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Section 1: 10-Q (FORM 10-Q)

rng-10q_20160930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2016

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      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      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

 

  (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  

As of November 1, 2016, there were 60,474,474 shares of Class A Common Stock issued and outstanding and 13,109,918 shares of Class B Common Stock outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

  

 

  

Page

 

PART I. FINANCIAL INFORMATION

Item 1.

  

Financial Statements (unaudited)

  

5

 

  

Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015

  

5

 

  

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015

  

6

 

  

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2016 and 2015

  

7

 

  

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015

  

8

 

  

Notes to Condensed Consolidated Financial Statements

  

9

Item 2.

  

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

  

20

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

30

Item 4.

  

Controls and Procedures

  

31

 

PART II. OTHER INFORMATION

Item 1.

  

Legal Proceedings

  

32

Item 1A.

  

Risk Factors

  

32

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

61

Item 3.

  

Default Upon Senior Securities

  

61

Item 4.

  

Mine Safety Disclosures

  

61

Item 5.

  

Other Information

  

61

Item 6.

  

Exhibits

  

61

Signatures

  

63

 

 

 

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 success in the enterprise market and with our carrier partners;

 

our progress against short term and long term goals;

 

our future financial performance;

 

our anticipated growth, 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;

 

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

 

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

 

our ability to predict software subscriptions 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 subscriptions to meet those needs, and our ability to successfully monetize them;

 

maintaining and expanding our customer base;

 

our anticipated benefits from our new sales agency agreement with Westcon Group;

 

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;

 

our ability to sell, market, and support our products and services;

 

our ability to expand our business to medium-sized and larger customers as well as expanding domestically 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 product and service providers;

 

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

 

our liquidity and working capital requirements;

 

the impact of changes in the regulatory environment;

 

our ability to protect our intellectual property and rely on open source licenses;

 

our expectations regarding the growth and reliability of the internet infrastructure;

 

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

 

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 capital expenditure projections;

 

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

3


 

 

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

 

the impact of economic downturns on us and our clients;

 

our ability to defend our systems and our customer information from fraud and cyber attack;

 

our ability to prevent the use of fraudulent payment methods for our products; and

 

our ability to retain key employees and to attract qualified personnel.

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,

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

152,390

 

 

$

137,588

 

Accounts receivable, net

 

23,583

 

 

 

19,163

 

Inventory

 

84

 

 

 

2,317

 

Prepaid expenses and other current assets

 

16,644

 

 

 

11,978

 

Total current assets

 

192,701

 

 

 

171,046

 

Property and equipment, net

 

31,139

 

 

 

28,160

 

Goodwill

 

9,393

 

 

 

9,393

 

Acquired intangibles, net

 

2,500

 

 

 

3,266

 

Other assets

 

3,064

 

 

 

2,948

 

Total assets

$

238,797

 

 

$

214,813

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

4,701

 

 

$

5,196

 

Accrued liabilities

 

46,368

 

 

 

34,702

 

Current portion of capital lease obligation

 

181

 

 

 

269

 

Current portion of long-term debt

 

14,528

 

 

 

3,750

 

Deferred revenue

 

42,738

 

 

 

36,657

 

Total current liabilities

 

108,516

 

 

 

80,574

 

Long-term debt

 

1,250

 

 

 

14,840

 

Sales tax liability

 

3,527

 

 

 

3,670

 

Capital lease obligation

 

 

 

 

181

 

Other long-term liabilities

 

3,402

 

 

 

5,416

 

Total liabilities

 

116,695

 

 

 

104,681

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

Common stock

 

7

 

 

 

7

 

Additional paid-in capital

 

351,784

 

 

 

319,792

 

Accumulated other comprehensive income

 

2,868

 

 

 

527

 

Accumulated deficit

 

(232,557

)

 

 

(210,194

)

Total stockholders' equity

 

122,102

 

 

 

110,132

 

Total liabilities and stockholders' equity

$

238,797

 

 

$

214,813

 

 

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,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software subscriptions

$

91,853

 

 

$

70,321

 

 

$

257,898

 

 

$

194,713

 

Other

 

4,986

 

 

 

6,459

 

 

 

17,323

 

 

 

18,076

 

Total revenues

 

96,839

 

 

 

76,780

 

 

 

275,221

 

 

 

212,789

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software subscriptions

 

19,211

 

 

 

17,084

 

 

 

54,107

 

 

 

49,503

 

Other

 

4,244

 

 

 

5,249

 

 

 

13,452

 

 

 

14,906

 

Total cost of revenues

 

23,455

 

 

 

22,333

 

 

 

67,559

 

 

 

64,409

 

Gross profit

 

73,384

 

 

 

54,447

 

 

 

207,662

 

 

 

148,380

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

16,490

 

 

 

13,475

 

 

 

48,097

 

 

 

37,612

 

Sales and marketing

 

50,306

 

 

 

34,878

 

 

 

137,796

 

 

 

101,473

 

General and administrative

 

13,649

 

 

 

11,922

 

 

 

41,114

 

 

 

34,231

 

Total operating expenses

 

80,445

 

 

 

60,275

 

 

 

227,007

 

 

 

173,316

 

Loss from operations

 

(7,061

)

 

 

(5,828

)

 

 

(19,345

)

 

 

(24,936

)

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(176

)

 

 

(245

)

 

 

(585

)

 

 

(927

)

Other income (expense), net

 

(696

)

 

 

(319

)

 

 

(2,280

)

 

 

(637

)

Other income (expense), net

 

(872

)

 

 

(564

)

 

 

(2,865

)

 

 

(1,564

)

Loss before provision (benefit) for income taxes

 

(7,933

)

 

 

(6,392

)

 

 

(22,210

)

 

 

(26,500

)

Provision (benefit) for income taxes

 

46

 

 

 

(56

)

 

 

153

 

 

 

(1,342

)

Net loss

$

(7,979

)

 

$

(6,336

)

 

$

(22,363

)

 

$

(25,158

)

Net loss per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

$

(0.11

)

 

$

(0.09

)

 

$

(0.31

)

 

$

(0.36

)

Weighted-average number of shares used in computing net loss

   per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

73,285

 

 

 

70,580

 

 

 

72,669

 

 

 

69,614

 

 

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,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net loss

$

(7,979

)

 

$

(6,336

)

 

$

(22,363

)

 

$

(25,158

)

Other comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

665

 

 

 

159

 

 

 

2,341

 

 

 

146

 

Unrealized loss on available-for-sale securities

 

 

 

 

94

 

 

 

 

 

 

190

 

Comprehensive loss

$

(7,314

)

 

$

(6,083

)

 

$

(20,022

)

 

$

(24,822

)

 

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,

 

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

$

(22,363

)

 

$

(25,158

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

10,749

 

 

 

9,935

 

Share-based compensation

 

22,603

 

 

 

15,790

 

Foreign currency remeasurement loss

 

2,450

 

 

 

315

 

Tax benefit from release of valuation allowance

 

 

 

 

(1,411

)

Non-cash interest expense and other expenses related to debt

 

 

 

 

156

 

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

 

 

 

 

602

 

Provision for bad debt

 

458

 

 

 

152

 

Deferred income taxes

 

(4

)

 

 

5

 

Others

 

464

 

 

 

220

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(4,878

)

 

 

(7,688

)

Inventory

 

2,233

 

 

 

(577

)

Prepaid expenses and other current assets

 

(4,667

)

 

 

(3,907

)

Other assets

 

201

 

 

 

173

 

Accounts payable

 

(2,470

)

 

 

(61

)

Accrued liabilities

 

13,737

 

 

 

4,758

 

Deferred revenue

 

6,080

 

 

 

8,700

 

Other liabilities

 

(2,157

)

 

 

204

 

Net cash provided by operating activities

 

22,436

 

 

 

2,208

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(9,634

)

 

 

(11,106

)

Capitalized internal-use software

 

(1,515

)

 

 

(1,836

)

Cash paid in business combination, net of cash acquired

 

 

 

 

(4,670

)

Proceeds from the maturity of available-for-sale securities

 

 

 

 

25,760

 

Proceeds from the maturity of restricted investments

 

 

 

 

100

 

Net cash provided by (used in) investing activities

 

(11,149

)

 

 

8,248

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of stock in connection with stock plans

 

8,268

 

 

 

12,040

 

Taxes paid related to net share settlement of equity awards

 

(131

)

 

 

(105

)

Payment of holdback from Glip acquisition

 

(1,500

)

 

 

 

Repayment of debt

 

(2,813

)

 

 

(5,205

)

Repayment of capital lease obligations

 

(269

)

 

 

(509

)

Net cash provided by financing activities

 

3,555

 

 

 

6,221

 

Effect of exchange rate changes on cash and cash equivalents

 

(40

)

 

 

145

 

Net increase in cash and cash equivalents

 

14,802

 

 

 

16,822

 

Cash and cash equivalents

 

 

 

 

 

 

 

Beginning of period

 

137,588

 

 

 

113,182

 

End of period

$

152,390

 

 

$

130,004

 

Supplemental disclosure of cash flow data

 

 

 

 

 

 

 

Cash paid for interest

$

568

 

 

$

1,697

 

Cash paid for income taxes

$

190

 

 

$

71

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

Issuance of common stock for business combination

$

 

 

$

3,447

 

Change in liability for unvested exercised options

$

3

 

 

$

28

 

Equipment and capitalized internal-use software purchased and unpaid at period end

$

2,617

 

 

$

1,617

 

Issuance of common stock for achievement of Glip related matters

$

1,080

 

 

$

 

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

$

 

 

$

190

 

 

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 and collaboration. 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, 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, 2016. Certain information and note disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) have been condensed or omitted under the rules and regulations of the Securities and Exchange Commission (SEC).

The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Use of Estimates

The preparation of condensed consolidated 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 condensed consolidated financial statements and the reported results of operations during the reporting period. The significant estimates made by management affect revenues, accounts receivable, allowance for doubtful accounts, inventory reserves, intangibles, goodwill, 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, which are adjusted prospectively based upon such periodic evaluation. Actual results could differ from these estimates and such differences may be material to the accompanying condensed consolidated financial statements.

 

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (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 (IASB) to clarify and converge the revenue recognition principles under U.S. GAAP and International Financial Reporting Standards (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, and can be adopted either retrospectively to each prior reporting 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 and has not selected an adoption method.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will require a lessee to recognize assets and liabilities for leases with lease terms of more than twelve months. Both capital and operating leases will need to be recognized on the balance sheet.  The standard is effective for fiscal years beginning after December 15, 2018, with early adoption permitted.  The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).  This standard amends ASU 2014-09 to improve the operability and understandability of the implementation guidance on principal versus agent considerations.  The effective date and transition of this amendment is the same as the effective date and transition of ASU 2014-09.  The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements and related disclosures.  

9


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718), which simplifies the accounting for stock-based compensation related to the accounting for forfeitures, employer tax withholding, excess tax benefits related to awards and cash flow presentations.  The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted.  The adoption of this amendment is not expected to have a material impact on the Company’s consolidated financial statements or related disclosures.  

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (Topic 606), which amends the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property.  The effective date and transition of this amendment is the same as the effective date and transition of ASU 2014-09.  The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements and related disclosures.  

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which clarifies certain issues related to transitioning to the new revenue guidance, as well as assessing collectability, recognition of noncash consideration, and presentation of sales and other similar taxes in revenue transactions.  The effective date and transition of this amendment is the same as the effective date and transition of ASU 2014-09.  The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements and related disclosures.  

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which clarifies the presentation and classification in the statement of cash flows.  The guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice for certain cash receipts and cash payments.  The standard is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.  The adoption of this amendment is not expected to have a material impact on the Company’s consolidated financial statements or disclosures.

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize at the transaction date the income tax effects for intra-entity transfers of assets other than inventory.  The standard is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.  The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements and related disclosures.  

Reclassification

Certain immaterial items previously reported have been reclassified to conform to the current year’s reporting presentation.

 

 

Note 2. Agency Agreement with Westcon Group

In January 2016, the Company entered into a sales agency agreement with Westcon Group, Inc. (Westcon), a global distributor of communications devices, to provide the phones purchased by customers. Under this agreement, the Company is an agent of Westcon and receives a commission for its services, which primarily include referring phone sales to Westcon. Westcon will provide phones directly to the Company’s customers instead of the Company purchasing phones from third-party vendors and reselling the phones to the Company’s customers. Commission revenues from the arrangement are recorded as the Company is the agent for these sales based on the following criteria:

 

the Company is not the primary obligor in the arrangement and the customer contracts for the sales of phones are entered into with Westcon;

 

the Company does not have latitude to establish pricing with customers as the sales agency agreement restricts the prices at which phones may be sold by the Company;

 

the Company does not have collection risk for phones sold under this model since it is entitled to a sales commission regardless of whether the customer pays Westcon;

 

the Company does not carry inventory and does not have general inventory risk; and

 

warranty responsibility and services are provided by Westcon.

The Company completed its transition of direct phone sales to Westcon during the three months ended June 30, 2016.  The transition excludes the Company’s carriers’ phone sales from the agency model. The Company does not plan to transition the carrier partners to the agency model as the billing relationships to these customers are through the carriers.  

10


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The Company’s sales of phones that are provided free or significantly discounted to customers are not part of the sales agency agreement with Westcon. The Company recognizes revenues and cost from these sales as the Company is the primary obligor and has latitude in pricing.

 

 

Note 3. Change in Presentation

As a result of the new sales agency model, the Company replaced the product revenues line in its consolidated statements of operations with a line called other revenues, which includes the commission revenues earned as an agent of Westcon, product revenues from sales of phones not sold under the sales agency agreement with Westcon, phone sales to carrier partners, phone rentals, and professional implementation services. Correspondingly, costs of other revenues include the costs for all the above items.

For the three and nine months ended September 30, 2016 and 2015, the majority of other revenues were product revenues from sales of phones that fell outside the sales agency agreement with Westcon.  Accordingly, to provide a comparison of product revenues and product cost of revenues prior to and subsequent to the change in presentation, product revenues were $2.2 million and $6.0 million for the three months ended September 30, 2016 and 2015, respectively, and $10.0 million and $16.9 million for the nine months ended September 30, 2016 and 2015, respectively.  Product cost of revenues were $3.4 million and $5.1 million for the three months ended September 30, 2016 and 2015, respectively, and $11.6 million and $14.5 million for the nine months ended September 30, 2016 and 2015, respectively.

 

 

Note 4. Financial Statement Components

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

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Cash

$

33,045

 

 

$

18,522

 

Money market funds

 

119,345

 

 

 

119,066

 

Total cash and cash equivalents

$

152,390

 

 

$

137,588

 

 

 

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

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Accounts receivable

$

20,811

 

 

$

15,509

 

Unbilled accounts receivable

 

3,177

 

 

 

4,031

 

Allowance for doubtful accounts

 

(405

)

 

 

(377

)

Accounts receivable, net

$

23,583

 

 

$

19,163

 

 

 

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

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Computer hardware and software

$

58,394

 

 

$

49,774

 

Internal-use software development costs

 

9,174

 

 

 

7,432

 

Furniture and fixtures

 

4,391

 

 

 

3,610

 

Leasehold improvements

 

2,480

 

 

 

2,412

 

Total property and equipment

 

74,439

 

 

 

63,228

 

Less: accumulated depreciation and amortization

 

(43,300

)

 

 

(35,068

)

Property and equipment, net

$

31,139

 

 

$

28,160

 

 

 

11


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Accrued liabilities consisted of the following (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Accrued compensation and benefits

$

14,937

 

 

$

10,128

 

Accrued sales, use and telecom related taxes

 

7,241

 

 

 

5,243

 

Accrued marketing

 

6,385

 

 

 

3,930

 

Other accrued expenses

 

17,805

 

 

 

15,401

 

Total accrued liabilities

$

46,368

 

 

$

34,702

 

 

 

Note 5. Fair Value of Financial Instruments

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.  The Company measures and reports certain cash equivalents, including money market funds and certificates of deposit, at fair value in accordance with the provisions of the authoritative accounting guidance that addresses fair value measurements.  This guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

Level 1:

Valuations based on observable inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2:

Valuations based on 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:

Valuations based on 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, 2016

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

119,345

 

 

$

119,345

 

 

$

 

 

$

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

$

530

 

 

$

 

 

$

530

 

 

$

 

 

  

 

Balance at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

119,066

 

 

$

119,066

 

 

$

 

 

$

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

$

530

 

 

$

 

 

$

530

 

 

$

 

 

 

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 September 30, 2016 and December 31, 2015, the Company estimated the fair value of its debt 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. The estimated fair value of the Company’s current and non-current debt obligations was $15.8 million at September 30, 2016, compared to its carrying amount of $15.8 million at that date. The estimated fair value of the Company’s current and non-current debt obligations was $19.0 million at December 31, 2015, compared to its carrying amount of $18.6 million 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.

 

12


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

Note 6. 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. 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 former stockholders of Glip was $11.9 million.  Of this total consideration, $1.5 million of cash was held back by the Company upon closing as security for certain indemnification obligations of such stockholders.  In June 2016, the Company paid the $1.5 million in full.  

The initial fair value of the milestone based earn out liability was determined to be $2.3 million using various estimates, including probabilities of achievement and discount rates. During the three months ended September 30, 2016, the Company issued 45,893 shares of the Company’s Class A common stock to settle certain milestones achieved.  Based on the completion of milestones for the quarter ended September 30, 2016 and the estimated probability of completing the remaining milestones, the estimated fair value of the milestones based earn out liability was $1.9 million at September 30, 2016, which is classified as a current liability in the condensed consolidated balance sheets.  

Additionally, under the terms of the acquisition, the Company may also pay up to $2.0 million 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. At September 30, 2016, the contingent payment liability was $1.2 million and classified as a current liability in the consolidated balance sheets.

The carrying values of intangible assets are as follows (in thousands):

 

 

 

 

 

 

 

 

September 30, 2016

 

 

December 31, 2015

 

 

Estimated Lives

 

Cost

 

 

Accumulated

Amortization

 

 

Acquired

Intangibles, Net

 

 

Accumulated

Amortization

 

 

Acquired

Intangibles, Net

 

Customer relationships

2 years

 

$

840

 

 

$

555

 

 

$

285

 

 

$

240

 

 

$

600

 

Developed technology

5 years

 

 

3,010

 

 

 

796

 

 

 

2,214

 

 

 

344

 

 

 

2,666

 

Total acquired intangible assets

 

 

$

3,850

 

 

$

1,351

 

 

$

2,499

 

 

$

584

 

 

$

3,266

 

 

Amortization expense from acquired intangible assets for the three months ended September 30, 2016 and 2015 was $0.3 million for both periods. Amortization expense from acquired intangible assets for the nine months ended September 30, 2016 and 2015 was $0.8 million and $0.3 million, respectively.  Amortization of developed technology is included in cost of revenues and amortization of customer relationships is included in sales and marketing expenses in the condensed consolidated statements of operations.  At September 30, 2016, the weighted average amortization periods for customer relationship and developed technology approximate 0.7 years and 3.7 years, respectively.

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

 

2016 (remaining)

 

 

 

 

$

255

 

2017

 

 

 

 

 

782

 

2018

 

 

 

 

 

602

 

2019

 

 

 

 

 

602

 

2020

 

 

 

 

 

258

 

Total estimated amortization expense

 

 

 

 

$

2,499

 

 

 

13


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 7. Debt

As of September 30, 2016, the Company’s debt was comprised of borrowings under the Third Amended and Restated Loan and Security Agreement dated March 30, 2015 (SVB Agreement), as amended, with Silicon Valley Bank (SVB).  Under the SVB Agreement, the Company has one outstanding growth capital term loan (2013 Term Loan) and a revolving line of credit.

The 2013 Term Loan was borrowed on December 31, 2013 with a principal amount of $15.0 million, 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.  In May 2016, the terms of the SVB Agreement were amended to reduce the margin on the annual rate of the 2013 Term Loan to either (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%, resulting in a current interest rate of 3.75% based on the prime rate option and cash balance maintained with SVB. As of September 30, 2016, the outstanding principal balance of the 2013 Term Loan was $5.0 million, of which $1.3 million is payable subsequent to September 30, 2017 and is classified as a non-current liability in the accompanying condensed consolidated balance sheet.   

The revolving line of credit provides for a maximum borrowing of up to $15.0 million in principal amount, subject to limits based on recurring software subscription revenue amounts as defined in the SVB Agreement. The recurring software 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.  In August 2015, the terms of the SVB Agreement were amended to extend the maturity of the revolving line of credit from August 13, 2015 to August 14, 2017.  In May 2016, the terms of the SVB Agreement were amended to reduce the margin on the annual rate of the revolving line of credit to either the (i) prime rate plus a margin of 0% or 0.25% or (ii) adjusted LIBOR rate (based on one, two, three, or six-month interest periods) plus a margin of 3.0% to 3.25%, resulting in a current interest rate of 3.50% based on the prime rate option and cash balance maintained with SVB. As of September 30, 2016, the outstanding principal balance and the available borrowing capacity of the line of credit were $10.8 million and $4.2 million, respectively. The outstanding principal balance is classified as a current liability in the condensed consolidated balance sheet as the principal balance is due in August 2017.   

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 $10.0 million, as defined in the agreement, and (ii) maintain minimum EBITDA levels, as determined in accordance with the agreement. In March 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, 2016.

 

 

 

Note 8. 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.  The Company leases space for its corporate headquarters in Belmont, California through July 2021.

Sales Tax Liability

The Company regularly increases its sales and marketing activities in various states within the U.S., which may create nexus in those states to collect sales taxes on sales to customers.  Although the Company is diligent in collecting and remitting such taxes, there is uncertainty as to what constitutes sufficient in state presence for a state to levy taxes, fees, and surcharges for sales made over the Internet.  As of September 30, 2016 and December 31, 2015, the Company had a long-term sales tax liability of $3.5 million and $3.7 million, respectively, based on its best estimate of the probable liability for the loss contingency incurred as of those dates. The

14


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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.

The Company recorded a current sales tax liability for non-contingent amounts expected to be remitted in the next twelve months of $4.7 million and $4.4 million as of September 30, 2016 and December 31, 2015, respectively, which is included in accrued liabilities.

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.

TCPA Matter

On April 21, 2016, Supply Pro Sorbents, LLC (SPS) filed a putative class action against the Company in the United States District Court for the Northern District of California (Court), alleging common law conversion and violations of the federal Telephone Consumer Protection Act (TCPA) arising from fax cover sheets used by the Company’s customers when sending facsimile transmissions over the Company’s system (Lawsuit).  SPS sought statutory damages, costs, attorneys’ fees and an injunction in connection with its TCPA claim, and unspecified damages and punitive damages in connection with its conversion claim.  On July 6, 2016, the Company filed a Petition for Expedited Declaratory Ruling before the Federal Communications Commission (FCC), requesting that the FCC issue a ruling clarifying certain portions of its regulations promulgated under TCPA at issue in the Lawsuit (Petition).  On July 8, 2016, the Company filed a motion to dismiss the Lawsuit in its entirety, along with a collateral motion to dismiss or stay the Lawsuit pending a ruling by the FCC on the Company’s Petition.  On October 7, 2016, the Court granted the Company’s motion to dismiss and gave SPS 20 days to amend its complaint.  The Court concurrently dismissed the Company’s motion to dismiss or stay as moot.  SPS filed its amended complaint on October 27, 2016, alleging the same theories and claims. The Company intends to vigorously defend itself and anticipates filing another motion to dismiss and a collateral motion to dismiss or stay the case pending resolution of the FCC Petition.  Litigation is inherently uncertain, however, and it is too early in this proceeding to predict the outcome of this Lawsuit.  Based on the information known by the Company as of the date of this filing and the rules and regulations applicable to the preparation of the Company’s condensed consolidated financial statements, it is not possible to provide an estimated amount of any such loss or range of loss that may occur.

As of December 31, 2015, there were no significant ongoing legal matters and the Company did not have any accrued liabilities recorded for such loss contingencies.

 

 

Note 9. Share-Based Compensation

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Cost of revenues

$

859

 

 

$

535

 

 

$

2,324

 

 

$

1,468

 

Research and development

 

1,996

 

 

 

1,351

 

 

 

5,491

 

 

 

3,745

 

Sales and marketing

 

3,023

 

 

 

1,797

 

 

 

7,791

 

 

 

5,333

 

General and administrative

 

2,511

 

 

 

2,069

 

 

 

6,997

 

 

 

5,244

 

Total share-based compensation expense

$

8,389

 

 

$

5,752

 

 

$

22,603

 

 

$

15,790

 

 

15


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Options

$

2,382

 

 

$

2,744

 

 

$

7,366

 

 

$

8,357

 

Employee stock purchase plan rights

 

527

 

 

 

287

 

 

 

1,375

 

 

 

854

 

Restricted stock units

 

5,480

 

 

 

2,721

 

 

 

13,862

 

 

 

6,579

 

Total share-based compensation expense

$

8,389

 

 

$

5,752

 

 

$

22,603

 

 

$

15,790

 

 

Equity Incentive Plans

As of September 30, 2016, a total of 8,775,309 shares remained available for grant under the 2013 Equity Incentive Plan (2013 Plan). A summary of option activity under all of the Company’s equity incentive plans at September 30, 2016 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, 2015

 

8,048

 

 

$

10.27

 

 

 

6.2

 

 

$

107,091

 

Granted

 

539

 

 

 

16.46

 

 

 

 

 

 

 

 

 

Exercised

 

(601

)

 

 

9.07

 

 

 

 

 

 

 

 

 

Canceled/Forfeited

 

(236

)

 

 

15.53

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2016

 

7,750

 

 

$

10.64

 

 

 

5.5

 

 

$

101,047

 

Vested and expected to vest as of September 30, 2016

 

7,379

 

 

$

10.37

 

 

 

5.5

 

 

$

98,134

 

Exercisable as of September 30, 2016

 

5,389

 

 

$

8.53

 

 

 

5.4

 

 

$

81,557

 

 

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

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Weighted average grant date fair value per share

$

9.22

 

 

$

7.48

 

 

$

6.70

 

 

$