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Section 1: 10-Q (10-Q)

rng-10q_20150930.htm

 

 

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, 2015

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.)

20 Davis Drive

Belmont, California 94002

(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

 

x¨

Non-accelerated filer

 

¨  (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 1, 2015, there were 56,786,478 shares of Class A Common Stock issued and outstanding and 14,159,413 shares of Class B Common Stock outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

  

 

  

Page

 

PART I. FINANCIAL INFORMATION

Item 1.

  

Financial Statements

  

5

 

  

Condensed Consolidated Balance Sheets at September 30, 2015 and December 31, 2014 (unaudited)

  

5

 

  

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014 (unaudited)

  

6

 

  

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2015 and 2014 (unaudited)

  

7

 

  

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (unaudited)

  

8

 

  

Notes to Condensed Consolidated Financial Statements (unaudited)

  

9

Item 2.

  

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

  

19

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

28

Item 4.

  

Controls and Procedures

  

29

 

PART II. OTHER INFORMATION

Item 1.

  

Legal Proceedings

  

30

Item 1A.

  

Risk Factors

  

30

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

59

Item 3.

  

Default Upon Senior Securities

  

59

Item 4.

  

Mine Safety Disclosures

  

59

Item 5.

  

Other Information

  

59

Item 6.

  

Exhibits

  

59

Signatures

  

61

 

 

 

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:

 

the timing of acquisitions of, or making and exiting investments in, other entities, businesses or technologies;

 

our success in the enterprise market and with our carrier partners;

 

our progress against short term and long term goals;

 

our anticipated benefits from our acquisition of Glip, Inc.;

 

our ability to successfully and timely integrate, and realize the benefits of, our acquisition of Glip, Inc. and any other significant acquisitions we may make;

 

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, as well as general macroeconomic conditions;

 

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

 

our ability to predict subscription revenues, formulate accurate financial projections and make strategic business decisions based on our analysis of market trends;

 

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;

 

maintaining and expanding our distribution channels, including our network of sales agents and resellers;

 

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 medium-sized and larger customers and internationally;

 

our ability to realize increased purchasing leverage and economies of scale as we expand;

 

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;

 

our capital expenditure projections;

 

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

 

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

3


 

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be significantly 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 significantly 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 significantly from those anticipated in these forward looking statements, even if new information becomes available in the future.

 

 

4


 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

RINGCENTRAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

 

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

130,004

 

 

$

113,182

 

Short-term investments

 

2,307

 

 

 

28,479

 

Accounts receivable, net

 

15,187

 

 

 

7,651

 

Inventory

 

2,287

 

 

 

1,710

 

Prepaid expenses and other current assets

 

12,749

 

 

 

8,767

 

Total current assets

 

162,534

 

 

 

159,789

 

Property and equipment, net

 

29,084

 

 

 

25,527

 

Goodwill

 

9,393

 

 

 

 

Acquired intangibles, net

 

3,522

 

 

 

 

Other assets

 

2,681

 

 

 

3,021

 

Total assets

$

207,214

 

 

$

188,337

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

4,162

 

 

$

4,181

 

Accrued liabilities

 

37,391

 

 

 

29,236

 

Current portion of capital lease obligation

 

262

 

 

 

509

 

Current portion of long-term debt

 

3,750

 

 

 

16,764

 

Deferred revenue

 

34,286

 

 

 

25,586

 

Total current liabilities

 

79,851

 

 

 

76,276

 

Long-term debt

 

15,778

 

 

 

7,813

 

Sales tax liability

 

3,887

 

 

 

3,953

 

Capital lease obligation

 

273

 

 

 

535

 

Other long-term liabilities

 

4,540

 

 

 

3,255

 

Total liabilities

 

104,329

 

 

 

91,832

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock

 

7

 

 

 

7

 

Additional paid-in capital

 

306,045

 

 

 

274,844

 

Accumulated other comprehensive income (loss)

 

86

 

 

 

(251

)

Accumulated deficit

 

(203,253

)

 

 

(178,095

)

Total stockholders' equity

 

102,885

 

 

 

96,505

 

Total liabilities and stockholders' equity

$

207,214

 

 

$

188,337

 

See accompanying notes to condensed consolidated financial statements

 

 

5


 

RINGCENTRAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscriptions

$

70,321

 

 

$

51,951

 

 

$

194,713

 

 

$

143,668

 

Product

 

6,459

 

 

 

4,993

 

 

 

18,076

 

 

 

14,325

 

Total revenues

 

76,780

 

 

 

56,944

 

 

 

212,789

 

 

 

157,993

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscriptions

 

17,084

 

 

 

14,799

 

 

 

49,503

 

 

 

43,305

 

Product

 

5,249

 

 

 

4,606

 

 

 

14,906

 

 

 

13,546

 

Total cost of revenues

 

22,333

 

 

 

19,405

 

 

 

64,409

 

 

 

56,851

 

Gross profit

 

54,447

 

 

 

37,539

 

 

 

148,380

 

 

 

101,142

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

13,475

 

 

 

11,931

 

 

 

37,612

 

 

 

32,478

 

Sales and marketing

 

34,878

 

 

 

26,697

 

 

 

101,473

 

 

 

76,342

 

General and administrative

 

11,922

 

 

 

9,725

 

 

 

34,231

 

 

 

28,184

 

Total operating expenses

 

60,275

 

 

 

48,353

 

 

 

173,316

 

 

 

137,004

 

Loss from operations

 

(5,828

)

 

 

(10,814

)

 

 

(24,936

)

 

 

(35,862

)

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(245

)

 

 

(505

)

 

 

(927

)

 

 

(1,582

)

Other income (expense), net

 

(319

)

 

 

(648

)

 

 

(637

)

 

 

(592

)

Other income (expense), net

 

(564

)

 

 

(1,153

)

 

 

(1,564

)

 

 

(2,174

)

Loss before provision (benefit) for income taxes

 

(6,392

)

 

 

(11,967

)

 

 

(26,500

)

 

 

(38,036

)

Provision (benefit) for income taxes

 

(56

)

 

 

19

 

 

 

(1,342

)

 

 

184

 

Net loss

$

(6,336

)

 

$

(11,986

)

 

$

(25,158

)

 

$

(38,220

)

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

$

(0.09

)

 

$

(0.18

)

 

$

(0.36

)

 

$

(0.58

)

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

   share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

70,580

 

 

 

67,800

 

 

 

69,614

 

 

 

66,313

 

See accompanying notes to condensed consolidated financial statements

 

 

6


 

RINGCENTRAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net loss

$

(6,336

)

 

$

(11,986

)

 

$

(25,158

)

 

$

(38,220

)

Other comprehensive gain/(loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net

 

159

 

 

 

387

 

 

 

146

 

 

 

57

 

Change in unrealized gain (loss) on available-for-sale securities

 

94

 

 

 

(34

)

 

 

190

 

 

 

(34

)

Comprehensive loss

$

(6,083

)

 

$

(11,633

)

 

$

(24,822

)

 

$

(38,197

)

See accompanying notes to condensed consolidated financial statements

 

 

7


 

RINGCENTRAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

 

Nine Months Ended

 

 

September 30,

 

 

2015

 

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(25,158

)

 

$

(38,220

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

9,935

 

 

 

7,409

 

Share-based compensation

 

15,790

 

 

 

11,306

 

Tax benefit from release of valuation allowance

 

(1,411

)

 

 

 

Non-cash interest expense related to debt

 

156

 

 

 

194

 

Net accretion of discount and amortization of premium on available-for-sale securities

 

602

 

 

 

 

Allowance for doubtful accounts

 

152

 

 

 

 

Loss on disposal of assets

 

131

 

 

 

24

 

Change in fair value of purchase consideration

 

89

 

 

 

 

Deferred income tax

 

5

 

 

 

82

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(7,688

)

 

 

(4,398

)

Inventory

 

(577

)

 

 

100

 

Prepaid expenses and other current assets

 

(3,907

)

 

 

(3,155

)

Other assets

 

488

 

 

 

(1,109

)

Accounts payable

 

(61

)

 

 

1,078

 

Accrued liabilities

 

4,758

 

 

 

11,318

 

Deferred revenue

 

8,700

 

 

 

6,863

 

Other liabilities

 

204

 

 

 

1,400

 

Net cash provided by (used in) operating activities

 

2,208

 

 

 

(7,108

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Proceeds from the maturity of available-for-sale securities

 

25,760

 

 

 

 

Purchases of available-for-sale securities

 

 

 

 

(28,696

)

Purchases of property and equipment

 

(11,106

)

 

 

(14,522

)

Cash paid for business combination, net of cash acquired

 

(4,670

)

 

 

 

Capitalized internal-use software

 

(1,836

)

 

 

(647

)

Proceeds from restricted investments

 

100

 

 

 

 

Net cash provided by (used in) investing activities

 

8,248

 

 

 

(43,865

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Net proceeds from secondary public offering of common stock

 

 

 

 

57,167

 

Payment of offering costs

 

 

 

 

(1,219

)

Proceeds from issuance of stock in connection with stock plans

 

12,040

 

 

 

7,052

 

Repayment of debt

 

(5,205

)

 

 

(7,182

)

Repayment of capital lease obligations

 

(509

)

 

 

(509

)

Taxes paid related to net share settlement of equity awards

 

(105

)

 

 

(42

)

Net cash provided by financing activities

 

6,221

 

 

 

55,267

 

Effect of exchange rate changes on cash and cash equivalents

 

145

 

 

 

19

 

Net increase in cash and cash equivalents

 

16,822

 

 

 

4,313

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of period

 

113,182

 

 

 

116,378

 

End of period

$

130,004

 

 

$

120,691

 

Supplemental disclosure of cash flow data:

 

 

 

 

 

 

 

Cash paid for interest

$

1,697

 

 

$

956

 

Cash paid for income taxes

 

71

 

 

 

82

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

Issuance of common stock for business combination

$

3,447

 

 

 

 

Equipment purchased and unpaid at period end

 

1,617

 

 

 

1,095

 

Change in unrealized gain (loss) on available-for-sale securities

 

190

 

 

 

(34

)

Change in liability for unvested exercised options

 

28

 

 

 

37

 

Equipment acquired under capital lease

 

 

 

 

1,149

 

 

See accompanying notes to condensed consolidated financial statements

 

8


 

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.

Basis of Presentation and Consolidation

The unaudited condensed consolidated financial statements and accompanying notes of the Company reflect all adjustments (all of which are normal, recurring in nature and those discussed in these Notes) that are, 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, 2015. 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 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, 2014 included in the Company’s fiscal 2014 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, 2014.

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, the allocation of the value of purchase consideration for business acquisitions, goodwill, intangible assets, 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 these estimates, and such differences could affect the results of operations reported in future periods.

 

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). This 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. In April 2015, the FASB proposed a one-year deferral of the effective date for the new revenue reporting standard for entities reporting under U.S. GAAP. In accordance with the deferral, ASU 2014-09 will be effective for fiscal 2018, including interim periods within that reporting period. Entities have the option of applying retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. 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.

 

9


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The new guidance simplifies the accounting for measurement-period adjustments in a business combination by requiring the acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are determined. The acquirer is also required to record in the reporting period in which the adjustments are determined, the effect on earnings of changes in depreciation, amortization, and other items resulting from the change to the provisional amounts. The new guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Therefore this guidance will impact future measurement period adjustments, if any, beginning in fiscal year 2016.

 

Note 2. Financial Statement Components

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

 

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Cash

$

13,195

 

 

$

12,800

 

Money market funds

 

116,809

 

 

 

100,382

 

Total cash and cash equivalents

$

130,004

 

 

$

113,182

 

 

 

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

 

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Accounts receivable

$

11,765

 

 

$

5,935

 

Unbilled accounts receivable

 

3,677

 

 

 

1,841

 

Allowance for doubtful accounts

 

(255

)

 

 

(125

)

Accounts receivable, net

$

15,187

 

 

$

7,651

 

 

 

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

 

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Computer hardware and software

$

49,188

 

 

$

43,805

 

Internal-use software development costs

 

7,171

 

 

 

5,335

 

Furniture and fixtures

 

3,464

 

 

 

2,020

 

Leasehold improvements

 

2,413

 

 

 

2,870

 

Total property and equipment

 

62,236

 

 

 

54,030

 

Less: accumulated depreciation and amortization

 

(33,152

)

 

 

(28,503

)

Property and equipment, net

$

29,084

 

 

$

25,527

 

 

 

Accrued liabilities consisted of the following (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Accrued compensation and benefits

$

10,891

 

 

$

7,596

 

Accrued sales, use and telecom related taxes

 

5,863

 

 

 

5,277

 

Other accrued expenses

 

20,637

 

 

 

16,363

 

Total accrued liabilities

$

37,391

 

 

$

29,236

 

 

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:

10


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Level 1:

Observable inputs that reflect 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 financial assets carried at fair value were determined using the following inputs (in thousands):

 

 

Balance at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

116,835

 

 

$

115,539

 

 

$

1,296

 

 

$

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

$

2,307

 

 

$

2,307

 

 

$

 

 

$

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

$

530

 

 

$

 

 

$

530

 

 

$

 

 

 

 

Balance at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

100,570

 

 

$

94,274

 

 

$

6,296

 

 

$

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

$

26,481

 

 

$

26,481

 

 

$

 

 

$

 

Commercial paper

$

1,998

 

 

$

 

 

$

1,998

 

 

$

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

$

630

 

 

$

 

 

$

630

 

 

$

 

 

 

At September 30, 2015, all short-term 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. The Company classifies all highly liquid instruments with an original maturity on the date of purchase of three months or less as cash and cash equivalents. The Company classifies available-for-sale securities that have a maturity date longer than three months as short-term investments, including those investments with a maturity date of longer than one year that are highly liquid These short-term investments may be sold at any time for use in current operations or for other purposes, such as consideration for business acquisitions, even if they have not yet reached maturity. As a result, all of our short-term investments held at September 30, 2015 were classified as current assets in the accompanying condensed consolidated balance sheet.

At September 30, 2015, 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

$

2,333

 

 

$

 

 

$

(26

)

 

$

2,307

 

Total

$

2,333

 

 

$

 

 

$

(26

)

 

$

2,307

 

 

The Company does not believe any of the unrealized losses represent an other-than-temporary impairment based on its evaluation of available evidence as of September 30, 2015. The Company expects to receive the full principal and interest on all of these short-term investments.

 

 

11


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The expected maturities of our short-term investments in available-for-sale securities at September 30, 2015 are shown below (in thousands):

 

Available-for-Sale Securities

Amortized

Cost

 

 

Estimated

Fair Value

 

Due in less than one year

$

2,333

 

 

$

2,307

 

Total

$

2,333

 

 

$

2,307

 

 

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.

At December 31, 2014 and September 30, 2015, the Company estimated the fair value of its debt primarily using an expected present value technique, which is based on observable market inputs using interest rates currently available to companies of similar credit standing for similar terms and remaining maturities, and considering its own credit risk. The estimated fair value of the Company’s current and non-current debt obligations was $25,671,000 at December 31, 2014, compared to its carrying amount of $24,577,000 at that date. The estimated fair value of the Company’s current and non-current debt obligations was $20,012,000 at September 30, 2015, compared to its carrying amount of $19,528,000 at that date. If the debt was measured at fair value in the condensed consolidated balance sheets, the Company’s current and non-current debt would be classified in Level 2 of the fair value hierarchy.

 

 

Note 4. Business Combinations

On June 4, 2015, the Company acquired Glip, Inc. (“Glip”), a cloud messaging and collaboration company based in Boca Raton, Florida. Glip is a provider of team messaging services, integrated with project management, group calendars, notes, annotations, and file sharing. Glip also includes integrations with a number of third party business solutions. The objective of the acquisition is to extend our platform by adding team messaging and collaboration services such as calendar, project management, and document sharing. The consideration for this acquisition, net of cash acquired and including the fair value of contingent consideration payable in cash upon achievement of certain earn out milestones and the fair value of common stock issuable to the sellers, was $11,906,000. Under the terms of the acquisition, the Company may also pay up to $2,000,000 in payments at the end of a two-year period to certain Glip employees, who continue to be employees of the Company, which are accounted for as a post-combination expense.  

The consideration exchanged consisted of the following (in thousands):

 

Cash, net of cash acquired

$

4,670

 

Common stock issued (223,190 shares)

 

3,447

 

Holdback based on standard representations and warranties

 

1,500

 

Total initial consideration

 

9,617

 

Milestone based earn out (after valuation adjustment)

 

2,289

 

Total consideration

$

11,906

 

 

The $3,447,000 fair value of the 223,190 unregistered common shares issued as part of the consideration paid for Glip ($3,830,000 before a $383,000 discount due to a 6-month restriction of resale as a result of SEC Rule 144 for issuance of unregistered shares) was determined on the basis of the five day weighted closing market price of the Company’s common shares preceding the acquisition date. We determined the initial fair value of the milestone based earn out liability of $2,289,000 using various estimates, including probabilities of success and discount rates. Based on the completion of milestones for the quarter ended September 30, 2015 and the estimated probability of completing of the remaining milestones, the estimated fair value of the milestone based earn out liability is $2,378,000 at September 30, 2015 and is classified as a current and non-current liability in the condensed consolidated balance sheet. At September 30, 2015, the contingent payment liability is $1,940,000 and classified as a non-current liability in the condensed consolidated balance sheet.

The following table summarizes the fair value of assets acquired as of the date of acquisition (in thousands):

 

Cash and cash equivalents

$

74

 

Acquired intangible assets

 

3,850

 

Goodwill

 

7,982

 

Net assets acquired

$

11,906

 

12


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

The Company has included the financial results of Glip in the condensed consolidated statements of operations from the date of acquisition.

The following table sets forth the fair value components of identifiable acquired intangible assets (in thousands) and their estimated useful lives (in years) as of the date of acquisition:

 

 

Fair Value

 

 

Estimated

Useful Life

Customer relationships

$

840

 

 

2 years

Developed technology

 

3,010

 

 

5 years

Total identifiable acquired intangible assets subject to amortization

$

3,850

 

 

 

 

The amount recorded for developed technology represents the estimated fair value of Glip’s cloud messaging and collaboration technology. The amount recorded for customer relationships represents the fair values of the underlying relationships with Glip customers. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating Glip’s cloud messaging and collaboration technology with the Company’s other offerings. The goodwill balance is not deductible for U.S. income tax purposes.

The weighted-average amortization periods for customer relationships and developed technology are approximately 1.7 years and 4.7 years, respectively.

Acquired intangible assets as of September 30, 2015 were as follows (in thousands):

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Acquired

Intangibles, Net

 

Customer relationships

$

840

 

 

$

135

 

 

$

705

 

Developed technology

 

3,010

 

 

 

193

 

 

 

2,817

 

Total acquired intangible assets

$

3,850

 

 

$

328

 

 

$

3,522

 

 

Amortization expense from acquired intangible assets for the three and nine months ended September 30, 2015 was $256,000 and $328,000, respectively. Amortization of developed technology is included in research and development expenses and amortization of customer relationships is included in sales and marketing expenses in the condensed consolidated statements of operations.

Estimated amortization expense for acquired intangible assets for the following five fiscal years and thereafter is as follows (in thousands):

 

2015 - remaining period

$

256

 

2016

 

1,022

 

2017

 

782

 

2018

 

602

 

2019

 

602

 

Thereafter

 

258

 

Total estimated amortization expense

$

3,522

 

 

 

Note 5. Debt

As of September 30, 2015, the Company’s debt is comprised of borrowings under the Third Amended and Restated Loan and Security Agreement dated March 30, 2015 (the “SVB Agreement”), as amended, with Silicon Valley Bank (“SVB”).

SVB Loan Agreement

Under the SVB Agreement, at September 30, 2015, the Company has one outstanding growth capital term loan (i.e., “the 2013 term loan”) and a revolving line of credit. The Company borrowed an additional growth capital loan in March 2012 (the “2012 term loan”) that matured in March 2015 and was repaid in full.

13


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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, plus accrued and unpaid 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, 2015, the current interest rate is 4.0%. As of September 30, 2015, the outstanding principal balance of the 2013 term loan was $8,750,000. $5,000,000 of the remaining principal balance is classified as non-current liabilities in the accompanying condensed consolidated balance sheet as this portion of the remaining principal balance is due beyond September 30, 2016.

The revolving line of credit provides for a maximum borrowing of up to $15,000,000 in principal amount, subject to limits based on recurring subscription revenue amounts as defined in the SVB 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 an annual rate of either 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, 2015, the current interest rate is 3.5%. On August 11, 2015, the Company amended the terms of the SVB Agreement extending the maturity of the revolving line of credit from August 13, 2015 to August 14, 2017. The outstanding principal balance is classified as non-current liabilities in the condensed consolidated balance sheet as the principal balance is due beyond September 30, 2016. As of September 30, 2015, the outstanding principal balance and the available borrowing capacity of the line of credit were $10,778,000 and $4,222,000, respectively.

The Company has pledged substantially 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, as amended, also contains customary affirmative covenants, as well as financial covenants that require the Company to (i) maintain minimum cash balances of $10,000,000, as defined in the agreement, and (ii) maintain minimum EBITDA levels, as determined in accordance with the agreement. On March 30, 2015, the Company adjusted certain financial covenants to expand its ability to invest in certain foreign subsidiaries and property and equipment. The Company was in compliance with all covenants under its credit agreement with SVB as of September 30, 2015.

 

Note 6. Commitments and Contingencies

Leases

The Company leases facilities for office space under non-cancelable 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. On September 25, 2014, the Company entered into a new lease for its headquarters in Belmont, California for a total lease commitment of $17,497,000 through 2021 and lease incentives totaling $1,486,000. The Company took full possession of the building in the first quarter of fiscal 2015.

On February 25, 2015, the Company signed an agreement that accelerated the termination date of the lease for its old headquarters office located in San Mateo, California from May 31, 2017 to April 30, 2015. The effectiveness of the early termination of the lease was contingent upon a third party entering into a lease agreement with the landlord for the San Mateo office space by February 28, 2015, and obtaining by March 30, 2015 the consent of the landlord’s lender to the early termination. The early termination of the lease was deemed effective on March 9, 2015 as both conditions were met. No additional lease payments were imposed by the early termination agreement and the Company’s future lease obligation ended on April 30, 2015. All office space lease agreements contain escalating monthly rental payments over the lease term, which are amortized to rent expense on a straight-line basis over the lease term.

Minimum Third Party Network Service Provider Commitments

On August 14, 2015, the Company amended its contract with a third-party network service provider containing a two year minimum commitment of approximately $170,000 a month. The commitment requires us to pay the higher of (i) our actual invoice or (ii) the monthly commitment amount.

14


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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 March 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 first two months of 2012 ended February 29, 2012. As of September 30, 2015 and December 31, 2014, the Company had a balance for a long-term sales tax liability of $3,887,000 and $3,953,000, 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 non-contingent amounts expected to be remitted in the next twelve months of $4,997,000 and $4,178,000, is included in accrued liabilities as of September 30, 2015 and December 31, 2014, 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. Except for the sales tax liability matter discussed above, the Company did not have any accrued liabilities recorded for such loss contingencies as of September 30, 2015 and December 31, 2014. Legal fees are expensed in the period in which they are incurred.

 

 

Note 7. Share-Based Compensation

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Cost of revenues

$

535

 

 

$

330

 

 

$

1,468

 

 

$

974

 

Research and development

 

1,351

 

 

 

926

 

 

 

3,745

 

 

 

2,426

 

Sales and marketing

 

1,797

 

 

 

1,396

 

 

 

5,333

 

 

 

3,661

 

General and administrative

 

2,069

 

 

 

1,546

 

 

 

5,244

 

 

 

4,245

 

Total share-based compensation expense

$

5,752

 

 

$

4,198

 

 

$

15,790

 

 

$

11,306

 

 

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Options

$

2,744

 

 

$

2,740

 

 

$

8,357

 

 

$

7,812

 

Employee stock purchase plan rights

 

287

 

 

 

273

 

 

 

854

 

 

 

1,203

 

Restricted stock units

 

2,721

 

 

 

1,185

 

 

 

6,579

 

 

 

2,291

 

Total share-based compensation expense

$

5,752

 

 

$

4,198

 

 

$

15,790

 

 

$

11,306

 

 

As of September 30, 2015 and December 31, 2014, there was approximately $21,799,000 and $20,069,000 of unrecognized share-based compensation expense, net of estimated forfeitures, related to non-vested stock option grants, which will be recognized on a straight-line basis over the remaining weighted-average vesting periods of approximately 2.6 years and 2.4 years, respectively.

15


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Equity Incentive Plans

As of September 30, 2015 a total of 7,997,000 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, 2015 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, 2014

 

9,158

 

 

$

8.23

 

 

 

7.2

 

 

$

61,367

 

Granted

 

1,853

 

 

 

16.30

 

 

 

 

 

 

 

 

 

Exercised

 

(1,556

)

 

 

6.57

 

 

 

 

 

 

 

 

 

Canceled/Forfeited

 

(651

)

 

 

11.40