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Section 1: 10-Q (10-Q)

      

      

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

      

FORM 10-Q

      

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from______ to______

Commission File Number: 001-36089

      

RingCentral, Inc.

(Exact Name of Registrant as Specified in its Charter)

      

   

 

Delaware

   

94-3322844

(State or other jurisdiction

of incorporation or organization)

   

(I.R.S. Employer

Identification No.)

1400 Fashion Island Boulevard, Suite 700

San Mateo, California 94404

(Address of principal executive offices)

(650) 472-4100

(Registrant’s telephone number, including area code)

      

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

   

 

Large accelerated filer

¨

   

Accelerated filer

¨

Non-accelerated filer

x

(do not check if a smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

As of November 4, 2013, there were 8,625,000 shares of Class A Common Stock issued and outstanding and 53,609,008 shares of Class B Common Stock outstanding.

      

      

   

   

   


   

TABLE OF CONTENTS

   

 

   

   

   

Page

PART I. FINANCIAL INFORMATION  

   

Item 1.

   

Financial Statements:  

 

 4

   

   

Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012 (unaudited)  

 

 4

   

   

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012 (unaudited)  

 

 5

   

   

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2013 and 2012 (unaudited)  

 

 6

   

   

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 (unaudited)  

 

 7

   

   

Notes to Condensed Consolidated Financial Statements (unaudited)  

 

 8

Item 2.

   

Management’s Discussion and Analysis of Financial Condition and Results of Operations  

 

 19

Item 3.

   

Quantitative and Qualitative Disclosures About Market Risk  

 

 27

Item 4.

   

Controls and Procedures  

 

 28

   

   

   

   

PART II. OTHER INFORMATION  

   

Item 1.

   

Legal Proceedings  

 

 29

Item 1A.

   

Risk Factors  

 

 30

Item 2.

   

Unregistered Sales of Equity Securities and Use of Proceeds  

 

 55

Item 3.

   

Defaults Upon Senior Securities  

 

 56

Item 4.

   

Mine Safety Disclosures  

 

 56

Item 5.

   

Other Information  

 

 56

Item 6.

   

Exhibits  

 

 56

Signatures  

   

   

 

 58

   

   

   

       

 

 2 


   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in, but not limited to, the sections titled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts”, “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Forward-looking statements include, but are not limited to, statements about:

 

·

our future financial performance;

 

·

our anticipated growth and growth strategies and our ability to effectively manage that growth and effect these strategies;

 

·

anticipated trends, developments and challenges in our business and in the markets in which we operate;

 

·

our ability to anticipate and adapt to future changes in our industry;

 

·

our ability to anticipate market needs and develop new and enhanced products and services to meet those needs, and our ability to successfully monetize them;

 

·

maintaining and expanding our customer base

 

·

maintaining, expanding and responding to changes in our relationships with other companies;

 

·

the impact of competition in our industry and innovation by our competitors;

 

·

our ability to sell our products;

 

·

our ability to expand internationally;

 

·

the impact of seasonality on our business;

 

·

the impact of any failure of our solutions or solution innovations;

 

·

our reliance on our third-party service providers;

 

·

the potential effect on our business of litigation to which we may become a party;

 

·

our liquidity and working capital requirements;

 

·

the estimates and estimate methodologies used in preparing our consolidated financial statements

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in the section entitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward looking statements, even if new information becomes available in the future

   

   

   

 

 3 


   

PART I — FINANCIAL INFORMATION

   

Item 1. Financial Statements

RINGCENTRAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

   

 

   

September 30,
2013

   

      

December 31,
2012

   

Assets:

   

   

   

      

   

   

   

Current assets:

   

   

   

      

   

   

   

Cash and cash equivalents

$

25,452

      

      

$

37,864

   

Accounts receivable, net

   

2,492

      

      

   

2,690

   

Inventory

   

2,034

      

      

   

833

   

Prepaid expenses and other current assets

   

11,656

      

      

   

3,408

   

Total current assets

   

41,634

      

      

   

44,795

   

Property and equipment, net

   

17,301

      

      

   

17,008

   

Other assets

   

1,828

      

      

   

1,551

   

Total assets

$

60,763

   

      

$

63,354

   

Liabilities and Shareholders’ Equity (Deficit)

   

   

   

      

   

   

   

Current liabilities:

   

   

   

      

   

   

   

Accounts payable

$

6,494

      

      

$

4,553

   

Accrued liabilities

   

20,484

      

      

   

21,487

   

Current portion of capital lease obligation

   

338

      

      

   

312

   

Current portion of long-term debt

   

9,617

      

      

   

7,636

   

Deferred revenue

   

15,573

      

      

   

11,291

   

Total current liabilities

   

52,506

      

      

   

45,279

   

Long-term debt

   

27,777

      

      

   

12,428

   

Sales tax liability

   

4,003

      

      

   

3,877

   

Capital lease obligation

   

365

      

      

   

703

   

Other long-term liabilities

   

1,422

      

      

   

996

   

Total liabilities

   

86,073

      

      

   

63,283

   

   

   

   

   

      

   

   

   

Commitments and contingencies (Note 5)

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Shareholders’ equity (deficit):

   

   

   

      

   

   

   

Convertible preferred stock

   

—  

      

      

   

74,020

   

Common stock

   

5

      

      

   

2

   

Additional paid-in capital

   

91,228

      

      

   

9,791

   

Accumulated other comprehensive loss

   

(154

)  

      

   

(85

Accumulated deficit

   

(116,389

)  

      

   

(83,657

Total shareholders’ equity (deficit)

   

(25,310

)  

      

   

71

   

Total liabilities and shareholders’ equity (deficit)

$

60,763

      

      

$

63,354

   

   

   

   

   

   

   

See accompanying notes to condensed consolidated financial statements

   

   

   

 

 4 


   

RINGCENTRAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

   

 

   

Three Months Ended
September 30,

   

   

Nine Months Ended
September 30,

   

   

2013

   

      

2012

   

   

2013

   

   

2012

   

Revenues:

   

   

   

      

   

   

   

   

   

   

   

   

   

   

   

Services

$

37,925

      

      

$

27,290

      

   

$

104,669

      

   

$

74,989

      

Product

   

4,009

      

      

   

2,298

      

   

   

10,494

      

   

   

6,412

      

Total revenues

   

41,934

      

      

   

29,588

      

   

   

115,163

      

   

   

81,401

      

Cost of revenues:

   

   

   

      

   

   

   

   

   

   

   

   

   

   

   

Services

   

12,080

      

      

   

9,191

      

   

   

34,178

      

   

   

26,310

      

Product

   

3,888

      

      

   

2,041

      

   

   

10,189

      

   

   

6,223

      

Total cost of revenues

   

15,968

      

      

   

11,232

      

   

   

44,367

      

   

   

32,533

      

Gross profit

   

25,966

      

      

   

18,356

      

   

   

70,796

      

   

   

48,868

      

   

   

   

   

      

   

   

   

   

   

   

   

   

   

   

   

Operating expenses:

   

   

   

      

   

   

   

   

   

   

   

   

   

   

   

Research and development

   

8,150

      

      

   

6,544

      

   

   

24,260

      

   

   

17,582

      

Sales and marketing

   

18,889

      

      

   

13,781

      

   

   

52,355

      

   

   

39,625

      

General and administrative

   

7,078

      

      

   

7,069

      

   

   

24,859

      

   

   

19,147

      

Total operating expenses

   

34,117

      

      

   

27,394

      

   

   

101,474

      

   

   

76,354

      

Loss from operations

   

(8,151

)  

      

   

(9,038

   

   

(30,678

)  

   

   

(27,486

   

   

   

   

      

   

   

   

   

   

   

   

   

   

   

   

Other income (expense), net:

   

   

   

      

   

   

   

   

   

   

   

   

   

   

   

Interest expense

   

(995

)  

      

   

(553

   

   

(2,222

)  

   

   

(784

Other income (expense), net

   

348

      

      

   

48

      

   

   

102

      

   

   

20

      

Other income (expense), net

   

(647

)  

      

   

(505

   

   

(2,120

)  

   

   

(764

Loss before provision (benefit) for income taxes

   

(8,798

)  

      

   

(9,543

   

   

(32,798

)  

   

   

(28,250

Provision (benefit) for income taxes

   

54

      

      

   

25

      

   

   

(66

)  

   

   

57

      

Net loss

$

(8,852

)  

      

$

(9,568

   

   

(32,732

)  

   

$

(28,307

Net loss per common share:

   

   

   

      

   

   

   

   

   

   

   

   

   

   

   

Basic and diluted

$

(0.36

)  

      

$

(0.43

   

$

(1.41

   

$

(1.27

Weighted-average number of shares used in computing net loss per share:

   

   

   

      

   

   

   

   

   

   

   

   

   

   

   

Basic and diluted

   

24,452

      

      

   

22,372

      

   

   

23,290

      

   

   

22,273

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

See accompanying notes to condensed consolidated financial statements

   

   

   

 

 5 


   

RINGCENTRAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands)

   

 

   

Three Months Ended
September 30,

   

   

Nine Months Ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Net loss

$

(8,852

)

   

$

(9,568

)

   

$

(32,732

)

   

$

(28,307

)

Other comprehensive loss:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Foreign currency translation adjustments, net

   

(313

)

   

   

(71

)

   

   

(69

)

   

   

(65

)

Comprehensive loss

$

(9,165

)

   

$

(9,639

)

   

$

(32,801

)

   

$

(28,372

)

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

See accompanying notes to condensed consolidated financial statements

   

   

   

 

 6 


   

RINGCENTRAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

   

 

   

Nine Months Ended
September 30,

   

   

2013

   

      

2012

   

Cash flows from operating activities:

   

   

   

      

   

   

   

Net loss

$

(32,732

)

      

$

(28,307

)

Adjustments to reconcile net loss to net cash used in operating activities:

   

   

   

      

   

   

   

Depreciation and amortization

   

6,606

   

      

   

4,389

   

Share-based compensation

   

4,546

   

      

   

1,984

   

Noncash interest and other expense related to warrants issued in connection with debt agreements

   

412

   

      

   

169

   

Changes in assets and liabilities

   

   

   

      

   

   

   

Accounts receivable

   

198

   

      

   

(749

)

Inventory

   

(1,202

)

      

   

435

   

Prepaid expenses and other current assets

   

(4,340

)

      

   

(2,123

)

Other assets

   

(200

)

      

   

(405

)

Accounts payable

   

1,652

   

      

   

(3,387

)

Accrued liabilities

   

(366

)

      

   

13,175

   

Deferred revenue

   

4,283

   

      

   

2,226

   

Other liabilities

   

553

   

      

   

544

   

Net cash used in operating activities

   

(20,590

)

      

   

(12,049

)

Cash flows from investing activities:

   

   

   

      

   

   

   

Purchases of property and equipment

   

(9,024

)

      

   

(6,620

)

Restricted investments

   

(130

)

      

   

—  

   

Net cash used in investing activities

   

(9,154

)

      

   

(6,620

)

Cash flows from financing activities:

   

   

   

      

   

   

   

Net proceeds from debt agreements

   

22,907

   

      

   

24,538

   

Proceeds from preferred stock warrants issued in connection with debt agreements

   

1,625

   

      

   

501

   

Repayment of debt

   

(5,928

)

      

   

(3,039

)

Repayment of capital lease obligations

   

(312

)

      

   

(576

)

Payment of deferred initial public offering costs

   

(1,773

)

      

   

—  

   

Proceeds from exercise of stock options and common stock warrants

   

835

   

      

   

403

   

Net cash provided by financing activities

   

17,354

   

      

   

21,827

   

Effect of exchange rate changes on cash and cash equivalents

   

(22

)

      

   

(2

)

Net increase (decrease) in cash and cash equivalents

   

(12,412

)

      

   

3,156

   

Cash and cash equivalents:

   

   

   

      

   

   

   

Beginning of period

   

37,864

   

      

   

13,577

   

End of period

$

25,452

   

      

$

16,733

   

Supplemental disclosure of cash flow data:

   

   

   

      

   

   

   

Cash paid for interest

$

1,187

   

      

$

476

   

Cash paid for income taxes

   

31

   

      

   

54

   

Noncash financing activities:

   

   

   

      

   

   

   

Change in liability for unvested exercised options

$

95

   

      

$

11

   

Issuance of common stock in connection with legal settlement

   

257

   

      

   

—  

   

Deferred debt issuance cost recorded in connection with issuance of preferred stock warrants

   

—  

   

      

   

122

   

Accrued liability for deferred initial public offering costs

   

2,135

   

      

   

—  

   

Conversion of convertible preferred stock into common stock

   

74,020

   

   

   

—  

   

Reclassification of preferred stock warrants from liability to equity

   

820

   

   

   

—  

   

Equipment purchased and unpaid at period end

   

570

   

      

   

702

   

Equipment purchased under capital lease

   

—  

   

      

   

1,329

   

   

See accompanying notes to condensed consolidated financial statements  

   

   

   

 

 7 


   

RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

   

   

   

Note 1. Description of Business and Summary of Significant Accounting Policies

Description of Business

RingCentral, Inc. (“the Company”) is a provider of software-as-a-service (“SaaS”) solutions for business communications. The Company was incorporated in California in 1999 and was reincorporated in Delaware on September 26, 2013.   The Delaware Certificate of Incorporation provides for two classes of common stock upon the effectiveness of our initial public offering (“IPO”): Class A and Class B common stock, both with a par value of $0.0001 per share.  Holders of our Class A common stock and Class B common stock have identical rights, however that holders of Class A common stock are entitled to one vote per share of Class A common stock and holders of Class B common stock are entitled to 10 votes per share of Class B common stock on all matters submitted to the stockholders for approval.  The shareholders’ equity section of the Company’s condensed consolidated balance sheets have been prepared to conform with Delaware law for all periods presented.  The Company is headquartered in San Mateo, California.

Initial Public Offering

On October 2, 2013, the Company closed its IPO and sold 8,625,000 shares of Class A common stock to the public, including the underwriters’ overallotment option of 1,125,000 shares of Class A common stock and 80,000 shares of Class A common stock sold by selling stockholders, at a price of $13.00 per share.  The Company received aggregate proceeds of $103,309,000 from the IPO, net of underwriters’ discounts and commissions, but before deduction of offering expenses of approximately $3,909,000.  The net proceeds and other impacts of the IPO described above are not reflected in the condensed consolidated financial statements at September 30, 2013, as the Company received the proceeds following the end of the fiscal quarter. Upon effectiveness of the Company’s registration statement on Form S-1 (the “Registration Statement”) and the filing of the Certificate of Incorporation in Delaware on September 26, 2013, all shares of the Company’s outstanding convertible preferred stock automatically converted into 30,368,527 shares of Class B common stock, and all shares of the Company’s outstanding common stock automatically converted into 23,316,877 shares of Class B common stock, resulting in 53,685,404 total shares of Class B common stock outstanding at September 30, 2013.  Immediately following the closing of the IPO, the Company had 8,625,000 shares of Class A common stock and 53,605,404 shares of Class B common stock outstanding.         

   

Basis of Presentation

The unaudited condensed consolidated financial statements and accompanying notes of the Company reflect all adjustments (all of which are normal and recurring in nature) that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2013. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted under the rules and regulations of the Securities and Exchange Commission (“SEC”).

The unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and related notes presented in the Company’s final prospectus filed with the SEC on September 27, 2013 pursuant to Rule 424(b) of the Securities Act of 1933 (“the final prospectus”). There have been no changes in the Company’s significant accounting policies from those that were disclosed in the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2012 included in the Company’s final prospectus for its IPO.

   

   

   

   

 

 8 


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

   

   

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management 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 revenues and expenses during the reporting period. The significant estimates made by management affect revenue, accounts receivable, the allowance for doubtful accounts, inventory and inventory reserves, share-based compensation, capitalized software development costs, provision for income taxes, uncertain tax positions, loss contingencies and accrued liabilities. Management periodically evaluates such estimates and they are adjusted prospectively based upon such periodic evaluation. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The new guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. This new accounting pronouncement is effective for interim and fiscal reporting periods beginning after December 15, 2012, with early adoption permitted.  The Company has adopted this standard during the first quarter of 2013.  The adoption of this standard expanded the consolidated financial statement footnote disclosures, however there were no amounts reclassified out of accumulated other comprehensive income in any period presented.     

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740) Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The new guidance requires the netting of unrecognized tax benefits (“UTBs”) against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. Under the new standard, UTBs will be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The Company did not early adopt this pronouncement.  The ASU should be applied prospectively to all UTBs that exist at the effective date. Retrospective application is permitted. The Company does not expect the adoption of this guidance to have any significant impact on the Company’s consolidated financial statements.

   

Note 2. Financial Statement Components

Cash and cash equivalents consisted of the following (in thousands):

   

 

   

September 30,
2013

   

      

December 31,
2012

   

Cash

$

13,220

      

      

$

3,599

      

Money market funds

   

12,232

      

      

   

34,265

      

Total cash and cash equivalents

$

25,452

      

      

$

37,864

      

Accounts receivable, net consisted of the following (in thousands):

   

 

   

September 30,
2013

   

      

December 31,
2012

   

Accounts receivable-trade

$

1,784

      

      

$

2,683

      

Unbilled accounts receivable-trade

   

833

      

      

   

440

      

Allowance for doubtful accounts

   

(125

      

   

(433

Accounts receivable, net

$

2,492

      

      

$

2,690

      

 

 9 


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

   

Prepaid expenses and other current assets consisted of the following (in thousands):

   

 

   

September 30,
2013

   

      

December 31,
2012

   

Deferred initial public offering costs

$

3,909

      

      

$

—  

      

Settlements receivable from credit card transaction processors

   

2,535

      

      

   

1,626

      

Other non-trade receivables from third parties

   

2,268

      

      

   

24

      

Prepaid expenses

   

2,656

      

      

   

1,596

      

Other current assets

   

288

      

      

   

162

   

Total prepaid expenses and other current assets

$

11,656

      

      

$

3,408

      

Property and equipment, net consisted of the following (in thousands):

   

 

   

September 30,
2013

   

      

December 31,
2012

   

Computer hardware and software

$

33,402

      

      

$

27,292

      

Furniture and fixtures

   

1,090

      

      

   

700

      

Leasehold improvements

   

845

      

      

   

441

      

Property and equipment, gross

   

35,337

      

      

   

28,433

      

Less: accumulated depreciation

   

(18,036

      

   

(11,425

Property and equipment, net

$

17,301

      

      

$

17,008

      

Accrued liabilities consisted of (in thousands):

   

 

   

September 30,
2013

   

      

December 31,
2012

   

Accrued compensation and benefits

$

4,066

      

      

$

3,216

      

Accrued sales, use and telecom related taxes

   

4,399

      

      

   

4,580

      

Accrued initial public offering costs

   

2,100

   

   

   

—  

   

Accrued expenses

   

8,451

      

      

   

11,998

      

Accrued legal settlements

   

750

      

      

   

1,075

      

Other

   

718

      

      

   

618

      

Total accrued liabilities

$

20,484

      

      

$

21,487

      

   

Note 3. Fair Value of Financial Instruments

The Company carries certain financial assets consisting of money market funds and certificates of deposit at fair value on a recurring basis. Fair value is based on the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1: Observable inputs which include unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3: Unobservable inputs that are supported by little or no market activity and that are based on management’s assumptions, including fair value measurements determined by using pricing models, discounted cash flow methodologies or similar techniques.

 

 10 


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

   

The fair value of assets carried at fair value was determined using the following inputs (in thousands):

   

 

   

Balance at
September 30, 2013

   

      

(Level 1)

   

      

(Level 2)

   

      

(Level 3)

   

Cash equivalents:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Money market funds

$

12,232

      

      

$

12,232

      

      

$

—  

      

      

$

—  

      

Other assets:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Certificates of deposit

$

630

      

      

$

—  

      

      

$

630

      

      

$

—  

      

   

 

   

Balance at
December 31, 2012

   

      

(Level 1)

   

      

(Level 2)

   

      

(Level 3)

   

Cash equivalents:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Money market funds

$

34,265

      

      

$

34,265

      

      

$

—  

      

      

$

—  

      

Other assets:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Certificates of deposit

$

500

      

      

$

—  

      

      

$

500

      

      

$

—  

      

In June 2013 and August 2013, the Company issued preferred stock warrants in connection with debt agreements that were recorded as liabilities at issuance and were carried at fair value through September 26, 2013, the date of the effectiveness of the Registration Statement and the filing of its Certificate of Incorporation in Delaware, after which the fair value of these financial instruments were reclassified to shareholders’ equity.  The Company’s preferred stock warrants automatically converted to common stock warrants upon the effectiveness of the Registration Statement and the filing of its Certificate of Incorporation in Delaware on September 26, 2013.  The fair value of the warrants at the issuance dates in June 2013 and August 2013 were $265,000 and $495,000, respectively.  The fair value of the June 2013 and August 2013 warrants at the date of reclassification were $320,000 and $500,000, respectively.  The fair value of preferred stock warrants was determined by the Black-Scholes option pricing model which is a technique using level 3 inputs which are detailed in Note 4.  

The Company’s other financial instruments, including accounts receivable, accounts payable and other current liabilities, are carried at cost which approximates fair value due to the relatively short maturity of those instruments. Based on borrowing rates available to the Company for loans with similar terms and considering our credit risks, the carrying value of debt approximates fair value.

   

Note 4. Debt

Loan and Security Agreement with Bank

In February 2009, the Company entered into a loan and security agreement with Silicon Valley Bank (“SVB”) that was last amended in August 2013. Under this agreement the Company borrowed $2,500,000 on a term loan in January 2010 and $8,000,000 on a term loan in March 2012, which was equal to the full final lending commitment. The 2010 term loan was repaid in 30 equal monthly installments of principal and interest, which accrued at an annual fixed rate of 6.5%. In addition, a final terminal payment was made at maturity equal to 3.5% of the original loan principal.  The 2010 term loan was repaid in full during the third quarter of 2012. The 2012 term loan is required to be repaid in 36 equal monthly installments of principal plus interest, which accrues at a floating annual rate equal to prime plus 2.75%. In addition, a final terminal payment is due at maturity equal to 0.5% of the original loan principal.

In August 2013, the Company entered into an amended loan and security agreement with SVB (the “Amended SVB Credit Agreement”), which provides for a revolving line of credit of up to $15,000,000 and a term loan of up to $5,000,000. The revolving line of credit bears interest at a floating annual rate of prime plus 2.0%, which must be paid monthly, and all outstanding principal and unpaid interest must be repaid by August 13, 2015. The term loan bears interest at a fixed annual rate of 11.0%, which must be paid monthly, and all principal amounts and unpaid interest must be repaid by August 1, 2016, unless the Company voluntarily repays the balance at an earlier date without penalty. A final payment of 2.75% of the amount advanced under the term loan is due upon repayment of this loan at maturity or prepayment of this loan. On August 14, 2013, the Company borrowed $10,778,000 under the revolving line of credit, which represented the full available borrowing capacity on that date. The borrowing limit available under the revolving line of credit increases as the principal balance of the existing $8,000,000 term loan from SVB is repaid subject to limits

 

 11 


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

   

based on recurring subscription revenue. The Company does not expect this requirement will limit the amount of borrowings available under the line of credit. The existing term loan had an outstanding balance of $4,222,000 on the amendment date.  At September 30, 2013, the principal balance and available borrowing capacity of the revolving line of credit were $10,778,000 and $222,000, respectively. On August 16, 2013, the Company borrowed the full $5,000,000 available under the new term loan.  

In connection with the Amended SVB Credit Agreement, the Company issued SVB warrants to purchase 90,324 shares of its Series E preferred stock at an exercise price of $9.69 per share.  As the Series E preferred stock warrants were issued in connection with a loan, the proceeds were allocated to the loan and the warrants based on the relative fair value of the instruments resulting in a loan discount of $866,000 being recorded, with a corresponding increase to additional paid in capital as part of shareholders’ equity.  The fair value of the Series E preferred stock warrants was measured at issuance using the Black-Scholes option pricing model with the following assumptions: (i) expected volatility of 60%, (ii) expected life of 10.0 years, (iii) risk free interest rate of 2.7%, (iv) dividend yield of 0.00%, and (v) fair value of Series E preferred stock of $12.86 per share.  Upon the effectiveness of the Registration Statement and the filing of its Certificate of Incorporation in Delaware on September 26, 2013, the Series E preferred stock and preferred stock warrants were converted into Class B common stock and warrants to purchase Class B common stock, respectively.  

The Company has pledged all of its assets, excluding intellectual property, as collateral to secure its obligations under the Amended SVB Credit Agreement.  The Amended SVB Credit Agreement contains customary negative covenants that limit the Company’s ability to, among other things, incur additional indebtedness, grant liens, make investments, repurchase stock, pay dividends, transfer assets and merge or consolidate.  The Amended SVB Credit Agreement also contains customary affirmative covenants, including requirements to, among other things, (i) maintain minimum cash balances representing the greater of $5,000,000 or two times the Company’s quarterly cash burn rate, as defined in the amended agreement, from and after the IPO, and (ii) deliver audited financial statements.  The Company was in compliance with all covenants under its credit agreement with SVB as of September 30, 2013.

Loan and Security Agreements with Financial Institution

In June 2012, the Company entered into a growth capital loan and security agreement and an equipment loan and security agreement with TriplePoint Capital LLC (“TriplePoint”). Under the growth capital loan and security agreement, the Company borrowed $6,000,000 in term loans in June 2012, equal to the full lending commitment available at the time. The growth capital term loans are required to be repaid in 33 equal monthly installments of principal and interest, which accrues at an annual fixed rate of 8.5% after an interest-only period of three months. In addition, a final terminal payment is due at maturity equal to 4.0% of the original loan principal. Under the equipment loan and security agreement, the Company borrowed $9,691,000 in term loans in August 2012 from the $10,000,000 lending commitment available at the time. The equipment term loans are required to be repaid in 36 equal monthly installments of principal and interest, which accrues at an annual fixed rate of 5.75%. In addition, a final terminal payment is due at maturity equal to 10% of the original loan principal.

Under the growth capital loan and security agreement, the Company was permitted to borrow an additional $4,000,000 on or before June 21, 2013 upon the submission of a Form S-1 registration statement to the SEC contemplating an IPO of the Company’s common stock with expected total net proceeds of at least $50,000,000. On June 21, 2013, the Company achieved the milestone necessary to access the additional $4,000,000 available under the original terms of the growth capital loan and security agreement and borrowed $4,000,000 (“growth capital loan part II”). The growth capital loan part II is required to be repaid in 33 equal monthly installments of principal and interest, which accrues at an annual fixed rate of 8.5% after an interest-only period of 3 months, which accrues at a fixed rate of 9.0%. In addition, a final terminal payment is due at maturity equal to 4.0% of the original loan principal.

In connection with the growth capital loan part II, the Company issued to TriplePoint a warrant to purchase 33,192 shares of Series D preferred stock with the exercise price set at the lower of: (i) $6.03 per share or (ii) the lowest price per share in the next round of equity financing.  As the Series D preferred stock warrants were issued in connection with a loan, the proceeds were allocated to the loan the warrants based on the relative fair value of the instruments resulting in a loan discount of $265,000 being recorded.  As a result of the variable exercise price feature, the Series D preferred stock warrants were recorded at fair value and classified as liabilities at issuance, with changes in fair value recognized in other income and expense for the period the warrants remained classified as liabilities.  The fair value of the Series D preferred stock warrants was reclassified to shareholders’ equity on

 

 12 


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

   

September 26, 2013, the date of the effectiveness of the Registration Statement and the filing of its Certificate of Incorporation in Delaware, when the Series D preferred stock and preferred stock warrants were converted into Class B common stock and warrants to purchase Class B common stock, respectively.  The fair value of the Series D preferred stock warrants was measured at issuance using the Black-Scholes option pricing model with the following assumptions: (i) expected volatility of 55%, (ii) expected life of 7.0 years, (iii) risk free interest rate of 1.9%, (iv) dividend yield of 0.00%, and (v) fair value of Series D preferred stock of $11.41 per share.

In August 2013, the Company amended the growth capital loan and security agreement with TriplePoint to provide an additional $5,000,000 term loan (“growth capital loan part III”).  In September 2013, the Company entered into a second amendment to the growth capital loan facility to adjust the repayment terms such that the term loan is required to be paid over 36 months as follows: 36 months of interest-only payments at a fixed annual rate of 11.0% and the loan principal at maturity.  In addition, a final payment of 2.75% of the original principal amount is due at maturity, which is August 13, 2016, or upon prepayment of this loan.  On August 19, 2013, the Company borrowed the full $5,000.000 available under this term loan.

In connection with growth capital loan part III, the Company issued to TriplePoint a warrant to purchase 51,614 shares of Series E preferred stock at an exercise price set at the lower of: (i) $9.69 per share or (ii) the lowest price per share in the next round of equity financing. As the Series E preferred stock warrants were issued in connection with a loan, the proceeds were allocated to the loan and the warrants based on the relative fair value of the instruments resulting in a loan discount of $495,000 being recorded.  As a result of the variable exercise price feature, the Series E preferred stock warrants were recorded at fair value and classified as liabilities at issuance, with changes in fair value recognized in other income and expense for the period the warrants remained classified as liabilities.  The fair value of the Series E preferred stock warrants was reclassified to shareholders’ equity on September 26, 2013, the date of the effectiveness of the Registration Statement and the filing of its Certificate of Incorporation in Delaware, when the Series E preferred stock and preferred stock warrants were converted into Class B common stock and warrants to purchase Class B common stock, respectively. The fair value of the Series E preferred stock warrants was measured at issuance using the Black-Scholes option pricing model with the following assumptions: (i) expected volatility of 60%, (ii) expected life of 10.0 years, (iii) risk free interest rate of 2.7%, (iv) dividend yield of 0.00%, and (v) fair value of Series E preferred stock of $12.86 per share.

The TriplePoint growth capital loan and security agreement, as amended and equipment loan and security agreement contain customary negative covenants that limit the Company’s ability to, among other things, incur additional indebtedness, grant liens, make investments, repurchase stock, pay dividends, transfer assets and merge or consolidate.  The TriplePoint growth capital loan and security agreement, as amended and equipment loan and security agreement also contain customary affirmative covenants, including requirements to, among other things, deliver audited financial statements.  The Company was in compliance with all covenants under its credit agreements with TriplePoint as of September 30, 2013.

Other Debt

In April 2012, the Company borrowed $1,500,000 to finance the purchase of software.  The loan is required to be repaid in three equal installments of $500,000 due in April 2012, January 2013 and January 2014.

   

Note 5. Commitments and Contingencies

Sales Tax Liability

During 2010 and 2011, the Company increased its sales and marketing activities in the U.S., which may be asserted by a number of states to create an obligation under nexus regulations to collect sales taxes on sales to customers in the state. Prior to 2012, the Company did not collect sales taxes from customers on sales in all states. In the second quarter of 2012, the Company commenced collecting and remitting sales taxes on sales in all states, therefore the loss contingency is applicable to sales and marketing activities in 2010, 2011 and the six months ended June 30, 2012. As of September 30, 2013 and December 31, 2012, the Company recorded a long-term sales tax liability of $4,003,000 and $3,877,000, respectively, based on its best estimate of the probable liability for the loss contingency incurred as of those dates. The Company’s estimate of a probable outcome under the loss contingency is based on analysis of its sales and marketing activities, revenues subject to sales tax, and applicable regulations in each state in each period. No significant adjustments to the long-term sales tax liability have been recognized in the accompanying consolidated financial statements

 

 13 


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

   

for changes to the assumptions underlying the estimate. However, changes in management’s assumptions may occur in the future as the Company obtains new information which can result in adjustments to the recorded liability. Increases and decreases to the long-term sales tax liability are recorded as general and administrative expense.

A current sales tax liability for noncontingent amounts expected to be remitted in the next twelve months of, $2,973,000 and $3,574,000, is included in accrued liabilities as of September 30, 2013 and December 31, 2012, respectively.

Legal Matters

In December 2012, CallWave Communications, LLC (“Callwave”) filed a lawsuit against the Company in the United States District Court for the District of Delaware and amended its complaint twice since then alleging patent infringement by the Company and AT&T Inc. (“AT&T”), a reseller of the Company’s product and services, seeking damages but no injunction.

On September 27, 2013, the Company entered into a settlement agreement with CallWave. Under the terms of the settlement, CallWave granted a non-exclusive license to the Company and agreed to dismiss all claims in the litigation with prejudice, including any claims for which the Company was required to indemnify and defend AT&T. As part of the settlement, the Company agreed to pay CallWave cash consideration which it recognized as general and administrative expense during the second quarter of 2013 as it determined the payment to be a cost to settle a loss contingency, and the amount was probable and estimable. During the third quarter of 2013, the Company paid substantially all of the cash consideration due under the settlement agreement and recorded a credit to general and administrative expense of $1,160,000 to reflect the final cost of the settlement net of insurance recovery.

   

Note 6. Share-Based Compensation

A summary of share-based compensation expense recognized in the Company’s consolidated statements of operations follows (in thousands):

   

 

   

Three Months Ended
September 30,

   

      

Nine Months Ended
September 30,

   

   

2013

   

      

2012

   

      

2013

   

      

2012

   

Cost of services revenues

$

129

      

      

$

66

      

      

$

297

      

      

$

175

      

Research and development

   

367

      

      

   

223

      

      

   

884

      

      

   

536

      

Sales and marketing

   

330

      

      

   

153

      

      

   

734

      

      

   

483

      

General and administrative

   

1,384

      

      

   

327

      

      

   

2,631

      

      

   

790

      

Total share-based compensation expense

$

2,210

      

      

$

769

      

      

$

4,546

      

      

$

1,984

      

As of September 30, 2013 and December 31, 2012, there was approximately $23,277,000 and $9,587,000 and of nonvested  share-based compensation expense, net of estimated forfeitures, related to stock option grants, which will be recognized on a straight-line basis over the remaining weighted-average vesting periods of approximately 3.0 years and 2.7 years, respectively.

Equity Incentive Plans

In September 2013, the Board adopted and the Company’s stockholder approved the 2013 Equity Incentive Plan (the “2013 Plan”).  The 2013 Plan became effective on September 26, 2013.  In connection with the adoption of the 2013 Plan, the Company terminated the 2010 Equity Incentive Plan (the “2010 Plan”), under which stock options had been granted prior to September 26, 2013.  The 2010 Plan was established in September 2010, when the 2003 Equity Incentive Plan (the “2003 Plan”) was terminated.  After the termination of the 2003 and 2010 Plans, no additional options were granted under these plans; however options previously granted will continue to be governed by these plans.  In addition, options authorized to be granted under the 2003 and 2010 Plans, including forfeitures of previously granted awards are authorized for grant under the 2013 Plan.  A total of 6,200,000 shares of Class A common stock have been reserved for issuance under the 2013 Plan.  The 2013 Plan includes an annual increase on the first day of each fiscal year beginning in 2014, equal to the least of: (i) 6,200,000 shares of Class A common stock; (ii) 5.0% of the outstanding shares of all classes of common stock as of the last day of the Company’s immediately preceding fiscal year; or (iii) such other amount as the board of directors may determine.  

 

 14 


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

   

The plans permit the grant of stock options and other share-based awards to employees, officers, directors and consultants by the Company’s board of directors. Option awards are generally granted with an exercise price equal to the fair market value of the Company’s common stock as determined by the Company’s board of directors at the date of grant. Option awards generally vest according to a graded vesting schedule based on four years of continuous service and generally have a 10-year contractual term. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the option agreement) and early exercise of the option prior to vesting (subject to the Company’s repurchase right). As of September 30, 2013 a total of 6,166,350 shares remain available for grant under the 2013 Plan.  As of December 31, 2012, a total of 468,000 shares were available for grant under the 2010 Plan, which was terminated in September 2013 upon the adoption of the 2013 Plan.

A summary of option activity under all of the plans at September 30, 2013 and changes during the periods then ended is presented in the following table (in thousands):

   

 

   

Number of
Options
Outstanding
(in thousands)

   

      

Weighted-
Average
Exercise Price
Per Share

   

      

Weighted-
Average
Contractual
Term
(in Years)

   

      

Aggregate
Intrinsic
Value
(in thousands)

   

Outstanding at December 31, 2012

   

8,609

      

      

$

2.89

      

      

   

7.2

      

      

$

40,705

      

Granted

   

3,701

      

      

   

11.30

      

      

   

   

      

      

   

0

      

Exercised

   

(593

)

      

   

1.42

      

      

   

   

      

      

   

0

      

Canceled/Forfeited

   

(632

)

      

   

4.16

      

      

   

   

      

      

   

0

      

Outstanding at September 30, 2013

   

11,085

      

      

$

5.71

      

      

   

8.0

      

      

$

136,491

      

Vested and expected to vest as of September 30, 2013

   

10,147

      

      

$

5.38

      

      

   

7.8

      

      

$

128,249

      

Exercisable as of September 30, 2013

   

4,612

      

      

$

2.06

      

      

   

6.3

      

      

$

73,610

      

The weighted average grant date fair value of options granted and the total intrinsic value of options exercised were as follows (in thousands, except weighted average grant date fair value):

   

 

   

Nine Months Ended September 30,

   

   

2013

   

   

2012

   

Weighted average grant date fair value per share

$

6.08

   

   

$

3.05

   

Total intrinsic value of options exercised

$

9,855

   

   

$

1,591

   

The Company estimated the fair values of each option awarded on the date of grant using the Black-Scholes option pricing model, which requires inputs including the fair value of common stock, expected term, expected volatility, risk-free interest and dividend yield.  The weighted-average assumptions used in the option pricing models and the resulting grant date fair value of stock options granted to employees and non-employees in the periods presented were as follows:

   

 

   

Three Months
Ended September 30,

   

Nine Months
Ended September 30,

   

   

2013

   

2012

   

2013

   

2012

   

Expected term for employees (in years)

6.1

   

6.1

   

6.1

   

6.1

   

Expected term for non-employees (in years)

10.0

   

10.0

   

10.0

   

10.0

   

Risk-free interest rate

1.99%

   

0.84%

   

1.68%

   

0.96%

   

Expected volatility

54%

   

57%

   

54%

   

61%

   

Expected dividend rate

0%

   

0%

   

0%

   

0%

   

 

 15 


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

   

Early Exercises of Nonvested Options

The Company’s option agreements with certain employees permit the early exercise of nonvested stock options. The Company has the right to repurchase issued but nonvested shares of common stock at the original exercise price following the termination of service. The shares are released from the repurchase right according to the vesting schedule specified in the option agreement. The Company treats the proceeds from early exercise as a deposit of the exercise price and records the cash received initially as a liability that is reclassified to shareholders’ equity as the shares vest.

A summary of the status of the Company’s early exercised and nonvested shares as of December 31, 2012 and September 30, 2013, and changes during the periods then ended is presented below (in thousands):

   

 

   

Number of
Shares

   

   

Nonvested
Common Stock
Liability

   

Nonvested as of December 31, 2011

   

58

      

   

$

64

      

Early exercises

   

100

      

   

   

200

      

Vested

   

(58

   

   

(60

Nonvested as of December 31, 2012

   

100

      

   

   

204

      

Early exercises

   

—  

      

   

   

—  

      

Vested

   

(51

   

   

(98

Nonvested as of September 30, 2013

   

49

      

   

   

106

      

Employee Stock Purchase Plan

In September 2013, the Board adopted, and the Company’s stockholder approved a 2013 Employee Stock Purchase Plan (ESPP).  The ESPP became effective on September 26, 2013.  A total of 1,250,000 shares of Class A common stock have been reserved for issuance under the ESPP.  The ESPP provides for annual increases in the number of shares available for issuance under the ESPP on the first day of each fiscal year beginning in fiscal 2013, equal to the least of: (i) 1% of the outstanding shares of all classes of common stock on the last day of the immediately preceding year; (ii) 1,250,000 shares; or (iii) such other amount as may be determined by the board of directors.  

The ESPP allows eligible employees to purchase shares of the Class A common stock at a discount through payroll deductions of up to the lesser of 15% of their eligible compensation or $25,000 per calendar year, at not less than 90% of the fair market value, as defined in the ESPP, subject to any plan limitations. A participant may purchase a maximum of 3,000 shares during an offering period. The offering period generally starts on the first trading day on or after May 11th and November 11th of each year, except that the first offering period commenced on the first trading day following the effective date of the Company’s registration statement. At the end of the offering period, the purchase price is set at the lower of: (i) the fair value of the Company’s common stock at the beginning of the six month offering period, and (ii) the fair value of the Company’s common stock at the end of the six month offering period.  At September 30, 2013, a total of 1,250,000 shares were available for issuance under the ESPP.

The assumptions used to value employee stock purchase rights under the Black-Scholes model during the three and nine months ended September 30, 2013 were as follows:

   

 

Expected term (in months)

   

6

      

Risk-free interest rate

   

0.03

Expected volatility

   

42

Expected dividend rate

   

0

   

 

 16 


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

   

Note 7. Geographic Concentrations

Revenue by geographic location is based on the billing address of the customer. More than 90% of the Company’s revenue is from the United States during the three and nine months ended September 30, 2013 and 2012. No other individual country exceeded 10% of total revenue during the three and nine months ended September 30, 2013 and 2012. Property and equipment by geographic location is based on the location of the legal entity that owns the asset. At September 30, 2013 and December 31, 2012, more than 85% and  95%, respectively, of the Company’s property and equipment is located in the United States, with no single country outside the United States representing more than 10% of property and equipment individually during the three and nine months ended September 30, 2013 and 2012.

   

Note 8. Income Taxes

The provision for income taxes for the three months ended September 30, 2013 and 2012, was approximately $54,000 and $25,000, respectively. The provision for income taxes consisted primarily of foreign income taxes.

The (benefit) provisions for income taxes for the nine months ended September 30, 2013 and 2012 were approximately $(66,000) and $57,000, respectively. The benefit for income taxes during the nine months ended September 30, 2013 consisted of foreign income taxes, state minimum taxes and recognition of a foreign tax credit related to its subsidiary in China.  The provision for income taxes during the nine months ended September 30, 2012 consisted primarily of state minimum taxes and foreign income taxes.

For the three and nine months ended September 30, 2013 and 2012, the provision for income taxes differed from the statutory amount primarily due to state and foreign taxes currently payable, and the Company realized no benefit for current year losses due to maintaining a full valuation allowance against the U.S. and foreign net deferred tax assets.

The realization of tax benefits of deferred tax assets is dependent upon future levels of taxable income, of an appropriate character, in the periods the items are expected to be deductible or taxable. Based on the available objective evidence, the Company does not believe it is more likely than not that the net deferred tax assets will be realizable. Accordingly, the Company has provided a full valuation allowance against the domestic and foreign net deferred tax assets as of September 30, 2013 and December 31, 2012. The Company intends to maintain the remaining valuation allowance until sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance. During the three and nine months ended September 30, 2013, there have been no material changes to the total amount of unrecognized tax benefits.

   

Note 9. Basic and Diluted Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase or forfeiture as they are not deemed to be issued for accounting purposes.  Diluted net loss per share is computed by giving effect to all potential shares of common stock, including preferred stock, warrants to exercise common and preferred stock and stock options, to the extent they are dilutive.  Upon the effectiveness of the Registration Statement and the filing of its Certificate of Incorporation in Delaware on September 26, 2013, all outstanding preferred stock and warrants to purchase preferred stock were converted to common stock and warrants to purchase common stock, respectively.  For the three and nine months ended September 30, 2013 and 2012, all such common stock equivalents have been excluded from diluted net loss per share as the effect to net loss per share would be anti-dilutive.

 

 17 


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

   

The following table sets forth the computation of the Company’s basic and diluted net loss per share of common stock (in thousands, except per share data):

   

 

   

Three Months Ended
September 30,

   

   

Nine Months Ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

   

   

   

   

   

   

   

   

   

   

   

   

Numerator

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Net loss

$

(8,852

   

$

(9,568

   

$

(32,732

   

$

(28,307

Denominator

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Weighted-average common shares for basic and diluted net loss per share

   

24,452

      

   

   

22,372

      

   

   

23,290

      

   

   

22,273

      

Basic and diluted net loss per share

$

(0.36

   

$

(0.43

   

$

(1.41

   

$

(1.27

The following table sets forth the potential shares of common stock that were excluded from diluted weighted-average common shares outstanding (in thousands):

   

 

   

Three Months Ended
September 30,

   

   

Nine Months Ended

September 30,

   

   

2013

   

   

   

2012

   

   

   

2013

   

   

   

2012

   

Shares of common stock issuable upon conversion of preferred stock

   

—  

   

   

   

27,272

   

   

   

—  

   

   

   

27,272

   

Shares of common stock issuable upon conversion of warrants

      

502

   

   

   

337

   

   

   

502

   

   

   

337

   

Shares of common stock subject to repurchase

      

49

   

   

   

110

   

   

   

49

   

   

   

110

   

Shares of common stock issuable under stock option plans outstanding

      

11,085

   

   

   

8,726

   

   

   

11,085

   

   

   

8,726

   

Potential common shares excluded from diluted net loss per share

   

11,636

   

   

   

36,445

   

   

   

11,636

   

   

   

36,445

   

The table above does not include shares recently issued upon the completion of the IPO.  

   

Note 10. Subsequent Events

On October 2, 2013, the Company completed its IPO whereby 8,625,000 shares of Class A common stock were sold to the public, including the underwriters’ overallotment option of 1,125,000 shares of Class A common stock and 80,000 shares of Class A common stock sold by selling stockholders, at a price of $13.00 per share.  The Company received aggregate proceeds of $103,309,000 from the IPO, net of underwriters’ discounts and commissions, but before deduction of offering expenses of approximately $3,909,000.

The Company has evaluated subsequent events through November 12, 2013, the date the condensed consolidated financial statements were issued.

   

   

   

   

 

 18 


   

   

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Prospectus filed on September 27, 2013, pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”) with the SEC. As discussed in the section titled “Special Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below.

Overview

RingCentral, Inc. (the “Company”, “we”, “us” or “our”) is a leading provider of software-as-a-service (“SaaS”), solutions for business communications. We believe that our innovative, cloud-based approach disrupts the large market for business communications solutions by providing flexible and cost-effective services that support distributed workforces, mobile employees and the proliferation of “bring-your-own” communications devices. We enable convenient and effective communications for our customers, across all their locations, all their employees, all the time, thus enabling a more productive and dynamic workforce. RingCentral Office, our flagship service, is a multi-user, enterprise-grade communications solution that enables our customers and their employees to communicate via voice, text and fax, on multiple devices, including smartphones, tablets, PCs and desk phones.

We founded our business in 1999 and currently offer three services: RingCentral Office, RingCentral Professional, and RingCentral Fax. Prior to 2009, substantially all of our revenues were derived from RingCentral Professional, which we previously sold as RingCentral Mobile, and, RingCentral Fax and Extreme Fax, a discontinued service. In 2009, we began selling RingCentral Office, our current flagship service, to deliver an enterprise-grade SaaS multi-user communications solution, with advanced inbound and outbound voice, text and fax capabilities, delivered as a scalable solution.

We primarily generate revenues by selling subscriptions for our RingCentral Office, RingCentral Professional, and RingCentral Fax offerings. RingCentral Office is offered at monthly subscription rates, varying with the specific functionalities and services and the number of users. RingCentral Professional is offered at monthly subscription rates that vary based on the desired number of minutes usage and extensions allotted to the plan. RingCentral Fax is offered at monthly subscription rates that vary based on the desired number of pages and phone numbers allotted to the plan. RingCentral Office customers generally pay higher monthly subscription rates than customers of our other service offerings. Our subscription plans have historically had monthly or annual contractual terms, although we also have subscription plans with multi-year contractual terms, generally with larger customers. We believe that this flexibility in contract duration and termination is important to meet the different needs of our customers. Generally, our fees for subscription plans have been billed in advance. However, as the number of RingCentral Office customers grows, we expect to bill more customers through commercial invoices with customary payment terms and, accordingly, our levels of accounts receivable may increase. For the three and nine months ended September 30, 2013 and 2012, services revenues were equal to or greater than 90% of our total revenues. The remainder of our revenues are comprised of product revenues from the sale of pre-configured office phones, which we offer as a convenience to our customers in connection with subscriptions to our services.

We make significant upfront investments to acquire customers. Until 2009, we acquired most of our customer subscriptions through e-commerce transactions on our website driven by online marketing channels. Beginning in 2009, in connection with our introduction of RingCentral Office, we established a direct, inside sales force. Since then, we have continued investing in our direct, inside sales force while also developing indirect sales channels to market our brand and our service offerings. Our indirect sales channel consists of a network of over 1,000 resellers, including American Telephone and Telegraph, Inc. (“AT&T”). We intend to continue to foster this network and to expand our network with other resellers. Beginning in 2011, we also began expanding into more traditional forms of media advertising, such as radio and billboard advertising.

 

 19 


   

Our revenue growth has primarily been driven by our flagship RingCentral Office service offering, which has resulted in an increased number of customers, increased average subscription revenues per customer, and increased retention of our existing customer and user base. We define a “customer” as one individual billing relationship for the subscription to our services, which generally correlates to one company account per customer. We define a user as one person within a customer who has been granted a subscription license to use our services, such that the number of users per customer generally correlates closely to the number of employees within a customer account. For the three and nine months ended September 30, 2013 and 2012, no single customer accounted for more than 10% of our total revenues, and our 10 largest non-reseller customers accounted for less than 10% of our total revenues. As of September 30, 2013, we had over 300,000 customers from industries including advertising, finance, healthcare, legal services, non-profit organizations, real estate, retail and technology, and ranging in size from businesses with fewer than 10 users to more than 500 users. For the three and nine months ended September 30, 2013 and 2012, 99% of our total revenues were generated in the U.S. and Canada, although we expect the percentage of our total revenues derived outside of the U.S. and Canada to grow as we expand internationally.

The growth of our business and our future success depend on many factors, including our ability to expand our customer base to medium-sized and larger customers, continue to innovate, grow revenues from our existing customer base, expand our distribution channels and scale 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 addition, there has been substantial litigation in the areas in which we operate regarding intellectual property rights, including third parties claiming patent infringement which is further described under “Item 1—Legal Proceedings” and Note 5 to our condensed consolidated financial statements. We cannot assure you that we will be successful in defending against any such claims or that we will be able to settle any ongoing or future claims or that any such settlement would be on terms that are favorable to us.

We have experienced significant growth in recent periods, with total revenues of $50.2 million, $78.9 million and $114.5 million in 2010, 2011 and 2012, respectively, generating year-over-year increases of 57% and 45%, respectively. We have continued to make significant expenditures and investments, including those in research and development, infrastructure and operations and incurred net losses of $7.3 million, $13.9 million and $35.4 million, in 2010, 2011 and 2012, respectively. For the three months ended September 30, 2013 and 2012, our total revenues were $41.9 million and $29.6 million, respectively, representing a year-over-year increase of 42%. For the nine months ended September 30, 2013 and 2012, our total revenues were $115.2 million and $81.4 million, respectively, representing a year-over-year increase of 41%.  For the three and nine months ended September 30, 2013 and 2012, our net losses were $8.9 million, $9.6 million, $32.7 million and $28.3 million, respectively.  

 

 20 


   

Results of Operations

The following tables show our results of operations in dollars and as a percentage of our total revenues. The historical results presented below are not necessarily indicative of the results that may be expected for any future period (in thousands):

   

 

   

Three Months Ended
September 30,

   

   

Nine Months Ended
September 30,

   

   

2013

   

      

2012

   

   

2013

   

   

2012

   

Revenues:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Services

$