firms. The committee meets from time to time to evaluate biographical information and background materials relating to potential candidates and sets up interviews of selected candidates by members of the committee and the Board.
Shareholders may recommend individuals to our nominating and governance committee for consideration as potential director candidates by contacting Vonage Holdings Corp., Attn: Corporate Secretary, 101 Crawfords Corner Road, Suite 2416, Holmdel, NJ 07733. Assuming that appropriate biographical and background material has been provided on third party vendors;a timely basis, the impactcommittee will evaluate shareholder-recommended candidates by following substantially the same process, and applying substantially the same criteria, as it follows for candidates submitted by others.
Shareholders also have the right under our bylaws to directly nominate director candidates, without any action or recommendation on the part of fluctuationsthe nominating and corporate governance committee or the Board.
How We are Organized
Our Board of Directors is currently composed of nine independent Directors, and Mr. Read, our Chief Executive Officer. Our Board of Directors has established audit, compensation, nominating and governance, technology, and transaction committees. Each of the Board committees is composed solely of independent Directors.
Our governance principles provide that our Board of Directors may fill the roles of Chairman of the Board and Chief Executive Officer based upon what is in economic conditions, particularlythe best interests of Vonage and its shareholders at any point in time. Our Board of Directors has determined that the positions of Chairman of the Board and Chief Executive Officer should be held by different persons, and has also determined the Board should have a Lead Independent Director who has not previously held an executive position with the Company. Mr. Citron, who has deep institutional knowledge of the Company, serves as Chairman of the Board, and Mr. Roberts serves as our Lead Independent Director. Our governance principles provide the flexibility for our Board of Directors to modify our leadership structure in the future as appropriate.
Our Lead Independent Director:
•has the responsibility to schedule and prepare agendas for and to chair meetings of non-management or independent Directors;
•presides at all meetings of the Board at which our Chairman of the Board is not present;
•coordinates with our Chairman of the Board and our Chief Executive Officer, and other Directors, to determine the frequency, length, and agenda of Board meetings;
•facilitates communication between our Chairman of the Board and our Chief Executive Officer and the other Directors (however, Directors are free to, and do routinely, communicate directly with our Chairman of the Board and our Chief Executive Officer);
•causes the dissemination of information to the other members of our Board;
•raises issues on behalf of the non-management or independent Directors when appropriate;
•has the authority to call meetings of non-management or independent Directors;
14 VONAGE ANNUAL REPORT 2021
•speaks on behalf of the independent Directors when necessary;
•discusses Board and committee evaluations with the nominating and governance committee;
•evaluates the performance of our smallChief Executive Officer and medium business customers;other executive officers in coordination with the compensation committee; and
•coordinates with our abilityChairman of the Board and our Chief Executive Officer to complymonitor communications from shareholders and other interested parties.
Board Committees
Our Board has established audit, compensation, nominating and governance, technology, and transactions committees, each of which operates under a charter that has been approved by our Board. Current copies of each committee's charter are posted on the Corporate Governance section of our website at http://ir.vonage.com/.
Our Board has determined that all of the members of each of the audit, compensation, nominating and governance, technology, and transactions committees are independent as defined under the rules of the Nasdaq Stock Market, including, in the case of all members of the audit committee, the independence requirements contemplated by Rule 10A-3(b)(1) under the Securities Exchange Act of 1934.
Audit Committee
The audit committee's responsibilities include:
•appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm;
•overseeing the work and evaluating the performance of our independent registered public accounting firm, including through the receipt and consideration of reports from such firm;
•reviewing and discussing with data privacymanagement and the independent registered public accounting firm our annual and quarterly financial statements and related regulatory matters;disclosures;
•monitoring our ability to obtaininternal controls over financial reporting and disclosure controls and procedures;
•overseeing our internal audit function;
•reviewing management's risk assessment and risk management policies;
•establishing policies regarding hiring employees from our independent registered public accounting firm;
•establishing procedures for the receipt, retention, confidential treatment, and investigation of accounting or maintain relevant intellectual property licensesauditing related complaints and concerns;
•meeting independently with our internal auditing staff, independent registered public accounting firm and management;
•overseeing compliance by the Company with applicable laws and regulations;
•reviewing and approving or to protect our trademarksratifying any related person transactions; and internally developed software; fraudulent use
•preparing the audit committee report required by SEC rules.
The members of our nameaudit committee are Ms. Hauser (Chair), Mr. Roberts, Ms. Katz, and Mr. McConnell. Each member of our audit committee meets the standards for financial literacy for companies listed on the Nasdaq Stock Market. In addition, our Board of Directors has determined that Ms. Hauser, Mr. Roberts, Ms. Katz, and Mr. McConnell, each of whom is independent under applicable rules governing independence of audit committee members, are each also an “Audit Committee Financial Expert” as defined by applicable SEC rules.
Audit committee meetings typically have included, for all or services; intellectual propertya portion of each meeting, not only the committee members but also other Board members, our chief executive officer, chief financial officer, chief accounting officer, chief legal officer, and our head of internal audit.
15 VONAGE ANNUAL REPORT 2021
Compensation Committee
The compensation committee's responsibilities include:
•annually reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer and other litigation that have been and may be brought against us; reliance on third partiesexecutives;
•determining, along with our other independent Directors, compensation for our 911 services; uncertainties relatingchief executive officer;
•reviewing and approving the compensation of our other executive officers;
•reviewing risks arising from our compensation policies and practices;
•overseeing and administering our cash and equity incentive plans;
•appointing, approving the compensation of, assessing the independence of, and overseeing the work of any compensation consultant, independent legal counsel or other advisor retained by the compensation committee;
•monitoring compliance of executive officers with our stock ownership policy;
•reviewing and discussing annually with management our “Compensation Discussion and Analysis,”; and
•preparing the compensation committee report required by SEC rules, which is included below.
Independent Compensation Advisor
The compensation committee has the authority to regulationengage its own independent advisors to assist in carrying out its responsibilities under its charter. The compensation committee has engaged and utilizes the services of business services; risks associatedan independent compensation consultant, Meridian Compensation Partners, LLC ("Meridian"), to advise the committee in connection with legislative, regulatory or judicial actions regardingits oversight of our business products; risks associated with operating abroad; risks associatedcompensation program. The compensation consultant attends meetings of the compensation committee as requested and also communicates with the taxationcompensation committee outside of meetings. The compensation consultant reports to the compensation committee rather than to management, although the compensation consultant may meet with management from time to time for purposes of gathering information on proposals that management may make to the compensation committee, at the request of the compensation committee. The compensation committee is free to replace the compensation consultant or hire additional consultants at any time. The compensation consultant does not provide services to management. In selecting its compensation consultant, the compensation committee considered factors relevant to the consultant's independence, including the factors set forth in applicable rules of the Nasdaq Stock Market, and determined that the services provided by Meridian in 2021 did not raise any conflicts of interest. The processes and procedures followed by our compensation committee in considering and determining executive compensation are described below under the heading “Compensation Discussion and Analysis.”
Compensation committee meetings typically have included, for all or a portion of each meeting, not only the committee members but also other Board members, our chief executive officer, chief financial officer, chief legal officer, and our chief human resources officer.
The members of our business; governmental regulationcompensation committee are Ms. Katz (Chair), Mr. Tzuo, and taxes inMr. Ward. In the case of all members of the compensation committee, our international operations; liability under anti-corruption laws or from governmental export controls or economic sanctions; our dependence on our customers' unimpeded access to broadband connections; risks associated with a material weakness in our internal controls;restrictions in our debt agreements that may limit our operating flexibility; foreign currency exchange risk; our ability to obtain additional financing if required; any reinstatement of holdbacks by our credit card processors; our history of net losses and ability to achieve consistent profitability inBoard has considered the future; our ability to fully realize the benefits of our net operating loss carry-forwards if an ownership change occurs; certain provisions of our charter documents; and other factors that areindependence criteria set forth in the “Risk Factors” sectionNasdaq Listing Rules that are specifically applicable to compensation committee members and determined that each of the members of our compensation committee is independent.
Nominating and Governance Committee
The nominating and governance committee's responsibilities include:
•identifying individuals qualified to become Board members;
•recommending to our Board the persons to be nominated for election as Directors for appointment and to each of the Board's committees;
•making recommendations to our Board on the size of and criteria for membership on the Board and Board committees;
•reviewing and making recommendations to the Board with respect to the compensation of non-executive Directors;
•developing and recommending governance principles to the Board;
16 VONAGE ANNUAL REPORT 2021
•reviewing our disclosures regarding the specific experience, qualifications, attributes or skills that led to the conclusion that each director and nominee should serve as a director;
•reviewing the Board's leadership structure in light of our specific characteristics and circumstances and recommending changes, if any, to the Board for approval, and reviewing our disclosure regarding Board leadership structure; and
•overseeing an annual self-evaluation of the Board and its committees.
Meridian advised the committee in connection with reviewing the compensation of non-executive Directors during 2021. The processes and procedures followed by the nominating and governance committee in identifying and evaluating director candidates are described below under the heading “Director Nomination Process.”
The members of our nominating and governance committee are Ms. Hauser, Ms. Hung (Chair), Mr. McConnell, and Mr. Ward. Nominating and governance committee meetings typically have included, for all or a portion of each meeting, not only the committee members but also other Board members and our chief executive officer.
Board Meetings and Attendance
During 2021, our Board of Directors met 18 times, our audit committee met 6 times, our compensation committee met 9 times, and our nominating and governance committee met 11 times. During 2021, each current director attended at least 75% of the aggregate of the number of Board meetings and the number of meetings held by all committees on which he or she then served.
Director Attendance at Annual Meeting of Shareholders
Our governance principles provide that Directors are encouraged to attend the annual meeting of shareholders. All of our Directors then serving on our Board attended the 2021 annual meeting of shareholders.
Risk Management and Role of the Board in Risk Oversight
Our Chief Executive Officer reports directly to our Board of Directors and is responsible for the day-to-day management of our Company, including how the Company addresses risk. Our Chief Financial Officer is responsible for day-to-day financial risk management under the direction of our Chief Executive Officer. Management has implemented an enterprise risk management process to identify, assess, and manage the most significant risks facing us and conducts risk assessments of our business periodically. The risk assessment process is global in nature and has been developed to identify and assess our risks, including the nature of the risk, as well as to identify steps to mitigate and manage each risk. Our senior leadership team, functional heads, and other sectionsmanagers are surveyed and/or interviewed to develop this information. The enterprise risk management process is led by our Chief Legal Officer, who reports to our Chief Executive Officer, and our Vice President, Internal Audit, who reports directly to our audit committee. In 2021, our Chief Legal Officer and Vice President, Internal Audit, provided status updates on our enterprise risk management process and related activities to our Board of this Annual ReportDirectors.
In support of the overall enterprise risk management process, our Chief Information Security Officer conducts further risk analysis from an information security and cybersecurity risk perspective and throughout 2021 provided status updates on Form 10-K,related activities to our Board of Directors. In addition, the Board examined additional areas of risk management affected by the Covid-19 pandemic throughout 2021.
Our Board of Directors is involved in oversight of Vonage's risk assessment and monitoring processes, which it conducts primarily through the work of committees of the Board. Management reviews significant risks with our Board of Directors throughout the year, as necessary and/or appropriate, and conducts a formal review of its assessment and management of the most significant risks with our Board of Directors on a periodic basis. Our audit committee has oversight responsibility to review management's risk assessment and risk management policies, including the policies and guidelines used by management to identify, monitor and manage our exposure to risk. Our audit committee reviews and discusses with our management, our outside auditor and our internal auditors the material risks facing Vonage and our management's plans to manage the risks identified as a result of the enterprise risk management process and reports on its review to the full Board of Directors. Our compensation committee reviews risks arising from our compensation policies and practices and reports on its review to the full Board of Directors. In conjunction with the audit committee, our technology committee reviews risks related to cybersecurity and data privacy.
Codes of Conduct
We have a comprehensive code of conduct applicable to all our Directors, officers, and employees and have a finance code of ethics applicable to our chief executive officer, chief financial officer and employees in our finance organization. The
17 VONAGE ANNUAL REPORT 2021
code of conduct and the finance code of ethics are posted in the Corporate Governance section of our website: http://www.vonage.com/investor-relations/governance. We will provide you with printed copies of our codes free of charge on written request to Vonage Holdings Corp., Attn: Corporate Secretary, 101 Crawfords Corner Road, Suite 2416, Holmdel, NJ 07733. There have not been any waivers to date, however we intend to disclose any waivers from provisions of our codes that apply to our principal executive officer, principal financial officer, principal accounting officer or controller, or any person performing similar functions, as well as amendments to our code(s) that are required to be disclosed under SEC rules, on the Corporate Governance section of our website promptly following the date of such amendment or waiver.
Board Communication
Our Board seeks, and welcomes, information from a diverse array of sources to help it perform its oversight functions. The Board has always valued input from shareholders as they both represent a wide array of backgrounds and perspectives and have a financial stake in the value of their input.
Our Board therefore maintains a number of means for shareholder input. Shareholders can participate in our annual meeting as well as in our Quarterly Reports on Form 10-Qengagement outreach and Current Reports on Form 8-K.
FINANCIAL INFORMATION PRESENTATION
For the financial information discussed in this Annual Report on Form 10-K, other than per share and per line amounts, dollar amounts are presented in thousands, except where noted. All trademarks are the property of their owners.
1 VONAGE ANNUAL REPORT 2017
PART I
ITEM 1. Business
OVERVIEW AND STRATEGY
At Vonage, we are redefining business communications. True to our roots as a technology disruptor, we are embracing technology to transform how businesses communicate to create better business outcomes. Our cloud communications platform enables businesses of all sizes to collaborate more productively and engage their customers more efficiently across any device. Vonage customers can choose among two separate delivery models to suit their specific communication needs: They can purchase Vonage Business with a Software-as-a-Service, or SaaS, model for a complete and configured unified communications solution or they can purchase Nexmo, "the Vonage API Platform", with a Platform-as-a-Service, or PaaS, model and consume our cloud communication in programmable modules, delivered via application programming interfaces, or APIs. We also provide a robust suite of feature-rich residential communication solutions.
All of our cloud communications solutions are designed to allow businesses to be more productive by integrating communications with all their existing business productivity tools and our programmable solutions allow customers to engage with their customers via embedded voice, chat, or messaging to create seamless and contextual communications that makes doing business easier for end customers.investor relations functions. The use cases for both within and between the SaaS and PaaS platforms continue to grow as businesses of all size continue to leverage cloud communications to improve employee productivity and customer experience. We also continue to provide a robust set of feature-rich residential communication solutions that allow consumers to connect their home phones and mobile phones on one number and we offer attractive international long distance rates that help create a loyal base of satisfied customers.
Our business is organized under two reportable segments, Business and Consumer. Additional discussion of our reportable segments is included in Note 16, Industry Segment and Geographical Information to the Consolidated Financial Statements.
Business
Our strategy is to use cloud communications to deliver better business outcomes for our customers, leveraging our unique combination of cloud-based Unified Communications as a Service, or UCaaS, solutions and Communications Platform as a Service, or CPaaS, offerings. Our innovative UCaaS solution is comprised of integrated voice, text, video, data, collaboration, and mobile applications over our flexible, scalable Session Initiation Protocol, or SIP, based Voice over Internet Protocol, or VoIP, network. Our CPaaS, solutions are designed to enhance the way businesses communicate with their customers by embedding communications into apps, websites and business processes. In combination, our products and services permit our business customers to communicate with their customers and employees through any cloud-connected device, in any place, at any time without the costly investment required with on-site equipment. We have a robust set of product families tailored to serve the full range of the business value chain, from the small and medium business, or SMB, market, through mid-market and enterprise markets. We provide customers with multiple deployment options, designed to provide the reliability and quality of service they demand. We provide customers the ability to integrate our cloud communications platform with many cloud-based productivity and CRM solutions, including Google’s G Suite, Zendesk, Salesforce’s Sales Cloud, Oracle, and Clio. Additionally, we provide a variety of Contact Center as a Service, or CCaaS, offerings as customers continue to transform their contact and call centers with cloud communications. With our ability to integrate these cloud-based workplace tools, Vonage integrates the entire business communications value chain - from employee communications that maximize productivity to the direct engagement with customers that CPaaS provides. When combined with our Multiprotocol Label Switching, or MLPS, network,Company maintains reporting mechanisms as well as voice services over customers' broadband networkswhen these contain Board-relevant information.
Our Board will give appropriate attention to written communications that are submitted by shareholders and other interested parties, and will respond if and as appropriate. Communications are forwarded to all Directors if they relate to important substantive matters or include suggestions or comments that the Lead Independent Director considers to be important for the Directors to know. In general, communications relating to corporate governance and corporate strategy are more likely to be forwarded than communications relating to ordinary business affairs, personal grievances, and matters as to which we receive repetitive or duplicative communications.
Shareholders and other interested parties who wish to send communications to our Lead Independent Director, the independent Directors as a group, or the Board should address such communications to such Directors or the Board of Directors, Vonage Holdings Corp., Attn: Corporate Secretary, 101 Crawfords Corner Road, Suite 2416, Holmdel, NJ 07733, via email at ir@vonage.com, or by submitting a communication through our SmartWan solution, we create a truly differentiated offering.website at https://ir.vonage.com/investor-resources/contact-ir.
DIRECTOR COMPENSATION
We support the full range of business customers, using three product families: Vonage Business Cloud, formerly Vonage Essentials, based on our proprietary call processing platform that is purpose-built for SMB and mid-market customers; Vonage Enterprise, formerly Vonage Premier, based on Broadsoft’s call processing platform in combination with other Vonage cloud based solutions, which serves mid-market businesses and large enterprises; and Nexmo, the Vonage API platform which provides customers with the ability to integrate communications into their business applications. We believe operating our product platforms at scale enables us to deliver the right products and solutions to address the needs of diverse customers while maximizing our subscriber economics, regardless of segment served. Revenues are generated primarily through the sale of subscriptions for our UCaaS services and usage-based sales through our CPaaS services allowing our customers to address their full communication needs. Our revenue generation efforts are focused on customer acquisition and retention as well as providing additional services to existing customers as they grow and scale.
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Our diverse customer base spans a wide variety of industries, including retail, manufacturing, automotive, legal, information technology, financial services, construction, real estate, engineering, healthcare, and non-profit.
Vonage Business Cloud
Vonage Business Cloud customers subscribe to our cloud-based communication services, delivered through our proprietary platform that is purpose-built for SMB and mid-market customers. Vonage Business Cloud provides a cost-effective, scalable, feature-rich solution, delivered over-the-top of a customer’s broadband, typically month-to-month without a commitment. Vonage Business Cloud is sold primarily through our direct telesales and online channels, and is increasingly sold through our channel partners and field sales teams. We believe the strength of the Vonage brand directly contributes to a lower-cost customer acquisition model and provides attractive subscriber economics.
Vonage Enterprise
Our Vonage Enterprise offerings are tailor-made for the large mid-market and enterprise segments. Vonage Enterprise is a feature-rich and fully managed solution that utilizes Broadsoft's enterprise-grade call processing platform, in combination with other cloud services like advanced contact center, video conferencing and speak2dial, and can be provided with high-level quality of service, or QoS, which is generally delivered over our national MPLS network, with 21 network Points of Presence, or POPs, across the country. Vonage can also provide QoS-level quality over-the-top of the customer’s broadband through our SmartWan router solution. Customers value our proprietary provisioning and feature-management tool which enables the rapid deployment of solutions directly by Vonage while giving full visibility to our channel partners and our customers. Further differentiating Vonage is our robust service delivery team comprised of team members specializing in project management, voice and data provisioning, and line number porting. This team is intensely focused on providing an outstanding customer experience, and is rapidly becoming a competitive differentiator.
Our Vonage Enterprise offering is sold primarily through our channel partners, and our field and enterprise sales teams, and generally requires a three-year contract. We are a preferred provider for many of the largest master agents in the country, harnessing a network of over 20,000 sub agents selling both Vonage Enterprise and Vonage Business Cloud. We believe we have one of the largest multi-channel distribution sales platforms in our industry to serve the full range of business customers. We plan to capitalize on the growing adoption of cloud-based communications and collaboration solutions by continuing to expand our salesforce, expand into new markets, and enhance our relationships with existing customers to provide additional functionality and overall business value that can be achieved with our UCaaS platform.
Nexmo, the Vonage API Platform
We are a global leader in the CPaaS segment of the cloud communications market, providing innovative communication APIs allowing developers and enterprises to embed contextual communications into mobile apps, websites and business workflows via text, social media, chat apps and voice. With just few lines of code, developers can embed programmable contextual communications into their applications and workflows to create innovative and engaging customer experiences for their customers. Nexmo, the Vonage API Platform can scale from one API call to billions. The platform makes it easy for our over 430,000 developers to access communication services via software and APIs. Through Nexmo we have a global network of interconnected carriers delivering our API-based communications platform, enabling businesses to communicate with their customers reliably and with ease, no matter where in the world they are located.
Consumer
For our Consumer customers, we enable users to access and utilize our services and features, via 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 and messaging services and other features around the world on a variety of devices.
Our Consumer marketing and distribution strategy is focused on the continued penetration of our core North American markets, where we will continue to provide value in international long distance and target under-served segments. The markets for international long distance allow us to leverage our VoIP network by providing customers a low-cost and feature-rich alternative to services offered by telecom, cable, and international calling card providers.
We generate revenue through the acquisition and retention of Consumer customers. As part of our overall strategy, we are focused on optimizing the Consumer business for profitability to improve the strong cash flows of the business. During 2017, we continued our disciplined focus on marketing efficiency by shifting customer acquisition spend to our higher performing channels, improving the quality of customers we acquire and driving lower churn, all of which drive higher customer life-time value. This focus has led to a reallocation of marketing spend to our Business segment.
The result of these initiatives has been to create a strong cash flow business which provides financial stability, as well as cost synergies and structural advantages to our Business segment.
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SERVICE OFFERINGS
Business
We provide a robust feature-rich range of communication services enabling businesses to interact with their customers, prospects and partners in a more efficient and effective manner. We provide services ranging from basic dial tone to services such as call queue, conferencing, call groups, mobile functionality, CRM integration, and detailed analytics - allowing our customers a high level of visibility into their business at prices that are often significantly lower than that of traditional on premises solutions. These services can be delivered over-the-top of the customers’ existing connectivity or bundled through our private MPLS connectivity service. Today more than 727 thousand business seats rely on Vonage to meet their communication needs, putting Vonage in a leading position within the UCaaS space. Our services are delivered through either proprietary networks or through trusted third parties to ensure our offerings provide all of the critical functions business needed for one of their most important business tools. During the year, we have continued to innovate and invest in both our Vonage Business Cloud and Vonage Enterprise platforms. These initiatives have enables us to increase scalability and enhance the user experience providing improved customer satisfaction.
Vonage Business Cloud
Vonage Business Cloud utilizes our proprietary technology platform to deliver seamless, integrated cloud-based communication services. It provides a cost-effective, highly scalable, feature-rich solution, delivered over-the-top of a customer’s broadband or our SmartWan solution, which provides elevated quality of service over a customer's network using SD-WAN, or software defined Wide Area Network, technology. All of our Vonage Business Cloud offerings allow free access to our mobile application. The mobile application allows users to choose WiFi, 3G and 4G and the extended features provide caller ID as if the user were calling from their office. Additional features include the ability to update account profiles, manage devices, and contact call logs directly from their mobile devices. We also offer virtual extensions, which connects employees to a business phone number through their mobile phones. A virtual extension is an additional dedicated direct dial number forwarded to the employee's mobile phone number, allowing employees to be reached from anywhere.
Vonage Business Cloud also integrates with other third-party software applications to improve workflow and enhance productivity. Our software usesuse a combination of open APIscash and pre-built integrations to enhance functionality with data from other third-party enterprise applications including Saleforce, Microsoft Dynamics, NetSuite, Zendesk, Oracle Sales Cloud and Hubspot. Vonage Business Cloud also provides customers with a desktop and video sharing solution with Amazon Chime. The investments we have made has enabled scalability to allow Vonage Business Cloud to serve a broader customer base.
Vonage Enterprise
Vonage Enterprise is a purpose-built cloud based platform for mid-market and enterprise customers, providing a complete set of enhanced unified communication and collaboration services, including: voice, data, video, mobile and contact center services. We focus on customers for whom guaranteed quality of service and uniformity of services across all locations is critical. We deliver services to this customer base over our private, nationwide, fully redundant, secure IP MPLS network using 21 network POPs that allow us to deliver dedicated, secure and private bandwidth utilizing all forms of last mile technologies including EoC and Fiber and bandwidth ranging from 1.5Mbps to 1Gbps. Services we deliver include Wide Area Networking, or WAN, Internet Access, MPLS VPN, Managed Firewall, Hosted UCaaS, Hosted Video Conferencing, Web Collaboration, Secure Instant Messaging & Presence, Mobility and Fixed Mobile Convergence. Through our Hosted Contact Center we are able to provide a best in class cloud based contact center solution to allow business to engage with their customers in any manner in which they choose.
Vonage Enterprise services include advanced features such as Single Number Reach, which provides each user one number, available over numerous devices including desk phones, tablets and smartphones, Shared Line Appearance, Busy Lamp Field, Phone Paging, Outlook Integration, IM, Presence, and Video. Vonage also delivers SIP Trunking, over the same network, to customers using premises PBXs, with the ability to overlay UCaaS features where the premises PBX is deficient or for disaster recovery and business continuity requirements. This product also supports a hybrid deployment where some locations may be fully hosted and others may continue to use the premises PBX. Vonage Enterprise customers also have the ability to utilize our gUnify middleware layer to integrate communications with the core, SaaS-based business applications that companies use as part of their every-day workflow, such as Google for Work, Salesforce, Zendesk, and others.
Vonage Enterprise customers also receive access to a custom-built portal through which they can fully administer all services, online bill pay, manage trouble tickets, manage bandwidth and services, access detailed Call Analytics, and execute Moves, Adds and Changes.
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Nexmo, The Vonage API Platform
The communications industry is undergoing a major transformation from dedicated communications applications and devices to communications embedded in other applications and devices where the communications happens within the context of those applications. For example, when calling or messaging a taxi driver, consumers can do this within the taxi app which has all the necessary context such as the pickup location and payment method, resulting in a better experience for both parties. Similarly, when contacting a company consumers can communicate within the context of the company’s branded mobile app or website and agents within the context of their CRM desktop application, delivering a better experience for consumers and improving productivity for contact center agents. We call this type of communications “contextual” because it is context rich and delivers a better experience. This trend is enabled by a new category of cloud communications platforms that enable software developers to build communications capabilities such as messaging and voice calling within their applications without having to build or maintain communications infrastructure.
While innovative software companies were the early adopters of cloud communication platforms, over time virtually all companies will benefit from the new approach as part of their digital transformation journey. As more startups disrupt existing industries, established enterprises will innovate with communications APIs in order to more effectively compete with the new entrants and with their traditional competitors. Over time enterprises of all sizes will adopt contextual communications to deliver better business outcomes.
Nexmo, the Vonage API Platform, abstracts the complexities of the global communications networks and delivers voice, messaging, and authentication capabilities in the form of APIs that developers can easily embed into their applications with a low risk, pay as you go business model that fosters innovation. Developers adopt our APIs via a low friction, self service model on our website where they start with a free trial account and pay for additional usage with a credit card using prepaid accounts. Our customers include digital native companies who are looking to disrupt an existing industry, enterprises undergoing digital transformation, and enterprise SaaS companies looking to enhance their products with embedded communications capabilities.
Our platform includes the following products:
Voice API: Our Voice API enables companies to deliver better and more flexible voice experiences when communicating with their customers within the context of their existing business workflow, backed by the quality, strength and reliability of the Vonage network in the United States and tier one carriers globally.
SIP Trunking: Our SIP Trunking enables companies to rapidly connect their PBX to the global telecommunications networks using a pay as you go model and without having to negotiate lengthy carrier contracts.
SMS API: Our SMS API enables companies to send and receive SMS messages within the context of their existing business workflows. Our direct to carrier approach and patented Adaptive Routing algorithm enables us to deliver messages reliably and with low latency, globally.
Verify: Our Verify API enables companies to deploy two-factor-authentication for their applications to help them acquire genuine customers and to protect against fraud. With a single API call, Verify delivers messages via SMS and voice calls if required to ensure high conversion rates. In addition, customers pay only for successful authentications.
Number Insight: Our Number Insight API enables companies to get real time intelligence on phone numbers anywhere in the world to ensure numbers are valid and reachable and to discover other insights such as carrier information, roaming status whether a landline or mobile, and caller name.
Virtual Phone Numbers: We offer phone numbers that are local all over the world enabling our customers to have a local presence globally. We also offer toll free numbers and short codes in the United States and Canada. Our numbers can be provisioned and de-provisioned programmatically to enable maximum utilizations.
Our product offerings combined with the strength of our network enable us to partner closely with our customers to ensure that they are successful through a personalized account management experience, high quality support and consulting services. The Company's CPaaS products are supported through our close relationships with tier one carriers across the globe and offer local numbers in more countries along with our private MPLS network with 21 points of presence in the United States allowing us to offer high voice quality, lower costs and increased reliability. Additionally, Nexmo has office locations all over the world, including the United States, United Kingdom, France, Germany, Hong Kong, Singapore, Japan, Korea and China. Our extensive network of developers provides customers with the ability to foster rapid innovations, including extensive developer documentation, sample codes, tutorials, libraries and free online support.
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Consumer
Our home telephone services are offered to customers through several service plans with different pricing structures. The service plans include basic features such as voicemail, call waiting, and call forwarding as well as unique features such as Simulring, Visual Voicemail and Extensions. We also charge for local and international calling outside of plan limits.
We have two primary Consumer offerings available in the United States: Vonage World and Vonage North America. For a flat monthly fee, Vonage World customer plans include unlimited domestic calling, which includes U.S., Canada, and Puerto Rico, and unlimited calling to landline phones in more than 60 countries, including India, Mexico, and China, and unlimited calling to mobile phones in certain of those countries. The Vonage North America plan includes unlimited calling across the U.S., Canada, Mexico and Puerto Rico. Each of our Consumer calling plans provides a number of basic features including call waiting, caller ID with name, call forwarding, and voicemail. Our plans also include unlimited Vonage Visual Voicemail, which is “readable voicemail” delivered via email or SMS text message, Vonage Extensions, which extends the plan, and in-bound calling, to additional phone numbers and devices, and selective call block, which allows users to block unwanted calls. We also offer, in some cases for additional fees, features such as area code selection, virtual phone number, and web-enabled voicemail. Additionally, we also provide similar product offerings to customers in both Canada and the United Kingdom.
Our mobile services include enhancements to our Consumer calling plans as well as mobile applications that can be initially downloaded for iPhone ® , iPad ® , iPod touch ® , and Android ® OS devices for free.
In order to access our consumer services, a customer need only connect a standard telephone to a broadband Internet connection through a small Vonage-enabled device. After connecting the device, our customers can use their telephone to make and receive calls. Vonage-enabled devices allow customers to use the Internet connection for their computer and telephones at the same time while ensuring a high quality calling experience. We also offer a cordless multi-phone system solution. Our plug-and-play Vonage-enabled devices permit portability as customers can take their Vonage device to different locations where broadband service is available. We generally have not charged new customers for the adapters permitting use of our service.
NETWORK OPERATIONS
The Vonage network uses our customer’s existing or Vonage procured high-speed broadband Internet service to allow calls over the Internet either from a standard telephone through a Vonage-enabled device or through soft phone software or mobile client applications. Our UCaaS services are not dependent on any specific type or provider of Internet service, and our customers are free to change their Internet service provider in response to a competitive alternative, or because they have moved to a different location. For many of our Vonage Enterprise customers, our UCaaS services are delivered over the Company's private, nationwide, fault tolerant, secure IP MPLS network under multi-year contracts to provide the high level of interconnection quality and the ability to offer service level agreements, or SLA, guaranteeing certain levels of voice service performance.
Our network is scalable and geographically distributed for robustness, high availability, and reliability across multiple call processing sites, using regional data interconnection points, where calls to non-Vonage customers are interconnected with the public switched telephone network. We periodically assess the locations of our regional data connection points in connection with efforts to improve the quality of and efficiency in delivering our service. Our interconnections with the public switched telephone network, or IP/SIP networks, are made pursuant to commercial agreements we have with several telecommunications providers. Under these agreements, we transfer calls originated by our customers to other carriers who connect the call to the called party or connect peer to peer. We have a varying degree of settlement arrangements with our carrier partners for indirect third party or direct termination of our calls. The calls are routed from our network to other carriers’ interconnected circuits at co-location facilities in which we lease space. This method of connecting to the public switched telephone or IP/SIP networks allows us to expand capacity quickly, as necessary to meet call volume, and to provide redundancy within our network.
Because Vonage’s system is standards based and not constrained to use any specific broadband service provider to connect to our customers, we can centrally manage and share resources across our customer base to minimize capital investment when entering new markets.
The following are also important in supporting our network operations:
Network Operations Center. We currently maintain a network operations center at our headquarters with monitoring redundancies at several points within our network. The network operations center monitors and manages the status and health of our network elements, allowing us to manage our network in real time, respond to alert notifications, and re-route network traffic as needed. We pursue a multi-faceted approach to managing our network to ensure high call quality and reliable communications services to our customers. For Business customers, we have operational centers on-site to monitor and manage network access traffic. We may consolidate these network operations centers in the future if greater efficiencies can be obtained.
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Back Office Systems. In addition to our network management systems, we have developed a number of software systems that enable us to manage our network and service offerings more efficiently and effectively. Key aspects of these systems include:
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◦ | Network Quality Metrics. We have implemented a suite of advanced Big Data analysis tools that allow us to monitor and troubleshoot the performance of our calling and data network, customer premises equipment, and other associated calling elements in near real-time. This suite is proprietary and was developed specifically to address the needs that Vonage has in monitoring, analyzing, understanding, troubleshooting, maintaining, and operating a world-class consumer VoIP platform.
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◦ | Web Portal. We provide a fully functional customer Web portal that allows our customers to configure and manage almost all aspects of their service on the Internet without requiring intervention of a customer-care representative. The portal permits customers to add and change features and phone numbers, update billing information, and access call usage and billing details.
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◦ | Emergency Calling Service and Enhanced 911 Service. We have deployed E-911 service to approximately 99.99% of our U.S. consumer and small and home office customer base that is comparable to the emergency calling services provided to customers of traditional wireline telephone companies in the same area. Our E-911 service does not support the calls of our soft phone software users. The emergency calls of our soft phone software users are supported by a national call center. Not all Vonage products require 911 service capabilities, such as our mobile client products but we are fully compliant with E911 requirements of the Federal Communications Commission, or FCC, for VOIP Interconnected providers. To enable us to effectively deploy and provide our E-911 service, we maintain an agreement with a provider that assists us in delivering emergency calls to an emergency service dispatcher at the public safety answering point, or PSAP, in the area of the customer’s registered location and terminating E-911 calls. We also contract for the national call center that operates 24 hours a day, seven days a week to receive certain emergency calls and for the maintenance of PSAP databases for the purpose of deploying and operating E-911 services. The databases include contact, technical infrastructure, boundary, and routing information for delivery of calls to a PSAP or emergency service providers in the United States.
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◦ | Local Number Portability. Our system allows our telephone replacement customers to port telephone numbers, which allows new customers to retain their existing telephone numbers when subscribing to our services. We rely on agreements with two service providers to facilitate the transfer of customer telephone numbers. In addition, we have engaged a provider that performs the third party verification of pertinent local number portability information from our subscribers prior to porting a customer from a local telephone company to us.
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◦ | Security. We have developed a service architecture and platform that uses industry-standard security techniques and allows us to remotely manage customer devices. Any Vonage-enabled device used by our customers can be securely managed by us, and these devices use authentication mechanisms to identify themselves to our service in order to place and receive calls. We regularly update our protocols and systems to protect against unauthorized access. As discussed in "Item 1A Risk Factors", security breaches and other cybersecurity or technological risks could compromise our information, systems and network and expose us to liability, which could have a material adverse effect on our business, financial condition, and operating results.
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MARKETING
Our marketing objective is to help drive growth and revenue across our business and consumer markets. We employ an integrated multi-channel approach to marketing, whereby we evaluate and focus our efforts on efficient marketing vehicles to accomplish our goals with the greatest return on investment. To do this, we make use of both broad-reaching and highly-targeted media channels.
For our business customers, our primary source of lead acquisition is digital marketing in the form of search engine marketing, digital advertising, social media advertising, and affiliate programs. We also utilize database marketing and lead aggregators to source business leads. We use direct marketing and account-based marketing to help source leads and create interest in our solutions. We have a significant strategy of using third-party and proprietary events to source business leads and convert prospects. For our residential customers, we have highly optimized our acquisition approach and focus mainly on digital advertising channels.
We make use of marketing research to gain consumer insights into brand, product, and service performance, and utilize those learnings to improve our messaging and media plans. Market research is also leveraged in the areas of testing, retention marketing, and product marketing to ensure we bring compelling products and services to market for our customers.
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We believe our brand is a meaningful factor for customers as they consider business services. We invest in our brand in order to retain and expand our customer base and to position Vonage as a technology leader that delivers innovative, unified communication services, serving the full range of businesses and enterprises. We expect these investments to continue as we further establish Vonage as a leading business services brand and pivot beyond our residential brand heritage.
SALES AND DISTRIBUTION
Enterprise Sales
In order to continue to expand in the enterprise sales channel, which we define as businesses larger than 1,000 seats, our enterprise sales organization is positioned to provide high quality business services for Enterprise, through our fully managed solution, which utilizes BroadSoft’s enterprise-grade call processing platform, with a broad portfolio of products delivered over our own private, national MPLS network, with 21 Points-of-Presence, or POPs, across the country and our own team of service delivery project managers using our proprietary provisioning tool Zeus, or with SmartWan, as well as our industry leading CPaaS products. Additionally, Contact Center solutions are commonly integrated into Enterprise solutions
Field Sales and Inside Sales - SMB and Midmarket
We utilize our team of sales agents, primarily based in geographic territories comprising customers and prospects, which we refer to as our field sales team, to market and sell our business services. These field sales agents utilize a consistent, automated, highly-structured sales process to effectively educate prospective customers regarding our services. We have developed a scalable model applicable to both existing and new markets. We now have field sales presence in 20 markets within the United States and made significant expansion into new markets globally primarily supporting Nexmo. For customers in the SMB segment, we leverage an Inside Sales team to provide solutions across our cloud communications offerings.
Channel Sales
In addition to inside sales and our field sales team, we also have a dedicated team focused on channel sales who work with our channel partners to market and sell our business services, which helps to broaden our sales distribution. In 2017, we continued to develop and expand this channel program by adding new senior management, channel managers, and additional national master agents. We now have a broad and deep coverage of the U.S. market through a network of over 20,000 sub agents and resellers.
Self-Service
Customers can subscribe to our consumer services at our websites, http://www.vonage.com, http://www.vonage.ca, http://www.vonage.co.uk and several affiliate websites, or through multiple toll free numbers including 1-877-4VONAGE. Business customers can subscribe to our services at our websites, including https://business.vonage.com/, http://www.vonagebusiness.com, https://enterprise.vonage.com, and https://www.nexmo.com, or through toll free numbers including 1-877-862-2562 and 1- 855-593-7326. Additionally, Nexmo's API enablement and developer focus lends itself to a self-service model. Our developers can register, sign up and test, and scale their businesses easily and quickly without having to engage with anyone at Nexmo. This allows customers to self-provision their accounts with the aim of improving the customer experience while reducing customer acquisition costs.
Customer Support
Consumer. We offer our customers support 24 hours a day, seven days a week through both our comprehensive online account management website and via our support number, chat or email. Many customers use our self-service website when they have a question or problem with their service and are able to resolve their concerns online without needing to speak to a customer care representative. Our customers can manage almost all aspects of their accounts online. This capability empowers our customers through self-service and reduces our customer care expenses.
Customers who cannot or do not wish to resolve their questions through our website may contact a customer care representative through our support number, chat or email. We staff our customer care organization through a combination of our own employees and outsourced customer care representatives. All new customer care representatives are trained through an established program developed by Vonage. We also have a separate team that provides advanced technical support for resolving customers’ complex issues. We use extensive monitoring of call quality and customer satisfaction scores to determine additional training or coaching requirements for individual associates and to drive continuous improvement in our processes, policies, and technology. We offer support in English, Spanish, Tagalog and French Canadian.
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Small and Medium Businesses. We have specialized teams of customer care representatives to work with customers in every stage of their life cycle, including porting specialists to transfer or port existing phone numbers, an order entry team to help customers bring their new phone system online, as well as billing and product specialists. Customers can also utilize our extensive online support resources, complete with cataloged feature descriptions, how-to videos and other key resources to help them enable the many system features. Additionally, our representatives have ready access to a full support team - from technical support pros and billing specialists, to engineers and product experts.
Medium and Large Enterprise. Our larger business customers benefit from a robust service delivery team comprised of team members specializing in project management, voice and data provisioning, and line number porting.
INTELLECTUAL PROPERTY
We believe that our technological position depends primarily on the experience, technical expertise, and creative ability of our employees. We currently own over 185 issued U.S. patents as well as a number of foreign patents and have more than 60 pending U.S. patent applications along with a number of foreign patent applications. We routinely review our technological developments with our technology staff and business units to identify the aspects of our technology that provide us with a technological or commercial advantage and seek intellectual property and patent protection as appropriate to protect such key proprietary technology in the United States and internationally, based on our assessment in light of applicable law. Our company policies require our employees to assign intellectual property rights developed in the scope of or in relation to our business to us and to treat proprietary know-how and materials as our confidential information.
In addition to developing technology and intellectual property, from time to time we evaluate opportunities for potential licensing and acquisition of third-party technology and intellectual property that may provide us with a strategic or commercial advantage in exchange for royalties or other consideration. As a result of these efforts, we have acquired multiple U.S. and foreign patents, and obtained licenses to numerous other patents. From time to time we receive letters from third parties inviting us to obtain patent licenses that might be relevant to our business. We also have become involved in litigation alleging that our products or services infringe on third party patents or other intellectual property rights.
We are the owner of numerous United States and international trademarks and service marks and have applied for registration of our trademarks and service marks in the United States and abroad to establish and protect our brand names as part of our intellectual property strategy. Examples of our registered marks include Vonage®, Vonage Mobile®, Vonage Extensions®, and Nexmo ®.
We endeavor to protect our internally developed systems and technologies and maintain our trademarks and service marks. Typically, we enter into confidentiality agreements with our employees, consultants, partners, customers, and vendors in an effort to control access to and dissemination of our technology, software, business plans, documentation, and other proprietary information and trade secrets.
COMPETITION
We face continued strong competition from traditional telephone companies, cable companies, wireless companies, alternative communication providers, direct unified communications providers, legacy consumer VOIP businesses, large technology incumbents, and collaboration providers in the consumer, mobile, SMB and enterprise markets. Because most of our target customers are already purchasing communications services from one or more of these providers, our success is dependent upon our ability to attract these customers away from their existing providers. We believe that the principal competitive factors affecting our abilityequity-based compensation to attract and retain customers are price, call quality, brand awareness, customer service, network and system reliability, service features and capabilities, scalability, usability, simplicity, mobile integration andqualified candidates to serve on our Board of Directors. In setting director compensation, we consider the unique ability to deliver CPaaS communications tools to business customerssignificant amount of time that our Directors expend in addition to our UCaaS offerings.
There is a continuing trend toward consolidation of compeitive companies, including the acquisition of alternative communication providers by Internet product and software companies with significant resources. In addition, certain of our competitors have partnered and may in the future partner with other competitors to offer products and services, leveragingfulfilling their collective competitive positions. We also are subject to the risk of future disruptive technologies, which could give rise to significant new competition.
Business
In connection with our cloud communications products, we face competition from the traditional telephone and cable companies as discussed above, as well as from vendors of premises-based solutions and/or hosted solutions including the following:
Independent cloud services providers;
Premises-based business communication equipment providers;
Hosted communication services providers;
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Traditional technology companies; and
Emerging competitors in technology companies.
As the cloud communications market evolves, and the convergence of voice, video, messaging, mobility and data networking technologies accelerates, we may face competition in the future from companies that do not currently compete in the market, including companies that currently compete in other sectors, companies that serve consumers rather than business customers, or companies which expand their market presence to include cloud communications.
Consumer
Traditional telephone and cable companies
The traditional telephone and cable companies are our primary competitors for our broadband telephone services. Traditional telephone companies in particular have historically dominated their regional markets. These traditional phone and cable company competitors are substantially larger and better capitalized than we are and have the advantage of a large existing customer base. Many of these competitors are continuing to make substantial investments in delivering broadband Internet access, VoIP phone service, and cable television to their customers and they often have larger product development and marketing budgets than us. Providing home phone, Internet access, and cable television to many of our existing and potential customers may enhance their image as trusted providers of services.
The traditional phone and cable companies own networks that include a “last mile” connection to substantially all of our existing and potential domestic customersduties as well as the places our customers call domestically. As a result, the vast majorityskill-level required by us of the calls placed by a Vonage customer are carried over the “last mile” by a traditional phone company, and we indirectly pay access charges to these competitors for each of these calls. In contrast, traditional wireline providers do not pay us when their customers call our customers.
Cable companies and, in many cases traditional phone companies, are also aggressively using their existing customer relationships to bundle services. For example, they bundle Internet access, cable television, and home phone service with an implied price for the phone service that may be significantly below ours. In addition, such competitors may in the future require new customers or existing customers making changes to their service to purchase voice services when purchasing high speed Internet access. Certain traditional phone companies are also able to bundle wireless telephone service. Many of these competitors are able to advertise on their local access channels with no significant out-of-pocket cost and through mailings in bills with little marginal cost. They also receive advertising time as part of their relationships with television networks and are able to use this time to promote their telephone service offerings.
Traditional phone and cable companies’ ownership of Internet connections to our customers could enable them to detect and interfere with the completionmembers of our customers’ calls. While we are not aware of any such occurrence, it is unclear whether current regulations would permit these companies to degrade the quality of, give low priority to or block entirely the information packets and other data we transmit over their lines. In addition, these companies may attempt to charge their customers more for using our services.
Many traditional phone and cable companies routinely send technicians to customers’ premises to initiate service. Although this is expensive, it also can be more attractive to customers than installing their own router. In addition, these technicians may install an independent source of power, which can give customers assurance that their phone service will not be interrupted during power outages.
The traditional phone and cable companies have long-standing relationships with regulators, legislators, lobbyists, and the media. This can be an advantage for them because legislative, regulatory or judicial developments in our rapidly evolving industry could have a negative impact on us.
In many cases, we charge prices that are lower than prices charged by the traditional phone and cable companies. We believe that we also currently compete successfully with the traditional phone and cable companies on the basis of the features we offer that they may not, such as area code selection, portable service, virtual phone numbers, and readable voice mail. We offer many of these features at no extra charge.
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Wireless telephone companies
We also compete with wireless phone companies for both our broadband telephone services, international long distance, and our mobile services. Some consumers use wireless phones, instead of VoIP phones, as a replacement for a wireline phone. Also, wireless phone companies increasingly are providing wireless broadband Internet access to their customers. As wireless providers offer more minutes at lower prices and other services that improve calling quality, their services have become more attractive to households as a competitive replacement for wireline service. In addition, wireless providers are also offering standalone wireless home servicesBoard, as well as the abilityoverall level and mix of compensation compared to link multiple devicesindustry- and size-relevant peers, referencing data compiled by the compensation committee's independent compensation consultant, Meridian Compensation Partners, LLC.
Cash Compensation Paid to Board Members
Directors' annual retainer fees for telephony service. Wireless telephone companies have a strong retail presence and have significant financial resources. We are developing next-generation services to meet2021 were as follows:
| | | | | |
| • Chairman of the Board annual retainer* | $ | 125,000 | |
| • Base annual retainer for all other non-executive Directors* | $ | 80,000 | |
| • Additional annual retainers*: | |
| • Lead director | $ | 25,000 | |
| • Audit committee chair | $ | 25,000 | |
| • Other audit committee members | $ | 5,000 | |
| • Compensation committee chair | $ | 15,000 | |
| • Nominating and governance committee chair | $ | 10,000 | |
| • Technology committee chair | $ | 10,000 | |
| • Other compensation committee and nominating committee members | $ | — | |
* Pro-rated for actual service during the emerging needs of mobile and other connected device userstwelve-month period covered by delivering easy-to-use applications that provide significant cost savings in large existing markets. We believe that our efforts will capitalize on favorable trends including the proliferation of low or no-cost Wi-Fi and other broadband around the world, accelerating smart phone adoption rates, and the growth of social communities.Alternative communications providersretainer.
We also compete against alternative communication providers somereimburse all Directors for reasonable and necessary expenses they incur in performing their duties as Directors of our Company. In addition, our Board of Directors has authority to make payments to Directors performing services determined by our Board of Directors, upon recommendation of the nominating and governance committee, to be extraordinary services which significantly exceed customary and routine services performed by a director, in an amount determined by our Board of
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Directors to be appropriate compensation for the services performed. Until 2022, we provided health, vision and dental benefits to our Chairman of the Board.
Equity-Based Grants to Board Members and Stock Ownership Guidelines for Directors
For 2021, on the first day of each quarter, non-employee Directors of our Company were awarded shares of common stock worth $28,750 (1.5x such share amount of common stock for Mr. Citron), based upon service in the prior quarter. The stock price used to calculate the number of shares of stock to be granted, all of which are larger than us and havefully vested, is the ability to devote greater resources to their communications services. Someclosing price of these service providers, including Internet product and software companies, have chosen to sacrifice telephony revenue inour common stock on the Nasdaq Stock Exchange on the date of grant, or if such date is not a trading day, the closing selling price on the trading day immediately preceding the date of grant. In order to gain market share or attract usersbe eligible for grants, a non-employee director must have served on our Board for the entire previous quarter.
Our Board of Directors has adopted stock ownership guidelines requiring our non-employee Directors to their platform and have offered their services at low prices or for free. While not all of these competitors currently offer the ability to call or be called by anyone not using their service, line portability, E-911 service, and customer service,maintain a minimum equity stake in the future they may integrate such capabilities intoCompany during their service offerings. As we continue the introductiontenure as director. Our Board of applicationsDirectors believes that integrate different formsthese requirements help to ensure an alignment of voice, video, messaging,director interests with those of shareholder interests and other services over multiple devices, we face competition from emerging competitors focusedpromote a focus on similar integration, as well as from alternative communication providers.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
We currently have UCaaS and consumer operationslong-term growth. Non-employee Directors must maintain a stock ownership level equal to five times our annual Board retainer in the United States, United Kingdom, and Canada and believe that our low-cost Internet based communications platform enables us to cost effectively deliver voice and messaging services to other locations throughout the world. Through Nexmo, we have operations in the United States, United Kingdom, Hong Kong, and Singapore providing our CPaaS solutions to customers located in many countries around the world.
We had approximately 2.2 million combined subscriber lines and business seats asdue course, following his or her accumulation of December 31, 2017. Customers in the United States represented 85% of our consolidated revenues at December 31, 2017, with the balance in Canada, the United Kingdom, and other countries.
For further information regarding the Company's revenues and long-lived assets attributable to our U.S. and foreign countries for the last three fiscal years see Note 16, Industry Segment and Geographical Information to the Company's Consolidated Financial Statements.
EMPLOYEES
stock awards described above. As of December 31, 2017, we had 1,780 employees. None of our employees are subject2021, all non-employee Directors owned the minimum amount, except for Mr. Tzuo and Mr. Ward. Shares included in the calculation to a collective bargaining agreement.
AVAILABLE INFORMATION
We were incorporated in Delaware in May 2000 and changed our name to Vonage Holdings Corp. in February 2001. We maintain a websiteassess compliance with the address www.vonage.com. References to our websiteguidelines include shares owned outright. Each non-employee director must retain 50% of net stock options exercised or stock delivered from stock awards until the guidelines are provided as a convenience, and the information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor’s own Internet access charges, we make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the U.S. Securities and Exchange Commission, or SEC. Copies are also available, without charge, by writing to Vonage’s Investor Relations Department at Vonage Holdings Corp., 23 Main Street, Holmdel, NJ 07733 or calling us at 732.365.1328 or sending an email through the Vonage Investor Relations website at http://ir.vonage.com/. Reports filed with the SECmet. Directors may be viewed at www.sec.gov or obtained at the SEC Public Reference Room in Washington, D.C. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
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ITEM 1A. Risk Factors
You should carefully consider the risks below, as well as all of the other information contained in this Annual Report on Form 10-K and our financial statements and the related notes included elsewhere in this Annual Report on Form 10-K, in evaluating our company and our business. Any of these risks could materially adversely affect our business, financial condition and results of operations and the trading price of our common stock.
For the financial information discussed in this Annual Report on Form 10-K, other than per share and per line amounts, dollar amounts are presented in thousands, except where noted.
If we are unable to compete successfully, we could lose market share and revenue.
The business cloud communications markets and consumer services market in which we participate are highly competitive. We face intense competition from a broad set of companies, including:
software as a service companies and other alternative communication providers and other providers of cloud communications services; and
traditional telephone, wireless service providers, cable companies and alternative communications providers with consumer offerings
Many of these providers are substantially larger and better capitalized than we are and have the advantage of greater name and brand name recognition and a large existing customer base. These service providers may have the ability to devote greater resources to their communications services and may be able to respond more quickly and effectively than we can to new or changing opportunities. Our competitors' financial resources may allow them to offer services at prices below cost or even for free in order to maintain and gain market share or otherwise improve their competitive positions. Some of our competitors also could use their greater financial resources to develop and market telephony and messaging services with more attractive features and more robust customer service. In addition, because of the other services our competitors provide, some of these service providers choose to offer cloud communications services as part of a bundle that includes other products, such as high speed Internet access and wireless telephone service. These bundled offers may enable our competitors to offer cloud communications services at prices with which we may not be able to compete or to offer functionality that integrates cloud communications services with their other offerings, both of which may be more desirable. As we continue the introduction of applications that integrate different forms of voice and messaging services over multiple devices, we face competition from emerging competitors focused on similar integration, as well as from established alternative communication providers. Any of these competitive factors could make it more difficult for us to attract and retain customers, reduce our market share and revenues, or cause us to lower our prices or offer additional features that may result in additional costs without commensurate price increases. In order to compete with such service providers, we may have to reduce our prices, which would impair our profitability, or offer additional features that may cause us to incur additional costs without commensurate price increases. To the extent that these or other companies strengthen their offerings, we may have to reduce our prices, increase promotions, or offer additional features, which may adversely impact our revenues and profitability.
In connection with our emphasis on the international long distance market for consumer customers, we face competition from low-cost international calling cards, digital calling cards and VoIP providers in addition to traditional telephone companies, cable companies, and wireless companies. To the extent that these providers target marketing to the same ethnic segments that we target or strengthen their offerings to these segments, we may have to reduce our prices or increase promotions, which would impair our profitability, or offer additional features that may cause us to incur additional costs without commensurate price increase.
As a result of increasing competition, domestic and international telephony and messaging rates have generally decreased during the past few years, and we expect this trend to continue. Continued rate pressures or increasing cost to use our services could lessen or eliminate the pricing advantage that we maintain over certain competitors and cause customers or potential customers to select alternative providers or cause us to lower our prices, which would adversely impact our revenues and profitability.
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As the cloud communications services market evolves, and the convergence of voice, video, messaging, mobility and data networking technologies accelerates, we may face competition in the future from companies that do not currently compete in the cloud communications services market, including companies that currently compete in other sectors, companies that serve consumer rather than business customers, or companies which expand their market presence to include business communications.
As the cloud communications services market evolves, combining voice, video, messaging and data networks, and information technology and communication applications, opportunity is created for new competitors to enter the cloud communications services market and offer competing products. This new competition may take many forms, and may offer products and applications similar to ours. If these new competitors emerge, the cloud communications services market will become increasingly competitive and we may not be able to maintain or improve our market position. Our failure to do so could materially and adversely affect our business and results of operations.
If we fail to adapt to rapid changes in the market for cloud communications services, then our products and services could become obsolete.
The market for our products and services is constantly and rapidly evolving as we and our competitors introduce new and enhanced products and services and react to changes in the cloud communications services industry and customer demands. We may not be able to develop or acquire new products and plans or product and plan enhancements that compete effectively with present or emerging cloud communications services technologies or differentiate our products and plans based on functionality and performance. In addition, we may not be able to establish or maintain strategic alliances that will permit enhancement opportunities or innovative distribution methods for our products and plans.
To address these issues, we are targeting revenue growth in large, existing markets, which require us to enhance our current products and plans, and develop new products and plans on a timely basis to keep pace with market needs and satisfy the increasingly sophisticated requirements of customers. If we are unable to attract users of these services our net revenues may fail to grow as we expect.
Cloud communications services are complex, and new products and plans and enhancements to existing products and plans can require long development and testing periods. Any delays in developing and releasing new or enhanced products and plans could cause us to lose revenue opportunities and customers. Any technical flaws in products we release could diminish the innovative impact of the products and have a negative effect on customer adoption and our reputation.
We also are subject to the risk of future disruptive technologies. New products based on new technologies or new industry standards could render our existing products obsolete and unmarketable. If new technologies develop that are able to deliver competing voice and messaging services at lower prices, better or more conveniently, it could have a material adverse effect on us.
The market for our CPaaS products and platform is relatively nascent and may not experience the growth that we anticipate.
The utilization of APIs to embed contextual, programmable real time communications into mobile apps, websites and business systems workflows, remains a relatively new market, and developers and organizations may not yet recognize the need for, or benefits of, our products and platform. It is important that we are able to educate developers, organizational leaders, and other potential customers regarding our products and platform in order to help grow the market and to realize our market share, The market for our products and platform or our share of that market could fail to grow significantly. If the CPaaS market, or our share of that market, does not experience significant growth, then our business, results of operations and financial condition could be adversely affected.
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If we are unsuccessful at retaining customers or attracting new consumer or business customers we may experience a reduction in revenue or may be required to spend more money or alter our marketing approaches to grow our customer base.
Our rate of customer terminations for our UCaaS services could increase in the future if customers are not satisfied with the quality and reliability of our network, the value proposition of our products, and the ability of our customer service to meet the needs and expectations of our customers. For our CPaaS customers, our ability to grow revenue depends, in part, on our ability to maintain and grow usage of our platform by new and existing customers. If we are not able to increase customer usage of our products, our revenue may decline which would adversely impact our business, results of operations and financial condition. Our CPaaS customers are charged based on their usage of our products and generally our customers do not have long-term contractual financial commitments to us, therefore, usage rates may fluctuate at any time. In addition, our agreements with business customers typically provide for service level commitments. If we are unable to meet these commitments or if we suffer extended periods of downtime for our products or platform, our business, results of operations and financial condition could be adversely affected. Our ability to attract and retain customers for our consumer services are impacted by our pricing, brand awareness, customer service, network and system reliability and service features and capabilities. Competition from traditional telephone companies, cable companies, wireless companies, alternative communication providers, low-cost international calling cards, disruptive technologies, general economic conditions, and our ability to activated and register new customers on our network also influence churn rate. A material decline in the usage of our business and consumer products could cause us to spend significantly more on sales and marketing than we currently budget in order to maintain or increase revenue from customers, which could adversely affect our business, results of operations and financial condition.
The success of our CPaaS products depends in part on attracting new customers in a cost-effective manner. The failure to do so could materially and adversely affect our business.
The success of our business relies on our ability to attract new customers in a cost effective manner by using a variety of marketing channels. We use developer events and developer evangelism, search engine marketing and optimization, and other marketing efforts such as regional customer events, email campaigns, advertising and public relations events. These methods are prioritized depending on effectiveness and efficiency, and may be altered if costs increase dramatically or if the results do not meet expectations. Alternative, less expensive channels, may not be as effective as our preferred channels. Our continued success requires that we continue to attract new customers in a cost-effective manner. If we fail to do so, our revenues may decrease and our operating results would suffer.
Our success in the cloud communications market for our business services depends in part on developing and maintaining effective distribution channels. The failure to develop and maintain these channels could materially and adversely affect our business.
A portion of our business revenue is generated through our direct sales, or “field sales,” team. This channel consists of sales agents that market and sell our business services products to customers to customers through direct, commonly face-to-face interaction. Our continued success requires that we continue developing and maintaining a successful sales organization. If we fail to do so, or if our sales agents are not successful in their sales efforts, our sales may decrease and our operating results would suffer.
A portion of our business revenue is generated through indirect channel sales. These channels consist of third-party resellers and value-added distributors that market and sell our business services products to customers. These channels may generate an increasing portion of our business revenue in the future. Generally, we do not have long-term contracts with these third-party resellers and value-added distributors, and the loss of or reduction in sales through these third parties could materially reduce our revenues. We also compete for preference amongst our current or potential resellers with our competitors. Our continued success requires that we continue developing and maintaining successful relationships with these third-party resellers and value-added distributors. If we fail to do so, or if our resellers are not successful in their sales efforts, our sales may decrease and our operating results would suffer.
We may face difficulties related to the acquisition or integration of businesses, which could harm our growth or operating results.
We have made several acquisitions over the past several years to build our business services and continue to periodically review acquisition opportunities. Acquisition and integration activities require substantial management time and resources. Acquisitions of existing businesses involve substantial risks, including the risk that we may not be able to integrate the operations, personnel, services, or technologies, the potential disruption of our ongoing businesses, the diversion of management attention, the maximization of financial and strategic opportunities, the difficulty in developing or maintaining controls and procedures, and the dilution to our existing stockholdersexempted from the issuance of additional shares of common stock. We may elect to acquire additional businesses or assets in the future. However, we cannot predict or guarantee that we will be able to identify suitable acquisition candidates or consummate any acquisition. As a result of these and other risks, we may not produce anticipated revenue, profitability, or synergies.
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Acquisitions may require us to issue debt or equity securities, use our cash resources, incur debt or contingent liabilities, amortize intangibles, or write-off acquisition-related expenses. If we are unable to successfully integrate any acquired businesses or assets we may not receive the intended benefits of such acquisition. In addition, we cannot predict market reactions to any acquisitions we may make or to any failure to announce any future acquisitions.
Further, while we conduct due diligence in connection with acquisition and joint venture opportunities, there may be risks or liabilities that such due diligence efforts fail to discover, are not disclosed to us, or that we inadequately assess. The discovery of material liabilities associated with acquisitions or joint venture opportunities, economic risks faced by joint venture partners, or any failure of joint venture partners to perform their obligations could adversely affect our business, results of operations, and financial condition.
Security breaches and other cybersecurity or technological risks could compromise our information systems and network and expose us to liability, which would cause our business and reputation to suffer and which could have a material adverse effect on our business, financial condition, and operating results.
There are several inherent risks to engaging in a technology business, including our reliance on our data centers and networks, and the use and interconnectivity of those networks. A significant portion of our operations relies heavily on our ability to provide secure processing, storage and transmission of confidential and other sensitive data, including intellectual property, proprietary business information, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, storage, and transmission of this information is critical to our operations and business strategy. As seen in our industry and others, these activities have been, and will continue to be, subject to continually evolving cybersecurity or other technological risks. Targeted attacks, such as advanced persistent threat is prevalent throughout the Internet and associated with the theft of intellectual property and state-sponsored espionage. Due to the nature of our business and reliance on the Internet, we are susceptible to this type of attack. In addition, physical security of devices located within our offices,guidelines and/or remote devices, pose cybersecurity and other technological risks that could negatively impact our business and reputation.
We also operate Internet based, worldwide data, voice, video communications, and messaging services and electronic billing, which require the transmission of confidential and at times personal or sensitive customer or employee information over public networks that may or may not support end to end security. Despite our security measures, which include the development, operation and maintenance of systems and processes that are designed to protect consumer and employee information and prevent fraudulent credit card transactions and other security breaches, our information technology and infrastructure may be vulnerable to attacks by hackers or breachedretention ratio due to error, malfeasance or other disruptions by a current or former employee or third-party provider and our failure to mitigate such fraud or breaches may adversely affect our operating results. Any such breach could compromise our systems and network and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption to our operations, damage to our reputation, and a loss of confidence in our products and services, and our ability to keep personally identifiable information confidential, which could adversely affect our business.
We have been subject to cyber incidents from external sources including “brute force” and distributed denial of service attacks, as well as attacks that introduce fraudulent VoiP traffic. Although these incidents have not had a material adverse effect financially or on our ability to provide services, this may not continue to be the case going forward. There can be no assurance that cyber incidents will not occur in the future, potentially more frequently and/or on a more significant scale.
We have taken steps designed to improve the security of our networks and computer systems and our physical space. Despite these defensive measures, there can be no assurance that we are adequately protecting our information or that we will not experience future incidents. The expenses associated with protecting our information could reduce our operating margins. We maintain insurance intended to cover some of these risks, however, this insurance may not be sufficient to cover all of our losses from any future breaches of our systems. In addition, third parties with which we do business may also be sources of cybersecurity or other technological risks. We outsource certain functions, which results in the storage and processing of customer information by third parties. While we engage in certain actions to reduce the exposure resulting from outsourcing, unauthorized access, loss or destruction of data or other cyber incidents could occur, resulting in similar costs and consequences as those discussed above.
We make available on our website our privacy policy, which describes how we collect, use, and disclose our customers' personal information. To the extent we expand our operations into new geographies, we may become subject to local data security, privacy, data retention, and disclosure laws and regulations. It may be difficult for us to comply with these laws and regulations if they were deemed to be applicable to us. In addition, risks related to cybercrime and fraud increase when establishing a global presence.
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We are subject to Payment Card Industry, or PCI, data security standards, which require periodic audits by independent third parties to assess compliance. PCI data security standards are a comprehensive set of requirements for enhancing payment account data security that was developed by the PCI Security Standards Council including American Express, Discover Financial Services, JCB International, MasterCard Worldwide, and VISA Inc., to help facilitate the broad adoption of consistent data security measures. Failure to comply with the security requirements as identified in subsequent audits or rectify a security issue may result in fines. While we believe it is unusual, restrictions on accepting payment cards, including a complete restriction, may be imposed on companies that are not compliant. Further, the law relating to the liability of providers of online payment services is currently unsettled and states may enact their own rules with which we may not comply.
We rely on third party providers to process and guarantee payments made by Vonage and its affiliates’ subscribers, up to certain limits, and we may be unable to prevent our customers from fraudulently receiving goods and services. Our liability risk will increase if a larger fraction of our Vonage transactions involve fraudulent or disputed credit card transactions. Any costs we incur as a result of fraudulent or disputed transactions could harm our business. In addition, the functionality of our current billing system relies on certain third party vendors delivering services. If these vendors are unable or unwilling to provide services, we will not be able to charge for our services in a timely or scalable fashion, which could significantly decrease our revenue and have a material adverse effect on our business, financial condition and operating results.
Sales of our business services to medium-sized and enterprise customers involve significant risks which, if not managed effectively, could materially and adversely affect our business and results of operations.
As we continue to expand our sales efforts to medium-sized and larger businesses, we may incur higher selling expense and longer, more complex, sales cycles. Customers in this market segment may also require bespoke features and integration services, increasing the complexity and expense related to the sales and delivery process. As a result, we may devote greater sales and support to these customers, which may result in increased costs and a strain on our support resources. These factors could materially and adversely affect our results of operations and our overall ability to grow our customer base.
Our ability to provide our telephony service and manage related customer accounts is dependent upon third-party facilities, equipment, and systems, the failure of which could cause delays of or interruptions to our service, damage our reputation, cause us to lose customers, limit our growth, and affect our financial condition.
Our success depends on our ability to provide quality and reliable telephony service, which is in part dependent upon the proper functioning of facilities and equipment owned and operated by third parties and is, therefore, beyond our control. Unlike traditional wireline telephone service or wireless service, our telephony service typically requires our customers to have an operative broadband Internet connection and an electrical power supply, which are provided by the customer's Internet service provider and electric utility company, respectively, and not by us. The quality of some broadband Internet connections may be too poor for customers to use our telephony services properly. In addition, if there is any interruption to a customer's broadband Internet service or electrical power supply, that customer will be unable to make or receive calls, including emergency calls, using our telephony service.
We outsource several of our network functions to third-party providers. For example, we outsource the maintenance of our regional data connection points, which are the facilities at which our network interconnects with the public switched telephone network. If our third-party service providers fail to maintain these facilities properly, or fail to respond quickly to problems, our customers may experience service interruptions. Interruptions in our service caused by third-party facilities have in the past caused and may in the future cause us to lose customers or cause us to offer substantial customer credits, which could adversely affect our revenue and profitability. If interruptions adversely affect the perceived reliability of our service, we may have difficulty attracting new customers, and our brand, reputation, and growth will be negatively impacted.
In order to access our consumer services, a customer needs to connect a standard telephone to a broadband Internet connection through a Vonage-enabled device that we provide. Although we closely monitor inventory levels, if we are unable to procure a sufficient number of devices from our suppliers in a timely manner, including as a result of a failure by a component supplier, we would be delayed in activating new customers and may lose these customers.
While we believe that relations with our current third party providers are good, and we have contracts in place with these vendors, there can be no guarantee that these third party providers will be able or willing to supply services to us in the future on commercially reasonable terms, or that we will be able to engage alternative or additional providers. We believe that we could replace our current third party providers, however, our ability to provide our services may be impacted during any transition, which could have an adverse effect on our business, financial condition or results of operations.
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We rely on third-party vendors that may be difficult to replace or may not perform adequately.
For our CPaaS customers, we rely on Softlayer to provide substantially all of the cloud infrastructure that hosts our CPaaS products and platform. Our CPaaS customers require uninterrupted performance of this platform and we are therefore vulnerable to service interruptions at Softlayer. We may experience interruptions, delays and outages in Softlayer’s service and availability due to a variety of factors, including infrastructure changes, human or software errors, website hosting disruptions and capacity constraints caused by technical failures, natural disasters, fraud or security attacks. To the extent that we do not effectively address interruptions, delays and outages in Softlayer’s service and availability or capacity constraints, our business, results of operations and financial condition may be adversely affected.
In some cases we rely on purchased or leased hardware and software licensed from third parties in order to provide our UCaaS services. For example, Broadsoft, Inc. provides us with infrastructure, call termination and origination services, and other hardware and software in connection with our Vonage Enterprise offerings. We also integrate third-party licensed software components into our platform. This hardware and software may not continue to be available on commercially reasonable terms or pricing or may fail to continue to be updated to remain competitive. The loss of the right to use this third party hardware or software may increase our expenses or impact the provisioning of our services. The failure of this third party hardware or software could materially impact the performance of our UCaaS services and may cause material harm to our business or results of operations.
We outsource some of our cloud infrastructure to Amazon Web Services, or AWS, which hosts certain of our products and platform. Customers of our products need to be able to access our platform at any time, without interruption or degradation of performance. AWS runs its own platform that we access, and we are, therefore, vulnerable to service interruptions at AWS. To the extent that we do not effectively address capacity constraints, either through AWS or alternative providers of cloud infrastructure, our business, results of operations and financial condition may be adversely affected. In addition, any changes in service levels from AWS may adversely affect our ability to meet our customers’ requirements.
Flaws in our technology and systems or our failure to adapt our systems to any new Internet Protocol could cause delays or interruptions of service, which could damage our reputation, cause us to lose customers, and limit our growth.
Although we have designed our service network to reduce the possibility of disruptions or other outages, our service may be disrupted by problems with our technology and systems that we provide to customers, software or facilities and overloading of our network. As we attract new subscribers, we expect increased call volume that we need to manage to avoid network interruptions. Interruptions have caused and may in the future cause us to lose customers and offer substantial customer credits, which could adversely affect our revenue and profitability. Network interruptions have also impaired our ability at times to sign-up new customers and the ability of customers to manage their accounts. If service interruptions or other outages adversely affect the perceived reliability of our service or customer service, we may have difficulty attracting and retaining customers and our brand reputation and growth may suffer.
In addition, we utilize third-party Internet-based or “cloud” computing services in connection with some of our business operations. Any disruption to the internet or to our third-party Web hosting or cloud computing providers, including technological or business-related disruptions, could adversely impact the experience of our customers and have adverse effects on our operations. In addition, fires, floods, earthquakes, power losses, telecommunications failures, and similar "Acts of God" could damage these systems and hardware or cause them to fail completely. While we do maintain redundant systems consistent with industry best practices certain events could result in downtime for our operations and could adversely affect our business.
Our Business segment is growing rapidly, and any inability to scale our business and grow efficiently could materially and adversely harm our business and results of operations.
As our Business segment expands, we will need to continue to improve our application architecture, integrate our products and applications across our technology platforms, integrate with third-party systems, and maintain infrastructure performance. We expect the number of users, the amount of data transferred and processed, the number of locations where our service is being used, and the volume of communications over our networks to continue to expand. To address this growth, we will need to scale our systems and customer services organization. Our ability to execute on these initiatives may impact system and network performance, customer satisfaction, and ultimately, sales and revenue. These efforts may also divert management resources. These factors may materially and adversely harm our business and results of operations.
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We depend on third party vendors to supply, configure and deliver the phones that we sell. Any delays in delivery, or failure to operate effectively with our own servers and systems, may result in delay or failure of our services, which could harm our business, financial condition and results of operations.
We rely on Yealink Inc. and Polycom, Inc. to provide, and a single fulfillment agent to configure and deliver, the phones that we offer for sale to our customers that use our UCaaS services. If these third parties are unable to deliver phones of acceptable quality or quantity, or in a timely manner, we may be forced to offer replacements at a higher cost than what is currently contracted. In addition, these phones must interoperate with our servers and systems. If either of our providers changes the operation of their phones, we may be required to engage in development efforts to ensure that the new phones interoperate with our system. The failure of our vendor-supplied phones to operate effectively with our system could impact our customers’ ability to use our services and could cause customers to cancel our services, which may cause material harm to our business or results of operations.
We market our products and services to small and medium-sized businesses, which may be disproportionately impacted by fluctuations in economic conditions.
We market our products to small and medium-sized businesses. Customers in this market may be affected by economic downturns to a greater extent, and may have more limited financial resources, than larger or more established businesses. If customers in our Business markets experience financial hardship as a result of a weak economy,determined by the demand for our services could be materially and adversely affected.compensation committee in its discretion.
2021 Director Compensation
The storage, processing, and use of personal information and related data subjectsfollowing table summarizes the compensation paid by us to evolving governmental laws and regulation, commercial standards, contractual obligations, and other legal obligations related to consumer and data privacy, which may have a material impact on our costs, use of our products and services, or expose us to increased liability.
Federal, state, local and foreign laws and regulations, commercial obligations and industry standards, each provide for obligations and restrictions with respect to data privacy and security, as well as the collection, storage, retention, protection, use, processing, transmission, sharing, disclosure and protection of personal information and other customer data. The evolving nature of these obligations and restrictions dictates that differing interpretations, inconsistency or conflicts among countries or rules, and general uncertainty impact the application to our business.
These obligations and restrictions may limit our ability to collect, store, process, use, transmit and share data with our customers, employees, and third party providers and to allow our customers to collect, store, retain, protect, use, process, transmit, share and disclose data with others through our products and services. Compliance with, and other burdens imposed by, such obligations and restrictions could increase the cost of our operations and impact our ability to market our products and services through effective segmentation.
Examples of key data privacy and security related obligations and restrictions include the European Union General Data Protection Regulation, GDPR. The GDPR was adopted in April 2016 and comprehensively regulates the processing of personal data of any individual residing in the EU. The GDPR effectively requires any company processing data of EU individuals to develop a comprehensive privacy program. The GDPR becomes effective on May 25, 2018. In addition, in January 2017, the European Commission introduced a new proposed ePrivacy regulation that would restrict communications service provider’s ability to use metadata and content from communications services. In order to become effective, the proposal needs to be adopted by the European Council and European Parliament. In October 2016, the Federal Communications Commission adopted a new privacy rules for the U.S. communications industry. These rules greatly extended the scope of FCC privacy regulation. Numerous parties have filed petitions for reconsideration at the FCC on the new privacy rules.
Failure to comply with obligations and restrictions related to applicable data protection laws, regulations, standards, and codes of conduct, as well as our own posted privacy policies and contractual commitments could subject us to lawsuits, fines, criminal penalties, statutory damages, consent decrees, injunctions, adverse publicity, loss of user confidence in our services, and loss of users, which could materially harm our business. Additionally, third-party contractors may have access to customer or employee data. If these or other third-party vendors violate obligations and restrictions related to applicable data protection laws or our policies, such violations may also put our customers’ or employees’ information at risk and could in turn have a material and adverse effect on our business.
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If we fail to protect our internally developed systems, technology, and software and our trademarks, we may become involved in costly litigation or our business or brand may be harmed.
Our ability to compete effectively is dependent in large part upon the maintenance and protection of systems and software that we have developed internally based on open standards. While we own over 185 issued U.S. patents as well as a number of foreign patents and more than 60 pending U.S. patent applications along with a number of foreign patent applications, we cannot patent much of the technology that is important to our business. Our pending patent applications may not be granted. Any issued patent that we own may be challenged, narrowed, invalidated, or circumvented. To date, we have relied on patent, copyright and trade secret laws, as well as confidentiality procedures and licensing arrangements, to establish and protect our rights to this technology. We typically enter into confidentiality agreements with our employees, consultants, customers, partners, and vendors in an effort to control access to and distribution of technology, software, documentation, and other information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use this technology without authorization. Policing unauthorized use of this technology is difficult. The steps we take may not prevent misappropriation of the technology we rely on. In addition, effective protection may be unavailable or limited in some jurisdictions outside the United States, Canada, and the United Kingdom. Litigation may be necessary in the future to enforce or protect our rights or to determine the validity and scope of the rights of others. That litigation could cause us to incur substantial costs and divert resources away from our daily business, which in turn could materially adversely affect our business.
The unlicensed use of our brands by third parties could harm our reputation, cause confusion among our customers, and impair our ability to market our services. To that end, we have registered numerous trademarks and service marks and have applied for registration of our trademarks and service marks in the United States and abroad to establish and protect our brand names as part of our intellectual property strategy. If our applications receive objections or are successfully opposed by third parties, it may be difficult for us to prevent third parties from using our brand without our permission. Moreover, successful opposition to our applications might encourage third parties to make additional oppositions or commence trademark infringement proceedings against us, which could be costly and time consuming to defend against. If we decide to take limited or no action to protect our trademarks, our trademark rights may be diluted and subject to challenge or invalidation, which could materially and adversely affect our brand in the marketplace.
Third parties may fraudulently use our name to obtain access to customer accounts and other personal information, use our services to commit fraud or steal our services or equipment, which could damage our reputation, limit our growth, and cause us to incur additional expenses.
Our customers have been subject to “phishing,” which occurs when a third party calls or sends an email or pop-up message to a customer that claims to be from a business or organization that provides services to the customer. The purpose of the inquiry is typically to encourage the customer to visit a bogus website designed to look like a website operated by the legitimate business or organization or provide information to the operator. At the bogus website, the operator attempts to trick the customer into divulging customer account or other personal information such as credit card information or to introduce viruses through “Trojan horse” programs to the customers’ computers. This has resulted in identity theft from our customers and the unauthorized use of Vonage services. Third parties have also used our communications services to commit fraud. Although we have engaged a third party to assist in the shutdown of purported phishing sites, if we are unable to detect and prevent “phishing,” use of our services for fraud, and similar activities, our brand reputation and growth may suffer and we may incur additional costs, including costs to increase security, or be required to credit significant amounts to customers.
Third parties also have used our communications services and obtained delivery of our equipment without paying, including by submitting fraudulent credit card information. This has resulted in our incurring the cost of providing the services, including incurring call termination fees, or providing the equipment without any corresponding revenues. We have implemented anti-fraud procedures in order to limit the expenses resulting from theft of service or equipment. If our procedures are not effective, theft of service or equipment could significantly increase our expenses and negatively impact our profitability.
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We may be subject to damaging and disruptive intellectual property disputes that could materially and adversely affect our business, results of operations, and financial condition, as well as the continued viability of our company.
There has been substantial litigation in the cloud communications, UCaaS, VoIP, telecommunications, hosted services, and related industries regarding intellectual property rights and, given the rapid technological change in our industry, expansion into new technological and geographical markets, and our continual development of new products and services, we and/or our commercial partners may be subject to infringement claims from time to time. For example, we may be unaware of filed patent applications and issued patents that could include claims that might be interpreted to cover our products and services. We have been subject to patent infringement claims in the past, are currently named as a defendant in several proceedings that relate to alleged patent infringement, and from time to time we receive letters from third parties offering an opportunity for us to obtain licenses to patents that may be relevant to our business or alleging that our services infringe upon third party patents or other intellectual property. We may seek to obtain rights to third party technology in the future, but may not be able to agree upon commercially reasonable terms or at all with respect to obtaining such rights. If we are unable to extend existing licenses or are unable to obtain rights to other technology that may be commercially advantageous or necessary for our product and service offerings, we may experience a decrease in the quality of our products or services or we may lose the ability to provide our products and services on a non-infringing basis until alternative technology or suitable alternative products and services can be developed, identified, obtained either through acquisition, license or other grants of rights, and integrated.
Parties making claims of infringement may be able to obtain injunctive or other equitable relief that could effectively block our ability to provide our services and could cause us to pay substantial royalties, licensing fees, damages or settlement fees. Our agreements with certain customers, vendors, or partners may obligate us to defend or indemnify them in connection with such claims of infringement, further increasing our costs of defense and potential liability. Although we generally limit our contractual liability regarding such obligations, we may incur significant liability with respect to them, and disputes with our customers, vendors or partners over such obligations may have an adverse relationship on our relations with those entities. The defense of any lawsuit could divert management’s efforts and attention from ordinary business operations and result in time-consuming and expensive litigation, regardless of the merits of such claims. These outcomes may:
result in the loss of a substantial number of existing customers or prohibit the acquisition of new customers;
cause us to accelerate expenditures to preserve existing revenues;
cause existing or new vendors to require prepayments or letters of credit;
cause our credit card processors to demand reserves or letters of credit or make holdbacks;
result in substantial employee layoffs;
materially and adversely affect our brand in the marketplace and cause a substantial loss of goodwill;
cause our stock price to decline significantly;
materially and adversely affect our liquidity, including our ability to pay debts and other obligations as they become due;
cause us to change our business methods or services;
require us to cease certain business operations or offering certain products and services; and
lead to our bankruptcy or liquidation.
We rely on third parties to provide a portion of our customer service representatives, provide aspects of our E-911 service, which differs from traditional 911 service, and initiate local number portability for our customers. If these third parties do not provide our customers with reliable, high-quality service, our reputation will be harmed and we may lose customers.
We offer our customers support 24 hours a day, seven days a week through both our comprehensive online account management website and our toll free number. Our customer support is currently provided via United States based employees as well as third party partners located in the United States, Philippines, Costa Rica, Chile, Mexico, and India. We can offer support in English, Spanish, and French Canadian. Our third-party providers generally represent us without identifying themselves as independent parties. The ability to support our customers may be disrupted by natural disasters, inclement weather conditions, civil unrest, and other adverse events in the locations where our customer support is provided.
We also contract for services required to provide E-911 services including assistance in routing emergency calls, terminating E-911 calls, operating a national call center that is available 24 hours a day, seven days a week to receive certain emergency calls, and maintaining PSAP databases for the purpose of deploying and operating E-911 services. Interruptions in service from our vendor could cause failures in our customers’ access to E-911 services and expose us to liability and damage our reputation.
We also have agreements with companies that initiate our local number portability, which allow new customers to retain their existing telephone numbers when subscribing to our services.
20 VONAGE ANNUAL REPORT 2017
If any of these third parties do not provide reliable, high-quality service, our reputation and our business will be harmed. In addition, industry consolidation among providers of services to us may impact our ability to obtain these services or increase our expense for these services.
Our services are subject to regulation in the United States, United Kingdom, and Canada, and future legislative, regulatory or judicial actions could adversely affect our business and expose us to liability.
Our business has developed in a relatively lightly regulated environment. However, the United States, United Kingdom, and Canada have applied some traditional telephone company regulations to VoIP and continue to evaluate how VoIP should be regulated. The effects of future regulatory developments are uncertain. At the federal level in the U.S., the Federal Communications Commission has imposed certain telecommunications regulations on VoIP services including:
Requirements to provide E-911 service;
Communications Assistance for Law Enforcement Act obligations;
Obligation to support Universal Service;
Customer Proprietary Network Information, or CPNI, requirements;
Disability access obligations;
Local Number Portability requirements;
Service discontinuance notification obligations;
Outage reporting requirements; and
Rural call completion reporting and rules related to ring signal integrity.
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 from imposing certain of its regulations on us. 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. As such, Vonage is subject to relatively few state regulatory requirements including:
Payment of state and local E-911 fees; and
State Universal Service support obligations.
In Canada, the Canadian Radio-television and Telecommunications Commission, or CRTC. regulates VoIP service. CRTC VoIP regulations include:
Requirement to provide 911 service; and
Local Number Portability requirements.
In the UK, we are subject to regulation in the UK by the Office of Communications, or OFCOM. OFCOM VoIP regulations include:
Requirement to provide 999/112 service; and
Number Portability requirements.
Vonage seeks to comply with all applicable regulatory requirements. We could, however, be subject to regulatory enforcement action if a regulator does not believe that we are complying with applicable regulations.
In addition, the regulatory framework for VoIP service is still evolving and it is possible that Vonage could be subject to additional regulatory obligations and/or existing regulatory obligations could be modified or expanded particularly at the state and local level. For instance, several states public utility commissions are attempting to regulate ‘fixed’ VoIP provided by cable companies versus the nomadic nature of Vonage's services. These states believe that the FCC’s 2004 Vonage Preemption Order did not preempt regulation of these ‘fixed’ services. The effects of future regulatory developments are uncertain. Future legislative, judicial or other regulatory actions could have a negative effect on our business. If we become subject to the rules and regulations applicable to telecommunications providers in individual states, we may incur significant litigation and compliance costs, and we may have to restructure our service offerings, exit certain markets, or raise the price of our services, any of which could cause our services to be less attractive to customers. In addition, future regulatory developments could increase our cost of doing business and limit our growth.
21 VONAGE ANNUAL REPORT 2017
The regulatory framework for CPaaS services is not developed;future legislative, regulatory or judicial actions on CPaaS could adversely affect our business and expose us to liability.
In most countries where we offer CPaaS products, it is not clear how CPaaS fits into the communications regulatory framework. Regulators could claim that our CPaaS products are subject to licensing and substantive communications regulatory requirements or could modify their regulatory requirements to make it clear that CPaaS products are covered.
Future legislative, judicial or other regulatory actions could have a negative effect on our business. If our CPaaS products become subject to the rules and regulations applicable to communications providers, we may incur significant litigation and compliance costs, and we may have to restructure our service offerings, exit certain markets, or raise the price of our services, any of which could cause our services to be less attractive to customers. In addition, future regulatory developments could increase our cost of doing business and limit our growth.
Customer misuse of our CPaaS products in violation of the Telephone Consumer Protection Act may cause us to face litigation risk.
The Telephone Consumer Protection Act of 1991 restricts telemarketing and the use of automatic SMS text messages without proper consent. The scope and interpretation of the laws that are or may be applicable to the delivery of text messages are continuously evolving and developing. If we do not comply with these laws or regulations or if we become liable under these laws or regulations due to the failure of our customers to comply with these laws by obtaining proper consent, we could face liability.
Our business is subject to country-specific governmental regulation and related actions and taxes that may increase our costs or impact our product offerings.
In the United States, Canada, and United Kingdom, we are not a regulated telecommunications business subject primarily to regulations surrounding provision of emergency services and payment into universal service type funds. Our services are also in use in countries outside of the United States, Canada, and the United Kingdom, including countries where providing VoIP services is or may be illegal. We may need to change our service offerings to avoid regulation as a telecommunications business in a jurisdiction, or if we are treated as a fully regulated telecommunications business, we may be required to incur additional expenses. In addition, if governments believe that we are providing unauthorized service in their countries, they may pursue fines, penalties, or other governmental action, including criminal action, that may damage our brand and reputation. If we use a local partner to provide services in a country and the local partner does not comply with applicable governmental regulations, we may face additional regulation, liabilities, penalties or other governmental action, and our brand and reputation may be harmed.
In addition to the risk of being directly subjected to regulation, decisions by foreign regulators to increase the charge for terminating international calls into their countries could cause increased costs, impact margin, and impact churn. These regulatory actions may be taken without notice and cause us to react quickly to changing market conditions. These efforts could divert management’s efforts and attention from ordinary business operations which could materially and adversely affect our results of operations.
As a United States-based company, any foreign subsidiary or joint venture that we use for international operations may be subject to a variety of governmental regulations in the countries where we market our products, including tariffs, taxes and employment regulations different from those in the U.S. For example, distributions of earnings and other payments, including interest, received from our foreign subsidiaries may be subject to withholding taxes imposed by the jurisdiction in which such entities are formed or operating, which will reduce the amount of after-tax cash we can receive. In general, as a United States corporation, we may claim a foreign tax credit against our federal income tax expense for such foreign withholding taxes and for foreign income taxes paid directly by foreign corporate entities in which we own 10% or more of the voting stock. The ability to claim such foreign tax credits and to utilize net foreign losses is, however, subject to numerous limitations, and we may incur incremental tax costs as a result of these limitations or because we are not currently in a tax-paying position in the United States. We may also be required to include in our income for United States federal income tax purposes our proportionate share of certain earnings of those foreign subsidiaries that are classified as “controlled foreign corporations” without regard to whether distributions have been actually received from such subsidiaries.
Our CPaaS offerings may be subject to liability for historic and future sales, use and similar taxes, that may increase our costs or impact our product offerings.
In some United States tax jurisdictions in which we conduct operations, sales and use and telecommunications taxes could apply to our CPaaS products. Historically, we have not billed or collected these taxes from our CPaaS customers. It is possible that some tax jurisdictions may assert that such taxes are applicable to our CPaaS products, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes on our CPaaS customers in the future. Such tax assessments, penalties and interest or future requirements may adversely affect our business, results of operations and financial condition. To the extent that we decide to collect such taxes from our CPaaS customers in the future, we may have some customers that question the incremental tax charges and some may seek to negotiate lower pricing from us, which could adversely affect our business, results of operations and financial condition.
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The global scope of our operations may subject us to potentially adverse tax consequences.
We generally report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Intercompany relationships are subject to complex transfer pricing regulations in various jurisdictions. If revenue and taxing authorities disagree with positions we have taken we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. In addition, changes in tax laws of countries in which we do business could change on a prospective or retroactive basis, and any such changes could increase our liabilities for taxes, interest and penalties, and therefore could harm our business, cash flows, results of operations and financial position.
We may be exposed to liabilities under anti-corruption, export control and economic sanction regulations, and similar laws and regulations, and any determination that we violated any of these laws or regulations could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act, or FCPA, the UK Bribery Act and other laws that prohibit improper payments or offers of payments to foreign governments and their officials, political parties, and/or private parties by persons and entities for the purpose of obtaining or retaining business. We have operations, agreements with third parties, and make sales internationally. In addition, we plan to expand our international operations through potential joint ventures with local partners. Our international activities create the risk of unauthorized payments or offers of payments by one of our employees, consultants, partners, sales agents or distributors, even though these parties are not always subject to our control. It is our policy to prohibit these practices by our employees, consultants, partners, sales agents or distributors, however, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, partners, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA, the UK Bribery Act or other laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results, and financial condition.
Our products and services may be subject to export control and economic sanctions regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department's Office of Foreign Assets Controls. Our products and services must be offered and sold in compliance with these laws and regulations. If we do not comply with these laws or regulations or if we become liable under these laws or regulations due to the failure of our customers to comply with these laws by obtaining proper consent, we could face liability. In addition, changes in our products or services, changes in applicable regulations, or change in the target of such regulations, could also result in decreased use of our products and services, or in our decreased ability to sell our products or provide our services to existing or prospective customers with international operations. Any decreased use of our products and services or limitation on our ability to export our products and provide our services could adversely affect our business, results of operations and financial condition.
The success of our business relies on customers’ continued and unimpeded access to broadband service. Providers of broadband services may be able to block our services or charge their customers more for also using our services, which could adversely affect our revenue and growth.
Our customers must have broadband access to the Internet in order to use our service. Some providers of broadband access, including outside of the United States, may take measures that affect their customers’ ability to use our service, such as degrading the quality of the data packets we transmit over their lines, giving those packets low priority, giving other packets higher priority than ours, blocking our packets entirely or attempting to charge their customers more for also using our services.
In the United States, there continues to be some uncertainty regarding whether suppliers of broadband Internet access have a legal obligation to allow their customers to access and use our service without interference. On February 26, 2015, the FCC adopted neutrality rules that would protect against interference by suppliers of broadband Internet access. On December 14, 2017, the FCC voted to reverse its 2015 neutrality rules. The FCC's recent reversal of its stance on net neutrality may have a negative long term impact on businesses such as ours who rely on the Internet to create and deliver products and services. Challenges to the FCC's ruling are underway, with public interest groups, states, local municipalities and companies seeking redress in the courts and/or through legislation.
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An unremediated material weakness in our internal control over financial reporting could adversely affect our reputation, business or stock price.
As described under Item 9A - Controls and Procedures, we identified a control deficiency constituting a material weakness in our internal control over financial reporting related to our controls over the preparation of the annual tax provisionnon-employee Directors for the year ended December 31,
2016. A material weakness is a deficiency, or combination2021. | | | | | | | | | | | | | | | | | |
| Name | Fees
Earned or
Paid in
Cash | | Stock Awards (1) | | Total |
| Jeffrey A. Citron | $ | 125,000 | | | $ | 172,443 | | | $ | 297,443 | |
Stephen Fisher (2) | $ | 90,000 | | | $ | 114,972 | | | $ | 204,972 | |
| Carolyn Katz | $ | 95,000 | | | $ | 114,972 | | | $ | 209,972 | |
| John J. Roberts | $ | 110,000 | | | $ | 114,972 | | | $ | 224,972 | |
Gary Steele (3) | $ | — | | | $ | 57,487 | | | $ | 57,487 | |
| Hamid Akhavan | $ | 80,000 | | | $ | 114,972 | | | $ | 194,972 | |
| Michael McConnell | $ | 85,000 | | | $ | 114,972 | | | $ | 199,972 | |
| Priscilla Hung | $ | 90,000 | | | $ | 114,972 | | | $ | 204,972 | |
| Jan Hauser | $ | 105,000 | | | $ | 114,972 | | | $ | 219,972 | |
| Tien Tzuo | $ | 80,000 | | | $ | 114,972 | | | $ | 194,972 | |
Steve Ward (4) | $ | 80,000 | | | $ | 28,749 | | | $ | 108,749 | |
__________(1)The amounts shown are the grant date fair value, calculated in accordance with FASB ASC 718 by multiplying the number of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Although we remediated this material weakness during 2017, we cannot assure you that we will not identify additional material weaknesses in our internal control over financial reporting in the future. If we are unable to remediate any future material weakness, our ability to record, process and report financial information accurately, and to prepare financial statements within the time periods specifiedshares awarded by the rules and forms of the Securities and Exchange Commission, could be adversely affected. The occurrence of or failure to remediate any future material weakness may adversely affect our reputation and business and the marketclosing price of our common stock and any other securities we may issue.
The debt agreements governing our financing contain restrictions that may limit our flexibility in operating our business or executing on our acquisition strategy.
On June 3, 2016, we entered into Amendment No. 1 to the Amended and Restated Credit Agreement, or the 2016 Credit Facility, consisting of a $125,000 senior secured term loan and a $325,000 revolving credit facility. The 2016 Credit Facility contains customary representations and warranties and affirmative covenants that limit our ability and/or the ability of certain of our subsidiaries to engage in specified types of transactions. These covenants and other restrictions may under certain circumstances limit, but not necessarily preclude, our and certain of our subsidiaries’ ability to, among other things:
consolidate or merge;
create liens;
incur additional indebtedness;
dispose of assets;
consummate acquisitions;
make investments; or
pay dividends and other distributions.
Under the 2016 Credit Facility, we are required to comply with the following financial covenants: specified maximum consolidated leverage ratio, specified minimum consolidated fixed coverage charge ratio, minimum cash position and maximum capital expenditures. Our ability to comply with such financial and other covenants may be affected by events beyond our control, so we may not be able to comply with these covenants. A breach of any such covenant could result in a default under the 2016 Credit Facility. In that case, the lenders could elect to declare due and payable immediately all amounts due under the 2016 Credit Facility, including principal and accrued interest.
Significant foreign currency exchange rate fluctuations could adversely affect our financial results.
Because our consolidated financial statements are presented in U.S. dollars, increases or decreases in the value of the U.S. dollar relative to other currencies in which we transact business could materially adversely affect our financial results. For example, Nexmo collects revenues in Euros, and accordingly the strengthening of the U.S. dollar relative to the Euro adversely affects our revenue and operating results presented in U.S. dollars. In addition, on June 23, 2016, the United Kingdom held a referendum in which a majority of voters approved an exit from the European Union, or E.U., commonly referred to as "Brexit." As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.'s withdrawal from the E.U. Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business, such as the British Pound, Euro and other currencies. Such strengthening of the U.S. dollar relative to other currencies may adversely affect our revenue and operating results. In addition, changes to U.K. border and immigration policy could likewise occur as a result of Brexit, affecting our U.K. operation's ability to recruit and retain employees from outside the U.K.
If we require additional capital, we may not be able to obtain additional financing on favorable terms or at all.
We may need to pursue additional financing to respond to new competitive pressures, pay extraordinary expenses such as litigation settlements or judgments or fund growth, including through acquisitions. Because of our past significant losses and our limited tangible assets, we do not fit traditional credit lending criteria, which, in particular, could make it difficult for us to obtain loans or to access the capital markets. In addition, the credit documentation for our recent financing contains affirmative and negative covenants that affect, and in many respects may significantly limit or prohibit, among other things, our and certain of our subsidiaries’ ability to incur, refinance or modify indebtedness and create liens.
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Our credit card processors have the ability to impose significant holdbacks in certain circumstances. The reinstatement of such holdbacks likely would have a material adverse effect on our liquidity.
Under our credit card processing agreements with our Visa, MasterCard, American Express, and Discover credit card processors, the credit card processor has the right, in certain circumstances, including adverse events affecting our business, to impose a holdback of our advanced payments purchased using a Visa, MasterCard, American Express, or Discover credit card, as applicable, or demand additional reserves or other security. If circumstances were to occur that would allow any of these processors to reinstate a holdback, the negative impact on our liquidity likely would be significant. In addition, our Visa and MasterCard credit card processing agreement may be terminated by the credit card processor at its discretion if we are deemed to be financially insecure. As a significant portion of payments to us are made through Visa and MasterCard credit cards, if the credit card processor does not assist in transitioning our business to another credit card processor, the negative impact on our liquidity likely would be significant. There were no cash reserves and cash-collateralized letters of credit with any credit card processors as of December 31, 2017.
We have incurred cumulative losses since our inception and may not achieve consistent profitability in the future.
We incurred a net loss attributable to Vonage of $33,933 for the year ended December 31, 2017 and our accumulated deficit is $672,561 from our inception through December 31, 2017. Although we have achieved profitability in prior years and believe we will achieve consistent profitability in the future, we ultimately may not be successful. We believe that our ability to achieve consistent profitability will depend, among other factors, on our ability to continue to achieve and maintain substantive operational improvements and structural cost reductions while maintaining and growing our net revenues. In addition, certain of the costs of our business are not within our control and may increase. For example, we and other telecommunications providers are subject to regulatory termination charges imposed by regulatory authorities in countries to which customers make calls.
We may be unable to fully realize the benefits of our net operating loss, or NOL, carry forwards if an ownership change occurs.
If we were to experience a “change in ownership” under Section 382 of the Internal Revenue Code, or Section 382, the NOL carry forward limitations under Section 382 would impose an annual limit on the amountdate of the future taxable income that may be offset by our NOL generated priorgrant. Stock awards were granted to the change in ownership. If a change in ownership were to occur, we may be unable to use a significant portion of our NOL to offset future taxable income. In general, a change in ownership occurs when, as of any testing date, there has been a cumulative change in the stock ownership of the corporation held by 5% stockholders of more than 50 percentage points over an applicable three-year period. For these purposes, a 5% stockholder is generally any person or group of persons that at any time during an applicable three-year period has owned 5% or more of our outstanding common stock. In addition, persons who own less than 5% of the outstanding common stock are grouped together as one or more “public group” 5% stockholders. Under Section 382, stock ownership would be determined under complex attribution rules and generally includes shares held directly, indirectly though intervening entities, and constructively by certain related parties and certain unrelated parties acting as a group. We have implemented a Tax Benefits Preservation Plan intended to provide a meaningful deterrent effect against acquisitions that could cause a change in ownership, however this is not a guarantee against such a change in ownership.
Our certificate of incorporation and bylaws and the agreements governing our indebtedness contain provisions that could delay or discourage a takeover attempt, which could prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares.
Certain provisions of our restated certificate of incorporation and our second amended and restated bylaws may make it more difficult for, or have the effect of discouraging, a third party from acquiring control of us or changing our board of directors and management. These provisions:
permit our board of directors to issue additional shares of common stock and preferred stock and to establish the number of shares, series designation, voting powers if any, preferences, other special rights, qualifications, limitations or restrictions of any series of preferred stock;
limit the ability of stockholders to amend our restated certificate of incorporation and second amended and restated bylaws, including supermajority requirements;
allow only our board of directors, Chairman of the board of directors or Chief Executive Officer to call special meetings of our stockholders;
eliminate the ability of stockholders to act by written consent;
require advance notice for stockholder proposals and director nominations;
limit the removal of directors and the filling of director vacancies; and
establish a classified board of directors with staggered three-year terms.
25 VONAGE ANNUAL REPORT 2017
Such provisions could have the effect of depriving stockholders of an opportunity to sell their shares at a premium over prevailing market prices. Any delay or prevention of, or significant payments required to be made upon, a change of control transaction or changes in our board of directors or management could deter potential acquirors or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
The following is a summary of our offices and locations:
|
| | | | | |
| Location | Business Use | Square Footage |
| | Lease Expiration Date |
| Holmdel, New Jersey | Corporate Headquarters, Network Operations, Customer Services, Sales and Marketing, Administration | 350,000 |
| | 2023 |
| New York, New York | Sales and Marketing, Administration, and Product Development | 10,166 |
| | 2026 |
| Dallas, Texas | Sales and Marketing, Administration, and Product Development | 5,567 |
| | 2021 |
| Atlanta, Georgia | Sales and Marketing, Administration, and Product Development | 162,839 |
| | 2020 |
| Scottsdale, Arizona | Network Operations, Customer Services, Marketing, and Administration | 37,870 |
| | 2021 |
| Englewood, Colorado | Sales and Marketing | 19,146 |
| | 2020 |
| Minneapolis, Minnesota | Sales and Marketing | 2,206 |
| | 2020 |
| Oak Brook, Illinois | Sales and Marketing | 4,890 |
| | 2019 |
| Houston, Texas | Sales and Marketing | 4,040 |
| | 2020 |
| McLean, Virginia | Network Operations, Customer Services, Sales and Marketing, Administration | 25,475 |
| | 2020 |
| Philadelphia, Pennsylvania | Sales and Marketing | 5,795 |
| | 2020 |
| San Francisco, California | Sales and Marketing, Administration, and Customer Services | 5,000 |
| | 2018 |
| London, United Kingdom | Sales and Marketing, Administration | 22,361 |
| | 2027 |
| Raanana, Israel | Application Development | 7,158 |
| | 2020 |
| | | 662,513 |
| | |
We sublease 52,000 square feet of office space in our Holmdel, NJ location to a third party. We believe that the facilities that we occupy are adequate for our current needs and do not anticipate leasing any material additional space.
26 VONAGE ANNUAL REPORT 2017
ITEM 3. Legal Proceedings
Refer to Note 11, Commitments and Contingencies to our Consolidated Financial Statements included in this Annual Report on Form 10-K for a discussion of recent developments regarding our legal proceedings.
ITEM 4. Mine Safety Disclosures
Not Applicable.
27 VONAGE ANNUAL REPORT 2017
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock
Our common stock has been listed on the New York Stock Exchange under the ticker symbol “VG” since May 24, 2006. Prior to that time, there was no public market for our common stock.first date of each quarter. The following table sets forth the high and low salesclosing prices for our common stock as reportedwere $12.88 on the NYSE for the quarterly periods indicated.January 1 2021, $12.07 on April 1, 2021, $14.44 on July 1, 2021, and $16.40 on October 1, 2021, respectively. Mr. Citron was granted 3,348, 3,571, 2,985, and 2,629 shares on January 1, 2021, April 1, 2021, July 1, 2021, and October 1, 2021, respectively. Mr. Fisher, Ms. Katz, Mr. Roberts, Mr. Akhavan, Mr. McConnell, Ms. Hung, Ms. Hauser, and Mr. Tzuo were granted 2,232, 2,381, 1,990, and 1,753 shares on January 1, 2021, April 1, 2021, July 1, 2021, and October 1,2021, respectively. Mr. Steele was granted 2,232 and 2,381 shares on January 1, 2021 and April 1, 2021, respectively. Mr. Ward was granted 1,753 on October 1, 2021.
(2)Mr. Fisher resigned in October 2021.
(3)Mr. Steele resigned in April 2021. |
| | | | | | | |
| | Price Range of Common Stock |
| | High | | Low |
| 2017 | | | |
| Fourth quarter | $ | 10.57 |
| | $ | 7.85 |
|
| Third quarter | $ | 8.59 |
| | $ | 6.28 |
|
| Second quarter | $ | 7.44 |
| | $ | 5.98 |
|
| First quarter | $ | 7.88 |
| | $ | 5.74 |
|
| 2016 | | | |
| Fourth quarter | $ | 7.57 |
| | $ | 6.10 |
|
| Third quarter | $ | 6.75 |
| | $ | 5.43 |
|
| Second quarter | $ | 6.29 |
| | $ | 3.82 |
|
| First quarter | $ | 5.88 |
| | $ | 4.13 |
|
Holders
At January 31, 2018, we had approximately 523 stockholders of record. This number does not include beneficial owners whose shares are held in street name.
Dividends
We have never paid cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock for at least the next 12 months. We intend to retain all of our earnings, if any, for general corporate purposes, and, if appropriate, to finance the expansion of our business.
Stock Performance Graph
The graphs below and related information shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission or otherwise subject(4)Mr. Ward was appointed to the liabilities of Section 18 of the Securities Exchange Act of 1934, or the Exchange Act, nor shall such information be deemed incorporated by reference into any filing under the Securities Act of 1933, or the Securities Act, or the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate such information by reference into a document filed under the Securities Act or the Exchange Act.board in July 2021.
The graph below compares the cumulative total return of our common stock between December 31, 2012 and December 31, 2017, with the cumulative total return of (1) NASDAQ Telecommunications, (2) Russell 2000 Index, and (3) NASDAQ Computer. This graph assumes the investment of $100 on December 31, 2012 in our common stock, NASDAQ Telecommunications, Russell 2000 Index, and NASDAQ Computer, and assumes the reinvestment of dividends, if any.
COMPARISON OF THE CUMULATIVE TOTAL RETURN ON COMMON STOCK BET
28 VONAGE ANNUAL REPORT 2017
WE
COMPARISON OF THE CUMULATIVE TOTAL RETURN ON COMMON STOCK BETWEEN DECEMBER 31, 2012 AND December 31, 2017
Among Vonage Holdings Corp., the NASDAQ Telecommunications, the Russell 2000 Index, and the NASDAQ Computer.
|
| | | | | | | | | | | | | | | | | | | |
| December 31, | |
| 2013 |
| | 2014 |
| | 2015 |
| | 2016 |
| | 2017 |
|
| Vonage Holdings Corp. | $ | 140.51 |
| | $ | 160.76 |
| | $ | 242.19 |
| | $ | 289.03 |
| | $ | 429.11 |
|
| NASDAQ Telecommunications | $ | 124.02 |
| | $ | 135.07 |
| | $ | 124.94 |
| | $ | 143.52 |
| | $ | 168.54 |
|
| Russell 2000 Index | $ | 137.00 |
| | $ | 141.84 |
| | $ | 133.74 |
| | $ | 159.78 |
| | $ | 180.79 |
|
| NASDAQ Computer | $ | 131.95 |
| | $ | 158.17 |
| | $ | 168.05 |
| | $ | 188.67 |
| | $ | 261.81 |
|
Common Stock repurchases
See Note 9, Common Stock to the Consolidated Financial Statements for information regarding common stock repurchases by quarter.
On December 9, 2014, Vonage's Board of Directors authorized a new program for the Company to repurchase up to $100,000 of its outstanding common stock. Repurchases under the 2014 $100,000 repurchase program are expected to be made over a four-year period beginning in 2015. Under this program, the timing and amount of repurchases will be determined by management based on its evaluation of market conditions, the trading price of the stock and will vary based on available capital resources and other financial and operational performance, market conditions, securities law limitations, and other factors. Repurchases may be made in the open market or through private transactions from time to time. The repurchases will be made using available cash balances. In any period, cash used in financing activities related to common stock repurchases may differ from the comparable change in stockholders' equity, reflecting timing differences between the recognition of share repurchase transactions and their settlement for cash.
During the three months ended December 31, 2017, we did not repurchase Vonage Holdings Corp. common stock. As of December 31, 2017, approximately $42,533 remained2021, Directors held options for the following aggregate number of our 2014 $100,000 repurchase program.
shares:
2919 VONAGE ANNUAL REPORT 20172021
| | | | | |
| Name | Number of Shares
Underlying Outstanding
Stock Options |
| Carolyn Katz | 150,000 | |
| John J. Roberts | 30,000 | |
Represents options granted under our director compensation programs only.See Item 12 "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" for more information regarding the equity ownership of our officers and Directors.
20 VONAGE ANNUAL REPORT 2021
EXECUTIVE OFFICERS OF VONAGE
Set forth below is certain information concerning our executive officers.
Rory Read, Chief Executive Officer. See biographical information above under Item 12 "Directors, Executive Officers and Corporate Governance — Board of Directors".
Jay Bellissimo, Chief Operating Officer. Mr. Bellissimo, age 57, joined us in January 2021 as Chief Operating Officer. With more than 30 years of experience in the technology industry, he joined Vonage from IBM, where he most recently served as General Manager of IBM, U.S. Public and Federal Market from November 2019 to January 2021. Prior to that, Mr. Bellissimo was Managing Partner, Global Business Services, Cognitive Process Transformation for IBM from January 2018 to November 2019 and General Manager, Chief Revenue Officer, Watson Cloud & Platform Unit of IBM from January 2014 to December 2017. He was also a member of IBM’s Performance Team, Client Experience Team and Acceleration Team, which focus on the company’s short- and long-term strategies for growth. Mr. Bellissimo held various positions throughout his career with IBM which began in September 2002. Prior to IBM, he held numerous industry management and practice leadership positions at PwC in Chemicals & Petroleum, Industrial Products and Aerospace & Defense. Mr. Bellissimo holds a B.A. in Political Science from St. Michael’s College. He serves on the Advisory Board of the Center of Innovation & Entrepreneurship at Claremont McKenna College.
Savinay Berry. EVP, Product and Engineering. Mr. Berry, age 47, joined us in February 2021. Prior to joining Vonage, Mr. Berry was Senior Vice President, Cloud Services at OpenText, responsible for all cloud services and strategy, including infrastructure, service delivery, managed services, and developer services from January 2019 to January 2021. Before that, he also served as OpenText Vice President, Engineering and Products leading cloud applications, design, performance and security from January 2017 to January 2019. Prior to OpenText, Mr. Berry was Vice President, Product Management at Dell EMC, where he was responsible for the content management product portfolio from 2013 to 2015. Before Dell, he served in product and engineering leadership roles at Intuit where he led the development of advanced products, such as wearables, mobile and intelligent systems. Earlier, Mr. Berry was Vice President of Product Management at Empowered Inc., acquired by Qualcomm. He holds both a Bachelor’s and Master’s degree in Electrical and Computer Engineering and an M.B.A. from Kellogg School of Management at Northwestern University.
Joy Corso, Chief Marketing Officer. Ms. Corso, age 53, joined us in July 2020 and serves as our Chief Marketing Officer. Prior to joining Vonage, she was Senior Vice President and Chief Marketing Officer at Virtustream, a Dell Technologies Business, from September 2018 to July 2020. Prior to that, from May 2014 to July 2018, Ms. Corso was the Vice President, Marketing of NORCAL Group and President of NORCAL Group Foundation. She has also held senior roles in top tier companies including Advanced Micro Devices, Raytheon, Fidelity Investments and Iron Mountain. Ms. Corso holds an M.B.A. and a B.S. in Business Administration from Providence College, and currently serves on the Regional Board of Trustees for Make-A-Wish Central and South Texas.
Vinod Lala, Chief Strategy Officer. Mr. Lala, age 52, joined us in June 2014 to lead Vonage’s transformation strategy and corporate development, leveraging his cloud technology, corporate investment and strategic advisory experience. He currently manages corporate strategy and development, financial planning & analysis and investor relations as well as debt and capital markets financings. Prior to Vonage, Mr. Lala was at Guggenheim Partners, where he was a Managing Director and led principal investments and mergers & acquisitions in cloud technology and communications. Prior to joining Guggenheim in 2011, Mr. Lala was a Managing Director in the Global Mergers & Acquisitions Group at Deutsche Bank, where he focused on communications, technology and media, and advised global businesses and their boards on corporate strategy, M&A and financing.
Stephen Lasher, Chief Financial Officer. Mr. Lasher, age 52, joined Vonage in January 2021 as our Chief Financial Officer. He joined Vonage from IBM, where he spent the last 24 years of his career and most recently served as Vice President of Finance for IBM Global Markets and Integrated Accounts, responsible for IBM’s financial operations, strategies, management, and controls for the company’s approximately $70B global sales function driving client adoption of hybrid cloud and Artificial Intelligence (AI) for enterprises in all industries and regions. Previously, Mr. Lasher was Vice President of Finance for IBM Global Business Services, responsible for a group of more than 500 finance professionals within the finance, operations and performance management teams for IBM's Global Business Services division. Prior to that, he was Vice President of Finance for IBM Cloud, and served as the global financial and operational leadership for IBM’s industry leading cloud portfolio of services and solutions. Earlier, Mr. Lasher was Vice President of Finance for the IBM Software Group, leading the finance operations for IBM’s multi-billion dollar software segment, and Vice President of Finance for IBM Software & Cloud Solutions. He was also Director of Finance for IBM Global Business Services Japan and served as the Chief Financial Officer for the multi-billion dollar consulting, system integration and outsourcing services business. Mr. Lasher graduated from Bentley University with a B.S. in Accounting.
21 VONAGE ANNUAL REPORT 2021
David Levi, Senior Vice President and Principal Accounting Officer. Mr. Levi, age 61, joined us in April 2017 as Senior Vice President and Principal Accounting Officer. Mr. Levi has more than 20 years of experience leading global finance teams across numerous industries and companies, including Bristol-Myers Squibb (BMS), The New York Times and Thomson Reuters. Prior to joining Vonage, Mr. Levi was Executive Director - Global Financial Compliance and Controls, and US Controller at BMS, January 2005 to April 2017. Prior to that, Mr. Levi served in senior Finance positions at other companies as Controller, Financial Reporting Director and as an audit manager at PriceWaterhouseCoopers.
Randy Rutherford, Chief Legal Officer. Mr. Rutherford, age 48, has been our Chief Legal Officer since December 2016. Mr. Rutherford joined us in November 2011 as Vice President, Law, and served as Vice President, Law and Deputy General Counsel beginning in October 2015. Previously, Mr. Rutherford was a partner at Day Pitney LLP from January 2009 through November 2011 and has over 20 years of experience advising senior management and boards of directors on corporate governance, securities law, executive compensation, capital markets, and mergers & acquisitions matters.
ITEM 6. Selected Financial Data11. Executive Compensation
The following table presents the Company's historical selected financial data. This information should be read in conjunction with the Consolidated Financial Statements and the related notes thereto in Item 15 and Item 7, Management’sCompensation Discussion and Analysis of Financial Condition and Results of Operations. The Company has completed several acquisitions as further described in Note 12, Acquisition of Business to the consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, |
| (In thousands, except per share amounts) | 2017 | | 2016 (1) | | 2015 (2) | | 2014 (3) | | 2013 (4) |
| Statement of Operations Data: | | | | | | | | | |
| Total revenues | $ | 1,002,286 |
| | $ | 955,621 |
| | $ | 895,072 |
| | $ | 868,854 |
| | $ | 829,067 |
|
| Income from operations | 59,391 |
| | 44,154 |
| | 52,992 |
| | 58,071 |
| | 53,975 |
|
| (Loss)/income from continuing operations | $ | (33,933 | ) | | $ | 13,151 |
| | $ | 25,035 |
| | $ | 29,707 |
| | $ | 29,427 |
|
| Discontinued operations | — |
| | — |
| | (2,439 | ) | | (10,260 | ) | | (1,626 | ) |
| Net (Loss)/Income | (33,933 | ) | | 13,151 |
| | 22,596 |
| | 19,447 |
| | 27,801 |
|
| Plus: Net loss from discontinued operations attributable to noncontrolling interest | $ | — |
| | $ | — |
| | $ | 59 |
| | $ | 819 |
| | $ | 488 |
|
| Net (loss)/income attributable to Vonage | $ | (33,933 | ) | | $ | 13,151 |
| | $ | 22,655 |
| | $ | 20,266 |
| | $ | 28,289 |
|
| Net (Loss)/Income per common share - continuing operations: | | | | | | | | | |
| Basic | $ | (0.15 | ) | | $ | 0.06 |
| | $ | 0.12 |
| | $ | 0.14 |
| | $ | 0.14 |
|
| Diluted | $ | (0.15 | ) | | $ | 0.06 |
| | $ | 0.11 |
| | $ | 0.14 |
| | $ | 0.13 |
|
| Net Loss per common share - discontinuing operations attributable to Vonage: | | | | | | | | | |
| Basic | — |
| | — |
| | (0.01 | ) | | (0.04 | ) | | (0.01 | ) |
| Diluted | — |
| | — |
| | (0.01 | ) | | (0.04 | ) | | (0.01 | ) |
| Net (Loss)/Income per common share - attributable to Vonage: | | | | | | | | | |
| Basic | (0.15 | ) | | 0.06 |
| | 0.11 |
| | 0.10 |
| | 0.13 |
|
| Diluted | (0.15 | ) | | 0.06 |
| | 0.10 |
| | 0.09 |
| | 0.13 |
|
| Weighted-average common shares outstanding: | | | | | | | | | |
| Basic | 225,311 |
| | 215,751 |
| | 213,147 |
| | 209,822 |
| | 211,563 |
|
| Diluted | 225,311 |
| | 231,941 |
| | 224,110 |
| | 219,419 |
| | 220,520 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Statement of Cash Flow Data: | | | | | | | | | |
| Net cash provided by operating activities | $ | 128,058 |
| | $ | 93,456 |
| | $ | 134,485 |
| | $ | 101,546 |
| | $ | 89,554 |
|
| Net cash used in investing activities | (30,737 | ) | | (191,449 | ) | | (153,509 | ) | | (119,523 | ) | | (122,237 | ) |
| Net cash provided by (used in) financing activities | (96,242 | ) | | 68,054 |
| | 35,451 |
| | (23,243 | ) | | 20,580 |
|
| Balance Sheet Data: | | | | | | | | | |
| Total assets | 858,681 |
| | 935,666 |
| | 784,566 |
| | 674,460 |
| | 642,158 |
|
| Total notes payable and indebtedness under revolving credit facility, including current portion | 232,515 |
| | 318,874 |
| | 210,392 |
| | 156,032 |
| | 121,075 |
|
| Capital lease obligations | 140 |
| | 3,428 |
| | 7,761 |
| | 10,201 |
| | 13,090 |
|
| Total stockholders’ equity | 472,898 |
| | 436,541 |
| | 388,741 |
| | 343,497 |
| | 338,074 |
|
(1) The year ended December 31, 2016 includes the impacts of the acquisition of Nexmo, which was completed in the second quarter. In addition, refer to Note 3. Correction of Prior Period Financial Statements for impact of correction on the financial statements for the year ended December 31, 2016.
(2) The year ended December 31, 2015 includes the impacts of the acquisition of iCore, which was completed in the third quarter and the acquisition of Simple Signal, which was completed in the second quarter.
(3) The year ended December 31, 2014 includes the impact of the acquisition of Telesphere Networks Ltd., which was completed in the fourth quarter.
(4) The year ended December 31, 2013 includes the impact of the acquisition of Vocalocity Inc., which was completed in the fourth quarter.
30 VONAGE ANNUAL REPORT 2017
ITEM 7. Management’sthis Compensation Discussion and Analysis, of Financial Conditionwe address the compensation provided to our named executive officers (NEOs). We also discuss the goals for our executive compensation program and Results of Operationsother important factors underlying our compensation practices and policies.
Executive Summary
You should readOur Company
At Vonage, our vision is to accelerate the following discussion together with “Selected Financial Data” and our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of many factors, including the factors we describe under “Item 1A—Risk Factors,” and elsewhere in this Annual Report on Form 10-K.
OVERVIEW
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 ("VCP"), our strategy is to deliver a single leading provider of cloud communications services for businessesplatform that powers our customers' and consumers. Our business services transform the way people work and businesses operate through a portfolio of communicationspartners' global engagement solutions that enable internal collaboration among employees, while also keeping companies closely connected with their customers, across any mode of communication, on any cloud-connected device. Vonage customers can choose among or combine two separate service delivery options to suit their specific cloud communication needs. They can buy Vonage Business as a subscription and they can buyusing our Vonage API Platform and consume our cloud communication as a service product as programmable modules, delivered via APIs. We also provide a robust suite of feature-rich residential communication solutions.
Business
For our Business customers, we provide innovative, cloud-basedAPIs, 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 based Voice over Internet Protocol, or VoIP, network.Contact Center innovations. We also offer CPaaS solutions designed to enhancebelieve that the way businesses communicate with their customers by embedding communications into apps, websites and business processes. In combination, ourVonage Communications Platform's products and services permit our business customersare well positioned to communicatetake advantage of emerging trends with sizable, growing total addressable markets as companies look to cloud-based communications solutions and API programming architectures as part of their customers and employees through any cloud-connected device, in any place, at any time without the often costly investment required with on-site equipment. We have a robust set of product families tailored to serve the full range of the business value chain, from the SMB market, through mid-market and enterprise markets. We provide customers with multiple deployment options, designed to provide the reliability and quality of service they demand. We provide customers the ability to integrate our cloud communications platform with many cloud-based productivity and CRM solutions, including Google’s G Suite, Zendesk, Salesforce’s Sales Cloud, Oracle, and Clio. With our ability to integrate these cloud-based, workplace tools, Vonage integrates the entire business communications value chain - from employee communications that maximize productivity to the direct engagement with customers that CPaaS provides. When combined with our MPLS network, as well as voice services over customers' broadband networks via our SmartWan solution, we create a differentiated offering.digital transformation.
Consumer
For our Consumer customers, we enable users to access and utilize our services and features, via their existing internet connections, including over 3G/4G, LTE, Cable, or DSL broadband networks. This technology enables us to offer our Consumer customers attractively priced voice 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, where we will continue towhich provide value in international long distance and target under-served segments.
Services outside
On November 22, 2021,the Company, Telefonaktiebolaget LM Ericsson (publ) ("Ericsson" or "Parent") and Ericsson Muon Holding Inc. entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for the acquisition of the United StatesCompany by Ericsson for approximately $6.2 billion in cash. The proposed transaction received the required approval of the Company's stockholders on February 9, 2022. Ericsson and Vonage continue to work toward closing this acquisition during the first half of 2022, on and subject to the terms of the merger agreement and subject to receiving regulatory approval.
We currently have UCaaS and consumer operationsNamed Executive Officers
Our “Named Executive Officers” are the executive officers who are included in the United States, United Kingdom,Summary Compensation Table. They include the following current and Canadaformer officers:
•Rory Read, Chief Executive Officer
•Stephen Lasher, Chief Financial Officer
•Timothy Shaughnessy, Interim Chief Financial Officer
•Jay Bellissimo, Chief Operating Officer
•Savinay Berry, EVP, Product and Engineering
•Joy Corso, Chief Marketing Officer
For the 2021 compensation period, we are reporting six named executive officers based on transitions of our CFO during the fiscal year. On January 13, 2020, we announced that Mr. Pearson planned to retire. He served as the Chief Financial Officer
22 VONAGE ANNUAL REPORT 2021
though August 15, 2020 and was succeeded by Mr. Shaughnessy on an interim basis. On January 29, 2021, Stephen Lasher was appointed as the Company's Chief Financial Officer. Mr. Shaughnessy remained as the Company's Interim Chief Financial Officer through February 28, 2021 for transition purposes.
For information regarding termination payments, see "Potential Payments Upon Termination of Employment or Change-in-Control," below.
2021 Performance
Our fiscal 2021 financial performance served as a key factor in determining compensation for 2021. In 2021, our management team continued to successfully pivot to cloud communications for the business market and drove business revenues to record levels. The team accomplished these results while also optimizing the profitability of our consumer services business. Building on the momentum of previous years, Vonage delivered strong financial and operational results in 2021, as follows:
•Delivered total revenues of $1,409 million, an increase from $1,248 million in the prior year, and our seventh consecutive year of consolidated revenue growth.
•Grew Vonage Business revenue 22% to $1,120 million, up from $915 million in 2020.
•GAAP Net Loss was $24.5 million or ($0.10) Per Share on a diluted basis, and Net Income, excluding adjustments*, of $32 million or $0.12 Per Share on a diluted basis.
•Achieved Adjusted EBITDA* of $198 million.
•Produced net cash provided by operating activities of $159 million, and Free Cash Flow* of $103 million, our eleventh consecutive year of positive Free Cash Flow*.
*Adjusted EBITDA, GAAP net income (loss) excluding adjustments, and free cash flow are non-GAAP financial measures. We define adjusted EBITDA as GAAP net income (loss) before interest, tax, depreciation and amortization, share-based expense, amortization of costs to implement cloud computing arrangements, acquisition related transaction and integration costs, organizational transformation costs, restructuring activities, and other non-recurring items. We define adjusted net income (loss), as GAAP net income (loss) excluding amortization of acquisition-related intangible assets, amortization of costs to implement cloud computing arrangements, acquisition related transaction and integration costs, amortization of debt discount, organizational transformation, restructuring costs, other non-recurring items and tax effect on adjusting items. We define free cash flow as net cash provided by operating activities minus capital expenditures, purchase of intangible assets, and acquisition and development of software assets. Please refer to Appendix A for reconciliations of: (1) adjusted EBITDA to GAAP net income (loss), (2) net income excluding certain adjustments to GAAP net income (loss), and (3) free cash flow to GAAP cash provided by operating activities.
2021 Executive Compensation Program Outcomes
The Company exceeded the ambitious target levels of performance on the measures used to assess annual corporate performance (which included VCP service revenue, VCP Adjusted EBITDA, and Customer Satisfaction (NPS). As a result, the annual performance-based executive compensation program delivered above-target payouts to our named executives for 2021.
For performance grants made in 2019 to our NEOs, at the end of 2021, the Company's three-year cumulative TSR was approximately 93%, which ranked at the 62nd percentile of the performance peer group and resulted in the vesting of 140.23% of the target number of shares awarded.
Compensation and Governance Matters
Our compensation committee reviews our compensation programs, technology company data and best practices in the executive compensation area annually to determine whether changes should be made to address the objectives described below. We continue to believe that our low-cost Internet based communications platform enables uscurrent structure helps to cost effectively deliver voicealign executive and messaging services to other locations throughout the world. Through Nexmo, we have operationsshareholder interests while providing performance and retention incentives in the United States, United Kingdom, Hong Kong, and Singapore, and provide CPaaS solutions to our customers located in many countries around the world.a competitive compensation package.
Trends in Our Industry
A number of trends in our industry have a significant effect on our results of operations and are important to an understanding of our financial statements.
3123 VONAGE ANNUAL REPORT 20172021
We have adopted compensation practices and policies that our Board believes advance our compensation objectives, including: | | | | | | | | |
| Things We Do | Summary |
ü
| Emphasize Pay for Performance | We link our named executive officers’ incentive compensation to our financial performance and the attainment of specified goals that drive shareholder value. |
ü
| Retain an Independent Compensation Consultant | Our compensation committee uses an independent compensation consultant to advise the committee on its oversight of our compensation program. The compensation consultant does not provide services to management. |
ü
| Grant Performance-Based Equity | We award a significant portion of our long-term incentive compensation in the form of performance-based restricted stock units. The number of units actually earned is determined at the end of the three year period based on company performance. |
ü
| Maintain Robust Stock Ownership Guidelines | Our stock ownership guidelines require that our CEO maintain a stock ownership level equal to 5x base salary and that our other NEOs maintain a stock ownership level equal to 3x base salary. |
ü
| Maintain Incentive Compensation Recovery Policy | Our Incentive Compensation Recovery Policy permits the Company to recoup from a covered officer (including NEOs) excess compensation and to recover improper gains in the event of a material restatement of the Company's financial results caused by the misconduct of the covered officer. |
ü
| Incorporate Best Practices in our Incentive Compensation Plan
| Our 2015 Equity Plan includes several provisions that are protective of our shareholders, including annual award limitations, and minimum vesting and exercise price provisions. |
ü
| Have "double-trigger" vesting of equity awards upon a change-in-control | Our 2015 Equity Plan includes "double trigger" vesting upon a change-in-control. Our compensation committee has discretion whether to accelerate vesting upon a change of control. |
| | | | | | | | |
| Things We Don't Do | Summary |
| x | Use Stock Options in our Long-Term Incentive Program | We do not provide annual long-term incentive compensation in the form of stock options. Stock options are available for promotion, special, or new hire grants. |
| x | Allow the repricing of options or "evergreen" share counting under our 2015 Equity Plan | Our 2015 Equity Plan contains prohibitions on evergreen provisions, and a prohibition on the repricing of options. |
| x | Permit Hedging of Company Stock | Our securities trading compliance policy prohibits any director, officer or employee from engaging in any strategy or using any product to hedge against potential changes in the value of Vonage securities. |
| x | Permit Pledging of Company Stock | Our securities trading compliance policy prohibits any director, officer or employee, except in limited circumstances, from directly or indirectly pledging Vonage securities. |
| x | Pay Excise Tax Gross-ups Upon Change of Control. | Our 2015 Equity Plan does not allow for the payment of excise tax gross-ups upon a change of control. |
| x | Provide Material Perquisites to our NEOs.
| We only provide minimal perquisites deemed necessary to support greater efficiency in how our executives work for us. |
2021 Executive Compensation Program
The 2021 compensation for our executive officers was designed to meet the following objectives:
•Provide competitive compensation in order to attract, retain, and motivate highly-skilled executives. We refer to this objective as “competitive compensation.”
•Reinforce the importance of meeting and exceeding identifiable and measurable goals, while not encouraging our management to take unreasonable risks. We refer to this objective as “performance incentives.”
•Provide opportunities for our executive officers to acquire meaningful equity ownership that will encourage the creation of shareholder value. We refer to this objective as “alignment with shareholder interests.”
•Provide an incentive for long-term continued employment with us. We refer to this objective as “retention incentives.”
24 VONAGE ANNUAL REPORT 2021
The principal components of 2021 compensation were as follows:
| | | | | | | | |
| Type of Compensation | | Objectives Addressed |
| Salary | | Competitive Compensation |
| |
| Annual Cash Bonus | | Performance Incentives
Competitive Compensation |
| |
| Long-Term Incentives | | Retention Incentives
Alignment with Shareholder Interests
Performance Incentives
Competitive Compensation |
When reviewing the compensation program, our compensation committee, with the assistance of an independent compensation consultant, considers the impact of the compensation program on Vonage's risk profile. Our compensation committee believes that our compensation program has been structured to provide strong incentives for executives to appropriately balance risk and reward. See also “Impact of Compensation Policies on Risk Management” above.
Engagement of Compensation Consultant
The compensation committee has the authority to engage its own independent consultants, counsel and other advisors to assist in carrying out its responsibilities under its charter. The compensation committee retained Meridian Compensation Partners, LLC, an independent compensation consultant, as described in further detail under “Compensation Committee” above, to advise the committee in connection with its oversight of our compensation program for 2021.
Our management, aided by our human resources and finance departments, and eConsultingNetwork, a compensation consultant retained by management, provided statistical data and survey information to the compensation committee to assist it in determining 2021 compensation levels. The compensation committee considered various factors, including the factors set forth in SEC rules, and determined that the services provided by eConsultingNetwork in 2021 did not raise any conflicts of interest. While the compensation committee utilized this information and valued management's observations with regard to compensation, the ultimate decisions regarding executive compensation were made by the compensation committee in consultation with the committee's own compensation consultant.
Determination of Competitive landscape.Compensation
As part of our annual process for assessing the competitiveness of executive compensation, we compare the compensation of our executives to survey data. For 2021 pay decisions, we used the following data sources:
•2020 Radford Global Technology Survey - Communications/Internet/Software (revenue $0.2B - $3.0B).
•2020 Equilar Top 25 Survey - Internet Services, Software, Technology, (revenue $0.5B - $3.0B).
Because the compensation committee was seeking survey data covering a broad range of companies meeting the revenue and industry criteria set forth above, the compensation committee did not focus on the individual companies included in the survey data. We face intense competition from traditional telephone companies, wireless companies, cablerefer to the data sources described above as the “market sample.”
We placed equal weight on each survey source. We believe that communications, software, internet companies, and alternative communication providers. Most traditional wireline and wireless telephone service providers and cabletechnology companies in general with comparable revenues represent an appropriate comparison group for our executives because they are substantially larger and better capitalized thanthe companies against which we are and have the advantage of a large existing customer base. In addition, because our competitors provide other services, they often choosemost likely to offer VoIP services or other voice services as part of a bundle that includes other products, such as video, high speed Internet access,compete for executive talent. The comparative analysis described above provides only guidelines, and wireless telephone service, which we do not offer. follow them rigidly.
Salaries
None of our NEOs received a salary increase in 2021. The salaries of our named executive officers for 2021 were as follows:
25 VONAGE ANNUAL REPORT 2021
| | | | | | | | |
| Name | 2020 Salary | 2021 Salary |
| Rory Read | $ | 850,000 | | $ | 850,000 | |
Stephen Lasher (1) | $ | — | | $ | 650,000 | |
Tim Shaughnessy (2) | $ | — | | $ | — | |
Jay Bellissimo (3) | $ | — | | $ | 600,000 | |
Savinay Berry (4)
| $ | — | | $ | 500,000 | |
| Joy Corso | $ | 400,000 | | $ | 400,000 | |
(1)Joined the Company in January 2021.
(2)Joined the Company in August 2020 as the interim CFO through February 2021. Mr. Shaughnessy received a fixed payment of $300,000 per month and was not eligible to receive incentive compensation.
(3)Joined the Company in January 2021.
(4)Joined the Company in February 2021.
Annual Cash Bonuses
When determining the annual cash bonuses of our executive officers, the compensation committee reviews achievement of objective performance criteria. The compensation committee may also consider discretionary factors relating to the executive's individual performance. For 2021, the target bonus opportunity percentages for the participating named executive officers were as follows:
| | | | | |
| Name | Target Percentage
of Base Salary |
| Rory Read | 125 | % |
| Stephen Lasher | 100 | % |
Tim Shaughnessy (1) | — | % |
| Jay Bellissimo | 100 | % |
| Savinay Berry | 100 | % |
| Joy Corso | 60 | % |
(1)As interim CFO, Mr. Shaughnessy did not participate in the 2021 bonus program.
Generally, there were three metrics applicable to all participants in the 2021 bonus program: VCP Service Revenue, Adjusted EBITDA (excluding Consumer), and Customer Satisfaction (NPS). The weighting of these metrics were as follows:
| | | | | |
| Corporate Metrics | Weighting |
| VCP Service Revenues | 60% of target bonus |
| Adjusted EBITDA (excluding Consumer) | 30% of target bonus |
| Customer Satisfaction (NPS) | 10% of target bonus |
•VCP Service Revenues includes revenues from the Vonage Communications Platform (UCaaS, CCaaS, and API service offerings).
•Adjusted EBITDA (excluding Consumer). Adjusted EBITDA is calculated as GAAP net income (loss) before interest, tax, depreciation and amortization, share-based expense, amortization of costs to implement cloud computing arrangements, acquisition related transaction and integration costs, organizational transformation, restructuring costs and other non-recurring items.
•Customer Satisfaction ("NPS") measures the satisfaction of our VCP segment customers.
Each metric has a minimum, target, and maximum performance level that would result in certain payments of the weighted target bonus for the metric. No payment is made for performance below the minimum performance level.
The following table shows the performance levels upon which minimum, target, and maximum bonuses would have been paid, the payout percentages associated with those performance levels, and the actual 2021 performance for the metrics.
26 VONAGE ANNUAL REPORT 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (amounts in thousands) | 2021 |
| Performance Measure | Weighting | | Minimum (50%) | | Target (100%) | | Maximum (150%) | | Actual Performance | | Weighted Attainment | | Attainment |
| VCP Service Revenues | 60.0 | % | | $ | 968,000 | | | $ | 1,003,000 | | | $ | 1,037,000 | | | $ | 1,054,000 | | | 167.0 | % | | 100.3 | % |
| Adjusted EBITDA (excluding Consumer) | 30.0 | % | | $ | (10,000) | | | $ | 13,000 | | | $ | 29,000 | | | $ | 11,000 | | | 96.0 | % | | 28.8 | % |
| Customer Satisfaction (NPS) | 10.0 | % | | 24 | | | 26 | | | 28 | | | 20 | | | — | % | | — | % |
| Total Bonus Payout | 100.0 | % | | | | | | | | | | | | 129.0 | % |
For Mr. Read and Mr. Lasher, there were four metrics applicable in the 2021 bonus program: VCP Service Revenue, Adjusted EBITDA (excluding Consumer), Adjusted EBITDA (Consumer only), and Customer Satisfaction (NPS). The weighting of these metrics were as follows:
| | | | | |
| Corporate Metrics | Weighting |
| VCP Service Revenues | 60% of target bonus |
| Adjusted EBITDA (excluding Consumer) | 20% of target bonus |
| Adjusted EBITDA (Consumer only) | 10% of target bonus |
| Customer Satisfaction (NPS) | 10% of target bonus |
The following table shows the performance levels upon which minimum, target, and maximum bonuses would have been paid, the payout percentages associated with those performance levels, and the actual 2021 performance for the metrics.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (amounts in thousands) | 2021 |
| 2021 Metric | Weighting | | Minimum (50%) | | Target
(100%) | | Maximum (150%) | | Weighted Attainment | | Attainment |
VCP Service Revenue | 60.0 | % | | $ | 968,000 | | | $ | 1,003,000 | | | $ | 1,037,000 | | | 167.0 | % | | 100.3 | % |
| Adjusted EBITDA (excluding Consumer) | 20.0 | % | | $ | (10,000) | | | $ | 13,000 | | | $ | 29,000 | | | 96.0 | % | | 19.2 | % |
| Adjusted EBITDA (Consumer only) | 10.0 | % | | $ | 175,000 | | | $ | 192,000 | | | $ | 205,000 | | | 82.0 | % | | 8.2 | % |
| Customer Satisfaction (NPS) | 10.0 | % | | 24 | | | 26 | | | 28 | | | — | % | | — | % |
| Total Corporate Plan | 100.0 | % | | | | | | | | | | 127.6 | % |
Rationale For Performance Measures
2021 performance targets reflect the Company's continued pivot towards the cloud communications for business markets. For 2021:
•VCP Service Revenues represent 60% of overall performance weighting, reflecting the Company's desire to increase focus on business service revenues to align with the Company's overall strategy;
•Adjusted EBITDA (excluding Consumer) reflects the Company's overall desire to increase VCP profitability;
•Adjusted EBITDA (Consumer only) reflects the Company's Consumer profitability; and
•Customer Satisfaction (NPS) measures customer satisfaction within our VCP segment based on a satisfaction score that is weighted by revenue, reflecting the Company's focus on improving customer experience.
27 VONAGE ANNUAL REPORT 2021
Calculation of Annual Cash Bonus Awards
The annual cash bonus awards are calculated by multiplying the total bonus achievement percentages by the executive's target bonus.
Annual Cash Bonus Payouts 2021 | | | | | | | | | | |
| Name | Total 2021 Bonus
Award | Base Metric Achievement Percentage | | |
| Rory Read | $ | 1,355,750 | | 127.6 | % | | |
| Stephen Lasher | $ | 768,790 | | 127.6 | % | | |
Tim Shaughnessy (1) | $ | — | | — | % | | |
| Jay Bellissimo | $ | 741,254 | | 129.0 | % | | |
| Savinay Berry | $ | 545,769 | | 129.0 | % | | |
| Joy Corso | $ | 309,600 | | 129.0 | % | | |
(1) As interim CFO, Mr. Shaughnessy did not participate in the 2021 bonus program.
These payments are reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.
Long-Term Incentives
2021 LTI Program
We award a significant portion of our long-term incentive compensation in the form of performance-based restricted stock units. The number of units actually earned will be determined at the end of the three-year performance period based on financial performance and relative total shareholder return performance. By linking a significant portion of our long-term incentives to three-year performance goals, we more closely align our NEOs' incentives with our strategic strategic priorities and long-term interests of shareholders.
| | | | | | | | |
| 2021 LTI Program |
| Award Type | % of Award | Vesting |
| Performance-based RSUs | 60% | 3 year cliff |
| Time-based RSUs | 40% | Equal 3 year increments |
We believe that our long-term compensation program elevates the link between pay and performance for our NEOs and closely aligns the interests of management and our shareholders. Performance RSUs are granted subject to the following terms:
•The number of performance RSUs granted is based on a target value determined by the compensation committee.
•For 2021, the number of performance RSUs actually earned will be based on two metrics:
◦25% of the award will be determined by Vonage's performance on the sum of business service revenue growth and consolidated AEBITDA margin (also called "Rule of 40")
◦75% of the award will be determined by Vonage's relative "Total Stockholder Return"( TSR) performance measured against a defined performance group consisting of technology companies we consider to be similar to Vonage, as discussed below. TSR is the percentage growth in stock price over the performance period, plus dividends and adjusted for events such as stock splits. Vonage's TSR performance will be ranked against the other companies in the performance group.
•Performance is measured over a three-year performance period.
•The actual number of shares received at the end of the performance period can range from 0-200% of the target number of shares, based on the Company's performance during the performance period, as follows.
28 VONAGE ANNUAL REPORT 2021
| | | | | | | | | | | | | | | | | | | | |
| TSR Payout Schedule |
| Percentile Ranking | | % of Target Earned |
| Greater than | | 80% | | | | 200% |
| 50 | % | — | 80% | | 100 | % | — | 200% |
| 30 | % | — | 50% | | 50 | % | — | 100% |
| Less than | | 30% | | | | 0% |
Payouts are based on ranking results with linear adjustment between percentile ranks in the chart above. For example, achievement of the 65th percentile would result in 150% of the target number of shares being issued at the end of the performance period and achievement of the 40th percentile would result in 75% of the target number of shares being issued at the end of the performance period.
•TSR payouts are capped at 100% (target) if the Company's TSR performance is negative at the end of the performance cycle, even if the Company's relative TSR performance would have produced a higher payout.
In addition, such competitors maywe believe that the inclusion of the Rule of 40 metric aligns with our business strategy and requires our executives to continue improving business performance.
Our TSR performance group for 2021 awards was based on companies included in our prior period performance group, with modifications approved by our compensation committee to improve relevance to our business. As discussed below, these modifications included the addition of companies in the future requireapplication software or cloud services industries. Our performance group for 2021 was set as follows:
| | | | | |
| 8x8, Inc. | Microsoft Corporation* |
| Adobe Inc. | Mimecast Limited |
| Akamai Technologies | NICE Systems, Inc. |
| Avaya Holdings Corp. | Nuance Communications |
| Atlassian, Inc. | Ooma, Inc. |
| Bandwidth Inc. | PTC Inc. |
| Cisco Systems | RingCentral, Inc. |
| eGain Corporation | Sinch |
| EnvestNet | Smartsheet Inc |
| Everbridge, Inc. | Splunk Technology |
| Five9, Inc. | Teletech Holdings |
| Intuit Inc. | Twilio Inc. |
| j2 Global, Inc. | Verient Inc. |
| Kaleyra, Inc.* | Zendesk, Inc. |
| LivePerson, Inc. | Zoom Video Communications, Inc. |
*Companies that are new customers or existing customers making changes to their servicethe list for 2021 awards.
The following companies were removed from the list for 2021 awards: Palo Alto Networks and Paylocity Holdings as they are less relevant to purchase voice services when purchasingour direct business competition.
We annually evaluate our performance group to ensure its rigor, as reflected by the inclusion of high speed Internet access. Further, as wireless providers offerperforming technology and software-as-a-service peers.
29 VONAGE ANNUAL REPORT 2021
Vesting of Prior LTI Awards
In 2021, awards made to our executives under the Company's 2019 LTI Program vested based upon Company TSR performance against the peer group over the three-year period from 2019-2021. To smooth the impacts of short-term price fluctuations in our stock price and provide a more minutesappropriate long-term award result, we use averaging at lower prices, better coverage,the beginning and companion landline alternative services, their services have become more attractiveend of our performance period to households as a replacement for wireline service. We also compete against alternative communication providers. Some of these service providers have chosen to sacrifice telephony revenue in order to gain market share and have offered their services at low prices or for free. As we continue to introduce applications that integrate different forms of voice and messaging services over multiple devices, we are facing competition from emerging competitors focused on similar integration,compute our TSR as well as from alternative voice communication providers. In addition, our competitors have partnered and may in the future partner with other competitors to offer products and services, leveraging their collective competitive positions. We also are subject to the risk of future disruptive technologies. In connection with our emphasis on the international long distance market in the United States, we face competition from low-cost international calling cards and VoIP providers in addition to traditional telephone companies, cable companies, and wireless companies,TSR for each of which may implement promotional pricing targeting international long distance callers.
Regulation. Our business has developed in a relatively lightly-regulated environment. The United States and other countries, however, are examining how VoIP services should be regulated. In particular, state telecommunications regulators continue to try to regulate VoIP service despite the FCC’s 2004 Vonage Preemption Order that preempted state regulation.performance peers. For example, on July 28, 2015, the Minnesota Public Utility Commission found that it has authority to regulate Charter’s ‘fixed' interconnected VoIP service. In addition to regulatory matters that directly address VoIP, a numberbeginning of other regulatory initiatives could impact our business. One such regulatory initiative is net neutrality. On February 26, 2015,period price, we average the FCC adopted strong net neutrality rules. On December 14, 2017 the FCC voted to reverse its 2015 neutrality rules. The FCC's recent reversalclosing price of its stance on net neutrality may have a negative long term impact on businesses such as ours who rely on the Internet to create and deliver products and services. Challenges to the FCC's ruling are underway, with public interest groups, states, local municipalities and companies seeking redress in the courts and/or through legislation. See also the discussion under "Regulation" in Note 11 to our financial statements for a discussion of regulatory issues that impact us.
Key Operating Data
The table below includes key operating data that our management uses to measure the growth and operating performance of the Business segment:
|
| | | | | | | | | | | |
| Business | For the Years Ended December 31, | |
| | 2017 |
| | 2016 |
| | 2015 |
|
Revenues (1) | $ | 498,922 |
| | $ | 376,352 |
| | $ | 219,027 |
|
Average monthly revenues per seat (2) | $ | 43.86 |
| | $ | 44.94 |
| | $ | 42.79 |
|
Seats (at period end) (2) | 727,085 |
| | 638,096 |
| | 541,884 |
|
Revenue churn (2) | 1.3 | % | | 1.4 | % | | 1.2 | % |
(1) Includes revenues of $139,665 and $58,148 from CPaaSeach Company's stock for the years ended December 31, 2017 and December 31, 2016, respectively.
(2) UCaaS only.
Revenues. Business revenues includes revenues from our business customers from primarily from acquired entities.
Average monthly revenues per seat. Average monthly revenues per seat for a particular period is calculated by dividing our revenues for that period by the simple average number of seats for the period, and dividing the result by the number of months in the period. The simple average number of seats for the period is the number of seats on60 days straddling the first day of the performance period. For the end of period plusprice of each Company, we average the numberfinal 60 trading days of seatsthe performance period. Dividends paid by companies in the peer group are assumed to be reinvested as of the ex-dividend date.
Using this methodology, our TSR performance for the 2019-2021 performance period was 93.02%, ranking at the 62nd percentile, and equating to a 140.23% payout under the terms of the 2019 LTI Program. Our Named Executive Officers did not receive any shares in connection with this performance period.
The named executive officers received the following equity awards in 2021 under the annual LTI program:
| | | | | | | | | | | | | | | |
| Name | | | Number of
Time-based
Restricted Stock
Units | | Target Number of
Performance-based
Restricted Stock
Units |
Rory Read(1) | | | — | | | — | |
| Stephen Lasher | | | 458,123 | | | 113,421 | |
Tim Shaughnessy (2) | | | — | | | — | |
| Jay Bellissimo | | | 340,264 | | | 113,421 | |
| Savinay Berry | | | 446,375 | | | 174,425 | |
| Joy Corso | | | 188,924 | | | 49,886 | |
1.Mr. Read was granted two years of awards under the LTI program in 2020 and was not eligible for additional equity grants until the 2022 annual grant cycle.
2.Mr. Shaughnessy was hired as the interim CFO from August 2020 through February 2021 and did not received any equity in connection with his role.
Stock Ownership Guidelines for Executives
Our compensation committee and Board of Directors have adopted stock ownership guidelines for our named executive officers and certain other covered executives. They believe that these requirements help ensure alignment of executive interests with shareholder interests and promote a focus on long-term growth. The following table shows the stock ownership levels required for our named executive officers, which are measured on a quarterly basis:
| | | | | |
| Name | Stock Ownership Level |
| Rory Read | 5.0x base salary |
| Stephen Lasher | 3.0x base salary |
Tim Shaughnessy (1) | Not applicable |
| Jay Bellissimo | 3.0x base salary |
| Savinay Berry | 3.0x base salary |
| Joy Corso | 3.0x base salary |
(1)Mr. Shaughnessy did not receive in any equity grants during his service and was not required to comply with the stock ownership guidelines.
Shares counted in assessing compliance with the guidelines include shares owned outright and the in-the-money value of vested stock options. While there is no specific time period required to achieve these guidelines, each covered executive must retain 50% of net stock options exercised or stock delivered from vested restricted stock units until the guidelines are met. Executives may be exempted from the guidelines and/or the retention requirement due to financial hardship as determined by the compensation committee in its discretion.
30 VONAGE ANNUAL REPORT 2021
Benefits and Perquisites
We have also taken steps to ensure executives’ continued health and ability to render services to the Company through an annual physical program. Our incremental costs for the perquisites described above are shown in note 6 to the Summary Compensation Table.
We also maintain a 401(k) savings plan, which is a tax-qualified defined contribution plan available to all of our employees. All of our NEOs participated in the plan in 2021. In 2021, we provided a matching contribution equal to 50% of each dollar contributed by a participant, up to a maximum contribution of $6,000. The matching contributions vest after one year following the date of employment. Employee and matching contributions are based on compensation up to annual limits established under the Internal Revenue Code (the eligible compensation limit was $290,000 in 2021). Our matching contributions for the participating named executive officers are shown in note 6 to the Summary Compensation Table. We do not provide any supplemental retirement benefits.
Equity Grant Practices
The compensation committee approves all equity grants to executive officers and ratifies all other new hire and promotion equity grants made on a quarterly basis. In February of each year, the compensation committee considers annual equity grants. The compensation committee's practice is to approve annual equity grants effective on the lastfirst trading day on or after March 15.
In addition, the compensation committee delegated to our Chief Executive Officer the ability to make equity grants aggregating up to 400,000 shares of common stock in each quarter for employees that are not executive officers. These awards may not exceed 50,000 shares in each quarter to any individual employee.
For special grants, equity is granted on the first trading day of the period, divided by two. Our average monthly revenues per seat decreased from $44.94 for 2016 to $43.86 for 2017month immediately following the month in part due towhich the loss of cloud service revenues for someequity grant is approved. For newly hired or promoted employees, restricted stock units are generally granted on the first trading day of the Company's UCaaS customersmonth immediately following the month in which the employee commences employment with us or the promotion is effective. In addition, we do not time equity grants to coincide with the release of material non-public information about Vonage.
Post-Employment Compensation
We have benefit plans, employment and letter agreements, and other arrangements for our named executive officers that provide special benefits upon certain types of termination events. The employment agreements and letter agreements provide financial security in the event the executive officer's employment is terminated without cause or his or her responsibilities are significantly diminished. The agreements also provide clear statements of the rights of the executive officers and protect them against an unfavorable change in employment terms. Absent these provisions, there is an increased risk that executive officers may be encouraged to seek other employment opportunities if they became concerned about their employment security as a result of changes to our Company or in the saleevent of a change in control. None of our Hosted Infrastructure product linecurrent executives is entitled to an excise tax gross up upon a change in May 2017 along withcontrol. In addition, all equity grants made to current executives require a “double trigger” (both a change in control and termination) for payout or accelerated vesting to occur.
We believe that our change in control benefits provide appropriate incentives for the Company's planexecutive officers to sell access more selectively duringcooperate in negotiating any change in control of Vonage without regard to the current year period.
Seats. Seats include, as of a particular date, all paid seats from which a customer can make an outbound telephone callpotential effect on that datetheir positions. See “Potential Post-Employment Payments” for further information regarding change in control and virtual seats. Seats exclude electronic fax lines and toll free numbers, which do not allow outbound telephone calls by customers. Seats increased from 638,096 as of December 31, 2016 to 727,085 as of December 31, 2017. This increase is due to continued growth in our Business customers as we have increased marketing investment to attract these more profitable customers.
termination benefits under the arrangements.
3231 VONAGE ANNUAL REPORT 20172021
Shareholder Outreach and Results of the 2021 Say-on-Pay Voting Results
Revenue churn. Revenue churn
At our 2021 annual meeting, shareholders did not approve our Say-on-Pay advisory vote. Prior to our 2021 annual meeting, we engaged with a substantial number shareholders regarding our compensation program. Shareholder feedback reflected overall approval of the structure of our compensation program, but some shareholders noted that they would not provide advisory approval based on one-time recruitment compensation to our Chief Executive Officer.
Vonage and its Board take shareholder feedback seriously. In light of discussions with our shareholders, we maintained the following key attributes in our 2022 executive compensation program:
•Continued to include a financial performance metric that accounts for 25% of our performance-based stock awardsthat we believe fosters greater alignment between rewards and profitable multi-year Vonage Communication Platform service revenue and Adjusted EBITDA* growth (remaining 75% continues to be based on relative Total Shareholder Return (TSR)).
•We maintained the weighting of stock awards to all executive officers at 60% performance-based awards in furtherance of our pay-for-performance philosophy.
Clawback, Anti-Hedging and Anti-Pledging Policies
Incentive Compensation Recovery Policy
The Company has put in place an Incentive Compensation Recovery Policy for incentive awards paid to executive officers. The policy is calculated by dividingtriggered in the monthly recurring revenue from customersevent of a material restatement of the Company's financial results (other than as a result of a change in accounting rules, principles or customer locations that have terminated during a periodinterpretations) caused or substantially caused by the simple averagemisconduct of the total monthly recurring revenue from all customerscovered officer (including our NEOs). If triggered, the compensation committee may seek to recoup the portion of cash and equity based incentive awards paid or awarded to the covered officer in a given period. The simple averageexcess of total monthly recurring revenue from all customers during the period is the total monthly recurring revenueawards that would have been paid or awarded based on the first dayrestated financial results to the extent permitted by applicable law. In the case of the period, plus the total monthly recurring revenueequity awards that vested based on the last dayachievement of financial results that were subsequently modified, the period, divided by two. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period if termination occurred within the first month after activation. Other companiescompensation committee and Board may calculate revenue churn differently, and their revenue churn data may not be directly comparablealso seek to ours. Revenue churn decreased from 1.4% for the year ended 2016 to 1.3% for the year ended 2017. Our revenue churn will fluctuate over time due to economic conditions, loss of customers who are acquired, and competitive pressures including promotional pricing. We are continuing to invest in our overall quality of service which includes customer care headcount and systems, billing systems, on-boarding processes and self-service options to ensure we scale our processes to our growth and continue to improve the overall customer experience.
The table below includes key operating data that our management uses to measure the growth and operating performance of the Consumer segment:
|
| | | | | | | | | | | |
| Consumer | For the Years Ended December 31, | |
| | 2017 |
| | 2016 |
| | 2015 |
|
| Revenues | $ | 503,364 |
| | $ | 579,269 |
| | $ | 676,045 |
|
| Average monthly revenues per subscriber line | $ | 26.19 |
| | $ | 26.43 |
| | $ | 27.58 |
|
| Subscriber lines (at period end) | 1,492,067 |
| | 1,711,366 |
| | 1,940,825 |
|
| Customer churn | 2.0 | % | | 2.2 | % | | 2.3 | % |
Revenues. Consumer revenues represents revenue from our consumer customers including revenues from our legacy business customers using Vonage VoIP products.
Average monthly revenues per subscriber line. Average monthly revenues per subscriber line for a particular period is calculated by dividing our revenues for that period by the simple average number of subscriber lines for the period, and dividing the result by the number of months in the period. The simple average number of subscriber lines for the period is the number of subscriber lines on the first day of the period, plus the number of subscriber lines on the last day of the period, divided by two. Our average monthly revenues per subscriber line decreased from $26.43 for 2016 to $26.19 for 2017 due primarily to lower international long distance pay-per-use revenue.
Subscriber lines. Our subscriber lines include, as of a particular date, all paid subscriber lines from which a customer can make an outbound telephone call on that date. Our subscriber lines include fax lines, including fax lines bundled with subscriber lines in our small office home office calling plans and soft phones, but do not include our virtual phone numbers and toll free numbers, which only allow inbound telephone calls to customers. Subscriber lines decreased from 1,711,366 as of December 31, 2016 to 1,492,067 as of December 31, 2017, reflecting planned actions to enhance the profitability of the assisted sales channel by eliminating lower performing locations and restructuring the pricing offers, and to shift investment to our business market.
Customer churn. Customer churn is calculated by dividing the number of customers that have terminated during a period by the simple average of number of customers in a given period. The simple average number of customers during the period is the number of customers on the first day of the period, plus the number of customers on the last day of the period, divided by two. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period if termination occurred within the first month after activation. Other companies may calculate customer churn differently, and their customer churn data may not be directly comparable to ours. Customer churn decreased to 2.0% for 2017 from 2.2% for 2016. The decrease was due primarily to our decision to maximize customer value by focusing marketing spend on higher return channels and away from assisted selling channels which had higher early life churn. We monitor customer churn on a daily basis and use it as an indicator of the level of customer satisfaction. Customers who have been with us for a year or more tend to have a lower churn rate than customers who have not. In addition, our customers who are international callers generally churn at a lower rate than customers who are domestic callers. Our customer churn will fluctuate over time due to economic conditions, competitive pressures including promotional pricing targeting international long distance callers, marketplace perception of our services, and our ability to provide high quality customer care and network quality and add future innovative products and services. Customer churn differs from our previously reported average monthly customer churn in that our business customers are no longer included in this metric. See the discussion below for detail regarding churn impacting our business customers.
33 VONAGE ANNUAL REPORT 2017
REVENUES
Revenues consist of services revenue and customer equipment and shipping revenue. Substantially all of our revenues are services revenue. For consumer customers in the United States, we offer domestic and international rate plans, including a variety of residential plans and mobile plans. Through our acquisitions we offer SMB, mid-market, and enterprise customers several service plans with different pricing structures and contractual requirements ranging in duration from month-to-month to three years. In addition, we provide managed equipment to business customers for which the customers pay a monthly fee. Customers also have the opportunity to purchase premium features for additional fees. In addition, through our acquisition of Nexmo we derive revenue from usage-based fees earned from customers using our cloud-based software products. These usage-based software products include our messaging, voice, Verify and chat APIs. Usage-based fees include number of text messages sent or received using our messaging APIs, minutes of call duration activity for our voice APIs, and number of converted authentications for our Verify API. Services revenue is offset by the cost of certain customer acquisition activities, such as rebates and promotions. In addition, in certain instances, we charge disconnect fees which are recognized as revenue at the time the disconnect fees are collected from our customer.
In the United States, we charge regulatory, compliance, E-911, and intellectual property-related recovery fees on a monthly basis to defray costs, and to cover taxes that we are charged by the suppliers of telecommunications services. In addition, we recognize revenue on a gross basis for contributions to the Federal Universal Service Fund, or USF, and related fees. All other taxes are recorded on a net basis.
Customer equipment and shipping revenue consists of revenue from sales of customer equipment to our wholesalers or directly to customers and retailers. In addition, customer equipment and shipping revenues include revenuesrecover improper gains from the sale or disposition of VoIP telephones in order to access our smallvested equity awards.
Hedging and medium business services. Customer equipment and shipping revenue also includes the fees, when collected, that we charge our customers for shipping any equipment to them.
OPERATING EXPENSE
Operating expenses consist of cost of service, cost of goods sold, sales and marketing expense, engineering and development expense, general and administrative expense, and depreciation and amortization.
34 VONAGE ANNUAL REPORT 2017
RESULTS OF OPERATIONPledging
The following table sets forth, asCompany's securities trading compliance policy contains prohibitions against certain types of stock-related transactions. The policy prohibits any director, officer or employee from engaging in any strategy or using any product to hedge against potential changes in the value of Vonage securities, including short selling techniques, “sales against the box”, puts, calls and other derivative securities, prepaid variable forwards, equity swaps, collars, exchange funds and forward sale contracts.
In addition, except in limited circumstances, no director or officer or employee may, directly or indirectly, pledge a percentagesignificant amount of consolidated operating revenues, our consolidated statementVonage securities. The restrictions include the intentional creation of income forany form of pledge, security interest, deposit, or lien, including the periods indicated: holding of shares in a margin account, that entitles a third-party to foreclose against, or otherwise sell, any shares, whether with or without notice, consent, or default.
|
| | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Total revenues | 100 | % | | 100 | % | | 100 | % |
| | | | | | |
| Operating Expenses: | | | | | |
| Cost of services (excluding depreciation and amortization) | 38 |
| | 34 |
| | 29 |
|
| Cost of goods sold | 3 |
| | 3 |
| | 4 |
|
| Sales and marketing | 31 |
| | 35 |
| | 39 |
|
| Engineering and development | 3 |
| | 3 |
| | 3 |
|
| General and administrative | 12 |
| | 13 |
| | 12 |
|
| Depreciation and amortization | 7 |
| | 7 |
| | 7 |
|
| Total operating expense | 94 |
| | 95 |
| | 94 |
|
| Income from operations | 6 |
| | 5 |
| | 6 |
|
| Other Income (Expense): | | | | | |
| Interest income | — |
| | — |
| | — |
|
| Interest expense | (1 | ) | | (2 | ) | | (1 | ) |
| Other income (expense), net | — |
| | — |
| | — |
|
| Total other income (expense), net | (1 | ) | | (2 | ) | | (1 | ) |
| Income from continuing operation before income taxes | 5 |
| | 3 |
| | 5 |
|
| Income tax expense | (8 | ) | | (2 | ) | | (2 | ) |
| (Loss)/income from continuing operations | (3 | ) | | 1 |
| | 3 |
|
| Loss from discontinued operations | — |
| | — |
| | — |
|
| Loss on disposal, net of taxes | — |
| | — |
| | — |
|
| Discontinued operations | — |
| | — |
| | — |
|
| Net (loss)/income | (3 | ) | | 1 |
| | 3 |
|
| Plus: Net loss from discontinued operations attributable to noncontrolling interest | — |
| | — |
| | — |
|
| Net (loss)/income attributable to Vonage | (3 | )% | | 1 | % | | 3 | % |
Deductibility of Executive Compensation
Management's discussion of the results of operations for the Years Ended December 31, 2017, 2016, and 2015
We calculate gross margin in order to evaluate operating revenues as total revenues less cost of service, which primarily consists of fees that we pay to third parties on an ongoing basis in order to provide our services, and cost of goods sold which primarily includes costs incurred whenAs a customer first subscribes to our service.
The following table presents the composition of gross margin for the years Ended December 31, 2017, 2016, and 2015:
|
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, | | $ Change 2016 to 2017 | % Change 2016 to 2017 | $ Change 2015 to 2016 | % Change 2015 to 2016 |
| (in thousands, except percentages) | 2017 | 2016 | 2015 | |
| Revenues | $ | 1,002,286 |
| $ | 955,621 |
| $ | 895,072 |
| | $ | 46,665 |
| 5 | % | $ | 60,549 |
| 7 | % |
Cost of services (1) | 378,960 |
| 321,373 |
| 261,768 |
| | 57,587 |
| 18 | % | 59,605 |
| 23 | % |
| Cost of goods sold | 25,994 |
| 33,777 |
| 34,210 |
| | (7,783 | ) | (23 | )% | (433 | ) | (1 | )% |
| Gross margin | $ | 597,332 |
| $ | 600,471 |
| $ | 599,094 |
| | $ | (3,139 | ) | (1 | )% | $ | 1,377 |
| — | % |
(1) Excludes depreciation and amortization of $27,308, $28,489, and $24,868, respectively.
35 VONAGE ANNUAL REPORT 2017
Business Segment Gross Margin for the Years Ended December 31, 2017, 2016, and 2015
|
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, | | $ Change 2016 to 2017 | % Change 2016 to 2017 | $ Change 2015 to 2016 | % Change 2015 to 2016 |
| (in thousands, except percentages) | 2017 | 2016 | 2015 | |
| Revenues | | | | | | | | |
| Service revenues | $ | 419,591 |
| $ | 301,877 |
| $ | 170,489 |
| | $ | 117,714 |
| 39 | % | $ | 131,388 |
| 77 | % |
Product revenues (1) | 52,498 |
| 52,450 |
| 35,545 |
| | 48 |
| — | % | 16,905 |
| 48 | % |
| Service and product revenues | 472,089 |
| 354,327 |
| 206,034 |
| | 117,762 |
| 33 | % | 148,293 |
| 72 | % |
| USF revenues | 26,833 |
| 22,025 |
| 12,993 |
| | 4,808 |
| 22 | % | 9,032 |
| 70 | % |
| Total revenues | 498,922 |
| 376,352 |
| 219,027 |
| | 122,570 |
| 33 | % | 157,325 |
| 72 | % |
| | | | | | | | | |
| Cost of revenues | | | | | | | | |
Service cost of revenues (2) | 190,934 |
| 111,485 |
| 44,997 |
| | 79,449 |
| 71 | % | 66,488 |
| 148 | % |
Product cost of revenues (1) | 51,026 |
| 51,129 |
| 31,185 |
| | (103 | ) | — | % | 19,944 |
| 64 | % |
| Service and product cost of revenues | 241,960 |
| 162,614 |
| 76,182 |
| | 79,346 |
| 49 | % | 86,432 |
| 113 | % |
| USF cost of revenues | 26,833 |
| 22,036 |
| 13,022 |
| | 4,797 |
| 22 | % | 9,014 |
| 69 | % |
| Total cost of revenues | 268,793 |
| 184,650 |
| 89,204 |
| | 84,143 |
| 46 | % | 95,446 |
| 107 | % |
| | | | | | | | | |
| Segment gross margin | | | | | | | | |
| Service margin | 228,657 |
| 190,392 |
| 125,492 |
| | 38,265 |
| 20 | % | 64,900 |
| 52 | % |
| Gross margin ex-USF (Service and product margin) | 230,129 |
| 191,713 |
| 129,852 |
| | 38,416 |
| 20 | % | 61,861 |
| 48 | % |
| Total segment gross margin | $ | 230,129 |
| $ | 191,702 |
| $ | 129,823 |
| | $ | 38,416 |
| 20 | % | $ | 61,879 |
| 48 | % |
| | | | | | | | | |
| Segment gross margin % | | | | | | | | |
| Service margin % | 54.5 | % | 63.1 | % | 73.6 | % | | (9 | )% | | (11 | )% |
|
|
| Gross margin ex-USF (Service and product margin) % | 48.7 | % | 54.1 | % | 63.0 | % | | (5 | )% | | (9 | )% | |
| Segment gross margin % | 46.1 | % | 50.9 | % | 59.3 | % | | (5 | )% | | (8 | )% | |
(1) Includes customer premise equipment, access, professional services, and shipping and handling.
(2) Excludes depreciation and amortization of $20,100, $18,820, and $15,819, respectively.
For the year ended December 31, 2017 compared to the year ended December 31, 2016
The following table describes the increase in business gross margin for the year ended December 31, 2017 as compared to the year ended December 31, 2016:
|
| | | |
| | (in thousands) |
| Service gross margin increased 20% primarily due to higher CPaaS gross margin of $8,321 related to Nexmo which was acquired on June 3, 2016 along with an increase in UCaaS gross margin of $29,944 primarily due to an increase in seats of 14% during the current year | $ | 38,265 |
|
| Product gross margin decreased 11% primarily due to lower costs during the current year period | 151 |
|
| | 38,416 |
|
36 VONAGE ANNUAL REPORT 2017
For the year ended December 31, 2016 compared to the year ended December 31, 2015
The following table describes the increase in business gross margin for the year ended December 31, 2016 as compared to the year ended December 31, 2015:
|
| | | |
| | (in thousands) |
| Service gross margin increased 52% due to an increase in the number of Business seats as we have shifted marketing investment to attract more profitable business customers combined with the acquisition of Simple Signal and iCore, both acquired in 2015, and the acquisition of Nexmo in June 2016 offset by higher technical care and network operations costs in support of growth within the segment | $ | 64,900 |
|
| Product gross margin decreased 70% due to an increase in costs associated with customer's equipment and broadband access as a result of increased customer additions and installation costs | (3,039 | ) |
| USF gross margin increased slightly due to the increase in Business seats along with the acquisitions of Simple Signal and iCore | 18 |
|
| Increase in segment gross margin | 61,879 |
|
Consumer Gross Margin for the Years Ended December 31, 2017, 2016, and 2015
|
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, | | $ Change 2016 to 2017 | % Change 2016 to 2017 | $ Change 2015 to 2016 | % Change 2015 to 2016 |
| (in thousands, except percentages) | 2017 | 2016 | 2015 | |
| Revenues | | | | | | | | |
| Service revenues | $ | 454,340 |
| $ | 522,515 |
| $ | 612,822 |
| | $ | (68,175 | ) | (13 | )% | $ | (90,307 | ) | (15 | )% |
Product revenues (1) | 525 |
| 702 |
| 645 |
| | (177 | ) | (25 | )% | 57 |
| 9 | % |
| Service and product revenues | 454,865 |
| 523,217 |
| 613,467 |
| | (68,352 | ) | (13 | )% | (90,250 | ) | (15 | )% |
| USF revenues | 48,499 |
| 56,052 |
| 62,578 |
| | (7,553 | ) | (13 | )% | (6,526 | ) | (10 | )% |
| Total revenues | 503,364 |
| 579,269 |
| 676,045 |
| | (75,905 | ) | (13 | )% | (96,776 | ) | (14 | )% |
| | | | | | | | | |
| Cost of revenues | | | | | | | | |
Service cost of revenues (2) | 80,454 |
| 100,054 |
| 123,580 |
| | (19,600 | ) | (20 | )% | (23,526 | ) | (19 | )% |
Product cost of revenues (1) | 7,208 |
| 14,394 |
| 20,616 |
| | (7,186 | ) | (50 | )% | (6,222 | ) | (30 | )% |
| Service and product cost of revenues | 87,662 |
| 114,448 |
| 144,196 |
| | (26,786 | ) | (23 | )% | (29,748 | ) | (21 | )% |
| USF cost of revenues | 48,499 |
| 56,052 |
| 62,578 |
| | (7,553 | ) | (13 | )% | (6,526 | ) | (10 | )% |
| Total cost of revenues | 136,161 |
| 170,500 |
| 206,744 |
| | (34,339 | ) | (20 | )% | (36,274 | ) | (18 | )% |
| | | | | | | | | |
| Segment gross margin | | | | | | | | |
| Service margin | 373,886 |
| 422,461 |
| 489,242 |
| | (48,575 | ) | (11 | )% | (66,781 | ) | (14 | )% |
| Gross margin ex-USF (Service and product margin) | 367,203 |
| 408,769 |
| 469,271 |
| | (41,566 | ) | (10 | )% | (60,502 | ) | (13 | )% |
| Total segment gross margin | $ | 367,203 |
| $ | 408,769 |
| $ | 469,271 |
| | $ | (41,566 | ) | (10 | )% | $ | (60,502 | ) | (13 | )% |
| | | | | | | | | |
| Segment gross margin % | | | | | | | | |
| Service gross margin % | 82.3 | % | 80.9 | % | 79.8 | % | | 1 | % | | 1 | % | |
| Gross margin ex-USF (Service and product margin) % | 80.7 | % | 78.1 | % | 76.5 | % | | 3 | % | | 2 | % | |
| Segment gross margin % | 72.9 | % | 70.6 | % | 69.4 | % | | 2 | % | | 1 | % | |
(1) Includes customer premise equipment, professional services, and shipping and handling.
(2) Excludes depreciation and amortization of $7,208, $9,669, and $9,049, respectively.
37 VONAGE ANNUAL REPORT 2017
For the year ended December 31, 2017 compared to the year ended December 31, 2016
The following table describes the decrease in consumer gross margin for the year ended December 31, 2017 as compared to the year ended December 31, 2016:
|
| | | |
| | (in thousands) |
| Service gross margin decreased 11% primarily due to a decline in subscriber lines of 13% over the current year reflecting planned actions to enhance profitability by restructuring pricing offers and targeting customers with lower subscription acquisition costs | $ | (48,575 | ) |
| Higher product gross margin of 51% primarily due to lower costs incurred primarily related to retail equipment as the Company shifted away from utilizing retailers in the current year | 7,009 |
|
| | (41,566 | ) |
For the year ended December 31, 2016 compared to the year ended December 31, 2015
The following table describes the decrease in consumer gross margin for the year ended December 31, 2016 as compared to the year ended December 31, 2015:
|
| | | |
| | (in thousands) |
| Lower service gross margin of 14% due to fewer subscriber lines reflecting planned actions to enhance profitability by aligning marketing spend, restructuring pricing offers and targeting consumers with lower subscription acquisition costs and churn profiles | $ | (66,781 | ) |
| Higher product gross margin as a result of a decrease in products costs of 31% due to decreased customer equipment costs resulting from lower new customer additions in the period and a decrease in reserves related to inventory | 6,279 |
|
| Decrease in segment gross margin | (60,502 | ) |
Operating Expenses
|
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, | | $ Change 2016 to 2017 | % Change 2016 to 2017 | $ Change 2015 to 2016 | % Change 2015 to 2016 |
| (in thousands, except percentages) | 2017 | 2016 | 2015 | |
| Sales and marketing | $ | 313,251 |
| $ | 330,969 |
| $ | 347,896 |
| | $ | (17,718 | ) | (5 | )% | $ | (16,927 | ) | (5 | )% |
| Engineering and development | 29,630 |
| 29,759 |
| 27,220 |
| | (129 | ) | — | % | 2,539 |
| 9 | % |
| General and administrative | 122,537 |
| 123,304 |
| 109,153 |
| | (767 | ) | (1 | )% | 14,151 |
| 13 | % |
| Depreciation and amortization | 72,523 |
| 72,285 |
| 61,833 |
| | 238 |
| — | % | 10,452 |
| 17 | % |
| Total other operating expenses | $ | 537,941 |
| $ | 556,317 |
| $ | 546,102 |
| | $ | (18,376 | ) | (3 | )% | $ | 10,215 |
| 2 | % |
For the year ended December 31, 2017 compared to the year ended December 31, 2016
Total other operating expenses decreased by $18,376 during the year ended December 31, 2017 as compared to the year ended December 31, 2016 due to the following:
Sales and marketing expense decreased by $17,718, or (5)%, due to a continued shift during 2017 in traditional marketing investments targeting Consumer customers to more selective targeted advertising focused on attracting more profitable Business customers resulting in overall fewer media marketing programs being deployed during the current year.
General and administrative expense decreased by $767, or (1)%, primarily due to a decrease in consulting and legal fees associated with the acquisition of Nexmo during the previous year.
For the year ended December 31, 2016 compared to the year ended December 31, 2015
Total other operating expenses increased $10,215 during the year ended December 31, 2016 as compared to the year ended December 31, 2015 due to the following:
Sales and marketing expense decreased by $16,927, or 5%, due to a shift in traditional media marketing investments from Consumer to Business customers as part of an effort to attract these more profitable customers.
Engineering and development expense increased by $2,539, or 9%, due to incremental investment in new business products and services, the acquisition of Nexmo in 2016 and the acquisition of iCore and Simple Signal in 2015.
General and administrative expense increased by $14,151, or 13%, primarily due to the addition of Simple Signal, iCore and Nexmo, offset by the reduction of Nexmo contingent consideration of $11,472.
Depreciation and amortization increased $10,452, or 17%, primarily due to the amortization of acquisition-related intangibles from the acquisition of Simple Signal in April 2015, iCore in August 2015, and Nexmo in June 2016.
38 VONAGE ANNUAL REPORT 2017
Other Income (Expense)
|
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, | | $ Change 2016 to 2017 | % Change 2016 to 2017 | $ Change 2015 to 2016 | % Change 2015 to 2016 |
| (in thousands, except percentages) | 2017 | 2016 | 2015 | |
| Interest income | $ | 17 |
| $ | 79 |
| $ | 89 |
| | $ | (62 | ) | (78 | )% | $ | (10 | ) | (11 | )% |
| Interest expense | (14,868 | ) | (13,042 | ) | (8,786 | ) | | (1,826 | ) | 14 | % | (4,256 | ) | 48 | % |
| Other income (expense), net | 1,253 |
| (346 | ) | (842 | ) | | 1,599 |
| 462 | % | 496 |
| 59 | % |
| | $ | (13,598 | ) | $ | (13,309 | ) | $ | (9,539 | ) | | $ | (289 | ) | 2 | % | $ | (3,770 | ) | 40 | % |
For the year ended December 31, 2017 compared to the year ended December 31, 2016
Interest expense. The increase in interest expense of $1,826, or 14%, was due mainly to higher interest rates in 2017 compared to 2016, offset by lower principal balances, and the additional interest expense associated with our interest rate swaps arrangement.
Other income (expense), net. Other income (expense), net increased by $1,599, or 462% in 2017 compared to 2016 due the sale of the Hosted Infrastructure product line during the second quarter of 2017 as further discussed in Note 12, Acquisitions and Dispositions.
For the year ended December 31, 2016 compared to the year ended December 31, 2015
Interest expense. The increase in interest expense of $4,256, or 48%, was due mainly to increased borrowings under the credit agreement, or the 2016 Credit Facility, entered into by the Company in June 2016 in order to finance the acquisition of Nexmo.
Provision for Income Taxes
|
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, | | $ Change 2016 to 2017 | % Change 2016 to 2017 | $ Change 2015 to 2016 | % Change 2015 to 2016 |
| (in thousands, except percentages) | 2017 | 2016 | 2015 | |
| Income tax expense | $ | (79,726 | ) | $ | (17,694 | ) | $ | (18,418 | ) | | $ | (62,032 | ) | (351 | )% | $ | 5,480 |
| 4 | % |
| Effective tax rate | 174 | % | 57 | % | 43 | % | | | | | |
For the year ended December 31, 2017 compared to the year ended December 31, 2016
During the year ended December 31, 2017, the Company recognized tax expense of $79,726 which primarily reflects the impactresult of the Tax Cuts and Jobs Act, or TCJA, which was signed into law by the President of the United Statesenacted on December 22, 2017. The TCJA most notably reduces2017, beginning in 2018, compensation paid to certain executive officers in excess of $1 million will generally be nondeductible for tax purposes. However, the corporate tax rateCommittee believes that shareholder interests are best served by maintaining flexibility to deliver appropriate levels of compensation even if such compensation is nondeductible.
Share-Based Compensation
We account for compensation expense from 35%our stock awards in accordance with the "Compensation - Stock Compensation Topic" of the Financial Accounting Standards Board Accounting Standards Codification ("FASB Codification") that requires companies to 21% along with eliminatingmeasure the alternative minimum tax, or AMT,cost of employee stock awards based on the grant date fair value and imposesrecognize that cost over the period during which a mandatory one-time taxrecipient is required to provide services in exchange for the stock awards, typically the vesting period. We consider the impact on foreign earnings. Based upon currently available information,the Company's compensation expense when determining and making stock awards.
32 VONAGE ANNUAL REPORT 2021
Section 280G Mitigation Actions
Pursuant to the terms of the Merger Agreement, the Company estimates thatis permitted to implement strategies to mitigate the enactmentpossible impact of Section 280G of the legislation will resultCode. On December 27, 2021, the compensation committee approved with respect to certain executive officers, (i) the payment, on or prior to December 31, 2021, of annual cash bonuses for calendar year 2021 that otherwise would be payable in 2022 and (ii) the settlement (in whole or in part), on or prior to December 31, 2021, of certain restricted stock unit awards and performance stock unit awards for restricted shares of Vonage Common Stock, less the appropriate withholding taxes, with the same vesting terms as such restricted stock unit awards and performance stock unit awards. Such executive officers entered into agreement with the Company providing for the actions described above and including the potential forfeiture and clawback described below. The executive officers have made elections under Section 83(b) of the Internal Revenue Code with respect to such shares of Company restricted stock. The actions described above have the effect of providing compensation in 2021 that would have otherwise been paid in a charge to income tax expense of $69,378 which is primarily associated withfuture year, but have not changed the re-measurement of the Company’s deferred tax balances at the 21% income tax rate.
During the year ended December 31, 2016, the Company's tax expense reflects a discrete period tax expense of $1,220 which was recorded related to expired stock options which was partially offset by $389, $661 and $77 which was recorded in the second quarter of 2016, the third quarter of 2016, and the fourth quarter of 2016, respectively. In addition, certain acquisition related expenses incurred in the second quarter of 2016 are treated as a permanent difference as the expenses are not deductible for tax purposes but are a reduction of pre-tax income. In the third quarter and fourth quarter of 2016, the reduction in the value of our contingent consideration in connection with the acquisition of Nexmo was treated as a permanent difference resulting in a decrease in the effective tax rate for the three months ended September 30, 2016. In the first quarter of 2015 a discrete period tax benefit of $1,058 was recorded in discontinued operations related to the write-off of intercompany loans associated with the wind down of our joint venture in Brazil.
Discontinued Operations Attributable to Vonage
During the year ended December 31, 2015, the Company had a loss from discontinued operations of $2,380vesting requirements as a result of the forfeiture and clawback provisions applicable to such compensation, as described below.
The compensation committee approved the following for each applicable named executive officer:
•For Rory Read, an accelerated payment in the amount of $1,221,875 and the settlement of 298,056 restricted stock units with 180,770 restricted shares of Vonage Common Stock (after payment of applicable withholding taxes) subject to forfeiture and clawback as described below.
•For Joy Corso, an accelerated payment in the amount of $276,000 and the settlement of 62,974 restricted stock units and 103,077 performance stock units with 100,706 restricted shares of Vonage Common Stock (after payment of applicable withholding taxes) subject to forfeiture and clawback as described below.
•For Savinay Berry, an accelerated payment in the amount of $575,000 and the settlement of 60,906 restricted stock units with 30,708 restricted shares of Vonage Common Stock (after payment of applicable withholding taxes) subject to forfeiture and clawback as described below.
If the executive officer’s service terminates under circumstances that would otherwise have resulted in the forfeiture of all or any portion of a restricted stock unit award or performance stock unit award, any restricted stock issued in respect of such award will be forfeited and any shares withheld by the Company exitingfor the Brazilian market.satisfaction of withholding taxes (or cash equal to the fair market value of such shares) will be subject to recovery by the Company. With respect to any performance stock units, if at the end of the applicable performance period, actual performance is less than the assumed level of performance, the applicable number of shares of restricted stock will be forfeited and any shares withheld by the Company for the satisfaction of withholding taxes will be subject to recovery by the Company, and if actual performance is greater than the assumed level of performance, the executive officer will be issued additional shares of restricted stock.
Summary Compensation Table | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name and
Principal Position | Year | | Salary | | Bonus (6) | | Stock Awards (7) | | Non-Equity Incentive Plan Compensation (8) | | All Other Compensation(9) | | Total |
Rory Read Chief Executive Officer | 2021 | | $ | 850,000 | | | | | | | $ | 1,355,750 | | | $ | 9,542 | | | $ | 2,215,292 | |
| 2020 | | $ | 434,808 | | | $ | 3,000,000 | | | $ | 24,546,250 | | | $ | 1,062,500 | | | $ | 6,000 | | | $ | 29,049,558 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
Stephen Lasher Chief Financial Officer (1) | 2021 | | $ | 602,500 | | | $ | 1,500,000 | | | $ | 8,874,373 | | | $ | 768,790 | | | $ | 7,200 | | | $ | 11,752,863 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
Tim Shaughnessy Interim Chief Financial Officer (2) | 2021 | | $ | 1,400,000 | | | | | | | | | | | $ | 1,400,000 | |
| 2020 | | $ | 1,200,000 | | | | | | | | | | | $ | 1,200,000 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
Jay Bellissimo Chief Operating Officer (3) | 2021 | | $ | 574,615 | | | $ | 2,000,000 | | | $ | 6,131,836 | | | $ | 741,254 | | | $ | 7,200 | | | $ | 9,454,905 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
Savinay Berry EVP, Product and Engineering (4) | 2021 | | $ | 423,077 | | | $ | 1,029,231 | | | $ | 9,828,965 | | | $ | 545,769 | | | $ | 6,000 | | | $ | 11,833,042 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
Joy Corso Chief Marketing Officer (5) | 2021 | | $ | 400,000 | | | | | $ | 4,470,706 | | | $ | 309,609 | | | $ | 7,500 | | | $ | 5,187,815 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
________________
(1)Mr. Lasher joined the Company in January 2021 as the CFO.
3933 VONAGE ANNUAL REPORT 20172021
(2)Mr. Shaughnessy was hired as the interim CFO from August 2020 through February 2021 and did not received any equity grants in 2021.
LIQUIDITY AND CAPITAL RESOURCES(3)Mr. Bellissimo joined the Company in January 2021 as the Chief Operating Officer.
(4)Mr. Berry joined the Company in February 2021 as the EVP, Product and Engineering.
Overview(5)Ms. Corso joined the Company in August 2020 as the Chief Marketing Officer.
(6)Reflects sign-on cash awards made to Mr. Lasher, Mr. Bellissimo, and Mr. Berry.
For(7)Stock awards consist of performance-based and time-based restricted stock units. The dollar amounts for the three years endedawards represent the grant-date fair value calculated in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718 (“FASB ASC 718”) by multiplying the number of shares of restricted stock awarded by the closing price of our common stock on the date of grant and based upon, where applicable, the probable outcome of performance conditions. Refer to “Compensation Discussion and Analysis—Long-Term Incentives” for additional information. The grant-date fair value of the stock-based awards will likely vary from the actual amount the named executive officer receives. Actual gains, if any, on shares acquired upon vesting of units are dependent on other factors, including the unit holders' continued employment with us through the vesting period, the achievement of any applicable operating and financial performance conditions, the future performance of our common stock, and overall stock market conditions. There can be no assurance that the values reflected in this table will be achieved. Performance-based restricted stock unit values are based upon achievement of target performance levels. If maximum performance were achieved under 2021 performance-based restricted stock awards, the total value of 2021 stock awards for participating executives would be as follows: Mr. Lasher $3,375977, Mr. Bellissimo $3,375,977, Mr. Berry $5,105,421, and Ms. Joy $1,464,650.
(8)The amounts in this column represent total performance-based bonuses earned for services rendered during 2020 and 2021. These bonuses were based on our operating and financial performance. The bonuses earned in 2020 and 2021, as applicable, were paid in the first quarter of the subsequent year. Please see the section titled “Annual Cash Bonuses” in the Compensation Discussion and Analysis for more information regarding our annual cash bonus for 2021.
(9)The amounts in this column consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | Year | | 401(k)
Match | | HSA Employer Contributions | | | | | | Legal Expense Reimbursement | | Total |
| Rory Read | 2021 | | $ | 6,000 | | | $ | — | | | | | | | $ | 3,542 | | | $ | 9,542 | |
| Stephen Lasher | 2021 | | $ | 6,000 | | | $ | 1,200 | | | | | | | $ | — | | | $ | 7,200 | |
| Tim Shaughnessy | 2021 | | $ | — | | | $ | — | | | | | | | $ | — | | | $ | — | |
| Jay Bellissimo | 2021 | | $ | 6,000 | | | $ | 1,200 | | | | | | | $ | — | | | $ | 7,200 | |
| Savinay Berry | 2021 | | $ | 6,000 | | | | | | | | | | | $ | 6,000 | |
| Joy Corso | 2021 | | $ | 6,000 | | | $ | 1,200 | | | | | | | $ | — | | | $ | 7,200 | |
34 VONAGE ANNUAL REPORT 2021
Grants of Plan-Based Awards—2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name (1) | Grant
Date | Date of
Corporate
Action | Estimated Potential Payouts Under Non-Equity Incentive Plan Awards (2) | | Estimated Future Payouts Under Equity Incentive Plan Awards (3) | All Other Stock Awards: Number of Shares of Stock or Units (4) | Grant Date Fair Value of Stock and Option Awards (5) |
Threshold | Target | Maximum | | Threshold | Target | Maximum |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Rory Read | 3/15/2021 | 2/10/2021 | $ | 1,062,500 | | $ | 1,062,500 | | $ | 2,125,000 | | | | | | | |
| Stephen Lasher | 2/1/2021 | 1/3/2021 | | | | | | | | 302,457 | | $ | 3,950,089 | |
| 11/8/2021 | 10/27/2021 | | | | | | | | 155,666 | | $ | 3,236,296 | |
| 2/1/2021 | 1/3/2021 | | | | | 56,711 | | 113,421 | | 226,842 | | | $ | 1,687,989 | |
| 2/1/2021 | 1/3/2021 | $ | 325,000 | | $ | 650,000 | | $ | 1,300,000 | | | | | | | |
| Jay Bellissimo | 2/1/2021 | 12/28/2020 | | | | | | | | 340,264 | | $ | 4,443,848 | |
| 2/1/2021 | 12/28/2020 | | | | | 56,711 | | 113,421 | | 226,842 | | | $ | 1,687,989 | |
| 2/1/2021 | 12/28/2020 | $ | 300,000 | | $ | 600,000 | | $ | 1,200,000 | | | | | | | |
| Savinay Berry | 4/1/2021 | 1/19/2021 | | | | | | | | 290,709 | | $ | 4,039,958 | |
| 11/8/2021 | 10/27/2021 | | | | | | | | 155,666 | | $ | 3,236,296 | |
| 4/1/2021 | 1/19/2021 | | | | | 87,213 | | 174,425 | | 348,850 | | | $ | 2,552,711 | |
| 4/1/2021 | 1/19/2021 | $ | 250,000 | | 500,000 | | $ | 1,000,000 | | | | | | | |
| Joy Corso | 3/15/2021 | 2/10/2021 | | | | | | | | 33,258 | | $ | 502,085 | |
| 11/8/2021 | 10/27/2021 | | | | | | | | 155,666 | | $ | 3,236,296 | |
| 3/15/2021 | 2/10/2021 | | | | | 24,943 | | 49,886 | | 99,772 | | | $ | 732,325 | |
| 3/15/2021 | 2/10/2021 | $ | 120,000 | | $ | 240,000 | | $ | 480,000 | | | | | | | |
(1)Mr. Shaughnessy was hired as the interim CFO from August 2020 through February 2021 and did not receive any equity grants in 2021.
(2)As discussed in the Compensation Discussion and Analysis, the annual cash bonus awards are attributable to operating and financial measures. The amount shown in the “Target” column represents a payout at the target bonus percentage for each named executive officer's base salary. The amount shown in the “Threshold” column represents the amount payable if only the minimum level of Company performance was attained for each metric applicable to the executive, which is 50% of the target amount shown above. If performance did not meet the minimum level of performance for any metric, then no bonus would have been paid. The amount shown in the “Maximum” column represents the amount payable if the maximum level of Company performance was attained for all metrics applicable to the executive, which is 200% of the corporate metrics.
Please see the section titled “Annual Cash Bonuses” in the Compensation Discussion and Analysis for additional information including the minimum threshold, target, and maximum level of performance for each performance measure, the calculation of the award payable based upon actual performance in 2021, the amount of the award and award as a percentage of the target award opportunity, and adjustments.
The annual cash bonus payments to our NEOs under our bonus plan for 2021 are reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.
(3)Amounts in this column represent performance-based restricted stock units granted under our 2015 Plan. The performance restricted stock units vest on a three-year cliff basis. The number of units actually earned will be determined after the end of the three-year performance period and can range from 0-200% of the target number of shares, based on the Company's Rule of 40 and TSR performance during the three-year performance period. Please see the section titled “Long-Term Incentives” in the Compensation Discussion and Analysis for additional information.
(4)Amounts in this column represent restricted stock units granted under our 2015 Plan. Generally, the restricted stock units granted under the 2015 Plan vest in equal annual installments on the first through third anniversaries. Please see the section titled “Potential Post-Employment Payments—Employment and Related Agreements” for a discussion of the acceleration of vesting of our restricted stock units in certain circumstances, including upon a change in control.
(5)The value of a stock award or option award represents the grant-date fair value calculated in accordance with FASB ASC 718. Stock awards consist only of restricted stock units. Actual gains, if any, on shares acquired upon vesting of restricted stock units or option exercises are dependent on other factors, including the holder's continued employment with us through the vesting period or option exercise period, the outcome of any performance conditions, the future performance of our common stock, and overall market conditions. There can be no assurance that the values reflected in this table will be achieved.
35 VONAGE ANNUAL REPORT 2021
Outstanding Equity Awards at Fiscal Year-End—2021
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Stock Awards | | |
Name(1) | | Number of Shares or Units of Stock that Have Not Vested (2)(13) | | Market Value of Shares or Units of Stock that Have Not Vested (3) | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that Have Not Vested(13) | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights that Have Not Vested |
| Rory Read | | 541,944 | | (4) | $ | 11,267,016 | | | | | |
| | 173,334 | | (5) | $ | 3,603,614 | | | | | |
| | | | | | 780,000 | | (11) | $ | 16,216,200 | |
| Stephen Lasher | | 226,843 | | (6) | $ | 4,716,066 | | | | | |
| | 155,666 | | (7) | $ | 3,236,296 | | | | | |
| | | | | | 113,421 | | (12) | $ | 2,358,022 | |
| Jay Bellissimo | | 340,264 | | (6) | $ | 7,074,089 | | | | | |
| | | | | | 113,421 | | (12) | $ | 2,358,022 | |
| Savinay Berry | | 229,803 | | (8) | $ | 4,777,604 | | | | | |
| | 155,666 | | (7) | $ | 3,236,296 | | | | | |
| | | | | | 174,425 | | (12) | $ | 3,626,296 | |
| Joy Corso | | 30,328 | | (9) | $ | 630,519 | | | | | |
| | 22,172 | | (10) | $ | 460,956 | | | | | |
| | 103,778 | | (7) | $ | 2,157,545 | | | | | |
| | | | | | 6,095 | | (11) | | $ | 126,715 | |
| | | | | | 49,886 | | (12) | | $ | 1,037,130 | |
(1)Mr. Shaughnessy was hired as the interim CFO from August 2020 through February 2021 and did not receive any equity grants in 2021.
(2)Please see the section titled “Potential Post-Employment Payments—Employment and Related Agreements” for a discussion of the acceleration of our option and stock awards upon a change in control.
(3)Based on the closing price of our common stock as of December 31, 2017, 2016,2021 of $20.79, as reported on the Nasdaq Stock Market.
(4)The restricted stock units vest in equal annual installments on the first through third anniversaries of July 1, 2020.
(5)The restricted stock units vest in equal annual installments on the first through third anniversaries of March 15, 2020.
(6)The restricted stock units vest in equal annual installments on the first through third anniversaries of February 1, 2021.
(7)The restricted stock units vest in equal annual installments on the first through third anniversaries of November 8, 2021.
(8)The restricted stock units vest in equal annual installments on the first through third anniversaries of April 1, 15, 2021.
(9)The restricted stock units vest in equal annual installments on the first through third anniversaries of August 3, 2020.
(10)The restricted stock units vest in equal annual installments on the first through third anniversaries of March 15, 2021.
(11)The restricted stock units vest upon the satisfaction of certain performance criteria based upon Company performance from January 1, 2020 through December 31, 2022.
(12)The restricted stock units vest upon the satisfaction of certain performance criteria based upon Company performance from January 1, 2021 through December 31, 2023.
(13)Outstanding equity award amounts do not include restricted shares that were accelerated for purposes under Section 280G of the Code.
36 VONAGE ANNUAL REPORT 2021
Option Exercises and 2015 we generated incomeStock Vested—2021 | | | | | | | | | | | | | | |
| | | |
Name (1) | | Number of Shares
Acquired on
Vesting
(#) | | Value Realized on Vesting ($)(2) |
| Rory Read | | 804,722 | | | $ | 13,091,514 | |
| Savinay Berry | | 60,906 | | | $ | 1,257,709 | |
| Stephen Lasher | | 75,614 | | | $ | 1,078,256 | |
| Joy Corso | | 181,211 | | | $ | 3,648,451 | |
_____________ (1)Mr. Shaughnessy served as the Company's interim CFO from operations. We expectAugust 2020 through February 2021 and did not received any equity grants in 2020. Mr. Bellissimo joined the Company in January 2021 as the COO and did not have any equity grants prior to 2021.
(2)Value realized upon exercise or vesting is based on the closing sales price of our common stock on the Nasdaq Global Select Market on the applicable exercise or vesting date.
Potential Post-Employment Payments
The following are descriptions of our employment arrangements with our named executive officers. The table following the description of our employment arrangements quantifies the potential payments and benefits to which the named executive officer would be entitled to under our arrangements with them for various scenarios involving a termination of employment or change-in-control. The amounts shown are estimated amounts that assume that the termination or change-in-control was effective as of December 31, 2021, and thus include amounts earned through such time. The actual amounts to be paid out can only be determined at the time of such executive's separation.
Employment and Related Agreements
Rory Read
Employment Agreement
Vonage entered into an employment agreement with Mr. Read on June 5, 2020. The employment agreement provides for Mr. Read’s employment for a three-year term commencing July 1, 2020 to serve as President and Chief Executive Officer of the Company, reporting directly to the Board.
In the event Mr. Read’s employment is terminated by the Company without cause or he resigns with “good reason”, he is entitled to the following severance benefits, subject to his execution and non-revocation of a general release of claims: (i) 12 months base salary plus his target bonus amount for the year in which his employment terminates, payable over the 12 month period following termination of employment, (ii) an annual bonus for the year of termination, based on actual performance for such year and pro-rated for the period he is employed during such year, (iii) any earned but unpaid bonus for a previously completed fiscal year, and (iv) continued participation in medical, dental and vision plans at the same cost to Mr. Read as other executives of the Company until he is eligible for COBRA coverage.
If Mr. Read’s employment is terminated due to his death or disability, he (or his estate) is entitled to (i) an annual bonus for the year of termination, based on actual performance for such year and pro-rated for the period he is employed during such year and (ii) any earned but unpaid bonus for a previously completed fiscal year.
If Mr. Read’s employment is terminated for cause or he resigns without “good reason”, he will be entitled only to accrued but unpaid compensation and benefits due to him in accordance with the Company’s benefit plans (“Accrued Rights”). Mr. Read will also be entitled to the Accrued Rights in the event of a termination of employment for any other reason.
Mr. Read is subject to non-competition, non-solicitation and non-hire restrictions, which will be in effect during his employment and for twelve months thereafter. Mr. Read is subject to non-disparagement and confidentiality restrictions during his employment and perpetually thereafter.
37 VONAGE ANNUAL REPORT 2021
Letter Agreement
On November 21, 2021, Mr. Read entered into a letter agreement with Parent (the “Letter Agreement”) setting forth certain understandings with respect to Mr. Read’s Employment Agreement with the Company dated June 5, 2020 and his outstanding Restricted Stock Units and Performance Restricted Stock Units, to be effective on, and subject to the occurrence of, the closing of the Merger.
Pursuant to the Letter Agreement, Mr. Read has agreed that his Employment Agreement will be amended to remove his existing right to resign for “good reason” as a result of his no longer holding the position of Chief Executive Officer of a publicly traded company or the Company not nominating him for election to the Board or removing him from the Board, in each case which would otherwise entitle him to severance payments under his Employment Agreement and accelerated vesting of his outstanding Restricted Stock Units and Performance Restricted Stock Units. The parties have also agreed to certain other changes to the definitions of termination for “good reason” and termination for cause for such purposes.
The Letter Agreement provides that Mr. Read’s Restricted Stock Units that are scheduled to vest in 2022 (506,666 units, a portion of which have been settled in restricted shares of Vonage Common Stock), which would otherwise be converted to a cash-based award as provided in the Merger Agreement, will become vested and payable in cash upon the closing of the Merger. The amounts so paid will be subject to clawback in the event that Mr. Read voluntarily resigns his employment without “good reason” (as amended by the Letter Agreement) prior to the originally scheduled vesting dates. In addition, 50% of Mr. Read’s Performance Restricted Stock Units (390,000 units, assuming target performance and 780,000, assuming maximum performance) that would otherwise be converted to a cash- based award as provided in the Merger Agreement will instead become vested and payable in cash upon the closing of the Merger. The amounts so paid will be subject to clawback in the event that Mr. Read voluntarily resigns without “good reason” (as amended) prior to the originally scheduled vesting dates. The remainder of Mr. Read’s outstanding Restricted Stock Units and Performance Restricted Stock Units (506,668 units and 390,000 units, assuming target performance, or 780,000 units, assuming maximum performance, respectively), as converted into cash-based awards as provided in the Merger Agreement, will continue to balance effortsbecome vested and payable in accordance with their original vesting schedule, subject to grow our revenue while consistently achieving operating profitability. To grow our revenue, weMr. Read’s continued employment following the Merger (subject to acceleration upon termination without cause or resignation for “good reason”). Parent has agreed to establish a rabbi trust to hold such cash amounts.
The Letter Agreement provides Mr. Read the opportunity to receive a “performance retention incentive payment” from Parent following the closing of the Merger with a targeted value of $12 million. The amount payable (if any) will be determined based on performance metrics tied to the Company’s business, 50% with respect to 2022 performance and 50% with respect to 2023 performance. The performance retention incentive payment will be payable on the Company’s first normal payroll payment date following July 1, 2024, subject to Mr. Read’s continued employment through such date, subject to proration upon termination without cause or resignation for “good reason”, based on actual performance as of the date of termination. The Letter Agreement also provides for certain tax indemnification payments up to a maximum amount of $4 million.
Stephen Lasher
The Company and Mr. Lasher entered into a letter agreement dated February 25, 2021, at the commencement of his employment with the Company. Pursuant to the letter agreement, in the event that Mr. Lasher’s employment is terminated by the Company without cause or by him for “good reason”, he is entitled to (i) twelve months of base salary payable by the Company in a lump sum, (ii) an amount equal to his target annual bonus, (iii) one year of continued vesting on unvested equity awards and (iv) twelve months of medical coverage. Mr. Lasher has also executed the Company’s employment covenants agreement, which provides for a one-year post-termination non-compete and non-solicit.
Timothy Shaughnessy
We entered into fixed term employment contract, dated August 17, 2020, with Mr. Shaughnessy, which provided that Mr. Shaughnessy would serve as the Interim Chief Financial Officer from August 18, 2020 through December 31, 2020, unless mutually extended between the Company and Mr. Shaughnessy. Pursuant to the Employment Agreement, Mr. Shaughnessy was paid a salary of $300,000 per month for each of the first three months and $300,000 for the last half of November 2020 and the entire month of December 2020. On December 31, 2020, the Company entered into an amendment to Mr. Shaughnessy's employment contract, which provides that Mr. Shaughnessy would continue to make investmentsserve as the Company's Interim Chief Financial Officer through February 28, 2021, with an option to further extend Mr. Shaughnessy's service through March 31, 2021, upon mutual agreement between the Company and Mr. Shaughnessy. In connection with his extended service, the Amendment provides that Mr. Shaughnessy would be paid a salary of $400,000 per month of service. In addition, Mr. Shaughnessy was eligible to receive a bonus, in growth initiatives, marketing, application development, network qualitysuch amount and expansion, and customer care. Although we believe we will achieve consistent profitabilityform payable, subject to the discretion of the compensation committee .
38 VONAGE ANNUAL REPORT 2021
Mr. Shaughnessy did not participate in the future, we ultimately mayCompany’s employee benefit plans available to other senior executives. In addition, Mr. Shaughnessy was not awarded any equity grants in connection with his agreement. Mr. Shaughnessy also executed the Company’s employment covenants agreement.
Mr. Shaughnessy served as Interim CFO through February 28, 2021 and did not receive any payments in connection with his retirement, other than accrued but unpaid compensation.
Jay Bellissimo
The Company and Mr. Bellissimo entered into a letter agreement dated February 25, 2021, at the commencement of his employment with the Company. Pursuant to the letter agreement, in the event that Mr. Bellissimo’s employment is terminated by the Company without cause or by him for “good reason”, he is entitled to (i) twelve months of base salary payable by the Company in a lump sum, (ii) an amount equal to his target annual bonus and (iii) one year of continued vesting on unvested equity awards. Mr. Bellissimo has also executed the Company’s employment covenants agreement, which provides for a one-year post-termination non-compete and non-solicit.
Savinay Berry
The Company and Mr. Berry entered into a letter agreement dated February 25, 2021, at the commencement of his employment with the Company. Pursuant to the letter agreement, in the event that Mr. Berry’s employment is terminated by the Company without cause or by him for “good reason”, he is entitled to (i) twelve months of base salary payable by the Company in a lump sum, (ii) an amount equal to his target annual bonus, (iii) one year of continued vesting on unvested equity awards and (iv) six months of medical coverage. Mr. Berry has also executed the Company’s employment covenants agreement, which provides for a one-year post-termination non-compete and non-solicit.
Joy Corso
The Company and Ms. Corso entered into a letter agreement dated July 6, 2020, at the commencement of her employment with the Company. Pursuant to the letter agreement, in the event that Ms. Corso's employment is terminated by the Company without cause or by her for “good reason”, she is entitled to nine months' of base salary payable by the Company in a lump sum. Ms. Corso has also executed the Company’s employment covenants agreement, which provides for a one-year post-termination non-compete and non-solicit.
2021 Executive Severance Policy
The executive officers are covered by the Company’s Executive Severance Policy which provides that if an executive officer is terminated without cause, the executive shall receive (i) twelve months of base salary payable by us during our regular payroll cycle over the twelve month period following termination of employment, (ii) a pro-rated bonus paid in the following year based on actual Company performance, (iii) twelve months’ vesting for all equity awards, and (iv) an amount of up to twelve months of COBRA payments. If the executive officer is party to an employment agreement or offer letter that provides for greater severance, such agreement or letter will apply.
Acceleration of Vesting of Stock Options, Time-Based and Performance-Based Restricted Stock Units
Our option and time-based restricted stock unit agreements for grants to our NEOs other than Mr. Read (and other certain sign-on grants) provide for acceleration of vesting of 50% of unvested stock options and time-based restricted stock units covered by those agreements in the event of death or disability.
Upon a change in control, any performance-based restricted stock unit award granted to our NEOs will be successfulconverted to an amount equal to the amount payable if the performance period were deemed to end on the date of the consummation of the change in control and we maywill vest the earlier of (i) as of the last day of the applicable performance period, subject to continued employment on the last day of the performance period, (ii) in the event employment terminates due to death or disability, or (iii) due to termination by without cause or for good reason.
In the event of a termination of employment for death or disability, a portion of any performance-based restricted stock unit award equal to a fraction based upon the percentage of the performance period elapsed at the time of termination of employment, but in any case no less than half, will vest. For termination of employment due to death, such vesting will occur upon termination. For termination of employment due to disability, such vesting will occur upon the end of the applicable performance period.
Treatment of Equity Awards in Connection with the Merger Agreement
The Merger Agreement provides that unless otherwise mutually agreed by the parties, or by Parent and the applicable holder, in consultation with the Company, at the Effective Time each outstanding equity award will be treated as follows:
39 VONAGE ANNUAL REPORT 2021
Company Options
Each Company Option that was granted under the Company Stock Plans and is outstanding as of immediately prior to the Effective Time (as defined in the Merger Agreement), whether vested or unvested, (i) if the per share of Vonage Common Stock exercise price of such Company Option is equal to or greater than the Merger Consideration, such Company Option will terminate and be cancelled, without any consideration being payable for such Company Option, and have no further force or effect and (ii) if the per share of Vonage Common Stock exercise price of such Company Option is less than the Merger Consideration, such Company Option will terminate and be cancelled in exchange for the right to receive a lump sum cash payment in the amount equal to (A) the number of shares of Vonage Common Stock underlying the Company Option immediately prior to the Effective Time, multiplied by (B) an amount equal to the Merger Consideration minus the applicable exercise price (the product of (A) and (B), the “Option Payment”). The Option Payment (if any) payable to each former holder of a Company Option that was outstanding immediately prior to the Effective Time will be paid through the Surviving Corporation’s payroll to such former holder without interest and net of any withholding taxes, as soon as practicable following the Effective Date, but in any event not achieve consistent profitability. We believelater than the first (1st) regular payroll date of the Surviving Corporation following the Effective Time; provided that if such first (1st) payroll date occurs fewer than five (5) business days following the Effective Time, the Option Payment will be paid no later than the second (2nd) regular payroll date of the Surviving Corporation following the Effective Time.
Company Restricted Stock Units
Each Restricted Stock Unit that was granted under the Company Stock Plans and is outstanding as of immediately prior to the Effective Time, whether vested or unvested, will terminate and be cancelled in exchange for: (i) with respect to Restricted Stock Units that become vested in accordance with their terms on or prior to the Effective Time but have not yet been paid, the right to receive a lump sum cash flow from operationspayment in the amount equal to (A) the number of shares of Vonage Common Stock underlying such Restricted Stock Unit, multiplied by (B) the Merger Consideration (each such payment, a “RSU Payment”); and (ii) with respect to all other Restricted Stock Units, a new cash-based award representing the right to receive an unvested amount in cash equal to (A) the number of shares of Vonage Common Stock underlying such Restricted Stock Unit, multiplied by (B) the Merger Consideration, which vesting will be subject to the continued employment of the former holder of such Restricted Stock Unit with Parent and its Affiliates (including the Surviving Corporation), on handthe same vesting schedule (including with respect to any terms providing for acceleration of vesting) and otherwise on substantially the same terms as the corresponding Restricted Stock Unit, except as otherwise provided for in the Merger Agreement (each such award, a “Parent RSU Cash Award”).
Following the Effective Time, no Restricted Stock Unit that was outstanding immediately prior to the Effective Time will fund our operationsremain outstanding and each former holder of any such Restricted Stock Unit will cease to have any rights with respect thereto, except the right to receive an RSU Payment or a Parent RSU Cash Award in exchange for at leastsuch Restricted Stock Unit. The vested cash amounts payable with respect to each portion of any RSU Payment or Parent RSU Cash Award will be paid through the next twelve months.Surviving Corporation’s payroll to the former holder of the corresponding Restricted Stock Unit without interest and net of any withholding taxes, as soon as practicable following the applicable vesting date, but in any event not later than the first (1st) regular payroll date of the Surviving Corporation following the applicable vesting date; provided that if such first (1st) payroll date occurs fewer than five (5) business days following the applicable vesting date for any portion of an RSU Payment or a Parent RSU Cash Award, the vested cash amounts with respect to such portion will be paid no later than the second (2nd) regular payroll date of the Surviving Corporation following the applicable vesting date. For purposes of the immediately preceding sentence, with respect to any RSU Payments, the Closing Date will be treated as the vesting date.
Company Performance Restricted Stock Units
Each Performance Restricted Stock Unit that was granted under the Company Stock Plans and is outstanding as of immediately prior to the Effective Time, whether vested or unvested, will terminate and be cancelled in exchange for: (i) with respect to Performance Restricted Stock Units with a performance period that ends on or prior to the Effective Time, the right to receive a lump sum cash payment in the amount equal to (A) the number of shares of Vonage Common Stock subject to such Performance Restricted Stock Unit that vested based on the actual level of achievement under the awards, multiplied by (B) the Merger Consideration (a “PRSU Payment”); and (ii) with respect to all other Performance Restricted Stock Units, a new cash-based award representing the right to receive an unvested amount in cash equal to (A) the number of shares of Vonage Common Stock subject to such Performance Restricted Stock Unit that would vest based on the actual level of achievement as of the Effective Time compared against pro-rated performance measures as of the Effective Time, multiplied by (B) the Merger Consideration, which vesting will be subject to the continued employment of the former holder of such Performance Restricted Stock Unit with Parent and its Affiliates (including the Surviving Corporation), on the same time-based vesting schedule (including with respect to any terms providing for acceleration of vesting) and otherwise on substantially the same terms as the corresponding Performance Restricted Stock Unit, except as otherwise provided for in the Merger Agreement (each such award, a “Parent PRSU Cash Award”).
40 VONAGE ANNUAL REPORT 2021
Following the Effective Time, no such Performance Restricted Stock Unit that was outstanding immediately prior to the Effective Time will remain outstanding and each former holder of any such Performance Restricted Stock Unit will cease to have any rights with respect to such Company Performance Restricted Stock Unit, except the right to receive a PRSU Payment or a Parent PRSU Cash Award in exchange for such Performance Restricted Stock Unit. The vested cash amounts payable with respect to each portion of any PRSU Payment or Parent PRSU Cash Award will be paid through the Surviving Corporation’s payroll to the former holder of the corresponding Performance Restricted Stock Unit without interest and net of any withholding taxes, as soon as practicable following the applicable vesting date, but in any event not later than the first (1st) regular payroll date of the Surviving Corporation following the applicable vesting date; provided that if such first (1st) payroll date occurs fewer than five (5) business days following the applicable vesting date for any portion of a PRSU Payment or Parent PRSU Cash Award, the vested cash amounts with respect to such portion will be paid no later than the second (2nd) regular payroll date of the Surviving Corporation following the applicable vesting date. For purposes of the immediately preceding sentence, with respect to any PRSU Payment, the Closing Date will be treated as the vesting date.
Potential Payments Upon Termination of Employment or Change-in-Control
The following table sets forth a summaryquantifies potential payments to our named executive officers upon termination of employment assuming the triggering event took place on December 31, 2021, the last business day of our last completed fiscal year.
As noted above, Mr. Shaughnessy retired from his position with the Company and did not receive any cash flowsseverance payments in connection with their respective retirement events.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | Cash
Severance
Payment | | Bonus (1) | | | | Acceleration of Restricted Stock Units (Unvested)(2) | | | | Total
Termination
Benefits |
| Rory Read | | | | | | | | | | | |
| Termination without cause or resignation for good reason | $ | 850,000 | | | $ | 1,062,500 | | | | | $ | 31,086,830 | | | | | $ | 32,999,330 | |
| Termination upon death or disability | | | $ | 1,062,500 | | | | | $ | 31,086,830 | | | | | $ | 32,149,330 | |
| Termination without cause or resignation for good reason following a change in control | $ | 850,000 | | | $ | 1,062,500 | | | | | $ | 31,086,830 | | | | | $ | 32,999,330 | |
| Stephen Lasher | | | | | | | | | | | |
| Termination without cause or resignation for good reason | $ | 650,000 | | | $ | 650,000 | | | | | $ | 3,174,758 | | | | $ | 4,474,758 | |
| Termination upon death or disability | | | | | | | $ | 5,155,192 | | | | | $ | 5,155,192 | |
| Termination without cause or resignation for good reason following a change in control | $ | 650,000 | | | $ | 650,000 | | | | | $ | 10,310,384 | | | | | $ | 11,610,384 | |
| Jay Bellissimo | | | | | | | | | | | |
| Termination without cause | $ | 600,000 | | | $ | 600,000 | | | | | $ | 2,358,023 | | | | | $ | 3,558,023 | |
| Resignation for good reason | $ | 600,000 | | | $ | 600,000 | | | | | | | | | $ | 1,200,000 | |
| Termination upon death or disability | | | | | | | $ | 4,716,056 | | | | | $ | 4,716,056 | |
| Termination without cause or resignation for good reason following a change in control | $ | 600,000 | | | $ | 600,000 | | | | | $ | 9,432,111 | | | | | $ | 10,632,111 | |
| Savinay Berry | | | | | | | | | | | |
| Termination without cause | $ | 500,000 | | | $ | 500,000 | | | | | $ | 1,827,129 | | | | | $ | 2,827,129 | |
| Resignation for good reason | $ | 500,000 | | | $ | 500,000 | | | | | | | | | $ | 1,000,000 | |
| Termination upon death or disability | | | | | | | $ | 5,820,098 | | | | | $ | 5,820,098 | |
| Termination without cause or resignation for good reason following a change in control | $ | 500,000 | | | $ | 500,000 | | | | | $ | 11,640,196 | | | | | $ | 12,640,196 | |
| Joy Corso | | | | | | | | | | | |
| Termination without cause | $ | 400,000 | | | $ | 240,000 | | | | | | | | | $ | 640,000 | |
| Resignation for good reason | $ | 300,000 | | | | | | | | | | | $ | 300,000 | |
| Termination upon death or disability | | | | | | | $ | 2,206,433 | | | | | $ | 2,206,433 | |
| Termination without cause or resignation for good reason following a change in control | $ | 400,000 | | | $ | 240,000 | | | | | $ | 4,412,865 | | | | | $ | 5,052,865 | |
(1)Pursuant to the 2021 executive severance policy, executives are also entitled to an annual bonus for the periods indicated: year of termination, based on actual performance for such year and pro-rated for the period in which they are employed during such year in cases of termination without cause.
41 VONAGE ANNUAL REPORT 2021
|
| | | | | | | | | | | | | | | | |
| | For the years ended December 31, | | $ Change 2016 to 2017 | $ Change 2015 to 2016 |
| (dollars in thousands) | 2017 | 2016 | 2015 | |
| Net cash provided by operating activities | $ | 128,058 |
| $ | 93,456 |
| $ | 134,485 |
| | $ | 34,602 |
| $ | (41,029 | ) |
| Net cash used in investing activities | (30,737 | ) | (191,449 | ) | (153,509 | ) | | 160,712 |
| $ | (37,940 | ) |
| Net cash (used in) provided by financing activities | (96,242 | ) | 68,054 |
| 35,451 |
| | (164,296 | ) | $ | 32,603 |
|
| Effect of exchange rate on changes on cash | 1,319 |
| 555 |
| (316 | ) | | 764 |
| $ | 871 |
|
Operating ActivitiesCEO Pay Ratio
Cash providedBelow is (i) the 2021 annual total compensation of our CEO; (ii) the 2021 annual total compensation of our median employee; (iii) the ratio of the annual total compensation of our CEO to that of our median employee, and (iv) the methodology we used to calculate our CEO pay ratio:
| | | | | |
| CEO Annual Total Compensation* | $ | 2,215,292 | |
| Median Employee Annual Total Compensation | $ | 144,320 | |
| CEO to Median Employee Pay Ratio | 15.34:1 |
This annual total compensation is the Summary Compensation Table amount.
Methodology
Our CEO pay ratio is a reasonable estimate calculated in a manner consistent with SEC rules. Our methodology and process is explained below:
•Determined Employee Population. We began with our global employee population as of December 31, 2021, including full-time, part-time, and seasonal or temporary workers, employed by operating activities increasedour Company or consolidated subsidiaries, but excluding our CEO. It also excludes the following: third-party contractors, consultants, fixed-term employees, interns and employees on leave of absence.
•Identified the Median Employee. We calculated compensation for each employee using annual base salary as of December 31, 2021, plus performance year 2021 cash incentives (paid in March 2022), 2021 sales commissions and equity awards granted in 2021. We estimated total compensation using a method similar to $128,058the Summary Compensation Table rules, but excluded employer health insurance contributions and the value of other benefits, and then identified the median employee.
•Calculated CEO Pay Ratio. We calculated our median employee’s annual total compensation for 2021 according to the SEC’s instructions for preparing the Summary Compensation Table. We then calculated our CEO’s annual total compensation using the same approach to determine the pay ratio shown above.
2021 Director Compensation
The following table summarizes the compensation paid by us to non-employee Directors for the year ended December 31, 2017 compared to $93,456 for2021. | | | | | | | | | | | | | | | | | |
| Name | Fees Earned or Paid in Cash | | Stock Awards (1) | | Total |
| Jeffrey A. Citron | $ | 125,000 | | | $ | 172,443 | | | $ | 297,443 | |
Stephen Fisher (2) | $ | 90,000 | | | $ | 114,972 | | | $ | 204,972 | |
| Carolyn Katz | $ | 95,000 | | | $ | 114,972 | | | $ | 209,972 | |
| John J. Roberts | $ | 110,000 | | | $ | 114,972 | | | $ | 224,972 | |
Gary Steele (3) | $ | — | | | $ | 57,487 | | | $ | 57,487 | |
| Hamid Akhavan | $ | 80,000 | | | $ | 114,972 | | | $ | 194,972 | |
| Michael McConnell | $ | 85,000 | | | $ | 114,972 | | | $ | 199,972 | |
| Priscilla Hung | $ | 90,000 | | | $ | 114,972 | | | $ | 204,972 | |
| Jan Hauser | $ | 105,000 | | | $ | 114,972 | | | $ | 219,972 | |
| Tien Tzuo | $ | 80,000 | | | $ | 114,972 | | | $ | 194,972 | |
Steve Ward (4) | $ | 80,000 | | | $ | 28,749 | | | $ | 108,749 | |
__________ (1)The amounts shown are the year ended December 31, 2016, primarily due to an increasegrant date fair value, calculated in operating income adjusted for non-cash itemsaccordance with FASB ASC 718 by multiplying the number of $27,817 drivenshares awarded by a decrease in operating expenses as compared to the year ended December 31, 2016 primarily attributable to decreased sales and marketing costs. Also attributing to the increase in operating activities was a decrease in cash used for working capital requirementsclosing price of $6,785 during the year ended December 31, 2017 as compared to the year ended December 31, 2016 primarily due to a decrease in timing of prepayments made during the current year.
Cash provided by operating activities decreased to $93,456 for the year ended December 31, 2016 as compared to $134,485 for the year ended December 31, 2015 primarily due to an increase in cash used for working capital requirements of $34,209 due to increased payments for acquisition and integration related costs along with increased payments related to interestour common stock on the Company's outstanding financing arrangements.
Investing Activities
Cash used in investing activitiesdate of grant. Stock awards were granted to directors on the first date of each quarter. The closing prices for the year ended December 31, 2017 of $30,737, which is a decrease from cash used in investing activities of $191,449 during the year ended December 31, 2016 is primarily attributable to payments of $163,042 made during the prior year to acquire Nexmo slightly offset by a decrease in cash provided from the maturity and sale of marketable securities of $14,389.
Cash used in investing activities increased to $191,449 for the year ended December 31, 2016 from $153,509 during the year ended December 31, 2015 primarily driven by an increase in payments made for the acquisition of businesses of $46,298 related the acquisition of Nexmo in 2016 as compared to payments made during 2015 for the acquisitions of Simple Signal and iCore. This was offset by an increase in cash provided by the sale and maturity of available for sale securities of $7,768 during the year ended December 31, 2016.
Financing Activities
Cash used by financing activities was $96,242 for the year ended December 31, 2017 as compared to cash provided by financing activities of $68,054 during the year ended December 31, 2016. The decrease in cash provided by financing activities was primarily attributable increased payments for financing arrangements net of new borrowings of $195,188 slightly offset by fewer repurchases ofour common stock of $23,360 during the current year.
Cash provided by financing activities increased to $68,054 for the year ended December 31, 2016 from $35,451 for the year ended December 31, 2015 due to increased proceeds from financing arrangements net or repayments of $53,938 in connection with the 2016 Credit Facility offset by an increase in payments made to repurchase common stock of $16,991.
were $12.88 on January 1 2021, $12.07 on April 1, 2021, $14.44 on July 1, 2021, and $16.40 on October 1, 2020, respectively. Mr. Citron was granted 3,348, 3,571, 2,985, and 2,629 shares on January 1, 2021, April 1, 2021, July 1, 2021, and October 1, 2021, respectively. Mr. Fisher, Ms. Katz, Mr. Roberts, Mr. Akhavan, Mr. McConnell, Ms. Hung, Ms. Hauser, and Mr. Tzuo were granted 2,232, 2,381, 1,990, and 1,753 shares on January 1, 2021, April 1, 2021, July 1, 2021, and
4042 VONAGE ANNUAL REPORT 20172021
Sources of Liquidity
The principal sources of liquidity are derived from available borrowings under our existing financing arrangements, existing cash on hand, and cash flows from operations. As described in Note 7, Long-Term Debt and Revolving Credit Facility, to the Consolidated Financial Statements, the Company's financing arrangements consist of the 2016 Credit Facility comprised of a $125,000 term note and a $325,000 revolving credit facility.
Uses of Liquidity
Acquisition of Businesses
NexmoOctober 1,2021, respectively. Mr. Steele was acquiredgranted 2,232 and 2,381 shares on June 3, 2016. Nexmo shareholders are receiving consideration of $231,122. 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)January 1, 2021 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, subject to vesting requirements over time. We financed the transaction with $179,000 from our 2016 Credit Facility.
iCore was acquired on August 31, 2015 for $92,000 cash consideration, increased by $689 of working capital excess as of the closing date, resulting in a total acquisition cost of $92,689. We financed the transaction with $10,689 of cash on hand and $82,000 from our 2015 revolving credit facility.
Simple Signal was acquired on April 1, 2015 for $25,578. We financed the transaction by borrowing $20,000 from our 2014 revolving credit facility.
Capital expenditures
For 2017, capital expenditures were primarily for the implementation of software solutions and purchase of network equipment as we continue to expand our network. Our capital expenditures for the year ended 2017 were $33,289, of which $11,3742021, respectively. Mr. Ward was for software acquisition and development. The majority of these expenditures are comprised of investments in information technology and systems infrastructure, including an electronic data warehouse, online customer service, and customer management platforms. For 2018, we believe our capital and software expenditures will be approximately $35,000.
Available Borrowings Under the 2016 Credit Facility
We maintain significant availability under our lines of credit to meet our short-term liquidity requirements. As of December 31, 2017, amounts available under the 2016 Credit Facility totaled $184 million.
State and Local Sales Taxes
We also have contingent liabilities for state and local sales taxes. As of December 31, 2017, we had a reserve of $1,147. If our ultimate liability exceeds this amount, it could affect our liquidity unfavorably. However, we currently do not believe that these contingent liabilities will significantly impair our liquidity.
41 VONAGE ANNUAL REPORT 2017
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The table below summarizes our contractual obligations at December 31, 2017, and the effect such obligations are expected to have on our liquidity and cash flow in future periods.
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (dollars in thousands) | Total | | Less than 1 year | | 2-3 years | | 4-5 years | | After 5 years |
| | (unaudited) |
| Contractual Obligations: | | | | | | | | | |
| 2016 term note | $ | 92,187 |
| | 18,750 |
| | 73,437 |
| | — |
| | — |
|
| 2016 revolving credit facility | $ | 141,000 |
| | — |
| | 141,000 |
| | — |
| | — |
|
| Interest related to 2016 term note | $ | 8,335 |
| | 3,996 |
| | 4,339 |
| | — |
| | — |
|
| Interest related to 2016 revolving credit facility | $ | 16,551 |
| | 6,624 |
| | 9,927 |
| | — |
| | — |
|
| Capital lease obligations | $ | 140 |
| | 140 |
| | — |
| | — |
| | — |
|
| Operating lease obligations | $ | 57,928 |
| | 11,481 |
| | 21,012 |
| | 12,441 |
| | 12,994 |
|
| Purchase obligations | $ | 53,650 |
| | 38,956 |
| | 13,698 |
| | 996 |
| | — |
|
| Total contractual obligations | $ | 369,791 |
| | $ | 79,947 |
| | $ | 263,413 |
| | $ | 13,437 |
| | $ | 12,994 |
|
| Other Commercial Commitments: | | | | | | | | | |
| Standby letters of credit | $ | 1,562 |
| | $ | 1,562 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Total contractual obligations and other commercial commitments | $ | 371,353 |
| | $ | 81,509 |
| | $ | 263,413 |
| | $ | 13,437 |
| | $ | 12,994 |
|
Credit Facility. On June 3, 2016, we entered the 2016 Credit Facility consisting of a $125,000 term note and a $325,000 revolving credit facility. See Note 7, Long-Term Debt and Revolving Credit Facility in the notes to the Consolidated Financial Statements.
Capital lease obligations. At December 31, 2017, we had current capital lease obligations of $140 mainly related to leasing of office equipment.
Operating lease obligations. At December 31, 2017, we had future commitments for operating leases for co-location facilities mainly in the United States that accommodate a portion of our network equipment, for office spaces leased in Holmdel, New Jersey for our headquarters, as well as various other locations for field sales and administration offices, in Tel Aviv, Israel for application development, and in London United Kingdom for our UK office.
Purchase obligations. The purchase obligations are primarily commitments to vendors who will provide local inbound services, provide customer care services, provide efax service, provide carrier operation, provide data center with technical supports, provide networks and telephone related services, provide marketing infrastructure and services, provide customer caller ID, provide electricity to our office, license patents to us, partner with us in international operations, process LNP orders, and lease office space to us. In certain cases, we may terminate these arrangements early upon payment of specified fees. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we are contractually committed. We also purchase products and services as needed with no firm commitment. For this reason, the amounts presented do not provide a reliable indicator of our expected future cash outflows or changes in our expected cash position. See also Note 11 to our Consolidated Financial Statements.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts and classifications of assets and liabilities, revenues and expenses, and the related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. The SEC has defined critical accounting policies as those policies management believes are most important to the portrayal of the Company's financial condition and results of operation and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company has identified the following critical accounting policies and estimated addressed below. Our significant accounting policies are summarized in Note 1 and Note 2 to our Consolidated Financial Statements. The following describes our critical accounting policies and estimates:
Use of Estimates
Our consolidated financial statements are prepared in conformity with U.S. GAAP, which require management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
42 VONAGE ANNUAL REPORT 2017
We base our estimates on historical experience, available market information, appropriate valuation methodologies, and on various other assumptions that we believed 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.
Revenue Recognition
Operating revenues consist of services revenues and sales of equipment to customers. The point in time at which revenues are recognized is determined in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition, and Accounting Standards Codification, or ASC, 605, Revenue Recognition. The Company recognizes revenue when the following criteria are met: persuasive evidence of an arrangement exist; delivery has occurred; the selling prices is fixed or determinable; and collectability is reasonably assured.
Services Revenue
Substantially all of our revenues are services revenues, which are derived from monthly subscription fees, usage based billion, and, in Vonage Enterprise, we offer domestic and international rate plans, including a variety of residential plans and mobile plans. For business customers, we offer SMB, mid-market, and enterprise customers several service plans with different pricing structures and contractual requirements ranging in duration from month-to-month to three years. As a result of multiple billing cycles each month, we estimate the amount of revenues earned from customers but not billed from the end of each billing cycle to the end of each reporting period and record these amounts as accounts receivable. These estimates are based primarily upon historical evidence and have been consistent with our actual results.
In the United States, we charge regulatory, compliance, E-911, and intellectual property-related fees on a monthly basis to defray costs, and to cover taxes that we are charged by the suppliers of telecommunications services. These charges, along with the remittance to the relevant government entity, are recorded on a net basis. In addition, we collect Federal Universal Service Fund, or USF, fees from customers to recover our obligation to contribute to the fund, as allowed by the FCC. We recognize USF revenues on a gross basis and record the related fees in cost of sales.
Through Nexmo, we provide CPaaS solutions to our customers through innovative communication APIs for text messaging and voice communications, allowing developers and enterprises to embed contextual communications into mobile apps, websites and business workflows via text, social media, chat apps and voice. Nexmo has two types of revenue activities:
•Retail - Revenue is primarily derived from supplying messaging (SMS and Voice) services to customers. Nexmo customers are typically billed in advance of use of our service. Revenue is recognized in the period when messages are sent by the customer.
•Trading - We refer to transactions with service providers or bulk SMS aggregators customers as "trading" activity. We sell services to these customers who then onsell to their customers, delivering voice or SMS messages. Since the aggregator is our customer, revenue is recognized on a gross basis with related costs included in cost of sales.
Customer Equipment and Shipping Revenue
Revenue is generated from sales of customer equipment to wholesalers or directly to customers for replacement devices, or for upgrading their device at the time of customer sign-up for which we charge an additional fee. In addition, customer equipment and shipping revenues include revenues from the sale of VoIP telephones in order to access our small and medium business services. Customer equipment and shipping revenues also include the fees that customers are charged for shipping their customer equipment to them. Customer equipment and shipping revenues include sales to our wholeslaers, who subsequently resell this customer equipment to customers. Revenues are reduced for payments to retailers and rebates to customers to the extent of customer equipment and shipping revenues.
On January 1, 2018, the Company adopted Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers (Topic 606). Refer to Item 15, Note 2, Summary of Significant Accounting Policies for additional information on the adoption of ASU 2014-09.
Valuation of Goodwill and Intangible Assets
As of December 31, 2017, the Company had goodwill of $373,764 consisting of $149,328 associated with the acquisition of Nexmo, which comprises the CPaaS reporting unit, and $224,436 associated with the acquisitions of iCore, Simple Signal, Telesphere and gUnify, which collectively comprise the UCaaS reporting unit. The Company does not have any goodwill allocated to its Consumer segment as of December 31, 2017. In addition, the Company recognized intangible assets measured primarily based upon significant inputs that are not observable in the market and represent Level 3 measurements as defined by ASC 820, Fair Value Measurements. Intangible assets acquired in the settlement of litigation or by direct purchase are accounted for based upon the fair value of assets received.
43 VONAGE ANNUAL REPORT 2017
The Company applies ASC 805, Business Combinations and ASC 350, Intangibles - Goodwill and Other to account for goodwill and intangible assets. The Company amortizes all finite-lived intangible assets over their respective estimated useful lives while goodwill has an indefinite life and is not amortized. Goodwill and intangible assets not subject to amortization are tested for impairment on an annual basisgranted 1,753 on October 1st and, when specific circumstances dictate, between annual tests. The Company tests for goodwill at the reporting unit level, which is identified by assessing whether the components of the Company's operating segments constitute businesses for which discrete financial information is available. With respect to the annual goodwill impairment test, the Company identified the UCaaS and CPaaS reporting units which collectively represent the Business segment. The goodwill impairment test involves evaluating qualitative information to determine if it is more than 50% likely that the fair value of a reporting unit is less than its carrying value. If such a determination is made or if the Company chooses not to utilize a qualitative approach, then the traditional two-step goodwill impairment test described below is applied. The first step, identifying a potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step, measuring the impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss. There1, 2021.
(2)Mr. Fisher resigned in October 2021.
(3)Mr. Steele resigned in April 2021.
(4)Mr. Ward was no impairment of goodwill for the year ended December 31, 2017.
The Company performed step one of the two-step impairment test for its UCaaS and CPaaS reporting units as of October 1, 2017 utilizing the income approach. Under the income approach, the Company estimated that the fair value of the reporting units' invested capital exceeded its carrying value and, as such, the Company concluded that goodwill associated with the reporting unitsappointed in the following table is not impaired:
|
| | |
Reporting Unit (Segment) | % Fair Value Over Carrying Value |
UCaaS (Business) | 392 | % |
CPaaS (Business) | 295 | % |
We perform a review of purchased-intangible assets whenever events or changes in circumstances indicate that the useful life is shorter than we had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess the recoverability of purchased-intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life of the asset is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life. There was no impairment of purchased-intangible assets identified for the years ended December 31, 2017, 2016, or 2015.
Income Taxes
We recognize deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of our assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. Our net deferred tax assets primarily consist of net operating loss carry forwards, or NOLs,. We are required to record a valuation allowance against our net deferred tax assets if we conclude that it is more likely than not that taxable income generated in the future will be insufficient to utilize the future income tax benefit from our net deferred tax assets (namely, the NOLs) prior to expiration. We periodically review this conclusion, which requires significant management judgment. If we are able to conclude in a future period that a future income tax benefit from our net deferred tax assets has a greater than 50% likelihood of being realized, we are required in that period to reduce the related valuation allowance with a corresponding decrease in income tax expense. This would result in a non-cash benefit to our net income in the period of the determination. In subsequent periods, we would expect to recognize income tax expense equal to our pre-tax income multiplied by our effective income tax rate, an expense that was not recognized prior to the reduction of the valuation allowance.July 2021.
As of December 31, 2017, we had NOLs2021, Directors held options for United States federalthe following aggregate number of shares:
| | | | | |
| Name | Number of Shares
Underlying Outstanding
Stock Options |
| Carolyn Katz | 150,000 | |
| John J. Roberts | 30,000 | |
Represents options granted under our director compensation programs only.See Item 12 "Security Ownership of Certain Beneficial Owners and state tax purposes, including those NOLs acquired as partManagement and Related Stockholder Matters" for more information regarding the equity ownership of past business combinations,our officers and Directors.
Compensation Committee Interlocks and Insider Participation
During 2021, the members of $556,368our compensation committee were Mr. Fisher, Ms. Hung, Ms. Katz, Mr. Tzuo, and $146,254, respectively, expiring at various times from years ending through 2037. In addition, we had NOLs for United Kingdom tax purposes of $50,142 with no expiration date.
Under Section 382Mr. Ward. None of the Internal Revenue Code, if we undergomembers of our compensation committee was at any time in 2021, or formerly, an “ownership change” which is generally definedofficer or employee of Vonage, and none of the members of our compensation committee had any relationship with Vonage requiring disclosure as a greater than 50% change by value in our equity ownership over a three-year period, our ability to use our pre-changerelated person transaction under Item 404 of control NOLs and other pre-change tax attributes against our post-change income may be limited. The Section 382 limitation is applied annually so as to limit the useRegulation S-K. See “Transactions with Related Persons.” During 2021, none of our pre-change NOLs to an amountexecutive officers served as a member of the compensation committee or Board of Directors of any entity that generally equalshad one or more executive officers that served on our compensation committee or Board of Directors.
COMPENSATION COMMITTEE REPORT
The compensation committee has reviewed and discussed with management the value of our stock immediately before the ownership change multiplied by a designated federal long-term tax-exempt rate. At December 31, 2017, there were no limitationsCompensation Discussion and Analysis set forth below. Based on the use of our NOLs except forforegoing review and discussion, the NOLs of Vocalocity as of the date of acquisition for which the Companycompensation committee has reflected in the deferred tax asset.
44 VONAGE ANNUAL REPORT 2017
Capitalized Software
Capitalized costs include external consulting fees, payroll related cost for employees who are directly associated with, and who devote time to, the Company's internal-use software projects. Capitalization begins when the planning stage is complete, and continues during the application development stage. Capitalization ceases when the software has been tested and is ready for its intended use. Internal and external costs incurred during the preliminary project stage, post implementation operation stage and ongoing maintenance are expensed as incurred. The Company amortizes completed internal-use software that is used on its network to expense over its estimated useful life.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies to Consolidated Financial Statements for a discussion of recent accounting developments.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in currency exchange rates and interest rates.
Foreign Exchange Risk
We sell our products and services primarily in the United States, Canada, the European Union, and Asia and have a portion of our sales denominated in Euros, the Canadian Dollar, and the British Pound. Our financial results could be affected by changes in foreign currency exchange rates, although foreign exchange risks have not been materialrecommended to our financial position or resultsBoard of operations to date.
We prepared a sensitivity analysis to determineDirectors that the impact of hypothetical changes foreign currency exchange rates have on our results of operations. The foreign currency rate analysis assumed a uniform movement in currencies by 10% relative to the U.S. Dollar on our results. Based upon the results of this analysis, a 10% change in currency rates would have resulted in an increase or decrease in our earnings for the year ended December 31, 2017 of approximately $3.5 million.
Interest RateCompensation Discussion and Debt Risk
Our exposure to market risk for changes in interest rates primarily relates to our long-term debt. In order to hedge the variability of expected future cash interest payments related to the 2016 Credit Facility we have entered into three interest rate swap agreements which were executed on July 14, 2017. The swaps have an aggregate notional amount of $150 million, require us to pay a fixed rate of 4.7%, while receiving LIBOR. The swaps are effective on July 31, 2017 through June 3, 2020 concurrent with the term of the 2016 Credit Facility and are accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging.
As of December 31, 2017, if the interest rate on our variable rate debt changed by 1% on our 2016 term note and our 2016 revolving credit facility, our annual debt service payment would change by approximately $1 million.
ITEM 8. Financial Statements and Supplementary Data
The financial statements and schedules required by this Item are listed in Part IV, Item 15Analysis be included in this Annual Report on Form 10-K.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
45 VONAGE ANNUAL REPORT 2017
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management,10-K for filing with the participation of our Chief Executive Officer and Chief Financial Officer, evaluatedSEC.
By the effectivenessCompensation Committee of the design and operationBoard of our disclosure controls and procedures as of December 31, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, as amended, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2017, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Remediation of Previous Material Weakness in Internal Control Over Financial Reporting.
In connection with the preparation of our consolidated financial statements as of and for the year ended December 31, 2016, we had identified a material weakness in our internal control over financial reporting related to our controls over the preparation of the annual tax provision. During the year ended December 31, 2017, the Company has executed on its remediation plan for this material weakness and the material weakness has been remediated.
Management’s Report on Internal Control Over Financial Reporting.
February 27, 2018
To the StockholdersDirectors of Vonage Holdings Corp.:
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;Carolyn Katz, Chair
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of our management and directors; andTien Tzuo
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.Steve Ward
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on our assessment, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017, our internal control over financial reporting was effective.
46 VONAGE ANNUAL REPORT 2017
Our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting. This report appears on page F-4.
|
| | |
/s/ ALAN MASAREK | | /s/ DAVID PEARSON |
Alan Masarek
Director, Chief Executive
Officer
| | David T. Pearson
Chief Financial Officer(Principal Financial Officer and Duly Authorized Officer) |
Report of the Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting.
See Report of Independent Registered Public Accounting Firm on page F-3.
Changes in Internal Control Over Financial Reporting
During 2017, the Company executed on its remediation plan with respect to the material weakness identified as of December 31, 2016. As part of this remediation plan, the Company executed on (i) the implementation of additional review procedures designed to enhance our tax provision controls and (ii) strengthening our tax provision controls with improved documentation standards, oversight and training. In the course of this remediation, we identified an additional error caused by the control deficiency identified at year-end as further described in Note 3, Correction of Prior Period Financial Statements to the Consolidated Financial Statements. There were no other changes to controls during the quarter ended December 31, 2017 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
ITEM 9B. Other Information
None.
47 VONAGE ANNUAL REPORT 2017
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
The discussion under the headings “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Director Nomination Process”, “Corporate Governance – Board Committees – Audit Committee”, and “Executive Officers of Vonage” in our Proxy Statement for the 2018 Annual Meeting of Stockholders is hereby incorporated by reference.
We have adopted a Vonage Code of Conduct applicable to all of our directors, officers, and employees and a Vonage Finance Code of Ethics applicable to our chief financial officer and other employees in our finance organization. The Vonage Code of Conduct and Vonage Finance Code of Ethics are posted in the Investor Relations section of our website, www.vonage.com. We will provide you with print copies of our codes free of charge on written request to Vonage Investor Relations, 23 Main Street, Holmdel NJ, 07733. We intend to disclose any amendments to, or waivers from, provisions of our codes that apply to our principal executive officer, principal financial officer, principal accounting officer or controller, or any person performing in similar functions, on our website promptly following the date of such amendment or waiver.
ITEM 11. Executive Compensation
The discussion under the headings “Compensation”, “Director Compensation”, “Corporate Governance – Compensation Committee Interlocks and Insider Participation”, and “Corporate Governance – Compensation Committee Report” in our Proxy Statement for the 2018 Annual Meeting of Stockholders is hereby incorporated by reference.
The “Compensation Committee Report” contained in our Proxy Statement shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, or the Securities Act, or the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate such information by reference into a document filed under the Securities Act or the Exchange Act.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
STOCK OWNERSHIP INFORMATION
The following table sets forth information regarding the beneficial ownership of our common stock as of March 31, 2022 by:
•each person or group who is known by us to own beneficially more than 5% of our common stock;
•each of our Directors;
•each of our named executive officers, as defined under SEC rules; and
•all of our current Directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Shares of common stock subject to (i) options that are currently
43 VONAGE ANNUAL REPORT 2021
exercisable or exercisable or (ii) restricted stock units that may vest within 60 days of April 29, 2022 are considered outstanding and beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
Unless otherwise indicated, each of the shareholders listed below has sole voting and investment power with respect to the shares beneficially owned. Except as indicated below, the address for each shareholder, director, or named executive officer is 101 Crawfords Corner Road, Suite 2416, Holmdel, New Jersey 07733.
This table assumes 256,435,472 shares of common stock outstanding as of March 31, 2022.
| | | | | | | | | | | | | | | |
| Number of | Percent of | |
| Shares | Shares | |
| Name | Beneficially | Beneficially | |
| Owned | Owned | |
| Beneficial Owners of More than 5% | | | | | |
BlackRock, Inc.(1) | 31,596,390 | | 12.32 | % | |
The Vanguard Group, Inc.(2) | 24,922,328 | | 10.40 | % | |
| Directors and Named Executive Officers | |
| Hamid Akhavan | 55,700 | | * | |
| Jay Bellissimo | 75,740 | | * | |
| Savinay Berry | 54,180 | | * | |
Jeffrey A. Citron(3) | 315,898 | | * | |
Joy Corso(4) | 100,706 | | * | |
| Jan Hauser | 22,184 | | * | |
| Priscilla Hung | 22,184 | | * | |
Carolyn Katz(5) | 271,047 | | * | |
| Stephen Lasher | 94,789 | | * | |
| Michael McConnell | 13,828 | | * | |
Rory Read(6) | 214,165 | | * | |
John J. Roberts(7) | 226,235 | | * | |
| Tim Shaughnessy | 0 | * | |
| Tien Tzuo | 8,356 | | * | |
| Stephen M. Ward, Jr. | 4,312 | | * | |
| All Directors and executive officers as a group (18 persons) | 1,678,443 | | 0.65 | % | |
*Less than 1%.
(1)Based on a Schedule 13G filed on February 8, 2022 by Blackrock, Inc. disclosing sole voting power over 0 shares of Vonage Common Stock and sole power to dispose of or direct the disposition of 0 shares of Vonage Common Stock. The address of BlackRock, Inc. is 55 East 52nd Street New York, NY 10022.
(2)Based on an amendment to Schedule 13G/A filed February 10, 2022 by The Vanguard Group, Inc. disclosing shared voting power over 460,552shares of Vonage Common Stock, sole power to dispose of or direct the disposition of 25,980,842shares of Vonage Common Stock and shared power to dispose of or direct the disposition of 677,571shares of Vonage Common Stock. The address of The Vanguard Group, Inc. is 100 Vanguard Blvd., Malvern, PA 19355.
(3)Includes 275,000 shares owned by the Mannis Group, Inc.
(4)Includes 93,983 restricted shares of Vonage Common Stock.
(5)Includes 150,000 shares underlying Company Options which are exercisable within 60 days of April 29, 2022.
(6)Includes 75,644 restricted shares of Vonage Common Stock.
(7)Includes 20,000 shares underlying Company Options which are exercisable within 60 days of April 29, 2022.
44 VONAGE ANNUAL REPORT 2021
EQUITY COMPENSATION PLAN INFORMATION
The discussionfollowing table provides information about the securities authorized for issuance under our equity compensation plans as of December 31, 2021.
| | | | | | | | | | | | | | | | | |
| Plan Category | Number of Securities to
be Issued Upon Exercise
of Outstanding Options
and Rights | | Weighted-average
Exercise Price of
Outstanding
Options and Rights | | Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (excluding securities
reflected in column (a)) |
| | (a) | | (b) | | (c) |
| Equity compensation plans approved by security holders (1) | 15,494,528 | | | $ | 12.85 | | | 7,912,826 | |
| Equity compensation plans not approved by security holders (2) | 87,871 | | | $ | 1.69 | | | 283,447 | |
| Total | 15,582,399 | | | | | 8,196,273 | |
________________(1)Includes awards outstanding under the headings “Stock Ownership Information”Company's 2015 Equity Incentive Plan (the "2015 Plan") and “Equity Compensationprior shareholder approved plans. Any shares underlying options that are canceled or expire without exercise will become available for issuance under the 2015 Plan. Awards under the 2015 Plan Information” inmay include restricted stock, unrestricted stock, restricted stock units, stock appreciation rights, performance shares or other equity-based awards, as our Proxy Statement forBoard of Directors or compensation committee may determine.
(2)Consists of shares issuable under the 2018 Annual MeetingNexmo Inc. 2011 Stock Plan, which stock options were assumed by the Company upon the June 3, 2016 acquisition of StockholdersNexmo Inc. The plan is hereby incorporatedlisted as "not approved" because the Nexmo Inc. 2011 Stock Plan was not subject to separate line item approval by reference.Vonage's shareholders when the merger, which included the assumption of this plan, was approved.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
Board Determination of Independence
Under applicable Nasdaq Stock Market rules, a director will only qualify as “independent” if our Board affirmatively determines that he or she has no material relationship with Vonage that would interfere with the exercise of independent judgment. Our Board has established guidelines to assist it in determining whether a director has such a material relationship. The discussionguidelines are included in our governance principles, which are available on our website as discussed above. Under these guidelines, a director is not considered to have a material relationship with Vonage if he or she:
•is independent under Section 5605 of the headings “ElectionNasdaq Listing Rules; and
•is not an executive officer of another company which is indebted to Vonage, or to which Vonage is indebted, where the total amount of either company's indebtedness to the other is more than 1% of the total consolidated assets of the company for which he or she serves as an executive officer.
In addition, ownership of a significant amount of our stock, by itself, does not constitute a material relationship. For relationships not covered by the guidelines set forth above, the determination of whether a material relationship exists is made by the other independent members of our Board.
Our Board has determined that Hamid Akhavan, Jeffrey Citron, Jan Hauser, Priscilla Hung, Carolyn Katz, Michael McConnell, John Roberts, Tien Tzuo, and Steve Ward meet the categorical standards described above, that none of these Directors – has a material relationship with Vonage and that each of these Directors is “independent” as determined under Section 5605 of the Nasdaq Listing Rules.
45 VONAGE ANNUAL REPORT 2021
None of the Directors determined to be independent engaged in any related person transactions with the Company. In making its determination that Mr. Citron is “independent”, our Board considered the fact that the Company provided health insurance and medical care payments to Mr. Citron in the amount of $30,185, $32,406, and $34,771 in 2019, 2020, and 2021, respectively. The Board also considered Mr. McConnell's appointment to our Board through a Cooperation Agreement with Legion Partners Asset Management, LLC.
Transactions with Related Persons”,Persons
Policies and “Corporate Governance –Procedures for Related Person Transactions
Our Board Determination of Independence” in our Proxy Statementhas adopted written policies and procedures for the 2018 Annual Meetingreview of Stockholdersany transaction, arrangement or relationship in which Vonage is hereby incorporatedor will be a participant, the amount involved exceeds $120,000, and one of our executive officers, directors, director nominees, or 5% shareholders (or their immediate family members), each of whom we refer to as a “related person,” has a direct or indirect material interest.
If a related person proposes to enter into such a transaction, arrangement or relationship, which we refer to as a “related person transaction,” the related person must report the proposed related person transaction to our chief legal officer. The policy calls for the proposed related person transaction to be reviewed and, if deemed appropriate, approved or ratified by reference.the Board's audit committee. Whenever practicable, the reporting, review, and approval will occur prior to entry into the transaction. If advance review and approval is not practicable, the audit committee will review, and, in its discretion after considering the factors set forth below, as appropriate, may ratify the related person transaction. The policy also permits the chairman of the audit committee to review and, if deemed appropriate, approve proposed related person transactions that arise between committee meetings, subject to ratification by the audit committee at its next meeting. Any related person transactions that are ongoing in nature will be reviewed annually.
A related person transaction reviewed under the policy will be considered approved or ratified if it is authorized by the audit committee after full disclosure of the material terms of the transaction and the related person's interest in the transaction. As appropriate for the circumstances, the audit committee will review and consider:
•the related person's interest in the related person transaction;
•the approximate dollar value of the amount involved in the related person transaction;
•the approximate dollar value of the amount of the related person's interest in the transaction without regard to the amount of any profit or loss;
•whether the transaction was undertaken in the ordinary course of our business;
•whether the terms of the transaction are no less favorable to us than terms that could have been reached with an unrelated third party;
•the purpose of, and the potential benefits to us of, the transaction; and
•any other information regarding the related person transaction or the related person in the context of the proposed transaction that would be material to investors in light of the circumstances of the particular transaction.
The audit committee may approve or ratify the transaction only if the audit committee determines that, under all of the circumstances, the transaction is in, or is not inconsistent with, our best interests. The audit committee may impose any conditions on the related person transaction it deems appropriate.
In addition to the transactions that are excluded by the instructions to the SEC's related person transaction disclosure rule, the Board has determined that the following transactions do not create a material direct or indirect interest on behalf of related persons and, therefore, are not related person transactions requiring approval or ratification for purposes of this policy:
•interests arising solely from the related person's position as an executive officer of another entity (whether or not the person is also a director of such entity) that is a participant in the transaction, where (a) the related person and all other related persons own in the aggregate less than a 10% equity interest in such entity, (b) the related person and his or her immediate family members are not involved in the negotiation of the terms of the transaction and do not receive any special benefits as a result of the transaction, (c) the amount involved in the transaction equals less than the greater of $200,000 or 5% of the annual gross revenues of the other entity that is a party to the transaction, and (d) the amount involved in the transaction equals less than 2% of Vonage's annual gross revenues; and
•a transaction that is specifically contemplated by provisions of Vonage's certificate of incorporation or bylaws.
46 VONAGE ANNUAL REPORT 2021
The policy provides that transactions involving compensation of executive officers shall be reviewed and approved by the compensation committee in the manner specified in its charter.
Related Person Transactions During 2021
The Company did not participate in any related persons transactions during 2021.
ITEM 14. Principal Accountant Fees and Services
Auditors' Fees
The discussion underfollowing table summarizes the heading “Ratificationfees Deloitte & Touche billed to us for fiscal 2021. | | | | | | | | |
| Fee Category | Fiscal Year 2021 | Fiscal Year 2020 |
Audit Fees (1) | $ | 2,926,982 | | $ | 3,061,478 | |
Audit Related Fees (2) | 96,957 | | — | |
Tax Fees (3) | 1,413,100 | | 914,946 | |
| Total Fees | $ | 4,437,039 | | $ | 3,976,424 | |
__________ (1)Audit fees consisted of Independent Registered Public Accounting Firm” in our Proxy Statementfees paid or accrued for services for the 2018 Annual Meetingintegrated audit of Stockholders is hereby incorporated by reference.
48 VONAGE ANNUAL REPORT 2017
PART IV
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Vonage Holdings Corp.
Opinion on the Financial Statement Schedule
We have audited the consolidatedour annual financial statements, including accounting consultations, audit of Vonage Holdings Corp. (the "Company") as of December 31, 2017, and for the year then ended (which report expressed an unqualified opinion and included an emphasis of a matter paragraph related to the adoption of a new accounting standard), and the Company'sour internal control over financial reporting as(as required by Section 404 of December 31, 2017,the Sarbanes-Oxley Act of 2002), reviews of our quarterly financial statements, consents and have issued our reports thereon dated February 27, 2018; such reports are included elsewhere in this Form 10-K. statutory audits of foreign subsidiaries.
(2)Audit-related fees consisted of fees paid or accrued for services relating to certain regulatory filings and tax due diligence services.
(3)Tax fees consisted of fees paid or accrued for domestic and foreign tax compliance services, including claims for refund, assistance with tax audits and preparation of transfer pricing documentation studies. Tax fees also consisted of tax advisory services, including assistance with advice related to acquisitions, internal restructurings and legislative updates.
Pre-Approval Policies and Procedures
Our audit also includedcommittee has adopted policies and procedures relating to the financial statement scheduleapproval of all audit and non-audit services that are to be performed by our independent registered public accounting firm to support its assessment of their independence. This policy generally provides that we will not engage our independent registered public accounting firm to render audit or non-audit services unless the service is specifically approved in advance by the audit committee or the engagement is entered into pursuant to one of the Companypre-approval procedures described below.
From time to time, our audit committee may pre-approve specified types of services that are expected to be provided to us by our independent registered public accounting firm during the next 12 months. Any such pre-approval is detailed as to the particular service or type of services to be provided and is also generally subject to a maximum dollar amount.
Our audit committee has also delegated to the chairman of the audit committee the authority to approve any audit or non-audit services to be provided to us by our independent registered public accounting firm. Any approval of services by the chairman of the audit committee pursuant to this delegated authority is reported on at the next meeting of the audit committee.
The audit committee pre-approved all of the fees billed to us by Deloitte & Touche for 2021.
47 VONAGE ANNUAL REPORT 2021
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(b) Exhibits
The exhibits listed in the Exhibit Index at Item 15. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statement schedule based on our audit. In our opinion, such financial statement schedule, when considered in relation to the financial statements takenfollowing page are filed or incorporated by reference as a whole, presents fairly, in all material respects, the information set forth therein.part of this Form 10-K/A.
/s/ DELOITTE & TOUCHE LLPITEM 16. Form 10-K Summary
Parsippany, NJ
February 27, 2018None.
4948 VONAGE ANNUAL REPORT 20172021
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Vonage Holdings Corp.
Holmdel, New Jersey 07733
The audits referred to in our report dated February 28, 2017, except for Note 3 for which is February 27, 2018, relating to the consolidated financial statements of Vonage Holdings Corp., which is contained in Item 8 of this Form 10-K also included the audit of the financial statement schedule related to the years ended December 31, 2016 and 2015 listed in the accompanying index. The financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion such financial statement schedule for the years ended December 31, 2016 and 2015, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ BDO USA, LLP
Woodbridge, New Jersey
February 28, 2017
50 VONAGE ANNUAL REPORT 2017
ITEM 15. Exhibits, Financial Statement Schedules
(a)
(1) Financial Statements. The index to our financial statements is found on page F-1 of this Form 10-K.
(2) Financial Statement Schedule. Schedule II—Valuation and Qualifying Accounts is as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| Balance at Beginning of Period |
| Additions | | Less Deductions |
| Other | | Balance at End of Period |
|
| Revenue |
| Expense |
| |
| Allowance for Doubtful Accounts: | | | | | | | | |
| Year ended December 31, 2017 | $ | 2,093 |
| $ | (1,822 | ) | $ | 1,987 |
| | $ | — |
| $ | — |
| | $ | 2,258 |
|
| Year ended December 31, 2016 | 1,091 |
| (51 | ) | 1,053 |
| | — |
| — |
| | 2,093 |
|
| Year ended December 31, 2015 | 607 |
| 492 |
| (8 | ) | | — |
| — |
| | 1,091 |
|
| Inventory Obsolescence: | | | | | | | | |
| Year ended December 31, 2017 | $ | 117 |
| $ | — |
| $ | 412 |
| | $ | (421 | ) | $ | — |
| | $ | 108 |
|
| Year ended December 31, 2016 | 686 |
| — |
| 589 |
| | (1,158 | ) | — |
| | 117 |
|
| Year ended December 31, 2015 | 181 |
| — |
| 1,882 |
| | (1,377 | ) | — |
| | 686 |
|
| Valuation Allowance for Deferred Taxes: | | | | | | | | |
| Year ended December 31, 2017 | $ | 18,546 |
| $ | — |
| $ | 3,844 |
| (1) | $ | — |
| $ | — |
| | 22,390 |
|
| Year ended December 31, 2016 | 20,456 |
| — |
| (1,910 | ) | (1) | — |
| — |
| | 18,546 |
|
| Year ended December 31, 2015 | 17,451 |
| — |
| 3,005 |
| (1) | — |
| — |
| | 20,456 |
|
(1)Amounts charged (credited) to expense represent change in valuation allowance.
(3) Exhibits.
|
| | | | | | | | |
Exhibit
Number
| | Description of Exhibit | |
| 2.1 | | | |
| 2.2 | | | |
| 2.3 | | |
2.2 | | |
2.3 | | |
2.4 | | | |
2.53.1 | | |
3.1 | | | |
| 3.2 | | | |
3.23.3 | | | |
| 4.1 | | | |
| 4.2 | | | |
10.14.3 | | | |
10.24.4 | | | |
| 4.5 | | | |
| 4.6 | | Description of Securities ((Incorporated by reference to Vonage Holding Corp.’s Annual Report on Form 10-K (File No. 001-32887) filed on February 20, 2020. | |
| 10.1 | | Nexmo Inc. 2011 Stock Plan (26)(Incorporated by reference to Vonage Holding Corp.’s Registration Statement on Form S-8 (File No. 001-32887) filed on June 29, 2016).* | |
10.310.2 | | | |
10.410.3 | | | |
10.510.4 | | | |
10.610.5 | | | |
10.710.6 | | | |
10.810.7 | | | |
10.910.8 | | | |
10.1010.9 | | | |
10.1110.10 | | | |
10.1210.11 | | |
51 VONAGE ANNUAL REPORT 2017
|
| | |
10.1310.12 | | | |
10.1410.13 | | | |
10.1510.14 | | | |
49 VONAGE ANNUAL REPORT 2021
| | | | | | | | | | | |
10.1610.15 | | | |
10.1710.16 | | |
10.18 | | | |
10.1910.17 | | | |
10.2010.18 | | | |
10.2110.19 | | | |
10.2210.20 | | | |
10.2310.21 | | | |
10.2410.22 | | | |
| 10.23 | | Second Amended and Restated Credit Agreement, dated August 13, 2014,July 31, 2018, by and among Vonage America Inc. and, Vonage Holdings Corp., as borrowers, various lenders, and JPMorgan Chase Bank, N.A., as Administrative Agent, Citizens Bank, N.A., and Bank of America, N.A. as Syndication Agent, and Silicon Valley Bank and Suntrust Bank, as Documentation Agents (19)the Lenders party thereto (Incorporated by reference to Vonage Holdings Corp.'s Current Report on Form 8-K (File No. 001-32887) filed on August 2, 2018). | |
10.2510.24 | | | |
| 10.25 | | | |
| 10.26 | | | |
| 10.27 | | Amendment No. 1 to the Second Amended and Restated Credit Agreement, dated March 11 2019, by and among Vonage America Inc., Vonage Holdings Corp., the Lenders from time to time party thereto, JPMorganJP Morgan Chase Bank, N.A., as Administrative Agent, Citizens Bank, N.A., as Syndication Agent, and Fifth Third Bank, MUFG Union Bank, N.A., Silicon Valley Bank and SunTrust Bank, as Documentation Agents. (20)the Lenders party thereto (Incorporated by reference to Vonage Holdings Corp.'s Current Report on Form 8-K (File No. 001-32887) filed on March 15, 2019). | |
10.2610.28 | | Amendment No. 12 to the Second Amended and Restated Credit Agreement, dated June 3, 2016,March 29, 2019, by and among Vonage America Inc., a Delaware corporation, Vonage Holdings Corp., Citizens Bank, N.A., Fifth Third Bank, MUFG Union Bank, N.A., Silicon Valley Bank, SunTrust Bank, Keybank National Association, Santander Bank, N.A., Capital One National Association, First Niagara Bank, N.A., and JPMorganJP Morgan Chase Bank, N.A., as Administrative Agent, (27)and the Lenders party thereto(3) (Incorporated by reference to Vonage Holding Corp.’s Quarterly Report on Form 10-Q (File No. 001-32887) filed on May 8, 2019). | |
21.110.29 | | | |
| 10.30 | | | |
| 10.31 | | | |
| 10.32 | | | |
| 10.33 | | | |
| 10.34 | | | |
| 10.35 | | | |
| 10.36 | | | |
| 10.37 | | | |
| 10.38 | | | |
| 10.39 | | | |
| 10.40 | | | |
| 10.41 | | | |
50 VONAGE ANNUAL REPORT 2021
| | | | | | | | | | | |
| 21.1 | | | |
| 23.1 | | | |
23.231.1 | | |
31.1 | | | |
| 31.2 | | | |
32.131.3 | | | |
| 31.4 | | | |
| 32.1 | | |
| |
(1)101 | Incorporated by reference to Amendment No. 1 to | The following financial information from Vonage Holdings Corp.’s Registration Statement on Form S-1 (File No. 333-131659) filed on April 7, 2006. |
| |
(2) | Incorporated by reference to Amendment No. 5 to Vonage Holdings Corp.’s Registration Statement on Form S-1 (File No. 333-131659) filed on May 8, 2006. |
| |
(3) | Incorporated by reference to Vonage Holdings Corp.’s Quarterly Report on Form 10-Q (File No. 001-32887) filed on August 4, 2006. |
| |
(4) | Incorporated by reference to Vonage Holding Corp.’s's Annual Report on Form 10-K (File No. 001-32887) filed on April 17, 2007.for the year ended December 31, 2021 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive income (Loss), (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Stockholders Equity, and (vi) Notes to the Consolidated Financial Statements. | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
* Management contract or compensatory plan or arrangement.
51 VONAGE ANNUAL REPORT 2021
APPENDIX A
VONAGE HOLDINGS CORP.
RECONCILIATION OF GAAP NET INCOME (LOSS)
TO ADJUSTED EBITDA AND TO ADJUSTED EBITDA MINUS CAPEX
(Dollars in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2021 | | 2020 | | 2019 | | |
| Net Loss | $ | (24,497) | | | $ | (36,212) | | | $ | (19,482) | | | |
| Interest expense | 28,348 | | | 32,160 | | | 32,821 | | | |
| Income tax | 4,435 | | | 4,217 | | | (6,626) | | | |
| Depreciation and amortization | 88,780 | | | 88,917 | | | 86,256 | | | |
| Amortization of costs to implement cloud computing arrangements | 3,515 | | | 2,885 | | | 1,362 | | | |
| EBITDA | 100,581 | | | 91,967 | | | 94,331 | | | |
| Share-based expense | 79,900 | | | 45,667 | | | 45,242 | | | |
| Acquisition related transaction and integration costs | 10,120 | | | — | | | 701 | | | |
Organizational transformation (1) | — | | | 5,119 | | | 14,533 | | | |
Restructuring activities (2) | 2,655 | | | 18,913 | | | — | | | |
Other non-recurring items. (3) | 4,314 | | | 8,518 | | | 3,289 | | | |
| Adjusted EBITDA | 197,570 | | | 170,184 | | | 158,096 | | | |
| Less: | | | | | | | |
| Capital expenditures | (8,996) | | | (10,571) | | | (20,273) | | | |
| Intangible assets | 256 | | | (312) | | | (318) | | | |
| Acquisition and development of software assets | (46,979) | | | (41,840) | | | (28,488) | | | |
| Adjusted EBITDA Minus Capex | $ | 141,851 | | | $ | 117,461 | | | $ | 109,017 | | | |
(1 ) The cost identified as "Organizational transformation" are related to the Company’s previously announced goal of becoming a pure-play software-as-a-service (“SaaS”) company, offering a suite of communications solutions for businesses. These costs include employee related exits including CEO succession, system change management, facility exit costs, and rebranding.
(2) Restructuring activities relate to the Company's business-wide optimization and alignment project initiated in 2020 and include employee related exits and further facility exit costs executed upon as part of the overall project.
(3) Other non-recurring items principally include certain litigation charges and other non-recurring project costs such as the review of the Consumer business and the business optimization project, both of which were initiated in 2020.
52 VONAGE ANNUAL REPORT 2021
VONAGE HOLDINGS CORP.
RECONCILIATION OF GAAP NET (LOSS) INCOME TO
NET INCOME EXCLUDING ADJUSTMENTS
(Dollars in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2021 | | 2020 | | 2019 | | |
| Net loss | $ | (24,497) | | | $ | (36,212) | | | $ | (19,482) | | | |
| Amortization of acquisition - related intangibles | 43,141 | | | 53,539 | | | 56,927 | | | |
| Amortization of costs to implement cloud computing arrangements | 3,515 | | | 2,885 | | | 1,362 | | | |
| Acquisition related transaction and integration costs | 10,120 | | | — | | | 701 | | | |
| Amortization of debt discount | 13,230 | | | 12,532 | | | 6,431 | | | |
Organizational transformation (1) | — | | | 5,119 | | | 14,533 | | | |
Restructuring activities (2) | 2,655 | | | 18,913 | | | — | | | |
Other non-recurring items (3) | 4,314 | | | 8,518 | | | 3,289 | | | |
| Tax effect on adjusting items | (20,014) | | | (21,316) | | | (17,481) | | | |
| Net income excluding adjustments | $ | 32,464 | | | $ | 43,978 | | | $ | 46,280 | | | |
| Net (loss) income per common share: | | | | | | | |
| Basic and diluted | $ | (0.10) | | | $ | (0.15) | | | $ | (0.08) | | | |
| | | | | | | |
| Weighted-average common shares outstanding: | | | | | | | |
| | | | | | | |
| Diluted | 251,500 | | | 246,082 | | | 242,018 | | | |
| Net income per common share, excluding adjustments | | | | | | | |
| Basic | $ | 0.13 | | | $ | 0.18 | | | $ | 0.19 | | | |
| Diluted | $ | 0.12 | | | $ | 0.17 | | | $ | 0.19 | | | |
| Weighted-average common shares outstanding: | | | | | | | |
| Basic | 251,500 | | | 246,082 | | | 242,018 | | | |
| Diluted | 270,831 | | | 254,874 | | | 250,034 | | | |
(1 ) The cost identified as "Organizational transformation" are related to the Company’s previously announced goal of becoming a pure-play software-as-a-service (“SaaS”) company, offering a suite of communications solutions for businesses. These costs include employee related exits including CEO succession, system change management, facility exit costs, and rebranding.
(2) Restructuring activities relate to the Company's business-wide optimization and alignment project initiated in 2020 and include employee related exits and further facility exit costs executed upon as part of the overall project.
(3) Other non-recurring items principally include certain litigation charges and other non-recurring project costs such as the review of the Consumer business and the business optimization project, both of which were initiated in 2020.
53 VONAGE ANNUAL REPORT 2021
VONAGE HOLDINGS CORP.
FREE CASH FLOW
(Dollars in thousands)
(unaudited)
| | | | | | | | | | | |
| | For the Years Ended
December 31, |
| | 2021 | | 2020 |
| Net cash provided by operating activities | $ | 158,711 | | | $ | 83,880 | |
| Less: | | | |
| Capital expenditures | (8,996) | | | (10,571) | |
| Intangible assets | 256 | | | (312) | |
| Acquisition and development of software assets | (46,979) | | | (41,840) | |
| Free cash flow | $ | 102,992 | | | $ | 31,157 | |
54 VONAGE ANNUAL REPORT 2021
| | |
(5) | Incorporated by reference to Vonage Holding Corp.’s Quarterly Report on Form 10-Q (File No. 001-32887) filed on November 14, 2007. |
| |
(6) | Incorporated by reference to Vonage Holding Corp.’s Annual Report on Form 10-K (File No. 001-32887) filed on March 17, 2008. |
| |
(7) | Incorporated by reference to Vonage Holding Corp.’s Current Report on Form 8-K (File No. 001-32887) filed on December 11, 2015. |
| |
(8) | Incorporated by reference to Vonage Holding Corp.’s Quarterly Report on Form 10-Q (File No. 001-32887) filed on August 11, 2008. |
| |
(9) | Incorporated by reference to Vonage Holding Corp.’s Quarterly Report on Form 10-Q (File No. 001-32887) filed on November 10, 2008. |
| |
(10) | Incorporated by reference to Vonage Holding Corp.’s Current Report on Form 8-K (File No. 001-32887) filed on June 6, 2013. |
| |
(11) | Incorporated by reference to the Current Report on Form 8-K (File No. 001-32887) filed by on October 10, 2013. |
| |
(12) | Incorporated by reference to Vonage Holding Corp.’s Quarterly Report on Form 10-Q (File No. 001-32887) filed on May 7, 2010. |
| |
(13) | Incorporated by reference to Vonage Holding Corp.’s Quarterly Report on Form 10-Q (File No. 001-32887) filed on November 4, 2015. |
| |
(14) | Incorporated by reference to Vonage Holding Corp.’s Current Report on Form 8-K (File No. 001-32887) filed on June 8, 2012. |
| |
(15) | Incorporated by reference to Vonage Holding Corp.’s Current Report on Form 8-K (File No. 001-32887) filed on August 20, 2015. |
| |
(16) | Incorporated by reference to Vonage Holding Corp.’s Quarterly Report on Form 10-Q (File No. 001-32887) filed on July 31, 2013. |
| |
(17) | Incorporated by reference to Vonage Holding Corp.’s Annual Report on Form 10-Q (File No. 001-32887) filed on May 7, 2015. |
| |
(18) | Incorporated by reference to Vonage Holding Corp.’s Current Report on Form 8-K (File No. 001-32887) filed on November 5, 2014. |
| |
(19) | Incorporated by reference to Vonage Holding Corp.’s Quarterly Report on Form 10-Q (File No. 001-32887) filed on November 5, 2014. |
| |
(20) | Incorporated by reference to Vonage Holding Corp.’s Quarterly Report on Form 10-Q (File No. 001-32887) filed on July 30, 2015. |
| |
(21) | Incorporated by reference to Vonage Holding Corp.’s Current Report on Form 8-K (File No. 001-32887) filed on August 4, 2008. |
| |
(22) | Incorporated by reference to Vonage Holding Corp.’s Annual Report on Form 10-K (File No. 001-32887) filed on February 13, 2015. |
| |
(23) | Incorporated by reference to Vonage Holding Corp.’s Annual Report on Form 10-K (File No. 001-32887) filed on February 12, 2016. |
52 VONAGE ANNUAL REPORT 2017
| |
(24) | Incorporated by reference to Vonage Holdings Corp.’s Quarterly Report on Form 8-K (File No. 001-32887) filed on May 5, 2016. |
| |
(25) | Incorporated by reference to Vonage Holdings Corp.’s Quarterly Report on Form 8-K (File No. 001-32887) filed on June 6, 2016. |
| |
(26) | Incorporated by reference to Vonage Holding Corp.’s Registration Statement on Form S-8 (File No. 001-32887) filed on June 29, 2016. |
| |
(27) | Incorporated by reference to Vonage Holdings Corp.’s Quarterly Report on Form 8-K (File No. 001-32887) filed on June 6, 2016. |
| |
† | Portions of this Exhibit have been omitted and filed separately with the Securities and Exchange Commission as part of an order or application for confidential treatment pursuant to the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended. |
| |
* | Management contract or compensatory plan or arrangement. |
(b) Exhibits Filed Herewith
Refer to (a)(3) above.
(c) Financial Statement Schedule
Report of Independent Registered Public Accounting Firm
Schedule II – Valuation and Qualifying Accounts.
ITEM 16. Form 10-K Summary
None.
53 VONAGE ANNUAL REPORT 2017
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Holmdel, State of New Jersey, on February 27, 2018.
| | | | | | | | | | | | | | |
| | VONAGE HOLDINGS CORP. |
| | | | |
| Dated: | April 29, 2022 | VONAGE HOLDINGS CORP.By: | | /s/ STEPHEN LASHER |
| | | | |
Dated: | February 27, 2018 | By: | | /S/ DAVID PEARSON |
| | | | David Pearson |
| | | | David T. Pearson
Stephen Lasher
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and as of the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | |
| /s/ RORY READ | | Director, Chief Executive Officer | | April 29, 2022 |
| Rory Read | | (principal executive officer) | | |
| | |
| /s/ STEPHEN LASHER | | Chief Financial Officer | | April 29, 2022 |
| Stephen Lasher | | (principal financial officer) | | |
| | |
| /S/ DAVID LEVI | | Senior Vice President and Controller | | April 29, 2022 |
| David Levi | | (principal accounting officer) | | |
| | | | |
Signature | | Title | | Date |
| | |
/S/ ALAN MASAREK | | Director, Chief Executive Officer | | February 27, 2018 |
Alan Masarek | | (principal executive officer) | | |
| | |
/S/ DAVID T. PEARSON | | Chief Financial Officer | | February 27, 2018 |
David T. Pearson | | (principal financial officer) | | |
| | |
/S/ DAVID LEVI | | Vice President and Controller | | February 27, 2018 |
David Levi | | (principal accounting officer) | | |
| | | | |
| /S/ JEFFREY A. CITRON | | Director, Chairman | | February 27, 2018April 29, 2022 |
| Jeffrey A. Citron | | | | |
| | | | |
| /S/ HAMID AKHAVAN | | Director | | April 29, 2022 |
| Hamid Akhavan | | Director | | February 27, 2018 |
| | | | |
| /S/ JAN HAUSER | | Director | | April 29, 2022 |
/S/ NAVEEN CHOPRAJan Hauser | | Director | | February 27, 2018 |
Naveen Chopra | | | | |
| /S/ PRISCILLA HUNG | | Director | | April 29, 2022 |
/S/ STEPHEN FISHERPriscilla Hung | | Director | | February 27, 2018 |
Stephen Fisher | | | | |
| | |
| /S/ CAROLYN KATZ | | Director | | February 27, 2018April 29, 2022 |
| Carolyn Katz | | | | |
| | | | |
| /S/ MICHAEL MCCONNELL | | Director | | April 29, 2022 |
| Michael McConnell | | | | |
| | | | |
| /S/ JOHN J. ROBERTS | | Director | | February 27, 2018April 29, 2022 |
| John J. Roberts | | | | |
| | |
/S/ GARY STEELE | | Director | | February 27, 2018 |
Gary Steele | | | | |
54 VONAGE ANNUAL REPORT 2017
INDEX TO FINANCIAL STATEMENTS
|
| |
| Page |
| /S/ TIEN TZUO | | Director | | April 29, 2022 |
| Tien Tzuo | |
| |
| |
| |
| |
| |
| |
| |
|
| | | | |
| /S/ STEVE WARD | | Director | | April 29, 2022 |
| Steve Ward | | | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Vonage Holdings Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Vonage Holdings Corp. (the "Company") as of December 31, 2017, the related consolidated statements of operations, comprehensive income/(loss), cash flows, and stockholders’ equity and redeemable noncontrolling interest, in the period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the year then ended, in conformity with the accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Adoption of ASU 2016-09
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for the excess tax benefit from stock-based awards prospectively beginning January 1, 2017 in accordance with the adoption of Accounting Standards Update 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Parsippany, NJ
February 27, 2018
We have served as the Company's auditor since 2017.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Vonage Holdings Corp.
Holmdel, New Jersey 07733
We have audited the accompanying consolidated balance sheets of Vonage Holdings Corp. as of December 31, 2016 and the related consolidated statements of income, comprehensive income, stockholders’ equity (deficit) and redeemable noncontrolling interest and cash flows for each of the two years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vonage Holdings Corp. as of December 31, 2016 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
Woodbridge, New Jersey
February 28, 2017, except for Note 3 for which is February 27, 2018
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Vonage Holdings Corp.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Vonage Holdings Corp. (the "Company") as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the financial statements as of and for the year ended December 31, 2017, of the Company and our report dated February 27, 2018, expressed an unqualified opinion on those financial statements and included an emphasis of a matter paragraph related to the adoption of a new accounting standard.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Parsippany, NJ
February 27, 2018
F-455 VONAGE ANNUAL REPORT 2017
2021
|
|
VONAGE HOLDINGS CORP. CONSOLIDATED BALANCE SHEETS |
VONAGE HOLDINGS CORP. CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| (In thousands, except par value) | December 31, 2017 | | December 31, 2016 |
| | | | (revised) (1) |
| Assets |
| Current assets: | | | |
| Cash and cash equivalents | $ | 31,360 |
| | $ | 29,078 |
|
| Marketable securities | — |
| | 601 |
|
| Accounts receivable, net of allowance of $2,258 and $2,093, respectively | 44,159 |
| | 36,688 |
|
| Inventory, net of allowance of $108 and $117, respectively | 2,971 |
| | 4,116 |
|
| Deferred customer acquisition costs, current | 1,089 |
| | 2,610 |
|
| Prepaid expenses | 23,763 |
| | 26,041 |
|
| Other current assets | 6,433 |
| | 3,147 |
|
| Total current assets | 109,775 |
| | 102,281 |
|
| Property and equipment, net of accumulated depreciation of $87,792 and $129,166, respectively | 46,754 |
| | 48,415 |
|
| Goodwill | 373,764 |
| | 360,363 |
|
| Software, net of accumulated amortization of $93,858 and $87,626, respectively | 22,252 |
| | 21,971 |
|
| Restricted cash | 1,967 |
| | 1,851 |
|
| Intangible assets, net of accumulated amortization of $124,573 and $88,419, respectively | 173,270 |
| | 199,256 |
|
| Deferred tax assets | 110,892 |
| | 184,210 |
|
| Other assets | 20,007 |
| | 17,319 |
|
| Total assets | $ | 858,681 |
| | $ | 935,666 |
|
| | | | |
| Liabilities and Stockholders’ Equity |
| Current liabilities: | | | |
| Accounts payable | $ | 29,766 |
| | $ | 30,751 |
|
| Accrued expenses | 85,410 |
| | 109,195 |
|
| Deferred revenue, current portion | 30,255 |
| | 32,442 |
|
| Current maturities of capital lease obligations | 140 |
| | 3,288 |
|
| Other current liabilities | 156 |
| | — |
|
| Current portion of notes payable | 18,750 |
| | 18,750 |
|
| Total current liabilities | 164,477 |
| | 194,426 |
|
| Indebtedness under revolving credit facility | 141,000 |
| | 209,000 |
|
| Notes payable, net of debt related cost and current portion | 72,765 |
| | 91,124 |
|
| Other liabilities | 7,541 |
| | 4,575 |
|
| Total liabilities | 385,783 |
| | 499,125 |
|
| | | | |
| Commitments and Contingencies (Note 11) | — |
| | — |
|
| | | | |
| Stockholders’ Equity | | | |
| Common stock, par value $0.001 per share; 596,950 shares authorized at December 31, 2017 and 2016; 298,174 and 282,319 shares issued at December 31, 2017 and 2016, respectively; 230,939 and 219,001 shares outstanding at December 31, 2017 and 2016, respectively | 298 |
| | 282 |
|
| Additional paid-in capital | 1,375,391 |
| | 1,310,847 |
|
| Accumulated deficit | (672,561 | ) | | (641,869 | ) |
| Treasury stock, at cost, 67,235 shares at December 31, 2017 and 63,318 shares at December 31, 2016 | (244,239 | ) | | (219,125 | ) |
| Accumulated other comprehensive income/(loss) | 14,009 |
| | (13,594 | ) |
| Total stockholders’ equity | 472,898 |
| | 436,541 |
|
| Total liabilities and stockholders’ equity | $ | 858,681 |
| | $ | 935,666 |
|
(1) see Note 3. Correction of Prior Period Financial Statements.
The accompanying notes are an integral part of these consolidated financial statements
F-5 VONAGE ANNUAL REPORT 2017
|
|
VONAGE HOLDINGS CORP. CONSOLIDATED STATEMENTS OF OPERATIONS |
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| (In thousands, except per share amounts) | 2017 | | 2016 | | 2015 |
| | | | (Revised) (1) | | |
| Total revenues | $ | 1,002,286 |
| | $ | 955,621 |
| | $ | 895,072 |
|
| | | | | | |
| Operating Expenses: | | | | | |
| Cost of services (excluding depreciation and amortization) | 378,960 |
| | 321,373 |
| | 261,768 |
|
| Cost of goods sold | 25,994 |
| | 33,777 |
| | 34,210 |
|
| Sales and marketing | 313,251 |
| | 330,969 |
| | 347,896 |
|
| Engineering and development | 29,630 |
| | 29,759 |
| | 27,220 |
|
| General and administrative | 122,537 |
| | 123,304 |
| | 109,153 |
|
| Depreciation and amortization | 72,523 |
| | 72,285 |
| | 61,833 |
|
| Total operating expenses | 942,895 |
| | 911,467 |
| | 842,080 |
|
| Income from operations | 59,391 |
| | 44,154 |
| | 52,992 |
|
| Other Income (Expense): | | | | | |
| Interest income | 17 |
| | 79 |
| | 89 |
|
| Interest expense | (14,868 | ) | | (13,042 | ) | | (8,786 | ) |
| Other income/(expense), net | 1,253 |
| | (346 | ) | | (842 | ) |
| Total other income/(expense), net | (13,598 | ) | | (13,309 | ) | | (9,539 | ) |
| Income from continuing operations before income tax expense | 45,793 |
| | 30,845 |
| | 43,453 |
|
| Income tax expense | (79,726 | ) | | (17,694 | ) | | (18,418 | ) |
| (Loss)/income from continuing operations | (33,933 | ) | | 13,151 |
| | 25,035 |
|
| Loss from discontinued operations | — |
| | — |
| | (1,615 | ) |
| Loss on disposal, net of taxes | — |
| | — |
| | (824 | ) |
| Discontinued operations | — |
| | — |
| | (2,439 | ) |
| Net (loss)/income | (33,933 | ) | | 13,151 |
| | 22,596 |
|
| Plus: Net loss from discontinued operations attributable to noncontrolling interest | — |
| | — |
| | 59 |
|
| Net (loss)/income attributable to Vonage | $ | (33,933 | ) | | $ | 13,151 |
| | $ | 22,655 |
|
| | | | | | |
| Net (loss)/income per common share - continuing operations: | | | | | |
| Basic | $ | (0.15 | ) | | $ | 0.06 |
| | $ | 0.12 |
|
| Diluted | $ | (0.15 | ) | | $ | 0.06 |
| | $ | 0.11 |
|
| Net loss per common share - discontinued operations attributable to Vonage: | | | | | |
| Basic | $ | — |
| | $ | — |
| | $ | (0.01 | ) |
| Diluted | $ | — |
| | $ | — |
| | $ | (0.01 | ) |
| Net (loss)/income per common share - attributable to Vonage: | | | | | |
| Basic | $ | (0.15 | ) | | $ | 0.06 |
| | $ | 0.11 |
|
| Diluted | $ | (0.15 | ) | | $ | 0.06 |
| | $ | 0.10 |
|
| | | | | | |
| Weighted-average common shares outstanding: | | | | | |
| Basic | 225,311 |
| | 215,751 |
| | 213,147 |
|
| Diluted | 225,311 |
| | 231,941 |
| | 224,110 |
|
(1) see Note 3. Correction of Prior Period Financial Statements.
The accompanying notes are an integral part of these consolidated financial statements
F-6 VONAGE ANNUAL REPORT 2017
|
|
VONAGE HOLDINGS CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) |
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| | | | (revised) (1) | | |
| Net (loss)/income | $ | (33,933 | ) | | $ | 13,151 |
| | $ | 22,596 |
|
| Other comprehensive income/(loss): | | | | | |
| Foreign currency translation adjustment, net of tax expense/(benefit) of $4,616, $(1,473), and $0, respectively | 26,637 |
| | (11,937 | ) | | 493 |
|
| Discontinued operations cumulative translation adjustment, net of tax expense of $0, $0, and $0, respectively | — |
| | — |
| | 974 |
|
| Unrealized loss on available-for-sale securities, net of tax expense of $0, $0, and $0, respectively | 1 |
| | 20 |
| | (13 | ) |
| Unrealized gain on derivatives, net of tax expense of $320, $0, and $0, respectively | 965 |
| | — |
| | — |
|
| Total other comprehensive income/(loss) | 27,603 |
| | (11,917 | ) | | 1,454 |
|
| Comprehensive (loss)/income | (6,330 | ) | | 1,234 |
| | 24,050 |
|
| | | | | | |
| Comprehensive income attributable to noncontrolling interest: | | | | | |
| Comprehensive income | — |
| | — |
| | 59 |
|
| Total comprehensive income attributable to noncontrolling interest | — |
| | — |
| | 59 |
|
| | | | | | |
| Comprehensive (loss)/income attributable to Vonage | $ | (6,330 | ) | | $ | 1,234 |
| | $ | 24,109 |
|
(1) see Note 3. Correction of Prior Period Financial Statements.
The accompanying notes are an integral part of these consolidated financial statements
F-7 VONAGE ANNUAL REPORT 2017
|
|
VONAGE HOLDINGS CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities: | | | (Revised) (1) | | (Revised) (1) |
| Net (loss)/income | $ | (33,933 | ) | | $ | 13,151 |
| | $ | 22,596 |
|
| Adjustments to reconcile net (loss)/income to net cash provided by operating activities: | | | | | |
| Depreciation and impairment charges | 34,255 |
| | 37,651 |
| | 35,620 |
|
| Amortization of intangibles | 38,056 |
| | 34,634 |
| | 26,404 |
|
| Deferred income taxes | 74,577 |
| | 12,058 |
| | 13,949 |
|
| Change in contingent consideration | — |
| | (16,472 | ) | | — |
|
| Loss on foreign currency | — |
| | — |
| | 1,358 |
|
| Allowance for doubtful accounts | 1,987 |
| | 1,053 |
| | (8 | ) |
| Allowance for obsolete inventory | 412 |
| | 589 |
| | 1,882 |
|
| Amortization of debt related costs | 1,074 |
| | 1,080 |
| | 997 |
|
| Loss on disposal of property and equipment | 212 |
| | — |
| | — |
|
| Share-based expense | 37,482 |
| | 40,682 |
| | 27,541 |
|
| Gain on sale of business | (1,879 | ) | | — |
| | — |
|
| Noncontrolling interest | — |
| | — |
| | 907 |
|
| Changes in operating assets and liabilities, net of acquisitions: | | | | | |
| Accounts receivable | (7,253 | ) | | (9,642 | ) | | 185 |
|
| Inventory | 789 |
| | 800 |
| | 2,815 |
|
| Prepaid expenses and other current assets | 3,339 |
| | (10,182 | ) | | (1,904 | ) |
| Deferred customer acquisition costs | 1,729 |
| | 1,357 |
| | 421 |
|
| Accounts payable | (664 | ) | | (13,604 | ) | | (3,830 | ) |
| Accrued expenses | (23,361 | ) | | 6,090 |
| | 9,522 |
|
| Deferred revenue | (2,584 | ) | | (2,126 | ) | | (3,682 | ) |
| Other assets and liabilities | 3,820 |
| | (3,663 | ) | | (288 | ) |
| Net cash provided by operating activities | 128,058 |
| | 93,456 |
| | 134,485 |
|
| Cash flows from investing activities: | | | | | |
| Capital expenditures | (21,915 | ) | | (26,146 | ) | | (17,323 | ) |
| Purchase of intangible assets | — |
| | (50 | ) | | (2,500 | ) |
| Purchase of marketable securities | — |
| | (5,664 | ) | | (9,982 | ) |
| Maturities and sales of marketable securities | 602 |
| | 14,991 |
| | 7,223 |
|
| Acquisition and development of software assets | (11,374 | ) | | (11,538 | ) | | (14,183 | ) |
| Acquisition of business, net of cash acquired | — |
| | (163,042 | ) | | (116,744 | ) |
| Proceeds from sale of business | 1,950 |
| | — |
| | — |
|
| Net cash used in investing activities | (30,737 | ) | | (191,449 | ) | | (153,509 | ) |
| Cash flows from financing activities: | | | | | |
| Principal payments on capital lease obligations | (5,788 | ) | | (8,583 | ) | | (3,549 | ) |
| Principal payments on notes and revolving credit facility | (101,750 | ) | | (72,812 | ) | | (47,500 | ) |
| Proceeds received from draw down of revolving credit facility and issuance of notes payable | 15,000 |
| | 181,250 |
| | 102,000 |
|
| Debt related costs | — |
| | (1,316 | ) | | (2,007 | ) |
| Common stock repurchases | (9,542 | ) | | (32,902 | ) | | (15,911 | ) |
| Employee taxes paid on withholding shares | (15,572 | ) | | (6,444 | ) | | (4,754 | ) |
| Proceeds from exercise of stock options | 21,410 |
| | 8,861 |
| | 7,172 |
|
| Net cash (used in) provided by financing activities | (96,242 | ) | | 68,054 |
| | 35,451 |
|
| Effect of exchange rate changes on cash | 1,319 |
| | 555 |
| | (316 | ) |
| Net change in cash and cash equivalents and restricted cash | 2,398 |
| | (29,384 | ) | | 16,111 |
|
| Cash and cash equivalents and restricted cash, beginning of period | 30,929 |
| | 60,313 |
| | 44,202 |
|
| Cash and cash equivalents and restricted cash, end of period | $ | 33,327 |
| | $ | 30,929 |
| | $ | 60,313 |
|
(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.
The accompanying notes are an integral part of these consolidated financial statements
F-8 VONAGE ANNUAL REPORT 2017
|
|
VONAGE HOLDINGS CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Shares Outstanding | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Treasury Stock | Accumulated Other Comprehensive Income | Redeemable Non-controlling interest | Total |
| | | | | (Revised) (1) | | | | |
| Balance at December 31, 2014 | 211,994 |
| $ | 264 |
| $ | 1,184,662 |
| $ | (677,675 | ) | $ | (159,775 | ) | $ | (3,131 | ) | $ | (848 | ) | $ | 343,497 |
|
| Stock option exercises | 5,414 |
| 5 |
| 7,167 |
| | | | | 7,172 |
|
| Share-based expense | | | 27,541 |
| | | | | 27,541 |
|
| Employee taxes paid on withholding shares | (919 | ) | |
| | (4,754 | ) | | | (4,754 | ) |
| Common stock repurchases | (3,320 | ) | | | | (15,250 | ) | | | (15,250 | ) |
| Acquisition of business | 1,111 |
| 1 |
| 5,577 |
| |
| | | 5,578 |
|
| Foreign currency translation adjustment | |
|
| | | 1,467 |
|
|
| 1,467 |
|
| Unrealized loss on available-for-sale securities | | | | | | (13 | ) | | (13 | ) |
| Net income | | | | 22,655 |
| | | 848 |
| 23,503 |
|
| Balance at December 31, 2015 | 214,280 |
| 270 |
| 1,224,947 |
| (655,020 | ) | (179,779 | ) | (1,677 | ) | — |
| 388,741 |
|
| Stock option exercises | 6,548 |
| 5 |
| 8,856 |
| | | | | 8,861 |
|
| Share-based expense | | | 40,682 |
| | | | | 40,682 |
|
| Employee taxes paid on withholding shares | (1,250 | ) | | | | (6,444 | ) | | | (6,444 | ) |
| Common stock repurchases | (7,400 | ) | | | | (32,902 | ) | | | (32,902 | ) |
| Acquisition of business | 6,823 |
| 7 |
| 36,362 |
| |
| | | 36,369 |
|
| Foreign currency translation adjustment | | | | | | (11,937 | ) |
|
| (11,937 | ) |
| Unrealized loss on available-for-sale securities | | | | | | 20 |
| | 20 |
|
Net income(1) | | | | 13,151 |
| | |
|
| 13,151 |
|
| Balance at December 31, 2016 | 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 | 15,856 |
| 16 |
| 21,394 |
| | | | | 21,410 |
|
| Share-based expense | | | 37,482 |
| | | | | 37,482 |
|
| Employee taxes paid on withholding shares | (2,319 | ) | | | | (15,572 | ) | | | (15,572 | ) |
| Common stock repurchases | (1,599 | ) | | | | (9,542 | ) | | | (9,542 | ) |
| Foreign currency translation adjustment | | | | | | 26,637 |
| | 26,637 |
|
| Unrealized loss on available-for-sale securities | | | | | | 1 |
| | 1 |
|
| Unrealized gain on derivatives | | | | | | 965 |
| | 965 |
|
| Net loss | | | | (33,933 | ) | | | | (33,933 | ) |
| Balance at December 31, 2017 | 230,939 |
| $ | 298 |
| $ | 1,375,391 |
| $ | (672,561 | ) | $ | (244,239 | ) | $ | 14,009 |
| $ | — |
| $ | 472,898 |
|
(1) see Note 3. Correction of Prior Period Financial Statements.
The accompanying notes are an integral part of these consolidated financial statements
F-9 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 1. Nature of Business
Nature of Operations
Vonage Holdings Corp. (“Vonage”, “Company”, “we”, “our”, “us”) is incorporated as a Delaware corporation. We are a leading provider of cloud communications services for businesses. We transform the way people work and businesses operate through a portfolio of cloud-based communications solutions that enable internal collaboration among employees, while also keeping companies closely connected with their customers, across any mode of communication, on any device.
For our business customers, we provide innovative, cloud-based Unified Communications as a Service, or UCaaS, solutions, comprised of integrated voice, text, video, data, collaboration, and mobile applications over our flexible, scalable Session Initiation Protocol, or SIP, based Voice over Internet Protocol, or VoIP, network. We also offer Communications Platform as a Service, or CPaaS, solutions designed to enhance the way businesses communicate with their customers by embedding communications into apps, websites and business processes. In combination, our products and services permit our business customers to communicate with their customers and employees through any cloud-connected device, in any place, at any time without the often costly investment required with on-site equipment.
We also provide a robust suite of feature-rich residential communication solutions.
Customers in the United States represented 85%, 91%, and 95% of our consolidated revenues at December 31, 2017, December 31, 2016, and December 31, 2015, respectively, with the balance in Canada, the United Kingdom, and other countries. Nexmo Inc., or 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.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with U.S. GAAP. The Accounting Standards Codification, ASC, established by the Financial Accounting Standards Board, FASB, is the source of authoritative GAAP to be applied to nongovernmental entities. In addition, the rules and interpretive releases of the Securities and Exchange Commission, SEC, under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.
The consolidated financial statements include the accounts and operations of Vonage and its wholly-owned subsidiaries for which we have a controlling interest. All intercompany balances and transactions have been eliminated in consolidation. The usual condition for a controlling financial interest is ownership of a majority of the voting interests of an entity; however, a controlling financial interest may also exist through arrangements that do not involve controlling voting interests. As such, Vonage applies the guidance of ASC 810, Consolidations, or ASC 810, to determine when an entity that is insufficiently capitalized or not controlled through its voting interests, referred to as a VIE, should be consolidated. In addition, the results of companies acquired or disposed of are included in the consolidated financial statements from the effective date of the acquisition or up to the date of disposal.
Revenue Recognition
Operating revenues consist of services revenues and customer equipment (which enables our services) and shipping revenues. The point in time at which revenues are recognized is determined in accordance with SEC Staff Accounting Bulletin, SAB, No. 104, Revenue Recognition, and ASC 605, Revenue Recognition.
At the time a customer signs up for our services, there are the following deliverables:
Providing equipment, if any, to the customer that enables our telephony services;
Providing services; and
Installation of equipment if required in the contract or terms of service.
F-10 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Activation devices are provided free of charge to our Consumer customers while VOIP enabled phones are provided for a fee to our Business customers. In most instances there are no fees collected at sign-up. We record the fees collected for shipping the equipment to the customer, if any, as shipping and handling revenue at the time of shipment.
Services Revenue
Substantially all of our revenues are services revenues, which are derived , usage based billion, and, in Vonage Enterprise, we offer domestic and international rate plans, including a variety of residential plans and mobile plans. For consumer customers in the United States, we offer domestic and international rate plans, including a variety of residential plans and mobile plans. For business customers, we offer SMB, mid-market, and enterprise customers several service plans with different pricing structures and contractual requirements ranging in duration from month-to-month to three years. In addition, we provide managed equipment to business customers for which the customers pay a monthly fee. Customers also have the opportunity to purchase premium features for additional fees. We also derive services revenues from per minute fees for international calls if not covered under a plan, including calls made via applications for mobile devices and other stand-alone products, and for any calling minutes in excess of a customer’s monthly plan limits. For a portion of our customers, monthly subscription fees are automatically charged to customers’ credit cards, debit cards or electronic check payments, or ECP, in advance and are recognized over the following month when services are provided. Revenues generated from international calls and from customers exceeding allocated call minutes under limited minute plans are recognized as services are provided, that is, as minutes are used, and are billed to a customer's credit cards, debit cards or ECP in arrears. As a result of multiple billing cycles each month, we estimate the amount of revenues earned from international calls and from customers exceeding allocated call minutes under limited minute plans but not billed from the end of each billing cycle to the end of each reporting period and record these amounts as accounts receivable. These estimates are based primarily upon historical minutes and have been consistent with our actual results.
In the United States, we charge regulatory, compliance, E-911, and intellectual property-related fees on a monthly basis to defray costs, and to cover taxes that we are charged by the suppliers of telecommunications services. These charges, along with the remittance to the relevant government entity, are recorded on a net basis. In addition, we collect Federal Universal Service Fund, or USF, fees from customers to recover our obligation to contribute to the fund, as allowed by the FCC. We recognize USF revenues on a gross basis and record the related fees in cost of services.
Services revenue also includes supplying messaging (SMS and Voice) services to customers as part of our CPaaS business. Revenue is recognized in the period when messages are sent by the customer. We also transact with providers or bulk SMS aggregators and sell services to these customers who then onsell to their customers. Since the aggregator is our customer, revenue is recognized on a gross basis with related costs included in cost of sales.
Customer Equipment and Shipping Revenue
Revenue is generated from sales of customer equipment to wholesalers or directly to customers for replacement devices, or for upgrading their device at the time of customer sign-up for which we charge an additional fee. In addition, customer equipment and shipping revenues include revenues from the sale of VoIP telephones in order to access our small and medium business services. Customer equipment and shipping revenues also include the fees that customers are charged for shipping their customer equipment to them. Customer equipment and shipping revenues include sales to our wholesalers, who subsequently resell this customer equipment to customers. Revenues are reduced for payments to wholesalers and rebates to customers to the extent of customer equipment and shipping revenues.
Cost of Services
Cost of service consists of costs that we pay to third parties such as access and interconnection charges that we pay to other companies to terminate domestic and international phone calls on the public switched telephone network. In addition, costs to lease phone numbers, to co-locate in other companies’ facilities, to provide enhanced emergency dialing capabilities to transmit 911 calls, and to provide local number portability are also included in cost of service. These costs also include taxes that we pay on telecommunications services from our suppliers or are imposed by government agencies such as USF contributions and royalties for use of third parties’ intellectual property. In addition, these costs include certain personnel and related costs for network operations and technical support that are attributable to revenue generating activities. Cost of services excludes depreciation and amortization expense of $27,308, $28,489, and $24,868 for the years ended December 31, 2017, 2016, and 2015, respectively.
Cost of Goods Sold
Cost of goods sold consists primarily of costs incurred on customer equipment for customers who subscribe through the direct sales channel in excess of activation fees. The amortization of deferred customer equipment, the cost of shipping and handling for customer equipment, and the cost of certain promotions are also included in cost of goods sold.
F-11 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of personnel and related costs for employees and contractors directly associated with our sales and marketing activities, internet advertising fees, radio and billboard advertising, public relations, commissions paid to employees, resellers and other third parties, trade shows, marketing and promotional activities, customer support, credit card fees, collections, and systems and information technology support. We expense advertising costs during the period in which they are incurred. Advertising costs included in sales and marketing were $57,703, $75,587, and $103,320 for the years ended December 31, 2017, 2016, and 2015, 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 $23,730, $22,447, and $18,350 for the years ended December 31, 2017, 2016, and 2015, respectively.
Costs for research, including predevelopment efforts prior to establishing technological feasibility of software expected to be marketed, are expensed as incurred.
Development costs are capitalized when technological feasibility has been established and anticipated future revenues support the recoverability of the capitalized amounts. Capitalization stops when the product is available for general release to customers. Due to the short time period between achieving technological feasibility and product release and the insignificant amount of costs incurred during such periods, we have not capitalized any software development, and have expensed these costs as incurred.
Restructuring Activities
For the year ended December 31, 2017, we recognized $5,101 of costs associated with restructuring activities included in general and administrative expense. This amount is primarily comprised of costs associated with severance and other employee related costs. As of December 31, 2017, $1,090 remained accrued related to restructuring activities and $4,011 was paid during 2017.
Cash, Cash Equivalents and Marketable Securities
We maintain cash with several investment grade financial institutions. Highly liquid investments, which are readily convertible into cash, with original maturities of three months or less, are recorded as cash equivalents.
Management determines the appropriate classification of our investments in debt and marketable equity securities at the time of purchase and reevaluates such designation at each balance sheet date. Our debt securities have been classified and accounted for as available for sale. In response to changes in the availability of and the yield on alternative investments as well as liquidity requirements, we may sell these securities prior to their stated maturities. These securities are carried at fair value, with the unrealized gains and losses reported as a component of other comprehensive income (loss). Any realized gains or losses on the sale of marketable securities are determined on a specific identification method, and such gains and losses are reflected as a component of other income or expense.
Certain Risks and Concentrations
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash equivalents, marketable securities, and accounts receivable. They are subject to fluctuations in both market value and yield based upon changes in market conditions, including interest rates, liquidity, general economic conditions, and conditions specific to the issuers. Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the United States. A portion of our accounts receivable represents the timing difference between when a customer’s credit card is billed and the subsequent settlement of that transaction with our credit card processors. This timing difference is generally three days for substantially all of our credit card receivables. We have never experienced any accounts receivable write-offs due to this timing difference. In addition, we collect subscription fees in advance, minimizing our accounts receivable and bad debt exposure. If a customer’s credit card, debit card or ECP is declined, we generally suspend international calling capabilities as well as their ability to incur domestic usage charges in excess of their plan minutes. Generally, if the customer’s credit card, debit card or ECP could not be successfully processed during three billing cycles, we terminate the account. In addition, we automatically charge any per minute fees to our customers’ credit card, debit card or ECP monthly in arrears. To further mitigate our bad debt exposure, a customer’s credit card, debit card or ECP will be charged in advance of their monthly billing if their international calling or overage charges exceed a certain dollar threshold.
F-12 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Inventory
Inventory consists of the cost of customer equipment and is valued at the lower of cost or market, with cost determined using the average cost method. We provide an inventory allowance for customer equipment that has been returned by customers but may not be able to be reissued to new customers or returned to the manufacturer for credit.
Property and Equipment
Property and equipment includes acquired assets and those accounted for under capital leases and consist principally of network equipment and computer hardware, software, furniture, and leasehold improvements. Company-owned equipment in use at customer premises is also included in property and equipment. Network equipment, computer hardware and furniture are stated at cost with depreciation provided using the straight-line method over the estimated useful lives of the related assets, which range from three to five years. Leasehold improvements are amortized over their estimated useful life of the related assets or the life of the lease, whichever is shorter. The cost of substantial improvements is capitalized while the cost of maintenance and repairs is charged to operating expenses as incurred. Company-owned customer premises equipment is depreciated on a straight-line basis over three years.
Our network equipment and computer hardware, which consists of routers, gateways, and servers that enable our services, is subject to technological risks and rapid market changes due to new products and services and changing customer demand. These changes may result in future adjustments to the estimated useful lives or the carrying value of these assets, or both.
Software Costs
We capitalize certain costs, such as purchased software and internally developed software that we use for customer acquisition and customer care automation tools, in accordance with FASB ASC 350-40, Internal-Use Software. Computer software is stated at cost less accumulated amortization and the estimated useful life is two to five years.
Goodwill
In accordance with ASC 350, Intangibles - Goodwill and Other, we recognize goodwill for the excess cost of an acquired business over the fair value assigned to assets acquired and liabilities assumed. Goodwill is tested for impairment on an annual basis on October 1st and, when specific circumstances dictate, between annual tests. When impaired, the carrying value of goodwill is written down to fair value. The goodwill impairment test involves evaluating qualitative information to determine if it is more than 50% likely that the fair value of a reporting unit is less than its carrying value. If such a determination is made or if an entity chooses not to perform a qualitative assessment, then the traditional two-step goodwill impairment test described below must be applied. The first step, identifying a potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step, measuring the impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss. There was no impairment of goodwill for the years ended December 31, 2017, 2016, and 2015.
Intangible Assets
Intangible assets acquired in the settlement of litigation or by direct purchase are accounted for based upon the fair value of assets received.
Purchased-intangible assets are accounted for based upon the fair value of assets received and are amortized on a straight-line or accelerated basis over the periods of economic benefit, ranging from two to ten years. We perform a review of purchased-intangible assets whenever events or changes in circumstances indicate that the useful life is shorter than we had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess the recoverability of purchased-intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life of the asset is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life. There was no impairment of purchased-intangible assets identified for the years ended December 31, 2017, 2016, and 2015.
Patents and Patent Licenses
Patent rights acquired in the settlement of litigation or by direct purchase are accounted for based upon the fair value of assets received.
F-13 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Asset Impairments
We evaluate impairment losses on long-lived assets used in operations when events and changes in circumstances indicate that the assets might be impaired. If our review indicates that the carrying value of an asset will not be recoverable, based on a comparison of the carrying value of the asset to the undiscounted future cash flows, the impairment will be measured by comparing the carrying value of the asset to its fair value. Fair value will be determined based on quoted market values, discounted cash flows or appraisals. Impairments of property and equipment are recorded in the statement of income as part of depreciation expense. There was no impairment of property and equipment identified for the years ended December 31, 2017, 2016, and 2015.
Debt Related Costs
Costs incurred in raising debt are deferred and amortized as interest expense using the effective interest method over the life of the debt. Costs associated with term loans are netted against the underlying notes payable in accordance with ASU 2015-15, "Interest-Imputation of Interest" while costs deferred associated with revolving facilities are included in other assets.
Restricted Cash and Letters of Credit
We had a cash collateralized letter of credit for $1,563 and $1,578 as of December 31, 2017 and 2016, respectively, mainly related to lease deposits for our Holmdel office. In the aggregate, cash reserves and collateralized letters of credit of $1,967 and $1,851 were recorded as long-term restricted cash at December 31, 2017 and 2016, respectively.
Derivative Financial Instruments
The Company accounts for derivative financial instruments under 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 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, or OCI, until the hedged transactions occur and are recognized in earnings.
During 2017, the Company entered into an interest rate swap to mitigate variability in earnings due to fluctuations in interest rates and has been designated and qualifies as a cash flow hedge. 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.
Income Taxes
We recognize deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of our assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. Our net deferred tax assets primarily consist of net operating loss carry forwards, or NOLs. We are required to record a valuation allowance against our net deferred tax assets if we conclude that it is more likely than not that taxable income generated in the future will be insufficient to utilize the future income tax benefit from our net deferred tax assets prior to expiration. We periodically review this conclusion, which requires significant management judgment. If we are able to conclude in a future period that a future income tax benefit from our net deferred tax assets has a greater than 50% likelihood of being realized, we are required in that period to reduce the related valuation allowance with a corresponding decrease in income tax expense. This would result in a non-cash benefit to our net income in the period of the determination. In the future, if available evidence changes our conclusion that it is more likely than not that we will utilize our net deferred tax assets prior to their expiration, we will make an adjustment to the related valuation allowance and income tax expense at that time. In subsequent periods, we would expect to recognize income tax expense equal to our pre-tax income multiplied by our effective income tax rate, an expense that was not recognized prior to the reduction of the valuation allowance. Our effective rate may differ from the federal statutory rate due, in part, to our foreign operations and certain discrete period items.
On December 22, 2017, the Tax Cuts and Jobs Act, or TCJA, was signed into law by the President of the United States. The TCJA most notably reduces the corporate tax rate from 35% to 21% along with eliminating the alternative minimum tax, or AMT, and imposing a mandatory one-time tax on foreign earnings. Under ASC 740, Income Taxes, an entity is required to recognize the effect of tax law changes during the period of enactment. As such, the Company will be reflecting the impact of this law within its December 31, 2017 financial statements. Due to the complexities of the new legislation and associated accounting considerations, SEC SAB 118 provides for an entity to utilize a provisional estimate within its financial statements for the impact of the TCJA. Based upon currently available information, the Company estimates that the enactment of the legislation will result in a charge to income tax expense of $69,378 which is primarily associated with the re-measurement of the Company’s deferred tax balances at the 21% income tax rate. The Company also reclassified the deferred tax asset related to AMT credits to receivables which are now refundable in the amount of $8,217, of which $4,108 is included in other current assets as of December 31, 2017.
F-14 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
The Company does not currently estimate a material impact associated with the repatriation tax or other facets of the TCJA. Due to the timing of the enactment and the complexity involved in applying the provisions of the TCJA, the Company has made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. Additionally, the Company is currently analyzing our global working capital and cash requirements and the potential tax liabilities attributable to a repatriation but we have yet to determine whether we plan to change our prior assessment and repatriate earnings. As such, we have not recorded any deferred taxes attributable to our investments in our foreign entities and will record the tax effects of any change in our prior assertion as we complete our analysis of the TCJA. As we collect further information and interpret the TCJA and any additional guidance issued by the U.S. Treasury Department, the IRS and other regulatory bodies, we may make adjustments to the provisional amounts. The Company will continue to analyze the effects of the TCJA on the Company’s operations and will record any adjustments associated with the enactment of the legislature during the measurement period as provided by SAB 118. The accounting for the impact of the TCJA will be completed in 2018.
We file income tax returns in the U.S. for federal and state purposes and in various foreign jurisdictions. Our federal tax return remains subject to examination by the Internal Revenue Service from 2014 to present, our New Jersey tax returns remain open from 2013 to present, our Canada tax return remains open from 2014 to present, and other domestic and foreign tax returns remain open for all periods to which those filings relate. Our Canadian corporate income tax returns for 2012 and 2013 were selected for examination by the Canada Revenue Agency. The Canada Revenue Agency concluded their audit and there were no changes. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
Business Combinations
We account for business combinations using the acquisition method of accounting. The acquisition method of accounting requires that the purchase price, including the fair value of contingent consideration, of the acquisition be allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent the Company identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. We include the results of all acquisitions in our consolidated financial statements from the date of acquisition.
Acquisition related transaction costs, such as banking, legal, accounting and other costs incurred in connection with an acquisition, are expensed as incurred in general and administrative expense.
Acquisition related integration costs include costs associated with exit or disposal activities, which do not meet the criteria of discontinued operations, including costs for employee, lease, and contract terminations, facility closing or other exit activities. Additionally, these costs include expenses directly related to integrating and reorganizing acquired businesses and include items such as employee retention costs, recruiting costs, certain moving costs, certain duplicative costs during integration and asset impairments. These costs are expensed as incurred in general and administrative expense.
Acquisition related consideration accounted for as compensation expense, such as restricted cash, restricted stock and option related costs incurred in connection with an acquisition are included in general and administrative expense.
Foreign Currency
Generally, the functional currency of our non-United States subsidiaries is the local currency. However, the functional currency of Nexmo's United States's subsidiary is the Euro. The financial statements of these subsidiaries are translated to their respective functional currency using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenues, costs, and expenses. Translation gains and losses from the Company's net investments in subsidiaries are deferred and recorded in accumulated other comprehensive income as a component of stockholders’ equity until sale or complete or substantially complete liquidation of the net investment in the foreign entity takes place. Foreign currency transaction gains or losses are reported within other income/(expense) in the Company's consolidated statements of operations. For the years ended December 31, 2017, 2016 and 2015, amounts recognized as foreign currency transaction losses were $620, $346 and $860, respectively.
F-15 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Share-Based Compensation
We account for share-based compensation in accordance with FASB ASC 718, “Compensation-Stock Compensation”. Under the fair value recognition provisions of this pronouncement, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable vesting period of the stock award on a straight-line basis. On January 1, 2017, the Company adopted ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting". Previously, excess tax benefits were recognized in additional paid-in capital on the consolidated balance sheet to the extent they reduced income taxes payable. Beginning in 2017, any excess tax benefits or shortfalls were recorded in the income tax provision upon vest or exercise. During 2017, the Company recorded a net benefit of $11 million related to excess tax benefits.
Comprehensive Income
Comprehensive income consists of net income (loss) and other comprehensive items. Other comprehensive items include changes in the fair value of derivatives, foreign currency translation adjustments and unrealized gains (losses) on available for sale securities.
Use of Estimates
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
We base our estimates on historical experience, available market information, appropriate valuation methodologies, and on various other assumptions that we believed 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.
Reclassifications
Reclassifications have been made to our consolidated financial statements for the prior year periods to conform to classification used in the current year period. The reclassifications did not affect results from operations or net assets.
Recent Accounting Pronouncements
In August 2017, FASB issued ASU 2017-12, "Derivatives and Hedging". The 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 of the hedge accounting guidance in current GAAP. It also amends the disclosures requirements by requiring a tabular disclosure related 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 ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance of this ASU. We have evaluated the impact of adopting ASU 2017-12 on our consolidated financial statements and related disclosures and have determined that it will not have a material impact on our consolidated financial statements.
In January 2017, FASB issued ASU 2017-04, "Intangibles - Goodwill and Other" which simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. This ASU is effective for an annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 will not have a material impact on our consolidated financial 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 consolidated financial statements and related disclosures.
F-16 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
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 assets and liabilities for operating leases. We will adopt these ASUs when effective. We are currently evaluating the impact of adopting ASU 2016-02 on our consolidated financial statements 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 and International Financial Reporting Standards, or IFRS, and 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 and recognized over the expected customer life. In August 2015, an ASU was issued by the FASB which deferred the effective date to annual and interim periods beginning on or after December 15, 2017. As of January 1, 2018, we have adopted the requirements of the new standard 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 as a cumulative adjustment to retained earnings.
We have finalized our evaluation the impact of the standard with respect to the terms of our revenue arrangements and the Company expects the impact of the adoption of Topic 606 to be the capitalization of incremental costs to obtain a contract of approximately $35 million to $40 million with a corresponding offset being recorded to stockholder's equity. This asset will be amortized to expense over a period of five to seven years, subject to periodic reviews for impairment and life.
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, any adjustments should be reflected 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. Upon adoption of ASU 2016-18, $716 and $20 were reclassified from investing activities and effect of exchange rate changes on cash, respectively, for the year ended December 31, 2016 and $813 and $5 were reclassified from investing activities and effect of exchange rate changes on cash, respectively, for the year ended December 31 2015. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheet to same such amounts show in the consolidated statement of cash flows: |
| | | | | | | | | | | | |
| | As of December 31, |
| | 2017 | 2016 | 2015 | 2014 |
| Cash and cash equivalents | $ | 31,360 |
| $ | 29,078 |
| $ | 57,726 |
| $ | 40,797 |
|
| Restricted cash | 1,967 |
| 1,851 |
| 2,587 |
| 3,405 |
|
| | $ | 33,327 |
| $ | 30,929 |
| $ | 60,313 |
| $ | 44,202 |
|
F-17 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
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. Early adoption is permitted for any entity in any interim or annual period. 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 January 1, 2017. 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, $6,444 and $4,754 was reclassified from operating activity to financing activity for the years ended December 31, 2016 and 2015, respectively.
In July 2015, FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory". This ASU applies to inventory that is measured using first-in, first-out, or 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, or LIFO, or the retail inventory. This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption on permitted at the beginning of an interim and annual reporting period. 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 consolidated financial statements and related disclosures.
F-18 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Note 3. Correction of Prior Period Financial Statements
In connection with the preparation of our consolidated financial statements for the quarter ended March 31, 2017, and our remediation efforts related to the material weakness in our internal control over financial reporting related to our controls over the preparation of the annual tax provision, we identified an error as of December 31, 2016 in our recognition of a deferred tax asset related to contingent consideration with vesting requirements paid in connection with the acquisition of Nexmo. Based in part upon the vesting requirements of contingent consideration, we recorded the consideration as compensation expense in general and administrative expense in our consolidated statements of operations. However, for tax purposes the contingent consideration should have been recorded as merger consideration and not deductible compensation. The correction of this error requires the reversal of the deferred tax asset on the consolidated balance sheets and related tax benefits of $4,756 as of December 31, 2016. In accordance with SAB No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we evaluated the error and determined that the related impact was not material to our results of 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 for the three months ended March 31, 2017. Accordingly, we have corrected the consolidated balance sheets as of December 31, 2016 and have corrected this error in all prior periods presented by revising the appropriate consolidated financial statements. The impact to the consolidated balance sheet as of December 31, 2016 and the consolidated statements of income for 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 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Consolidated Statements of Operations | | | | | |
| | Three Months Ended December 31, 2016 | | Year Ended December 31, 2016 |
| | (Unaudited) | | | | |
| | 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 |
|
F-19 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Note 4. Earnings Per Share
Net income or loss per share has been computed according to FASB ASC 260, “Earnings per Share”, which requires a dual presentation of basic and diluted earnings per share, or EPS. Basic EPS represents net income or loss divided by the weighted average number of common shares outstanding during a reporting period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, including stock options and restricted stock units under our 2001 Stock Incentive Plan and 2006 Incentive Plan were exercised or converted into common stock. The dilutive effect of outstanding, stock options and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amounts of average unrecognized compensation cost attributed to future services.
The following table sets forth the computation for basic and diluted net income per share:
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | | | (Revised) (1) | | |
| Numerator | | | | | |
| (Loss)/income from continuing operations | $ | (33,933 | ) | | $ | 13,151 |
| | $ | 25,035 |
|
| Discontinued operations | — |
| | — |
| | (2,439 | ) |
| Plus: Net loss from discontinued operations attributable to noncontrolling interest | — |
| | — |
| | 59 |
|
| Loss from discontinued operations attributable to Vonage | — |
| | — |
| | (2,380 | ) |
| Net (loss)/income attributable to Vonage | $ | (33,933 | ) | | $ | 13,151 |
| | $ | 22,655 |
|
| | | | | | |
| Denominator | | | | | |
| Basic weighted average common shares outstanding | 225,311 |
| | 215,751 |
| | 213,147 |
|
| Dilutive effect of stock options and restricted stock units | — |
| | 16,190 |
| | 10,963 |
|
| Diluted weighted average common shares outstanding | 225,311 |
| | 231,941 |
| | 224,110 |
|
| Basic net (loss)/income per share | | | | | |
| Basic net (loss)/income per share - from continuing operations | $ | (0.15 | ) | | $ | 0.06 |
| | $ | 0.12 |
|
| Basic net loss per share - from discontinued operations attributable to Vonage | — |
| | — |
| | (0.01 | ) |
| Basic net (loss)/income per share - attributable to Vonage | $ | (0.15 | ) | | $ | 0.06 |
| | $ | 0.11 |
|
| Diluted net income per share | | | | | |
| Diluted net (loss)/income per share - from continuing operations | $ | (0.15 | ) | | $ | 0.06 |
| | $ | 0.11 |
|
| Diluted net loss per share - from discontinued operations attributable to Vonage | — |
| | — |
| | (0.01 | ) |
| Diluted net (loss)/income per share - attributable to Vonage | $ | (0.15 | ) | | $ | 0.06 |
| | $ | 0.10 |
|
(1) see Note 3. Correction of Prior Period Financial Statements
The following shares were excluded from the calculation of diluted income per share because of their anti-dilutive effects:
|
| | | | | | | | |
| | For the years ended December 31, | |
| | 2017 |
| | 2016 |
| | 2015 |
|
| Restricted stock units | 11,928 |
| | 8,282 |
| | 5,827 |
|
| Employee stock options | 10,448 |
| | 9,030 |
| | 13,600 |
|
| | 22,376 |
| | 17,312 |
| | 19,427 |
|
F-20 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Note 5. Goodwill and Intangible Assets
Goodwill
The Company's goodwill is derived primarily from the acquisitions of Vocalocity, Telesphere, iCore, Simple Signal, and Nexmo which are included in the Company's Business segment. The following table provides a summary of the changes in the carrying amounts of goodwill:
|
| | | |
| Balance at January 1, 2016 | $ | 222,106 |
|
| Increase in goodwill related to finalization of acquisition accounting for Simple Signal | 16 |
|
| Increase in goodwill related to finalization of acquisition accounting for iCore and immaterial correction of an error discussed further below | 2,314 |
|
| Goodwill recognized for the acquisition of Nexmo on June 3, 2016 | 143,073 |
|
| Currency translation adjustments | (7,146 | ) |
| Balance at December 31, 2016 | 360,363 |
|
| Decrease in goodwill related to finalization of acquisition accounting for Nexmo | (5,482 | ) |
| Currency translation adjustments | 18,883 |
|
| Balance at December 31, 2017 | $ | 373,764 |
|
During the year ended December 31, 2016, the Company recorded an immaterial correction of an error related to the overstatement of certain deferred tax assets recorded in connection with acquisition accounting that were outside of the measurement period. The Company recognized a $2,298 decrease in deferred tax assets, net and a $2,298 increase to goodwill on the consolidated balance sheet as of December 31, 2016. Management performed an evaluation under SAB No. 108 and concluded the effect of the adjustment is immaterial to the current period’s financial statements. The correction of the error did not have an effect on our consolidated statements of operations or on our consolidated statements of cash flows for the year ended December 31, 2016.
The performance of the Company's annual impairment analysis did not result in any impairments of goodwill for the years ended December 31, 2017, 2016 and 2015, respectively.
Intangible assets, net
The Company's intangible assets as of December 31, 2017 and 2016 primarily reflect intangible assets established with the acquisitions of various companies such as customer relationships, trade names and developed technology. In addition, the Company's intangible assets include patents we have purchased and licensed, including in connection with the settlement of litigation.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | December 31, 2017 | | December 31, 2016 |
| | Useful Lives | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | | Gross Carrying Value | Accumulated Amortization | Net Carrying Value |
| Customer relationships | 7 | to | 12 | years | $ | 184,465 |
| $ | (62,072 | ) | $ | 122,393 |
| | $ | 173,187 |
| $ | (39,413 | ) | $ | 133,774 |
|
| Developed technology | 3 | to | 10 | years | 90,417 |
| (44,413 | ) | 46,004 |
| | 88,609 |
| (31,364 | ) | 57,245 |
|
| Patents and patent licenses | 3 | to | 5 | years | 20,214 |
| (16,184 | ) | 4,030 |
| | 20,214 |
| (14,667 | ) | 5,547 |
|
| Trade names | 2 | to | 5 | years | 1,708 |
| (1,356 | ) | 352 |
| | 1,820 |
| (787 | ) | 1,033 |
|
| Non-compete agreements | | 3 | | years | 1,039 |
| (548 | ) | 491 |
| | 3,845 |
| (2,188 | ) | 1,657 |
|
| Total finite-lived intangible assets | | | | | 297,843 |
| (124,573 | ) | 173,270 |
| | 287,675 |
| (88,419 | ) | 199,256 |
|
F-21 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
During the years ended December 31, 2017, 2016 and 2015, the Company recorded amortization expense of $38,056, $34,634 and $26,404, respectively. Amortization expense may vary in the future as acquisitions, dispositions and impairments, if any, occur. The total expected future annual amortization for the succeeding five years ended December 31 is as follows:
|
| | | |
| | Estimated Amortization Expense |
| 2018 | $ | 35,747 |
|
| 2019 | 32,384 |
|
| 2020 | 27,934 |
|
| 2021 | 21,985 |
|
| 2022 | 17,006 |
|
Note 6. Income Taxes
The components of income from continuing operations before income tax expense are as follows:
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| United States | $ | 39,370 |
| | $ | 31,076 |
| | $ | 38,115 |
|
| Foreign | 6,423 |
| | (231 | ) | | 5,338 |
|
| | $ | 45,793 |
| | $ | 30,845 |
| | $ | 43,453 |
|
The income tax provision from continuing operations consisted of the following amounts:
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Current: | | | | | |
| Federal | $ | (1,101 | ) | | $ | (621 | ) | | $ | (1,846 | ) |
| Foreign | (1,731 | ) | | (1,064 | ) | | (1,667 | ) |
| State and local taxes | (2,317 | ) | | (3,951 | ) | | (956 | ) |
| | $ | (5,149 | ) | | $ | (5,636 | ) | | $ | (4,469 | ) |
| Deferred: | | | | | |
| Federal | $ | (75,928 | ) | | $ | (12,550 | ) | | $ | (11,289 | ) |
| Foreign | 1,631 |
| | 2 |
| | (1,088 | ) |
| State and local taxes | (280 | ) | | 490 |
| | (1,572 | ) |
| | (74,577 | ) | | (12,058 | ) | | (13,949 | ) |
| | $ | (79,726 | ) | | $ | (17,694 | ) | | $ | (18,418 | ) |
The reconciliation between the United States federal statutory rate of 35% to the Company's effective rate is as follows:
|
| | | | | | | | |
| | For the years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| U.S. Federal statutory tax rate | 35 | % | | 35 | % | | 35 | % |
| Permanent items | 10 | % | | 10 | % | | 3 | % |
| Effect of the Tax Cuts and Jobs Act | 152 | % | | — | % | | — | % |
| Equity-based compensation | (24 | )% | | — | % | | — | % |
| State and local taxes, net of federal benefit | 5 | % | | 7 | % | | 2 | % |
| International tax (reflects effect of losses for which tax benefit not realized) | (4 | )% | | — | % | | 1 | % |
| Valuation reserve for income taxes and other | — | % | | 5 | % | | 2 | % |
| Effective tax rate | 174 | % | | 57 | % | | 43 | % |
F-22 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
For the year ended December 31, 2017, the Company's overall effective tax rate was different from the statutory rate of 35% primarily due to the impact of tax reform enacted in the United States on December 22, 2017 reducing the corporate tax rate from 35% to 21% beginning January 1, 2018. This resulted in an expense of $69,378 attributable to the re-measurement of the Company's deferred tax assets as of December 31, 2017. The Company does not currently estimate a material impact associated with the repatriation tax or other facets of the TCJA. Due to the timing of the enactment and the complexity involved in applying the provisions of the TCJA, the Company has made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. As we collect further information and interpret the TCJA and any additional guidance issued by the U.S. Treasury Department, the IRS and other regulatory bodies, we may make adjustments to the provisional amounts. The Company will continue to analyze the effects of the TCJA on the Company’s operations and will record any adjustments associated with the enactment of the legislature during the measurement period as provided by SAB 118.
On January 1, 2017, the Company adopted ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting". Previously, excess tax benefits were recognized in additional paid-in capital on the consolidated balance sheet to the extent they reduced income taxes payable. Beginning in 2017, any excess tax benefits or shortfalls were recorded in the income tax provision upon vest or exercise. During 2017, the Company recorded a net benefit of $11 million related to excess tax benefits.
For the year ended December 31, 2016, the Company's overall effective tax rate was different than the statutory rate of 35% primarily due to the permanent adjustment for the contingent consideration relating to the acquisition of Nexmo.
For the year ended December 31, 2015, the Company's overall effective tax rate was different than the statutory rate of 35% primarily due to the limitation of the deductibility of compensation expense to certain executives as well as costs related to the acquisitions which occurred during the year.
The temporary differences which gave rise to the Company's deferred tax assets consisted of the following:
|
| | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| Assets and liabilities: | | | |
| Accounts receivable and inventory allowances | $ | 553 |
| | $ | 816 |
|
| Deferred rent | 862 |
| | 630 |
|
| Contingent consideration | — |
| | 1,482 |
|
| Acquired intangible assets and property and equipment | (39,077 | ) | | (61,486 | ) |
| Accrued expenses | 5,182 |
| | 10,145 |
|
| Research and development and alternative minimum tax credit | 958 |
| | 8,039 |
|
| Stock option compensation | 17,734 |
| | 24,026 |
|
| Capital leases | 37 |
| | (7,762 | ) |
| Cumulative translation adjustments | (714 | ) | | — |
|
| Deferred revenue | 6,994 |
| | 11,362 |
|
| Derivatives | (319 | ) | | — |
|
| Net operating loss carryforwards | 141,072 |
| | 215,504 |
|
| | 133,282 |
| | 202,756 |
|
| Valuation allowance | (22,390 | ) | | (18,546 | ) |
| Deferred tax assets, net, non-current | $ | 110,892 |
| | $ | 184,210 |
|
Deferred tax assets and valuation allowance
Net deferred tax balance - As of December 31, 2017 and 2016, Vonage recorded a net deferred tax asset of $110,892 and $184,210, respectively. The Company believes that the net deferred tax assets related to its United Kingdom subsidiary Vonage Limited may not be realizable under a "more likely than not" measurement and as such, a valuation allowance has been established to reduce the asset accordingly.
NOL carryforwards - As of December 31, 2017, the Company has U.S. Federal and state NOL carryforwards of $556,368 and $146,254, respectively, which expire at various times through 2037. We have NOLs for United Kingdom tax purposes of $50,142 with no expiration date. Under Section 382 of the Internal Revenue Code, if we undergo an “ownership change” which is generally defined as a greater than 50% change by value in our equity ownership over a three-year period, our ability to use our pre-change of control NOLs and other pre-change tax attributes against our post-change income may be limited. The Section 382 limitation is applied annually so as to limit the use of our pre-change NOLs to an amount that generally equals the value of our stock immediately before the ownership change multiplied by a designated federal long-term tax-exempt rate. At December 31,
F-23 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
2017, there were no limitations on the use of our NOLs except for certain of the NOLs of Vocalocity as of the date of acquisition for which the Company has reflected in the deferred tax asset.
Valuation Allowance - As of December 31, 2017, the Company's tax effected valuation allowance was $22,390, primarily consisting of NOLs associated with Vonage Limited and state NOLs for certain legal entities.
Uncertain tax benefits
The Company had uncertain tax benefits of $1,086 and $0 as of December 31, 2017 and 2016, respectively. The Company recognizes interest and penalties related to uncertain tax benefits in income tax expense. The Company did not have any interest or penalties related to these uncertain tax benefits as of December 31, 2017 and 2016. The following table reconciles the total amounts of uncertain tax benefits:
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| Balance as of January 1 | $ | — |
| | — |
|
| Increase due to current year positions | 1,086 |
| | — |
|
| Uncertain tax benefits as of December 31 | $ | 1,086 |
| | $ | — |
|
Tax jurisdictions
Business is conducted in various countries throughout the world and is subject to tax in numerous jurisdictions. A significant number of tax returns that are filed are subject by various Federal, state and local tax authorities. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2014. With few exceptions, state and local income tax examinations are no longer open for years before 2013.
Note 7. Long-Term Debt and Revolving Credit Facility
A schedule of long-term debt at December 31, 2017 and 2016 is as follows:
|
| | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| 2.50-3.25% Term note - due 2020, net of debt related costs | 72,765 |
| | 91,124 |
|
| 2.50-3.25% Revolving credit facility - due 2020 | 141,000 |
| | 209,000 |
|
| Total long-term debt and revolving credit facility | $ | 213,765 |
| | $ | 300,124 |
|
As our credit facility described below matures in 2020, there are no future anticipated payments of debt obligations beyond June 3, 2020. As of December 31, 2017, future payments under long-term debt obligations over each of the next three years are as follows:
|
| | | |
| | 2016 Credit Facility |
| 2018 | 18,750 |
|
| 2019 | 18,750 |
|
| 2020 | 195,687 |
|
| Minimum future payments of principal | 233,187 |
|
| Less debt issuance costs | 672 |
|
| Current portion of long-term debt | 18,750 |
|
| Long-term debt and revolving credit facility | $ | 213,765 |
|
F-24 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
2016 Financing
On June 3, 2016, we entered into Amendment No. 1 to the Amended and Restated Credit Agreement, or the 2016 Credit Facility, consisting of a $125,000 term note and a $325,000 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 all of the assets of each borrower and each guarantor. The loans under the 2016 Credit Facility mature in June 2020. Principal amounts under the 2016 Credit Facility are repayable in quarterly installments of approximately $4,688 for the term note. The unused portion of our revolving credit facility incurs a 0.45% commitment fee. Such commitment fee will be reduced to 0.40% if our consolidated leverage ratio is greater than or equal to 1.50 to 1.00 and less than 2.50 to 1.00, 0.375% if our consolidated leverage ratio is greater than or equal to 0.75 to 1.00 and less than 1.50 to 1.00, and to 0.35% if our consolidated leverage ratio is less than 0.75 to 1.00. We may prepay the 2016 Credit Facility at our option at any time without premium or penalty.
The 2016 Credit Facility includes customary representations and warranties and affirmative covenants of the borrowers. In addition, the 2016 Credit Facility contains customary negative covenants, including, among other things, restrictions on the ability of us and our subsidiaries to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, consummate acquisitions, make investments, and pay dividends and other distributions. As of December 31, 2017, we were in compliance with all covenants, including financial covenants, for the 2016 Credit Facility.
Outstanding amounts under the 2016 Credit Facility, at our option, will bear interest at:
LIBOR (applicable to one-, two-, three-, six-, or twelve-month periods) plus an applicable margin equal to 2.50% if our consolidated leverage ratio is less than 0.75 to 1.00, 2.75% if our consolidated leverage ratio is greater than or equal to 0.75 to 1.00 and less than 1.50 to 1.00, 3.00% if our consolidated leverage ratio is greater than or equal to 1.50 to 1.00 and less than 2.5 to 1.00, and 3.25% if our consolidated leverage ratio is greater than or equal to 2.50 to 1.00, payable on the last day of each relevant interest period or, if the interest period is longer than three months, each day that is three months after the first day of the interest period, or
the base rate determined by reference to the highest of (a) the prime rate of JPMorgan Chase Bank, N.A., (b) the federal funds effective rate from time to time plus 0.50%, and (c) the adjusted LIBO rate applicable to one month interest periods plus 1.00%, plus an applicable margin equal to 1.50% if our consolidated leverage ratio is less than 0.75 to 1.00, 1.75% if our consolidated leverage ratio is greater than or equal to 0.75 to 1.00 and less than 1.50 to 1.00, 2.00% if our consolidated leverage ratio is greater than or equal to 1.50 to 1.00 and less than 2.50 to 1.00, and 2.25% if our consolidated leverage ratio is greater than or equal to 2.5 to 1.00, payable on the last business day of each March, June, September, and December and the maturity date of the 2016 Credit Facility.
Use of Proceeds
We used $197,750 of the net available proceeds of the 2016 Credit Facility to retire all of the debt under the credit facility entered into in 2015. We used $179,000 from our 2016 Credit Facility in connection with the acquisition of Nexmo on June 3, 2016. Remaining proceeds from the term note and the undrawn revolving credit facility under the 2016 Credit Facility will be used for general corporate purposes. We also incurred fees of $1,316 in connection with the 2016 Credit Facility, of which $395 was allocated to the term note and $921 was allocated to the revolving credit facility. The unamortized fees of $2,740 in connection with the 2015 Credit Facility were allocated as follows: $930 to the term note and $1,810 to the revolving credit facility. These fees were amortized to interest expenses over the life of the debt using the effective interest method for the term note and straight line method for the revolving credit facility.
Repayments
In 2017, we made mandatory repayment of $18,750 under the term note. In addition, we repaid the $83,000 outstanding under the revolving credit facility.
Interest Rate Swap
On July 14, 2017, we executed on three interest rate swap agreements in order to hedge the variability of expected future cash interest payments 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.
F-25 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
As of December 31, 2017, the fair market value of the swaps was $1,285, which is included in other assets and accumulated OCI on the face of our consolidated balance sheet. As of December 31, 2017, the critical terms of the swap agreements have not changed and therefore, there is no ineffectiveness to be recorded and all changes in the fair value of the interest rate swaps are recorded in accumulated OCI. The following table summarizes the effects of ASC 815 on the Company's accumulated OCI balance attributable to cash flow derivatives:
|
| | | | |
| | | Year Ended December 31 |
| | | 2017 |
| Accumulated OCI beginning balance | | $ | — |
|
| Mark-to-market of cash flow hedge accounting contracts | | 965 |
|
| Accumulated OCI ending balance, net of tax of $320 | | $ | 965 |
|
| Gains expected to be realized from accumulated OCI during the next 12 months | | $ | — |
|
NOTE 8. Fair Value of Financial Instruments
ASC 820-10 defines fair value as the amount that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820-10 describes the following three levels of inputs that may be used:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.
Level 3: Unobservable inputs when there is little or no market data available, thereby requiring an entity to develop its own assumptions. The fair value hierarchy gives the lowest priority to Level 3 inputs.
Although management believed its valuation methods were appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could have resulted in a different fair value measurement at the reporting date.
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 December 31, 2017 and December 31, 2016:
|
| | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| Level 1 Measurements | | | |
Money market fund (1) | $ | — |
| | $ | 300 |
|
| Level 2 Measurements | | | |
Available-for-sale securities (2) | $ | — |
| | $ | 601 |
|
Interest rate swaps (3) | $ | 1,285 |
| | $ | — |
|
(1) Included in cash and cash equivalents on our consolidated balance sheet.
(2) Included in marketable securities on our consolidated balance sheet.
(3) Included in other liabilities on our consolidated balance sheet.
F-26 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Fair Value of Other Financial Instruments
The carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable, approximate fair value and are classified as Level 1 because of their short 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 December 31, 2017 and 2016. We believe the fair value of our debt at December 31, 2017 and December 31, 2016 were approximately the same as their carrying amounts as market conditions, including credit spread relative to our credit rating, and illiquidity, remain relatively unchanged from the issuance date of our debt on June 3, 2016 for a similar debt instrument and are classified as Level 3 within the fair value hierarchy.
As of December 31, 2017, we did not have any other assets or liabilities that are measured and recognized at fair value on a recurring basis.
Note 9. Common Stock
As of December 31, 2017 and December 31, 2016, the Company had 596,950 shares of common stock authorized. For a detailed description of our share-based compensation programs refer to Note 10, Employee Stock Benefit Plans.
Common Stock Repurchases
On December 9, 2014, Vonage's Board of Directors authorized a program for the Company to repurchase up to $100,000 of its outstanding common stock, or the 2014 $100,000 repurchase program. Repurchases under the 2014 $100,000 repurchase program are expected to be made over a four-year period ending on December 31, 2018.
Under the 2014 $100,000 repurchase program, the timing and amount of repurchases will be determined by management based on its evaluation of market conditions, the trading price of the stock and will vary based on available capital resources and other financial and operational performance, market conditions, securities law limitations, and other factors. Repurchases may be made in the open market or through private transactions from time to time. The repurchases will be made using available cash balances. In any period, under each repurchase program, cash used in financing activities related to common stock repurchases may differ from the comparable change in stockholders' equity, reflecting timing differences between the recognition of share repurchase transactions and their settlement for cash.
We repurchased the following shares of common stock with cash resources under the 2014 $100,000 repurchase program as of December 31, 2017 and 2016:
|
| | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| Shares of common stock repurchased | 1,599 |
| | 7,400 |
|
| Value of common stock repurchased | $ | 9,510 |
| | $ | 32,762 |
|
As of December 31, 2017, $42,533 remained of our 2014 $100,000 repurchase program. The repurchase program expires on December 31, 2018 but may be suspended or discontinued at any time without notice.
In any period under the 2014 $100,000 repurchase program, cash used in financing activities related to common stock repurchases may differ from the comparable change in stockholders' equity, reflecting timing differences between the recognition of share repurchase transactions and their settlement for cash.
Net Operating Loss Rights Agreement
On June 7, 2012, we entered into a Tax Benefits Preservation Plan, or Preservation Plan, designed to preserve stockholder value and tax assets. Our ability to use our tax attributes to offset tax on U.S. taxable income would be substantially limited if there were an "ownership change" as defined under Section 382 of the U.S. Internal Revenue Code. In general, an ownership change would occur if one or more "5-percent shareholders," as defined under Section 382, collectively increase their ownership in us by more than 50 percent over a rolling three-year period.
In connection with the adoption of the Preservation Plan, our board of directors declared a dividend of one preferred share purchase right for each outstanding share of the Company’s common stock. The preferred share purchase rights were distributed to stockholders of record as of June 18, 2012, as well as to holders of the Company's common stock issued after that date, but will only be activated if certain triggering events under the Preservation Plan occur.
F-27 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Under the Preservation Plan, preferred share purchase rights will work to impose significant dilution upon any person or group which acquires beneficial ownership of 4.9% or more of the outstanding common stock, without the approval of our board of directors, from and after June 7, 2012. Stockholders that own 4.9% or more of the outstanding common stock as of the opening of business on June 7, 2012, will not trigger the preferred share purchase rights so long as they do not (i) acquire additional shares of common stock or (ii) fall under 4.9% ownership of common stock and then re-acquire shares that in the aggregate equal 4.9% or more of the common stock.
The Preservation Plan was initially set to expire no later than the close of business June 7, 2013, unless extended by our board of directors. On June 8, 2017, at the Vonage 2017 annual meeting of stockholders, stockholders ratified the continued extension of the Preservation Plan through June 30, 2019.
Note 10. Employee Stock Benefit Plans
Share-Based Compensation
Our stock option program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. Currently, we grant options from our 2015 Equity Incentive Plan. Our 2006 Incentive Plan was terminated by our board of directors in 2015 and our 2001 Stock Incentive Plan was terminated by our board of directors in 2008. As such, share-based awards are no longer granted under either the 2006 Incentive Plan and the 2001 Stock Incentive Plan. Under the 2015 Equity Incentive Plan, share-based awards can be granted to all employees, including executive officers, outside consultants, and non-employee directors. Vesting periods for share-based awards are generally three or four years for both plans. Awards granted under each plan expire in five or ten years from the effective date of grant. As of April 2010, the Company began routinely granting awards with a ten year expiration period.
The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model. The assumptions used to value options are as follows:
|
| | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Risk-free interest rate | 1.95-2.18% |
| | 1.17-2.12% |
| | 1.38-1.80% |
|
| Expected stock price volatility | 46.19-47.59% |
| | 47.52-72.50% |
| | 73.55-83.14% |
|
| Dividend yield | 0.00 | % | | 0.00 | % | | 0.00 | % |
| Expected life (in years) | 6.25 |
| | 6.25 |
| | 6.25 |
|
We estimated the volatility of our stock using historical volatility of our common stock in accordance with guidance in FASB ASC 718, “Compensation-Stock Compensation”. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options. The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding, which we derive based on our historical settlement experience. As we historically have not paid dividends, we utilize a dividend yield of 0%.
We also issue restricted performance stock units with vesting that is contingent on both total shareholder return, or TSR, compared to members of our peer group and continued service. For the market-based restricted performance stock units issued during the year ended December 31, 2017 and 2016, the payouts at vesting which are linearly interpolated between the percentiles specified below are as follows:
|
| | | | | | | | |
| Payout Schedule |
| Percentile Ranking | | % of Target Earned |
| Greater than |
| | 80% | | | | 200% |
| 50 | % | — | 80% | | 100 | % | — | 200% |
| 30 | % | — | 50% | | 50 | % | — | 100% |
| Less than |
| | 30% | | — | % | | —% |
Notwithstanding the foregoing, if our TSR is negative for the performance period, then the vesting percentage shall not exceed 100%. In addition, we reduce the shares available for grant to cover the potential payout of 200%.
F-28 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
To value these market-based restricted performance stock units, we used a Monte Carlo simulation model on the date of grant. Compensation expense for restricted stock units with performance and market conditions is recognized over the requisite service period using the straight-line method.
The assumptions used to value these market based restricted performance stock units are as follows:
|
| | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Risk-free interest rate | 1.54 | % | | 1.12 | % | | 0.98 | % |
| Expected stock price volatility | 35.99 | % | | 42.61 | % | | 40.21 | % |
| Dividend yield | 0.00 | % | | 0.00 | % | | 0.00 | % |
| Expected term (in years) | 2.79 |
| | 2.79 |
| | 2.79 |
|
Our stock incentive plans as of December 31, 2017 are summarized as follows (in thousands):
|
| | | | | | | | | | | |
| | Shares Authorized | | Shares Available for Grant | | Stock Options Outstanding | | Non-vested Restricted Stock and Restricted Stock Units |
| Options assumed from acquisition | 2,227 |
| | 377 |
| | 594 |
| | 685 |
|
| 2006 Incentive Plan | 71,669 |
| | — |
| | 8,576 |
| | 2,226 |
|
| 2015 Incentive Plan | 21,731 |
| | 11,455 |
| | 1,278 |
| | 9,017 |
|
| Total as of December 31, 2017 | 95,627 |
| | 11,832 |
| | 10,448 |
| | 11,928 |
|
2015 Equity Incentive Plan
On June 3, 2015, we adopted our 2015 Equity Incentive Plan which replaced the 2006 Incentive Plan. Shares issued under the plan may be authorized and unissued shares or may be issued shares that we have reacquired. Shares covered by awards that are forfeited, canceled or otherwise expire without having been exercised or settled, or that are settled by cash or other non-share consideration, will become available for issuance pursuant to a new award. Shares that are tendered or withheld to pay the exercise price of an award or to satisfy tax withholding obligations will not be available for issuance pursuant to new awards. Our 2015 Equity Incentive Plan will terminate on June 3, 2025. At December 31, 2017, 11,455 shares were available for future grant under the 2015 Equity Incentive Plan.
The 2015 Equity Incentive Plan permits the grant of stock options, restricted stock, restricted stock units, stock appreciation rights, performance stock, performance units, annual awards, and other awards based on, or related to, shares of our common stock. Options awarded under our 2015 Equity Incentive Plan may be non-qualified stock options or may qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended. For purposes of complying with the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended, the maximum number of shares of common stock that may be subject to stock options, stock appreciation rights, performance-based restricted stock awards, performance-based restricted stock units and performance-based stock awards granted to any participant other than a non-employee director during any calendar year will be limited to 10,000 shares of common stock for each such award type individually. The maximum number of shares of common stock that may be subject to stock options, stock appreciation rights, restricted stock awards, restricted stock units and stock awards granted to any non-employee director during any calendar year will be limited to 10,000 shares of common stock for all such award types in the aggregate. Further, the maximum amount that may become payable to any one Participant during any one calendar year under all Cash Performance Awards intended to qualify as “performance-based compensation” under Section 162(m) of the Internal Revenue Code of 1986, as amended, is limited to $5,000.
F-29 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Stock Options
The following table summarizes the activity and changes related to stock options during the year:
|
| | | | | | |
| | Stock Options Outstanding |
| | Units | | Weighted Average Exercise Price Per Unit |
| | (in thousands) | | |
| Outstanding at December 31, 2016 | 17,580 |
| | $ | 2.82 |
|
| Stock options granted | 1,022 |
| | 6.46 |
|
| Stock options exercised | (7,734 | ) | | 2.81 |
|
| Stock options canceled | (420 | ) | | 2.75 |
|
| Outstanding at December 31, 2017 | 10,448 |
| | $ | 3.19 |
|
| Exercisable at December 31, 2017 | 7,875 |
| | $ | 2.78 |
|
The weighted average exercise price of options granted was $6.46, $5.91, and $4.41 for the years ended December 31, 2017, 2016, and 2015, respectively. The aggregate intrinsic value of exercised stock options for the years ended December 31, 2017, 2016, and 2015 was $38,958, $12,142, and $8,040, respectively.
The weighted average grant date fair market value of stock options granted was $3.04, $3.01, and $3.09 for the years ended December 31, 2017, 2016, and 2015, respectively.
Restricted Stock and Restricted Stock Units
The following table summarizes the activity and changes related to restricted stock and restricted stock units during the year:
|
| | | | | | |
| | Restricted Stock and Restricted Stock Units Outstanding |
| | Units | | Weighted Average Grant Date Fair Market Value Per Unit |
| | (in thousands) | | |
| Non-vested at December 31, 2016 | 15,923 |
| | 5.04 |
|
| Restricted stocks and restricted stock units granted | 6,599 |
| | 6.79 |
|
| Restricted stocks and restricted stock units vested | (8,145 | ) | | 5.02 |
|
| Restricted stocks and restricted stock units canceled | (2,449 | ) | | 5.16 |
|
| Non-vested at December 31, 2017 | 11,928 |
| | $ | 5.94 |
|
The weighted average grant date fair market value of restricted stock and restricted stock units granted was $6.79, $4.93, and $5.37 during the year ended December 31, 2017, 2016, and 2015, respectively. The fair value of restricted stock and restricted stock units that vested during the years ended December 31, 2017, 2016, and 2015 was $41,057, $12,248, and $8,844, respectively. The aggregate intrinsic value of restricted stock units outstanding was $121,306 as of December 31, 2017.
Supplemental Information
Total share-based compensation expense recognized for the years ended December 31, 2017, 2016, and 2015 was $37,482, $40,682, and $27,541, respectively, which were recorded to cost of services and general and administrative expense in the consolidated statement of income. As of December 31, 2017, total unamortized share-based compensation was $29,642, accounting for forfeitures when they occur, which is expected to be amortized over the remaining vesting period of each grant, up to the next 48 months. Compensation costs for all share-based awards are amortized on a straight-line basis over the requisite service period. Our current policy is to issue new shares to settle the exercise of stock options and prospectively, the vesting of restricted stock units.
F-30 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Information regarding the options outstanding as of December 31, 2017 is summarized below:
|
| | | | | | | | | | | | | | | | | |
| | Stock Options Outstanding | | Stock Options Exercisable |
Range of Exercise Prices | Stock Options Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Aggregate Intrinsic Value | | Stock Options Vested and Exercisable | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Aggregate Intrinsic Value |
| | (in thousands) | (in years) | | (in thousands) | | (in thousands) | (in years) | | (in thousands) |
| $0.33 to $1.43 | 2,734 |
| | 1.32 |
| | | 2,317 |
| | 1.34 |
| |
| $1.44 to $1.99 | 12 |
| | 1.72 |
| | | 12 |
| | 1.72 |
| |
| $2.00 to $4.00 | 5,779 |
| | 3.25 |
| | | 4,773 |
| | 3.18 |
| |
| $4.01 to $7.34 | 1,923 |
| | 5.68 |
| | | 773 |
| | 4.68 |
| |
| | 10,448 |
| 4.97 | 3.19 |
| $ | 72,950 |
| | 7,875 |
| 3.96 | 2.78 |
| $ | 58,181 |
|
Retirement Plan
In March 2001, we established a 401(k) Retirement Plan, or the Retirement Plan, available to employees who meet the plan’s eligibility requirements. Participants may elect to contribute a percentage of their compensation to the Retirement Plan up to a statutory limit. We may make a contribution to the Retirement Plan in the form of a matching contribution. The employer matching contribution is 50% of each employee’s contributions not to exceed $6 in 2015, 2016, and 2017. Our expense related to the Retirement Plan was $5,411, $5,015, and $3,676 in 2017, 2016, and 2015, respectively.
Note 11. Commitments and Contingencies
Capital Leases
Assets financed under capital lease agreements are included in property and equipment in the consolidated balance sheet and related depreciation and amortization expense is included in the consolidated statements of operations.
On March 24, 2005, we entered into a lease for our headquarters in Holmdel, New Jersey. The overall lease term is twelve years and five months, which ended on August 31, 2017. At the inception of the lease in 2005, we issued a letter of credit which requires $7,350 of cash as collateral, which is classified as restricted cash. A portion of the cash was released, leaving a balance of $1,563 at December 31, 2017.
In November 2015, we entered into the fourth amendment to our headquarters lease effective December 1, 2015. The amendment extends the term of the lease for a period of seventy-four months to commence September 1, 2017 and continue through October 31, 2023. Based on the terms of the lease, it was accounted for as an operating lease when it became effective on September 1, 2017.
Operating Leases
We have entered into various non-cancelable operating lease agreements for certain of our existing office and telecommunications co-location space in the United States and for international subsidiaries with original lease periods expiring through 2026. We are committed to pay a portion of the buildings’ operating expenses as determined under the agreements.
F-31 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
At December 31, 2017, future payments under capital leases and minimum payments under non-cancelable operating leases are as follows over each of the next five years and thereafter:
|
| | | | | | | | | | | | | | | |
| | Capital Leases | | Operating Leases | | Committed Sub-lease Income | | Net Operating Leases |
| 2018 | $ | 140 |
| | $ | 12,094 |
| | $ | (613 | ) | | $ | 11,481 |
|
| 2019 | — |
| | 11,662 |
| | (613 | ) | | $ | 11,049 |
|
| 2020 | — |
| | 10,576 |
| | (613 | ) | | $ | 9,963 |
|
| 2021 | — |
| | 7,019 |
| | (613 | ) | | $ | 6,406 |
|
| 2022 | — |
| | 6,648 |
| | (613 | ) | | $ | 6,035 |
|
| Thereafter | — |
| | 13,403 |
| | (409 | ) | | $ | 12,994 |
|
| Total minimum payments required | 140 |
| | $ | 61,402 |
| | $ | (3,474 | ) | | $ | 57,928 |
|
Rent expense net of sub-lease income was $11,429, $7,495, and $6,378 for the years ended December 31, 2017, 2016 and 2015, respectively.
Stand-by Letters of Credit
We have stand-by letters of credit totaling $1,563 and $1,578, as of December 31, 2017 and 2016, respectively.
End-User Commitments
We are obligated to provide telephone services to our registered end-users. The costs related to the potential utilization of minutes sold are expensed as incurred. Our obligation to provide this service is dependent on the proper functioning of systems controlled by third-party service providers. We do not have a contractual service relationship with some of these providers.
Vendor Commitments
We have several commitments primarily commitments to vendors who will provide local inbound services, provide carrier operation, provide data center with technical supports, provide networks and telephone related services, provide marketing infrastructure and services, provide customer caller ID, provide hardware and software supports, provide web hosting service, provide electricity to our office, and license patents to us. In certain cases, we may terminate these arrangements early upon payment of specified fees. These commitments total $53,650. Of this total amount, we expect to purchase $38,956 in 2018, $11,592 in 2019, $2,106 in 2020, and $498 in 2021 and 2022, respectively. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we are contractually committed. We also purchase products and services as needed with no firm commitment. For this reason, the amounts presented do not provide a reliable indicator of our expected future cash outflows or changes in our expected cash position.
Litigation
From time to time, in addition to those identified below, we are subject to legal proceedings, claims, investigations, and proceedings in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment, and other matters. From time to time, we also receive letters or other communications from third parties inviting us to obtain patent licenses that might be relevant to our business or alleging that our services infringe upon third party patents or other intellectual property. In accordance with generally accepted accounting principles, we make a provision for a liability 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 matters 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 consolidated financial position, cash flows or results of operations.
F-32 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
IP Matters
RPost Holdings, Inc. On August 24, 2012, RPost Holdings, Inc., RPost Communications Limited, and RMail Limited, collectively, RPost, filed a lawsuit against StrongMail Systems, Inc., or 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 December 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, or 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. On November 30, 2017, the Federal Circuit rejected another AIP appeal and affirmed the Patent Office's rejection of the '247 patent. On February 22, 2018, AIP’s case was dismissed with prejudice by joint stipulation, with no payment to AIP.
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. A fifth joint status report was filed with the District Court on December 26, 2017.
DSA Promotions, LLC v. Vonage America, Inc. On September 28, 2017, DSA Promotions, LLC, or 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 November 6, 2017. On November 20, 2017, Vonage filed a motion to transfer venue to New Jersey. On December 4, 2017, DSA filed its response and brief in opposition to the motion to transfer venue.
F-33 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Regulation
Telephony services are subject to a broad spectrum of state and federal regulations. Because of the uncertainty over whether Voice over Internet Protocol 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 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, or 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, or 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. In December 2017, the FCC issued a decision reversing its prior position on net neutrality. The decision allows for paid prioritization. Numerous public interest groups and some companies are currently or expected to challenge the order in court. It is also anticipated that Congress may introduce legislation to overrule the FCC's decision and reinstate net neutrality.
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 reviewed and evaluated the FCC's proposed changes and provided input to The Voice on the Net, or VON, Coalition, an organization that works to advance regulatory policies for IP-enabled communications.
Federal - NPRM - Number Slamming
On July 13, 2017, the FCC adopted a NPRM regarding ways to protect consumers from number slamming and cramming without impeding competition or impairing the ability of consumers 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 vanity and repeater numbers - in order to better promote the equitable and efficient use of numbers, especially as afforded 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, or NOI, with respect to 911 access, routing and location in Enterprise Communication Systems. Vonage continues to monitor activity related to this NOI.
F-34 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
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 working with the VON Coalition and 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, or 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.
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.
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 hearings 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.
F-35 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
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 time, we did not collect or remit state or municipal taxes (such as sales, excise, utility, use, and ad valorem taxes), fees or surcharges, or 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 and municipal taxing and 911 agencies seeking payment of Taxes that are applied 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, and in those states we remit fees to the 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. As such, we have a reserve of $1,147 as of December 31, 2017 as our best estimate of the potential tax exposure for any retroactive assessment.
Note 12. 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 the Business segment. As a result of the sale, we recorded a gain of $1,879 within other income for the year ended December 31, 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 Inc. is a global leader in the Communications-Platform-as-a-Service, or CPaaS, segment of the cloud communications market. Nexmo provides innovative communication APIs for text messaging and voice communications, allowing developers and enterprises to embed contextual communications into mobile apps, websites and business workflows via text, social media, chat apps and voice.
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, or 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, or the "Variable Payout Amount, 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 was in the form of restricted cash, restricted stock and options held by Nexmo management and employees, or the Employee Payout Amount, subject to vesting requirements over time and to be amortized to compensation expense quarterly until vested. The purchase price was subject to adjustments pursuant to the merger agreement for closing cash and working capital of Nexmo, reductions for indebtedness and transaction expenses of Nexmo that remained unpaid as of closing, and escrow fund deposits. The aggregate consideration was allocated among Nexmo equity holders.
F-36 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
The consideration was allocated to acquisition cost as follows:
|
| | | |
| Cash paid at closing (inclusive of cash acquired of $16,094) | $ | 179,186 |
|
| Stock paid at closing | 31,591 |
|
| Variable Payout Amount (described below) | 16,472 |
|
| Employee Payout Amount (described below) | 4,779 |
|
| Acquisition Cost | $ | 232,028 |
|
In addition, Nexmo shareholders were eligible to earn a Variable Payout Amount of up to $20,000, subject to the achievement of certain performance targets during the 12 month period following the closing of the transaction. We estimated using probability weighting that the value of the contingent consideration is $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, the Company agreed to a $5,000 settlement in lieu of contingent consideration that could be potentially earned under the purchase agreement for which 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 was recorded as post-acquisition expense assuming all amounts vest, of which $31,087 was recorded as compensation expense and $572 was recorded as interest expense as continued employment is a condition of receiving consideration.
During the years ended December 31, 2017 and 2016, we incurred approximately $0 and $5,500, respectively in acquisition related transaction costs, which were recorded in general and administrative expense in the accompanying consolidated statements of income.
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 year ended December 31, 2017, when the allocation became final. Measurement period adjustments primarily reflect the tax impact of the acquisition date fair values.
F-37 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
The table below summarizes the Nexmo assets acquired and liabilities assumed as of June 3, 2016:
|
| | | | | | | | | | | |
| | 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 |
|
The intangible assets as of the closing date of the acquisition included:
|
| | | |
| Customer relationships | $ | 85,900 |
|
| Developed technologies | 13,768 |
|
| Non-compete agreements | 972 |
|
| Trade names | 1,130 |
|
| | $ | 101,770 |
|
Acquisition of iCore
On August 31, 2015 the Company, completed the acquisition of iCore Networks, Inc., or iCore, a provider of cloud-based unified communications and collaboration services, delivering voice, video and mobile communications solutions to business customers to complement the Company's rapidly growing UCaaS business further strengthening the Company's national footprint. The Company acquired iCore for $92,689 in cash consideration, which was subject to adjustments for closing cash and working capital of iCore, reductions for indebtedness and transaction expenses of iCore that remained unpaid as of closing, and escrow fund deposits.
The acquisition was accounted for using the acquisition method of accounting under which assets and liabilities of iCore 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.
F-38 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
The table below summarizes the iCore assets acquired and liabilities assumed as of August 31, 2015:
|
| | | |
| | Acquisition Date Fair Value |
| Assets | |
| Current assets: | |
|
| Cash and cash equivalents | $ | 1,014 |
|
| Current assets | 2,700 |
|
| Total current assets | 3,714 |
|
| Property and equipment | 4,437 |
|
| Intangible assets | 38,064 |
|
| Other assets | 659 |
|
| Total assets acquired | 46,874 |
|
| Liabilities | |
|
| Current liabilities: | |
|
| Accounts payable | 3,344 |
|
| Accrued expenses | 3,979 |
|
| Deferred revenue, current portion | 576 |
|
| Current maturities of capital lease obligations | 557 |
|
| Total current liabilities | 8,456 |
|
| Capital lease obligations, net of current maturities | 552 |
|
| Deferred tax liabilities, net, non-current | 8,487 |
|
| Total liabilities assumed | 17,495 |
|
| Net identifiable assets acquired | 29,379 |
|
| Goodwill | 63,310 |
|
| Total purchase price | $ | 92,689 |
|
Acquisition of Simple Signal
Pursuant to the Agreement and Plan of Merger dated March 15, 2015, by and among Vonage Holdings Corp., a Delaware corporation, Stratus Acquisition Corp., a California corporation and an indirect wholly owned subsidiary of Parent, or Merger Sub, Simple Signal Inc., a California corporation, or Simple Signal, and Simplerep, LLC, a Colorado limited liability company, as representative of the security holders of Simple Signal, on April 1, 2015, Merger Sub merged with and into Simple Signal, and Simple Signal became a wholly owned indirect subsidiary of Vonage.
Simple Signal provides cloud-based unified communications and collaboration services, delivering voice, video, and mobile communications solutions to business customers. Simple Signal is a natural complement to our expanding UCaaS business. We acquired Simple Signal for $25,578, including 1,111 shares of Vonage common stock (which shares had an aggregate value of approximately $5,578 based upon the closing stock price on April 1, 2015) and cash consideration of $20,000, subject to adjustments pursuant to the merger agreement for closing cash and working capital of Simple Signal, reductions for indebtedness and transaction expenses of Simple Signal that remained unpaid as of closing, and escrow fund deposits.
The acquisition was accounted for using the acquisition method of accounting under which assets and liabilities of Simple Signal 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.
F-39 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
The table below summarizes the Simple Signal assets acquired and liabilities assumed as of April 1, 2015: |
| | | |
| | Acquisition Date Fair Value |
| Assets | |
| Current assets: | |
| Cash and cash equivalents | $ | 53 |
|
| Current assets | 1,042 |
|
| Total current assets | 1,095 |
|
| Property and equipment | 979 |
|
| Software | 401 |
|
| Intangible assets | 6,407 |
|
| Deferred tax assets, net, non-current | 741 |
|
| Total assets acquired | 9,623 |
|
| | |
|
| Liabilities | |
|
| Current liabilities: | |
|
| Accounts payable | 785 |
|
| Accrued expenses | 593 |
|
| Deferred revenue, current portion | 370 |
|
| Total current liabilities | 1,748 |
|
| Total liabilities assumed | 1,748 |
|
| Net identifiable assets acquired | 7,875 |
|
| Goodwill | 17,703 |
|
| Total purchase price | $ | 25,578 |
|
Pro forma financial information (unaudited)
The following unaudited supplemental pro forma information presents the combined historical results of operations of Vonage and Nexmo for the years ended December 31, 2016 and 2015, as if the acquisition had been completed at January 1, 2015.
|
| | | | | | | |
| | | For the years ended |
| | | December 31, 2016 | December 31, 2015 |
| Revenue | | $ | 989,846 |
| $ | 958,416 |
|
| Net income attributable to Vonage | | 8,403 |
| 5,679 |
|
| Net income attributable to Vonage per share - basic | | 0.04 |
| 0.03 |
|
| Net income attributable to Vonage per share - diluted | | 0.04 |
| 0.02 |
|
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 2015 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, 2015 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.
F-40 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Note 13. Property and Equipment
|
| | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| Network equipment and computer hardware | $ | 79,990 |
| | $ | 93,437 |
|
| Building (under capital lease through August 31, 2017) | — |
| | 25,709 |
|
| Leasehold improvements | 36,987 |
| | 44,293 |
|
| Customer premise equipment | 12,884 |
| | 9,700 |
|
| Furniture | 4,668 |
| | 4,239 |
|
| Vehicles | 17 |
| | 203 |
|
| | 134,546 |
| | 177,581 |
|
| Less accumulated depreciation | (87,792 | ) | | (129,166 | ) |
| Property, plant and equipment | 46,754 |
| | 48,415 |
|
Note 14. Accrued Liabilities
|
| | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| Compensation and benefits, related taxes and temporary labor | $ | 30,059 |
| | $ | 35,525 |
|
| Marketing | 10,759 |
| | 12,754 |
|
| Taxes and fees | 13,353 |
| | 19,234 |
|
| Acquisition related consideration accounted for as compensation | 2,534 |
| | 6,608 |
|
| Telecommunications | 16,068 |
| | 14,896 |
|
| Settlement | — |
| | 5,000 |
|
| Other accruals | 6,782 |
| | 10,256 |
|
| Customer credits | 2,310 |
| | 2,074 |
|
| Professional fees | 1,618 |
| | 1,680 |
|
| Inventory | 1,927 |
| | 1,168 |
|
| | $ | 85,410 |
| | $ | 109,195 |
|
Note 15. Discontinued Operations
On March 31, 2015, the Company completed its previously announced exit from the Brazilian market for consumer telephony services and the associated wind down of its joint venture operations in the country. The Company incurred a loss on disposal of $824. The loss on disposal is comprised of the write-off of noncontrolling interest of $907, foreign currency loss on intercompany loan forgiveness of $783, and residual cumulative translation of $192, partially offset by a tax benefit of $1,058.
The results of operations of this discontinued operation are as follows:
|
| | | |
| | For the year ended December 31, |
| | 2015 |
| Revenues | $ | 33 |
|
| Operating expenses | 1,648 |
|
| Loss from discontinued operations | (1,615 | ) |
| Loss on disposal, net of taxes | (824 | ) |
| Net loss from discontinued operations | (2,439 | ) |
| Plus: Net loss from discontinued operations attributable to noncontrolling interest | 59 |
|
| Net loss from discontinued operations attributable to Vonage | $ | (2,380 | ) |
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Note 16. Industry Segment and Geographic Information
ASC 280, Segment Reporting, establishes reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. Under ASC 280, the method for determining what information to report is based upon the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. Our chief operating decision-makers review revenue and gross margin information for each of our reportable segments, but do not review operating expenses on a segment by segment basis. In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by the reportable segments.
Historically, we have had two operating segments that we have aggregated for reporting purposes. In 2016, as a result of the acquisition of Nexmo, we no longer meet the aggregation criteria for operating segments and now have the following two reportable segments:
Business
For our Business customers, we provide innovative, cloud-based Unified Communications as a Service, or UCaaS, solutions, comprised of integrated voice, text, video, data, collaboration, and mobile applications over our flexible, scalable SIP based Voice over Internet Protocol, or VoIP, network. Through Nexmo, the Vonage API Platform, we also offer Communications Platform as a Service, or CPaaS, solutions designed to enhance the way businesses communicate with their customers embedding communications into apps, websites and business processes. Together we have a robust set of product families tailored 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. We provide customers with multiple deployment options, designed to provide the reliability and quality of service they demand. We provide customers the ability to integrate our cloud communications platform with many cloud-based productivity and CRM solutions, including Google’s G Suite, Zendesk, Salesforce’s Sales Cloud, Oracle, Clio, and other CRM solutions. In combination, our products and services permit our business customers to communicate with their customers and employees through any cloud-connected device, in any place, at any time without the often costly investment required with on-site equipment.
Consumer
For our Consumer customers, we enable users to access and utilize our UCaaS services and features, via 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 and messaging services and other features around the world on a variety of devices.
For our segments we categorize revenues as follows:
Services revenues. Services revenues consists primarily of revenue attributable to our communication services for Consumer and UCaaS and CPaaS services for Business,
Product revenues. Product revenues includes equipment sold to customers, shipping and handling, professional services, and broadband access.
USF revenues. USF revenues represent fees passed on to customers to offset required contributions to the USF.
For our segments we categorize cost of revenues as follows:
Services cost of revenues. Services cost of revenues consists of costs associated with network operations and technical support personnel, communication origination, and termination services provided by third party carriers and excludes depreciation and amortization.
Product 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 represent contributions to the USF and related fees.
F-42 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Information about our segment results for the years ended December 31, 2017, 2016, and 2015 were as follows: |
| | | | | | | | | | | |
| Year ended December 31, 2017 | | | | | |
| | Business | | Consumer | | Total |
| Revenues | | | | | |
| Service revenues | $ | 419,591 |
| | $ | 454,340 |
| | $ | 873,931 |
|
| Product revenues (1) | 52,498 |
| | 525 |
| | 53,023 |
|
| Service and product revenues | 472,089 |
| | 454,865 |
| | 926,954 |
|
| USF revenues | 26,833 |
| | 48,499 |
| | 75,332 |
|
| Total revenues | 498,922 |
| | 503,364 |
| | 1,002,286 |
|
| | | | | | |
| Cost of revenues | | | | | |
| Service cost of revenues (2) | 190,934 |
| | 80,454 |
| | 271,388 |
|
| Product cost of revenues (1) | 51,026 |
| | 7,208 |
| | 58,234 |
|
| Service and product cost of revenues | 241,960 |
| | 87,662 |
| | 329,622 |
|
| USF cost of revenues | 26,833 |
| | 48,499 |
| | 75,332 |
|
| Total cost of revenues | 268,793 |
| | 136,161 |
| | 404,954 |
|
| | | | | | |
| Segment gross margin | | | | | |
| Service margin | 228,657 |
| | 373,886 |
| | 602,543 |
|
| Product margin | 1,472 |
| | (6,683 | ) | | (5,211 | ) |
| Gross margin ex-USF (Service and product margin) | 230,129 |
| | 367,203 |
| | 597,332 |
|
| USF margin | — |
| | — |
| | — |
|
| Total segment gross margin | $ | 230,129 |
| | $ | 367,203 |
| | $ | 597,332 |
|
|
| | | | | | | | |
| Segment gross margin % | | | | | |
| Service margin % | 54.5 | % | | 82.3 | % | | 68.9 | % |
| Gross margin ex-USF (Service and product margin %) | 48.7 | % | | 80.7 | % | | 64.4 | % |
| Segment gross margin % | 46.1 | % | | 72.9 | % | | 59.6 | % |
(1) Includes customer premise equipment, access, professional services, and shipping and handling.
(2) Excludes depreciation and amortization of $20,100, $7,208, and $27,308, respectively.
F-43 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
|
| | | | | | | | | | | |
| Year ended December 31, 2016 | | | | | |
| | Business | | Consumer | | Total |
| Revenues | | | | | |
| Service revenues | $ | 301,877 |
| | $ | 522,515 |
| | $ | 824,392 |
|
| Product revenues (1) | 52,450 |
| | 702 |
| | 53,152 |
|
| Service and product revenues | 354,327 |
| | 523,217 |
| | 877,544 |
|
| USF revenues | 22,025 |
| | 56,052 |
| | 78,077 |
|
| Total revenues | 376,352 |
| | 579,269 |
| | 955,621 |
|
| | | | | | |
| Cost of revenues | | | | | |
| Service cost of revenues (2) | 111,485 |
| | 100,054 |
| | 211,539 |
|
| Product cost of revenues (1) | 51,129 |
| | 14,394 |
| | 65,523 |
|
| Service and product cost of revenues | 162,614 |
| | 114,448 |
| | 277,062 |
|
| USF cost of revenues | 22,036 |
| | 56,052 |
| | 78,088 |
|
| Total cost of revenues | 184,650 |
| | 170,500 |
| | 355,150 |
|
| | | | | | |
| Segment gross margin | | | | | |
| Service margin | 190,392 |
| | 422,461 |
| | 612,853 |
|
| Product margin | 1,321 |
| | (13,692 | ) | | (12,371 | ) |
| Gross margin ex-USF (Service and product margin) | 191,713 |
| | 408,769 |
| | 600,482 |
|
| USF gross margin | (11 | ) | | — |
| | (11 | ) |
| Total segment gross margin | $ | 191,702 |
| | $ | 408,769 |
| | $ | 600,471 |
|
|
| | | | | | | | |
| Segment gross margin % | | | | | |
| Service margin % | 63.1 | % | | 80.9 | % | | 74.3 | % |
| Gross margin ex-USF (Service and product margin %) | 54.1 | % | | 78.1 | % | | 68.4 | % |
| Segment gross margin % | 50.9 | % | | 70.6 | % | | 62.8 | % |
(1) Includes customer premise equipment, access, professional services, and shipping and handling.
(2) Excludes depreciation and amortization of $18,820, $9,669, and $28,489, respectively.
F-44 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
|
| | | | | | | | | | | |
| Year ended December 31, 2015 | | | | | |
| | Business | | Consumer | | Total |
| Revenues | | | | | |
| Service revenues | $ | 170,489 |
| | $ | 612,822 |
| | $ | 783,311 |
|
Product revenues (1) | 35,545 |
| | 645 |
| | 36,190 |
|
| Service and product revenues | 206,034 |
| | 613,467 |
| | 819,501 |
|
| USF revenues | 12,993 |
| | 62,578 |
| | 75,571 |
|
| Total revenues | 219,027 |
| | 676,045 |
| | 895,072 |
|
| | | | | | |
| Cost of revenues | | | | | |
Service cost of revenues (2) | 44,997 |
| | 123,580 |
| | 168,577 |
|
Product cost of revenues (1) | 31,185 |
| | 20,616 |
| | 51,801 |
|
| Service and product cost of revenues | 76,182 |
| | 144,196 |
| | 220,378 |
|
| USF cost of revenues | 13,022 |
| | 62,578 |
| | 75,600 |
|
| Total cost of revenues | 89,204 |
| | 206,774 |
| | 295,978 |
|
| | | | | | |
| Segment gross margin | | | | | |
| Service margin | 125,492 |
| | 489,242 |
| | 614,734 |
|
| Product margin | 4,360 |
| | (19,971 | ) | | (15,611 | ) |
| Gross margin ex-USF (Service and product margin) | 129,852 |
| | 469,271 |
| | 599,123 |
|
| USF margin | (29 | ) | | — |
| | (29 | ) |
| Total segment gross margin | $ | 129,823 |
| | $ | 469,271 |
| | $ | 599,094 |
|
|
| | | | | | | | |
| Segment gross margin % | | | | | |
| Service margin % | 73.6 | % | | 79.8 | % | | 78.5 | % |
| Gross margin ex-USF (Service and product margin %) | 63.0 | % | | 76.5 | % | | 73.1 | % |
| Segment gross margin % | 59.3 | % | | 69.4 | % | | 66.9 | % |
(1) Includes customer premise equipment, access, professional services, and shipping and handling.
(2) Excludes depreciation and amortization of $15,819, $9,049, and $24,868, respectively.
F-45 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
A reconciliation of the total of the reportable segments' gross margin to consolidated income before provision for income taxes is as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, | |
| | 2017 | | 2016 | | 2015 |
| Total reportable gross margin | $ | 597,332 |
| | $ | 600,471 |
| | $ | 599,094 |
|
| Sales and marketing | 313,251 |
| | 330,969 |
| | 347,896 |
|
| Engineering and development | 29,630 |
| | 29,759 |
| | 27,220 |
|
| General and administrative | 122,537 |
| | 123,304 |
| | 109,153 |
|
| Depreciation and amortization | 72,523 |
| | 72,285 |
| | 61,833 |
|
| Income from operations | 59,391 |
| | 44,154 |
| | 52,992 |
|
| | | | | | |
| Interest income | 17 |
| | 79 |
| | 89 |
|
| Interest expense | (14,868 | ) | | (13,042 | ) | | (8,786 | ) |
| Other income (expense), net | 1,253 |
| | (346 | ) | | (842 | ) |
| Income before income taxes | $ | 45,793 |
| | $ | 30,845 |
| | $ | 43,453 |
|
Information about our operations by geographic location is as follows: |
| | | | | | | | | | | |
| | For the years ended December 31, | |
| | 2017 |
| | 2016 |
| | 2015 |
|
| Revenues: | | | | | |
| United States | $ | 851,413 |
| | $ | 872,147 |
| | $ | 854,706 |
|
| Canada | 30,252 |
| | 27,417 |
| | 25,935 |
|
| United Kingdom | 28,309 |
| | 17,365 |
| | 14,431 |
|
Other Countries (1) | 92,312 |
| | 38,692 |
| | — |
|
| | $ | 1,002,286 |
| | $ | 955,621 |
| | $ | 895,072 |
|
(1) No individual other international country represented greater than 9% of total revenue during the periods presented.
|
| | | | | | | |
| | December 31, 2017 |
| | December 31, 2016 |
|
| Long-lived assets: | | | |
| United States | $ | 615,432 |
| | $ | 629,269 |
|
| United Kingdom | 365 |
| | 450 |
|
| Israel | 243 |
| | 286 |
|
| | $ | 616,040 |
| | $ | 630,005 |
|
F-46 VONAGE ANNUAL REPORT 2017
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Note 17. Cash Flow Information
Detail of supplemental disclosures for cash flow and non-cash investing and financing information was
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| (In thousands) | 2017 | | 2016 | | 2015 |
| Supplemental disclosures of cash flow information: | | | | | |
| Cash paid during the periods for: | | | | | |
| Interest | $ | 13,323 |
| | $ | 11,621 |
| | $ | 7,834 |
|
| Income taxes | 6,760 |
| | 5,335 |
| | 2,516 |
|
| Non-cash investing and financing activities: | | | | | |
| Capital expenditures included in accounts payable and accrued liabilities | $ | 2,345 |
| | $ | 3,610 |
| | $ | 8,741 |
|
| Issuance of common stock in connection with acquisition of business | — |
| | 31,591 |
| | 5,578 |
|
| Purchase of intangible assets | — |
| | — |
| | 5,000 |
|
| Contingent consideration in connection with acquisition of business | — |
| | 16,472 |
| | — |
|
| Assumption of options in connection with acquisition of business | — |
| | 4,779 |
| | — |
|
Note 18. Quarterly Financial Information (Unaudited)
Refer to Note 3, Correction of Prior Period Financial Statements for correction to the quarter ended December 31, 2016 and Note 12, Acquisition of Business for a description of the effect of unusual or infrequently occurring events during the quarterly periods. Summarized unaudited quarterly financial data is as follows:
|
| | | | | | | | |
| | |
| | March 31, | June 30, | September 30, | December 31, |
| Year Ended 2017 | | | | |
| Revenue | 243,347 |
| 251,836 |
| 253,083 |
| 254,020 |
|
| Income from operations | 5,124 |
| 6,659 |
| 24,623 |
| 22,985 |
|
| Net income attributable to Vonage | 5,913 |
| 4,825 |
| 10,602 |
| (55,273 | ) |
| Net income attributable to Vonage per common share: | | | | |
| Basic net income per share | | | | |
| Basic net income per share attributable to Vonage | 0.03 |
| 0.02 |
| 0.05 |
| (0.24 | ) |
| Diluted net income per share | | | | |
| Diluted net income per share attributable to Vonage | 0.02 |
| 0.02 |
| 0.04 |
| (0.24 | ) |
| | | | | |
Year Ended 2016 (1) | | | | |
| Revenue | 226,824 |
| 233,675 |
| 248,359 |
| 246,763 |
|
| Income from operations | 18,524 |
| 5,387 |
| 15,029 |
| 5,214 |
|
| Net income attributable to Vonage | 7,931 |
| 218 |
| 7,040 |
| (2,038 | ) |
| Net income attributable to Vonage per common share: | | | | |
| Basic net income per share | | | | |
| Basic net income per share attributable to Vonage | 0.04 |
| — |
| 0.03 |
| (0.01 | ) |
| Diluted net income per share | | | | |
| Diluted net income per share attributable to Vonage | 0.04 |
| — |
| 0.03 |
| (0.01 | ) |
(1) see Note 3. Correction of Prior Period Financial Statements
F-47 VONAGE ANNUAL REPORT 2017
