The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in Item 8, "Financial Statements and Supplementary Data" included in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements reflecting our current expectations that involve risks and uncertainties which are subject to safe harbors under the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements include, but are not limited to, statements concerning our plans, objectives, expectations and intentions, future financial position, future revenues, projected costs, expectations regarding demand and acceptance for our technologies, growth opportunities and trends in the market in which we operate, prospects and plans and objectives of management, and the expected impact of the COVID-19 pandemic on our operations. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. The cautionary statements made in this Annual Report on Form 10-K should be read as applying to all related forward-looking statements wherever they appear in this Annual Report on Form 10-K. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under Item 1A, "Risk factors" and elsewhere in this Annual Report on Form 10-K. Business overview We are a provider of secure, integrated, intelligent communication and clinical workflow solutions, focused on empowering mobile workers in healthcare, hospitality, retail, energy, education and other mission-critical mobile work environments, inthe United States and internationally. The significant majority of our business is generated from sales of our solutions in the healthcare market to help our customers enhance quality of care, safety, patient and staff experience and improve operational efficiency. As ofDecember 31, 2021 , care teams at over 2,300 healthcare facilities worldwide have selected our solutions. We primarily sell products, software subscriptions and support and professional services directly to our customers. Total revenue increased 18.0% to$234.2 million in 2021 from$198.4 million in 2020, and our 2020 revenue increased 9.9% from$180.5 million in 2019. For the year endedDecember 31, 2021 , we recorded a net loss of$8.5 million compared to a net loss of$9.7 million for the year endedDecember 31, 2020 . Our diverse customer base ranges from large hospital systems to small local hospitals, as well as other healthcare facilities and customers in non-healthcare markets. We do not rely on any one customer for a substantial portion of our revenue. While we have international customers in other English-speaking countries such asCanada , theUnited Kingdom ,Australia ,New Zealand and parts of theMiddle East , most of our customers are located inthe United States . International customers represented 9.4% and 10.7% of our revenue in 2021 and in 2020, respectively. We believe certain international markets represent attractive growth opportunities. We are considering plans to expand our international presence.
We outsource the manufacturing of our hardware products. Our outsourced
manufacturing model allows us to scale our business without the significant
capital investment and on-going expenses required to establish and maintain
manufacturing operations. We work closely with our contract manufacturers,
including Sercomm and
In the second quarter of 2021, we acquired PatientSafe for$36.0 million , net of$0.2 million of cash acquired. PatientSafe provides a clinical communication and collaboration ("CC&C") solution for smartphones that is engineered to run either on-premises or in the cloud. For further discussion on the acquisition, please refer to Note 12 in the notes to the consolidated financial statements. A discussion and analysis of our financial condition and results of operations for the year endedDecember 31, 2019 is included in Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC onFebruary 25, 2021 .
Transaction with Stryker
Under the terms of the Agreement and Plan of Merger, dated as ofJanuary 6, 2022 (together with any amendments and supplements thereto, the "merger agreement") among Stryker Corporation ("Stryker"),Voice Merger Sub Corp. andVocera , Stryker, through a wholly owned subsidiary, commenced a cash tender offer to purchase all outstanding shares of common stock ofVocera for$79.25 per share. The tender offer is scheduled to expire at one minute after11:59 p.m. Eastern time , onFebruary 22, 2022 , unless extended in accordance with the terms of the merger agreement. The tender offer is subject to various conditions, including a minimum tender of at least a majority of outstanding shares ofVocera common stock, and other 45
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customary conditions. The transaction is expected to close in the first quarter of 2022. Upon closing of the transaction,Vocera's common stock will no longer be listed on any public market.
COVID-19 Pandemic
The ongoing outbreak of coronavirus, SARS-CoV-2, or COVID-19, continues to be a global pandemic and public health emergency. Many federal, state and local governments and private entities have mandated various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories and quarantining of people who may have been exposed to the virus. Since our last filing, COVID-19 infections have continued and are increasing in many geographies of the world as new variants arise and these rates may continue to increase. Over the course of the COVID-19 pandemic, our business has been impacted in several ways, including the following: •We have taken measures to protect the health and safety of our employees, primarily by shifting the majority of our employees to remote work. •Our access to our healthcare customers' locations for sales and implementation activities was limited in many cases. The sales cycle and implementation timeline for broader strategic deals in some cases has been 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. Overall, the outbreak did not have a material impact on our operating results or business in the year endedDecember 31, 2021 . While future impacts cannot be predicted at this time, the shift in hospital resources, attention to treatment of COVID-19 patients and declines in hospital revenues may result in reduced demand for our products and solutions, longer sales cycles, and/or delays of customer implementations, which could negatively impact our financial condition. We have generated operating cash flows in the past and our$332.4 million in cash and short-term investments provides us with ample liquidity to meet our current needs. However, given the dynamic nature of this situation, we cannot accurately estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows.
Components of operating results
Revenue. We generate revenue from the sale of products and services. As discussed further in the section titled "Critical accounting policies and estimates-Revenue recognition", revenue is recognized utilizing a five-step approach which depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Revenue is comprised of the following:
•Product. Our solutions include both hardware and software. We refer to hardware revenue as device revenue, which includes revenue from sales of our communication badges and badge accessories, which include batteries, battery chargers, lanyards, clips and other ancillary badge components as well as revenue from the resale of third-party devices and related accessories. Software revenue is derived primarily from the sale of perpetual or term-based licenses to ourVocera Communication and Workflow System. Term based licenses delivered on-premises can be renewed on a subscription basis. Product revenue is generally recognized upon shipment of hardware and delivering of licenses. •Service. We receive service revenue from sales of software maintenance, sales of cloud-based software subscriptions, extended hardware warranties and professional services. Subscription revenue is generally recognized ratably over the application term. Cloud-based software subscription and software maintenance are typically invoiced annually in advance, recorded as deferred revenue, and recognized as revenue ratably over the service period. Our professional services revenue is based on both time and materials, and fixed price contracts, and is recognized as the services are provided. Extended warranties are invoiced in advance, recorded as deferred revenue, and recognized ratably over the extended warranty period.
Cost of revenue. Cost of revenue is comprised of the following:
•Cost of product. Cost of product is comprised primarily of materials costs, software license costs, provisions for excess and obsolete inventory, warranty, and manufacturing overhead costs for test engineering, material requirements planning and our shipping and receiving functions. These overhead costs also include facilities, equipment depreciation, amortization of developed technology and stock-based compensation expenses. We expect material costs to vary with the product life cycle of our devices. •Cost of service. Cost of service is comprised primarily of employee wages, benefits and related personnel expenses of our technical support team, our professional consulting personnel and our training teams. Cost of service also includes facility 46 -------------------------------------------------------------------------------- Table of Contents and information technology costs. We expect our cost of service will increase as we continue to invest in support services to meet the needs of our customer base.
Operating expenses. Operating expenses are comprised of the following:
•Research and development. Research and development expenses consist primarily of employee wages, benefits and related personnel expenses, hardware materials, and consultant fees and expenses related to the design, development, testing and enhancements of our solutions. We intend to continue to invest in improving the functionality of our solutions and the development of new solutions.
•Sales and marketing. Sales and marketing expenses consist primarily of employee wages, benefits and related personnel expenses, as well as trade shows, marketing programs and collateral and public relations programs.
•General and administrative. General and administrative expenses consist primarily of employee wages, benefits and related personnel expenses, consulting, accounting fees, legal fees and other general corporate expenses.
Interest income and other income (expense), net.
•Interest income. Interest income consists primarily of interest income earned on our cash, cash equivalent and short-term investment balances. Our interest income will vary each reporting period depending on our average cash, cash equivalent and short-term investment balances during the period and market interest rates. •Interest expense. Interest expense consists of amortization of debt discount and debt issuance costs as well as the contractual interest incurred due to the issuance of the Convertible Senior Notes which are discussed in further detail in Note 8 of the Notes to Consolidated Financial Statements.
•Other income (expense), net. Other income (expense), net consists primarily of foreign exchange gains and losses.
Provision for income taxes. We are subject to income taxes in the countries where we sell our solutions. We anticipate that in the future as we expand our sale of solutions to customers outsidethe United States , we will become subject to taxation based on the foreign statutory rates in the countries where these sales took place and our effective tax rate could fluctuate accordingly. Currently, each of our international subsidiaries is operating under cost plus agreements where theU.S. parent company reimburses the international subsidiary for its costs plus an arm's length profit. Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances have been established to reduce deferred tax assets to the amount reasonably expected to be realized. Changes in valuation allowances are reflected as a component of provision for income taxes. AtDecember 31, 2021 , we held a$61.5 million valuation allowance against our deferred tax assets. We review on a quarterly basis our conclusions about the appropriate amount of our deferred income tax asset valuation allowance. 47 -------------------------------------------------------------------------------- Table of Contents Results of operations The following table is a summary of our consolidated statements of operations for the years endedDecember 31, 2021 and 2020. The period-to-period comparisons of results are not necessarily indicative of results for future periods. Years ended December 31, 2021 2020 (in thousands, except percentages) Amount % Revenue Amount % Revenue Consolidated statements of operations data: Revenue Product$ 118,170 50.5 %$ 100,567 50.7 % Service 116,015 49.5 97,853 49.3 Total revenue 234,185 100.0 198,420 100.0 Cost of revenue Product 31,675 13.5 28,805 14.5 Service 47,657 20.4 40,998 20.7 Total cost of revenue 79,332 33.9 69,803 35.2 Gross profit 154,853 66.1 128,617 64.8 Operating expenses Research and development 45,850 19.5 38,820 19.6 Sales and marketing 74,551 31.8 65,494 33.0 General and administrative 38,537 16.5 28,382 14.3 Total operating expenses 158,938 67.8 132,696 66.9 Loss from operations (4,085) (1.7) (4,079) (2.1) Interest income 1,032 0.4 3,169 1.6 Interest expense (3,198) (1.3) (9,354) (4.7) Other expense, net (1,550) (0.7) (640) (0.3) Loss before income taxes (7,801) (3.3) (10,904) (5.5) (Provision for) benefit from income taxes (694) (0.3) 1,248 0.6 Net loss$ (8,495) (3.6) %$ (9,656) (4.9) %
Year ended
Revenue: Years ended December 31, 2021 2020 Change (in thousands, except percentages) Amount Amount Amount % Product Revenue Device$ 72,473 $ 69,321 $ 3,152 4.5 % Software 45,697 31,246 14,451 46.2 Total product revenue 118,170 100,567 17,603 17.5 Service Revenue Subscription and support 94,246 78,532 15,714 20.0 Professional services and training 21,769 19,321 2,448 12.7 Total service revenue 116,015 97,853 18,162 18.6 Total revenue$ 234,185 $ 198,420 $ 35,765 18.0 % 48
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Total revenue increased$35.8 million , or 18.0%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase in total revenue was a result of an increase in revenue across all product lines, with significant growth in software and subscription and support. Product revenue increased$17.6 million , or 17.5%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Device revenue increased$3.2 million , or 4.5%, and software revenue increased$14.5 million , or 46.2%, for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . The increase in device revenue was driven primarily by an increase in unit sales of badges and related hardware and accessories to new customers. The increase in software revenue was due to an increase in the number of software licenses delivered to our customers and the additional revenue from Edge products. Service revenue increased$18.2 million , or 18.6%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Subscription and support revenue increased$15.7 million , or 20.0%, and professional services and training revenue increased$2.4 million , or 12.7%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase in subscription and support revenue was primarily the result of an increased number of customers who purchased software maintenance contracts, and the additional subscription revenue from the Ease products of$4.0 million . The increase in professional services and training revenue was due to an increase in implementation services for our solutions. Cost of revenue: Years ended December 31, 2021 2020 Change (in thousands, except percentages) Amount Amount Amount % Cost of revenue Product$ 31,675 $ 28,805 $ 2,870 10.0 % Service 47,657 40,998 6,659 16.2 Total cost of revenue$ 79,332 $ 69,803 $ 9,529 13.7 % Gross margin Product 73.2 % 71.4 % 1.8 % Service 58.9 58.1 0.8 Total gross margin 66.1 % 64.8 % 1.3 % Cost of product revenue increased$2.9 million , or 10.0%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The cost of product revenue increased primarily due to an increase in the amortization of developed technology related to the acquisitions of Ease and the PatientSafe. Product gross margin as a percentage of product revenue increased in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to a higher proportion of software revenue. Cost of service revenue increased$6.7 million , or 16.2%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Cost of service revenue increased primarily due to higher compensation and benefits costs as a result of increased headcount related to core business and the acquisitions of Ease and PatientSafe. Service gross margin as a percentage of service revenue increased for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to an increase in service revenue while costs saw the benefit of scale. Operating expenses: Years ended December 31, 2021 2020 Change (in thousands, except percentages) Amount Amount Amount % Operating expenses: Research and development$ 45,850 $ 38,820 $ 7,030 18.1 % Sales and marketing 74,551 65,494 9,057 13.8 General and administrative 38,537 28,382 10,155 35.8 Total operating expenses$ 158,938 $ 132,696 $ 26,242 19.8 % 49
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Research and development expense. Research and development expense increased$7.0 million , or 18.1%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . This increase was primarily due to an increase of$5.2 million in compensation, benefits, and hiring costs including bonuses and headcount related to acquisitions, an increase of$1.5 million in outside services and development, and an increase of$0.3 million in equipment and supplies cost. Sales and marketing expense. Sales and marketing expense increased$9.1 million , or 13.8%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . This was primarily due to an increase of$7.1 million in compensation, benefits, and hiring costs including bonuses and headcount related to acquisitions, an increase of$0.8 million in amortization related to the acquisitions of Ease and PatientSafe, an increase of$0.5 million in outside services, an increase of$0.5 million in marketing development, and an increase of$0.2 million in other expenses, primarily comprised of travel costs. General and administrative expense. General and administrative expense increased$10.2 million , or 35.8%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . This was primarily due to an increase of$7.1 million in outside services,$5.8 million of which relate to transaction costs associated with the transactions contemplated by the merger agreement. Additionally, there was an increase in compensation, benefits, and hiring costs of$3.5 million due to changes in headcount throughout the year, achievement of performance related compensation targets. Years ended December
31,
(in thousands, except percentages) 2021 2020 Change Non-operating income (expense) elements: Interest income$ 1,032 $ 3,169 $ (2,137) Interest expense$ (3,198) $ (9,354) $ 6,156 Other expense, net$ (1,550) $ (640) $ (910) Income taxes: Benefit from (provision for) income taxes$ (694) $ 1,248 $ (1,942) Loss before income taxes$ (7,801) $ (10,904) $ 3,103 Effective tax rate % (8.9) % 11.4 % (20.3) %
Interest income. Interest income decreased
Interest expense. Interest expense decreased$6.2 million for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . The decrease was primarily due to the impact of the adoption of ASU 2020-06 Accounting for Convertible Instruments and Contracts in an Entity's Own Equity which eliminated the debt discount amortization for 2021. The amortization of the debt discount was previously accounted for as part of interest expense and represented$6.5 million of the total interest expense for the year endedDecember 31, 2020 . Other expense, net. The change in other expense, net for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 , was primarily due to the$2.1 million inducement loss resulting from the repurchase of the 2023 Notes and a one-time payment of$1.7 million to the acquired company's shareholders partially offset by the change in the fair value adjustment of the Ease contingent consideration included in earnings of$2.9 million for the year endedDecember 31, 2021 , as well as the impact of foreign exchange fluctuations. Benefit from (provision for) income taxes. The$0.7 million tax provision on$7.8 million of loss before income taxes in 2021 represented an effective tax rate of (8.9)%. The effective tax rate for 2021 was due primarily to income taxes on foreign operations and amortization of goodwill. The$1.2 million tax benefit on$10.9 million of loss before income taxes in 2020 represented an effective tax rate of 11.4%. The effective tax rate for 2020 was primarily due to the release of the valuation allowance of$2.1 million as a result of the EASE acquisition, partially offset by income taxes on foreign operations and the amortization of goodwill. 50
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Liquidity and capital resources
Years ended December
31,
(in thousands) 2021
2020
Consolidated statements of cash flow data: Net cash provided by operating activities$ 53,975 $ 26,858 Net cash used in investing activities (83,710)
(20,441)
Net cash provided by financing activities 91,063
2,855
Net increase in cash and cash equivalents$ 61,328
As of
InMarch 2021 , we issued$200.0 million in aggregate principal amount of 0.50% Convertible Senior Notes and we used part of the net proceeds from the issuance of the 2026 Notes to retire approximately$102.9 million aggregate principal amount of the 2023 Notes. In addition, inApril 2021 , the purchasers partially exercised the overallotment option and we issued an additional$24.5 million aggregate principal amount of the 2026 Notes. For additional information, see Note 8 of the Notes to the consolidated financial statements. During 2021 and 2020, our purchases of property and equipment were$3.8 million and$4.2 million , respectively. The expenditures in 2021 primarily related to purchases associated with the new company headquarters and other leasehold improvements, manufacturing tools and equipment, and computer equipment. The expenditures in 2020 primarily related to leasehold improvements, manufacturing tools and equipment, and computer equipment. We believe that our existing sources of liquidity will satisfy our anticipated working capital and capital requirements for at least the next twelve months. Our future liquidity and capital requirements will depend upon numerous factors, including our rate of growth, the rate at which we add personnel to generate and support future growth, and potential future acquisitions. In the future, we may seek to sell additional equity securities or borrow funds. The sale of additional equity or convertible securities may result in additional dilution to our stockholders. If we raise additional funds through the issuance of debt securities or other borrowings, these securities or borrowings could have rights senior to those of our common stock and could contain covenants that could restrict our operations. Any required additional capital may not be available on reasonable terms, if at all.
Operating activities
Cash provided by operating activities was$54.0 million in 2021. Cash provided by operating activities was the result of non-cash items such as stock-based compensation of$31.3 million , non-cash lease expense of$3.8 million , amortization of debt issuance costs of$1.4 million , depreciation of$4.9 million for property and equipment and amortization of$5.4 million for acquired intangible assets, an inducement loss of$2.1 million resulting from the repurchase of our 2023 Notes, accretion of investments of$2.6 million and$0.7 million of other items, partially offset by the change in fair value of contingent consideration of$2.9 million and a net loss of$8.5 million . With respect to changes in assets and liabilities, we experienced an increase in accounts receivable of$1.6 million , an increase of$0.8 million in other receivables, a decrease of$2.9 million in inventories, a decrease of$1.3 million in prepaid expenses and other assets, an increase in deferred commissions of$4.3 million , an increase of$1.7 million in accounts payable, a decrease of$2.1 million in accrued payroll and other liabilities, a decrease of$1.1 million in lease-related performance liabilities and a$17.4 million increase in deferred revenue. Cash provided by operating activities was$26.9 million in 2020, due in part to non-cash items such as stock-based compensation of$25.7 million , amortization of debt discount and issuance costs of$7.2 million , and depreciation and amortization of$6.4 million for property and equipment and acquired intangible assets, partially offset by a decrease in lease-related performance liabilities of$1.2 million and the 2020 net loss of$9.7 million . With respect to changes in assets and liabilities, we experienced an increase in accounts receivable of$2.7 million , an increase of$5.3 million in inventories, an increase of$1.2 million in prepaid expenses and other assets, an increase in deferred commissions of$1.8 million , a decrease of$2.6 million in accounts payable, an increase of$8.3 million in accrued payroll and other liabilities and a$2.1 million increase in deferred revenue.
Investing activities
Cash used in investing activities was
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Cash used in investing activities was$20.4 million in 2020, which was primarily attributable to$139.7 million in purchases of short-term investments and the acquisition of Vocera Ease for$24.2 million , offset by$118.3 million in short-term investment maturities and of$29.4 million sales of short-term investments. An additional$4.2 million of cash was used for the purchase of property and equipment and leasehold improvements.
Financing activities
Cash provided by financing activities was$91.1 million in 2021, primarily attributable to$217.7 million of net proceeds from convertible senior notes,$4.2 million of proceeds from issuance of common stock from our Amended and Restated 2012 Employee Stock Purchase Plan ("ESPP"),$3.2 million of proceeds from stock option exercises, and$0.5 million of cash from lease-related performance obligations. These items were partially offset by$102.9 million related to the repayment of a portion of our 2023 Notes, a$17.4 million payment for the purchase of capped calls related to our 2026 Notes, and$14.2 million cash paid for employee taxes collected via net share settlement. Cash provided by financing activities was$2.9 million in 2020, primarily attributable to$3.5 million of proceeds from stock option exercises,$3.7 million of proceeds from issuance of common stock from the ESPP and$2.0 million of cash from lease-related performance obligations. These items were partially offset by a$6.4 million decrease for employee taxes paid on net share settlement on the vesting of restricted stock awards.
Critical accounting policies and estimates
The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We evaluate our estimates on an ongoing basis, including those related to product warranties, goodwill and intangible assets, revenue recognition, stock-based compensation, accounting for business combinations, contingent consideration, and the provision for income taxes. We base our estimates and judgments on our historical experience, knowledge of factors affecting our business and our belief as to what could occur in the future considering available information and assumptions that we believe to be reasonable under the circumstances. The accounting estimates we use in the preparation of our consolidated financial statements will change as events occur, more experience is acquired, additional information is obtained and our operating environment changes. Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in our reported results of operations and, if material, the effects of changes in estimates are disclosed in the notes to our consolidated financial statements. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results could differ materially from the amounts reported based on these estimates. While our significant accounting policies are more fully described in Note 1 of the "Notes to our consolidated financial statements" included in Item 8, "Financial Statements and Supplementary Data," we believe the following reflects our critical accounting policies and our more significant judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
Some of our contracts with customers contain multiple performance obligations. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price ("SSP") basis. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. For performance obligations that we routinely sell separately, such as support and maintenance on our core offerings, we determine SSP by evaluating the standalone sales over the trailing 12 months. For those that are not sold routinely, we determine SSP based on our overall pricing trends and objectives, taking into consideration market conditions and other factors, including the value of our contracts, the products sold and geographic locations.
Standard product warranties
We provide for the estimated costs of product warranties at the time the related revenue is recognized. Costs are estimated based on historical and projected product failure rates, historical and projected replacement costs, and knowledge of specific product failures, if any. The specific product warranty includes parts and labor over a period generally ranging from one to three years. We generally do not provide performance warranties for software. We regularly assess our estimates to evaluate the adequacy of the recorded warranty liabilities and adjust the amounts as necessary. The total warranty expense under our standard warranty in 2021 was$0.2 million , compared to$0.3 million in 2020 and$0.2 million in 2019. The key drivers to the warranty reserve calculation are the installed base of products under standard warranty, the estimated return rate of the installed base of products under standard warranty, and the availability of refurbished units to fulfill expected warranty claims. 52
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Table of Contents Stock-based compensation Performance Stock Units Performance stock units consist of grants of performance-based restricted stock units to certain members of executive management that vest contingent upon the achievement of pre-determined market and service conditions (referred to herein as "performance stock units"). The fair value of our performance stock units is estimated using a Monte-Carlo simulation model which is a probabilistic approach for calculating the fair value of the awards. The Monte-Carlo simulation is a statistical technique used, in this instance, to simulate future stock prices ofVocera relative to constituents in the S&P 600 Health Care Equipment and Services Index. Key assumptions for the Monte-Carlo simulation model are the risk-free interest rate, expected volatility, expected dividends and correlation coefficient.
We allocate the purchase price of any acquisitions to tangible assets and liabilities and identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates are based on information obtained from management of the acquired companies and historical experience. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made. In addition, unanticipated events and circumstances may occur which affect the accuracy or validity of such estimates, and if such events occur we may be required to record a charge against the value ascribed to an acquired asset or an increase in the amounts recorded for assumed liabilities.
Goodwill is tested for impairment at the reporting unit level at least annually, or more often if events or changes in circumstances indicate the carrying value may not be recoverable. Our annual assessment date isOctober 1st and the results of our assessment performed indicated that an impairment was not required. No impairment was recorded in 2021, 2020 or 2019. As ofDecember 31, 2021 , no changes in circumstances indicate that goodwill carrying values may not be recoverable. Application of the goodwill impairment test requires judgment. Circumstances that could affect the valuation of goodwill include, among other things, a significant change in our business climate and the buying habits of our customers along with changes in the costs to provide our products and services.
Intangible assets
Intangible assets are amortized over their estimated useful lives. Upon completion of development, acquired in-process research and development assets are generally considered amortizable, finite-lived assets and are amortized over their estimated useful lives. Finite-lived intangible assets consist of customer relationships, developed technology, trademarks, backlog and non-compete agreements. We evaluate our intangible assets for impairment at the asset group level, which means the intangibles grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Management has concluded that our asset groups align with our reporting unit. The intangible assets are allocated to the Product and Services asset groups, given that the Product and Services asset groups are the lowest level for which discrete cash flow information are identifiable, independent from other assets. We assess the recoverability of these assets whenever adverse events or changes in circumstances or business climate indicate that expected undiscounted future cash flows related to such intangible assets may not be sufficient to support the net book value of such assets. An impairment is recognized in the period of identification to the extent the carrying amount of an asset exceeds the fair value of such asset. No impairment of intangible assets was recorded in 2021, 2020 or 2019. Significant judgments required in assessing the impairment of goodwill and intangible assets include the identification of the reporting unit, identifying whether events or changes in circumstances require an impairment assessment, estimating future cash flows, determining appropriate discount and growth rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value as to whether an impairment exists and, if so, the amount of that impairment. 53
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Income taxes
We use the asset and liability method of accounting for income taxes. Under this method, we record deferred income taxes based on temporary differences between the financial reporting and tax bases of assets and liabilities and use enacted tax rates and laws that we expect will be in effect when we recover those assets or settle those liabilities, as the case may be, to measure those taxes. In cases where the expiration date of tax carryforwards or the projected operating results indicate that realization is not likely, we provide for a valuation allowance. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. We have deferred tax assets, resulting from deductible temporary differences that may reduce taxable income in future periods. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we estimate future taxable income, considering the feasibility of ongoing tax-planning strategies and the realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be impacted by changes in tax laws, changes in statutory tax rates and future taxable income levels. If we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through an increase to income in the period in which that determination is made. Due to recurring operating losses, we established a full valuation allowance throughDecember 31, 2021 , we had a full valuation allowance against our deferred tax assets. We continue to evaluate the realizability of ourU.S. and Canadian deferred tax assets. If our financial results improve, we will reassess the need for a full valuation allowance each quarter and, if we determine that it is more likely than not the deferred tax assets will be realized, we will adjust the valuation allowance. AtDecember 31, 2021 , we had a valuation allowance against net deferred tax assets of$61.5 million . We review on a quarterly basis our conclusions about the appropriate amount of our deferred tax asset valuation allowance. There is inherent uncertainty in evaluating the sustainability of the income tax positions we take on our tax returns. We assess our income tax positions and record tax benefits for all years subject to examination based upon our management's evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the highest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be realizable, no tax benefit has been recognized in our financial statements. We include interest and penalties with income taxes on the accompanying statement of operations. Our tax years after 2014 are subject to tax authority examinations. Additionally, our net operating losses and research credits are subject to tax authority adjustment.
Recently issued accounting guidance
See "Note 1. The Company and Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" for a full description of recent accounting pronouncements including the respective expected dates of adoption and estimated effects, if any on our consolidated financial statements.
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