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Item 1.	Financial Statements (Unaudited)

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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, education 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, safety, patient and staff experience and increase operational efficiency.

The Vocera communication and collaboration solution includes: an intelligent enterprise software platform; a lightweight, wearable, voice-controlled communication badge and newly introduced Smartbadge; and smartphone applications. The solution 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 the Vocera Badge, Vocera Smartbadge, smartphones and other mobile communication devices 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, 2019. The year-end condensed consolidated 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, 2020 or for any other interim period or any other future year.

Except for the change in certain accounting policies upon adoption of the accounting standards described below, there have been no material changes to the Company’s significant accounting policies compared to the accounting policies 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, 2019.

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, accounts receivable reserves, inventory reserves, bonuses, 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.

Recently Adopted 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 new guidance was effective for the Company beginning January 1, 2020. The Company applied the guidance using a modified retrospective approach requiring that the Company recognize the cumulative effect of initially applying the impairment standard as an adjustment to opening accumulated deficit in the period of initial application. There was no adjustment to the Company’s opening accumulated deficit in the period as there were no incremental impairment losses as a result of the adoption.

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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 was effective for the Company beginning January 1, 2020. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements.

Recent Accounting Pronouncements

In December 2019, the FASB issued new guidance to simplifying the accounting for income taxes, which removes certain exceptions for intra period allocations, recognizing deferred taxes for investments and calculating income taxes in interim periods. This guidance also reduces complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The new standard is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is evaluating the impact of this new accounting guidance on its condensed consolidated financial statements.

2.	Revenue, deferred revenue and deferred commissions

Disaggregation of Revenue

A typical sales arrangement involves multiple arrangements, such as the sales of the Company’s proprietary communication device (“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)	2020				2019
Product revenue
Device	$	13,903			$	10,060
Software	3,947				3,943
Total product	17,850				14,003
Service revenue
Maintenance and support	18,069				16,393
Professional services and training	4,754				4,913
Total service	22,823				21,306
Total revenue	$	40,673			$	35,309

Contract balances

The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable are recorded at the invoiced amount and in the period the Company delivers goods or provides services or when the Company’s 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, 2020 and December 31, 2019 is presented in the accompanying condensed consolidated balance sheets. In situations where revenue recognition occurs before invoicing, an unbilled receivable is created, which represents a contract asset. As of March 31, 2020 and December 31, 2019, contract assets totaling $4.5 million and $4.3 million, respectively, were included in prepaid and other current assets in the condensed 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.

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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, 2020 are as follows:

(in thousands)	December 31, 2019				Additions				Commissions Recognized				March 31, 2020
Deferred commissions	$	10,477			$	2,489			$	(2,659	)		$	10,307

Of the $10.3 million total deferred commissions balance as of March 31, 2020, the Company expects to recognize approximately 48% 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 condensed consolidated balance sheet date. Changes in the balance of total deferred revenue (contract liability) during the three months ended March 31, 2020 are as follows:

(in thousands)	December 31, 2019				Additions				Revenue Recognized				March 31, 2020
Deferred revenue	$	61,475			$	14,945			$	(19,744	)		$	56,676

Revenue recognized during the three months ended March 31, 2020 from deferred revenue balances at the beginning of the period was $18.5 million. Revenue recognized during the three months ended March 31, 2019 from deferred revenue balances at the beginning of the period was $15.2 million.

The “contracted but not recognized” performance obligations represent the Company’s deferred revenue and non-cancelable backlog amounts. This balance as of March 31, 2020 was $112.5 million, of which the Company expects to recognize approximately 66% 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, 2020, 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, 2020 to be a Level 2 measurement due to limited trading activity of the Convertible Senior Notes. Refer to Note 8 to the condensed consolidated financial statements for further information.

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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, 2020 and December 31, 2019, are summarized as follows (in thousands):

	March 31, 2020										December 31, 2019
	Level 1			Level 2			Total				Level 1			Level 2			Total
Assets
Money market funds	$	3,855		$	—		$	3,855			$	4,086		$	—		$	4,086
Commercial paper	—			17,899			17,899				—			12,854			12,854
U.S. government agency securities	—			—			—				—			3,000			3,000
Corporate debt securities	—			186,725			186,725				—			188,310			188,310
Total assets measured at fair value	$	3,855		$	204,624		$	208,479			$	4,086		$	204,164		$	208,250

4.	Cash, Cash Equivalents and Short-Term Investments

The following tables present cash, cash equivalents and short-term investments (in thousands) as of March 31, 2020 and December 31, 2019:

	As of March 31, 2020
	Amortized Cost				Unrealized Gains				Unrealized Losses				Fair value
Cash and cash equivalents:
Demand deposits and other cash	$	25,289			$	—			$	—			$	25,289
Money market funds	3,855				—				—				3,855
Commercial paper	1,994				—				(2		)		1,992
Total cash and cash equivalents	31,138				—				(2		)		31,136
Short-Term Investments:
Commercial paper	15,911				10				(14		)		15,907
Corporate debt securities	187,238				296				(809		)		186,725
Total short-term investments	203,149				306				(823		)		202,632
Total cash, cash equivalents and short-term investments	$	234,287			$	306			$	(825	)		$	233,768

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	As of December 31, 2019
	Amortized Cost				Unrealized Gains				Unrealized Losses				Fair value
Cash and cash equivalents:
Demand deposits and other cash	$	21,618			$	—			$	—			$	21,618
Money market funds	4,086				—				—				4,086
Commercial paper	—				—				—				—
Total cash and cash equivalents	25,704				—				—				25,704
Short-Term Investments:
Commercial paper	12,861				—				(7		)		12,854
U.S. government agency securities	3,000				—				—				3,000
U.S. Treasury securities	—				—				—				—
Corporate debt securities	187,866				499				(55		)		188,310
Total short-term investments	203,727				499				(62		)		204,164
Total cash, cash equivalents and short-term investments	$	229,431			$	499			$	(62	)		$	229,868

The Company has determined that the unrealized losses on its short-term investments as of March 31, 2020 and December 31, 2019 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.

Classification of the cash, cash equivalents 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, 2020
Cash and cash equivalents (1)	$	31,136			$	—			$	31,136
Short-term investments	130,834				71,798				202,632
Cash, cash equivalents and short-term investments	$	161,970			$	71,798			$	233,768
Balances as of December 31, 2019
Cash and cash equivalents (1)	$	25,704			$	—			$	25,704
Short-term investments	113,010				91,154				204,164
Cash, cash equivalents and short-term investments	$	138,714			$	91,154			$	229,868
(1) Includes demand deposits and other cash, money market funds and other cash equivalent securities, all with 0-90 day maturity at purchase.

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5.	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,
	2020				2019
Numerator:
Net loss	$	(10,470	)		$	(11,735	)
Denominator:
Weighted average shares used to compute net loss per common share - basic	31,738				30,800
Weighted-average shares used to compute net loss per common share - diluted	31,738				30,800
Net loss per share
Basic	$	(0.33	)		$	(0.38	)
Diluted	$	(0.33	)		$	(0.38	)

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)	2020			2019
Options to purchase common stock, including ESPP	620			724
Restricted stock units	1,635			1,850

6.	Goodwill and Intangible Assets

Goodwill

As of March 31, 2020 and December 31, 2019, 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, 2020, there were no changes in circumstances indicating that the carrying values of goodwill or acquired intangibles may not be recoverable.

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.

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The estimated useful lives and carrying value of acquired intangible assets are as follows:

			March 31, 2020												December 31, 2019
(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			$	9,854			$	196			$	10,050			$	9,803			$	247
Customer relationships	7 to 9		10,920				6,088				4,832				10,920				5,819				5,101
Backlog	3		1,400				1,287				113				1,400				1,287				113
Non-compete agreements	2 to 4		460				460				—				460				460				—
Trademarks	3 to 7		1,110				1,110				—				1,110				1,110				—
Intangible assets, net book value			$	23,940			$	18,799			$	5,141			$	23,940			$	18,479			$	5,461

Amortization expense was $0.3 million and $1.0 million for the three months ended March 31, 2020 and 2019, 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, 2020 was as follows:

(in thousands)		Future amortization
2020 (remaining nine months)		$	1,036
2021		1,130
2022		1,050
2023		1,050
2024		875
Future amortization expense		$	5,141

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7.	Balance Sheet Components

Inventories

(in thousands)	March 31, 2020				December 31, 2019
Raw materials	$	962			$	831
Finished goods	5,065				3,745
Total inventories	$	6,027			$	4,576

Property and equipment, net

(in thousands)	March 31, 2020				December 31, 2019
Computer equipment and software	$	14,088			$	13,596
Furniture, fixtures and equipment	2,554				2,430
Leasehold improvements	5,351				5,283
Manufacturing tools and equipment	2,476				2,435
Construction in process	131				582
Property and equipment, at cost	24,600				24,326
Less: Accumulated depreciation	(16,349		)		(15,665		)
Property and equipment, net	$	8,251			$	8,661

Depreciation and amortization expense for property and equipment was $1.0 million and $0.9 million for the three months ended March 31, 2020 and 2019, 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, 2020				December 31, 2019
Minimum payments to be received on sales-type leases	$	1,796			$	2,078
Less: Unearned interest income and executory revenue portion	(1,097		)		(1,190		)
Net investment in sales-type leases	699				888
Less: Current portion	(346		)		(452		)
Non-current net investment in sales-type leases	$	353			$	436

Sales-type lease activity recognized in the condensed consolidated statement of operations are as follows:

	Three months ended March 31,
(in thousands)	2020				2019
Lease revenue	$	435			$	661
Less: Cost of lease shipments	(10		)		(52		)
Gross profit	425				609
Interest income (expense), net on lease receivable	$	(6	)		$	(3	)
Initial direct cost incurred	$	23			$	31

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There were no allowances for doubtful accounts on these leases as of March 31, 2020 and December 31, 2019. 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 condensed 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, 2020 were as follows:

(in thousands)	Future lease payments
2020 (remaining nine months)	$	716
2021	615
2022	387
2023	78
Total	$	1,796

Accrued payroll and other current liabilities

(in thousands)	March 31, 2020				December 31, 2019
Payroll and related expenses	$	7,276			$	6,053
Accrued payables	1,707				2,674
Operating lease liabilities, current portion	2,336				2,323
Lease financing, current portion	898				1,033
Product warranty	440				420
Customer prepayments	665				631
Sales and use tax payable	469				599
Other	1,520				1,024
Total accrued payroll and other current liabilities	$	15,311			$	14,757

The changes in the Company’s product warranty reserve are as follows:

	Three months ended March 31,
(in thousands)	2020				2019
Warranty balance at the beginning of the period	$	420			$	376
Warranty expense accrued for shipments during the period	108				77
Changes in estimate related to pre-existing warranties	(31		)		(31		)
Warranty settlements made	(57		)		(48		)
Total product warranty	$	440			$	374

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 leases have remaining lease terms of approximately ten months to approximately five years. Operating lease cost, including short-term operating leases was $0.7 million and $0.6 million for the three months ended March 31, 2020 and 2019, respectively.

Supplemental balance sheet information related to leases was as follows:

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(in thousands)	March 31, 2020
Other long-term assets	$	5,590
Accrued payroll and other current liabilities	2,336
Other long-term liabilities	4,116
Total operating lease liabilities	$	6,452

Other information related to leases was as follows:

	Three months ended March 31,			Three months ended March 31,
(in thousands)	2020			2019
Supplemental Cash Flow Information
Cash paid for amounts included in the measurement of lease liabilities	$	712		$	630
Right-of-use assets obtained in exchange for lease obligations	$	—		$	689
Weighted average remaining lease term	2.39 years			3.11 years
Weighted average discount rate	8		%	8		%

Maturities of lease liabilities as of March 31, 2020 are as follows:

(in thousands)	Operating leases
2020 (remaining nine months)	$	2,191
2021	2,960
2022	1,326
2023	403
2024	319
Total maturities of lease liabilities	7,199
Less imputed interest	$	(747	)
Total	$	6,452

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

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(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, 2020, 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, 2020 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, 2020				December 31, 2019
Liability:
Principal	$	143,750			$	143,750
Unamortized debt discount	(22,321		)		(23,880		)
Unamortized issuance costs	(2,516		)		(2,692		)
Net carrying amount	$	118,913			$	117,178
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, 2020 was approximately $142.7 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 $21.24 on March 31, 2020, the if-converted value of the Notes of $94.7 million was less than their principal amount.     

Interest expense related to the Notes is as follows:

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	Three months ended March 31,
(in thousands)	2020			2019
Contractual interest expense	$	539		$	539
Amortization of debt discount	1,559			1,422
Amortization of issuance costs	176			160
Total interest expense	$	2,274		$	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, 2020
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, 2020 and December 31, 2019, approximately $7.6 million and $9.7 million, respectively, of such inventory was purchased and held by the third-party manufacturers which was subject to these purchase guarantees.

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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, 2020 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, 2019	606,327			$	13.41		3.62	$	4,566
Options granted	—			—
Options exercised	(77,909	)		9.38
Options canceled	—			—
Outstanding at March 31, 2020	528,418			$	14.01		3.38	$	3,974

At March 31, 2020, there was no unrecognized compensation cost related to options. As of March 31, 2020, there were 1,855,146 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, 2020 and 2019. As of March 31, 2020, there were 1,189,618 shares available for future issuance under the ESPP.

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The following Black-Scholes option-pricing assumptions were used for each respective period for the ESPP:

	Three months ended March 31,
	2020		2019
Expected term (in years)	0.50		0.50
Volatility	50.0%		33.0%
Risk-free interest rate	1.59%		2.51%
Dividend yield	0%		0%

Restricted Stock Units

A summary of RSU activity for the three months ended March 31, 2020 is presented below:

	Restricted Stock Units
	Number of shares			Weighted Average Grant Date Fair Value per Share
Outstanding at December 31, 2019	1,550,646			$	28.94
Granted	203,971			22.84
Vested	(101,431	)		31.08
Forfeited	(17,868	)		28.11
Outstanding at March 31, 2020	1,635,318			$	28.06

At March 31, 2020, there was $28.8 million of unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted-average period of 1.75 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)	2020				2019
Cost of revenue	$	973			$	978
Research and development	966				822
Sales and marketing	1,860				1,720
General and administrative	2,042				2,024
Total stock-based compensation	$	5,841			$	5,544

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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,
	2020				2019
(in thousands)
Revenue
Product	$	17,850			$	14,003
Service	22,823				21,306
Total revenue	40,673				35,309
Cost of revenue
Product	6,364				5,334
Service	10,523				10,290
Total cost of revenue	16,887				15,624
Gross profit
Product	11,486				8,669
Service	12,300				11,016
Total gross profit	23,786				19,685
Operating expenses	32,386				30,745
Interest expense, net and other	(1,745		)		(711		)
Loss before income taxes	$	(10,345	)		$	(11,771	)

12.	Income Taxes

The Company recorded a $(0.1) million and $36,000 (provision for) benefit from income taxes for the three months ended March 31, 2020 and 2019, respectively. The provision recorded for the three months ended March 31, 2020 was primarily due to the accretion of the deferred tax liability associated with indefinite lived intangibles and state income taxes. The benefit recorded for the three months ended March 31, 2019 was primarily due to the tax benefit from the gain recorded in other comprehensive income.

As of March 31, 2020, 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, 2020, 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, 2019.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted and signed into law. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. The Company is currently evaluating the impact of the CARES Act, but at present does not expect the NOL provisions of the CARES Act to result in a material impact to the Company as it has historically generated taxable losses.

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

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•	We have taken measures to protect the health and safety of our employees by shifting the majority of our employees to remote work.

•	We booked some urgent orders in the first quarter to serve hospitals focused on preparations for COVID-19.

•	We issued some free “surge” software licenses to our customers that they can use for a limited time while they are responding to the pandemic.

•	Our access to our healthcare customers’ locations for sales and implementation activities has been limited in many cases. The sales cycle and implementation timeline for broader strategic deals was elongated as they shifted their primary focus to preparing for and responding to the pandemic.

•	We have experienced some delays in receiving parts due to supplier and shipping issues.

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Item 3.	Quantitative and Qualitative Disclosures About Market Risk

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Item 1.	Legal Proceedings

Item 1A.	Risk Factors

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•	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.

•	the ongoing impact of the COVID-19 pandemic;

•	the financial health of our healthcare customers and budgetary constraints on their ability to upgrade their communications, particularly in light of the pandemic;

•	the availability of government funding for healthcare facilities operated by the United States federal, state and local governments;

•	changes in customer purchasing patterns or sales cycles;

•	market acceptance of our Smartbadge and its impact on orders for our existing Badge and related software;

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•	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;

•	occurrence of health epidemics or contagious diseases and potential effects on our business and manufacturing operations;

•	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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•	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.

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•	challenges incorporating non-English speech recognition capabilities into our solutions as we expand into non-English speaking jurisdictions;

•	difficulties integrating our solutions with wireless infrastructures with which we do not have experience;

•	difficulties integrating local dialing plans and applicable PBX standards;

•	challenges associated with delivering support, training and documentation in several languages;

•	difficulties in staffing and managing personnel and resellers;

•	the need to comply with a wide variety of foreign laws and regulations, including increasingly stringent data privacy regulations, requirements for export controls for encryption technology, employment laws, changes in tax laws and tax audits by government agencies;

•	political and economic instability in, or foreign conflicts that involve or affect, the countries of our customers;

•	the impacts associated with epidemics or contagious diseases;

•	adverse effects on us directly, or on our customers and suppliers, of changes in trade, fiscal or tax policies, including the imposition of tariffs;

•	difficulties in collecting accounts receivable and longer accounts receivable payment cycles;

•	exposure to competitors who are more familiar with local markets;

•	risks associated with the Foreign Corrupt Practices Act and local anti-bribery law compliance;

•	difficulties associated with resolving contract disputes in foreign countries with varied legal systems;

•	limited or unfavorable intellectual property protection in some countries; and

•	currency exchange rate fluctuations, which could affect the price of our solutions relative to locally produced solutions.

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•	delayed market acceptance of our affected solutions;

•	loss of revenue or delay in revenue recognition;

•	loss of customers or inability to attract new customers;

•	diversion of engineering or other resources for remedying the defect or error;

•	damage to our brand and reputation;

•	delay in delivery of information;

•	increased service and warranty costs, including potential replacement costs for product recalls or returns; and

•	legal actions by our customers and hospital patients, including product liability claims.

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•	current or future U.S. or foreign patent applications will be approved;

•	our issued patents will protect our intellectual property and not be held invalid or unenforceable if challenged by third parties;

•	we will succeed in protecting our technology adequately in all key jurisdictions in which we develop technology, or we or our competitors operate; or

•	others will not independently develop similar or competing products or methods or design around any patents that may be issued to us.

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•	heighten our vulnerability to adverse general economic conditions and heightened competitive pressures;

•	require us to dedicate a larger portion of our cash flow from operations to interest payments, limiting the availability of cash for other purposes;

•	limit our flexibility in planning for, or reacting to, changes in our business and industry; and

•	impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes.

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•	actual or anticipated variation in anticipated operating results of us or our competitors;

•	the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

•	announcements by us or our competitors of new solutions, new or terminated significant contracts, commercial relationships or capital commitments;

•	changes in the regulatory environment affecting our healthcare customers, including impediments to their ability to obtain reimbursement for their services, and other actual or anticipated legal or regulatory developments in the United States or foreign countries;

•	actual or anticipated developments in our competitors’ businesses or the competitive landscape generally;

•	failure of securities analysts to maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

•	developments or disputes concerning our intellectual property or other proprietary rights;

•	commencement of, or our involvement in, litigation;

•	announced or completed acquisitions of businesses, technologies or assets by us or our competitor;

•	changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

•	price and volume fluctuations attributable to inconsistent trading volume levels of our common stock;

•	our decision to seek additional equity or debt financing;

•	our public float relative to the total number of shares of our common stock that are issued and outstanding;

•	price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

•	rumors and market speculation involving us or other companies in our industry;

•	the dissemination of adverse or misleading reports or opinions about our business;

•	any major change in our management;

•	unfavorable economic conditions and slow or negative growth of our markets; and

•	other events or factors, including those resulting from war, incidents of terrorism or health epidemics or contagious diseases.

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•	authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares and to discourage a takeover attempt;

•	prohibit stockholder action by written consent, requiring all stockholder actions to be taken at a meeting of stockholders;

•	establish advance notice procedures for nominating candidates to our board of directors or proposing matters that can be acted upon by stockholders at stockholder meetings;

•	limit the ability of our stockholders to call special meetings of stockholders;

•	prohibit stockholders from cumulating their votes for the election of directors;

•	permit newly created directorships resulting from an increase in the authorized number of directors or vacancies on our board of directors to be filled only by majority vote of our remaining directors, even if less than a quorum is then in office;

•	provide that our board of directors is expressly authorized to make, alter or repeal our bylaws;

•	establish a classified board of directors so that not all members of our board are elected at one time;

•	provide that our directors may be removed only for “cause” and only with the approval of the holders of at least 66 2/3rds percent of our outstanding stock; and

•	require super-majority voting to amend certain provisions in our certificate of incorporation and bylaws.

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

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Item 6.	Exhibits

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