What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-01 compared with 2020-02-27 · 91 added, 104 removed, 273 unchanged (42% of the section changed)

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You should read the following discussion in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.

We are a pioneer and leading provider of intelligent cloud software for contact centers, facilitating more than six billion call minutes between our more than 2,000 clients and their customers per year.

We are a pioneer and leading provider of intelligent cloud software for contact centers, facilitating more than seven billion call minutes between our more than 2,000 clients and their customers per year.

We believe we achieved this leadership position through our expertise and technology, which has empowered us to help organizations of all sizes transition from legacy on-premise contact center systems to our cloud solution.

Our solution, which is comprised of our VCC cloud platform and applications, allows simultaneous management and optimization of customer interactions across voice, chat, email, web, social media and mobile channels, either directly or through our APIs.

Our solution, comprised of our VCC cloud platform and applications, allows simultaneous management and optimization of customer interactions across voice, chat, email, web, social media and mobile channels, either directly or through our APIs.

Our VCC cloud platform matches each customer interaction with an appropriate agent resource and delivers relevant customer data to the agent in real-time through integrations with adjacent enterprise applications, such as CRM software, to optimize the customer experience and improve agent productivity.

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The remainder was comprised of professional services revenue from the implementation and optimization of our solution.

Effects of COVID-19

In December 2019, a novel coronavirus disease known as COVID-19 was reported and on March 11, 2020, the WHO characterized COVID-19 as a pandemic.

This pandemic has resulted in a widespread health crisis that has significantly harmed the U.S.

and global economies and caused significant fluctuation in financial markets, including those on which our common stock and our convertible senior notes trade, and may impact demand for our solution.

In accordance with the various social distancing and other office closure orders and recommendations of applicable government agencies, all of our employees have transitioned to work-from-home operations and we have canceled all business travel by our employees except where necessary and properly authorized, which has changed how we operate our business.

Our clients and business partners are also subject to various and changing social distancing and office closure orders and recommendations and travel restrictions and prohibitions, which have changed the way we interact with our clients and business partners.

COVID-19 had a moderately positive impact on our 2020 financial results due to the shift from brick-and-mortar to virtual.

The severity and duration of the COVID-19 pandemic, and its impact on the U.S.

and global economy, is uncertain, but we believe that there will be a continuing net benefit to us longer term.

See Part I, Item 1A.

Risk Factors, for further discussion of the impact of the COVID-19 pandemic on our business and operations.

Key GAAP Operating Results

Our revenue increased to $434.9 million for the year ended December 31, 2020, from $328.0 million and $257.7 million for the years ended December 31, 2019 and 2018, respectively.

Revenue growth has primarily been driven by our larger clients increasing their number of agent seats.

Revenue growth was primarily attributable to our larger clients, driven by an increase in our sales and marketing activities and our improved brand awareness.

For each of the years ended December 31, 2020, 2019 and 2018, no single client accounted for more than 10% of our total revenue.

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The growth of our business and our future success depend on many factors, including our ability to continue to expand our base of larger clients, grow revenue from our existing client base, innovate and expand internationally.

While these areas represent significant opportunities for us, they also pose risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results.

In order to pursue these opportunities, we anticipate that we will continue to expand our operations and headcount in the near term.

Due to our continuing investments to grow our business, increase our sales and marketing efforts, pursue new opportunities, enhance our solution and build our technology, we expect our cost of revenue and operating expenses to increase in absolute dollars in future periods.

However, we expect cost of revenue and certain operating expenses to decrease as a percentage of revenue as we grow our revenue and gain economies of scale by increasing our client base without direct incremental costs and by utilizing more of the capacity of our data centers.

However, we expect cost of revenue and certain operating expenses to fluctuate as a percentage of revenue in the near term taking into consideration the impact of COVID-19 and the macroeconomic environment.

Key Operating and Non-GAAP Financial Performance Metrics

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We believe that our Annual Dollar-Based Retention Rate provides insight into our ability to retain and grow revenue from our clients, and is a measure of the long-term value of our client relationships.

Prior Calculation - Net Invoicing.

Our Annual Dollar-Based Retention Rate is calculated by dividing our Retained Net Invoicing by our Retention Base Net Invoicing on a monthly basis, which we then average using the rates for the trailing twelve months for the period being presented.

We define Retention Base Net Invoicing as recurring net invoicing from all clients in the comparable prior year period, and we define Retained Net Invoicing as recurring net invoicing from that same group of clients in the

current period.

We define recurring net invoicing as subscription and related usage revenue excluding the impact of service credits, reserves and deferrals.

Historically, the difference between recurring net invoicing and our subscription and related usage revenue has been within 10%.

The following table shows our Annual Dollar-Based Retention Rate for the periods presented:

The following table shows our Annual Dollar-Based Retention Rate based on Net Invoicing for the periods presented:

Twelve Months Ended December 31,

2019 2018 2017

Annual Dollar-Based Retention Rate 110% 105%

Our Dollar-Based Retention Rate improved year over year primarily due to our larger clients increasing their number of agent seats.

New Calculation - Net Revenue .

Starting from the fourth quarter of 2020, we revised our Annual Dollar-Based Retention Rate calculation to be based on Net Revenue, rather than Net Invoicing.

We now have eight quarters of trended Annual Dollar-Based Retention Rates based on ASC 606 Net Revenue and, consistent with our peers, we are using Net Revenue rather than Net Invoicing and will no longer report the Net Invoicing calculation going forward.

The following table shows our Annual Dollar-Based Retention Rate based on Net Revenue for the periods presented:

Twelve Months Ended December 31,

Annual Dollar-Based Retention Rate 117% 112%

Our Dollar-Based Retention Rate based on Net Revenue improved year-over-year primarily due to our larger clients increasing their number of agent seats.

Adjusted EBITDA

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GAAP measure, net loss.

We calculate adjusted EBITDA as net loss before (1) depreciation and amortization, (2) stock-based compensation, (3) interest income, expense and other, (4) provision for income taxes, and (5) other items that do not directly affect what we consider to be our core operating performance.

We calculate adjusted EBITDA as net loss before (1) depreciation and amortization, (2) stock-based compensation, (3) interest income, expense and other, (4) loss on early extinguishment of debt, (5) acquisition-related transaction costs and one-time integration costs, (6) COVID-19 relief bonuses for employees, (7) provision for (benefit from) income taxes, and (8) other items that do not directly affect what we consider to be our core operating performance.

The following table shows a reconciliation of net loss to adjusted EBITDA for the periods presented (in thousands):

Year Ended December 31,

2019 2018 2017

Net loss $ (42,130) $ (4,552)

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Legal and indemnification fees related to settlement — 356

Acquisition related transaction costs 338 — —

Reversal of interest and penalties on accrued federal fees (4)

Provision for income taxes 104 300 268

Acquisition related transaction costs and one-time integration costs 6,335 338

COVID-19 relief bonuses for employees 1,817 —

Loss on early extinguishment of debt 6,964 —

Provision for (benefit from) income taxes (2,453) 104

Adjusted EBITDA $ 85,681 $ 60,820

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(3) See “Legal Matters” in Note 10 to the consolidated financial statements for additional information.

(4) Included in general and administrative expense.

Amount represents the reversal of accrued interest and penalties related to the Universal Services Fund, or USF, liability following a favorable ruling from the FCC’s Wireline Competition Bureau.

See Note 10 to the consolidated financial statements for additional information.

Key Components of Our Results of Operations

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Fixed subscription fees, including plans with bundled usage, are generally billed monthly in advance, while variable usage fees are billed in arrears.

Fixed subscription fees are recognized on a straight-line basis over the applicable term, which is predominantly the monthly contractual billing period.

Fixed subscription fees are recognized on a straight-line basis over the

applicable term, which is predominantly the monthly contractual billing period.

Support activities include technical assistance for our solution and upgrades and enhancements on a when and if available basis, which are not billed separately.

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Cost of Revenue

Our cost of revenue consists primarily of personnel costs, including stock-based compensation, fees that we pay to telecommunications providers for usage, USF contributions and other regulatory costs, depreciation and related expenses of the servers and equipment, costs to build out and maintain co-location data centers, allocated office and facility costs and amortization of acquired technology.

Our cost of revenue consists primarily of personnel costs, including stock-based compensation, fees that we pay to telecommunications providers for usage, USF costs which have been increasing, contributions and other regulatory costs, depreciation and related expenses of the servers and equipment, costs to build out and maintain co-location data centers, costs of public cloud-based data centers, allocated office and facility costs and amortization of acquired technology.

Cost of revenue can fluctuate based on a number of factors, including the fees we pay to telecommunications providers, which vary depending on our clients’ usage of our VCC cloud platform, the timing of capital expenditures and related depreciation charges and changes in headcount.

We expect to continue investing in our network infrastructure and operations and client support function to maintain high quality and availability of service, resulting in absolute dollar increases in cost of revenue.

As our business grows, we expect to realize economies of scale in network infrastructure, personnel and client support.

In the near-term, however, we expect cost of revenue to increase both in absolute dollars and as a percentage of revenue, primarily due to increased investments in public cloud.

Operating Expenses

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Sales and marketing expenses consist primarily of salaries and related expenses, including stock-based compensation, for personnel in sales and marketing, sales commissions, as well as advertising, marketing, corporate communications, travel costs and allocated overhead.

We believe it is important to continue investing in sales and marketing to continue to generate revenue growth, and we expect sales and marketing expenses to increase in absolute dollars and fluctuate as a percentage of revenue as we continue to support our growth initiatives.

We believe it is important to continue investing in sales and marketing to continue to generate revenue growth, and we expect sales and marketing expenses to increase in absolute dollars over the long term and fluctuate as a percentage of revenue as we continue to support our growth initiatives.

General and Administrative.

General and administrative expenses consist primarily of salary and related expenses, including stock-based compensation, for management, finance and accounting, legal, information systems and human resources personnel, professional fees, compliance costs, other corporate expenses and allocated overhead.

We expect that general and administrative expenses will fluctuate in absolute dollars from period to period but decline as a percentage of revenue over time.

We expect that general and administrative expenses will fluctuate in absolute dollars and as a percentage of revenue in the near term, due to among other things, the impact of COVID-19 and the resulting macroeconomic conditions, but to increase in absolute dollars and decline as a percentage of revenue over time.

Results of Operations for the Years Ended December 31, 2020 and 2019

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Year Ended December 31,

2019 2018 2017

Revenue 100 % 100 %

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Interest expense (7) % (4) %

Loss on early extinguishment of debt (2) % — %

Interest income and other 1 % 2 %

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% of Revenue 41% 41%

The increase in cost of revenue for 2019 compared to 2018 was primarily due to a $10.8 million increase in personnel costs, including stock-based compensation costs, driven by increased headcount and a higher fair value of employee equity awards due primarily to our increased stock price, a $4.4 million increase in third party hosted software costs driven by increased client activities, a $4.4 million increase in facilities and related costs, a $4.3 million increase in USF contributions and other federal telecommunication service fees due primarily to increased client usage and a significant increase in the USF contribution rate, a $2.5 million increase in depreciation and data center costs, driven by increased capital expenditures to support our growing capacity needs and continuing expansion of our existing data center facilities and a $0.5 million increase in amortization of intangible assets from our acquisition of Whendu.

The increase in cost of revenue for 2020 compared to 2019 was primarily due to a $11.6 million increase in personnel costs, including stock-based compensation costs, driven mainly by increased headcount and a higher fair value of employee equity awards due primarily to our increased stock price, a $10.2 million increase in depreciation and data center costs driven by increased capital expenditures to support our growing capacity needs and continuing expansion of our existing data center facilities, a $6.8 million increase in third-party hosted software costs driven by increased client activities, a $6.0 million increase in amortization expense due to the acquisitions of Virtual Observer

in April 2020 and Inference in November 2020 and the acquisition of certain intangible assets from Whendu in November 2019, a $4.5 million increase in USF contributions and other federal telecommunication service fees due primarily to increased client usage and an increase in the USF contribution rate, and a $1.9 million increase in office, facilities and related costs.

Year Ended December 31,

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% of Revenue 59% 59%

The increase in gross profit for 2019 compared to 2018 was primarily due to increases in subscription and related usage revenues.

The decrease in gross margin for 2019 compared to 2018 was primarily due to an increase in personnel costs, including stock-based compensation costs, driven by increased headcount and a higher fair value of employee equity awards primarily due to our increased stock price.

The increase in gross profit for 2020 compared to 2019 was primarily due to increases in subscription and related revenues.

Gross margin for 2020 was flat compared to 2019.

Operating Expenses

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% of Revenue 30% 29%

The increase in sales and marketing expenses for 2019 compared to 2018 was primarily due to a $13.4 million increase in personnel-related costs, including stock-based compensation costs, driven mainly by increased headcount and a higher fair value of employee equity awards due primarily to our increased stock price, a $4.8 million increase in sales commission expenses driven by the growth in sales and bookings of our solution, and a $1.1 million increase in facilities and related costs.

The remaining net increase in sales and marketing expenses was primarily due to the

execution of our growth strategy to acquire new clients, increase the number of agent seats within our existing client base, and increased advertising and other marketing expenses to increase our brand awareness.

The increase in sales and marketing expenses for 2020 compared to 2019 was primarily due to a $25.5 million increase in personnel-related costs, including stock-based compensation costs driven mainly by increased headcount and higher fair value of equity awards due primarily to our increased stock price, a $6.7 million increase in sales commission expenses driven by the growth in sales and bookings of our solution, and a $1.8 million increase in facilities and related costs.

The remaining net increase in sales and marketing expenses was primarily due to the execution of our growth strategy to acquire new clients, increase the number of agent seats within our existing client base, and increased advertising and other marketing expenses to increase our brand awareness.

General and Administrative

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% of Revenue 15% 15%

The increase in general and administrative expenses for 2019 compared to 2018 was primarily due to a $6.9 million increase in personnel-related costs including stock-based compensation costs, driven mainly by increased headcount and a higher fair value of employee equity awards due primarily to our increased stock price.

The increase in stock-based compensation costs in 2019 also related to an equity award granted to an executive officer in May 2018, which continued to vest.

Legal costs in 2019 compared to 2018 increased due to a settlement payment of $0.4 million in the Melcher Litigation in June 2019 and acquisition-related transaction costs of $0.3 million.

The increase in general and administrative expenses for 2020 compared to 2019 was primarily due to a $11.6 million increase in personnel-related costs including stock-based compensation costs, driven mainly by increased headcount and a higher fair value of equity awards due primarily to our increased stock price, and a $5.0 million increase in legal and other professional service costs mainly related to our acquisitions.

Other Income (Expense), Net

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Interest expense $ (28,348) $ (13,794) $ (14,554) (106) %

Loss on early extinguishment of debt (6,964) — (6,964) (100) %

Interest income and other 3,034 6,079 (3,045) 50 %

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% of Revenue (7) % (2) %

The unfavorable change of $(0.8) million in other income (expense), net for 2019 compared to 2018 was primarily due to an increase of $3.5 million in interest expense related to our convertible senior notes issued in May 2018, offset in part by higher interest income on our marketable investments.

The increase in interest expense for 2020 compared to 2019 was primarily due to increased interest expense under our 2025 convertible senior notes issued in May and June 2020, offset in part by the decrease in interest expense as a result of the 2023 Note Repurchase Transactions and other 2023 convertible senior note settlements, which decreased the aggregate outstanding principal amount of our 2023 convertible senior notes.

The $7.0 million of loss was from the early extinguishment of our 2023 convertible senior notes during 2020.

The decrease in interest income and other for 2020 compared to 2019 was primarily from lower interest income on our marketable investments.

Liquidity and Capital Resources

To date, we have financed our operations, primarily through sales of our solution, lease facilities and net proceeds from our equity and debt financings including the issuance of our 0.125% convertible senior notes in May 2018.

As of December 31, 2019, we had $315.3 million in working capital, which included $78.0 million in cash and cash equivalents and $242.0 million in marketable investments.

In May 2018, we issued $258.8 million aggregate principal amount of our 0.125% convertible senior notes, or Notes, due May 1, 2023 in a private offering.

The Notes are our senior unsecured obligations and bear interest at a fixed rate of 0.125% per annum, payable semiannually in arrears on May 1 and November 1 of each year, beginning November 1, 2018.

To date, we have financed our operations, primarily through sales of our solution, lease facilities and net proceeds from our equity and debt financings, including the issuance of our 2025 convertible senior notes in May and June 2020 and of our 2023 convertible senior notes in May 2018.

As of December 31, 2020, we had $585.6 million in working capital, which included $220.4 million in cash and cash equivalents, $383.2 million in short-term marketable investments and $42.1 million in long-term marketable investments.

In May and June 2020, we issued $747.5 million aggregate principal amount of our 2025 convertible senior notes in a private offering.

The 2025 convertible senior notes mature on June 1, 2025 and are our senior unsecured obligations.

The 2025 convertible senior notes bear interest at a fixed rate of 0.50% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2020.

The total net proceeds from the offering, after deducting initial purchasers’ discounts and commissions and estimated debt issuance costs, were approximately $728.8 million.

In May 2018, we issued $258.8 million aggregate principal amount of our 2023 convertible senior notes in a private offering.

The 2023 convertible senior notes mature on May 1, 2023 and are our senior unsecured obligations.

The 2023 convertible senior notes bear interest at a fixed rate of 0.125% per annum, payable semiannually in arrears on May 1 and November 1 of each year.

The total net proceeds from the offering, after deducting the initial purchasers’ discounts and estimated debt issuance costs, were approximately $250.8 million.

For additional information regarding the Notes, see Note 6 to the consolidated financial statements included in this report.

In August 2016, we entered into a loan agreement, which we refer to as the 2016 Loan and Security Agreement, with two lenders for a revolving credit facility of up to $50.0 million.

The revolving credit facility bore a variable annual interest rate of the prime rate plus 0.50%, subject to a 0.25% increase if our adjusted EBITDA was negative at the end of any fiscal quarter.

In May 2018, we paid off the then outstanding principal balance of the revolving line of credit, and in July 2018, we terminated the 2016 Loan and Security Agreement.

As of December 31, 2020, after giving effect to the 2023 Note Repurchase Transactions and other settlements upon conversion requests, approximately $58.9 million aggregate principal amount of 2023 convertible senior notes remained outstanding.

For additional information regarding the convertible senior notes and related transactions, see Note 6 to the consolidated financial statements included in this report.

We believe our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.

Our future capital requirements will depend on many factors including our growth rate, continuing market acceptance of our solution, client retention, our ability to gain new clients, the timing and extent of spending to support research and development efforts, the outcome of any pending or future litigation or other claims by third parties or governmental entities, the expansion of sales and marketing activities and personnel and the introduction of new and enhanced offerings.

We may also acquire or invest in

complementary businesses, technologies and intellectual property rights, which may increase our future capital requirements, both to pay acquisition costs and to support our combined operations.

We may raise additional equity or debt financing at any time.

We may not be able to raise additional equity or debt financing on terms acceptable to us or at all.

If we are unable to raise additional capital when desired or required, our business, operating results and financial condition would be harmed.

In addition, if our operating performance during the next twelve months is below our expectations, our liquidity and ability to operate our business could be harmed.

If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted.

If we raise additional funds through the incurrence of additional indebtedness, we will be subject to increased debt service obligations and could also be subject to restrictive covenants and other operating restrictions that could harm our ability to conduct our business.

Our future capital requirements will depend on many factors including our growth rate, continuing market acceptance of our solution, client retention, our ability to gain new clients, the timing and extent of spending to support research and development efforts, the outcome of any pending or future litigation or other claims by third parties or governmental entities, the expansion of sales and marketing activities and personnel, the introduction of new and enhanced offerings, and the impact of the COVID-19 pandemic on these or other factors.

We may also acquire or invest in complementary businesses, technologies and intellectual property rights, which may increase our use of cash and future capital requirements, either to pay acquisition costs or to support our combined operations.

We may raise additional capital through equity or engage in debt financings at any time to fund these or other requirements.

However, we may not be able to raise additional capital through equity or debt financings when needed on terms acceptable to us or at all, depending on our financial performance, market conditions and other factors, including the length and severity of the impact of the COVID-19 pandemic on general economic conditions and potential future impacts on the financial markets.

If we are unable to raise additional capital as needed, our business, operating results and financial condition could be harmed.

In addition, if our

operating performance during the next twelve months is below our expectations, our liquidity and ability to operate our business also could be harmed.

If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders would be diluted.

The following table summarizes our cash flows for the periods presented (in thousands):

Year Ended December 31,

2019 2018 2017

Net cash provided by operating activities $ 67,302 $ 51,221

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Net increase (decrease) in cash and cash equivalents $ 142,396 $ (3,936)

Year-to-year comparisons between 2019 and 2018 have been omitted from this Form 10-K but may be found in “Management's Discussion and Analysis of Financial Condition” in Part II, Item 7 of our Form 10-K for the fiscal year ended December 31, 2019, which specific discussion is incorporated herein by reference.

Cash Flows from Operating Activities

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Net cash provided by operating activities was $67.3 million during the year ended December 31, 2020.

Net cash provided by operating activities resulted from our net loss of $4.6 million adjusted for non-cash items of $73.2 million, primarily consisting of $42.1 million of stock-based compensation, $14.4 million of depreciation and amortization and $12.8 million of amortization of discount and issuance costs on our convertible senior notes, offset by use of cash for operating assets and liabilities of $17.4 million primarily due to the timing of cash payments to vendors and cash receipts from clients.

Net cash provided by operating activities was $38.6 million during the year ended December 31, 2018.

Net cash provided by operating activities resulted from net loss of $0.2 million adjusted for non-cash items of $45.9 million, primarily consisting of $28.5 million of stock-based compensation, $10.3 million of depreciation and amortization and $7.9 million of amortization of discount and issuance costs on our convertible senior notes, offset by use of cash for operating assets and liabilities of $7.1 million, which was primarily driven by deferred contract acquisition costs due to deferral of incremental sales commissions in connection with the adoption of ASC 606.

During the year ended December 31, 2017, net cash provided by operating activities was $11.1 million compared to $6.8 million for the same period of 2016.

The increase of $4.3 million was primarily due to an $8.0 million favorable impact from a decrease in net loss after adjusting for non-cash expenses, offset by a $3.7 million decrease in net cash resulting from changes in operating assets and liabilities.

Cash outflows during 2017 included total payments of $1.8 million for settlement, legal and indemnification fees related to the Melcher litigation.

See Note 10 to the consolidated financial statements for more information.

Net cash provided by operating activities resulted from our net loss of $42.1 million adjusted for non-cash items of $128.8 million, primarily consisting of $64.7 million of stock-based compensation, $25.7 million of amortization of discount and issuance costs on our convertible senior notes, $25.1 million of depreciation and amortization and $7.0 million of loss from the early extinguishment of our 2023 convertible senior notes, offset by use of cash for operating assets and liabilities of $19.4 million primarily due to the timing of cash payments to vendors and cash receipts from customers.

Cash Flows from Investing Activities

Net cash used in investing activities in 2019 was $63.6 million compared to $216.7 million in 2018.

Net cash used in investing activities in 2019 was comprised of $359.5 million related to purchases of marketable investments and $19.2 million in capital expenditures and $13.9 million related to cash paid to acquire substantially all of the assets of Whendu, offset by $328.7 million of cash proceeds from maturities of marketable investments and the $0.2 million cash proceeds from the sale of convertible notes held for investment.

Net cash used in investing activities in 2018 was $216.7 million compared to $2.7 million in 2017.

Net cash used in investing activities in 2018 was comprised of $220.7 million related to purchases of marketable investments and $9.3 million in capital expenditures, offset by $11.3 million of cash proceeds from maturities of marketable investments and the $1.9 million cash proceeds from the sale of convertible notes held for investment.

Net cash used in investing activities of $382.3 million in 2020 was comprised of $620.9 million related to purchases of marketable investments, $165.3 million, net of cash acquired, in connection with the acquisitions of Inference and Virtual Observer, and $30.4 million in capital expenditures, offset in part by $434.5 million related to cash proceeds from maturities of marketable investments.

Cash Flows from Financing Activities

Net cash provided by financing activities in the year ended December 31, 2019 was $8.5 million, compared to $191.1 million in the year ended December 31, 2018.

Net cash provided by financing activities of $8.5 million in the year ended December 31, 2019 related to $7.8 million from the sale of common stock under our employee stock purchase plan and cash proceeds of $7.7 million from exercises of stock options, offset in part by repayments of finance leases of $7.1 million.

Net cash provided by financing activities in the year ended December 31, 2018 was $191.1 million, compared to $2.4 million in the year ended December 31, 2017.

Net cash provided by financing activities of $191.1 million in the year ended December 31, 2018 related to cash proceeds of $250.7 million from the issuance of our convertible senior notes, cash proceeds of $7.8 million from exercises of stock options and warrants, and $5.7 million from the sale of common stock under our employee stock purchase plan, offset in part by repayments under our line of credit of $32.6 million, payments for capped call transactions of $31.4 million and payments of finance leases of $8.5 million.

Net cash provided by financing activities of $457.4 million in 2020 related to net cash proceeds of $728.8 million from the issuance of the 2025 convertible senior notes, net of initial purchasers' discounts and commissions and estimated debt issuance costs, cash proceeds of $11.7 million from exercise of stock options, and $11.5 million from the sale of common stock under our employee stock purchase plan, partially offset by $181.5 million of cash paid in connection with the 2023 Note Repurchase Transactions, $18.9 million of cash paid in connection with other 2023 convertible senior note settlements, $90.5 million of cash paid in connection with the 2025 Capped Call Transactions and $3.7 million of payments related to finance leases.

Critical Accounting Policies and Estimates

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Revenue Recognition

Revenue is recognized when control of the promised services are transferred to customers, in an amount that reflects the consideration that we expect to receive in exchange for those services.

Revenue is recognized when control of the promised services is transferred to customers, in an amount that reflects the consideration that we expect to receive in exchange for those services.

We generate all of our revenue from contracts with customers.

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Support activities include technical assistance for our solution and upgrades and enhancements to our VCC cloud platform on a when-and-if-available basis, which are not billed separately.

Professional services are primarily billed on a fixed-fee basis.

Professional services are primarily billed on a fixed-fee basis and are performed by us directly or, alternatively, clients may also choose to perform these services themselves or engage their own third-party service providers.

Revenue for professional services is recognized over time, as services are performed.

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The cost of gross USF contributions payable to the USAC and suppliers is presented as a cost of revenue in the consolidated statements of operations and comprehensive loss.

Business Combinations, Goodwill, and Acquisition-Related Intangible Assets

Accounting for business combinations requires us to make significant estimates and assumptions.

We allocate the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value at the acquisition dates, with the excess recorded to goodwill.

Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows, expected asset lives, royalty rates, and discount rates.

The amounts and useful lives assigned to acquisition-related intangible assets impact the amount and timing of future amortization expense.

We use estimates, assumptions, and judgments when performing a goodwill impairment test or assessing the recoverability of acquisition-related finite-lived intangible assets.

We test goodwill for impairment on an annual basis in the fourth quarter and more frequently if a significant event or circumstance indicates impairment, and assess the recoverability of acquisition-related intangible assets whenever events or circumstances indicate that the carrying amounts of such assets may not be recoverable.

We also evaluate the estimated remaining useful lives of acquisition-related intangible assets for changes in circumstances that warrant a revision to the remaining periods of amortization.

Recent Accounting Pronouncements

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46,387 1,094 8,955 11,965 24,373

Cloud services (4)

11,400 7,000 4,400 — —

Hosting services (5)

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Equipment maintenance (7)

165 140 25 — —

Total $ 881,954 $ 16,981 $ 80,408 $ 760,192 $ 24,373

(1) Represents the outstanding principal balance under our 0.125% convertible senior notes issued in May 2018.

(1) Represents the outstanding principal balance under our 2025 convertible seniors and our 2023 convertible senior notes.

See Note 6 to the consolidated financial statements for more information.

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(3) Represents our obligations to make payments under the lease agreements for our office facilities and office equipment leases.

The operating lease not yet commenced relates to our Bishop Ranch Building Lease, or the Bishop Ranch Lease, that we entered into on July 29, 2020, which commenced on February 1, 2021.

(4) Represents a three-year cloud services agreement that grants us a license to access and use certain cloud services.

(5) Represents guaranteed minimum payments for co-location facilities and services.

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Other than as described below, there are no claims that we are aware of that could have a material effect on our consolidated balance sheet, consolidated statement of operations and comprehensive loss, or consolidated statements of cash flows.

On October 27, 2016, we received notice from Lance Fried, a former officer and director of Face It, Corp., or Face It, of his claim for indemnification by us (as successor in interest to Face It), and for advancement of all legal fees and expenses he incurs in connection with the defense of the lawsuit captioned Melcher, et al.

Five9, Inc., et al., No.

16-cv-02440, in the U.S.

District Court for the Southern District of California, which we refer to as the Melcher Litigation.

In the lawsuit, plaintiff Carl Melcher, a purported former stockholder of Face It, and his related investment entity, Melcher Family Limited Partnership, alleged that Face It repurchased the plaintiffs’ stock in September 2013 before we acquired Face It, and that in connection with the repurchase, Fried made material misstatements or omissions to Melcher by failing to disclose that Face It allegedly was in concurrent discussions about a potential sale of its company to us.

The lawsuit alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as various claims under state law and common law.

On January 9, 2018, Mr.

Fried initiated an arbitration proceeding against us in which he alleged that we breached advancement obligations to him.

We asserted counterclaims in the arbitration proceeding against both Mr.

Fried and the representative of the former Face It stockholders, seeking to recoup all losses incurred by us

in connection with the Melcher Litigation, including any amounts incurred to indemnify or advance the legal fees and expenses of Mr.

Fried pursuant to his indemnification claim.

On June 11, 2018, the arbitrator ordered us to advance the fees Mr.

Fried incurred in connection with the defense of the Melcher Litigation, and ordered our counterclaims stayed pending the resolution of the Melcher Litigation.

In June 2019, Mr.

Fried reached a settlement in the Melcher Litigation.

Pursuant to a separate June 2019 settlement agreement between us, Mr.

Fried, and the representative of the former Face It stockholders, we agreed to contribute a portion of the amount Mr.

Fried agreed to pay the Melcher parties.

Specifically, we agreed to pay $0.4 million to the Melcher parties on Mr.

Fried’s behalf in light of Mr.

Fried’s asserted indemnity obligations against us.

As a result of the settlements, all claims against us, including claims for indemnification, have been released by Mr.

Fried and the former Face It stockholders.

We also released claims we asserted against Mr.

Fried and the former Face It stockholders.

The Melcher Litigation and the arbitration proceeding have been dismissed.

We incurred a total of approximately $1.4 million in fees and expenses including legal fees advanced on Mr.

Fried’s behalf and settlement contributions for the Melcher Litigation.

These amounts were included in general and administrative expenses.

Contingencies — Legal and Regulatory

3 unchanged sentences

We develop our views on estimated losses in consultation with inside and outside counsel, which involves a subjective analysis of potential results and outcomes, assuming various combinations of appropriate litigation and settlement strategies.

Legal fees are expensed in the period in which they are incurred.

are expensed in the period in which they are incurred.

See Note 10 to the consolidated financial statements for more details.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis