Company Quick10K Filing
Quick10K
Vocera Communications
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$35.11 31 $1,090
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-31 Officers, Shareholder Vote
8-K 2019-04-25 Earnings, Exhibits
8-K 2019-04-08 Officers, Other Events
8-K 2019-02-07 Earnings, Exhibits
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-07-25 Earnings, Officers, Exhibits
8-K 2018-06-01 Officers, Shareholder Vote, Exhibits
8-K 2018-05-14 Enter Agreement, Off-BS Arrangement, Sale of Shares, Other Events, Exhibits
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-02-08 Earnings, Exhibits
CBS CBS 17,170
CPE Callon Petroleum 1,850
ANGO Angiodynamics 738
ATRS Antares Pharma 481
CYH Community Health Systems 411
CIA Citizens 344
SBOW Silverbow Resources 202
ASUR Asure Software 108
CVU CPI Aerostructures 78
FTEK Fuel Tech 63
VCRA 2019-03-31
Part I: Financial Information
Item 1. Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii: Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.01 vcra3312019-ex3101.htm
EX-31.02 vcra3312019-ex3102.htm
EX-32.01 vcra3312019-ex3201.htm

Vocera Communications Earnings 2019-03-31

VCRA 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 vcra10q-3312019form10xq.htm 10-Q Q1'19 VCRA FORM 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from              to
Commission File Number: 001-35469

VOCERA COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
94-3354663
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Vocera Communications, Inc.
525 Race Street
San Jose, CA 95126
(408) 882-5100
(Address and telephone number of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:
(Title of class)
(Trading Symbol)
(Name of exchange on which registered)
Common Stock, $0.0003 par value
VCRA
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x  No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuance to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “small reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding as of May 3, 2019
Common Stock, $0.0003 par value per share
 
31,134,768




VOCERA COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019
INDEX
PART I: FINANCIAL INFORMATION
 
 
Page No.
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
PART II: OTHER INFORMATION
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 


2


PART I: FINANCIAL INFORMATION

Item 1.
Financial Statements (Unaudited)
Vocera Communications, Inc.
Condensed Consolidated Balance Sheets
(In Thousands, Except Share and Par Amounts)
(Unaudited)
 
March 31, 2019
 
December 31, 2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
32,936

 
$
34,276

Short-term investments
189,395

 
186,894

Accounts receivable, net of allowance
24,446

 
40,127

Other receivables
5,335

 
4,148

Inventories
5,987

 
4,350

Prepaid expenses and other current assets
5,268

 
4,691

Total current assets
263,367

 
274,486

Property and equipment, net
7,498

 
7,468

Intangible assets, net
8,018

 
9,070

Goodwill
49,246

 
49,246

Deferred commissions
10,322

 
10,303

Other long-term assets
6,825

 
1,525

Total assets
$
345,276

 
$
352,098

Liabilities and stockholders' equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
3,091

 
$
4,217

Accrued payroll and other current liabilities
13,222

 
12,885

Deferred revenue, current
41,339

 
44,053

Total current liabilities
57,652

 
61,155

Deferred revenue, long-term
11,606

 
14,579

Convertible senior notes, net
112,122

 
110,540

Other long-term liabilities
6,502

 
2,957

Total liabilities
187,882

 
189,231

Commitments and contingencies (Note 9)

 

Stockholders' equity
 
 
 
Preferred stock, $0.0003 par value - 5,000,000 shares authorized as of March 31, 2019 and December 31, 2018; zero shares issued and outstanding

 

Common stock, $0.0003 par value - 100,000,000 shares authorized as of March 31, 2019 and December 31, 2018; 30,891,117 and 30,708,138 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
9

 
9

Additional paid-in capital
301,484

 
295,647

Accumulated other comprehensive loss
(18
)
 
(443
)
Accumulated deficit
(144,081
)
 
(132,346
)
Total stockholders’ equity
157,394

 
162,867

Total liabilities and stockholders’ equity
$
345,276

 
$
352,098

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


Vocera Communications, Inc.
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)

Three months ended March 31,
 
2019
 
2018
Revenue
 
 
 
Product
$
14,003

 
$
21,087

Service
21,306

 
19,155

Total revenue
35,309

 
40,242

Cost of revenue
 
 
 
Product
5,334

 
6,345

Service
10,290

 
9,996

Total cost of revenue
15,624

 
16,341

Gross profit
19,685

 
23,901

Operating expenses
 
 
 
Research and development
8,146

 
7,314

Sales and marketing
16,019

 
15,022

General and administrative
6,580

 
6,359

Total operating expenses
30,745

 
28,695

Loss from operations
(11,060
)
 
(4,794
)
Interest income
1,279

 
215

Interest expense
(2,121
)
 

Other income (expense), net
131

 
(279
)
Loss before income taxes
(11,771
)
 
(4,858
)
Benefit from income taxes
36

 
88

Net loss
$
(11,735
)
 
$
(4,770
)
 
 
 
 
Loss per share
 
 
 
     Basic
$
(0.38
)
 
$
(0.16
)
     Diluted
$
(0.38
)
 
$
(0.16
)
Weighted average shares used to compute net income (loss) per share
 
 
 
     Basic
30,800

 
29,476

     Diluted
30,800

 
29,476



The accompanying notes are an integral part of these condensed consolidated financial statements.


4


Vocera Communications, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(In Thousands)
(Unaudited)

 
Three months ended March 31,
 
2019
 
2018
Net loss
$
(11,735
)
 
$
(4,770
)
Other comprehensive loss, net:
 
 
 
Change in unrealized gain (loss) on investments, net of tax
425

 
(83
)
Comprehensive loss
$
(11,310
)
 
$
(4,853
)

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


Vocera Communications, Inc.
Consolidated Statements of Stockholders' Equity
(In Thousands, except share amounts)
 
Common stock
Additional
paid-in
capital
Accum. other
comprehensive
income (loss)
Accumulated
deficit
Total
stockholders’
equity
 
Shares
Amount
Balance at December 31, 2017
29,412,116

$
9

$
250,854

$
(191
)
$
(122,672
)
$
128,000

Exercise of stock options
59,527


958



958

RSUs released net of shares withheld for tax settlement
62,834


(987
)


(987
)
Employee stock-based compensation expense


4,587



4,587

Net loss




(4,770
)
(4,770
)
Other comprehensive loss



(83
)

(83
)
Balance at March 31, 2018
29,534,477

$
9

$
255,412

$
(274
)
$
(127,442
)
$
127,705

 
 
 
 
 
 
 
Balance at December 31, 2018
30,708,138

$
9

$
295,647

$
(443
)
$
(132,346
)
$
162,867

Exercise of stock options
122,376


1,564



1,564

RSUs released net of shares withheld for tax settlement
60,603


(1,271
)


(1,271
)
Employee stock-based compensation expense


5,544



5,544

Net loss




(11,735
)
(11,735
)
Other comprehensive gain



425


425

Balance at March 31, 2019
30,891,117

$
9

$
301,484

$
(18
)
$
(144,081
)
$
157,394



The accompanying notes are an integral part of these consolidated financial statements


6


Vocera Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
Three months ended March 31,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net loss
$
(11,735
)
 
$
(4,770
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
1,890

 
1,967

Change in lease-related performance obligations
(266
)
 
(284
)
Stock-based compensation expense
5,544

 
4,587

Amortization of debt discount and issuance costs
1,582

 

Other
24

 
25

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
15,681

 
4,914

Other receivables
(1,156
)
 
86

Inventories
(1,637
)
 
(763
)
Prepaid expenses and other assets
(414
)
 
(1,195
)
Deferred commissions
(19
)
 
567

Accounts payable
(1,173
)
 
1,815

Accrued payroll and other liabilities
(1,689
)
 
(5,027
)
Deferred revenue
(5,687
)
 
(790
)
Net cash provided by operating activities
945

 
1,132

Cash flows from investing activities
 
 
 
Purchase of property and equipment
(853
)
 
(555
)
Purchase of short-term investments
(31,349
)
 
(6,030
)
Maturities of short-term investments
29,624

 
5,542

Net cash used in investing activities
(2,578
)
 
(1,043
)
Cash flows from financing activities
 
 
 
Cash from lease-related performance obligations

 
89

Proceeds from exercise of stock options
1,564

 
958

Tax withholdings paid on behalf of employees for net share settlement
(1,271
)
 
(1,007
)
Net cash provided by financing activities
293

 
40

Net increase (decrease) in cash and cash equivalents
(1,340
)
 
129

Cash and cash equivalents at beginning of period
34,276

 
28,726

Cash and cash equivalents at end of period
$
32,936

 
$
28,855

 
 
 
 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Property and equipment in accounts payable and accrued liabilities
$
161

 
$
284


The accompanying notes are an integral part of these condensed consolidated financial statements.

7


Notes to Unaudited Condensed Consolidated Financial Statements

1.
The Company and Summary of Significant Accounting Policies
Organization and Business
Vocera Communications, Inc. and its subsidiaries (collectively the “Company” or “Vocera”) is a provider of secure, integrated, intelligent communication and clinical workflow solutions, focused on empowering mobile workers in healthcare, hospitality, retail, energy and other mission-critical mobile work environments, in the United States and internationally. The significant majority of the Company’s business is generated from sales of its solutions in the healthcare market to help its customers improve quality of care, patient and staff experience and increase operational efficiency.
The Vocera communication and collaboration solution, which includes an intelligent enterprise software platform; a lightweight, wearable, voice-controlled communication badge; and smartphone applications, enables users to connect instantly with other staff simply by saying the name, function or group name of the desired recipient. It also delivers HIPAA-compliant secure text messages, alerts and alarms directly to a range of smartphones both inside and outside the hospital, replacing legacy pagers and in-building wireless phones.
Basis of Presentation
The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission, and include the accounts of Vocera and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The year-end condensed balance sheet data was derived from the Company’s audited financial statements but does not include all disclosures required by GAAP.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s interim consolidated financial information. The results for the quarter presented are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other interim period or any other future year.
The accounting policies followed in the preparation of these financial statements are consistent in all material respects with those presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Use of Estimates
The preparation of the accompanying unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting periods. The estimates include, but are not limited to, revenue recognition, warranty reserves, inventory reserves, goodwill and intangible assets, stock-based compensation expense, provisions for income taxes and contingencies. Actual results could differ from these estimates, and such differences could be material to the Company’s financial position and results of operations.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in other long-term assets, accrued payroll and other current liabilities and other long-term liabilities on the consolidated balance sheets. Sales-type leases are included in other receivables, accrued payroll and other current liabilities and other long-term liabilities on the consolidated balance sheets.  
The Company has elected an accounting policy to not recognize short-term leases (one year or less) on the consolidated balance sheet. The Company also elected the package of practical expedients which applies to leases that commenced before the adoption date. By electing the package of practical expedients, the Company did not need to reassess whether any existing contracts are or contained a lease or the lease classification for any existing leases.
Operating lease right of use assets and operating lease liabilities are recognized based on the present value of the lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the incremental borrowing rate is used based on the information available at commencement date in determining the present value of future payments. The operating lease right of use asset also includes any lease payments made and excludes lease incentives. Lease terms

8


may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company accounts for lease components and nonlease components as a single lease component.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB amended lease accounting requirements to begin recording assets and liabilities arising from leases on the balance sheet. The new guidance requires significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. This new guidance was effective beginning on January 1, 2019 under a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply.
The Company elected the package of practical expedients permitted under the transition guidance within the new standard. The adoption of the standard resulted in recognition of right-of-use assets, which includes the impact of existing deferred rents and tenant improvement allowances of $5.1 million and lease liabilities of $6.7 million, respectively as of January 1, 2019. The standard did not affect our consolidated net earnings or cashflows.
In February 2018, the FASB issued new guidance which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and required certain disclosures about stranded tax effects. This standard was effective for the Company beginning January 1, 2019 and may be applied either in the period of adoption or retrospectively. Early adoption is permitted. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule was effective on November 5, 2018. The Company adopted this guidance in the first quarter of fiscal year 2019.
Recent Accounting Pronouncements
In June 2016, the FASB issued new guidance related to the accounting for credit losses on instruments for both financial services and non-financial services entities. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The guidance will be effective beginning January 1, 2020. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance on its consolidated financial statements.
In January 2017, the FASB issued new guidance to simplify the accounting for goodwill impairment. The guidance simplifies the measurement of goodwill impairment by removing step 2 of the goodwill impairment test, which requires the determination of the fair value of individual assets and liabilities of a reporting unit.  The new guidance requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis.  The new standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company is evaluating the impact of this new accounting guidance on its consolidated financial statements.

2.
Revenue, deferred revenue and deferred commissions
The core principle of ASC 606 is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This principle is achieved through applying the following five-step approach:
Identification of the contract, or contracts, with a customer - A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s

9


historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer. Customer payments received by the Company are non-refundable.
Identification of the performance obligations in the contract - Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are capable of being both: a) functionally distinct, whereby the customer can benefit from the goods or service either on their own or together with other resources that are readily available from third parties or from the Company, and b) contractually distinct, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, the Company applies judgment to determine whether promised goods or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised goods or services are accounted for as a combined performance obligation.
Determination of the transaction price - The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer.
Allocation of the transaction price to the performance obligations in the contract - If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price, or SSP, basis. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
Recognition of revenue when, or as, the Company satisfies a performance obligation - The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer.
Disaggregation of Revenue
A typical sales arrangement involves multiple arrangements, such as the sales of the Company’s proprietary communication Vocera Badge, perpetual software licenses, professional services, and maintenance and support services which entitle customers to unspecified upgrades, patch releases and telephone-based support. The following table depicts the disaggregation of revenue according to revenue type and is consistent with how the Company evaluates its financial performance:
 
Three months ended March 31,
(in thousands)
2019
 
2018
Product revenue
 
 
 
Device
$
10,060

 
$
12,648

Software
3,943

 
8,439

Total product
14,003

 
21,087

 

 
 
Service revenue
 
 
 
Maintenance and support
16,393

 
13,965

Professional services and training
4,913

 
5,190

Total service
21,306

 
19,155

Total revenue
$
35,309

 
$
40,242

Device revenue - In transactions where the Company delivers hardware, the Company considers itself to be the principal in the transaction and records revenue and costs of goods sold on a gross basis. Hardware revenue is generally recognized upon transfer of control to the customer.
Software revenue - Revenue from the Company’s software products is generally recognized upon transfer of control to the customer.
Maintenance and support revenue - The Company generates maintenance and support revenue primarily from post contract support (PCS) contracts, and, to a lesser extent, from sales of extended warranties on the Vocera Badge. The majority of software sales are in conjunction with PCS contracts, which generally have one-year terms. The Company recognizes revenue from PCS contracts ratably over the contractual service period. The service period typically commences upon transfer of control of the

10


corresponding software products to the customer. The Company recognizes revenue from extended warranty contracts ratably over their contractual service period, which is typically one year. This period starts one year from the date on which the transfer of control on the underlying hardware occurs because the hardware generally carries a one-year warranty.
Professional services and training revenue - Professional services and training revenue is generated when the Company installs and configures its software and devices at new or existing customer sites. The Company recognizes revenue related to professional services as they are performed.
Contracts with multiple performance obligations - Some of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative stand-alone selling price basis. For deliverables that are routinely sold separately, such as maintenance and support on the core offerings, the Company determines SSP by evaluating renewals over the trailing 12-months. For those that are not sold routinely, the Company determines SSP based on its overall pricing trends and objectives, taking into consideration market conditions and other factors, including the value of the contracts and the products sold.
Contract balances - The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable are recorded at the invoiced amount. A receivable is recognized in the period the Company delivers goods or provides services or when the right to consideration is unconditional. Payment terms on invoiced amounts are typically 30 days. The balance of accounts receivable, net of allowance for doubtful accounts, as of March 31, 2019 and December 31, 2018 is presented in the accompanying consolidated balance sheets.

Costs to obtain and fulfill a contract - The Company capitalizes certain incremental contract acquisition costs consisting primarily of commissions paid and the related payroll taxes when customer contracts are signed. The Company determines whether costs should be deferred based on its sales compensation plans, if the commissions are incremental and would not have been incurred absent the execution of the customer contract. Sales commissions for renewals of customer contracts are not commensurate with the commissions paid for the acquisition of the initial contract given the substantive difference in commission rates in proportion to their respective contract values. Commissions paid upon the initial acquisition of a contract are amortized over the estimated period of benefit, which may exceed the term of the initial contract. Accordingly, amortization of deferred costs is recognized on a systematic basis that is consistent with the pattern of revenue recognition allocated to each performance obligation and is included in sales and marketing expense in the condensed consolidated statements of operations. The Company determines its estimated period of benefit by evaluating the expected renewals of its customer contracts, the duration of its relationships with its customers and other factors. Deferred costs are periodically reviewed for impairment. Changes in the balance of total deferred commissions (contract asset) during the three months ended March 31, 2019 are as follows:
(in thousands)
December 31, 2018
 
Additions
 
Commissions Recognized
 
March 31, 2019
Deferred commissions
$
10,303

 
$
1,727

 
$
(1,708
)
 
$
10,322

Of the $10.3 million total deferred commissions balance as of March 31, 2019, the Company expects to recognize approximately 47% as commission expense over the next 12 months and the remainder thereafter.
Deferred revenue - The Company records deferred revenue when cash payments are received in advance of the performance under the contract. The current portion of deferred revenue represents the amounts that are expected to be recognized as revenue within one year of the consolidated balance sheet date. Changes in the balance of total deferred revenue (contract liability) during the three months ended March 31, 2019 are as follows:
(in thousands)
December 31, 2018
 
Additions
 
Revenue Recognized
 
March 31, 2019
Deferred revenue
$
58,632

 
$
14,918

 
$
(20,605
)
 
$
52,945



11


Revenue recognized during the three months ended March 31, 2019 from deferred revenue balances at the beginning of the period was $15.2 million. Revenue recognized during the three March 31, 2018 from deferred revenue balances at the beginning of the period was $14.5 million.
The majority of the Company’s “contracted but not recognized” performance obligations are not subject to cancellation terms. The Company’s “contracted but not recognized” revenue, which represents revenue allocated to performance obligations for revenue contracted, and which includes deferred revenue and non-cancelable amounts that will be invoiced and recognized as revenue in future periods, was $118.6 million as of March 31, 2019, of which the Company expects to recognize approximately 62% as revenue over the next 12 months and the remainder thereafter.

3.
Fair Value of Financial Instruments
The Company’s cash, cash equivalents and short-term investments are carried at their fair values with any differences from their amortized cost recorded in equity as unrealized gains (losses) on marketable securities. As a basis for determining the fair value of its assets and liabilities, the Company follows a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. During the three months ended March 31, 2019, there have been no transfers between Level 1 and Level 2 fair value instruments and no transfers in or out of Level 3.
The Company’s money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The fair value of the Company’s Level 2 fixed income securities is obtained from independent pricing services, which may use quoted market prices for identical or comparable instruments or model-driven valuations using observable market data or other inputs, corroborated by observable market data. The Company does not have any financial instruments which are valued using Level 3 inputs.
In addition to its cash, cash equivalents and short-term investments, the Company measures the fair value of its Convertible Senior Notes on a quarterly basis for disclosure purposes. The Company considers the fair value of the Convertible Senior Notes at March 31, 2019 to be a Level 2 measurement due to limited trading activity of the Convertible Senior Notes. Refer to Note 8 to the consolidated financial statements for further information.
The Company’s assets that are measured at fair value on a recurring basis, by level, within the fair value hierarchy as of March 31, 2019 and December 31, 2018, are summarized as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
 
Level 1

Level 2

Total

 
Level 1

Level 2

Total

Assets
 
 
 
 
 
 
 
Money market funds
$
3,549

$

$
3,549

 
$
3,737

$

$
3,737

Commercial paper

12,587

12,587

 

16,570

16,570

U.S. government agency securities

1,784

1,784

 

3,325

3,325

U.S. Treasury securities

1,736

1,736

 

2,730

2,730

Corporate debt securities

175,231

175,231

 

166,759

166,759

Total assets measured at fair value
$
3,549

$
191,338

$
194,887

 
$
3,737

$
189,384

$
193,121


4.
Cash, Cash Equivalents and Short-Term Investments
The following tables present current and prior-year-end balances for cash, cash equivalents and short-term investments (in thousands):

12


 
As of March 31, 2019
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair value
Cash and cash equivalents:
 
 
 
 
 
 
 
Demand deposits and other cash
$
27,444

 
$

 
$

 
$
27,444

Money market funds
3,549

 

 

 
3,549

Commercial paper
1,944

 

 
(1
)
 
1,943

Total cash and cash equivalents
32,937

 

 
(1
)
 
32,936

 
 
 
 
 
 
 
 
Short-Term Investments:
 
 
 
 
 
 
 
Commercial paper
10,641

 
5

 
(2
)
 
10,644

U.S. government agency securities
1,789

 

 
(5
)
 
1,784

U.S. Treasury securities
1,740

 

 
(4
)
 
1,736

Corporate debt securities
175,044

 
239

 
(52
)
 
175,231

Total short-term investments
189,214

 
244

 
(63
)
 
189,395

Total cash, cash equivalents and short-term investments
$
222,151

 
$
244

 
$
(64
)
 
$
222,331

 
As of December 31, 2018
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair value
Cash and cash equivalents:
 
 
 
 
 
 
 
Demand deposits and other cash
$
28,049

 
$

 
$

 
$
28,049

Money market funds
3,737

 

 

 
3,737

Commercial paper
2,491

 

 
(1
)
 
2,490

Total cash and cash equivalents
34,277

 

 
(1
)
 
34,276

Short-Term Investments:
 
 
 
 
 
 
 
Commercial paper
14,091

 

 
(11
)
 
14,080

U.S. government agency securities
3,339

 

 
(14
)
 
3,325

U.S. Treasury securities
2,740

 

 
(10
)
 
2,730

Corporate debt securities
167,110

 
28

 
(379
)
 
166,759

Total short-term investments
187,280

 
28

 
(414
)
 
186,894

Total cash, cash equivalents and short-term investments
$
221,557

 
$
28

 
$
(415
)
 
$
221,170

 
 
 
 
 
 
 
 
The Company has determined that the unrealized losses on its short-term investments as of March 31, 2019 and December 31, 2018 do not constitute an “other than temporary impairment.” The unrealized losses for the short-term investments have all been in a continuous unrealized loss position for less than twelve months. The Company’s conclusion of no “other than temporary impairment” is based on the high credit quality of the securities, their short remaining maturity and the Company’s intent and ability to hold such loss securities until maturity.

13


Classification of the cash, cash equivalent and short-term investments by contractual maturity was as follows:
(in thousands)
One year or shorter

 
Between 1 and 2 years

 
Total

Balances as of March 31, 2019
 
 
 
 
 
Cash and cash equivalents (1)
$
32,936

 
$

 
$
32,936

Short-term investments
111,590

 
77,805

 
189,395

Cash, cash equivalents and short-term investments
$
144,526

 
$
77,805

 
$
222,331

 
 
 
 
 
 
Balances as of December 31, 2018
 
 
 
 
 
Cash and cash equivalents (1)
$
34,276

 
$

 
$
34,276

Short-term investments
109,451

 
77,443

 
186,894

Cash, cash equivalents and short-term investments
$
143,727

 
$
77,443

 
$
221,170

 
 
 
 
 
 
(1) Includes demand deposits and other cash, money market funds and other cash equivalent securities, all with 0-90 day maturity at purchase.

5.
Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):
 
Three months ended March 31,
 
2019
 
2018
 
 
 
 
Numerator:
 
 
 
Net loss
$
(11,735
)
 
$
(4,770
)
 
 
 
 
Denominator:
 
 
 
Weighted average shares used to compute diluted loss per common share
30,800

 
29,476

 
 
 
 
Net loss per share
 
 
 
   Basic
$
(0.38
)
 
$
(0.16
)
   Diluted
$
(0.38
)
 
$
(0.16
)
The following securities were not included in the calculation of diluted shares outstanding as the effect would have been anti-dilutive:
 
Three months ended March 31,
(in thousands)
2019
 
2018
Options to purchase common stock, including ESPP
724

 
1,330

Restricted stock units
1,850

 
2,027


6.
Goodwill and Intangible Assets
Goodwill
As of March 31, 2019 and December 31, 2018, the Company had $49.2 million and $49.2 million of goodwill, respectively, with $41.2 million and $8.0 million allocated to the Company’s Product and Services operating segments, respectively. As of March 31, 2019, there were no changes in circumstances indicating that the carrying values of goodwill or acquired intangibles may not be recoverable.

14


Intangible Assets
Acquisition-related intangible assets are amortized either straight-line, or over the life of the assets on a basis that resembles the economic benefit of the assets. This yields amortization in the latter case that is higher in earlier periods of the useful life.
The estimated useful lives and carrying value of acquired intangible assets are as follows:
 
 
 
March 31, 2019
 
December 31, 2018
(in thousands)
Range of
Useful Life
(years)
 
Gross
 Carrying
 Amount
 
Accumulated
Amortization
 
Net
 Carrying
 Amount
 
Gross
 Carrying
 Amount
 
Accumulated
Amortization
 
Net
 Carrying
 Amount
Developed technology
3 to 7
 
$
10,050

 
$
8,338

 
$
1,712

 
$
10,050

 
$
7,731

 
$
2,319

Customer relationships
7 to 9
 
10,920

 
4,963

 
5,957

 
10,920

 
4,645

 
6,275

Backlog
3
 
1,400

 
1,245

 
155

 
1,400

 
1,203

 
197

Non-compete agreements
2 to 4
 
460

 
460

 

 
460

 
460

 

Trademarks
3 to 7
 
1,110

 
916

 
194

 
1,110

 
831

 
279

Intangible assets, net book value
 
 
$
23,940

 
$
15,922

 
$
8,018

 
$
23,940

 
$
14,870

 
$
9,070

Amortization expense was $1.0 million and $1.3 million for the three months ended March 31, 2019 and 2018, respectively.
Amortization of acquired intangible assets is reflected in the cost of revenue for developed technology and backlog and in operating expenses for the other intangible assets. The estimated future amortization of existing acquired intangible assets as of March 31, 2019 was as follows:
(in thousands)
 
Future amortization
2019 (remaining nine months)
 
$
2,665

2020
 
1,251

2021
 
1,127

2022
 
1,050

2023
 
1,050

2024
 
875

     Future amortization expense
 
$
8,018



15


7.
Balance Sheet Components
Inventories
(in thousands)
March 31,
2019
 
December 31,
2018
Raw materials
$
233

 
$
197

Finished goods
5,754

 
4,153

        Total inventories
$
5,987

 
$
4,350

Property and equipment, net
(in thousands)
March 31,
2019
 
December 31,
2018
Computer equipment and software
$
11,055

 
$
10,433

Furniture, fixtures and equipment
2,246

 
2,246

Leasehold improvements
5,194

 
5,183

Manufacturing tools and equipment
2,404

 
2,371

Construction in process
408

 
520

        Property and equipment, at cost
21,307

 
20,753

Less: Accumulated depreciation
(13,809
)
 
(13,285
)
        Property and equipment, net
$
7,498

 
$
7,468

Depreciation and amortization expense was $0.9 million and $0.7 million for the three months ended March 31, 2019 and 2018, respectively.
Net investment in sales-type leases
The Company has sales-type leases with terms of 3 to 4 years. Sales-type lease receivables are collateralized by the underlying equipment. The components of the Company’s net investment in sales-type leases are as follows:
(in thousands)
March 31,
2019
 
December 31,
2018
Minimum payments to be received on sales-type leases
$
1,706

 
$
2,111

Less: Unearned interest income and executory revenue portion
(992
)
 
(1,387
)
Net investment in sales-type leases
714

 
724

Less: Current portion
(575
)
 
(427
)
Non-current net investment in sales-type leases
$
139

 
$
297

Sales type lease activity recognized in the consolidated statement of operations are as follows:
 
Three months ended March 31,
(in thousands)
2019
 
2018
Lease revenue
$
661

 
$
1,009

Less: Cost of lease shipments
(52
)
 
(137
)
Gross profit
609

 
872

 
 
 
 
Interest income (expense), net on lease receivable
(3
)
 
(1
)
Initial cost expensed
31

 
46



16


There were no allowances for doubtful accounts on these leases as of March 31, 2019 and December 31, 2018. There is no guaranteed or unguaranteed residual value on the leased equipment. The current and non-current net investments in sales-type leases are reported as components of the consolidated balance sheet captions “other receivables” and “other long-term assets,” respectively.
The minimum payments expected to be received for future years under sales-type leases as of March 31, 2019 were as follows:
(in thousands)
Future lease payments
2019 (remaining nine months)
$
740

2020
736

2021
205

2022
25

     Total
$
1,706

Accrued payroll and other current liabilities
(in thousands)
March 31,
2019
 
December 31,
2018
Payroll and related expenses
$
5,453

 
$
7,241

Accrued payables
2,305

 
2,115

Operating lease liabilities, current portion
1,855

 

Lease financing, current portion
941

 
956

Product warranty
374

 
376

Customer prepayments
655

 
629

Sales and use tax payable
364

 
379

Other
1,275

 
1,189

        Total accrued payroll and other current liabilities
$
13,222

 
$
12,885

The changes in the Company’s product warranty reserve are as follows:
 
Three months ended March 31,
(in thousands)
2019
 
2018
Warranty balance at the beginning of the period
$
376

 
$
353

Warranty expense accrued for shipments during the period
77

 
86

Changes in estimate related to pre-existing warranties
(31
)
 
(59
)
Warranty settlements made
(48
)
 
(77
)
Total product warranty
$
374

 
$
303


Leases
The Company has operating leases for office space at its headquarters and subsidiaries under non-cancelable operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet; lease expense for these leases is recognized on a straight-line basis over the lease term. The Company’s lease terms have remaining lease terms of nine months to four years. Operating lease cost, including short-term operating leases was $0.6 million and $0.7 million for the three months ended March 31, 2019 and 2018, respectively.
Supplemental balance sheet information related to leases was as follows:

17


(in thousands)
March 31,
2019
Operating lease right of use asset
$
5,502

Accrued payroll and other current liabilities
1,855

Other long-term liabilities
4,865

Total operating lease liabilities
$
6,720

Other information related to leases was as follows:
 
Three months ended March 31,
(in thousands)
2019
Supplemental Cash Flow Information
 
Cash paid for amounts included in the measurement of lease liabilities
$
630

Right-of-use assets obtained in exchange for lease obligations
$
689

Weighted average remaining lease term
3.11 years

Weighted average discount rate
8
%
Maturities of lease liabilities as of March 31, 2019 are as follows:
(in thousands)
Operating leases
2019 (remaining nine months)
$
1,857

2020
2,521

2021
2,403

2022
762

2023
18

Total maturities of lease liabilities
7,561

Less imputed interest
$
(841
)
Total
$
6,720


8.
Convertible Senior Notes
In May 2018, the Company issued $143.75 million aggregate principal amount of 1.50% Convertible Senior Notes due 2023, including $18.75 million aggregate principal amount of such notes pursuant to the exercise in full of options granted to the initial purchasers, collectively the “Notes.” The Notes are unsecured, unsubordinated obligations and bear interest at a fixed rate of 1.50% per annum, payable semi-annually in arrears on May 15 and November 15 of each year, commencing on November 15, 2018. The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $138.9 million.
Each $1,000 principal amount of the Notes will initially be convertible into 31.0073 shares of the Company’s common stock, the “Conversion Option,” which is equivalent to an initial conversion price of approximately $32.25 per share, subject to adjustment upon the occurrence of specified events. The Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding February 15, 2023, only under the following circumstances:
(1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2018 (and only during such calendar quarter), if the last reported sale price of the Company common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price of the Notes on each applicable trading day;
(2) during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each day of that ten day consecutive trading day period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate of the Notes on such trading day; or

18


(3) upon the occurrence of specified corporate events (as set forth in the indenture governing the Notes).
On or after February 15, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. If certain specified fundamental changes occur (as set forth in the indenture governing the Notes) prior to the maturity date, holders of the Notes may require the Company to repurchase for cash all or any portion of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events occur prior to the applicable maturity date, the Company will increase the conversion rate for a holder who elects to convert their notes in connection with such a corporate event in certain circumstances. It is the Company’s current intent and policy to settle conversions through combination settlement which involves repayment of the principal portion in cash and any excess of the conversion value over the principal amount in shares of its common stock. During the three months ended March 31, 2019, the conditions allowing holders of the Notes to convert have not been met. The Notes are therefore not convertible during the three months ended March 31, 2019 and are classified as long-term debt.
In accounting for the transaction, the Notes were separated 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 carrying amount of the equity component representing the Conversion Option was $33.4 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component was recorded in additional paid-in capital and will be 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, the “debt discount,” is amortized to interest expense over the contractual term of the Notes at an effective interest rate of 7.6%.
In accounting for the debt issuance costs of $4.9 million related to the Notes, the Company allocated the total amount incurred to the liability and equity components of the Notes based on their relative values. Issuance costs attributable to the liability component were $3.8 million and will be amortized to interest expense using the effective interest method over the contractual term of the Notes. Issuance costs attributable to the equity component were $1.1 million and are included with the equity component in additional paid-in capital.
The Notes consist of the following:
(in thousands)
March 31,
2019
 
December 31,
2018
Liability:
 
 
 
   Principal
$
143,750

 
$
143,750

   Unamortized debt discount
(28,424
)
 
(29,846
)
   Unamortized issuance costs
(3,204
)
 
(3,364
)
     Net carrying amount
$
112,122

 
$
110,540

 
 
 
 
Stockholders’ equity:
 
 
 
   Debt discount for conversion option
$
33,350

 
$
33,350

   Issuance costs
$
(1,136
)
 
$
(1,136
)
     Net carrying amount
$
32,214

 
$
32,214


The total estimated fair value of the Notes as of March 31, 2019 was approximately $174.1 million. The fair value was determined based on the closing trading price per $100 of the Notes as of the last day of trading for the period. The fair value of the Notes is primarily affected by the trading price of the Company’s common stock and market interest rates. Based on the closing price of the Company’s common stock of $31.63 on March 29, 2019, the if-converted value of the Notes of $141.0 million was less than their principal amount.     

Interest expense related to the Notes is as follows:

19


 
Three months ended March 31,
(in thousands)
2019
Contractual interest expense
$
539

Amortization of debt discount
$
1,422

Amortization of issuance costs
$
160

Total interest expense
$
2,121


Capped Calls
In connection with the pricing of the Notes, the Company entered into privately negotiated capped call transactions with certain counterparties, the “Capped Calls.” The Capped Calls each have an initial strike price of approximately $32.25 per share, subject to certain adjustments, which correspond to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $38.94 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, approximately 4.5 million shares of the Company’s common stock. Conditions that cause adjustments to the initial strike price of the Capped Calls mirror conditions that result in corresponding adjustments for the Notes. The Capped Calls are generally intended to reduce or offset the potential dilution to the Company’s common stock upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the Notes. As these transactions meet certain accounting criteria, the Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. The cost of $8.9 million incurred in connection with the Capped Calls was recorded as a reduction to additional paid-in capital.
The net impact to the Company’s stockholders' equity, included in additional paid-in capital, of the above components of the Notes is as follows:
(in thousands)
March 31,
2019
Conversion option
$
33,350

Purchase of capped calls
$
(8,907
)
Issuance costs
$
(1,136
)
Total
$
23,307


Impact on Earnings Per Share
The Notes will not have an impact on the Company’s diluted earnings per share until they meet the criteria for conversion, as discussed above, as the Company intends to settle the principal amount of the Notes in cash upon conversion. Under the treasury stock method, in periods when the Company reports net income, the Company is required to include the effect of additional shares that may be issued under the Notes when the price of its’ common stock exceeds the conversion price. However, upon conversion, there will be no economic dilution from the Notes until the average market price of the Company’s common stock exceeds the cap price of $38.94 per share, as exercise of the capped calls offsets any dilution from the Notes from the conversion price up to the cap price. Capped Calls are excluded from the calculation of diluted earnings per share, as they would be anti-dilutive under the treasury stock method.

9.
Commitments and Contingencies
Non-cancelable Material Commitments
The Company is required to purchase unused, non-cancelable, non-returnable raw material inventory that was purchased by its contract manufacturers based on committed finished goods orders from the Company, certain long lead-time raw materials based on the Company’s forecast and current work-in-progress materials. As of March 31, 2019 and December 31, 2018, approximately $12.3 million and $11.1 million, respectively, of such inventory was purchased and held by the third-party manufacturers which was subject to these purchase guarantees.

20


Indemnifications
The Company undertakes, in the ordinary course of business, to (i) defend customers and other parties from certain third-party claims associated with allegations of trade secret misappropriation, infringement of copyright, patent or other intellectual property rights, tortious damage to persons or property or breaches of certain Company obligations relating to confidentiality (e.g., safeguarding protected health information) and (ii) indemnify and hold harmless such parties from certain resulting damages, costs and other liabilities. The term of these undertakings may be perpetual and the maximum potential liability of the Company under certain of these undertakings is not determinable. Based on its historical experience, the Company believes the liability associated with these undertakings is minimal.
The Company has entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of the individual. The Company currently has directors and officers insurance. As there has been no significant history of losses, no expense accrual has been made.
Litigation    
From time to time, the Company may be involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters which arise in the ordinary course of business. The Company defends itself vigorously against any such claims. Although the outcome of these matters is currently not determinable, management expects that any losses from existing matters that are probable or reasonably possible of being incurred as a result of these matters would not be material to the financial statements as a whole.

10.
Stock-based Compensation and Awards
Stock Option Activity
A summary of the stock option activity for the three months ended March 31, 2019 is presented below:
 
Options Outstanding
 
Number of options
 
Weighted average exercise price
Weighted average remaining contractual term
Aggregate intrinsic value
 
 
(in years)
(in thousands)
Outstanding at December 31, 2018
797,501

 
$
13.31

4.71
$
20,767

Options granted

 

 
 
Options exercised
(122,376
)
 
12.78

 
 
Options canceled


 


 
 
Outstanding at March 31, 2019
675,125

 
$
13.41

4.44
$
12,303

At March 31, 2019, there was no unrecognized compensation cost related to options. As of March 31, 2019, there were 2,273,713 shares that remained available for future issuance of options, restricted stock units (“RSUs”) or other equity awards under the 2012 Equity Incentive Plan.
Employee Stock Purchase Plan
In March 2012, the Company’s 2012 Employee Stock Purchase Plan (the “ESPP”) was approved. No shares of common stock were purchased during the three months ended March 31, 2019 and March 31, 2018. As of March 31, 2019, there were 1,028,384 shares available for future issuance under the ESPP.

21


The following Black-Scholes option-pricing assumptions were used for each respective period for the ESPP:
 
Three months ended March 31,
 
2019
 
2018
Expected term (in years)
0.50
 
0.50
Volatility
33.0
%
 
29.0%
Risk-free interest rate
2.51
%
 
1.39%
Dividend yield
0%
 
0%
Restricted Stock Units
A summary of RSU activity for the three months ended March 31, 2019 is presented below:
 
Restricted Stock Units
 
Number of shares
 
Weighted Average Grant Date Fair Value per Share
Outstanding at December 31, 2018
1,807,180

 
$
23.13

Granted
152,686

 
38.54

Vested
(93,667
)
 
21.57

Forfeited
(15,864
)
 
27.12

Outstanding at March 31, 2019
1,850,335

 
$
24.44

At March 31, 2019, there was $29.2 million of unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted-average period of 1.50 years.
Allocation of Stock-Based Compensation Expense
The following table presents the allocation of stock-based compensation expense:
 
Three months ended March 31,
(in thousands)
2019
 
2018
Cost of revenue
$
978

 
$
747

Research and development
822

 
607

Sales and marketing
1,720

 
1,496

General and administrative
2,024

 
1,737

Total stock-based compensation
$
5,544

 
$
4,587



22


11. Segments
The Company has two operating segments, which are both reportable business segments: (i) Product and (ii) Service, both of which are comprised of Vocera and its wholly-owned subsidiaries’ results of operations.
The following table presents a summary of the operating segments:
 
Three months ended March 31,
 
2019
 
2018
(in thousands)
 
 
 
Revenue
 
 
 
Product
$
14,003

 
$
21,087

Service
21,306

 
19,155

Total revenue
35,309

 
40,242

 
 
 
 
Cost of revenue
 
 
 
Product
5,334

 
6,345

Service
10,290

 
9,996

Total cost of revenue
15,624

 
16,341

 
 
 
 
Gross profit
 
 
 
Product
8,669

 
14,742

Service
11,016

 
9,159

Total gross profit
19,685

 
23,901

 
 
 
 
Operating expenses
30,745

 
28,695

Interest income (expense), net and other
(711
)
 
(64
)
Loss before income taxes
$
(11,771
)
 
$
(4,858
)

12.
Income Taxes
The Company recorded a $36,000 and $88,000 benefit from income taxes for the three months ended March 31, 2019 and 2018, respectively. The benefit recorded for the three months ended March 31, 2019 was primarily due to the accretion of the deferred tax liability associated with indefinite lived intangibles, the tax effect of unrealized gains on investments recorded within other comprehensive income, taxes on international operations and state income taxes. The benefit recorded for the three months ended March 31, 2018 was primarily due to a reduction in the U.S. valuation allowance attributable to indefinite lived intangibles becoming a source of future taxable income to realize the deferred tax asset recorded for the U.S. federal net operating loss generated in the current year. This deferred tax asset will have an indefinite carryforward period as a result of recently enacted tax law changes. The benefit recorded was offset by taxes on international operations and state income taxes.
As of March 31, 2019, the Company has provided a valuation allowance against certain federal and state deferred tax assets. Management continues to evaluate the realizability of deferred tax assets and the related valuation allowance. If management’s assessment of the deferred tax assets or the corresponding valuation allowance were to change, the Company would record the related adjustment to income during the period in which management makes the determination.
As of March 31, 2019, there were no material changes to either the nature or the amounts of the uncertain tax positions previously determined for the year ended December 31, 2018.


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements


23


The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our other Securities and Exchange Commission, or SEC, filings, including our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 27, 2019. These discussions contain forward-looking statements reflecting our current expectations that involve risks and uncertainties which are subject to safe harbors under the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements include, but are not limited to, statements concerning our plans, objectives, expectations and intentions, future financial position, future revenues, projected costs, expectations regarding demand and acceptance for our technologies, growth opportunities and trends in the market in which we operate, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.
Business Overview
We are a provider of secure, integrated, intelligent communication and clinical workflow solutions, focused on empowering mobile workers in healthcare, hospitality, retail, energy and other mission-critical mobile work environments, in the United States and internationally. The significant majority of our business is generated from sales of our solutions in the healthcare market to help our customers improve quality of care, patient and staff experience and increase operational efficiency.
We primarily sell products, software maintenance and professional services directly to end users. Total revenue decreased 12.3% from $40.2 million for the three months ended March 31, 2018 to $35.3 million for the three months ended March 31, 2019. For the three months ended March 31, 2019, we recorded a net loss of $11.7 million compared to a net loss of $4.8 million for the three months ended March 31, 2018.
Our diverse customer base ranges from large hospital systems to small local hospitals, as well as other healthcare facilities and customers in non-healthcare markets. We do not rely on any one customer for a substantial portion of our revenue. While we have international customers in other English-speaking countries such as Canada, the United Kingdom, Australia, New Zealand and parts of the Middle East, most of our customers are located in the United States. International customers represented 9.3%, 10.2% and 10.2% of our revenue in the three months ended March 31, 2019, and the years ended December 31, 2018 and 2017, respectively. We believe certain international markets represent attractive growth opportunities. We are exploring plans to expand our presence in other English-speaking markets and enter non-English speaking markets.
We outsource the manufacturing of our hardware products. Our outsourced manufacturing model allows us to scale our business without the significant capital investment and on-going expenses required to establish and maintain manufacturing operations. We work closely with our contract manufacturers, including Sercomm and SMTC Corporation, and key suppliers to manage the procurement, quality and cost of components. We seek to maintain an optimal level of finished goods inventory to meet our forecast for sales and unanticipated shifts in sales volume and mix.
Convertible Senior Notes
In May 2018, we issued $143.75 million aggregate principal amount of 1.50% Convertible Senior Notes due 2023, including $18.75 million aggregate principal amount of such notes pursuant to the exercise in full of options granted to the initial purchasers, collectively the “Notes.” The total net proceeds from the offering, after deducting initial purchase discounts and debt issuance costs, were approximately $138.9 million.
In connection with the pricing of the Notes, we entered into privately negotiated capped call transactions with certain counterparties, the “Capped Calls.” The Capped Calls each have an initial strike price of approximately $32.25 per share, subject to certain adjustments, which correspond to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $38.94 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, approximately 4.5 million shares of our common stock. We used proceeds of $8.9 million to purchase the Capped Calls, which were recorded as a reduction to additional paid-in capital. For further discussion on the Capped Calls, please refer to Note 8 in the notes to the condensed consolidated financial statements.
We expect to use the remaining net proceeds for general corporate purposes, which may include funding research and development, increasing working capital, acquisitions or investments in complementary businesses, products or technologies and capital expenditures.

24


Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended December 31, 2018, except as disclosed in Note 1 to the condensed consolidated financial statements “Recently Adopted Accounting Pronouncements.”
Results of Operations     
The following table presents our results of operations for the periods indicated. The period-to-period comparisons of results are not necessarily indicative of results for future periods.
 
Three months ended March 31,
Consolidated statement of operations data:
2019
 
2018
(unaudited)
(in thousands)
Amount
 
% Revenue
 
Amount
 
% Revenue
Revenue
 
 
 
 
 
 
 
  Product
$
14,003

 
39.7
 %
 
$
21,087

 
52.4
 %
  Service
21,306

 
60.3

 
19,155

 
47.6

     Total revenue
35,309

 
100.0

 
40,242

 
100.0

Cost of revenues
 
 

 
 
 

  Product
5,334

 
15.1

 
6,345

 
15.8

  Service
10,290

 
29.1

 
9,996

 
24.8

     Total cost of revenues
15,624

 
44.2

 
16,341

 
40.6

Gross profit
19,685

 
55.8

 
23,901

 
59.4

Operating expenses:
 
 

 
 
 

  Research and development
8,146

 
23.1

 
7,314

 
18.2

  Sales and marketing
16,019

 
45.4

 
15,022

 
37.3

  General and administrative
6,580

 
18.6

 
6,359

 
15.8

     Total operating expenses
30,745

 
87.1

 
28,695

 
71.3

Income (loss) from operations
(11,060
)
 
(31.3
)
 
(4,794
)
 
(11.9
)
Interest income
1,279

 
3.6

 
215

 
0.5

Interest expense
(2,121
)
 
(6.0
)
 

 

Other income (expense), net
131

 
0.4

 
(279
)
 
(0.7
)
Income (loss) before income taxes
(11,771
)
 
(33.3
)
 
(4,858
)
 
(12.1
)
Benefit from income taxes
36

 
0.1

 
88

 
0.2

Net income (loss)
$
(11,735
)
 
(33.2
)%
 
$
(4,770
)
 
(11.9
)%

25


Revenue:
 
Three months ended March 31,
 
2019
 
2018
 
Change
(in thousands)
Amount
 
Amount
 
Amount
%
Product revenue
 
 
 
 
 
 
Device
$
10,060

 
$
12,648

 
$
(2,588
)
(20.5
)%
Software
3,943

 
8,439

 
(4,496
)
(53.3
)
Total product
14,003

 
21,087

 
(7,084
)
(33.6
)
 

 
 
 
 
 
Service revenue
 
 
 
 
 
 
Maintenance and support
16,393

 
13,965

 
2,428

17.4

Professional services and training
4,913

 
5,190

 
(277
)
(5.3
)
Total service
21,306

 
19,155

 
2,151

11.2

Total revenue
$
35,309

 
$
40,242

 
$
(4,933
)
(12.3
)%
Three months ended March 31, 2019 compared to the three months ended March 31, 2018.
Total revenue decreased $4.9 million, or 12.3%, for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.
Product revenue decreased $7.1 million, or 33.6%, for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Device revenue decreased $2.6 million, or 20.5%, and software revenue decreased $4.5 million, or 53.3%, for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The decrease in device revenue was driven primarily by a decrease in unit sales of badges and related accessories. The decrease in software revenue is primarily due to a decrease in sales of new software licenses and expansions of existing customer licenses.
Service revenue increased $2.2 million, or 11.2%, for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Software maintenance and support revenue increased $2.4 million, or 17.4%, and professional services and training revenue decreased $0.3 million, or 5.3%, for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The increase in software maintenance and support revenue was primarily the result of having a larger customer base purchasing software maintenance contracts. The decrease in professional services and training revenue was due to a decrease in implementation services for our solutions.
Cost of revenue:
 
Three months ended March 31,
 
2019
 
2018
 
Change
(in thousands)
Amount
 
Amount
 
Amount
%
Cost of revenue
 
 
 
 
 
 
Product
$
5,334

 
$
6,345

 
$
(1,011
)
(15.9
)%
Service
10,290

 
9,996

 
294

2.9

Total cost of revenue
$
15,624

 
$
16,341

 
$
(717
)
(4.4
)%
 
 
 
 
 
 
 
Gross margin
 
 
 
 
 
 
Product
61.9
%
 
69.9
%
 
(8.0
)%
 
Service
51.7
%
 
47.8
%
 
3.9
 %
 
Total gross margin
55.8
%
 
59.4
%
 
(3.6
)%
 
Three months ended March 31, 2019 compared to the three months ended March 31, 2018.
Cost of product revenue decreased $1.0 million, or 15.9%, for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. This was primarily driven by lower product revenue. Product gross margin as a percentage of product revenue decreased in the three months ended March 31, 2019 compared to the three months ended March 31, 2018, due primarily to a lower mix of software revenue.

26


Cost of service revenue increased $0.3 million, or 2.9%, for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The cost of service revenue increased primarily due to increased headcount. Service gross margin as a percentage of service revenue increased for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 due primarily to a higher mix of support and maintenance revenue.
Operating expenses:
 
Three months ended March 31,
 
2019
 
2018
 
Change
(in thousands)
Amount
 
Amount
 
Amount
%
Operating expenses
 
 
 
 
 
 
Research and development
$
8,146

 
$
7,314

 
$
832

11.4
%
Sales and marketing
16,019

 
15,022

 
997

6.6

General and administrative
6,580

 
6,359

 
221

3.5

Total operating expenses
$
30,745

 
$
28,695

 
$
2,050

7.1
%
Three months ended March 31, 2019 compared to the three months ended March 31, 2018.
Research and development expense. Research and development expense increased $0.8 million or 11.4% for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. This was primarily due to an increase in compensation and benefits as a result of increased headcount.
Sales and marketing expense. Sales and marketing expense increased $1.0 million or 6.6% for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. This was primarily due to a $0.7 million increase in marketing development and a $0.3 million increase in travel expense.
General and administrative expense. General and administrative expense increased $0.2 million, or 3.5%, for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. This was primarily due to an increase in compensation and benefits as a result of increased headcount.
Interest Income and Other Expense, Net:
 
Three months ended March 31,
(in thousands)
2019
 
2018
 
Change

Interest income
$
1,279

 
$
215

 
$
1,064

Interest expense
(2,121
)
 

 
(2,121
)
Other income (expense), net
131

 
(279
)
 
410

Three months ended March 31, 2019 compared to the three months ended March 31, 2018.
Interest income. Interest income increased $1.1 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. This increase was due to higher cash and short-term investment balances and earning a higher rate of return on our investments. For further discussion on the Notes, please refer to Note 8 to the condensed consolidated financial statements.
Interest expense. For the three months ended March 31, 2019 we had interest expense of $2.1 million resulting from the amortization of debt discount and debt issuance costs and the contractual interest incurred on the issuance of the Notes.
Other income (expense), net. The change in other income (expense) in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was primarily due to foreign exchange fluctuations.
Liquidity and Capital Resources
As of March 31, 2019, we had cash and cash equivalents and short-term investments of $222.3 million. We believe that our existing sources of liquidity will satisfy our working capital and capital requirements for at least the next twelve months and the foreseeable future.

27


 
Three months ended March 31,
(in thousands)
2019
 
2018
Consolidated Statements of Cash Flow Data:
 
 
 
Net cash provided by operating activities
$
945

 
$
1,132

Net cash used in investing activities
(2,578
)
 
(1,043
)
Net cash provided by financing activities
293

 
40

Net increase (decrease) in cash and cash equivalents
$
(1,340
)
 
$
129

Operating activities
Cash provided by operating activities was $0.9 million for the three months ended March 31, 2019, due to a net loss of $11.7 million, offset by non-cash items such as stock-based compensation of $5.5 million, amortization of debt discount and issuance costs of $1.6 million, an increase in lease-related performance liabilities of $0.3 million and depreciation and amortization of $1.9 million for property and equipment and acquired intangible assets. With respect to changes in assets and liabilities, we experienced a decrease in accounts receivable of $15.7 million, an increase of $1.2 million in other receivables, an increase of $1.6 million in inventories, an increase of $0.4 million in prepaid expenses and other assets, an decrease of $1.2 million in accounts payable, an decrease of $1.7 million in accrued payroll and other liabilities and a $5.7 million decrease in deferred revenue.
Cash used in operating activities was $1.1 million for the three months ended March 31, 2018, due to a net loss of $4.8 million, a reduction in lease-related performance obligations of $0.3 million, offset by non-cash items such as stock-based compensation of $4.6 million and depreciation and amortization of $2.0 million for property and equipment and acquired intangible assets. With respect to changes in assets and liabilities, we experienced a decrease in accounts receivable of $4.9 million, an increase of $1.8 million in accounts payable and a decrease in deferred commissions of $0.6 million. These factors were offset by certain cash outflows, including an increase of $0.8 million in inventories, an increase of $1.2 million in prepaid expenses and other assets, a decrease of $5.0 million in accrued payroll and other liabilities and a $0.8 million decrease in deferred revenue.
Investing activities
Cash used in investing activities was $2.6 million for the three months ended March 31, 2019, due to $29.6 million of short-term investment maturities, offset by $31.3 million for purchases of short-term investments. An additional $0.9 million of cash was used for the purchase of property and equipment and leasehold improvements.
Cash used in investing activities was $1.0 million for the three months ended March 31, 2018 due to $6.0 million for purchases of short-term investments, offset by $5.5 million of short-term investment maturities. An additional $0.6 million of cash was used for the purchase of property and equipment and leasehold improvements.
Financing activities
Cash provided by financing activities was $0.3 million for the three months ended March 31, 2019, attributable to $1.6 million of proceeds from stock option exercises. This was partially offset by $1.3 million cash paid for employee taxes paid on net share settlement.
Cash provided by financing activities was $0.0 million for the three months ended March 31, 2018, attributable to $1.0 million of proceeds from stock option exercises and $0.1 million of cash from lease-related performance obligations. This was partially offset by $1.0 million cash paid for employee taxes paid on net share settlement.
Off-Balance Sheet Arrangements
During the three months ended March 31, 2019, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Refer to Note 9 to the condensed consolidated financial statements, “Commitments and Contingencies,” for a discussion of our non-cancelable purchase commitments.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. To achieve this objective, historically we have invested in money market funds. With the proceeds from our two public offerings in 2012 and the issuance of our convertible senior notes in 2018, we have invested in a broader portfolio of high credit quality short-term securities. To minimize the exposure due to an adverse shift in interest rates, we maintain an average portfolio duration of one year or less.

28


Our primary exposure to market risk is interest income and expense sensitivity, which is affected by changes in the general level of the interest rates in the United States. However, because of the short-term nature of our interest-bearing securities, a 10% change in market interest rates would not be expected to have a material impact on our consolidated financial condition or results of operations.
Historically our operations have consisted of research and development and sales activities in the United States. As a result, our financial results have not been materially affected by factors such as changes in foreign currency exchange rates or economic conditions in foreign markets. We are developing plans to expand our international presence. Accordingly, we expect that our exposure to changes in foreign currency exchange rates and economic conditions may increase in future periods.
Item 4.    Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to management, including principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
As of March 31, 2019, we carried out an evaluation under the supervision of, and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2019.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting which occurred during the period covered by this Quarterly Report on Form 10-Q which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

29


PART II: OTHER INFORMATION
Item 1.
Legal Proceedings
From time to time, we may be involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters which arise in the ordinary course of business.

Item 1A.
Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information set forth in this Quarterly Report on Form 10-Q. Our business, financial condition, results of operations or future prospects could be materially and adversely harmed if any of the following risks, or other risks or uncertainties that are not yet identified or that we currently believe are immaterial, actually occur. The trading price of our common stock could decline due to any of these risks or uncertainties, and, as a result, you may lose all or part of your investment.
Risks related to our business and industry
We have incurred significant losses in the past, and will likely experience losses in the future.
We have incurred significant losses in the past and reported a net loss of $11.7 million for the three months ended March 31, 2019. As of March 31, 2019, we had an accumulated deficit of $144.1 million. If we cannot make consistent progress toward future profitability, our business and our stock price may be adversely affected.
Our ability to be profitable in the future depends upon continued demand for our solutions from existing and new customers. Further adoption of our solutions depends upon our ability to improve quality of care, enhance patient and staff satisfaction, increase hospital efficiency and productivity, and bring value to customers outside of healthcare. In addition, our profitability will be affected by, among other things, our ability to execute on our business strategy, the timing and size of orders, the pricing and costs of our solutions, competitive offerings, macroeconomic conditions affecting the health care industry and the extent to which we invest in sales and marketing, research and development and general and administrative resources.

We depend on sales in the healthcare market for substantially all of our revenue, and a decrease in sales in the healthcare market would harm our business.

To date, substantially all of our revenue has been derived from sales to the healthcare market and, in particular, hospitals. Sales to the healthcare market accounted for 97%, 97% and 97% of our revenue for the three months ended March 31, 2019 and the years ended December 31, 2018 and 2017, respectively. We anticipate that sales to the healthcare market will represent a significant portion of our revenue for the foreseeable future.
Most of our solutions require a substantial upfront investment by new customers. The cost of the initial deployment depends on the number of users and departments involved, the size and age of the hospital and the condition of the existing wireless infrastructure, if any, within the hospital. Even if hospital personnel determine that our solutions provide compelling benefits over their existing communications methods, their hospitals may not have, or may not be willing to spend, the resources necessary to install and maintain wireless infrastructure to initially deploy and support our solutions or expand our solutions to other departments or users. Hospitals face significant budget constraints from unpredictable patient population trends and commercial reimbursements, and increasing demands from, and competition for, patients. In addition, both governmental and commercial hospitals are experiencing lower Medicare reimbursement rates and higher compliance demands, and as part of the tax reform law that came into effect in December 2017, the tax penalty for violating the individual health insurance mandate under the Patient Protection and Affordable Care Act of 2010 (ACA) was set to zero effective in 2019, essentially repealing it. The President of the United States and members of Congress have also attempted to repeal or amend the ACA, as well as continue to undertake other healthcare reforms. As a consequence of these regulatory and other factors, we may experience slowdowns and deferral of orders for our solutions, or customers may choose other less expensive solutions, both of which could negatively impact our sales. We might not be able to sustain or increase our revenue from sales of our solutions, or achieve the growth rates that we envision, if hospitals continue to face significant budgetary constraints and reduce their spending on communications systems.
While we are seeking to increase sales of our solutions to non-healthcare customers, we do not anticipate that non-healthcare markets will represent a significant portion of our revenue in the foreseeable future.


30


If we fail to successfully develop and introduce new solutions and features to existing solutions, our revenue, operating results and reputation could suffer.

Our success depends, in part, upon our ability to develop and introduce new solutions and to add features to existing solutions that meet existing and new customer requirements. We may not be able to develop and introduce new solutions or features on a timely basis or in response to customers’ changing requirements. Similarly, our new solutions and features may not sufficiently differentiate us from competing solutions such that customers can justify deploying our solutions. We expect to incur costs associated with the development and introduction of new solutions before the anticipated benefits or the returns are realized, if at all. We may experience technical problems and additional costs as we introduce new features to our software platform, deploy future models of our wireless badges (like the new Smartbadge), which can require customers to perform software upgrades to their systems, and integrate new solutions with existing customer clinical systems and workflows. In addition, we may face technical difficulties as we expand into non-English speaking countries and incorporate non-English speech recognition capabilities into our solutions. We also may incur substantial costs or delays in the manufacture of any additional new products or models as we seek to optimize production methods and processes at our contract manufacturer. In addition, we expect that we will at least initially achieve lower gross margins on new models, while endeavoring to reduce manufacturing costs over time. If any of these problems were to arise, our revenue, operating results and reputation could suffer.

If we fail to offer high-quality services and support for any of our solutions, our operating results and our ability to sell those solutions in the future will be harmed.

Our ability to sell our solutions depends on our professional services and technical support teams providing high-quality services and support. Our professional services team assists our customers with their wireless infrastructure assessment, clinical workflow design, communication solution configuration, clinical integration, training and project management during the pre-deployment and deployment stages. Once our solutions are deployed within a customer’s facility, the customer typically depends on our technical support team to help resolve technical issues, assist in optimizing the use of our solutions and facilitate adoption of new functionality. If we do not effectively assist our customers in deploying our solutions, succeed in helping our customers quickly resolve technical and other post-deployment issues, or provide effective ongoing support services, our ability to expand the use of our solutions with existing customers and to sell our solutions to new customers will be harmed. If deployment of our solutions is deemed unsatisfactory, we may incur significant costs to attain and sustain customer satisfaction or, in extreme cases, our customers may choose not to deploy our solutions. As we rapidly hire new services and support personnel, we may inadvertently hire underperforming people who will have to be replaced, or fail to effectively train such employees, leading in some instances to slower growth, additional costs and poor customer relations. In addition, the failure of channel partners to provide high-quality services and support in markets outside the United States could also harm sales of our solutions.
As we continue to pursue opportunities for larger deals that have greater technical complexity, including deals that require more complex integrations with our customer’s workflows, we may experience a longer time period for our solutions to deploy and as a result, our revenue recognition for these deals may be delayed. Additionally, as we enter agreements with new and existing customers for larger and more complex deals across multiple sites, we have been, and may continue to be, required to agree to customer acceptance clauses. Delays may occur in obtaining customer acceptance regardless of the quality of our products and services, and may cause us to defer revenue recognition where such acceptance provisions are substantive in nature, or they may require us to incur additional professional services or other costs in an effort to obtain such customer acceptance.

Our sales cycle can be lengthy and unpredictable, which may cause our revenue and operating results to fluctuate significantly.

Our sales cycles can be lengthy and unpredictable. Our sales efforts involve educating our customers about the use and benefits of our solutions, including the technical capabilities of our solutions and the potential cost savings and productivity gains achievable by deploying them. Customers typically undertake a significant evaluation process, which frequently involves not only our solutions but also their existing communications methods and those of our competitors, and can result in a lengthy sales cycle that sometimes exceeds twelve months. With our introduction of the Smartbadge, it may take our customers additional time to evaluate this new device and to compare it with our existing Badge and other solutions. This may also result in delays and reductions in orders for our existing Badge. We spend substantial time, effort and money in our sales efforts without any assurance that our efforts will produce sales. Similarly, our increasing dependence on larger, hospital-wide deployments may increase fluctuations in our revenue and operating results because the failure to complete a significant sale, or the loss of a large customer, will have a greater impact on those results. In addition, purchases of our solutions are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays. We have experienced and may continue to experience elongated sales cycles due to ongoing uncertainty surrounding past and future healthcare reform legislation, the impact of shifting federal government budgets, changes to Medicare and Medicaid reimbursement and potential future statutes and rulemaking.


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Our business has gone through cycles of expansion, relative stability and contraction, and if we are not able to manage such cycles effectively, our operating results may suffer.

We have experienced periods of expansion, relative stability and contraction in our revenues and operations in the past. Such fluctuations have placed, and may continue to place, strains on our management systems, infrastructure and other resources. Especially during growth periods, we hire additional direct sales, professional services and marketing personnel domestically and internationally, acquire complementary businesses, technologies or assets, and increase our investment in research and development. Our future operating results depend to a large extent on our ability to successfully implement such plans and manage such investments. To do so successfully we must, among other things:
manage our expenses in line with our operating plans and current business environment;
maintain and enhance our operational, financial and management controls, reporting systems and procedures;
integrate acquired businesses, technologies or assets;
manage operations in multiple locations and time zones; and
develop and deliver new solutions and enhancements to existing solutions efficiently and reliably.

We expect to incur costs associated with the investments made to support our business strategy before the anticipated benefits or the returns are realized, if any. If we are unable to grow our business or manage our future growth effectively, we may not be able to take advantage of market opportunities or develop new solutions or enhancements to existing solutions. We may also fail to satisfy customer requirements, maintain quality, execute our business plan or respond to competitive pressures, which could result in lower revenue and a decline in the share price of our common stock.

Our revenue and operating results have fluctuated, and are likely to continue to fluctuate, making our quarterly results difficult to predict, which may cause us to miss analyst expectations and may cause the price of our common stock to decline.

Our operating results have been and may continue to be difficult to predict, even in the near term, and are likely to fluctuate as a result of a variety of factors, many of which are outside of our control.
Comparisons of our revenue and operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. Each of the following factors, among others, could cause our operating results to fluctuate from quarter to quarter:
the financial health of our healthcare customers and budgetary constraints on their ability to upgrade their communications;
the availability of government funding for healthcare facilities operated by the United States federal, state and local governments;
market acceptance of our Smartbadge and its impact on orders for our existing Badge and related software;
changes in the regulatory environment affecting our healthcare customers, including impediments to their ability to obtain reimbursement for their services;
our ability to expand our sales and marketing operations;
our ability to successfully integrate acquired businesses, technologies or assets;
the announcement of new significant contracts or relationships;
the procurement and deployment cycles of our healthcare customers and the length of our sales cycles;
changes in how healthcare operating and capital budgets are administered within the enterprise;
changes in customer deployment timelines;
variations in the amount of orders booked in a prior quarter but not delivered until later quarters;
our mix of solutions and the varying revenue recognition rules that apply;
pricing, including discounts by us or our competitors;
our ability to expand into non-healthcare markets;
our ability to develop significant new reseller relationships and maintain existing reseller relationships;
the financial health of our resellers;
our ability to successfully deploy our solutions in a timely manner;
our ability to sell and integrate third-party products and services, and our customer’s satisfaction with those third-party products and services;
our ability to forecast demand and manage lead times for the manufacture of our solutions;
our ability to develop and introduce new solutions and features to existing solutions that achieve market acceptance;
the announcement of a new product, which may cause sales cycles to lengthen;
federal government shutdowns;
fluctuations in foreign currencies in the international markets in which we operate; and
future accounting pronouncements and changes in accounting policies.


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We primarily compete in the rapidly evolving and competitive healthcare market, and if we fail to effectively respond to competitive pressures, our business and operating results could be harmed.

We believe that the primary competition for our solutions has consisted of traditional methods using wired and wireless phones, pagers and overhead intercoms. While we believe that our system is superior to these legacy methods, our solutions require a significant infrastructure investment by a hospital and many hospitals’ spending is severely constrained by other priorities.
Manufacturers and distributors of product categories such as cellular phones, smartphone applications, pagers, mobile radios and in-building wireless telephones also sell their products to hospitals as components of communication solutions. Of these product categories, in-building wireless telephones and pagers represent the most significant current competition for the sale of our solutions. The market for in-building wireless phones is dominated by communications companies such as Cisco Systems, Ascom and Spectralink. In addition, the growing proliferation of smartphones and related applications, including cloud-based applications, represents another category of competitive offerings. Although our customers value secure text-messaging using smartphones, we do not believe most of our potential customers would consider that feature alone an adequate substitute for a comprehensive multi-mode communication solution. Some customers may choose solutions that are not HIPAA-compliant, given their budget constraints. Furthermore, in clinical integrations and middleware, we compete with companies including Connexall and Philips Healthcare.
While we do not currently have a directly comparable single competitor that provides a solution as richly-featured as Vocera’s solution for the healthcare market, we could face such competition in the future. Potential competitors in the healthcare or communications markets include large, multinational companies with significantly more resources to dedicate to product development and sales and marketing. These companies, which may include electronic health record vendors or other large software companies, may have existing relationships within the hospital, which may enhance their ability to gain a foothold in our market. For example, some of the electronic health record vendors have started to offer secure text messaging as an additional service and have said they plan to expand these offerings to complete more directly with us. Additionally, there has been some recent merger and acquisition activity in the healthcare market. These companies may choose to more tightly integrate their offerings. Customers may prefer to purchase a more highly integrated or bundled solution from a single provider or an existing supplier rather than a new supplier, regardless of performance or features. Accordingly, if we fail to effectively respond to competitive pressures, we could experience pricing pressure, reduced profit margins, higher sales and marketing expenses, lower revenue and the loss of market share, any of which would harm our business, operating results or financial condition.

If we do not achieve the anticipated strategic or financial benefits from our acquisitions or if we cannot successfully integrate them, our business and operating results could be harmed.

We have acquired, and in the future may acquire, complementary businesses, technologies or assets that we believe to be strategic. We may not achieve the anticipated strategic or financial benefits, or be successful in integrating any acquired businesses, technologies or assets. If we cannot effectively integrate the acquired business and products into our business, we may not achieve market acceptance for, or derive significant revenue from, these new solutions.
Integrating newly acquired businesses, technologies and assets could strain our resources, could be expensive and time consuming, and might not be successful. Our recent acquisitions expose us, and we will be further exposed, if we acquire or invest in additional businesses, technologies or assets, to a number of risks, including that we may:
experience technical issues as we integrate acquired businesses, technologies or assets into our existing solutions;
encounter difficulties leveraging our existing sales and marketing organizations, and direct sales channels, to increase our revenue from acquired businesses, technologies or assets;
find that the acquisition does not further our business strategy, we overpaid for the acquisition or the economic conditions underlying our acquisition decision have changed;
have difficulty retaining key personnel of acquired businesses;
suffer disruption to our ongoing business and diversion of our management’s attention as a result of transition or integration issues and the challenges of managing geographically or culturally diverse enterprises;
experience unforeseen and significant problems or liabilities associated with quality, technology and legal contingencies relating to the acquisition, such as intellectual property or employment matters; and
incur substantial costs to integrate the acquired business.

If we were to proceed with one or more additional significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash. To the extent we issue shares of capital stock or other rights to purchase capital stock, including options and warrants, the ownership of existing stockholders would be diluted. In addition, acquisitions may result in the incurrence of debt, contingent liabilities, large write-offs, or other unanticipated costs, events or circumstances, any of which could harm our operating results.

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In addition, from time to time we may enter into negotiations for acquisitions that are not ultimately consummated. These negotiations could result in significant diversion of management time, as well as substantial out-of-pocket costs.

We could be required to record adjustments to our