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Section 1: 10-Q (10-Q)

rng-10q_20180930.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, 2018

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, every Interactive Data File required to be submitted 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 such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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 2, 2018, there were 68,578,598 shares of Class A Common Stock issued and outstanding and 11,754,332 shares of Class B Common Stock issued and outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

  

 

  

Page

 

PART I. FINANCIAL INFORMATION

Item 1.

  

Financial Statements (unaudited)

  

5

 

  

Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017

  

5

 

  

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017

  

6

 

  

Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2018 and 2017

  

7

 

  

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

  

8

 

  

Notes to Condensed Consolidated Financial Statements

  

9

Item 2.

  

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

  

27

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

37

Item 4.

  

Controls and Procedures

  

38

 

PART II. OTHER INFORMATION

Item 1.

  

Legal Proceedings

  

39

Item 1A.

  

Risk Factors

  

40

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

71

Item 3.

  

Default Upon Senior Securities

  

72

Item 4.

  

Mine Safety Disclosures

  

72

Item 5.

  

Other Information

  

72

Item 6.

  

Exhibits

  

72

Signatures

  

74

 

 

 

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 entitled “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 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;

 

our success in the enterprise market;

 

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 scale to our desired goals, particularly the implementation of new processes and systems and the addition to our workforce;

 

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;

 

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 success with our carrier partners;

 

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 any significant acquisition we may make;

 

our capital expenditure projections;

3


 

 

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

 

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

 

the impact of economic downturns on us and our customers;

 

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;

 

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

 

the impact of foreign currencies on our non-U.S. business as we expand our business internationally.

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,

 

 

2018

 

 

2017

 

 

 

 

 

 

*As Adjusted

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

577,283

 

 

$

181,192

 

Accounts receivable, net

 

74,183

 

 

 

46,690

 

Deferred sales commission costs

 

20,869

 

 

 

15,424

 

Prepaid expenses and other current assets

 

29,823

 

 

 

21,512

 

Total current assets

 

702,158

 

 

 

264,818

 

Property and equipment, net

 

60,200

 

 

 

43,298

 

Deferred sales commission costs, noncurrent

 

50,263

 

 

 

37,871

 

Goodwill

 

9,393

 

 

 

9,393

 

Acquired intangibles, net

 

8,366

 

 

 

1,462

 

Other assets

 

11,463

 

 

 

2,972

 

Total assets

$

841,843

 

 

$

359,814

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

6,017

 

 

$

7,322

 

Accrued liabilities

 

85,714

 

 

 

54,977

 

Current portion of capital lease obligation

 

943

 

 

 

 

Deferred revenue

 

80,024

 

 

 

62,917

 

Total current liabilities

 

172,698

 

 

 

125,216

 

Convertible senior notes, net

 

361,637

 

 

 

 

Capital lease obligation

 

2,829

 

 

 

 

Other long-term liabilities

 

5,232

 

 

 

6,252

 

Total liabilities

 

542,396

 

 

 

131,468

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

Common stock

 

8

 

 

 

8

 

Additional paid-in capital

 

526,891

 

 

 

434,840

 

Accumulated other comprehensive income

 

2,573

 

 

 

2,998

 

Accumulated deficit

 

(230,025

)

 

 

(209,500

)

Total stockholders' equity

 

299,447

 

 

 

228,346

 

Total liabilities and stockholders' equity

$

841,843

 

 

$

359,814

 

*    See Note 2 for a summary of adjustments.

 

 

 

 

 

 

 

 

 

 

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,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

*As Adjusted

 

 

 

 

 

 

*As Adjusted

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software subscriptions

$

158,068

 

 

$

119,916

 

 

$

440,987

 

 

$

334,942

 

Other

 

15,757

 

 

 

10,363

 

 

 

44,013

 

 

 

27,490

 

Total revenues

 

173,825

 

 

 

130,279

 

 

 

485,000

 

 

 

362,432

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software subscriptions

 

27,958

 

 

 

22,912

 

 

 

79,200

 

 

 

64,970

 

Other

 

11,316

 

 

 

7,872

 

 

 

33,814

 

 

 

22,681

 

Total cost of revenues

 

39,274

 

 

 

30,784

 

 

 

113,014

 

 

 

87,651

 

Gross profit

 

134,551

 

 

 

99,495

 

 

 

371,986

 

 

 

274,781

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

26,347

 

 

 

19,082

 

 

 

73,812

 

 

 

54,786

 

Sales and marketing

 

86,279

 

 

 

61,605

 

 

 

237,222

 

 

 

172,231

 

General and administrative

 

28,952

 

 

 

19,073

 

 

 

73,984

 

 

 

52,885

 

Total operating expenses

 

141,578

 

 

 

99,760

 

 

 

385,018

 

 

 

279,902

 

Loss from operations

 

(7,027

)

 

 

(265

)

 

 

(13,032

)

 

 

(5,121

)

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(4,916

)

 

 

(6

)

 

 

(11,163

)

 

 

(94

)

Other income, net

 

2,533

 

 

 

613

 

 

 

3,944

 

 

 

1,313

 

Other income (expense), net

 

(2,383

)

 

 

607

 

 

 

(7,219

)

 

 

1,219

 

(Loss) income before income taxes

 

(9,410

)

 

 

342

 

 

 

(20,251

)

 

 

(3,902

)

Provision for income taxes

 

108

 

 

 

73

 

 

 

274

 

 

 

181

 

Net (loss) income

$

(9,518

)

 

$

269

 

 

$

(20,525

)

 

$

(4,083

)

Net (loss) income per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.12

)

 

$

0.00

 

 

$

(0.26

)

 

$

(0.05

)

Diluted

$

(0.12

)

 

$

0.00

 

 

$

(0.26

)

 

$

(0.05

)

Weighted-average number of shares used in computing net (loss) income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

79,903

 

 

 

76,915

 

 

 

79,116

 

 

 

75,815

 

Diluted

 

79,903

 

 

 

83,109

 

 

 

79,116

 

 

 

75,815

 

*    See Note 2 for a summary of adjustments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements

 

 

 

6


 

RINGCENTRAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited, in thousands)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

*As Adjusted

 

 

 

 

 

 

*As Adjusted

 

Net (loss) income

$

(9,518

)

 

$

269

 

 

$

(20,525

)

 

$

(4,083

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(222

)

 

 

88

 

 

 

(425

)

 

 

166

 

Comprehensive (loss) income

$

(9,740

)

 

$

357

 

 

$

(20,950

)

 

$

(3,917

)

*    See Note 2 for a summary of adjustments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

 

2018

 

 

2017

 

 

 

 

 

 

*As Adjusted

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

$

(20,525

)

 

$

(4,083

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

17,194

 

 

 

11,929

 

Share-based compensation

 

49,379

 

 

 

30,504

 

Amortization of deferred sales commission costs

 

13,956

 

 

 

8,874

 

Amortization of debt discount and issuance costs

 

11,003

 

 

 

 

Foreign currency remeasurement (gain) loss

 

657

 

 

 

(700

)

Provision for bad debt

 

2,390

 

 

 

1,508

 

Deferred income taxes

 

15

 

 

 

(18

)

Other

 

458

 

 

 

123

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(29,883

)

 

 

(11,188

)

Deferred sales commission costs

 

(31,793

)

 

 

(23,402

)

Prepaid expenses and other current assets

 

(6,256

)

 

 

(6,872

)

Other assets

 

(406

)

 

 

1,419

 

Accounts payable

 

(1,128

)

 

 

2,168

 

Accrued liabilities

 

27,954

 

 

 

9,426

 

Deferred revenue

 

17,107

 

 

 

11,288

 

Other liabilities

 

(1,020

)

 

 

(100

)

Net cash provided by operating activities

 

49,102

 

 

 

30,876

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(17,852

)

 

 

(15,886

)

Capitalized internal-use software

 

(8,117

)

 

 

(5,432

)

Cash paid for acquisition of intangible assets

 

(18,470

)

 

 

 

Restricted investment

 

 

 

 

530

 

Net cash used in investing activities

 

(44,439

)

 

 

(20,788

)

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of convertible senior notes, net of issuance costs

 

449,457

 

 

 

 

Payments for capped call transactions and costs

 

(49,910

)

 

 

 

Repurchase of common stock

 

(15,000

)

 

 

 

Proceeds from issuance of stock in connection with stock plans

 

13,632

 

 

 

19,685

 

Taxes paid related to net share settlement of equity awards

 

(5,457

)

 

 

(2,125

)

Repayment of debt

 

 

 

 

(14,840

)

Repayment of capital lease obligations

 

(741

)

 

 

(181

)

Net cash provided by financing activities

 

391,981

 

 

 

2,539

 

Effect of exchange rate changes

 

(553

)

 

 

(676

)

Net increase in cash, cash equivalents and restricted cash

 

396,091

 

 

 

11,951

 

Cash, cash equivalents and restricted cash

 

 

 

 

 

 

 

Beginning of period

 

181,192

 

 

 

160,355

 

End of period

$

577,283

 

 

$

172,306

 

Supplemental disclosure of cash flow data

 

 

 

 

 

 

 

Cash paid for interest

$

40

 

 

$

116

 

Cash paid for income taxes, net of refunds

$

331

 

 

$

188

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

Reclassification from intangible assets to prepaid and other assets

$

8,223

 

 

$

 

Equipment acquired under capital lease

$

4,513

 

 

$

 

Liability for potential future payments

$

2,001

 

 

$

 

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

$

2,293

 

 

$

1,204

 

Issuance of common stock for achievement of Glip related matters

$

 

 

$

3,260

 

*    See Note 2 for a summary of adjustments.

 

 

 

 

 

 

 

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 that enables businesses to communicate, collaborate and connect. 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, 2018. 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”).

Effective January 1, 2018, the Company adopted the requirements of Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), issued by the Financial Accounting Standards Board (“FASB”), as discussed in Note 2. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, the Company refers to Topic 606 and Subtopic 340-40 as “Topic 606” or the “new standard.”  All amounts and disclosures set forth in this Quarterly Report on Form 10-Q have been adjusted to comply with the new standard.

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, 2017, filed with the SEC on February 26, 2018.

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, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The significant estimates made by management affect revenues, allowance for doubtful accounts, deferred sales commission costs, goodwill, share-based compensation, capitalization of internally developed software, return reserves, provision for income taxes, uncertain tax positions, loss contingencies, sales tax liabilities, and accrued liabilities. Management periodically evaluates these estimates and will make adjustments prospectively based upon the results of such periodic evaluations. Actual results could differ from these estimates.

Changes in Significant Accounting Policies

Except for the accounting policies for revenue recognition and deferred commissions that were updated as a result of adopting Topic 606, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2017, that have had a material impact on the Company’s condensed consolidated financial statements and related notes.

Revenue Recognition

The Company derives its revenues primarily from software subscriptions, sale of products, and professional services. Revenues are recognized when control of these services is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

The Company determines revenue recognition through the following steps:

 

identification of the contract, or contracts, with a customer;

 

identification of the performance obligations in the contract;

9


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

determination of the transaction price;

 

allocation of the transaction price to the performance obligations in the contract; and

 

recognition of revenue when, or as, the Company satisfies a performance obligation.

The Company recognizes revenues as follows:

Software subscriptions revenue

Software subscriptions revenue is generated from the sale of subscriptions to the Company’s software applications and related services. These arrangements have contractual terms typically ranging from one month to five years, and include recurring fixed plan subscription fees and variable usage-based fees for usage in excess of plan limits.

Arrangements with customers do not provide the customer with the right to take possession of the Company’s software at any time. Instead, customers are granted continuous access to the services over the contractual period. The Company transfers control evenly over the contractual period by providing stand-ready service. Accordingly, the fixed consideration related to subscription is generally recognized over time on a straight-line basis over the contract term beginning on the date the Company’s service is made available to the customer. The Company may offer its customer services for no consideration during the initial months. Such discounts are recognized ratably over the term of the contract.

Fees for additional minutes of usage in excess of plan limits are deemed to be variable consideration that meet the allocation exception for variable consideration as they are specific to the month that the usage occurs.

The Company’s subscription contracts typically allow the customers to terminate their services within the first 30 or 60 days and receive a refund for any amounts paid. After the termination period ends, the contract is non-cancellable and the customer is obligated to pay for the remaining term of the contract. Accordingly, the Company considers the non-cancellable term of the contract to begin after the expiration of the termination period.

The Company has service-level agreements with customers warranting defined levels of uptime reliability and performance and these customers can get credits or refunds if the Company fails to meet those levels. If the services do not meet certain criteria, fees are subject to adjustment or refund representing a form of variable consideration.

The Company records reductions to revenue for estimated sales returns and customer credits at the time the related revenue is recognized. Sales returns and customer credits are estimated based on the Company’s historical experience, current trends and the Company’s expectations regarding future experience. The Company monitors the accuracy of its sales reserve estimates by reviewing actual returns and credits and adjusts them for its future expectations to determine the adequacy of its current and future reserve needs. If actual future returns and credits differ from past experience, additional reserves may be required.

Other revenue

Other revenue is generated from product revenues from sales of phones and professional implementation services.

Product revenue is recognized when the products have been delivered to the customer. The amount of revenue recognized for products is adjusted for expected returns, which are estimated based on historical data.

The Company offers professional services that support implementation and deployment of its subscription services.  Professional services do not result in significant customization of the product and are generally short-term in duration. The majority of our professional services contracts are on a fixed price basis and revenue is recognized over time as services are performed.

Deferred sales commission costs

The Company capitalizes sales commission expenses and associated payroll taxes paid to internal sales personnel and resellers, who sell our solutions. The resellers are selling agents for the Company and earn sales commissions which are directly tied to the value of the contracts that the Company enters with the end-user customers. These sales commissions are incremental costs the Company incurs to obtain contracts with its end-user customers. The Company pays sales commissions on initial contracts and contracts for increased purchases with existing customers (expansion contracts). The Company does not pay sales commissions for contract renewals.  

10


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

These sales commission costs are deferred and then amortized over the expected period of benefit, which is estimated to be five years. The Company has determined the period of benefit taking into consideration the expected subscription term and expected renewal periods of its customer contracts, the duration of its relationships with its customers considering historical and expected customer retention, technology and other factors. Amortization expense is included in sales and marketing expenses in the accompanying condensed consolidated statement of operations.

Disaggregation of revenue

The following table provides information about disaggregated revenue by primary geographical markets:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Primary geographical markets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

96.1

%

 

 

96.3

%

 

 

96.0

%

 

 

96.6

%

Others

 

3.9

 

 

 

3.7

 

 

 

4.0

 

 

 

3.4

 

Total revenues

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

The Company derived approximately 88% of subscription revenues from RingCentral Office product for both the three and nine months ended September 30, 2018; and 84% for the three and nine months ended September 30, 2017.

Deferred revenue

During the three and nine months ended September 30, 2018, the Company recognized revenue of $8.8 million and $56.6 million, respectively, that was included in the corresponding deferred revenue balance at the beginning of the year.

Remaining performance obligations

The typical subscription term ranges from one month to five years. Contract revenue as of September 30, 2018 that has not yet been recognized was $558.0 million. This excludes contracts with an original expected length of less than one year. The Company expects to recognize revenue of $333.3 million over the next 12 months and $224.7 million thereafter.  

Share-Based Compensation

Share-based compensation expense resulting from options, restricted stock units (“RSUs”), performance-based awards, and employee stock purchase plan (“ESPP”) rights granted is measured as the grant date fair value of the award and is recognized using the straight-line attribution method over the requisite service period of the award, which is generally the vesting period. The Company estimates the fair value of stock options, ESPP rights, and performance-based awards using the Black-Scholes-Merton option-pricing model. The Company estimates the fair value of RSUs as the closing market value of its Class A Common Stock on the grant date.  For awards with performance-based and service-based conditions, compensation cost is recognized over the requisite service period if it is probable that the performance condition will be satisfied. The expense for performance-based awards is evaluated each quarter based on the achievement of the performance conditions. The effect of a change in the estimated number of performance-based awards expected to be earned is recognized in the period those estimates are revised. Compensation expense for stock options and RSUs granted to non-employees is revalued, or marked to market, as of each reporting date until the stock options and RSUs are vested.  Compensation expense is recognized net of estimated forfeiture activity, which is based on historical forfeiture rates.

Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires that lessees recognize a right-of-use asset and a lease liability on the balance sheet for all leases, with the exception of short-term leases. Both capital and operating leases will need to be recognized on the balance sheet. The standard is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. In 2018, the FASB issued ASU 2018-10 and 2018-11, providing, among other things, codification improvements and the optional transition method.  The Company will adopt the standard in the first quarter of 2019, utilizing the optional transition method for adoption of Topic 842, which allows entities to continue to apply the legacy guidance in ASC 840, Leases, including disclosure requirements, in the comparative periods presented in the year of adoption. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures

11


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

and expects to take advantage of the transition package of practical expedients permitted within the new standard, which among other things, allows the Company to carryforward its historical lease classifications. The Company expects the impact of adoption of the new standard on the Company’s consolidated statements of operations not to be material. The Company anticipates the most significant impact of adopting the new standard will primarily be the establishment of a right-of-use asset and a corresponding lease liability in its consolidated balance sheets.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which modifies the goodwill impairment test and requires an entity to write down the carrying value of goodwill up to the amount by which the carrying amount of a reporting unit exceeds its fair value. The standard is effective for interim and annual reporting periods beginning after December 15, 2019, 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 June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include and simplify financial reporting for share-based payments issued to nonemployees. This amendment is applicable to all public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is in the process of evaluating the impact of implementing this amendment on its financial statements or disclosures.

 

In July 2018, the FASB issued ASU 2018-09, Codification Improvements, which is intended to change or to clarify the codification or correct unintended application of guidance that is not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Since this applies to various codifications, its implementation and impact on financial statements would be commensurate with the codification itself, for example -  it clarifies when companies should recognize excess tax benefits for share-based compensation awards; removes inconsistent guidance about income tax accounting for business combinations; clarifies derivatives measurement of a liability with an identical instrument held as an asset, and allows companies to use the portfolio approach to valuation of financial instruments; etc. The adoption of this amendment is not expected to have a material impact on the Company’s consolidated financial statements or disclosures.

In June 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurements, which expands the disclosure requirements for Level 3 fair value measurements and expands disclosures for entities that calculate net assets value. This amendment is applicable to all public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company expects to adopt this update effective fiscal first quarter of 2020. The adoption of this amendment is not expected to have a material impact on the Company’s consolidated financial statements or disclosures.

In June 2018, the FASB issued ASU 2018-15, Intangibles- Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This amendment is applicable to all public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is in the process of evaluating the impact of implementing this amendment on its financial statements or disclosures.

In August 2018, the SEC issued a final rule that amends certain disclosure requirements that were redundant, duplicative, overlapping or superseded. The final rule requires registrants, among other things, to disclose in interim periods changes to stockholders’ equity for current and comparative year-to-date periods with subtotals for each interim period, and dividends per share for each class of shares. The final rule is effective for all filings made on or after November 5, 2018. On September 25, 2018, the SEC released guidance advising it will not object to a registrant adopting the requirement to include changes in stockholders’ equity in the Form 10-Q for the first quarter beginning after the effective date of the rule. The Company expects to adopt the new rule in the first fiscal quarter of 2019. The adoption of this amendment is not expected to have a material impact on the Company’s consolidated financial statements or disclosures.

 

 

12


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 2. Impact of Recent Accounting Pronouncements

On January 1, 2018, the Company adopted Topic 606 utilizing the full retrospective method of transition. The Company adjusted its condensed consolidated financial statements from amounts previously reported due to the adoption of Topic 606.

Select condensed consolidated balance sheet line items, which reflect the adoption of the new ASU are as follows (in thousands):

 

 

December 31, 2017

 

 

As Reported

 

 

Adoption of Topic 606

 

 

As Adjusted

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

$

45,339

 

 

$

1,351

 

 

$

46,690

 

Deferred sales commission costs

 

 

 

 

15,424

 

 

 

15,424

 

Deferred sales commission costs, noncurrent

 

 

 

 

37,871

 

 

 

37,871

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

64,415

 

 

 

(1,498

)

 

 

62,917

 

Stockholders' equity

$

172,202

 

 

$

56,144

 

 

$

228,346

 

The following table reflects the effect of adoption of Topic 606 on the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2017 (in thousands):

 

 

Three Months Ended September 30, 2017

 

 

Nine Months Ended September 30, 2017

 

 

As Reported

 

 

Adoption of Topic 606

 

 

As Adjusted

 

 

As Reported

 

 

Adoption of Topic 606

 

 

As Adjusted

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software subscriptions

$

119,401

 

 

$

515

 

 

$

119,916

 

 

$

333,501

 

 

$

1,441

 

 

$

334,942

 

Other

 

10,363

 

 

 

 

 

 

10,363

 

 

 

27,490

 

 

 

 

 

 

27,490

 

Total revenues

 

129,764

 

 

 

515

 

 

 

130,279

 

 

 

360,991

 

 

 

1,441

 

 

 

362,432

 

Gross profit

 

98,980

 

 

 

515

 

 

 

99,495

 

 

 

273,340

 

 

 

1,441

 

 

 

274,781

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

67,071

 

 

 

(5,466

)

 

 

61,605

 

 

 

186,759

 

 

 

(14,528

)

 

 

172,231

 

Operating loss

 

(6,246

)

 

 

5,981

 

 

 

(265

)

 

 

(21,090

)

 

 

15,969

 

 

 

(5,121

)

Net (loss) income

$

(5,712

)

 

$

5,981

 

 

$

269

 

 

$

(20,052

)

 

$

15,969

 

 

$

(4,083

)

Basic net (loss) income per common share

$

(0.07

)

 

$

0.07

 

 

$

0.00

 

 

$

(0.26

)

 

$

0.21

 

 

$

(0.05

)

Diluted net (loss) income per common share

$

(0.07

)

 

$

0.07

 

 

$

0.00

 

 

$

(0.26

)

 

$

0.21

 

 

$

(0.05

)

Weighted-average number of shares used in computing net (loss) income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

76,915

 

 

 

 

 

 

76,915

 

 

 

75,815

 

 

 

 

 

 

75,815

 

Diluted

 

76,915

 

 

 

6,194

 

 

 

83,109

 

 

 

75,815

 

 

 

 

 

 

75,815

 

13


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The following table reflects the effect of adoption of Topic 606 on the Company’s condensed consolidated statement of cash flows for the nine months ended September 30, 2017 (in thousands):

 

 

Nine Months Ended September 30, 2017

 

 

As Reported

 

 

Adoption of Topic 606

 

 

As Adjusted

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(20,052

)

 

$

15,969

 

 

$

(4,083

)

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

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred sales commission costs

 

 

 

 

8,874

 

 

 

8,874

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(10,996

)

 

 

(192

)

 

 

(11,188

)

Deferred sales commission costs

 

 

 

 

(23,402

)

 

 

(23,402

)

Deferred revenue

 

12,537

 

 

 

(1,249

)

 

 

11,288

 

Net cash provided by operating activities

 

30,876

 

 

 

 

 

 

30,876

 

 

 

Note 3. Other Revenue and Cost of Revenue

Other revenues are primarily comprised of product revenue from the sale of pre-configured phones, phone rentals, and professional services. For the three and nine months ended September 30, 2018 and 2017, the majority of other revenues consisted of product revenues from sales of phones.  Product revenues were $9.0 million and $6.9 million for the three months ended September 30, 2018 and 2017, respectively, and $25.8 million and $19.1 million for the nine months ended September 30, 2018 and 2017, respectively. Product cost of revenues were $7.1 million and $6.2 million for the three months ended September 30, 2018 and 2017, respectively, and $22.5 million and $18.2 million for the nine months ended September 30, 2018 and 2017, respectively.   

 

 

Note 4. Financial Statement Components

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

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Cash

$

62,009

 

 

$

70,893

 

Money market funds

 

515,274

 

 

 

110,299

 

Total cash and cash equivalents

$

577,283

 

 

$

181,192

 

 

 

The Company has an immaterial restricted cash balance as of September 30, 2018 and December 31, 2017, included in the cash balance above.

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

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

 

 

 

 

 

*As Adjusted

 

Accounts receivable

$

65,885

 

 

$

42,243

 

Unbilled accounts receivable

 

10,456

 

 

 

5,159

 

Allowance for doubtful accounts

 

(2,158

)

 

 

(712

)

Accounts receivable, net

$

74,183

 

 

$

46,690

 

 

*    See Note 2 for a summary of adjustments.

14


RINGCENTRAL, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

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

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Prepaid expenses

$

18,113

 

 

$

13,690

 

Inventory

 

168

 

 

 

198

 

Other current assets

 

11,542

 

 

 

7,624

 

Total prepaid expenses and other current assets

$

29,823

 

 

$

21,512

 

 

 

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

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Computer hardware and software

$

93,223

 

 

$

74,555

 

Internal-use software development costs

 

26,406

 

 

 

18,217

 

Furniture and fixtures

 

5,586

 

 

 

6,293

 

Leasehold improvements

 

6,400

 

 

 

4,311

 

Total property and equipment

 

131,615

 

 

 

103,376

 

Less: accumulated depreciation and amortization

 

(71,415

)

 

 

(60,078

)

Property and equipment, net

$

60,200

 

 

$

43,298

 

 

Depreciation and amortization expense was $4.8 million and $13.9 million for the three and nine months ended September 30, 2018, respectively, and was $4.0 million and $11.3 million for the three and nine months ended September 30, 2017, respectively.

 

Accrued liabilities consisted of the following (in thousands):

 

 

September 30,