VG 10-K Fiscal year ended Dec. 31, 2019

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•	Independent cloud service providers;

•	Premises-based business communication equipment providers;

•	Hosted communication services providers;

•	Traditional technology companies; and

•	Emerging competitors in technology companies.

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•	software as a service companies, contact center as a service companies, 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

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•	consolidate or merge;

•	create liens;

•	incur additional indebtedness;

•	dispose of assets;

•	consummate acquisitions;

•	make investments; or

•	pay dividends and other distributions.

•	specified maximum consolidated leverage ratio;

•	specified minimum consolidated fixed coverage charge ratio, minimum cash position and maximum capital expenditures.

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•	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;

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•	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.

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•	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; and

•	Consumer protection, including protection from unwanted telemarketing and other calls.

•	Payment of state and local E-911 fees; and

•	State Universal Service support obligations.

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•	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 Amended and Restated By-laws, 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; and

•	limit the removal of directors and the filling of director vacancies.

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•

Sales and marketing expense increased by $51,678 , or 17% , primarily due to additional costs from TokBox and NVM which were acquired in August 2018 and October 2018, respectively. Additionally, sales and marketing costs were impacted by increased spending in the current year related to media marketing initiatives, expansion of the Company's sales force, hosting the Company's first ever Vonage Campus event in October 2019, and the attendance at conferences such as Dreamforce.

•	Engineering and development expense increased $17,321 or 33% , in connection with the Company's continued transformation focused on innovation and developing further functionality related to its proprietary platform in order to support customers through the mid-market and enterprise sector.

•	General and administrative expense increased by $17,348 , or 13% , primarily due to higher personnel costs driven by the increase in headcount following the acquisition of TokBox and NVM.

•	Depreciation and amortization expense increased by $15,276 , or 22% , primarily due to the amortization of acquired intangible assets related to TokBox and NVM.

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•	Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

•	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; and

•	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.

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*	Management contract or compensatory plan or arrangement.

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•	We tested the effectiveness of controls over the Company’s accounting for the Convertible Senior Notes, and over the determination of the fair value of the liability component.

•	With the assistance of professionals in our firm having expertise in debt issuance accounting, we evaluated the Company’s conclusions regarding the accounting treatment applied to the Convertible Senior Notes.

•	With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology and the significant assumptions used to determine the fair value of the liability component, by:

–	Testing the source information underlying the fair value of the liability component and the mathematical accuracy of the calculation.

–	Developing an independent expectation of the certain of the significant assumptions, including the implied credit spread and expected volatility, and comparing our estimate to the Company’s estimate.

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Nature of Operations

Vonage Holdings Corp. (“Vonage”, “Company”, “we”, “our”, “us”) is incorporated as a Delaware corporation. At Vonage, our strategy is to continually redefine business communications. We are making communications more flexible, intelligent and personal to help enterprises the world over stay ahead. We provide unified communications, contact centers and programmable communications APIs, built on what we believe to be the world's most flexible cloud communications platform. True to our roots as a technology disruptor, our flexible approach helps us better serve the growing collaboration, communications, and customer experience needs of companies, across all communications channels.

For our Business customers, our provide innovative, cloud-based Applications, comprised of integrated voice, text, video, data, collaboration, and mobile applications over our flexible, scalable SIP based VoIP network. We also offer API solutions designed to enhance the way businesses communicate with their customers by embedding communications into apps, websites and business processes. In combination, our products and services permit our business customers to communicate with their customers and employees through any cloud-connected device, in any place, at any time without the often costly investment required with on-site equipment. We have a robust set of product families tailored to serve the full range of the business value chain, from the SMB market, through mid-market and enterprise markets. We provide customers with multiple deployment options, designed to provide the reliability and quality of service they demand. We provide customers the ability to integrate our cloud communications platform with many cloud-based productivity and CRM solutions, including Google’s G Suite, Zendesk, Salesforce’s Sales Cloud, Oracle, and Clio. With our ability to integrate these cloud-based, workplace tools, Vonage integrates the entire business communications value chain - from employee communications that maximize productivity to the direct engagement with customers that APIs provides. When combined with our MPLS network, as well as voice services over customers' broadband networks via our SmartWan solution, we create a differentiated offering.

We also provide a robust suite of feature-rich residential communication solutions that allow consumers to connect their home phones and mobile phones on one number and we offer attractive international long distance rates that help create a loyal base of satisfied customers.

Principles of Consolidation

The consolidated financial statements have been prepared in accordance with U.S. GAAP. The ASC established by the FASB is the source of authoritative GAAP to be applied to nongovernmental entities. In addition, the rules and interpretive releases of the 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.

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Revenue Recognition

Beginning January 1, 2018, our results are presented in accordance with the guidance of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) , or Topic 606. We measure revenue based upon consideration specified by contracts with our customers. Revenue is recognized when our performance obligation under the contract is satisfied by transferring control over the product or service to the customer. We derive our revenues for our Consumer and Business segments primarily from the sale of our communication services and customer equipment as further described in Note 3, Revenue Recognition . The majority of the Company's contracts with customers have a single performance obligation for service revenues. We recognize revenue with customers when control transfers, which occurs upon delivery of a service or product. For our Business segment, the typical life of a customer for service is 7 years .

Contract Acquisition Costs

We have various commission programs for which eligible employees and third parties may earn commission on sales of services and products to customers. We expect that these commission fees are recoverable and, therefore, we have capitalized these commissions as contract costs included within deferred customer acquisitions cost on our consolidated balance sheet. Capitalized commission fees are amortized to sales and marketing expense over estimated customer life, which is 7 years for Business customers. In addition, the Company expenses sales commissions for commission plans related to customer arrangements deemed less than a year and for residuals and renewals.

Cost of Revenues

Cost of revenues is primarily comprised of cost of services consisting 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 $ 38,167 , $ 27,754 , and $ 27,308 for the years ended December 31, 2019 , 2018 , and 2017 , respectively.

Also included in cost of revenues is costs of goods sold consisting 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.

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.

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

USF cost of revenues. USF cost of revenues represents contributions to the Federal USF and related fees.

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 $ 46,606 , $ 54,735 , and $ 57,703 for the years ended December 31, 2019 , 2018 , and 2017 , respectivel y.

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Engineering and Development Expenses

Engineering and development expenses predominantly include personnel and related costs for developers responsible for research and development of new products.

Costs for research, including predevelopment efforts prior to establishing technological feasibility of software expected to be marketed, are expensed as incurred.

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. 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,
	2019			2018			2017			2016
Cash and cash equivalents	$	23,620		$	5,057		$	31,360		$	29,078
Restricted cash	2,015			2,047			1,967			1,851
	$	25,635		$	7,104		$	33,327		$	30,929

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.

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 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 3 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.

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Leases

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, operating lease obligations, current portion and operating lease obligations on the Company's consolidated balance sheets. A right-of-use asset represents the Company's right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. A right-of-use asset and related liability is recognized at the commencement date of the arrangement based upon the present value of lease payments over the lease term. As most of our lease arrangements do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments.

When the Company has the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and it is reasonably certain that the Company will exercise the option, the Company will consider these options in determining the classification and measurement of the lease. Lease expense for lease payments is recognized on a straight-line basis over the term of the lease arrangement.

The Company has lease arrangements with lease and non-lease components, which are generally accounted for separately. For certain leases, the Company accounts for the lease and non-lease components as a single lease component.

As of December 31, 2019, the Company did not have any finance lease arrangements.

Software

The Company capitalizes software which primarily consists qualifying internal-use software development costs that are incurred during the application development stage. Capitalization is dependent on whether management with the relevant authority has authorized and committed to funding the project, it is probable the project will be completed, and the software will be used to perform the function intended. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Capitalized software is stated at cost less accumulated amortization and amortized on a straight-line basis over their estimated useful lives.

Cloud Computing Arrangements

The Company incurs costs to implement cloud computing arrangements that are hosted by a third party vendor. Generally, these arrangements are service contracts that do not provide the Company with the right to take possession of the software or the ability to run the software on its own hardware or contract with another party, other than the vendor, to host the software. As such, the costs incurred to implement these arrangements are capitalized into other assets on the Company's balance sheet and amortized on a straight-line basis over their estimated useful lives.

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 based on the quantitative test result. The Company early adopted ASC No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment on September 30, 2019. The new guidance eliminates Step 2 of the old goodwill impairment test. A goodwill impairment loss will instead be measured at the amount by which a reporting unit's carrying amount, including goodwill, exceeds its fair value, not to exceed the carrying amount of goodwill. The new guidance allows an entity to assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any).

The Company performed its quantitative assessment of the Applications Group and API Platform Group reporting units as of October 1, 2019 and estimated that the fair value of the reporting units' invested capital exceeded its carrying value and accordingly, no impairment needed to be recognized for the year ended December 31, 2019. There were also no impairments recorded during the years ended December 31, 2018 and 2017, respectively.

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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 twelve 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, 2019 , 2018 , and 2017 .

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 long-lived assets are recorded in the statement of operations as part of depreciation and amortization expense. There was no impairment of property and equipment identified for the years ended December 31, 2019 , 2018 , and 2017 .

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. Upon refinancing, costs associated with the new debt are either expensed or deferred and unamortized costs associated with the old debt are either written off or deferred and to be amortized as interest expense if deferred using the effective interest method over the life of the new debt per the guidance in ASC 470-50. Total costs related to the Convertible Senior Notes were allocated to the liability and equity components of the Convertible Senior Notes based on the proportion of the proceeds allocated to the debt and equity components. Costs attributable to the liability component were recorded as additional debt discount and amortized to interest expense using the effective interest method over the contractual terms of the Convertible Senior Notes. Costs attributable to the equity component were netted with the equity component in stockholders’ equity.

Restricted Cash and Letters of Credit

We had a cash collateralized letter of credit for $ 1,528 and $ 1,516 as of December 31, 2019 and 2018 , respectively, mainly related to lease deposits for our Holmdel office. In the aggregate, cash reserves and collateralized letters of credit of $ 2,015 and $ 2,047 were recorded as long-term restricted cash at December 31, 2019 and 2018 , 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 three interest rate swap agreements to mitigate variability in our 2016 Credit Facility earnings due to fluctuations in interest rates and has been designated and qualified as a cash flow hedge. Upon the refinancing in 2018, the Company de-designated the swaps of our 2016 Credit Facility and re-designated the swaps as a cash flow hedge of the 2018 Credit Facility. As such, the balances in Accumulated Other Comprehensive Income related to de-designated 2016 Credit Facility cash flow hedge were either released into earnings or continue to be deferred and amortized over the remaining life of the 2018 Credit Facility. 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.

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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 TCJA was signed into law by the President of the United States. The TCJA most notably reduced 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 was required to recognize the effect of tax law changes during the period of enactment. As such, the Company reflected the impact of this law within its December 31, 2017 financial statements. The Company recorded a charge to income tax expense of $ 69,378 related to the re-measurement of the Company’s deferred tax balances at the 21% income tax rate in its December 31, 2017 statement of operations.

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 2015 to present, our New Jersey tax returns remain open from 2014 to present, our Canada tax return remains open from 2015 to present, and other domestic and foreign tax returns remain open for all periods to which those filings relate. The Company received notice that the State of New Jersey will commence an income tax audit for the tax years ended December 31, 2014 through December 31, 2017. 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.

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Foreign Currency

Generally, the functional currency of our non-United States subsidiaries is the local currency. However, the functional currency of API'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), net in the Company's consolidated statements of operations. For the year ended December 31, 2019 , the amount recognized as foreign currency transaction loss was $ 727 , for the years ended December 31, 2018 , the amount recognized as foreign currency transaction gain was $ 145 , and for the year ended December 31, 2017, the amount recognized as foreign currency transaction loss was $ 620 , respectively.

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.  Any excess tax benefits or shortfalls are recorded in income taxes upon vest or exercise.  During the years ended December 31, 2019 , 2018 , and 2017 , the Company recorded a net benefit of $ 5 million , $ 16 million , and $ 11 million , respectively, related to excess tax benefits.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other comprehensive items. Other comprehensive items include unrealized gains (losses) on 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 December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes by removing certain exceptions currently permissible under ASC Topic 740 along with requiring entities to recognize a franchise tax that is partially based on income as an income-based tax and account for any incremental amounts incurred as non-income based tax, evaluate when a step up in the tax basis of goodwill should be considered as part of the business combination and when it should be considered a separate transaction, specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements, reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation and other minor improvements. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting ASU 2019-12 on our consolidated financial statements and disclosures.

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In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which requires the use of a new current expected credit loss ("CECL") model in estimating allowances for doubtful accounts with respect to accounts receivable, straight-line receivable and notes receivable. Receivables from revenue transactions, or trade receivables, are recognized when the corresponding revenue is recognized under ASC Topic 606, Revenue from Contracts with Customers . The CECL model requires that the Company estimates its lifetime expected credit loss with respect to these receivables and records allowances when deducted from the balance of the receivables, which represent the estimated net amounts expected to be collected. Given the generally short term nature of trade receivables, we do not expect to apply a discounted cash flow methodology. However, the Company will consider whether historical loss rates are consistent with expectations of forward-looking estimates for our trade receivables. In November 2018, the FASB issued ASU 2018-19 to clarify that operating lease receivables recorded by lessors are explicitly excluded from the scope of Topic 326. In April 2019, the FASB issued ASU 2019-04 to improve certain codifications including Topic 326 where accrued interest on receivables, recoveries, variable interest rates and prepayments are addressed. In November 2019, the FASB issued ASU 2019-11 to require entities to include expected recoveries of the amortized cost basis previously written off or expected to be written off in the valuation account for purchased financial assets with credit deterioration and clarifies and improves various aspects of the guidance for ASU 2016-13. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of this ASU will not have a material impact on our consolidated financial statements and related disclosures.

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

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other . The guidance eliminates Step 2 of the goodwill impairment test. A goodwill impairment loss will now be measured as the amount by which a reporting unit's carrying amount, including goodwill, exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption was permitted for any impairment test performed on testing dates after January 1, 2017. The Company early adopted this guidance effective September 30, 2019. The adoption of this ASU did not have a material impact on our consolidated financial statements and related disclosures.

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842) which replaces the guidance on accounting for leases in Topic 840. The new guidance increases transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance sheet for most leases and disclose key information about leasing arrangements.

The Company adopted the new standard on January 1, 2019 using a modified retrospective transition approach, which involves applying the new standard to all leases existing at the date of the initial application with any cumulative impact of the adoption recorded to retained earnings. The Company elected the practical expedient which permits the Company the use of hindsight along with package of practical expedients permitted under the transition guidance which excludes lease arrangements with an initial term of twelve month or less. Additionally, the Company carried over its assessment under ASC 840 regarding whether our contracts contained a lease arrangement, the classification of those lease, and the remaining lease terms. The Company also elected the optional transition method that allows adoption of the new standard prospectively, as of the effective date, without adjusting comparative periods presented.

The adoption of Topic 842 has had a significant effect on our balance sheet, mostly related to (1) the recognition of new right-of-use assets and new lease liabilities on our balance sheet for our existing operating leases (most notably leases of office space and co-location space); and (2) the derecognition of existing assets (most notably prepaid rent), and existing liabilities (most notably deferred rent) related to such leases. It will not materially affect our earnings or cash flows. We recorded the following transactions on January 1, 2019:

•	Recognize currently unrecognized right-of-use assets of approximately $ 57.3 million net of deferred rent and lease incentives which were previously included in other liabilities.

•	Recognize currently unrecognized lease liabilities of approximately $ 64.5 million (based on the present value of the remaining rental payments for existing operating leases).

•	Recognize an adjustment to retained earnings of $ 458 thousand related to release of deferred tax assets.

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On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Our results for reporting periods beginning after January 1, 2018 are presented in accordance with the provisions under Topic 606 but any prior period amounts have not been adjusted and continue to be reported in accordance with our revenue recognition policy.

Service Revenues

Substantially all of our revenues are service revenues, which are derived from monthly subscription fees under usage based or pay-per-use type billing arrangements, and contract-based services 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 small and medium business, 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 a monthly fee. Customers also have the opportunity to purchase premium features for additional fees. We also derive service 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 ECP in advance and are recognized over the following month as service is provided.

Service revenue also includes supplying messaging (SMS and Voice) services to customers as part of our CPaaS offerings. 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 revenues.

In the United States, we charge regulatory, compliance and intellectual property, and E-911 recovery fees on a monthly basis to defray costs and to cover taxes that we are charged by the suppliers of telecommunications services. These charges, along with the remittance to the relevant government entity, are recorded on a gross basis. In addition, we charge customers USF fees from customers to recover our obligation to contribute to the fund, as allowed by the FCC. We recognize USF revenue on a gross basis and record the related fees in cost of revenues.

Customer Equipment and Shipping Revenues

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

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Disaggregation of Revenue

The following tables detail our revenue from customers disaggregated by primary geographical market, source of revenue, and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue for our Business and Consumer segments.

	For the years ended December 31,												For the years ended December 31,
	2019												2018
	Business				Consumer				Total				Business				Consumer				Total
Primary geographical markets
United States	$	500,545			$	354,710			$	855,255			$	421,239			$	404,482			$	825,721
Canada	6,942				19,754				26,696				3,549				23,718				27,267
United Kingdom	55,721				11,002				66,723				36,992				12,438				49,430
Other Countries	240,672				—				240,672				146,364				—				146,364
	803,880				385,466				1,189,346				608,144				440,638				1,048,782
Major Sources of Revenue
Service revenues	$	719,514			$	340,462			$	1,059,976			$	526,707			$	394,389			$	921,096
Access and product revenues	46,232				264				46,496				50,068				559				50,627
USF revenues	38,134				44,740				82,874				31,369				45,690				77,059
	803,880				385,466				1,189,346				608,144				440,638				1,048,782

In addition, the Company recognizes service revenues from its customers through subscription services provided or through usage or pay-per-use type arrangements. During the year ended December 31, 2019 , the Company recognized $ 637,980 related to subscription services, $ 338,697 related to usage, and $ 212,669 related to other revenues such as USF, other regulatory fees, and credits. During the year ended December 31, 2018 , the Company recognized $ 607,823 related to subscription services, $ 247,256 related to usage, and $ 193,703 related to other revenues such as USF, other regulatory fees, and credits.

Contract Assets and Liabilities

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

	December 31, 2019				December 31, 2018
Receivables (1)	$	101,813			75,342
Contract liabilities (2)	59,464				53,447

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

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

Our deferred revenue represents the advance consideration received from customers for subscription services and is predominantly recognized over the following month as transfer of control occurs. During the year ended December 31, 2019 and 2018, the Company recognized revenue of $ 456,855 and $ 445,547 , respectively, related to its contract liabilities. We expect to recognize $ 59,464 into revenue over the next twelve months related to our deferred revenue as of December 31, 2019 .

Remaining Performance Obligation

Transaction price allocated to the remaining performance obligation represents contracted revenue that has not yet been recognized. The typical subscription term may range from 1 month to 3 years. Contracted revenue as of December 31, 2019 that has not yet been recognized was approximately $ 0.4 billion . This excludes contracts with an original expected length of less than one year. The Company expects to recognize the majority of its remaining performance obligation over the next 18 months .

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Contract Acquisition Costs

We have various commission programs for internal sales personnel and channel partners that are incremental to the acquisition of customer contracts. These costs are recorded as deferred contract acquisition costs on the consolidated balance sheets which eligible employees and third parties may earn commission on sales of services and products to customers. We expect that these commission fees are recoverable and, therefore, we have capitalized $ 68,982 and $ 49,636 as contract costs, net of accumulated amortization, as of December 31, 2019 and December 31, 2018 , respectively, included within deferred customer acquisitions costs, current portion and deferred customer acquisition costs on our consolidated balance sheet. In addition, we established a deferred tax liability associated with the transition asset of $ 9,636 upon the adoption of Topic 606 on January 1,2018. Capitalized commission fees are amortized to sales and marketing expense over the estimated customer life, which is seven years for Business customers. During the year ended December 31, 2019 and 2018 , the amounts amortized to sales and marketing were $ 11,359 and $ 10,287 , respectively. There were no impairment losses recognized in relation to the costs capitalized for the years ended December 31, 2019 and December 31, 2018 . In addition, the Company expenses sales commissions for commission plans related to customer arrangements deemed less than a year and for residuals and renewals.

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Acquisition of NewVoiceMedia

On October 31, 2018, the Company acquired 100 % of the issued and outstanding shares of NVM, a cloud CCaaS provider, for a purchase price of $ 350,179 paid in cash. NVM is a private limited company organized under the laws of England & Wales. Adding NVM's contact center solutions to its existing suite of products will enable the Company to offer a full array of cloud business communications solutions delivered through owned technology.

The acquisition was recorded as a business combination under ASC 805, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair value on the acquisition date. The accounting for the business combination was completed as of October 31, 2019, at which point the fair values became final.

Under the terms of the offer, NVM shareholders received cash in the amount of approximately $ 341 million (approximately £ 260 million based on a 1.31335 GBP to USD exchange rate as of September 18, 2018) shortly after completion of the offer and the Company paid transactions costs incurred by NVM of approximately $ 9 million on the date of the acquisition.

The table below summarizes the NVM assets acquired and liabilities assumed as of October 31, 2018:

	Preliminary Acquisition Date Fair Value as of December 31, 2018			Measurement Period Adjustments			Final Acquisition Date Fair Value
Assets
Cash and cash equivalents	$	1,994					$	1,994
Accounts receivable	13,747			( 1,448		)	$	12,299
Other current assets	3,907			( 565		)	$	3,342
Property and equipment	3,474						$	3,474
Intangible assets	154,300						$	154,300
Other assets	378						$	378
Total assets acquired	177,800			( 2,013		)	175,787
Liabilities
Accounts payable	4,712						4,712
Accrued expenses	4,145			333			4,478
Deferred tax liabilities	7,756			( 598		)	7,158
Deferred revenue	22,000			800			22,800
Total liabilities assumed	38,613			535			39,148
Net identifiable assets acquired	139,187			( 2,548		)	136,639
Goodwill	210,992			2,548			213,540
Total purchase price	$	350,179		$	—		$	350,179

The fair values of intangible assets at the acquisition date were measured primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820. The fair values of the trade name, customer relationships and developed technology were determined utilizing variations of the income approach where the expected future cash flows resulting from the acquired identifiable intangible assets were reduced by operating costs and charges for contributory assets and then discounted to present value at the weighted average cost of capital.

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The Company recorded goodwill of $ 213,540 which is attributable to the Business segment and is not deductible for tax purposes. The factors that resulted in goodwill arising from the acquisition include the revenues and synergies anticipated with the ability to provide a contact center solution to our existing suite of cloud communication services along with a skilled workforce proficient in API development. The Company also recorded intangible assets of $ 154.3 million comprised of trade name of $ 5.3 million , customer relationships of $ 87 million , and developed technology of $ 62 million . In addition, the Company incurred and expensed acquisition related transaction costs included in general and administrative expense related to the acquisition of NVM of $ 253 and $ 9,627 for the years ended December 31, 2019 and 2018, respectively.

Supplemental Pro Forma Information (unaudited)

The following supplemental pro forma information represents the results of operations if Vonage had acquired NVM on January 1, 2018.

		For the year ended
		December 31, 2018
Revenue		$	1,105,674
Net loss		( 17,475		)
Loss per share - basic		( 0.07		)
Loss per share - diluted		( 0.07		)

The pro forma information has been adjusted to include the pro-forma impact of amortization of intangible assets based on the purchase price allocations. The pro forma data has also been adjusted to eliminate non-recurring transaction costs as well as the related tax impact of pro forma adjustments. There were no transactions between Vonage and NVM. The pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings or any related integration costs.

Acquisition of TokBox

On August 1, 2018, the Company acquired 100 % of the issued and outstanding shares of TokBox for a purchase price of $ 32,906 paid in cash. San Francisco-based TokBox develops and operates the OpenTok Platform and is a provider in the WebRTC programmable video segment of the cloud communications market which will compliment the Company's existing portfolio of programmable communications.

The acquisition was recorded as a business combination under ASC 805, with identifiable assets acquired and liabilities assumed provisionally recorded at their estimated fair value on the acquisition date. The accounting for the business combination was completed as of June 30, 2019, at which point the fair values became final.

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The table below summarizes the TokBox assets acquired and liabilities assumed as of August 1, 2018:

	Acquisition Date Fair Value
Assets
Cash and cash equivalents	$	557
Current assets	2,205
Property and equipment	124
Intangible assets	15,602
Deferred tax asset	92
Restricted cash	50
Total assets acquired	18,630
Liabilities
Accounts payable	371
Accrued expenses	6,003
Total liabilities assumed	6,374
Net identifiable assets acquired	12,256
Goodwill	20,650
Total purchase price	$	32,906

The Company recorded goodwill of $ 20,650 which is attributable to the Business segment and is deductible for tax purposes. The factors that resulted in goodwill arising from the acquisition include the revenues expected to be achieved by incorporating a video feature in the Company's API platform along with a skilled workforce proficient in API development. The Company also recorded intangible assets of $ 15,602 comprised of customer relationships of $ 5,020 and developed technology of $ 10,582 .

Supplemental Pro Forma Information (unaudited)

The following supplemental pro forma information represents the results of operations if Vonage had acquired TokBox on January 1, 2018.

		For the year ended
		December 31, 2018
Revenue		$	1,054,649
Net income		19,459
Earnings per share - basic		0.08
Earnings per share - diluted		0.08

The pro forma information has been adjusted to include the pro-forma impact of amortization of intangible assets based on the preliminary purchase price allocations. The pro forma data has also been adjusted to eliminate non-recurring transaction costs as well as the related tax impact of pro forma adjustments. There were no transactions between Vonage and TokBox. The pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings or any related integration costs.

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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 of 2017 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 historically been included within the Business segment. As a result of the sale, we recorded a gain $ 1,879 for the year ended December 31, 2017, within other income. This disposal did not represent a strategic shift in operations and, therefore, did not qualify for presentation as discontinued operations.

Earnings (loss) per share has been computed according to FASB ASC 260, “Earnings per Share”, which requires a dual presentation of basic and diluted 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 earnings (loss) per share:

	For the years ended December 31,
	2019				2018				2017
Numerator
Net (loss) income	$	( 19,482	)		$	35,728			$	( 33,933	)
Denominator
Basic weighted average common shares outstanding	242,018				237,499				225,311
Dilutive effect of stock options and restricted stock units	—				11,393				—
Diluted weighted average common shares outstanding	242,018				248,892				225,311
Basic (loss) earnings per share
Basic (loss) earnings per share	$	( 0.08	)		$	0.15			$	( 0.15	)
Diluted (loss) earnings per share
Diluted (loss) earnings (loss) per share	$	( 0.08	)		$	0.14			$	( 0.15	)

The following shares were excluded from the calculation of diluted earnings (loss) per share because of their anti-dilutive effects:

	For the years ended December 31,
	2019			2018			2017
Restricted stock units	10,389			3,285			11,928
Employee stock options	4,946			1,163			10,448
	15,335			4,448			22,376

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As the Company expects to settle the principal amount of its outstanding convertible senior notes in cash and any excess in cash or shares of the Company’s common stock, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of the Company’s common stock for a given period exceeds the conversion price of $ 16.72 per share. The Company's convertible senior notes are further described in Note 8, Long-Term Debt .

Goodwill

The Company's goodwill is derived primarily from the acquisitions of Vocalocity, Telesphere, iCore, Simple Signal, Nexmo, TokBox and NVM 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, 2018	$	373,764
Increase in goodwill related to acquisition of TokBox	20,650
Increase in goodwill related to acquisition of NVM	210,992
Foreign currency translation adjustment	( 6,907		)
Balance at December 31, 2018	598,499
Increase in goodwill related to measurement period adjustments to initial acquisition accounting of NVM	2,548
Foreign currency translation adjustment	1,923
Balance at December 31, 2019	$	602,970

Intangible assets, net

The Company's intangible assets as of December 31, 2019 and 2018 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, 2019										December 31, 2018
	Useful Lives (years)			Gross Carrying Value			Accumulated Amortization			Net Carrying Value				Gross Carrying Value			Accumulated Amortization			Net Carrying Value
Customer relationships	7	to	12	$	272,767		$	( 115,583	)	$	157,184			$	272,226		$	( 84,339	)	$	187,887
Developed technology	3	to	10	169,722			( 80,523		)	89,199				162,316			( 57,948		)	104,368
Patents and patent licenses	3	to	5	20,554			( 19,228		)	1,326				20,214			( 17,700		)	2,514
Trade names	2	to	5	7,074			( 4,878		)	2,196				6,952			( 1,947		)	5,005
Non-compete agreements		3		970			( 970		)	—				991			( 854		)	137
Total finite-lived intangible assets				$	471,087		$	( 221,182	)	$	249,905			$	462,699		$	( 162,788	)	$	299,911

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During the years ended December 31, 2019 , 2018 , and 2017 , the Company recorded amortization expense of $ 58,441 , $ 39,457 and $ 38,056 , 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
2020	$	51,219
2021	43,390
2022	39,942
2023	33,523
2024	27,927

The components of loss or income before income taxes are as follows:

	For the years ended December 31,
	2019				2018				2017
United States	$	11,994			$	31,205			$	39,370
Foreign	( 38,102		)		5,320				6,423
	$	( 26,108	)		$	36,525			$	45,793

The income tax benefit or expense consisted of the following amounts:

	For the years ended December 31,
	2019				2018				2017
Current:
Federal	$	—			$	—			$	( 1,101	)
Foreign	( 3,599		)		( 3,023		)		( 1,731		)
State and local taxes	( 3,186		)		( 2,583		)		( 2,317		)
	$	( 6,785	)		$	( 5,606	)		$	( 5,149	)
Deferred:
Federal	$	( 1,495	)		$	6,249			$	( 75,928	)
Foreign	7,321				1,290				1,631
State and local taxes	7,585				( 2,730		)		( 280		)
	13,411				4,809				( 74,577		)
	$	6,626			$	( 797	)		$	( 79,726	)

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The reconciliation between the United States federal statutory rate of 21% for the year ended December 31, 2019 and 2018, and 35% for the years ended December 31, 2017, respectively, to the Company's effective rates are as follows:

	For the years ended December 31,
	2019			2018			2017
U.S. Federal statutory tax rate	21	%		21	%		35	%
Statutory permanent items	( 3	)%		3	%		9	%
Effect of the Tax Cuts and Jobs Act	—	%		—	%		152	%
Equity-based compensation	19	%		( 43	)%		( 24	)%
Acquisition costs	—	%		4	%		—	%
Officers' compensation	( 7	)%		3	%		1	%
Interest	( 10	)%		1	%		—	%
State and local taxes, net of federal benefit	13	%		12	%		5	%
International tax (reflects effect of losses for which tax benefit not realized)	( 9	)%		4	%		( 4	)%
Uncertain tax positions	2	%		2	%		—	%
Tax credits	1	%		( 2	)%		( 2	)%
Valuation reserve for income taxes and other	—	%		—	%		( 3	)%
Tax rate change	—	%		—	%		3	%
Other	( 2	)%		( 3	)%		2	%
Effective tax rate	25	%		2	%		174	%

For the year ended December 31, 2019, the Company's overall effective tax rate was different from the statutory rate of 21% primarily as a result of a permanent benefit related to the equity based stock compensation and an interested related adjustment in the United Kingdom.

For the year ended December 31, 2018, the Company's overall effective tax rate was different from the statutory rate of 21% primarily as a result of the increase in the state provision along with the permanent benefit related to the equity-based stock compensation and its related state impact.

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.

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The temporary differences which gave rise to the Company's net deferred tax assets consisted of the following:

	December 31, 2019				December 31, 2018
Assets and liabilities:
Accounts receivable and inventory allowances	$	1,044			$	839
Deferred rent	1,833				1,212
Acquired intangible assets and property and equipment	( 35,524		)		( 56,801		)
Accrued expenses	7,964				7,344
Research and development	1,170				991
Stock option compensation	17,979				14,741
Capital leases	—				( 38		)
Cumulative translation adjustments	40				170
Deferred revenue	7,471				5,355
Derivatives	3				142
Prepaid expense	( 15,569		)		( 13,312		)
Convertible debt and capped call	( 7,934		)		—
Net operating loss carryforwards	149,848				165,732
	128,325				126,375
Valuation allowance	( 19,978		)		( 23,815		)
Deferred tax assets, net, non-current	$	108,347			$	102,560

Deferred tax assets and valuation allowance

Net deferred tax balance. As of December 31, 2019 and 2018 , we recorded a net deferred tax asset, net of valuation allowance of $ 108,347 and $ 102,560 , respectively. The Company believes that the net operating losses related to one of its United Kingdom subsidiaries, Vonage Limited, and certain U.S. states 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, 2019 , the Company has U.S. Federal and state NOL carryforwards of $ 509,313 and $ 237,667 , respectively, which expire at various times through 2037. We have Non-US NOLs of $ 165,104 primarily related to the United Kingdom which has 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, 2019 , there were no limitations on the use of our NOLs except for certain of the NOLs of Vocalocity, which the Company has reflected in the deferred tax asset.

Valuation allowance. As of December 31, 2019 and 2018 , the Company's valuation allowance was $ 19,978 and $ 23,815 , respectively, primarily consisting of NOLs associated with Vonage Limited, NVM and state NOLs for certain legal entities.

Uncertain tax benefits

The Company had uncertain tax benefits of $ 914 and $ 1,107 as of December 31, 2019 and 2018 , respectively. The Company recognizes interest and penalties related to uncertain tax benefits in income tax expense. The Company incurred interest expense or penalties of $ 60 , $ 68 , and $ 61 for the years ended December 31, 2019 , 2018 , and 2017 , respectively.

The following table reconciles the total amounts of uncertain tax benefits:

	As of December 31,
	2019				2018
Balance as of January 1	$	1,107			1,086
Increase due to current year positions	155				1,107
Decrease due to prior year positions	( 243		)		( 1,086		)
Decrease due to settlements and payments	( 86		)		—
Decrease due to lapse of applicable statute of limitations	( 71		)		—
Increase due to foreign currency fluctuation	52				—
Uncertain tax benefits as of December 31	$	914			$	1,107

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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 to audit 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 2015. With few exceptions, state and local income tax examinations are no longer open for years before 2014.

A schedule of long-term debt, excluding current portion, at December 31, 2019 and 2018 is as follows:

	December 31, 2019				December 31, 2018
Term note - due 2023	$	—			$	95,000
Revolving credit facility - due 2023	220,500				425,000
Convertible senior notes - due 2024	345,000				—
Long-term debt including current maturities	$	565,500			$	520,000
Less current maturities	—				10,000
Less unamortized discount	61,234				—
Less debt issuance cost	7,108				772
Total long-term debt	$	497,158			$	509,228

As of December 31, 2019 , future payments under long-term debt obligations over each of the next five years are as follows:

	Long-term debt
2020	$	—
2021	—
2022	—
2023	220,500
2024	345,000
Minimum future payments of principal	$	565,500

Convertible Senior Notes

In June 2019, the Company issued $ 300.0 million aggregate principal amount of 1.75 % convertible senior notes due 2024 in a private placement and an additional $ 45.0 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment option of the initial purchasers. The Convertible Senior Notes are the Company's senior unsecured obligations. The Convertible Senior Notes bear interest at a rate of 1.75 % per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2019. The Convertible Senior Notes will mature on June 1, 2024, unless earlier redeemed, repurchased or converted. We may not redeem the notes prior to June 5, 2022. On or after June 5, 2022, we may redeem for cash all or a portion of the notes if the last reported sale price of the Company's common stock has been at least 130 % of the conversion price then in effect on (i) each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date the Company provides notice of redemption and (ii) the trading day immediately preceding the date the Company provides such notice. The total net proceeds from the offering, after deducting initial purchase discounts and expenses payable by the Company, were $ 334.8 million .

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

The Company used the net proceeds from the offering to (i) pay the cost of the capped call transactions described below, (ii) to repurchase approximately $ 10 million in shares of its common stock from purchasers of the Convertible Senior Notes in privately negotiated transactions effected through one of the initial purchasers or an affiliate thereof concurrently with the pricing of the Convertible Senior Notes described below, and (iii) to repay the outstanding principal balance under its credit facility.

Prior to December 1, 2023, the notes will be convertible only upon satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. We will satisfy any conversion election by paying or delivering, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock. The Convertible Senior Notes and shares of common stock issuable upon conversion, if any, have not been registered under the Securities Act, or under any U.S. state securities laws or other jurisdiction and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

During the year ended December 31, 2019, the conditions allowing holders of the Convertible Senior Notes to convert were not met.

In accounting for the issuance of the Convertible Senior Notes, the Company separated the Convertible Senior Notes into liability and equity components.  The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The fair value was determined utilizing a discounted cash flow model that includes assumptions such as implied credit spread, expected volatility, and the risk-free rate for notes with a similar term. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Convertible Senior Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense at an effective interest rate of 6.4 % over the contractual terms of the Convertible Senior Notes.

In accounting for the transaction costs related to the Convertible Senior Notes, the Company allocated the total amount incurred to the liability and equity components of the Convertible Senior Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component of $ 7,973 were recorded as additional debt discount and will be amortized to interest expense using the effective interest method over the contractual terms of the Convertible Senior Notes.  Issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity.

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

	December 31, 2019
Principal	$	345,000
Unamortized discount	( 61,234		)
Unamortized issuance cost	( 7,108		)
Net carrying amount	$	276,658

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

	December 31, 2019
Proceeds allocated to the conversion option (debt discount)	$	67,664
Issuance cost	( 1,944		)
Income tax expense	( 15,597		)
Net carrying amount	$	50,123

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

	For the years ended December 31,
	2019
Contractual interest expense	$	3,304
Amortization of debt discount	6,430
Amortization of debt issuance costs	865
Total interest expense related to the Convertible Senior Notes	$	10,599

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

Concurrently with the issuance of the Convertible Senior Notes, the Company’s board of directors approved the repurchase of an aggregate of 852,515 , or $ 10,000 of, shares of the Company’s outstanding common stock in privately negotiated transactions at a price of $ 11.73 per share, which was equal to the closing price per share of the Company’s common stock on June 11, 2019, the date of the pricing of the offering of the Convertible Senior Notes. The share repurchase was recorded to treasury stock on the Company's consolidated balance sheet.

2018 Term Note and Revolving Credit Facility

On July 31, 2018, the Company replaced its 2016 Credit Facility previously consisting of a $ 125 million term loan and a $ 325 million revolving credit facility with the 2018 Credit Facility consisting of a $ 100 million senior secured term loan and a $ 500 million revolving credit facility. The co-borrowers under the 2018 Credit Facility are the Company and Vonage America Inc., the Company’s wholly owned subsidiary. Obligations under the 2018 Credit Facility are guaranteed, fully and unconditionally, by the Company’s other United States subsidiaries and are secured by substantially all of the assets of each borrower and each guarantor.

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The company used $ 232,000 of the proceeds available under our 2018 Credit Facility plus cash on hand to retire all of the debt outstanding under our 2016 Credit Facility and to cover transaction fees and expenses. Total transaction fees and expenses incurred were $ 3,376 , of which $ 474 was allocated to the term note and $ 2,813 was allocated to the revolving credit facility to be amortized over the term of 2018 Credit Facility. The remaining $ 89 of transaction fees and expenses were expensed during the year ended December 31, 2018. The Company recognized a loss on extinguishment of debt of $ 14 which primarily consisted of the write off of previously deferred financing costs partially offset by the realization of a portion of gains associated with the interest rate swaps included in accumulated other comprehensive income. Remaining proceeds available from the undrawn revolving credit facility under our 2018 Credit Facility will be used for general corporate purposes and to fund potential additional acquisitions.

2018 Credit Facility Terms

The following description summarizes the material terms of the 2018 Credit Facility:

The loans under the 2018 Credit Facility mature on July 31, 2023. The unused portion of the Company's revolving credit facility incurs a 0.30 % per annum commitment fee.

Outstanding amounts under the 2018 Credit Facility, at the Company's option, will bear interest at:

•	LIBOR (applicable to one-, two-, three-, six-, or twelve-month periods) plus an applicable margin equal to 2.00 % up to 2.75 % per annum 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 rate of interest last quoted by the Wall Street Journal as the “Prime Rate” in the U.S., (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 1.00 % up to 1.75 % per annum payable on the last business day of each March, June, September, and December and the maturity date of the 2018 Credit Facility.

In 2019 , we made repayments of $ 95 million under the 2018 term loan and made discretionary repayments of $ 348.5 million under the 2018 revolving credit facility, and borrowed $ 144 million under the revolving credit facility. In addition, the effective interest rate was 4.56 % as of December 31, 2019 .

In 2018, we made mandatory repayments of $ 5 million under the 2018 term loan and made discretionary repayments of $ 42 million under the 2018 revolving credit facility.

As of December 31, 2019 , we were in compliance with all covenants, including financial covenants, for the 2018 Credit Facility.

2016 Financing

In 2018, we made mandatory repayments of $ 9.4 million under the term note and made discretionary repayments of $ 35 million under the revolving credit facility and borrowed $ 40 million 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 from 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 .

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As of December 31, 2019 and 2018 , the fair market value of the swaps was $ 18 and $ 1,859 , respectively, which is included in other assets on our consolidated balance sheet. The following table summarizes the effects of ASC 815 on the Company's accumulated OCI balance attributable to cash flow derivatives:

	Years Ended December 31
	2019				2018
Accumulated OCI beginning balance	$	975			$	965
Reclassified from accumulated OCI to income:
Due to reclassification of previously deferred gain	( 531		)		( 469		)
Change in fair value of cash flow hedge accounting contracts, net of tax	( 1,445		)		479
Accumulated OCI ending balance, net of tax (expense) benefit of ($4) and $393, respectively	$	( 1,001	)		$	975
Gains expected to be realized from accumulated OCI during the next 12 months	$	531			$	—

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, 2019 and December 31, 2018 :

	December 31, 2019				December 31, 2018
Level 2 Measurements
Interest rate swaps (1)	$	18			$	1,859

(1) Included in other assets on our consolidated balance sheets.

As of December 31, 2019 , the fair value of the 1.75 % Convertible Senior Notes was approximately $ 309,641 . The fair value was determined based on the quoted price for the Convertible Senior Notes in an inactive market on the last trading day of the reporting period and is classified as Level 2 in the fair value hierarchy.

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Fair Value of Other Financial Instruments

The carrying amounts of our other 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. We believe the fair value of our 2018 Credit Facility at December 31, 2019 and December 31, 2018 was approximately the same as its carrying amount as market conditions, including available interest rates, credit spread relative to our credit rating, and illiquidity, remain relatively unchanged from the issuance date of our debt obligations for a similar debt instrument and are classified as Level 3 within the fair value hierarchy.

As of December 31, 2019 , we did not have any other assets or liabilities that are measured and recognized at fair value on a recurring basis.

As of December 31, 2019 and December 31, 2018 , the Company had 596,950 shares of common stock authorized. For a detailed description of our share-based compensation programs refer to Note 11, Employee Stock Benefit Plans.

The following table reflects the changes in the Company's common stock issued and outstanding:

For the Year Ended
(in thousands)	Issued			Treasury			Outstanding
Balance at December 31, 2016	282,318			( 63,317	)		219,001
Shares issued under the 2015 Equity Incentive Plan	15,856			—			15,856
Employee taxes paid on withholding shares	—			( 2,319	)		( 2,319	)
Common stock repurchases	—			( 1,599	)		( 1,599	)
Balance at December 31, 2017	298,174			( 67,235	)		230,939
Shares issued under the 2015 Equity Incentive Plan	11,562			—			11,562
Employee taxes paid on withholding shares	—			( 2,758	)		( 2,758	)
Balance at December 31, 2018	309,736			( 69,993	)		239,743
Shares issued under the 2015 Equity Incentive Plan	5,832			—			5,832
Employee taxes paid on withholding shares	—			( 2,113	)		( 2,113	)
Assets acquisition	240			—			240
Common stock repurchases (Note 8)	—			( 853	)		( 853	)
Balance at December 31, 2019	315,808			( 72,959	)		242,849

Common Stock Repurchases

On June 11, 2019, concurrently with the issuance of the Convertible Senior Notes, the Company repurchased the Company’s outstanding common stock in privately negotiated transactions. For additional information, refer to Note 8. Long-Term Debt.

We repurchased the following shares of common stock during the year ended December 31, 2019 :

	December 31, 2019
Shares of common stock repurchased	852,515
Value of common stock repurchased	$	10,000

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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.

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.

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 ten years expiration period.

The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model. The company did not grant options in 2019 and 2018. The assumptions used to value options in 2017 is as follows:

	2017
Risk-free interest rate	1.95-2.18%
Expected stock price volatility	46.19-47.59%
Dividend yield	0.00	%
Expected life (in years)	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 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, 2019 and 2018 , the payouts at vesting which are linearly interpolated between the percentiles specified below are as follows:

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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 % .

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:

	2019			2018			2017
Risk-free interest rate	2.40	%		2.38	%		1.54	%
Expected stock price volatility	39.95	%		36.72	%		35.99	%
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, 2019 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			296			219
2006 Incentive Plan	71,669						3,650			34
2015 Incentive Plan	42,731			23,145			1,077			10,355
Total as of December 31, 2019	116,627			23,441			4,946			10,389

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, 2019 , there are 23,145 shares 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 .

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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, 2018	5,935			$	3.79
Stock options granted	—			—
Stock options exercised	( 948	)		2.62
Stock options canceled	( 41	)		4.04
Outstanding at December 31, 2019	4,946			$	4.01
Exercisable at December 31, 2019	4,425			$	3.73

There were no options granted in 2019 and 2018. The weighted average exercise price of options granted was $ 6.46 for the years ended December 31, 2017 . The aggregate intrinsic value of exercised stock options for the years ended December 31, 2019 , 2018 , and 2017 was $ 7,616 , $ 38,248 , and $ 38,958 , respectively.

The weighted average grant date fair market value of stock options granted was $ 3.04 for the years ended December 31, 2017 .

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, 2018	9,906			$	8.81
Restricted stock and restricted stock units granted	7,696			11.29
Restricted stock and restricted stock units vested	( 4,917	)		6.69
Restricted stock and restricted stock units canceled	( 2,296	)		10.31
Non-vested at December 31, 2019	10,389			$	10.58

The weighted average grant date fair market value of restricted stock and restricted stock units granted was $ 11.29 , $ 10.55 , and $ 6.79 per unit during the year ended December 31, 2019 , 2018 , and 2017 , respectively. The fair value of restricted stock and restricted stock units that vested during the years ended December 31, 2019 , 2018 , and 2017 was $ 32,872 , $ 44,812 , and $ 41,057 , respectively. The aggregate intrinsic value of restricted stock units outstanding was $ 76,986 as of December 31, 2019 .

Supplemental Information

Total share-based compensation expense recognized for the years ended December 31, 2019 , 2018 , and 2017 was $ 45,242 , $ 33,799 , and $ 37,482 , respectively, which were recorded to cost of services and general and administrative expense in the consolidated statement of income. As of December 31, 2019 , total unamortized share-based compensation was $ 51,602 , accounting for forfeitures when they occur, which is expected to be amortized over the remaining weighted average recognition period of 2.1 years. 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.

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Information regarding the options outstanding as of December 31, 2019 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)
$0.69 to $1.99	268			1.22						264			1.22
$2.00 to $4.00	3,337			3.41						3,337			3.41
$4.01 to $7.25	1,341			6.06						824			5.83
	4,946		5.13	4.01		$	16,804			4,425		4.87	3.73		$	16,281

Retirement Plan

The Company entered into various non-cancelable operating lease arrangements for certain of our existing office and telecommunications co-location space as well as operating leases for certain equipment. The operating leases expire at various times through 2026, some of which provide the Company options to extend the leases for terms up to 5 years beyond the original term. We are committed to pay a portion of the buildings’ operating expenses as required under the arrangements which we will separate as a non-lease component when readily determinable.

During the year ended December 31, 2019 , the Company incurred operating lease expense of $ 14,390 , related to its operating leases and $ 1,272 of sub-lease income. Under ASC 840, the Company had rent expense net of sub-lease income of $ 22,706 and $ 11,429 for the years ended December 31, 2018 and 2017, respectively. Additionally, the remaining weighted average lease term for our operating leases was 6.88 years and the weighted average discount rate utilized to measure the Company's operating leases was 5.18 % as of December 31, 2019 .

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

	The Year Ended
	December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities	$	16,972
Right-of-use assets obtained in exchange for lease obligations	7,718

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Maturities of lease liabilities as of December 31, 2019 were as follows:

2020	$	15,017
2021	11,663
2022	7,599
2023	7,197
2024	6,592
Thereafter	21,178
Total lease payments	$	69,246
Less imputed interest	( 11,047		)
Total	$	58,199

R ental commitments under non-cancelable operating leases in effect as of December 31, 2018 were as follows (as calculated under ASC 840, Leases):

2019	$	17,204
2020	14,209
2021	10,378
2022	8,206
2023	8,154
Thereafter	9,908
Total minimum payments required	$	68,059

	December 31, 2019				December 31, 2018
Network equipment and computer hardware	$	88,360			$	91,901
Leasehold improvements	37,522				36,464
Customer premise equipment	28,022				18,280
Furniture	4,113				7,616
	158,017				154,261
Less accumulated depreciation	( 109,646		)		( 104,999		)
Property, plant and equipment	$	48,371			$	49,262

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	December 31, 2019				December 31, 2018
Compensation and benefits, related taxes and temporary labor	$	40,101			$	33,249
Marketing	15,294				10,238
Taxes and fees	22,922				11,189
Telecommunications	40,498				21,403
Interest	873				65
Customer credits	2,772				3,325
Professional fees	4,482				2,049
Inventory	871				1,188
Other accruals	9,776				4,664
	$	137,589			$	87,370

Commitments

Stand-by Letters of Credit

We have stand-by letters of credit totaling $ 1,528 and $ 1,516 , as of December 31, 2019 and 2018 , 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, provide software maintenance service, and license patents to us. In certain cases, we may terminate these arrangements early upon payment of specified fees. These commitments total $ 94,196 as of December 31, 2019. Of this total amount, we expect to purchase $ 41,807 in 2020 , $ 26,952 in 2021 , $ 21,892 in 2022 , and $ 3,545 in 2023 , respectively. During the fourth quarter of 2019, the Company executed a contract with a vendor related to co-location and infrastructure services over the next three years which comprises a large portion of the Company's purchase commitments as of December 31, 2019. 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.

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Contingencies

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 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 noted below and our inability to reasonably estimate the amount of loss or range of loss, it is possible that the resolution of one or more of these matters could have a material adverse effect on our condensed consolidated financial position, cash flows or results of operations.

Regulation

Telephony services are subject to a broad spectrum of state, federal and foreign regulations. Because of the uncertainty over whether VoIP should be treated as a telecommunications or information service, we have been involved in a substantial amount of state and federal regulatory activity. Implementation and interpretation of the existing laws and regulations is ongoing and is subject to litigation by various federal and state agencies and courts. Due to the uncertainty over the regulatory classification of VoIP service, there can be no assurance that we will not be subject to new regulations or existing regulations under new interpretations, and that such change would not introduce material additional costs to our business. The Company continues to monitor federal regulations relating to net neutrality, rural call completion issues, number slamming, 911 access, access to telecommunication equipment and services by persons with disabilities, caller ID services, number portability, unwanted calls to reassigned numbers, and robocalling. As we continue to expand globally, these types of regulations are likely to be similarly enacted and enforced by the local regulatory authorities.

State and Municipal Taxes

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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-maker reviews revenue and gross margin information for each of our reportable segments, but does not review operating expenses on a segment by segment basis. In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by the reportable segments.

Business

For our Business customers, our Applications Group provides innovative, cloud-based UCaaS and CCaaS solutions, comprised of integrated voice, text, video, data, collaboration, and mobile applications over our flexible, scalable SIP based VoIP network. The API Platform Group also offers 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 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 Software Defined Wide Area Network, or SD-WAN, UCaaS and CPaaS services for Business,

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

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.

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

USF cost of revenues. USF cost of revenues represents contributions to the Federal USF and related fees.

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Information about our segment results for the years ended December 31, 2019 , 2018 , and 2017 were as follows:

Year ended December 31, 2019
	Business				Consumer				Total
Revenues
Service revenues	$	719,514			$	340,462			$	1,059,976
Access and product revenues (1)	46,232				264				46,496
Service, access and product revenues	765,746				340,726				1,106,472
USF revenues	38,134				44,740				82,874
Total revenues	803,880				385,466				1,189,346
Cost of revenues
Service cost of revenues (2)	336,045				34,677				370,722
Access and product cost of revenues (1)	53,455				4,033				57,488
Service, access and product cost of revenues	389,500				38,710				428,210
USF cost of revenues	38,134				44,740				82,874
Total cost of revenues	427,634				83,450				511,084
Segment gross margin
Service margin	383,469				305,785				689,254
Access and product margin	( 7,223		)		( 3,769		)		( 10,992		)
Gross margin ex-USF (Service, access and product margin)	376,246				302,016				678,262
USF margin	—				—				—
Segment gross margin	$	376,246			$	302,016			$	678,262

Segment gross margin %
Service margin %	53.3	%		89.8	%		65.0	%
Gross margin ex-USF (Service, access and product margin) %	49.1	%		88.6	%		61.3	%
Segment gross margin %	46.8	%		78.4	%		57.0	%

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

(2) Excludes depreciation and amortization of $ 33,484 , $ 4,683 , and $ 38,167 , respectively.

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Year ended December 31, 2018
	Business				Consumer				Total
Revenues
Service revenues	$	526,707			$	394,389			$	921,096
Access and product revenues (1)	50,068				559				50,627
Service, access and product revenues	576,775				394,948				971,723
USF revenues	31,369				45,690				77,059
Total revenues	608,144				440,638				1,048,782
Cost of revenues
Service cost of revenues (2)	239,096				47,439				286,535
Access and product cost of revenues (1)	58,081				5,289				63,370
Service, access and product cost of revenues	297,177				52,728				349,905
USF cost of revenues	31,374				45,716				77,090
Total cost of revenues	328,551				98,444				426,995
Segment gross margin
Service margin	287,611				346,950				634,561
Access and product margin	( 8,013		)		( 4,730		)		( 12,743		)
Gross margin ex-USF (Service, access and product margin)	279,598				342,220				621,818
USF margin	( 5		)		( 26		)		( 31		)
Segment gross margin	$	279,593			$	342,194			$	621,787

Segment gross margin %
Service margin %	54.6	%		88.0	%		68.9	%
Gross margin ex-USF (Service, access and product margin) %	48.5	%		86.6	%		64.0	%
Segment gross margin %	46.0	%		77.7	%		59.3	%

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

(2) Excludes depreciation and amortization of $ 22,554 , $ 5,200 , and $ 27,754 , respectively.

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Year ended December 31, 2017
	Business				Consumer				Total
Revenues
Service revenues	$	417,118			$	454,340			$	871,458
Access and product revenues (1)	54,971				525				55,496
Service, access 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)	184,054				80,454				264,508
Access and product cost of revenues (1)	57,906				7,208				65,114
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	233,064				373,886				606,950
Access and product margin	( 2,935		)		( 6,683		)		( 9,618		)
Gross margin ex-USF (Service, access and product margin)	230,129				367,203				597,332
USF margin	—				—				—
Segment gross margin	$	230,129			$	367,203			$	597,332

Segment gross margin %
Service margin %	55.9	%		82.3	%		69.6	%
Gross margin ex-USF (Service, access and product margin) %	48.7	%		80.7	%		64.4	%
Segment gross margin %	46.1	%		72.9	%		59.6	%

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

(2) Excludes depreciation and amortization of $ 20,100 , $ 7,208 , and $ 27,308 , respectively.

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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,
	2019				2018				2017
Total reportable gross margin	$	678,262			$	621,787			$	597,332
Sales and marketing	363,111				311,433				313,251
Engineering and development	69,460				52,139				29,630
General and administrative	152,672				135,324				122,537
Depreciation and amortization	86,256				70,980				72,523
Income from operations	$	6,763			$	51,911			$	59,391
Interest expense	$	( 32,821	)		$	( 15,068	)		$	( 14,868	)
Other income (expense), net	( 50		)		( 318		)		1,270
Income before income taxes	$	( 26,108	)		$	36,525			$	45,793

Information about our operations by geographic location is as follows:

	For the years ended December 31,
	2019				2018				2017
Revenues:
United States	$	855,255			$	825,721			$	851,413
Canada	26,696				27,267				30,252
United Kingdom	66,723				49,430				28,309
Other Countries (1)	240,672				146,364				92,312
	$	1,189,346			$	1,048,782			$	1,002,286

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

	December 31, 2019				December 31, 2018
Long-lived assets:
United States	$	640,277			$	596,820
United Kingdom	299,660				366,594
Israel	1,609				1,688
	$	941,546			$	965,102

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

	For the years ended December 31,
(In thousands)	2019				2018				2017
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest	$	23,006			$	14,278			$	13,323
Income taxes	4,365				6,644				6,760
Non-cash investing and financing activities:
Capital expenditures included in accounts payable and accrued liabilities	$	1,326			$	1,036			$	2,345
Issuance of shares for asset acquisition	3,000				—				—

Refer to Note 12, Acquisition and Dispositions 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 2019
Revenue	$	279,541		$	297,584		$	302,534		$	309,687
(Loss) income from operations	( 2,592		)	( 167		)	5,547			3,975
Net (loss) income	( 534		)	4,524			( 21,097		)	( 2,375		)
(Loss) earnings per common share:
Basic earnings per share
Basic earnings per share	$	—		$	0.02		$	( 0.09	)	$	( 0.01	)
Diluted earnings per share
Diluted earnings per share	$	—		$	0.02		$	( 0.09	)	$	( 0.01	)
Year Ended 2018
Revenue	$	253,573		$	259,875		$	261,531		$	273,803
Income from operations	17,668			13,375			14,847			6,021
Net income (loss)	24,524			8,559			9,588			( 6,943		)
Earnings (loss) per common share:
Basic earnings (loss) per share
Basic earnings (loss) per share	$	0.11		$	0.04		$	0.04		$	( 0.03	)
Diluted earnings (loss) per share
Diluted earnings (loss) per share	$	0.10		$	0.03		$	0.04		$	( 0.03	)