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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, 2014

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  x    No  ¨

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 October 28, 2014, there were 49,769,673 shares of Class A Common Stock issued and outstanding and 18,344,298 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, 2014 and December 31, 2013 (unaudited)

  

4

 

  

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013 (unaudited)

  

5

 

  

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2014 and 2013 (unaudited)

  

6

 

  

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited)

  

7

 

  

Notes to Condensed Consolidated Financial Statements (unaudited)

  

8

Item 2.

  

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

  

17

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

26

Item 4.

  

Controls and Procedures

  

27

 

PART II. OTHER INFORMATION

Item 1.

  

Legal Proceedings

  

28

Item 1A.

  

Risk Factors

  

28

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

56

Item 3.

  

Default 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 our business to larger customers and 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; and

the political environment and stability in the regions in which we or our subcontractors operate.

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,

 

 

December 31,

 

 

2014

 

 

2013

 

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

120,691

 

 

$

116,378

 

Short-term investments

 

28,662

 

 

 

 

Accounts receivable, net

 

7,443

 

 

 

3,045

 

Inventory

 

2,012

 

 

 

2,111

 

Prepaid expenses and other current assets

 

8,369

 

 

 

5,214

 

Total current assets

 

167,177

 

 

 

126,748

 

Property and equipment, net

 

25,862

 

 

 

16,660

 

Other assets

 

2,866

 

 

 

1,777

 

Total assets

$

195,905

 

 

$

145,185

 

Liabilities and Stockholders' Equity:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

5,700

 

 

$

4,414

 

Accrued liabilities

 

31,659

 

 

 

20,559

 

Current portion of capital lease obligation

 

615

 

 

 

347

 

Current portion of long-term debt

 

18,489

 

 

 

9,871

 

Deferred revenue

 

23,415

 

 

 

16,552

 

Total current liabilities

 

79,878

 

 

 

51,743

 

Long-term debt

 

8,750

 

 

 

24,356

 

Sales tax liability

 

3,953

 

 

 

3,988

 

Capital lease obligation

 

618

 

 

 

247

 

Other long-term liabilities

 

2,771

 

 

 

1,336

 

Total liabilities

 

95,970

 

 

 

81,670

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock

 

7

 

 

 

6

 

Additional paid-in capital

 

268,189

 

 

 

193,574

 

Accumulated other comprehensive loss

 

(286

)

 

 

(310

)

Accumulated deficit

 

(167,975

)

 

 

(129,755

)

Total stockholders' equity

 

99,935

 

 

 

63,515

 

Total liabilities and stockholders' equity

$

195,905

 

 

$

145,185

 

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

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

$

51,951

 

 

$

37,925

 

 

$

143,668

 

 

$

104,669

 

Product

 

4,993

 

 

 

4,009

 

 

 

14,325

 

 

 

10,494

 

Total revenues

 

56,944

 

 

 

41,934

 

 

 

157,993

 

 

 

115,163

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

14,799

 

 

 

12,080

 

 

 

43,305

 

 

 

34,178

 

Product

 

4,606

 

 

 

3,888

 

 

 

13,546

 

 

 

10,189

 

Total cost of revenues

 

19,405

 

 

 

15,968

 

 

 

56,851

 

 

 

44,367

 

Gross profit

 

37,539

 

 

 

25,966

 

 

 

101,142

 

 

 

70,796

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

11,931

 

 

 

8,150

 

 

 

32,478

 

 

 

24,260

 

Sales and marketing

 

26,697

 

 

 

18,889

 

 

 

76,342

 

 

 

52,355

 

General and administrative

 

9,725

 

 

 

7,078

 

 

 

28,184

 

 

 

24,859

 

Total operating expenses

 

48,353

 

 

 

34,117

 

 

 

137,004

 

 

 

101,474

 

Loss from operations

 

(10,814

)

 

 

(8,151

)

 

 

(35,862

)

 

 

(30,678

)

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(505

)

 

 

(995

)

 

 

(1,582

)

 

 

(2,222

)

Other income (expense), net

 

(648

)

 

 

348

 

 

 

(592

)

 

 

102

 

Other income (expense), net

 

(1,153

)

 

 

(647

)

 

 

(2,174

)

 

 

(2,120

)

Loss before provision (benefit) for income taxes

 

(11,967

)

 

 

(8,798

)

 

 

(38,036

)

 

 

(32,798

)

Provision (benefit) for income taxes

 

19

 

 

 

54

 

 

 

184

 

 

 

(66

)

Net loss

$

(11,986

)

 

$

(8,852

)

 

$

(38,220

)

 

$

(32,732

)

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

$

(0.18

)

 

$

(0.36

)

 

$

(0.58

)

 

$

(1.41

)

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

   share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

67,800

 

 

 

24,452

 

 

 

66,313

 

 

 

23,290

 

See accompanying notes to condensed consolidated financial statements

 

 

5


 

RINGCENTRAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net loss

$

(11,986

)

 

$

(8,852

)

 

$

(38,220

)

 

$

(32,732

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net

 

387

 

 

 

(313

)

 

 

57

 

 

 

(69

)

Unrealized loss on available-for-sale securities

 

(34

)

 

 

-

 

 

 

(34

)

 

 

-

 

Comprehensive loss

$

(11,633

)

 

$

(9,165

)

 

$

(38,197

)

 

$

(32,801

)

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

 

2014

 

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(38,220

)

 

$

(32,732

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

7,409

 

 

 

6,606

 

Share-based compensation

 

11,306

 

 

 

4,546

 

Noncash interest expense related to debt

 

194

 

 

 

412

 

Loss on disposal of assets

 

24

 

 

 

 

Deferred income tax

 

82

 

 

 

(45

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(4,398

)

 

 

198

 

Inventory

 

100

 

 

 

(1,202

)

Prepaid expenses and other current assets

 

(3,155

)

 

 

(4,340

)

Other assets

 

(1,109

)

 

 

(155

)

Accounts payable

 

1,078

 

 

 

1,652

 

Accrued liabilities

 

11,318

 

 

 

(366

)

Deferred revenue

 

6,863

 

 

 

4,283

 

Other liabilities

 

1,400

 

 

 

553

 

Net cash used in operating activities

 

(7,108

)

 

 

(20,590

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(15,169

)

 

 

(9,024

)

Purchases of available-for-sale securities

 

(28,696

)

 

 

 

Restricted investments

 

 

 

 

(130

)

Net cash used in investing activities

 

(43,865

)

 

 

(9,154

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Net proceeds from secondary public offering of common stock

 

57,167

 

 

 

 

Net proceeds from debt agreements

 

 

 

 

22,907

 

Repayment of debt

 

(7,182

)

 

 

(5,928

)

Repayment of capital lease obligations

 

(509

)

 

 

(312

)

Proceeds from issuance of preferred stock warrants

 

 

 

 

1,625

 

Payment of offering costs

 

(1,219

)

 

 

(1,773

)

Proceeds from issuance of stock in connection with stock plans

 

7,010

 

 

 

835

 

Net cash provided by financing activities

 

55,267

 

 

 

17,354

 

Effect of exchange rate changes on cash and cash equivalents

 

19

 

 

 

(22

)

Net increase (decrease) in cash and cash equivalents

 

4,313

 

 

 

(12,412

)

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of period

 

116,378

 

 

 

37,864

 

End of period

$

120,691

 

 

$

25,452

 

Supplemental disclosure of cash flow data:

 

 

 

 

 

 

 

Cash paid for interest

$

956

 

 

$

1,187

 

Cash paid for income taxes

 

82

 

 

 

31

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

Change in liability for unvested exercised options

$

37

 

 

$

95

 

Issuance of common stock in connection with legal settlement

 

 

 

 

257

 

Accrued liability for deferred 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

 

1,095

 

 

 

570

 

Equipment acquired under capital lease

 

1,149

 

 

 

 

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 Company is headquartered in San Mateo, California.  

Public Offerings

On October 2, 2013, the Company completed its initial public offering (the “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 offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-190815) (the “Initial Registration Statement”). 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 $3,888,000.

On March 11, 2014, the Company completed a secondary public offering and sold 7,991,551 shares of Class A common stock to the public, including 791,551 of the underwriters’ overallotment option and 5,200,000 shares of Class A common stock sold by selling stockholders, at a price of $21.50 per share. The offer and sale of all of the shares in the secondary public offering were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-194132) (the “Secondary Registration Statement”). The Company received aggregate proceeds of $57,167,000 from the secondary public offering, net of underwriters’ discounts and commissions, but before deduction of offering expenses of approximately $1,050,000.

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, 2014. 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 (the “SEC”).

The unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the fiscal year ended December 31, 2013 included in the Company’s fiscal 2013 Annual Report on Form 10-K. 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, 2013.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires 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 revenues, accounts receivable, the allowance for doubtful accounts, inventory and inventory reserves, share-based compensation, deferred revenue, return reserves, provision for income taxes, uncertain tax positions, loss contingencies, sales tax liabilities 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.

 

 

8


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new guidance is a result of a joint project with the International Accounting Standards Board (the “IASB”) to clarify and converge the revenue recognition principles under U.S. GAAP and IFRS and to develop guidance that would streamline and enhance revenue recognition requirements. Entities have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The new standard requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grand-date fair value of the award. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The Company believes the adoption of this standard will not have a material impact on its consolidated financial statements because it does not anticipate granting share-based payment awards with performance targets that can be achieved after the requisite service period.

 

Note 2. Financial Statement Components

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

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Cash

$

20,338

 

 

$

34,561

 

Money market funds

 

100,353

 

 

 

81,817

 

Total cash and cash equivalents

$

120,691

 

 

$

116,378

 

 

 

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

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Accounts receivable

$

6,058

 

 

$

2,192

 

Unbilled accounts receivable

 

1,490

 

 

 

992

 

Allowance for doubtful accounts

 

(105

)

 

 

(139

)

Accounts receivable, net

$

7,443

 

 

$

3,045

 

 

 

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

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Computer hardware and software

$

43,271

 

 

$

30,449

 

Internal-use software development costs

 

5,283

 

 

 

4,636

 

Furniture and fixtures

 

1,997

 

 

 

1,127

 

Leasehold improvements

 

2,866

 

 

 

859

 

Property and equipment, gross

 

53,417

 

 

 

37,071

 

Less: accumulated depreciation

 

(27,555

)

 

 

(20,411

)

Property and equipment, net

$

25,862

 

 

$

16,660

 

 

 

9


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 Accrued liabilities consisted of (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Accrued compensation and benefits

$

8,874

 

 

$

5,660

 

Accrued sales, use and telecom related taxes

 

5,963

 

 

 

3,967

 

Accrued expenses

 

15,554

 

 

 

10,168

 

Other

 

1,268

 

 

 

764

 

Total accrued liabilities

$

31,659

 

 

$

20,559

 

 

Note 3. Fair Value of Financial Instruments

The Company carries certain financial assets consisting of money market funds, certificates of deposit, commercial paper and corporate debt securities 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.

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

 

 

Balance at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

100,353

 

 

$

94,057

 

 

$

6,296

 

 

$

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

$

26,666

 

 

$

26,666

 

 

$

 

 

$

 

Commercial paper

$

1,996

 

 

$

 

 

$

1,996

 

 

$

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

$

630

 

 

$

 

 

$

630

 

 

$

 

 

 

 

Balance at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

81,817

 

 

$

72,717

 

 

$

9,000

 

 

$

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

$

630

 

 

$

 

 

$

630

 

 

$

 

 

 

During the three months ended September 30, 2014, the Company purchased investments in commercial paper and corporate debt securities with original maturities ranging from 4 to 15 months. Management determines the appropriate categorization of its investments at the time of purchase and reevaluates classification at each reporting date. At September 30, 2014, all investments were designated as available-for-sale and reported at fair value based either upon quoted prices in active markets, quoted prices in less active markets, or quoted market prices for similar investments, with unrealized gains and losses, net of related tax, if any, included in other comprehensive loss. We may sell these securities at any time for use in current operations or for other purposes, such as consideration for acquisitions, even if they have not yet reached maturity. As a result, all of our investments held at September 30, 2014, including securities with maturities beyond twelve months, were classified as current assets in the accompanying condensed consolidated balance sheet.

10


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

At September 30, 2014, available-for-sale securities consisted of the following (in thousands):

 

 

Available-for-Sale Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Estimated Fair Value

 

Corporate debt securities

$

26,700

 

 

$

 

 

$

(34

)

 

$

26,666

 

Commercial paper

 

1,996

 

 

 

 

 

 

 

 

 

1,996

 

Total

$

28,696

 

 

$

 

 

$

(34

)

 

$

28,662

 

 

 

The expected maturities of our investments in available-for-sale securities at September 30, 2014 are shown below (in thousands):

 

Available-for-Sale Securities

Amortized Cost

 

 

Estimated Fair Value

 

Due in less than one year

$

26,362

 

 

$

26,331

 

Due in one to five years

 

2,334

 

 

 

2,331

 

Total

$

28,696

 

 

$

28,662

 

 

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, the stable interest rate environment and considering our credit risks, the carrying value of debt approximates fair value.

 

Note 4. Debt

As of September 30, 2014, the Company’s debt is comprised of borrowings under loan and security agreements, as amended, with Silicon Valley Bank (“SVB”) and TriplePoint Capital LLC (“TriplePoint”).

SVB Loan Agreement

Under the SVB agreement, the Company has two outstanding growth capital term loans (i.e., “the 2012 term loan” and “the 2013 term loan”), and a revolving line of credit.

The 2012 term loan was borrowed in March 2012 with a principal amount of $8,000,000, which is being repaid in 36 equal monthly installments of principal and interest. Under the 2012 term loan, interest is paid monthly and accrues at a floating rate based on the Company’s option of the (i) prime rate plus a margin of 0.25% or 0.50% or (ii) adjusted LIBOR rate (based on one, two, three or six-month interest periods) plus a margin of 3.25% or 3.50%, in each case such margin being determined based on cash balances maintained with SVB. The Company elected the prime rate option and, based on cash balances maintained with SVB at September 30, 2014, the current interest rate is 3.5%. In addition, a final terminal payment equal to 0.5% of the original loan principal, or $40,000, is due at maturity. The remaining principal balance and the final terminal payment are classified as current liabilities in the accompanying condensed consolidated balance sheet because the loan matures March 2015. As of September 30, 2014, the outstanding principal balance of the 2012 term loan was $1,333,000. As of September 30, 2014, the unamortized discount on the 2012 term loan was $6,000 which is recorded in the current portion of long-term debt line in the accompanying condensed consolidated balance sheet.

The 2013 term loan was borrowed on December 31, 2013 with a principal amount of $15,000,000, which is being repaid in 48 equal monthly installments of principal and interest. Interest is due monthly and accrues at a floating rate based on the Company’s option of an annual rate of either the (i) prime rate plus a margin of 0.75% or 1.00% or (ii) adjusted LIBOR rate (based on one, two, three or six-month interest periods) plus a margin of 3.75% or 4.00%, in each case such margin being determined based on cash balances maintained with SVB. The Company elected the prime rate option and based on cash balances maintained with SVB at September 30, 2014, the current interest rate is 4.0%. As of September 30, 2014, the outstanding principal balance of the 2013 term loan was $12,500,000.

11


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The revolving line of credit provides for a maximum borrowing of up to $15,000,000 subject to limits based on the outstanding principal balance of the 2012 term loan and recurring subscription revenue amounts as defined in the agreement. The recurring subscription revenue requirement is not expected to limit the amount of borrowings available under the line of credit. Under the line of credit, interest is paid monthly and accrues at a floating rate based on the Company’s option of the (i) prime rate plus a margin of 0.25% or 0.50% or (ii) adjusted LIBOR rate (based on one, two, three or six-month interest periods) plus a margin of 3.25% or 3.50%, in each case such margin being determined based on cash balances maintained with SVB. The Company elected the prime rate option and based on cash balances maintained with SVB at September 30, 2014, the current interest rate is 3.5%. All outstanding principal and unpaid interest must be repaid by August 13, 2015. The outstanding principal balance is classified as a current liability in the accompanying condensed consolidated balance sheet because the loan matures August 2015. As of September 30, 2014, the outstanding principal balance and the available borrowing capacity of the line of credit were $10,778,000 and $2,889,000, respectively. As of September 30, 2014, the unamortized discount on the revolving line of credit was $205,000 which is recorded in the current portion of long-term debt line in the accompanying condensed consolidated balance sheet.

The Company has pledged all of its assets, excluding intellectual property, as collateral to secure its obligations under the SVB agreement. The SVB 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 SVB agreement also contains customary affirmative covenants, including requirements to, among other things, (i) maintain minimum cash balances representing the greater of $10,000,000 or three times the Company’s quarterly cash burn rate, as defined in the agreement, and (ii) maintain minimum EBITDA levels, as determined in accordance with the agreement. On June 17, 2014, the Company adjusted certain financial covenant thresholds to expand its ability to invest in certain foreign subsidiaries. The Company was in compliance with all covenants under its credit agreement with SVB as of September 30, 2014.

TriplePoint Loan Agreement

Under the equipment loan and security agreement with TriplePoint, the Company borrowed equipment term loans with aggregate principal of $9,691,000 in August 2012. The equipment term loans are being 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, or $970,000. The remaining principal balance and the final terminal payment are classified as current liabilities in the accompanying condensed consolidated balance sheet because the loan matures August 2015. As of September 30, 2014, the outstanding principal balance of the TriplePoint equipment term loan was $2,848,000. As of September 30, 2014, the unamortized discount on the revolving line of credit was $9,000 which is recorded in the current portion of long-term debt line in the accompanying condensed consolidated balance sheet.

The TriplePoint equipment loan and security 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 TriplePoint equipment loan and security agreement also contain customary affirmative covenants, including requirements to, among other things, deliver audited financial statements. On June 17, 2014, the Company adjusted certain financial covenant thresholds to expand its ability to invest in certain foreign subsidiaries. The Company was in compliance with all covenants under its credit agreements with TriplePoint as of September 30, 2014.

 

12


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 5. Commitments and Contingencies

Leases

The Company leases facilities for office space under noncancelable operating leases for its U.S. and international locations and has entered into capital lease arrangements to obtain property and equipment for its operations. In addition, the Company leases space from third party datacenter hosting facilities under co-location agreements to support its cloud infrastructure. In March 2014, the Company entered into a new lease for its office in Denver, Colorado for a total lease commitment of $4,653,000 through 2019 and lease incentives totaling $1,159,000. In May 2014, the Company entered into a new lease for its office in London, England for a total lease commitment of approximately $1,941,000 through 2019 with an option to extend through 2024. On September 25 2014, the Company entered into a new lease for its headquarters for a total lease commitment of $17,497,000 through 2021 and lease incentives totaling $1,486,000. The Company is currently occupying a small portion of the building and will take possession of the remainder of the building sometime in the first quarter of fiscal 2015. All agreements contain escalating monthly rental payments over the lease term, which will be amortized to rent expense on a straight-line basis over the lease term.

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 so a loss contingency related to sales taxes exists for sales and marketing activities in 2010, 2011 and the six months ended June 30, 2012. As of September 30, 2014 and December 31, 2013, the Company had a balance for a long-term sales tax liability of $3,953,000 and $3,988,000, 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 condensed consolidated financial statements 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 $4,441,000 and $3,451,000, is included in accrued liabilities as of September 30, 2014 and December 31, 2013, respectively.

Legal Matters

The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. The Company assesses its potential liability by analyzing specific litigation and regulatory matters using reasonably available information. The Company develops its views on estimated losses in consultation with inside and outside counsel, which involves a subjective analysis of potential results and outcomes, assuming various combinations of appropriate litigation and settlement strategies. Legal fees are expensed in the period in which they are incurred. As of September 30, 2014 and December 31, 2013, there were no significant ongoing legal matters and the Company did not have any accrued liabilities recorded for such loss contingencies.

 

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

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Cost of services revenues

$

330

 

 

$

129

 

 

$

974

 

 

$

297

 

Research and development

 

926

 

 

 

367

 

 

 

2,426

 

 

 

884

 

Sales and marketing

 

1,396

 

 

 

330

 

 

 

3,661

 

 

 

734

 

General and administrative

 

1,546

 

 

 

1,384

 

 

 

4,245

 

 

 

2,631

 

Total share-based compensation expense

$

4,198

 

 

$

2,210

 

 

$

11,306

 

 

$

4,546

 

 

13


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

A summary of share-based compensation expense by award type follows (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Options

$

2,740

 

 

$

2,210

 

 

$

7,812

 

 

$

4,546

 

Employee stock purchase plan rights

 

273

 

 

 

 

 

 

1,203

 

 

 

 

Restricted stock units

 

1,185

 

 

 

 

 

 

2,291

 

 

 

 

Total share-based compensation expense

$

4,198

 

 

$

2,210

 

 

$

11,306

 

 

$

4,546

 

 

As of September 30, 2014 and December 31, 2013, there was approximately $20,456,000 and $22,439,000 of unrecognized share-based compensation expense, net of estimated forfeitures, related to nonvested stock option grants, which will be recognized on a straight-line basis over the remaining weighted-average vesting periods of approximately 2.5 years and 3.0 years, respectively.

Equity Incentive Plans

As of September 30, 2014 a total of 7,567,000 shares remained available for grant under the 2013 Plan. A summary of option activity under all of the Company’s equity incentive plans at September 30, 2014 and changes during the period then ended is presented in the following table:

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

Number of

 

 

Weighted-

 

 

Average

 

 

Aggregate

 

 

Options

 

 

Average

 

 

Contractual

 

 

Intrinsic

 

 

Outstanding

 

 

Exercise Price

 

 

Term

 

 

Value

 

 

(in thousands)

 

 

Per Share

 

 

(in Years)

 

 

(in thousands)

 

Outstanding at December 31, 2013

 

11,156

 

 

$

5.87

 

 

 

7.7

 

 

$

139,484

 

Granted

 

935

 

 

 

15.88

 

 

 

 

 

 

 

 

 

Exercised

 

(2,437

)

 

 

1.87

 

 

 

 

 

 

 

 

 

Canceled/Forfeited

 

(476

)

 

 

6.03

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2014

 

9,178

 

 

$

7.95

 

 

 

7.4

 

 

$

47,452

 

Vested and expected to vest as of September 30, 2014

 

8,765

 

 

$

7.84

 

 

 

7.4

 

 

$

46,456

 

Exercisable as of September 30, 2014

 

4,730

 

 

$

5.20

 

 

 

6.8

 

 

$

36,024

 

 

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):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Weighted average grant date fair value per share

$

5.56

 

 

$

6.75

 

 

$

6.42

 

 

$

6.08

 

Total intrinsic value of options exercised

$

3,944

 

 

$

6,028

 

 

$

26,429

 

 

$

9,855

 

 

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 in the periods presented were as follows:

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Expected term for employees (in years)

 

4.6

 

 

 

6.1

 

 

 

4.4

 

 

 

6.1

 

Expected term for non-employees (in years)

 

7.0

 

 

 

10.0

 

 

 

7.0

 

 

 

10.0

 

Risk-free interest rate

 

1.56

%

 

 

1.99

%

 

 

1.38

%

 

 

1.68

%

Expected volatility

 

47

%

 

 

54

%

 

 

48

%

 

 

54

%

Expected dividend rate

 

0

%

 

 

0

%

 

 

0

%

 

 

0

%

14


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

On January 29, 2014, the Compensation Committee of the Board of Directors approved an amendment to the 2013 Plan to decrease the contractual term of all equity awards issued from the 2013 Plan from 10 years to 7 years for all awards granted after January 29, 2014.

Employee Stock Purchase Plan

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 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 Initial Registration Statement, and the offering period ends six months after the beginning of the offering period, on the last trading day on or after May 10th and November 10th of each year. At the end of the offering period, the purchase price is set at the lower of: (i) 90% of the fair value of the Company’s common stock at the beginning of the six month offering period, and (ii) 90% of the fair value of the Company’s common stock at the end of the six month offering period. As of September 30, 2014, there was a total of $122,000 of unrecognized share-based compensation expense, net of estimated forfeitures, related to ESPP, which will be recognized on a straight-line basis over the remaining weighted-average vesting period of approximately 0.1 years. At September 30, 2014, a total of 1,658,000 shares were available for issuance under the ESPP.

Restricted Stock Units

For the three and nine months ended September 30, 2014, we issued 266,000 and 1,192,000 restricted stock units of Class A common stock under the 2013 Plan with a weighted average grant date fair value of $13.61 and $16.35 per share. No restricted stock units were issued during the nine months ended September 30, 2013. As of September 30, 2014, there was a total of $18,030,000 of unrecognized share-based compensation expense, net of estimated forfeitures, related to restricted stock units, which will be recognized on a straight-line basis over the remaining weighted-average vesting period of approximately 3.6 years.

 

Note 7. 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, 2014 and 2013. Property and equipment by geographic location is based on the location of the legal entity that owns the asset. At September 30, 2014 and December 31, 2013, more than 87% and 84%, respectively, of the Company’s property and equipment was located in the United States, with no single country outside the United States representing more than 10% of property and equipment.

 

Note 8. Income Taxes

The provision (benefit) for income taxes for the three and nine months ended September 30, 2014 and 2013, was $19,000, $54,000, $184,000, and ($66,000), respectively. The provision for income taxes during the three and nine months ended September 30, 2014 and the three months ended September 30, 2013 consisted primarily of state minimum taxes, and foreign income taxes. 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.

For the three and nine months ended September 30, 2014 and 2013, the provision for income taxes differed from the U.S federal 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 all of the domestic and the majority of the foreign net deferred tax assets as of September 30, 2014 and December 31, 2013. The Company intends to maintain the full 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, 2014, there have been no material changes to the total amount of unrecognized tax benefits.

15


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

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 purchase common and preferred stock, stock options and restricted stock units, to the extent they are dilutive. Upon the effectiveness of the Initial 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, 2014 and 2013, 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.

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

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013